DBSV S'pore Wired Daily 2 January 2013

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Publish date: Wed, 02 Jan 2013, 03:43 PM

Today's Focus

Global over local - Positive on China beneficiaries Midas, HPH Trust, Capitamalls Asia, Wilmar and PCRT; supply chain manager Noble Group and container shipper NOL.

STI upside capped at 3200-3250 on technical and forward PE valuation

STX OSV - Overhang appears well absorbed, attractive on forward PE valuation. Accumulate at current level looking beyond the short-term.

It's global over local as 2013 starts. While far from picture perfect, the macro outlook is improving even as Singapore's economy continues its slow-growth high-inflation environment.

Externally, optimism is rising that China's economy has bottomed out and started its recovery. The latest official December PMI reading of 50.6, the 3rd consecutive month in expansion territory, adds another piece of evidence to support this view. The US economy looks to continue its tepid growth.

While the Eurozone's 2012 recession is likely to extend into 2013, contagion risks have subsided. That is, China is looking better while things are not getting worse in US and Eurozone. While Singapore managed to avert a technical recession, there is little to cheer as the country's economy grew at a slower-than-expected 1.2% pace last year. Worse, the slower-than-average GDP growth and higher-than-average inflation is expected to continue this year. The Singapore government forecasts GDP growth of just 1-3% this year. This is lower than DBS economist's estimate of 3.2%. Our economist foresees inflation to reach 4% this year, twice above the historical average.

We maintain our view that with the 220pts rally since mid-Nov 2012, there is limited upside for the STI in the short-term. The index trades at just 100pts below its current 12-mth forward PE reading of 3074, which is seen as a stiff resistance that's tough to reach. Technically, we see short-term resistance anywhere from 3200-3250.

We avoid sectors that are exposed to Singapore's domestic economy. One area is Singapore banks. NIM is expected to stay under pressure even as loan growth slows. There is also limited upside for SingTel as the company faces short-term cost pressure, a tough environment in India and Optus losing market share. Altogether, the 3 banks and SingTel should put a cap to STI's upside as they take up a hefty 34.5% of the index.

We are optimistic on companies that are able to ride the improving macro backdrop, especially the anticipated recovery in China. Our picks are Midas, HPH Trust, Capitamalls Asia, Wilmar and PCRT. Macro recovery optimism should also benefit supply chain manager Noble Group and container shipping NOL.

The O&M sector should also benefit. Besides the usual names, one stock that we think offers good value beyond the near-term is STX OSV. The stock price has been suppressed recently on news of its parent's stake sale at $1.22 per share. Although this year may see a marginal 3% decline in EPS, the stock now trades at just 7x FY13F and 6.4x FY14F earnings. This Monday was the 'D+2' of the high volume day at 24.6mil shares on 21st December and the stock price held at $1.30. That is, near-term overhang appears well absorbed. Accumulate at current level looking beyond the near-term.

Singapore's economy grew 1.8% q-o-q in the fourth quarter of 2012, compared with a revised 6.3% contraction in the third quarter and avoiding a technical recession. The market was expecting a 1.0% contraction from the previous three months. On a y-o-y basis, the economy grew at a modest pace of 1.1%. For the full year, the economy expanded only 1.2%, slightly lower than the government's growth forecast of around 1.5%, as the weakness in the manufacturing sector continued to weigh on the economy. Output in the manufacturing sector fell 1.5% y-o-y in the fourth quarter compared with a 1.6% contraction in the previous quarter. Services sector output grew 1.5% y-o-y, while the construction sector expanded 5.9%.

DBSV Research is initiating coverage on United Envirotech, a membrane-based wastewater treatment company, with BUY call and fully diluted TP of S$0.69 (assumed full dilution of the S$136.2m convertible bond), which offers 41% potential upside. Our analyst expects earnings breakthrough as recurring income streams gather momentum. The stock is trading at attractive 8x/7xPE for 75%/21% net profit growth in FY14F/15F, vs industry average of 13x. We see potential upside from acquisitions and expansion, but convertible bond dilution can be potential overhang.

