Singapore Strategy. Gimme Shelter SINGAPORE. Event. Impact. Outlook

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1 SINGAPORE Top picks Mkt cap (S$) Target Total PE(x) (US$m) Price price return 16E Vol. FSSTI / Large cap CAPL 8, % 14.0 L ST 40, % 13.7 L JS 16, % 10.3 L SGX 5, % 20.8 L SIA 9, % 15.6 L FSSTI 2,540 2,950 20% 10.9 Mid-Cap ARA % 13.0 L SPOST 2, % 16.0 L CCT 2, % 14.2 L FR 2, % 13.4 L/M SSG % 20.7 L Source: FactSet, Macquarie Research. Priced as of 12 th February Key Underperforms Mkt Cap (S$) Target Total PE (x) (US$m) Price Price Return 16E Vol. SPH 4, % 19.8 L SATS 3, % 20.0 L SMM 2, % 13.2 L/M Source: FactSet, Macquarie Research. Priced as of 12 th February Analyst(s) Macquarie Capital Securities (Singapore) Pte. Limited Conrad Werner conrad.werner@macquarie.com Tuck Yin Soong tuckyin.soong@macquarie.com Neel Sinha neel.sinha@macquarie.com Thomas Stoegner thomas.stoegner@macquarie.com Ken Ang, CFA ken.ang@macquarie.com Justin Chiam justin.chiam@macquarie.com Macquarie Capital Securities (Malaysia) Sdn. Bhd. Prem Jearajasingam prem.jearajasingam@macquarie.com Azita Nazrene azita.nazrene@macquarie.com 16 February 2016 Gimme Shelter Event A weaker outlook for Singapore s key top down drivers raises the spectre of earnings contraction for the FSSTI. When coupled with cuts to our team s bottom up price targets, we arrive at a new FSSTI target of 2,950, 8% below our previous 3,215. The silver lining is that this still implies 20% TSR post the YTD selloff. In fact, Singapore is trading at the third lowest PER in Asia, while offering the region s highest dividend yield (Fig 4), and our Outliers framework identifies many ideas that we think can provide shelter amid the volatility. Impact We are lowering our twelve month FSSTI index target by 8% to 2,950, which is driven in roughly equal measures by reductions in our top down and bottom up index valuations (our target is the average of the two. Top down: 2,800, bottom up: 3,100). Top down: potential earnings contraction for FSSTI in Our top down model suggests risk of a ~2% EPS contraction for the FSSTI which contrasts with the +4% growth both our bottom up forecasts and consensus call for. As the bottom up earnings forecasting track record has been poor, the message from the top down model (R-squared of 83%) is worth heeding. Bottom up: Outliers framework still identifies many interesting shelters. Given a backdrop of potential earnings disappointments, we look for names that have demonstrated a solid earnings trend over the last twelve months, which our team also sees as sustainable. We then further drill down to those names whose share prices are not pricing in these positive earnings trends / outlooks. Our Outliers screen does this in a succinct manner, and we perform a final sense check with our research team to ensure a consistency of views. In terms of our resulting target index positioning (Fig 2) we: Raise our OWs in Property and Telecom, while moving to an OW from UW in Commodities and Transport. Property and Telecom are showing very solid earnings trends but have unjustifiably sold off for various reasons. The market is not appreciating the sustainability of strong Transport earnings amid lower oil prices, we think, while some Commodities plays should see a turn in fortunes amid rising CPO prices. Top picks here include CAPL, ST, SIA and mid caps FR and ARA. Lower our OW position in banks where a long-running upgrade cycle has ended (valuation keeps this sector from becoming an UW). We keep SGX, which has regulatory tailwinds in its derivatives business, as a top pick within the broader financials space. Raise our UW in Industrials and hold steady our UW in Consumer, with SMM, SPH and SATS being key Underperform ideas. We do see some interesting non-index ideas in these two otherwise uninspiring sectors though, and have JS, SPOST and SSG as top picks. Outlook With 20% TSR to our FSSTI target, we think a lot of potential bad news, including potential earnings contraction for the index, is priced in and that Singapore deserves another look. Please refer to page 18 for important disclosures and analyst certification, or on our website

