Singapore Strategy – the Road Ahead

Equity Research 10 August 2021

Strategy report Carmen Lee Singapore Strategy – Singapore Strategist

The road ahead Singapore | Equities

Investment summary

As Singapore celebrates its 56th birthday, there is growing optimism that the economy is poised to re-open with the easing of restrictions and the resumption of more activities. The focus is clearly on the road ahead. Government measures and initiatives have supported most industries during this challenging period and there were also incentives to encourage companies to digitalize and be part of the country’s smart nation initiatives. Current market valuation of 12.9x is not excessive versus historical average of 13.3x, especially in view of the strong pick up in earnings expected for this year and next. Earnings growth is estimated at an average 14.2% in 2021 and 11.1% in 2022. In terms of price-to-book ratio, the STI is currently trading at 1.1x, which is also below the 10-year historical average of 1.21x. As we expect short-term volatility to remain, we prefer a strategy of holding a portfolio of growth and cyclical stocks. Some of our favorites includes Ascendas REIT, CapitaLand Integrated Commercial Trust, ComfortDelgro, DBS Group Holdings Ltd, Keppel Corp, Keppel DC REIT, Mapletree Industrial Trust, NetLink NBN Trust, SATS, Sembcorp Industries, Singapore Telecommunications, Thai Beverage, United Overseas Bank, UOL Group, Venture Corp and Wilmar International.

• Keeping focus on the road ahead

• Earnings recovery and inexpensive valuations

• Recommend holding a portfolio of growth and cyclical stocks

Focusing on the future

As Singapore celebrates its 56th birthday, there is growing optimism that the economy is poised to re-open with the easing of restrictions and the resumption of more activities. The focus is clearly on the road ahead. Despite recent market rout, the Singapore market has been resilient and was relatively unscathed by recent sell-down in the region – placing the STI as among the better performers in July and YTD.

Vaccination rate at 69%

As of 8 Aug 2021, about 79% of the population have received at least one dose of vaccination and 69% have completed the full regimen. New vaccination-differentiated measures were also announced recently, leading the way for more controlled easing of restriction measures. While near term volatility remains, the recovery theme is still intact.

Equity Research 10 August 2021

Corporate earnings on recovery path

Current market valuation of 12.9x is not excessive versus historical average of 13.3x, especially in view of the strong pick up in earnings expected for this year and next. Earnings growth is estimated at an average 14.2% in 2021 and 11.1% in 2022. In terms of price-to-book ratio, the STI is currently trading at 1.1x, which is also below the 10-year historical average of 1.21x. Risks remain that the delta variant could pose a major threat to this region. Several countries are on lock down again and this could derail growth. This could in turn result in supply chain disruptions, as seen during the outbreaks of the coronavirus in Asia last year, which affected several key manufacturing hubs.

Some of our favourites

As we expect short-term volatility to remain, we prefer a strategy of holding a portfolio of growth and cyclical stocks. Some of our favorites includes Ascendas REIT, CapitaLand Integrated Commercial Trust, ComfortDelgro, DBS Group Holdings Ltd, Keppel Corp, Keppel DC REIT, Mapletree Industrial Trust, NetLink NBN Trust, SATS, Sembcorp Industries, Singapore Telecommunications, Thai Beverage, United Overseas Bank, UOL Group, Venture Corp and Wilmar International.

Exhibit 1: Singapore stock picks Last done Last YTD Fair Upside Indicated PER Historical Rating (as at 6 Aug 2021) Done (%) Value (%) Div Yield FY1 P/B ($) ($) (%) (x) (x) Ascendas REIT 3.14 5.4 3.83 22.0 5.0 21.4 1.4 BUY

