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 2 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.