2 Analysis Amid secular stagnation... Over the last few years Viktor Shvets, our Asia ex Japan strategist, has consistently nailed his colours to the mast of global secular stagnation and his latest report provides further detailed support for his view that investors continue to inhabit a netherworld of no discernible business and capital market cycles with an overarching deflationary thematic. Singapore used to offer three attractive traits... We have consistently taken our cue from Viktor. At the same time we have been highlighting three aspects of the Singapore index that should have made it stand out regionally against this backdrop: 1) attractive valuation, 2) reasonable and resilient earnings expectations and 3) low policy risk. But we are now down to only one of those: The valuation pillar is still intact, and highlighted by MSCI Singapore s 4.8% dividend yield, which is the highest in Asia (Fig 4). But aspects 2) and 3) from above, which are more fundamental in nature and thus more impactful, are less applicable now. But earnings could contract... Our top down model suggests risk of a ~2% EPS contraction for the FSSTI in 2016E, which contrasts with the +4% growth both our bottom up forecasts and consensus call for. As the track record from the bottom up side has been poor (Figs 5-6), the message from the top down model, which has an R-squared of 83%, is worth heeding. As explained in the section starting on page 4, we use four drivers in the top down model: NODX, ex-motor retail sales, and two FX rates, which all correlate well with FSSTI earnings. And policy risk is a bit higher. Neither NODX nor retail sales have been showing strength (Figs 9-10). Singapore can try to boost its trade position via looser monetary policy (weaker S$) and it has taken two such steps in the last 12 months. But we have seen little positive impact against a tide of weak overall global demand. In theory a weaker S$ can also help attract visitors to Singapore and boost retail sales, but arrivals have not been able to crest a peak set in While we think MAS is reluctant to change its policy, based on the 6 monthly briefings we attend, an overall sluggish GDP picture with low inflation tilts the risk of further loosening at MAS next scheduled meeting in April to the upside. That would be negative for FSSTI earnings which are positively correlated with the S$, as explained in the next section. Gimme shelter! We are lowering our twelve month FSSTI index target by 8% from 3,215 to 2,950 which is driven in roughly equal measure by reductions in both our top down and bottom up index targets (we use the average of the two). The top down target (2,800) is derived from the model alluded to above, and described in the next section. The bottom up target (3,100) represents our team s aggregate price targets. As with earnings, the bottom up message is more bullish, but it is interesting that we still have 14% total return to the more conservative top down target (Fig 1), which may suggest that a lot of bad news is already priced in, and we actually see FSSTI offering decent value here (Fig 3). Fig 1 2,950 index target is the midpoint between our bottom up and top down approaches Fig 2 Target Index weights: a defensive bias 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 2, % 10.2% 3, % 22.0% 2, % 16.1% 3,150 3,050 2,950 2,850 2,750 2,650 2,550 2,450 2,350 Weights Key Stocks, Relative Previous FSSTI MQ Diff OW UW Diff. Commodities 4.4% 4.9% 0.5% WIL, GGR -0.8% NOBL Consumer 9.3% 7.7% -1.7% GENS SPH -1.8% JCNC Financials 37.7% 38.7% 1.0% SGX 2.5% DBS, UOB Industrials 9.2% 5.4% -3.8% KEP, SMM -2.3% SCI, STE Property 18.6% 21.0% 2.4% CAPL, HKL 1.8% GLP, UOL Telecoms 13.0% 14.2% 1.2% ST STH 0.8% 0.0% Top Down Bottom Up Average Upside Yield Index 2,250 Transport 7.8% 8.1% 0.3% SIA SATS -0.3% CD Total 100% 100% 0.0% 0.0% Source: Bloomberg, Macquarie Research, February 2016 Source: Bloomberg, Macquarie Research, February February

3 A more defensive sector and stock bias. Still, with the top down message signalling earnings risk, we gravitate to sectors and stocks that have shown earnings resilience amid difficult macro conditions, and which our team believes can be sustained. We also like areas where we expect a turn in earnings trends, but with few positive macro stories this opportunity set looks more limited. To screen for such sectors and stocks, while adding in a valuation overlay, we again turn to our Outliers framework, first introduced last October. With it, we can see to what degree 53 Singapore names we cover have had their earnings estimates either up or downgraded over the last twelve months, and whether share prices have been tracking the changes in outlook, be that positive or negative. We then further overlay our team s fundamental views to derive our sector and stock positioning, which is shown in Figure 2 (overall top picks are shown in Figs 7-8). A full discussion starts on page 7, but to summarize our positioning (Fig 2) we: Lower our overweight (OW) position in Financials. A banks upgrade cycle that started in January 2012 lost steam as of July Fundamentally, the team is incrementally concerned about revenue growth and asset quality. Valuations have come off a lot for the banks and this prevents deeper reductions to our weights. As a stock exchange, SGX s model has different drivers and we continue to like the derivatives growth story. SGX remains a top pick for us. Raise our OW position in Property. Despite its positive earnings trends, the FSSTI property sector has sharply de-rated, leaving many shares trading at their -1 STD deviation bands. We highlight CapitaLand (a top pick), Hongkong Land, and UOL which have all seen estimate upgrades in the last twelve months. We think this is in large part due their investment property exposures, which should continue to provide solid recurring income. These three names also have low exposures to residential development in Singapore, where cooling measures are set to drive a 10% fall in average prices for 2016, in our view. Move Commodities to OW from underweight (UW). CPO is one market where we expect better fundamentals to drive a turn in earnings trends. We expect 18% YoY growth in 2016 s average CPO prices, and see the SG-listed planters as the best plays on this. From an FSSTI perspective, we overweight GGR and Wilmar. Mid cap First Resources is our sector top pick. Keep our UW position in Consumer, but SPOST and SSG are mid cap top picks. Our UW is mainly driven by SPH and JCNC, expensive stocks for whom operational headwinds are not priced in. We have Genting Singapore as an OW as we think expectations have been sufficiently right sized in the last twelve months. And we like mid caps SPOST and Sheng Siong Group, two names with strong earnings stories not yet reflected in their share prices. Raise our OW in Telecom due to the increased weight we assign to SingTel (ST), which is also one of our large cap top picks. ST has and continues to deliver stable earnings trends, but the stock has sold off unreasonably in our view due to rising concerns over the emergence of a fourth mobile operator in Singapore, which we think is unlikely. Fig 3 Valuation pillar intact: FSSTI s next twelve month (NTM) PER sits well below its historical average Fig 4 And in a Regional context Singapore s yield remains attractive Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 FSSTI NTM PE (cons.) Note: Data is for FSSTI index Source: Bloomberg, Macquarie Research, February 2016 Today: 10.8 Avg.: STD: STD: 12.4 Avg CH KOR SG Asia ex Note: Data is for MSCI indices, as used by our strategy team Source: Macquarie Research, February TW TH HK INDO MY India PH NTM PE (x) Forward div. yield (%) February

