Singapore Strategy

Strategy Note Singapore│May 24, 2018

Singapore Singapore Strategy Hunger games Highlighted companies ■ The share price performances of CD, GENS and VMS in 2Q18 clearly show that the market is hungry and quick to reward underdogs and vice versa. Singapore Post (Add, TP: S$1.59) SPOST should be on a stronger footing come ■ SingPost, ThaiBev and SPH could be the next three large-cap candidates worth FY3/19F with major capex cycle over (plus net keeping a close watch for “the worst is over” run in the next 6-9 months. cash position), and earnings improvement in ■ For 2H18, our OW sectors are still banks, property, capital goods and gaming. We both logistics and ecommerce segments. upgrade consumer to OW and downgrade tech to Neutral, healthcare to UW. Catalysts are faster-than-expected ■ Our large-cap Alpha picks are: DBS, KEP (new), STE, UOL, SingPost (new), ThaiBev ecommerce turnaround and further strategic (new) and Sheng Siong (new). partnerships. ■ Small-cap picks are: China Sunsine, mm2, Yongnam, Riverstone (new) and Sunningdale (new). FSSTI target: 3,738 (14x CY19F P/E) vs. 7% EPS growth.

Thai Beverage (Add, TP: S$0.98) The next “worst could be over” stocks: SingPost, ThaiBev and SPH We think Thaibev’s downside risks are Our top 3 stocks to watch/own is based on 1) earnings growth and 2) relative share price relatively priced in post share price falling 14% underperformance. SingPost is picked because the suspense of postal terminal dues was YTD. It is trading at 16x CY19F P/E, close to 1 s.d. below its 5-year average mean. Potential removed in 4QFY3/18 with room for margin improvement. Narrower losses in ecommerce catalysts are a spike in domestic alcohol should also support +19% yoy profit growth in FY19F. ThaiBev is a play on sequential volumes in 3QFY9/18 (World Cup earnings improvement from the World Cup and hope of a gradual rise in consumer celebrations) and in FY19F after the sentiment. SPH is on our watch list as new management could resuscitate growth via coronation of the new king. asset management.

EPS trimmed in 1Q18 but little risk that it will widen for FY18 Sector ratings

Following a dismal 1Q18 earnings season (23 misses vs. 9 beats for the stocks under our OVERWEIGHT NEUTRAL UNDERWEIGHT coverage), market EPS was cut (-0.7% for CY18) across sectors other than banks and transport. However, we think our FY18 EPS is firm and see little risk of widening EPS Capital Goods Commodities Healthcare cuts in 2H18. This is supported by banks delivering on NIM expansion, underpinned by Consumer/ Manufacturing Telcos housing, trade and corporate expansion as global growth broadens. We hope telcos’ Gaming consecutive cuts over the past year could taper off, helped by overseas business and Financials REITs growing fixed enterprise. OW on banks, property, capital goods, gaming; upgrade consumer Property Transport Our unchanged OW sectors are: banks (higher interest rates), capital goods (high oil price), property (replacement demand locally fueled by enbloc purchase and higher FSSTI valuations residential prices). We upgrade consumer from Neutral to OW, led by our recent upgrade for Thai Bev, as well as steady growth from Sheng Siong with more new stores in the STI CY16 CY17 CY18 CY19 CY20 Core P/E (x) 13.7x 15.2x 14.3x 13.3x 12.2x pipeline. Gaming remains an OW as a play on consumer spending and growth in visitor FD Core P/E (x) 13.8x 15.3x 14.3x 13.4x 12.2x arrivals in Singapore. Core EPS grow th (%) -8.3% 6.8% 11.0% 7.3% 6.8% Core Net Profit Grow th (%) -9.0% 19.8% 12.1% 7.3% 6.8% Tech downgrade to Neutral; healthcare joins telcos as UW P/BV (x) 1.1x 1.3x 1.3x 1.2x 1.1x Dividend yield (%) 3.8% 4.2% 3.8% 3.8% 4.1% We believe the technology sector is heading into a slower earnings growth phase in EV/EBITDA (x) 10.8x 10.3x 12.2x 11.7x 11.5x FY18-19F after super profits seen in 2017. Trade war overhang and single customer risk P/FCF (x, equity) 17.3x 20.0x 25.0x 14.7x 9.8x P/FCF (x, firm) 16.8x 16.1x 41x 15.9x 10.1x may be blown up to cloud share price performance. From a country strategy perspective, Net gearing (%) 16.5% 17.1% 18.5% 17.9% 15.2% we see no reason to own healthcare in the near term as hospitals grapple with gestation ROE (%, recurring) 8.0% 8.8% 9.1% 9.4% 9.8% costs and the potential for more delays in the commencement of new hospitals overseas. FSSTI level 2,881 3,403 3,543 3,543 3,543 CIMB/consensus (x) 0.99 0.98 0.97 We find it hard to justify the steep valuations (>30x forward P/E) vs. lacklustre earnings.

Alpha picks change Our other large-cap new Alpha picks are: DBS (strong earnings growth), KEP (higher dividend potential), Sheng Siong (positive Singapore consumer sentiment). We removed VMS (trade/tech tensions and well-owned) and SMM (weak margin). Small-cap new picks are Riverstone (capacity expansion) and Sunningdale (de-rated significantly post 1Q18 results).

Figure 1: Alpha picks for 2018

Price Target Market 3-year P/BV Recurring EV/EBITDA Dividend Company (local Price Upside/ Cap Core P/E (x) EPS (x) ROE (%) (x) Yield (%) Analyst(s) Bbg Ticker Recom. curr) (lc) (Downside) (US$ m) CY18F CY19F CY20F CAGR (%) CY18F CY18F CY18F CY18F Alpha picks (Large-cap) DBS Group DBS SP Add 28.73 34.00 18.3% 54,725 12.4 11.1 10.3 23.4% 1.52 12.5% na 4.2% Keppel Corporation KEP SP Add 8.08 10.00 23.8% 10,874 13.8 13.6 11.2 41.3% 1.22 9.1% 15.59 3.3% Sheng Siong Group SSG SP Add 0.99 1.18 19.7% 1,106 20.4 18.6 17.8 8.9% 5.09 25.8% 14.69 3.4% Singapore Post Ltd SPOST SP Add 1.33 1.59 19.3% 2,236 24.9 21.4 18.5 15.4% 1.70 6.9% 12.49 2.8% ST Engineering STE SP Add 3.44 3.80 10.6% 7,974 19.3 18.5 17.5 7.8% 4.62 24.3% 11.49 4.5% Thai Beverage THBEV SP Add 0.78 0.98 26.0% 14,552 17.2 16.2 na na 3.24 19.4% 9.76 2.7% UOL Group UOL SP Add 8.29 9.65 16.4% 5,189 16.2 18.3 17.3 2.3% 0.72 4.5% 17.54 2.1% Average 13.9 12.9 11.4 15.4% 1.61 11.8% 12.26 3.7% Alpha picks (Small-cap) LIM Siew Khee China Sunsine Chemical HoldingsCSSC SP Add 1.50 1.87 24.8% 548 6.4 7.7 7.5 12.3% 1.58 27.2% 3.60 3.4% T (65) 6210 8664 mm2 Asia MM2 SP Add 0.47 0.74 58.4% 406 16.6 14.1 12.9 21.1% 2.69 18.2% 9.23 0.0% Riverstone Holdings RSTON SP Add 1.00 1.28 28.0% 551 15.2 13.1 11.7 16.5% 3.03 20.9% 9.98 2.6% E [email protected] Sunningdale Tech Ltd SUNN SP Add 1.27 2.50 96.8% 179 8.0 6.0 5.3 14.7% 0.63 8.0% 3.06 5.4% Yongnam Holdings YNH SP Add 0.31 0.56 80.6% 120 23.2 5.9 5.5 na 0.54 2.4% 6.04 0.0% Average 10.4 9.4 8.7 24.3% 1.52 15.4% 5.87 2.4% Singapore Research Team SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

 We believe the 1Q18 earnings disappointment is priced in given that the long- IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCHterm CERTIFICATIONS, average P/BVARE PROVIDED is 0.55x. AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN Powered by the THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFA Platform Potential catalysts include a better qoq performance as new projects in the consumer/IT segment ramp up production.. We expect Riverstone’s production

Singapore Strategy Note│May 24, 2018

Figure 2: Alpha picks for 2018 Bloomberg Price Tgt Price Upside/ Market Cap Core P/E (x) 3-year EPS P/BV (x) Recurring ROE (%) EV/EBITDA (x) Dividend Yield (%) Company Recom. Ticker (local curr) (local curr) (Downside) (US$ m) CY18F CY19F CY20F CAGR (%) CY18F CY19F CY18F CY19F CY20F CY18F CY19F CY18F CY19F Alpha picks (Large-cap) DBS Group DBS SP Add 28.73 34.00 18.3% 54,725 12.4 11.1 10.3 23.4% 1.52 1.41 12.5% 13.1% 13.2% na na 4.2% 4.2% Keppel Corporation KEP SP Add 8.08 10.00 23.8% 10,874 13.8 13.6 11.2 41.3% 1.22 1.17 9.1% 8.8% 10.2% 15.6 15.0 3.3% 3.4% Sheng Siong Group SSG SP Add 0.99 1.18 19.7% 1,106 20.4 18.6 17.8 8.9% 5.09 4.70 25.8% 26.2% 25.4% 14.7 13.2 3.4% 3.8% Singapore Post Ltd SPOST SP Add 1.33 1.59 19.3% 2,236 24.9 21.4 18.5 15.4% 1.70 1.66 6.9% 7.9% 8.9% 12.5 11.0 2.8% 3.0% ST Engineering STE SP Add 3.44 3.80 10.6% 7,974 19.3 18.5 17.5 7.8% 4.62 4.38 24.3% 24.3% 24.3% 11.5 11.2 4.5% 4.7% Thai Beverage THBEV SP Add 0.78 0.98 26.0% 14,552 17.2 16.2 na na 3.24 2.94 19.4% 19.0% na 9.8 8.6 2.7% 3.1% UOL Group UOL SP Add 8.29 9.65 16.4% 5,189 16.2 18.3 17.3 2.3% 0.72 0.70 4.5% 3.9% 4.0% 17.5 19.2 2.1% 2.1% Average 13.9 12.9 11.4 15.4% 1.61 1.52 11.8% 12.1% 11.9% 12.3 11.6 3.7% 3.8%

Alpha picks (Small-cap) China Sunsine Chemical Holdings CSSC SP Add 1.50 1.87 24.8% 548 6.4 7.7 7.5 12.3% 1.58 1.37 27.2% 19.0% 17.0% na na 3.4% 2.7% mm2 Asia MM2 SP Add 0.47 0.74 58.4% 406 16.6 14.1 12.9 21.1% 2.69 2.26 18.2% 17.4% 16.1% na na 0.0% 0.0% Riverstone Holdings RSTON SP Add 1.00 1.28 28.0% 551 15.2 13.1 11.7 16.5% 3.03 2.63 20.9% 21.5% 21.0% na na 2.6% 3.1% Sunningdale Tech Ltd SUNN SP Add 1.27 2.50 96.8% 179 8.0 6.0 5.3 14.7% 0.63 0.59 8.0% 10.1% 10.8% na na 5.4% 6.8% Yongnam Holdings YNH SP Add 0.31 0.56 80.6% 120 23.2 5.9 5.5 na 0.54 0.50 2.4% 8.8% 8.6% na na 0.0% 0.0% Average 10.4 9.4 8.7 24.3% 1.52 1.35 15.4% 15.2% 14.6% 5.9 5.3 2.4% 2.4%

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Singapore Strategy Note│May 24, 2018

Hunger games

The power of newsflow Hungry for positive catalysts Our observation on the performance of FSSTI members YTD and in 2Q18 (Figure 3) found the market clearly hungry for the slightest positive catalysts and quick to reward underdogs. Likewise, it was quick to punish on perceived negative news. Three stocks that surprised in terms of share price performance in 2Q18 were 1) Comfort Delgro, 2) Genting Singapore, and 3) Venture Corporation.

Figure 3: 2Q18 vs. YTD share price performance % (STI member)

YTD Change 2Q Change

18.9 18.9 Title: 20

16.6 16.6 Source: 15.8 15.8 15

11.3 11.3 Please fill in the values above to have them entered in your report

9.2 9.2

9.0 9.0 7.8 7.8

10 7.5

21.3 21.3

8.3 8.3

6.1 6.1

5.7 5.7

5.5 5.5

4.4 4.4

4.2 4.2

3.4 3.4

3.3 3.3 3.0 3.0

5 2.9

1.8 1.8

1.6 1.6

1.5 1.5

1.3 1.3

1.1 1.1

1.0 1.0

0.9 0.9

0.6 0.6 0.1 0.1 0

(5)

(0.6)

(0.8)

(1.1)

(1.2)

(1.6)

(2.0)

(2.3)

(2.9) (3.3)

(10) (4.9)

(5.6)

(6.2)

(6.5)

(6.7) (7.1)

(15) (8.9)

(12.1)

(13.2) (13.3) (20) (13.7) reaction to new sflow (25) reaction to results

(30) (25.6)

(24.7)

SIA CIT

SCI

WIL

STE HKL

KEP STH

CCT

DBS SPH UOL

SGX

UOB VMS

GGR

SATS CAPL

FSSTI GENS

OCBC

AREIT THBEV YZJSGD SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

ComfortDelgro (CD) turned out to be the best outperformer YTD as competition in the ride hailing space is perceived to be easing post the merger of Uber and Grab. Structurally, we think there is no significant change in its earnings profile in the near term. The company will still see slight decline in earnings (-1.3%) in FY18F and the hype over the seven small investments it made recently amounting to S$140m (assuming target return of 10%) have been factored in the Bloomberg consensus forecasts, in our view. Genting Singapore has been the best performer so far in 2Q18, buoyed by its strong 1Q18 earnings which beat Bloomberg consensus estimates on the back of 1) better gaming gross gaming revenue, 2) better VIP luck rate, and 3) higher EBTIDA margin of 53.2%. We still like the stock as the company’s strategy to loosen credit has worked well, as seen in 1Q18 as its VIP market share improved to 49% from 37.1% in FY17. However, its share price performance may be capped in the next quarter as its 2Qs are seasonally weaker. Venture Corp’s fate took a turn in 2Q18 as the +30% rise in its share price in 1Q18 was wiped out following a short-seller’s report and as Phillip Morris lowered its guidance on sales of its e-cigarette device IQOS (which Venture Corp supplies parts to) in Japan. We believe its earnings is still on track to grow 16% in FY18F with stronger 2H18F. Nonetheless, we think the stock's 107% surge in 2017 still leaves room for investors to cream some profits.

