9 September 2016 Asia Pacific/Singapore Credit Suisse Research

Singapore Market Strategy The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver Connections Series incisive cross-sector and cross-border thematic insights for our clients.

Research Analysts Bad and getting worse

Equity Research: Gerald Wong, CFA 65 6212 3037 Figure 1: Singapore's corporate share of GDP has been falling since [email protected] 2010 Economic Research: Michael Wan 65 6212 3418 [email protected] 60% 35% 55% 30% 50% 25% 45% 20% 40% 15% 35% 10% 30% 5% 25% 0% 20% -5% 1980 1985 1990 1995 2000 2005 2010 2015 Real GDP %yoy - RHS Wage share of GDP Corporate share of GDP

Source: CEIC, Bloomberg, Credit Suisse

■ Regulatory changes have lowered corporate profitability. While the slowdown in Singapore's economic growth is largely perceived to be driven by cyclical headwinds, we believe pro-consumer policy shifts since 2011 have also driven corporate profitability lower. This is reflected in regulatory changes across various sectors, including potential fourth mobile operator, new rail financing framework, as well as tighter foreign worker restrictions. ■ Economic structural problems intensifying. In our view, the growing divergence between declining corporate profitability and rising labour costs is unsustainable. Wage share of GDP has risen to 43% in 2015 from 39% in 2011, and the gap has to be closed through weaker employment or currency depreciation unless there is a surge in productivity. Initial signs of stress have appeared, with investment commitments moderating, labour market weakening, and export competitiveness declining. As a result, we expect GDP growth to surprise to the downside and slow to 1.1% in 2017, below consensus expectation of 1.9%. ■ Remain cautious on Singapore. Close to 30% of firms on the SGX were loss-making in 2Q16, while 12-month moving average net margins have fallen to 6.7%, close to GFC low of 6.3%. With a decline in ROE to 8.2%, below the 2008-09 trough of 10.2%, MSCI Singapore has been the worst- performing market in Non-Japan Asia year-to-date. Despite attractive valuation of just 1.12x P/B, we remain cautious unless there are signs of reversal in government policy. Our least preferred stocks are DBS, M1, and Starhub (UNDERPERFORM). Our preferred picks are CityDev, SATS, and MCT (OUTPERFORM).

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

9 September 2016

RESEARCH ANALYSTS Bad and getting worse Equity Research: Gerald Wong, CFA 65 6212 3037 Regulatory changes have eroded corporate profitability [email protected] We believe broad policy shifts by the Singapore government since 2011 have driven Economic Research: Michael Wan 65 6212 3418 corporate profitability lower while transferring a larger share of the economic pie to [email protected] workers and consumers. This is reflected through a number of major regulatory changes, including the potential introduction of a fourth telco operator, the new rail financing framework, greater capital requirements for banks, cooling measures in the property We believe broad policy sector, lower vesting contract levels for power generation companies, as well as tightening shifts by the Singapore on use of foreign workers across various industries. government since 2011 have driven corporate While there have been selected cases where both consumer and corporates have profitability lower benefited through more government subsidies, such as in the Bus Contracting Model, the factors above still dominate. Recent policy announcements have continued to reinforce this policy shift, including the raising of minimum salary requirement for Employment Pass (EP) applications. Economic impact: Structural problems intensifying

In our view, the growing Together with government policies to raise wages and promote inclusive growth, GDP divergence between growth and value added accruing to corporates have fallen relative to compensation to declining corporate employees (i.e., wages) since 2010. Wage share of GDP has risen to 43% in 2015 from profitability and rising 39% five years ago. We note Singapore's GDP wage share coincides well with distinct labour costs is business cycle; for instance the sizeable rise in the early 1980s has preceded the 1985 unsustainable wage-induced recession. The current divergence between weak and declining corporate profitability, coupled with still rising labour costs in Singapore, is an unsustainable status quo, in our view. Unless we see a surge in productivity driving down unit labour costs, this gap will more likely be closed over time through weaker employment and wage growth, and/or a depreciation in the exchange rate. Initial signs of stress are starting to show up, with investment commitments moderating, labour market weakening close to Global Financial Crisis lows, while global export shares and competitiveness declining. At the We forecast GDP growth same time, retail sales have not benefited as negative spillover effect from a weaker of 1.1% in 2017, below corporate outlook has dominated. As a result, we expect GDP growth to surprise on the consensus expectation of 1.9% downside, and continue to forecast the Monetary Authority of Singapore (MAS) to ease again through a downward re-centering of the exchange rate policy band come October. Remain cautious on Singapore Reflecting the fall in corporate profitability, close to 30% of firms on the SGX were loss- making in 2Q16. Likewise, net margin (12-month moving average) for stocks on SGX fell to 6.7% in 2Q16, close to the Global Financial Crisis low of 6.3%. Reflecting the decline in Despite attractive profitability, MSCI Singapore ROE has declined from a peak of 17% in 2008 to 8.2%, which valuation, we remain is already below the 2008-09 trough of 10.2%. With a strong correlation between ROE and cautious on MSCI index performance, MSCI Singapore has underperformed Non-Japan Asia YTD. While MSCI Singapore unless there Singapore is currently trading at a P/B of 1.12x, just 6% above the 2008-09 lows of 1.06x, we are signs of reversal in do not see a broad-based market recovery as ROE remains under pressure. government policy We are generally cautious on sectors highly leveraged to domestic growth, and where valuation has not reflected the near-term headwinds. As such, our key underweights are in the banks and telco sectors. Our least preferred stocks are DBS, Starhub, and M1 (UNDEPERFORM). Our preferred stocks are City Developments, SATS, and MCT (OUTPERFORM).

Singapore Market Strategy 2 9 September 2016

Equity Research

FOR IMPORTANT DISCLOSURES AND DISCLAIMERS, PLEASE SEE THE EQUITY RESEARCH DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 9 September 2016

Focus charts Figure 2: Regulatory change across key industries in Singapore Sector Regulatory change or requirement Impact Telcos IDA reserved low-frequency-band spectrum for new operators to enhance Attractive sector returns by operators could be threatened. competition in mobile market. Land Transport Transfer of three rail lines to new rail financing framework, where the Land Composite operating margin of the operator will be capped at 5.0% (with Transport Authority (LTA) will own the operating assets. downside risks) from 15.7% in FY12-16. Property Eight rounds of property cooling measures have been implemented since Private residential prices have declined 9.4% from peak in 3Q13, while 2009. transaction volumes have more than halved from 2012 levels. Banks Monetary Authority of Singapore (MAS) requires higher capital Structural pressure on NIMs due to more stringent capital requirements. requirements of 200bps above Basel III standards. Utilities Vesting contract levels which are at a premium to spot prices reduced from Generation companies are making negative spark spreads. 60% in 2011 to 25% in 2016. Services/Construction/ Various foreign labour tightening policies introduced have reduced foreign Credit Suisse estimates 0.9 pp reduction in trend growth from foreign labour Marine population growth from 92,000 per annum in 2005-10 to 33,300 in 2015. restrictions

Source: Company data, Credit Suisse Equity Research estimates

Figure 3: Divergence between declining corporate Figure 4: Singapore's exports have been a laggard profits and rising labour costs looks unsustainable compared to the region

Corporate Surplus %yoy Selected Asia Nominal Exports (Index 2011 = 100)

25.0% Unit Labour Costs (t-1) %yoy 10.0% 200 CH PH SG

8.0% ID VN TW 20.0% 180 6.0% 15.0% 160 4.0% 10.0% 140 2.0% 120 5.0% 0.0%

-2.0% 100 0.0%

-4.0% 80 -5.0% -6.0% how will gap be closed 60 -10.0% between rising labour -8.0% costs and lower 40 -15.0% corporate profits? -10.0% 20 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CEIC, Credit Suisse Equity Research estimates Source: CEIC, Credit Suisse Equity Research estimates

Figure 5: Quarterly net margin structurally lower Figure 6: MSCI Singapore has underperformed on declining market ROE 16.0

14.0

12.0

10.0

8.0

6.0

4.0

1Q04 1Q05 1Q07 1Q09 1Q10 1Q12 1Q13 1Q15 1Q03 1Q06 1Q08 1Q11 1Q14 1Q16

Net margin- 12 month moving average (%)

Source: Company data, the BLOOMBERG PROFESSIONAL™ service Source: Company data, the BLOOMBERG PROFESSIONAL™ service

Singapore Market Strategy 4 9 September 2016

Policy shifts have eroded corporate profitability Singapore Equity Research We believe broad policy shifts by the Singapore government since 2011 have driven Analyst Team Gerald Wong, CFA corporate profitability lower while transferring a larger share of the economic pie to (Strategy / Capital Goods) workers and consumers. This is reflected through a number of major regulatory changes, 65 6212 3037 which we summarise below: Varun Ahuja, CFA (Telecom Services) ■ Telcos: IDA is keen to bring in a fourth operator 65 6212 3017

Louis Chua, CFA ■ Land transport: New rail financing framework (Property – Developers / Land Transport) ■ Property: Eight rounds of cooling measures introduced 65 6212 5721

Danny Goh ■ Banks: Greater capital requirements (Banks) 60 3 2723 2083 ■ Utilities: Reduction in vesting contract levels for power generation plants Da Wei Lee (Healthcare) ■ Services/Construction/Marine: Tightening on use of foreign workers 65 6212 3004 We are cognisant that this is not a zero-sum game, and there have been selected cases Christopher Siow (Transport) where both consumer and corporates benefited through more government subsidies, such 65 6212 3062 as in the Bus Contracting Model. In the area of digital disruption, the government has

Ting Min Tan generally adopted a light-touch approach in regulating both private car hires and short- (Agricultural Products & term leases, which allows consumers to enjoy the benefits of innovation while attempting Agribusiness) 603 2723 2080 to level the playing field for both new entrants and incumbents. Recent policy

