Morning Market Commentary

- STI: +0.19% to 3368.2                                 - SET: +0.82% to 1597.9
- JCI: +0.53% to 5060.9                                 - KLCI: +0.57% to 1717.7
- HSCEI: +1.23% to 10918                            - Hang Seng: +0.69% to 22737
- Nikkei 225: -0.44% to 13799.4                    - ASX200: +0.36% to 3402.3
- India NIFTY: +0.44% to 5930.2                  - S&P500: -0.93% to 1582.7

DBS – 1Q13 results 1st take
By Ken Ang

DBS reported a strong set of 1Q13 results. 1Q13 core net profit of S$950 million was 25% higher q-q, and 2% higher y-y. This was higher than market estimates, and 12% above our forecast of S$846 million. Earnings beat was mostly due to 1) Strong record-high Fees and commission of S$507 million, due to higher Wealth Management and Investment banking fees. We note y-y improvements in all segments of fees and commission. 2) Higher net trading income of S$410 million. This was guided to be due to higher customer flows for treasury products. This doubled from 4Q13, and was 17% higher y-y to a quarterly high of S$299 million. 3) Stable net interest income. NIMs were more stable q-q, improving 2bps (OCBC: -6bps) to 1.64%. Y-y, NIMs were lower 13 bps (OCBC: -22bps). The q-q 3bps decline in average interest rate on customer loans, and 9bps lower securities yield was mitigated by cheaper cost of funding. Cost of funding declined 4bps q-q. Loans growth was also healthy at 6%.

Expenses were within expectations, while Loans provision was much higher than expected. This was due to 1) Higher general provision of S$110 million, which was taken in line with loans growth. 2) Higher specific allowance made for loans in South and South East Asia, and Rest of the world. By industry, this was likely for specific loans in Manufacturing and General Commerce. NPL ratio continued to be stable at 1.2%, while we do not see any cause for concern on asset quality. 1Q13 fully adjusted CET 1 of 11.3% is above MAS requirement of 9%, but not excessive. More details will be provided in our report after the management briefing held later in the day.

MARKET OUTLOOK:
By Ng Weiwen, Macro Analyst

Disappointing macro data yesterday dampened animal spirits with both the S&P 500 as well as Dow retreating nearly 1%. Specifically, manufacturing activity in both the US (ISM and Markit) and China (NBS) expanded at a weaker-than-expected pace. US ADP employment report also suggest that the upcoming non-farm payrolls is likely to surprise on the downside. This negative sentiment is likely to weigh on Asian session today when most markets re-open after the Labour Day hols.

Based on the FOMC released during the wee hours of today (Thurs, 2am), LSAPs of US$85bn / mth is set to continue. The key takeaway is that the FOMC statement stated that the pace of asset purchases could be -either increased or decreased- depending on macro conditions (i.e. labour market as well as inflation expectations).

Japan markets were open on 1st May (Labour Day) and the Nikkei continues to struggle to break above the 14 k level. Nonetheless, we are cautiously optimistic about Japan (Nikkei) as we are seeing incipient signs of attempts at implementation of structural micro reforms (economic and fiscal) which are essential ingredients for a structural bull run in Japan to materialise. Already, there are signs of the Japanese economy humming again with better-than-expected readings in manufacturing (PMI at 13-mth high) as well as household consumption.

Risk events ahead for the rest of this week and our expectations as follows:

(i)  China PMI (HSBC; 2nd May) – manufacturing activity to continue to expand in April, the pace of expansion will likely have eased on the back of weak April export orders. This particular reading will give us a better sense of the extent of slowdown for this bellwether region.

(ii)  ECB monetary policy meeting (2nd May) - Disappointing EZ PMIs (esp Germany) have increased the odds of a rate cut at the next monetary meeting on 2nd May. Sharper-than-expected decline in inflation (Apr) as well as rise in unemployment (Mar) just boost the case for a rate cut. We are pencilling in a possible 25 bps cut in refinancing rate, with no change to the deposit rate floor. Though, we caution that a rate cut –even if materialise- may not actually boost the real economy especially when banks are still wary of lending to firms (particularly SMEs) based on the recent quarterly ECB bank survey.

Though there is a risk that markets might buy the rumour and sell the news.

(iii) US Non-Farm Payrolls (3rd May) – Labour market likely to be still sluggish. With ADP employment undershooting, NFP could come in weaker-than-expected. That does not bode well for consumer and business expenditure in 2q13, reinforcing our view that the US economy is undergoing a soft patch.

(iv) Malaysia 13th GE (5th May) – OW Malaysia (KLCI) if BN wins a strong mandate. Beware of knee-jerk reaction when markets reopen on 6th May if BN register a weaker performance than the 12th GE and worse still fail to garner a simple majority.

