Strategy 25 April 2018

Singapore Strategy

Stick with the cyclicals

 Singapore’s vulnerability to trade wars notwithstanding, we think it is premature to turn defensive in portfolios

 Raising end-2018 STI target slightly to 3,840 (from 3,780) and upgrading consumer services to Neutral (from Underweight) Ramakrishna Maruvada (65) 6228 6742  We remain Overweight on the banks and property developers; [email protected] Underweight on telecoms and S-REITs

Olivia Xia (852) 2773 8736 [email protected]

Summary: The spectre of trade wars raises tail risks for the Singapore Daiwa STI sector recommendations stock market as the city-state is deeply integrated into the Asian supply Sectors Weighting Relative preferences Banks OW DBS, UOB chain, with total exports and imports accounting for over 300% of the OW developers; Real estate OW nation’s GDP. Thus, despite the fluid nature of the situation, it is important (CIT, CAPL); UW REITs Telecoms UW to ascertain how the US- trade spat could evolve to uncover its Consumer services N investment implications. For now, we continue to believe that the trade Industrials N STE, SATS tensions would be resolved through negotiations. The US government’s Oil and gas N KEP Consumer goods N Wilmar shifting stance in the past – over North Korea, for example – and the Source: Daiwa absence of stresses in major risk assets support this belief, in our view.

2018E valuations for Daiwa’s top picks Meanwhile, the domestic economy appears to be steaming ahead (we Price PER PBR Div BBG code Rating reaffirm our 2018 GDP growth forecast of 3.7% YoY), though there are (in l.c.) (x) (x) Yield signs of a slowdown in the export cycle, with non-oil domestic exports Index Picks DBS SP O/P 29.99 13.5 1.6 4.0% (NODX) growth softening in 1Q18 (to 1.2% YoY from 10.7% YoY in 4Q17). UOB SP O/P 29.69 13.4 1.4 3.5% Corporate earnings continue to be revised upwards – we have raised our CIT SP O/P 12.53 16.2 1.2 1.4% 2018-19E market earnings by 0.5-0.7% over the past 3 months – albeit at a KEP SP Buy 8.26 13.4 1.2 2.9% CAPL SP O/P 3.72 16.7 0.8 3.2% modest pace. With the market earnings-growth outlook remaining solid STE SP Buy 3.48 19.2 4.7 4.6% (2018-19E: 10.5% YoY and 9.2% YoY, on our forecasts), we raise our end- SATS O/P 5.43 24.6 3.6 3.3% 2018E STI target slightly to 3,840 (from 3,780), based on an unchanged 1- WIL SP Buy 3.22 12.4 0.9 2.8% Small caps year forward PER of 13.7x. RFMD SP O/P 1.17 32.0 2.7 1.9% SIE SP O/P 3.24 24.1 2.3 5.6% HMI SP Buy 0.65 43.0 9.3 0.5% Also, we are making some changes to our trade ideas. We no longer suggest the following trades: 1) long basket of exporters, 2) avoid land Source: Daiwa transport stocks, and 3) avoid supermarket operators (page 5). Accordingly, we are upgrading consumer services to Neutral (from Underweight).

On the long side, our preferred trades are now: 1) banks, for their above- market earnings growth potential, 2) property developers, as we expect a recovery in prices in 2018-19, and 3) corporate restructuring plays with robust fundamentals, like ST (STE SP) and Wilmar (WIL SP), and 4) Keppel Corp (KEP SP), as a diversified property and oil & gas play. Meanwhile, we think investors should avoid: 1) telecoms, on the new entrant threat, and 2) REITs, due to their poor DPU growth outlook.

We are adding Health Management International (HMI SP) to our out-of- index picks (no deletions). Our revised top index picks are DBS (DBS SP), UOB (UOB SP), City Developments (CIT SP), Keppel Corp, CapitaLand (CAPL SP), ST Engineering (STE SP), SATS (SATS SP) and Wilmar (WIL SP). Our revised out-of-index picks are Raffles Medical (RFMD SP), SIA Engineering (SIE SP) and Health Management International. In this report we elaborate on the bull cases for some of our top picks.

See important disclosures, including any required research certifications, beginning on page 36

Singapore Strategy: 25 April 2018

Table of contents

Reassessing geopolitical risks ...... 3 Trade tensions: what is the end game? ...... 3 Portfolio positioning: should you go long ‘defensive’? ...... 3 Economics ...... 8 Solid growth, though headwinds loom ...... 8 More balanced growth ahead...... 8 Headwinds primarily in the external sector ...... 9 Pre-emptive tightening by the MAS ...... 10 Country themes ...... 11 Interest rates: trades for a rising rate environment ...... 11 Reflation: recovery in domestic property prices ...... 12 Restructuring and policy: a few pockets of opportunities ...... 15 Commodity rallies: prefer indirect exposure ...... 16 DBS: rising rates – set to flex its muscles ...... 17 City Developments: property prices on upswing ...... 19 Keppel Corp: share-price weakness offers an attractive entry point ...... 21 ST Engineering: leveraging innovation for growth ...... 24 Wilmar: quality agribusiness exposure ...... 26 SIA Engineering: on the cusp of a turnaround ...... 29 Raffles Medical: regional expansion to bear fruit ...... 31

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Singapore Strategy: 25 April 2018

Reassessing geopolitical risks

The Singapore stock US-China trade tensions have emerged as a key risk factor globally, and it is no different market entered a for those investing in the Singapore stock market. The US government’s announcement on correction phase on 23 22 January of plans to levy tariffs on imported solar panels and washing machines proved January to be the trigger point as many of the region’s stock markets, including that of Singapore, entered into a correction phase in the ensuing days.

Singapore risks being With total trade (imports and exports) accounting for more than 300% of the nation’s GDP, caught in a cross-fire Singapore is the most vulnerable among the ASEAN nations to any external trade shocks. due to its reliance on As such, we think the most pressing issue for investors at the moment are the following: trade 1) How could these trade tensions play out? 2) Should investors turn to “defensive” instead of “cyclical” stocks? 3) Which sectors could benefit or be at a disadvantage?

Trade tensions: what is the end game? We expect the trade The Trump administration’s shifting stance over a range of issues – for example, on North issues to be resolved Korea, “DACA” immigration policy and NAFTA – leaves us hopeful that the current trade through negotiations spat with China would eventually be resolved through negotiated settlement. As discussed by our regional strategist, Paul Kitney, in an earlier report (see Animal Spirits, “Trade War or Skirmish – Impact on Asia?”, published 23 March 2018), the reasons for this belief are as follows:

1) Most of the tariffs announced since 22 January have not yet been implemented 2) There do not appear to be signs of severe stress in global asset classes (judging from the performance of various risk assets since 23 January) 3) It pays to recall that the North Korea crisis, which dominated headlines for much of 2017, has receded; President Trump’s threat to “destroy” the country now appear a distant memory following his “willingness” to meet to resolve issues.

ZTE ban moves the The recent news of the US ban on the sale of software and parts to emerging China 5G spectre of trade wars a technology powerhouse ZTE (763 HK, not rated) has moved the spectre of trade wars a notch higher, in our view notch higher; notwithstanding this episode, Paul Kitney believes that tariff threats should be considered a prelude to a negotiation on trade, in particular the terms of trade (market access and Intellectual property rights).

Price performances of various risk assets since Trump’s tariff Yield movement of treasuries and long-term bonds since announcement Trump’s tariff announcement 8% pp 0.50 4% 0.45 0% 0.40 0.35 (4%) 0.30 0.25 (8%) 0.20 (12%) 0.15

0.10 Gold

SP500 0.05

PalmOil

Soybean USDJPY

USDSGD STI Index MSCIAPEJ

Brent Crude 0.00 MOEXRussia

MSCIEmerging SG 2Y US 2Y US 10Y Sibor 3M SG 10Y

Source: Bloomberg Source: Bloomberg Note: For the three-month period from 23rd Jan to 24th April Note: For the three-month period from 23rd Jan to 24th April

Portfolio positioning: should you go long ‘defensive’? Recent earnings and The case for a more ‘defensive’ positioning in a portfolio is two-fold: 1) some of the leading macro data paint a earnings indicators and latest macro data were slightly disappointing, and 2) the timeframe mixed picture for settlement of trade issues remains unknown.

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Singapore Strategy: 25 April 2018

Earnings revisions and macro data paint a mixed picture The 3-month IBES earnings revisions index (which measures the number of consensus upgrades in relation to downgrades) has trended down in recent weeks after registering a continual improvement since 2017.

IBES Singapore 3-month moving average earnings revisions index The IBES Singapore 3- month earnings 34% revisions index has halted its upward 14% trajectory (6%)

(26%)

(46%)

(66%)

Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-02 Source: IBES, Daiwa Custom Products Group

Similarly, Daiwa analysts’ earnings forecast revisions have slowed. For example, over the past 3-month period, Daiwa’s STI market earnings forecasts for 2018 and 2019 have been revised up by 0.8% and 0.7%, respectively. Stock specific factors – increased index weighting and strong results for Venture Corp and strong results for – have largely contributed to these modest upward revisions.

Daiwa analysts’ forecast revisions over the past 3 months % 2018E 2019E Remarks Market 0.8% 0.7% Banks -0.5% -1.9% Real Estate 0.0% 0.7% Telecom -0.5% -0.2% Upward revision to Singapore Airlines offset by Comfort Delgro and Consumer services -0.7% -0.6% Industrial 7.2% 9.4% Upward revision to Venture Corp, Jardine Strategic Oil & Gas 3.4% 3.6% Upward revision to Keppel Consumer goods -2.1% -0.7%

Source: Bloomberg, Daiwa forecasts

3-month consensus 2017 EPS revisions for STI constituents There have been an 25 equal number of positive 20 and negative earnings 15 revisions for STI 10 constituents over the 5 past 3 months 0 (5) (10) (15)

(20)

JS

ST

CT JM

CD

CIT

SIA

SCI

YZJ WIL

STE HKL

STH

KEP

CCT

DBS SPH UOL

SGX

VMS UOB

GGR

CAPL SATS

JCNC

HPHT

GENS

OCBC AREIT THBEV Source: Bloomberg

On the macro front, the 1Q18 advance GDP estimates suggest acceleration in the pace of economic growth (1Q18: +4.3% YoY vs. 4Q17: 3.6% YoY). But recently released NODX data suggest that export growth has moderated somewhat due partly to the high base effect (1Q18: 1.2% YoY vs. 4Q17: 10.7% YoY).

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Singapore Strategy: 25 April 2018

We forecast robust So what to make of these mixed macro and corporate earnings data? While there appears market earnings growth: to be temporary slowdown in the export cycle, we think this is a pause, rather than a turn in 10.5% YoY for 2018; the corporate earnings cycle as the consensus has finally caught up with positive macro 9.2% YoY for 2019 surprises seen over the past year. Our bottom-up earnings forecasts continue to suggest a sustained rebound in market earnings over 2018-19. We now forecast adjusted market earnings growth of 10.5% YoY for 2018 (previously 10.7% YoY), followed by 9.2% YoY for 2019 (previously 8.7%). We expect the market earnings growth to be led mainly by the banks.

Adjusted earnings forecasts by sector YoY 2017 2018E 2019E Market (FSSTI) 11.5% 10.5% 9.2% Banks 8.6% 17.2% 12.5% Real estate 12.2% 0.6% 6.7% Telecoms -3.2% 1.7% 5.8% Consumer services 37.1% 8.4% 3.9% Industrial 21.4% 7.7% 7.6% Oil and gas -33.4% 53.7% 3.9% Consumer goods 30.9% -8.0% 10.2%

Source: Daiwa estimates and forecasts, Bloomberg consensus, companies Note: Included effect of recent index constituent changes

It is premature to turn Thus, while it appears tempting to turn towards ‘defensive’ stocks during the interim period defensive, in our view; before the resolution of trade issues, we continue to believe that investors should still look we still prefer to long the to long the cyclicals during the ongoing market correction. In our opinion, the fundamentals cyclicals of traditional ‘defensive’ sectors like telecoms and the REITs remain poor; the telecom sector is bracing for entry of a new player (TPG Telecom [TPM AU, not rated]) towards end 2018, while the DPU growth outlook for the S-REITs remains lacklustre (2018: weighted average growth of 2.4%).

Raising index target to 3,840 We are raising our end-2018 index target slightly to 3,840 (from 3,780) after applying an unchanged 1-year forward PER of 13.7x (a 5% premium to past 15-year average).

FSSTI: 12-month-forward PER bands FSSTI: 12-month-forward PBR bands

12M forward PER (x) 12M forward P/BV (x) 30 2.5 2.3 25 2.1 +2 stdev +2 stdev 1.9 20 +1 stdev +1 stdev 1.7 15 Mean 1.5 Mean 1.3 10 -1 stdev -1 stdev 1.1 -2 stdev -2 stdev 5 0.9 0.7

0 0.5

Jan-07 Jan-13 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Jan-11 Jan-13 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-12 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-01 Source: Bloomberg, Daiwa estimates Source: Bloomberg, Daiwa estimates Note: FSSTI has been reconstituted from 2008

Key trade ideas and changes In our previous strategy report (see Singapore Strategy: positioning for a brighter economy, 19 January 2018) we discussed 8 potential trade ideas for the market. We are, however, no longer suggesting the following trades: 1) long basket of exporter stocks, 2) avoid land transport stocks, and 3) avoid supermarket operators.

