OSK DMG - Market Outlook for the Year

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    Strategy, 2 January 2015

    Strategy - Singapore Overweight

    Go Against The Flow

    Terence Wong CFA, +65 6232 3896

    [email protected]

    Consumer

    James Koh, +65 6232 3839

    [email protected] Cai. +65 6232 3871

    [email protected]

    Healthcare

    Arshath Mohamed, +65 6232 3897

    [email protected]

    Offshore & Marine

    Lee Yue Jer CFA, +65 6232 3898

    [email protected]

    Jesalyn Wong, +65 6232 3872

    [email protected]

    Property & REITs

    Ong Kian Lin, +65 6232 3895

    [email protected]

    Ivan Looi, +65 6232 3841

    [email protected]

    Technology

    Jarick Seet, +65 6232 3891

    [email protected]

    Transport/Materials & Mining

    Shekhar Jaiswal, +65 6232 [email protected]

    Small Cap Situationals

    Goh Han Peng, +65 6232 3893

    [email protected]

    Banks/Plantation/Telecommunications

    Regional [email protected]

    We are expecting the Singapore market to post a rebound after two

    disappointing years. While the tight labour market and the lack ofproductivity improvement will continue to be a drag on the economy,we see bright spots that are expected to lift the STI by 11% to 3,720, itshighest level since 2007.

    Go contrarian.We believe in investing where most fear to tread, namelythe offshore & marine and property sectors. The free-fall in oil prices willcontinue to grapple the market, although we believe that prices willrecover some time before the middle of the year. This ought to set thestage for a rebound in the offshore & marine sector. As for property, thephysical market is likely to remain subdued, leading to a fall in residentialprices by up to 10%, in our view. We expect some cooling measures tobe lifted in 2H15, which should see interest returning to this segment.

    Head for mid caps. For the past two years, we have advocated forinvestors to do selected stock picking in the small cap space, which havepaid-off handsomely. This year, given the slump in many prominent midcaps, we believe that this segment is the sweet spot to be in.

    STI target of 3,720 based on 15x FY15F P/E.This is driven by: i) theexpected positive returns from bellwether sectors, ii) productivity inSingapore turning around, and i ii) attractive valuations.

    Our Top Picks. The majority of our top BUYs are mid caps, namelyCWT (CWT SP, BUY, TP: SGD2.00), Ezion (EZI SP, BUY, TP:SGD2.65), M1 (M1 SP, BUY, TP: SGD4.40), Nam Cheong (NCL SP,BUY, TP: SGD0.61) and OSIM International (OSIM) (OSIM SP, BUY,TP: SGD2.30). For the large caps, we like DBS (DBS SP, BUY, TP:SGD22.60) and Keppel Land (KPLD SP, BUY, TP: SGD3.88), whileBreadTalk (BREAD SP, BUY, TP: SGD1.90), Centurion Corp (Centurion)(CENT SP, BUY, TP: SGD0.83), Giken Sakata (GSS SP, BUY, TP:SGD0.61) and IPS Securex (IPSS SP, BUY, TP: SGD1.26) get our votein the small cap space. Top SELLs include Parkson Retail Asia (PRA

    SP, SELL, TP: SGD0.65) and Silverlake Axis (SILV SP, SELL, TP:SGD1.03).

    http://www.efa.biz/http://www.efa.biz/http://www.efa.biz/mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.efa.biz/
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    Strategy - Singapore2 January 2015

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    Table of Contents

    What now 2015? 3

    STI Target 4

    Sector & Stock Picks 5

    Talking Points 6

    Sector Outlook

    Banks 8

    Consumer 10

    Construction & Engineering 12

    Healthcare Services 14

    Land Transportation 16

    Oil & Gas 18

    Plantation21

    Property 23

    REITs 25

    Technology 27

    Telecommunications 29

    Stock Picks

    Top BUY

    BreadTalk Group 31

    CapitaCommercial Trust 35

    Centurion Corporation39

    CWT 43

    DBS Holdings 47

    Ezion Holdings 51

    Giken Sakata 55

    IPS Securex 59

    Keppel Land 63

    M1 Ltd 67

    Nam Cheong 71

    OSIM 75

    Top SELLParkson Retail Asia 79

    Silverlake Axis 83

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    2014 has been a little less exciting than I thought. I had expected the Singaporemarket to make a comeback in 2014 after a lacklustre 2013, given its reasonablevaluations and the fact that it is the safest house in the neighbourhood. But it wasnot to be. While the STI year-end target of 3,480 was not very much off the mark,the general market has been largely listless, contradicting my earlier thoughts that itwas going to be boring no more.

    The best performers in 2014 were the REITs, which made a comeback from a poor

    showing in 2013 as interest rates remained low. The banking sector was the nextbest performer. It was in play in the recent months, as the market speculated thatthe US Federal Reserve (US Fed) was going to lift rates due to a strengtheningeconomy.

    As for the worst performers, basic materials, which count aluminium and steelmanufacturers as constituents, saw another awful outing, slumping by over 30% forthe second year running. It is joined by the oil & gas (O&G) sectors 32% dive, withthe bulk of the fall coming in the last two months due to the sharp dive in oil prices.

    Figure 1: Sector returns 2014 (%)

    1.1

    -11.5

    -32.2

    -4.0-1.9

    -6.4

    -31.7

    4.07.2

    2.1

    -2.1

    -35.6

    6.1

    0.7

    -40.0

    -30.0

    -20.0

    -10.0

    0.0

    10.0

    Straits Times Index STI FTSE ST MID CAP INDEX

    FTSE ST SMALL CAP INDEX FTSE ST Catalist Index

    FTSE ST CHINA INDEX FTSE ST CONSUMER GOODS

    FTSE ST HEALTH CARE INDX FTSE ST Oil & Gas Index

    FTSE ST REAL ESTATE INDX FTSE ST RE INVEST TRUST

    FTSE ST TECHNOLOGY INDEX FTSE ST UTILITIES INDEX

    FTSE ST BASIC MATERIALS FTSE ST FINANCIALS

    Source: OSK-DMG

    What now 2015?

    I am once again staking my bets on Singapore in 2015 due to:

    i. Bellwethers expected to do well, which should comfortably lift the

    index.We believe that the bank, property and offshore & marine sectors,

    all of which are index heavyweights, will outperform in 2015.

    ii. Corporates getting used to labour pains.The lack of growth arising from

    a stem in foreign labour has been one of the markets bugbears since

    2011. The Government has been focusing on a quality growth through

    productivity drive. While productivity growth is still going to be sub-par,businesses are increasingly grappling with an increase in business costs

    arising from a labour shortage. Moreover, we expect rentals to tame down,

    which bodes well for domestic businesses.

    iii. Playing catch-up with regional peers. Regional markets have surged

    ahead over the past few years as investors were happy hunting for growth.

    In 2015, as a result of a host of macroeconomic worries, there will be a

    flight to safety.

    iv. Positive sentiments from the Golden Jubilee. Singapore will be

    celebrating its 50thbirthday, and there will likely be something meaningful

    for citizens during the Budget (Feb 2015) and National Day Rally (Aug

    2015).

    v. Attractive valuations.See next section.

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    STI target

    The STI is now trading at 13.3x P/E and 1.4x P/BV. This is attractive vis--visregional peers as well as the indexshistorical trading band. We believe that giventhe reasons indicated in the last section, the STI has the capacity to rise to 3,720,based on 15x FY15F P/E (the average it has been trading at ex-2009).

    Figure 2: STI vs Regional Peers

    Country Benchmark index P/E (x) P/BV (x) Dividend yield (%)

    Singapore STI 13.3 1.4 3.3

    Hong Kong Hang Seng 9.7 1.3 3.9

    Indonesia JCI 19.7 2.6 2

    Malaysia KLCI 15.3 2 3.3

    Thailand SET 16.5 2.1 3.1

    Source: Bloomberg

    Figure 3: Forward P/E band

    7.5

    9.5

    11.5

    13.5

    15.5

    17.5

    19.5

    11 -Jan -0 8 11 -Jan -0 9 11 -Jan -1 0 11 -Jan -1 1 11 -Jan -1 2 11 -Jan -1 3 11 -Jan -1 4

    Forward P/E +1SD -1SD Average

    Source: Bloomberg

    Figure 4: Forward P/BV band

    0.75

    0.95

    1.15

    1.35

    1.55

    1.75

    1.95

    2.15

    11 -Jan -0 8 11 -Jan -0 9 11 -Jan -1 0 11 -Jan -1 1 11 -Jan -1 2 11 -Jan -1 3 11 -Jan -1 4

    Forward P/BV +1SD -1SD Average

    Source: Bloomberg

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    Sector & Stock Picks

    Figure 5: Sector Overview

    Sector View Comment Most Preferred Call Least Preferred Call

    Banks Overweight The impending US interest rate normalization will underpin a multi-year

    NIM recovery, albeit on a gradual basis.

    DBS Buy UOB Neutral

    Consumer Overweight ASEAN growth story intact while we are still wary of Singapore-

    focused players due to weak spending environment and labour crunch

    BreadTalk Buy Parkson Retail Asia Sell

    Construction Overweight Still very underappreciated sector. More jobs as a result of the

    upcoming elections.

    Lian Beng Buy

    Healthcare Neutral The much touted medical tourism sector is facing some headwinds. Cordlife Buy Raffles Medical Neutral

    Land Transport Underweight Benefits from the new cost-plus model seem to be pretty much priced

    in.

    ComfortDelgro Neutral SMRT Neutral

    Oil & gas Overweight Stocks slumped big time on the back of collapse in oil prices. We

    expect oil prices to improve in 2015, setting the stage for a rebound in

    the sector.

    Ezion Buy Vard Sell

    Property Neutral Property market will worsen next year as supply shoots up while the

    cooling measures continue to bite. We expect residential prices to fall

    6-10%. Government is l ikely to reverse some of the cooling measures

    in 2H15, which bodes well for stocks.

    Keppel Land Buy CDL Neutral

    REITs Neutral Resilient in 1H15, but will be volatile in 2H15 over jitters of interest rate

    hike in the US.

    CapitaCommercial Trust Buy Cache Neutral

    Technology Neutral Stock selection is key in this sector. We prefer the small niche

    players over the prominent names like Venture and Si lverlake.

    Hi-P International Buy Silverlake Sell

    Telecoms Neutral Sector is expected to grow at pedestrian pace of ~5%, but dividend

    yields of 4-5% remains a draw.

