Morning Market Commentary

- STI: +0.02% to 3288.8                        - SET: +0.75% to 1540.1
- JCI: +0.97% to 4696.1                        - KLCI: +0.32% to 1627.4
- HSCEI: +0.15% to 11334                   - Hang Seng: +0.17% to 22820.1
- Nikkei 225: +2.43% to 11662.5         - ASX200: +0.29% to 3345.8
- India NIFTY: +0.08% to 5854.8         - S&P500: -1.83% to 1487.9

OUE Update: First take
By Bryan Go, Property Analyst

OUE reported FY12 revenue of $417.9mn, an increase of 26%y-y mainly due to higher contributions from hospitality, property investment and property development divisions. The top line exceeded our expectation by 9.5%. Contributions from associated co. however turned negative to -$24mn (FY11:$40.5mn) due to share of One Raffles Place’s reval losses of $40.6mn in FY12, compared to reval gain of $21.3mn in the prior year. In addition, the group also recognised lower reval gains of $24.5mn in FY12 (FY11: $253.1mn) on its investment properties . PATMI as a results decreased 76%y-y to $90.1mn. The management proposed a final dividend of S 3cents and special dividend of S 5cents, bringing the total FY12 dividend to S 11cents. While revenue and operating profits beat our expectations, reval losses on ORP were a tad negetive surprise to us. Our TP and recommendation on OUE are under review pending analyst briefing on Tuesday morning.

MARKET OUTLOOK:
By Ng Weiwen, Macro Analyst

Singapore 2013 Budget –announced yesterday- reflects the government’s commitment to economic restructuring– a recurrent theme that we have highlighted on this page as well as our ASEAN strategy reports. The budget  was broadly fiscal neutral.

On this page, I'm going to delve into the macroeconomic and investment implications of the Budget, rather than the details of the various measures.

Macroeconomic Implications:
1. Inflationary pressures are likely to persist. But the drivers will now be wage-cost inflation (as a result of tighter foreign labour restrictions), in addition to private road transport and accommodation costs.

2. Offshoring will gain impetus as a result of the govt's focus on higher value-added activities here.

3. With a  tight labour market as well as sticky and persistent inflationary pressures, we expect MAS to continue to stand pat -maintaining a modest and gradual appreciation of the S$NEER- at its upcoming Apr monetary policy meeting.

Investment Implications:
1. Negative for property (high-end residential) counters. Hike in property tax for high-end residential properties and a larger tax increase for investment properties are essentially property cooling measures in disguise (the timing is uncanny, coming after Hong Kong’s property cooling measures last weekend) and a politically astute move. Psst... Iskandar Malaysia beckons and we wouldn't be surprised to see increased property investment flowing there as a result of these new property tightening measures.

2. Construction companies will be weighed down by higher labour costs. Foreign worker restrictions will be tightened further, with foreign worker levies raised across the board and dependency ratio ceiling reduced. Notwithstanding the expected ramp up in infrastructure building, the construction sector (whose investment outlook we were constructive on) will see increases in levies for less-skilled work permit holders as well workers hired outside a company's man-year entitlement. All these hikes in workers’levies might result in a significant rise in the labour costs of construction companies and put pressure on profit margins.

3. This brings us to the third point - Would banks feel the pinch? (as a result of pts 1 and 2). Specifically, the tighter foreign worker policies will affect (foreign) labour-intensive construction as well as services sector . With companies in these sectors facing pressure on their margins and possibly some cash flow strain in the near term (notwithstanding the restructuring transition package), it might be inevitable that these firms might face difficulties in servicing their bank loans/debt.

Today, the STI is likely to retrace lower as a result of the possibly negative aspects of this year's Budget (as discussed above), messy Italian electoral exit polls (see below), thereby taking cue from the pull-back in US mkts overnight. Near-term support at 3250 level. 3319 (52-week high) will be the immediate resistance level, followed by 3400 psychological resistance level and subsequently 3800 major key resistance.

Nikkei 225:
The Nikkei 225 gapped up yesterday, following a breakout (on the upside) in USDJPY on murmurs from government officials that Abe plans to nominate Kuroda (ADB chief) as the next BoJ governor –a choice that is palatable to the opposition factions.

This was within our expectations. We have repeatedly guided in our 20th Feb morning commentary (with specific tactical trading ideas) as well as last weekend seminar to clients over the weekend to keep a lookout for a breakout in the USDJPY and consequently Nikkei from their respective consolidation range in view of the upcoming nomination of the next BoJ Governor. Markets view candidate Iwata as the most dovish, followed by Kuroda and Muto. Kuroda- ADB head- is viewed as markets as dovish.

What’s next?
Do note that the Nikkei might pull back from its recent high after a short bout of breakout as there is a significant probability that markets might ‘sell the fact’ once Abe’s choice of candidate is presented to parliament mid this week.

Already, 'smart money' are possibly reversing their short yen positions. If you were watching  the New York fx trading session yesterday/wee hours of today, USDJPY nose-dived to a tad below 91 level within the blink of an eye.

