03 December 2015 Asia Pacific/Singapore Equity Research Strategy (Conglomerates HK (Asia)/Utilities SG (Asia)/Capital Goods SG (Asia)/Conglomerates SG (Asia))
Singapore Market Strategy Research Analysts Gerald Wong, CFA 65 6212 3037
[email protected] Singapore Research Analyst Team Gerald Wong, CFA (Strategy / Capital Goods) 65 6212 3037 Anand Swaminathan (Banks / Media / Healthcare / Mid-caps) 65 6212 3012 Louis Chua (Property - Developers) 65 6212 5721 Nicholas Teh (Property - REITs) 65 6212 3026 Varun Ahuja, CFA (Telecom Services) 65 6212 3017
STRATEGY
2016 Outlook: Domestic policies in focus Figure 1: MSCI Singapore ROE likely to remain depressed weighed down by decline across key sectors 30.0 25.0 20.0 15.0 10.0
Shew Heng Tan (Oil & Gas) 65 6212 3014
5.0
Timothy Ross (Transportation) 65 6212 3337
0.0
Ting Min Tan (Agricultural Products & Agribusiness) 603 2723 2080 Priscilla Tjitra (Agricultural Products & Agribusiness) 62 21 2553 7906 Arjan van Veen (Diversified Financials) 852 2101 7508 Iris Wang (Healthcare) 852 2101 7646 Michael Wan (Economics) 65 6212 3418 Kwee Hong Ching 65 6212 3142 Daniel Lim 65 6212 3011 Da Wei Lee 65 6212 3004 Shih Haur Hwang 65 6212 3024 Christopher Siow 65 6212 3062
2007
2008 MSCI Singapore
2009
2010 Capital goods
2011
2012 Real estate
2013
2014
2015E
Transportation
2016E Telco
Source: the BLOOMBERG PROFESSIONAL™ service, IBES, Credit Suisse
■ External headwinds and domestic restructuring weighing on outlook. We expect Singapore GDP growth to remain lacklustre, reflecting weaker outlook for China and ASEAN, as well as lower trend growth with domestic restructuring. This is likely to present downside risks to market expectations of an acceleration in EPS growth to 5% in 2016 from a 2% decline in 2015. ■ We expect government measures in the property, land transport and telco sectors to be closely watched. We believe a further 5-10% decline in property prices would set the stage for an easing of property cooling measures in 2H16, driving an improvement in sentiment for developers. Within the land transport sector, an emphasis on improving reliability is likely to lead to an asset-light model for rail operators. We expect resilient telco sector returns to be at risk with threat of new entrant. O&M sector restructuring could be a surprise. ■ Overweight Property and Transport. Our model portfolio favours sectors which are less externally driven and could be beneficiaries of domestic policies, including the Property and Transport sectors. Our top picks are CDL, Singtel, and DBS. Other preferred stocks include SIA, Wilmar, Genting, CMT, SCI, SATS, and Raffles Medical. We are cautious on Capital Goods, Telco, and Office REITs. Our least preferred are M1, Starhub, and Suntec REIT.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS
BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
03 December 2015
Focus charts and table Figure 2: Consensus 2016E EPS were cut by 12.3% since
Figure 3: Downside risks to consensus expectations of
January 2015
5.2% EPS growth in 2016
102.0
50.0
100.0
40.0 30.0
98.0
20.0
96.0
5.2 7.0
10.0
94.0
0.0
92.0
-10.0
90.0
-20.0
88.0
-30.0
-2.3
-40.0
Singapore - EPS15
Singapore - EPS16
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2000
2001
-50.0
Nov-15
Aug-15
May-15
Feb-15
Nov-14
Aug-14
May-14
Feb-14
Nov-13
86.0
MSCI SG EPS growth (%)
Source: IBES
Source: MSCI, IBES
Figure 4: MSCI Singapore P/B within 10% from 2008/09
Figure 5: We are Overweight Real Estate and Transport, and
lows, but broad-based recovery unlikely as ROE remains
Underweight Capital Goods and Consumer Discretionary
under pressure 2.8 Real estate 2.4
Transportation Health care
2.0
Consumer staples 1.6
Banks Diversified financials
1.2 1.23x in Sep 01
0.8
1.37x in May 12
1.21x in Jan 03
0.77x in Aug 98 0.4 Dec-95
Dec-97
Dec-99
1.36x in Aug 13
1.06x in Feb 09
REITs
1.14x now
Telecom services Consumer discretionary
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
Capital goods
Singapore - Trailing PB
-1.5%
Source: MSCI
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
Source: Credit Suisse estimates
Figure 6: Top picks in Singapore Price Target (S$) price Company
RIC
Singtel DBS Wilmar Intl SIA Genting Singapore CMT City Developments Sembcorp Industries SATS Raffles Medical
STEL.SI DBSM.SI WLIL.SI SIAL.SI GENS.SI CMLT.SI CTDM.SI SCIL.SI SATS.SI RAFG.SI
Rating
1 Dec
O O O O O O O O O O
3.83 16.55 2.90 10.18 0.77 1.96 7.28 3.25 3.94 4.14
Market cap
Year end
(S$) (US$ mn) 4.40 22.00 3.74 14.00 1.00 2.30 12.00 4.20 4.45 5.00
43,449 29,614 13,213 8,691 6,580 4,939 4,710 4,134 3,151 1,691
ROE (%)
NDE (%)
(T) FY14A FY15E FY16E FY16E FY16E FY16E
FY16E
Mar Dec Dec Mar Dec Dec Dec Dec Mar Dec
Yield (%)
P/E (x) 16.7 10.7 11.7 41.5 20.3 15.0 14.6 7.2 24.4 35.8
16.1 9.6 11.5 35.3 32.1 16.7 13.1 9.7 22.4 33.0
15.3 8.6 10.0 14.2 22.4 16.2 9.4 8.4 17.7 27.2
4.8 3.6 3.4 4.5 1.3 5.9 2.2 4.9 3.6 1.4
P/B (x) 2.4 0.9 0.7 1.0 1.2 1.1 0.7 0.9 2.8 3.5
16.0 11.6 7.8 6.8 5.4 6.6 7.8 11.3 16.6 13.7
34.1 n.m. 74.2 Net Cash Net Cash 40.3 19.8 50.8 Net Cash Net Cash
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates
Singapore Market Strategy
2
03 December 2015
2016 Outlook: Domestic policies in focus External macro headwinds remain We expect Singapore GDP growth to remain lacklustre, reflecting weaker outlook for China and ASEAN. Slower growth in these economies have had a knock-on impact on Singapore's exports, as reflected in a decline in non-oil domestic exports and industrial production. While tourist arrivals have started to recover since May 2015, driven by strong growth in Chinese tourist arrivals, retails sales (ex-motor vehicles) have remained weak. As a result, Singapore's economic activity has been supported largely by domesticoriented industries, while external oriented and trade-related sectors have been sluggish. In addition, we believe ongoing domestic restructuring with tight labour policies is likely to lead to lower trend growth. Despite a productivity growth target of 2-3%, productivity has been declining since 2Q14, and we expect raising labour productivity to be challenging as the economy undergoes a structural shift from manufacturing towards services. While inflation is likely to pick up slightly from 2015 levels as the effects of budget measures and SG50 promotions start to wear off, lower commodity prices present downside risks. With a low inflation outlook and weak growth, the Credit Suisse forex team has a USDSGD forecast of 1.47 in 12 months.
We expect Singapore GDP growth to remain lacklustre, reflecting weaker outlook for China and ASEAN, as well as lower trend growth with domestic restructuring.
Domestic policy in focus With a lack of macro drivers, we expect government measures in the telco, property and land transport sectors to be key share price drivers in 2016. In the cellular market, we see a high probability of fourth cellular operator emerging from the spectrum auction in 1H16, which could drive resilient returns of telcos downwards. Within the property sector, we believe the time is ripe for an easing of some of the measures, given that specific policy intent of these measures has been achieved: (1) speculative activities have fallen, (2) foreign demand has been curbed, and (3) income growth has now outpaced home prices. With the bus government contracting model on track to start in 3Q16, we expect continued emphasis on improving rail reliability, with a potential transition to a similar asset-light model for rail. This will be like the rail financing framework for the Downtown Line operated by ComfortDelgro, where the operating assets are owned directly by the Land Transport Authority (LTA). In addition, we believe restructuring in the offshore and marine sector could be a surprise against a backdrop of sharply declining sector returns and rising workforce reductions.
Our model portfolio favours sectors which are less externally driven and could be beneficiaries of domestic policies, including the property and transport sectors
Overweight Property and Transport We believe external headwinds and ongoing domestic restructuring will present further downside risks to market expectations of an acceleration in EPS growth to 5% in 2016 from a 2% decline in 2015. Consensus 2016E EPS were cut 12.3% since January 2015, with the largest cuts in the consumer discretionary, consumer staples, and industrials sectors. MSCI Singapore ROE has declined from a peak of 17% in 2008 to 9.5% in 2015, and is expected to decline further to 9.2% in 2016. While MSCI Singapore is currently trading at a P/B of 1.14x, just 8% above the 2008-09 lows of 1.06x, we do not see a broad-based market recovery as ROE remains under pressure. Our STI target is 3,000, based on a forward P/E of 12.5x, one standard deviation below the historical average. Within our model portfolio, our largest Overweights are in Real Estate, Transportation, and Healthcare sectors. Our top picks are CDL, Singtel, and DBS. Our other preferred stocks include SIA, Wilmar, Genting, CMT, SCI, SATS, and Raffles Medical. We are cautious on capital goods, telco, and office REITs. Our least preferred are M1, Starhub, and Suntec REIT.