Nicholas Teh announcements have continued to reinforce this policy shift, including the raising of (Property - REITs) minimum salary requirement for Employment Pass (EP) applications. 65 6212 3026

Kwee Hong Ching Regulatory changes across key industries 65 6212 3142 Figure 7 details a list of key regulatory change across key industries in Singapore. In our Shih Haur Hwang 65 6212 3024 view, these policy shifts have driven corporate profitability lower while transferring a larger

Daniel Lim share of the economic pie to workers and consumers. 65 6212 3011

Figure 7: Regulatory changes across key industries in Singapore Sector Regulatory change or requirement Impact Telcos IDA reserved low-frequency-band spectrum for new operators to enhance Attractive sector returns by operators could be threatened. competition in mobile market. Land Transport Transfer of three rail lines to new rail financing framework, where the Land Composite operating margin of the operator will be capped at 5.0% (with Transport Authority (LTA) will own the operating assets. downside risks) from 15.7% in FY12-16. Property Eight rounds of property cooling measures have been implemented since Private residential prices have declined 9.4% from peak in 3Q13, while 2009. transaction volumes have more than halved from 2012 levels. Banks Monetary Authority of Singapore (MAS) requires higher capital requirements Structural pressure on NIMs due to more stringent capital requirements. of 200 bp above Basel III standards. Utilities Vesting contract levels which are at a premium to spot prices reduced from Generation companies are making negative spark spreads 60% in 2011 to 25% in 2016. Services/Constructio Various foreign labour tightening policies introduced have reduced foreign Credit Suisse estimates 0.9 pp reduction in trend growth from foreign labour n/Marine population growth from 92,000 per annum in 2005-10 to 33,300 in 2015. restrictions.

Source: Company data, Credit Suisse Equity Research estimates Telcos: IDA keen to bring in fourth operator The Singapore Cellular market is at a critical juncture with the possible entry of a new fourth cellular operator in the market. We see a high probability of a new operator coming in to Singapore cellular market. Below we detail our reasoning for it.

Singapore Market Strategy 5 9 September 2016

Availability of low-band spectrum The regulator has again reserved spectrum in the upcoming spectrum auction (expected in 4Q16) for the new operator. The IDA has decided to reserve 60MHz (2x10MHz in 900MHz and 40MHz in 2.3GHz) for the new operator at a reserve price of S$35 mn. We view IDA’s recent terms as attractive, given the regulator is reserving 2x10MHz of 900MHz. Low frequency band spectrum is important for the new operator’s economics as it reduces the cost of operation given the reach and in building penetration of the frequency band. Additionally, incumbent operators are currently using the 900MHz spectrum and the regulator is withdrawing the same from incumbents to reserve it for new operator, highlighting IDA's keenness to introduce competition in the mobile market. We also note if there is no fourth mobile operator during the upcoming auction then there will not be any new operators in the sector for the next 15 years, given the unavailability of a low band spectrum, in our view.

Figure 8: IDA's terms for the upcoming spectrum auction look attractive for new operator 700MHz 900MHz 2300MHz (TDD) 2500MHz (TDD) 703-748MHz 885-915MHz Frequencies 2300-2340MHz 2570-2615MHz / 758-803MHz / 930-960MHz Amount of spectrum to be allocated 2x45MHz 2x30MHz 40MHz 45MHz Expected start date 1 Jan'18 1-Apr-17 1-Apr-17 1-Apr-17 Duration of spectrum (indicative) 15 years 16 years 16 years 16 years Spectrum reserved for new operator - 2x10MHz 40MHz - Proposed reserve price for new operator S$35m for the entire block Spectrum put for general auction 2x45MHz 2x20MHz - 45MHz Lot Size 2x5MHz 2x5MHz 5MHz 5MHz S$20m per S$20m per Reserve price in general auction S$3m per 5MHz S$3m per 5MHz 2x5MHz 2x5MHz Source: IDA, Credit Suisse Equity Research Three companies have filed expression of interest with IDA In September 2016, IDA announced that three companies—airYotta Pte Ltd, My Republic, and TPG Telecom—have submitted expression of interest with the regulator in being the fourth mobile operator in Singapore. In the earlier auction (2013), no new operator had shown interest in the Singapore cellular market despite the IDA reserving 2x20MHz of 2600MHz spectrum. Attractive sector returns might be under pressure With the No. 3 mobile operator (M1) having c.17% revenue market share and generating c.25% return on capital employed in 2015, we believe the sector returns look attractive for a new entrant to strive for a business case in the Singapore telecoms market. We note that M1 has consistently been generating RoCE of higher than 25% over the last ten years. The Singapore mobile sector has seen some pricing actions over the last 12-15 months (since talks of fourth mobile operators have gained momentum). We believe most of these price moves were aimed at pre-empting the introduction of competition in the sector. Of all the price actions (introduction of SIM-only plans, data add-on plans, and StarHub's new SurfHub plans), we are apprehensive of the data add-on plans as we believe they limit the data monetisation potential. We expect more aggressive price promotions over the next 18-24 months as the potential new entrant launches services in Singapore. We expect cellular industry service revenue to decline at a three-year CAGR of 1.8% until 2018E before stabilising in 2019E and 2020E as we anticipate the entry of a fourth cellular operator in Singapore in 2017. M1 is most vulnerable to losing market share, given the cellular business constitutes c. 90% of the company's total service revenue.

Singapore Market Strategy 6 9 September 2016

Land transport: New rail financing framework From 1 October 2016, three rail lines—North-South and West-West Lines (NSEWL), Circle Line (CCL) and Bukit Panjang LRT (BPLRT)—will be on the NRFF, with the operator going asset-light and focused on operations and maintenance. The announcement comes on the back of extensive consultations with the Land Transport Authority (LTA) since 2011, and is aimed at bringing current rail lines into a more sustainable financing framework. With operating assets held by LTA and capex obligations no longer borne by the operator, the operator will pay a licence charge for the right to use the operating assets and operate the lines. Figure 9: Overview of current vs new rail financing framework Current Rail Financing Framework (CRFF) New Rail Financing Framework (NRFF) Rail lines North-South & West-West Lines Circle Line (CCL) Bukit Panjang LRT (BPLRT) NSWEL, CCL, BPLRT (NSEWL) Licence tenure 30 + 30 years 10 + 30 years 29 + 30 years 15 + 5 years Licence term 1998 – 2028/2058 2009 – 2019/2049 1999 – 2028/2058 Oct 2016 – 2031/2036 Remaining term 12/42 years 3/33 years 12/42 years 15/20 years License obligations Buy over the rail operating assets by the specific dates set out in the respective licences, fund all capex All operating assets to be owned relating to the operating assets by LTA

Source: LTA Post-transition to the NRFF, LTA will receive a licence charge for the right to use the rail assets and operate the lines. The purpose of the licence charge is to allow the operator to share with LTA the risks and rewards of operating the three lines. In order to manage the revenue and operating cost risks borne by the operator, LTA has agreed a revenue collar and profit cap and collar arrangement during the licence period. Additionally, LTA may reimburse the operator, or vice-versa, when regulatory changes lead to changes in operating costs or revenue, thus providing some degree of insulation from cost pressures. Profit cap and collar The NRFF has been structured to allow the operator to achieve a composite EBIT (fare and non-fare) margin of 5% through the profit cap and collar arrangement with LTA, sharing both in the upside and downside risks. Figure 10 below illustrates the four different scenarios and the corresponding adjustment to the licence charge payable by LTA in order to allow the operator to achieve an EBIT margin of as close to 5% as possible. We note that LTA's sharing of the downside risks it limited to the maximum licence charge payable by the operator.

Figure 10: Profit cap and collar mechanism EBIT margin before licence charged calibration

EBIT margin below EBIT margin EBIT margin EBIT margin 3.5% between 3.5-5% between 5.1-6% above 6%

50% shortfall borne by LTA to share 85% of LTA to share 95% of No involvement from LTA (limited to max excess of 5% EBIT excess of 5% EBIT LTA licence charge payable) margin margin

Source: Company data, Credit Suisse Equity Research estimates

Singapore Market Strategy 7 9 September 2016

Asymmetric risks with limited upside from 5% EBIT margin While the risk-sharing mechanism provides for greater earnings and cash flow stability than the CRFF, we highlight that earnings risks are skewed to the downside, with EBIT margins unlikely to be higher than 5% in future. This is a result of the profit cap and collar mechanism, which substantially reduces the operator's share of the EBIT upside, while downside risks are largely borne by the operator. The composite margin of 5% is lower than Hong Kong's MTR (which operates an asset- heavy model no doubt) EBIT margin of 16.7% in FY14 and 14.7% in FY15 on its Hong Kong transport operations alone, i.e., excluding its commercial and property business. Property: Progressive cooling measures introduced since 2009 Eight rounds of property cooling measures have been implemented since 2009, with the objective of achieving a stable and sustainable property market. This has led to eleven straight quarters of decline in private residential prices, with prices having moderated a cumulative 9.4% from their peak in 3Q13. 1H16 total sales volume was up 9.4% YoY to 7,397 units buoyed by a mix of developer discounting, opportunistic buying and investor capitulation amid a softening rental market. Overall private residential vacancy rates jumped 1.4 pp to 8.9%, with non-landed vacancy similarly rising 1.7 pp to 10.4%. Meanwhile, the rental market continues to soften with a 0.6% QoQ decline. Private residential vacancies are now at 16-year highs since 2Q 2000, and we caution that 2016E remains a year of peak supply, with 21,608 units expected to complete and supply remaining elevated thereafter. With deteriorating fundamentals, we expect vacancies to continue its uptrend in the coming quarters.