4 Increase our UW in Industrials which have shown by far the worst EPS revision trends over the last twelve months. The contrarian trade is tempting, but we think numbers continue to disappoint as persistently low oil prices raise the odds of order deferrals in the oil rig and shipbuilding space, to which Keppel, the two Sembcorp entities, Yangzijiang and even STE are exposed. JS is a top pick though, as its wide NAV discount enables investors to buy into a portfolio of leading Asian auto, property and retail franchises at a very attractive valuation Move Transport to OW from underweight (UW) as we make SIA a top pick. SIA is less defensive than our other ideas, but we think lower oil prices can sustain SIA s strong earnings revision story for at least another twelve months, and we like management s efficiency drive. REITs revisited (from page 13). Our top down REIT model is showing decent high single digit upside (Fig 33) and this sector tends to show very strong Outlier qualities, especially in terms of earnings resilience as seen again in 1Q16 results. The forward outlook is a bit more mixed, but the sector has sold off excessively leaving some stocks very attractively valued. We think MAGIC and CCT merit revisiting, and we have the latter as a mid cap top pick. Fig 5 Consensus EPS: Recurring disappointments Fig 6 Consensus EPS growth expectations S$ Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan E 2016E Note: Chart shows consensus EPS estimate trends for the FSSTI Source: Bloomberg, Macquarie Research, February % 12% 10% 8% 6% 4% 2% 0% -2% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan E 2016E Note: Chart shows consensus EPS growth estimate trends for the FSSTI Source: Bloomberg, Macquarie Research, February 2016 Fig 7 Top Picks EPS MQ vs. Mkt Cap (S$) Target Div CAGR Cons EPS PE PE PB Catalyst/ Downside FSSTI / Large cap (US$ m) Rec Price Price Diff Yield TSR 15-17E 2016E 2017E 2016E 2017E 2015E Driver Risk Vol. CapitaLand 8,694 O % 3% 42% 17% 6% -14% Resilient earnings Slow restructuring L SingTel 40,919 O % 5% 40% 9% 2% 8% Valuation Fourth operator in SG L Jardine Strategic 16,780 O % 1% 25% 12% 2% 4% Wide NAV discount DFI recovery stalls L SGX 5,284 O % 4% 28% 5% 0% -1% Derivs / FX growth Traditional securities L Singapore Airlines 9,486 O % 4% 18% 13% -10% -24% More focused strategy Oil price rebound L FSSTI 255,832 2,540 2,950 16% 4% 20% 4% 0% -3% Valuation Top down message: EPS cuts Mid Cap ARA Asset Mgmt 728 O % 5% 98% -3% NM NM AUM growth Cap rate expansion L Singapore Post 2,292 O % 5% 51% 13% 12% -10% E-Commerce Governance overhang L CCT 2,812 O % 7% 35% 3% 11% 3% Accretive deals Office rent pressure L First Resources 2,140 O % 2% 30% 23% 4% 1% CPO price evolution CPO price evolution L/M Sheng Siong Group 902 O % 4% 27% 9% -2% -7% Earnings delivery International expansion L Source: FactSet, Macquarie Research. Priced as of February 12, 2015 Fig 8 Key Underperforms EPS MQ vs. Mkt Cap (S$) Target Div CAGR Cons EPS PE PE PB Catalyst/ Upside Company (US$ m) Rec Price Price Diff Yield TSR 14-16E 2015E 2016E 2015E 2016E 2014 Driver Risk Vol. SPH 4,119 U % 5% -16% -7% 3% -1% Traditional media declinedigital profits surprise L SATS 3,110 U % 4% -15% 4% -12% -14% High expectations/val'n Air traffic iin SG and Japan L Sembcorp Marine 2,133 U % 4% -5% 15% -25% -4% Order deferrals Oil price recovery; M&A L/M Source: FactSet, Macquarie Research. Priced as of February 12, February

5 Top down: Potential for earnings contraction already looks priced in Our top down approach is to first derive a projected growth rate for FSSTI s EPS based on a regression using selected macro drivers, which then enables us to calculate FSSTI s forward EPS in absolute. Using the same growth rate in a second regression that captures the past relationship between FSSTI s growth and valuation, we can derive a fair PE multiple to apply to the top down EPS in order to arrive at a twelve month top down index target. The regression we use to project FSSTI s earnings growth has an R-squared of 83%. We have found solid correlations between the following four independent macro variables and FSSTI s trailing EPS growth, using data since January 2009: NODX growth is volatile month to month, but there is an 89% correlation between NODX s trailing 12 month moving average growth rate and FSSTI s earnings growth over the same period. Following a poor December, NODX s moving average growth stands at basically zero. International Enterprise (IE), which maintains this series, is calling for 0-2% growth in But we have found IE s estimates have tended to be overoptimistic, especially at the start of the last few years, and see the low end of their range as the most likely outcome. On the domestic side, the 12 month moving average of retail (ex motor) sales growth also shows solid correlation with FSSTI earnings growth at 73%. Like NODX, the message from this series is unsupportive, as it has shown a mostly negative evolution for the last year and a half. Our property team forecasts subdued total retail sales growth of 2% in 2016E and, with the retail (ex motor) subset 85% correlated to visitor arrivals which are flattish, we pencil in a flat retail (ex motor) sales growth for 2016E as well. Finally, FSSTI earnings are correlated to two FX series, namely USDSGD (65% correlation) and SGDCNY (81%). A weaker S$ versus both the US$ and CNY is negative for FSSTI EPS growth. As we have outlined in the past this is likely due to a weaker S$ policy by the MAS signalling weak global macroeconomic conditions more generally, and there being few beneficiaries of a weak S$ in the FSSTI (banks can benefit from higher interest rates, but also face rising asset quality risks). Our house forecasts call for continued weakening in USDSGD (1.41 average for 2016E, vs for 2015), but some strengthening in SGDCNY (4.66 for 2016E versus 4.57 for 2015). The top down model suggests potential FSSTI earnings contraction in Based on the expectations for the four independent variables outlined above, our regression predicts a -1.9% earnings contraction for FSSTI in 2016, which would get us to a 2016E index EPS of S$219. This compares with our team s aggregated bottom up forecast of +3.7% earnings growth for FSSTI in 2016 (i.e. EPS of S$232). We think the model s cautionary message is worth heeding given its respectable R-squared, and in light of the recurring over-estimation of EPS growth by consensus over the last five years (Figs 5 and 6). Fig 9 A flattish NODEX is a top down FSSTI earnings growth headwind (89% correlation) Fig 10 As are contracting retail (ex motor) sales (73% correlation) Sep-15 May-15 Jan-15 Sep-14 May-14 Jan-14 Sep-13 May-13 Jan-13 Sep-12 May-12 Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 Sep-09 May-09 Jan-09 FSSTI EPS (yoy%) NODEX (RHS, yoy%) Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 FSSTI EPS (yoy%) Retail Sales, ex motor (RHS, yoy%) Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep Source: International Enterprise, Macquarie Research, February 2016 Source: CEIC, Macquarie Research, February February