    M1 Buy StarHub Neutral

    Source: OSK-DMG

    Figure 6: Top BUYS 2015

    Stocks Rec Target Market Cap

    2014 2015 2014 2015 2014 2015 2014 2015

    (SGD) (SGDm) x x x x % % % %

    Large Caps

    DBS BUY 21.00 46,578 11.5 10.0 1.2 1.2 3.4 3.7 11.7 11.9

    Keppel Land BUY 3.88 5,214 12.3 11.7 0.7 0.7 3.0 7.1 6.0 6.2

    Mid Caps

    CWT BUY 2.00 1,014 7.4 6.9 1.3 1.1 2.1 2.7 18.9 17.5

    Ezion BUY 2.65 2,382 6.4 4.3 1.1 0.9 0.1 0.1 24.6 22.5

    M1 BUY 4.40 3,368 19.1 17.0 8.3 8.2 5.8 5.8 43.4 48.6

    Nam Cheong BUY 0.61 709 5.5 4.4 1.5 1.2 4.6 5.7 29.5 29.5

    OSIM BUY 2.30 1,813 16.3 15.4 3.6 3.2 3.0 3.1 21.9 21.8

    Small Caps

    Breadtalk BUY 1.90 410 28.6 23.9 4.0 3.6 1.3 1.5 14.5 15.8

    Centurion BUY 0.83 387 13.3 10.1 1.2 1.1 0.8 0.8 14.0 11.0Giken Sakata BUY 0.65 138 34.6 3.2 5.5 1.8 0.0 6.3 17.4 75.9

    IPS Securex BUY 1.26 55 25.1 6.2 6.2 3.0 0.0 1.5 19.8 63.8

    ROEP/E P/B Dividend Yield

    Source: OSK-DMG estimates

    Closing Price: 11 December 2014

    Key risks

    Some of the key risks we see:

    i. An unstable Russia.The weak oil prices have caused a dive in the RUB,

    which could lead to a collapse of the financial system. Another risk is that

    Russia may need to distract its people from the financial calamity through a

    war, conveniently through Ukraine.

    ii. US growth weakens.A lot of hope has been pinned on the US saving theworld from a major downturn. If its economy hits a brick wall, it will be bad

    news for the world.

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    Talking Points 2015There will be a few tough questions that the markets will need to tackle, chief ofwhich are oil prices and the property market in Singapore. I believe both will play outto the benefit of the Singapore equity market.

    Oil Pricesrebound in 2H15

    Oil has been hit big time, slumping some 40% within a 2-month period onoversupply fears. It did not help that the Organisation of Petroleum ExportingCountries (OPEC) decided to keep its target output unchanged at 30m barrels perday (mmbpd). With no more near-term catalysts, we believe that we are seeing thelast leg down for oil prices. Oil demand is still growing, albeit at a slower clip.According to offshore & marine analyst Lee Yue Jer, with the best shales alreadytapped, and natural decline rates being much higher than conventional oil, bothOPEC supply and shale producers have a place in a future 1-2 years out from todayat higher prices. Production will eventually fall with cuts by either OPEC at thecartels 5 Jun 2015 meeting or by US shale producers. This should contribute tostabilising the oil price before a rebound by mid-year. This bodes well for theoffshore & marine plays under our coverage, which should be strong outperformersin 2015. We like Ezion and Nam Cheong.

    But even with a pickup in oil prices, the average prices are set to be lower than ayear ago, which should benefit the stock market in general and backs our overallpositive stance. Transport companies (we are underweight the sector) andmanufacturers will be the biggest beneficiaries of lower oil prices. There is also agreater propensity to spend, which will benefit the retailers.

    Property(some) cooling measures to go

    The property market was very dreadful in 2014, particularly on the volume front.Only 8,716 units were sold in the first 11 months of 2014, less than half of 2013,representing the lowest point since 2008. The number of units that will be shootingoutand the rising vacancy rates will be issues that the property sector will haveto contend with.

    Figure 7: Property index vs sales volume

    Source: Bloomberg, OSK-DMG

    The property market is expected to get worse, with our analyst Ong Kian Linbelieving that residential prices will likely slide by 6-10% in 2015. This drop isactually good news for the properties in the longer term. The Government hasmaintained through 2014 that the prices are still high and sees no reason to lift theproperty measures. I believe that some of the measures will be lifted by the NationalDay Rally in Aug 2015. The Government mentioned previously that the draconianmeasures are temporary for citizens but structural for foreigners. Lifting themeasures will be one way to convince citizens that there is a pronounced differencewith non-citizens, which was a major issue in the last General Election (GE) in 2011.

    The removal of some of the property measures will lend a boost to property stocksin the second half of the year. Till then, REITs will likely outperform property stocks.We like CapitaCommercial Trust (CCT SP, BUY, TP: SGD1.80) in the REIT space,while CapitaLand (CAPL SP, BUY, TP SGD3.88) and Keppel Land are our picks inthe property sector. Given the big discounts to RNAV, property stocks do presentbetter long-term opportunities.

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    Electionsmoney is on the final quarter of 2015

    Prime Minister Lee Hsien Loong said recently that the GE might not be wheneverybody is expecting it. I will nevertheless hazard a guess (disclaimer: my trackrecord on predicting the elections is l ittle patchier than my stock calls).

    The elections do not have to be called till Jan 2017, but I think that it will be early.

    This seems to be a consensus view, but just how early? I think it will be happen in4Q15 as the ground should be sweet after celebrations and special events tocommemorate Singapores 50

    thbirthday. It should be after the National Day Rally in

    Aug 2015, which is typically a platform to rally the nation and showcase theGovernments blueprint for the future.Given that this Golden Jubilee is a specialyear for the nation, I believe the Government will be a little more generous whencompared to the past few years. The elections will also be more likely towards yearend as the calendar for the Government looks a lot lighter after Aug 2015 followingthe celebrations and the South-East Asian (SEA) Games after a 22-year absencein Jun 2015.

    If the opposition plays the by-election strategy like it did prior to GE 2011 and allowthe Peoples Action Party (PAP) to return as the Government on nomination day, theSTI will likely see a short-term rally. But, given the new-found confidence by theopposition, especially the Workers Party, the by-election card will unlikely be played.

    Companies involved in the public works like ISOTeam (ISO SP, BUY, TP: SGD0.75)will be the most direct beneficiaries. As a company dealing in the landscaping andpainting of Housing and Development Board (HDB) units and other governmentbuildings, contracts for ISOTeam should flow in the months leading up to theelections. Over a longer term, the construction sector should be one of those with amulti-year growth story, given all the major works that were announced in the pasttwo National Day Rallies, ie Changi Airport Terminal 5, the rejuvenation of Jurongand Paya Lebar, and a new live, work, play city in Tanjong Pagar. This shouldbenefit the likes of Pan-United Corp (PAN SP, NR) Singapores largest readymixed concrete supplierand Lian Beng (LBG SP, BUY, TP: SGD0.75), one of thenations biggest contractors.

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    Strategy, 2 January 2015

    Banks Overweight (from Neutral)

    NIM Recovery To Brighten Earnings Prospects

    Macro

    Risks

    Growth

    Value

    Singapore Research+65 6533 0781

    [email protected]/E (x) P/B (x) Yield (%)

    De c-15F De c-15F De c-15F

    DBS Group Holdings SGD19.80 SGD22.60 11.1 1.2 3.4 BUY

    Oversea-Chinese Banking Corp SGD10.48 SGD11.70 10.4 1.3 3.5 BUY

    United Overseas Bank Ltd SGD24.55 SGD25.40 11.8 1.3 3.3 NEUTRAL

    Company Name Price Target Rating

    Source: Bloomberg, OSK-DMG

    We upgrade our sector rating to OVERWEIGHT from Neutral. US

    interest rate normalisation would underpin a multi-year NIM recoveryfor SG Banks, albeit on a gradual basis. This provides headroom forrevision in FY15F-16F earnings. DBS is our Top Pick as it offers thebest leverage to rising US rates. We raise OCBC to BUY (from Neutral)as we believe dilution from rights issue has been priced in while its

    integration with OCBC-Wing Hang is progressing well.

    More subdued earnings growth for 2015.After better-than-expectedcore earnings growth of 14.7% for 2014F, Singapores three listed banks(SG Banks) are projected to improve 2015 net profit at a more moderate11.7%. Banks bottomline growth would be tempered by the sluggishSingapore property market, softer topline growth in key ASEANoperations and potential headwinds from major economies.

    Prospects of NIM recovery provide headroom for earnings upgrade.Still, there is room for upward revision in our estimates as banks netinterest margins (NIM) would expand, aided by the normalisation of USinterest rates, with the first hike expected in 2H15. But we believe NIMrecovery would be gradual given: i) the uneven global economic outlookfor 2015; ii) uncertainty in timing and quantum of rate hikes; and iii)funding cost pressures as system liquidity tightens. We will review ourearnings forecasts once there is greater certainty of a rate hike. Oursensitivity analysis points to DBS being the biggest beneficiary with a 12-13% uplift in net profit from a 100bps rise in short-term interest rates.

    Loan growth moderates, asset quality concerns linger. We expectloan growth to moderate to 9% in 2015F (2014F: +13.5%) due to thec.40% drop in Singapore mortgage approvals and weak externalenvironment. SG Banks gross non-performing loan (NPL) ratio isforecast to be relatively stable at 0.93% (2014F: 0.92%) while credit coststays at 20bps in 2015. Hoewver, the recent plunge in crude oil pricescould exert pressure on asset quality. Meanwhile, non-interest incomegrowth is projected at a modest 5% as rising bond yields would likely captrading opportunities. On the flipside, banks have kept the duration of

    their securities portfolios short and this should keep marked-to-marketlosses manageable.

