STI:                -0.24%     to     3,123.8            KLCI:          -0.30%     to     1,829.2
JCI:                -1.29%     to     4,202.8            SET:            +0.51%     to     1,230.8
HSI:                -0.58%     to     22,684.2          HSCEI:       -1.40%     to     10,290.6
Nifty:              -0.32%     to     6,191.5            ASX200:      -0.47%     to     5,324.9
Nikkei:           -2.35%     to     15,908.9          S&P500:     -0.25%     to     1,826.8

MORNING COMMENTARY:

OCBC potential acquisition of Wing Hang Bank
By Joshua Tan and Benjamin Ong

Oversea-Chinese Banking Corp has officially announced yesterday that it has entered into an exclusivity agreement on 31 Dec 2013 with the substantial shareholders of Wing Hang Bank Limited (WHB) to seek to finalise the terms for an offer by OCBC for all the shares of WHB, if the transaction proceeds. According to media reports, OCBC is offering nearly 2x Price-to-Book value for WHB.

WHB's 30 June 2013 book value is about S$3.3b and its current market capitalization is about S$5.8b, thereby trading at about 1.74x P/B. Assuming that OCBC offers a maximum of 2x P/B for WHB, this would mean paying up to an approximate 15% premium over current price of HKD115.6 per WHB share. Comparing the ROE profiles of our Singapore Banking Sector which we project FY13 to be between 11%-12% and they are trading between 1.2x to 1.6x P/B, WHB's 30 June 2013 annualized ROE of 10.1% with 1.74x P/B does seem to push the higher side. However, we note that Hong Kong banks have been seemingly commanding a premium price as we observe China Merchants Bank paying 2.9x P/B for Wing Lung Bank in 2008 and Yue Xiu Group paying 2.1x P/B for Chong Hing Bank recently to gain a platform for building cross border financing. On a relative comparison, WHB's premium appears to be fairer.

The addition of WHB would be in line with OCBC's strategic direction, providing it with a gateway into Greater China and would potentially level it up the playing field against DBS. However, we remain cautious as we weigh the potential benefits against the premium price of WHB. DBS took a number of years before it could improve its ROE profile after acquiring Dao Heng Bank. OCBC would also be likely to raise capital through equity to fund the acquisition and this would prove to be dilutive to shareholders of OCBC. We are of the view that should the acquisition proceed at a premium price, it would take certainly take a number of years before OCBC can generate decent returns and efficiently make use of its new foothold.

MARKET OUTLOOK:
By Joshua Tan, Head of Research

MACRO DATA:

USA
Service industries in the U.S. expanded at a slower pace than forecast in December as orders contracted for the first time since 2009, showing uneven progress in the biggest part of the economy.
The Institute for Supply Management’s non-manufacturing index decreased to a six-month low of 53 in December from 53.9 in the prior month. The median projection in a Bloomberg survey of economists was 54.7. Readings above 50 indicate growth in the industries that make up almost 90 percent of the economy.

China
China’s services industries grew at a slower pace in December, coincides with a similar survey by China’s National Bureau of Statistics, underscoring a slowdown in manufacturing and confirming a moderation in the country’s growth at the end of last year. The HSBC/Markit Economics services Purchasing Managers’ Index (PMI) dropped to 50.9 in December, its lowest since August 2011, after a 52.5 reading in the previous month.

The sub-index measuring new business orders dropped to a six-month low of 51.8 in December on subdued client demand, reflecting slower new business growth. However, the sub-index measuring employment gew at the strongest pace since June, indicating an improved labour market conditions, which mainly due to company expansions. "We expect the steady expansion of manufacturing sectors to lend support to service sector growth," said HSBC's China chief economist, Qu Hongbin. "Moreover, the implementation of reforms such as lowering the entry barriers for private business in service sectors and expanded VAT reforms should help to revitalise service sectors in the year ahead," Qu added.

Hong Kong
The HSC Hong Kong manufacturing PMI fell to 51.2 in December from November’s 10-month high of 52.1 as new orders and output grew at weaker rates. Despite a lower reading, the PMI still signals a modest improvement in private-sector business. Commenting on the weaker growth rate, HSBC chief China economist, Qu Hongbin said that, "the pace of growth in the Hong Kong economy may have slowed marginally in December but output and new orders are still rising faster than their historical average rates. There was an overall contraction in employment but the acceleration in new orders from China is encouraging and should limit any downside to overall output."