CapitaLand Integrated Commercial Trust 2.15 -0.5 2.53 17.7 5.0 20.7 1.0 BUY ComfortDelgro Corp 1.59 -4.8 1.90 19.5 3.5 17.9 1.3 BUY DBS Group Holdings Ltd 31.00 23.8 34.00 9.7 3.8 11.9 NA BUY Keppel Corp Ltd 5.44 1.1 6.33 16.4 3.7 14.6 0.9 BUY Keppel DC REIT 2.60 -7.5 3.19 22.7 3.8 26.0 2.1 BUY Mapletree Industrial Trust 2.96 2.7 3.41 15.2 4.6 21.6 1.6 BUY NetLink NBN Trust 0.98 1.0 1.10 12.8 5.2 37.5 1.4 BUY SATS Ltd 3.99 0.3 4.80 20.3 NA 86.7 2.9 BUY Sembcorp Industries 2.00 17.0 2.50 25.0 2.6 10.8 1.0 BUY Singapore Telecommunications 2.28 -1.3 2.89 26.8 4.4 16.4 1.4 BUY Thai Beverage 0.66 -10.2 0.91 37.9 3.2 15.5 2.8 BUY United Overseas Bank 26.63 17.9 30.50 14.5 4.4 11.4 1.1 BUY UOL Group 7.29 -5.4 8.91 22.2 2.3 18.3 0.6 BUY Venture Corp 19.40 -0.1 22.25 14.7 4.0 16.8 2.2 BUY Wilmar International 4.45 -4.3 6.21 39.6 3.5 13.0 1.1 BUY Source: Bloomberg, Internal estimates

Equity Research 10 August 2021

INVESTMENT HIGHLIGHTS

Keeping our focus on the road ahead…

For this year’s National Day 2021 celebration, the theme is “Together, Our Singapore Spirit” and the new song is aptly titled “The Road Ahead”. The song is composed and sang by a group of young talented Singaporeans. The singers are Linying, Sezairi Sezai, Shye-Anne Brown and Shabir Tabare Alam. While the names may not be as popular as Blackpink or Drake, they have also carved their own niches in the music industry. For example, Sezairi’s song “It’s You” has more than 28m streams on Spotify – higher than some of the top regional singers! Based on Spotify’s rate of 0.003 to 0.005 per stream, that is still a decent income of USD84K to USD140k!

What is the relevance to the Singapore stock market? For a small economy, both in terms of the equity and the music markets, the pandemic has exerted a huge toll due to movement restrictions and semi-lockdowns. However, the focus on the road ahead is relevant for Singapore in planning for the new norm. With government’s measures and initiatives to support most industries during this challenging period and incentives to encourage selective industries to digitalize and be part of the country’s smart nation initiatives, the outlook is healthy.

Singapore was relatively unscathed by recent market rout

In July 2021, heightened regulatory uncertainties in China led to massive losses for most Chinese stocks. The MSCI China Index suffered a loss of 14.1% in a month – the second worst month in the last ten years. This in turn hurt the sentiment for emerging markets as shown by the 7% decline in Jul 2021 for the MSCI Emerging Markets Index (MXEF) versus the 1.7% gain for the MSCI World Index (MXWO). With intensifying anti-trust scrutiny and regulatory measures on several big Chinese companies, and together with Beijing’s commitment to ensure income equality and a level playing field, market sentiment in this region has turned cautious as risks of further regulatory measures cannot be discounted. This could potentially impact near to medium term corporate earnings and stock prices. Despite this, Singapore’s STI posted gains of 1.17% in July 2021 - bucking regional market’s downtrends. For the year, the STI is also among some of the markets with double-digit gains (+11.6% as of 6 Aug 2021).

Exhibit 2: Regional indices YTD performance Indices Last YTD Target Upside as at 6 Aug 2021 Done Change

FTSE Bursa Malaysia KLCI 1,490 -8.4% 1,781 19.6% Hang Seng Index 26,179 -3.9% 35,092 34.0% Jakarta Stock Exchange Composite 6,203 3.8% 7,785 25.5% Korea Stock Exchange KOSPI 3,270 13.8% 4,110 25.7% MSCI China 94 -13.0% 138 45.9% Philippines Stock Exchange PSE 6,540 -8.4% 7,780 19.0% S&P BSE SENSEX Index 54,278 13.7% 60,081 10.7% S&P/ASX 200 7,538 14.4% 7,654 1.5% Shanghai Shenzhen CSI 300 4,922 -5.6% 6,331 28.6% Stock Exchange of Thailand SET 1,522 5.0% 1,812 19.1% Straits Times Index STI 3,177 11.7% 3,602 13.4%