Singapore Market Strategy
Government measures in the telco, property and land transport sectors could be key share price drivers in 2016
3
03 December 2015
External macro headwinds remain We expect Singapore GDP growth to remain lacklustre, reflecting weaker outlook for China and ASEAN. Slower growth in these economies have had a knock-on impact on Singapore's exports, as reflected in a decline in non-oil domestic exports and industrial production. While tourist arrivals have started to recover since May 2015, driven by strong growth in Chinese tourist arrivals, retails sales (ex-motor vehicles) have remained weak. As a result, Singapore's economic activity has been supported largely by domesticoriented industries, while external-oriented and trade-related sectors have been sluggish. In addition, we believe ongoing domestic restructuring with tight labour policies is likely to lead to lower trend growth. Despite a productivity growth target of 2-3%, productivity has been declining since 2Q14, and we expect raising labour productivity to be challenging as the economy undergoes a structural shift from manufacturing towards services. While inflation is likely to pick up slightly from 2015 levels as the effects of budget measures and SG50 promotions start to wear off, lower commodity prices present downside risks. With a low inflation outlook and weak growth, the Credit Suisse forex team has a USDSGD forecast of 1.47 in 12 months.
Singapore macroeconomic outlook weak We expect Singapore GDP growth in 2016 to remain lacklustre, at the mid-range of Ministry of Trade and Industry's forecast of 1-3%. Our forecast partly reflects the weaker growth outlook for China and Asia region. Most ASEAN economies are also expected to have a more moderate growth profile over the next two years. This coordinated slowdown will likely offset the better growth outlook for the US, given Asia outweighs the US as a source of final demand for Singapore. Figure 7: Distribution of expenditure—Singapore GDP 25
%
20 15 10 5 0 -5 -10
Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
-15
Private consumption
Govt. consumption
GFCF
Net Exports
Statistical Discrepancy
YoY GDP growth
Change in Inventories
Source: CEIC
Singapore Market Strategy
4
03 December 2015
Weakness in regional economies dragging down growth Singapore's GDP growth is likely to be dampened by weakness in its major trading partners—China, Indonesia, and Malaysia. Collectively, these three economies account for a third of goods exports, and are a significant source of demand for services such as tourism. Slower growth in these economies have had a knock-on impact on Singapore's exports, with the three-month moving average Non-Oil Domestic Exports (NODX) declining 2-3% on average since August 2015. Figure 8: Singapore's economic linkages with regional
Figure 9: Non-Oil Domestic Exports trending down
economies
% of total
20%
20
15 10
15%
20
10%
5%
12.1 11.9
13.4 11.8 9.9
8.9
11.4
0%
8.2
-5% -10%
5 0 Domestic Exports
Re-exports China
Tourism
Indonesia
* 2013 data. Source: MAS
3.2 1.9 0.4 FDI in Singapore*
-15%
-20% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15
25
Malaysia
NODX (3MMA, YoY, %)
Source: CEIC
Likewise, industrial production in Singapore has been declining YoY for most of 2015. As shown in Figure 10, Singapore's economic activity has been supported by domesticoriented industries, while external oriented and trade-related sectors have been sluggish. Figure 10: Economic Activity Index
Figure 11: Singapore IP growth Oct-2015 = -5.4% YoY 70 60 50
40 30 20 10 0 -10 -20 -30
Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15
-40
SG IP (YoY growth %)
Source: MAS
Singapore Market Strategy
Source: CEIC
5
03 December 2015
Tourist arrivals showing signs of slight recovery, but retail sales remain weak Tourist arrivals into Singapore have turned positive since May 2015, rising 5.8% YoY on average in 3Q15. This was driven by a sharp recovery in the number of Chinese tourists, which increased 44% YoY in 3Q15 as the effects of Malaysian Airlines incident start to dissipate. However, this was offset by continued decline in Malaysian and Indonesian tourists, which fell 3% and 5% YoY, respectively, in 3Q15 as their currencies remained weak. Despite the pickup in tourist arrivals, retail sales (ex-motor vehicles) remained weak, declining 1% YoY in September after showing tentative signs of improvement in July and August. The greatest fall in sales was in the recreational, optical and fashion sectors, driven by weak consumer sentiment. Figure 12: Surge in Chinese arrivals driving recovery in
Figure 13: Retail sales (ex-motor vehicles) Sep 2015 =
overall tourist arrivals
-1% YoY
80%
25%
60%
20%
15%
40%
10%
20%
5%
0%
0%
-20%
-5%
-60%
-15%
Visitor arrival growth YoY
Source: CEIC
Malaysia
Indonesia
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
-10%
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
-40%
China
Retail sales (ex Motor Vehicles) growth
Source: CEIC
Singapore trend growth lower with tight labour policies We believe that Singapore's trend growth is much lower now. Population growth should slow further over the next few years, if we are right that a continuation of the tight labour policies are likely. This could lead to lower economic growth rate for Singapore and weakness in earnings growth for companies leveraged to economic growth. Average quarterly earnings growth for the Singapore market was at 3.7% since 1Q12, as GDP growth slowed down to 3.4% over this period.
Singapore Market Strategy
6
03 December 2015
Figure 14: We expect trend growth to continue slowing
Figure 15: Slower growth to lead to lower earnings growth YOY (%) 140.0
GDP (10 Year average)
10.0%
YOY (%) 20
-5
5.0%
-100.0
-10 CY1Q03
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
4.0%
Earnings growth (%)
Source: CEIC, Credit Suisse estimates
CY1Q15
-60.0
CY1Q14
6.0%
CY1Q13
0
CY1Q12
-20.0
CY1Q11
7.0%
CY1Q10
5
CY1Q09
20.0
CY1Q08
8.0%
CY1Q07
10
CY1Q06
60.0
CY1Q05
15
CY1Q04
100.0
9.0%
GDP growth (%) [RHS]
Source: CEIC, Company data, Credit Suisse
The Economic Strategies Committee has set a 2-3% productivity growth target in 2010 to move the economy towards productivity-driven growth. This involves initiatives such as hiking foreign worker levies to encourage reliance on cheap foreign labour, as well as the establishment of the National Productivity Fund to give grants and incentives to invest in productivity. While there was some initial success with productivity growth of 12% achieved initially in 2010, progress has since languished with productivity declining since 2Q14. Figure 16: Labour productivity change
20.0 15.0 10.0 5.0 0.0 -5.0 -10.0
1Q2015
1Q2014
1Q2013
1Q2012
1Q2011
1Q2010
1Q2009
1Q2008
1Q2007
1Q2006
1Q2005
-15.0
Labour Productivity change (%) Source: CEIC
Thus far, the government has been able to partly offset the drop in foreign labour growth by increasing resident labour force participation rates, but boosting this further from the already high 67% might be a challenge. In addition, raising labour productivity growth further over the next decade could be challenging, as the economy is going through structural shifts from manufacturing towards a services-driven economy.
