Tuesday, January 7, 2014

Singapore 2014 Theme (DBSV)

Theme 1: Leverage on US-Europe recovery
Being a globalised economy, the continued US recovery even if slow, and the anticipated shift out of recession for the Eurozone should underpin Singapore equities. DBS Research expects US GDP growth to inch higher to 2% while the Eurozone swings out from recession with a 0.5% recovery. The forecast from international organizations are more positive – the European Commission expects the Eurozone to return 1.1% growth in 2014 after contracting 0.4% in 2013.

Meanwhile, the IMF has indicated it would raise its current 2014 US GDP growth forecast of 2.6% this month. Europe and US combined account for 23% of Singapore’s exports. Our Singapore economist expects Singapore’s GDP expansion to revert back to its potential rate of 4.0% in 2014 on expansion in both the manufacturing & services sectors.

We are positive on companies with significant revenue exposure to US and/or Europe. HPH Trust has a 40-45% trade flow to US and Europe. With the industrial action now well behind it and a full year’s contribution from ACT, we expect HIT to post significant improvement in 2014, which should lead to an overall earnings improvement for HPHT. At the same time, overall throughput numbers should show a mild improvement. We expect DPU to improve to 5.9UScts in FY14 from 5.3UScts. Forward yield is very attractive at close to 9%.

Goodpack is one of the best proxies to US/Europe recovery with almost half of its revenue from that region. While the long awaited European OEM contract is pending approval, Goodpack has gained traction with another US-based automotive-related supplier. Macro recovery coupled with positive earnings delivery and conclusions of auto contracts should continue to underpin interest in the stock.

Venture is well positioned to ride on the rebound in business capex, as global recovery gathers momentum.
Corporates are expected to ramp up spending to capitalize on the long awaited rebound in global demand. Its foray into 3D printing, while small currently, offers exciting growth prospects in the long run. Armed with a cash hoard, VMS offers shareholders an attractive dividend yield of 6.5% and earnings growth rebounding to 9% in 2014.

Our large cap pick is ST Engineering, with 33% sales exposure from US and Europe and backed by a 4.5% yield.

Theme 2: China Reform beneficiaries
China’s economy has a big influence on the rest of Asia and the good news is that its GDP slowdown since 2010 has stabilised. The country is likely to target a similar growth of 7.5% for 2014 as leaders balance the need to keep the economy on a stable footing while pushing through necessary structural reforms. Our HK/China economist forecasts China GDP to improve to 7.8% in 2014 from 7.6% in 2013.

Besides stabilizing growth, the new Chinese leadership under Xi Jinping has shown commitment to reform efforts. China’s reform process is long and tedious because of their immense complexity. There is also the need to balance reform efforts and stability, the latter still remains the watchword for China.

The 3rd Plenum in 2013 focused in key areas such as resource pricing and finance, in addition to steps to boost China's urban population. It first aims to restructure the economy by providing more spending power to the people. The role of the state will also be cut back and SOEs will see more of their profits redistributed. Pricing regulations in transportation and telecommunications, water, oil, natural gas and electricity, all currently strictly controlled by the state, will be eased. The onechild policy in place since 1970 will be gradually eased.

We are positive on stocks that ride on China’s urbanization process and the country’s transformation from a manufacturing export economy to one more dependent on domestic consumption.

We expect MIDAS to enjoy a firm earnings rebound in FY14F as high-speed railway (HSR) contracts roll in. Midas recently won its first HSR contract (Rmb168m) in over two years as China resumed its HSR development programme. More is likely to come and we believe the Group could win a substantial order arising from the recent second rolling stock tender for 314 train sets, or about 2,500 train carriages. Over the next two years, we believe a further 700 train sets could be tendered for, resulting in further wins for Midas in the HSR segment.

We pick Osim as growth is driven by strong performance from China and Taiwan markets from the new uInfinity chair. It is also more resilient to softening demand in ASEAN. Going forward, management is lining up newer versions of existing models to be launched next year. This will ensure that there is sustainable revenue growth from these new chair aunches in 2014.

Steady traffic growth at a mid to high single digit pace over the next few years on China Merchant’s toll roads and early repayment of its loans should drive its core earnings steadily higher in FY14. The stock offers an attractive 6% yield.