Singapore Strategy Note│May 24, 2018

Figure 4: Comfort Delgro share price -21% Figure 5: Genting Singapore share price Figure 6: Venture Corporation share price in 2017, +19% YTD +50% in 2017, -1% YTD +107% in 2017, YTD -1% GENS SP Equity VMS SP Equity 2.90 CD SP Equity 1.50 35 Title: Title: Title: Source: Source: Source: 1.40 2.70 30 Please fill in the values above to have them entered in yourPlease report fill in the values above to have them entered in yourPlease report fill in the values above to have them entered in your report 1.30 2.50 25 1.20 2.30 20 1.10 2017 2017 2017 2.10 15 -21% 50% 107% 1.00

1.90 0.90 10

1.70 0.80

Jul-17

Apr-17 Oct-17 Apr-18

Jan-17 Jun-17 Jan-18

Apr-17 Oct-17 Apr-18

Feb-17 Mar-17 Feb-18 Mar-18

Jan-17 Jun-17 Jan-18

Aug-17 Sep-17 Nov-17 Dec-17

Feb-17 Mar-17 Feb-18 Mar-18

May-17 May-18

Aug-17 Sep-17 Nov-17 Dec-17

Jul-17

May-17 May-18

Apr-17 Oct-17 Apr-18

Jan-17 Jun-17 Jan-18

Feb-17 Mar-17 Feb-18 Mar-18

Aug-17 Sep-17 Nov-17 Dec-17 May-18 May-17 SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

Who could be next? Three stocks to watch Taking a page from the above, we identify three stocks that could be the next outperformers on the back of these basic criteria – 1) positive newsflow, 2) earnings growth, 3) 12 months of underperformance. We highlight three names that could yield more than 10% capital returns in the next 6-9 months.

1) Thai Beverage (Add, TP: S$ 0.98). We recently upgraded the stock from Hold to Add. Its share price has been beaten down by more than 14% YTD (2016: +8%) amid uncertainties relating to its SABECO acquisition and elevated balance sheet risks, but we think the downside risks are priced in. It is currently trading at CY19F P/E of 16x or 1 s.d. below its 5-year average mean of 19x. We note the last time it traded at such levels was at end-CY15 when net profits were lower at THB4.2bn- THB5.9bn per quarter vs. THB6.3bn in 2QFY9/18. Thai Bev is a cheaper proxy vs. Thai-listed stocks to ride the positive spillover from the anticipated short-term spike in food & beverage sales during the World Cup in 2H18F, in our view.

2) Singapore Post (Add, TP: S$1.59). The worst could be over for Singapore Post. Its e-commerce losses are narrowing and the impact from the changes in terminal dues system was finally known in 4Q17 as its postal services operating margin fell to 20.5% (9M17: 24%). This could be the bottom. We expect to see some relief in the quarters ahead from ongoing measures to implement higher postal rates across all of its customers and bilateral negotiation with other countries. Key potential catalysts are faster-than-expected e-commerce turnaround and further strategic partnerships. The stock is trading at 23x CY19F on the back of +c.19% yoy earnings growth in FY19F.

3) Singapore Press Holdings (Hold, TP: S$2.49). SPH meets our criteria given its underperformance in recent years (2017: -27%). We think this could be the next CD, in terms of stock outperformance, driven by multiple positive newsflow 1) successful launch of Biddadari development by 4QCY18F, and 2) earnings bottoming in FY8/18F. The recent change in its management (CEO and CFO) and better communication on its growth strategy via asset management could restore investors’ confidence to re-rate the stock as a yield play (c.4%), in our view. The stock is also not widely covered.

Singapore Strategy Note│May 24, 2018

Figure 7: ThaiBev share price: -14% YTD, Figure 8: SingPost share price: -15% in Figure 9: SPH share price: -25% in 2017, - +8% in 2017 2017, +6% YTD 1% YTD

THBEV SP… SPOST SP… SPH SP… 1.05 1.60 3.80Title: Title: Title: Source: Source: Source: 1.55 1.00 3.60

1.50 3.40Please fill in the values above to have them entered in yourPlease report fill in the values above to have them entered in yourPlease report fill in the values above to have them entered in your report 0.95 1.45 3.20 0.90 1.40 3.00 0.85 2017 2017 2017 1.35 2.80 8% -15% -25%

0.80 1.30 2.60

0.75 1.25 2.40

1.20 2.20

0.70

Jul-17

Apr-17 Oct-17 Apr-18

Jan-17 Jun-17 Jan-18

Jul-17

Mar-17 Mar-18

Feb-17 Feb-18

Nov-17 Dec-17

Aug-17 Sep-17

May-17 May-18

Apr-17 Oct-17 Apr-18

Jan-17 Jun-17 Jan-18

Feb-17 Mar-17 Feb-18 Mar-18

Aug-17 Sep-17 Nov-17 Dec-17

Jul-17

May-17 May-18

Apr-17 Oct-17 Apr-18

Jan-17 Jun-17 Jan-18

Feb-17 Mar-17 Feb-18 Mar-18

Aug-17 Sep-17 Nov-17 Dec-17 May-18 May-17 SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

1Q18 earnings wrap More misses, but good quality beats The three sectors that had most misses were capital goods, property developers and small-cap technology. Capital goods continued to be plagued by weak operating leverage, but we believe positive positive sentiment buoyed by high oil prices and order wins will continue to keep investors interested in the sector. The disappointing performance of property developers were largely due to timing of project recognition which led to lower residential margins (City Development), and higher amortisation and depreciation from consolidation of acquisitions (UOL's consolidation of UIC). Misses in the small cap technology space were due to fluctuation in forex (Sunningdale), revenue decline (UMS) and high expenses from acquisitions (AEM). Conversely, we saw good quality beats by the banks as DBS and UOB affirmed the trend of improving net interest margins (NIM) and lower credit costs. Singapore Airlines's profit outperformance was due to better-than-expected yields at mainline and Scoot.

Figure 10: Highlights of positive and negative surprises for 1Q18

Above expectations Below expectations Sector Company name Remarks Sector Company name Remarks CapitalGoods CSE Global Higher EBIT CapitalGoods Keppel Corporation Property divestment gain. Losses in O&M and investments Finance DBS Group NIM expansion and lower credit costs CapitalGoods Sembcorp Industries SMM’s losses and wider-than-expected losses in India Finance United Overseas Bank Lower credit costs CapitalGoods Sembcorp Marine Challenging industry conditions Gaming Genting Singapore Better gaming GGR and VIP luck rate Commodities Golden Agri-Resources Lower-than-expected FFB output Others China Sunsine Chemical Higher ASPs and volume Commodities Wilmar International Lower tropical oils Property United Engineers Overall Property above, lower losses in China Consumer Best World International Transitioning China operations to wholesale business model REITs Mapletree Commercial Trust Higher contributions from VivoCity, MBC1 and MLHF Consumer Thai Beverage Weaker domestic beer volumes Mapletree Greater China REITs Strong showing at Festival Walk Finance OCBC Flat NIM and weak Insurance Commercial Trust Transport Singapore Airlines Better-than-expected yields at SIA mainline and Scoot. Manufacturing AEM Holdings Ltd Higher expenses from its three recent acquisitions Manufacturing Jadason Enterprises Sharp decline in GPM Manufacturing Silverlake Axis Ltd Lower maintenance and enhancement revenue, FX losses Manufacturing Sunningdale Tech Ltd Lower utilization and GPM. Negative FX Manufacturing UMS Holdings Ltd Revenue decline Others Riverstone Holdings Lower ASPs Others Singapore Post Ltd Weaker international mail margins and associates’ losses. Others Yongnam Holdings Lower revenue Property City Developments Lower residential margins Property Frasers Property Limited Lower hospitality contributions Property Perennial Real Estate Deconsolidation of TripleOne Somerset Property UOL Group Increased amortisation and depreciation of fair value REITs Ascott Residence Trust Organic weakness in Japan, Philippines, Vietnam and the US REITs ESR-REIT Lower-than-expected NPI margin Telco Starhub Weak mobile and pay TV SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Singapore Strategy Note│May 24, 2018

Market EPS forecasts trimmed after four good quarters; CY18F earnings firm, CY19F uncertain In 1Q18, our analysts started to trim their EPS forecasts (-0.7% for CY18F and - 0.3% for CY19F). Excluding banks and transport companies, earnings forecasts were cut across sectors, led by telcos on lower mobile revenue, and technology stocks on fluctuating US$. Our bottomed-up FSST target now stands at 3,738 based on 14x CY19F P/E vs. 7% EPS growth.

CY18F earnings firm, but CY19F uncertain Going into 2H18, we believe the risk of earnings slash may be low in CY18F, but uncertain for CY19F. The current troubles in Argentina, Turkey and Venezuela, trade war noises, Trump-Kim Summit jitters, spike in energy prices, sharp rebound in the US dollar and US interest rate are not signs of an impending systemic emerging market crisis that could trigger the next global recession. However, we do think growth in the emerging markets as well as overall global growth are set to be slower this year. The weaker-than-expected preliminary Eurozone and Japanese manufacturing PMI data for May suggest that the 1Q18 economic weaknesses in Europe may extend into 2Q, and therefore the European Central Bank and Bank of Japan may have to start worrying about new downside risks. In the US, IHS Markit’s PMI surveys show accelerating economic growth. Here in Asia, the macro report card is mixed. Taken together, global growth is not as synchronised as in 2017, but global growth, though set to slow, is still strong, levelling off rather than decelerating sharply from the end- 2017 high. In Apr, the International Monetary Fund (IMF) said global growth had become “broader and stronger”, and forecasted global growth of 3.9% for 2018F vs. 2017’s 3.7%. Therefore, for trade-dependent Singapore, there are still growth opportunities from the slower global growth scenario, with trade war remaining the biggest risk.

Figure 11: Earnings changes, by sector Core Net Profit Core Net Profit Earnings Change Sector Recom. (US$m) (1Q18) (US$m) (4Q17) QoQ CY2018 CY2019 CY2018 CY2019 CY2018 CY2019 Financials Overweight 11,053 12,112 10,955 12,016 0.9% 0.8% Property Overweight 3,436 3,514 3,467 3,466 -0.9% 1.4% REITS Neutral 2,814 2,956 2,829 2,956 -0.6% 0.0% Telco Underweight 2,971 3,016 3,081 3,225 -3.6% -6.5% Transport Neutral 905 987 833 902 8.7% 9.4% CapitalGoods Overweight 2,126 2,289 2,160 2,292 -1.6% -0.1% Commodities Neutral 1,394 1,532 1,438 1,573 -3.1% -2.6% Gaming Overweight 531 550 553 574 -4.1% -4.1% Consumer Overweight 1,656 1,829 1,729 1,909 -4.2% -4.2% Manufacturing Neutral 525 614 573 569 -8.4% 7.9% Healthcare/others Underweight 836 803 835 819 0.2% -2.0% Average 28,246 30,202 28,454 30,302 -0.7% -0.3% SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Singapore Strategy Note│May 24, 2018

Figure 12: Earnings changes, by sector

6.0% Title: 4.0%

3.8% Source:

4.0%

2.7%

2.5%

2.5% 1.9%

2.0% 1.8% Please fill in the values above to have them entered in your report

1.1%

0.8%

0.5%

0.4% 0.2% 0.0% 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

-2.0%

0.2%

0.3%

0.5% -

- -0.03304

0.7%

1.0%

1.4%

1.6%

1.8%

1.9%

2.0% -

-4.0% -

3.1%

3.3%

3.6% -

3.6%

3.7%

- - -6.0% -

-8.0%

6.5%

- -

-10.0%

8.2%

8.7% -

-12.0%

10.0% -

Current Year Current Year + 1

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 13: FSSTI valuations

STI CY2016 CY2017 CY2018 CY2019 CY2020 Core P/E (x) 13.7x 15.2x 14.3x 13.3x 12.2x FD Core P/E (x) 13.8x 15.3x 14.3x 13.4x 12.2x Core EPS growth (%) -8.3% 6.8% 11.0% 7.3% 6.8% Core Net Profit Growth (%) -9.0% 19.8% 12.1% 7.3% 6.8% P/BV (x) 1.1x 1.3x 1.3x 1.2x 1.1x Dividend yield (%) 3.8% 4.2% 3.8% 3.8% 4.1% EV/EBITDA (x) 10.8x 10.3x 12.2x 11.7x 11.5x P/FCF (x, equity) 17.3x 20.0x 25.0x 14.7x 9.8x P/FCF (x, firm) 16.8x 16.1x 40.5x 15.9x 10.1x Net gearing (%) 16.5% 17.1% 18.5% 17.9% 15.2% ROE (%, recurring) 8.0% 8.8% 9.1% 9.4% 9.8% FSSTI level 2,881 3,403 3,543 3,543 3,543 CIMB/consensus (x) 0.99 0.98 0.97 SOURCE: CGS-CIMB RESEARCH

Figure 14: FSSTI’s 12M forward core P/E (x) Figure 15: 12M forward core P/E vs. EPS growth

18.0 18.0x Title: 20% Title: Forward Core P/ESource: Source: 17.0 17.0x +2SD : 16.4 Forecast 15% period 16.0 +1.5SD : 15.6 16.0x Please fill in the values above to have them entered in your report Please fill in the values above to have them entered in your report +1SD : 14.9 10% 15.0 15.0x +0.5SD : 14.2 14.0 5% Mean : 13.5 14.0x #VALUE! #VALUE! -0.5SD : 12.8 13.0 13.0x Mean : 13.5 0% -1SD : 12.1 12.0 +2SD : 16.4 #VALUE! -1.5SD : 11.4 12.0x

-5% EPSGrowth

ForwardCore P/E +1.5SD : 15.6 11.0 -2SD : 10.7 11.0x +1SD : 14.9 EPS Growth -10% 10.0 10.0x -2SD : 10.7 -1.5SD : 11.4 9.0 -15% 9.0x -1SD : 12.1 8.0 8.0x +0.5SD : 14.2 -20% Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14 Jul-15 Oct-16 Jan-18

12M Fwd Core P/E SOURCE: CGS-CIMB RESEARCH SOURCE: CGS-CIMB RESEARCH

Singapore Strategy Note│May 24, 2018

Figure 16: FSSTI’s P/BV (x) trading band Figure 17: FSSTI's P/BV vs ROE

2.2 2.2x Title: 14.0% Title: Source: Source: 2.0 2.0x 13.0% +2SD : 1.9 Core ROEPlease fill in the values above to have them entered in your report Please fill in the values above to have them entered in your report Forecast 1.8 1.8x period 12.0% +1SD : 1.6 1.6 1.6x 11.0% Mean : 1.4

1.4 1.4x 10.0% CoreROE -1SD : 1.2 CurrentP/BV 1.2 1.2x 9.0% Current P/BV -2SD : 1.0 1.0 1.0x 8.0%

0.8 0.8x 7.0% Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14 Jul-15 Oct-16 Jan-18

P/BV SOURCE: CGS-CIMB RESEARCH SOURCE: CGS-CIMB RESEARCH

Sector preferences Maintain Overweight: banks, property, capital goods We are in line with Bloomberg consensus to stay Overweight on banks (higher interests rates), capital goods (high oil price), property (replacement demand locally fuelled by enbloc purchase and higher residential prices) sectors. Downgrade technology to Neutral, upgrade consumer to Overweight We believe the technology sector is heading into a slower earnings growth phase in 2018-19F after the super profits seen in 2017. In addition, trade war overhang and single customer risk (more common in the small cap space) may be blown up to cloud share price performance. On the other hand, we upgrade the consumer sector from Neutral to Overweight, led by our recent upgrade in Thai Bev, as well as steady growth from Sheng Shiong with more new stores in the pipeline. Gaming remains an Overweight sector and a proxy to consumer spending and tourism play in Singapore. Upgrade transport to Neutral We upgrade Transport to Neutral on the back of an easing competition landscape for CD and higher yield expected for SIA. However, we still see downside risks for SATS' share price if its deal with Turkish Airlines is delayed. The Turkish lira sell-off could also stall negotiations of contract terms, in our view. Healthcare joins telco as Underweight Despite the sector's underperformance, telco stocks have not reached screaming Buy levels. We are likely to see clarity in the competition landscape towards end-2018F/2019F with the entry of TPG. As for healthcare stocks, from a country strategy perspective, we see no reason to own any in the near term as the healthcare groups are grappling with the gestation costs of their new hospitals and face the potential of further delays in the commencement of their new hospitals overseas. We find it hard to justify the demanding valuations (>30x 12M forward P/E for Raffles Medical Group) vs. negative earnings growth.