India
India’s services sector contracted for the sixth consecutive month in December amid a decline in incoming new orders in macro headwinds. The HSBC/Markit PMI for the services industry fell to 46.7 in December, following November’s figure at 47.2. According to HSBC, new business contracted at the fastest pace since September amid weaker economic outlook and competitive pressures. The upcoming general elections had also weighed on the new orders, it said.

Singapore
Manufacturing activity in Singapore contracted for the first time in ten months in December, as overall PMI stood at 49.7, 1.1 points lower than November’s 50.8. "The decline in the overall PMI was attributed to slower growth in new orders and new export orders as well as a decline in production output, stockholdings of finished goods and imports," said the Singapore Institute of Purchasing & Materials Management.
 

Regional Market Focus

Singapore

• The Straits Times Index (STI) ended -7.65 points lower or -0.24% to 3123.82, taking the year-to-date performance to -1.30%.
• The FTSE ST Mid Cap Index declined -0.23% while the FTSE ST Small Cap Index gained 0.19%. The top active stocks were SingTel (-1.67%), Memstar Technology (4.76%), OCBC (-1.50%), HanKore (2.52%) and DBS (0.24%).
• The outperforming sectors today were represented by the FTSE ST Basic Materials Index (3.61%). The two biggest stocks of the FTSE ST Basic Materials Index are Midas Holdings (1.00%) and Geo Energy Resources (1.59%). The underperforming sector was the FTSE ST Telecommunications Index, which declined -1.55% with SingTel’s share price declining -1.67% and StarHub’s share price declining -0.94%. The FTSE ST Financials Index declined -0.19%.
• We said last week that the next resistance is at 3170, and a short term consolidation is likely at these levels – this is what we are experiencing this week.
• We have a longer term bullish bias due to macro fundamentals.
• Immediate supports at 3075, 3050 and 3000.

Thailand

• Thai stocks opened lower on Mon with the SET index hitting a session’s low of 1,205 points before the market bounced back to finish the day in the green as buying interest returned in the afternoon session led by foreign buying. The main index ended the session at 1,230.84 points on Mon.
• In our view, there is scope for a short-term rebound in Thai stocks today after the pace of foreign buying picked up significantly to the tune of around Bt1.3bn on Mon though domestic political pressure would continue to weigh on the market in the long term. The Thai baht extended its weakness above 33 to the US dollar. Domestic political factor still bears close watching. Today the National Anti-Corruption Commission (NACC) will decide whether to press charges against 381 MPs and senators in connection with charter amendments to change the composition of the Senate.
• There is nothing new on the external front after a mixed bag of US economic data. The measures of activity in the US services sector indicated slower growth in Dec while new orders for factory goods rebounded in line with expectations. The US Senate also voted to confirm Janet Yellen as the next chair of the Federal Reserve. Traders are now awaiting US labor market data due out this Fri to look for clues on the next round of QE tapering.
• For short-term trading ideas, beaten-down, high dividend plays look interesting. Today we expect a trading range of 1210-1250 points for the SET index.
• Resistance for the SET index is pegged at 1250-1280 points and support at 1220-1200 points today.

• The Jakarta Composite Index (JCI) declined on Monday (06/01), as worries about worsening fuel subsidies weighed on the stock market, with negative moves in Asia also hampered sentiments. The benchmark index of Indonesian stocks dropped 54.854 points, or 1.29%, to close at 4,202.809. The sharp decline on Monday included eight of the nine main stock sectors, with mining sector lost 3.39%, agriculture sector slid 3.28%, and finance sector fell 2.15%. The LQ45 index shed 9.789 points, or 1.38%, to end at 699.558.
• In economic news, the ministry of finance said Indonesia’s fuel subsidies in 2013 could have exceeded IDR 250 trillion, as depreciation of the Rupiah raised the costs of oil imports. But the final figure will be published after the audit by the nation’s Audit Board. In other economic report, Bank Indonesia on Monday said consumer confidence index climbed to 116.5 in Dec., from 114.3 a month earlier.
• 232 shares declined and 60 shares advanced Monday on the Indonesia Stock Exchange, where 1.97 billion shares worth IDR 2.69 trillion changed hands on the regular market. Trading volume on Monday was still low after the New Year holiday. Foreign investors posted net sale of IDR 188.32 billion.
• The Jakarta Composite Index (JCI) will likely to consolidate today, after service sector data in the US showed weaker than expected result, and as the Rupiah remained weak against the US dollar. We expect the JCI to move sideways, and trade within 4,143 - 4,293 range.

