00b--SingStrat 2011 outlook Front · A strong currency, reasonable valuations and available policy...

6 December 2010 Nomura

N O M U R A S I N G A P O R E L I M I T E D

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Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months.

Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 41 to 44.

Strategy | S I N G A P O R E

2011 Outlook Jit Soon Lim, CFA +65 6433 6969 [email protected]

And the Singapore Research Team

Riding the reflation cycle in 2011 We see 10% to 15% market returns in Singapore in 2011, underpinned by a strong currency, attractive-looking valuations and the persistence of negative real interest rates. Banks have started to stir from their undervalued positions, with OCBC re-rating strongly in 4Q10. We think this momentum will continue, underpinned by regional growth and steady NIMs in 2011. We are positive about upstream commodity plays like Golden Agri and Indofood Agri on rising CPO prices. With an improving oil price outlook and start of a new rig upgrading cycle for the offshore sector, we believe Keppel and SembMarine will likely re-rate positively in 2011. The upswing in the office asset cycle will support a further re-rating in the office plays. We remain positive on CCT, K-REIT and Suntec.

Favourable liquidity conditions to support market in 1H2011

Bullish on Banks and Upstream commodity plays

Offshore marine to see upswing in rig upgrading/build cycle

Stick with office, policy overhang on residential

Themes: M&A, ASEAN and favourable policies

TOP DOWN

Stocks for action We are positive on sectors that benefit

from reflation and higher commodity

prices. These include banks,

commodities, offshore marine and

commercial property.

Stock RatingPrice (S$)1 Dec 10

Price target

OCBC (OCBC SP) BUY 9.99 11.80

DBS (DBS SP) BUY 14.02 16.00

K-REIT (KREIT SP) BUY 1.38 1.62

CCT (CCT SP) BUY 1.50 1.68

Golden Agri (GGR SP) BUY 0.74 0.85

IndoAgri (IFAR SP) BUY 2.73 3.20

Noble (NOBL SP) BUY 2.08 2.52

Keppel (KEP SP) BUY 10.96 13.10

SembMarine (SMM SP) BUY 4.88 6.03

Biosensors (BIG SP) BUY 1.21 1.50

Fraser & Neave (FNN SP) BUY 6.21 7.24

Venture Corp (VMS SP) BUY 9.02 11.50

Pricing as at 1 Dec 2010

Analyst Jit Soon Lim, CFA

+65 6433 6969

[email protected]


Don’t miss our companion outlook reports on Asia and Malaysia,

published on 6 December 2010.

6 December 2010 Nomura 1

Strategy | S I N G A P O R E

2011 Outlook Jit Soon Lim, CFA +65 6433 6969 [email protected]


Action We see 10 to 15% market returns in Singapore in 2011, underpinned by attractive

valuations, favourable liquidity conditions and a strong S$. Macro and industry drivers underpin our positive stance towards banks (attractive valuations), commodities (food inflation), offshore marine (capex cycle) and commercial property (cyclical upswing).

Anchor themes A strong currency, reasonable valuations and available policy flexibility (strong fiscal position) support Singapore’s market outlook in 2011. Moderation in exports due to a stronger S$ is consistent with our view of slower but more sustainable GDP growth going into 2011.

Greater cooperation within ASEAN to improve trade and FDI across ASEAN, while better Singapore-Malaysia relations could accelerate cross-border investments.

Riding the reflation cycle in 2011 Favorable liquidity conditions to support market in 1H2011

As one of the few countries in Asia unlikely to impose capital controls, the Singapore market is poised to benefit from the easier global liquidity environment in 2011 against the backdrop of what look to be attractive valuations (14x PE, 11% market EPS growth and dividend yield of 3%).

Bullish Banks and Upstream commodity plays

Banks have started to stir from their undervalued positions, with OCBC rerating strongly in 4Q2010. We think this momentum will continue, underpinned by regional growth and steady NIMs in 2011. We are positive about upstream commodity plays like Golden Agri and Indofood Agri on rising CPO prices. We like Noble for its upstream coal assets and increasing contribution from its midstream investments.

Offshore marine to see upswing in rig upgrading/build cycle

With an improving oil price outlook (US$95/barrel forecast for 2011) and start of a new rig upgrading cycle for the offshore sector (regulatory driven), we believe Keppel and Semb Marine will likely re-rate positively in 2011.

Stick with Office, policy overhang on Residential

The upswing in the office asset cycle will support further rerating in the office plays. We remain positive on CCT, K-REIT and Suntec. Potential policy risks for the residential sector will undermine share price performance of the developers.

Themes: M&A, ASEAN and favourable policies

Easy credit conditions will encourage M&A/restructuring activity while broader ASEAN cooperation will likely spur cross border investments. Singapore’s strong fiscal situation suggests more investments to entrench Singapore’s long term competitiveness.

N O M U R A S I N G A P O R E L I M I T E D

Stocks for action We are positive on sectors that benefit from reflation and higher commodity prices. These include banks, commodities, offshore marine and commercial property.

Stock RatingPrice (S$)1 Dec 10

Price target

OCBC (OCBC SP) BUY 9.99 11.80

DBS (DBS SP) BUY 14.02 16.00

K – REIT (KREIT SP) BUY 1.38 1.62

CCT (CCT SP) BUY 1.50 1.68

Golden Agri (GGR SP) BUY 0.74 0.85





Biosensors (BIG SP) BUY 1.21 1.50

Fraser & Neave (FNN SP) BUY 6.21 7.24

Venture Corp (VMS SP) BUY 9.02 11.50


TOPDOWN

Analyst Jit Soon Lim, CFA

+65 6433 6969

[email protected]


Strategy | Singapore Jit Soon Lim, CFA


Contents

Riding the reflation cycle 3 Themes in 2011 4 Sector strategy 5 Economic forecasts 8 Earnings Outlook and Valuation 9 Valuation 10 Risks 11 Themes and issues for 2011 12

Sector Banks 18

Soft commodities/agri 21

Real Estate Investment Trusts 23

Residential property 25

Capital goods/O&M 27

Airlines 29

Shipping 32

Telecommunications 34

Also see our Anchor Report: Malaysia Strategy — The rally is still young (6 December, 2010)

Also see our Anchor Report: Asia Pacific Strategy — Deflation, inflation and the return of the productive economy (6 December, 2010)

http://www.nomura.com/research/GetPub.aspx?spid=7226

http://www.nomura.com/research/GetPub.aspx?spid=7229



Singapore strategy

Riding the reflation cycle While we have a constructive view of Singapore in 2011, a tug of war between key macro factors will likely create some degree of volatility in 2011. Global reflationary efforts and currency appreciation will provide the impetus for the Singapore market to rerate higher, but the spectre of protectionism and over-extended global bond markets may dampen sentiment as the year progresses.

As a financial centre, Singapore is unlikely to impose capital controls on capital inflows driven by its economic performance relative to other developed countries or as a consequence of surplus liquidity generated from the developed countries. Singapore’s exchange-rate-based monetary policy has the unintended consequence of keeping interest rates in Singapore low against the backdrop of rising inflation. The persistence of negative real interest rates in Singapore will support asset prices. At the firm level, low interest rates will also encourage companies to look at M&A/corporate restructuring more favourably. In addition to market returns, currency gain will provide another source of return to USD based investors. We expect the S$ to appreciate by 5% versus the USD in 2011.

Exhibit 1. Singapore market – total returns

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Source: Bloomberg, Nomura research

Exhibit 2. Real interest rates vs. PPI/STI

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Source: CEIC, Nomura research (PPI/STI rebased to 1Q05)

2011 will see Singapore’s GDP growth slow sharply to 5.3% from 15.5% in 2010. This slower growth is in line with the government’s focus on long term sustainable growth underpinned by productivity. With output now above “potential” (or trend) levels, monetary and fiscal policies have shifted to moderating inflationary expectations. The services sector, which is less dependent on global growth, will be a key driver of growth in 2011. In spite of the slower growth, we believe the labour market will tighten further, reducing unemployment to below 2%. Policy makers will have to contend with the following macro issues in 2011:

The impact of negative real interest rates

The issue of Singapore’s competitiveness if the S$ appreciates too sharply

Wage pressures with the removal of jobs credits, higher worker levies and a tighter labour market.



Exhibit 3. FX: SGD vs. regional currencies

(8)(6)(4)(2)02468

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Source: Bloomberg (Rebased from 1 Jan 2010)

Exhibit 4. Productivity vs. wage growth

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Source: CEIC, Nomura research

Themes in 2011 We see four themes that may play out for the Singapore market in 2011:

Theme 1: Currency strength, low interest rates and policy responses

Against the backdrop of easy global liquidity conditions and in light of Singapore's currency stance, real interest rates are likely to remain negative, supporting the uptrend in asset prices.

In spite of three sets of administrative measures introduced since Sep 2009, the residential property market continues to remain firm. The government may therefore introduce more measures to cap residential prices from appreciating further.