Figure 11: Private residential prices have declined Figure 12: Annual transaction volumes have more 9.4% from peak than halved from 2012 levels

Index, 4Q98=100 45,000 40,654 160 38,900 40,000 37,102 37,873

140 35,000 32,640

120 30,000 25,042 22,719 100 25,000 20,000 17,851 80 13,642 14,117 15,000 12,052 12,847 60 10,000 7,397 40 5,000

- 20 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1H16 Mar-93 May-95 Jul-97 Sep-99 Nov-01 Jan-04 Mar-06 May-08 Jul-10 Sep-12 Nov-14 Primary sales Secondary sales URA Private Residential Price Index HDB Resale Price Index Source: URA Source: URA

In addition, we believe several specific policy objectives have been achieved: (1) speculative activity has fallen significantly, with monthly sub-sales now at a negligible 2- 4% of total volumes, (2) foreign demand has been curbed significantly with overall foreigner buying at 4% of total volumes, (3) housing affordability has improved substantially with incomes having risen faster than home prices on both a short-term and long-term perspective. The government has previously highlighted that property prices have increased faster than incomes, and that the gap must be closed. On both the public and private segments, we note that longer-term incomes have in general kept pace with property prices, with a large divergence observed only in recent years. However, we note that housing affordability has improved substantially since the cooling measures were introduced, and even if we

Singapore Market Strategy 8 9 September 2016

assumed that incomes remain flat from 2014 levels, the "gap" between incomes and prices has since been effectively eliminated.

Figure 13: Average and median household incomes Figure 14: Average and median household incomes vs HDB resale prices (2000=100) vs HDB resale prices (2008=100)

200 150

180 140

130 160 120 140 110 120 100

100 90

80 80

2008 2009 2010 2011 2012 2013 2015 2014

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

Average household income Median household income Average household income Median household income HDB Resale price index HDB Resale price index

Source: URA, HDB, Singstat, Credit Suisse Equity Research Source: URA, HDB, Singstat, Credit Suisse Equity Research Banks: More stringent capital requirements Basel III sets out the global standards on bank capital adequacy, and substantially tightens the definition of Equity Tier 1 by several punitive deductions from the numerator while increasing risk weights against trading exposure and derivatives. The committee will also try to harmonise the regulations, so that the ratios become transparently comparable across jurisdictions. In addition, a leverage ratio as well as liquidity requirements have been introduced. MAS requires Singapore-incorporated banks to meet higher capital requirements, including a minimum Common Equity Tier 1 (CET1) capital adequacy ratio (CAR) of 6.5%, Tier 1 CAR of 8% and Total CAR of 10% from 1 January 2015. These standards are higher than the Basel III minimum requirements of 4.5%, 6% and 8% for CET1 CAR, Tier 1 CAR and Total CAR, respectively. Figure 15: New minimum capital requirements and timeline As of 1 January (%) 2013 2014 2015 2016 2017 2018 2019 Common Equity Tier 1 (CET 1) 4.50 5.50 6.50 6.50 6.50 6.50 6.50 Capital Conservation Buffer (CCR) 0.63 1.25 1.88 2.50 CET1 CAR + CCR 4.50 5.50 6.50 7.13 7.75 8.38 9.00 Tier 1 CAR 6.00 7.00 8.00 8.00 8.00 8.00 8.00 Total CAR 10.00 10.00 10.00 10.00 10.00 10.00 10.00 Total CAR + CCR 10.00 10.00 10.00 10.63 11.25 11.88 12.50 Source: MAS The biggest impact on banks would be from the more stringent capital requirements. NIM would also have structurally trended downwards as the liquidity requirements (i.e., Liquidity coverage ratio and NSFR, net stable funding ratio) would have put pressure on banks to be more aggressive on expansion of retail deposits that would have led to higher funding cost. Due to stricter capital requirements, banks would also have made more of a conscious effort to focus on lower risk asset growth that would compress loan yields.

Singapore Market Strategy 9 9 September 2016

Utilities: Reduction in vesting contract levels Following a biennial review, EMA announced that the vesting contract level will be progressively reduced from 40% to 30% for 1H15, 25% for 2H15, and 20% for 2016. This was driven by the view that it can be lowered to the LNG vesting level (about 16%) for 2015-16 without market power concerns. The gradual reduction is intended to allow the respective retail arms to adjust their hedging portfolios and contract cover as the vesting contract level is reduced. In particular, it was noted that there is no intent for vesting contracts “to provide revenue certainty to the gencos nor is the sustainability of gencos' revenue a factor that should be taken into account when setting the VCL.” Following an appeal by the large gencos to the Minister of Trade & Industry, the vesting contract level was maintained at 25% for 2016. Figure 16: Vesting contract level to fall to 30% in 1H15, 25% in 2H15, and 20% in 2016 Period Vesting contract level 1 Jan 2011 - 31 Dec 2011 60% 1 Jan 2012 - 30 Jun 2013 55% 1 Jul 2013 - 31 Dec 2013 50% 1 Jan 2014 - 31 Dec 2014 40% 1 Jan 2015 - 30 Jun 2015 30% 1 Jul 2015 - 31 Dec 2015 25% 1 Jan 2016 - 31 Dec 2016 25% Source: Energy Market Authority As shown in Figure 17, the average vesting contract price of S$141/MWh is at a 47% premium to the USEP of S$96/MWh in 2015. While the average USEP rose above the vesting price for certain periods in 2Q09-1Q12, the average USEP has been consistently below the vesting price since 3Q12 as new generation capacity has been added to the market. As such, the decline in vesting contract levels has led to a further decline in blended power spreads.

Figure 17: Vesting contract levels have declined from 60% in 2011 to 25% in 2016, which has led to decline in blended spreads

600 70%

500 60%

400 50%

300 40%

200 30%

100 20%

0 10% Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Vesting Price ($/MWh) (LHS) Uniform Singapore Energy Price ($/MWh) (LHS) Vesting Contract Level (RHS)

Source: Energy Market Authority, Energy Market Company

Vesting contracts were implemented by the Energy Market Authority in January 2004 to control the exercise of market power by the generation companies and promote efficiency

Singapore Market Strategy 10 9 September 2016

and competition in the electricity market. The vesting contracts commit the generation companies to sell a specified amount of electricity (vesting contract levels) at a specified price (the vesting contract price). As a result, it takes away incentives for the generation companies to exercise their market power by withholding their generation capacity to push up spot prices in the wholesale electricity market. Vesting contracts were allocated only to generation companies that had made their planting decisions before the decision in 2001 to introduce vesting contracts. A generation company’s allocation is made in proportion to the licensed capacity eligible for vesting contracts, as shown in Figure 18. Figure 18: Maximum capacity eligible for vesting contracts Genco Maximum capacity (MW) Seraya 3,100 Senoko 3,300 Tuas 2,670 Sembcorp 785 Keppel 470 PacificLight Power 800 Source: Energy Market Authority Tightening on use of foreign workers The government has brought down the growth rate in the foreign population significantly through the various foreign labour tightening policies introduced since 2010 and then added after GE2011. The culmination of these tightening measures have lowered foreign population growth to around 33,000 per annum in 2015, significantly lower than the average of 92,000 per annum back in 2005 to 2010. If the foreign population continues to grow at around 30,000 to 40,000 per annum over the next few years, we will be roughly on track to reaching the 5.8 mn lower bound scenario in 2020 as laid out in the Population White Paper. We have incorporated this reduction into our projections of labour force growth through to 2020, which would ultimately translate into around 280,000 fewer foreign workers than would otherwise have been the case by the end of the period if these curbs succeed. In our view, overall population growth should moderate closer to 1% YoY over the next few years. Figure 19: Foreign manpower growth has been gradually tightened, in line with scenarios in population white paper Total Resident Citizens PRs Foreigners 2005 to 2010 average 151.7 59.7 28.9 30.8 91.9 2011 to 2015 average 91.7 26.2 28.9 -2.7 65.5 2011 107.0 17.5 26.5 -9.0 89.4 2012 128.7 29.0 27.9 1.0 99.8 2013 86.7 26.5 28.4 -1.8 60.2 2014 70.6 26.0 29.5 -3.5 44.6 2015 65.3 32.0 32.0 0.0 33.3 2015 to 2020* 53.0 19.5 25.0 -5.5 33.5 2020 to 2030* 70.0 20.0 10.0 10.0 50.0 * based on the lower bound Population White Paper scenario of 5.8 million for 2020 and 6.5 million for 2030. Source: NPTD, MOM, Credit Suisse Equity Research Increasing foreign worker levy The foreign worker levy is used as a pricing mechanism to control the number of foreign workers in Singapore, where employers are liable to pay monthly levies to hire employees who hold work permits or S Passes. Employers who hire skilled work permit holders can enjoy lower levy rates, subject to the dependency ratio of their industry. As shown in

Singapore Market Strategy 11 9 September 2016

Figure 20, foreign worker levies for unskilled workers in the construction sector will increase from S$230 in 2011 to S$700 in 2017, while levies for the unskilled workers in the service industry have increased from S$280 in 2011 to S$450 in 2016.

Figure 20: Foreign worker levy for the construction Figure 21: Foreign worker levy for the service sector industry

800 500 450 700 450 700 420 420 650 400 400 600 550 550 340 350 500 300 300 300 300 450 300 280 240 400 350 250

300 300 300 300 300 200 180 300 250 230 150 200 180 100 100 50

0 0 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16

Construction - Skilled Construction - Unskilled Service - Skilled Service - Unskilled

Source: Ministry of Manpower Source: Ministry of Manpower Lower dependency ratio The foreign worker dependency ratio has also been decreased across key industries. In services, the dependency ratio has fallen from allowance foreign workers to represent up to 50% of the workforce to just 40% in 2018. In the Marine Industry, the dependency ratio will fall from 1 local full time worker to 5 foreign workers (83.3%) to 1 local full time worker to 3.5 foreign workers (77.8%) in 2018.

