Morning Commentary

• STI: -0.14% to 3065.7
• MSCI SE Asia: +0.15% to 843.9
• Hang Seng: -1.19% to 21767.8
• MSCI APxJ: -0.09% to 452
• Euro Stoxx 50: +0.28% to 2582.4
• S&P500: -0.47% to 1409.5

Transport Sector Update – SIA looking to sell Virgin:

Sale of SIA's stake in Virgin Atlantic would unlock hidden value in the stock and release cash to the group. While we do not rule out the possibility for special dividends, we believe that any cash proceeds would more likely be redeployed into investments. Discussions on the sale is preliminary and we expect neutral stock impact.

Olam’s rights cum bonds and warrants:

For 1000 Olam shares: 313 US$1.00 bonds yielding 6.75% due 2018 (US$750m raised) + 162 free detachable warrants for a new Olam share at strike price US$1.291 (potentially US$500m). Fully underwritten by Temasek. Obviously a move to put to rest doubts about its balance sheet after Muddy Waters, only we think it might have the opposite effect coming so soon off the back of the war of words. The warrants are dilutive even though Olam had said it was done with equity raisings. While we do not have coverage on Olam, our view is this: Olam’s asset heavy strategy warrants profit growth rates in the high teens at least and eventual free cash generation to justify all that capex. The current share price reflects that growth rates for FY2012 did not materialise. Investors who hold this stock need to keep a tab that such growth rates resume.

Property Sector Update – Far East Orchard & Straits Trading

On 26 Nov 2012, Far East Orchard Limited (FEOL) has inked a non-binding memorandum of understanding (MOU) with The Straits Trading Company Limited (STC) to explore the proposed acquisition of 50% interest in three hotels in Australia, namely, Rendezvous Studio Hotel Perth Central, Rendezvous Grand Hotel Melbourne and Rendezvous Hotel Perth and 50% interest in STC’s 50% stake in Costal Coffee Pty Ltd., a café business in Australia. Furthermore, the MOU also allows FEOL to explore the proposed acquisition of STC’s entire hospitality management business in its wholly-owned subsidiary (Hospitality Management Company). As part of the transaction, STC will have the right to subscribe up to 20% of the share capital of the enlarged Hospitality Management Company.

We see the 50-50 join venture to own the three hotels and café business, as well as the proposed acquisition of hospitality management business as a strategic partnership for both parties. STC had been recording net losses from its regional hotel operations for the past few years including the first nine months of the current financial year. With the collaboration, STC can leverage on FEOL’s experience in hospitality operations in a bid to reverse the losses, despite FEOL being a new entrant to Australia’s hospitality market, while FEOL would (1) diversify its hospitality portfolio beyond Singapore, and (2) be able to penetrate the mature but growing hospitality market in Australia which has a high barrier to entry due to exorbitant construction costs to establish hotel properties.

MARKET OUTLOOK:

Yesterday morning we said that although trading signals for stocks are still generally positive, we’re a little cautious on technical reasons as well as the way fiscal cliff negotiations are going. Our stance today is a little stronger on the negative side and short term traders may want to consider mounting positions on the short side.

Technicals: the S&P500 indeed rejected off the 50dma and 1417 neckline – a confluence of resistance, while the STI’s brief foray beyond the upper downward sloping trendline (yesterday’s webinar slides shows this trendline, pls ask your dealer for a copy) was sold into to close slightly below it – not a super strong rejection but a rejection nonetheless and should be seen in context of broader market action. The HIS and HSCEI have also halted their upward trajectory. (see Phillip CFD for trading indices)

Global macro data has been signalling a stabilization and giving hope to a reacceleration – the only major country which gave a backward November number on the manufacturing PMI was the US! China flipped into expansion on the HSBC Mfg PMI, corroborating the official PMI which strengthened, while even the EZ’s rate of contraction eased. Thus fiscal cliff uncertainty continues to be a drag and poses a challenge for the US economy.