One potential negative consequence of the S$’s strength is the potential loss of relative competitiveness for Singapore’s exports and translation losses from overseas earnings of Singapore companies. To maintain competitiveness, Singapore has relied on supply side policies, ie, through investments in infrastructure, education and training. With a strong fiscal surplus, the government is likely to continue its strategy to raise productivity levels through encouraging training.

Theme 2: General Elections

The government appears to be preparing the ground for a general election, going by recent press coverage. The government has indicated that the coming elections will be a “watershed election” as the ruling PAP will introduce the next batch of Singapore’s future leadership talent pool. Although there is unlikely to be any market impact from the general election, we believe the government could announce policies that could improve the welfare of Singaporeans and strengthen the social safety net.

Theme 3: M&A/restructuring

The M&A and restructuring theme is expected to continue into 2011 as companies look to bolt on new capabilities and geographies through acquisitions. Singapore companies have also become attractive targets: some examples being the takeover of Parkway by Khazanah and the strategic 14.7% stake in F&N by Kirin Holdings. Low interest rates may also encourage companies to become more active in M&A and restructuring.

Theme 4: Creating an ASEAN Economic community

ASEAN is committed to achieving the idea of a single market and production base by 2015. A key thrust behind the AEC is connectivity which will likely see increased infrastructure spending in ASEAN. Increased spending in infrastructure will create opportunities for companies in ASEAN to build and finance these infrastructure



projects. The recent improved relations between Singapore and Malaysia could provide the model for greater cooperation in cross border investments for the ASEAN member countries.

Sector strategy We believe reflation will be a key rerating driver in 2011 and therefore are bullish towards the banks, commodities and commodity related sectors and commercial property. The banks are seen as proxies for the market and may benefit from fund flows. The upstream and midstream commodity plays will likely benefit from the food inflation theme. The offshore sector will benefit from the higher oil price and the start of a new rig upgrading cycle. Commercial property will benefit from cyclical recovery but also the impact of continued low interest rates and liquidity flowing into the sector.

We are less positive on telcos, which we believe will underperform as risk appetite improves. We are also bearish on gaming given what look to be rich valuations.

Exhibit 5. Outperformers in 2010

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(%) REITsCapital goodsMediaTransportSTIGamingSTI


Exhibit 6. Underperformers in 2010

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Exhibit 7. Sector views – Nomura coverage

Sector Nomura sector view Stock picks (BUY)

Bullish

Banks/Financials Valuations for the Singapore banks are attractive, with price/book of 1.3x FY11F on ROE of 12% and attractive dividend yields. In addition, we expect earnings growth for the banks to average 14% in 2011. Banks are also seen as proxies to the market in a reflationary environment. OCBC and DBS are Anand’s preferred picks among the Singapore banks. OCBC has managed to chalk up strong loan growth momentum, while its unique wealth management/insurance franchise differentiates it from its peers. DBS is starting to show signs of focusing on its core franchises to drive growth and profitability. Improvements in its LDRs and impressive top management hires should put the group on the path to improving ROEs, we believe. Meanwhile, UOB appears to have underperformed its peers in loan growth, reflecting a conservative lending posture and perhaps more exposure to Thailand and a higher LDR in Indonesia and Malaysia.

OCBC, DBS

Commodities Ken Wong, our ASEAN plantations analyst, is positive on the upstream plays like Golden Agri and Indofood Agri on the back of our positive view on CPO. Tanuj Shori likes Noble for its upstream coal asset and strong earnings rebound in 2011 as its mid stream assets contribute more materially. His Buy on Olam reflects his positive view on its fertiliser investment in Gabon. While Tanuj likes Wilmar’s long term potential, short term price performance may be constrained

Golden Agri. Indofood Agri, Noble, Olam

Neutral

Property REITs: Tony Darwell is bullish on the recovery in the asset cycle for the office sector, as rents and capital values improve. He likes CCT, K-REIT and Suntec. He sees mispricing in the retail and industrial sectors, which remain exposed to a contraction in demand. Developers: Min Chow maintains a cautious view on developers given the recent policy measures and weakening fundamentals with rising vacancy and historically low yields. He is selectively positive on stocks with attractive valuation, especially UOL.

CCT, K-REIT, Suntec REIT.

Conglomerates

Lisa Lee is bullish on the recovery in capex spending for the Offshore and Marine sector in 2011 driven by the higher oil price and increased regulatory requirements in the GOM. She likes Keppel and SMM. The Petrobras contract is also a potential catalyst. Jitsoon likes F&N for its growing F&B business and potential alliances with new shareholder Kirin Holdings. The group could also look to restructure its F&B and property businesses.

Keppel, SMM , F&N

Transport Airlines. SIA is well positioned to benefit from the recovery in the aviation cycle as premium travel recovers. Jim Wong has a BUY on SIA and believes the momentum of improving premium traffic and lower fuel costs will underpin recovery. Land transport. As the government changes its public transport policies to increase usage of public transport, changes in the short term may affect profitability of the operators. Lisa Lee has NEUTRAL calls on both SMRT and Comfort Delgro. Shipping. Andrew Lee, our regional shipping analyst, has a NEUTRAL on NOL, as valuations have already priced in the rebound in rates while the outlook appears to be weakening in the face of new supply and slowing demand.

SIA

Bearish

Gaming Our gaming analyst Choong Wai Kee believes analysts have generally overestimated the potential of the gaming market in Singapore, as borne out by Genting Singapore’s 3Q results. He believes the stock is overvalued and maintains a REDUCE. Min Chow is negative on CDL H-REIT on valuation grounds, as the shares have priced in optimistic scenarios for occupancies and room rates.

Telco Sachin Gupta believes that while the sector offers stability of cashflow, strong balance sheets and potential for capital management there are few catalysts to help a re-rating. He has a Neutral on Singtel and maintains a Reduce on Starhub given the erosion in its core business. He also likes M1 for its dividend yield and as a potential M&A target.

M1

Source: Nomura research



Stock picks

In line with our reflation theme and sector views, we outline our top picks below for 2011.

Exhibit 8. Top picks for Singapore market

Price (S$) 1 Dec 10 Rating

Price target (S$)

P/E (x)FY11F

P/BV (x)FY11F

Yield (%)FY11F Nomura comment

Reflation

OCBC (OCBC SP)

9.99 BUY 11.80 12.5 1.5 3.4 Private banking platform will diversify earnings while capital ratios are strong. Relatively larger overseas platform compared with peers.

DBS (DBS SP)

14.02 BUY 16.00 10.9 1.2 5.1 Increasingly tangible traction in leveraging core franchise strength and building an execution base for regional growth initiatives should deliver substantial restructuring gains over the medium term.

Property related exposure

K-REIT (KREIT SP) 1.38 BUY 1.62 19.8 1.0 5.0 Play on prime grade A office space. Acquisition of 1/3 stake in MBFC 1 & 2 will be yield accretive and increase its exposure to international grade space to 70% of its valuation.

CCT (CCT SP)

1.50 BUY 1.68 21.4 1.0 4.7 CCT remains the dominant office landlord in Singapore in terms of International Grade A (IGA) office space, with 2.3mn sf, equal to 72% of its total office portfolio and 62.6% of its commercial portfolio.

Commodity and Energy related exposure

Golden Agri (GGR SP) 0.74 BUY 0.85 13.2 1.0 1.5 We believe that Golden Agri offers strong growth potential on the back of its strong mature hectarage increases in the coming years. GGR’s problems with environmentalists could start to wane as it starts to meet conditions by RSPO.

Indofood Agri (IFAR SP) 2.73 BUY 3.20 13.3 2.0 0 IndoAgri offers strong leverage to CPO price strength and higher growth from its large immature areas, with increasingly diversified exposure to its growing non-palm plantations like rubber and sugar.

Noble (NOBL SP) 2.08 BUY 2.52 14.2 2.4 1.2 Commodity price upcycle, along with strong performance in agri (oilseeds and sugar), energy (coal), and locked margins in FY11F should ensure a good FY11 for the company.

Keppel Corp (KEP SP)

10.96 BUY 13.10 15.8 2.5 3.4 Although O&M revenues appear to be peaking, infrastructure and property are providing some cushion. Optionality on Brazil contracts. Stock has also correlated well with oil price.

Sembcorp Marine (SMM SP)

4.88 BUY 6.03 16.3 3.7 3.1 Strong order momentum expected to continue, particularly from the production platform segment, following a series of jack-up orders announced recently. Optionality on Brazil contracts.

Situational and M&A

Biosensors* (BIG SP)

1.21 BUY 1.50 16.1 3.9 0 Strong growth for its stent sales in EU and Asia, continued growth in China and potential revenue share from Japan underpin prospects. Recent positive clinical trial data at TCT could provide impetus for new products. New shareholder Hony Capital could help enhance its China presence.

Fraser and Neave (FNN SP)

6.21 BUY 7.24 14.3 1.3 2.8 Strong F&B growth outlook with optionality on its property assets. Potential split of F&B and property may unlock value. New shareholder Kirin could help create new products for its F&B business.