Figure 22: Foreign worker dependency ratio across key sectors Dependency ratio Sector 2018 2010 Manufacturing 60% 65% Construction 87.5% 87.5% Marine 77.8% 83.3% Process 87.5% 87.5% Services 40% 50% Source: Ministry of Manpower

Singapore Market Strategy 12 9 September 2016

Regulatory changes have benefited corporates in selected instances Transition to Bus Contracting Model (BCM) a positive The Land Transport Authority (LTA) has announced that it has reached an agreement with SBS Transit, ComfortDelGro's 75% subsidiary, on the transition towards a GCM for its Singapore public bus business. While ComfortDelgro will have a smaller fleet post-BCM, free cash flows will increase significantly with the removal of bus capex, on top of the removal of fare/ridership risks. The directly negotiated bus packages have been reorganised into 11 packages, from the originally announced nine, to facilitate greater contestability in the long term. This will still comprise 80% of the existing buses in Singapore. SBST will operate eight of 11 packages for a total contract fee of S$5,322 mn, although no margin guidance was provided. Contract duration ranges from two to ten years, with an average of 7.25 years—longer than that of the other operators. As the fees take into account geographical differences, bus/route profiles, etc., the contract fees may not be directly comparable across operators. Nonetheless, we estimate annual run-rate revenues to be c. S$724 mn for SBST, in line with our prior estimates of S$738 mn. Note that this excludes adjustments for inflation, wage and fuel costs changes, service variation and incentive payments. SBST will retain advertising and rental revenues under the GCM.

Figure 23: Details of the eleven negotiated packages under the bus government contracting model No. Package Duration No. of services Service-years1 Average route Contract fee p.a. (years) distance (km)2 (S$ mn)1 Existing New Total SBS Transit: Average duration of 7.25 years, 196 services for total contract fee of S$5,322 mn 1 Bukit Merah 2 18 0 18 36 20.5 66.5 2 Sengkang - Hougang 5 27 3 30 150 20.4 110.8 3 Bedok 7 23 1 24 168 22.4 88.6 4 Tampines 8 24 3 27 216 20.4 99.7 5 Jurong West 8 24 2 26 208 14.2 96.0 6 Serangoon - Eunos 9 22 1 23 207 21.0 84.9 7 Clementi 9 24 0 24 216 23.3 88.6 8 Bishan-Toa Payoh 10 24 0 24 240 18.0 88.6 Total 196 1,441 20.0 723.9 Other operator: Average duration of 6 years, 77 services for total contract fee of S$1,865 mn 1 Sembawang - Yishun 4 23 1 24 92 30.4 95.8 2 Choa Chu Kang - Bukit Panjang 7 32 0 32 224 20.3 127.8 3 Woodlands 7 21 0 21 147 20.6 83.9 Total 77 467 23.5 307.5 Source: LTA, Credit Suisse Equity Research estimates (1) Based on Credit Suisse Equity Research estimates assuming equal contract fees per service per year. (2) Based on Credit Suisse Equity Research estimates, using TransitLink data.

Singapore Market Strategy 13 9 September 2016

Figure 24: Comparison between packages for competitive tender and directly negotiated packages 3 packages put up for competitive tender 11 directly negotiated packages Package Bulim Loyang Seletar 1 to 8 9 to 11 Operator Tower Transit Go-Ahead TBA SBS Transit Other Commencement date May 2016 Sep 2016 1H18 1 Sep 2016 1 Sep 2016 Contractual amount (S$ mn) 556 497.7 TBA 5,322 1,865 Initial contract term 5 5 5 2 to 10 4 to 7 Option for renewal 2 2 2 Yes Yes Contract fee per annum 111.2 99.5 TBA Various Various No. of services 26 25 26 18-30 21 to 32 - Existing 25 22 24 Various Various - New 1 3 2 Various Various Initial approx. number of buses 380 400 420 2,900 1,100 Amount (S$ mn) per service p.a. 4.3 4.0 TBA 3.7 4.0 *Amount (S$ mn) per bus p.a. 0.29 0.25 TBA 0.25 0.28 * Based on average contract term of 7.25 years for packages 1 to 8 and 6 years for 9 to 11. Source: LTA, Credit Suisse Equity Research estimates Light-touch approach in regulating digital disruption Leveling the playing field for incumbent taxi operators In April 2016, the Land Transport Authority announced that it will be introducing regulations for private hire car drivers and vehicles, which are estimated to take effect by 1H17. These regulations will require all drivers to complete at least a ten-hour training programme to obtain a Private Hire Car Driver's Vocational Licence (PDVL). Taxi drivers have to go through a 60-hour vocational licence (TVDL) course. We view the potential licensing requirements as a positive for the taxi industry, in line with the Transport Minister’s attempt to level the playing field and to protect commuter interests, particularly safety. We believe a significant number of Uber/GrabCar drivers operate on a part-time basis, drawn to the convenience of signing up as a driver to supplement their incomes. While we do not expect Uber/GrabCar drivers to stop operations en masse, this will likely serve as deterrence to the incremental Uber/GrabCar driver, and hence reduce the scale advantages of Uber/Grab’s network vis-à-vis the smaller taxi operators. URA guidelines for short term leases Current URA guidelines on leases do not allow for leases below six months, making the short-term leases under the home-sharing sites illegal. However, from January to April 2015, the URA launched a public consultation to gather feedback on whether private homes should be allowed to be used for short term stays. The consultation resulted in no clear consensus while the URA continues to study the issue, mentioning that any change in rules should ensure a “level playing field” which is a similar stance to what the government had taken on car sharing. Another key consideration for the government will also be to ensure that residents are not inconvenienced by the frequent turnover of guests.

Singapore Market Strategy 14 9 September 2016

Figure 25: Current differences between taxis/taxi companies and private hire cars Taxis UberX/Grab car/private hire cars Companies: Licensing framework Taxi Service Operator Licence NA Licensing conditions Expected to meet Quality of Service (QoS) and Taxi Availability (TA) Not required Standards Quality of service standards To maintain KPIs across taxi booking services (call answer rate, Not required waiting time, cater rate etc.), safety (first inspection passing rate, accident rate) and taxi drivers' conduct Taxi availability standards To ensure a minimum % of taxis on the road during peak periods and Not required minimum daily mileage per taxi Public opinion surveys Subject to monthly surveys to collect feedback from commuters Not required Drivers: Licensing framework Taxi Drivers’ Vocational Licence Points System NA Initial course requirement S$358 course fee, for five modules over a 60-hour classroom training Free, estimated 30 minutes of in-house training on sign-up session, with five theory and three practical tests Medical examination Complete medical check-up with a chest x-ray required Not required Ongoing requirements TDVL refresher course once every six years Not required Driver's licence Class 3/3A Singapore driving licence & taxi driver vocational licence, Class 3/3A Singapore driving licence, at least one year of driving at least one year of driving experience experience Minimum age 30 21 Nationality & language ability Singapore citizens, able to speak English and mother tongue No restrictions Source: Company data, LTA, Credit Suisse Equity Research Recent announcements reinforce policy shift More stringent Employment Pass salary criteria In July 2016, the Ministry of Manpower announced that the qualifying salary for Employment Pass (EP) applications will be raised from S$3,300 to S$3,600 from 1 January 2017. According to MOM, this was intended to keep pace with rising local wages, as well as to maintain the quality of Singapore's foreign workforce and enhance their complementarity to the local workforce. This follows an increase in the previous minimum EP qualifying salary from S$3,000 to S$3,300 in January 2014. In our view, this reflects that the government is unlikely to reverse the policy shift in the near term. Fine-tuning of existing policies does not represent a reversal Raising of maximum LTV ratio for motor vehicles In May 2016, MAS raised the maximum loan-to-value ratio for motor vehicles to 60-70%, from 50-60% previously. The maximum loan tenure will also be raised to 7 years, from 5 years. These new rules are effective 27 May 2016. While this could help reduce downside risks to the Consumer Price Index (CPI), the impact of these changes on certificate of entitlement (COE) premiums will likely be quite small, in our view. First, the increase in LTV ratios and raising of maximum loan tenures are small. Second, these changes come at a time of rising COE supply. Third, domestic demand and employment conditions remain subdued.

Singapore Market Strategy 15 9 September 2016

Figure 26: Motor vehicle premiums, coupled with Figure 27: Singapore household debt continues to lower property rents, have been the largest moderate due to the various macroprudential contribution to fall in CPI. measures since 2010.

Source: CEIC, Credit Suisse Equity Research Source: CEIC, Credit Suisse Equity Research Fine-tuning of TDSR requirements for refinancing of mortgages In September 2016, MAS announced two key changes to the total debt servicing ratio (TDSR) framework, where up to 60% of a borrowers income may be used to service all debt obligations. Effective immediately, the TDSR will not apply to refinancing of debt on all owner-occupied residential properties, including those purchased after the introduction of TDSR on 29 Jun 2013. At the same time, the TDSR will not apply to borrowers refinancing their investment property loan provided that they: (a) commit to a debt reduction plan to repay at least 3% of their outstanding balance over less than three years; (b) fulfil their credit assessment from financial institutions. This follows adjustments made in February 2014, where exemptions to TDSR were applied to refinancing of owner-occupied properties purchased before TDSR was introduced. Refinancing of properties purchased for investment was also exempted from TDSR for a transition period until 30 June 2017 if the property was purchased before 29 June 2013. The new rules however supersede the latter. The TDSR framework will continue to apply to new property loans. The intention of the adjustments is to help borrowers refinance their existing property loans at lower interest rates and better manage their debt obligations. We interpret this positively, as the government remains vigilant, and willing to fine-tune measures to suit market needs. In the Financial Stability Review published in Nov 2015, MAS estimated that 73% of outstanding housing loans are for owner-occupation as of 3Q15, and 5-10% of households have debt-servicing ratios above 60%.