6 Top down index target of 2,800 still implies solid >10% total return though. There is a 74% correlation between the FSSTI s trailing earnings growth and its trailing PER since January Based on this relationship, the top down implied EPS contraction mentioned above would be consistent with a fair trailing PER of 12.8x (historical average since Jan 2009: 14.4x), which would imply a rounded twelve month FSSTI target of 2,800 (S$219 * 12.8x). As shown in Figure 1 above, that still implies ~10% total return at today s heavily sold down levels. The risk is a deterioration in the top down drivers we use. NODEX looks exposed in light of weak global trade. A one percentage change in the NODX 12 month moving average growth reading impacts the index target by 5% in our top down framework. Flatlining visitor arrivals do not augur well for retail (ex motor) sales growth; a 1 percentage point change in the 12 month moving average of that series results in a 2% change to the top down index target. And related to the last two points, the outlook for Singapore s GDP growth is uncertain due to an ongoing contraction in manufacturing. When coupled with a still relatively subdued inflation backdrop, we would not rule out further monetary easing (weaker S$) by the MAS at its next scheduled meeting in April. A 1% change in our average USDSGD forecast for 2016 drives a 3% change to our top down index target (1% change in SGDCNY = 1% change to the index target). Fig 11 Weaker SGD vs. the USD implies weaker FSSTI earnings growth (65% correlation). We expect some further weakening in USDSGD in 2016 Fig 12 A weaker SGD versus CNY is also a headwind for earnings growth (81% correlation) Sep-15 May-15 Jan-15 Sep-14 May-14 Jan-14 Sep-13 May-13 Jan-13 Sep-12 May-12 Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 Sep-09 May-09 Jan-09 FSSTI EPS (yoy%) Stronger SGD vs USD Weaker SGD vs USD 12-mth avg. USDSGD (RHS, yoy%) Sep-15 May-15 Jan-15 Sep-14 May-14 Jan-14 Sep-13 May-13 Jan-13 Sep-12 May-12 Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 Sep-09 May-09 Jan-09 FSSTI EPS (yoy%) Stronger SGD vs CNY Weaker SGD vs CNY 12-mth avg. SGDCNY (RHS, yoy%) Source: FactSet, Macquarie Research, February 2016 Source: FactSet, Macquarie Research, February 2016 Fig 13 Sluggish GDP growth outlook and Fig 14 A still benign inflation picture raises the odds of MAS easing policy further E* 2016E* 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% MAS expectation: 2016 Headline: % 2016 Core: % Nov-15 Sep-15 Jul-15 May-15 Mar-15 Jan-15 Nov-14 Sep-14 Jul-14 May-14 Mar-14 Jan-14 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Jan-12 SG overall GDP (%) MAS core inflation Headline Inflation * 2015: MTI advance estimate based on 11 months of actual data; 2016: Midpoint of MTI s 1-3% forecast range. Source: MTI, Macquarie Research, February 2016 Source: MAS, Macquarie Research, February February

7 Bottom up: Panning for outliers The top down message from the previous section is not inspiring: FSSTI risks an earnings decline in 2016, which consensus is not yet reflecting, but a silver lining is that an earnings decline seems to be priced by the market already. In that context we look for sectors and stocks that: Have demonstrated a solid earnings trend over the last twelve months and whose earnings outlook is defensible and positive. Earnings recovery stories are also interesting. Are pricing in especially attractive valuations, especially when set against a solid earnings track record and outlook. We apply our Outliers framework, which captures the evolution of consensus forward earnings estimates for Singapore stocks (the red bars in Figures like 15 and 17 below) and compares this to their share price performance over the same period (the black bars). This type of comparison helps identify cases of potentially unjustified de- and re-ratings, i.e. when the red and black bars are not doing the same thing. We marry up this screen with our team s fundamental views to derive our target sector allocations and individual stock picks. Figs show a summary snapshot of the latest Outliers screen. Additional charts starting from Fig 17 organize the data by sector. Highlighting some of the big picture and sector / stock messages that stand out to us: Big picture: Seven out of every ten stocks have seen their forward estimates cut over the last twelve months (Fig 15). Starting from Fig 17, we can also see that no sector has emerged completely unscathed from the earnings estimate downdraft. That said, Property, Telecom and Transport have fared relatively better than the others. For Banks, the steady multi-year upgrade cycle that began in 2012 has petered out and given way to an incipient downgrade cycle from July Industrials, Consumer and Commodities have generally seen earnings estimates fall across the board, though the degree of pressure varies from stock to stock. Share prices have responded to the earnings changes, and then some. In Fig 15 we can also see that only two stocks have risen in absolute terms over the last twelve months. So even some stocks that have enjoyed earnings upgrades have been de-rated by the market over the last year. And some sectors with only modest downgrades (so far), like the aforementioned Banks, have still been aggressively sold off. Another way to visualize this is shown in Fig 16, where we show the gap between estimate changes and share price performance. For example, in Fig 15 we could see that SIA has seen its forward earnings revised upwards by 24% over the last twelve months, but its shares have come off by -7% over the same period, resulting in the 31% reading in Figure 16. Indeed, SIA presents one of the most significant earnings / share price mismatches seen over the last twelve months. Fig 15 Few shares have seen consensus forward earnings estimate rise or stay flat over the last twelve months 40% 20% 0% -20% -40% -60% -80% SIA* SATS** SSG* UOL HKL CAPL* CD AREIT SPOST* CT ST* SGX* DBS THBEV UOB CITDEV GLP STH OCBC Wil Forward consensus EPS estimate evolution (LTM) SPH** JM JS* STE DFI SIE YZJ HPHT FR* Keppel Olam Share price performance (LTM) JC&C ARA SCI Nobl GGR EZI GENS SMM** Note: The red bars show changes in consensus forward EPS estimates over the last twelve months (LTM). The black bars show the share price performance over the same period. * Denotes a top pick, ** Denotes a key underperform Source: FactSet, Macquarie Research, February February