Venture Corp (VMS SP)

9.02 BUY 11.50 13.5 1.3 5.5 Successfully restructured its business mix with less reliance on printing and imaging. Test and Measurement and Retail Systems solutions now provide greater balance. Strong cashflows, improving margins and strong dividend yield make Venture an attractive company, we believe.

* March FYE; FY12F estimates




Economic forecasts Yougesh Khatri / Euben Paracuelles

Although Q3 2010 GDP slowed to 10.6% y-o-y from 19.5% in Q2, this was higher than the advanced estimate of 10.3% y-o-y. On a sequential basis, this implies a contraction of 18.7% q-o-q, saar, following significant expansions of 45.6% and 27.3% in Q1 and Q2, respectively. The slowdown was driven by the manufacturing sector, reflecting a sharp correction in biomedical output. Services continued to perform relatively well, rising 10.1% y-o-y, from 11.7% in Q2. The government reiterated its 2010 growth forecast of 15%, which implies that Q4 growth will be stronger quarter-on-quarter, avoiding a technical recession (i.e. another quarterly drop).

We maintain our 2010 GDP growth forecast of 15.5%, particularly given the good start to Q4 (October exports and the manufacturing PMI were better than expected) and given government expectations that the biomedical sector will rebound through the rest of the year. Next year, the government expects growth to slow to 4-6%, in line with our 5.3% forecast. This slower growth is in line with the government’s focus on growth which is sustainable and underpinned by productivity growth.

The Monetary Authority of Singapore’s (MAS) decision to increase the slope and width of the SGD NEER band “slightly” reflects its concerns that price pressures are building given (1) high resource utilization levels; (2) a tight labour market; (3) a diminishing cyclical productivity boost; and (4) greater pass-through from commodity prices given buoyant domestic demand. Our output gap estimates suggest that demand-side pressures could push headline inflation beyond the 2-3% target in 2011. On this basis, the decision seems to us justified. CPI inflation eased to 3.5% y-o-y in October from 3.7% and underlying inflation eased to 2% from 2.3%. But headline CPI is poised to rebound to 4% by December, driven by housing and road transport components.

Risks: The main downside risk is a renewed slump in the global economy. The biomedical sector, which has grown rapidly and comprises about 25% of manufacturing value-added, is volatile and increases risks to both the upside and downside.

Exhibit 9. Details of the forecast

% y-y growth unless otherwise stated 1Q10 2Q10 3Q10 4Q10F 1Q11F 2Q11F 3Q11F 4Q11F 2010F 2011F 2012F

Real GDP [sa, % q-o-q, annualized] 45.6 27.3 (18.7) 18.1 (1.2) 28.2 (14.8) 14.1

Real GDP 16.9 19.5 10.6 15.5 4.8 5.0 6.2 5.3 15.5 5.3 5.8

Private consumption 6.2 7.3 5.2 5.0 6.0 5.2 5.0 5.0 5.9 5.3 5.1

Government consumption 13.1 4.9 7.5 7.5 5.0 7.0 5.0 5.0 8.8 5.4 6.5

Gross fixed capital formation 11.2 (1.4) 5.6 7.6 12.0 12.0 11.0 11.0 5.6 11.5 8.0

Exports (goods & services) 20.1 23.8 20.4 8.6 6.5 7.2 7.5 7.2 18.0 7.1 10.2

Imports (goods & services) 17.5 21.5 17.4 7.5 8.8 8.9 9.0 9.2 15.8 9.0 10.4

Contributions to GDP:

Domestic final sales 7.6 2.9 4.2 4.8 6.0 5.1 5.0 5.0 4.8 5.3 4.6

Inventories 1.5 4.6 (3.7) 5.4 1.8 1.1 1.8 1.9 1.9 1.6 (1.1)

Net trade (goods & services) 9.0 10.1 11.4 4.9 (3.0) (1.2) (0.6) (1.5) 8.8 (1.6) 2.3

Unemployment rate (sa, %) 2.2 2.2 2.1 1.7 1.7 1.7 1.7 1.7 2.1 1.7 1.7

Consumer prices index 0.9 3.1 3.4 3.8 3.1 2.8 2.5 2.7 2.8 2.8 2.6

Exports 38.3 36.6 27.5 11.7 13.2 11.6 9.2 15.4 27.4 12.3 15.3

Imports 35.3 33.8 22.5 14.7 21.1 17.4 20.7 15.1 25.7 18.5 15.6

Merchandise trade balance (US$bn) 7.1 9.3 11.8 6.5 2.4 5.9 3.6 7.8 34.7 19.7 21.9

Current account balance (% of GDP) 16.1 19.6 23.4 10.6 11.0 16.2 19.8 15.3 17.3 15.7 16.7

Fiscal Balance (% of GDP) 0.4 0.8 0.8

3 month SIBOR (%) 0.65 0.56 0.51 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40

Exchange rate (SGD/USD) 1.40 1.40 1.32 1.28 1.26 1.25 1.23 1.21 1.28 1.21 1.17

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table last revised 26 November 2010

Source: CEIC and Nomura Global Economics



Earnings Outlook and Valuation The market EPS growth trend for Singapore for FY2011 has been relatively steady through the recent reporting periods, with the market consensus EPS growth hovering around 11% for FY2011.

Exhibit 10. EPS growth trend

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Source: Bloomberg estimates, Nomura research

Exhibit 11. Earnings revision index

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Nomura’s market EPS forecast is similar to the market consensus for FY2011 at 12% (see exhibit below). The sectors which we forecast to show the strongest EPS growth are banks, commodities, healthcare, developers and aviation.

We forecast the banks to grow earnings by 15%, underpinned by loan growth from Singapore and the region, while interest margins remain steady.

The commodity stocks will benefit from higher CPO prices while the mid stream players will grow from a weaker base in 2010.

Although we expect the capital goods sector to see flat growth (mainly due to a drag from offshore names), we expect earnings to surprise on the upside as new order wins are announced in 2011.

The strong EPS growth at SIA reflects its recovery as load factors improve and yields progress on higher premium travellers.

Exhibit 12. Market valuation – Nomura coverage

P/E (x) EPS growth (%) P/BV (x) ROE (%) Div yield (%)

2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F

Banks 13.0 11.2 17.0 15.2 1.4 1.3 10.6 11.6 3.7 4.2

Capital Goods 15.4 15.9 (3.1) (1.9) 3.1 2.9 20.3 18.2 3.5 3.6

Commodities 17.9 13.5 (8.5) 30.1 3.1 2.7 17.2 20.0 1.2 1.4

Media 15.1 17.9 3.0 (15.7) 3.2 3.2 21.1 20.0 5.0 5.0

Healthcare 26.9 22.4 20.2 18.9 4.3 3.8 16.0 16.9 1.3 1.3

Gaming 30.3 30.7 nm (1.5) 3.8 3.3 4.6 12.9 0.0 0.0

Property - developers 18.7 17.0 17.9 23.9 1.3 1.3 7.1 7.4 1.7 1.6

Property – REITs 17.7 17.6 0.9 (0.2) 1.0 1.1 5.9 6.0 5.6 5.6

Technology 13.6 13.2 13.1 2.8 1.3 1.3 9.7 9.7 5.5 5.5

Telecom 13.4 13.1 (4.7) 2.4 2.4 2.3 17.5 17.6 4.9 5.1

Transport – land 15.3 15.2 3.1 (0.9) 2.3 2.2 15.1 14.2 4.1 4.0

Transport – air nm 12.9 400.0 32.4 1.4 1.3 8.1 10.5 2.9 3.6

Transport - shipping nm 27.7 nm 18.8 1.3 1.2 nm 8.1 1.9 1.0

Total market 15.7 13.7 6.7 12.3 1.8 1.7 11.2 12.1 3.8 3.5

Note: Genting Singapore, SIA are excluded from FY10F EPS growth due to low/negative base in 2009, but included in FY11F

Source: Nomura estimates



Valuation Relative to the ASEAN markets, the Singapore market has underperformed and is still about 15% below the 2007 peaks, while Indonesia, Malaysia and Thailand have breached their 2007 highs. In addition, the earnings of corporate Singapore for 2010 will have exceeded the levels seen in 2007.

Exhibit 13. Performance of ASEAN vs. HK & MSCI AeJ (Oct 2007 – present)

(80)

(60)

(40)

(20)

0

20

40

60

80

Oct

-07

Nov

-07

Jan-

08

Mar

-08

Apr

-08

Jun-

08

Aug

-08

Sep

-08

Nov

-08

Jan-

09

Mar

-09

Apr

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Jun-

09

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Sep

-09

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Jan-

10

Mar

-10

Apr

-10

Jun-

10

Aug

-10

Sep

-10

Nov

-10

(%)STI KLCI SET

JCI HSI MSCI AeJ

Source: Bloomberg

Even after the 10% progress in the market in 2010, valuation of the Singapore market is not over extended, in our view, with the PE at 14x on EPS growth of 11%, slightly below long term averages. This compares with the more than 1 std deviation that the other ASEAN markets are trading relative to their own histories. Its forward P/BV of 1.6x is also slightly below the long term average of 1.7x and below the Asia average of 2.0x. Part of the reason why the Singapore market continues to trade at or near its long term average is that the banking sector had underperformed in 2010 and provided a drag on valuations.