There were negative data The exceptional stock-market rally over the past year coupled with recent negative data points in the technology points (weak 2018 guidance from semiconductor major Taiwan Semiconductor sector and positives Manufacturing (TSMC) (2330 TT, TWD 227.0, Outperform [2]), a slowdown in Singapore’s ones in land transport NODX data, and elevated risks for being the focal point of US-China trade spat) make us wary of continuing to long the technology names. In addition, consolidation in the ride-

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Singapore Strategy: 25 April 2018

hailing market (Uber-Grab merger) should help listed land transport stocks, while we believe the demand-side risks to supermarket operators have been reduced as the goods and services tax hike is likely to be implemented only after 2020.

Our revised trade ideas for the market are as follows: 1) Long the banks; DBS and UOB continue to be our top picks 2) Long property developers as we expect property prices to recover; City Developments and CapitaLand are our key picks 3) Long potential M&A and corporate restructuring plays; STE, SIA Engineering and Wilmar are our key picks 4) Long Keppel Corp as laggard property play with exposure to the offshore marine sector, which appears to be past its bottom 5) Avoid telecoms: new entrant threats are not fully discounted 6) Avoid REITs which are exposed to a rise in interest rates due to their weak DPU growth profile.

We are upgrading Reflecting our revised views on land transport, supermarket operators and after taking into consumer services to account strong earnings from Singapore Airlines, we are upgrading our rating on the Neutral consumer services sector to Neutral (from Underweight). We would look to fund this upgrade via slightly increased underweights for telecoms and the S-REITs.

In addition, we recommend investors continue to Overweight the banks and property developers, while remaining Underweight the telecoms and S-REITs. We remain Neutral on the consumer goods, oil & gas, and industrials sectors, where we advocate a stock- picking strategy.

Daiwa’s recommended sector weightings Sectors Weighting Preferences/key trades Banks Overweight DBS, UOB Real estate Overweight Overweight developers (CIT, CAPL); Underweight REITs (from Neutral) Telecom Underweight Consumer services Neutral Industrial Neutral STE, SATS Oil and gas Neutral (from Underweight) Keppel Corp Consumer goods Neutral Prefer Wilmar over Golden Agri

Source: Daiwa

We are adding HMI We are adding Health Management International (HMI; HMI SP) to our out-of-index picks International to our small list (no deletions). Our revised top index picks are DBS (DBS SP), UOB (UOB SP), City caps list Developments (CIT SP), Keppel Corp (KEP SP), CapitaLand (CAPL SP), STE (STE SP), SATS (SATS SP) and Wilmar (WIL SP). Our revised out-of-index picks are Raffles Medical (RFMD SP), SIA Engineering (SIE SP) and HMI.

What are the risks to our view? Three other economic In our view, the unfolding of 3 alternative economic scenarios could undermine our overall scenarios that could strategy stance for the Singapore market. pose a risk to our view The first scenario involves the eruption of a full-scale trade war between the US and China. This scenario poses significant downside risks to our STI target and could undermine our strategy to Overweight the trade and external-demand sectors. This is because the Singapore economy is highly exposed to trade flows.

The second scenario involves an economic environment characterised by rising domestic interest rates along with a sharp recovery in oil/commodity prices. Such an outcome could undermine our Neutral stance on the oil & gas sector. A sharp, rather than gradual, increase in long-term rates could also raise worries over their impact on the economy, which we see as posing a risk to the entire market.

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Singapore Strategy: 25 April 2018

Under the third scenario, the economic environment is characterised by a fall in interest rates or steep deterioration in non-performing loans for banks. This would represent a risk to our call for investors to Overweight banks. This could also pose problems for our Overweight stance on property developers, especially as end-user demand wanes. Under a low-interest-rate and worsening-asset-quality scenario, we believe dividend yield plays such as REITs could perform better than other sectors. Meanwhile, our Underweight stance on the telecoms sector could be undermined if new entrant TPG Telecom proves to be less of a threat than we anticipate.

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Singapore Strategy: 25 April 2018

Economics

Olivia Xia (852) 2773 8736 ([email protected])

Solid growth, though headwinds loom The advance GDP figures point to solid economic expansion in 1Q18, with encouraging signs of a broader-based growth from both the manufacturing and service sectors. Yet export growth momentum for 1Q18 moderated on the back of weakened external demand for electronics and China’s economic slowdown. The engine of Singapore’s economic growth is likely to continue to shift to domestic demand, as household income rises and investment accelerates from fiscal policy initiatives. We reiterate our GDP growth forecast of 3.7% YoY for 2018, but see downside risks emerging from waning external demand and brewing trade tensions.

The Monetary Authority of Singapore (MAS) tightened its monetary policy in April, which we view as largely pre-emptive to assure price stability. Without inflation or GDP overshooting official target, we see the likelihood of further tightening in October as quite low.

Daiwa’s economic forecasts for Singapore % YoY 2013 2014 2015 2016 2017 2018E 2019E Real GDP 5.1 3.9 2.2 2.4 3.6 3.7 3.9 Goods producing industry 2.0 3.6 -2.7 3.2 5.7 3.5 3.3 Manufacturing 1.7 2.7 -5.1 3.7 10.0 8.4 7.1 Construction 3.0 7.6 5.8 1.9 -8.4 1.1 1.5 Services producing industry 7.3 4.3 3.5 1.5 2.8 3.4 3.8 CPI 2.4 1.0 -0.5 -0.5 0.6 1.1 1.4 Exports (FOB) 1.2 0.1 -6.5 -5.1 10.3 9.8 8.3 Imports (CIF) 0.7 -1.4 -11.5 -4.7 12.1 11.0 8.7 Trade balance, (SGDbn) 39.9 47.5 68.4 63.6 62.9 72.2 95.4 Current account balance, (% of GDP) 16.5 18.7 18.6 19.0 18.8 19.3 19.0 Fiscal balance, (% of GDP) 1.2 1.3 0.6 -1.2 0.1 -0.8 -0.7 USD/SGD, end of period 1.27 1.32 1.41 1.45 1.34 1.33 1.33

Source: CEIC, Daiwa forecasts

More balanced growth ahead Economic growth is Based on advance estimates, Singapore’s GDP increased by 4.3% YoY for 1Q18, likely to be broader- accelerating from 3.6% YoY growth for 4Q17 and also 3.6% YoY for 2017. The based in 2018 manufacturing sector continued to lead the growth, with a 10.1% YoY expansion driven by the electronics and precision engineering segments. Services sector growth picked up to 3.8% YoY in 1Q18 from 3.5% YoY in 4Q17, due to strengthened financial activities and trade-related services. While the construction sector remained in contraction (1Q18: -4.4% YoY), we noted a marginal improvement with a 4.1% QoQ seasonally-adjusted (SA) gain. Overall, the economy is becoming more balanced, in our view.

Singapore: quarterly GDP Singapore GDP: service and construction sector picked up (%YoY) (%YoY) (% YoY) 25 10 25 20 20 8 15 15 10 6 10 5 5 0 4 0 (5) (5) 2 (10) (10)

(15) 0 (15)

Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Mar-18 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Sep-14 Sep-11 Sep-12 Sep-13 Sep-15 Sep-16 Sep-17 Manufacturing Construction Services Overall GDP (RHS) Manufacturing Construction Services

Source: CEIC, Daiwa Source: CEIC, Daiwa

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Singapore Strategy: 25 April 2018

Entering into 2018, signs indicate that global macro momentum may have peaked. Global manufacturing PMI reached a 3-month low in March, with the G3 factory gauges of PMI all edging down. As the global economic upcycle matures, Singapore’s manufacturing sector may see softer growth on the back of reduced export orders. However, the prospects for the services and construction industries remain bright, in our view. We expect an improving labour market and higher wages to support goods and service consumption. More construction work is also likely as fiscal policy initiatives accelerate investment spending. The leading indicator of new construction contracts awarded in Singapore has also been on the rise since 2017. We expect this to translate into more projects on the ground in the coming quarters.

Singapore: consumer loans on the rise Singapore: construction contracts and investment growth (SGDbn) (%YoY) (%YoY) (%YoY) 300 25 250 40

200 30 250 20 150

Thousands 200 20 15 100 10 150 50 10 0 100 0 (50) -10 50 5 (100) -20

0 0

Dec-02 Dec-07 Dec-00 Dec-01 Dec-03 Dec-04 Dec-05 Dec-06 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Feb-13 Feb-16 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-14 Feb-15 Feb-17 Feb-18

Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-05 Contracts Awarded: New Works GFCF: Construction (RHS)

Source: CEIC, Daiwa Source: CEIC, Daiwa

Headwinds primarily in the external sector In 1Q18, NODX growth eased to 1.2% YoY from 10.7% YoY in 4Q17, due largely to declines in electronics, which was down 7.7% YoY. While the moderation of exports looks discouraging, it came from a high base for comparison. In 1Q17, NODX registered the fastest quarterly expansion of 15.2% YoY since 2011.

Going forward, sources of external demand will mainly come from the G3 nations (the US, EU and Japan), in our view, as the Chinese economy gradually slows. We still expect slower but expansionary growth of exports in 2018, as supported by resilient demand for semiconductors and related products during times of digital transformation. Downside risks will come from weaker-than-expected external demand, and of course, a deterioration of global or regional trade environment due to the China-US trade war.

Singapore: NODX by product Singapore: NODX by country (YoY%, 3MMA) (3MMA, % YoY) 40 60 30 40 20 10 20 0 0 (10) (20) (20) (30)

(40) (40)

Feb-08 Feb-13 Feb-17 Feb-09 Feb-10 Feb-11 Feb-12 Feb-14 Feb-15 Feb-16 Feb-18

Aug-08 Aug-12 Aug-17 Aug-09 Aug-10 Aug-11 Aug-13 Aug-14 Aug-15 Aug-16

Mar-08 Mar-11 Mar-07 Mar-09 Mar-10 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Sep-09 Sep-07 Sep-08 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 NODX NODX: electronics G3 Intra Asia (excl. CH & HK) CH+HK Source: CEIC, Daiwa Source: CEIC, Daiwa

The net impact of a trade Singapore’s economy is very sensitive to changes in the external trade environment, given war will be negative for its heavy reliance on trade. In 2017, exports of goods and services made up 200% of total Singapore’s open GDP. As the China-US trade tension escalates, Singapore could suffer from ramifications economy of reduced regional trade activities. The city-state is deeply integrated into the Asian supply chain. ASEAN as a whole could be adversely affected by reduced trade volume from

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Singapore Strategy: 25 April 2018

China, which will further impact Singapore’s exports and thus domestic manufacturing and external-focused service sector. Singaporean manufacturers with operations in China and end-product destinations in the US will suffer the most, in our view.

That said, Singapore may also benefit from some degree of trade diversion, as higher import tariffs imposed on Chinese or American exports could benefit exporters of similar products from a third country. Similarly, foreign direct investment between the US and China could also be diverted towards alternative locations such as Singapore, if restrictions on foreign investment are tightened.

Singapore: top-10 export destinations in 2017 Singapore: top-10 export products in 2017

China ICs EU Petrochemicals United States Pharmaceuticals PCs Malaysia Parts of PC Taiwan Elctrical Machinery Japan Diodes, Transistors South Korea Electrical Circuit Apparatus Indonesia Telecom Equipment Thailand (SGDbn) Parts of ICs (SGDbn)

0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 Source: CEIC, Daiwa Source: CEIC, Daiwa

Pre-emptive tightening by the MAS Anticipation of rising In its April monetary policy statement, the MAS tightened monetary policy by slightly inflation prompted increasing the slope of the SGD NEER band from 0% while keeping the width and mid- monetary policy point of the band unchanged. The tightening came as the monetary authority anticipated tightening in April; we do rising upside pressure on the MAS core inflation and steady economic growth in 2018. For not expect another 2M18, the MAS core inflation was up 1.6% YoY, higher than the 1.5% YoY in 2017. tightening move in October Going forward, we see inflationary pressure rising but still being under control. We estimate wage inflation and domestic demand-induced price gains to push up headline inflation to 1.1% YoY by end-2018, but see little risk of inflation overshooting. Thus, we see another rate hike in October as unlikely.

The major risk of inflation comes from oil prices, in our view. Singapore’s domestic price level can be quite sensitive to international oil prices, as it is a net oil importer. Geopolitical uncertainties still pose upside risks to oil prices. If inflation overshoots the target range due to a surge in oil prices, we think the MAS might have to tighten monetary policy again in October.