Market Outlook
Markets are getting jittery this week in view of the macro risk events ahead:

(i) Italian reform commitments are in doubt. At the time of this writing, the latest Italian election poll suggest a divide. Specifically, former PM Berlusconi's center-right coalition might gain victory in the upper house. We are still awaiting the final vote tally.

(ii) Political gridlock (again!) in negotiations over the impending 1st March sequestration in the US. If warring politicians do not strike a more modest deficit reduction deal before then, the US$85 billion automatic "sequester" spending reductions will kick in, weighing on the economy as well as equities.

Any pull back in equity prices-on account of macro uncertainties- offer an attractive point of entry to accumulate our OWs on China - Hong Kong (compelling valuations), Singapore (attractive dividend yield of 3.3% and construction boom), Thailand and Philippines (resilient domestic demand).

(All equity indices mentioned in this note are tradable with Phillip CFDs or ETFs)

Macro Data:

In Singapore, headline inflation eased from 4.3% y-y in Dec to 3.6% in Jan, notwithstanding higher private road transport cost –which along with accommodation cost- accounted for more than three-quarters of headline inflation. Excluding these 2 components, MAS Core Inflation eased 0.7%-ppt m-m to 1.2%. Looking ahead, accommodation and private road transport cost pressures are likely to persist, resulting in headline inflation to stay elevated around 3.5 - 4.5% this year. While a stronger Singapore dollar might not be able to fully mitigate domestic drivers of inflation, we expect MAS to continue to stand pat -maintaining a modest and gradual appreciation of the S$NEER.

In China, manufacturing activity continued to expand for the fourth consecutive month, albeit at a slower pace. Specifically, the HSBC flash PMI for February slipped 1.9 pts m-m to 50.4 (the lowest in four months).

Regional Market Focus

Singapore

• The benchmark STI closed little changed to 3,288.76 (+0.02%). The 6.0bn shares traded were worth S$1.6bn in value.
• Our initial read on OUE’s results are mixed. While revenue and operating profits beat our expectations, revaluation losses at an associated company was a negative surprise for us. Results update to follow.
• GLP gapped down by more than 6% during early trading after news of a placement by GIC at S$2.60-S$2.66.
• Top picks for the year are Pan United (Buy, TP: S$0.88), SIAEC (Buy, TP: S$6.10) & Capitaland (Accumulate, TP: S$4.05). Pan United is a dominant supplier to the construction industry in Singapore and we expect the company to perform well given the strong pipeline of infrastructure work over the next few years. Although current price has overshot our TP, and may experience short term profit taking, we look forward to 4q12 results to reassess our TP. SIAEC is a key beneficiary of the aviation growth story in the region and offers excellent dividend yields. Capitaland would be a beneficiary of the stabilisation of property prices and bottoming out of economic conditions in China.

Thailand

• Thai stocks rebounded nicely last Fri after the previous session’s sharp fall as weak US economic data eased concerns about the earlier-than-expected end of QE.
• Wild swings are likely to continue in the Thai stock market today. The composite SET index may be poised for a lower open amid euro-zone uncertainty after the end of the Italian elections as inconclusive election outcome would leave a split parliament in the euro zone's third-largest economy, paralyzing a new government and potentially reigniting the euro-zone debt crisis. Uncertainty surrounding the Italian election weighed on US equities overnight and most Asian bourses this morning while the US dollar regained ground. Euro-zone uncertainty aside, the other key factor to watch this week will be the ongoing negotiations on US budget cuts to reach a deal before Mar 1 deadline. Overall we expect the SET index to trade sideways down in a range of 1530-1547 today.
• In the near term, we advise investors to look for good earnings and dividend plays as long as the composite SET index continues to hold above 1520 but investors should pare back equity holdings if the main index closes below 1515. 
• Today we peg resistance for the SET index at 1547-1555 and support at 1533-1523.

Indonesia

• Most of the stocks traded on the Indonesia Stock Exchange finished higher on Monday (2502), as positive sentiments in Asia stoked rebounds on the region’s stock indexes. The Jakarta Composite Index (JCI) surged 44.984 points, or 0.97%, to finish at 4,696.107. Monday’s gain was supported by seven of the 9 major sectors, led by financial sector that jumped 2.51%, trade and services sector climbed 1.24%, and basic industry sector advanced 1.23%. The majority of Indonesia’s blue-chip stocks also rose, as the LQ45 index that measures these stocks added 11.358 points, or 1.43%, at 805.650. As many as 147 shares advanced, 125 shares declined, and 200 shares remained unchanged Monday on the Indonesia Stock Exchange, where volume on the regular board reached 5.95 billion shares worth IDR 5.66 trillion. Foreign investors accumulated net purchases totaling IDR 417.77 billion.
• The Jakarta Composite Index (JCI) will likely decline today, as concerns about spending cuts in the US hit sentiments on markets globally. We expect the JCI to trade lower today, with support and resistance at 4,643 and 4,722 respectively.