    Upgrade sector to OVERWEIGHT, DBS Top Pick.SG Banks are up13% YTD (11 Dec 2014), outperforming the FTSE STIs 4.8% rise. WithUS interest rate normalisation expected to be a key theme in 2015, webelieve SG Banks would be a sector of focus for investors. We upgradethe sector to OVERWEIGHT from Neutral. DBS is our Top Pick as itoffers the best leverage to rising interest rates. Our Gordon GrowthModel (GGM)-based TP is raised to SGD22.60 (from SGD21.00) afterfactoring in higher ROE and lower WACC. We have also raised ourrecommendation on OCBC to BUY (from Neutral) with a higher TP ofSGD11.70 (from SGD10.55) with 6% upward revision in earnings formore positive contributions from OCBC-Wing Hang, lifting ROEassumptions to 12.9% (from 11.9%).

    http://www.efa.biz/http://www.efa.biz/http://www.efa.biz/http://www.efa.biz/
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    Banks2 January 2015

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    Figure 1: NIMs bottomed in 2Q13 Figure 2: SGD SIBOR tracks movements in Fed Fund rate

    1.6%1.7%1.8%1.9%2.0%2.1%

    2.2%2.3%2.4%2.5%2.6%

    0.0%

    0.5%

    1.0%

    1.5%2.0%

    2.5%

    3.0%

    3.5%

    4.0%

    4Q03

    2Q04

    4Q04

    2Q05

    4Q05

    2Q06

    4Q06

    2Q07

    4Q07

    2Q08

    4Q08

    2Q09

    4Q09

    2Q10

    4Q10

    2Q11

    4Q11

    2Q12

    4Q12

    2Q13

    4Q13

    2Q14

    NetInterestMargins

    3MS

    GD

    SIBOR

    3M SGD SIBOR DBS OCBC UOB

    -

    1.0

    2.0

    3.0

    4.0

    5.0

    6.0

    7.0

    8.0

    Aug-99

    May-00

    Feb-01

    Nov-01

    Aug-02

    May-03

    Feb-04

    Nov-04

    Aug-05

    May-06

    Feb-07

    Nov-07

    Aug-08

    May-09

    Feb-10

    Nov-10

    Aug-11

    May-12

    Feb-13

    Nov-13

    Aug-14

    3M SIBOR 3M USD LIBOR Fed Fund Target Rate

    Source: Company data, Bloomberg, OSK-DMG

    Figure 3: Loan growth to moderate in 2015

    Source: Company data, Bloomberg, OSK-DMG

    Figure 4: Singapore private property index on the decline

    12.5%

    1.9%

    18.5%

    26.7%

    7.7%

    17.5%

    13.5%

    9.1%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    0

    100

    200

    300

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    500

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    2008 2009 2010 2011 2012 2013 2014F 2015F

    (SGD'bn) DBS OCBC UOB % YoY (RHS)

    0

    50

    100

    150

    200

    250

    1Q90

    4Q90

    3Q91

    2Q92

    1Q93

    4Q93

    3Q94

    2Q95

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    3Q97

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    1Q08

    4Q08

    3Q09

    2Q10

    1Q11

    4Q11

    3Q12

    2Q13

    1Q14

    4Q14

    Source: Company data, Bloomberg, OSK-DMG

    Figure 5: Modest rise in gross impaired loans

    Source: Company data, Bloomberg, OSK-DMG

    Figure 6: Impairment charges to remain manageable

    1.67%

    2.37%

    1.60%

    1.22% 1.19%

    1.03%0.92% 0.93%

    0.5%

    0.7%

    0.9%

    1.1%

    1.3%

    1.5%

    1.7%

    1.9%

    2.1%

    2.3%

    2.5%

    -

    1,000

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    4,000

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    6,000

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    8,000

    2008

    2009

    2010

    2011

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    2014F

    2015F

    (SGDm) DBS OCBC UOB GIL Ratio (RHS)

    71 84

    41

    32

    23 26 21 20

    -

    10

    20

    30

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    (bps)(SGDm) DBS OCBC UOB Credit cost (RHS)

    Source: Company data, Bloomberg, OSK-DMG

    Figure 7: Softer non-interest income growth in 2015

    Source: Company data, Bloomberg, OSK-DMG

    Figure 8: Capital position healthy (Sep 2015)

    20.7% 26.0%

    -5.4%

    18.1%

    5.4%

    11.8%

    4.9%

    -10.0%

    -5.0%

    0.0%

    5.0%

    10.0%

    15.0%

    20.0%

    25.0%

    30.0%

    500

    2,500

    4,500

    6,500

    8,500

    10,500

    12,500

    2009

    2010

    2011

    2012

    2013

    2014F

    2015F

    (SGDm)Non-II % YoY (RHS)

    13.4% 13.2%14.0%

    15.6% 15.5%

    17.0%

    6%

    8%

    10%

    12%

    14%

    16%

    18%

    DBS OCBC UOB

    CET-1 Tier-1 Total CAR

    Source: Company data, Bloomberg, OSK-DMG Source: Company data, Bloomberg, OSK-DMG

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    Consumer2 January 2015

    See important disclosures at the end of this report 11

    Focus ChartsSingapore Consumer Sector

    Figure 1: 9M14 YoY % growth in recurring net profit for ourcoverage universe, mostly flattish

    Figure 2: 9M YoY% growth in sales for our coverage universegrowth in sales not enough to counter higher costs

    3.8

    -2.5

    0.6 1.1

    -33.7

    -14.0

    21.0

    2.6

    -40

    -30

    -20

    -10

    0

    10

    20

    30

    BreadTalk

    DairyFarm

    Kingsmen

    OSIM

    P

    arksonRetail

    PetraFoods

    ShengSiong

    Super

    (%)

    11.6

    3.9

    19.9

    9.4

    1.2

    -1.5

    5.9

    -4.4

    -10

    -5

    0

    5

    10

    15

    20

    25

    BreadTalk

    DairyFarm

    Kingsmen

    OSIM

    P

    arksonRetail

    PetraFoods

    ShengSiong

    Super

    (%)

    Source: OSK-DMG compilation Source: OSK-DMG compilation

    Figure 3: Household debt levels in ASEANpolar oppositesfor different ASEAN markets

    Figure 4: Singapores household debt has risen significantlysince 2008

    8782

    75

    13

    7 6

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    Malaysia Thailand Singapore Vietnam Indones ia Philippines

    %

    64

    66

    68

    70

    72

    74

    76

    2008 2009 2010 2011 2012 2013

    (%)

    Source: Moodys Investors Service Source: CEIC

    Figure 5: Singapore property prices have started to decline Figure 6: Singapore consumer confidence

    0

    50

    100

    150

    200

    250

    1975Q

    1

    1977Q

    1

    1979Q

    1

    1981Q

    1

    1983Q

    1

    1985Q

    1

    1987Q

    1

    1989Q

    1

    1991Q

    1

    1993Q

    1

    1995Q

    1

    1997Q

    1

    1999Q

    1

    2001Q

    1

    2003Q

    1

    2005Q

    1

    2007Q

    1

    2009Q

    1

    2011Q

    1

    2013Q

    1

    20

    30

    40

    50

    60

    70

    80

    90

    100

    Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-1

    Source: URA property price index Source: MasterCard Asia Pacific Consumer Confidence

    *100 being most optimistic and 0 being most pessimistic.

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    Strategy, 2 January 2015

    Construction Overweight (Maintained)

    Short-Term Pain For Long-Term Gain

    Macro

    Risks

    Growth

    Value

    Singapore Research +65 6533 0781

    [email protected]

    P/E (x) P/B (x) Yield (%)

    De c-15F De c-15F De c-15F

    Hafary Holdings SGD0.22 SGD0.35 11.6 2.0 1.4 BUY

    ISOTeam SGD0.52 SGD0.77 8.0 1.7 1.9 BUY

    Lian Beng SGD0.67 SGD1.17 na na - BUY

    Yongnam Holdings SGD0.20 SGD0.29 17.5 0.8 2.5 BUY

    Company Name Price Target Rating

    Source: Company data, OSK-DMG

    While demand continues to be robust, the cost environment has been

    challenging in terms of levies and quotas on foreign workers, and themandatory use of productive technologies. Maintain OVERWEIGHT withLian Beng as Top Pick. Construction players will likely see cost savingsfruition in the mid-term post investing in productive technologies likeprecast and prefabrication plants.

    Construction demand outlook still remains fairly strong. Construction activity in Singapore, a key support pillar of the countrysreal GDP growth, is expected to stay healthy in 2015. The Building andConstruction Authority (BCA) estimates construction demand in2015/2016 to average SGD31bn-38bn and SGD25bn-34bn annually,with public sector projects to contribute c.60% of total demand.

    Restructuring in progress for productivity gains. Constructioncompanies will continue to face headwinds in terms of a rising costenvironment. In the latest budget, the Singapore Government hasundertaken concrete measures to encourage productivity in theconstruction sector, such as mandating the use of productivetechnologies and prefabrication in public and private sector projects. On

    the other hand, levies and quota for foreign workers continue to beelevated and restrictive. The former adds on to higher investment andoperating costs while the latter adds on to operating costs. Theinvestment in productive technologies is likely to only bear fruit inreducing operating costs in the longer run.

    Top Pick is Lian Beng (LBG SP, BUY, TP: SGD1.17).Lian Beng is ourpreferred pick in terms of value and its diversity in businesses. Apartfrom delivering in execution on its bread and butter constructionbusiness, the company has diversified into property development andupstream granite, asphalt premix and ready-mixed concrete supply. Itsrecent share buybacks should also lend support to its share price.

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    Construction2 January 2015

    See important disclosures at the end of this report 13

    Reference Exhibits

    Figure 1: Construction demand (construction contracts awarded)

    9.44 10.2911.46

    16.80

    24.46

    35.68

    22.52

    27.56

    35.49

    30.76

    35.84

    0

    5

    10

    15

    20

    25

    30

    35

    40

    2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

    SGDbn

    Cons truct ion Cont rac ts Awarded Average - 23.66

    Source: BCA

    Figure 2: Cement prices - up 11% since 2010's low

    0

    20

    40

    60

    80

    100

    120

    140

    Feb-04

    Jul-04

    Dec-04

    May-05

    Oct-05

    Mar-06

    Aug-06

    Jan-07

    Jun-07

    Nov-07

    Apr-08

    Sep-08

    Feb-09

    Jul-09

    Dec-09

    May-10

    Oct-10

    Mar-11

    Aug-11

    Jan-12

    Jun-12

    Nov-12

    Apr-13

    Se

    -13

    Feb-14

    Jul-14

    Source: BCA

    Figure 3: Foreign worker levies applicable to work permit holders in the construction industry in Singapore

    Sector Dependency ceiling Worker category Monthly levy rate (SGD)

    Construction One local full-time worker to sevenforeign workers

    Higher skilled & on MYE 300

    Basic skilled & on MYE 550

    Higher skilled & exempted from MYE 700

    Basic skilled & exempted from MYE 950

    Note: MYE = man-year entitlement

    Source: Ministry of Manpower

    Remains robust with BCA estimatingconstruction demand in 2014 and 2015/2016to average SGD31bn-38bn and SGD25bn-34bn.

    Cement prices are now at SGD97.2/tonne, up11% since 2010's low

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    Strategy, 2 January 2015

    Healthcare Services Neutral

    Slowdown In Medical Tourism Is The Key Concern

    Macro

    Risks

    Growth

    Value

    Arshath Mohamed+65 6232 3897

    [email protected]

    Shekhar Jaiswal +65 6232 3894

    [email protected] P/E (x) P/B (x) Yield (%)

    De c-15F De c-15F De c-15F

    Cordlife Group SGD0.92 SGD1.55 14.6 1.6 2.8 BUY

    Raffles Medical Group SGD3.89 SGD4.05 28.1 3.9 1.2 NEUTRAL

    Company Name Price Target Rating

    Source: Company data, OSK-DMG

    We believe Singapores healthcare sector might experience almost

    flattish growth in 2015. While the aging population does createsignificant opportunities for the healthcare industry, we believe itsimpact will be offset by slowdown in medical tourism. We are NEUTRALon the sector with the only BUY recommendation on Cordlife, which welike for its rapidly growing business within the Asian region.