Notwithstanding some possible pullback today, STI is on track to challenge the 3400 psychological hurdle and subsequently 3485 peak as long as it remains above 3250 key support.

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

Macro Data:

In US, manufacturing activity continued to expand, albeit at a slower pace during Apr. Specifically, the ISM manufacturing index declined 0.6pts m-m to 50.7 while the Markit counterpart slumped 2.5pts m-m to 52.1 during Apr. On the labour front, ADP private sector payrolls rose -at the slowest pace in 7 months- by 119,000 in April (as compared to gains of 131,000 in March). This weaker-than-expected ADP reading suggests that risks to the upcoming non-farm payrolls are to the downside. A sluggish labour market does not bode well for consumer and business expenditure in 2q13.  (by Ng Weiwen)

In Singapore, seas adjusted unemployment inched up 0.1%-pt to 1.9% in March 2013, owing to softness in the economy as well as ongoing tightening of foreign labour. Separately, a net weighted balance of 12% of manufacturers expect business conditions to be more favourable over the next six months (Apr-Sept).  In the electronics cluster, a net weighted balance of 18% of manufacturing firms also shared the same positive sentiment.  (by Ng Weiwen)

In China, official manufacturing reported 50.6 in Apr, lower compared to the market expected 50.7 reading and prior 50.9 reading in Mar, indicating a slower expansion in the nation’s manufacturing sector. The sub gauge of new order fell to 51.7 in Apr, from 52.3 in Mar. The data reflected that the China’s economic recovery is slower compared to the pace market expected earlier this year. The most recent Bloomberg survey has shown that the median market forecasted 2013 China GDP growth fell slightly to 8.0%, meeting our forecast, from prior 8.2%. We expect the recovery to continue, in a mild pace. (by Roy Chen)

Regional Market Focus

Singapore

• The benchmark STI inched higher to close at 3,368.18 (+0.19%). The 2.1bn shares traded were worth S$2.0bn in value.
• Unless there is a radical change in the business model, we expect a multi-year de-rating on the stock of SMRT (Sell, TP: S$0.93). The unsustainable business model, structurally lower earnings, rising leverage and poor dividend yield support gives investors little reason to own this stock. Clients interested in getting into dividend plays may consider our recommendation on SIAEC.
• Our Reduce rating on OCBC is maintained with our analyst forecasting a contraction in earnings for the year ahead. As compared to the slight improvement in NIMs for DBS (+2bp q-q) (reported prior to market opening today), OCBC also reported a contraction in its NIMs (-6bp q-q) for this quarter.
• Top picks for the year are Pan United (Buy, TP: S$1.21), SIAEC (Buy, TP: S$6.10) & Boustead Singapore (Buy, TP: S$1.80). 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. SIAEC is a key beneficiary of the aviation growth story in the region and offers excellent dividend yields. There are hidden gems within Boustead Singapore and we believe that the stock would continue to re-rate as the market appreciates the economic moat in its businesses.

Thailand

• Thai stocks opened higher on Tue on positive external vibes before the momentum later lost steam as investors awaited the outcome of the Bank of Thailand’s meeting on baht measures but bargain buying in late trading led the composite SET index higher to finish the session in positive territory.
• Market-moving factors are pointing to potential downside for Thai stocks today as the market resumes trading after it was closed for the Labor Day holiday. Downbeat manufacturing data from China and the US and weaker-than-expected US private-sector job data triggered a sharp sell-off in commodities, which would likely weigh on energy stocks on the Thai bourse today.
• Eyes will be on the outcome of the ECB meeting amid expectations of an interest rate cut today and US non-farm payrolls data due out tomorrow.
• Even though there is potential for a rally in the composite SET index to retest a key psychological level of 1600, we believe it is unlikely to break above this key barrier due to short-term selling bouts. On this basis, we advise investors to take partial profits.
• Resistance for the SET index is pegged at 1600-1612 and support at 1590-1582 today.