Singapore Strategy Note│May 24, 2018

Figure 18: Sector ratings Figure 19: Overall calls in 2018

OVERWEIGHT NEUTRAL UNDERWEIGHT Sector Most preferred Least preferred Financial DBS UOB Capital Goods Commodities Healthcare Property City Dev, UOL REITs CDLHT, MLT, K-REIT, CCT Consumer/ Telcos ST M1, Starhub Manufacturing Telcos Gaming Transport SIA SATS Capital Goods KEP, STE, CSE, Dyna-Mac SMM Commodities FR, Wilmar GGR Financials REITs Gaming GENS Consumer/ HMI, Sheng Shiong, THBEV Best World, Q&M Property Transport Healthcare Manufacturing AEM, Sunningdale China Sunsine, mm2, Riverstone, Others Sunningdale, Singpost, Yongnam

SOURCE: CGS-CIMB RESEARCH SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 20: Sector YTD average price performance (%)

Transport 10.4% Title: Source: Finance 7.9%

STI Index 3.3% Please fill in the values above to have them entered in your report CapitalGoods 1.5% Gaming -0.8% Others -1.6% Manufacturing -1.9% Property -2.4% REIT -7.3% Consumer -7.4% Telco -10.8% Commodities -13.5%

-15% -10% -5% 0% 5% 10% 15%

SOURCE: BLOOMBERG

Singapore Strategy Note│May 24, 2018

BANKS - OVERWEIGHT YEO Zhi Bin +(65) 6210 8669 - [email protected] Positive trends  NIM expansion. Three-month SIBOR/SOR averaged 1.28%/1.2% for 1Q18 and roughly increased by 11bp/16bp qoq. Evidently, the banks have benefited from rising interest rates. DBS’s NIM expanded 5bp qoq to 1.83% in 1Q18 as loan yields outpaced cost of deposits. UOB’s NIM grew 3bp qoq to 1.84% on higher loan yields and qoq increases across all of its ASEAN markets. The only exception was OCBC, which registered flat NIM qoq (1.67%). The flatness stemmed from a higher proportion of trade loans (yields lower margins) and Indonesia (the Indonesian government is limiting loan rates to less than 10%). UOB was not as affected in Indonesia as the bank has been curtailing loans and is also flushing out expensive time deposits.  Fee momentum remains robust. Propelled by wealth management, fee momentum remains robust. The banks registered 19-49% yoy growth in wealth management fees. We note that the strength in DBS’s 1Q18 wealth management (+49% yoy) was partly due to the ANZ acquisition. Organic growth came from investment products and unit trusts as well as bancassurance. Nonetheless, with weakening market conditions in recent months, we opine that the banks’ wealth management fees could drop a notch in 2Q18.  A very benign credit cycle. While we had expected credit costs to be below-the-cycle-average, we were surprised by the extent of the decline. DBS reported total credit costs at 20bp of loans vs. through-the-cycle average of 25-27bp; OCBC booked total credit costs at a mere 4bp while UOB reported 11bp vs. through-the-cycle average of 32bp. In addition, asset quality was healthy as we observed a normalisation in NPA formation and stabilisation in NPA ratios/NPA allowance coverages. The pick-up in oil price could also spur some oil-services recoveries over the mid-term. While higher interest rates have cast a bit of shadow on asset quality, the banks believe that delinquencies are not likely to be significant as rates are still low on a historical and absolute level. We would be more watchful of SMEs in a rising rate environment.  On track to meet our DPS targets. With healthy RORWA/ROE generation, we estimate that DBS and UOB could well afford a 50% dividend payout and yet still be amply capitalised. The banks guided for a comfortable CET1 ratio (fully phased-in) ranging from 12.5% to 13.5%. UOB’s CET1 stood at a sector-high of 14.9% as at end-1Q18, which is slightly excessive, in our view. Post the payout of FY17’s final and special DPS, we estimate its CET1 to decrease to c.14.3%. For FY18F, we believe that UOB could pay a core DPS of S$1/share and special DPS of S$0.2/share (total payout at c.50%) to bring its CET1 closer to 14%. DBS has also committed to a DPS of S$1.2/share for FY18F (c.50% payout), which would keep its CET1 at 13% - a comfortable range.

Negative trends  UOB could see higher operating expenses. UOB was the only bank which experienced negative jaws in 1Q18 as an increase in operating expenses outpaced total income growth. It guided for Cost to Income Ratio (CIR) to remain at c.44%, in line with FY17’s restated cost ratio of 43.7%. The bank shared that it would spend an additional S$300m-400m on IT per annum for the next 3-4 years. Hence, we believe that CIR could remain at the 44% mark but would trend down when cost savings from process improvements are reaped. Meanwhile, DBS guided at the start of the year for CIR to be maintained at 43%, in line with FY17 as it brings forward some digital spending. We expect OCBC to achieve CIR of 42-43%, the midpoint of its 40-45% guidance.

Singapore Strategy Note│May 24, 2018

Figure 21: Singapore banks’ NIMS are on the rise. DBS expects Figure 22: Fully-loaded CET1 ratio: DBS and UOB could well at least 10bp increase in its NIM for FY18F afford a 50% dividend payout and still be amply capitalised

2.6% 16.0% Title: Title: Source: Source: 15.0% 14.9% 2.4% Please fill in the values above to have them entered in your report Please fill in the values above to have them entered in your report 14.0% 14.0% 2.2% 13.1% 13.0%

2.0% 12.0%

1.8% 11.0%

10.0% 1.6% 9.0%

1.4% 8.0%

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

3Q03 1Q04 1Q05 3Q05 1Q07 3Q07 1Q09 3Q10 1Q11 3Q12 1Q13 1Q14 3Q14 1Q16 3Q16 1Q18 1Q03 3Q04 1Q06 3Q06 1Q08 3Q08 3Q09 1Q10 3Q11 1Q12 3Q13 1Q15 3Q15 1Q17 3Q17

DBS OCBC UOB DBS OCBC UOB

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 23: DBS total credit costs (bp of Figure 24: OCBC total credit costs (bp of Figure 25: UOB total credit costs (bp of loans) loans) loans)

(bp) (bp) (bp) Title: Title: Title: 60 120 80 Source: Source: Source: 50 100 70 Please fill in the values above to have them entered in your reportPlease fill in the values above to have them entered in your reportPlease fill in the values above to have them entered in your report 40 60 80 30 50 60 20 40 40 10 30 - 20 20 (10) - 10 (20)

(20) - (30)

(40) (40) SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Outlook 20% earnings growth in FY18F with multiple drivers. 1Q18 performance underlines our confidence that global growth and Singapore banks’ positive earnings momentum remain intact. We forecast Singapore banks to achieve average earnings growth of around 20% for FY18F. We believe that the direct impact of a potential trade war is likely to be modest, and any repercussions would be more keenly felt along the technology supply chain. In addition, we do not expect central banks’ tighter monetary policy to derail growth this year. We believe ROEs will be driven by the following tailwinds: I. higher rate environment, II. sustainable fee income momentum, III. benign credit environment, IV. leaner capital structure with clarity on Basel reforms, and V. digitalisation productivity gains.

NIMS expansion underpinned by housing, trade and corporate expansion. DBS is expecting NIM to increase by at least 10bp for FY18F, while UOB for the first time in a very long while, gave a quantitative guidance that it expects NIM to increase between 5bp to 10bp. Loan growth is expected to be in the high-single digits, underpinned by housing, trade and corporates expanding overseas.

Singapore Strategy Note│May 24, 2018

Credit cost may surprise on the upside. The banks have been somewhat conservative, maintaining a guidance of 20-25bp (despite credit costs coming below this range in 1Q18). While we acknowledge that some buffer is necessary – there is some uncertainty whether there could be a spike in credit costs with the migration of loans from Stage 1 to 2 – we believe that the credit environment would remain benign, and credit costs could come in below banks’ guidance. Stay invested to collect dividends. Heading into 2Q18, interim DPS declared for 1H18 could help support banks’ share prices. Sector downside risks include a disorderly rise in interest rates and derailment of global growth.

Most and least preferred DBS (Add, S$34.0) is our most preferred; OCBC (Hold, S$14.0) is our least. With its strong S$-CASA franchise, DBS is the most rate-sensitive bank and would benefit the most from rising rates. Further, we view the bank as one of the most digitally-savvy in ASEAN. Digitalisation enables DBS to increase its wallet share at lower marginal costs in its core markets of Singapore and Hong Kong, and scale profitably in the emerging markets of Indonesia. Moreover, the bank is one of the first to be able to measure the financial value from digitalisaion. It expects to reduce CIR by 50bp p.a. over the next five years to a long-term target of 40%. Our GGM-based TP implies 1.8x FY18 P/BV vs. sustainable ROE of 14%. A c.4% FY18F dividend yield should also be supportive of its share price. While OCBC’s banking performance for 1Q18 has been solid, the softness in Great Eastern Holdings’ (GEH, Not Rated) earnings momentum puts overall results a shade behind the two other banks’ stellar performances. Further, the flat NIM disappointed investors. Essentially, the adoption of new accounting standards at GEH would better reflect operating income and reduce earnings volatility as marked-to-market (MTM) impact would now flow through other comprehensive income (there would still be some MTM impact from the insurer’s equity investments). Our GGM-based TP implies 1.5x FY18 P/BV vs. sustainable ROE of 11.8%. Upside risk could come from the sale of 30% of GEH Malaysia – but this is not an event which we would currently hold our breath for.

Valuations

Figure 26: Singapore bank sector’s current P/BV vs. 12-month Figure 27: DBS current P/BV vs. 12mth fwd core ROE forward ROE

1.8x 15.0% Title: 2.0x 12.5% Title: Source: Source: 1.6x 14.0% 1.8x 12.0% Please fill in the values above to have them entered in your report Please fill in the values+1SD: above 1.4x to have them entered in your report 1.4x 13.0% 1.6x +1 SD: 1.5x 11.5% Avg: 1.2x 1.2x 12.0% Cur P/BV: 1.4x 11.0% ROE:

1.0x 11.0%

1.2x Mean: 1.3x 10.5% -1SD: 1.0x

Current P/BV Current Current P/BV 0.8x 10.0%

1.0x -1 SD: 1.1x 10.0%

12mth 12mth Fwdcore ROE 12mth 12mth Fwdcore ROE 0.6x 9.0% 0.8x 9.5%

0.4x 8.0% 0.6x 9.0% 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Financial P/BV (x) 12-mth Fwd ROE (RHS) Current P/BV 12mth Fwd Core ROE SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCE: CGS-CIMB RESEARCH, COMPANY REPORTS

Singapore Strategy Note│May 24, 2018

Figure 28: OCBC current P/BV vs. 12mth fwd core ROE Figure 29: UOB current P/BV vs. 12mth fwd core ROE

2.2x 13.5% 2.4x Title: 13.0% Title: Source: Source: 2.0x 13.0% 2.2x 12.5%

1.8x 12.5% 2.0x Please fill in the values above to have them entered in your report Please fill in the values above to have them entered in your report +1SD: 1.6x 12.0% 1.6x 12.0% 1.8x 11.5% Cur P/BV: +1SD: 1.6x Cur P/BV: 1.4x Avg: 1.4x 11.5% 1.6x ROE: 11.0% ROE: 1.2x 11.0% 1.4x Avg: 1.3x 10.5%

1.0x -1SD: 1.1x 10.5% 1.2x Current P/BV Current P/BV -1SD: 1.1x 10.0%

0.8x 10.0% 1.0x

12mth 12mth Fwdcore ROE 12mth 12mth Fwdcore ROE

0.6x 9.5% 0.8x 9.5%

0.4x 9.0% 0.6x 9.0%

Current P/BV 12mth Fwd Core ROE Current P/BV 12mth Fwd Core ROE SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

PROPERTY- OVERWEIGHT LOCK Mun Yee +(65) 6210 8606 - [email protected] Positive trends  Price recovery. Private home prices have risen by 5.5% from 2H17 to 1Q18, the first price recovery since 2013. We expect prices to continue improving for the remainder of this year as newer projects with higher selling prices are rolled out and as buying appetite remains firm. The price improvement was most felt for properties in the Core Central Region and Outside Central Region, which rose 7% over the same period while those in the Rest of Central region saw a smaller 3% rise. On the flipside, HDB resale prices have continued to trend down, declining by 12% since 2Q13.  Take-up rates continue to be robust. In the first four months of the year, cumulative primary home sales (excluding executive condominiums) totaled 2,356 units, which is 51% lower yoy. Despite this, take-up rates remain fairly robust at 110% of newly launched units, indicating still fairly robust buying appetite. While primary volume transactions make up c.20% of our full-year projection of 11,000-12,000 units, we anticipate more and larger projects to be launched over the next few months and volume to continue picking up.

Negative trends  Residential rental continues to be weak. Rental rates for the private residential market have been declining since 2013. There was a slight uptick in rents in the Core Central Region and Outside Central Region in 1Q18 while the Rest of Central Region remains lacklustre. We believe any recovery in the rental market would likely remain modest for now.  Rising interest rates. The risk to our Overweight view on the residential sector is the prospect of rising interest rates and hence higher mortgage payments. Three-month SIBOR has risen by 38bp since the most recent low in 1Q18. In terms of sensitivity, for every S$100,000 of outstanding loans, a 10bp increase in mortgage rates could result in a 1.2% increase in monthly installment. This would erode buyer affordability.

