Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence Buy ST Ltd Target Price: SGD4.07 Price: SGD3.59 There Is Growth Beyond 2017 Market Cap: USD8,250m Bloomberg Ticker: STE SP

We initiate coverage on ST Engineering with a BUY and SGD4.07 TP (13% Share Data upside). Its exposure to the commercial and defence industries across Avg Daily Turnover (SGD/USD) 10.2m/7.46m four segments creates a defensive business model that is tough to beat. It 52-wk Price low/high (SGD) 3.05 - 3.85 is world’s largest MRO service provider for aircraft and Asia’s leading provider of ICT solutions. Aircraft fleet size growth, rising demand for P2F Free Float (%) 49 conversions and more spending on Smart Nation initiatives should lead to Shares outstanding (m) 3,122 strong 2018 growth. While a 4% yield could support the stock, strong Estimated Return 13% order wins and accretive M&As may act as near-term catalysts. Shareholders (%)

Expectations of higher YoY order inflows. ST Engineering’s outstanding 50.8 highest-ever orderbook of SGD13.5bn provides revenue visibility for 2017 and Aberdeen 5.0 2018. This is as the book-to-bill ratio stands at c.2x. We believe the group could Capital Group 3.2 achieve SGD5.5bn in new orders in 2017 (2016: SGD5bn), as it has already announced SGD2.7bn worth of order wins in 1H17. Share Performance (%) Aerospace to ride on long-term aircraft fleet growth. We believe the long- YTD 1m 3m 6m 12m term growth prospects for ST Engineering’s world-leading MRO business Absolute 11.1 (5.8) (3.8) (1.9) 7.5 remain strong. This as aircraft fleets in and are set to grow at 10.6% Relative (1.1) (2.9) (3.6) (5.4) (5.8) and 11.9% respectively in 2017-2027. It is also estimated that the average age Source: Bloomberg of aircraft fleets in China and India would increase to 7.8 years (from 6.1 years) and 10.2 years (6.9 years) respectively. This implies greater need for MRO ST Engineering Ltd (STE SP) checks. We also view positively its exposure to rapidly growing passenger-to- Price Close Relative to (RHS) freighter (P2F) conversion business. 3.9 105 3.7 102 Proxy to ’s Smart Nation initiative. In May, Singapore announced 3.5 99 3.3 95 a total of SGD2.4bn worth of tenders to be called this year to invest in data 3.1 92 2.9 89 analytics software and a communications backbone. ST Engineering is looking 12 to be the backbone for this network. Its acquisition of 51% of SP Telecom, 10 8 which owns an extensive network of fibre optic back-haul infrastructure and 6 facilities, should enhance its capabilities in delivering Smart Nation solutions. 4

We believe there is potential for growth beyond Singapore, as Frost & Sullivan 2

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Nov Sep May Improving outlook with likely higher dividends. Supported by growth in the aerospace and electronics segments, plus land systems’ recovery, the group is Source: Bloomberg set to deliver 10% earnings growth in 2018-2019 (2017: +2%). With rising profit, and limited capex requirement, we believe ST Engineering could gradually increase the 2019 dividend/share to SGD0.17 (2016: SGD0.15). With a dividend yield of 4%, it is as among the few strong dividend-paying blue-chip Table Of Contents Financial Exhibits 2 counters on the SGX with expectations of earnings growth. Investment Thesis 3 Premium valuation for quality. Our SGD4.07 TP is based on the average of Valuation 9 Key Risks 12 P/E-, P/BV-, EV/EBITDA- and DCF-based valuations and implies 23.3x 2018F Segment Outlook 13 P/E, ie slightly above +1SD forward P/E. We believe the premium valuation is Financial Analysis 23 justified, given prospects of earnings recovery and steady dividend yields. Company Background 27 SWOT Analysis 30

Key risks. Sustained weakness in the marine business and delays in order inflows for the aerospace and electronics businesses could lead to lower-than- estimated earnings in 2017-2019.

Forecasts and Valuations Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total turnover (SGDm) 6,335 6,684 6,748 6,949 7,260 Reported net profit (SGDm) 529 485 495 545 608 Recurring net profit (SGDm) 529 485 495 545 608 Recurring net profit growth (%) (0.5) (8.4) 2.2 10.0 11.5 Recurring EPS (SGD) 0.17 0.16 0.16 0.17 0.19 DPS (SGD) 0.16 0.15 0.15 0.15 0.16 Recurring P/E (x) 21.2 23.1 22.6 20.6 18.5 P/B (x) 5.26 5.14 5.01 4.85 4.61 P/CF (x) 24.1 14.8 11.7 14.1 13.5 Dividend Yield (%) 4.4 4.2 4.2 4.2 4.4 Analyst EV/EBITDA (x) 15.9 15.6 14.2 13.3 12.0 Shekhar Jaiswal Return on average equity (%) 24.8 22.5 22.4 24.0 25.6 Net debt to equity (%) 10.7 7.2 net cash net cash net cash +65 6232 3894 Our vs consensus EPS (adjusted) (%) (2.1) (0.8) 1.9 [email protected]

Source: Company data, RHB

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Financial Exhibits

Financial model updated on: 2017-09-04. Asia Financial summary Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Singapore Recurring EPS (SGD) 0.17 0.16 0.16 0.17 0.19 Industrial EPS (SGD) 0.17 0.16 0.16 0.17 0.19 ST Engineering Ltd DPS (SGD) 0.16 0.15 0.15 0.15 0.16 Bloomberg STE SP BVPS (SGD) 0.68 0.70 0.72 0.74 0.78 Buy Weighted avg adjusted shares (m) 3,121 3,122 3,122 3,122 3,122

Valuation basis Valuation metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F We use a blended valuation methodology to value ST Recurring P/E (x) 21.2 23.1 22.6 20.6 18.5 Engineering. Our SGD4.07 TP is based on the P/E (x) 21.2 23.1 22.6 20.6 18.5 average values derived from P/E- (23x), P/BV- (5.5x), EV/EBITDA- (16x) and DCF-based valuations (WACC P/B (x) 5.26 5.14 5.01 4.85 4.61 of 6.8% and terminal growth rate of 2%). Our TP FCF Yield (%) 1.7 4.6 6.4 4.9 5.3 implies 23.3x 2018 P/E, which is slightly above +1SD Dividend Yield (%) 4.4 4.2 4.2 4.2 4.4 forward P/E as measured since 1 Jan 2008. EV/EBITDA (x) 15.9 15.6 14.2 13.3 12.0

EV/EBIT (x) 21.8 23.9 19.5 18.2 16.2 Key drivers

i. Strong order wins; Income statement (SGDm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F ii. Recovery in the marine and aerospace sectors. Total turnover 6,335 6,684 6,748 6,949 7,260