Singapore Market Strategy
7
03 December 2015
Figure 17: Rising local labour force participation rates
Figure 18: Raising productivity growth further could be a
have helped offset foreign employment growth until 1H15
challenge
no. of ppl Half-yearly changes in employment
12
Total Foreign Employment Total Local Employment
60,000
50,000
Singapore Contribution to Real GDP Growth
pp
Capital
Labour
Total Factor Productivity
10 8
40,000
6
30,000
4
20,000
2
10,000
0
0
-2
-10,000
-4
-20,000
-6
-30,000
-8
Source: CEIC, Credit Suisse
Source: Credit Suisse FX team estimates
Wage pressures likely to persist despite a weaker employment market We expect the unemployment rate to trend up gradually over the next two years to reach 2.3% by end 2016, reflecting weaker demand conditions. While overall unemployment has been relatively stable at 2%, unemployment rose among residents (2.8% to 3.0%) and citizens (2.9% to 3.1%), the second consecutive quarter of increase since June 2014. There have been some recent negative datapoints: (1) Employment growth was revised down. (2) Job vacancy ratios fell, albeit still elevated. (3) Hours worked fell further, which could indicate companies are cutting back on hours. (4) Redundancies rose both YoY and QoQ, seasonally adjusted. (5) Re-entry rates fell slightly. (6) Hiring sentiment in Singapore has also been cautious, with only a net 32% of employers expecting to increase headcount. The silver lining is that turnover ratios such as quit rates and hiring rates stabilised. Slower foreign and resident labour force growth nonetheless helped cap the rise in the headline unemployment rate. Figure 19: Singapore employment change
Figure 20: Credit Suisse expects unemployment to reach 2.2% in 2015E and 2.3% in 2016E (%)
SG Employment Change
thousand
Manufacturing sa Services sa
50
7.00
Construction sa
6.00
40
5.00 30
4.00
20
3.00
10
2.00 CS 2015E estimate: 2.2%
1.00
0
Singapore Market Strategy
15
14
13
12
11
10
09
08
07
06
Overall unemployment rate
Mar-16
Mar-15
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-97
Source: CEIC
05
04
03
02
01
00
99
98
-20
Mar-98
0.00
-10
Resident unemployment rate
Source: CEIC, Credit Suisse estimates
8
03 December 2015
However, the slower pace of employment growth may not lead to an easing of wage pressures, as pockets of labour market tightness are expected to continue. This is reflected in uneven vacancy rates across sectors, with elevated levels of vacancy rates for the accommodation and food services, as well as retail trade sectors. MAS expects resident wage growth to be close to its ten-year historical average of 3.6% in 2016, stable from 2015 but above 2.3% in 2014. Hence, we do not expect any easing in staff costs, which have gone up as a percentage of revenue from 16.3% on average in 2010 to 18.3% in 2014, and further to 19.6% in 1H15. Figure 22: Wage costs / revenue
Figure 21: Vacancy rate by sector
2005-14 Average
20.0
Source: MAS
15.0
CY1Q15
CY1Q14
CY1Q13
CY1Q12
CY1Q11
14.0
CY1Q07
Accommodation & Food Services
Community, Social & Personal Services Administrative & Support Services Retail Trade
Information & Communications
16.0
Real Estate Services
0
Professional Services
17.0 Financial & Insurance Services
2 Transportion & Storage
18.0
Wholesale Trade
4
Manufacturing
19.0
Construction
6
CY1Q10
2Q2015
CY1Q09
1Q2015
CY1Q08
%, SA
8
Staff costs to revenue (%) Source: Company data, Credit Suisse research
Inflation likely to accelerate gradually in 2016 We are expecting 2016 headline inflation to be at the higher end of MAS forecast of 0.51.5%, although downside risks remain on lower commodity prices. Inflation is expected to pick up slightly from 2015 as the effects of budget measures and SG50 promotions start to wear off. However, weak demand conditions, the softer labour market, coupled with rising interest rates should help cap pass-through from higher labour costs to consumer prices. Figure 23: Inflation likely to rise gradually in 2016
Figure 24: Oil prices expected to remain low
8.0
110
7.0 100
6.0 5.0
90
US$/bbl
4.0 3.0
2.0
80 70
1.0 60
(1.0)
50
Jan-00 Oct-00 Jul-01 Apr-02 Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15
(2.0)
CPI
Source: CEIC
Singapore Market Strategy
MAS Core Inflation
40 3Q14A
1Q15A
Brent (actual)
3Q15E
1Q16E
3Q16E
Brent (forecast)
2017E
2019E
Futures
Source: the BLOOMBERG PROFESSIONAL™ service, CS estimates
9
03 December 2015
Expect further currency weakness The Credit Suisse forex team has a USDSGD forecast of 1.47 in 12 months. In our view, the hurdle to moving towards a neutral stance appears to be very high. Given deflation and weaker-than-expected growth, most other central banks would have acted to ease monetary conditions, but the MAS has simply reduced the pace of appreciation, i.e., slower tightening, rather than actually seeking depreciation. We read this as reflecting what appears to be a belief that the SGD basket is an asymmetrical policy tool, good at slowing growth and reducing inflation via appreciation, but not very effective at stimulating growth during periods of external weakness. However, the SGD NEER is likely to trade persistently below the middle of its policy bands as the pressure for MAS to ease again is likely to persist. Based on our GDP and unemployment forecast, the MAS should reduce further its concern about wage cost pressures and amplify its statement that weak growth will constrain pass-through from wages into inflation. In January 2015, the MAS justified its inter-meeting reduction of the slope of bands with its cut in inflation expectations. Figure 25: CS estimates of SGD NEER—some weakening near term 128.0
124.0
120.0
116.0
112.0
108.0 Jan-11
Jul-11
Jan-12
SGD NEER
Jul-12
Jan-13
Upper/lower band
Jul-13
Jan-14 Lower band
Jul-14
Jan-15
Jul-15
Mid point of policy band
Source: Credit Suisse FX team
Singapore Market Strategy
10
03 December 2015
Domestic policy in focus With a lack of macro-economic drivers. we expect government measures in the telco, property, land transport sectors to be closely watched. ■
Potential for new entrant in cellular market: We see a high probability of a fourth cellular operator emerging from the spectrum auction in 1H16. In 2H 2016, we expect cellular pricing in Singapore to come under pressure as incumbent operators pre-empt the potential launch of services by new player in 2017.
■
Pre-emptive recalibration of property measures: In our view, the time is ripe for an easing of some of the measures, given that specific policy intent of these measures has been achieved: (1) speculative activities have fallen, (2) foreign demand has been curbed, and (3) income growth has now outpaced home prices.
■
Bus and rail restructuring: With the bus government contracting model on track to start in 3Q16, we expect continued emphasis in improving rail reliability, with a potential transition to a similar asset light model for rail. This will be like the rail financing framework for the Downtown Line operated by ComfortDelgro, where the operating assets are owned directly by the LTA.
In addition, we believe restructuring in the offshore and marine sector could be a surprise against a backdrop of sharply declining sector returns and rising workforce reductions.
Potential for new entrant in cellular market The Singapore Cellular market is at a critical juncture with uncertainty surrounding the possible entry of a new fourth cellular operator in the market. We believe the current market scenario is different and see a high probability of a new operator coming in to Singapore cellular market. Below we detail our reasoning for it. Availability of low-band spectrum Unlike the 2013 spectrum auction, when the IDA reserved 2x20MHz of 2600MHz for new operators (at S$40 mn), the 2016 auction is likely to have low-frequency-band spectrum (700MHz and 900MHz) reserved for new operators. The IDA has proposed to reserve 2x10MHz of 700MHz, 2x10MHz of 900MHz, and 20MHz of 2300MHz at a reserve price of S$40 mn for any new operator in the upcoming spectrum auction (most likely in 2016). Though the proposal is still in the consultation stage, we see a strong likelihood of it being implemented given IDA’s keenness to have a fourth cellular operator in Singapore. Low frequency band spectrum is important for the new operator’s economics as it reduces cost of operation given the reach and in building penetration of the frequency band. Figure 26: IDA's proposal on upcoming spectrum auction Frequencies Amount of spectrum to be allocated Expected start date Duration of spectrum (indicative) Spectrum reserved for new operator
700MHz 703-748MHz / 758-803MHz 2x45MHz
Lot Size Reserve price in general auction
900MHz (EGSM) 890-915MHz / 935-960MHz 2x5MHz
2018 at the earliest
2300MHz (TDD)
2500MHz (TDD)
2300-2330MHz
2570-2615MHz
30MHz
45MHz
1-Apr-17
12 to 16years
12 to 16years
3 to 5years
12 to 16years
12 to 16years
2x10MHz
2x10MHz
-
20MHz
-
10MHz
45MHz
5MHz S$5m per 5MHz
5MHz S$5m per 5MHz
Proposed reserve price for new operator Spectrum put for general auction
900MHz 927-932MHz / 935-960MHz 2x25MHz
2x35MHz 2x5MHz S$20m per 2x5MHz
S$40m for the entire block Allocation under 2x15MHz FROR 2x5MHz S$20m per Pro-rated based 2x5MHz on 900MHz price
Note: EGSM spectrum is proposed to be allocated via first right of refusal (FROR) to StarHub. Source: IDA, Credit Suisse
Singapore Market Strategy
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03 December 2015
Interest shown by two new players In the earlier auction (2013), no new operator had shown interest in the Singapore cellular market despite the IDA reserving 2x20MHz of 2600MHz spectrum. However, this time two new players, My Republic and Consistel, have shown interest in being the fourth operator in Singapore and are actively participating in the consultation process. We believe that if the IDA goes ahead with its current proposals, at least one of the two players is likely to participate in the upcoming spectrum auction. The key question is on the availability of capital for either of the two players to fund its Singapore cellular operations. In our base case, we are assuming that the funding is in place for at least one of the two companies. Attractive sector returns With number three cellular operator (M1), having c17% revenue market share (as of June 2015), generating c28% return on capital employed in 2014, we believe sector returns look attractive for a new entrant to strive for a business case in Singapore telecom market. Stock implications We believe consensus is yet to bake in the complete financial impact from the potential entry of a fourth cellular operator. Hence, we expect earnings cuts for Singapore telcos (especially for M1 and StarHub) in 2H 2016. We are 17% and 11% below consensus on 2017E earnings for M1 and StarHub, respectively. Singtel is our top pick among the Singapore telecoms stocks, given Singapore business only contributes c20% to our SOTP-based target price, and within that Singapore mobile only constitutes c5%.
Pre-emptive recalibration of property measures Achieving a stable and sustainable property market has been the key objective of the government, as eight rounds of property cooling measures have been implemented since 2009. We believe that the time is now ripe for an easing of some of the measures, given that the specific policy intents of the measures have been achieved on various fronts: (1) speculative activity has fallen significantly, with monthly sub-sales now at a negligible 24% of total volumes, (2) foreign demand has been curbed significantly with overall foreigner buying at 4% of total volumes, (3) housing affordability has improved substantially with incomes having risen faster than home prices on both a short-term and long-term perspective. Against a backdrop of a rising interest rate environment, a weakening labour market and an oversupply situation that is expected to persist in the next few years, we think a preemptive re-calibration of measures rather than ex-post corrective actions would be a better way to go in achieving a stable and sustainable property market. This is especially so given the context of a home ownership rate of 90%, with residential property representing a dominant majority at 46% of household assets; we believe that a large correction in property prices is neither desirable and/or tolerated.