Singapore Strategy Note│May 24, 2018

Figure 30: URA PPI vs HDB RPI Figure 31: Monthly primary home sales

180 3500

3000 160

2500 140 2000 120 1500

100 1000

80 500

60 0 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 2014Q1 2016Q1 2018Q1 J-07 A-08 F-09 D-09 O-10 A-11 J-12 A-13 F-14 D-14 O-15 A-16 J-17 A-18 URA PPI CCR RCR OCR HDB RPI Units (excl ECs) ECs SOURCE: CGS-CIMB RESEARCH SOURCE: CGS-CIMB RESEARCH

Figure 32: URA residential rents by segment Figure 33: 3-month SIBOR rate

130 1.6

120 1.5

110 1.4

100 1.3

90 1.2

80 1.1

70 1

60 0.9

50 0.8

0.7

1998Q4 1999Q3 2000Q2 2001Q1 2001Q4 2002Q3 2003Q2 2004Q1 2004Q4 2005Q3 2006Q2 2007Q1 2007Q4 2008Q3 2009Q2 2010Q1 2010Q4 2011Q3 2012Q2 2013Q1 2013Q4 2014Q3 2015Q2 2016Q1 2016Q4 2017Q3

Non-Landed Properties Non-Landed Core Central Region 0.6 2/1/2017 2/4/2017 2/7/2017 2/10/2017 2/1/2018 2/4/2018 Non-Landed Rest of Central Region Non-Landed Outside Central Region SOURCE: CGS-CIMB RESEARCH SOURCE: CGS-CIMB RESEARCH

Outlook Residential price +8% yoy, 11,000-12,000 volume demand in 2018. 1Q18 results of developers were generally below or on the lower end of expectations. This was due to higher one-offs such as depreciation charges or lower margins owing to the product mix during the quarter. We believe the Singapore residential price recovery trend remains intact given the above-average demand coming from enbloc-replacement appetite as well as upgrader market. We lift our expectation for residential price increases from our earlier +5% expectation to +8% for 2018, but maintain our projection of 11,000-12,000 volume demand for this year. To date, we estimate some 6,200 households will be displaced by enbloc sales. While we think that some of the buyers have bought forward to lock in prices of their purchases, we anticipate more replacement demand to kick in for the rest of this year. RNAVs of developers should remain robust, underpinned by the healthy commercial property rental market. Key risk to our view is whether there is possibility of policy risk in the near term, given the sharp price uptick in 1Q18.

Singapore Strategy Note│May 24, 2018

Most and least preferred UOL (Add, TP: S$9.65) is our most preferred given its diversified business model spanning across residential, commercial, hospitality and investment holding. As such, we see its RNAV supported by a sizeable commercial property portfolio and holdings in UOB shares. Post the rollout of Amber 45, the group plans to market The Tre Ver in 3Q18. The latter was bought in late 2016, when land cost was lower than current market levels. Hence, we anticipated decent margins from this project. The stock is currently trading at a 30% discount to RNAV.

Valuations Property stocks are currently trading at a 37% discount to RNAV, at the -1 s.d. discount to mean, while at 0.8x P/BV, valuations are still midway between -1 s.d. and average P/BV. We think that in this part of the virtuous cycle of the residential market recovery, stock prices have the potential to trade closer to - 0.5 s.d. of the average discount to RNAV.

Figure 34: Singapore developers discount to RNAV trend Figure 35: Singapore developers P/BV trend

80% 3.0

60% 2.5 40%

20% 2.0

0% 1.5 -20%

-40% 1.0

-60% 0.5 -80%

-100% 0.0 J-90 J-92 J-94 J-96 J-98 J-00 J-02 J-04 J-06 J-08 J-10 J-12 J-14 A-16 A-18 M-90 M-92 M-94 M-96 M-98 M-00 M-02 M-04 M-06 M-08 M-10 M-12 M-14 J-16 J-18 SOURCE: CGS-CIMB RESEARCH SOURCE: CGS-CIMB RESEARCH

Figure 36: UOL discount to RNAV Figure 37: City Dev discount to RNAV

30% 120%

100% 10% 80%

60% -10%

40%

-30% 20%

0% -50% -20%

-40% -70% -60%

-90% -80% A-97 D-98 A-00 A-02 D-03 A-05 A-07 D-08 A-10 A-12 D-13 A-15 A-17 M-97 N-98 J-00 M-02 N-03 J-05 M-07 N-08 J-10 M-12 N-13 J-15 M-17

SOURCE: CGS-CIMB RESEARCH SOURCE: CGS-CIMB RESEARCH

Singapore Strategy Note│May 24, 2018

REITS - NEUTRAL LOCK Mun Yee +(65) 6210 8606 - [email protected] YEO Zhi Bin +(65) 6210 8669 - [email protected]

Positive trends  RevPAR marks a turn. We still expect Revpar to grow 5% in Singapore. The three Singapore-focused hospitality REITs – CDREIT, FEHT and OUEHT – registered a synchronised improvement in 1Q18 RevPARs. OUEHT’s Mandarin Orchard Singapore was the leader of the pack, achieving 6.9% yoy improvement. FEHT registered a 3.3% improvement while CDREIT’s RevPAR inched up by 0.8%. We think that part of the reason why FEHT’s RevPAR outpaced CDREIT’s is because of the base effect. FEHT’s RevPAR slide was higher than CDREIT’s in 1Q17. With occupancies relatively full, we also observed that the hoteliers have been trying to push room rates up. For 2M18, the Singapore Tourism Board reported a 7.3%/4% yoy increase in visitor arrivals/visitor days.  Industrial REITs continue acquisition momentum. Industrial REITs’ organic performance remained sluggish with difficult industry conditions only expected to stabilise towards year-end. Inorganic contributions continued to prop up the performance of the big-3, while smaller-cap REITs were adversely affected by multi-tenanted building (MTB) conversions (CACHE, in particular, would be affected by MTB conversion of CWT Commodity Hub). Nevertheless, the industrial REITs have been particularly active in investments. Thus far, KDCREIT completed the acquisition of maincubes, Frankfurt and has reinforced its Singapore market share with the proposed acquisition of Kingsland data centre. Meanwhile, FLT proposed the acquisition of 21 European industrial properties for c.S$1bn; AREIT’s new CEO announced the REIT’s intentions to diversify into Europe over the next 12 months. For the Mapletree group, MINT executed a novation agreement on the purchase of 7 Tai Seng with its sponsor and MLT (vendor of the property). We believe the building will be upgraded to a data centre and is backed by a 25-year lease. MLT has also proposed the acquisition of a 50% stake in 11 properties in China from its sponsor for c.Rmb1.3bn (c.S$296.5m). Lastly, EREIT has proposed a merger with VIT (Not Rated) by way of a scheme arrangement. If it goes through, this would be the first M&A in S-REIT history.  Narrowing gap between spot and average passing office rents. Although reversions remained negative for office rents in 1Q18, with the exception of K-REIT, the spread between average passing rents and spot rents have narrowed, thanks to the improved office leasing market. According to CBRE, spot rents climbed 3.2% qoq in 1Q18 to c.S$9.70psf/mth. With the narrowing rental gap, there is likely to be less drag on office REITs’ earnings.

Negative trends  Higher interest rates. Rising interest rates can affect REITs on two fronts – higher interest cost as well as narrowing spread between yields and 10-year government bond yields. Our sensitivity study shows that every 0.5% pt change in average interest cost could result in 0-3.4% erosion in distribution income. S-REITs are trading at c.5.8% DPU yield currently, or at 313bp spread over the 10-year government bond yield. This is slightly below the long-term average spread of 330bp.  Retail remains lacklustre. Although the latest Mar retail sales (excluding motor vehicles) data in Singapore showed a slight +1.1% mom and +2.6% yoy uplift, buoyed by higher departmental store and F&B expenditure, we expect growth in the retail sector to remain modest. Hence, we believe retail REITs would be more dependent on inorganic and AEI activities to drive DPU growth.

Singapore Strategy Note│May 24, 2018

Figure 38: Singapore hotel room supply tapering off Figure 39: New office supply by year

3-year CAGR = 1.3% 75,000 4000000 531 392 69,332 1,691 0.6% 3500000 70,000 2.5% 0.8% 66,718 3000000 65,000 2500000

60,000 2000000

1500000 55,000 1000000

50,000 500000

0 45,000 2017f 2018f 2019f 2020f 2021f 2022f End-2017 2018 2019 2020 End-2020 CBD (sf) CBD Fringe (sf) Decentralised (sf) Hotel Supply as at End-2017 Estimated Hotel Supply by End-2020 Estimated Future Hotel Supply SOURCE: CGS-CIMB RESEARCH, COMPANY REPORTS, HORWATH HTL SOURCE: CGS-CIMB RESEARCH

Outlook Low refinancing risks. As at end-1Q18, S-REITs are trading at c.1x P/BV and 5.8% FY18 DPU yield. With accelerated refinancing activities during the quarter, S-REITs have reduced refinancing risks to c.8% of total outstanding debt for CY18 and a further 15-16% for CY19. In addition, S-REITs announced a slew of new acquisitions (and fund raising) to grow their yields to buffer the effect of rising rates. As a result, gearing increased qoq to c.36.1% compared to 33.4% as at end-FY17. DPU growth led by acquisitions. Looking ahead, we expect SREIT sector DPU growth to improve to 1.9% for FY18 and a further 2.7% in FY19, led largely by new acquisitions. Sub-sectors that offer the highest yoy growth rates include hospitality, industrial and commercial sectors. Our house view still projects four Fed rate hikes for 2018. As such, while we remain Neutral on the sector, our strategy for stocks would be to prefer those with stronger DPU growth, which could offset the effect of rising rates.

Figure 40: SREITs debt maturity profile Figure 41: S-REIT sector gearing

45%

40% >20232018 Average: 36.1% 10% 9% 35% 2023 30% 9% 2019 15% 25%

20%

2022 15% 17% 2020 10% 16% 5% 2021

18% 0%

AiT

FLT

FHT FCT

Viva First

MLT ART

CCT RHT

CMT MCT

MINT

FEHT

FCOT LMRT

CRCT

IREIT

KREIT PREIT AREIT

Suntec

Cache

MAGIC

Sabana

OUEHT OUECT

AAREIT

CDREIT

SGREIT

Manulife

SB REIT SB

ESR Reit ESR Reit SPH KDC REIT KDC KBS Keppel SOURCE: CGS-CIMB RESEARCH SOURCE: CGS-CIMB RESEARCH

Singapore Strategy Note│May 24, 2018

Most and least preferred CDREIT (Add, TP:S$1.92) is our preferred pick in the hospitality sector, mainly because it is the bellwether of the Singapore hospitality sector. We believe CDREIT should continue to outperform peers during a cyclical upturn. With supply of incoming hotel rooms tapering and healthy demand, we project a 5% recovery in its FY18F Singapore revenue per available room (RevPAR). In addition, we believe CDREIT would distribute part of the gains from the divestment of its two Brisbane hotels to mitigate the divestment and the asset enhancement initiatives (AEIs) at its Maldives resorts. MLT (Add, TP: S$1.39) is our preferred pick among the industrials for its Asia-Pacific logistics story, given the secular trend of e-commerce. We note that its organic portfolio has stabilised and is now showing same-store sales growth. Inorganic contributions from its proposed acquisition of a 50% interest in 11 logistics properties in China from its sponsor as well as redevelopment projects (i.e. 76 Pioneer Road in Singapore and Ouluo Logistics Centre in China) should add another layer of growth. Lastly, the potential sale of 7 Tai Seng to MINT could yield a sizeable divestment gain (c.S$23.1n) which could be distributed to unitholders. We like K-REIT (Add, TP: S$1.34) and CCT (Add, TP:S$1.94) as proxies for the office market in Singapore. We recently upgraded both stocks from Hold to Add on the back of positive office rental reversions in Singapore and DPU- accretive acquisition in Germany, respectively. KREIT has a remaining 15% of leases up for renewal/review in FY18F and a further 11.9% in FY19F, largely in Singapore. KREIT guided that as at end-FY17, the expiring rents of these leases range from S$8.50 to S$12.00 psf. We expect a 15% yoy pick-up in spot rents and anticipate further positive rental reversions from these leases. CCT’s below- book valuation (c.0.97x CY18F P/BV) offers decent upside of c. 20% total return.

Valuations

Figure 42: S-REITs forward yield trend Figure 43: S-REIT P/BV trend

14% 1.6 S-REIT yield Title: Title: Source: P/BV Source: 12% 1.4

Please fill in the+1SD: values 1.25x above to have them entered in your report Please fill in the values above to have them entered in your report 10% 1.2 Ave: 5.8% Ave: 1.03x Ave:-2SD: 1.03x 9.4% +1SD: 1.25x 8% -1SD: 7.6% 1.0 -1SD: 7.6% +2SD: 1.46x -1SD: 0.82x Ave: 5.8% +1SD: 4.0% -1SD: 0.82x 6% 0.8 +2SD: 2.2% -2SD: 0.60x 0.95 +1SD: 4.0% 4% 0.6 1.03

2% 0.4 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

Singapore Strategy Note│May 24, 2018

TELCOS - UNDERWEIGHT FOONG Choong Chen, CFA +(60) 3 2261 9081 - [email protected] Positive trends  Fixed enterprise revenue continues to grow. Fixed enterprise revenue at M1/StarHub grew by 14%/18% yoy in 1Q18, driven by enterprise customers’ digitalisation initiatives. StarHub’s enterprise revenue was also partly boosted by acquisitions of Accel Systems & Technologies and D’Crypt. Meanwhile, Singtel’s enterprise revenue fell 1.4% yoy, dragged by the continued decline in its traditional carriage business.

Negative trends  Mobile service revenue declines further. Industry mobile service revenue fell 4.3% yoy in 1Q18, pressured by a continued decline in voice and roaming usage, while data monetisation has not been optimal due to a competitive market. Mobile service revenue was also diluted by greater take- up of SIM-only plans. The only exception among the incumbents was M1, where mobile service revenue grew 2.5% yoy due to subs growth in higher- end plans and greater contribution from Circles.Life.  Pay TV on a structural decline. Industry pay TV revenue was down 9.5% yoy in 1Q18, mainly on the back of i) decline in the subs base (-5.7% yoy) on steady ARPU and ii) lower advertising revenue.  EBITDA margin pressure. EBITDA margins across all three players eased 0.4-2.1% yoy in 1Q18. This was attributable to service revenue pressure and a higher mix of fixed enterprise/ICT revenues (which earn lesser margins).

Figure 44: Industry mobile service revenue Figure 45: Industry EBITDA margin on service revenue (S$m) (%) Pre-SFRS 15 Post-SFRS 15 45.0 1,000 42.5 178 174 -4.3% yoy 41.7 179 170 40.8 40.0 39.7 800 151 155 157 158 153 36.8 312 298 305 299 35.0 221 229 223 228 34.5 600 205 31.5 30.0 29.5 400 28.8 28.9

26.0 520 525 520 526 511 506 506 509 487 25.0 25.3 200

20.0 0 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Singtel StarHub M1 M1 Singtel StarHub SOURCE: CGS-CIMB RESEARCH SOURCE: CGS-CIMB RESEARCH

Outlook Falling revenue from mobile, broadband and Pay TV. We expect industry mobile service revenue to fall 3.6% yoy in 2018F (2016: -2.3%, 2017: -2.2%) and 5-6% p.a. yoy in 2019-20F upon TPG’s market entry in 2H18. As we have seen from 1Q18’s results, subscription fee hikes in Sep 2017 at Singtel/StarHub may be more than offset by a further drop in roaming usage, greater ARPU dilution from SIM-only plans and entry of more Mobile virtual network operators (MVNOs). The latter could negatively affect Circles.Life and its host network, M1. For residential fixed broadband and Pay TV, we expect flat (competition, advanced stage of migration to fibre plans) and progressively declining revenue (piracy, OTT video platforms), respectively.

Singapore Strategy Note│May 24, 2018

The fixed enterprise business should remain the bright spot with continued growth in demand for managed services (including cyber security) and infocomm technology solutions. However, we think healthy fixed enterprise revenue growth would not fully offset declining mobile, pay TV and broadband revenues.