    Aging population taking centre stage. The median age of Singaporesresident population increased to 39.3 years in 2014 from 38.9 in 2013.Assuming the current trend continues, by 2050, 38% of Singaporespopulation will be aged over 60. This key trend will keep the healthcareservices sector ticking over the coming years. Singapore has alsowitnessed increasing affluence over the years. With the public sectorbeing stretched, it gives private players like Raffles Medical (RFMD SP,TP: SGD4.05) to benefit from the aging population trend. As well tocounter the rise in incidences of chronic diseases, Singapore will spendmore on preventive cares, which include regular health check-ups,leading to higher spending on healthcare services within the country.

    Medical tourists to look for cheaper destinations. Singapore haswitnessed a slowdown in tourists in 2014 (8M14: -3.3% vs 8M13).Singapores medical tourism has also been shrinking mainly due toincreased competition from Malaysia and Thailand. Costs of medicaltreatment in Malaysia and Thailand are relatively lower compared to thatin Singapore. Indonesian citizens made up about 58% of Singaporestotal medical receipt in 2012. During our recent visit to Indonesia withFirst REIT (FIRT SP, NR), which owns hospitals managed by SiloamHospitals, we noted that the gap between quality of healthcare servicesoffered in Singapore and Indonesia is closing quite rapidly. This, alongwith lower costs, may result in slower medical tourist arrivals intoSingapore, thereby dragging the growth in Singapores healthcareservices industry.

    We like Cordlife (CLGL SP, BUY, TP: SGD1.55) for its rapid growth

    and unique business model.Despite a NEUTRAL rating on healthcareservices, we prefer exposure to Cordlife for its unique business and rapidexpansion across the Asian markets. The company provides storageservices for cord blood and cord tissues. In FY13, Cordlife ventured intonew markets, namely India, Indonesia and the Philippines. In less thantwo years, India accounts for a significant portion of its new clientadditions. We are bullish on the companys growth potential in itsaforementioned new markets, which have very low industry penetrationrates. Among other healthcare stocks, we are NEUTRAL on RafflesMedical for its muted growth outlook.

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    Healthcare Services2 January 2015

    See important disclosures at the end of this report 15

    Figure 1: Singapores population in the 65 years and aboveage group

    Figure 2: Singapore age distribution by 2030

    8.0%

    8.5%

    9.0%

    9.5%

    10.0%

    10.5%

    11.0%

    200.0

    250.0

    300.0

    350.0

    400.0

    450.0

    2007 2008 2009 2010 2011 2012 2013Population - 65 & above ('000) Population - 65 & above (%)

    Source: SIngStat Source: US Census Survey

    Figure 3: ost of different medical treatments in the region Figure 4: Number of JCI accredited hospitals in the region

    2005 2011 2012 2014Singapore 9 20 22 22

    Malaysia 0 9 6 13

    Thailand 1 15 39 37

    Philippines 1 5 5 6

    Indonesia na na na 18

    Source: RHB Source: RHB

    Figure 5: Cordlifes revenue, EBIT and recurring net profit Figure 6: Raffle Medicals revenue, EBIT and recurring netprofit

    -

    10

    20

    30

    40

    50

    60

    70

    FY14 FY15F FY16F

    Revenue (SGD m) EBIT (SGD m) Net profit (recurring) (SGD m)

    -

    50.0

    100.0

    150.0

    200.0

    250.0

    300.0

    350.0

    400.0

    450.0

    2013 2014F 2015F

    Revenue (SGD m) Operating Income (SGD m)

    Net profit (without exceptionals) (SGD m)

    Source: Company, RHB Source: Company, RHB

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    Strategy, 2 January 2015

    Land Transportation Underweight

    Hoping For Too Much, Too Early

    Macro

    Risks

    Growth

    Value

    ComfortDelGro and SMRT 1-year priceperformance

    80

    90

    100

    110

    120

    130

    140

    150

    Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14

    ComfortDelGro (CD SP) SMRT Corp (MRT SP)

    Source: Bloomberg, OSK-DMG

    Shekhar Jaiswal+65 6232 3894

    [email protected]: Company data, OSK-DMG

    ComfortDelGros and SMRTs share prices have re-rated in 2014, aided

    by the announcement of Singapores new cost-plus bus operatingmodel and improvements in their respective operations. We believeclarity on the terms of the new model and likely timeline for the new railfinancing framework are the catalysts for further re-rating.ComfortDelGros cheaper valuation, favourable margin mix and balance

    sheet strength make it our choice.

    Benefits from new cost-plus operating model already seem pricedin. The Singapore Government announced the new cost-plus buscontracting model in 2014. Both public bus operators, ComfortDelGro(CD SP, TAKE PROFIT, TP: SGD2.66) and SMRT (MRT SP, NEUTRAL,TP: SGD1.50), are struggling with their domestic bus operations on astandalone basis and are in need of this new model. However, itsbenefits will be gradual in nature and we do not expect them to materiallychange the earnings growth trajectory of both companies. Moreover, thesharp rise in the share prices of both companies, we believe, was partlyaided by the announcement of the new bus operating model.

    Implementation of new rail financing framework may not be allpositive for SMRT. SMRT has submitted a proposal to the Land

    Transport Authority (LTA) in early April for a sustainable rail frameworkthat was asset light in nature. The discussions between SMRT and theLTA are currently ongoing and we do not expect an early implementationof the revised rail financing framework. However, we would like toreiterate that the implantation of a new framework may only strengthenSMRTs balance strength, as expenses will simply be transferred tolicensing charges from depreciation. While a cost-plus model similar tothe new bus operating model will be a positive for SMRT, we believe it isunlikely to be permitted.

    ComfortDelGro remains our preferred exposure in an Underweight-rated land transport sector. Although SMRT has witnessed strongimprovement in business operations and profitability over the past fewquarters, uncertainty over the time frame and details of the new rail

    financing framework will likely limit the upside to its price performance.We prefer exposure to ComfortDelGro for its overseas businessexposure, favourable margins mix and balance sheet strength, whichcould lead to an earnings accretive acquisition in the near term.Moreover, at 19x FY15F P/E, ComfortDelGro trades at a much cheapervaluation when compared with SMRT.

    P/E (x) P/B (x) Yield (%)Dec-15F Dec-15F Dec-15F

    ComfortDelGro SGD2.60 SGD2.66 18.7 2.3 2.9TAKE PROFITSMRT Corp SGD1.59 SGD1.50 25.9 2.7 1.8 NEUTRAL

    Company Name Price Target Rating

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    Transportation2 January 2015

    See important disclosures at the end of this report 17

    Figure 1: ComfortDelGro - bus segment revenue andcontributions

    Figure 2: ComfortDelGro - bus segment EBIT and EBITmargins

    49%

    50%

    49%50%

    48%48%

    49%

    49%

    48%48%

    51%51%

    49%

    51%51%

    45%

    46%

    47%

    48%

    49%

    50%

    51%

    52%

    300

    350

    400

    450

    500

    550

    1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14

    Bus revenue (SGD m) Bus c ontrib utio n (%)

    7%

    9%

    10%

    8% 8% 8%

    10%

    7%8%

    9%

    10%

    6%

    8%

    9%9%

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    -

    10

    20

    30

    40

    50

    60

    1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14

    Bus EBIT (SGD m) Bus EBIT marg in (%)

    Source: Company data Source: Company data

    Figure 3: SMRT - MRT segment revenue and contributions Figure 4: MRT - MRT segment EBIT and EBIT margins

    53%54%54%54%

    55%55%

    54%54%

    54%54%

    53%53%53%53%

    45%

    47%

    49%

    51%

    53%

    55%

    57%

    -

    20

    40

    60

    80

    100

    120

    140

    160

    180

    1QFY12 3QFY12 1QFY13 3QFY13 1QFY14 3QFY14 1QFY15

    MRT revenue (SGD m) MRT cont ribut ion (%)

    17%16%

    18%

    13%

    17%16%

    10%

    1%

    2%1% 0%

    1%

    3%

    5%

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    14%

    16%

    18%

    20%

    -

    5

    10

    15

    20

    25

    30

    1QFY12 3QFY12 1QFY13 3QFY13 1QFY14 3QFY14 1QFY15

    MRT EBIT (SGD m) MRT EBIT margin (%)

    Source: Company data Source: Company data

    Figure 5: ComfortDelGro - 1-year forward P/Es Figure 6: SMRT - 1-year forward P/Es

    8.0

    10.0

    12.0

    14.0

    16.0

    18.0

    20.0

    22.0

    24.0

    Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

    P/E Avg. P/E=14.5 -1 std=12.3+1 std=16.8 -2 std=10 +2 std=19

    -

    5.0

    10.0

    15.0

    20.0

    25.0

    30.0

    35.0

    40.0

    45.0

    Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14

    P/E Avg. P/E=21.9 -1 std=10.9 +1 std=32.9

    Source: Bloomberg, OSK-DMG Source: Bloomberg, OSK-DMG

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    Strategy, 2 January 2015

    Offshore & Marine Overweight

    Sunshine After The Rain

    Macro

    Risks

    Growth

    Value

    Lee Yue Jer, CFA+65 6232 3898

    [email protected]

    Jesalyn Wong +65 6232 3872

    [email protected]

    P/E (x) P/B (x) Yield (%)

    De c-15F De c-15F De c-15F

    Ezion Holdings SGD1.06 SGD2.65 4.3 0.9 0.1 BUYGiken Sakata SGD0.27 SGD0.65 2.1 1.3 9.5 BUY

    Keppel Corp SGD8.10 SGD12.60 9.0 1.3 5.9 BUY

    Nam Cheong SGD0.31 SGD0.61 4.4 1.1 5.7 BUY

    Pacific Radiance SGD0.77 SGD1.55 5.2 0.8 3.9 BUY

    Vard Holdings SGD0.62 SGD0.57 10.3 1.0 2.9 SELL

    Company Name Price Target Rating

    Source: Company data, OSK-DMG

    Sector stocks have collapsed 38% on average, in line with Brent crudes

    c.45% fall. Yet, growth prospects remain strong for those on fixedcontracts/stable long-term economics. Our large-cap Top Pick is Ezion,with Nam Cheong and Giken Sakata as mid-/small-cap picks. PacificRadiance and Marco Polo Marine are likely to deliver strong alphas too.Top SELL is Vard on its deepwater exposure and cancellation risks.

    Saudi-shale showdown. Stocks have been hammered by SaudiArabias refusal to cut output despite excess supply as it seeks to slowUS shale production growth. This is a short-term gambit. 10 of 12Organisation of the Petroleum Exporting Countries (OPEC) members arein fiscal deficits and default risks in shale producers have spiked.Production cuts by either/both should occur soon and we expect 2015crude oil prices to rebound towards USD80/barrel (bbl).