Singapore Market Strategy
12
03 December 2015
Figure 27: Speculative activity has declined
Figure 28: while foreigner buying has also fallen
Units 400
40%
300 250
14%
35%
12%
30%
10%
25%
8%
200
Sub-sales
15%
12%
10%
8% 4% 2%
5% 0%
Jul-15
Jan-15
Jul-14
Jan-13
Jan-14
0%
Jul-13
Jul-12
2%
Jan-12
50
Jul-11
4%
Jan-11
100
Jul-10
6%
Jan-10
150
20%
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15
350
CCR
Sub-sales % of total sales - RHS
Source: URA, Credit Suisse
RCR
OCR
Overall
Source: URA, Credit Suisse
The government has previously highlighted that property prices have increased faster than incomes, and that the gap must be closed. On both the public and private segments, we note that longer-term incomes have in general kept pace with property prices, with a large divergence observed only in recent years. However, we note that housing affordability has improved substantially since the cooling measures were introduced, and even if we assumed that incomes remain flat from 2014 levels, the "gap" between incomes and prices has since been effectively eliminated. Figure 29: Average and median household incomes vs.
Figure 30: Average and median household incomes vs.
HDB resale prices (2000=100)
HDB resale prices (2008=100)
200
150
180
140 130
160
120
140 110
120
Average household income HDB Resale price index
Median household income
Source: URA, HDB, Singstat, Credit Suisse
Average household income HDB Resale price index
2015
2014
2013
2012
2011
2010
2008
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
80
2002
80 2001
90
2000
100
2009
100
Median household income
Source: URA, HDB, Singstat, Credit Suisse
Stock implications We view a potential re-calibration of stamp duty measures in 2H16 as a key re-rating catalyst for the sector. However, as we expect the market to deteriorate further, before an eventual easing improves sentiment, bottom-up drivers would have greater significance, with corporate action to unlock value the key share price driver in the near term. CDL is our top pick. As we believe that multiple catalysts lie ahead for CDL, with further upside likely to be driven by: (1) asset divestments to unlock portfolio value, (2) positive sales momentum from past overseas investments, (3) a pick-up in Singapore residential sentiment in 2016, with the potential tweaking of residential policy measures, and (4) a potential re-inclusion into the FTSE EPRA/NAREIT index.
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03 December 2015
Bus and rail restructuring Bus: Government contracting model on track for 3Q16 As rail network expansion is a long-term plan, the bus service enhancement programme (BSEP) was launched in 2012 to add 1,000 new government-funded buses and 80 new bus services to address interim gaps. Further, the bus reform was announced in 2014 where the LTA will own and determine the number of buses to operate, and tender these bus contracts on a cost-plus margin to operators by Sep 2016. The routes are organised into 12 bus packages where nine will be reserved for incumbents (80% of existing buses), and three will be subject to competitive tender. The first tender was awarded to Tower Transit, a new foreign-owned entrant to the market. The second tender was also awarded to a foreign-owned entrant, the UK-based Go Ahead Group. The first three tenders will provide the LTA with a price discovery process to better determine a reasonable margin for the incumbent-run packages. Figure 31: Results of first package—Bulim bus tender won by Tower Transit Company SMRT Buses Ltd RATP Dev Transdev Asia *Tower Transit Group (won tender) Keolis Busways SBS Transit Ltd Woodlands Transport Go Ahead Group Aedge Holdings Pte Ltd Jinan Public Transportation Corporation Travel GSH Pte Ltd & Qingdao Jiaoyun Group
Country
Bid (S$ mn/year)
Singapore France United Kingdom France Australia Singapore Singapore United Kingdom Singapore China Singapore & China
90.6 92.6 111.2 111.8 113.6 120.0 136.8 138.6 na na na
Source: LTA
Figure 32: Bids for second package: Loyang tender results by 4Q15 Companies * Go Ahead Group (won tender) Woodlands Transport Keolis SBS Transit Ltd Tian San Shipping / Kumho SMRT Buses Ltd RATP Dev Transdev Asia Busways Travel GSH Pte Ltd & Qingdao Jiaoyun Group Jinan Public Transportation Corporation
Country
Tender 2 Bids (S$ mn/yr)
Tender 1 Bids (S$ mn/yr)
United Kingdom Singapore France Singapore Singapore/S. Korea Singapore France Australia Singapore & China China
99.5 106.5 107 109.2 114 119.6 120.7 126.3 Dropped Dropped
138.6 136.8 111.8 120 90.6 92.6 113.6 -
Source: LTA
Rail: New Rail Financing Framework The Land Transport Authority (LTA) is transitioning to a New Rail Financing Framework (NRFF) for the public rail business to facilitate the future expansion of the Rapid Transit System (RTS) network in a financially sustainable manner, as well as to inject greater contestability into the rail industry. Under the new financing framework, the government will take ownership control of operating assets, while operators will pay a license charge for use of the assets. The sums collected will then be used to replace and enhance operating equipment such as trains,
Singapore Market Strategy
14
03 December 2015
signalling systems, and other operating assets. To date, however, only the Downtown Line is under the NRFF while negotiations are ongoing between the LTA and current operators for the transition of existing lines. Figure 33: MRT lines operated by SMRT and Comfort Delgro SMRT North-South-East-West Line Circle Line
Operating assets held under SMRT SMRT is expected to purchase the operating assets from LTA at book values on 4 May 2019
ComfortDelGro Northeast Line
SBS Transit was to purchase the operating assets from LTA in 2008 following a review. There has been no review between SBS Transit and LTA to date
Downtown Line
Under the NRFF, where operating assets are owned by LTA
Source: LTA
Stock implications The impact of New Rail Financing Framework on SMRT will depend on the valuation of train assets to be transferred to LTA vis-à-vis SMRT’s existing capex obligations, subsequent payment incurred by SMRT in the form of a license charge, as well as compensation from LTA for early termination of its license agreement.
Offshore and Marine restructuring could be a surprise The offshore and marine sector has seen the largest decline in returns since 2009, driven by both structural and cyclical factors. This could have major implications for the economy as the offshore and marine sector represents 7.6% of total manufacturing output and 21% of total manufacturing employment in 2014. Figure 34: Marine and offshore engineering represents
Figure 35: Marine and offshore engineering represents
about 8% of Singapore manufacturing output
about 20% of Singapore manufacturing employment
350
294 238
S$ bn
250
253
302
300
8.0
273
264
217
147
100
142
6.0
159
154
185
208
226
237
256
244
357
278
281
278
281
5.0
351
358
370
382
5 2003
414
418
425
425
421 20.0
15.0 340
200
318
314
317
324
329
340
323
329
335
338
335
333 10.0
4.0
100
5.0
3.0 6 2002
404
418
300
207
50 0
400
7.0
227
192
200
25.0 435
304
S$ bn
300
150
500
9.0
6 2004
9 2005
12
17
20
2006
2007
2008
Marine and offshore engineering - LHS
20 2009
Others - LHS
17
17
20
2010
2011
2012
22 2013
23 2014
Output as % of Total manufacturing - RHS
Source: Company data, Credit Suisse estimates
2.0
0
39
37
41
46
53
64
2002
2003
2004
2005
2006
2007
Marine and offshore engineering - LHS
95
94
85
84
87
89
88
2008
2009
2010
2011
2012
2013
2014
0.0
Others - LHS
Employment as % of Total manufacturing - RHS
Source: Company data, Credit Suisse estimates
In our view, the key challenges facing the Singapore offshore and marine industry are as follows: ■
Aggressive Chinese competition in rigbuilding: While Singapore rigbuilders have been able to win a fair number of rigs orders in 2011-14 (80 out of 188 jackups, representing 43% global market share), increasing competition by Chinese yards has manifested in the form of a deterioration in payment terms for new rigbuilding contracts. This is reflected in Sembcorp Marine's contract with Marco Polo Marine in February 2014 which was based on a payment term of 10:10:80 (10% on contract signing, 10% on achieving milestone, and 80% on delivery), raising credit risk in the event of rig cancellation.
■
Major working capital outflow: We expect continued working capital outflow in 2016 as customers continue to request for delay in delivery for rigs under construction. As
Singapore Market Strategy
15
03 December 2015
shown in Figure 37, Sembcorp Marine's net gearing has increased to 0.66x in September 2015. ■
Significant exposure to Brazil remains a major risk: Sete Brasil represents about 40% of Keppel O&M and Sembcorp Marine's orderbooks, but has yet to make a payment since November 2014 as it is undergoing restructuring. In addition, the deepening corruption investigations in Brazil remain a major overhang.