Most and least preferred Singtel (Add, TP: S$S3.90) is still our preferred pick for its more diversified earnings base, which will see it being less impacted by more intense mobile competition upon TPG’s entry. We see Singtel’s core EPS recovering, albeit by a mild 1.3% in FY3/19F, before growing more substantially by 5.5%/5.0% in FY20F/21F, driven by stronger associate earnings (Bharti, Telkomsel, AIS) and lower Digital Life losses. Meanwhile, Singapore and Optus earnings should see less drag from rising interest cost and depreciation going forward, as we expect capex to start easing after a high-investment cycle in the past three years. M1 (Hold, TP: S$1.85) is our least preferred Singapore telco as it remains most exposed to the threat of more competition from TPG, given its high mobile revenue mix and lower-ARPU postpaid subs, which could be more price sensitive. In addition, given the expected entry of more MVNOs competing against TPG, the lower-end of the market is likely to become very competitive.

Valuations Singtel’s FY3/19F EV/OpFCF of 14.8x is at a 10% discount to the ASEAN telco average, supported by attractive FY19-21F yields of 5.1-5.3%. M1’s and StarHub’s FY18 EV/OpFCF are at a 33% and 18% discount to the ASEAN telco average. We think this is fair given the possible decline in their earnings over the next three years. A good entry point for M1 would be below S$1.50 (bear case), and a good exit point above S$2.10 (bull case). Meanwhile, a good entry point is below S$2.00 (bear case) and exit point above S$2.80 (bull case) for StarHub.

Figure 46: Telco - 12-mth Fwd Rolling FD Core P/E (x) Figure 47: Telco - current P/BV vs. core ROE

21x Telco 12-mth Fwd 3.6x Telco P/BV (x) 22% $A$24:$H$41 Rolling FD Core P/E (x) Current ROE (RHS) 3.4x 19x 20% 3.2x +1 SD 17x 18% 3.0x +1 SD

15x Mean 2.8x 16% Jul-06 2.6x Mean Aug-06 13x -1 SD 14% 2.4x Sep-06 -1 SD Oct-06 11x 12% 2.2x Nov-06 Dec-06 9x 2.0x $A$1:$H$18 10% Jan-07 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Mar-07Feb-07 SOURCE: CGS-CIMB RESEARCH, COMPANY SOURCE: CGS-CIMB RESEARCH, COMPANY

Singapore Strategy Note│May 24, 2018

CAPITAL GOODS - OVERWEIGHT LIM Siew Khee +(65) 6210 8664 - [email protected] Cezzane SEE +(65) 6210 8699 - [email protected]

Positive trends  Crude oil price on bullish ground. Both the Brent and WTI crude oil prices have rallied 17%/18% YTD to US$78.2/US$71.3 per barrel on the back of several positives. Crude oil prices are now well over the levels of certain offshore projects’ breakeven levels of US$20-40/barrel.  Compliance of OPEC and Russia, underperformance of Venezuela. Average OPEC production settled at 32.3mbbls/day (below the cap of 32.5mmbbls/day agreed upon in FY17). Russia’s production also settled at 11.18mmbbls/day (down by 0.27mbbls/day, close to the agreed 0.3mmbbls/day). Almost all OPEC countries complied with the production caps, led by Saudi Arabia and the UAE. Meanwhile, a significant drop in Venezuelan production due to underinvestment helped keep OPEC production low.  OECD commercial inventories have declined. International Energy Agency (IEA) states that spell out (OECD) commercial stocks declined by 26 mbbbls to 2 841(correct?) mbbbls and were just 30 mbbbls above the five-year average at end-February. The average could be reached by May, on the assumption of a tight balance in 2Q18. Product stocks are already in deficit.  The return of engine MRO. We saw STE’s engine spell out (MRO) continue, with strong volume and improving margins as a result of the return of the much-awaited engine maintenance, repair and overhaul. This should last for at least three more years, cushioning the sector headwinds of longer intervals for aircraft MRO.  Operating margins improved for those who have reduced costs significantly. KEP’s Offshore & Marine operating margin improved from losses in 4Q17 to 2.4% in 1Q18 as a result of significant cost-cutting exercises since 2016 as well as closure of suboptimal yards. Margin recovery is likely as long as yards are able to keep up with order momentum. Smaller oil & gas proxies, including CSE Global and Dyna-mac, also showed improvement in margins.

Negative trends  US rig count and DUC well count sees slight pick-up. Baker Hughes US rig count was on the downtrend for most of FY17 but has picked up slightly since Dec 17. Drilled-but-uncompleted wells also plateaued slightly at end- 17, but have marginally increased by 6.6% since Dec 17. This could be due to the pick-up in rigs as well.  High fixed costs and new designs eating into margins. We think operating leverage for SMM may still be weak in the next two quarters as fixed costs are still high, in addition to dealing with the learning curve for large-scale production projects.

Singapore Strategy Note│May 24, 2018

Figure 48: WTI vs. Brent crude oil price

140 Title: Source: 120 Please fill in the values above to have them entered in your report 100

60 US$/barrel

0 1-Jan-12 1-Jan-13 1-Jan-14 1-Jan-15 1-Jan-16 1-Jan-17 1-Jan-18 WTI Brent SOURCE: CGS-CIMB RESEARCH, BLOOMBERG

Figure 49: OPEC’s average production is forecasted to be within Figure 50: EIA forecasts average consumption and supply to be its cap for CY17; but increases post the cap expiry in Mar 18 largely in equilibrium

33.1 104.0 1.5 Title: 32.9 32.9 32.9 32.8 102.0 Source: 32.8 32.9 Average 32.8 32.732.8 Average 32.8 1.0 CY17F : 32.5 32.7 32.7 CY18F: 32.6 32.8 100.0 32.7 Please fill in the values above to have them entered in your report 32.7 98.0 32.532.5 0.5

96.0 MMbbls 32.5 32.5 32.3 32.4 94.0 0.0 32.3

32.3 MMbbls 92.0 32.1 32.132.1 -0.5

Milionbarrels/day 90.0 32.1 88.0 31.9 -1.0 31.9 31.8 86.0 84.0 -1.5 31.7 2013 2014 2015 2016 2017 2018F 2019F

Surplus/(Deficit) - RHS Average World Consumption - LHS

Jul 18F Jul

Jul 17A Jul

Oct 18F Oct

Oct 17A Oct 18A Apr 18F Jun Apr 17A Apr

Jan 17A Jan 17A Jun 18A Jan

Nov 18F Nov Dec 18F Dec

Feb 17A Feb 17A Mar 18A Mar 18F Aug 18F Sep

Feb 18A Feb Average World Supply - LHS

Aug 17A Aug 17A Nov 17A Dec Sep 17A Sep May 18F May May 17A May SOURCE: CGS-CIMB RESEARCH, COMPANY Note: Million barrels per day (MMbbls) SOURCE: CGS-CIMB RESEARCH, COMPANY

Figure 51: US rig count plateaued at end-FY17, but has come up Figure 52: Wells drilled but uncompleted (DUC) inventory still on recently an uptrend

1,800 9,000 Title: Title: 1,600 Source: +6.6% since 7,677 Source: 8,000 Dec 17 1,400 7,000 Please fill in the values above to have them entered in your report Please fill in the values above to have them entered in your report 1,200 6,000 1,000 +12.4% from Dec-17 5,000 800 4,000 600

Rig Count (no. of rigs)of(no.Count Rig 3,000 400 2,000 200 1,000 0

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

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

Feb-12 Feb-14 Feb-16 Feb-18 Feb-11 Feb-13 Feb-15 Feb-17

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

Jun-15 Jun-17 Jun-14 Jun-16

Feb-14 Feb-16 Feb-15 Feb-17 Feb-18

Dec-14 Dec-16 Dec-13 Dec-15 Dec-17

Aug-15 Aug-17 Aug-16 Aug-14 SOURCES: CGS-CIMB RESEARCH, BAKER HUGHES, BLOOMBERG SOURCE: CGS-CIMB RESEARCH, EIA

Singapore Strategy Note│May 24, 2018

Outlook We remain positive on the sector as we believe that the underlying macroeconomic factors will remain unchanged in the near term. Global demand is still on an uptrend (EIA estimates FY18-19F growth of 1.9%/1.6%) whilst we understand that OPEC and Russia are likely to continue with its production caps until end-18, given that the crude oil price has largely been on an uptrend. Sanctions on Iran by the US could be another catalyst for crude oil prices. We note that production structure contracts have trickled in.

Most and least preferred Keppel Corp (Add, TP: S$10.00) is our preferred pick on the back of multiple catalysts including 1) divestment gains from asset recycling and 2) perceived saver bids on higher-margin O&M jobs vs. SMM. Generally, we still prefer large cap stocks in the near-term to ride the rally as we believe they will be the first beneficiaries of any upcoming production structure contracts and given their safe balance sheets. CSE Global and Dyna-mac could be the safer bets. For the small caps, impairment risks are largely behind them. Within the segment, CSE Global is the safest bet with earnings picking up in 1Q18 and dividend yield of 6%. Dyna-mac turned the corner in 1Q18 with a slight profit. We believe the strong balance sheet and sufficient cost-cutting measures taken in the past year enable the yard to ride on a production–related upcycle. MMT’s and Ezion’s balance sheet risks are largely over, but we believe sentiment will only return with contract flow pick-up which we understand may be skewed towards end-CY18F. As at 1Q18, MMT is currently trading at P/BV of 0.47x and Ezion at 2.1x. Ezion has an additional risk of further share dilution as its restructuring exercise has led to warrants issued to both share/security holders. Currently, such warrants are out-of-the-money.

Valuations

Figure 53: Capital Goods - 12-mth Fwd Rolling FD Core P/E (x) Figure 54: Capital Goods - current P/BV vs. core ROE

Capital Goods 12-mth Fwd Capital Goods Rolling P/BV (x) 24x 5.5x $A$24:$H$41 Rolling FD Core P/E (x) Current ROE (RHS) 29% 22x 5.0x 20x 4.5x 25% +1 SD 18x 4.0x 21% 16x 3.5x +1 SD Mean 14x 3.0x Mean 17% Jul-06 12x 2.5x -1 SD Aug-06 10x 2.0x 13% -1 SD Sep-06 8x 1.5x Oct-06 9% Nov-06 6x 1.0x Dec-06 4x 0.5x $A$1:$H$18 5% Jan-07 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Mar-07Feb-07 SOURCE: CGS-CIMB RESEARCH, COMPANY SOURCE: CGS-CIMB RESEARCH, COMPANY

Singapore Strategy Note│May 24, 2018

TECH/MANUFACTURING - DOWNGRADE TO NEUTRAL William TNG, CFA +(65) 6210 8676 - [email protected] Positive trends  Long-term growth drivers remain intact. We believe Internet-of-Things, industrial automation for factories, artificial intelligence, life sciences, increasing new applications for drones and autonomous vehicles will drive long-term demand for semiconductors, related packaging materials and product design and assembly services.

Negative trends  Investors have turned cautious after the strong share price gains clocked by tech manufacturing companies in 2017.  Current risks are volatile exchange rates, higher oil prices and progress of the ongoing US-China trade war discussions. On the ground, tech manufacturing companies are sensing that their customers have turned cautious and are reducing volume requirements.

Outlook Stronger hoh in 2H18. Barring a full-blown trade war, the tech manufacturing industry should continue to experience its traditional seasonality effect of a stronger second half as new products are launched. Given the strong 2H17 earnings performance, yoy growth could be challenging in 2H18.

Valuations

Figure 55: Technology - 12-mth Fwd Rolling FD Core P/E (x) Figure 56: Technology - current P/BV vs. core ROE

31x 4.5x 21% $A$24:$H$41 Technology 12-mth Fwd Rolling FD Core P/E 4.0x 19% 26x 3.5x 17% 3.0x 15% 21x +1 SD 2.5x 2.6 +1 SD 13% 2.0x Mean 16x Jul-06 Mean 11% 1.5x Aug-06 Sep-06 -1 SD 9% 11x -1 SD 1.0x Oct-06 Technology P/BV (x) Nov-06 0.5x 7% Current ROE (RHS) Dec-06 6x 0.0x $A$1:$H$18 5% Jan-07 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Mar-07Feb-07 SOURCE: CGS-CIMB RESEARCH, COMPANY SOURCE: CGS-CIMB RESEARCH, COMPANY

Singapore Strategy Note│May 24, 2018

CONSUMER - UPGRADE TO OVERWEIGHT Cezzane SEE +(65) 6210 8699 - [email protected]

Positive trends  YTD retail sales are still on an uptrend. Total retail sales value in Mar 18 was estimated at S$3.8bn; online sales contributed about 4.1%. Overall retail sales (seasonally adusted) increased 2.3% in Mar 18 mom; excluding motor vehicles, retail sales rose 1.1%. On a yoy basis, overall retail sales decreased 1.5%, largely due to lower motor vehicle sales. Excluding motor vehicles, retail sales increased 2.6% yoy, continuing the growth trend seen in FY17, which was the first year of growth after three years of consecutive declines.  Department stores, food retailers, apparel/footwear and furniture and household equipment lead the way. Yoy, most industries recorded higher sales in Mar 18, those with the highest sales growth included department stores (+9.1%), food retailers (+7.5%) and apparel and footwear retailers (5.0%).

Negative trends  Mini-marts and convenience stores losing grip. Mini-marts and convenient stores reported a yoy downtick of 1.0% in sales growth, extending its negative trend, despite a small uptick in Feb 18.  Still weak beer sales for ThaiBev. Estimated domestic 2QFY9/18 spirits and beer volumes of 365.1m litres were down c.6% yoy (2QFY9/17: 388m litres) largely on lower beer volumes (c.-10% yoy) despite market share staying at c.40%; whilst spirits chartered flat 0.7% yoy growth. Weaker beer demand was attributed to the stagnant purchasing power of the rural economy (which is its main clientele) due to soft household income. Apr volumes are purportedly still weak. This was the one of the key drivers for ThaiBev’s weak 2QFY18/1HFY18 core net profit (-3%/19% yoy) despite the consolidation of SABECO (effective stake estimated at 26.3%) in ThaiBev’s earnings and cashflow.

Figure 57: Singapore retail sales (excluding motor vehicles) have been on a general uptrend since FY17

130.0 3.0 Title: Source: 2.5 120.0 Please fill in the values above to have them entered in your report 2.0

110.0 (YoY%)3MMA 1.5

100.0 1.0

0.5 90.0 0.0 80.0

RetailSales IndexCurrent @ Prices -0.5

70.0 -1.0

3mnth Moving Average Chg -RHS RSI -exclding motor vehicles -LHS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Singapore Strategy Note│May 24, 2018

Figure 58: Department stores saw significant retail sales growth Figure 59: Mini-marts and convenient stores saw continual in the past 2 months downtick in yoy retail sales growth

160.0 30.0 120.0 Title: 8.0 Source: 25.0 140.0 6.0 100.0 20.0 Please fill in the values above to have them entered4.0 in your report 120.0 15.0 80.0 2.0 100.0 10.0

0.0 % 80.0 5.0 60.0 % -2.0 0.0 60.0 40.0 -4.0

-5.0 RSI RSI @ Current Prices 40.0 RSI @ Current Prices -10.0 -6.0 20.0 20.0 -15.0 -8.0

0.0 -20.0 0.0 -10.0

YoY Chg -RHS Department stores RSI - LHS YoY Chg-RHS Minimart/Convenience Stores RSI - LHS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 60: Estimated domestic 2QFY9/18 spirits and beer volumes of 365.1m litres were down c.6% yoy

300.0 80.0% Title: 11.7% 61.9% Source: 60.6% 70.0% 57.5% 250.0 60.0% 49.7% Please fill in the values above to have them entered in your report 50.0% 200.0 37.9% 40.0%

30.0% 150.0 20.0%

Million litres Million 3.8% 4.7% 4.4% 10.0% 100.0 0.7% 0.6% -1.9% -2.4% -1.9% -8.9% -8.9% 0.0% -7.6% -16.1% -10.0% 50.0 -5.9% -10.4% -20.0%

- -30.0% 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18

Spirit Volumes-LHS Beer Volumes -LHS Spirits yoy chg -RHS Beer yoy chg - RHS

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Outlook Singapore retail sales expected to grow, supermarkets to see further improvement. The Retail Sales Index, excluding motor vehicles, typically tracks Singapore’s GDP growth rate. With an in-house GDP growth view of 3.6% (supported by still-healthy export demand and domestic growth drivers), we believe Singapore retail is off on a better footing in FY18F. According to the Housing Development Board (HDB), there are at least c.10 supermarket open bid opportunities (cumulative c.5,900 sqm) still available in 2018, and at least another 16 in FY19-22F, implying ample opportunities ahead. This does not include closed bid opportunities (direct awards) that are in the market. Looking to the World Cup to boost beer consumption. ThaiBev guided that it is hoping the World Cup will boost domestic beer volumes in 2QFY9/18.