8 We think figure 16 is a useful screening tool on its own, with the names at either end of the chart s scale meriting further consideration. But it is best used alongside Figure 15. For example, the message for SIA, share price weakness despite earnings upgrades, is far more compelling than Noble s, which is basically earnings have been cut, but shares have traded off even more. For names like GGR and FR which show a positive reading in Figure 16, the message is the shares have somehow avoided a de-rating on a par with the earnings cuts we have seen. This is a good segue into a discussion on the various sectors themselves, tying in our colleagues fundamental views and with reference to our sector and stock picks shown in Figure 2. Banks: We lower our OW position The upgrade cycle for the Banks that started in January 2012 lost steam as of July 2015, and we have started to see small downgrades emerge for OCBC and UOB, while DBS is still holding steady (Fig 17). At the same time the shares for all three have fallen to the point where they are trading well below their -1 standard deviation ranges (Fig 18). Fig 16 All but six stocks have de-rated in the last twelve months, including many with earnings upgrades 30% 20% 10% 0% -10% -20% -30% -40% -50% Nobl HKL SPOST* UOL SIA* DBS GLP CITDEV CAPL* HPHT DFI OCBC Keppel EZI UOB YZJ SCI SGX* ST* STE JS* CD AREIT STH EPS vs. Share evolution "Gap" (LTM) JM ARA CT SIE SMM** SPH** Wil THBEV SSG* SATS** Olam GENS FR* GGR JC&C Note: The red bars show the gap between each stock s consensus EPS estimate evolution and its share price performance over the last twelve months. So a negative reading implies that share has seen an implicit de-rating. * Denotes a top pick, ** Denotes a key underperform Source: Macquarie Research, February 2016 Fig 17 Banks: EPS estimates starting to turn and Asset quality fears have hit the shares extra hard Fig 18 Leaving their P/BV s below their -1 standard deviation bands. Thomas and Ken prefer UOB. 5% X 1.6 0% -5% % -15% % -25% % -35% DBS OCBC UOB 0.8 DBS OCBC UOB Cons. NTM EPS est. trend (LTM) Share Px trend (LTM) -1 STD P/BV Average P/BV +1 STD P/BV Today Source: FactSet, Macquarie Research, February 2016 Source: FactSet, Macquarie Research, February February

9 Thomas and Ken attribute the de-ratings to concerns over slowing top-line growth and potential asset quality deterioration. And while they still see the Singapore banks as well positioned in a regional Banks context, enough concern was raised by their asset quality stress tests to downgrade OCBC and DBS to Neutral in January (UOB was kept at Outperform). In particular, they highlight the banks exposures to oil and gas credits and a slowing China trade finance market, among other issues. Thomas and Ken also see consensus as being overoptimistic (they are 5-10% below the street for 2016E-17E) which suggests larger negative red bars in Fig 17 going forward. Given the sharp continued sell-down in the banks since Thomas and Ken s downgrades, we think the Banks valuations are too compelling for us to move our position to Neutral, but we do lower the amount of our Overweight (Fig 2). Property: We raise our OW position The Property space has generally held up well in terms of earnings expectations (Fig 19), led by Hongkong Land, CapitaLand and UOL, all three of which we Overweight in our model portfolio (Fig 2). As highlighted by our Property team in their 2016 outlook report, we think this is in no small part due the high exposures of these three names to top tier investment properties, which provide recurring income. These three names also have low exposures to residential development in Singapore, a market still buffeted by cooling measures. Interestingly, even the name most exposed to Singapore residential from an RNAV perspective, City Developments, has seen only low single digit percentage downward earnings revisions in the last twelve months. The stock has still underperformed against the backdrop of a muted Singapore property market. Tuck and Sam are not calling for a material reversal of cooling measures anytime soon, but everything has a price and we re-flag their recent upgrade of City Dev. GLP shows a similar share price / earnings dichotomy, which leaves the shares attractively valued. Indeed the whole sector is trading at or below its -1 Standard Deviation P/BV band (Fig 20). Our top pick from a strategy perspective remains CapitaLand (CAPL) which is also on our Asian Marquee List and is a top pick in the regional property sector. Tuck and Sam s recent in depth update reviews the benefits of management s recently streamlined strategy and highlights the stock s close to trough valuation. Commodities: We move our position to OW from UW We think the narrative for CPO planters will be better in 2016 than it has been in many years as the complex is set to tighten. As explained in our 2016 outlook report where we upgraded our view, we see 2016 s average CPO prices 18% higher than the 2015 average, and 30% higher than the 4Q15 average. We think the Singapore listed planters are the best plays, despite some sticker shock risk around IAS 16 accounting adoption, which is explained in the linked report. From an FSSTI perspective, we overweight GGR and Wilmar, while mid cap First Resources is our top pick for the sector. Noble remains an overweight position, but we acknowledge that it is a special situation stock, with some critical events on the horizon in 1H16. Fig 19 Property: Recurring income models proving resilient against a difficult macro backdrop Fig 20 Property P/BV: Most stock are trading at or below their -1 Standard Deviation bands 15% X 10% 5% 1.7 0% -5% -10% % -20% -25% % -35% -40% HKL CAPL CITDEV GLP CT AREIT UOL Cons. NTM EPS est. trend (LTM) Share Px trend (LTM) 0.2 HKL CAPL CITDEV GLP CT AREIT UOL -1 STD P/BV Average P/BV +1 STD P/BV Today Source: FactSet, Macquarie Research, February 2016 Source: FactSet, Macquarie Research, February February