Figure 36: Chinese yards have exceeded Singapore yards
Figure 37: Transport manufacturing has been driving
in rig market share since 2014
weak employment numbers in Singapore
100% 90%
1
7
80%
4
70%
6
9
13 16
1
8
9
3
17
10
5
4 14
11
20
40%
7
19
11
17
10%
24
14
31
22
33
14
1 2005
3
350
2
300
1
250
0
200
-1
150
-2
100
-3
50
-4
0% 2004
400
4 23
20%
17
10
33
30%
43
4
8
2
29
6
60% 50%
19
4 6
2006
2007
2008
Singapore
2009 China
2010
Korea
2011
2012
2013
2014
0 2010
2011
2012
2013
Change in net employment
Others
Source: IHS-Petrodata, Credit Suisse estimates
2014
Retrenched (RHS)
Source: CEIC
Stock implications We expect heightened cancellation and rig deferral risks to weigh on sentiment on the sector in the near term. As such, we maintain our UNDERWEIGHT stance on the O&M sector. However, key indicators we would be tracking to determine the potential for restructuring include (1) balance sheet risks, (2) declining orderbook and operating leverage to a decline in revenue, and (3) the outcome of Sete Brasil restructuring, and eventual orderbook and credit risks. Figure 38: Sete Brasil represents about 35% of Keppel's
Figure 39: Net gearing of SMM has increased to 0.66x as
orderbook
of September 2015 Energy Arabian Drilling 2%
Falcon Energy 2% BOT Lease Caspian Drilling 2% 2% Ensco Floatel 2% 2%
Perforadora Central 2%
Gulf Drilling International 3% TS Offshore 4%
Parden 1%
New Orient Bumi Armada Marine 1% 1% Crystal Heights 1%
0.66
0.60
0.51
0.40 0.21 Sete Brasil 35% Fecon 5%
0.28
0.20 0.03 0.00 -0.20
Petrobras 7% Grupo R 7%
-0.40 Golar 15%
Transocean 8%
Source: Company data, Credit Suisse estimates
Singapore Market Strategy
0.80
-0.60
-0.30
-0.33 -0.46
-0.48
1Q13
2Q13
-0.42 3Q13
4Q13
-0.50 1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
Net gearing (x)
Source: Company data, Credit Suisse estimates
16
03 December 2015
Overweight Property and Transport Expect more earnings cuts Consensus 2015E and 2016E EPS have been cut by 8.1% and 12.3% since January 2015, respectively. As a result, the market now expects MSCI Singapore to see EPS growth of 5.2% in 2016, following a decline of 2.3% in 2015. The largest cuts were in the consumer discretionary, consumer staples and industrials sectors. Consumer discretionary stocks have been impacted by weak retail sales (JCNC) and falling gaming revenues (Genting). Consumer staples have been hit by a decline in commodity prices (Golden Agri), while Industrial stocks have been impacted by lower newbuild rig orders (Sembcorp Marine) and weak power spreads (Sembcorp Industries). Real Estate, Financials and Telcos have seen relatively resilient earnings. Figure 40: 2015E and 2016E Singapore consensus
Figure 41: MSCI Singapore EPS growth (%)
102.0
50.0
100.0
40.0 30.0
98.0
20.0
96.0
5.2 7.0
10.0
94.0
0.0
92.0
-10.0
90.0
-20.0
88.0
-30.0
-2.3
-40.0
Singapore - EPS15
Singapore - EPS16
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
-50.0
2000
Nov-15
Aug-15
May-15
Feb-15
Nov-14
Aug-14
May-14
Feb-14
Nov-13
86.0
MSCI SG EPS growth (%)
Source: IBES
Source: MSCI, IBES
P/B likely to remain depressed as ROE remains under pressure The MSCI Singapore ROE has declined from a peak of 17% in 2008 to 9.5% in 2015, and is expected to decline further to 9.2% in 2016. While MSCI Singapore is currently trading at a P/B of 1.14x, just 8% above the 2008-09 lows of 1.06x, we do not see a broad-based market recovery as ROE remains under pressure. That said, downside should also be limited as the market is already trading at a discount to P/B of 1.23x in 2001 (global recession) and 1.21x in 2003 (SARS episode). Only during the Asian Financial Crisis of 1997/98 did P/B see much lower levels of 0.77x. Figure 42: ROE likely to decline further in 2016E
Figure 43: MSCI Singapore—P/B
18%
2.8
16%
2.4
14% 2.0
12%
9.2% 2016
10% 9.5% now
8%
1.6 1.2 1.23x in Sep 01
6% 0.8
4%
0.4 Dec-95
Dec-97
MSCI Singapore - ROE
Singapore Market Strategy
Dec-99
Dec-01
1.37x in May 12
1.36x in Aug 13
Dec-11
Dec-13
1.06x in Feb 09
0.77x in Aug 98
2% Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15
Source: MSCI, IBES
1.21x in Jan 03
Dec-03
Dec-05
Dec-07
Dec-09
1.14x now
Dec-15
Singapore - Trailing PB
Source: MSCI
17
03 December 2015
Figure 44: ROE decline most significant in the capital
Figure 45: Profit margin for capital goods and consumer
goods, consumer staples and real estate sectors
staples sectors have declined significantly 10.0
30.0
9.0 25.0
8.0 7.0
20.0
6.0 5.0
15.0
4.0 10.0
3.0 2.0
5.0
1.0 0.0
0.0 2007
2008
2009
Capital goods
2010
2011
Consumer staples
2012 Real estate
2013
2014
2007
2015E
2008
2009
2010 Capital goods
Transportation
Source: the BLOOMBERG PROFESSIONAL™ service, IBES, Credit Suisse
2011
2012
2013
2014
2015E
Consumer staples
Source: the BLOOMBERG PROFESSIONAL™ service, IBES, Credit Suisse
STI target of 3,000 Our STI target is at 3,000, based on a forward P/E of 12.5x, in line with one standard deviation below its historical average. This would imply a P/B of 1.2x, also one standard deviation below its historical average. Figure 46: STI target of 3,000 based on P/E of 12.5x, one standard deviation below historical average
20.0 18.0 +1 Std dev = 15.7x
16.0 14.0
Average: 14.1x
12.0
-1 Std dev = 12.5x
10.0
12.5x now
8.0 6.0 Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates
Model portfolio: Overweight Property and Transport Figure 47 shows our model portfolio. Our largest Overweights are in Real Estate, Transportation, and Healthcare sectors. We have a tactical Overweight in Consumer Staples, as we expect palm oil stocks to outperform with rising palm oil prices, driven by El Nino. Our largest Underweights are in the Capital Goods, Consumer Discretionary and Telco sectors.
Singapore Market Strategy
18
03 December 2015
Figure 47: CS Singapore model portfolio sector tilts Real estate Transportation Health care Consumer staples Banks Diversified financials REITs Telecom services Consumer discretionary Capital goods -1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
Source: MSCI, Credit Suisse estimates
Figure 48: CS Singapore model portfolio Sector Banks Telecom services Real estate Capital goods Transportation REITs Consumer discretionary Consumer staples Diversified financials Health care
CS MSCI SG vs MSCI Recommended stocks 37.0 36.9 0.1 DBS 14.5 15.0 -0.5 Singtel 10.5 9.3 1.2 CDL 9.5 10.6 -1.1 SCI 8.5 7.4 1.1 SIA, SATS 7.0 7.4 -0.4 CMT, AREIT, KDC Reit 6.0 6.8 -0.8 Genting 4.0 3.7 0.3 Wilmar, First Resources 2.5 2.8 -0.3 0.5 0.0 0.5 Raffles Medical
Source: MSCI, Credit Suisse estimates
Stock picks Our top picks in Singapore are Singtel, DBS, and CDL. Other preferred stocks include SIA, Wilmar, Genting, CMT, SCI, SATS, and Raffles Medical. Figure 49: Top picks in Singapore Price Target (S$) price Company
RIC
Singtel DBS Wilmar International SIA Genting Singapore CMT City Developments Sembcorp Industries SATS Raffles Medical
STEL.SI DBSM.SI WLIL.SI SIAL.SI GENS.SI CMLT.SI CTDM.SI SCIL.SI SATS.SI RAFG.SI
Rating
1 Dec
O O O O O O O O O O
3.83 16.55 2.90 10.18 0.77 1.96 7.28 3.25 3.94 4.14
Market cap
(S$) (US$ mn) 4.40 22.00 3.74 14.00 1.00 2.30 12.00 4.20 4.45 5.00
43,453 29,616 13,214 8,692 6,580 4,939 4,711 4,134 3,151 1,691
Year end
ROE (%)
NDE (%)
(T) FY14A FY15E FY16E FY16E FY16E FY16E
FY16E
Mar Dec Dec Mar Dec Dec Dec Dec Mar Dec
Yield (%)
P/E (x) 16.7 10.7 11.7 41.5 20.3 15.0 14.6 7.2 24.4 35.8
16.1 9.6 11.5 35.3 32.1 16.7 13.1 9.7 22.4 33.0
15.3 8.6 10.0 14.2 22.4 16.2 9.4 8.4 17.7 27.2
4.8 3.6 3.4 4.5 1.3 5.9 2.2 4.9 3.6 1.4
P/B (x) 2.4 0.9 0.7 1.0 1.2 1.1 0.7 0.9 2.8 3.5
16.0 11.6 7.8 6.8 5.4 6.6 7.8 11.3 16.6 13.7
34.1 n.m. 74.2 Net Cash Net Cash 40.3 19.8 50.8 Net Cash Net Cash
Source: Credit Suisse estimates
Singapore Market Strategy
19
03 December 2015
Our most non-consensus OUTPERFORM calls based on a potential turnaround in 2016 include CDL, SIA, Genting, and SCI, where expectations are low and there is scope for ROE to surprise positively. Figure 50: Genting Singapore's ROE
Figure 51: SCI's ROE
20.0%
40.0%
15.0%
20.0%
10.0%
5.4% FY16 (CS)
5.0% 4.1% now 0.0%
5.0% FY16 (IBES)
10.5% now
0.0%
10.5% 2016 (IBES)
-20.0% -40.0% -60.0%
-5.0% -10.0% Dec-09 Sep-10
11.3% 2016 (CS)
Jun-11
Mar-12
Dec-12 Sep-13
Jun-14
Mar-15
-80.0% Dec-97 Nov-99 Oct-01 Sep-03 Aug-05
Dec-15 Sep-16
Jul-07
Jun-09 May-11 Apr-13 Mar-15
SEMBCORP INDUSTRIES LTD - ROE
GENTING SINGAPORE PLC - ROE
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates
Figure 52: CDL's ROE
Figure 53: SIA's ROE 18.0% 16.0% 14.0% 12.0%
8.0% FY17 (CS)
10.0%
8.0% 5.5% now
6.0% 4.0% 2.0% 0.0% Dec-95 Feb-98 Apr-00
Jun-02 Aug-04 Oct-06 Dec-08 Feb-11 Apr-13
6.9% FY17 (IBES)
Jun-15
SINGAPORE AIRLINES LTD - ROE
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates
We are cautious on capital goods, telco, and office REITs. Our least preferred are M1, Starhub, and Suntec REIT. Figure 54: Key UNDERPERFORM ideas in Singapore Price Target (S$) price Company
RIC
StarHub SUNT M1
STAR.SI SUNT.SI MONE.SI
Rating U U U
[1 Dec] 3.60 1.56 2.76
Market cap
(S$) (US$ mn) 3.10 1.54 2.35
4,431 2,796 1,841
Year end
ROE (%)
NDE (%)
(T) FY14A FY15E FY16E FY16E FY16E FY16E
FY16E
Dec Dec Dec
Yield (%)
P/E (x) 16.8 16.9 14.6
16.1 14.6 14.4
17.1 13.9 14.9
5.6 6.3 6.7
P/B (x) 30.0 0.7 6.5
183.2 5.2 43.6
119.4 55.5 75.8
Source: Credit Suisse estimates
Singapore Market Strategy
20
Singapore Market Strategy
Singapore market outlook by sector Figure 55: Sector outlook Sector
Earnings outlook
Financials
Preferred stock in sector: DBS (OUTPERFORM)
Key drivers
Weaker top-line growth – The weakness in overall macro demand and capital market activity is likely to be a drag on both loan growth and non-interest income.