Our large cap pick is Global Logistics Properties. GLP offers exposure to China’s growth with 54% of its gross asset value in China spread over an attributable 12.9m sq m of GFA. Backed by another 11.8m sq m of land reserves, this provides an added kicker for earnings from future developments. The establishment of the 3-year US$3bn China Logistics Fund I, in which GLP will retain a 56% stake, will deliver another development platform for accelerated growth in China to tap the under-served modern logistics real estate market.

Theme 3: Wave of opportunities in oil and gas sector
Rate recovery in the OSV market
We see brighter spots in the oil and gas small mid cap proxies compared to the global rigbuilders. The oil and gas sector is reversing a two year earnings downtrend to post growth of 27% for 2014, on the back of rates recovery, improved execution and better margins. We expect the recovery in the offshore support vessel (OSV) market to gain further traction in FY14, underpinned by a growing rig fleet size of 9%, 12% and 15% in 2013/14/15 respectively. Using offshore rig count as a proxy for end-demand for AHTS and PSVs, we project sequential improvements in vessel-to-rig ratios for both the AHTS and PSV fleet in 2014 and beyond. Combined with declining orderbook-to-fleet ratios, this indicates increasingly healthy demand-supply dynamics for the sector. Asset owners/ operators like Jaya, Pacific Radiance and Ezra will be the first to benefit from this trend, while built-to-stock shipyards like Nam Cheong will also prosper as vessel owners seek to take advantage of higher rates without having to wait 1-2 years for a newbuild vessel.

M&A activities to attract situational interest in the sector
The OSV sector, especially in the Asia-Pacific region, is quite fragmented with a number of players offering similar services and vessel types. Hence, consolidation makes sense in  order to gain better access to capital and move up the value chain. We have already seen private equity activity in the space heating up, with buyouts of SGX-listed subsea services player Kreuz Holdings and ASX-listed OSV player Miclyn Express Offshore in 2H-2013. Given that these takeovers happened quite early in the cycle and without any control premium involved, valuations are still conservative, with Miclyn Express Offshore being bought out at 11.4x FY12/ 8.4x FY13 PE and 1.4x FY12/ 1.2x FY13 P/BV. The subsea services segment is another interesting sector, as it represents possibly the highest growing subsegment within the offshore services space, and track record plays a key role, thus making existing Tier-2/ Tier-3 players prime candidates for acquisition by new players with financial muscle. The take-over offer for Kruez Holdings @80cts, which takes in subsea projects, was pegged at 1.8x P/BV and 8x forward earnings. Press reports have indicated in the recent past that some parties like Korea's Samsung have expressed interest in possibly taking a stake in Ezra’s deepwater subsea division, EMAS AMC. Thus, we believe FY14 could herald more M&A activity in this sector.

Ezion continues to thrive on its niche products. Ezion remains our top pick, the stock offering high growth and earnings visibility. Despite the strong share price appreciation over the past 2 years, we believe valuation is undemanding at 9.5x FY14 PE compared to its 42% 2-year earnings CAGR. Its associates, Charisma Energy and Ocean Sky, have also attracted investors’ interest since Ezion’s entry in the last two years.

Theme 4: Domestic recovery proxies
Stocks in consumer services and banks should ride on Singapore’s sustained recovery. As an open economy with diversified exposure to global economies, improving growth momentum in G3 as well as China will lead to sustained GDP recovery on the home front. DBS Economist expects Singapore’s GDP growth momentum to be sustained, from 3.7% for 2013, to 4% for 2014. Banks and stocks in consumer services – Courts, Genting Singapore, Comfort Delgro, Sheng Siong, Overseas Education are good proxies to ride on the   improved economic growth. Courts will benefit from new stores in Malaysia and earnings will recover once the management relaxes its credit by start of FY15. Genting Singapore’s recovery is driven by normalization of VIP win rate, expansion in rolling chip driven by sustainable global recovery and increased tourist arrivals boosting mass market volumes.

Theme 5: Winning chips in small mid caps
Small/mid caps could be the winning chips again. Among DBS’s coverage, small caps are charging ahead with earnings growth of 21% vs 14% for large caps in 2014, and may well be the winners again for this year.

Source/Extract/Excerpts/来源/转贴/摘录: DBSV-Research,
Publish date: 03/01/13

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