Taiwan Stock Exchange Weighted 17,526 19.0% 20,777 18.5% Source: Bloomberg

Equity Research 10 August 2021

High vaccination rate; controlled lifting of restrictions

As of 8 Aug 2021, about 79% of the population have received at least one dose of vaccination and 69% have completed the full regimen. This is just a shade off the government’s target of 70% and allows for the re- opening of Singapore’s economy and the resumption of more indoor and outdoor activities. New vaccination-differentiated measures were also announced recently. With effect from 10 Aug 2021, dine-in will resume and groups of five will be permitted at all F&B outlets if all parties are fully vaccinated. There is also an increase in event size and capacity limits. All these point to further controlled easing of restriction measures in the coming months, especially if vaccination rate hits the next target level of 80%. With this, travel and more activities will resume.

Global economy growth remains intact

With optimism over the global roll-out of vaccines, the re-opening theme remains intact. Global growth is projected at 6.0% in 2021 and 4.5% in 2022. In Asia, growth is 7.5% and 5.7%, respectively. In Singapore, after the -5.9% growth in 2020, the local economy is poised to enjoy growth of 6.5% in 2021 and 4.0% in 2022.

Exhibit 3: Regional indices YTD performance

GDP Growth 2020 2021F 2022F 2023F World -3.8 6.0 4.5 3.4

G10 -5.0 5.4 4.1 2.1

Eurozone -6.8 4.6 4.3 2.0

Asia ex-Japan 1.0 7.5 5.7 5.3

US -3.5 6.5 4.2 2.3

China 2.3 8.5 5.6 5.5

Japan -5.1 2.6 2.6 1.2

Korea -1.0 4.0 3.0 2.5

Taiwan 2.5 5.6 3.0 2.7

Hong Kong -6.0 6.5 3.0 2.9

Singapore -5.9 6.5 4.0 3.1

India 4.2 -7.5 9.2 6.9

Indonesia -2.1 4.0 5.2 5.3

Malaysia -5.6 5.0 5.5 4.8

Australia -2.8 4.8 3.2 3.0

Source: Bloomberg

Singapore market has outpaced the region

Since the start of this year, value investors seeking under-valued stocks which were sold down in 2020, have helped to propel the benchmark Straits Times Index (STI) to higher levels. The STI has proven to be highly resilient despite recent market volatility. From the lows in March 2020, the STI is up 42% or 12% YTD – making it one of the best performing markets in the region.

Equity Research 10 August 2021

Exhibit 4: STI has gained 42% from March 2020 low Straits Times Index 3800

3600

3400

3200

3000

2800

2600

2400

2200 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jul-21

Last +1 SD -1 SD Ave +2 SD -2 SD

Source: Bloomberg

Earnings improvement

Since the lows in Aug 2020, corporate earnings have shown progressive improvement, largely buoyed by optimism that most economies are gradually recovering, and this should augur well for corporate results. In Singapore, most sectors are positioned to see good growth rates in 2021 and 2022. For major sectors such as financials and property, 2021 earnings growth rates are projected at 7.9% and 10.8%, respectively.

Exhibit 5: Earnings on an uptrend

Straits Times Index (STI): Earnings 270 260 250 240 230 220 210 200 190 180 170 160 150 140 Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20 Feb-21 May-21

Earnings +1 SD -1 SD Ave

Source: Bloomberg

Equity Research 10 August 2021

Exhibit 6: Growth for most sectors in Singapore in 2021 Indices (as at 6 Aug 2021) Est Nxt Yr Current Nxt Yr Est Est. PER PER EPS EPS P/B Div (x) (x) Growth Growth (x) Yield