FOR IMPORTANT DISCLOSURES AND DISCLAIMERS, PLEASE SEE THE EQUITY RESEARCH DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT. 9 September 2016

Economic Research

FOR IMPORTANT DISCLOSURES AND DISCLAIMERS, PLEASE SEE THE ECONOMIC RESEARCH DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT. 9 September 2016

Government policies to raise wages and benefit consumers RESEARCH ANALYSTS The reduction in corporate profitability is also an outcome of deliberate government Economic Research policies to raise wages and promote inclusive growth, and in particular for lower income households over the last five years. On top of the foreign labour curbs mentioned Michael Wan previously, these schemes include: +65 6212 3418 [email protected] The Wage Credit Scheme: Government co-funds wage increases for Singapore citizens earning S$4,000 and below, between 2013 and 2015. This scheme was extended for two more years for 2016 and 2017, although at lower level of funding. This is a temporary scheme for businesses, slated to end in 2018. Progressive Wage Model: Wages for the cleaning, landscaping and security sectors is now mandated at a minimum of S$1,000 to S$1,300 depending on industry. This will be enforced through business licensing requirements. Increases in CPF employer contributions and CPF salary ceilings: Since 2011, employer contribution rates have been raised by 1.5 percentage points, while both employee and employer contribution rates have also been raised for older and low-wage workers. The CPF salary ceiling was also raised from S$5,000 to S$6,000 in 2016. Enhanced Workfare Income Supplement (WIS): The Workfare Income Supplement (WIS) scheme, which supplements incomes of lower income workers has been gradually enhanced since 2013, with increased payouts, a greater component in cash, together with higher ceilings on qualifying incomes. Social transfers have also been increased to raise living standards of lower income households, while encouraging greater social mobility. Programs such as the Silver Support Scheme, which provides retirement support for lower-income elderly, the Pioneer Generation Package, universal healthcare insurance in Medishield Life, have enhanced social safety nets. Education subsidies through SkillsFuture helps social mobility by making the resident labour force more employable and resilient to technological upheavals.

Figure 28: Wages have continued to rise, especially Figure 29: The government has also spent more on among lower income households social transfers and healthcare Household Income per Household Member per decile SG Social Development and Health Spending (% (CAGR 2010 to 2015) 3.5% of GDP) 7.5% Health Social 2010 to 2015 3.0%

7.0% 2.5%

6.5% 2.0%

1.5% 6.0%

1.0% 5.5% 0.5%

5.0% 0.0%

Source: CEIC, Credit Suisse Economic Research Source: Singapore Ministry of Finance, Credit Suisse Economic Research

Singapore Market Strategy 18 9 September 2016

To be sure, this challenge of making growth inclusive is certainly not unique to Singapore, and is becoming an increasingly global challenge. In fact, Singapore seems to be ahead of the political cycle compared with the developed world. There have been rising concerns about the wave of anti-globalisation movements in the developed world in recent years. We see this in the Brexit vote, the rise of anti-establishment candidates in developed Europe, and also the support for Donald Trump in the upcoming US Presidential Elections1. Across Asia, we are also seeing measures by governments to support consumers by easing credit conditions, pressure banks to lower lending rates, and also launching fiscal stimulus to support private consumption (see Asia: Eyes on central banks and consumers).

1 See Branko Milanovic (2016) https://hbr.org/2016/05/why-the-global-1-and-the-asian-middle-class-have-gained-the-most-from- globalization

Singapore Market Strategy 19 9 September 2016

Impact: Structural problems intensifying Singapore's wage share of GDP has been rising since 2010 As a result of these policies and also regulatory changes, GDP growth and value added accruing to corporates have fallen relative to compensation to employees (i.e., wages) since 2010, with the wage share of GDP rising to 43% in 2015, from 39% five years ago. We note Singapore's GDP wage share coincides well with distinct business cycle; for instance the sizeable rise in the early 1980s has preceded the 1985 wage-induced recession.

Figure 30: Singapore's wage share of GDP has been rising since 2010

60% 35% 55% 30% 50% 25% 45% 20% 40% 15% 35% 10% 30% 5% 25% 0% 20% -5% 1980 1985 1990 1995 2000 2005 2010 2015 Real GDP %yoy - RHS Wage share of GDP Corporate share of GDP

Source: CEIC, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Economic Research

Divergence between declining corporate profitability and rising labour costs looks unsustainable The current divergence between weak and declining corporate profitability, coupled with still rising labour costs in Singapore is an unsustainable status quo, in our view (see Figure 31). Unless we see a surge in productivity driving down unit labour costs, this gap will more likely be closed over time through weaker employment and wage growth, and/or a depreciation in the exchange rate to sustain international competitiveness and hence improve corporate profitability (see our reports: Singapore: Structural problems intensifying and Asian export race: Who's winning the contest).

Singapore Market Strategy 20 9 September 2016

Figure 31: Divergence between declining corporate Figure 32: Productivity growth remains depressed, profits and rising labour costs looks unsustainable having gone nowhere since 2005

Corporate Surplus %yoy Singapore Labour Productivity sa (Index 2010 110 = 100 25.0% Unit Labour Costs (t-1) %yoy 10.0%

8.0% 20.0% 100 6.0% 15.0% 4.0% 90 10.0% 2.0%

5.0% 0.0% 80 -2.0% 0.0% -4.0% 70 -5.0% -6.0% how will gap be closed -10.0% between rising labour -8.0% 60 costs and lower -15.0% corporate profits? -10.0%

50 1991 1994 1997 2000 2003 2006 2009 2012 2015 Source: CEIC, Credit Suisse Economic Research estimates Source: CEIC, Credit Suisse Economic Research estimates Initial signs of stress are starting to show up Initial signs of stress are starting to show up, with investment commitments moderating, labour market weakening close to Global Financial Crisis lows, while global export shares and competitiveness declining. Moderation in investment commitments With a decline in profitability and uncertain economic outlook, we expect slower fixed investment commitment to lead to a moderation in investment activity. Net investment commitments have continued to trend lower, falling 3% in 2015, from a 2.4% decline in 2014. Expected value-added from investment commitments has also fallen correspondingly by 2% in 2015, which should cap GDP prospects in 2017.

Figure 33: Slower fixed investment commitments Figure 34: Expected value added from investments will likely constrain investment activity have moderated too

Singapore Fixed Investment Commitments SGD bn Singapore Expected Value Added created Fixed Investment %yoy 25 from investment commitments 40% 80% Manufacturing Services Total Fixed Investment Commitments %yoy (t +1)

30% 60% 20

20% 40% 15

10% 20% 10 0% 0% 5 -10% -20%

-20% -40% 0 2002 2004 2006 2008 2010 2012 2014 2016 2010 2011 2012 2013 2014 2015 Source: CEIC, EDB, Credit Suisse Economics Research estimates Source: CEIC, EDB, Credit Suisse Economics Research estimates

Singapore Market Strategy 21 9 September 2016

Recent public announcements suggest that the outlook for future investment commitments over the next two years has worsened. As evidence, Figure 35 shows public announcements from major firms reducing exposure to Singapore. Figure 35: Public news reports of companies relocating or closing down

Industry Remarks Oil service sector Technip, Mcdermott, Subsea7. All three shifted to Kuala Lumpur, Malaysia to take advantage of the lower costs there and also to be closer to customers in Malaysia's oil and gas sector. Shipping Maersk has shifted some business and sales functions to Hong Kong from Singapore. Mining and Manufacturing Caterpillar has closed one of its facilities in Singapore, with 90 jobs cut. E-commerce Rakuten has cut about 150 employees across Singapore, Indonesia and Malaysia, although it will maintain its regional headquarters in Singapore. Retail Robinson announced it will shut 10 loss-making stores, likely in the second half of the year. Finance Several investment banks have announced job cuts and are offshoring some business functions in a bid to cut costs in low revenue environment. Source: Business Times, Straits Times, Upstream Various business surveys, for instance the Jetro survey and the American Chamber of Commerce, paint a similar picture. These are just the public announcements by large multi-national companies, and we believe will likely under-estimate the extent of company relocations and closures as they do not take into account the stress faced by small and medium enterprises (SMEs). With these developments, shop space and factory vacancy rates have already risen by around 2 pp to 3 pp so far, the highest since the Global Financial Crisis. While office space vacancy rates have been flat, we expect these should rise moving forward.

Figure 36: Japanese companies have indicated Figure 37: Investment intentions by American plans to shift production overseas from Singapore companies have moderated as well Japanese companies shifting production Investment intentions by Singapore-based American capabilities to third countries 70 companies 16 2012 2013 2014 2015 14 2014 2015 60 12 50 10

8 40 6 4 30 2 20 0 10

0 Expand Remain the same Contract Source: Jetro Survey, Credit Suisse Economics Research Source: AmCham, Credit Suisse Economics Research Weaker labour market Labour demand also looks increasingly constrained by declining corporate profitability and the slowdown in investment activity. Employment growth was already extremely weak in 2015, moderating to a paltry 1% YoY growth in 2015, from 3.7% YoY in 2014, and has also remained soft lacklustre in 1H 2016 (see Figure 36). Retrenchments have also recently picked up close to GFC highs (see Figure 37). Forward-looking indicators continue to point to weaker employment prospects. These include the Manpower Group's employment surveys, and labour market details such as softer job vacancy rates, lower labour market churn, and lower hours worked. As such, we expect the resident unemployment, which has been relatively well behaved, to rise moving forward. All these support our view for private consumption growth to moderate further and surprise on the downside.