Most and least preferred Sheng Siong (Add, TP: S$1.18) is the other preferred consumer name. Sheng Siong’s net profit rose 9.5% qoq and 6.6% yoy (vs. 4Q17/1Q17: S$16.7m/S$17.1m) on growth in revenue (+14.0% qoq, +5.1% yoy), bolstered by operating leverage. Two new stores won in 1Q18 (swifter than our expectations) are expected to come on board in 2Q18, lifting end-CY18F store

Singapore Strategy Note│May 24, 2018

count to 50 (vs. 44 at end-FY17). Its tender pipeline is still robust, given the ample opportunities for the year. The stock also boasts a strong balance sheet at net cash/share of 5S$cts as at 1Q18.

Best World (Hold, TP: S$1.39) is our least preferred. We recently downgraded Best World (BW) from Add to Hold. Its 1Q18 headline net profit of S$5.6m was at only 9.2% of our and 8.9% of Bloomberg consensus full-year estimates (S$61m/S$63.4m). Earnings were skewed by the delayed recognition of some China takings as BW is still in the process of transitioning its China operations to a wholesale business model. BW guided that revenue could stay lower yoy in 2Q18, with China wholesale revenue maybe only registering from 2H18 onwards. Taiwan’s sales have also been on a yoy decline, and despite BW’s cautious optimism that yoy sales can stay flat, we are slightly concerned that it could trend down for the year.

Valuations

Figure 61: Consumer - 12-mth Fwd Rolling FD Core P/E (x) Figure 62: Consumer - current P/BV vs. core ROE

28x Consumer 12-mth Fwd 30x 250% $A$24:$H$41 Rolling FD Core P/E (x) Consumer P/BV (x) 26x 25x Current ROE (RHS) 24x 200% +1 SD 22x 20x 150% 20x Mean +1 SD 15x 18x 100% Jul-06 -1 SD 16x 10x Aug-06 Mean Sep-06 14x 50% Oct-06 5x 12x Nov-06 -1 SD Dec-06 10x 0x $A$1:$H$18 0% Jan-07 05 06 07 08 09 10 11 12 13 14 15 16 17 18 06 07 08 09 10 11 12 13 14 15 16 17 18 Mar-07Feb-07 SOURCE: CGS-CIMB RESEARCH, COMPANY SOURCE: CGS-CIMB RESEARCH, COMPANY

Singapore Strategy Note│May 24, 2018

GAMING - OVERWEIGHT Cezzane SEE +(65) 6210 8699 - [email protected] Positive trends  Gaining market share. GENS’s reported 1Q18 adjusted EBITDA of S$358.9m was up 26.7% yoy, with key drivers being i) higher market share in both the VIP and mass markets at 49% and 42.6%, respectively (from FY17 average of 37.1% and 39.4%, respectively). Higher VIP market share was spurred by GENS’s active strategy to loosen VIP credit since 4Q17, whilst higher mass market share was due to favourable RM/S$ appreciation in 1Q18.

Negative trends  Slight narrowing of Singapore VIP, but not due to GENS. Singapore’s VIP volume and Macau’s VIP baccarat GGR have typically had a strong correlation (c.0.82x). In 1Q18, Macau’s VIP bacarrat GGR rose to MOP42.3bn, up 21% yoy, but Singapore VIP volumes fell slightly to S$18bn (-1.9%), largely due to MBS shedding some VIP volume (-22% yoy); GENS, however, had a significantly strong showing with VIP volume growth of c.36% yoy.

Figure 63: Macau VIP and Singapore VIP Rolling Chip Volume Figure 64: Macau VIP and Singapore VIP Rolling Chip Volume (~85% correlation) (~82% correlation)

4,500 70% 70,000 100% Title: Title: 4,000 60,000 80% Source: 60% Source: 3,500 60% 50,000 50% 3,000 Please fill in the values above to have them entered in your report Please fill in the values above to have them entered in your report 40% 40,000 2,500 40%

20% S$m 30,000 2,000 30% 0% 20,000 1,500 -20% 20% 1,000 10,000 -40% 10% 500 - -60% - 0%

2010 2011 2012 2013 2014 2015 2016 2017 3M17 3M18

4Q10 1Q11 2Q11 4Q11 1Q12 2Q12 4Q12 1Q13 4Q13 1Q14 4Q14 1Q15 3Q15 4Q15 1Q16 3Q16 4Q16 1Q17 3Q17 4Q17 3Q11 3Q12 2Q13 3Q13 2Q14 3Q14 2Q15 2Q16 2Q17 1Q18

Yoy change in Singapore VIP volume- RHS Macau VIP baccarat (MOP$m)- LHS Total Singapore VIP GGR - LHS Total Singapore Mass GGR - LHS Singapore VIP rolling volume (S$m) - LHS GENS GGR % - RHS MBS GGR % - RHS

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Outlook Our Hong Kong gaming analyst forecasts that Macau GGR will continue its strong trajectory and grow +25% yoy, +11% mom in May on healthy supply (junkets) and demand fundamentals for gaming, strong discretionary spending in China, improved Macau infrastructure access, and lessening policy risk. Given GENS’s correlation of 0.86x to Macau baccarat VIP, this could continue to have positive spillover effects on GENS. Besides that, GENS is keeping a close eye on its receivables; as such, adjusted EBITDA margins are likely to stay above 45%. Management was positive on the Japan Gaming Bill and mentioned there is a chance that the ‘Responsible Gambling Bill’ and ‘Implementation Bill’ could be sanctioned in FY18; with bidding for prospective casinos to emerge in FY19F. GENS issued a JPY20bn (S$240m) yen-denominated bond in FY17. We continue to like the stock. We have an Add call with TP of S$1.40/share.

Singapore Strategy Note│May 24, 2018

Valuations

Figure 65: Gaming - 12-mth Fwd Rolling EV/EBITDA (x) Figure 66: Gaming - current P/BV vs. core ROE

18x Gaming 12-mth Forward EV/EBITDA (x) 6x Gaming P/BV (x) 20% $A$24:$H$41 Current ROE (RHS) 18% 16x 5x 16% +1 SD 14x 14% 4x 12% 12x Mean +1 SD 3x 10% 10x 8% Jul-06 -1 SD 2x Mean Aug-06 8x 6% Sep-06 4% Oct-06 1x -1 SD 6x Nov-06 2% Dec-06 4x 0x $A$1:$H$18 0% Jan-07 10 11 12 13 14 15 16 17 18 10 11 12 13 14 15 16 17 18 Feb-07 Mar-07 SOURCE: CGS-CIMB RESEARCH, COMPANY SOURCE: CGS-CIMB RESEARCH, COMPANY

HEALTHCARE - UNDERWEIGHT FROM NEUTRAL NGOH Yi Sin +(65) 6210 8604 - [email protected] Positive trends  Local patient demand is key driver, medical tourism flat. In 1Q18, we saw broad-based growth in revenue across the listed healthcare groups, largely driven by higher local patient numbers. An increase in average bill size (inpatient: +3.8% yoy, outpatient: +9.0% yoy) was more apparent at Health Management International (HMI SP) which owns two hospitals in Malaysia. Meanwhile, channel checks at other specialty clinics indicate that medical tourism numbers have been stable and we expect such trends to continue over the next six months.  Earnings recovery after gestation. If 2016-17 was the year of M&As for most asset-light specialist groups, then 2018 could be when we see earnings improvement as i) start-up losses from new doctors narrow (example: Singapore O&G) and ii) synergies from various healthcare segments become more visible (example: Singapore Medical Group). HMI became the latest entrant to the M&A scene with its 62.5% stake acquisition in StarMed Specialist Centre @ Farrer Square. We expect earnings to ramp up post a gestation period of 1-2 years (estimated opening in 2H18) to contribute to overall growth.

Negative trends  Ambulatory centres a potential threat to hospitals? HMI’s recent investment in StarMed Specialist Centre, a specialist day-surgery centre, highlights the growing trend of day surgeries and ambulatory centres. Since 2012, the number of day surgeries in Singapore has climbed 30.6% to more than 320k in 2016, according to the Singapore Department of Statistics. Preference for minimally-invasive procedures, coupled with medical inflation, has made ambulatory centres more popular vs. full-fledged, multi- disciplinary hospitals, especially in developed markets. We see possible disruption to hospital operators from ambulatory centres in the medium term, as they offer more affordable healthcare options due to lower overheads and the absence of overnight stays.  Industry consolidation a sign of increasing competition and regulatory intensity? We think the spurt of acquisitions in Singapore did not happen overnight. Rather, it was the result of rising competition and regulatory scrutiny that make it difficult for standalone clinics to survive. Recent policy

Singapore Strategy Note│May 24, 2018

changes, which include the ban of third-party administrators, prohibition of profit guarantees for M&A deals, introduction of fee benchmarks and new rulings on riders for Integrated Shield Plans, could curb doctors’ pricing power to some extent. Consequently, healthcare specialists who leave the public sector to set up their own clinics may face operational inefficiencies (due to the lack of scale) and limited patient referrals, and ultimately be enticed to join a larger (listed) group.

Figure 67: RFMD's domestic revenue growth (excluding China Figure 68: We expect increasing patient load and average bill operations) size to drive HMI's topline across both hospitals

Revenue (RM'm) 750.0 25.6% 30% 800.0 Title: 20.0% Title: 18.9% 19.0% 15.2% Source: 14.1%14.2% 15.4% 20% Source: 650.0 12.6% 700.0 15.0% 11.3% 9.4% 9.4% 9.9%9.6% 8.5% 8.9% 7.2% 7.6% 10.4% 11.0% 10% 9.6% Please fill in the values above to have them entered in your report 550.0 2.4% 8.9% 0.8% 600.0 10.0% Please fill in the values above to have them entered in your report 0% 450.0 500.0 5.0% -10% 350.0 -20% 400.0 0.0% 250.0 -30% 300.0 -5.0% 150.0 -40% 200.0 -10.0% 50.0 -50% 100.0 -15.0% (50.0) -60%

0.0 -20.0% FY 2016 FY2017 FY2018F FY2019F FY2020F Hospital Services (S$m) Healthcare Services (S$m) MMC RSH IHS HMI's topline growth rate (%) Investment Holdings (S$m) Revenue growth (%) SOURCE: CIMB RESEARCH, COMPANY SOURCE: CGS-CIMB RESEARCH, COMPANY

Figure 69: Performance snapshot of major healthcare companies

% yoy net profit growth (by calendar quarter) Name Rating FYE 1Q17 2Q17 3Q17 4Q17 1Q18 Comments RFMD SP Hold Dec 0.1% 0.6% 1.0% 9.1% 1.7% Local patient load growth and new govt contracts Increasing bill sizes and patient volume growth (exclude MI consolidation HMI SP Add June 0.7% -6.0% 1.4% 9.7% 15.8% exercise) QNM SP Reduce Dec 10.9% 14.3% 11.9% 8.9% 10.7% Contribution from new outlets offset deconsolidation effect of Aoxin and Aidite Earnings decline attributable to suspension of key doctor, which has since TKMED SP Hold Dec -0.8% -17.9% -17.6% -18.7% -36.9% been lifted wef Mar 18 Dec (prev. Organic growth across newly acquired clinics, and drive double-digit growth in SMG SP NR semi annual 526.7% 499.4% 138.9% key verticals reporting) SOG SP NR Dec 2.8% -13.7% -3.3% 163.9% 23.7% Higher patient volume in O&G and cancer-related ISEC SP NR Dec 4.6% 12.1% 30.6% 40.6% 28.9% Increased patient visits in Malaysia and Singapore SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Outlook We downgrade Singapore’s healthcare sector from Neutral to Underweight, as we expect sentiment for 2H18 to be largely muted, weighed by competitive pressure, regulatory intensity and upcoming gestation from the opening of overseas hospitals. We remain watchful of the following data points that could put further pressure on healthcare stocks under our coverage: i) medical tourism in Singapore, ii) extent of hospital start-up costs that have been priced in as well as iii) implications of GST removal and ringgit strength on Malaysia’s hospital operations.

Singapore Strategy Note│May 24, 2018

Most and least preferred HMI (Add, TP: S$0.80) is our most preferred small-cap pick given its proxy to medical tourism in Malaysia, and potential earnings ramp up from its recently- acquired Singapore operations. Our least preferred is Q&M because of its high valuation (30x current P/E) and decelerating acquisition pace. Raffles Medical Group (Hold, TP: S$1.24) is our least preferred large-cap healthcare stock. We recently downgraded Raffles Medical Group from Add to Hold as the company faces gestation in the coming quarters from its China expansion plans (Chongqing: 4Q18, Shanghai: 2H19). We think IHH Healthcare could re-rate on the back of profitability turnaround at its Gleneagles Hong Kong hospital.

Valuations

Figure 70: Healthcare - 12-mth Fwd Rolling FD Core P/E (x) Figure 71: Healthcare - current P/BV vs. core ROE

Healthcare P/BV (x) 41x Healthcare 12-mth Fwd 7.0x 30% $A$24:$H$41 Rolling FD Core P/E (x) Current ROE (RHS) 36x 28% 6.0x 26% 31x +1 SD 24% 5.0x +1 SD 26x 22% Mean Mean 4.0x 20% 21x Jul-06 18% 3.0x -1 SD Aug-06 16x 16% Sep-06 -1 SD 14% Oct-06 11x 2.0x Nov-06 12% Dec-06 6x 1.0x $A$1:$H$18 10% Jan-07 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Mar-07Feb-07 SOURCE: CGS-CIMB RESEARCH, COMPANY SOURCE: CGS-CIMB RESEARCH, COMPANY

TRANSPORT - NEUTRAL FROM UNDERWEIGT Raymond YAP, CFA +(60) 3 2261 9072 - [email protected] Cezzane SEE +(65) 6210 8699 - [email protected] LIM Siew Khee +(65) 6210 8664 - [email protected]

Positive trends  Airlines. Singapore Airlines (SIA) has seen two consecutive quarters of yoy increases in revenue per unit of ASK capacity (RASK) due to higher load factors which have more than offset yield declines in the case of SilkAir and Scoot. In the case of the SIA mainline carrier, it managed to deliver a 1% yoy increase in yields during the quarter Jan-Mar 2018, the first in three years. In the charts below, “FSC” stands for the Full-Service Carriers, i.e. SIA mainline and SilkAir, while “LCC” stands for the Low-Cost Carrier, Scoot, which was merged last year from the originally separate Scoot long-haul and Tigerair short-haul operations.