Key risks Gross profit 1,282 1,305 1,329 1,357 1,465 EBITDA 698 718 772 823 909 i. Poor execution of diversification in the aerospace sector; Depreciation and amortisation (187) (247) (211) (222) (233) ii. Long-term slowdown in the Operating profit 510 471 562 601 676 industry; Net interest (16) (15) (18) (15) (13) iii. Delay in the implementation of Singapore’s Income from associates & JVs 58 64 55 56 58 Smart Nation initiative. Pre-tax profit 630 591 644 695 775 Company Profile Taxation (99) (98) (118) (118) (132) Minority interests (3) (8) (31) (32) (35) ST Engineering is an integrated engineering group in the aerospace, electronics, land systems and marine Recurring net profit 529 485 495 545 608 sectors. The company has diversified its businesses and geographic reach over the years. Cash flow (SGDm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Change in working capital (227) (13) 204 (45) (87) ST Engineering’s 1-year forward P/BV vs ROEs Cash flow from operations 465 759 956 794 830 Capex (270) (247) (237) (240) (240) 8.0 33% Cash flow from investing activities (477) (267) (213) (182) (181) 31% 7.0 Proceeds from issue of shares (76) 6 17 0 0 29% Dividends paid (498) (466) (467) (471) (490) 6.0 27% Cash flow from financing activities (519) (535) (491) (511) (531) 25% 5.0 Cash at beginning of period 1,471 951 905 1,136 1,237 23% Net change in cash (531) (44) 252 101 118 4.0 21% Ending balance cash 951 905 1,136 1,237 1,355 19% 3.0 17%

2.0 15% Balance sheet (SGDm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Total cash and equivalents 951 905 1,136 1,237 1,355 Tangible fixed assets 1,709 1,670 1,709 1,760 1,800 P/BV ROE Intangible assets 737 1,020 1,000 967 934

Total investments 462 406 427 370 311 Total other assets 471 457 571 571 571 Total assets 8,169 8,365 8,641 8,829 9,052 Short-term debt 175 87 0 0 0 Total long-term debt 1,019 993 1,027 1,027 1,027 Other liabilities 469 536 516 516 516 Total liabilities 5,908 5,921 6,106 6,188 6,258 Shareholders' equity 2,132 2,182 2,238 2,312 2,429 Minority interests 129 262 297 329 364 Total equity 2,261 2,444 2,535 2,641 2,794 Net debt 242 175 (108) (209) (327) Total liabilities & equity 8,169 8,365 8,641 8,829 9,052

Key metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Revenue growth (%) (3.1) 5.5 1.0 3.0 4.5 Recurrent EPS growth (%) (0.7) (8.5) 2.2 10.0 11.5 Gross margin (%) 20.2 19.5 19.7 19.5 20.2 Operating EBITDA margin (%) 11.0 10.7 11.4 11.8 12.5 Net profit margin (%) 8.4 7.2 7.3 7.8 8.4 Dividend payout ratio (%) 94.1 96.2 94.3 86.3 80.7 Capex/sales (%) 4.3 3.7 3.5 3.5 3.3 Interest cover (x) 12.8 11.1 13.8 14.9 16.8

Source: Company data, RHB, Bloomberg

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Investment Thesis Strong orderbook position to support revenue growth ST Engineering’s orderbook has seen significant improvement over the last decade. The outstanding orderbook has more than doubled between 2005-2010 to SGD11.5bn. Since then, it has been ranging between SGD11.6-13.2bn. In 2Q17, the group announced its highest-ever orderbook of SGD13.5bn amidst SGD2.7bn worth of order wins in 1H17. The new wins were supported by SGD1.8bn of orders landed by the aerospace segment and SGD900m in orders by the electronics division. The former’s order wins was helped by multi-year renewals from both commercial and military customers. We remain confident that ST Engineering can achieve SGD5.5bn worth of new order wins in 2017.

Figure 1: ST Engineering’s announced order wins Figure 2: ST Engineering’s outstanding orderbook is at a record high

Source: Company data, RHB Source: Company data, RHB

The group’s outstanding orderbook of SGD13.5bn provides strong revenue visibility for 2017 and 2018. This is as the book-to-bill ratio stands at c.2x. Driven by benefits of increased diversification by the aerospace division and Smart Nation project wins by the electronics business, we remain confident of ST Engineering delivering a PBT CAGR of 7.8% over 2016-2019.

Figure 3: ST Engineering's 3-year revenue CAGR of 2.8% Figure 4: ST Engineering's 3-year PBT CAGR of 7.8%

Source: Company data, RHB Source: Company data, RHB

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Aerospace and electronics’ long-term growth prospects We believe the group’s move into new markets ought to support growth for its aerospace business. Singapore Technologies Aerospace Ltd (ST Aerospace) has been actively working to broaden its capabilities, which should support growth in the longer term. These include: i. A partnership with Airbus for P2F conversions of the latter’s A320/A321 and A330 jets – this marks a diversification of ST Aerospace’s conversion portfolio; ii. Continued expansion of its cabin interior service solutions business, particularly for VIP aircraft completions; iii. Expansion of its mid-life aircraft leasing business. We believe initiatives taken by ST Engineering for its electronics division would be the key to longer-term growth for the group. It ought to be the key beneficiary of Singapore’s Smart Nation initiative. In May, the Government announced that SGD2.4bn worth of technology tenders are to be called this year to invest in data analytics software and a communications backbone to link up sensors and data centres. The implementation, we believe, could take 2-3 years. Among Singapore corporates, ST Engineering seems to have a foot in the door in this initiative. The group is looking to be the backbone for this network. This would be a network that connects sensors, cameras, and so forth, where data from these devices can be collected and analysed. ST Engineering’s acquisition of 51% of SP Telecommunications Pte Ltd (SPTel) was completed in early May for a consideration of SGD55m. SPTel owns an extensive network of fibre optic back-haul infrastructure and facilities, similar to NetLink Trust. The combination of the electronic wing’s ICT expertise and SPTel’s assets ought to enhance the former’s capabilities in its strategy to build a comprehensive suite in smart city offerings.

Figure 5: Aerospace revenue growth outlook Figure 6: Electronics revenue growth outlook

Source: Company data, RHB Source: Company data, RHB

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Strong proxy to the rise in global defence spending ST Engineering derives 35% of its revenue from defence-related projects, with Singapore being one of its key customers. The country’s defence expenditure has grown at a healthy CAGR of 4% over the last decade to SGD13.8bn in 2016. The Government’s 2017 defence budget stands at SGD14.2bn (+1.6% YoY). We have witnessed a revival of military spending in the US, which remains the second- largest geographical market for the group’s land systems business (31% of the division’s revenue in 2016). US military spending was on a decline between 2011 and 2015, with annual military spending having fallen to USD596bn in 2015 from USD711bn in 2011. However, the trend reversed in 2016, as the US pushed its defence spending higher to USD611bn. On 16 Mar, US President Donald Trump submitted his request to the US Congress for USD639bn in military spending, ie USD54bn higher (c.10% increase) for FY18 as well as a USD30bn rise for FY17, which ends in September. These proposals for increased military spending bode well for ST Engineering, as the US accounted for 24.4% of the group’s total revenue in 2016. We note that it has a long history of selling defence products to the US.