Exhibit 14. Singapore market – 12-mth fwd P/E

0

5

10

15

20

25

30

Jan-

97

Jan-

98

Jan-

99

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00

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04

Jan-

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Jan-

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Jan-

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10

12mth fwd P/E(x) +1 stdev

Mean -1 stdev

12.0x

15.1x

18.2x


Exhibit 15. Singapore market – trailing P/BV

0.0

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97

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99

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P/B - 1 stdev

Mean +1 stdev

2.1x

1.7x

1.3x




Exhibit 16. Dividend yield vs 1 year deposit rate

0

1

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3

4

5

6

7

8

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l-01

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Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

(%)12-mth fwd Div Yield

12-mth deposit rate


Exhibit 17. Singapore market – ROE

02468

101214161820

Jan-

97

Jan-

98

Jan-

99

Jan-

00

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Jan-

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(%) ROE


Relative to the region, Singapore is at the mid range in terms of P/E, and at the lower end in

terms of price book. However, earnings growth at 10-11% lags the regional average of 15%.

Exhibit 18. Regional consensus valuation

P/E (x) P/BV (x) EPS growth (%) Dividend yield (%) ROE (%)

Country Index universe FY10F FY11F FY10F FY11F FY10F FY11F FY10F FY11F FY10F FY11F

Australia AOI 14.6 12.4 1.9 1.8 22.4 17.6 4.2 4.5 12.8 14.3

China CSI 300 14.9 12.7 2.3 2.0 33.2 18.2 2.1 2.6 16.4 17.2

Hong Kong HSI 14.2 12.3 1.9 1.7 27.5 15.5 3.1 3.4 13.8 14.8

India SENSEX 18.0 15.3 3.1 2.6 15.7 17.8 1.3 1.5 17.9 17.9

Indonesia JCI 18.3 15.0 3.6 3.1 32.6 21.6 2.0 2.6 21.6 22.8

Korea KOSPI 11.3 9.8 1.4 1.3 48.0 15.3 1.8 2.3 13.7 14.0

Malaysia KLCI 16.9 14.9 2.4 2.1 36.6 13.5 3.2 3.5 13.8 14.2

Philippines PASHR 16.1 14.5 2.3 2.2 29.6 11.3 2.6 3.0 15.1 15.5

Singapore FSTAS 15.3 13.8 1.8 1.6 29.2 10.3 2.7 2.9 10.7 11.0

Taiwan TWSE 14.2 12.6 1.9 1.8 67.4 11.1 4.0 4.5 13.8 14.3

Thailand SET 14.2 12.1 2.1 1.9 31.4 16.6 3.4 3.8 15.2 16.2

Source: Bloomberg, Thomson Reuters Datastream, IBES, Nomura International (Hong Kong) Limited – Quantitative research

Risks Asset allocation shifts away from Singapore towards the North Asian markets may undermine Singapore’s performance.

A strong S$ relative to its Asian neighbours will likely have a moderating effect on Singapore’s exports and economy. However if the S$ appreciates too sharply, it may see significant loss of competitiveness and impact the export sector more materially.

Wage pressures from full employment and cost increases from the removal of jobs credit and higher worker levies may impact corporate profits.

With demand for property starting to recover post the August 2010 measures, one risk to the market is the possibility of more property measures in 2011.



Themes and issues for 2011

Theme 1: Currency strength, low interest rates and policy responses

The government has adopted an appreciating S$ policy to manage inflation and moderate growth amidst an environment of easy global liquidity and inflation. Two possible issues could emerge:

1) Competitiveness: One negative consequence of currency strength is the potential loss of relative competitiveness for Singapore’s exports. The government is less worried about cyclical factors and is more concerned with long term competitiveness. In this regard the government is likely to continue focusing on supply side policies ie through investments in infrastructure, education and training to raise productivity growth.

Singapore companies with significant revenues denominated in USD could see adverse translation effects from a stronger S$. On the other hand, those who buy inputs in USD but sell domestically could see better margins. The impact of a strong S$ is summarised below.

Exhibit 19. Impact of stronger S$ vs US$ on Singapore companies

Net profit

% of earnings in US$ in 2011F % impact on net profit if S$ strengthens by 10% vs USD in 2011

DBS 20% of earnings are from its Hong Kong subsidiary S$2,932mn -2%

Olam International 90-95% S$336mn -0.4%

Wilmar International 50% (Accounts are denominated in US$) US$2195mn -0.6%

SPH Newsprint in US$ and forms about 18% of total costs

S$308.4mn +3%

Keppel Corp Offshore and Marine contracts are in US$ and account for 60% of earnings.

S$1113mn As materials and equipment for its offshore and marine contracts are in US$, there is a natural hedge. These account for about 70-75% of total costs.

SembCorp Ind Exposure to US$ mainly at SMM level. The bulk of utilities are in S$, UK sterling and other currencies.

S$621.6mn ~ exposure to US$ is mainly at SMM level. The bulk of utilities are in S$, UK sterling and other currencies.

ST Engineering Exposure to US$ from its US facilities in aerospace and marine divisions

S$571.4mn Every +/- US$1ct move will have +/-S$1.3mn impact on net profit

SembCorp Marine While the bulk of SMM's rig building and conversion orders are in US$, also depends on country of origin of the customer

S$569.6mn Materials and equipment for its offshore contracts are in US$, providing a natural hedge. These account for 70-75% of total costs. The remainder is hedged and the impact depends on the hedging position

City Developments 15 S$675mn -2%

Keppel Land 15 S$381.8mn -2%

Biosensors USD functional ccy US$62mn -4%

Venture Corp >95% sales in US$ offset by 90% COGS in US$ S$187.4mn 10% USD depreciation to SGD will result in a 0.8~1pp shrink in GMs. Net operating profit will shrink by 25~30% (all else maintained)

SIA -247% $1,259mn +12%

SATS 5%-10% (More than 70% in SG$ and the rest mainly in US$, HK$ and Euros)

S$208mn -0.3%


2) Negative real interest rates: Against the backdrop of easy global liquidity conditions and in the light of Singapore's currency stance, real interest rates are likely to remain negative, supporting the uptrend in asset prices, especially residential property. In spite of three sets of administrative measures introduced since Sep 2009, sentiment in the residential property market has recovered, with volumes increasing from the pullback in buying demand immediately following the August 30 measures.

In tandem with recent additional measures introduced in Hong Kong and China, our residential property analyst Sai Min Chow opines that the Singapore government could impose further measures to cool the residential property market. (See Buckets of Cold Water Ready to Pour dated 24 November 2010). He summarises potential measures below.



Exhibit 20. Potential measures that the government can introduce

Potential measures Objectives and intent Likelihood

Holding Period Tax (HPT) - imposition of tax on gains from property sales within three years of purchase.

To discourage short-term speculative activities This was part of 1996's anti-speculation measures, together with the sellers' stamp duty. With the latter already resurrected last September, it would not be a surprise to see the re-introduction of the HPT.

Further lowering of the maximum LTV for second mortgages onwards - from the current 70% to say 60%. A higher cash down-payment (from the current 10%) may also be required.

This helps to emphasise the importance for financial institutions to maintain credit standards and will encourage greater financial prudence among home buyers.

SG has never had an LTV cap lower than 80% before 30 August 2010 so an LTV cap of 60% is drastic from a historical perspective. In the recent measures announced on 19 Nov, the HK govt set the LTV cap for property purchases >HK$8mn at 60%, and for purchases >HK$12mn as well as non self use and commercial/company-owned properties the LTV cap is set at 50%.

More stringent Debt Servicing Ratio (DSR) criteria when assessing mortgage applications. Currently a benchmark of about 40% of household income is used and this could be lowered to say 30%. A hypothetical rate hike of say 200bps may also be required in calculating the DSR.

This helps to encourage greater financial prudence (in both the lending institutions and home buyers) by adopting more stringent credit standards.

The removal of interest absorption schemes and interest-only mortgages last Sep set the precedence for the govt's interference on banks' lending practices but the govt may be reluctant to further interfere with banks' lending practices at this point. The HKMA has adopted similar guidelines in the measures announced on 13 August.

An interest margin floor (of say, 150bps) for home loans.

This helps to prevent unsustainably low interest pricing from encouraging property speculation.

The govt is probably reluctant to interfere with banks' pricing of loans at this point. As a comparison, the HKMA set guidelines that mortgage pricing in HK should not be lower than HIBOR plus 70bps and/or Prime minus 310bps, which came into effect in May.


Min Chow highlights that the triggers that could result in the government imposing more measures are continued strong sales and a continued rise in property prices. Recent launches like Lakefront Residences and Spottiswoode Residences have set benchmark prices in their respective areas which could result in a sequentially faster growth (say, 3%) in the 4Q10 URA PPI reading.