MSCI Singapore Free Index 13.4 12.1 13.5% 11.0% 1.2 4.2 Straits Times Index STI 12.9 11.6 14.2% 11.1% 1.1 4.2 FTSE ST Small Cap Index 14.4 13.4 1.6% 7.3% 1.2 4.9 FTSE ST Mid Cap Index 17.4 16.2 17.0% 7.7% 1.1 4.3 FTSE ST China Index 10.8 10.2 11.0% 6.2% 0.9 4.3 FTSE ST All-Share Real Estate 16.8 16.0 10.8% 4.6% 0.9 4.9

FTSE ST All-Share RE Invt & Sves 11.9 11.3 17.8% 5.3% 0.5 3.8 FTSE ST All-Share REIT 19.7 19.0 7.4% 4.1% 1.2 5.3 FTSE ST All-Share Energy 11.9 10.8 21.2% 10.0% 0.8 4.0 FTSE ST All-Share Industrials 13.4 11.2 33.5% 19.5% 0.8 3.4 FTSE ST All-Share Consumer Staples 12.4 11.6 7.0% 7.3% 1.2 3.7 FTSE ST All-Share Consumer Discretionary 22.0 16.5 182.1% 33.2% 1.2 2.9 FTSE ST All-Share Telecommunications 15.4 13.5 15.1% 14.0% 1.3 5.3 FTSE ST All-Share Utilities 13.4 11.9 19.2% 12.1% 1.3 5.2 FTSE ST All-Share Financials 11.1 10.1 7.7% 9.9% 1.2 4.5 FTSE ST All-Share Technology 18.8 17.4 24.3% 7.7% 4.6 1.6

Source: Bloomberg

Exhibit 7: Earnings and valuations versus regional peers

Est Nxt Yr Current Nxt Yr Est Est. Indices (as at 6 Aug 2021) PER PER EPS EPS P/B Div (x) (x) Growth Growth (x) Yield Hang Seng Index 11.1 10.0 12.3% 11.9% 1.1 3.1% Korea Stock Exchange KOSPI 11.4 10.5 1.7% 9.0% 1.2 1.7% Straits Times Index STI 12.9 11.6 14.2% 11.1% 1.1 4.2% Shanghai Shenzhen CSI 300 13.3 11.8 13.9% 12.4% 1.8 2.3% FTSE Bursa Malaysia KLCI 13.7 13.3 -2.7% 3.2% 1.4 4.3%

Jakarta Stock Exchange Composite 14.1 12.4 23.1% 14.3% 1.8 2.2% Philippines Stock Exchange PSE 14.6 12.5 25.9% 17.1% 1.4 1.9% Taiwan Stock Exchange Weighted 14.7 14.3 -1.4% 2.9% 2.3 3.6% Stock Exchange of Thailand SET 15.8 14.1 13.1% 12.1% 1.6 3.0% S&P/ASX 200 18.1 17.7 -1.7% 2.6% 2.3 3.7% S&P BSE SENSEX Index 20.1 17.6 18.5% 14.4% 3.0 1.4%

Simple Average 14.5 13.2 10.6% 10.1% 1.7 2.9% Source: Bloomberg

Equity Research 10 August 2021

Near term volatility remains; but recovery theme is still intact

As regulatory risks in China remain and could impact sentiment for the rest of the region, this overhang could limit near term upside. However, we believe that a sustained sell-off is unlikely. The recovery theme is intact, and fundamentals are improving as more economic activities resume and corporate report cards show earnings recovery.

For example, late in 2020, market expectations were for the S&P 500 to report 2Q 2021 earnings of USD40.97. Currently, the estimate is at USD51.13 for 2Q 2021. This surprise on the upside has led to good gains for the S&P 500, which is up 2.3% in July or up 17% this year – the sixth consecutive month of gains. As corporate earnings have outpaced estimates, this gives credence to the global economic rebound.

Vaccination is proving to be an effective tool in the fight against the spread of the coronavirus. With the pick- up in economic activities and the improvement in corporate earnings outlook, this will boost longer term market outlook.

Valuations are undemanding

In terms of price-to-book ratio, the STI is currently trading at 1.1x, which is also below the 10-year historical average of 1.21x. The range for the regional markets is from 1.1x to 2.0x (SENSEX Index).