Singapore: nominal effective exchange rate (NEER) of SGD Singapore: price indicators and oil prices (Jan 1999=100) (USD/Barrel) (% YoY) 130 140 8 120 Estimated Upper Band Limit 6 120 100 4 80 2 110 60 0 40 Estimated Lower Band Limit 100 20 (2) 0 (4)

90

Feb-94 Feb-98 Feb-92 Feb-96 Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-14 Feb-16 Feb-18

WTI spot price MAS Core CPI (RHS) Headline CPI (RHS)

Feb-03 Feb-07 Feb-11 Feb-15 Feb-02 Feb-04 Feb-05 Feb-06 Feb-08 Feb-09 Feb-10 Feb-12 Feb-13 Feb-14 Feb-16 Feb-17 Feb-18 Feb-01 Source: CEIC, Daiwa Source: CEIC, Daiwa

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Singapore Strategy: 25 April 2018

Country themes Interest rates: trades for a rising rate environment Long banks and avoid Within the Singapore market, we see banks as the key beneficiary of a rising rate yield plays like REITs environment. On the other hand, we see traditional ‘defensive’ yield sectors, such as REITs and telecoms in a rising and telecoms, as being most vulnerable to rising rates. In our view, an above-market rate cycle earnings growth outlook remains the key reason to continue to stay invested in Singapore banking stocks. In addition, we believe the Fed’s latest interest-rate projections still suggest 3 interest-rate hikes in 2018. We think these hikes would be a positive catalyst for the banks, given the effect on the SIBOR and banks’ net interest margins (NIMs). On the other hand, the entry of a new player in the telecom market and likely increases in bond yields on the back of the Fed’s tightening of its balance sheet remain negative factors that underpin our Underweight call on the telecoms and S-REIT sectors.

Banks will see above- We forecast average EPS growth of 17% YoY for 2018 and 12% YoY for 2019 for the big-3 market earnings growth Singapore banks (vs. 10.5% and 9.2%, respectively, for the Singapore market), driven by for 2018-19 on our an improvement in economic growth prospects (for Singapore and the region) and an forecasts easing of pressure on credit costs (with the oil and gas support services [OGSS] exposure overhang effectively removed by end-2017). With these forecasts, we assume that 3- month SIBOR will average 1.5% for 2018, 1.75% for 2019 and 2% for 2020 (after averaging 1-1.1% for 2016-17). These SIBOR forecasts assume roughly a 33% transmission from the US rates (through the Fed rate hikes) to SGD rates, which we believe is conservative (in view of a potential extension of SGD strength, which tends to dilute the interest-rate transmission) vs. the long-term transmission of about 50%.

DBS is about twice as What if SIBOR ends up being higher than our forecasts? Among the 3 banks, DBS has the sensitive to SIBOR than highest EPS sensitivity to increases in SIBOR. The bank’s sticky and low-cost deposits in its peers Singapore and Hong Kong set it up well for wider NIMs and more net interest income when interest rates rise, as most of its loans are on floating rates. With DBS’s dominant share of savings accounts (52%) in Singapore, we estimate the bank’s EPS is twice as sensitive to increases in SIBOR as its peers; every 10bps increase in the 3-month SIBOR would lead to a 2% increase in DBS’s EPS, based on our estimates.

Singapore banks: Daiwa’s EPS growth forecasts Singapore banks: NIM and EPS sensitivities NIM (bps) sensitivity to EPS sensitivity to EPS sensitivity to 35% 31% 10bps increase in SIBOR 10bps increase in NIM 50bps increase in SIBOR 30% DBS 2.5 8% 10% 25% UOB 1 7% 4% OCBC 1 6% 3% 20% 15% 15% 13%

10%

5%

0% 2018E 2019E 2020E DBS OCBC UOB

Source: Daiwa forecasts Source: Daiwa estimates

Yield spread of REITs is Meanwhile, we believe a rising rate environment is negative for ‘bond proxies’ like REITs already at very low and telecoms, and the sectors’ dividend yield spread is already narrow (REITs: spread over levels 10-year risk-free rate of 3.2pp as at 24 April 2018 vs. long-term average of 3.6pp). In addition, for the REITs, any increases in inflation expectations and interest rates beyond our forecasts – we assume annual increases of 10-15bps to total borrowing costs – would likely flow through to higher borrowing costs over time (75% of borrowings in the sector are fixed or hedged with average term to maturity ranging from 2.4-4.9 years). Our sensitivity analysis indicates that office REITs (with an average gearing of 37.5% and cap rates as low as 3.6-3.7% for some properties) are among the most sensitive to borrowing cost increases.

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Singapore Strategy: 25 April 2018

S-REITs: financial position as at 31 December 2017 S-REITs: DPU sensitivity to borrowing cost increases Borrowing Average term Interest Fixed Ticker 10bp 20bp 50bp 100bp cost to maturity coverage Gearing debt CCT -1.5% -2.9% -7.4% -14.7% Ticker (% p.a.) (years) (x) (%) (%) SUN -1.2% -2.4% -6.0% -11.9% CCT 2.6 2.4 4.9 37.3 80.0 KREIT -1.3% -2.6% -6.5% -13.0% SUN 2.6 3.0 3.9 36.4 75.0 FCOT -0.7% -1.4% -3.4% -6.9% KREIT 2.6 3.4 4.3 38.7 77.0 CT -0.8% -1.6% -3.9% -7.8% FCOT 3.0 2.3 4.3 34.2 80.7 FCT -0.6% -1.2% -3.1% -6.1% CT 3.2 4.9 4.8 34.2 95.0 SGREIT -0.9% -1.8% -4.5% -9.1% FCT 2.4 2.7 6.5 29.4 55.0 CRCT -0.5% -1.1% -2.7% -5.4% SGREIT 3.1 4.0 4.1 35.3 99.0 AREIT -0.7% -1.4% -3.5% -7.1% CRCT 2.5 3.4 5.8 28.4 80.0 MINT -0.6% -1.3% -3.2% -6.5% AREIT 2.9 2.8 5.9 35.2 70.5 MLT -0.7% -1.4% -3.5% -7.1% MINT 2.9 3.0 7.2 33.8 60.7 EREIT -0.8% -1.6% -3.9% -7.8% MLT 2.3 4.6 5.5 37.8 78.0 ART -0.8% -1.7% -4.1% -8.3% EREIT 3.6 2.4 3.5 39.6 69.2 CDREIT -0.7% -1.4% -3.4% -6.8% ART 2.4 4.1 4.7 34.5 81.0 Average -0.8% -1.7% -4.2% -8.5%

CDREIT 2.1 2.6 7.3 32.6 59.1 Average 2.7 3.3 5.2 34.8 75.7

Source: S-REITs Source: Daiwa estimates

Top interest-rate pick: DBS Within the banking sector, we see DBS as the clear leader with EPS growth of 31% YoY for 2018E and 15% YoY for 2019E. Our EPS forecasts are within 2% of the Bloomberg consensus forecasts for 2018-19.

DBS is now a compelling In addition to industry-leading EPS growth, we believe DBS has emerged as a compelling dividend-growth stock high-yield stock. Compared to its peers, DBS provided a more investor-friendly final after lifting its DPS dividend for 2017 consisting of a core final semi-annual dividend of SGD0.60 (vs. SGD0.30 guidance for 2H16) and a SGD0.50 special dividend (the ex-date for both dividends is 3 May 2018). We believe the increase is significant as it represents a structurally higher payout of 54% for 2018E vs. 34-39% for 2012-16. We also regard it as a bullish signal to the market as it is a reflection of management’s confidence in both its business outlook and capital position. On management’s core annual DPS guidance of SGD1.20, we found that DBS’ shares rank highly and even exceed most S-REITs on ‘yield + growth’, ie, 12-month- forward dividend yield plus 3-year DPS CAGR (as discussed in our 7 March 2018 report, S-REITs: High-yield party almost over as DBS muscles in).

Reflation: recovery in domestic property prices Buyers are returning to After 3 years of sluggish and below-average primary home sales, corresponding to the the property market property-market downturn that began in 3Q13, home buyers returned big in 2017 as the number of private homes sold by developers increased by 34% YoY to 10,707 units, the highest level since 2013. The improvement in demand was fuelled by a potent combination of improved buyer sentiment, pent-up demand and the government’s relaxation on 11 March 2017 of several measures including the seller’s stamp duty (SSD).

Property prices have Accordingly, home prices hit a bottom in 2Q17 and have since started recovering. We started to recover; we forecast private home prices to appreciate by 5-8% YoY for 2018 and 2019, with potential look for prices to rise by upside risk for 2018 if the current buying momentum continues. Recent data points 5-8% YoY in 2018-19E suggest buyer sentiment remains strong notwithstanding the government’s recent measure to raise the top-marginal buyer’s stamp duty for residential properties.

For example: 1) the flash estimate for the Urban Redevelopment Authority (URA) private residential price index increased by 3.1% QoQ for 1Q18 vs. 0.8% for 4Q17 led by the non- landed core central region (+5.0% QoQ) and outside central region (+3.8% QoQ).

2) The Rivercove Residences Executive Condominium (EC) in Sengkang was 80% sold after the first ballot and booking exercise was completed on 15 April 2018 at an ASP of SGD965/sq ft, according to the Singapore Business Times. We believe this outcome bodes

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Singapore Strategy: 25 April 2018

well for the Sumang Walk EC site that City Developments won in February 2018 for a record SGD583/sq ft for an EC.

3) Over the 7-8 April weekend, Park Place Residences in Paya Lebar sold a further 149 units in its phase 2 launch at an ASP of SGD2,000/sq ft, 11% higher than the ASP of SGD1,800/sq ft for the 210 units sold in phase 1 last year. Over the same weekend, Oxley Holdings (Not rated) sold 129 units (76%) of the 170-unit Verandah Residences in Pasir Panjang at an ASP of SGD1,815/sq ft.

4) City Developments sold 315 units of the 450 units released at the launch of 861-unit The Tapestry in Tampines over the 24-25 March weekend. To date, 338 units have been sold at an ASP of SGD1,310/sq ft.

Singapore non-landed residential index and sub-segments Singapore private property price indices (YoY change) 180 PPI Non-landed CCR RCR OCR 2005 3.9% 4.5% 6.0% 1.3% 1.1% 160 2006 10.2% 11.1% 17.1% 3.0% 4.3% 2007 31.1% 32.6% 32.6% 30.4% 26.3% 140 2008 -4.7% -5.3% -5.6% -4.7% -2.8% 120 2009 1.7% 0.5% -1.8% 3.1% 11.7% 2010 17.6% 14.0% 14.2% 17.6% 15.0% 100 2011 5.9% 4.6% 4.0% 4.5% 7.6% 80 2012 2.8% 2.5% 0.8% 1.6% 6.5% 2013 1.1% 1.9% -1.9% -0.1% 6.5% 60 2014 -4.0% -3.5% -4.1% -5.3% -2.2% 2015 -3.7% -3.6% -2.5% -4.3% -3.7%

2016 -3.1% -2.6% -1.2% -2.8% -3.4%

2009Q1 2013Q1 2016Q3 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2017Q1 2017Q3 2018Q1 2006Q1 2017 1.0% 1.2% 0.8% 1.6% 1.2% Overall CCR RCR OCR

Source: Singapore URA Source: Singapore URA Note: CCR – core central region; RCR – rest of central region; OCR – outside central region Note: PPI – private property price index; CCR – core central region; RCR – rest of central region; OCR – outside central region

Strong momentum for An important factor that probably improved home-buying sentiment, home sales, and price en-bloc activities so far recovery was the significant increase in collective (or en-bloc) sales activity by developers. this year We estimate that there were over 30 collective sales events in the market in 2017 involving over 3,400 units with a combined sales value of SGD8.6bn. This was the highest annual value since the peak of the last collective-sales boom of SGD11.5bn in 2007. En-bloc activities have gathered more pace this year, with deals worth SGD7.2bn having been transacted in the year to 16 April 2018. In our opinion, en-bloc activity and the aggressive pricing in recent deals are a reflection of developer optimism and their expectations for the magnitude of price increases in 1-2 years.

In our view, valuations of the property developers we cover now look undemanding ahead of our expectation for a recovery in property prices. City Developments is our top sector pick here.