On fiscal cliff negotiations: currently the President has asked for US$1tr tax increases on the wealthy, plus US$600b more revenues by closing tax loopholes, and a US$50b infrastructure spend, while offering US$400b of entitlement cuts in return. Republicans have balked as the combined US$1.6b over 10yrs proposal which is 33% more than last year’s proposal of US$1.2tr revenues, while the US$400b spending cuts proposal is the same. Recall that Republican’s could not get past this last year (they were willing to give US$800b revenues max) and talks broke down. Thus, the President, leveraging off his election victory which is also widely seen as a decisive repudiation of Republican ideology – is upping the ante by asking for 33% more while giving the same. Uh oh… Positive niceties over, fight begins.

Peering further out into 2013: Assuming we get a deal, we are getting increasingly constructive on the investment climate going into 1H13 - underlying macro conditions see the rate of slowdown in Asia easing and China bottoming. While the US is mixed in our opinion – housing recovery (good), consumption subsidised by savings (mixed), investment sentiment crushed by the fiscal cliff uncertainty (bad) – if a political compromise is reached on the fiscal cliff, a rebound in investment could be catalytic for markets.

SG equity strategist favours Capitaland, SATS and SIAEC.

Macro Data

In US, manufacturing activity reversed into contraction in Nov. Specifically, the ISM manufacturing index slumped from 51.7 in Oct to 49.5 (a 3- year low) in Nov. While it might be tempting to view this weak reading as a temporary distortion due to Hurricane Sandy, we wish to highlight that production has actually gained 1.3 pts m-m (to 53.7). Instead, we reckon that the decline in manufacturing was largely due to to lower new orders (with businesses holding back capex in view of uncertainties shrouding the looming fiscal cliff) as well as a continued contraction in export orders.

In Thailand, inflation decelerated from 3.32% y-y in Oct to 2.74% in Nov. Core inflation- which excludes energy and fresh food prices- inched up slightly to 1.85%, from 1.83% in the preceding month, still within the central bank’s target range of 0.5%-3%. Looking ahead, in view of the benign inflation as well as pre-emptive Oct rate cut, we expect BoT to stand pat unless economic activity substantially slows down.

In Indonesia, inflation eased from 4.61% y-y in Oct to 4.32% in Nov, owing to lower food prices. Exports continued to decline 7.61% y-y in Oct, following the 9.35% contraction in the preceding month. With inflation print ytd well within the central bank’s year-end target range of 3.5 - 5.5%, we expect Bank Indonesia to continue to stand pat on the back of lower inflation expectations as well as resilient domestic demand. As we have guided previously, a rate cut is unlikely as such a dovish stance would further exacerbate the weakness in rupiah (IDR) in view of Indonesia’s sluggish external balances.

In Euro zone, final manufacturing PMI remained at 46.2 in Nov, slight improvement from 45.4 in Oct, but still a contraction in manufacturing activities for the 16th straight month. Flash manufacturing PMI for Germany stayed at 46.8, the same as it was in Oct, indicating a contraction and the gauge for France fell to 44.5 from earlier 44.7, indicating a slightly faster contraction in manufacturing activities.

In China, HSBC manufacturing PMI rose to 50.5 in Nov, marking the highest in the last 13 months, indicating a moderate expansion in the nation’s manufacturing sector, compared to 49.5 in Oct. A separate report showed that the government backed non-manufacturing PMI rose to 55.6 in Nov from 55.5 in Oct, indicating a slightly faster expansion in the nation’s non-manufacturing sector. The China’s economy is consolidating strength to bottom out though the pace could be slow as external environment remain uncertain due to the Europe debt crisis and approaching US fiscal cliff.

In Taiwan, HSBC manufacturing PMI fell to 47.4 in Nov, compared to 47.8 in Oct, indicating a faster contraction in the island’s manufacturing activities.