Figure 7: Singapore's military expenditure has been on a Figure 8: Defence contribution to ST Engineering's revenue steady rise has been fairly consistent

Source: World Bank, RHB Source: Company data, RHB

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Consensus more optimistic of ST Engineering’s outlook beyond 2017 While we have noticed material downward revisions to the group’s profit estimates for 2017 after its 2Q17 results, the reduction in 2018 estimates has not been so significant. Post recent downgrades, consensus is now looking at 9.7% profit growth next year, which seems healthy. While consensus has been revising EBITDA estimates for 2017 and 2018 lower, there is still strong expectation of growth next year. This indicates greater confidence in ST Engineering’s ability to grow revenue and generate strong operating cash flows.

Figure 9: Consensus expects strong profit growth in 2018… Figure 10: …and even higher EBITDA growth in 2018

Source: Bloomberg, RHB Source: Bloomberg, RHB

Our profit estimate for 2017 is below consensus, as we believe there may be risk of further impairments/write-offs, albeit small ones. However, we remain positive on the earnings growth outlook for 2018-2019. We expect gradual improvement in revenue growth, along with margins expansion, which should support a profit CAGR of 7.8% during the FY17-19 forecast period.

Figure 11: Consensus vs RHB

Source: Bloomberg, RHB

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Expecting a gradual improvement in dividend payments in 2017-2019 ST Engineering remains a defensive company with the ability to generate strong FCFs. With a moderation in the capex cycle, we expect the group to spend c.SGD240m in capex in FY17-19, leaving c.SGD650-810m in FCF available for dividend payments. ST Engineering declared a dividend of SGD0.15 per share in 2016. This was similar to 2015’s DPS, despite reported earning dropping by 8.4% YoY. This implied that the payout ratio had increased to 97%, despite management guiding that the ratio would be at 75- 80%. We view this as a good indication that management is willing to defend the absolute DPS level of SGD0.15 per share, even when the business environment is tough. With rising profit, and limited capex spending requirement, we believe the group could gradually increase the dividend per share by SGD0.01 each year. We estimate DPS to gradually increase to SGD0.17 per share in 2019 from SGD0.15 in 2016.

Figure 12: ST Engineering’s FCF and dividend trends Figure 13: Expecting higher dividends over the next three years

Source: Company data, RHB Source: Company data, RHB

Strong balance sheet and earnings recovery merit valuation premium ST Engineering's four key divisions bring pivotal diversification benefits – its aerospace, electronics, land systems, and marine businesses accounted for 37%, 28%, 20% and 13% of 2016’s revenue respectively. We believe such diversification allows the group to avoid reliance on any one particular unit for growth. This has engendered relatively stable revenue and profits, and allowed ST Engineering to weather even crisis periods. The group’s strong net cash balance sheet and ability to generate strong FCFs support sustained dividend payments, even during weak business performance. Moreover, its outstanding orderbook of SGD13.5bn provides strong revenue visibility, as the book-to-bill ratio stands at c.2x. Driven by the benefits of increased diversification by the aerospace division and Smart Nation project wins by the electronics wing, we remain confident of ST Engineering delivering a profit CAGR of 7.8% in 2016-2019. We initiate coverage on ST Engineering with a BUY rating and SGD4.07 TP, which is based the average values derived from P/E-, P/BV-, EV/EBITDA- and DCF-based valuations. We would like to highlight that our DCF-based valuation ascribes a higher SGD4.14 TP, which is slightly higher than the current TP.

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Figure 14: ST Engineering’s forward P/BV multiples should Figure 15: Expect significant improvement in ROEs expand in line with improving ROEs

Source: Bloomberg, RHB Source: Company data, RHB

Figure 16: ST Engineering’s forward EV/EBITDA multiples Figure 17: Estimating strong EBITDA growth should expand in line with EBITDA growth and improving margins

Source: Bloomberg, RHB Source: Company data, RHB

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Valuation Initiate coverage with a BUY recommendation and SGD4.07 TP We use a blended valuation methodology to value ST Engineering. Our SGD4.07 TP is based on the average values derived from P/E- (23x), P/BV- (5.5x), EV/EBITDA- (16x) and DCF-based valuations (WACC of 6.8% and terminal growth rate of 2%). Our TP implies 23.3x 2018 P/E, which is slightly above +1SD above the group’s 1-year forward average P/E as measured since 1 Jan 2008.

Figure 18: ST Engineering’s TP derivation

Source: RHB

Figure 19: ST Engineering's DCF-based valuation

Source: RHB

Figure 20: DCF assumptions Figure 21: DCF sensitivity

Source: RHB Source: RHB

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Figure 22: P/E-based valuations Figure 23: P/BV-based valuations

Source: RHB Source: RHB

Figure 24: EV/EBITDA-based valuation

Source: RHB

Figure 25: ST Engineering's 1-year forward P/E Figure 26: ST Engineering's 1-year forward EV/EBITDA

Source: Bloomberg, RHB Source: Bloomberg, RHB

Figure 27: ST Engineering's 1-year forward P/BV Figure 28: ST Engineering's 1-year forward P/BV vs ROE

Source: Bloomberg, RHB Source: Bloomberg, Company data, RHB

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Figure 29: Relative valuation

Source: Bloomberg, RHB

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Key Risks Order inflow delays for the aerospace and electronics businesses Our earnings estimates for ST Engineering is based on the premise that rapid growth and sustained increase in Asia’s aircraft fleet sizes and average age respectively would lead to higher business opportunities for the group’s commercial aerospace business division. In addition, we assess that growth in the electronics business would be well supported by a rise in order inflows from Singapore’s Smart Nation initiatives. Any delays in the growth of the Asian aviation industry or delays in the deployment of the island republic’s Smart Nation initiatives could hold-up order inflows and, hence, revenue recognition over our forecast period.

Poor diversification execution in the aerospace sector ST Engineering is looking to build a more diversified business presence in the aerospace sector through its investments in: i. Elbe Flugzeugwerke GmbH (EFW) – a JV that is responsible for the Airbus P2F conversions business; ii. ST Aerospace Aircraft Seats Pte Ltd – a JV with Japan’s Tenryu Holdings Co Ltd that is responsible for building a long-term business roadmap for the supply of economy, business, and first class seats to passenger aircraft. While we see strong potential in both business opportunities, we remain cognisant that execution remains key for the group to build a credible business presence in each of these business lines.

