Singapore Market Focus Market Strategy

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1 Singapore Market Focus Market Strategy Refer to important disclosures at the end of this report DBS Group Research. Equity 2 Jun 2017 Shifting Sands STI 3250 near term cap Trim UOB, OCBC, Keppel Corp, SIA Eng, GLP, YZJ Interest switches to consumer discretionary and industrials Genting, ST Eng, SembCorp Industries Hospitality REITs gather interest CDL Hospitality Trust and Far East Hospitality Trust Sentiment is positive for property developers City Dev and UOL June rate hike well anticipated. We expect the FED to lift the FED funds rate by 25bps to 1.25% rates and go for another two more (consensus expects one more) by year-end. YTD recovery story intact, growth moderating. While the YTD recovery story remains intact, be watchful of signs that suggest the manufacturing sector is peaking. The risk comes from China s tight credit conditions and property market that could indirectly affect Singapore s exports of electronic components. The latest China Caixin PMI for May slipped into contraction territory at 49.6, the first time since June STI May s high unlikely to be taken out anytime soon. While the STI can head for 3350, pegged to 14.02x (+0.25SD) FY18F PE, by year-end, we think that the recent high of 3274 should continue to provide a near-term cap given the earnings cut from the 1Q17 results season. If the 3188 level fails, expect a further dip to 3160 or lower to 3110 before finding support. Trim large caps such as banks UOB, OCBC, Keppel Corp, SIA Engineering, GLP and Yangzijiang that have outperformed YTD with limited/no returns to TP. Sentiment is positive for property developers. The rapid succession of three en-bloc sales that were closed over the past 1-2 week points to Singapore developers bullish outlook towards land-banking good quality sites as they price in a recovery in City Dev and UOL are key beneficiaries of a rise in home prices given their existing unsold stock and potentially better margins for recent land-banked projects. Switch to consumer discretionary and industrials. We see the likelihood of a shift in sector relative performance as the economic recovery theme progresses. Interest in bank and property stocks should shift to consumer discretionary stocks and industrial sectors. Among the STI component stocks in these two sectors, our picks are Genting Singapore, ST Engineering and SembCorp Industries Hospitality REITs gather interest. Going into the next year, new supply that has been an overhang should materially decline while demand should receive a boost from 2018 being a biannual conference year. This should end the sector s two-year downturn. We maintain our positive view on Singapore s hospitality REITs. Our top two picks in the sector are CDL Hospitality Trust and Far East Hospitality Trust. STI : 3, Analyst Yeo Kee Yan CMT Janice Chua keeyan@dbs.com janicechuast@dbs.com Key Indices Current % Chng STI Index 3, % FS Small Cap Index % USD/SGD Curncy % Daily Volume (m) 1,131 Daily Turnover (S$m) 602 Daily Turnover (US$m) 427 Market Key Data (%) EPS Gth Div Yield 2016 (6.1) F F (x) PER EV/EBITDA F F (6.1) 3.5 STOCKS 12-mth Mkt Cap Performance (%) S$ US$m S$ 3 mth 12 mth Rating Genting Singapore , BUY ST Engineering , BUY Sembcorp Industries , (1.3) 12.5 BUY CDL Hospitality Trusts , BUY Far East Hospitality Trust BUY City Developments , BUY UOL Group , BUY Closing price as of 30 May 2017 Source for all data in this page: DBS Bank, Bloomberg Finance L.P. Click here for Company Guide ed: CK, JS / sa:sm, PY