10 Consumer: We keep our UW intact; but SPOST and SSG are mid cap top picks Our underweight positioning for the Consumer space at the FSSTI level is driven by SPH and JCNC, which we see as expensive stocks for which operational headwinds are not priced in. We agree with SPH s strategic efforts at offsetting the slow burn decline in its traditional media business with investments in the digital arena, but we are underwhelmed by the returns SPH s new ventures are generating. In JCNC s case, the structural headwinds facing its main subsidiary Astra International (ASII IJ, Rp7,125, Neutral, TP: Rp6,000) have been well outlined by Lyall Taylor. These have also driven material consensus estimate cuts in the last twelve months (Fig 23). But these cuts have not been mirrored by JCNC s stock price, which has held up much better. On top of that, with JCNC looking to diversify its asset footprint in response, we think a conglomerate discount at least in line with JCNC s past average is justified. But JCNC is now trading at a narrower discount. We have Genting Singapore as an overweight position as we see forward expectations as sufficiently right sized post a period of big cuts. We are encouraged by management s strategic re-focus on the more profitable mass market gaming segment too. We do have two Consumer companies among our mid cap top picks though. Singapore Post and Sheng Siong stand out as the only Consumer names with consensus EPS upgrades over the last twelve months. We see SPOST as one of the very few ways to play e-commerce in Singapore, while SSG continues to deliver stable results despite rising competition in Singapore s supermarket industry with its focused, niche approach. Fig 21 Commodities: We see a better narrative for CPO exposed names in 2016 on rising prices Fig 22 Commodities PER: We prefer FR over GGR. Noble can re-rate with a successful debt rollover. 0% -10% -20% -30% -40% -50% -60% -70% X % Wil GGR Nobl Olam FR 2.0 Wil GGR Nobl Olam FR Cons. NTM EPS est. trend (LTM) Share Px trend (LTM) -1 STD PER Average PER +1 STD PER Today Source: FactSet, Macquarie Research, February 2016 Source: FactSet, Macquarie Research, February 2016 Fig 23 Consumer: SSG and SPOST stand out earnings-wise and are mid cap top picks for us Fig 24 Consumer PER: Many trading at upper end of historical range, with the exception of DFI X 20% % 0% % -20% % % % GENS JC&C THBEV SPH SPOST DFI SSG 8.0 GENS JC&C THBEV SPH SPOST DFI SSG Cons. NTM EPS est. trend (LTM) Share Px trend (LTM) -1 STD PER Average PER +1 STD PER Today Source: FactSet, Macquarie Research, February 2016 Source: FactSet, Macquarie Research, February February

11 Industrials: We increase our UW Industrials have shown the worst EPS revision trends over the last twelve months (Fig 25), a trend likely to continue against a persistently low oil price backdrop, which has raised the odds of order deferrals and cancellations in the oil rig and shipbuilding space, to which Keppel, the two Sembcorp entities and Yangzijiang are exposed. Brazil remains a key question mark: Keppel and Sembcorp Marine have 41% and 44% of their order books linked to Petrobras, which has funding issues and is undergoing corruption investigations. SMM has the least protection from a business diversification perspective here. ST Engineering is also exposed to marine activities, which remain an earnings headwind, though it is more insulated by its steadier MRO profit stream. Still, the stock remains on a rich valuation despite the de-rating we have seen in the last twelve months. The Jardine head stocks offer the best fundamental / valuation combination, in our view, especially Jardine Strategic. We think JS wide discount to NAV enables investors to buy into a portfolio of leading Asian auto, property and retail franchises at a very attractive valuation. Other : Many good ideas in our view; ST, SIA and SGX are large cap top picks We aggregate the remaining Index constituents in Figure 27, which includes telecom, transport and Singapore s stock exchange, SGX. This group shares a commonality, namely more defensive, compounder type fundamentals (SIA being the exception), which we think are well suited to today s environment. As shown in Fig 27, they have largely performed well earningswise, with the exception of Hutchison Ports Holdings. We source several top picks from this group: Fig 25 Industrials: Poor earnings trends likely to continue for most. We do like Jardine Strategic though Fig 26 Industrials PER: Generally cheap versus past, but not so tempting given weak fundamentals 0% X % -20% % % -50% % JS JM Keppel SMM STE SCI SIE YZJ Cons. NTM EPS est. trend (LTM) Share Px trend (LTM) 5.0 JS JM Keppel SMM STE SCI SIE YZJ -1 STD PER Average PER +1 STD PER Today Source: FactSet, Macquarie Research, February 2016 Source: FactSet, Macquarie Research, February 2016 Fig 27 Other : Exchanges, Telco, and Transport: Estimates mostly held up better than share prices... Fig 28 And while the PERs vary across this catchall group, we have 3 top picks here (SGX, ST, SIA) 30% 20% X % 0% % -20% -30% % -50% SGX ST STH SIA HPHT CD SATS Cons. NTM EPS est. trend (LTM) Share Px trend (LTM) 10.0 SGX ST STH SIA HPHT CD SATS -1 STD PER Average PER +1 STD PER Today Source: FactSet, Macquarie Research, February 2016 Source: FactSet, Macquarie Research, February February