Exhibit 21. Pre-sales (incl. EC): rebounded 74% in October

0.0

600.0

1,200.0

1,800.0

2,400.0

3,000.0

Jan‐95

Nov

‐95

Sep‐96

Jul‐9

7

May‐98

Mar‐99

Jan‐00

Nov

‐00

Sep‐01

Jul‐0

2

May‐03

Mar‐04

Jan‐05

Nov

‐05

Sep‐06

Jul‐0

7

May‐08

Mar‐09

Jan‐10

Pre‐sale volume (units) Historical mthly avg

Note: Data prior to June 2007 based on caveats lodged

Source: URA, Nomura research

The commercial office market, which is free of administrative policy measures, could benefit due to a diversion of liquidity flows from the residential property market.



Theme 3: M&A/restructuring

We explored in our note dated 5 August 2010 (Singapore Strategy: Follow the Money), the M&A / restructuring possibilities in Singapore. We expect this theme to continue in 2011 as companies, sovereign wealth funds and private equity funds compete to acquire attractive companies and franchises in Singapore and the region, especially in the current low interest rate environment. Recent examples include Khazanah’s acquisition of Parkway and Kirin’s strategic investment in Fraser and Neave.

Exhibit 22. Notable M&A activity in Singapore in 2010

Fund/Investor Target Description

Khazanah Parkway Holdings US$2.4bn takeover of company

Peter Lim Thomson Medical Takeover values Thomson at S$513mn

Kirin Holdings 14.7% stake in Fraser and Neave Acquired Temasek’s 14.7% stake for S$984mn

Hony Capital 29.5% stake in Biosensors Acquired stake at S$0.88 share. Hony is a leading Chinese PE fund Source: Company data, Nomura research

Meanwhile Singapore companies have also been embarking on M&A to expand their geographies or capabilities/product lines. These include Ezra’s acquisition of Aker Marine for US$250m, F&N’s acquisition of a 23% stake in Cocoaland and the Singapore Exchange’s proposed acquisition of ASX.

Exhibit 23. M&A by Singapore companies in 2010

Fund/Investor Target Description

Fraser and Neave

23% of Cocoaland for Rm54mn

Cocoaland is based in Malaysia and is involved in confectionary and snacks

100% of Kings Cremeries for S$21mn Acquired from National Foods

Ezra

100% of Aker Marine for US$250mn via US$50mncash and Ezra shares

AM is a leading global subsea services player

Wilmar 100% of Sucrogen for US$1.7bn Acquired from CSR and will enable WIlmar to enter the sugar business. Pending approval from New Zealand

Acquired 91% of Kulim’s oleochemical business for US$140mn

SGX

Proposed acquisition of ASX for A$8.4bn

Merger would combine the capabilities of ASX and SGX to compete in the Asian time zone

Olam

Acquired almond orchards for US$262mn and Gilroy Foods for US$250mn

Building upstream assets to improve overall group margins

SATS

Proposed acquisition of the in flight catering business of JAL

Details are pending

Source: Company data, Nomura research

We outline below the potential M&A and restructuring possibilities in Singapore in 2011:



Exhibit 24. Possible corporate actions in Singapore

Company Possible corporate actions

M&A Action

M1 Potential takeover target. Smallest telco but could benefit from NBN. Keppel and SPH together own 33.9% while Axiata owns 29%.

UIC Owns prime commercial properties in Singapore. The Wee and Gokongwei families own 49% and 35% respectively of UIC and both had in the past attempted to make general offers for UIC.

Kim Eng Holdings Retail broker with a regional presence. MUFJ and Yuanta both own about 29% of the company.

Venture Corp Well managed contract manufacturer with strong balance sheet and cash-flows. Potential takeover target or buyout from management or PE funds.

Corporate Actions

F&N Possible divestment of Times Publishing and other non-core assets including stakes in Vinamilk, Fung Choi Media and China Dairy. Separation of its property and F&B activities, See report: Sweet Spot, 4 Mar 2010)

SCI Possible sale of its 24% stake in Gallant Ventures.

Biosensors Potential restructuring of its JV in China.

UOL Potential unlocking of value as it redevelops its older properties or if it restructures UIC/Singaporeland.

Singtel 20% stake in Singapore Post is a non-core investment which could be divested. Sing Tel could relist Optus to unlock value

SIA Could sell its 49% stake in Virgin Atlantic, which has been written down to S$93m

DBS Targeting M&A in the region, eg, Malaysia and Indonesia (see report: Who dares wins, 30 Apr 201

Potential Temasek Selldown*

SCI Temasek could trim shareholding from current 49% to below 40%

SMRT Temasek could reduce to below 50% from current 54%

Starhub Temasek owns 56%, 49% via ST Telemedia and 7% by Mediacorp. ST or Mediacorp could sell down.

SATS Temasek could trim its current 44% stake.

Sing Tel Temasek could trim its current 56% stake

* For Temasek-related IPOs and potential sell-downs, see report: Temasek’s New Direction, 2 June 2009

Source: Company data, Reuters, Business Times, Bloomberg, Nomura research

With the upturn in financial markets, there has been increased fund raising activity including the listing of Global Logistics, one of the larger IPOs in 2010. The IPO pipelines in 2011 and beyond are captured below.

Exhibit 25. Recent and potential listings in Singapore

Company Corporate Actions

Recent IPOs

Mapletree Industrial Industrial property arm of Mapletree group

Global Logistics Warehouse and logistics operator in China and Japan

STX OV Norwegian based ship builder listed in Singapore

Mewah Refiner of CPO with downstream franchise in Africa

Amtek Component manufacturer for the electronics industry

Potential IPOs*

Mapletree Commercial REIT Listing of Vivocity and other commercial assets

Fortis Healthcare Potential secondary listing in Singapore

Pacific Internet Looking to list in any major markets including Singapore

Sri Trang Agro-Industry Thailand’s largest rubber maker seeking dual listing in Singapore by 1H11

Park Hotel Group Potential hospitality REIT IPO in 2H11

New Century Shipbuilding May revive previously cancelled IPO

STX Dalian China shipbuilding unit of STX group looking to list either in Hong Kong or Singapore

Changi Airport Listing of Changi Airport (pending injection from Ministry of Finance )

PSA International Listing of Singapore’s port operator

Petro Vietnam Finance Arm of state owned oil company Petrovietnam

DLF Reit Postponed due to global banking crises

Unitech Reit Postponed due to global banking crises

* For Temasek-related IPOs and potential sell-downs, see report: Temasek’s New Direction, 2 June 2009




Theme 4: ASEAN Economic Community

Although the deadline for the formation of an ASEAN Economic Community (AEC) by 2015 is 5 years away, this is an ambitious target having being brought forward from the original date of 2020. Through the AEC, ASEAN hopes to achieve a single market and production base or an economic bloc where there is a free flow of goods, services, investments, capital and skilled labor.

The AEC will strengthen ASEAN’s competitiveness through greater economies of scale and efficiency. Academics have estimated that ASEAN economic welfare should rise by 5.3% or US$69billion. (See Realising the ASEAN Economic Community, edited by Michael Plummer and Chia Siow Yue). In terms of executing and setting the milestones to achieve the AEC by 2015, twelve priority sectors have been identified for rapid liberalization, ie, wood based products, automotives, rubber based products, textiles and apparels, electronics, agro based products, fisheries, e-ASEAN, healthcare, air travel, tourism and logistics.

Even as ASEAN seeks to achieve its economic bloc, the central thrust behind the initiative is connectivity. Indeed in the recent ASEAN Ministerial Summit in Hanoi in November 2010, the ASEAN Heads of State unveiled a Master plan on connectivity which will focus on transport, information communication technology, energy and cross border linkages and movement of people, goods and services.

Subsequently the ASEAN Multilateral Agreement on Full Liberalisation of Passenger Air Services, extending unlimited air traffic rights to all cities with international airports in ASEAN with full third, fourth and fifth freedom rights, was signed.

We believe that these initiatives will encourage increased infrastructure spending in the ASEAN region. At the country level, the ASEAN countries are already committed to spending on infrastructure to stimulate long term economic growth.

For example Malaysia has announced a long term economic plan to transform the country and this would entail infrastructure spending totalling RM58b over 2011 to 2015. In Jakarta, the government has increased the allocation of infrastructure development (ie, budget allocated to the Ministry of Public Works) from 4.6% in 2010 to 6.9% in 2011, representing a 57% y-y increase to Rp56.5tn.

Exhibit 26. Proposed infrastructure spend in ASEAN

Country Infrastructure spending

Indonesia Indonesia government targets over Rp1.4trn (~US$150bn) of infrastructure investments through 2014, 2/3 of which to be raised through the private sector.

Malaysia Under the 10th Malaysia Plan (2011~2015), the Malaysia government is allocating about RM58.4bn (~US$19bn) for various infrastructure projects, including MRT in Greater KL and various PPPs.

Thailand Under the Thai Khem Khaeng 2555 (Strong Thailand 2012) fiscal stimulus program, the government aims to spend a total of Bt1.4trn (~US$43bn) and focuses on infrastructure projects and investments in agriculture, education and health.