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Singapore Strategy: 25 April 2018

Singapore residential: collective sale activity in 2017 and 2018 YTD Development Location Buyer Tenure Land area New GFA Land price Land cost

(sq ft) (sq ft) (SGDm) (SGD/sq ft)

Apr Tulip Garden Farrer Road Yanlord Land and MCL Land Freehold 316,708 506,733 906.9 1,790 Apr Katong Omega East Coast Road Global Dragon (TMC Education) Freehold 27,902 42,969 46.31 1,141 Apr Cairnhill Heights Cairnhill Rise Tiong Seng JV Freehold 15,407 42,924 72.6 1,854 Apr The Estoril Holland Road Far East Freehold 84,600 148,896 224 1,504 Mar Fairhaven Sophia Road Lafe Corporation Freehold 16,660 38,385 57 1,485 Mar Ampas Apartment Balestier Road Oxley Freehold 30,329 84,669 95 1,122 Mar Makeway View Newton Bukit Sembawang Freehold 41,582 116,430 168 1,626 Mar Pacific Mansion River Valley Close Hong Leong, Guocoland Freehold 128,352 542,544 980 1,806 Mar Katong Park Towers Arthur Road Bukit Sembawang 99 140,758 325,151 345 1,246 Mar Goodluck Garden Toh Tuck Road Qingjian Group Freehold 360,139 554,614 610 1,100 Mar Toho Mansion Holland Road Koh Brothers Freehold 47,660 73,396 120 1,804 Mar Hollandia Holland Road FEC Properties Freehold 53,505 107,688 183 1,703 Mar Eunos Mansion Bedok Reservoir Road Fragrance Group Freehold 111,735 196,654 220 1,119 Feb Cairnhill Mansions Cairnhill Road Low Keng Huat Freehold 43,103 156,581 362 2,312 Feb City Towers Bukit Timah Road Cheung Kong Freehold 104,532 219,517 402 1,847 Feb Brookvale Park Sunset Way Hoi Hup Sunway 999 373,008 656,494 530 847 Feb Riveira Point Kim Yam Road Macly Group Freehold 14,579 49,265 72 1,461 Jan The Wilshire Farrer Road TE2 Development, Roxy-Pacific Freehold 39,130 70,741 99 1,455 Jan Kismis View Upper Bukit Timah TE2 Development, Roxy-Pacific 99 90,863 127,208 103 941 Feb Pearl Bank Apartments Outram Park CapitaLand 99 82376 613,701 728 1,515 Jan Park West Jalan Lempeng SingHaiyi Group 99 633,639 1,460,000 841 775 2018 YTD Total 2,756,567 6,134,560 7,165

Dec Vista Park South Buona Vista Road Oxley 99 319,250 446,951 418 1,096 Dec Parkway Mansion Amber Road Sustained Land consortium Freehold 38,975 109,130 147 1,347 Dec Derby Court Derbyshire Road Roxy-Pacific Holdings Freehold 18,506 53,153 74 1,390 Dec Apartment 8 Meyappa Chettiar Road Oxley Freehold 9,667 20,301 22 1,084 Dec 31-51 Lorong 24 Geylang Guillemard Road KSH Holdings consortium Freehold 26,188 73,326 60 818 Dec Jervois Green Jervois Road Spring Court consortium Freehold 26,700 37,380 53 1,418 Dec Crystal Tower Ewe Boon Road Allgreen Properties Freehold 60,482 98,179 181 1,840 Dec Royalville Bukit Timah Road Allgreen Properties Freehold 174,176 243,846 478 1,960 Nov How Sun Park How Sun Road SingHaiyi Group Freehold 54,943 76,920 81 1,053 Nov Lodge 77 Upper East Coast Road TKC Freehold 13,123 39,369 29 737 Nov Mayfair Gardens Dunearn/Rifle Range Road Oxley 99 208,475 291,865 311 1,244 Nov Casa Contendere Gilstead Road Tee Land Freehold 37,972 53,161 72 1,354 Oct Dunearn Court Dunearn Road Roxy-Pacific Holdings Freehold 19203 26,884 36 1,339 Oct Florence Regency (HUDC) Hougang Avenue 2 Logan Property 99 389,236 1,089,861 629 842 Oct Changi Garden Upper Changi Road North Chip Eng Seng Freehold 200,093 280,130 249 888 Oct Normanton Park 1 Normanton Park Kingsford Development 99 660,999 1,388,098 830 969 Oct Amber Park Amber Road City Developments, Hong Realty Freehold 213,670 598,276 907 1,516 Oct 2, 6, 12, 14 Guillemard Lane Guillemard Lane Roxy-Pacific Freehold 25,601 71,683 56 781 Sep Nanak Mansions 92-128 Meyer Road UOL Group Freehold 109,630 153,482 201 1,429 Sep Jervois Gardens 30F-G Jervois Road SC Global Freehold 34,039 52,420 72 1,374 Sep Seraya Crescent Upper Thomson Tee Land Freehold 24,069 33,697 26 764 Aug 208 Yio Chu Kang Road 208 Yio Chu Kang Road Oxley 99 14,136 19,791 8 424 Aug Sun Rosier Bartley Road SingHaiyi Group Freehold 146,046 204,464 271 1,325 Aug Tampines Court (HUDC) 120 Tampines Street 11 Sim Lian 99 702,164 1,966,059 970 676 Jul Serangoon Ville (HUDC) Serangoon North Avenue 1 KSH Holdings and Oxley 99 296,913 831,356 499 835 Jul The Albracca Meyer Road Sustained Land 99 23,400 49,130 69 1,409 Jul Lotus @ Pasir Panjang Pasir Panjang Road Oxley Freehold 88,651 125,468 121 964 Jun 1 Draycott Park Draycott Drive Selangor Dredging Bhd Freehold 17,442 48,837 72 1,787 Jun Eunosville (HUDC) Sims Avenue 99 376,713 1,054,796 766 910 May Rio Casa (HUDC) Hougang Avenue 7 JV: Oxley and Lian Beng 99 396,230 1,109,444 575 706 May Goh & Goh Building Upper Bukit Timah Road BBR Holdings Freehold 30,874 92,622 102 1,096 May One Tree Hill Gardens Orchard Road Lum Chang Group Freehold 39,063 65 1,664 Jan 145 Amber Road Amber Road UOL Group Freehold 69,858 146,702 156 1,063 2017 Total 4,866,488 10,886,783 8,604

Source: Compiled by Daiwa from company announcements and news reports

Top reflation picks: City Developments and Keppel Corp City Developments’ We believe City Developments is now better positioned to capture the home sales pipeline now comprises momentum in Singapore after the YTD tender results. City Developments won 3 of the 4 more than 3 years of government land sale tenders that closed in 2018. These 3 projects alone will yield a total sales of about 1,750 units (according to City Developments) compared with the company’s annual home sales of 1,017 units in 2016 and 1,171 units in 2017. After this replenishment exercise, City Developments now has a pipeline of about 3,570 units available for launch, or roughly over 3 years of sales. Of this pipeline, about 2/3 of the units are mass market and 1/3 high end. The recent land banking exercises (in late 2017 and early 2018) have also led to greater visibility in the schedule of future launches.

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Singapore Strategy: 25 April 2018

Singapore: public land tenders in 2018 secured by City Developments Top bid Tender closing Site Highest bidder Price Unit price* Total over 2nd date (SGDm) (SGD/sq ft) bidders (%) 27-Feb-18 Sumang Walk (EC+) City Developments (60%) and TID Residential 509.4 583 17 4.8 30-Jan-18 West Coast Vale City Developments 472.4 800 6 0.7 30-Jan-18 Handy Road City Developments 212.2 1,722 10 12.3 30-Jan-18 Chong Kuo Road Lian Soon Holdings 43.9 681 8 0.1

Source: Singapore URA, HDB Note: *Based on maximum GFA; +Executive Condominium

Keppel Corp is a One might now view Keppel Corp as a property play, given that its property division property play that is accounted for c.80% of the group’s profit in 2017. However, we do not see this high levered to any recovery contribution continuing, with the company increasing its focus on the other 2 key verticals in oil & gas sector of the group: infrastructure and investment. We envision a more diversified earnings structure for Keppel by 2022 with a higher earnings quality profile as the company continues its focus on growing recurring income generation, which encompassed 38% of its 2017 earnings base.

In addition, we believe Keppel Corp’s current valuation is undemanding, given our positive earnings outlook over the next 2-3 years for all 4 of its divisions, with an increasing focus on stronger earnings quality through recurring income generation that will likely see a valuation rerating premium accrued to Keppel vs. previous project-based earnings that tend to warrant a valuation multiple discount. Keppel’s current share price accrues zero- value to its O&M division which we believe can be viewed as a free call option for O&G recovery down the road.

Restructuring and policy: a few pockets of opportunities Several industries in Singapore are going through a period of rapid change brought about by shifts in technologies, competition and government policy, creating pockets of opportunities for investors.

Both MRO players and Rig builders and maintenance, repair and overhaul (MRO) market players in particular are rigbuilders are facing facing significant challenges. As such consolidation remains a key theme for these sectors. challenges; we like the We especially like the MRO players here because of the following: 1) demand looks well- former sector supported by a projected near doubling in the global aircraft fleet over the next 2 decades, 2) Singapore-based players are well positioned to withstand pressures from lower-cost MRO players due to the government’s proactive support as indicated in its Budget 2018, and 3) we see significant synergies between heavyweights STE and SIA Engineering due to their complementary expertise and geographic footprints. On the other hand, we are less enthused about rig builders as we view the expertise and customer footprints of SemcorpMarine and Keppel Corp as substitutes.

There are other restructuring plays we like, but these are driven by stock-specific factors: Wilmar for its potential China IPO; Raffles Medical for its overseas expansion strategy.

Avoid telecoms, On the flip side, many of the traditional domestic-demand sectors are still being disrupted supermarket operators by technological (online commerce, e-payments, sharing economy companies) and and land transport on government policy (power sector liberalisation, carbon tax, new telecom licences) changes. technology and policy Sectors we like to avoid here include telecoms (new player set to enter the market in late threats 2018), super market operators (face threats from online commerce) and land transport players.

Restructuring plays: ST Engineering and Wilmar We see STE as a We believe a merger between ST Engineering and SIA Engineering is a long-term solution consolidator in the MRO for Singapore’s MRO incumbents to address the threat of heightened competition from sector lower-cost MRO suppliers in Malaysia, Indonesia and Thailand. Such a strategy would realise synergies from economies of scale, with complementary MRO assets that would serve to increase the enlarged entity’s clout over global MRO players. For example, SIA

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Singapore Strategy: 25 April 2018

Engineering is strong in line maintenance and has been expanding its line maintenance operations in both Asia Pacific and North America. This is an area in which ST Engineering is lacking. Conversely, ST Engineering’s entry into the passenger-to-freighter (PTF) market could be a complementary business to SIA Engineering’s clients. More importantly, we believe a merger between ST Engineering and SIA Engineering could help streamline operating expenses and boost operating margins significantly (c.5%), allowing the incumbents to compete effectively for business on its service superiority vs. low cost, which is not a strong and lasting differentiating service factor, in our view.

Wilmar is our preferred Meanwhile, given our expectation for a decline in CPO prices in 2018, we continue to pick in the palm-oil advocate a more selective stock-specific strategy for investors seeking exposure to the space palm oil space. Our order of preference favours companies with diversified operations as well as greater downstream exposure, as a lower commodity price cycle would likely benefit refiners through lower feedstock prices. Hence, Wilmar remains our preferred pick due to its integrated business model and diversified exposure to non-palm businesses, as well as a potential listing of its China assets in 2019.

Commodity rallies: prefer indirect exposure Crude prices have surged to highs not seen since December 2014, underpinned by greater geopolitical uncertainty in the Middle East and elevated concerns over the prospect of imminent military action from Western powers. While stronger oil prices are generally positive for energy stocks, particularly upstream players where earnings are directly correlated to energy prices, we believe the earnings flow-through impact will be more muted for downstream offshore yards with excess capacity and heightened competitive landscape being the key issues. New orders for the Singapore yards remain uninspiring YTD 2018 (c.SGD1.4bn) vs. our full-year forecast of c.SGD5bn.

Price performance: Brent (USD) vs. SemcorpMarine (SGD) vs. Singapore yards historical new order wins trend (SGDbn) Keppel (SGD) 140 12 25

120 10 20 100 8 80 6 15 60 4 40 10 Past 6-years average: SGD8.6bn 20 2

0 0 5

Jul-16 Jul-13 Jul-14 Jul-15 Jul-17

Oct-15 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18

Jan-17 Jan-15 Jan-16 Jan-18 Jan-14 0 Brent (LHS) SMM (RHS) KEP (RHS) 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

Source: Bloomberg Source: Companies, Daiwa forecasts

We remain Neutral on the Singapore yards on fundamental grounds. Despite their new orders likely having troughed in 2016/17, our expectation for new orders to be won over the next 2-3 years remains significantly below the past 6-year average of SGD8.6bn, with most of these new orders non-offshore in nature and potentially loss-making due to the learning-curve effect.

However, noting the strong correlation between Brent crude prices vs. Keppel (0.90x) and SembMarine (0.90x) based on their past-5-year price performance, we believe a sustained oil rally could help buoy the share prices of local yards. In this context, we recommend investors who wish to partake in the current oil-led rally have exposure in Keppel vs. SembMarine. We see the former’s O&M division earnings as having bottomed in 2017, alongside new order wins. While we do expect SembMarine’s new orders to improve substantially in 2018, we see the company remaining in a loss-making situation for the current year based on our revenue and operating cost assumptions which we detailed in our report dated 6 March: Singapore Rigbuilders: All-in on new orders?