Exhibit 8: STI PER is hovering just above 10-year average

Straits Times Index: Best PE Ratio (x) 16

9 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jul-21

Best PE +1 SD -1 SD Ave +2 SD -2 SD

Source: Bloomberg

Equity Research 10 August 2021

Exhibit 9: STI PBR is below 10-year average

Straits Times Index: Price to Book (x) 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jul-21

PB Ratio +1 SD -1 SD Ave +2 SD -2 SD

Source: Bloomberg

Exhibit 10: Singapore sectors are projected to see good 12-month upsides

YTD Indices (as at 5 Aug 2021) Last Done Target Upside Change MSCI Singapore Free Index 366.0 12.8% 408.6 11.6% Straits Times Index STI 3,175.1 11.6% 3,601.8 13.4% FTSE ST Small Cap Index 343.5 13.8% 387.8 12.9% FTSE ST Mid Cap Index 739.9 6.2% 822.3 11.1% FTSE ST China Index 232.7 8.8% 294.7 26.6% FTSE ST All-Share Real Estate 816.4 4.9% 909.8 11.4% FTSE ST All-Share RE Invt & Sves 712.1 7.6% 847.3 19.0% FTSE ST All-Share REIT 884.7 3.9% 961.4 8.7% FTSE ST All-Share Energy 260.2 2.9% 298.5 14.7%

FTSE ST All-Share Industrials 670.8 9.7% 764.1 13.9% FTSE ST All-Share Consumer Staples 460.1 -2.4% 599.5 30.3% FTSE ST All-Share Consumer Discretionary 496.3 6.9% 549.7 10.8% FTSE ST All-Share Telecommunications 583.1 -0.3% 701.4 20.3% FTSE ST All-Share Utilities 301.2 8.3% 347.9 15.5% FTSE ST All-Share Financials 1,078.1 16.2% 1,188.9 10.3% FTSE ST All-Share Technology 348.6 22.9% 439.6 26.1%

Source: Bloomberg

Equity Research 10 August 2021

Positive on equities

Based on Bloomberg consensus, analysts are generally positive on equities. The 12-month target for the MSCI World Index is on an uptrend since the low in April 2020 and has now surpassed pre-COVID levels. This reflects market optimism for equities, which have so far been riding the reopening theme. However, the Singapore market was a laggard and that optimism only started in Nov 2020. Since then, it has been gaining momentum but is still not at pre-COVID levels. With vaccination rate expected to reach 80% soon and with the resumption of more activities, this could boost confidence that the economic outlook and corporate earnings will improve and that the 12-month target for the STI should steadily recover back to pre-COVID levels.