Indonesia

• The Jakarta Composite Index (JCI) gained 26.848 points, or 0.53%, to finish at a new record high of 5,060.919 on Wednesday (01/05), after data released by the central bureau of statistics showed inflation cooled down in April, despite mostly lower closes in Asia stock markets after weaker than expected manufacturing data from China. The advance on Wednesday was supported by five of the 9 major sectors, led by Construction, Property and Real Estate sector with 2.97%-gain, Basic Industry sector with 1.04%-advance, and Financial sector with 0.85%-rise. The LQ45 index added 2.917 points, or 0.34%, to end at 860.037 with 18 of the 45 blue-chip constituents closed in green. From the economic front, inflation in Indonesia cooled down to 0.1% (mom) in April, or 5.57% year-on-year, lower than economists’ expectations. The decline was mainly due to decreased food prices. 165 shares climbed, 118 shares fell, and 190 shares remained unchanged Wednesday on the Indonesia Stock Exchange. Volume on the regular board reached 5.19 billion shares worth IDR 5.47 trillion. Foreign investors’ transactions accumulated to a net purchase of IDR 7.33 billion.
• The Jakarta Composite Index (JCI) will likely decline today, amidst negative tones in Asia after US stock markets plunged overnight on concerns the Federal Reserve may limit its stimulus measure depending on the country’s economic progress. We expect the JCI to trade lower today, with support and resistance each at 4,995 and 5,096.

Sri Lanka

• The Colombo bourse exhibited a slight slowdown during the day which in turn result the indices to conclude on a mixed note; this was having closed within the green space for the past 4 trading days where both indices contentedly closed positive. The benchmark ASPI Index closed negative at 5,953.19 losing 14.43 points or 0.24%; this was having recorded a positive closures for the past four trading days while accruing 95.19 points or 1.61%. However, the S&P SL20 Index closed on the positive side for the 6th successive trading day at 3,365.79 gaining 2.65 points or tiny 0.08%. The market capitalization as at the day’s closure stood at LKR 2.28Tn resulting in a year to date gain of 5.22% and the market PER and PBV stood at 16.08 and 2.19 respectively. The turnover for the day amassed to record LKR 876.33Mn indicating a gain of 3.52% against the previous trading day. Under the sectorial round-up Bank Finance & Insurance and Land & Property sectors stood out to be the top contributors for the day with subscriptions worth LKR 283.31Mn and LKR 279.65Mn respectively. Further the two sectors made a significant 64.24% contribution to the day’s aggregate turnover value. During the day, a total of 32.21Mn shares changed hands resulting in a decrease of 50.69% against the previous trading day. Price losers were ahead of the gainers while the loser to gainer ratio was being recorded at 138:70. Foreign participants were bullish during the day for the 3rd successive trading day resulting in a net foreign inflow of LKR 85.80Mn as a result of foreign purchases and sales worth LKR 204.04Mn and LKR 118.24Mn respectively. In regard to the local FOREX market, the USD closed the day at LKR 128.38/- selling and LKR 125.32/- buying.

Australia

• The Australian share market on Wednesday, hit a fresh five-year high as ANZ's $3 billion plus half-year profit dragged its shares to record highs and the local market along for the ride. The benchmark S&P/ASX200 index was up 65.4 points, or 1.28 per cent to 5,191.2.
• Today (01/05/13), the Australian market looks set to open lower despite gains on Wall Street. The SFE Futures 200 is pointing 10 points lower or 0.19 per cent to 5,158.
• In economic news on Thursday, the Australian Bureau of Statistics (ABS) is due to release March building approvals figures as well as international trade price indexes for the March quarter. The HIA new home sales for March figures are also due out.
• In equities news, APN News & Media has its annual general meeting.

Hong Kong

• Local stocks rallied. The HSI and HSCEI rose 156 points and 132 points to 22737 and 10917 respectively. Market volume was 52.4 billion.
• Investors are suggested to maintain attention to the development of two Korea conflicts, which is a major uncertainty to the market recently, we suggest a cautious bullish view in short term. 
• Technically, the HSI is expected to gain a support from 21800 level, major resistance will be 22800 level.

Morning Note

Company Highlights

Vard Holdings Limited announced that it has entered into a contract with Buksr og Berging for the construction of one Azimuth Stern Drive (ASD) offshore tug vessel. The vessel is scheduled for delivery in Q1-2015 from Vard Braila in Romania. The vessel has been developed by Buksr og Berging, and will have a length of 42.5 meters with a beam of 15 meters and a bollard pull of approximately 115 tons.  (Closing price: S$1.03, +1.478%)

China Yongsheng Limited (the “Company”) wishes to issue a profit warning regarding the financial results of the Company and its subsidiaries (the “Group”) for the first quarter period ended 31 March 2013 (the “1Q 2013”). Based on the preliminary financial figures, the Group is expected to report a loss for the 1Q 2013 as the first quarter results of the Group are traditionally weaker. (Closing price: S$0.021, -4.545%)

Great Group Holdings Ltd issued a profit warning and expects to report an operating loss for 1Q 2013. This is due to, amongst others, lower revenue and gross margin resulting from weaker demand in Europe and severe competition in the midst of an increasingly challenging business environment. (Closing price: -, -%)

Source: PhillipCapital Research - 2 May 2013