2 June Market Outlook Looking back at May The benchmark STI ended the month of May up 35pts (+1.1%), coming off a high of 3275 and following a mixed outcome from the 1Q17 results season. Gains in bank stocks were offset by weakness in real estate (Capitaland and UOL) and consumer services (SIA) sectors. Our positive view on the technology sector last month (refer to Monthly Strategy dated 3 May and entitled Uplift to 3250 ) where we highlighted Venture Corp, UMS and Hi-P paid off as the sector continued its YTD run-up. Shares of UMS shares rallied 27% while Hi-P surged 32% on earnings optimism. FTSE ST sector indices performance for May Noble Group was a major contributor to the overall earnings cut. The O&G sectors suffered earnings cut through the likes of Ezra, Ezion and PACC offshore. The consumer services sector was dragged down by SIA while the consumer services sector was affected by Japfa. The technology sector benefited from a positive earnings uplift from Venture Corp and UMS. SREITs sector enjoyed a modest upward revision to DPU from Ascott Residence Trust, CapitaLand Retail China Trust and CDL Hospitality Trusts amongst others. Outlook Key Event Event Date Comments FOMC meeting June Consensus sees a 100% chance that the FED funds rate will increase to 1.25% June rate hike a certainty unless a comet strikes Earth 1Q results season fails to lift Singapore market The 1Q17 results season saw a resumption of the downward earnings revision trend for the stocks under our coverage. FY17F earnings were revised down 2.9% while FY18F earnings were cut by 1.5%. This is against earlier optimism that the earnings upward revision witnessed in the previous 4Q16 results season can sustain, given the slew of economic data pointing to a recovery. Back to negative earnings revision trend It s a quiet month on the events calendar with the midmonth FOMC meeting as the only key event. The FED had recently signalled that it will look past the recent mixed US data and will likely hike rates come June. We expect the FED to lift the FED funds rate by 25bps to 1.25% rates and go for another two more by year-end. Consensus has priced in a 100% chance of a June rate hike, followed by another by year-end. Investors will be eying the FED s comments for indications on the pace of rate hikes going forward. YTD recovery story intact amid signs of growth moderation Singapore s 1Q GDP growth was revised up to 2.7% y-o-y from the 2.5% advanced estimates. Our Singapore economist expects full-year GDP growth of 2.8%. This, however, is on the premise that global economic conditions continue to improve. For Singapore, the main concern is that the turnaround thus far has been uneven and restricted to just a few externally driven clusters such as electronics. The rest of the economy has yet to feel the uplift and the labour market has also remained soft. Page 2

3 Electronics PMI Singapore non-oil domestic exports (y-o-y) Source: Bloomberg Finance L.P., DBS Bank Source: Bloomberg Finance L.P., DBS Bank Our Singapore economist observes signs suggesting the manufacturing sector may be peaking. Tighter credit conditions and stiffer regulations on the property market in China could weigh down on consumer sentiments and indirectly on Singapore s exports of electronics components. The latest China Caixin PMI for May, a private gauge of China s manufacturing, slipped into contraction territory for the first time since June last year (actual 49.6, consensus 50.1). Industrial production y-o-y China Caixin PMI contracted for the first time since June 2016 Source: Bloomberg Finance L.P., DBS Bank STI Outlook May s high unlikely to be taken out anytime soon The 1Q17 results season saw a 0.7% downward revision for FY17F and 0.4% downward revision for FY18F. Trading at above 14.02x (+0.25SD) blended FY17/18F PE, May s high of 3274 now stuck out like a sore thumb in the near term, as the earnings revision trend turned negative again. Source: Bloomberg Finance L.P. A difficult Brexit process could be another risk factor. The transport engineering cluster is not entirely out of the woods given that oil prices have turned sideways. Hope is now pinned on companies capex spending to increase and for consumer demand in the US to be sustained that will lend some support to the manufacturing sector in the months ahead. While the STI can head for 3350, pegged to 14.02x (+0.25SD) FY18F PE, by year-end, we think that the recent high of 3274 should continue to provide a near-term cap. The 3188 level is key. If this level fails, expect a further pullback to the 13.64x (average) blended FY17/18F PE level at 3160 or lower to 3110 before finding support. STI at various forward PE levels -0.5sd 12.87x PE -0.25sd 13.25x PE Avg 13.64x PE +0.25sd 14.02x PE +0.5sd 14.41x PE FY17 2,889 2,974 3,062 3,147 3,234 FY18 3,074 3,164 3,257 3,348 3,441 Avg 17 & 18 2,981 3,069 3,160 3,248 3,338 Page 3