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Singapore Strategy: 25 April 2018

DBS: rising rates – set to flex its muscles

David Lum (65) 6329 2102 ([email protected])

What is the bull case? Strongest EPS growth in sector and a compelling yield play Strongest EPS growth in We have observed that the EPS-growth outlook for the Singapore banks (average of 17% a fast-growing sector YoY for 2018E and 12% YoY for 2019E) is among the highest regionally. Within the sector, we see DBS as the clear leader with EPS growth of 31% YoY for 2018E and 15% YoY for 2019E. Our EPS forecasts are within 2% of the Bloomberg consensus for 2018-19E.

DBS now a compelling In addition to industry-leading EPS growth, DBS has also emerged as a compelling high- yield stock after lifting yield stock, in our view. Compared to its peers, DBS provided a more investor-friendly final DPS guidance dividend consisting of a core final semi-annual dividend of SGD0.60 (vs. SGD0.30 for 2H16) and a SGD0.50 special dividend (the ex-date for both dividends is 3 May 2018). We believe the increase is significant as it represents a structurally higher payout of 54% for 2018E vs. 34-39% for 2012-16. We also regard it as a bullish signal to the market since it is a reflection of management’s confidence in both its business outlook and capital position. On management’s core-annual DPS guidance of SGD1.20, we have found that DBS shares rank highly and even exceed most S-REITs on ‘yield + growth’, ie, 12-month forward dividend yield plus 3-year DPS CAGR (as discussed in our 7 March 2018 report, S-REITs: High-yield party almost over as DBS muscles in).

Singapore banks: Daiwa EPS-growth forecasts Singapore banks: NIM and EPS sensitivities NIM (bp) sensitivity to EPS sensitivity to EPS sensitivity to 35% 31% 10bp increase in SIBOR 10bp increase in NIM 50bp increase in SIBOR 30% DBS 2.5 8% 10% UOB 1 7% 4% 25% OCBC 1 6% 3%

20% 15% 15% 13%

10%

5%

0% 2018E 2019E 2020E DBS OCBC UOB

Source: Daiwa forecasts Source: Daiwa estimates

Key items and EPS sensitivity Most EPS-sensitive to rising rates in sector About twice as sensitive We estimate that DBS has the highest EPS sensitivity to increases in SIBOR. The bank’s to SIBOR than its peers sticky and low-cost deposits in Singapore and Hong Kong sets up well for a wider NIM and more net-interest income when interest rates rise since most of its loans are on floating rates. With a dominant share of savings accounts (52%) in Singapore, DBS’s EPS is twice as sensitive to increases in SIBOR as its peers, on our estimates, with every 10bp increase in 3-month SIBOR leading to a 2% increase in DBS’s EPS.

Balanced and multi- DBS also has multiple sources of EPS growth in addition to interest-rate increases and pronged growth drivers NIM expansion, which we estimate would contribute about 1/3 of the EPS-growth forecast of 31% YoY for 2018E (our EPS forecast for 2018 is 0.7% lower than that of the Bloomberg consensus). We estimate that about ½ of the EPS growth for 2018E will come from lower credit costs YoY (considering that earnings in 2017 were dragged by oil-and-gas support serviced related credit-costs and a one-time NPL clean-up in 3Q17) and with the remainder from a combination of loan growth (we forecast 7.1%YoY for 2018E) and non-interest income growth (we forecast 1.2% YoY for 2018E).

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Singapore Strategy: 25 April 2018

Annual-average 3-month SIBOR (%) vs. annual DBS NIM (%) Singapore: 3-month SIBOR (% p.a.) from 2016

4.0 2.3 1.6 3.5 2.2 1.5 3.0 2.1 1.4 2.0 2.5 1.3 1.9 2.0 1.2 1.8 1.5 1.1 1.7 1.0 1.0 1.6 0.9 0.5 1.5 0.8

0.0 1.4

Jul-16 Jul-17

2003 2008 2013 1999 2000 2001 2002 2004 2005 2006 2007 2009 2010 2011 2012 2014 2015 2016 2017

Jan-16 Jan-17 Jan-18

Mar-16 Mar-17 Mar-18

Nov-16 Nov-17

Sep-16 Sep-17

May-16 May-17

2018E 2019E 2020E 3mth SIBOR (% p.a.) [left axis] DBS NIM (%) [right axis] 3-month SIBOR Annual/YTD average

Source: Bloomberg, company, Daiwa forecasts Source: Bloomberg

What could go wrong? SIBOR remains volatile; could peter out for rest of year Strong EPS growth Although we and the rest of the market expect DBS to achieve the strongest EPS growth in would depend on a the sector for 2018-19E, our EPS forecasts assume that the 3-month SIBOR rate will significant increase in average 1.5% for 2018E, 1.75% for 2019E and 2% for 2020E (after averaging 1-1.1% for SIBOR 2016-17). These SIBOR forecasts assume roughly a 33% transmission from US rates (through Fed rate hikes) to SGD rates, which we believe is conservative (in view of a potential extension of SGD strength which tends to dilute the interest-rate transmission) vs. the long-term transmission of about 50%. If the average SIBOR rate is lower than expected for 2018, there could be downside risk to our EPS forecast.

A slimmer capital cushion No capital buffer under For a bank, there is a natural trade-off between paying more dividends and maintaining an the new normal? adequate level of capital to fund asset growth. One main reason cited by DBS to adopt a more generous payout policy is regulatory-capital certainty, specifically the finalisation of the Basel capital reforms, which management estimates would only increase its risk- weighted assets (RWA) by a manageable 5% by 2022.

A dividend cut would not Whether DBS’s more aggressive payout policy will be the new normal for previously well be well-received by the capitalised banks in their transition to FRS109 is not clear to us. What is clear is that DBS market may not be able to absorb shocks from a severe economic downturn or financial crisis, and that any dividend cut in the future for whatever reason would be a highly negative development.

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Singapore Strategy: 25 April 2018

City Developments: property prices on upswing

David Lum (65) 6329 2102 ([email protected])

What is the bull case? Successful landbanking continues Pipeline now more than We believe City Developments is even better positioned to capture the home sales 3 years of sales momentum in Singapore following the YTD tender results. City Developments has won 3 of the 4 government land sale tenders that have closed so far in 2018. These 3 projects alone will yield a total of about 1,750 units (according to City Developments), compared with the company’s annual home sales of 1,017 units in 2016 and 1,171 units in 2017. After this replenishment exercise, City Developments now has a pipeline of about 3,570 units available for launch, or roughly over 3 years of sales. Of this pipeline, about 2/3 of the units are mass market and 1/3 high end. The recent land banking exercises (in late 2017 and early 2018) have also led to greater visibility in the schedule of future launches.

Singapore: public land tenders in 2018 Has secured 3 of the 4 Top bid government land sites Tender closing Site High bidder Price Unit price* Total over 2nd date (SGDm) (SGD/sq ft) bidders (%) offered for tender so far 27-Feb-18 Sumang Walk (EC+) City Developments (60%) and TID Residential 509.4 583 17 4.8 in 2018 30-Jan-18 West Coast Vale City Developments 472.4 800 6 0.7 30-Jan-18 Handy Road City Developments 212.2 1,722 10 12.3 30-Jan-18 Chong Kuo Road Lian Soon Holdings 43.9 681 8 0.1

Source: Singapore URA, HDB Note: *Based on maximum GFA; +Executive Condominium

Launches continue to be well received Potential positive Since the launch of its high-end New Futura condo on 18 January 2018, City catalysts from new Developments has managed to sell 48 of the 64 units in the project’s South Tower at an launches, and City ASP of SGD3,200/sq ft. The 60-unit North Tower has not been launched. Given that all of Developments has one the property-cooling measures remain in place, including the 15% additional buyer’s stamp of the busiest schedules duty (ABSD) for foreign buyers, we believe the take-up rate (with all 4-bedroom units fully sold in the South Tower) and achieved pricing (at a decent premium to the achieved ASP of over SGD2,800/sq ft for City Developments’ Gramercy Park, a comparable high-end freehold project) are encouraging data-points. City Developments has one of the busiest launch schedules for 2018 among the listed developers and we believe further sales or pricing progress in the New Futura launch and other upcoming launches are likely to be share-price catalysts.

Key items and EPS sensitivity No issue for City Developments’ financial position Balance sheet nearly With City Developments having a net gearing ratio of 9% (7% including fair-value gains on impervious investment properties) and an interest-coverage ratio of 13.6x as at 31 December 2017, we see a negligible impact on its EPS and NAV from higher borrowing costs due to rising rates.

Interest-rate impact on the residential market could be muted Rising interest rates From City Developments’ perspective, we believe rising interest rates probably matter unlikely to derail our more for their potentially negative impact on the residential-property market. As long as the gradual property-price monthly payments for mortgages do not spike up, we believe rising rates could create a recovery scenario slight headwind for the physical market, which would still be consistent with our view that the current home-price recovery is likely to be more restrained vs. previous recoveries. We maintain our forecast for private property-price increases of 5-8% YoY for 2018-20E, representing cumulatively upside potential of 20% from the bottom in 2Q17 vs. trough-to- peak gains of 55-60% for previous recoveries, which had no cooling measures and highly buyer-friendly (and even speculation-friendly such as allowing zero down-payments on purchase) measures at the start of the recoveries.

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Singapore Strategy: 25 April 2018

Singapore: non-landed (private) residential index City Developments: 2018-19 residential launch schedule 180 Launch Project Location Total units Area (sq ft) 165.0 January 2018 New Futura Leonie Hill Road 240 248,199 March 2018 The Tapestry Tampines Ave 10 861 654,553 160 148.9 2Q-3Q 2018 South Beach Beach Road 190 391,161 140 4Q18-1Q19 West Coast Vale site West Coast Vale 730 590,481 133.7 1H19 Amber Park site Amber Road 600 598,290 120 1H19 Handy Road site Handy Road 200 123,205 1Q19E Sumang Walk site Sumang Walk 820 873,697 100 TBA Boulevard Hotel site Cuscaden Road 154 345,405

80

60

3Q08 2Q12 1Q16 4Q04 3Q05 2Q06 1Q07 4Q07 2Q09 1Q10 4Q10 3Q11 1Q13 4Q13 3Q14 2Q15 4Q16 3Q17 2Q18 1Q19 4Q19 3Q20 1Q04 Source: Singapore URA, Daiwa forecasts from 2Q18 Source: Company, Daiwa estimates

Might lead to cheaper asset acquisitions Rising interest rates A rising interest-rate environment would normally put pressure on cap rates and conducive for building investment-property valuations, but for City Developments it could prove conducive for one up assets, AUM of its major initiatives announced in the 4Q17 results: the establishment of a brand new fund management platform with a target assets-under-management (AUM) size of USD5bn by 2023. City Developments recognises that it is playing catch up with the major property companies in Singapore and the rest of the world in its bid to increase the group’s EBITDA from recurring income from 56% in 2017 to 65% in the longer term, and building up a fund management platform to generate more recurrent income will help it reach its goal. Acquiring income-producing assets on its own or through its fund management platform at attractive prices is never easy, but a rising rate environment (the higher the better) could lower the risk of overpaying for assets.

What could go wrong? Rising development risk and policy risk Poor take-up in With most recent landbanking activity achieving record prices in both the en-bloc and upcoming launches public tender markets, we see a greater development risk in addition to market-price risk if the developer poorly times or prices its upcoming launches. The government has already signalled that developers that overbid would still have to sell their projects within 5 years of acquisition (via public tender or en-bloc) or face a stiff penalty (the ABSD clawback of 10- 15% of the land cost of a project including interest). We believe City Developments’ robust launch schedule is a positive feature, but if there is an unforeseen decline in property prices in the next few quarters or if any of the City Developments launches is poorly received, then we see downside risk for the earnings outlook and share price.

Policy risk has At the other extreme, we see rising policy risk (in the form of new cooling measures) if increased, but mass- home prices continue the positive momentum that was evident in the 1Q18 URA flash market home prices estimates. At this early stage of the physical-market recovery, we believe policy risk is still probably have 15% low and that that it would take several consecutive quarters of accelerating home prices to upside before any trigger a response from the government. At a minimum, we reckon that mass-market home government response prices would have to increase by double digits YoY and surpass at least 10%, the all-time high in 3Q13.

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Singapore Strategy: 25 April 2018

Keppel Corp: share-price weakness offers an attractive entry point

Royston Tan (65) 6228 6745 ([email protected])

What is the bull case? Bad news appears to be Keppel’s share price has retreated by c.7% from its peak in late January 2018, due likely to over-discounted by the a combination of market weakness and disappointment that no significant corporate market initiatives were taken to consolidate the rigbuilding industry in Singapore. The company announced losses for its 4Q17 financials due to one-off fine payments amounting to SGD619m in relation to the Brazil corruption charges as well as SGD135m in provision charges for Sete projects and other O&M assets. While its 4Q17 results missed our expectations due to these one-off provisions/impairments, we believe its O&M division is now on a stronger footing post the kitchen-sinking provisions and expect all 4 of its key divisions to register positive earnings growth from 2018.