Improvement in NIMs – The imminent lift off in US short-term rates is likely to provide a boost to Singapore banks' NIMs.
Asset quality concerns likely to linger – There appears to be a wide gap in terms of market perception and bank managements' confidence in the asset quality of their loan books. While stock prices seem to be pricing in 60-65 bp of credit costs, banks are budgeting for 30-35 bp. We expect concerns to linger until there is more confidence on the overall macro environment.
Key risks
ASEAN asset quality – Our base case is still for a gradual pick up in NPLs. But a worse-than-expected outcome would be a key downside risks (UOB and OCBC would be the most affected).
Stock picks
DBS (OUTPERFORM) preferred pick – DBS benefits the most from a stronger USD and rise short term rates. It is the least exposed to ASEAN asset quality risks.
Telecom services
Preferred stock in sector: Singtel (OUTPERFORM)
Key drivers
The IDA is expected to conduct a spectrum auction in 1H 2016. We see a high probability of a fourth cellular operator emerging from the auction. Hence, we think news flows surrounding the potential entry of new operator are likely to be the key stock price driver in 1H 2016.
In 2H 2016, we expect cellular pricing in Singapore to come under pressure as incumbent operators pre-empt the potential launch of services by new player in 2017.
We believe consensus is yet to bake in the complete financial impact from the potential entry of a fourth cellular operator. Hence, we expect earnings cuts for Singapore telcos (especially for M1 and StarHub) in 2H2016. We are 17% and 11% below consensus on 2017E earnings for M1 and StarHub, respectively.
Key risks
Key upside risks to our forecasts/valuations arise from the absence of a fourth cellular operator in Singapore.
Stock picks
M1 (UNDERPERFORM) is likely to be impacted the most with the entry of fourth cellular operator in Singapore given 90% of its service revenue comes from cellular segment. We expect M1 earnings and dividend to remain under pressure over the next three years.
StarHub (UNDERPERFORM) is also impacted by the rising competition in the cellular sector as c56% of its service revenue comes the cellular market. However, compared to M1, StarHub is better placed given its strong bundling proposition and its much stronger footing in fixed network services.
SingTel (OUTPERFORM) is our top pick among the Singapore telecom stocks, given its Singapore business only contributes c20% to our SoTP-based target price and within that Singapore mobile only constitutes c5%.
03 December 2015
21
Singapore Market Strategy
Sector
Earnings outlook
Capital goods
Preferred stock in sector: Sembcorp Industries (OUTPERFORM)
Key drivers
Based on Credit Suisse's Brent forecast of US$58/bbl in 2016, we expect new rigs orders to be remain depressed. We forecast S$3 bn of new orders for SMM (vs S$2.9 bn in 9M15) and S$4 bn of new orders for Keppel (vs S$1.9 bn in 9M15).
We forecast Keppel O&M operating margin to decline to 11% in 2016E from 12% in 2015E, and for SMM's operating margin to be at about 10%.
We would be watchful of growing balance sheet stress in the sector, as capex cuts lead to growing delays and cancellations in the industry. SMM's net gearing has increased from 0.2x in December 2014 to 0.7x in September 2015.
Further deterioration in industry fundamentals could lead to pickup in M&A activity and consolidation across sector.
Key risks
While restructuring of Sete Brasil is ongoing, there remains limited visibility on the eventual outcome. Singapore yards could be asked to finance the construction of rigs which could lead to further working capital outflow.
Stock picks
With the offshore and marine business likely to remain a drag, we expect performance of non-Marine businesses to drive share price performance. Our preferred pick is Sembcorp Industries as we expect completion of India power plants to drive earnings growth in the Utilities business.
We see limited positive drivers for STE (NEUTRAL) in the near term with headwinds across its Land Systems and Marine divisions, but we expect support for STE's share price as it is trading close to its 08/09 P/B lows.
We expect Noble's (NEUTRAL) associates to remain a drag to earnings with weak coal prices, and balance sheet concern remains a key risk.
Real estate Key drivers
Preferred stock in sector: City Developments (OUTPERFORM)
Key risks Stock picks
Although Singapore residential only accounts for 24% and 5% of our GAV estimates for CDL and CAPL, share price performance could continue to be impacted by sentiment surrounding the residential market in 2016E.
With private residential prices down 8% from their peak in 3Q13, we expect a 5-10% decline in prices in 2016E, given an oversupply situation that will persist well into 2019E. Arguably, such an outcome could then lay the stage for an easing of cooling measures in 2H16 in our view.
As we expect the market to deteriorate further, before an eventual easing improves sentiment, bottom-up drivers would have greater significance, with corporate action to unlock value the key share price driver in the near term.
For City Developments, we would be looking out for capital recycling initiatives and other corporate actions to unlock value from its balance sheet. Improved earnings disclosure in its annual report could also result in a re-inclusion to the FTSE EPRA/NAREIT index, which could spark a renewed interest in the stock.
For CAPL, we think 2016 is an important milestone year to assess CAPL’s progress in achieving its medium term ROE target of 8-12%; although we think there could be downside risks to ROE given potential impairments, macro headwinds and slower residential contributions.
While we think the specific policy intents of the government cooling measures have been achieved, continued inaction in re-calibrating the cooling measures could continue to weigh on sentiment.
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CDL is our top pick. We believe that multiple catalysts lie ahead for CDL, with further upside likely to be driven by: (1) asset divestments to unlock portfolio value, (2) positive sales momentum from past overseas investments, (3) a pick-up in Singapore residential sentiment in 2016, with the potential tweaking of residential policy measures, and (4) a potential re-inclusion into the FTSE EPRA/NAREIT index
Singapore Market Strategy
Sector
Earnings outlook
REITs
Preferred stock in sector: CMT, AREIT (OUTPERFORM)
Share price drivers
Further delays in potential fed rate hikes could provide a more conducive environment for the REITs.
Stronger-than-expected rent reversions – given the weak environment CMT and AREIT reversions are expected at mid-single digit levels.
Continued improvement in tenant sales and occupancy would further emphasise the sustainability of the current level of reversions for CMT. We would also be watching out for the potential sale/redevelopment of Funan Digitalife mall or acquisition of the remaining stake in Westgate.
We would watch for further improvements in occupancies in AREITs portfolio which bottomed in 1Q15. AREIT is also likely to be on the lookout for assets overseas as they look to grow their matured markets assets to account for 20-30% of portfolio value (11% currently).
A rise in cap rates will put pressure on asset values. We believe key retail asset NPI yields offer a decent buffer to current cap rates and industrial REIT cap rates have been relatively flat since GFC, however, a significant slowdown in transactions or decline in spot rents could be a further drag.
Further slowdown to economic growth could put downward pressure on rent reversions.
We believe the retail sector fundamentals are most favourable and the completion of AEIs at several malls should support growth and occupancy rates. CMT 2016 yields are already trading at 1 SD above historical averages implying that risks on a rate hike and slowing reversions are largely priced in.
Risk-reward looks more attractive for AREIT at current CY16 yield of 6.8% while occupancy could continue to improve moving forward. Additionally, the completion of Australian logistics assets in 4Q15 will support growth in 2016.