Exhibit 11: MSCI World Index forward 12-month target on uptrend

MSCI World Index: 12-month target 3600

3400

3200

3000

2800

2600

2400

2200

Jul 2019 Jul 2020 Jul 2021 Jul

Jun 2019 Jun 2020 Jun 2021 Jun

Apr 2021 Apr Apr 2019 Apr 2020 Apr

Jan 2020 Jan Jan 2019 Jan 2021 Jan

Feb 2019 Feb 2020 Feb 2021 Feb

Sep 2019 Sep 2020 Sep

Oct 2019 Oct 2020 Oct

Mar 2019 Mar 2020 Mar 2021 Mar

Nov 2019 Nov 2020 Nov

Aug 2019 Aug 2020 Aug

Dec 2019 Dec 2020 Dec

May 2019 May 2020 May 2021 May

Source: Bloomberg

Exhibit 12: Forward 12-month targets on uptrend

Straits Times Index: 12-month target 3,800

3,600

3,400

3,200

3,000

2,800

Jul 2019 Jul 2020 Jul 2021 Jul

Jun 2019 Jun 2020 Jun 2021 Jun

Apr 2019 Apr 2020 Apr 2021 Apr

Jan 2019 Jan 2020 Jan 2021 Jan

Feb 2019 Feb 2020 Feb 2021 Feb

Sep 2020 Sep Sep 2019 Sep

Oct 2019 Oct Oct 2020 Oct

Mar 2019 Mar 2020 Mar 2021 Mar

Nov 2019 Nov 2020 Nov

Aug 2019 Aug 2020 Aug

Dec 2019 Dec 2020 Dec

May 2020 May 2021 May May 2019 May Source: Bloomberg

Equity Research 10 August 2021

Banks are good proxies to re-opening together with higher dividends

Banks worldwide have performed well as optimism of economic recovery boosted transactions and earnings. Most of the key financial indices have done well this year with gains of 5-29%, with the exception of China, which is down 11.9% YTD. In Singapore, the MSCI Singapore Financials Index is up 21.9% so far this year. Of the three locally listed banks, DBS led the pack with a gain of 23.8% YTD, followed by OCBC at 23.5% and UOB at 17.9%. Recent 2Q results have in generally came in higher than street’s estimates and there were upgrades to price targets. For example, DBS’s consensus price target was SGD25.78 at the beginning of 2021 and SGD32.71 at the beginning of Aug 2021. It is now at SGD33.31 (as of 9 Aug 2021). This trend was similarly seen for the other two listed banks. In general, we expect better-than-expected earnings to translate to more earnings and price target upgrades.

In Jul 2021, the Monetary Authority of Singapore (MAS) lifted the dividend restrictions on Singapore banks. As a recap, in Jul 2020, a cap was imposed on total FY2020 dividends per share (DPS) and this was pegged at 60% of FY2019 DPS. This lifting was welcomed by the market and all three local banks dished out higher dividends at the recently concluded 2Q results.

Exhibit 13: Banking is good proxy to re-opening theme

Actual For. Div Last YTD Upside P/B As at 6 Aug 2021 Target PER PER Yield one (%) (%) (x) (x) (x) (%) MSCI World Financials Index 146.15 22.4% 158.43 8.4% 13.1 1.3 12.7 2.8 S&P 500 Financials Sector GICS 628.53 28.2% 671.77 6.9% 14.0 1.6 14.5 1.7 MSCI USA Financials Index 205.43 28.6% 219.81 7.0% 13.6 1.7 14.2 1.8 MSCI Europe Financials Index 63.69 19.6% 70.28 10.3% 11.2 0.9 10.3 4.5 MSCI Australia Financials Index 177.22 22.0% 176.74 -0.3% 24.1 1.7 15.9 4.1 MSCI Japan Financials Index 73.59 15.6% 88.73 20.6% 9.0 0.5 8.3 4.5 MSCI Taiwan Financials Index 136.70 21.4% 141.20 3.3% 10.1 1.1 10.5 4.2 MSCI Korea Financials Index 205.78 17.4% 271.83 32.1% 4.9 0.4 5.0 5.5 MSCI China Financials Index 424.84 -11.9% 612.02 44.1% 5.8 0.7 4.8 5.8 MSCI Hong Kong Financials Index 663.37 4.9% 788.59 18.9% 26.7 2.6 20.7 2.0 MSCI Singapore Financials Index 397.19 21.9% 436.94 10.0% 13.1 1.3 11.2 4.0

DBS Group Holdings Ltd 31.00 23.8% 33.31 7.4% 13.1 1.4 12.0 3.8 Oversea-Chinese Banking Corp L 12.42 23.5% 13.98 12.5% 11.7 1.1 11.3 4.2 United Overseas Bank Ltd 26.63 17.9% 30.06 12.9% 13.6 1.1 11.4 4.4

Source: Bloomberg

Some of our favorites in the Singapore market

The STI has delivered a good showing so far this year, up 11.7%. Going forward, we believe that fundamentals remain healthy and valuations are not excessive. If the STI trades at 1 standard deviation above historical average, this puts it at 14.2x. At 14.2x, the STI has a theoretical value of 3484, or a 9.7% upside from current level. Consensus, based on Bloomberg, is at 3602, or an upside of 13.4%.

Risks remain that the delta variant could pose a major threat to this region. Several countries are on lock down again and this could derail growth. This could in turn result in supply chain disruptions, as seen during the outbreaks of the coronavirus in Asia last year, which affected several key manufacturing hubs.

Equity Research 10 August 2021

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