4 Straits Times Index (Daily) Strategy Sentiment is positive for property developers. The rapid succession of three en-bloc sales that were closed over the past 1-2 weeks points Singapore developers bullish outlook towards land-banking good quality sites as they price in a recovery in Our property analyst thinks the Singapore government will respond by (i) raising the number of available land sites in the 2H17 government public land tender programme and/or (ii) raising the number of confirmed sites in the pipeline. City Dev and UOL are key beneficiaries of a rise in home prices given their existing unsold stock and potentially better margins for recently land-banked projects. Singapore property stocks Company 30 May mth Return P/BV 16 (x) 1m Perf Rel STI 3m Perf Rel STI 6m Perf Rel STI 13m Perf Rel STI City Development % 1.0 (4) UOL % 0.7 (6) CapitaLand % 0.8 (8) (7) 4 3 Frasers Centrepoint Ltd % 0.8 (6) 4 na na Trim large caps that have outperformed YTD with limited or no upside to TP We advocate trimming back on large cap STI component stocks that have outperformed YTD and have either risen near or exceeded the fundamental TP (refer to list below). We keep our view that Index heavyweight bank stocks UOB and OCBC that are among the sector outperformers during the initial phase of an economic recovery should consolidate as interest shifts to consumer discretionary and industrial sectors. We will also trim stocks that have outperformed YTD and are trading above our TPs i.e. Keppel Corp and SIA Engineering while GLP and Yangzijiang are approaching our fundamental TP following their stellar YTD performances. Stocks that outperformed YTD & near/exceed TP Company 30 May mth Return Mkt Cap (S$m) Rcmd Keppel Corp % 11,747 HOLD 8 SIA Eng % 4,389 HOLD 4 UOB % 37,795 BUY 4 OCBC % 43,596 HOLD 4 GLP % 13,639 HOLD 32 Yangzijiang % 4,828 BUY 6m Perf Rel STI Page 4

5 Interest switches to consumer discretionary and industrials We see the likelihood of a shift in sector relative performance as the economic recovery theme progresses. Interest in bank and property stocks that are late economic contraction leaders should shift to other consumer discretionary stocks and industrial sectors. Among the STI component stocks in these two sectors, our picks are Genting Singapore, ST Engineering and SembCorp Industries Large-cap consumer discretionary and industrial sectors picks Company 30 May mth Return PER 17 (x) PER 18 (x) EPS Growth 17 (%) EPS Growth 18 (%) Div Yield 16 (%) Div Yield 17 (%) Net Debt / Equity 17 (%) P/BV 16 (x) Genting % cash 1.9 SCI % ST Eng % Hospitality REITs gathers interest as sector approaches cyclical low We maintain our positive view on Singapore s hospitality REITs. Our REIT analyst says the end of the two-year downturn in the Singapore hospitality is in sight with only seven months till the start of Going into the next year, new supply that has been an overhang should materially decline (1% growth versus 5-6% over the past two years). Demand should receive a boost from 2018 being a biannual conference year. We are also sensing increasing optimism from various hoteliers that we are approaching a near-term cyclical low. Our top two picks in the sector are CDL Hospitality Trust and Far East Hospitality Trust. Hospitality REITs Company 30 May mth Return Mkt Cap (S$m) Div Yield 17 (%) Net Debt / Equity 17 (%) CDL HT % 1, Far East HT % 1, OUE HT % 1, P/BV 16 (x) Page 5

6 Significant Reports Date Report Title Sub Title Regional 09-May-17 Regional DBS Commodity Tracker s recovery to be divergent 11-May-17 ASEAN Equity Strategy Better prospects ahead 11-May-17 Plantation Companies Near-term price recovery 18-May-17 Regional Telecom Sector Fixed-line calm amidst mobile storm 29-May-17 Regional DBS Commodity Tracker s recovery to be divergent Singapore 04-May-17 Monthly Strategy Uplift to 3, May-17 Singapore Property Strong sales momentum continues 18-May-17 Singapore REITs Cycling up 23-May-17 Hi-P International (initiate coverage) In for the long haul 24-May-17 Small Mid Cap Strategy Ride on the Tech bull 25-May-17 Sunningdale Tech (initiate coverage) Rising SUNN 30-May-17 Frasers Property Group Winds of Change Revisions to recommendations Stock Name Current Previous Change Date StarHub FULLY VALUED HOLD 04-May-17 Riverstone Holdings BUY HOLD 05-May-17 ComfortDelgro HOLD BUY 15-May-17 Far East Hospitality Trust BUY HOLD 15-May-17 Global Logistic Properties HOLD BUY 17-May-17 Mermaid Maritime HOLD BUY 17-May-17 Pacific Radiance FULLY VALUED HOLD 18-May-17 Valuetronics (Equity Explorer) NOT RATED 23-May-17 Page 6