Key risks
Stock picks
Sector
Earnings outlook
Consumer staples
Preferred stock in sector: Wilmar, First Resources (OUTPERFORM)
Key drivers
We are currently assuming palm oil prices of RM2,400 in CY2016. Assuming a 28-35% increase in palm oil prices (based on moderate events in the past), palm oil prices could go up to RM2,300–2,500/t, but there should be more upside to palm oil prices if the El Niño develops into a very strong event. This 2015 El Niño is now the strongest El Niño since 1997-98. More interestingly, it continues to strengthen. El Niño will likely peak at end 2015, and spill over to early 2016, making it a relatively "long" El Niño. This is good news for palm oil prices which usually spike up during an El Niño event, which in turn leads to outperformance of plantation stocks. Plantation companies usually record windfall profits during El Niño years. During the last six El Niños, palm oil prices rose between 7% and 125%—a wide range depending very much on the severity of the El Niño. In the 1997-98 strong El Niño, palm oil prices spiked 125%, but the moderate El Niños resulted in palm oil prices rising 28-35%. During the last six El Niños, the plantation sector outperformed by 6-25%. In the 1997-98 strong El Niño, the plantation sector outperformed by 22%. The moderate El Niños resulted in the plantation sector outperforming by 9-25%.
Stock picks
All upstream plantation companies are leveraged to an El Niño, as a rising tide lifts all ships. Our top pick is First Resources.
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Singapore Market Strategy
Sector
Earnings outlook
Transportation
Preferred stock in sector: SIA and SATS (OUTPERFORM)
Land transport: With the bus government contracting model on track to start in 3Q16, we expect continued emphasis in improving rail reliability, with a potential transition to a similar asset light model for rail.
SIA (OUTPERFORM): We expect large earnings drags from Tiger Airways, Scoot and Virgin Australia to reverse. The increased investment in Tiger Airways should generate synergy benefits in excess of S$10 mn a year. While revenue pressures are expected to remain, we perceive a sharp reduction in jet fuel costs likely to accelerate during 2HFY3/16 and into FY17 as expensive hedges roll off.
SATS (OUTPERFORM): SATS is a play on revival in Singapore tourism volumes. A potential turnaround in Japan and better operational leverage could additional boost to earnings. Topline outlook is improving across business segments: (1) Improving Changi volumes, (2) Japan finally on the verge of a turnaround, and (3) Improving regional growth prospects
HPHT (NEUTRAL): We expect poor throughput volumes, offset by rising revenue/TEU and reduction in semi-variable costs as volumes decline. We believe that the company should trade on a real yield of 6.3% (after backing out what it borrows to meet its distribution target).
NOL (NEUTRAL): Having divested its logistics business earlier this year, NOL is one of the 'cleaner' liner businesses, whose focus on re-fleeting over the past three years would render acquirers technologically advanced vessels. NOL's attractions are amplified by its current valuation at just over 0.7x P/B or a 34% discount to its post-GFC average. Any control transaction would entail a premium that we believe should be at least 15-18% based on the recent SGX and shipping takeover precedents.
Sector
Earnings outlook
Consumer discretionary
Preferred stock in sector: Genting Singapore (OUTPERFORM)
Genting (OUTPERFORM): We believe risk-reward for Genting looks promising as it could be at an inflection point in 2016 supported by a turnaround in its mass market business. Assuming both its AFS assets and receivables are worthless, and GENS' casino is valued at 9x 2016 EV/EBIDA, the stock should still be worth S$0.71 per share.
SPH (NEUTRAL): We do not expect a quick turnaround for top line in the near term given persistent weak economic conditions. While we believe cost management has been impressive, incremental benefits will be hard to come by. Earnings momentum is likely to remain lacklustre, but a 5% dividend yield remains supportive.
JCNC: It appears that we have just passed through the trough for this downcycle for Astra (OUTPERFORM) and the auto industry. We have seen margins improve from very low levels for the past two quarters and volume recovery in the past two months. A recovery in auto volumes next year (we are assuming 10% growth) should lead to lower discounts compared to 2015.
Source: Credit Suisse estimates
03 December 2015
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Top stock picks Figure 56: CS Singapore top picks Singapore Telecom (STEL.SI, OUTPERFORM, TP S$4.4) Market cap: US$43,449 mn
DBS Group (DBSM.SI, OUTPERFORM, TP S$22) Market cap: US$29,614 mn
■ SingTel is our top pick among the Singapore telecom stocks as the company offers a unique combination of dividends and growth (primarily coming from associates). Additionally, the company has the least exposure (in terms of contribution to consolidated financials) to Singapore cellular sector among the three Singapore telcos.
■ DBS benefits the most from a stronger USD and rise in short term rates. It is also the least exposed to ASEAN asset quality risks.
■ We expect SingTel’s net profit to show a three-year CAGR of c4% by FY18E largely driven by associate countries. Even though its Singapore business is likely to be under stress from the cellular segment, the impact on consolidated earnings will not be significant as Singapore contributes c30% (as of FY15) to consolidated net profit.
■ DBS' management probably appears the most confident about the growth and asset quality outlook for FY16E, the key difference being the lack of any meaningful onshore exposure in ASEAN. ■ DBS has also provided more colour on key areas of concern (China/commodities exposure) to boost confidence. ■ Key upside risks from better than expected NIM improvement. Key downside risks are Singapore and China asset quality.
■ We believe currency movements can be a key variable in SingTel's earnings given c70% of its earnings comes from outside of Singapore which are exposed to currency fluctuations. Based on our estimates, a 5% depreciation in SGD vs. all group operating currencies can lead to c3.5% decline in our FY16E/17E earnings estimates ■ We believe SingTel is trading at attractive valuations (2016E/2017E EV/EBITDA of c7x vs c9x for M1 and StarHub) and has factored in the potential downside from the entry of a fourth cellular operator, in our view. Wilmar International Ltd (WLIL.SI, OUTPERFORM, TP S$3.74) Market cap: US$13,213 mn
Singapore Airlines (SIAL.SI, OUTPERFORM, TP S$14) Market cap: US$8,691 mn
■ We expect earnings to improve sequentially in 4Q15 to be better as: (1) palm oil prices have improved; (2) the biodiesel mandate in Indonesia should kickstart; (3) the sugar milling division should gain from the recent surge in sugar prices; (4) management has indicated that “the oilseeds and grains division should remain satisfactory.”
■ We expect large earnings drags from Tiger Airways(TR), Scoot (TZ) and Virgin Australia (VA) to reverse. TZ's expanded fleet of new B787 aircraft should provide the platform from which it can generate a profit in FY16— its fifth year of operation
■ Wilmar reported mark-to-market losses in investment securities (Asian-linked equities) of some US$62 mn. We are less fussed about this as this is not new, i.e., Wilmar’s “financial assets held for trading” have been in the balance sheet for more than five years.
■ The increased investment in Tiger Airways should generate synergy benefits in excess of S$10 mn a year and will close at the end of December. Management highlights that it is about fully accessing the benefits of SQ's parentage and growing the budget network rather than just being a cost-driven process.
■ S$3 appears to be a strong support level—major shareholders (ADM, Kuok, Martua) who should understand the true value of Wilmar have acquired shares at these levels.
■ While revenue pressures are expected to remain, we perceive a sharp reduction in jet fuel costs likely to accelerate during 2HFY3/16 and into FY17 as expensive hedges roll off. ■ Our target price of S$14 is based on based on a target EV/CFMV of 135% and equivalent to a forward EV/EBITDAR of 4.8x.
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Genting Singapore (GENS.SI, OUTPERFORM, TP S$1) Market cap: US$6,580 mn
Capitaland Mall Trust (CMLT.SI, OUTPERFORM, TP S$2.3) Market cap: US$4,939 mn
■ While we acknowledge that Singapore's gaming industry might not necessarily rebound sharply in 2H15 (2015 GGR: -10%), mainly due to VIP issues from China's anti-graft campaign and ASEAN currency woes, we believe that GENS' business may be at an inflection point, come 2016, supported by a turnaround in its mass market business.
■ CMT's suburban mall exposure and network of malls will provide stability going forward. Additionally about 76% of CMT's portfolio is exposed to necessity shopping
■ We argue EV/EBITDA or FCF yield, rather than P/E, is a better valuation matrix for GENS because P/E overly penalises GENS by undermining its strong FCF. As a reminder, GENS' 2016E FCF yield of 8.4% is superior to 75% of the casinos within our Asia/Asia Pacific/global coverage. At 8.9x 2016E EV/EBITDA (adjusted for perpetual securities), or ~8.4% free cash flow (FCF) yield, we believe there is upside if the recovery prospects begin to be priced in. ■ As there have been concerns about the recoverability of GENS's AFS securities and receivables (primarily from VIP customers), they do not necessarily mean that these assets are worth nothing as there is room for recoverability, in our view. Assuming both assets are worthless (i.e., GENS loses all its AFS assets and writes off its receivables) and GENS' casino is valued at a reasonable 9x 2016E EBITDA (in line with regional average), the stock should still be worth SG$0.71/share. ■ Key near-term catalysts that would catalyse the share price are: (1) a recovery in the mass market business, (2) a recovery in the win rate and (3) entry into Japan. Our target price is SG$1.00, implying 29.0% potential upside (no value assigned to Jeju as it is still three years away from operation).
■ We believe CMT's asset quality will allow tenants to achieve higher sales and CMT's malls have shown resilience in 2015, outperforming islandwide retail sales. The largest portion (27%) of CMT's portfolio is leased to the F&B sector which has seen sales grow 3% YoY in 9M15 vs a 2.4% decline island wide. Fashion tenants (15% of portfolio) also showed grown of +5.0% YoY despite a decline in industry wide fashion sales. ■ The completion of asset enhancements at Tampines Mall, (including the creation of 21.5k sq ft NLA), IMM (continued repositioning as an outlet mall), Bukit Panjang Plaza (~12.5k sq ft GFA) and commencement of tenant operations at Clarke Quay should help support DPU growth into 2016 and 2017. Additionally, the potential sale/redevelopment of Funan Digitalife mall could provide further upside
■ CMT trades at a 2016 yield of 5.9%, which is 1 SD above its historical average. Similarly PB valuations of 1.1x is in 1 sd below its historical average and while there may be some risk to asset values through cap rate expansion, NPI yields on CMT's key assets still provide a decent ~50 bps buffer to current valuer cap rates.