12 SingTel (ST) has sold off on fears of a fourth operator entering the Singapore mobile market. But Prem Jearajasingam has continuously stressed that the mature Singapore telecoms market is not structurally attractive for a fourth player. Limits on spectrum trading and tight funding availability are added hindrances for any would-be bidders. Confirmation of Prem s thesis should take place over the next six months, we think, as spectrum auction dates and conditions are finalized. Confirmation of the lack of a credible fourth player will reverse ST s recent de-rating, in our view. A 5% dividend yield meanwhile provides downside support. SGX s earnings expectations have held steady, despite continued weakness in its core securities activities on lacklustre trading volumes, but derivatives are picking up the slack. A50 and iron ore contracts have been performing well. Moreover, Ken Ang sees the new CEO s initiatives on FX derivatives as a key step in SGX s quest to become Asia s derivatives hub. Ken s thesis is that higher margin requirements and capital charges on FX futures clearing are set to drive volumes from banks onto exchanges like SGX. Ken sees this opportunity as driving a potential incremental 40% uplift to SGX earnings in the medium term. Singapore Airlines (SIA) has the lowest competitive moats among the names shown in Fig 27-28, but we think the stars have aligned for at least the next twelve months. In fact, SIA has seen very strong earnings upgrades over the last twelve months, which we think can continue. Azita Nazrene has been highlighting not only the benefits of lower fuel prices but also a change in strategy, which can provide more lasting benefits. For example, Azita welcomes SIA s progress on network rationalisation among its four SG based airline brands. Management has announced that Scoot will take over SQ s Jeddah route, Tigerair s Perth route, one of two daily Guangzhou routes from Tigerair and SilkAir s Hangzhou route. Also, points on its frequent flyer program, KrisFlyer, can be earned and redeemed on Scoot and Tigerair flights. She awaits further developments in its partnership with Lufthansa, which may see codeshare expansion and widen SIA s footprint in Europe. Like SIA, SATS has demonstrated very strong earnings revision trends of late, but, unlike SIA, this has also been accompanied by a strong re-rating (Fig 28) partially driven by the stock s FSSTI inclusion last September. Neel Sinha sees this premium rating as stretched with rising consensus expectations likely to be disappointed in coming quarters. For example, he sees the benefits of a 25-30% capacity increase at Changi Airport in 2017 (Terminal 4) as likely to be negated by revenue pressure from airlines struggling with competition and the newer entrants in aviation support. The fact that SATS has grown flights and passengers handled by 70%+ and meals served by 20%+ over the past 15 years, yet operating profit in FY15 is still largely at FY01 levels, is a somewhat startling testament to this dynamic. 16 February

13 REITs: Back in focus; we like CCT Valuation and a history of more stable earnings has rekindled interest in the SREITs. On valuation, FSTREI s yield has widened out to above its +1 standard deviation band (Fig 29-30). At the same time, two top down drivers that correlate well with SREIT valuations, and which had been showing unfavourable trends in the last months, are reversing or stabilizing: Singapore 10 year government bond yields, have been coming off since the start of the year as the outlook for economic growth has worsened (Fig 31). This has left SREITs with the highest yield spread versus the relevant domestic 10 year yield in Asia, according to Tuck. At the same time, USDSGD s weakness seems to have stabilized at the ~1.40 level. Our house forecasts pencil further stability with a 2016 average of 1.42 (Fig 32). We use these two variables as inputs into a regression that tries to predict the fair yield spread for FSTREI versus the Singapore 10 year yield. This, in turn, allows us to calculate a theoretical top down total return for FSTREI. The model shows a decent +7% total return for FSTREI today (Fig 33). This level may be less attractive than one might expect, as all the return comes from yield with no implicit upside from capital appreciation. And while SG 10 year government bond yields could contract further, FX risks are skewed to the downside, as the MAS may consider loosening given the muted macro backdrop. Still, we think there is enough there to justify a closer look to identify some Outliers using the framework outlined in the previous section. Fig 29 FSTREI yield has widened to above its +1STD deviation band Fig 30 As has FSTREI s yield premium vs. the SG 10 year yield Dec-15 Jun-15 Dec-14 Jun-14 Dec-13 Jun-13 Dec-12 Jun-12 Dec-11 Jun-11 Dec-10 Jun-10 Dec-09 Jun-09 Dec-08 Jun-08 Dec-07 SREIT yield avg (ex GFC) +1 std -1 std +1 std -1 std Source: Bloomberg, Macquarie Research, February 2016 Source: Bloomberg, Macquarie Research, February Dec-14 Jun-14 Dec-13 Jun-13 Dec-12 Jun-12 Dec-11 Jun-11 Dec-10 Jun-10 Dec-09 Jun-09 Dec-08 Jun-08 Dec-07 SREIT yield premium avg (ex GFC) Jun-15 Dec-15 Fig 31 SG 10 year yield has been contracting Fig 32 Some risk to our stable house FX assumptions if MAS loosens policy, but US 10 year yields already below our forecasts (and we assume gradual increase) Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 SG govt 10yr Q15 1Q16E 2Q16E 3Q16E 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E USA 10 Year Government Bonds (per end %) SGDUSD Source: Bloomberg, Macquarie Research, February 2016 Source: Bloomberg, Macquarie Research, February February