Sustained weakness in the marine business The marine business undertook provisions for doubtful debts for an oil & gas conversion in 1Q17 and reported pre-tax losses in 2Q17. 2Q17 shipbuilding losses were due to cost overruns and 1-month downtime (due to the weather) at Singapore Technologies Marine Ltd’s (ST Marine) US-based operations. While management has highlighted that it is looking to realign its focus on ship repairs over shipbuilding, sustained weakness in the latter industry could materially drag ST Engineering’s earnings lower over the FY17-19 forecast period. Amidst expectations of additional provisions to be made, we are assuming for the shipbuilding business to remain loss-making in 2017 and 2018. We note that ST Marine is part of an arbitration proceeding with Hornbeck Offshore Services Inc (Hornbeck) in the US, whereby the latter is claiming USD43.5m from the former. At the same time, ST Marine has asserted counterclaims of USD3.3m against Hornbeck. We believe there may be a case for higher-than-estimated provisions for the marine business if the arbitration case is settled in favour of the US firm.

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Segment Outlook Aerospace – segment information ST Engineering’s aerospace business is the world’s largest commercial airframe MRO services provider. It provides a suite of services ranging from MRO services in airframes, components and engines, to designing and technical services. The group also provides training for pilots and technical vocations in air charter services. This business division accounted for 37% of ST Engineering’s revenue, 49% of EBITDA and 48% of net profit in 2016. Aerospace has a well-diversified global business presence, with hangars operating in the US, China, Europe and Singapore. In 2016, Asia accounted for 47% of this division’s revenue, with the US being the second-largest revenue source, ie accounting for 28% of topline for that year.

Figure 30: Aerospace revenue by geography (2016) Figure 31: Aerospace revenue by business service (2016)

Source: Company data, RHB Source: Company data, RHB

Under the aerospace wing, the group reports revenue and PBT for following business operations: i. Aircraft maintenance & modifications (AMM); ii. Component/engine repair & overhaul (CERO); iii. Engineering, materials & services (EMS). AMM is the largest business line under the aerospace division, accounting for 44% and 57% of segment revenue and PBT respectively in 2016.

Figure 32: Aerospace revenue growth outlook Figure 33: Aerospace PBT margins outlook

Source: Company data, RHB Source: Company data, RHB

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Segment earnings forecasts Albeit at a slower pace, we expect continuing growth in AMM and EMS revenues, partially offset by softness in the CERO business. This ought to translate into revenue CAGR of 1.9% in 2016-2019. During this same period, we expect strong growth in P2F conversion deliveries and the aircraft leasing business to support PBT CAGR of 4.5%.

High capex spend by airlines creates MRO opportunities The airline industry has been witnessing strong growth in operating cash flow and net profits over the last few years. This was thanks to declining oil prices and improving travel demand. Global airline earnings increased by 14.3% YoY to USD40bn in 2016 from USD35bn in 2015. Aviation consultancy service provider ICF assessed that airlines invest their profits in three aspects: i. Capex; ii. Investors; iii. Employees.

Figure 34: Key areas on which airlines spend their profits

Source: ICF, RHB

Airlines’ capex spending – which includes expenditure on fleet renewals, airport facilities (eg lounges) and cabin modifications – account for almost 50% of their profits earned. In addition to airline MRO services, ST Engineering’s aerospace business is aggressively diversifying into the cabin modifications segment. The group has been growing its cabin interiors business by developing cabin products and offering a full suite of turnkey cabin retrofit solutions. These range from design conceptualisation and engineering to implementation and certification. ST Engineering showcased its new range of lightweight economy class seats at the Singapore Airshow 2016. ST Aerospace also became the first company to receive the Production Organisation Approval from the Civil Aviation Authority of Singapore (CAAS) that year. It was also the first seat design and development company to receive the Singapore Technical Standard Order Certificate of Approval from the country’s civil aviation authority. With improving profitability, aircraft fleet standardisation (with the arrival of newer aircraft), and rising competition, airlines globally are investing aggressively in refreshing their product offerings. This is to attract and retain their customer base. We believe that, over the longer term, cabin modifications could become one of the key growth drivers for the ST Aerospace unit.

Figure 35: Expected key aircraft platforms based on estimated MRO spend

Source: Oliver Wyman, RHB

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

ST Aerospace specialises in commercial narrow-body and military aircraft maintenance and aerospace engineering. Its capabilities include, but are not limited to, offering full suite of maintenance and engineering services for Airbus 318/319/320/321 and Boeing 737- 300/400/500/600/700/800/900 series of aircraft. International management consulting firm Oliver Wyman estimates the size of the narrow body MRO market globally in 2027 at c.USD49bn. This is from an estimated current market size of c.USD29bn now, ie a CAGR of 5.4% over 10 years.

Asia-Pacific to witness a rapid growth in fleet sizes and age Oliver Wyman’s Global Fleet & MRO Market Forecast report estimates that Asia-Pacific’s aircraft fleet is to witness a 61% growth between 2017-2027 – with much of the growth being driven by China and India. Although from a small base, India is expected to witness a 90% growth in aircraft fleet size. China, during the same period, looks set to experience an 89% fleet growth – this is despite its fleet size being almost 8x that of India’s. Net fleet growth refers to the percentage difference between new fleets delivered and old fleets being retired. This means that a positive net fleet growth signifies a greater number of new aircraft being delivered, rather than the disposal of old retired ones. On an annualised basis, the region’s aircraft fleet is expected to grow at a CAGR of 5.1%, while the same growth for China and India is estimated to be 10.6% and 11.9% respectively.

Figure 36: 2017-2027 fleet growth by region Figure 37: Annualised fleet growth rates by region

Source: Oliver Wyman, RHB Source: Oliver Wyman, RHB

With a rapid growth in passenger traffic, Asia-Pacific, India, and China are not only expected to experience strong growth in fleet sizes, but – as the markets mature – Oliver Wyman estimates that the average fleet age would increase as well. Over the next decade, the firm estimates that the average age of aircraft fleets in China and India would increase to 7.8 years from 6.1 years (the former) and 10.2 years 6.9 years (the latter).

Figure 38: Average fleet age by region (in years)

Source: Oliver Wyman, RHB

We assess that both growth in aircraft fleet sizes and increases in their average age of in Asia would provide significant growth opportunity to the MRO industry. We believe, as the market leader in the MRO market, ST Aerospace would be able to seize the opportunity at hand. We note that revenue from Asia’s aerospace business accounted for 23% of ST Engineering’s total revenue in 2016. We believe this contribution ought to grow significantly over the next 5-10 years, given that the group continues to maintain its market leadership in the global airframe MRO space. ST Aerospace has already undertaken some initiatives to increase its MRO capacity in China and the US in order to ensure that it continues to leverage from growth in aviation traffic. It recently completed the construction of a second hangar in , China, with the expectation of reaching a steady state capacity of 1m man hours. Meanwhile, the construction of another aircraft hangar complex for airframe-related MRO services at the Pensacola International Airport in Florida, US, is currently underway.