7 Big Cap Small Cap Yangzijiang Olam International OCBC Venture Corporation Genting DBS Group UOB First Resources SIA Engineering SembCorp Industries StarHub Limited UOL Frasers Centrepoint Ltd CapitaLand Thai Beverage Public IHH Healthcare Singapore Post SPH Dairy Farm (US$) ComfortDelgro m-o-m % change Hi-P International UMS Holdings MM2 Asia Nam Cheong Breadtalk Group Riverstone Holdings Best World International ifast Corporation Cityneon Holdings Far East Hospitality Trust Tat Hong Holdings CSE Global Cosco Corporation Katrina Group Jumbo Group Japfa Ltd Pacific Radiance Ltd Ezion Holdings Procurri Corporation Limited Noble Group m-o-m % change Source: Bloomberg Finance L.P., DBS Bank Event chart STI 3,300 ST 1 June 2017: 3236; +0.9% m-o-m; +12.5% YTD 3,200 3,100 2,600 US rate hike worries Oil price decline Weak 1Q earnnigs, Return of US rate hike worries Uncertain outlook; selling ahead of BREXIT RMB 3,000 depreciation STI valuation moved up to Weak earnings outlook -1SD 2,900 USDSGD STI valuation pullback attractive at -2SD Expectation 2,800 Expectations of further of a delay in monetary policies easing rate hike Pullback in USD Pullback in 2,700 RMB Rebound in oil price USD devaluation PBOC cut requirement ratio rates by 50 basis points Flight to safety - rebound led by REITS and Telco Britain exit EU Weak corporate res ults; O&G companies not meeting loan obligations US presidential election Rebound led by Banks (expectation of higher NIM), O&G (rebound in oil price) and Property (attractive valuation; M&A interest) 2,500 Average daily volume: 1.88bn - Source: Bloomberg Finance L.P., DBS Bank Volume STI Index Page 7

8 DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 2 Jun :00:29 (SGT) Dissemination Date: 2 Jun :23:11 (SGT) Sources for all charts and tables are DBS Bank unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the DBS Group ) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. 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9 Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests 2 in relation to an issuer or a new listing applicant that the analyst reviews. 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DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in Genting Singapore, ST Engineering, Sembcorp Industries, CDL Hospitality Trusts, Far East Hospitality Trust, City Developments, UOL Group, UOB, OCBC, Keppel Corporation, Global Logistic Properties, Yangzijiang Shipbuilding, CapitaLand, Singapore Airlines Limited, Venture Corporation, Noble Group, Ezra Holdings, Ezion Holdings, Ascott Residence Trust, CapitaLand Retail China Trust, Starhub, ComfortDelgro, Far East Hospitality Trust, Global Logistic Properties recommended in this report as of 28 Apr Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in CDL Hospitality Trusts, Ascott Residence Trust, CapitaLand Retail China Trust, Starhub, ComfortDelgro recommended in this report as of 28 Apr DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, DBSV HK or their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of Ascott Residence Trust as of 28 Apr Compensation for investment banking services: 5. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Singapore Airlines Limited, Noble Group, Ezion Holdings, Japfa Ltd, Ascott Residence Trustas of 28 Apr DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Singapore Airlines Limited, Noble Group, Ezion Holdings, Ascott Residence Trust in the past 12 months, as of 28 Apr An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. Page 9

10 7. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Directorship/trustee interests: 8. Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Non-Exec Director of CapitaLand as of 31 Mar Danny Teoh Leong Kay, a member of DBS Group Holdings Board of Directors, is a Director of Keppel Corporation as of 31 Mar Peter Seah Lim Huat, Chairman & Director of DBS Group Holdings, is a Director / Chairman of Singapore Airlines as of 31 Mar Lim Sim Seng, a member of DBS Group Executive Committee, is an Independent Non-Executive Director of ST Engineering as of 1 May Nihal Vijaya Devadas Kaviratne CBE, a member of DBS Group Holdings Board of Directors, is a Director of Starhub as of 31 Mar Disclosure of previous investment recommendation produced: 13. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. 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