14 In the past, SREITs have displayed more stable earnings trends than the FSSTI, based on the data from our Outliers database: SREIT earnings estimate revisions are both lower in absolute terms over time, and have half the volatility than their non-reit peer sectors. But the picture over the last twelve months has been more mixed (Fig 34), with some REITs falling prey to not immaterial downgrades. This may be down to the pressure our team sees on most of the REIT s key end markets, including Office and Retail (rental declines are accelerating) as well as Industrial and Residential (rental declines slowing but still declining). Still, the overall trend looks comparatively better than for the non-reits, and recent reporting generally was within expectations. Two names that stand out from our perspective are CapitaCommercial Trust (CCT) and Mapletree Greater China Commercial trust (MAGIC). Both face structural concerns like rising office stock in Singapore s central business district (CCT) and China s general economic slowdown which is impacting HK retail sales (MAGIC). But both have seen their earnings expectations revised upwards nonetheless (Fig 34). CCT has been managing tenancy well despite the impending increase in office supply and has a call option on a marquee office property in Singapore s central business district, which has seen good leasing and provides scope for incremental DPU growth not in our estimates. MAGIC s flagship Festival Walk mall property continues to attract demand from new tenants. The shares of these two REITs have heavily sold off, leaving their valuations below their -1 Standard Deviation bands (Fig 35) and sport yields in the order of 7-8% today (Fig 38). Of the two we have CCT as our top pick on better DPU growth. Fig 33 Regression on REIT yield premium versus SG 10 year bond yield and FX: Also implies mid single digit TSR, which would increase if SG 10 year yields continue to contract. FX still a risk. FSTREI Total Return scenarios FSTREI Total Return scenarios USDSGD ($) USDSGD ($) 6% % SG 10y % 3% 4% 4% 5% Cons % 3% 4% 5% 6% Bond % 4% 5% 6% 6% Fwd % 4% 5% 6% 7% Yield % 5% 6% 7% 8% DPU % 5% 6% 7% 8% (%) % 6% 7% 8% 9% Growth % 6% 7% 8% 9% % 8% 9% 10% 10% (%) % 7% 8% 9% 9% % 9% 10% 11% 12% % 7% 8% 9% 10% Note: Left chart keeps DPU growth constant. Right chart keeps SG 10 government year yield constant. Shaded cell represents today s input readings. Source: FactSet, Bloomberg, Macquarie Research. Priced as of February Fig 34 Earnings trends have been more mixed than perhaps expected. The selloff has been universal Fig 35 And this has left many REITs trading at or below historical -1 Std. deviation bands. With most end markets facing rental declines we are not that tempted 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% CT MCT MAGIC FRT CRCT AREIT MLT MINT CACHE AAREIT CCT SUN KREIT ART CDREIT FIRT X CT MCT MAGIC FRT CRCT AREIT MLT MINT CACHE AAREIT CCT SUN KREIT ART CDREIT FIRT Cons. NTM EPS est. trend (LTM) Share Px trend (LTM) -1 STD P/BV Average P/BV +1 STD P/BV Today Source: FactSet, Macquarie Research, February 2016 Source: Bloomberg, Macquarie Research, February February

15 Trading Comparables: FSSTI, Mid Caps and REITs Fig 36 FSSTI Valuations EPS Mkt Cap (S$) Target Div Total Growth MQ vs Cons PER (x) 15E 15E BBG Code Company (US$ m) Rec Price Price Upside Yield Return 15-17E 16E 17E 16E 17E P/B ROE WIL SP Equity Wilmar International 13,393 O % 3% 16% 9% -7% -6% % GGR SP Equity Golden Agri 3,322 O % 2% 5% 29% 8% 28% % NOBL SP Equity Noble Group 1,453 O % 3% 46% 25% -10% 4% % Commodities 18,168 20% 2% 22% 17% -3% 9% % THBEV SP Equity Thai Beverage 12,182 N % 4% 15% 3% 9% 6% % JCNC SP Equity Jardine C&C 10,676 N % 3% -7% 3% -5% -9% % GENS SP Equity Genting Singapore 5,868 O % 3% 29% 50% 22% 10% % SPH SP Equity SPH 4,119 U % 5% -16% -7% 3% -1% % Consumer 32,844 1% 4% 5% 7% 7% 1% % DBS SP Equity DBS 23,534 N % 5% 28% 0% -5% -9% % OCBC SP Equity OCBC 22,099 N % 5% 19% -1% -6% -9% % UOB SP Equity UOB 20,429 O % 5% 19% 0% -6% -11% % SGX SP Equity SGX 5,284 O % 4% 28% 5% 0% -1% % Financials 71,346 19% 5% 23% 0% -4% -8% % KEP SP Equity Keppel Corp. 6,324 U % 5% 15% -9% -11% -7% % STE SP Equity ST Engineering 6,037 U % 5% 6% 1% 0% -4% % SCI SP Equity Sembcorp Industries 3,071 U % 4% 13% 6% -9% -4% % SIE SP Equity SIA Engineering 2,773 NR 3.45 NR NM 4% NM 5% NM NM % YZJ SP Equity Yangzijiang Shipbuilding 2,440 NR 0.89 NR NM 6% NM -7% NM NM % SMM SP Equity Sembcorp Marine 2,133 U % 4% -5% 15% -25% -4% % Industrials 22,778 3% 5% 7% -4% -11% -5% % HKL SP Equity Hongkong Land (US$) 13,317 O % 3% 69% 14% 7% 7% % CAPL SP Equity CapitaLand 8,694 O % 3% 42% 17% 6% -14% % GLP SP Equity Global Logistics Prop 5,571 O % 3% 84% 27% 1% -1% % CT SP Equity CapitaMall Trust 5,244 O % 6% 12% 5% 3% 0% % CIT SP Equity City Developments 4,457 O % 2% 58% -15% -21% -38% % AREIT SP Equity Ascendas REIT 4,303 O % 7% 10% 5% 7% 7% % UOL SP Equity UOL Group 3,096 O % 3% 48% 5% 29% 7% % Property 44,683 42% 4% 46% 9% 4% -5% % ST SP Equity SingTel 40,919 O % 5% 40% 9% 2% 8% % STH SP Equity StarHub 4,540 N % 5% 10% 5% 4% 11% NM NM Telecoms 45,459 19% 5% 25% 9% 3% 9% % SIA SP Equity Singapore Airlines 9,486 O % 4% 18% 13% -10% -24% % CD SP Equity ComfortDelGro 4,298 O % 9% 30% 12% 2% 8% % HPHT SP Equity HPH Trust (US$) 3,659 NR 0.42 NR NM 11% NM -1% NM NM % SATS SP Equity SATS 3,110 U % 4% -15% 4% -12% -14% % Transport 20,553 5% 7% 11% 9% -6% -10% % FSSTI Index FSSTI 255,832 2,540 2,950 16% 4% 20% 4% 0% -3% % *GGRs BVPS and net income have been adjusted for FV gains in biological assets. Source: FactSet, Bloomberg, Macquarie Research. Priced as of February February