Philippines Under the Comprehensive and Integrated Infrastructure Program (CIIP), the Philippine government aims for Php3,326bn (~US$76bn) of infrastructure spending over 2009~16, of which Php400bn is expected to come from PPP.


Cooperation between Singapore and Malaysia a possible model for ASEAN

Since the land swap deal was signed in June 2010, progress on the resolution of the lands has been relatively fast with the announcement of the award of 6 parcels of land to a 60:40 joint venture between Khazanah and Temasek. Plans for the relocation of the current railway station at Tanjung Pagar to Woodlands are on target with the shift expected to complete by mid 2011. Meanwhile the 50:50 joint venture between Khazanah and Temasek to develop a wellness township in the Iskandar development region is progressing.

The key between the improved relations between Singapore and Malaysia is greater connectivity and increased cross border investments. While a rail link between Singapore and Tanjung Puteri (east of Johor Baru) will take some time (estimated to



be 2018), plans to improve connectivity have started with doubling of scheduled bus services between the two countries and the introduction of eight new routes between the 2 countries. In addition toll charges for the second link have already been cut by 30%.

Greater connectivity between Singapore and Johor could kick start increased investments into the Iskandar development region, where Malaysia has been promoting investments in manufacturing, tourism, education and healthcare.

Exhibit 27. Potential beneficiaries of increased cross border investments

Company Impact

Parkway Building wellness township in Iskandar

Comfort/SMRT Increased connectivity could mean higher usage of trains and buses

SP Setia Owns land in Iskandar area

UEM Land Largest developer in the Iskandar region


Theme 5: General Election

The last election was held in May 2006 and the current government’s term ends in February 2012. In the last election, the PAP secured 66.6% of the votes and won 82 of the 84 Parliamentary seats contested. The PAP appears to be preparing the ground for an election in 2011.

Exhibit 28. Past elections in Singapore

Year Polling Day New Parliament convention % Vote*

1984 22-Dec-84 25-Feb-85 64.8

1988 3-Sep-88 9-Jan-89 63.2

1991 31-Aug-91 6-Jan-91 61.0

1997 2-Jan-97 26-May-97 65.0

2001 3-Nov-01 25-Mar-02 75.0

2006 6-May-06 2-Nov-06 66.6

Source: Singapore Elections website * percentage of votes secured by the PAP

Recent rhetoric by the government suggests that the government is focused on spreading the “fruits of economic growth” to all Singaporeans and addressing the issue of the widening income gap. The PAP government also believes that this will be a “watershed” election as it will introduce a new batch of talent for the future leadership of the country.

The key issues that the government may need to address in the elections:

Narrowing the income gap and increasing the social safety net for Singaporeans

Singaporeans’ concerns about foreign talent encroaching the opportunities available to Singaporeans

Liberalizing the political arena given the aspirations for the younger population for greater political expression.

Making public housing available and affordable in the light of the strong property market and improving the quality of public housing

Addressing concerns about the impact of the Integrated resorts on Singaporeans

The market’s reaction to announcements of past elections has been mixed. In the 2006 elections, the market edged up slightly but there is no clear trend in other election episodes.

Strategy | Singapore Anand Pathmakanthan, CFA


Banks

Action Margin weakness will, barring an unexpected S$ interest rate rebound, continue to

be a key drag over FY11. With balance sheet strength not in question, breaking out of FY10’s sharp underperformance vis-a-vis regional peers requires mitigating loan and fee income growth, with margin-supportive offshore asset growth and tapping cross-platform synergies a priority. OCBC is structurally best positioned to deliver.

Catalysts Sustainable, broadening loan and fee income growth momentum, margin stability

and delivery on restructuring and synergy targets are sought-after FY11 catalysts.

Anchor themes

Facing a prolonged period of S$ interest rate weakness, Sing banks need to work around the resulting margin drag by generating more loan and fee income volumes, while maintaining operating and credit cost discipline. An increasing premium will be attached to ability to expand offshore franchises and cross-sell fee products.

Working around sustained margin drag 2010: margin decline casts a pall over strong earnings recovery

Sing banks are on track to deliver 20-25% earnings growth in FY10F but, as underscored by deep share price underperformance vs. regional peers, investors are ignoring the one-off earnings bounce from normalising loan loss provisioning and instead focusing on weak operating income traction, the latter underpinned by seven straight quarters of net interest margin (NIM) falls as interbank rates have plummeted. Also unrewarded are robust balance sheets and full BASEL III compliance (i.e. core equity ratios would be c.10% even if immediately adopted).

2011: driving loan volumes, fee income the priority

With S$ interest rates unlikely to budge until at least 2012 and provisioning levels normalising in the 10-40bps range (FY09: 50-115bps), forecast sector FY11F average earnings growth of 13% depends on sustained recovery in loan and fee income volumes. Capacity to aggressively grow higher-margin offshore assets, drive NIM-supportive balance sheet trends e.g. rising CASA deposit share, LDR, and leverage cross-selling synergies from a broader product base will be keys to mitigating anticipated sustained NIM drag from broadly pressured asset yields.

Risks: competition, mortgage dependence flagged

With liquidity ample, economic growth solid and BASEL III proving much less of a hindrance to growth than initially anticipated, competitive pressures will continue to intensify, posing headwinds to volume growth and NIM. Further, noting more than 80% of S$ loan growth since Jan 09 has come from mortgages, additional cross-ASEAN government administrative measures to cool property markets will weigh on loan growth, especially if SME and corporate demand does not pick up.

Stock selection: OCBC as core holding; DBS for beta

We expect OCBC to continue to build on relative outperformance in the wake of robust 3Q10 results as it sidesteps NIM pressure via a growth-supportive ASEAN operating footprint and synergy-rich multi-product wealth management platform. DBS is showing increasingly tangible traction in leveraging its core S$ deposit base advantage but interest rates remain a key earnings driver – we estimate every 100bps change in SIBOR will impact earnings by c.12%. We believe UOB will continue to lag peers given conservative outlook and narrow product platform.

Analysts Anand Pathmakanthan, CFA

+65 6433 6986

[email protected]

Manjith Nair (Associate)

Stocks for action Recommended core holding OCBC has the best balance of growth and quality; DBS is showing increasingly tangible restructuring traction but execution risk is an overhang; UOB is having trouble delivering growth, endangering sector ROE leadership.

BULLISH

Stock Rating PricePrice

target

DBS Group Holdings (DBS SP)

BUY 14.02 16.00

Overseas Chinese Banking Corporation (OCBC SP)

BUY 9.99 11.80

UOB (UOB SP) NEUTRAL 18.50 21.30

Share pricea as at 1st December 2010



Exhibit 29. Sing: segmental loan growth

(20)

(10)

0

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30

40

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60

Jan-

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pr-1

0Ju

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Manufacturing

Building & ConstructionHousing & bridging loansTotal Loans

(% y-y)

Source: URA, Nomura Research

Exhibit 30. Sing banks: loan growth performance

(5)

0

5

10

15

20

25

4Q09 1Q10 2Q10 3Q10 FY09 1Q10 2Q10 3Q10

Q-Q growth YTD growth

DBS OCBC* UOB(%)


Exhibit 31. Sing banks: margin trend vs. SIBOR

0.4389

1.71.81.92.02.12.22.32.42.52.6

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

1-D

ec-

2010

(NIM %)

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1.5

2.0

2.5

3.0

3.5

(%)SGD SIBOR 3 month Q Avg (RHS)DBS (LHS)OCBC (LHS)UOB (LHS)


Exhibit 32. Sing banks: CASA deposit share trend

25

35

45

55

65

75

85

95

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

DBS S$ deposits DBS total

OCBC total UOB total

(%)


Exhibit 33. Sing banks: credit cost as % of loans

0.0

0.4

0.8

1.2

1.6

2.0

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

DBS OCBC UOB

(%)


Exhibit 34. Sing banks: capital ratios

(S$bn) DBS OCBC UOB (as at 3Q10) (as at 3Q10) (as at 3Q10) Core equity 20.83 12.26 13.41Other capital instruments (prefs, inno)

3.73 3.96 2.15

Eligible Tier 1 capital 24.55 16.22 15.56 Eligible Tier 2 capital 5.93 0.40 4.98

TOTAL ELIGIBLE CAPITAL 30.48 16.62 20.54 Risk-weighted assets: 186.8 106.7 103.3 Ratios (%) Core equity Tier 1 11.1 11.5 13.0Total Tier 1 13.1 15.2 15.1Total CAR 16.3 15.6 19.9 Goodwill (S$bn): 4.80 4.04 4.219 Note: in all cases, goodwill is deducted when calculating Eligible Tier 1




Exhibit 35. Singapore banks — valuation summary

P/E (x) P/BV (x) Yield (%) RoA (%) ROE (%) EPS growth (%)

Company Ticker Nomura

ratingMarket cap

($mn) Price

(local) FY10F FY11F FY10F FY11F FY10F FY11F FY10F FY11F FY10F FY11F FY10F FY11F

DBS Group Holdings DBS SP Buy 24,619 14.02 13.4 11.0 1.2 1.2 4.3 5.1 0.52 1.05 5.4 11.1 16.7 21.9

Overseas Chinese Banking Corporation

OCBC SP Buy25,390 9.99 14.1 12.5 1.6 1.5 3.0 3.4 1.13 1.15 11.9 12.4 18.3 12.7

United Overseas Bank UOB SP Neutral 21,955 18.50 12.3 11.0 1.4 1.3 4.3 4.9 1.24 1.25 12.2 12.4 19.0 12.0

Average 13.3 11.5 1.4 1.3 3.9 4.5 1.0 1.2 9.8 12.0 18.0 15.5

Prices as of 1st December 2010 Source: Bloomberg, Nomura estimates

Strategy | Singapore Tanuj Shori / Ken Arieff Wong


Soft commodities/agri

Action Amidst the soft commodity rally and food inflation, we believe upstream will benefit

the most, as higher commodity prices will flow down to their earnings and valuation multiples. GGR and IFAR are our top picks for next year in CPO regionally. We remain positive on the midstream space driven by company specific catalysts, where we like Olam and Noble’s asset strategies and earnings growth over the next 2-3 years and Wilmar’s new business contributions from sugar, rice and flour.