Singapore Market Strategy 22 9 September 2016

Figure 38: Employment growth has weakened close Figure 39: … while retrenchments have also picked to Global Financial Crisis lows… up significantly thousand SG Employment Change thousands Retrenched Workers Total sa 80 Overall Employment Change sa 8.0

70 7.0 60 6.0 50 40 5.0

30 4.0 20 3.0 10 0 2.0

-10 1.0 -20 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: CEIC, Credit Suisse Economics Research estimates Source: CEIC, Credit Suisse Economics Research estimates

Figure 40: Labour turnover measures have Figure 41: Hours worked has also come off moderated Recruitment Rate sa (LHS) % % Resignation Rate sa Total paid hours worked per week seasonally 3.50 2.50 adjusted 47.5 Hours Worked 4.8 3.30 2.40 4.6 2.30 Overtime Hours Worked (RHS) 3.10 47.0 2.20 4.4 2.90 2.10 4.2 2.70 46.5 2.00 4.0 2.50 1.90 3.8 2.30 1.80 46.0 3.6 2.10 1.70 1.90 1.60 45.5 3.4 3.2 45.0 3.0 97 99 01 03 05 07 09 11 13 15 Source: CEIC, Credit Suisse Economics Research estimates Source: CEIC, Credit Suisse Economics Research estimates Declining export competitiveness Another key area of stress that has showed up has been through weaker exports performance and competitiveness. Our regional analysis shows that Singapore's exports have underperformed global trade, and have also fallen behind the region's outperformers such as Vietnam, the Philippines and China (see Asian export race: Who's winning the contest). In addition, using 'shift-share' analysis, we find that a reduction in competitiveness is the key driver for Singapore's export underperformance, rather than just a product mix issue, suggesting that there are stronger structural issues at play here.

Singapore Market Strategy 23 9 September 2016

Figure 42: Singapore's exports have been a laggard Figure 43: This has been driven by weaker compared with the region competitiveness, rather than a product mix issue

Selected Asia Nominal Exports (Index 2011 = 100) Asia Shift-Share Analysis (2011 to 2015) Competitiveness Industry mix 200 CH PH SG 60% Interactive Total ID VN TW 180 50% 160 40% 140 30% 120 20%

100 10%

80 0%

60 -10%

40 -20% CH TW IN ID KR MA PH SG TH VN 20 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Credit Suisse Economics Research, CEIC, UNCTAD Source: Credit Suisse Economics Research, CEIC, UNCTAD

We think Singapore's exports are likely to continue underperforming (see link). Singapore's relative labour productivity differentials have continued to deteriorate since 2010. There are also initial signs that the exports weakness has broadened beyond just the goods sector into services. Interestingly, services exports market share has also plateaued out in 2014 after trending higher since 2005.

Figure 44: Singapore is losing global market share Figure 45: Some signs that Singapore's services in goods exports exports market share is plateauing too Singapore Goods Exports Market Share (%) Singapore Services Exports Market Share (%) 3.0% 2.4% 2.8% 2.4% 2.6% 2.3%

2.3% 2.4%

2.2% 2.2%

2.2% 2.0%

2.1% 1.8% 2.1% 1.6% 2.0% 1.4% 2.0% 1.2% 1.9%

1.0%

2004 2006 2008 2010 1996 1997 1998 1999 2000 2001 2002 2003 2005 2007 2009 2011 2012 2013 2014 2015 1995 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E

Source: CEIC, UNCTAD, Credit Suisse Economics Research estimates Source: CEIC, UNCTAD, Credit Suisse Economics Research estimates Rise in wages not reflected in retail sales Thus far, rise in wages and lower corporate profitability has not resulted in a sizeable boost in consumer sentiment or spending. It seems like the negative spillover from weaker corporate profits, coupled with slower global growth have dominated. According to the AC

Singapore Market Strategy 24 9 September 2016

Nelson survey, consumer confidence index in Singapore has been declining in the last few quarters, and reached levels close to that of Malaysia in 2Q16 (see Figure 47).

Figure 46: Singapore's retail sales and private Figure 47: Nielsen Consumer Confidence Index, consumption have weakened Southeast Asia vs Global (3Q 2015-2Q 2016) (%)

Retail ex Motor Sales %yoy 3mma 140

20% Retail ex Motor %yoy 3mma 117119 120 116115 114 111 15% 105 101 101 99 97 98 98 94 10% 100 88 88 87 78 80 79 5% 80

0% 60 -5% 40 -10%

-15% 20

1997 2015 1987 1989 1991 1993 1995 1999 2001 2003 2005 2007 2009 2011 2013 2017 0 Indonesia Thailand Global Singapore Malaysia

Q3 2015 Q4 2015 Q1 2016 Q2 2016

Source: CEIC, Credit Suisse Economics Research estimates Source: AC Nelson We expect growth and inflation to surprise on the downside MAS to weaken exchange rate The themes above continue to fit with our view that both growth and inflation will surprise consensus on the downside for both 2016 and 2017 (see Figure 48). Our forecast for GDP for this year and the next is firmly at the bottom of the consensus forecast range, and implies some quarters of contraction in GDP on a sequential basis, although not an outright recession. We also forecast MAS core inflation to average just +0.4% over 2016 and 2017, comfortably below the government's medium term forecast of 2%2. We also continue to forecast the Monetary Authority of Singapore (MAS) to ease again through a downward re-centering of the exchange rate policy band come October.

Figure 48: Singapore macroeconomic forecasts CS Forecast Consensus Government forecast 2016 2017 2016 2017 2016 GDP 1.3 1.1 1.7 1.9 1% to 2% Private Consumption 1.8 1.0 2.4 2.6 n.a. Fixed Investment 0.9 0.4 0.3 2.2 n.a. Headline CPI -0.9 -0.2 -0.6 0.9 -1% to 0% MAS Core Inflation* 0.4 0.4 n.a. n.a. around 1% Unemployment rate 2.3 2.5 n.a. n.a. n.a. 3m Sibor 1.25 1.75 n.a. n.a. n.a. Source: CEIC, Credit Suisse Economics Research estimates

2 See April 2016 MAS Monetary Policy Statement

FOR IMPORTANT DISCLOSURES AND DISCLAIMERS, PLEASE SEE THE ECONOMIC RESEARCH DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT.

Equity Research

FOR IMPORTANT DISCLOSURES AND DISCLAIMERS, PLEASE SEE THE EQUITY RESEARCH DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 9 September 2016

Remain cautious on Singapore EQUITY RESEARCH Research Analysts Corporate profitability weakening

Reflecting the breadth in the fall in corporate profitability, close to 30% of firms on the SGX Gerald Wong, CFA +65 6212 3037 were loss-making in 2Q16. It is also interesting to note that the percentage of loss-making [email protected] firms has averaged 26.3% since 1Q14, vs 2005-2007 average of 11.1%.

Figure 49: % of loss making firms vs SG real GDP 45.0% -15.0% 40.0% -10.0% 35.0% -5.0% 30.0% 0.0% 25.0% 5.0% 20.0% 10.0% 15.0% 10.0% 15.0% 5.0% 20.0%

0.0% 25.0%

1Q02 1Q03 1Q05 1Q07 1Q08 1Q10 1Q11 1Q12 1Q13 1Q15 1Q16 1Q04 1Q06 1Q09 1Q14

% of Loss making firms (ex S Chips) SG Real GDP, YoY (%) Inversed - RHS

Source: Company data, the BLOOMBERG PROFESSIONAL™ service

The average net margin (12-month moving average) for stocks on the SGX fell to 6.7% in 2Q16, close to GFC low of 6.3% in 2Q09. Net margins have also declined from 13.6% on average in 2003-07, to 8.0% on average in the last five years. The greatest stress to corporate profitability was seen in the energy, materials and industrials sectors, driven by the sharp fall in the commodity prices. The number of loss making firms in the real estate, financials and telco sectors is significantly lower.

Figure 50: Greatest impact to corporate profitability Figure 51: Quarterly net margin structurally lower seen in the energy, IT, materials and industrials sectors (exclude S-chips)

70% 16.0 62% 60% 14.0 50% 43% 42% 40% 12.0 40% 33% 30% 30% 25% 23% 10.0 20% 11% 8.0 10% 6% 0% 6.0 0%

4.0

1Q04 1Q05 1Q07 1Q09 1Q10 1Q12 1Q13 1Q15 1Q03 1Q06 1Q08 1Q11 1Q14 1Q16

% of loss making firms by sector Net margin- 12 month moving average (%)

Source: Company data, the BLOOMBERG PROFESSIONAL™ service Source: Company data, the BLOOMBERG PROFESSIONAL™ service

Singapore Market Strategy 27 9 September 2016

ROE has been under pressure MSCI Singapore ROE has declined from a peak of 17% in 2008 to 8.2%, which is already below the 2008-09 trough of 10.2%. We further break down the decline in ROE across industries. While the ROE for cyclical sectors such as capital goods, consumer discretionary and consumer staples has declined with sharp correction in commodity prices, the ROE for more domestically driven sectors such as banks, real estate and telcos have seen pockets of weakness.

Figure 52: ROE has declined sharply and is now below 08-09 trough

18

16

14

12

10 08/09 low :10.2% 8.2% 8 now 6 2003 low :5.8% 4 1999 low :3.6% 2

0 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13

MSCI Singapore - ROE (%)

Source: MSCI

Figure 53: ROE for cyclical sectors has declined Figure 54: ROE for domestic sectors has seen since 2012 pockets of weakness as well 30.0 25.0

25.0 20.0

20.0 15.0

15.0

10.0 10.0

5.0 5.0

0.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E

Capital goods Consumer discretionary Consumer staples Banks Real estate Telecom services

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

In Figure 55, we show the correlation between ROE (one-year lag) and performance of MSCI Singapore (YoY change). There is a generally strong relationship between ROE and performance of the index.