Singapore Strategy Note│May 24, 2018

Figure 72: FSC: Passenger RASK (Scts/ASK) and yoy change Figure 73: LCC: Passenger RASK (Scts/ASK) and yoy change (%) (%)

4% 10.00 10% Title: 5.80 Title: Source: Source: 3% 9.50 5.60 2% 5% Please fill in the values above to have them entered5.40 in your report Please fill in the values above to have them entered in your report 1% 9.00 5.20 0% 8.50 0% -1% 5.00 8.00 -2% 4.80 -5% -3% 7.50 4.60 -4% 7.00 4.40 -5% -10% 6.50 -6% 4.20

-7% 6.00 -15% 4.00

Jun 15 Jun 17 Jun Jun 16 Jun

Jun 11 Jun 13 Jun 14 Jun 16 Jun 17 Jun Jun 12 Jun 15 Jun

Mar 16 Mar 18 Mar Mar 15 Mar 17 Mar

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

Dec 14 Dec 15 Sep 16 Sep 16 Dec 17 Sep Dec 15 Dec 17 Dec

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

Yoy (%) Pax RASK (Scts/ASK) - FSC only Yoy (%) Pax RASK (Scts/ASK) - LCC only

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CIMB RESEARCH, COMPANY REPORTS

 Passenger travel demand has also been strong throughout the FSC and LCC space, with passenger load factors (PLF) rising as Revenue Passenger Kilometer (RPK) demand growth has exceeded Available Seat Capacity (ASK) growth.

Figure 74: FSC business - RPK vs ASK growth (%) and PLF yoy change (% pts)

PLF yoy change (% pts) - LHS 5% 12% RPK yoy growth (%) - FSC only 4% ASK yoy growth (%) - FSC only 10%

3% 8%

2% 6%

1% 4%

0% 2%

-1% 0%

-2% -2%

-3% -4%

-4% -6%

Jun 13 Jun 14 Jun 15 Jun 16 Jun 17 Jun Jun 11 Jun 12 Jun

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

Dec 11 Dec 12 Dec Sep 12 Sep 13 Sep 13 Dec 14 Sep 14 Dec 15 Sep 15 Dec 16 Sep 16 Dec 17 Sep 17 Dec Sep 11 Sep SOURCES: CGS-CIMB, COMPANY REPORTS

Singapore Strategy Note│May 24, 2018

Figure 75: LCC business - RPK vs ASK growth (%) and PLF yoy change (% pts)

PLF yoy change (% pts) - LHS 6% 30% RPK yoy growth (%) - LCC only 5% ASK yoy growth (%) - LCC only 25% 4%

3% 20% 2%

1% 15%

0% 10% -1%

-2% 5% -3%

-4% 0% Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18

SOURCES: CGS-CIMB, COMPANY REPORTS

 Demand for airfreight has been particularly strong throughout 2017 and continues to be strong for the Jan-Mar 2018 quarter. SIA’s guidance is for continued growth in airfreight demand throughput in 2018F as a result of robust global GDP and trade growth.

Figure 76: SIA Cargo - RFTK vs AFTK growth (%) and CLF yoy change (% pts)

CLF yoy change (% pts) - LHS 10% RFTK yoy growth (%) 15% AFTK yoy growth (%) 8% 10%

6% 5%

4% 0%

2% -5%

0% -10%

-2% -15%

-4% -20%

-6% -25%

Jun 08 Jun 11 Jun Jun 05 Jun 14 Jun 17 Jun

Mar 06 Mar 09 Mar 18 Mar Mar 12 Mar 15 Mar

Dec 06 Dec 07 Sep 09 Dec 10 Sep Sep 13 Sep 15 Dec 16 Sep Dec 12 Dec SOURCES: CGS-CIMB, COMPANY REPORTS

Singapore Strategy Note│May 24, 2018

Figure 77: Cargo RAFTK (Scts/AFTK) and yoy change (%)

60% 29 Title: Yoy (%) SIA cargo RAFTK (Scts/AFTK) Source: 50% 27 40% Please fill in the values above to have them entered in your report

30% 25

20% 23 10% 21 0%

-10% 19

-20% 17 -30%

-40% 15

Jun 08 Jun 11 Jun Jun 05 Jun 14 Jun 17 Jun

Mar 12 Mar 15 Mar Mar 06 Mar 09 Mar 18 Mar

Dec 06 Dec 07 Sep 12 Dec 15 Dec 16 Sep Sep 10 Sep 13 Sep Dec 09 Dec SOURCES: CGS-CIMB, COMPANY REPORTS

 Land transport. Comfortdelgro’s public transportation segment revenues may stay flat yoy as rail, which was supposed to break even in FY18, has been pushed ahead.  Taxi segment as seen some lesser competition post the Grab/Uber acquisition and CD placed an order for 200 new hybrid Hyundai Ioniqs in May and guides for the potential for further additions moving ahead.  CD has embarked on c.S$140m worth of acquisitions in its bid to grow its other businesses and has guided that it is still in the market for M&A opportunities, especially for private hire car deals, and is open to considering other avenues to enter the segment beyond its discussions with Lion City.

Negative trends  Airlines. Oil prices have been rising as a result of very effective production cuts by OPEC and its non-OPEC collaborators. Without a fuel surcharge mechanism in place, SIA may be hard-pressed to respond to higher fuel prices quickly. SIA’s competitors in the region have also not raised ticket prices even though the Chinese and Middle Eastern Gulf airlines do not have fuel hedges in place.

Figure 78: Singapore jet fuel prices (US$/bbl), vs. Brent crude price

Crack spread (US$/bbl) - RHS Jet fuel price (US$/bbl) - LHS Brent crude price (US$/bbl) - LHS Title: 200 50 Source:

180 45 Please fill in the values above to have them entered in your report 160 40

140 35

120 30

100 25

80 20

60 15

40 10

20 5

0 SOURCE: CIMB RESEARCH, BLOOMBERG0

Singapore Strategy Note│May 24, 2018

Outlook Airlines 5% ASK growth. After five years of flat capacity, SIA mainline is guiding for 5% ASK growth in FY19F, as it is confident that it has the right aircraft to expand, i.e. the A350ULR for the resumption of non-stop Los Angeles and New York flights, and the 787-10 and the regional A350-900 for medium-haul flights. Fleet efficiency will improve as several classic 777s are removed. We are banking on SIA mainline delivering matching 5% RPK growth in FY19F, with its new A380 and 787-10 products helping to grow its pool of customers. Stable yields for mainline. For the SIA group’s passenger business as a whole, SIA guided for “strong advance passenger bookings” and “continued stabilisation in yields” despite “intense competition and cost pressures”. We expect SIA mainline to build on the 1% yoy increase in 4QFY18 yields (the first yield increase in three years) as we head into FY19F. Rising fuel prices would no doubt impact SIA’s unhedged competitors more than SIA itself, and may lead to an industry-wide rise in ticket prices which SIA can ride on. With FY19F planned capacity growth of 9% at SilkAir, SilkAir might have to struggle with yields, even though we have pencilled in a low-single digit rise in yields to offset higher fuel costs. While Scoot is planning to step up ASK growth to 17% this year, we expect its low fares to be warmly embraced, and no yield discounts are expected. SIA is relatively well positioned as it has hedged 45% of its fuel requirements in FY18F at an average jet fuel price of US$65/bbl, against the spot price of around US$88/bbl. Every US$5/bbl increase in average jet fuel prices could reduce our core net profit forecast for SIA by 19%, assuming no effort to pass on higher costs to passengers.

Figure 79: FY2019F SIA group core net profit sensitivity (S$ m) Jet fuel price Average exchange rate (S$:US$1) US$/barrel S$1.20 S$1.25 S$1.30 S$1.35 S$1.40 Bull case US$75 1,234.1 1,095.8 957.6 819.5 681.4 US$80 1,111.7 968.3 825.0 681.8 538.6 Base case US$85 989.3 840.8 692.4 544.1 395.8 US$90 866.9 713.3 559.8 406.4 253.0 Bear case US$95 744.5 585.8 427.2 268.7 110.2 SOURCES: CIMB, COMPANY REPORTS

Most and least preferred SIA (Add, TP: S$11.75) is our preferred pick on the back of 1) hope for mainline to recover and 2) impending final dividend of S$0.30 (to be paid on 15 Aug). We note that CD is on an M&A track that could lead to future growth, but we believe at a forward P/E of c.17x CY19F, recovery prospects may already be priced in. SATS (Hold, TP: S$5.17) is our least preferred pick as the stock is trading at c. 23x FY19F with room for disappointment if deal with Turkish Airlines is delayed, amidst sell-off in Turkish Lira.

Singapore Strategy Note│May 24, 2018

Valuations

Figure 80: Transport - 12-mth Fwd Rolling FD Core P/E (x) Figure 81: Transport - current P/BV vs. core ROE

37x 1.6x 14% Transport 12-mth Fwd Rolling $A$24:$H$41 FD Core P/E (x) 1.5x 32x 12% +1 SD 1.4x 10% 27x +1 SD 1.3x Mean 8% 22x Mean 1.2x 6% Jul-06 1.1x 17x Aug-06 -1 SD 4% -1 SD 1.0x Sep-06 Oct-06 12x Transport P/BV (x) 0.9x 2% Nov-06 Current ROE (RHS) Dec-06 7x 0.8x $A$1:$H$18 0% Jan-07 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Mar-07Feb-07 SOURCE: CGS-CIMB RESEARCH, COMPANY SOURCE: CGS-CIMB RESEARCH, COMPANY

COMMODITIES - NEUTRAL Ivy NG Lee Fang, CFA +(60) 3 2261 9073 - [email protected]

Positive trends  Declining palm oil stocks level in Malaysia.  Rising biodiesel demand due to higher crude oil prices.  Potential import duties on US soybeans and related products by China.

Negative trends  Rising palm oil supplies in 2H18.  Higher import duties on palm oil by India.  Reinstatement of export tax by Malaysian government.

Most and least preferred We like First Resources (Add, TP: S$2.03) and Wilmar (Add, TP: S$4.10). We like First Resources due to its young estates profile (c.12 years) which offers high potential output growth. We also like Wilmar (Add, TP: S$4.10) as we expect the listing of its China operations, which could be worth more than Wilmar’s current market cap of US$15bn, to catalyse its share price. Stronger yoy 2Q18F earnings from better crush and refining margins should also re-rate the stock. Golden Agri (Reduce, TP: S$0.31) is our top short as we are concerned about its plantation earnings and unexciting output prospects given its older estates profile (17 years).

Singapore Strategy Note│May 24, 2018

Figure 82: Historical relationship between CPO prices and Malaysian stocks

('000 tonnes) (US$ /tonne) Stock (LHS) CPO price (RHS) 3,500 1,400

1,300

3,000 1,200

1,100

2,500 1,000

900

2,000 800

700

1,500 600

500

1,000 400 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

SOURCE: BLOOMBERG

Figure 83: Total palm oil stocks present in China's domestic Figure 84: Indian edible oil stocks at ports and pipelines (1 ports (9 Apr 2018: 708,700 tonnes) Mar 2018: 2,197,000 tonnes) (Palm oil stocks at China domestic ports - '000 tonnes) ('000 tonnes) 1,600 2,800

1,400 2,600

2,400 1,200

2,200 1,000 2,000 800 1,800 600 1,600 400 1,400 200 1,200 - 1,000 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

SOURCES: CIMB, COFEED SOURCES: CIMB, SOLVENT EXTRACTORS' ASSOCIATION OF INDIA, AGRIWATCH

Valuations

Figure 85: Commodities - 12-mth Fwd Rolling FD Core P/E (x) Figure 86: Commodities - current P/BV vs. core ROE

3.5x 25% Commodities P/BV (x) $A$24:$H$41 25x Current ROE (RHS) 3.0x 20% 21x +1 SD 2.5x 15% 17x Mean 2.0x +1 SD 10% Jul-06 13x 1.5x Mean Aug-06 -1 SD Sep-06 Oct-06 9x 5% 1.0x -1 SD Nov-06 Commodities 12-mth Fwd Rolling FD Core P/E (x) Dec-06 5x 0.5x $A$1:$H$18 0% Jan-07 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Mar-07Feb-07 SOURCE: CGS-CIMB RESEARCH, COMPANY SOURCE: CGS-CIMB RESEARCH, COMPANY

Singapore Strategy Note│May 24, 2018

Analysts’ Alpha picks CIMB analysts’ Alpha picks for 2H18 (Large Cap)

DBS (Add, TP: S$34.00)

 With its strong S$-CASA franchise, DBS is the most rate- 1.8x 15.0% Title: sensitive bank in Singapore and would benefit the most Source: 1.6x 14.0% from rising rates. Please fill in the values above to have them entered in your report +1SD: 1.4x  We view the bank as one of the most digital-savvy in 1.4x 13.0% ASEAN. Digitalisation enables DBS to increase its wallet Avg: 1.2x 1.2x 12.0% Cur P/BV: share at lower marginal costs in its core markets of ROE: 1.0x 11.0%

Singapore and Hong Kong, and scale profitably in the -1SD: 1.0x Current P/BV

emerging markets of Indonesia. 0.8x 10.0%

 DBS is among the first to be able to measure the financial 12mth Fwdcore ROE value from digitalisation. It expects to reduce CIR by 50bp 0.6x 9.0% p.a. over the next five years to a long-term target of 40%. 0.4x 8.0%  Our GGM-based TP implies 1.8x CY18F P/BV vs.

sustainable ROE of 14%. Its CY18F dividend yield of Current P/BV 12mth Fwd Core ROE c.4% should also be supportive of its share price.