Catalysts Supply-driven imbalances and consolidation will drive near- to medium-term

newsflow and implied price reactions for soft commodities and related equity plays

Anchor themes

Dominant themes: 1) China/India consumption; 2) food inflation and price controls; 3) weather patterns; 4) US$ and crude oil movements; 5) business restructuring.

Agri-commodities the place to be Bullish on Palm Oil upstream on strong CPO price and growth

We are Bullish on the ASEAN palm oil sector on our strong CPO price for 2011-12F (RM3,000/tonne). We think tighter supply/demand fundamentals for vegetable oils (especially in 1H2011), especially given weak production of palm oil in 2010, higher crude oil price forecasted (US$95/bbl in 2011F) and increased fund flows into the commodities space (as an inflation and US$ hedge), should all provide support for higher CPO prices (which should also lead to P/E expansion). From a regional upstream perspective, we have a distinct preference for Singapore-listed Palm Oil planters Golden Agri and IndoFood Agri over other planters for their high leverage to CPO price strength, strong CPO production growth and reasonable looking valuations (12.8-12.9x FY11 P/E).

Still positive on Noble, Olam and Wilmar – company catalysts

We still like Noble, as we believe it is most exposed to bullish commodity markets and can surprise on earnings vs street expectations. Agri and energy seem to be doing well, particularly sugar, soybean and coal. Wilmar, in our view, is now trading at a good entry point post the correction after Q3 results, for solid long-term exposure (we are positive on next year’s growth driven by strong volumes and Sucrogen). We recently turned back positive on Olam as its asset picks continue to surprise (eg, the urea project in Gabon), and we believe any further M&A activity can act as a catalyst for the stock to rise.

Weather patterns, policy decisions, USD and crude oil support

Potential weakness in the US dollar, strength in crude oil prices reigniting biodiesel demand, key government policy interventions and weather patterns will be the key themes determining supply demand balances in the coming year for key vegetable oils, oilseeds, sugar and grains, in our view. Any potential US dollar weakness and strength in crude oil prices should support demand, while an improved weather scenario should help the supply side. Increased consumption from China and India will remain a key driver for demand growth for key food commodities and thus any price controls from these governments can act as a dampener to a rally in food prices. A few catalysts to watch out for will be the EU’s policy decisions on palm oil, Asia’s biodiesel policies, India’s export policies on sugar, as well as other input cost trends.

Analysts Tanuj Shori

+65 6433 6981

[email protected]

Ken Arieff Wong

+603 2027 6895

[email protected]

Tushar Mohata (Associate)

Stocks for action We like Singapore-listed planters for their strong leverage to CPO prices and good growth, while we like the midstream space on company specific catalysts.

BULLISH

Stock Rating

Price(S$)

(1 Dec)

Price target

(S$)


GoldenAgri (GGR SP) BUY 0.74 0.85

Wilmar (WIL SP) BUY 6.05 7.60


Olam (OLAM SP) BUY 3.10 3.90

Strategy | Singapore Tanuj Shori / Ken Arieff Wong


Exhibit 36. Commodity prices – year to date

(20)

(10)

0

10

20

30

40

50

60

70

80

Co

coa

Th

aila

nd R

ice

US

Soy

Mea

lC

hina

Soy

bea

nC

hin

a S

oy M

eal

Tea

US

Ric

eC

off

eeU

S S

oyb

ean

Ch

ina

Su

gar

US

Soy

bea

nA

lmo

nds

Chi

na S

oyb

ean

US

Wh

eat

Can

ola

Oil

Ma

lays

ia C

PO

Cor

nS

unflo

wer

Oil

Re

fined

Pal

mC

ott

on

(%)

Source: Bloomberg

Exhibit 37. Stock prices – year to date

(10)

(5)

0

5

10

15

20

25

30

35

40

45

Wilm

ar

Nob

le

ST

I

Indo

food

Agr

i

Ola

m

Gol

den

Agr

i

(%)

Source: Bloomberg

Exhibit 38. Sectoral performance YTD

(20)

(10)

0

10

20

30

40

50

31-D

ec

31-J

an

28-F

eb

31-M

ar

30-A

pr

31-M

ay

30-J

un

31-J

ul

31-A

ug

30-S

ep

31-O

ct

Singapore Commodity SCM

Malaysian Planters

Indonesian Planters

(%)

Source: Bloomberg

Exhibit 39. Sector stock View – Commodities

Price S$ P/E (x) P/B (x) Yield %

22 Nov Price

target Rating 2011F 2011F 2011F Comments

Olam* 3.20 3.90 BUY 20.7 3.1 1.4 Any positive announcement in the Gabon fertilizer project, possible merger with Louis Dreyfus, or other M&A activity may act as a catalyst.

Noble 2.09 2.52 BUY 14.1 2.4 1.2 Commodity price upcycle, along with strong performance in agri (oilseeds and sugar), energy (coal), and locked margins in FY11F should ensure a good FY11 for the company.

Golden Agri 0.715 0.85 BUY 12.8 1.0 1.6 Environmental pushback (e.g. from Greenpeace) should ease, which should improve sentiment. New plantings should normalise in 2011 after a weak 2010. Could see acquisitions given strong cash balance.

Indofood Agri 2.63 3.20 BUY 12.9 1.9 na Maiden sizeable contribution from sugar expected to be seen in 2010. Strong production growth and strong CPO prices should keep earnings firm.

Wilmar 6.15 7.60 BUY 16.8 2.2 1.2 Sucrogen contribution and positive oilseed crushing margins should help the company deliver strong earnings growth in 2011F.

* values adjusted for calendar year 2011

Source: Nomura Singapore

Strategy | Singapore Tony Darwell


Real Estate Investment Trusts

Action While office REITs are depicted as “yield plays”, with the underlying yield tied to the

three-year reversionary lease cycle, we view office REITs as tax efficient landlords. Consequently, investors should keep an eye on asset values rather than simply focusing on yield to assess potential unit price performance. With CBD strata title offices now asking S$2,600/psf + we see further upside in asset values in 2011.

Catalysts With yields in the physical market at 4%, asset values remain attractive, implying

further transaction activity, prompting revisions to REITs’ underlying BVs.

Anchor themes

A faster than expected pick-up in rents and capital values has been supported by a squeeze in “reported” vacancy. Stronger demand, reflected in higher pre-commitments coupled with anticipated stock demolitions will see lower than expected peak vacancy underpinning the current momentum in rental growth.

Positive on offices, pensive on retail Office pre-commitment demand to maintain momentum in 1H11

On our estimates, 500,000sf of pre-commitments are likely to be signed in 4Q10, surprising the market to the upside. The level of pre-commitment demand augurs well for the prospects for the office market in 2011 following pre-commitment levels of circa 210,000sf in 3Q10 and 260,000sf in 2Q10. On our estimates, we conservatively expect a further 200,000sf+ of demand likely to be signed in 1Q11, given our understanding of pre-leasing deals currently under negotiation. With demand remaining firm, we expect office rents to see further upside in 2011.