Singapore Market Strategy 28 9 September 2016

Figure 55: MSCI Singapore likely to underperform on declining ROE

17.0% 100.0%

16.0% 80.0%

15.0% 60.0%

14.0% 40.0%

13.0% 20.0%

12.0% 0.0%

11.0% -20.0%

10.0% -40.0%

9.0% -60.0%

8.0% -80.0% May-06 Apr-07 Mar-08 Feb-09 Jan-10 Dec-10 Nov-11 Oct-12 Sep-13 Aug-14 Jul-15 Jun-16

MSCI Singapore - ROE Index perf. (YoY %) - 1yr lag

Source: MSCI, the BLOOMBERG PROFESSIONAL™ service

This is likewise reflected in a number of key sectors, including consumer discretionary and industrials, as shown in Figure 56 and Figure 57.

Figure 56: Consumer Discretionary ROE vs Index Figure 57: Industrials ROE vs Index Performance Performance (YoY %) (YoY %)

21.0% 100.0% 20.0% 100.0%

19.0% 80.0% 18.0% 80.0%

16.0% 60.0% 17.0% 60.0%

14.0% 40.0% 15.0% 40.0% 12.0% 20.0% 13.0% 20.0% 10.0% 0.0% 11.0% 0.0% 8.0% -20.0%

9.0% -20.0% 6.0% -40.0%

7.0% -40.0% 4.0% -60.0%

5.0% -60.0% 2.0% -80.0% May-06 Nov-07 May-09 Nov-10 May-12 Nov-13 May-15 May-06 Nov-07 May-09 Nov-10 May-12 Nov-13 May-15

Consumer Discretionary - ROE Index perf. (YoY %) - 1yr lag Industrials - ROE Index perf. (YoY %) - 1yr lag

Source: MSCI, the BLOOMBERG PROFESSIONAL™ service Source: MSCI, the BLOOMBERG PROFESSIONAL™ service Expect more consensus cuts Following a 12.7% cut to consensus 2016 EPS in 2015, consensus EPS has been further cut by 11.5% year-to-date. As a result, the market now expects MSCI Singapore to see EPS decline of 5.8% in 2016, following a decline of 3.8% in 2015.

Singapore Market Strategy 29 9 September 2016

Figure 58: 2016E and 2017E Singapore consensus Figure 59: MSCI Singapore EPS growth (%) 105.0 50.0 40.0 100.0 30.0 95.0 20.0 10.0 4.2 5.3 90.0 0.0 -10.0 85.0 -5.8 -20.0 80.0 -30.0 -40.0 75.0

-50.0

Jul-15 Jul-16

2008 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Apr-15 Oct-15 Apr-16

Jan-15 Jun-15 Jan-16 Jun-16

Feb-15 Mar-15 Feb-16 Mar-16

Dec-14 Aug-15 Sep-15 Nov-15 Dec-15 Aug-16 Sep-16

May-15 May-16 MSCI SG EPS growth (%) Singapore - EPS16 Singapore - EPS17 Source: IBES Source: MSCI, IBES

Across the region, Singapore has seen the most significant cuts to 2017 EPS of 13.6%, while cuts to 2016 EPS of 11.5% would be close to China. This has led to the underperformance of MSCI SG, being the worst-performing in the region year-to-date.

Figure 60: Cuts to EPS across region Figure 61: YTD performance in USD in NJA (%)

2.0 1.2 30.0 0.1 25.2 0.0 24.3 25.0 -2.0 19.3 -4.0 20.0 -3.8 17.4 -6.0 -4.8 -5.0 -5.4 -6.0 15.0 -8.0 -6.6 12.2 -7.7 -8.3-8.4 -8.0-8.4 -8.4-8.2 9.5 9.4 9.2 -10.0 -9.3 10.0 8.1 -10.0 -9.7 -10.1 6.9 6.6 -12.0 -11.5 -11.5 -11.2 4.1 -11.7 5.0 -14.0 -13.6 -16.0

0.0

India

China

Korea

India

Taiwan

China

Korea

Thailand

Taiwan

Australia

Malaysia

Indonesia

Thailand

Australia

Singapore

Malaysia

Asia ex-Jp Asia

Philippines

Indonesia

Hong Kong Hong

Singapore

Asia ex-Jp Asia

Philippines Hong Kong Hong

2016E EPS revisions - YTD (%) 2017E EPS revisions - YTD (%) YTD performance (US$)

Source: IBES Source: Datastream

While MSCI Singapore is currently trading at a P/B of 1.12x, just 6% above the 2008-09 lows of 1.06x, we do not see a broad-based recovery as ROE remains under pressure.

Figure 62: MSCI Singapore—P/B

2.8

2.4

2.0

1.6

1.2 1.36x in 1.23x in 1.37x in 1.21x in Aug 13 Sep 01 May 12 1.12x 0.8 Jan 03 1.06x in now Feb 09 0.77x in Aug 98 0.4 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15

Singapore - Trailing PB

Source: MSCI

Singapore Market Strategy 30 9 September 2016

Maintain defensive positioning Credit Suisse Model Portfolio Figure 63 shows our model portfolio. We maintain our defensive positioning, with OVERWEIGHTs in the Transportation, Real Estate, Health care, REITs sectors. Our largest UNDERWEIGHTs are in the Capital Goods and Financials sectors.

Figure 63: CS Singapore model portfolio sector tilts

Transportation

Real estate

Health care

REITs

Consumer discretionary

Consumer staples

Telecom services

Financials

Capital goods

-1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%

Source: MSCI, Credit Suisse Equity Research estimates

Figure 64: CS Singapore model portfolio Sector CS MSCI SG vs MSCI Recommended stocks Financials 38.5 39.3 -0.8 UOB Telecom services 15.5 15.8 -0.3 Singtel Real estate 10.0 9.1 0.9 CDL REITs 8.7 8.6 0.1 MCT, CDLHT, KDCREIT Transportation 8.0 7.0 1.0 SATS, ComfortDelgro, SIA Capital goods 7.8 9.1 -1.3 Consumer discretionary 7.0 7.0 0.0 Genting Consumer staples 4.0 4.0 0.0 First Resources Health care 0.5 0.0 0.5 Raffles Medical Source: MSCI, Credit Suisse Equity Research estimates Cautious on banks and telcos We are generally cautious on sectors highly leveraged to domestic growth, and where valuation has not reflected the near term headwinds. As such, our key underweights are in the banks and telco sectors. Our top sells are DBS, Starhub, and M1.

Singapore Market Strategy 31 9 September 2016

Figure 65: Top Underperform-rated ideas Price Target Market Yield P/B ROE NDE (S$) price cap P/E (x) (%) (x) (%) (%) Company RIC Rating [7 Sep] (S$) (U$ mn) FY15A FY16E FY17E FY16E FY16E FY16E FY16E DBS DBSM.SI U 15.55 14.80 29,226 9.0 9.4 9.4 3.9 0.9 10.1 n.m. StarHub STAR.SI U 3.44 3.00 4,423 15.8 15.6 18.2 5.8 27.7 189.5 290.6 M1 MONE.SI U 2.52 2.00 1,754 13.2 13.7 15.9 5.8 5.3 40.1 93.4 Source: Company data, Credit Suisse Equity Research estimates Banks: In the eye of a storm Judging from past experience, our analysis shows that Singapore banks' price performance and loan growth are highly correlated with domestic GDP growth. Our calculations suggest that the market is already pricing in a 50-55% rise in credit cost from the 1H2016 levels reported (i.e., 39-49 bp), implying a 20-33% NPL ratio for oil and gas support services loans. Our stress test for oil and gas exposure suggests that in a "high stress" scenario (i.e., 50% NPL), there could be 18-23% downside risk to our current net profit estimates and stocks could de-rate to 0.7-0.8x P/BV (from 0.9x). For DBS, we expect further delinquencies among some of its oil and gas creditors in coming months to be a major headwind for the stock.

Figure 66: Singapore GDP growth (YoY%) vs banks' loan growth (YoY%)

35 22

30 17 25 12 20

15 7

10 2 5 -3 0

-5 -8 2Q03 2Q04 2Q05 2Q06 2Q07 2Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16

DBS UOB OCBC GDP YoY% (LHS)

Source: CEIC, Company data

Telcos: Giant leap towards new mobile entrant We expect more aggressive price promotions over the next 18-24 months as the potential new entrant launches services. We expect mobile industry service revenue to decline at a three-year CAGR of 1.8% until 2018E. We see downside risk to consensus estimates as we think it is not yet fully baking in new mobile entrant. We have UNDERPERFORM ratings on M1 and StarHub as they are more exposed to the mobile market. SingTel is our top pick in the sector as we believe the stock offers a unique combination of yield and growth. It has limited exposure to Singapore mobile market (constitute 5% of our TP).

Singapore Market Strategy 32 9 September 2016

Figure 67: We see downside risks to consensus estimates 100

95 SingTel - Current CS e

90

85 StarHub - Current CSe

M1 Consensus 80 STH Consensus

75 STEL Consensus M1 - Current CSe

70 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

Source: Company data, Credit Suisse Equity Research estimates OVERWEIGHT on Transport, Real Estate, and REITs

Figure 68: Top OUTPERFORM-rated ideas Price Target Market Yield P/B ROE NDE (S$) price cap P/E (x) (%) (x) (%) (%) Company RIC Rating [7 Sep] (S$) (U$ mn) FY15A FY16E FY17E FY16E FY16E FY16E FY16E CDL CTDM.SI O 9.06 11.50 6,116 15.5 13.0 12.3 1.8 0.9 6.8 20.6 SATS SATS.SI O 4.72 5.00 3,939 27.1 24.0 20.9 3.2 3.5 15.0 Net Cash MCT MACT.SI O 1.60 1.73 3,397 21.6 21.4 23.6 5.1 1.2 5.9 53.8 Source: Company data, Credit Suisse Equity Research estimates City Developments (OUTPERFORM, TP S$11.50) We expect further upside to be driven by further capital recycling initiatives to unlock portfolio value. In addition, potential easing of property cooling measures in Singapore could provide upside optionality. Valuations are attractive at a 30% discount to RNAV and 0.9x P/B (-1.2 SD from historical average). CDL is a CS AxJ Focus List stock and our top pick in the sector. SATS (OUTPERFORM, TP S$5.00) SATS is the most direct proxy to the continued tourism recovery in Singapore. We expect 15% earnings growth in FY17E to drive outperformance, with 3.2% dividend yield supportive. Mapletree Commercial Trust (OUTPERFORM, TP S$1.73) Good retail asset quality with above peer rent reversions with potential upside from re- tenanting out some anchor tenant space at VivoCity in the future. Recent acquisition of MBC Phase 1 is accretive and provides support for DPU growth given its +3% annual step up in rents.