In Japan, capital expenditure rose by 2.2% y-y in 3q12, slower compared to the 7.7% y-y pace in 2q12. The nation’s economy is likely to run into a recession in the fourth quarter. The bank of Japan would likely continue to play easing card in Dec, though the framework of new government may still be not clear in the new policy meeting on 19 and 20 Dec.

In South Korea, CPI fell by 0.4% m-m in Nov, after the 0.1% m-m drop in Oct. On y-y basis, CPI rose by 1.6% y-y, compared to the 2.1% y-y pace in Oct. Though there are signs of stabilization, the nation’s economy is still at a fragile state. The government is holding the benchmark rate at 2.75% and the easing inflation does have granted the government with further scope for benchmark rate cut.

In Australia, performance of manufacturing index fell to 43.6 in Nov from 45.2 in Oct, marking a contraction for a ninth consecutive month. Total manufacturing income rose by 1.3% q-q in 3q12, after 1.9% q-q drop in 2q12. Gross operating profit of business fell by 2.9% q-q in 3q12, after a revised 0.3% q-q drop in 2q12. The nation’s retail sales stay unchanged in Oct from Sept, where it advanced 0.5% m-m. An inflation gauge, TD inflation, fell by 0.1% m-m in Nov, reversing the 0.1% m-m gain in Oct. Over the year, price index rose by 2.5%, falling at the middle of the government’s target range of 2-3%. With the non-performing business profit and the inflation staying in target range, the RBA governor may announce a further 25 bps cut in benchmark rate to 3.0% later today.

Company Highlights

Singapore Airlines announced that it is in discussions with interested parties concerning the possible divestment of its 49% shareholding in Virgin Atlantic Limited. (S$10.710 unchanged)

TA Corporation Ltd announced that one of its wholly-owned subsidiary, Sino Holdings (S’pore) Pte Ltd, has entered into a joint venture agreement with three (3) individual Thai partners namely, Siripun Monnutsiri, Nakarin Monnutsiri and Nutsiree Monnutsiri who jointly owned a company called Sireerin Signature Co., Ltd (”Sireerin Signature”) incorporated in Thailand. Sireerin Signature will be the company for this joint venture (“JV”) and has no other business operation since incorporation except for the purpose of the joint venture. The first project to be undertaken by this JV is the investment and development of a mixed-use property near Bangkok. (S$0.340, -1.449%)

Mapletree Commercial Trust ("MCT") announced that DBS Trustee Limited, in its capacity as trustee of MCT, has on 3 December 2012 entered into a conditional sale and purchase agreement with MapletreeAnson Pte. Ltd., a wholly-owned subsidiary of Mapletree Investments Pte Ltd, to acquire a building known as Mapletree Anson. The purchase consideration for the acquisition of Mapletree Anson shall be S$680.0 million. (S$1.210, +1.255%)

Goodland Group Limited announced that the Company’s wholly-owned subsidiary, Goodland Assets Pte. Ltd., has on 3 December 2012, exercised options to purchase the properties at Marne Road, Singapore at the aggregate purchase consideration of S$41,762,000. (S$0.280, -1.754%)

Yangzijiang Shipbuilding (Holdings) Limited announced that the group has clinched its debut offshore oil and gas order through Jiangsu Yangzijiang Offshore Engineering Co., Ltd (“JYOEC”). JYOEC, which the group holds 78% effective interest in, has entered into a construction contract with Explorer I Limited, which is wholly-owned by Mena Offshore Investments Limited and managed by Offshore Logistics (Asia Pacific) Pte. Ltd. to construct and deliver one unit of Letourneau Super 116E Class design self-elevating Mobile Offshore Jackup Drilling Rig worth US$170 million. This contract includes an option to construct one additional identical unit. (S$0.925, -1.070%)

IHH Healthcare Berhad announced that Acibadem Poliklinikleri A.S., an indirect subsidiary of the Company, had on 1 December 2012 acquired Tolga Saglik Hizmetleri in Turkey with a purchase consideration of USD 1,500,000. (S$1.285, -1.154%)

Source: PhillipCapital Research - 04 Dec 2012