City Developments (CTDM.SI, OUTPERFORM, TP S$12) Market cap: US$4,710 mn
Sembcorp Industries (SCIL.SI, OUTPERFORM, TP S$4.2) Market cap: US$4,134 mn
■ We believe that multiple catalysts lie ahead for CDL, with further upside likely to be driven by: (1) asset divestments to unlock portfolio value, (2) positive sales momentum from past overseas investments, (3) a pick-up in Singapore residential sentiment in 2016, with the potential tweaking of residential policy measures, and (4) a potential re-inclusion into the FTSE EPRA/NAREIT index
■ We believe Sembcorp’s current share price has incorporated headwinds related to the deterioration in Singapore power spreads and lower Marine orders, but has not captured the strong Utilities earnings growth prospects from start-up of India power assets.
■ We believe CDL has an underappreciated portfolio of investment properties, the value of which could be potentially unlocked near term through an asset divestment, while retaining long-term ownership. As at Sep-2015, CDL's investment properties are held at S$3.1 bn vs our estimated value of S$7.6 bn. We view this as a key catalyst for CDL, given it allows the company to: (1) realise a healthy gain on divestment, (2) crystallise value on its balance sheet and (3) recycle cash proceeds for future investments ■ With market transaction volumes at a trough, CDL will be best positioned for a potential turnaround in sentiment in 2016, given its status as a Singapore residential proxy. Current concerns are also overdone; even if residential ASPs fall a further 20%, our RNAV only falls by 5% ■ We believe current valuations are attractive, at a 41% discount to RNAV and 0.79x P/B (-1.4 S.D. from average), especially with its assets held at historical costs.
Singapore Market Strategy
■ With its 1,320 MW TPCIL plant in Andhra Pradesh commencing operations in September 2015, and 1,320 MW NCCPP plant scheduled for completion in 2016, we expect India to contribute close to 20% of Utilities net profit and 10% of Group net profit in 2017E. The coastal location of both plants in southern India where there is a power deficit, as well as security of coal supply, should present superior plant economics. ■ We expect cuts to consensus utilities net profit to be reversed with more long-term PPAs secured for India. In our view, key risks would include a weak financial position of Indian JV partners, as well as a further deterioration in Marine balance sheet, which we believe can be supported by Sembcorp Industries’ low corporate debt. ■ On our estimates, the ex-Marine stub is currently trading at a P/B of 0.9x, below its historical average of 1.1x and NJA average of 1.4x. We believe the ex-Marine business is undervalued given its consistent ROE of above 10%, and we expect Sembcorp Industries’ share price to be supported by an attractive dividend yield of 4.9%.
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SATS Ltd (SATS.SI, OUTPERFORM, TP S$4.45) Market cap: US$3,151 mn
Raffles Medical Group (RAFG.SI, OUTPERFORM, TP S$5) Market cap: US$1,691 mn
■ SATS is a play on revival in Singapore tourism volumes. A potential turnaround in Japan and better operational leverage could additional boost to earnings.
■ Raffles is a play on resilient healthcare demand and attractive inorganic growth opportunities in Singapore and China.
■ Top-line outlook is improving across business segments – 1) Improving Changi volumes, 2) Japan finally on the verge of a turnaround and 3) Improving regional growth prospects. ■ Over the medium term, SATS benefits from capacity expansion (Terminal 4 and 5) in Changi.
■ Key expansion projects lined for completion in through 2016-18: Holland Village specialist centre on track to open in 1Q16 (likely to break even from day one thanks to rental income). Raffles hospital expansion project in Singapore likely to be completed by early 2017. Shanghai hospital likely to start in December 2015 and operational by early 2018.
■ Potential gains likely from continued regional diversification. SATS is potentially looking at acquiring Brahims – the leading caterer in the KLIA airport – likely to provide SATS with better regional scale and scope. Source: Credit Suisse estimates
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Companies Mentioned (Price as of 01-Dec-2015) Ascendas REIT (AEMN.SI, S$2.44) CapitaLand (CATL.SI, S$3.12) Capitaland Mall Trust (CMLT.SI, S$1.96) City Developments (CTDM.SI, S$7.28) ComfortDelGro Corporation Ltd (CMDG.SI, S$2.96) DBS Group (DBSM.SI, S$16.55) First Resources Ltd (FRLD.SI, S$1.96) Genting Singapore (GENS.SI, S$0.76) Golden Agri-Resources (GAGR.SI, S$0.36) Hutchison Port Holdings Trust (HPHT.SI, $0.54) Jardine Cycle (JCYC.SI, S$32.18) Keppel Corporation (KPLM.SI, S$6.61) Keppel DC REIT (KEPE.SI, S$1.04) M1 Limited (MONE.SI, S$2.76) Neptune Orient Lines (NEPS.SI, S$1.21) Noble Group Ltd (NOBG.SI, S$0.43) Oversea-Chinese Banking Corporation (OCBC.SI, S$8.67) Raffles Medical Group (RAFG.SI, S$4.14) SATS Ltd (SATS.SI, S$3.94) SBS Transit (SBVV.SI, S$1.905) SMRT Corporation Ltd (SMRT.SI, S$1.46) ST Engineering (STEG.SI, S$2.86) Sembcorp Industries Limited (SCIL.SI, S$3.25) Sembcorp Marine Ltd. (SCMN.SI, S$2.06) Singapore Airlines (SIAL.SI, S$10.18) Singapore Press Holdings (SPRM.SI, S$4.03) Singapore Telecom (STEL.SI, S$3.83) StarHub Ltd (STAR.SI, S$3.6) Suntec REIT (SUNT.SI, S$1.56) Tiger Airways (TAHL.SI, S$0.4) United Overseas Bank (UOBH.SI, S$19.45) Virgin Australia (VAH.AX, A$0.44) Wilmar International Ltd (WLIL.SI, S$2.9)
Disclosure Appendix Important Global Disclosures I, Gerald Wong, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less th an or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy* 59% (32% banking clients) Neutral/Hold* 28% (36% banking clients) Underperform/Sell* 12% (25% banking clients) Restricted 1% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock rat ings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-andanalytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names
The subject company (CMLT.SI, KPLM.SI, UOBH.SI, STEL.SI, SATS.SI, KEPE.SI, SUNT.SI, GAGR.SI, SCIL.SI, GENS.SI, SIAL.SI, AEMN.SI, SMRT.SI, DBSM.SI, SCMN.SI, SPRM.SI, TAHL.SI, CTDM.SI, CATL.SI, NEPS.SI, HPHT.SI) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (KPLM.SI, UOBH.SI, STEL.SI, SATS.SI, KEPE.SI, GAGR.SI, SCIL.SI, SIAL.SI, AEMN.SI, SMRT.SI, SCMN.SI, SPRM.SI, NEPS.SI) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (STEL.SI, KEPE.SI, GAGR.SI, SCIL.SI, SIAL.SI, SMRT.SI, SCMN.SI, NEPS.SI) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (KPLM.SI, UOBH.SI, STEL.SI, SATS.SI, KEPE.SI, GAGR.SI, SCIL.SI, SIAL.SI, AEMN.SI, SMRT.SI, SCMN.SI, SPRM.SI, NEPS.SI) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (CMLT.SI, RAFG.SI, KPLM.SI, UOBH.SI, STEL.SI, MONE.SI, SATS.SI, FRLD.SI, KEPE.SI, SUNT.SI, GAGR.SI, SCIL.SI, GENS.SI, SIAL.SI, AEMN.SI, SMRT.SI, DBSM.SI, SCMN.SI, SPRM.SI, TAHL.SI, CTDM.SI, CATL.SI, NEPS.SI, HPHT.SI, STEG.SI, CMDG.SI) within the next 3 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (AEMN.SI). Credit Suisse has a material conflict of interest with the subject company (KPLM.SI) . Credit Suisse has a material conflict of interest with the subject company (KPLM.SI) . Credit Suisse is acting as a joint financial adviser for Keppel Corporation in relation to the voluntary unconditional cash offer for Keppel Land (the "Offer"). The information set out in this report is based on publicly available sources and does not arise from Credit Suisse's role as joint financial adviser to Keppel Corporation in relation to the Offer. Credit Suisse has a material conflict of interest with the subject company (WLIL.SI) . Credit Suisse is acting as financial advisor to Goodman Fielder in relation to the receipt of the announced proposal from Wilmar International Limited and First Pacific Company Limited. Credit Suisse has a material conflict of interest with the subject company (CATL.SI) . Credit Suisse (Singapore) Limited is acting as a joint financial advisor to Sound Investment Holdings Pte Limited, a wholly-owned subsidiary of CapitaLand Limited, regarding its proposed voluntary conditional cash offer for the shares in CapitaMalls Asia Limited.
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Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.creditsuisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (KPLM.SI, UOBH.SI, STEL.SI, KEPE.SI, GAGR.SI, SCIL.SI, SIAL.SI, SMRT.SI, SCMN.SI, SPRM.SI, CATL.SI, NEPS.SI) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Singapore Branch ..........................................................................................................................................Gerald Wong, CFA
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