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ST Engineering Ltd Singapore Initiating Coverage

6 September 2017 Industrial | Aerospace & Defence

Large market potential in P2F conversions Over the next decade, Oliver Wyman estimates that there would be a total requirement of 785 cargo aircraft globally. Of this, 231 aircraft would be new, while the 412 balance are converted passenger aircraft. This is a clear indication that there would be greater demand for P2F conversions than new order deliveries over the next decade. EFW, a subsidiary of Airbus and ST Aerospace, estimates that 1,000 narrow body freighter conversions would be needed over the course of the next 20 years. The rise in e-commerce globally would create the need for a large cargo aircraft fleet globally – this is to ensure timely deliveries. As a result, the demand for P2F conversions is expected to be higher, as we assess the cost of converting a passenger aircraft into a freighter is relatively lower than the list price of a similar-sized cargo aircraft (Figure 39). The average cost of P2F conversions could range between USD20-42m. This is based on the: i. Type of aircraft; ii. Additional aircraft component requirements; iii. Engine make; iv. Manufacturing year of an aircraft and its engines. Using Oliver Wyman’s estimate of 412 P2F conversions – and assuming a P2F conversion cost range of USD20-42m – this implies a total market size of USD8.2-17.3bn.

Figure 39: 2017-2027 global aircraft demand

Source: Oliver Wyman, RHB

Figure 40: P2F conversion costs (USDm)

Note: **Costs vary based on requirements of additional aircraft components, the engine make, and manufacturing year of the aircraft and its engines Source: RHB

ST Aerospace is already set to benefit from the growing demand for P2F conversions and recently announced an Airbus A330-300 P2F conversion business – with DHL being the launch customer. The firm’s current P2F capabilities of include Boeing 757-200SF, Airbus A330, and Airbus A320/321 aircraft.

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Electronics – segment information ST Engineering’s electronics division is the second-largest business segment for the group, accounting for 28% and 35% of its 2016 revenue and PBT respectively. This business segment operates largely in Asia, as the region accounts for 78% of the segment’s revenue source. This division focuses on the provision of following services: i. Rail electronics and intelligent transportation; ii. Satellite communications; iii. Advanced electronics and ICT solutions. This segment has witnessed strong growth over the last few years, aided by sturdy order wins. In 2016, we estimate that this industry reported SGD2.3bn worth of order wins. YTD order wins for the electronics business has already reached almost SGD1bn, with SGD464m and SGD490m in order wins announced in 1Q17 and 2Q17 respectively.

Figure 41: Electronics revenue by geography (2016) Figure 42: Electronics revenue by business services (2016)

Source: Company data, RHB Source: Company data, RHB

Under the electronics division, ST Engineering reports revenue and PBT for following business operations: i. Communications and sensor systems group (CSG); ii. Large scale systems group (LSG); iii. Software systems group (SSG). CSG is the largest business line under the electronics wing, accounting for 49% and 37% of the segment’s revenue and PBT respectively in 2016.

Figure 43: Electronics revenue growth outlook Figure 44: Electronics PBT margin outlook

Source: Company data, RHB Source: Company data, RHB

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Segment earnings forecast We conservatively estimate the segment to book an 11.5% revenue CAGR and 9.8% PBT CAGR over 2016-2019, largely aided by growth in its communications and sensor systems group. We believe the high backlog of orders and continuing demand for its transportation solutions would continue to support earnings growth. We also believe the rapidly- expanding industry demand for ICT solutions and deployment of Singapore’s Smart Nation initiatives could provide a significant boost for its order wins and earnings for the electronics segment.

Rising global demand for ICT solutions amidst growth in Smart City solutions By 2025, it is estimated that more than half of the world’s population could reside in urban areas. The estimated number is 4.6bn people. With such rapid expansion in urbanisation, governments around the world are frantically seeking solutions to accommodate the urban dwellers. The term “Smart City” encompasses integrating ICT and Internet of Things (IoT) to facilitate creation of an efficient and better quality of life in urban areas. Frost & Sullivan estimates that the global Smart City market could be valued at USD1.5trn by 2020. Various aspects of Smart City initiative are expected to grow at a 6.9-19.6% CAGR from now until 2020 (see Figure 46).

Figure 45: Global Smart City market by segments in 2020 Figure 46: Frost & Sullivan estimates for Global Smart City market growth

Source: Frost & Sullivan, RHB Source: Frost & Sullivan, RHB

Singapore’s Smart Nation initiative Singapore’s Smart Nation initiative was launched in Nov 2014. This initiative is spearheaded by the Government with the objective of allowing people to be empowered by technology, helping to improve and enhance the quality of life. This would be done through the establishing of necessary networks and infrastructure, which would create economic opportunities for everyone to participate in. There are five key domains that the Government is targeting: i. Transport; ii. Home and environment; iii. Business productivity; iv. Health and enabled ageing; v. Public sector services. Figure 47 further elaborates each of the key focus areas. Within each, the Government would put in place infrastructure, policies and enablers to spur innovation.

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Figure 47: Key focus areas of Singapore's Smart Nation initiative

Source: Smart Nation Singapore, RHB

Under the Smart Nation initiative, plenty of projects have been put to trial. However, no formal contracts have been awarded yet. The IoT is a fundamental piece of any smart nation initiative, with the key pillar being connectivity and big data. In May, the Government announced that a total of SGD2.4bn worth of technology tenders that would be called this year to invest in data analytics software and a communications backbone to link up sensors and data centres. The implementation, we believe, would take 2-3 years.

ST Engineering has a foot in the door in Smart Nation initiative Among Singapore corporations, along with the telecom operators, ST Engineering seems to have a foot in the door in this initiative, and is looking to be the backbone for the network. This would be a network which connects sensors, cameras and so forth where data from these devices can be collected and analysed. Its Galaxy System is a radio frequency mesh network that brings together all the various devices deployed in a smart city. These could be sensors that are able, for example, to read water meters or a pressure sensor for the sewerage network.

Figure 48: ST Electronics' capabilities in advanced electronics and infocomm technologies

Source: Company, RHB

ST Engineering acquired a 51% stake in SPTel in early May for SGD55m. The latter owns an extensive network of fibre optic back-haul infrastructure and facilities, similar to NetLink Trust. We believe the combination of its electronics division’s ICT expertise and the assets of SPTel would enhance its electronics’ capabilities in its strategy to build a comprehensive suite in the smart city offering.