    Growth prospects undiminished. In a subdued price environment,P/Es may not re-rate but earnings growth can still drive stock price. Welike firms with long-term charters Ezion (EZI SP, BUY, TP: SGD2.65)and Pacific Radiance (PACRA SP, BUY, TP: SGD1.55)and those withsolid industry positions and business economics, ie Nam Cheong (NCLSP, BUY, TP: SGD0.61), Giken (Giken) Sakata (GSS SP, BUY, TP:

    SGD0.65) and Marco Polo Marine (MPM) (MPM SP, BUY, TP:SGD0.60). Shallow-water operations focus is a must for downside riskprotection. Across our coverage, average year-ahead net profit growth is40%. Giken and MPM take top spots.

    After the crash? We find 10-year correlations for large-caps Keppel(KEP SP, BUY, TP: SGD12.60) and Sembcorp Marine (SembMarine)(SMM SP, NEUTRAL, TP: SGD3.80) to oil price at 0.82 and 0.85, risingto 0.93 and 0.96 in the last six months respectively. Nam Cheong hashad negative 0.42 correlations since listing, rising to 0.44 when oil pricesbegan sliding. Prices should stabilise soon and a breakdown of therecent positive correlation should occur as company fundamentals getre-priced into valuations again.

    Industry capex cuts likely to fall on deepwater. Of the 92m barrels ofoil produced globally, c.70% is onshore, c.20% in shallow water, and

    c.10% in deepwater. In the 1980s recession, oil demand fell by only10%. Hence, shallow-water is now the new onshore, ie recession-proof.Capex cuts will hit deepwater much harder. We are most negative onVard (VARD SP, SELL, TP: SGD0.57) and its mostly deepwater-focusedorderbook, and PACC Offshore (POSH, NR) and Ezra (EZRA SP,NEUTRAL, TP: SGD0.82) who have significant deepwater exposures.

    Maintain OVERWEIGHT. The recent sector underperformance has setthe stage for a strong rebound in 2015. Stocks have priced in realisticbear case scenarios and some have overshot to even below worst caseintrinsic values. Recoveries to even bear case valuations ought togenerate significant alphas.

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    Offshore & Marine2 January 2015

    See important disclosures at the end of this report 19

    Key Charts

    Figure 1: Average decline of 38% from peaks in the past six months

    -64%

    -56%

    -55%

    -53%

    -52%

    -51%

    -50%

    -46%

    -43%

    -42%

    -38%

    -38%

    -33%

    -30%

    -27%

    -26%

    -25%

    -23%

    -18%

    -15%

    -4%

    -70% -60% -50% -40% -30% -20% -10% 0%

    RHPetrogas

    Ezra

    Posh

    Vallianz

    Swissco

    Rex

    PacificRadiance

    Vard

    Ezion

    MTQ

    NamCheong

    Mermaid

    Ausgroup

    SembMarine

    MPM

    Keppel

    Giken

    SembIndustries

    Mencast

    XMH

    Yangzijiang

    Source: Bloomberg, OSK-DMG

    Figure 2: Current year P/Es Figure 3: Current year earnings growth

    12.8

    12.110.9

    10.6

    10.0

    9.5

    8.6

    8.4

    7.2

    6.5

    6.4

    6.1

    6.0

    5.8

    2.7

    0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

    AusGroup

    EzraXMH Holdings

    SembMarine

    Keppel Corp

    Sembcorp Industries

    Vard

    Mencast

    Yangzijiang Shipbuilding

    MTQ

    Ezion

    Pacific Radiance

    Marco Polo Marine

    Nam Cheong

    Giken Sakata

    -19%

    -13%

    -4%

    0%

    13%

    26%

    32%

    35%

    36%

    61%

    78%

    80%

    N.A.

    N.A.

    -40% -20% 0% 20% 40% 60% 80% 100%

    Vard

    MTQ

    SembMarine

    Yangzijiang Shipbuilding

    Keppel Corp

    Pacific Radiance

    Marco Polo Marine

    Ezion

    XMH Holdings

    Nam Cheong

    Ezra

    Mencast

    RH Petrogas

    AusGroup

    Source: OSK-DMG Source: OSK-DMG

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    Offshore & Marine2 January 2015

    See important disclosures at the end of this report 20

    Figure 4: Year-ahead P/Es Figure 5: Year-ahead earnings growth

    9.9

    9.6

    9.6

    8.5

    8.3

    7.9

    6.5

    6.4

    6.3

    5.85.0

    4.7

    4.3

    3.0

    0.9

    N.A.

    0.0 2.0 4.0 6.0 8.0 10.0 12.0

    Keppel Corp

    Vard

    SembMarine

    Sembcorp Industries

    AusGroup

    XMH Holdings

    Mencast

    Yangzijiang Shipbuilding

    Ezra

    MTQPacific Radiance

    Nam Cheong

    Ezion

    Marco Polo Marine

    Giken Sakata

    RH Petrogas

    -3%

    1%

    12%

    15%

    18%

    21%

    26%

    29%

    30%

    33%

    41%

    56%

    69%

    101%

    167%

    -50% 0% 50% 100% 150% 200%

    RH Petrogas

    Keppel Corp

    Yangzijiang Shipbuilding

    Pacific Radiance

    SembMarine

    XMH Holdings

    Nam Cheong

    Mencast

    Vard

    MTQ

    Ezra

    Ezion

    AusGroup

    Marco Polo Marine

    Giken Sakata

    Source: OSK-DMG Source: OSK-DMG

    Figure 6: Summary of Singapore's offshore & marine coverage

    Mkt Cap

    Company Ticker SGDm Rating TP FYE Hist Pros-1 Pros-2 Hist Pros-1 Pros-2 Pros-1 Pros-2 Pros-1 Pros-2

    Keppel Corp KEP SP Equ 14,950 SGD 8.210 BUY 12.60 Dec 12.0 10.0 9.9 1.7 1.6 1.5 5.1 5.1 15.9 15.0

    Sembcorp Industries SCI SP Equi 7,604 SGD 4.290 NEUTRAL 5.10 Dec 10.2 9.5 8.5 1.7 1.5 1.4 3.6 4.1 15.0 15.6

    Sembcorp Marine SMM SP Eq 6,017 SGD 2.900 NEUTRAL 3.80 Dec 13.7 10.6 9.6 2.8 2.6 2.3 3.9 4.1 19.0 20.3

    Yangzijiang YZJSGD SP 4,503 SGD 1.180 BUY 1.68 Dec 6.8 7.2 6.4 1.2 1.0 0.9 4.4 4.4 18.1 16.1

    Ezion EZI SP Equi 1,697 SGD 1.080 BUY 2.65 Dec 7.6 6.4 4.3 1.4 1.2 0.9 0.1 0.1 24.6 22.5

    Vard VARD SP E 732 SGD 0.625 SELL 0.58 Dec 11.8 8.6 9.6 1.1 1.1 1.0 2.1 2.7 7.6 9.1

    Nam Cheong NCL SP Equ 639 SGD 0.305 BUY 0.61 Dec 9.5 5.8 4.7 2.0 1.6 1.3 4.2 5.3 29.5 29.5

    Pacific Radiance PACRA SP 555 SGD 0.750 BUY 1.55 Dec 9.9 6.1 5.0 1.5 1.3 1.1 2.5 2.9 17.6 17.5

    Ezra EZRA SP E 529 SGD 0.534 NEUTRAL 0.85 Aug 21.0 12.1 6.3 0.6 0.6 0.5 1.8 1.8 5.1 6.6

    Mencast MCAST SP 357 SGD 0.270 BUY 0.62 Dec 14.4 8.4 6.5 1.5 1.6 1.4 7.3 5.2 18.7 20.4

    RH Petrogas RHP SP Equ 253 SGD 0.335 BUY 0.50 Dec 23.2 N.A. N.A. 1.1 1.2 1.2 N.A. N.A. -13.3 -2.2

    Ausgroup AUSG SP E 230 SGD 0.305 NEUTRAL 0.36 Jun N.A 12.8 8.3 1.1 1.0 0.9 1.3 2.0 6.7 9.4

    MTQ MTQ SP Eq 162 SGD 1.050 BUY 1.77 Mar 8.1 6.5 5.8 1.5 1.4 1.2 3.4 4.2 15.2 17.7

    Giken Sakata GSS SP Eq 128 SGD 0.265 BUY 0.65 Aug 37.0 2.7 0.9 5.9 1.9 0.9 5.8 15.5 75.9 78.9

    XMH Holdings XMH SP Equ 124 SGD 0.285 BUY 0.42 Apr 12.2 10.9 7.9 2.3 2.0 1.5 4.5 5.3 24.1 23.2

    Marco Polo Marine MPM SP Eq 91 SGD 0.440 BUY 0.60 Sep 8.9 6.0 3.0 0.6 0.6 0.5 0.0 3.0 8.7 15.5

    Last price

    P/E (x) P/B (x) Yield (%) ROE (%)

    Source: OSK-DMG

    Note: Pros-1 and Pros-2 refer to prospective one- and two-year-ahead periods, based on financial year-end periods.

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    Sector Update, 2 January 2015

    Plantation Overweight

    Action Only In 2H2015

    Macro

    Risks

    Growth

    Value

    Singapore Research +65 6533 0781

    [email protected] P/E (x) P/B (x) Yield (%)De c-15F De c-15F De c-15F

    Bumitama Agri Ltd SGD1.03 SGD1.48 10.7 2.0 - BUY

    First Resources SGD1.82 SGD2.36 11.6 1.8 2.6 BUY

    Golden Agri SGD0.46 SGD0.50 13.9 0.5 1.6 NEUTRAL

    Company Name Price Target Rating

    Source: Company data, OSK-DMG

    We believe the key catalyst for palm oil prices in 2015 is weather since

    food demand growth remains muted and non-mandatory biodieselusage slows due to a decline in crude oil prices. Nevertheless, in 2H15,when production starts to suffer from the 12-month impact of the dryweather in 2014, the sector could turn bullish again. While we maintainour NEUTRAL call on the regional sector, we like the SGX-listed

    planters on valuation grounds.

    With weather being the only potential driver going into 2015, beingbullish on the sector is a risky proposition. Nevertheless, weather istraditionally the single biggest driver for agriculture prices and by itself is sufficient to result in sustained upswing in prices. We view theupside from this as too significant to ignore. Even if the El Ninoweatherphenomenon currently at the alert level fails to materialise, it isunlikely to dent sector sentiment. This is because the market has beenignoring the development of El Ninoafter its earlier failure to develop. Inany case, damage to 2015 production has already been done by 2H14sdryness in Kalimantan.

    Demand growth will remain lacklustre, much like 2014, and especiallyfrom China where edible oil imports have slowed due to the availability of

    soybean as well as slower economic growth. We believe palm oil supplygrowth in 2015 will be even slower than in 2014 due to the adverseweather effects. In 1Q, production in Sumatra and West Malaysia willsuffer from the extreme dryness in 1Q14 while 2H will see the impact ofthe dryness that occurred in a large part of Kalimantan in 2H14.