Sri Lanka

• The Colombo bourse concluded the last trading day of the week on a marginal positive note. The Benchmark ASPI gained marginal 9.5 points or 0.17% and stood at 5,735.61, while the S&P SL20 index gained 10.72 points (0.33%) to close at 3,223.28. A total turnover of LKR 300Mn was recorded during the day observing a 38.04% decrease over the previous day. Diversified Holdings (LKR 106.8Mn) and Bank Finance and Insurance (LKR 78.6Mn) were the best performing sectors for the day with increased investor interest. A total of 12.6Mn shares were traded during the day, which was a 9.63% decrease compared to the previous trading day. Foreigners appeared to be bullish for second consecutive trading day resulting a net foreign outflow of LKR 94.2Mn, while reducing the year to date net foreign outflow to LKR 447.8Mn.

Week at a Glance……

• Market experienced a further drop on third week in February. Bourse started the week on lackluster movement and Indices were gradually declined amidst the continued selling pressure within the market mainly due to speculative driven behavior of the investors. Vast reductions were observed from both indices over week despite the marginal upturns on Friday. The ASPI dipped massive 94.65 points or 1.62% and the S&P SL20 index also dropped by marginal 50.97 points or 1.56% during the week.
• Healthy foreign buying’s were continued to facilitate the market turnover to surpass LKR 3.5Bn turnover mark during the week. Foreign participation for the week consisted with LKR 2.4Bn worth of foreign purchases against foreign sales of LKR 1.9Bn, recording a weekly net foreign inflow of LKR 511.5Mn, which is a 245.1% increase compared to the previous week.
• The week recorded a turnover of LKR 3.94Bn supported by 20 crossings totaling up to LKR 1.93Bn accounting to significant 49% to the aggregated weekly turnover, which was an increase of 28.10% compared to the pr
• evious week. The total market capitalization stood at LKR 2.2Tn, recording a year to date gain of 1.66% and the market PER(X) and PBV(X) stood at 15.50 and 2.11 respectively. The USD closed at LKR 128.82  (22 Feb 2013)

Australia

• On Monday the Australian share market closed higher as investors continued to feel optimistic despite weaker manufacturing data from China. The benchmark S&P/ASX200 index was up 37.7 points or 0.75 per cent to 5,055.8.
• Today, the Australian market looks set to open lower, following Wall Street's downward movement after Italian election exit polls indicated a coalition may be needed. The SFE Futures 200 is pointing downwards 69 points or 1.36 per cent to 4,973.
• In economic news on Tuesday, Reserve Bank of Australia governor (financial markets) Guy Debelle is slated to speak at UniBreakfast, University of Adelaide Business School, Adelaide.
• In equities news, Virgin Australia, Seven Group Holdings, Prime Media Group, Flight Centre, Transfield Services, Ramsay Health Care and Whitehaven Coal are among the companies expected to post first half results, while QBE Insurance Group and Oil Search are due to announce full year earnings. Meanwhile, Macmahon shareholders are due to vote on the sale of its construction arm to Leighton.

Hong Kong

• Local stocks rebounded slightly. The HSI and HSCEI rose 37 points and 16 points to 22820 and 11333 respectively. Market volume was 54.601 billion.
• We believe the market is going to consolidate, as some of the technical indicators is showing the HSI is overbought, investors are suggested to stand on the sideline and wait for a clear trading signal.
• Technically, the HSI is expected to gain a support from 22500 level, major resistance will be 23000 level.

Morning Note

Company Highlights

A-Sonic Aerospace Limited announced that one of its subsidiaries had entered into a Strategic Alliance and Shareholders’ Agreement with WFC Investment B.V. to divest 710,378 ordinary shares in the issued and paid-up share capital of its subsidiary, Worldwide GSA Pte. Ltd., for a total cash consideration of S$3.300 million. The Shares constitute approximately 50% of the issued share capital of WWGSA. (Closing price: S$0.046, unchanged)

United Envirotech Ltd (“the Company”) announced that the Company’s 40%-owned associate, Max Rise Water Services Holdings Limited, had incorporated a wholly-owned subsidiary in Tangshan City, Hebei Province, China.  The wholly-owned subsidiary known as Tangshan Max Rise Water Services Sci-Tech Co., Ltd (“Tangshan MR”) has a total paid up capital of RMB 40 million. The main activities of Tangshan MR are to undertake the Transfer-Operate-Transfer (“TOT”) project and to operate and manage a 80,000m3/day industrial wastewater treatment facility. (Closing price: S$0.730, +2.098%)

Carriernet Global Ltd (the “Company”) announced that the Company has on 25 February 2013 entered into a conditional subscription agreement with Tres Maria Capital Ltd (the “Subscriber”), pursuant to which the Company agrees to issue and allot to the Subscriber and the Subscriber has agreed to subscribe and pay for 1,025,000,000 new ordinary shares in the share capital of the Company (the “Subscription Shares” and each a “Subscription Share”) at S$0.011 for each Subscription Share. (Closing price: S$0.018, +12.5%)

Source: PhillipCapital Research - 26 Feb 2013