Singapore Market Strategy 33 9 September 2016

Appendix Existing and additional foreign worker curbs The limits on foreign labour have been stepped up since 2010, while there are a slew of additional restrictions to be implemented from 2013 to 2015. To the extent they work, the restrictions effectively represent a negative supply shock with potentially important implications for growth in the productive potential of the country.

Figure 69: Existing and additional foreign worker curbs Date of Description of foreign worker curbs implementation July 2010 Progressive increases in foreign worker levies to be introduced over July 2010 to July 2012 for S Pass and Work Permit Holders. Progressive cuts in Man-Year Entitlement (MYE) for construction sector to be implemented from July 2010 to July 2013. Jan 2012 Further increases in foreign worker levies to be phased in from January 2012 to July 2013 Jan 2012 Raised Q1 Pass qualifying salary to $3,000 from $2,800, P2 qualifying salary to $4,500 from $4,000, with no change to P1 Pass at $8,000 July 2012 Reduction in Dependency ratio ceilings: Services Sector DRC will be reduced from 50% to 45%, Manufacturing DRC will be reduced from 65% to 60%, and S Pass sub-DRC will be reduced from 25% to 20%, to be phased in from 2012 to 2014. Further reduction in Man-Year-Entitlement (MYE) for construction sector, bringing cumulative cuts to 45% by July 2013. July 2013 S Pass minimum qualifying salary raised from $2,000 to $2,200 for new applications. In addition, more experienced S Pass Holders have to be employed at higher pay to continue working here: According to the government’s estimate, this will affect 1 in 2 existing S-Pass Holders. New criteria shall apply for all existing S Pass Holders by December 2014. July 2013 Additional foreign worker levies will kick in starting July 2013 July 2013 Lower Dependency Ratio Ceilings (DRC) for new applications: The Services sector DRC will be lowered to 40%, from 45%, and the S Pass sub-DRC will be lowered to 15% from 20% from July 2013 for new applications July 2013 Salary threshold for full-time employment will be increased to $1,000, from $850 previously: To calculate the Dependency Ratios, only a local earning $1,000 will be counted as a full-time employee. A local earning $500 to $1,000 will be counted as a part-time employee. By end-2013 The government will tighten the criteria for EP Pass holders (currently those earning above $3,000) July 2014 Additional foreign worker levies to kick in July 2014 Companies will have to comply with lower DRC ratios announced in Budget 2012 for existing workers July 2015 More foreign worker levies to kick in: In particular, this sharpens the distinction between skilled and unskilled workers. For example, an unskilled worker in Manufacturing sector will incur $700 July 2015 Companies will have to comply with lower DRC ratios announced in Budget 2013 for existing workers Source: Ministry of Manpower, Credit Suisse Equity Research

Singapore Market Strategy 34 9 September 2016

Property cooling measures Figure 70: Summary of key property cooling measure by type

Measure Date Summary of impact Objective Loan-to-Value (LTV) ratio - LTV 1 19-Feb-10 LTV lowered to 80% (from 90%) Signal to the financial institutions to maintain credit standards, and encourages greater financial prudence among property purchasers - LTV 2 30-Aug-10 LTV lowered to 70% (from 80%) for 2nd housing loan onwards To encourage greater financial prudence among property purchasers - LTV 3 13-Jan-11 LTV lowered to 60% (from 70%) for 2nd housing loan onwards To encourage greater financial prudence LTV lowered to 50% (from 70%) for non-individuals among property purchasers - LTV 4 6-Oct-12 If loan tenure exceeds 30 years: Part of broader aim of avoiding a price bubble and LTV lowered to 60% (from 80%) fostering long-term stability in the property market LTV lowered to 40% (from 60%) for 2nd housing loan onwards LTV lowered to 40% (from 50%) for non-individuals - LTV 5 11-Jan-13 LTV lowered to 50% (from 60%) for 2nd housing loan, 40% (from 60%) for 3rd To discourage over-borrowing, financing conditions for housing loan onwards housing have also been tightened If loan tenure exceeds 30 years: LTV lowered to 30% (from 40%) for 2nd housing loan and 20% (from 40%) for 3rd housing loan onwards LTV lowered to 20% (from 40%) for non-individuals Sellers' Stamp Duty (SSD) - SSD 1 19-Feb-10 SSD of 3% (from 0%) To discourage short-term speculative activity that could distort underlying prices - SSD 2 30-Aug-10 SSD staggered at 3% for 1st year, 2% for 2nd year, 1% for 3rd year To temper sentiment - SSD 3 13-Jan-11 SSD raised to 16% (from 3%) for 1st year,12% (from 1%) for 2nd year, 8% (from To cool the property market and discourage speculative 1%) for 3rd year, 4% (from 0%) for 4th year activity in the industrial market Additional Buyer's Stamp Duty (ABSD) - ABSD 1 7-Dec-11 Foreigners and non-individuals: 10% (from 0%) on top of existing To moderate investment demand for private residential PRs: 3% (from 0%) for 2nd property onwards property and promote a more stable and sustainable Singaporeans: 3% (from 0%) for 3rd property onwards market - ABSD 2 11-Jan-13 Foreigners and non-individuals: 15% (from 10%) on top of existing To be tighter on property ownership for investment, as PRs: 5% for 1st property, 10% (from 3%) for 2nd property onwards well as on foreign buyers Singaporeans: 7% (from 0%) for 2nd property, 10% (from 3%) for 3rd and subsequent property Total Debt Servicing Ratio (TDSR) - TDSR 28-Jun-13 A max limit of 60% of total gross monthly income can be used to service loans To encourage prudent borrowing by households and and mortgages strengthen credit underwriting standards by financial institutions Source: URA, MAS, Credit Suisse Equity Research

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Singapore Market Strategy 36 9 September 2016

Companies Mentioned (Price as of 08-Sep-2016) CDL Hospitality Trusts (CDLT.SI, S$1.38) City Developments (CTDM.SI, S$9.11) ComfortDelGro Corporation Ltd (CMDG.SI, S$2.87) DBS Group Holdings Ltd (DBSM.SI, S$15.55) First Resources Ltd (FRLD.SI, S$1.84) Keppel DC REIT (KEPE.SI, S$1.21) M1 Limited (MONE.SI, S$2.55) MTR Corporation (0066.HK, HK$43.15) Mapletree Commercial Trust (MACT.SI, S$1.58) Raffles Medical Group (RAFG.SI, S$1.53) SATS Ltd (SATS.SI, S$4.76) SBS Transit (SBVV.SI, S$2.35) Singapore Airlines Limited (SIAL.SI, S$10.76) Singapore Telecom (STEL.SI, S$4.06) StarHub Ltd (STAR.SI, S$3.45) United Overseas Bank Ltd (UOBH.SI, S$18.78)

Equity Research Disclosure Appendix Important Global Disclosures Gerald Wong, CFA, Varun Ahuja, CFA, Louis Chua, CFA, Danny Goh, Dawei Lee, Christopher Siow, Tan Ting Min and Nicholas Teh each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 55% (54% banking clients) Neutral/Hold* 28% (21% banking clients) Underperform/Sell* 17% (47% banking clients) Restricted 0% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names The subject company (DBSM.SI, UOBH.SI, CTDM.SI, SATS.SI, MACT.SI, KEPE.SI, STEL.SI, SIAL.SI, STAR.SI) currently is, or was during the 12- month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (UOBH.SI, SATS.SI, MACT.SI, KEPE.SI, STEL.SI, SIAL.SI) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (UOBH.SI, MACT.SI, STEL.SI, SIAL.SI) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (UOBH.SI, SATS.SI, MACT.SI, KEPE.SI, STEL.SI, SIAL.SI) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (DBSM.SI, UOBH.SI, CDLT.SI, CMDG.SI, CTDM.SI, MONE.SI, SATS.SI, MACT.SI, RAFG.SI, FRLD.SI, KEPE.SI, STEL.SI, SIAL.SI, STAR.SI) within the next 3 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (KEPE.SI). For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. For a history of recommendations for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to https://rave.credit-suisse.com/disclosures/view/report?i=247299&v=796ri68yod6e46i1wonu0f4r9 . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (UOBH.SI, MACT.SI, KEPE.SI, STEL.SI, SIAL.SI) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. This research report is authored by: Credit Suisse AG, Singapore BranchGerald Wong, CFA ; Varun Ahuja, CFA ; Louis Chua, CFA ; Dawei Lee ; Christopher Siow ; Nicholas Teh ; Kwee Hong Ching ; Shih Haur Hwang ; Daniel Lim Credit Suisse Securities (Malaysia) Sdn Bhd...... Danny Goh ; Tan Ting Min To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Singapore BranchGerald Wong, CFA ; Varun Ahuja, CFA ; Louis Chua, CFA ; Dawei Lee ; Christopher Siow ; Nicholas Teh ; Kwee Hong Ching ; Shih Haur Hwang ; Daniel Lim Credit Suisse Securities (Malaysia) Sdn Bhd...... Danny Goh ; Tan Ting Min Important MSCI Disclosures The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create and financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Credit Suisse.

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For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.

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