    Crude oil price weakness is a drag on prices, at least psychologically.Biodiesel margins are now close to zero, hence, non-mandatory usagewill be curtailed. However, if Brent crude does not fall significantly furtherfrom here, mandatory usage will continue on. Indonesias biodieselusage should increase significantly in 2015 from this years dismal 1.6mtonnes, hence, mitigating the slowdown in non-mandatory usage.Indonesias mandatory usage requires at least 3m tonnes per year.

    Average CPO price. With the YTD average CPO price atMYR2,434/tonne, our full-year average of MYR2,400 remains on track.We expect prices to strengthen next year, averaging MYR2,500/tonne.

    2015 unlikely to be a quiet year for the sector.While interest in thesector remains thin, we believe the worst is over for the sector anddownside is limited. Investors with long investment horizons could startbuying. Most excitement may take place in 2H when production starts tosuffer from the 12-month impact of this years dry weather. We believethe impact could be significant, given that 3Q is a high-crop quarter.

    OVERWEIGHT on SGX-planters. We remain OVERWEIGHT on theSGX plantation stocks, mainly on valuation grounds, while our regionalsector call remains a NEUTRAL. Bumitama Agri (BAL SP, BUY, TP:SGD1.48) is our Top Pick, while we also find value in First Resources(FR SP, BUY, TP: SGD2.36).

    http://www.efa.biz/http://www.efa.biz/http://www.efa.biz/http://www.efa.biz/
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    Plantation2 January 2015

    22

    Figure 1: Palm oil trades at USD71/tonne discount to soybeanoil

    Figure 2: Palm oil/gasoil spread narrowed to USD1.30/barrel(bbl)

    -50

    -

    50

    100

    150

    200

    250300

    350

    400

    450

    500

    -

    200

    400

    600

    800

    1,000

    1,200

    1,400

    1,600

    Premium, USD (RHS) Soyoil, USD (LHS) CPO, USD (LHS)

    -40.0

    -30.0

    -20.0

    -10.0

    -

    10.0

    20.0

    30.0

    40.0

    75

    85

    95

    105

    115

    125

    135

    145

    155

    165

    175

    Jul-11 Dec-11 May-12

    Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14

    Gasoil (LHS) CPO (LHS)

    Brent crude (LHS) Biodiesel margin (RHS)

    Source: Bloomberg, OSK-DMG Source: OSK-DMG, Bloomberg

    Figure 3: Clear signs of warming sub-sea temperature pointsto El Ninogaining traction

    Figure 4: Southern Oscillation Index is already in El Nino

    territory

    Source: Australian Bureau of Meteorology

    Figure 5: China's YTD edible oil imports down 15.1% YoY,palm down 10.9%

    Figure 6: India's 10M edible oil import up 9.2%, palm down7.6%

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    70%

    80%

    90%

    100%

    -

    1,000

    2,000

    3,000

    4,000

    5,000

    6,000

    7,000

    8,000

    YTDCY05

    YTDCY06

    YTDCY07

    YTDCY08

    YTDCY09

    YTDCY10

    YTDCY11

    YTDCY12

    YTDCY13

    YTDCY14

    China 's v eg etab le o il imp or t China 's p alm o il imp or t Palm's marke t s ha re , %

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    70%

    80%

    90%

    -

    2,000.0

    4,000.0

    6,000.0

    8,000.0

    10,000.0

    12,000.0

    YTDCY07

    YTDCY08

    YTDCY09

    YTDCY10

    YTDCY11

    YTDCY12

    YTDCY13

    YTDCY14

    Ind ia 's e dible o il imp or t Ind ia 's p alm o il imp or t Palm o il 's marke t s ha re

    Source: China's Customs Source: India's Customs

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    Strategy, 2 January 2015

    Real Estate Neutral

    Three-Party Catch-22 Situation To Persist

    Macro

    Risks

    Growth

    Value

    Rental pulsebeat:

    2Q/3Q14 SGD psf/mth/ Index QoQ (%) YoY (%)

    Office Grade A 10.60 3.4 11.0

    Retail Orchard Rd 34.20 0.0 3.3

    Biz Park (City Fringe) 5.50 1.9 3.8

    Multi-user factory (B1)

    median rent2.15 (2.2) (2.3)

    Warehouse median rent 2.05 0.0 (1.3)

    Residential median rent 3.74 (1.1) (2.2)

    SRX Rental Index (Sep) 124.3 (0.2) (5.3)

    Source: OSK-DMG, URA, HDB, CBRE

    Price pulsebeat:

    2Q/3Q14 S GD psf/I ndex QoQ (%) YoY (%)

    Office Grade A 2,750 0.0 12.2

    Retail Orchard Rd 7,200 0.0 2.9

    Multi-user factory (B1) 637 (1.8) 3.4

    Warehouse median 857 3.2 (11.3)

    URA Residential PPI 207.9 (0.7) (3.9)

    HDB Resale 192.5 (1.6) (6.0)

    SRPI Price Index

    (Sep)

    168.7 (0.3) (4.6)

    Source: OSK-DMG, URA, HDB, CBRE

    Residential price & rental indices (4Q98 = 100)

    207.9

    160.6

    0

    50

    100

    150

    200

    250

    4Q98

    3Q99

    2Q00

    1Q01

    4Q01

    3Q02

    2Q03

    1Q04

    4Q04

    3Q05

    2Q06

    1Q07

    4Q07

    3Q08

    2Q09

    1Q10

    4Q10

    3Q11

    2Q12

    1Q13

    4Q13

    3Q14

    Resident ial Price Index Res ident ial Rental Index

    Source: URA

    Ong Kian Lin +65 6232 3895

    [email protected]

    Goh Han Peng +65 6232 3893

    [email protected]

    Ivan Looi +65 6232 3841

    [email protected]

    P/E (x) P/B (x) Yield (%)

    De c-15F De c-15F De c-15F

    CapitaLand SGD3.33 SGD3.54 19.3 0.8 - BUY

    City Developments SGD10.00 SGD9.47 15.8 1.1 - NEUTRAL

    Keppel Land SGD3.36 SGD3.88 11.7 0.7 - BUY

    Oxley Holdings SGD0.52 SGD0.91 9.9 2.3 - BUY

    Sinarmas Land SGD0.59 SGD1.01 16.8 1.7 0.9 BUY

    Company Name Price Target Rating

    Source: Company data, OSK-DMG

    We believe the three-party Catch-22 situation amongst homebuyers,

    authorities and developers will persist, resulting in a 6-10% annual dropin island wide residential property prices in 2014-15. Our Top Picks arestill diversified developers such as Keppel Land and CapitaLand.

    Homebuyers perspective. Homebuyers are holding back in

    anticipation of the surge in physical completions in 2015-16 (46,000private homes to be completed over the next two years) and prospectiveprice declines.

    Authorities perspective. From the authorities perspective, it will bedifficult to justify any easing of cooling measures without a significantdrop in property prices, when prices in general are only slightly off theirpeaks in 3Q13 (down 3.9%). Already, deputy prime minister TharmanShanmugaratnam stated that there is some distance to go in achievinga meaningful correction. He added that if meaningful reversal is notattained after each upswing, property prices will outpace householdincomes in the long run, a scenario that is best avoided.

    Developers perspective. Developers have incurred high land costsbut do not want to launch any new project with poor buyers responseand henceforth generate adverse publicity, which is detrimental to thefuture sales progress of the development. They also cannot afford tolower prices substantially because of their high cost base, as well as animplicit responsibility to hold up property values for existing customers;especially those that have purchased units in another recentdevelopment in the same vicinity. It thus makes sense for developers todrag out the launches, hoping that at some point, the authorities willease some of the cooling measures or that economic recovery will catchup and spur buyers demand. It is this impasse that is slowing downtransaction volumes and impeding sales progress. Without an externaltrigger, prices are likely to still be artificially held -up and we see this asthe main risk for protracting any potential easing of the cooling measuresor property prices.

    Lifeless property market. We project new homes sales (including

    executive condominiums (ECs)) to hit 7,000-9,500 units in 2015. On theback of expectations for slightly extended dovish monetary policies, weproject the ASP for residential property to drop 6-10% per annum in2014-2015 (Urban Redevelopment Authoritys (URA) Property PriceIndex (PPI) is down 3.9% YoY). We think the continued weakness in thehousing development boards (HDB) resale market (down 6.0% YoY) willnegatively impact the wealth effect, reducing upgraders demand formass market private homes. On the other hand, drastic declines (>20%per annum) appear unlikely. This is because the Government holds thewildcard to reverse some of its cooling measures should prices take aturn for the worse. Our Top Picks are still diversified developers such asKeppel Land (KPLD SP, BUY, TP:SGD3.88) and CapitaLand (CAPL SP,BUY, TP: SGD3.54).

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    Real Estate2 January 2015

    See important disclosures at the end of this report 24

    Singapore Charts At a Glance

    Figure 1: Residential supply-demand dynamics Figure 2: Office supply-demand dynamics (Downtown core)

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    0

    10,000

    20,000

    30,000

    40,000

    50,000

    1989

    1990

    1991

    1992

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014F

    2015F

    2016F

    2017F

    2018F

    >2018F

    Numberofunits

    [LHS] Net supply [LHS] Net absorption

    [LHS] Average absorption [RHS] Vacancy rate (%)

    Average net absorption: 8,927 units

    Average vacancy rate: 6.8%

    70

    75

    80

    85

    90

    95

    100

    (1.5)

    (1.0)

    (0.5)

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    3.0

    3.5

    4.0

    4.5

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014F

    2015F

    2016F

    2017F

    Net Sup ply ('m sq ft) Net Ab so rp tio n ('m sqf t)

    Occupancy (%) [RHS]

    (Net abso rption 0.73m sq ft from 1993-2013)

    Source: URA, CBRE, OSK-DMG Source: URA, CBRE, OSK-DMG

    Figure 3: Retail supply-demand (Outside Central Region) Figure 4: Factory supply-demand (Island wide)

    89

    90

    91

    92

    93

    94

    95

    96

    97

    98

    (0.3)(0.2)(0.1)0.00.10.20.30.40.50.60.70.80.91.01.11.21.31.41.5

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014F

    2015F

    2016F

    2017F

    Net new supply (m sq f t) Net absorption (m sq f t )

    Occupancy (%) [RHS]

    (m sq ft) (%)

    (Net abso rption 0.26m sq ftfrom 1993-2013)

    86

    88

    90

    92

    94

    96

    98

    100

    (5)

    0

    5

    10

    15

    20

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014F

    2015F

    2016F

    2017F

    Net supplyl (m sq f t) Net absorption (m sq f t)

    Occupancy rate (%) [RHS]

    (%)(m sq ft)

    Net absop rtion7.1m sq ft from 1993-2013

    Source: URA, CBRE, OSK-DMG Source: URA, CBRE, OSK-DMG

    Figure 5: Business park supply-demand (Island wide) Figure 6: Warehouse supply-demand (Island wide)