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ST Electronics is the leading infocommunications technology provider in the region. Some of the recent significant milestones achieved by the group include a recent win for a consultancy contract for the design of Sri Lanka’s National Security Operations Centre.

Land systems – segment information ST Kinetics provides land systems and specialty vehicles to ST Engineering. Its capabilities cover: i. Design and development; ii. Systems integration; iii. Production; iv. After-sales support; v. Through-life management. This unit is made up of the defence and commercial business group. Based on our discussions with management, we assess the breakdown between defence and commercial contracts as roughly even.

Figure 49: Land systems revenue by geography (2016) Figure 50: Land systems revenue by business (2016)

Source: Company data, RHB Source: Company data, RHB

This business segment accounted for 20% of ST Engineering’s revenue in 2016. However, due to the group’s depressed earnings over the last few years, this segment’s contributions to PBT declined to 4% in 2016 from 15% in 2013. Under land systems, ST Engineering reports revenue and PBT for the following business operations: i. Automotive; ii. Munitions & weapons (M&W); iii. Service, trading & others (S&T). Automotive is the largest business line under land systems, accounting for 77% of the segment’s revenue in 2016. However, due to large write-downs undertaken by the business line, the automotive business was loss-making in 2016.

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Figure 51: Land systems revenue growth outlook Figure 52: Land systems PBT margin outlook

Source: Company data, RHB Source: Company data, RHB

Segment earnings forecast We estimate for the segment to report revenue CAGR of 2.3% in 2016-2019. However, as we expect a recovery in margins for the automotive division from 2017 onwards, we estimate PBT to grow to SGD104m in 2019 from SGD22m in 2016. We believe growth in this business segment would be supported by a rising defence budget in Singapore and the US. We also believe that most countries around the world are likely to witness a demand increase for counterterrorism solutions, systems for cyber security and intelligence gathering, as well as unmanned security. Moreover, we also expect a recovery in commercial projects over the forecast period.

Marine – segment information ST Marine is a provider of turnkey: i. Shipbuilding; ii. Repair & conversion; iii. Naval operations & integrated logistics solution services; iv. Engineering services… …to a global customer base. This division has a presence in the global new build market, particularly in the Americas, where it is complemented by Mississippi-based VT Halter Marine (Halter Marine). ST Marine currently has two yards in Singapore (Benoi and Tuas) and three in the US. Although, the marine business has a strong track record in both commercial and naval applications, the revenue and earnings contribution from this segment remains cyclical and highly dependent on the oil price cycle. This division accounted for 13% of revenue and 13% of PBT for the group in 2016. ST Marine provides a full suite of services, ie from concept definition, basic design, and installation & integration, to integrated logistics engineering. These services are offered under the shipbuilding, ship repair and engineering business lines. Note that ST Marine’s shipbuilding business has been impacted by a slowdown in global ship demand. Both revenue and profits for this division have been on a decline over the past 2-3 years.

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Figure 53: Marine revenue by geography (2016) Figure 54: Marine revenue by business service (2016)

Source: Company data, RHB Source: Company data, RHB

Under the marine wing, ST Engineering reports revenue and PBT for following business operations: i. Shipbuilding; ii. Ship repair; iii. Engineering services. Shipbuilding is the largest business line under the marine business, accounting for 58% of segment revenue in 2016. However, due to consistent decline in margins witnessed by this business line and slowdown in order inflow, the shipbuilding division reported a meagre SGD800,000 of PBT in 2016. This was 1% of the PBT reported by the marine business last year.

Figure 55: Marine revenue growth outlook Figure 56: Marine PBT margins outlook

Source: Company data, RHB Source: Company data, RHB

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Segment earnings forecast We estimate the marine segment’s revenue to decline at a CAGR of 8.3% in 2016-2019. During the same period, we estimate for PBT to decline at a CAGR of 10.8%. The decline was in line with the anticipated decline in new build orders and increased focus on ship repair over shipbuilding. We expect shipbuilding revenue to decline 10-24% in 2017-2019, with the segment reporting losses in 2017-2018. In line with management’s focus on increased ship repair business, the business line would remain as the largest PBT contributor during the forecast period. Shipbuilding revenue would largely be supported by defence-related orders like the delivery of littoral mission vessels to the Republic of Singapore Navy (RSN). ST Engineering’s marine business undertook provisions for doubtful debts for oil & gas conversions in 1Q17 and reported pre-tax losses in 2Q17. The shipbuilding losses during the latter quarter were due to cost overruns and 1-month downtime (due to adverse weather conditions) at ST Marine’s US-based operations. The latter is also engaged in arbitration proceedings with Hornbeck. Hornbeck is claiming USD43.5m from Halter Marine, while ST Marine has asserted counterclaims of USD3.3m against Hornbeck. We believe there may be a case for increased provisions under the marine business in 2017- 2018.

Financial Analysis Resumption in revenue and earnings growth For 2017, management is guiding for revenue to be comparable to 2016, with PBT to be higher than last year’s numbers. We are forecasting for 2017 revenue to remain largely unchanged at SGD6,748m (+1% YoY). We also expect reported profit to improve to SGD495m (from SGD485m in 2016). We expect recovery in the aerospace business and rapid growth in electronics segment to largely support 3-4.5% revenue growth in 2018-2019. This is because we believe the marine business would continue to remain soft during our FY17-19 forecast period.

Figure 57: Revenue growth forecast Figure 58: Recurring net profit and net profit margin

Source: Company data, RHB Source: Company data, RHB

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We forecast for ST Engineering’s net profit margins to sequentially improve to 8.4% in 2019 from 7.2% in 2016. This would translate into the group delivering 7.8% profit CAGR during 2016-2019. This strong growth in profit should also support improvement in the group’s ROEs. We forecast for ST Engineering’s ROEs to improve to 25.6% in 2019 from 22.5% in 2016. Despite the improvement, its ROEs would still be lower than the highs of more than 30% achieved during the 2010-2012 period.

Figure 59: We expect gradual improvement in ROEs, in line with higher profitability

Source: Company data, RHB

Healthy balance sheet Historically, ST Engineering has maintained an under-geared balance sheet. This was largely due to strong FCF generation and timely debt repayments. The debt raised in 2009 was aggressively repaid in 2009-2014. However, due to weak operating cash flow generation in 2014-2016 – and significant investments made in 2015-2016 – the group’s balance sheet moved into a net debt position of SGD242m in 2015 from net cash previously. With an improving business environment, the net debt position has been reduced to SGD175m. We believe ST Engineering could revert back to a strong net cash position in 2017, and its net cash position of SGD108m possibly almost tripling to SGD327m by 2019.