Keppel Corp (Add, TP: S$10.00) 3.0 140  Key catalysts for KEP is the potential of higher dividend on the back of stronger gains from its asset recycling and 120 2.5 stronger recovery in offshore and marine (O&M) margins. 100  High oil prices should support the demand for rigs which 2.0 +1SD: 1.9x could lead to more de-risking of its jack-up inventory, 80 resulting in improvement in operating leverage. 5-yr Ave (13-17): 1.4x 60  KEP is also a proxy to ride the property cycle in 1.5

Singapore and emerging markets with its land bank of 40

61,000 homes. 1.0 -1SD: 1.0x  The stock is trading c.1.15x CY18F P/BV, or close to -1 20 s.d. of its 5-year mean (1.4x). 0.5 0 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Rolling P/BV (x) Crude Oil (RHS)

Sheng Siong Group (Add, TP: S$1.18) 700  The company is seeing swifter supermarket wins, post a Store Count at least 10% area 600 slowdown in FY17. It won two new stores in 1Q18, faster growth in FY18F swifter than our expectations as we had projected them 500 450 447 coming on board in 2Q18. As such, we lift our end-CY18F 431 436 400 400 404 404 36 store count to 50 (vs. 44 at end-FY17). Its tender pipeline 400 404 335 348 is still robust, given the ample supermarket opportunities 8.9% 39 42 50 300 33 33 34 44 48 for the year; hence there could be upward bias to our 22 25

store count. ft) sq. retail('000Total area 200  SSG boasts a strong balance sheet, with net cash/share of 5S$cts as at end-1Q18. SSG is trading at 12M forward 100 P/E of c.19.6x, below its 3-year average mean despite its 0 stable ROE of 25.4%. It has a FY18F yield of 3.4%. Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 1Q18 2Q18F 

SOURCE: CGS-CIMB RESEARCH, COMPANY REPORTS

Singapore Strategy Note│May 24, 2018

CIMB analysts’ Alpha picks for 2H18 (Large Cap)

Singapore Post (Add, TP: S$1.59) Operating profit by segment (S$'mln)  We think SPOST entered FY3/19F on a stronger footing, 350 Title: Source: with its major capex cycle over (plus net cash position), 300 250 and earnings improving in both logistics and e-commerce +53% -79% +14% Please fill in the values above to have them entered in your report +0.5% +16% segments. 200 +171% +9%  We also expect its collaboration with Alibaba to underpin 150 stronger international mail volume growth, hence 100 50 mitigating margin pressure from the terminal due Postal 0 Logistics changes. FY14 FY15 FY16 FY17 FY18 FY19F FY20F FY21F  Full rental contribution from SPC retail mall is another (50) Others income boost. Key potential re-rating catalysts are faster- (100) than-expected e-commerce turnaround and further (150) strategic partnerships. Postal Logistics eCommerce Others

ST Engineering (Add, TP: S$3.80) 25

 We think the key catalysts for STE in the next six months 24 is the potential award of defence contract to supply +1SD: 22.8x amphibious combat vehicles (in collaboration with SAIC) 23 to the US Marine Corps. The results of the bid will be 22 +0.5SD: 21.8x known by end-Jun/Jul. 21 5-yr Ave (13-17): 20.8x

 The trend of strong engine maintenance, repair and 20 -0.5SD: 19.8x overhaul revenue is likely to last for 3-4 years as STE 19 -1SD: 18.8x ramps up more capacity to cope with the demand recovery. 18  It is also a proxy to ride the secular trend of smart cities 17

spending globally. The stock is trading at c.19x CY19F 16 P/E, below its 5-year mean of c. 21x. Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 12-mth Fwd Rolling FD Core P/E (x)

Thai Beverage (Add, TP: S$0.98)

 We believe that its downside risks are relatively priced-in 28x 1.2 Title: post the stock's 14.1% decline YTD. At 12M forward P/E 26x Source: of c.16.5x, it is trading at close to 1 s.d. below its 5-year +2 s.d. 24.3x 1.0 24x Please fill in the values above to have them entered in your report average mean, which historically was the level when its 22x 0.8 net profits were THB4.2bn-5.9bn/ quarter vs. THB6.3bn 20x currently. 18x 0.6 EPS  The company is in the midst of transforming into a truly 16x Fwcore dP/E -2 s.d. 14.4x 0.4 regional beverage play post acquiring Myanmar’s Grand 14x Royal and 26.3% of Vietnam’s SABECO; this could 12x 0.2 provide longer-term upsides. 10x  Potential catalysts for its domestic alcohol sales volumes 8x - are the World Cup celebrations in 3QFY9/18, and the coronation of the new king in FY19F. It also has bullets from the potential corporate restructuring of F&N/FCL and Forward core P/E Recurring EPS

further inorganic growth in its food business.

UOL Group (Add, TP: S$9.65) 30%  1Q18 net profit of S$73.8m was slightly below expectation, at 17% of our FY18 forecast. 10%

 Amber 45 launch saw strong preview interest; Tre Ver to -10% be rolled out in 3Q.  Office rents to benefit from office upcycle; hotel -30% performance to improve in 2H18. Chart on the right refers to UOL discount to RNAV. -50%

-70%

-90% A-97 D-98 A-00 A-02 D-03 A-05 A-07 D-08 A-10 A-12 D-13 A-15 A-17

SOURCE: CGS-CIMB RESEARCH, COMPANY REPORTS

Singapore Strategy Note│May 24, 2018

CIMB analysts’ Alpha picks for 2H18 (Small Cap)

China Sunsine Chemicals (Add, TP: S$1.87) Rmb/ton 24,000  We reaffirm our Add call with TP of S$1.87, pegged to 9.8x CY19F EPS. Sunsine delivered record earnings and 22,000 topped our forecasts for the past two quarters amid 20,000 consolidation in the domestic supply of rubber 18,000 accelerators in its favour.  Our channel checks revealed domestic prices of rubber 16,000 accelerators have risen sharply (c.5% mom) in May, while 14,000 aniline (bulk of its raw material) costs stayed flat. 12,000  If the momentum continues, we expect Sunsine to deliver strong earnings for the rest of FY18F and could sound 10,000

another positive earnings alert for its 2Q18. Key catalysts

01-Apr 08-Apr 15-Apr 22-Apr 29-Apr

07-Jan 14-Jan 21-Jan 28-Jan

04-Feb 11-Feb 18-Feb 25-Feb 04-Mar 11-Mar 18-Mar 25-Mar 13-May could come from stronger-than-expected earnings. 06-May Rubber accelerators price index Aniline price index

mm2 Asia (Add, TP: S$0.74) PATMI breakdown (S$m) 45.0 Title:  We like mm2 as a proxy for growing media and Source: 40.0 entertainment business in Asia, given its extensive 6.1 35.0 Please fill in the values above to have them entered in your report presence across the entire value chain, which include 51% CAGR 5.4 30.0 6.5 6.0 1.0 cinema assets, events production (UnUsUal) and post- 25.0 3.6 1.0 production businesses. 20.0 2.7 2.7 1.0  It also recently announced a film partnership with Korea’s 15.0 26.4 22.9 CJ E&M. Key potential near-term catalyst is the possible 10.0 0.1 17.3 18.3 0.5 spin-off of its Vividthree subsidiary, which could set it off 5.0 7.5 5.1 on a stronger earnings trajectory. - (0.1)  At current valuation of c.14x CY19F P/E, we think mm2’s (5.0) FY15 FY16 FY17 FY18F FY19F FY20F growth prospects and potential synergies may have been Core production & distribution Post-production Cinema operations Unusual Productions overlooked.

Riverstone Holdings (Add, TP: S$1.28) % USD/MYR Impacted by lower ASPs as Title: 36 companywas unable to pass over 4.40 Source:  Our TP is pegged to 16.7x CY19F P/E. We expect costs amid keen competition. Riverstone’s production capacity to rise by another 1.4bn 34 4.20 Please fill in the values above to have them entered in your report

gloves or c.18% of its existing annual capacity of 7.6bn 32 gloves by 3Q18F. 4.00 30  We expect it to maintain c.90% overall utilisation level 3.80 28 despite new production lines, backed by strong demand 3.60 for its gloves amid the shift away from PVC towards nitrile 26 3.40 gloves and new customer acquisitions in China and 24

Vietnam. 22 3.20  Currently trading at c.27% discount to its peer average of 20 3.00 18x. A stronger US$ could well benefit Riverstone and it FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 1Q18

was able to pass on higher raw material costs in 1Q18. Gross margin USD/MYR exchange rate (RHS) We expect some recovery in its gross margin in FY18F.

Title: 1.2 Sunningdale Tech (Add, TP: S$2.50) Source:  Valuation has de-rated to 0.62x CY18F P/BV after its disappointing 1Q18 results. 1.0 +2sd = 0.97x Please fill in the values above to have them entered in your report  We believe the 1Q18 earnings disappointment is priced in 0.8 +1sd = 0.76x given that the long-term average P/BV is 0.55x. #VALUE!  Potential catalysts include a better qoq performance as #VALUE! 0.6 new projects in the consumer/IT segment ramp up Average = 0.55x Average = 0.55x production. 0.4 +1sd = 0.76x -1sd = 0.34x -1sd = 0.34x +2sd = 0.97x 0.2 -2sd = 0.13x -2sd = 0.13x 0.0 07 08 09 10 11 12 13 14 15 16 17 18

SOURCE: CGS-CIMB RESEARCH, COMPANY REPORTS

Singapore Strategy Note│May 24, 2018

CIMB analysts’ Alpha picks for 2H18 (Small Cap)

S$m Yongnam Holdings (Add, TP: S$0.56) Title: 500  We reaffirm our Add call with TP of S$0.56, based on 0.8x Source: CY19F P/BV. Its JV with Leighton has just won a major Please fill in the values above to have them entered in your report 400 North-South Corridor project worth S$553.8m.

 This would significantly boost its order book from S$142m 300 to S$308m, above its 3-year average (c.S$290m), based

on its 30% stake in the JV. We expect significant revenue 200 contribution to start in 1Q19F.  Also actively pursuing the Melbourne Metro project and 100 other civil engineering and strut orders for infrastructure projects in Singapore, Australia, Hong Kong and the - 2QCY15 3QCY15 4QCY15 1QCY16 2QCY16 3QCY16 4QCY16 1QCY17 2QCY17 3QCY17 4QCY17 1QCY18 Middle East. Key potential catalysts include further contract wins. Orderbook 6-year average

SOURCE: CGS-CIMB RESEARCH, COMPANY REPORTS

Singapore Strategy Note│May 24, 2018

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Singapore Strategy Note│May 24, 2018

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Singapore Strategy Note│May 24, 2018

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Singapore Strategy Note│May 24, 2018

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Singapore Strategy Note│May 24, 2018

Where this material is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent “research” (cannot remove research from here under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any such non-independent material will not have been prepared in accordance with legal requirements designed to promote the independence of research (cannot remove research from here) and will not subject to any prohibition on dealing ahead of the dissemination of research. Any such non-independent material must be considered as a marketing communication. United States: This research report is distributed in the United States of America by CGS-CIMB Securities (USA) Inc, a U.S. registered broker- dealer and a related company of CGS-CIMB Research Pte Ltd, PT CGS-CIMB Sekuritas Indonesia, CGS-CIMB Securities (Thailand) Co. Ltd, CGS- CIMB Securities (Hong Kong) Limited, CGS-CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds, and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CGS-CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CGS-CIMB Securities (USA) Inc. CIMB Securities (USA) Inc. does not make a market on other securities mentioned in the report. CGS-CIMB Securities (USA) Inc. has not managed or co-managed a public offering of any of the securities mentioned in the past 12 months. CGS-CIMB Securities (USA) Inc. has not received compensation for investment banking services from any of the company mentioned in the past 12 months. CGS-CIMB Securities (USA) Inc. neither expects to receive nor intends to seek compensation for investment banking services from any of the company mentioned within the next 3 months. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. Distribution of stock ratings and inv estment banking clients for quarter ended on 31 March 2018 1275 companies under cov erage for quarter ended on 31 March 2018 Rating Distribution (%) Inv estment Banking clients (%) Add 61.1% 5.5% Hold 29.7% 2.0% Reduce 8.9% 0.4%

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2017, Anti-Corruption 2017 AAV – Very Good, n/a, ADVANC – Excellent, Certified, AEONTS – Good, n/a, AMATA – Very Good, n/a, ANAN – Excellent, n/a, AOT – Excellent, Declared, AP – Excellent, Declared, ASK – Very Good, Declared, ASP – Very Good, Certified, BANPU – Excellent, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – Good, Declared, BCP - Excellent, Certified, BCPG – Very Good, n/a, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, n/a, BEC – Very Good, n/a, , BGRIM – not available, n/a, BH - Good, n/a, BJC – Very Good, Declared, BJCHI – Very Good, Declared, BLA – Very Good, Certified, BPP – Good, n/a, BR - Good, Declared, BTS - Excellent, Certified, CBG – Good, n/a, CCET – Good, n/a, CENTEL – Very Good, Certified, CHG – Very Good, Declared, CK – Excellent, n/a, COL – Very Good, Declared, CPALL – not available, Declared, CPF – Excellent, Declared, CPN - Excellent, Certified, DELTA - Excellent, n/a, DEMCO – Excellent, Certified, DIF – not available, n/a, DTAC – Excellent, Certified, EA – Very Good, n/a, ECL – Very Good, Certified, EGCO - Excellent, Certified, EPG – Very Good, n/a, GFPT - Excellent, Declared, GGC – not available, Declared, GLOBAL – Very Good, Declared, GLOW – Very Good, Certified, GPSC – Excellent, Declared, GRAMMY - Excellent, n/a, GUNKUL – Excellent, Declared, HANA - Excellent, Certified, HMPRO - Excellent, Certified, ICHI – Excellent, n/a, III – not available, n/a, INTUCH - Excellent, Certified, IRPC – Excellent, Certified, ITD – Very Good, n/a, IVL - Excellent, Certified, JAS – not available, Declared, JASIF – not available, n/a, JUBILE – Good, Declared, KAMART – not available, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KGI – Very Good, Certified, KKP – Excellent, Certified, KSL – Very Good, Certified, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Certified, M – Very Good, n/a, MACO – Very Good, n/a, MAJOR – Very Good, n/a, MAKRO – Very Good, Declared, MALEE – Very Good, n/a, MBKET – Very Good, Certified, MC – Very Good, Declared, MCOT – Excellent, Certified, MEGA – Very Good, n/a, MINT - Excellent, Certified, MTLS – Very Good, Declared, NYT – Excellent, n/a, OISHI – Very Good, n/a, PLANB – Excellent, Declared, PLAT – Very Good, Certified, PSH – Excellent, Certified, PSL - Excellent, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Certified, RATCH – Excellent, Certified, ROBINS – Excellent, Certified, RS – Very Good, n/a, SAMART - Excellent, n/a, SAPPE - Good, n/a, SAT – Excellent, Certified, SAWAD – Very Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCBLIF – not available, n/a, SCC – Excellent, Certified, SCN – Very Good, Declared, SCCC - Excellent, Declared, SIM - Excellent, n/a, SIRI – Very Good, Declared, SPA - Good, n/a, SPALI - Excellent, n/a, SPRC – Excellent, Declared, STA – Very Good, Declared, STEC – Excellent, n/a, SVI – Excellent, Certified, TASCO – Very Good, n/a, TCAP – Excellent, Certified, THAI – Very Good, n/a, THANI – Very Good, Certified, THCOM – Excellent, Certified, THRE – Very Good, Certified, THREL – Excellent, Certified, TICON – Very Good, Declared, TIPCO – Very Good, Certified, TISCO - Excellent, Certified, TK – Very Good, n/a, TKN – Very Good, Declared, TMB - Excellent, Certified, TNR – Good, n/a, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – not available, n/a, TRUE – Excellent, Declared, TTW – Very Good, n/a, TU – Excellent, Declared, TVO – Excellent, Declared, UNIQ – not available, Declared, VGI – Excellent, Declared, WHA – not available, Declared, WHART – not available, n/a, WORK – not available, n/a. Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorized into: - Companies that have declared their intention to join CAC, and - Companies certified by CAC

Singapore Strategy Note│May 24, 2018

Recommendation Framework Stock Ratings Definition: Add The stock’s total return is expected to exceed 10% over the next 12 months. Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months. Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months. The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition: Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation. Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation. Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition: Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark. Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

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