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    (0.5)

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014F

    2015F

    2016F

    Net new supply (m sq f t) Net absorption (m sq f t )

    Occupancy (%) [RHS]

    (%)(m sq ft)

    Net absop rtion0.7m sq ft from 2003-2013

    78

    80

    82

    84

    86

    88

    90

    92

    94

    96

    0

    1

    2

    3

    4

    5

    6

    7

    8

    9

    10

    1993

    1994

    1995

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014F

    2015F

    2016F

    2017F

    Net new supply (m sq f t) Net absorption (m sq f t )

    Occupancy (%) [RHS]

    (%)(m sq ft)

    Net absop rtion2.4m sq ft from 1993-2013

    Source: URA, CBRE, OSK-DMG Source: URA, CBRE, OSK-DMG

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    Strategy, 2 January 2015

    REITS Neutral

    All Remains Well For Now

    Macro

    Risks

    Growth

    Value

    S-REITs segmental performance

    1D

    (%)

    2D

    (%)

    3D

    (%)

    5D

    (%)

    1M

    (%)

    3M

    (%)

    6M

    (%)

    12M

    (%)

    MTD

    (%)

    YTD

    (%)

    22

    May

    2013

    Office: 0.5 (0.5) (1.0) (1.9) 1.8 0.9 0.7 17.2 (1.9) 14.6 (6.5)

    Retail: 0.4 0.2 0.0 (0.2) 1.5 (0.6) 4. 0 10. 9 (0.2) 10.0 (11.3)

    Industrial: 0.7 0.1 (0.2) (0.6) 1.3 (0.9) (0.9) 7.7 (0.6) 6.2 (13.0)

    Hospitality: 0.1 (0.0) 0.1 (0.2) 0.9 0.7 (0.8) 3.2 (0.2) 2.2 (17.5)

    Healthcare: 1.5 1.3 0.8 1.7 2.2 1.1 2.7 10.8 1.7 8.3 (11.9)

    S-REITs: 0.5 0.0 (0.2) (0.6) 1.5 (0.1) 1. 4 10. 6 (0.6) 9.0 (11.2)

    STI: 0.6 0.6 0.1 (0.8) 1.2 (0.3) 0.8 6.8 (0.8) 5.0 (3.8)

    Outperf. (0.1) (0.6) (0.3) 0.2 0.3 0.2 0.6 3.9 0.2 4.1 (7.4)

    Blue denotes best-performing; Red denotes worst-performing

    Source: Bloomberg

    S-REITs segmental spreads

    219 219 219 219 219

    332 362 341

    458 477

    0.80

    0.860.96

    0.74 0.82

    2.76 3.14 2.44 2.75 3.65

    0.91 1.08 1.41 0.96 1.14

    0

    100

    200

    300

    400

    500

    600

    700

    800

    O ff ic e R et ai l H ea lt hc ar e H os pi ta li ty I nd us tr ia l

    Risk-free Yield Spreads Adj. Beta Cost of Borriwng (%) P/B

    (bps)

    Source: Bloomberg

    Most geared S-REITs

    45.7%

    42.1% 41.7%39.8%

    38.2% 38.0% 37.7%

    0%

    5%10%

    15%

    20%

    25%

    30%

    35%

    40%

    45%

    50%

    VIT

    KREIT

    FHT

    OUTCT

    ASHT

    MCT

    MAGIC

    Source: Companies

    *All prices as of morning 8 Dec 2014

    Key rates and forex3-mth SIBOR (%): 0.4510-yr SG Gov yield (%): 2.19USDSGD exchange: 1.3227

    Source: Bloomberg

    Ong Kian Lin +65 6232 3895

    [email protected]

    Ivan Looi +65 6232 3841

    [email protected]

    Source: Company data, OSK-DMG

    Going into 2015, we believe that the average sector yields are likely to

    be range-bound between 5.9% and 6.5% from 6.1% currently. Themarket has likely priced in a progressive and gradual lift-off in interestrates from mid 2015. For 1H15, we do not expect a major block that mayderail the low-interest rate environment. Low DPU growth may persist,but we do not expect significant downside risk to property prices in

    1H15, es eciall in the office and retail subsectors.

    Not a house of straws. 9M14 results for the S-REITs in our coveragewere in line with our estimates. Rental reversions were mostly positivewhile occupancy rates were relatively stable across all segments. On arelative basis, the outlook for the office segment remains the brightestgiven the 2-year supply shortage in the central business district (CBD).Retail sales continued to soften on underwhelming demand, rising malland e-commerce competition as well as slowing tourist arrivals. Hotelroom rates remain under pressure from the exodus of Chinese visitorsand an abundant supply expected over the next three years. Theindustrial segment appears to be most at risk, with rental and propertyprices already on the verge of a decline.

    Three key trends:

    i) Rental reversions may moderate.Most REITs registered single-digitrental reversions vs mid- to low-teens in 2013, suggesting that rentalsare probably reaching a peak. The expected addition to supply over thenext few years is also putting a cap on landlords bargaining power inraising rental rates.

    ii) Net property income (NPI) margins continue to deteriorate. Theeffects of the labour crunch stemming from a tighter policy on foreignlabour quotas continue to be felt by high-touch and foreign worker-dependent sectors, particularly hospitality, retail and industrial.

    iii) Still macro-driven. Following the end of quantitative easing (QE) inOctoberby the US Federal Reserve (the Fed),all eyes are onthe paceand timing of the eventual increase of the US federal fund rate, whichwould affect S-REITs share price performance.

    NEUTRAL. The office sub-sector remains our preferred segment,followed by retail and hospitality. The industrial REITs remain the most atrisk of NAV depreciation. For exposure, we recommendCapitaCommercial Trust (CCT SP, BUY, TP: SGD1.85), Suntec RealEstate Investment Trust (SUNTEC SP, BUY, TP:SGD2.00) andCapitaMall Trust (CT SP, BUY, TP:SGD2.10) in our sequence ofpreference.

    P/E (x) P/B (x) Yield (%)Dec-15F Dec-15F Dec-15F

    Ascendas REIT SGD2.35 SGD2.50 14.0 1.1 6.5 BUYCache Logistics Trust SGD1.16 SGD1.21 13.7 1.2 7.8 NEUTRALCapitaCommercial Trust SGD1.70 SGD1.85 32.9 1.0 5.1 BUYCapitaMall Trust SGD2.00 SGD2.10 15.1 1.1 5.7 BUYCDL Hospitality Trusts SGD1.74 SGD1.78 13.9 1.0 6.4 NEUTRAL

    Keppel REIT SGD1.21 SGD1.18 15.7 0.9 6.4 NEUTRALMapletree Logistics Trust SGD1.17 SGD1.22 8.6 1.1 6.7 NEUTRALOUE Hospitality Trust SGD0.91 SGD0.97 13.8 1.0 7.4 BUYStarhill Global REIT SGD0.80 SGD0.91 15.5 0.9 6.4 BUYSuntec Real Estate Investment Trust SGD1.91 SGD2.00 17.4 0.9 4.4 BUY

    Company Name Price Target Rating

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    REITS2 January 2015

    See important disclosures at the end of this report 26

    S-REITs: Key Charts At a Glance

    Figure 1: Segmental performance Figure 2: S-REITs segmental spreads (bps)

    1D

    (%)

    2D

    (%)

    3D

    (%)

    5D

    (%)

    1M

    (%)

    3M

    (%)

    6M

    (%)

    12M

    (%)

    MTD

    (%)

    YTD

    (%)

    22

    May

    2013

    Office: 0.5 (0.5) (1.0) (1.9) 1.8 0.9 0.7 17.2 (1.9) 14.6 (6.5)Retail: 0.4 0.2 0.0 (0.2) 1.5 (0.6) 4.0 10.9 (0.2) 10.0 (11.3)

    Industrial: 0.7 0.1 (0.2) (0.6) 1.3 (0.9) (0.9) 7.7 (0.6) 6.2 (13.0)

    Hospitality: 0.1 (0.0) 0.1 (0.2) 0.9 0.7 (0.8) 3.2 (0.2) 2.2 (17.5)

    Healthcare: 1.5 1.3 0.8 1.7 2.2 1.1 2.7 10.8 1.7 8.3 (11.9)

    S-REITs: 0.5 0.0 (0.2) (0.6) 1.5 (0.1) 1.4 10.6 (0.6) 9.0 (11.2)

    STI: 0.6 0.6 0.1 (0.8) 1.2 (0.3) 0.8 6.8 (0.8) 5.0 (3.8)

    Outperf. (0.1) (0.6) (0.3) 0.2 0.3 0.2 0.6 3.9 0.2 4.1 (7.4) 219 219 219 219 219

    332 362 341

    458 477

    0.80

    0.860.96

    0.74 0.82

    2.76 3.14 2.44 2.75 3.65

    0.91 1.08 1.41 0.96 1.14

    0

    100

    200

    300

    400

    500

    600

    700

    800

    Office Retail Healthcare Hospitality Industrial

    Risk-f ree Yield Spreads Ad j. Beta Cost o f Borriwng (%) P/B

    (bps)

    Source: OSK-DMG, Bloomberg Source: OSK-DMG, Bloomberg

    Figure 3: Aggregate debt profile (S-REITs) Figure 4: Gearing of S-REITs

    658

    3,236

    6,8516,011

    7,482

    4,456

    23,086

    1%6%

    13%11%

    14%

    9%

    44%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    35%

    40%

    45%

    50%

    0

    5,000

    10,000

    15,000

    20,000

    25,000

    FY2014

    FY2015

    FY2016

    FY2017

    FY2018

    FY2019

    >FY2019

    Debt maturing [LHS] % o f to tal d eb t [RHS]

    (SGD m)