Figure 60: Reversion to strong net cash balance sheet Figure 61: Strong interest coverage ratios

Source: Company data, RHB Source: Company data, RHB

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Strong FCF generation capability ST Engineering remains a defensive counter with the ability to generate strong FCFs. Capex as percentage of revenue has been fairly stable at an average of c.4% since 2011. We expect a slight moderation in the capex cycle and estimate that the group could spend c.SGD240m in capex in 2017-2019. This would imply capex as a percentage of revenue to range between 3.3-3.5% during this timeframe. ST Engineering should generate an operating cash flow of SGD700-900m in 2017-2019. Based on our capex assumptions of c.SGD240m pa, FCF should range between SGD650-810m, which would be significantly higher than what was achieved by the group in the last two years. Given a net cash balance sheet, we do expect much of the FCF generated by ST Engineering to be passed on to shareholders in the form of dividends.

Figure 62: ST Engineering’s stable capex outlook Figure 63: Improving earnings and stable capex should support strong FCF generation

Source: Company data, RHB Source: Company data, RHB

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ST Engineering could gradually increase dividend payouts The group declared dividend of SGD0.15 per share in 2016. This was similar to 2015’s DPS despite reported earning dropping by 8.4% YoY. This implied that the payout ratio increased to 97% despite management guiding that the ratio would be at 75-80%. We view this as a good indication that management is willing to defend the absolute DPS level of SGD0.15 per share, even when the business environment is tough. With rising profit and limited capex spending requirements, we believe the group could gradually increase the dividend per share by SGD0.01 each year. We estimate DPS to gradually increase to SGD0.17 per share in 2019 from SGD0.15 in 2016. Our DPS estimate implies a 2018 dividend yield of 4% at the current share price.

Figure 64: ST Engineering’s FCF and dividend trends Figure 65: ST Engineering should be able to maintain a high payout ratio

Source: Company data, RHB Source: Company data, RHB

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Company Background The origins of Singapore Technologies Engineering or ST Engineering can be traced back to 1967 when Chartered Industries of Singapore (CIS) was formed to manufacture ammunition. CIS and a number of defence-related companies – created during the late 1960s and 1970s – were grouped under holding company Sheng-Li in 1974. The latter was renamed Singapore Technologies (ST) Holdings in 1990, and came under state investment company Temasek Holdings (Temasek) in 1994. From 1990, the ST group began to list some of its companies on the SGX. ST Aero and ST Shipbuilding were the first in Aug 1990. They were followed by ST Capital, ST Electronic & Engineering, ST Auto and ST Computer Systems & Services. For defence- related firms, ST maintained management control by retaining at least 51% of the shares. In Dec 1997, ST Engineering was created by amalgamating four listed companies, namely ST Aerospace, ST Electronics, ST Kinetics and ST Marine. Following the merger of the four companies on 28 Aug 1997, shares of ST Engineering made their debut on the SGX on 8 Dec 1997. Temasek remains the largest shareholder of ST Engineering with a c.51% stake.

Aerospace business division (ST Aerospace) ST Aerospace is the aerospace arm of ST Engineering. It is the world’s largest commercial airframe MRO service provider. It has a global customer base, targeting both commercial and military operators. The group provides a suite of services ranging from MRO services in airframes, components and engines to designing and technical services. It also provides trainings for pilot and technical vocations in air charter services. The ST Aerospace business division includes AMM, CERO and EMS services.

Figure 65: ST Aerospace capabilities

Source: Company

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Electronics business division (ST Electronics) ST Electronics has more than 40 years of experience in providing a comprehensive range of solutions in electronics, communications, advanced electronics and ICT solutions to governments and commercial enterprises globally. Its strength lies in the ability to use cutting-edge technologies, as well as the innovating of new products to meet client needs. Some of the solutions that are implemented by ST Electronics include e-government ICT, satellite communications, rail and intelligent transportation markets, and eco-enabling ICT solutions for businesses. This division includes the following business operations, ie LSG, CSG, and SSG.

Figure 66: ST Electronics capabilities

Source: Company

Land systems business division (ST Kinetics) ST Kinetics provides the land systems and specialty vehicles to ST Engineering. Its capabilities cover design and development, systems integration, production, after-sales support and through-life management. This wing is made up of the defence and commercial business groups. ST Kinetics business divisions comprise automotive, M&W and ST.

Figure 67: ST Kinetics’ capabilities

Source: Company

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Marine business division (ST Marine) ST Marine is a provider of turnkey shipbuilding, repair & conversion, naval operations, and integrated logistics solution services – as well as engineering services – to a local and international customer base. Its presence in the global new build market, particularly in the Americas, is complemented by Mississippi-based Halter Marine. ST Marine has a strong track record in both commercial and naval applications. It also provides a full suite of services from concept definition, basic design, and installation & integration to integrated logistics engineering. ST Marine is mainly involved in shipbuilding, ship repair and engineering.

Figure 68: ST Marine’s capabilities

Source: Company

Other businesses Singapore Technologies Dynamics Pte Ltd (ST Dynamics) is the advanced engineering centre of ST Engineering. Meanwhile, ST Synthesis Pte Ltd (ST Synthesis) provides logistics and supply chain management to facilities engineering services.

Figure 69: Temasek remains the largest shareholder Figure 70: 35% of ST Engineering’s FY16 revenue was from defence

Source: Bloomberg, RHB Source: Company data

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SWOT Analysis

 A virtual monopoly in domestic defence contracts  Weakness in the oil price cycle and  The world's largest commercial aircraft MRO services resulting decline in provider new build orders  One of the largest ICT service providers in the Asia- for ships could Pacific region continue to drag earnings from the marine business over the next few years

 Rapid growth in  Rapid growth of aircraft fleet in original equipment Asia and manufacturer demand for (OEM) presence development of and building of global Smart large capacity in Cities to provide Asia’s MRO long-term market by growth competitors opportunities for the aerospace and electronics businesses

 Remains exposed to multiple business cycles that could impact it various business segments negatively

Recommendation Chart

Date Recommendation Target Price Price Price Close 2017-09-05 5.0 Source: RHB, Bloomberg

4.5

4.0

3.5

3.0

2.5 Sep-12 Dec-13 Mar-15 Jun-16

Source: RHB, Bloomberg

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RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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Industrial | Aerospace & Defence

Hong Kong This report is issued and distributed in by RHB Securities Hong Kong Limited (興業僑豐證券有限公司) (CE No.: ADU220) (“RHBSHK”) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities. Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact RHBSHK. RHBSHK is a wholly owned subsidiary of RHB Hong Kong Limited; for the purposes of disclosure under the Hong Kong jurisdiction herein, please note that RHB Hong Kong Limited with its affiliates (including but not limited to RHBSHK) will collectively be referred to as “RHBHK.” RHBHK conducts a full-service, integrated investment banking, asset management, and brokerage business. RHBHK 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 research report. Investors should consider this report as only a single factor in making their investment decision. Importantly, please see the company-specific regulatory disclosures below for compliance with specific rules and regulations under the Hong Kong jurisdiction. Other than company-specific disclosures relating to RHBHK, this research report is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such.