Given our expectations for a brighter O&M outlook for Keppel on the back of a rebound in new order wins, we believe its share-price weakness, unaffected by any major company- specific news, provides an ideal opportunity for investors to partake in the growth of the Singapore and China property markets, with zero value ascribed to its O&M division at the current price. Alongside a strategy to increase the quality of its earnings ahead through greater recurring income generation vs. its previous heavy reliance on its project-based rigbuilding business, we see Keppel as being attractive at current prices.

Key assumptions/sensitivity A mini conglomerate with a focus on earnings quality Keppel recently Since the onset of the global O&G downturn, Keppel has sought to diversify its earnings announced its first semi- away from its O&M division (which used to account for the bulk of earnings), concurrently submersible streamlining operational expenses by reducing its global yard workforce as well as construction package mothballing non-strategic yards. While the 4-year-long O&G downturn still weighs heavily with Awilco Drilling, the on its financials, as evidenced by its 4Q17 results, we see the worst as being over for its first major drilling O&M division, with a multitude of short-term positive catalysts, such as: 1) the sale of newbuild order since inventories, 2) partial resumption of Sete projects, and 3) stronger-than-expected new 2015 order wins in the LNGC and FLNG segments not yet factored in by the market, in our view. We expect its O&M division, now a more streamlined entity, to start to turn around in 2018, riding on a potential increase in new order wins (2018E: SGD2bn vs. 2017: SGD1.2bn, on our forecasts) in the next year.

Keppel: O&M division new order wins trend (USDbn) Keppel: recurring income generation breakdown by segment 12 120% 9.8 4% 10 100% 19% 80% 27% 8 6.8 26% 60% 19% 6 5.5 40% 24% 29% 4 3.0 2.0 2.0 20% 1.8 26% 27% 2 1.2 0.5 0% 2016 2017 0 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E REITs & Trust Infrastructure Asset Management Rental & Charter Others

Source: Company, Daiwa forecast Source: Company

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Singapore Strategy: 25 April 2018

Keppel’s investment Unlike SembMarine, which is a 100% leveraged play on the O&G cycle, Keppel has division could see remained profitable since the onset of the O&G downturn in 2014 due to its diversified recurring income portfolio of property, infrastructure and investment-related assets. One might now view generation from land Keppel Corp as a property play, given that this division accounted for c.80% of the group’s parcel sales in Tianjin, profit in 2017. However, we do not see this high contribution continuing, with the company which recorded sales increasing its focus on the other 2 key verticals of the group: infrastructure and investment. profit in excess of We envision a more diversified earnings structure for Keppel by 2022 with a higher-quality SGD100m in 2017 earnings profile as the company continues its focus on growing recurring-income generation, which encompassed 38% of its 2017 earnings base.

A key recurring-income generating entity would be Keppel Capital, which saw steady growth in its asset management fees from SGD124m in 2015 to SGD134m in 2017. With the company targeting to increase its AUM from SGD29bn as at end-2017 to SGD50bn by 2022, we can expect this particular segment to play an increasingly important role in achieving its earnings-quality goal.

Harnessing synergies through all verticals A long-term strategic goal of the company is to be able to harness the operational strength of all its 4 key engines and thereby create a self-sustaining Keppel eco-system, rather than having each division operating in silos. For example, the company is currently integrating its data-centre development abilities alongside its vessel construction prowess to create a floating water-cooled data centre that could change the way data centres are constructed in the next 10-20 years. Such projects could be funded externally through Keppel Capital, hence reducing the pressure on Keppel Corp’s balance sheet. The company could look to own and operate these assets, generating recurring operating and management income and upon maturity, unlock the value of the assets by divesting into vehicles such as Keppel Data Centre Trust, thereby recycling capital to be reinvested in higher-returns projects.

Keppel: SOTP valuation At the current price Stake Basis Equity value (SGD) Equity per share (SGD) level, the market does Offshore & Marine Keppel Offshore & Marine 100% O&M 2018E 2x book value 2,711 1.49 not look to be ascribing Property any value to Keppel’s Keppel Land & other props 100% Property 2018E 1.0x book value 9,441 5.19 O&M division, whose Tianjin Land 45% RNAV 1,542 0.85 Infrastructure earnings look set to turn Keppel Infrastructure Trust 18% Market Value 415 0.23 around in 2018, on our Keppel T&T 80% Enterprise value 819 0.45 forecasts Keppel Merlimau 49% Daiwa Estimate 500 0.28 Other Investments Keppel Capital 100% 20X 2018E PER 2,823 1.55 DynaMac Holdings 27% Market Value 39 0.02 K1 Ventures 36% Market Value 72 0.04 Kris Energy 40% Market Value 69 0.04 Total Value (SGD m) 18,432 Shares (m) 1,818 SGD/share 10.14 10% Conglomerate discount (SGD) 9.12

Source: Daiwa forecasts

Earnings growth of 41% YoY for 2018E Following a tough 2017 which was fraught with various one-off provision/impairment expenses, Keppel looks set to start from a clean slate in 2018 and resume its earnings growth trajectory. We look for 41% YoY growth in core earnings for 2018, due in part to strong divestment gains of c.SGD290m from its China marina business. The company has been consistently recycling its assets and booking hefty divestment gains through the years, a trait that is becoming increasingly accepted by the market, which appears to believe now that such “one-off” divestment gains could be recurring.

We believe Keppel’s current valuation is undemanding, given our positive earnings outlook over the next 2-3 years for all 4 of its divisions, with an increasing focus on stronger earnings quality through recurring-income generation that will likely see a valuation rerating

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premium accrued to Keppel vs. previous project-based earnings that tend to warrant a valuation multiple discount. In our view, Keppel’s current share price ascribes zero value to its O&M division, which we believe can be viewed as a free call option on an O&G recovery down the road.

What could go wrong? Significant slowdown in property sales Given that property earnings currently contribute 80% to group’s bottom line, a significant slowdown in property sales would have a negative impact on its future earnings. While sentiment within the Singapore property front remains buoyant, there are already initial signs of a slowdown in momentum pertaining to property sales in China due to the state government’s cooling measures.

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Singapore Strategy: 25 April 2018

ST Engineering: leveraging innovation for growth

Royston Tan (65) 6228 6745 ([email protected])

What is the bull case? We forecast all 4 key ST Engineering ended 2017 with a positive performance in 4Q17, with its net profit of divisions to register SGD512m coming in 6% above our forecast due to: 1) c.SGD20m in tax benefits from tax growth in 2018, backed reform changes in the US, and 2) better operating cost control. We believe its 2 key by a strong order divisions, aerospace and electronics, will continue to spearhead its operating performance backlog of SGD13.2bn in 2018 and beyond, with management generally positive on the industry outlook for these as of end-2017 and a divisions. While its land system division is more heavily dependent on government rebound in operating contracts, where revenue and earnings tend to be more lumpy by nature, the development margins of autonomous vehicles could be a major key business driver for this division over the coming decade. The company’s autonomous bus will be among the first in Singapore to operate on public roads come 2H18, where it will deploy a driverless-on-demand minibus on Sentosa. A more full-scale application could be ready by 2020.

Last, its marine division looks on track for a full-scale turnaround in 2018, post the completion and delivery of the 2 container roll-on, roll-off (ConRo) vessels that have been an expensive learning experience for the company, with major provisions on these assets undertaken over the past year due to management’s underestimation of project-completion and regulatory costs.

ST Engineering: order backlog trend ST Engineering: operating margins (RHS) and net profit (LHS) trend

(SGDbn) (SGDm) Ending order book 14 650 12% 2004: SGD5.3bn 2017: SGD13.2bn 12 600 11% 10 10% 550 8 9% 500 6 8%

4 450 7%

2 400 6% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E2018E2019E 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Net profit (LHS) Operating margin (RHS)

Source: Company Source: Company, Daiwa forecasts

The company looks set to integrate its 4 key divisions under one ST Engineering master brand by June this year to build stronger brand equity and better position the company as one single entity that is capable of integrating all its technological resources among its different businesses.

Key assumptions/sensitivity Focus on technological innovation We believe the company is among the best positioned SGX-listed companies to ride on macro themes such as the global rise in aviation demand as well as increasing adoption of Internet-of-Things (IoT) applications over the foreseeable decade.

Set up a USD150m The company recently show-cased its business capabilities at the Singapore Airshow 2018 corporate venture- where innovations such as virtual reality (VR) aviation training facilities, mind-controlled capital unit in July 2017 drones, autonomous buses and robots for medical applications were among some of the to invest in promising key highlights for the company during the airshow. While some of these innovations are technological start-ups still at the infancy stage of R&D testing, it is critical that ST Engineering continues to stay at the forefront of such cutting-edge technological developments that will be gradually adopted over the upcoming decade with the pace of technological shifts increasing.

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Singapore Strategy: 25 April 2018

MRO division to grow amid competitive challenges While major aviation industry players foresee demand for MRO services to be strongest in the Asia Pacific vs other regions, increasing competition in the MRO space has undoubtedly put pressure on the company’s operating margins, as evidenced by ST Engineering’s declining operating-margin trend for its aerospace division over the past couple of years. The company’s strategy to focus on increasing its technological superiority over lower-cost peers is a key differentiating factor, whereby greater productivity and efficiency are likely traits that clients will place greater importance on over cost, with the increasing sophistication of new-generation aircraft.

The company’s diversification into passenger-to-freight conversion is another exciting source of growth for its aerospace business over the next few years.

Consolidation among local MRO heavyweights remain a long-term solution The global MRO industry We believe a merger of ST Engineering and SIA Engineering is a long-term solution for our remains fragmented; and local MRO incumbents to address the threat of heightened competition from lower-cost we believe it is inevitable MRO suppliers in Malaysia, Indonesia and Thailand. Such a strategy would realise that major consolidation synergies from economies of scale, with complementary MRO assets that would serve to will materialise in the increase the enlarged entity’s clout over global MRO players. For example, SIA face of heightened Engineering is strong in line maintenance and has been expanding its line-maintenance competition operations in both Asia Pacific and North America. This is an area in which ST Engineering is lacking. Conversely, ST Engineering’s entry into the PTF market could be a complementary business to SIA Engineering’s clients.

More importantly, we believe a consolidated ST Engineering and SIA Engineering could help streamline their operating expenses and boost their operating margins significantly (c.5%), allowing the incumbents to compete effectively for business in terms of service superiority vs. low-cost offerings, which are not a strong and lasting differentiating service factor, in our view.

2018 likely to outperform market’s expectations We believe ST Engineering is well-positioned to exceed the street’s earnings expectations for 2018, assuming no further provisions/impairment charges are made for its marine division this year. We estimate total provisions/impairment charges amounting to c.SGD50m were made in 2017 due to cost overruns on its 2 ConRo vessels. Assuming the successful deliveries of these vessels by 1H18, we believe we could see normalised earnings of c.SGD560m for 2018 in the absence of these one-off expenses, without factoring in any earnings growth for its 3 other divisions.

Hence, we view the street’s 2018 earnings forecast of c.SGD542m as overly conservative and believe St Engineering’s share price will see a positive rerating upon street upgrades when earnings strength becomes increasingly evident over the next few quarters.

What could go wrong? Losing technological advantage in the MRO segment We believe a strong focus on technological differentiation is a key competitive advantage that ST Engineering has over its lower-cost neighbouring Asia peers. Failure to stay ahead of the technological curve in the arena of smart MRO initiatives could see ST Engineering lose market share to peers that compete on lower-cost service offerings to airlines.

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Singapore Strategy: 25 April 2018

Wilmar: quality agribusiness exposure

Jame Osman (65) 6228 6744 ([email protected])

What is the bull case? 4Q17 results were better Wilmar’s shares have risen by only 4.2% YTD, lifted by the company’s 4Q17 results, which than expected came in ahead of market expectations. A stronger-than-expected performance in the company’s oilseeds and grains segment, as well as contributions from associates/JVs, offset weakness in its palm and sugar businesses.

Current environment Given our current expectations for a decline in CPO prices in 2018, we continue to favours diversified advocate a selective stock-specific strategy for investors seeking exposure to the palm oil players, in our view space. Our order of preference favours companies with diversified operations as well as greater downstream exposure, as a lower commodity price cycle would likely benefit refiners through lower feedstock prices. Hence, Wilmar remains our preferred pick due to its integrated business model and diversified exposure to non-palm businesses, as well as a potential listing of its China assets in 2019.

Wilmar: net profit trend and forecasts (USDm) 1,700 30% 25% 1,500 20% 1,300 15% 10% 1,100 5% 900 0% (5%) 700 (10%) 500 (15%) 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Net profit (PATMI) Adj. net profit % growth YoY (RHS)

Source: Company

Key assumptions/sensitivity The share-price performance of the plantation stocks is correlated with CPO prices to varying degrees, as investors typically view these companies as proxies for exposure to the underlying commodity (palm oil), without the associated physical risks (transportation, storage, spoilage, etc).