    Avg. term to maturity: 5.52 yrs

    Sector Gearing: 36%

    45.7%

    42.1%

    41.7%

    39.8%

    38.2%

    38.0%

    37.7%

    37.1%

    37.0%

    37.0%

    36.4%

    35.5%

    35.0%

    34.6%

    34.1%

    33.9%

    33.3%

    33.1%

    33.1%

    32.9%

    32.7%

    32.6%

    32.2%

    31.1%

    30.9%

    30.8%

    30.8%

    30.2%

    30.2%

    29.3%

    29.1%

    28.3%

    26.0%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    35%

    40%

    45%

    50%

    VIT

    KREIT

    FHT

    OUTCT

    ASHT

    MCT

    MAGIC

    FCOT

    SSREIT

    Saizen

    ART

    SUNTEC

    CACHE

    PLIFE

    CMT

    Cambridge

    MLT

    IREIT

    MIT

    FIRT

    OUEHT

    AREIT

    AAREIT

    Fortune

    FEHT

    CRCT

    Soilbuild

    CCT

    CDLHT

    FCT

    SGREIT

    LMRT

    SPHREIT

    Source: Companies Source: Companies

    Figure 5: W.A term to maturity of S-REITs Figure 6: Most geared S-REITs

    2.0yrs

    2.0yrs

    2.2yrs

    2.3yrs

    2.4yrs

    2.5yrs

    2.5yrs

    2.7yrs

    2.9yrs

    3.1yrs

    3.2yrs

    3.3yrs

    3.3yrs

    3.3yrs

    3.4yrs

    3.5yrs

    3.6yrs

    3.6yrs

    3.8yrs

    3.9yrs

    3.9yrs

    3.9yrs

    4.0yrs

    4.0yrs

    4.0yrs

    4.2yrs

    4.3yrs

    4.7yrs

    4.7yrs

    4.7yrs

    6.5yrs

    0.0

    1.0

    2.0

    3.0

    4.0

    5.0

    6.0

    7.0

    LM

    RT

    Soilb

    uild

    CR

    CT

    SSR

    EIT

    CDLHT

    Cambridge

    FCT

    MAGIC

    AAR

    EIT

    M

    CT

    OUE

    CT

    AS

    HT

    FE

    HT

    M

    LTVIT

    KR

    EIT

    OUE

    HT

    Sta

    rhill

    MIT

    Sun

    tec

    A

    RT

    P

    life

    C

    CT

    SPHR

    EIT

    AR

    EIT

    CAC

    HE

    FC

    OT

    IR

    EIT

    C

    MT

    FHT

    Saizen

    (yrs)

    45.7%

    42.1% 41.7%39.8%

    38.2% 38.0% 37.7%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    35%

    40%

    45%

    50%

    VIT

    KREIT F

    HT

    OUTCT

    ASHT

    MCT

    MAGIC

    Some S-REITs have informed OSK-DMG that they conducted post-refinancing afterour initial cut-off on 30 Sep (3Q14). Figures reflect amendments. Source: Companies

    Source: OSK-DMG, Companies

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    Strategy, 2 January 2015

    Technology NEUTRAL

    Picking The Cream Of The Crop

    Macro

    Risks

    Growth

    Value

    Jarick Seet+65 6232 3891

    [email protected]

    Terence Wong CFA +65 6232 3896

    [email protected]

    P/E (x) P/B (x) Yield (%)

    Dec-13 Dec-13 Dec-13

    Global Testing SGD0.09 SGD0.17 66.6 0.6 - BUY

    Hi-P International SGD0.72 SGD0.87 92.3 1.0 2.8 BUY

    IPS Securex Holdings SGD0.68 SGD1.26 27.2 9.0 - BUY

    Nera Telecommunications Ltd SGD0.77 SGD0.83 16.0 4.2 7.8 NEUTRAL

    Riverstone Holdings Ltd SGD0.96 SGD1.15 15.8 2.8 2.7 BUY

    Silverlake Axis SGD1.27 SGD1.03 33.0 12.2 2.6 SELL

    Trek 2000 International Ltd SGD0.37 SGD0.61 289.3 2.1 0.7 BUY

    Venture Corp Ltd SGD7.73 SGD7.50 16.2 1.2 6.5 NEUTRAL

    Company Name Price Target Rating

    Source: Company data, OSK-DMG

    We have downgraded the Singapore technology sector to NEUTRAL

    from Overweight, as we expect macroeconomic conditions to onlystrengthen slightly in 2015. We remain bullish on Singapore s techstocks in niche markets and fields. However, we are less optimistic onSingapore's tech heavyweights, who are still in the midst of recoveringfrom their clients mergers. Our Top Picks for the sector are IPS

    Securex and Hi-P - we expect 2015 to be a stellar year for both of them.

    Slightly stronger Global IT Spending in 2015.According to Gartner,global IT spending is expected to increase 3.7% to USD3.9trn, ascompared with a 2.1% growth in 2014. The devices market segment andenterprise software segment are expected to be the leading performers,growing 5.8% and 7.3% respectively in 2015.

    Companies in niche fields to excel. We expect IPS Securex (IPSS SP,BUY, TP: SGD1.26), who is in a niche field like the national defence andsecurity business, to benefit from regional governments boosting theirdefence and military budgets, due to growing political instability andongoing disputes. On the other hand, we also like Hi-P (HIP SP, BUY,TP: SGD0.87), an integrated contract manufacturing service providerwho is undergoing a potentially huge turnaround after being impacted by

    a worldwide shift in demand for smartphones. We expect key catalystssuch asXiaomi, YotaPhoneand its other new projects to substantiate aturnaround in 2015.

    2015 set to be a stellar year for our Top Buys. Looking forward, wethink that 2015 could potentially be a stellar year for our Top Picks in theSingapore technology space, with Pepperball to potentially be the gamechanger for IPS Securex. We also believe that Xiaomi and other newprojects could steer a key turnaround in Hi-P's earnings. In addition, weare also positive on Trek 2000's (TREK SP, BUY, TP: SGD0.61)wireless Flucard deal with Rely/Mattel to catapult Trek's earnings to amuch higher level. Overall, we remain bullish on Singapores tech stocksin niche markets and fields. However, we are less positive onSingapores tech heavyweights who are still in the midst of recovering

    from their clients mergers. As a result, we have downgraded thetechnology sector to NEUTRAL (from Overweight) for 2015.

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    Technology2 January 2015

    See important disclosures at the end of this report 28

    Figure 1: Global IT spending forecast (USD trn)

    1.61.6

    1.7

    0.9 1.01.0

    0.3 0.3 0.3

    0.1 0.1 0.1

    0.7 0.7 0.7

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    3.0

    3.5

    4.0

    4.5

    2013 2014 2015

    Devices Data Center Systems Enterprise Software IT Services Telecom Ser vices

    Source: Gartner Research

    Figure 2: Worldwide semiconductor capital spending forecast (USD bn)

    -2%

    11%

    9%

    -4%

    4%

    7%57.8

    64.5

    70.167.2

    69.674.3

    -6%

    -4%

    -2%

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    14%

    0.0

    10.0

    20.0

    30.0

    40.0

    50.0

    60.0

    70.0

    80.0

    2013 2014 2015 2016 2017 2018

    Semiconductor Capital Spending Growth (%)

    Source: Gartner Research

    Figure 3: Wafer-level manufacturing equipment forecast (USD bn)

    -9%

    18%

    11%

    -5%

    9%7%

    28.8

    33.8

    37.635.6

    38.7

    41.4

    -10%

    -5%

    0%

    5%

    10%

    15%

    20%

    0.0

    5.0

    10.0

    15.0

    20.0

    25.0

    30.0

    35.0

    40.0

    45.0

    2013 2014 2015 2016 2017 2018

    Wafer-Level Manufacturing Equipment Growth (%)

    Source: Gartner Research

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    Strategy, 2 January 2015

    Telecommunications Neutral

    Giving Less For More

    Macro

    Risks

    Growth

    Value

    Singapore Research+65 6533 0781

    [email protected].,com

    P/E (x) P/B (x) Yield (%)

    De c-15F De c-15F De c-15F

    M1 SGD3.60 SGD4.40 17.0 8.2 5.8 BUY

    SingTel SGD3.98 SGD3.93 15.7 2.4 4.2 NEUTRAL

    StarHub SGD4.10 SGD4.20 16.4 36.8 4.9 NEUTRAL

    Company Name Price Target Rating

    Source: Company data, OSK-DMG

    We believe 2015 will pan out as another NEUTRAL year for the telco

    sector due to the normalisation of US interest rates, competitiveheadwinds and regulatory-centric developments. While we expectearnings downside to be mitigated by the data monetisation efforts bythe telcos, sector earnings growth at 5-6% for 2015/2016 does not lookparticularly attractive with dividend yields (4-5%) as the silver lining.

    Our preferred picks are M1 and SingTel.

    Chugging along. We expect industry mobile revenue to grow at a slightlystronger 3-4% in 2015 vs a projected 2-3% in 2014 as the telcos ramp upefforts to better monetise surging data traffic. Although more than half ofpostpaid subscribers (subs) (59% as at 3Q14) have migrated to tiereddata plans, with a rising number breaching their data caps, industrypostpaid ARPUs fell 3-4% YoY in 9M14 due to the structural pressure onroaming, prepaid revenue weakness and stronger take up of data-only/shared SIMs. The new ruling on SIM card ownership (effective Apr2014) contributed to the estimated 10-12% YoY decline in industryprepaid revenue for 2Q/3Q14.

    Headwinds remain for fixed broadband(FBB). We expect the pressureon FBB revenue to persist due to price competition and consumers

    upgrading to fiber broadband from ADSL (Asynchronous DigitalSubscriber Lines) services. Both SingTel (ST SP, NEUTRAL, TP:SGD3.93) and StarHub (STH SP, NEUTRAL, TP: SGD4.20) posted 7-16% YoY declines in their 9M14 FBB revenues as ARPUs slipped to newlows. Fiber subscriber growth numbers rose 54% YoY over the sameperiod, supported by better provisioning levels and few tactical campaignsby the telcos. We expect the growth of fiber broadband services to becatalysed by incentives laid out during the Budget to defray the cost ofsetting up fiber infrastructure in apartments and buildings.

    Fourth operator conundrum. The telcos are bracing for the possibilitythat the Infocomm Development Authority (IDA) may award a full mobilelicense to a new fourth operator, which would further intensifycompetition in the market. We think it would be most difficult for a newentrant to compete in the mobile space given the already entrenched

    market share and services of the incumbent operators and steepinvestments required to roll out a greenfield network. We note there wereno new takers for the 1.8GHz spectrum put up for auction in 2013(eventually re-allocated to SingTel, StarHub and M1 (M1 SP, BUY, TP:SGD4.40)) while mobile virtual network operators (MVNO) have had apoor track record in the past.

    Maintain NEUTRAL on sector- preferred picks are M1 & SingTel.Although we expect earnings downside for the sector to be supported bythe telcos data monetisation efforts and the tight rein on subscriberacquisition cost (SAC), we think sentiment on the sector may be cappedby the ongoing normalisation of interest rates in the US, competitiveheadwinds and regulatory developments. We prefer telcos offering: i)reasonable earnings growth, ii) sustainable dividend yields and iii) havingsome strategic advantage. Our preferred picks are M1 and SingTel.

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    Telecommunications2 January 2015

    See important disclosures at the end of this report 30

    Figure 1: YoY growth in mobile revenue Figure 2: % of postpaid subs on tiered data plans

    -4.0%

    -2.0%

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    Singtel Spore Starhub M1

    17% 16%14%

    16%

    57% 59%61% 59%

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    SingTel StarHub M1 Average

    4Q12 3Q14

    Source: OSK-DMG Source: OSK-DMG

    Figure 3: FBB revenue remains under pressure Figure 4: Mobile revenue share of the telcos

    10%

    20%

    30%

    40%

    50%

    60%

    S