• The market was unable to sustain the positive movements seen during the past few trading days, while resulting in the bourse to witness its first negative closure for the year. The benchmark ASPI settled lower at 5,944.99 dropping 28.81 points or 0.48%; this was having gathered 127.87 points or 2.17% during the past six trading days.  The S&P SL20 too closed negative at 3,281.24, dropping by 13.58 points or 0.41%. As at the day’s close, the total market capitalization dropped to LKR 2.47Tn, charting a year to date gain of 0.54%. The market PER & PBV stood at 16.01x and 1.97x respectively. The aggregated turnover for the day amounted to LKR 462.20Mn, indicating a rise of 32.20% as against its previously recorded. Under the sectorial summary, Diversified Holdings (DIV) sector stood out as the prime contributor providing LKR 163.74Mn and Bank Finance & Insurance (BFI) sector added LKR 146.00Mn to the daily turnover. Moreover, the two sectors DIV & BFI collectively made account to nearly 70.00% of the daily aggregated turnover. Price losers outstripped the price gainers by 151:52. During the day, shares totaling up to 23.96Mn changed hands, recording a drop of 49.57% compared with the previous trading day. Foreign participants maintained their bullish stance for the second consecutive trading day, to record a net foreign inflow of LKR 70.61Mn; this was resulted by foreign buying worth LKR 157.32Mn and selling which amounted to LKR 86.71Mn. The local FOREX market closed with the USD selling at LKR 132.22/-.

• HSI lost 133 points or 0.58% to 22,684. CEI slumped 146 points or 1.40% to 10,290. Trading volume decreased to HKD62.158 billion.
• HK market was still weak, dragged by weaker China markets on China PMI trailed estimates. HSI even fell below 250-MA for intra-day trading.
• China financial sector led the indexes down. ICBC (1398.HK), CPIC (2601.HK) and Citic Sec (6030.HK) slid 2%, 2.9% and 5% respectively.
• 4 blue chips reached 52-week low, including Hang Lung PPT (101.HK), New World Dev (17.HK), Wharf Holdings (4.HK) and Belle Int’l (1880.HK).
• Software stocks out-performed with Kingsoft (3888.HK), Kingdee Int’l (268.HK) and Netdragon (777.HK) up 4.4-14.5%.
• HKTV fell 3.9% as China Mobile Communications Corporation stated that it decided to launch internal investigation regarding the transaction of mobile TV services.
• Technically, 250-MA at 22,605 is a major support for HSI. The next resistance and support will be at 23,000 and 22,605 respectively.

Morning Note
Company Highlights

SGX-listed AusGroup Limited is pleased to announce that it has entered into a conditional placement agreement with DBS Bank Ltd. that will see the group’s financial position strengthened by a capital injection of approximately S$15.2m (”Net Proceeds”). Today’s announcement underpins the group’s restructuring activities - aimed at targeting new opportunities in a changing market, focusing on customer needs and driving operational efficiencies. (Closing Price S$0.24, +27.0%)

Singapore Technologies Engineering Ltd (ST Engineering) announced today that its marine arm, Singapore Technologies Marine Ltd (ST Marine) has secured new orders worth about S$446m in the fourth quarter of 2013. These orders are in addition to the recent contract worth about US$350m won by our US shipyard, VT Halter Marine, Inc for the design and construction of two units of Container Roll-on/Roll-off vessels and the bareboat charter contract for the Roll-on/Roll-off Passenger vessel to Nova Star Cruises Limited. The contracts are for logistics management, maintenance, major upgrade and conversion projects, which will be carried out in the Singapore yards. On shiprepair and upgrading, ST Marine has secured and delivered a series of contracts to support the offshore industries. These include repairs and upgrade of various types of offshore support vessels such as drillship and pipe-laying vessels. (Closing Price S$3.88, +0.8%)

Singapore Exchange Mainboard listed Sarin Technologies Ltd (“Sarin” or “the Group”), a worldwide leader in the development, manufacturing, marketing and sale of precision technology products for the planning, processing, evaluation and measurement of diamonds and gems, announced today that, with the culmination of 18 months of development efforts, it has launched a radically new version of its polished-diamond quality assurance and polishing process control software – the InstructorTM 3.0. The new software runs on many of Sarin’s rough and polished diamond modeling platforms of the DiaExpertTM and DiaMensionTM families including the popular DiaMensionTM HD and DiaScanTMS+ systems. The new version of the InstructorTM has been specifically developed to significantly improve the accuracy of polished diamond modeling, in particular for fancy-shaped diamonds, the tools provided for in-process polishing decisions, and at the same time improves the software’s overall ease of use. (Closing Price S$1.93, - )

Source: Phillip Securities Research - 7 Jan 2014