Hence, companies with greater exposure to the downstream palm oil space usually see a higher correlation between their share-price performances and CPO price movements. Among the companies under our coverage, this theory (mostly) holds true – shares of Golden Agri (GGR SP, SGD0.35, Underperform [4]) the largest plantation company in Indonesia, have the highest correlation coefficient among the 4 companies, while Wilmar (the most diversified of the plantation companies) has a comparatively low ratio. However, what is puzzling to us is First Resources’ (FR SP, SGD1.69, Outperform [2]) correlation coefficient of 0.02 with CPO prices (suggesting almost no correlation), possibly as the share price is driven more by underlying fundamentals, given the potential for earnings growth in the medium term.

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Singapore Strategy: 25 April 2018

Singapore Plantations Sector: correlation of share-price performance with CPO price Correlation coefficient 250

Golden Agri: 0.89 200 IndoAgri: 0.75 Wilmar: 0.54 150

First Resources: 0.02 100

50

0

Apr-17 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Aug-11 Aug-08 Aug-09 Aug-10 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 CPO price Wilmar First Resources IndoAgri Golden Agri

Source: Bloomberg, Daiwa calculations

What could go wrong? Higher tariffs in on While industry production is likely to see positive YoY growth in 2018, several demand imported vegetable oils variables cloud the outlook for CPO prices in the near term, in our opinion. In India, which imports around 60-70% of its edible oil requirement, the government raised the import tax on edible oils in March 2018 to the highest level in more than a decade to support domestic crop consumption following record levels of rapeseed, as well as better groundnut and soybean crop harvests. Following on from an increase in November 2017, the import tax on CPO was lifted to 44% (from 30% and 15% before that), while the duty on refined palm oil was lifted to 54% (from 40% and 25% before that).

Meanwhile, the EU passed two resolutions in 2017 – to implement a single certified sustainable palm oil (CSPO) scheme for Europe-bound palm oil exports after 2020, as well as plans to ban palm oil from the EU biofuel programme by 2020. Finally, the prospect of an escalation in trade tariffs with the US could impact the import of soybeans imported from the US into China, which has seen a significant YoY increase in the past several years in response to greater demand from livestock farming (and corresponding soybean- meal production). Given the current overcapacity of soybean crushing facilities in China, a significant decline in throughput is likely to negatively impact crush margins, even as the sector has observed consolidation and stabilising margins (as seen in Wilmar’s recent results).

US-China trade war More recently, fears over a potential US-China trade war, including plans to impose a 25% negative for Wilmar tariff on US soybean imports, have stoked concerns that oilseed crushers in China such as Wilmar could be negatively impacted by lower crush volumes. Wilmar’s oilseed segment PBT margins had been the key positive surprise in the past two quarters, as soybean crush margins – plagued by overcapacity issues in the past few years – have only recently seen some sort of stabilisation. Further, as it appears that soybean meal is not on the hit list of tariff-imposed imports, US crushers including Bunge and ADM could benefit by importing processed soybeans rather than unprocessed soybeans. Given that Wilmar’s oilseed and grains segment contributed around 53% of its 2017 PBT, a significant decline in soybean imports would pose downside risks to earnings forecasts for Wilmar in the near term.

However, the impact could be mitigated by the fact that China has been reducing its reliance on US soybean imports by stepping up imports from other major producers like Brazil and Argentina. China imports around 95m MT of soybeans annually (around 63% of global imports); by way of comparison, Brazil and Argentina produce around 115m MT (34% of global production) and 42m MT (12% of global production), respectively.

Although some market observers believe that the potential decline in imported soybeans could be beneficial for palm oil prices, given substitution effects between soybean oil and palm oil, we believe that a significant amount of soybeans are used mainly for livestock farming purposes. As such, it is as yet unclear whether this could point to higher demand for palm oil, as there could still be uncleared soybean-oil stocks. Nevertheless, near-term

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Singapore Strategy: 25 April 2018

sentiment could drive CPO prices. Under such a scenario, this would be positive for ‘pure- play’ CPO producers such as Golden Agri and First Resources. We estimate that a 10% increase in CPO price would result in a 32% increase to our 2018E earnings forecast for Golden Agri.

Singapore Plantations Sector: EPS sensitivity to CPO-price changes (2018E) Wilmar GGR FR IFAR Earnings sensitivity to 10% increase in CPO price 4.9% 32.3% 10.7% 9.4%

Source: Daiwa estimates

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Singapore Strategy: 25 April 2018

SIA Engineering: on the cusp of a turnaround

Royston Tan (65) 6228 6745 ([email protected])

What is the bull case? We look for an earnings After 3 consecutive years of adjusted earnings declines, we forecast an earnings recovery recovery from FY18 for SIA Engineering in FY18, led by strong demand for engine MRO maintenance. While the company’s core airframe maintenance and component overhaul services segment remains lacklustre, we foresee a gradual pick-up in activities, spearheaded by a rise in shop visits for subsidiary SIA Engineering Philippines (SIAP), a 65:35 JV with Cebu Air, as evident in its 1H FY18 results, where “C” checks at its Clark base almost doubled from 16 in 1H FY17 to 30 in 1H FY18.

We see Singapore According to Clark International Airport Corporation (CIAC), 2017 saw a record high of Airlines’ aggressive fleet 1.5m passengers (up 59% YoY) passing through Clark International Airport (CIA) due to expansion plans new Clark flights launched by local and international airlines in the face of heavy traffic benefiting SIA congestion at nearby Manila Ninoy Aquino International Airport. CAPA forecasts passenger Engineering over the traffic at CIA to increase at a similar rate in 2018, with medium- to longer-term growth longer term stemming from the ongoing terminal expansion initiatives at CIA, which should be completed by 2020. We see SIAP as one of the key beneficiaries of the growth at CIA, given its 3 hangar facilities ideally located at Clark. On a medium- to longer-term horizon, we think SIA Engineering would be a beneficiary of parent SIA’s aggressive fleet expansion plans, which could see the latter’s fleet size increasing by more than 50% over the next 10 years, on our forecasts.

SIA Engineering: “C” checks at Clark base SIA Engineering: JVs and associates’ contributions (SGDm) 40 180 35 160 140 30 Likely bottomed in FY2016-17 120 25 100 20 80 60 15 40 10 20 5 0 FY2013 FY2014 FY2015 FY2016 FY2017 9MFY17 9MFY18 0 Associate profits JV profits FY2013 FY2014 FY2015 FY2016 FY2017 1HFY17 1HFY18 Source: Company Source: Company

We expect SIAE to While we are cautiously optimistic of a turnaround in its core maintenance segment, we benefit from additional believe that a key earnings driver in the short term will be demand for engine MRO. We inspections for Trent highlighted in our 13 April note, Additional inspections for Trent 1000 engines that SIA 1000 engines in the Engineering is likely to be a beneficiary of greater engine maintenance/inspection activity short term as guided by Rolls Royce due to issues pertaining to its Trent 1000 Package C engines. SIA Engineering saw its 3Q FY18 JV earnings increase by 60% YoY to SGD22.9m as a result of a better performance by Singapore Aero Engine Services Pte Ltd (SAESL), a 50:50 JV with Rolls Royce for the maintenance of Trent engines. We believe that ongoing issues with the Trent 1000 engines will further propel earnings growth for SAESL for the next couple of quarters. On a medium-term horizon, we see the recent partnership with General Electric (GE) in relation to maintenance jobs for the GE90 engines (one of the most widely-used engines for B777-300ER aircraft) as a key earnings catalyst for the company’s engine MRO business.

While concerns over elevated competition for MRO business in the Asia Pacific region are not without basis, we believe that demand for MRO services in the short term (2-3 years) will still outstrip supply. We are, however, more cautious of additional capacity coming on line from 2021-22, when key MRO clusters in countries such as Thailand and Malaysia

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Singapore Strategy: 25 April 2018

become operational. We detailed the hangar capacities for regional MRO operators in our 10 April sector report, MRO: Asia Pacific aftermarket battleground heats up, with the conclusion that MRO demand, particularly in the engines segment, remains in favour of the existing incumbents. However, operators like SIA Engineering should not be resting on their laurels, but rather should be focusing on developing their smart MRO capabilities as well as engaging in more strategic partnerships with key OEM players in the aviation MRO supply chain to gain a competitive edge vs. lower-cost operators. In this respect, we see SIA Engineering as having one of the most comprehensive partnerships among MRO operators, some of which are still in the start-up phase and might not be contributing to group earnings at the moment (ie, JV with Boeing). However, we believe these partnerships will be critical in ensuring that SIA Engineering’s product/service offerings to clients remain relevant in the era of new-generation aircraft.

Market concerns over We have an Outperform (2) rating on SIA Engineering with a DCF-based 12-month TP of competition from low- SGD3.68. We believe that market concerns over elevated competition are likely factored cost players already into the share price, and we see potential for the company to beat Daiwa’s and the baked into the share market’s earnings expectations in its 4Q FY18 results (mid-May) on stronger-than- price, in our view expected JV/associates’ contributions, as well as a rebound in core operating margins (excluding FX and one-off provisioning impact).

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Singapore Strategy: 25 April 2018

Raffles Medical: regional expansion to bear fruit

Jame Osman (65) 6228 6744 ([email protected])

What is the bull case? Muted share-price Raffles Medical Group’s (RMG) share-price performance has been relatively muted YTD performance thus far (+2.7% vs. +2.8% in the FSSTI) following a disappointing 2017 in which the share price declined by around 22% and underperformed the strong Singapore market recovery. A large part of the share-price weakness could be attributable to the company’s weaker-than- expected financial performance over the past several quarters, which was impacted by a combination of: 1) a slowdown in top-line growth (2017: +0.8% YoY), and 2) the spectre of start-up costs from its various expansion projects weighing on the near-term earnings outlook.

RMG: revenue growth trend by segment (% YoY) 35%

30% Acquisition of International SOS 25% clinics 20% 15% 10% 5% 0% (5%) 2010 2011 2012 2013 2014 2015 2016 2017 Healthcare services Hospital services

Source: Company

4Q17 results came in Nevertheless, RMG’s 4Q17 results came in ahead of market expectations, which have ahead of market been reset over the past few quarters to factor in the earnings impact of the significant expectations; focus capacity coming on stream in 2018. With the completion of its hospital extension in could shift to top-line Singapore (opened in January 2018), management said it believes “high single-digit” growth in the near term revenue growth in 2018 is attainable (our forecast: +8.2% YoY for its Singapore business), driven by an improvement in operational trends observed YTD, increased capacity following the opening of its hospital extension, and healthy domestic demand. RMG also announced a 5-year partnership with the government to provide family medicine, which should result in higher patient load.

2018 to see opening of 2018 is also likely to see the opening of RMG’s first hospital in Chongqing, China (likely to RMG’s Chongqing open sometime in 4Q18 with 200 operating beds [bed capacity of 700]). We believe the hospital way in which staff-cost trends are managed will be key to determining the eventual impact of start-up losses from the hospital; management said that recruitment will likely only begin in 2H18, while it will only scale up operations when occupancy exceeds the 50% level.

Strong structural growth We believe that, going forwards, investors could shift their focus toward the company’s outlook remains the key near-term revenue growth as an indication of how the company’s expansion plans could draw for us bear fruit in the years ahead. As we see it, RMG remains one of the best-managed private hospital operators in the region, and we are positive on the company’s expansion efforts to transform itself into a regional healthcare operator.

Key assumptions/sensitivity Given there is little visibility at this early stage as to how profitable RMG’s China ventures could turn out to be in the years ahead, some of this uncertainty could be reflected in the current share price. Daiwa and Bloomberg consensus forecasts over the 2018-20E period will likely be sensitive to incremental data points over operational and financial trends as these projects ramp up operations.

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We estimate that RMG’s Chongqing and hospitals will collectively contribute around SGD228m in revenue in 2019E, when both hospitals should be operational. On our forecasts, China operating profit will increase at a 146% CAGR over 2020-25E and eventually contribute around 45% of RMG’s overall profitability by 2025E, if the company can successfully ramp up its operations.