We reiterate BUY call on China Merchant Hldgs (Pacific) with higher TP of S$1.20 (Prev S$ 1.09). The Group is buying 48.1km Jiurui Expressway for Rmb675m. The consideration includes disposal of New Zealand property business and issue of 72.7m new shares at S$0.84 to the sellers of Jiurui Expressway. The deal structure is positive in many ways as it would allow the Group to exit its non-core New Zealand property business at a fair price (close to NAV), issue new shares at a premium of >10% to its trading price, which could also help alleviate its illiquidity issue. The transaction will a) lengthen CMHP's average concession period b) streamline its focus to expressways only and c) improve liquidity.

International Air Transport Association (Iata), which represents more than 90% of global carriers, raised the industry's global 2012 earnings forecast thrice in 2012. In March, it forecast a global industry profit of US$3 bn, with US$2.3 bn chalked up by Asia-Pacific carriers. In June, it stuck to its US$3 bn global profit forecast, but scaled down the outlook for Asia-Pacific carriers to US$2 bn because of the continuing slump in the cargo side of their businesses. In October, it raised the forecast of global profit to US$4.1 bn, and upped its Asia-Pacific forecast back to US$2.3 bn. And, in December, Iata surprised the market by announcing that it expected global airlines to turn in a cumulative profit of US$6.7 bn, thanks to strong performance in the second and third quarters. This figure is expected to rise to US$8.4 bn this year, topping the US$7.5 bn projected in October.

Initial public offering (IPO) activity is set to pick up in 2013: there is a queue of companies waiting to list this year, many of them in the consumer, retail and healthcare sectors, as well as business trusts and real estate investment trusts (Reits), say investment bankers.

Growth in bank lending continued on its overall downward trajectory in November, pulled down by a dip in loans to businesses. Consumer loans - particularly housing and bridging loans - remained resilient. Total domestic banking unit loans grew 15.9% in November over the past year to $481.7 bn, slower than the 17.9% growth in October. Business loans shrank by 0.4% over the month - the first drop in 13 months - compared with a 1.3% m-o-m growth in October. Over a year, it grew 15.3%, slower than the 19.1% growth in October. This was primarily due to a decline in lending to financial institutions and general commerce - the second and third largest business loan segments respectively - over the previous month. On a year-on-year basis, consumer loans growth picked up to 16.6% from October's 16.3%, thanks to a strong housing and bridging loan segment that continued to keep pace.

Prices of private homes in Singapore rose to new record highs in the fourth quarter, mainly because of strong demand in the suburban areas, preliminary government data showed. The private residential property price index rose 1.8% to a record 211.9 points in the October-to-December period from the previous three months. The home price index had risen 0.6% in the previous quarter. Prices of non-landed private residential properties in the core central region rose 0.8% in the fourth quarter, accelerating from a 0.1% rise in the previous quarter. Price growth in the rest of the central region accelerated to 0.9% in the October-to-December period, from 0.8% in the third quarter. Prices outside the central region also rose faster in the fourth quarter, by 3.4% compared with the previous quarter, from a 1.0% rise in the third quarter. For 2012, prices of private residential properties increased by about 2.8%, the pace easing from the 5.9% increase in 2011.

China's official manufacturing purchasing managers' index (PMI) held steady in December at 50.6, matching November's seven-month high, as growth in new orders was unchanged and the pace of output softened marginally. The reading was slightly below market expectation of a rise to 51.0. The survey showed that output in oil processing, quarrying and tobacco industries slipped while food processing, auto manufacturing, textiles, steel and electronics all expanded. A new export orders sub-index fell to 50 from 50.2 in November.

Source: DBSV

Midas (5EN)HPH Trust USD (NS8U)Wilmar Intl (F34)

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