United States This report was prepared by RHB and is being distributed solely and directly to “major” U.S. institutional investors as defined under, and pursuant to, the requirements of Rule 15a-6 under the U.S. Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, access to this report via Bursa Marketplace or any other Electronic Services Provider is not intended for any party other than “major” US institutional investors, nor shall be deemed as solicitation by RHB in any manner. RHB is not registered as a broker-dealer in the United States and does not offer brokerage services to U.S. persons. Any order for the purchase or sale of the securities discussed herein that are listed on Bursa Malaysia Securities Berhad must be placed with and through Auerbach Grayson (“AG”). Any order for the purchase or sale of all other securities discussed herein must be placed with and through such other registered U.S. broker-dealer as appointed by RHB from time to time as required by the Exchange Act Rule 15a-6. This report is confidential and not intended for distribution to, or use by, persons other than the recipient and its employees, agents and advisors, as applicable. Additionally, where research is distributed via Electronic Service Provider, the analysts whose names appear in this report are not registered or qualified as research analysts in the United States and are not associated persons of Auerbach Grayson AG or such other registered U.S. broker-dealer as appointed by RHB from time to time and therefore may not be subject to any applicable restrictions under Financial Industry Regulatory Authority (“FINRA”) rules on communications with a subject company, public appearances and personal trading. Investing in any non-U.S. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in the United States. The financial instruments discussed in this report may not be suitable for all investors. Transactions in foreign markets may be subject to regulations that differ from or offer less protection than those in the United States.

OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST Malaysia RHB does not have qualified shareholding (1% or more) in the subject company (ies) covered in this report except for: a) - RHB and/or its subsidiaries are not liquidity providers or market makers for the subject company (ies) covered in this report except for: a) - RHB and/or its subsidiaries have not participated as a syndicate member in share offerings and/or bond issues in securities covered in this report in the last 12 months except for: a) - RHB has not provided investment banking services to the company/companies covered in this report in the last 12 months except for: a) -

Thailand RHB Securities (Thailand) PCL and/or its directors, officers, associates, connected parties and/or employees, may have, or have had, interests and/or commitments in the securities in subject company(ies) mentioned in this report or any securities related thereto. Further, RHB Securities (Thailand) PCL may have, or have had, business relationships with the subject company(ies) mentioned in this report. As a result, investors should exercise their own judgment carefully before making any investment decisions.

Indonesia PT RHB Sekuritas Indonesia is not affiliated with the subject company(ies) covered in this report both directly or indirectly as per the definitions of affiliation above. Pursuant to the Capital Market Law (Law Number 8 Year 1995) and the supporting regulations thereof, what constitutes as affiliated parties are as follows: 1. Familial relationship due to marriage or blood up to the second degree, both horizontally or vertically; 2. Affiliation between parties to the employees, Directors or Commissioners of the parties concerned; 3. Affiliation between 2 companies whereby one or more member of the Board of Directors or the Commissioners are the same; 4. Affiliation between the Company and the parties, both directly or indirectly, controlling or being controlled by the Company; 5. Affiliation between 2 companies which are controlled, directly or indirectly, by the same party; or

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ST Engineering Ltd Singapore Initiating Coverage

Industrial | Aerospace & Defence

6. Affiliation between the Company and the main Shareholders. PT RHB Sekuritas Indonesia is not an insider as defined in the Capital Market Law and the information contained in this report is not considered as insider information prohibited by law. Insider means: a. a commissioner, director or employee of an Issuer or Public Company; b. a substantial shareholder of an Issuer or Public Company; c. an individual, who because of his position or profession, or because of a business relationship with an Issuer or Public Company, has access to inside information; and d. an individual who within the last six months was a Person defined in letters a, b or c, above.

Singapore RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or associated companies do not make a market in any securities covered in this report, except for: (a) - The staff of RHB Research Institute Singapore Pte Ltd and its subsidiaries and/or its associated companies do not serve on any board or trustee positions of any issuer whose securities are covered in this report, except for: (a) - RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or its associated companies do not have and have not within the last 12 months had any corporate finance advisory relationship with the issuer of the securities covered in this report or any other relationship (including a shareholding of 1% or more in the securities covered in this report) that may create a potential conflict of interest, except for: (a) -

Hong Kong The following disclosures relate to relationships between RHBHK and companies covered by Research Department of RHBSHK and referred to in this research report: RHBSHK hereby certifies that no part of RHBSHK analyst compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. RHBHK had an investment banking services client relationships during the past 12 months with: -. RHBHK has received compensation for investment banking services, during the past 12 months from: -. RHBHK managed/co-managed public offerings, in the past 12 months for: -. On a principal basis. RHBHK has a position of over 1% market capitalization of: -.

Additionally, please note the following: Ownership and material conflicts of interest: RHBSHK policy prohibits its analysts and associates reporting to analysts from owning securities of any company covered by the analyst. Analyst as officer or director: RHBSHK policy prohibits its analysts, and associates reporting to analysts from serving as an officer, director, advisory board member or employee of any company covered by the analyst. RHBHK salespeople, traders, and other non-research professionals may provide oral or written market commentary or trading strategies to RHB clients that reflect opinions that are contrary to the opinions expressed in this research report. This research report is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.

Kuala Lumpur Hong Kong Singapore

RHB Research Institute Sdn Bhd RHB Securities Hong Kong Ltd. RHB Research Institute Singapore Level 3A, Tower One, RHB Centre 12th Floor Pte Ltd. Jalan Tun Razak World-Wide House 10 Collyer Quay Kuala Lumpur 50400 19 Des Voeux Road #09-08 Ocean Financial Centre Malaysia Central, Hong Kong Singapore 049315 Tel : +(60) 3 9280 8888 Tel : +(852) 2525 1118 Tel : +(65) 6533 1818 Fax : +(60) 3 9200 2216 Fax : +(852) 2810 0908 Fax : +(65) 6532 6211 Jakarta Bangkok

PT RHB Sekuritas Indonesia RHB (China) Investment Advisory Co. Ltd. RHB Securities (Thailand) PCL Wisma Mulia, 20th Floor Suite 4005, CITIC Square 10th Floor, Sathorn Square Office Tower Jl. Jenderal Gatot Subroto No. 42 1168 Nanjing West Road 98, North Sathorn Road, Silom Jakarta 12710, Indonesia Shanghai 20041 Bangrak, Bangkok 10500 Tel : +(6221) 2783 0888 China Thailand Fax : +(6221) 2783 0777 Tel : +(8621) 6288 9611 Tel: +(66) 2 088 9999 Fax : +(8621) 6288 9633 Fax : +(66) 2 088 9799

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