RMG: revenue contribution of China hospitals to the overall business over 2017-25E

50% 46% 44% 45% 45% Shanghai hospital 41% operational 2H19 39% 40% 34% 35% 30% Chongqing hospital 27% operational 2H18 25% 20% 15% 10% 7% 5% 0% 0% 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Source: Daiwa forecasts Note: For simplicity, China includes only the Shanghai and Chongqing hospital, but excludes its existing clinics

RMG: breakdown between Singapore and China businesses SGD m 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenue Singapore + others 410.5 473.6 477.6 516.9 559.0 595.7 632.1 670.2 711.7 748.9 787.8 China - - - 36.0 204.0 302.4 396.9 472.3 554.3 616.0 680.9 Total revenue 410.5 473.6 477.6 552.9 763.0 898.1 1,029.0 1,142.5 1,265.9 1,364.8 1,468.7

Operating profit Singapore + others 80.6 81.9 80.1 84.5 108.2 124.3 130.1 136.5 143.0 148.3 154.0 China - - - (1.8) (14.9) (12.7) 6.9 36.1 70.0 108.9 136.2 Total operating profit 80.6 81.9 80.1 82.7 93.4 111.5 137.0 172.7 213.0 257.2 290.2 % contribution Revenue Singapore + others 100% 100% 100% 93% 73% 66% 61% 59% 56% 55% 54% China 0% 0% 0% 7% 27% 34% 39% 41% 44% 45% 46%

Operating profit Singapore + others 100% 100% 100% 102% 116% 111% 95% 79% 67% 58% 53% China 0% 0% 0% -2% -16% -11% 5% 21% 33% 42% 47%

Source: Company, Daiwa forecasts Note: *For simplicity, China includes only the Shanghai and Chongqing hospital, but excludes its existing clinics

What could go wrong? Execution risk remains the primary risk we see for RMG. Some investors remain sceptical of management’s ability to execute in China. However, we believe that that the company’s regional experience, group practice model, and Mayo Clinic affiliation are sustainable competitive advantages. Also, RMG has existing experience in China – it operates a 13,000 sq ft medical centre in Shanghai (since 2010), as well as the 6 clinics it acquired from International SOS in August 2015.

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Singapore: valuations 24/4/2018 Price (loc curr) Mkt. cap PER (x) PBR (x) Div yield(%) BBG code Company Rating 24/4/2018 (USDm) 2018E 2019E 2018E 2019E 2018E 2019E Banks DBS SP DBS Group Outperform 29.99 58,046 13.5 11.7 1.6 1.5 4.0% 4.3% OCBC SP Oversea-Chinese Banking Corporation Hold 13.74 43,449 12.9 11.6 1.4 1.3 3.5% 3.9% UOB SP Outperform 29.69 37,284 13.4 12.1 1.4 1.3 3.5% 4.0% Developers HKL SP Hongkong Land Buy 7.13 16,775 16.6 14.8 0.5 0.5 2.9% 3.1% CAPL SP CapitaLand Outperform 3.72 11,933 16.7 16.3 0.8 0.8 3.2% 3.2% CIT SP City Developments Outperform 12.53 8,605 16.2 15.4 1.2 1.2 1.4% 1.4% FCL SP Frasers Centrepoint Outperform 1.95 4,264 9.1 9.5 0.7 0.7 4.4% 4.4% OUE SP OUE Buy 1.79 1,219 26.3 21.0 0.4 0.4 1.7% 2.0% YOMA SP Yoma Strategic Hold 0.43 564 36.6 26.3 1.1 1.1 0.6% 0.6% Telecoms ST SP Singapore Telecom Hold 3.43 42,355 14.0 13.1 1.8 1.8 5.3% 5.7% STH SP StarHub Sell 2.27 2,964 19.5 21.3 53.7 284.0 7.0% 6.2% M1 SP M1 Hold 1.81 1,255 12.9 14.6 3.7 3.5 6.2% 5.5% Netlink SP NetLink NBN Trust Buy 0.81 2,364 44.0 38.0 1.1 1.1 5.7% 5.7% Offshore Marine KEP SP Keppel Corp Buy 8.26 11,262 13.4 13.3 1.2 1.2 2.9% 3.0% SCI SP Industries Hold 3.21 4,333 13.8 12.3 0.8 0.8 2.7% 3.3% YZJSGD SP Yangzijiang Sell 1.21 3,632 10.7 13.4 0.8 0.8 3.7% 3.1% SMM SP Hold 2.27 3,582 -229.6 93.2 2.0 2.0 0.9% 0.9% Industrial SIA SP Singapore Airlines Hold 10.79 9,771 20.7 19.4 0.9 0.9 1.9% 1.9% SATS SP SATS Outperform 5.43 4,571 24.6 22.3 3.6 3.5 3.3% 3.5% STE SP Singapore Technologies Engineering Buy 3.48 8,171 19.2 18.1 4.7 4.5 4.6% 4.6% SIE SP SIA Engineering Outperform 3.24 2,741 21.4 18.7 2.3 2.3 4.3% 4.6% REITS CT SP CapitaLand Mall Trust Outperform 2.08 5,576 14.5 13.7 1.1 1.0 5.4% 5.5% AREIT SP Ascendas Real Estate Investment Trust Underperform 2.68 5,936 13.3 13.1 1.2 1.2 6.2% 6.3% CCT SP CapitaLand Commercial Trust Sell 1.8 4,913 21.5 20.5 1.0 1.0 4.8% 4.9% SUN SP Suntec REIT Underperform 1.9 3,843 25.2 16.5 0.9 0.9 5.3% 5.3% KREIT SP Keppel REIT Underperform 1.2 3,115 31.4 14.8 0.9 0.8 4.8% 4.7% MINT SP Mapletree Industrial Trust Underperform 2 2,850 12.3 16.3 1.4 1.4 5.9% 6.2% MLT SP Mapletree Logistics Trust Underperform 1.25 2,893 14.4 17.3 1.2 1.2 6.0% 6.1% FCT SP Frasers Centrepoint Trust Outperform 2.22 1,556 15.7 11.7 1.1 1.1 5.6% 5.8% ART SP Ascott Residence Trust Hold 1.12 1,830 16.8 16.4 0.9 0.9 6.4% 6.6% SGREIT SP Starhill Global REIT Outperform 0.72 1,186 10.2 11.1 0.8 0.8 6.9% 7.0% CDREIT SP CDL Hospitality Trusts Hold 1.73 1,575 12.6 10.7 1.1 1.1 5.8% 6.2% CRCT SP CapitaLand Retail China Trust Underperform 1.54 1,142 13.7 9.2 0.9 0.9 6.8% 7.2% FCOT SP Frasers Commercial Trust Hold 1.44 969 23.9 18.9 0.9 1.0 6.5% 6.6% EREIT SP ESR-REIT Outperform 0.535 1,296 14.9 13.3 0.9 0.9 7.8% 8.0% AGT SP Accordia Golf Trust Outperform 0.63 523 11.4 11.1 0.7 0.7 7.2% 8.8% Consumer CD SP ComfortDelGro Corp Hold 2.21 3,608 15.6 15.0 1.8 1.7 4.8% 5.3% RFMD SP Raffles Medical Group Outperform 1.17 1,556 32.0 27.8 2.7 2.6 1.9% 2.0% SSG SP Sheng Siong Group Hold 1.02 1,158 21.5 20.5 5.2 4.8 3.3% 3.4% DFI SP Dairy Farm International Buy 8.41 11,374 20.8 18.4 6.0 5.4 3.1% 3.5% Bread SP BreadTalk Group Outperform 1.96 416 20.6 18.3 3.3 2.9 1.3% 1.3% HMI SP Health Management International Buy 0.65 412 25.5 21.9 7.4 6.0 1.2% 1.4% Plantations WIL SP Buy 3.22 15,376 12.4 11.2 0.9 0.9 2.8% 3.1% GGR SP Golden Agri-Resources Underperform 0.35 3,366 20.4 19.0 0.8 0.8 1.1% 1.5% FR SP First Resources Outperform 1.69 2,022 11.3 10.2 1.8 1.6 2.6% 2.9% IFAR SP Indofood Agri Resources Underperform 0.32 350 6.7 6.0 0.4 0.3 2.3% 2.7%

Source: Bloomberg, Daiwa forecasts

Daiwa Securities group subsidiary, Daiwa PI Partners Co.Ltd., has extended to Accordia Golf Co, Ltd.(“Accordia Golf”) a loan facility with stock acquisition rights. Another Daiwa Securities group subsidiary, Daiwa Real Estate Asset Management Co. Ltd., has entered into an asset management agreement to provide advice to a godo kaisha SPC established for the purpose of acquiring from Accordia Golf shares in Accordia Golf subsidiaries owning golf courses. Daiwa Real Estate Asset Management Co. Ltd. owns a 51% stake in the trustee-manager that assumes the role of trustee and asset manager of Accordia Golf Trust, a tokumei kumiai (silent partnership) investor in the SPC. (Accordia Golf owns a 49% stake in the trustee-manager). When Accordia Golf Trust was listed on the , Daiwa Securities group was one of the underwriters and sellers of Accordia Golf Trust units in Japan and abroad (Daiwa Securities Co. Ltd. was sole seller in Japan). As a joint global coordinator, Daiwa Securities group subsidiary Daiwa Capital Markets Singapore Limited provided general advice concerning Accordia Golf Trust, including with regard to structuring the trust vehicle.

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Singapore Strategy: 25 April 2018

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Steel Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Machinery) Co-head of Asia Pacific Research Iris PARK (82) 2 787 9165 [email protected] Craig CORK (852) 2848 4463 [email protected] Consumer/Retail Regional Head of Asia Pacific Product Management SK KIM (82) 2 787 9173 [email protected] Paul M. KITNEY (852) 2848 4947 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Strategist for Asia Pacific; Strategy (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Kevin LAI (852) 2848 4926 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Chief Economist for Asia ex-Japan; Macro Economics (Regional) Olivia XIA (852) 2773 8736 [email protected] TAIWAN Macro Economics (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Head of Automobiles; Transportation and Industrial (Hong Kong/China) (Regional) Jay LU (852) 2848 4970 [email protected] Nora HOU (886) 2 8758 6249 [email protected] Automobiles and Components (Hong Kong/China) Banking; Diversified financials; Insurance Leon QI (852) 2532 4381 [email protected] Steven TSENG (886) 2 8758 6252 [email protected] Regional Head of Financials; Banking; Diversified financials; Insurance IT/Technology Hardware (PC Hardware) (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Yan LI (852) 2773 8822 [email protected] IT/Technology Hardware (Handsets and Components) Banking (China) Helen CHIEN (886) 2 8758 6254 [email protected] Anson CHAN (852) 2532 4350 [email protected] Small/Mid Cap Consumer (Hong Kong/China) Adrian CHAN (852) 2848 4427 [email protected] INDIA Consumer (Hong Kong/China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Jamie SOO (852) 2773 8529 [email protected] Head of India Research; Strategy; Banking/Finance Gaming and Leisure (Hong Kong/China) Saurabh MEHTA (91) 22 6622 1009 [email protected] John CHOI (852) 2773 8730 [email protected] Capital Goods; Utilities Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Fiona LIANG (852) 2532 4341 [email protected] SINGAPORE Industrial (Hong Kong/China) Ramakrishna MARUVADA (65) 6228 6742 [email protected] Dennis IP (852) 2848 4068 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE David LUM (65) 6228 6740 [email protected] (Hong Kong/China) Banking; Property and REITs Daniel YANG (852) 2848 4443 [email protected] Royston TAN (65) 6228 6745 [email protected] Power, Utilities, Renewable and Environment (PURE) – Solar and Nuclear (China) Oil and Gas; Capital Goods Don LAU (852) 2848 4469 [email protected] Jame OSMAN (65) 6228 6744 [email protected] Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong) Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore) Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong and China Property JAPAN Cynthia CHAN (852) 2773 8243 [email protected] Yukino YAMADA (81) 3 5555 7295 [email protected] Property (China) Strategy (Regional) Carlton LAI (852) 2532 4349 [email protected] Small/Mid Cap (Hong Kong/China) Michelle WANG (852) 2773 8842 [email protected] Transportation (Hong Kong/China) Hebe LIU (852) 2773 8731 [email protected] Custom Products Group

PHILIPPINES Renzo CANDANO (63) 2 737 3022 [email protected] Consumer Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg Ilag (63) 2 737 3023 [email protected] Utilities; Energy

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Singapore Strategy: 25 April 2018

Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100 Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935 Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340 Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Daiwa Capital Markets Europe Limited, Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, (7) 495 641 3416 (7) 495 775 6238 Moscow Representative Office Russian Federation Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 Manama, Bahrain Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621 Daiwa Capital Markets Singapore Limited 7 Straits View, Marina One East Tower, #16-05 & #16-06, (65) 6387 8888 (65) 6282 8030 Singapore 018936, Republic of Singapore Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638 Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191 Seoul, Korea Daiwa Securities Co. Ltd., Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District， (86) 10 6500 6688 (86) 10 6500 3594 Beijing 100020, People’s Republic of China Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, (86) 21 3858 2000 (86) 21 3858 2111 Shanghai China 200120 , People’s Republic of China Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, (66) 2 252 5650 (66) 2 252 5665 Lumpini, Pathumwan, Bangkok 10330, Thailand Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hoan Kiem Dist. Hanoi, Vietnam

DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417 London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

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This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Daiwa Securities Group Inc., its subsidiaries or affiliates do and seek to do business with the company(s) covered in this research report. Therefore, investors should be aware that a conflict of interest may exist. The following are additional disclosures.

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Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 68.4% Hold** 21.2% Sell*** 10.4% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2018. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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