“Reported” vacancy to remain low in 1H11, underpinning rents

The 11.5% YTD rise in rents and 17.6% YTD rise in capital values have been underpinned by better-than-expected demand contributing to a squeeze in ‘reported vacancy’ (according to CB Richard Ellis, vacancy in the central business district [CBD] is at 4.8% in 3Q10, vs 8.5% in 4Q09), given the mismatch between the physical completion of the new generation of International Grade-A office buildings and actual occupation. With ‘reported vacancy’ likely to remain at 6-7% over 1Q11 and 2Q11, rising to 9.4% not until 3Q11F, on our estimates, we see momentum in the office market holding up. We expect further upside over the next nine quarters, i.e., 4Q10-4Q12, and office rentals for International Grade-A space to rise by a further 21.9% (from S$9.00/psf at 3Q10) to S$10.97/psf pm — with the pace of growth concentrated over the next three quarters (4Q10-2Q11F), as reported vacancy remains in check at 6-7%. We expect Grade A space to see further upside of 11.4%, with Grade-A rents rising 25.0% in total over the period 1Q10 to 4Q12F

Higher demand/rents underpinned asset value expectations

Following the landmark Marina Bay Financial Centre (MBFC) transaction at S$2,450psf (11 October 2010), office capital values are likely to see further gains in 1H11, following the 17.6% rise YTD (3Q10). Expectations in the strata title market appear to have gathered pace with floors in Finlayson Green and Samsung Hub reportedly on the market for S$2,600-S$2,700/psf. (Note: 4 floors in Samsung Hub were sold in August 2010 for S$2,125/psf). With rents YTD broadly

Analysts Tony Darwell

+65 6433 6963

[email protected]

Vineet Verma (Associate)

Stocks for action We retain our Bullish stance on the office sector with rising asset values in 2011 to underpin REITs’ unit performance: Top picks: CCT and K-REIT. We expect structural and cyclical weakness in the retail sector in 1H11. CMT remains a REDUCE.

NEUTRAL


target

CapitaCommercial Trust BUY 1.50 1.68

K-REIT Asia BUY 1.38 1.62

Suntec REIT BUY 1.47 1.80

CapitaMall Trust REDUCE 1.91 1.75


Strategy | Singapore Tony Darwell


keeping pace with asset values, yield compression has remained modest. Based on current Grade-A office investment yields of 4% (versus 2.25% in the luxury residential market), valuations remain attractive, in our view.

Exhibit 40. CBD office yields vs interest rates

4.0%

2.0%

0

1

2

3

4

5

6

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

SG CBD office yield

SGD (10 yr bond)

(%)

4.0%

2.0%

0

1

2

3

4

5

6

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

SG CBD office yield

SGD (10 yr bond)

(%)

Source: Jones Lang LaSalle, Nomura Singapore

Exhibit 41. CBD office vs luxury residential yields

0

1

2

3

4

5

6

Mar

-00

Dec

-00

Se

p-0

1

Jun

-02

Mar

-03

Dec

-03

Se

p-0

4

Jun

-05

Mar

-06

Dec

-06

Se

p-0

7

Jun

-08

Mar

-09

Dec

-09

Se

p-1

0

SG luxury residential yield

SG CBD office yield

(%)

0

1

2

3

4

5

6

Mar

-00

Dec

-00

Se

p-0

1

Jun

-02

Mar

-03

Dec

-03

Se

p-0

4

Jun

-05

Mar

-06

Dec

-06

Se

p-0

7

Jun

-08

Mar

-09

Dec

-09

Se

p-1

0

SG luxury residential yield

SG CBD office yield

(%)

Source: Jones Lang LaSalle, Nomura Singapore

Retail – cautious outlook

While supply will tend to create its own demand in the context of the retail sector (i.e. landlords will look to pre-commit new shopping malls prior to completion), it is evident in the URA 3Q10 real estate statistics (released on 22 October 2010) that vacancy in the retail sector is rising amid modest volumes of supply, and that demand, to an extent, appears to be weakening. The relative benign demand appears to have been reflected in somewhat pedestrian rental growth — up 0.8% q-q versus 0.6% q-q in 2Q10 — and a slowdown in the pace of capital value growth. With retail sales growth moderating, the spectre of new supply on our take augurs for a relatively benign retail market in 2011.

Industrial – improving macro though valuations look demanding

Real estate consultants appear more upbeat on the prospects for the industrial sector with demand continuing to remain firm in 3Q10 (latest data available). According to URA net demand in 9M10 has been circa 713,000sm versus 714,000sm in 2010. With demand outstripping supply, vacancies have fallen to 7.5% in 3Q10 from 8.1% in 4Q09. which appears to be underpinning Colliers’ assessment that industrial rents (flatted factories) in 2011 could rise by up to 5%, with DTZ suggesting rental growth in the vicinity of 3-5% over 2011/12. While the macro-economic prospects appear to be improving, valuations look demanding.

Exhibit 42. Valuations of SG REITs

P/E Dividend yield Gross debt/assets

Mkt cap

(US$mn) Curr. Share price

Target price

Upside (%) Ratings

Potentialtotal

return (%) NAV

Spread on 10 yr

bond (bps)Yearend FY09 FY10F FY11F FY09 FY10F FY11F FY09 FY10F FY11F

Singapore REITs

CACT.SI CapitaCommercial Trust 2,823 SGD 1.50 1.68 12.0 BUY 17 1.68 266 Dec 21.1 20.0 21.4 4.7 5.0 4.7 (36) (31) (27)

KASA.SI KREIT Asia 1,236 SGD 1.38 1.62 17.4 BUY 22 1.62 215 Dec 26.0 22.3 20.0 3.8 4.5 5.0 (29) (43) (43)

SUNT.SI Suntec REIT 1,810 SGD 1.47 1.80 22.4 BUY 29 1.80 399 Dec 14.0 15.8 16.2 7.1 6.3 6.2 (34) (34) (35)

CMLT.SI CapitaMall Trust 4,055 SGD 1.91 1.75 (8.4) REDUCE (3) 1.75 264 Dec 21.5 20.1 19.7 4.7 5.0 5.1 (31) (36) (36)

MMPR.SI Starhill Global REIT 797 SGD 0.62 0.65 5.7 NEUTRAL 12 0.65 384 Dec 12.6 16.2 15.0 8.0 6.2 6.7 (31) (31) (30)

AEMN.SI Ascendas REIT 2,635 SGD 2.11 1.66 (21.3) REDUCE (15) 1.66 394 Mar 13.9 15.7 16.5 7.2 6.4 6.1 (35) (31) (30)

CDLT.SI CDL Hospitality Trust 1,296 SGD 2.03 1.72 (15.3) REDUCE (10) 1.72 274 Dec 22.3 19.7 19.5 4.5 5.1 5.1 (19) (21) (21)

Weighted average (0.6) 19.1 18.7 18.8 5.5 5.4 5.4

Source: Pricing as of 01 December 2010, Nomura Singapore

Strategy | Singapore Min Chow Sai


Residential property

Action Stock performance is likely to remain newsflow driven in 2011F and to this end we

see two potential catalysts – more administrative measures to cool the market and more information about the SG-MY JV to surface. Overall, the policy overhang should translate into a flattish outlook for home prices in 2011F and developers should be priced at mid-cycle valuations. UOL, AG, WINGT remain our key BUYs.

Catalysts More details on the SG-MY JV should surface in the next 12 months to provide

positive catalysts but further administrative measures are likely to cap enthusiasm.

Anchor themes

The tug-of-war between underlying housing demand and the government’s objective to keep housing affordable suggests limited upside to home prices, although rents could still go up. While the jury is still out on the market, we think valuations and balance sheets remain the key to longer-term performance.

Policies, SG-MY JV in focus for 2011F Property market still buoyant, despite measures

Following the August 30 cooling measures, pre-sales volume fell 27% m-m in September but saw a rebound of 74% m-m (including executive condo sales) in October. In addition, we note that while secondary transaction volume was down 11% q-q in 3Q10, the 5,833 units that changed hands during the quarter was still significantly higher than the quarterly average of 2,921 units since 1Q95. It therefore appears the underlying housing demand and overall liquidity conditions are still keeping the property market relatively buoyant, despite the government’s efforts hitherto to cool the market.

Expect more administrative measures in 2011F

Further macro-prudential and administrative measures should continue to be an overhang for the sector going into 2011F, in our view. One area that we think the government may potentially want to curb is property purchases by foreigners. While the representation of foreign private home buyers declined for the second consecutive quarter (albeit slightly) in 3Q10, the representation is still high relative to historical levels. We also observed that foreign buyers appear to be buying more in the mass-/mid-market segment during 3Q10.

Khazanah-Temasek JV: more details to come in 2011F

While the agreement was finalised in September, details of the joint developments in Marina Bay and Rochor remain scarce and we expect more information to surface as July approaches when the land parcels will be handed over to the JV. Developers with assets in Marina Bay, Rochor and Tanjong Pagar should continue to capture the market’s interest in 2011F as more information is released, in our view.

Stock selection remains key; top picks: UOL, AG, WINGT

On a total return basis, residential developers under coverage outperformed the broader market year to date. Our view that policy overhang should translate into an overall flattish outlook for home prices in 2011F and developers should be priced at mid-cycle valuation remains unchanged. On this premise, we think UOL, AG and WINGT remain attractively priced at respective discounts of 34%, 44% and 17% to their intrinsic NAV estimates.

Analyst Min Chow Sai

+65 6433 6959

[email protected]

Stocks for action Policy overhang should translate into an overall flattish outlook for home prices but developers with assets in Marina Bay, Rochor and Tanjong Pagar could capture investors’ interest. UOL, AG, WINGT remain our top picks.

NEUTRAL


target

UOL Group (UOL SP) BUY 4.63 5.55

Allgreen (AG SP) BUY 1.16 1.42

Wing Tai (WINGT SP) BUY 1.70 2.16


Strategy | Singapore Min Chow Sai


Exhibit 43. Pre-sales rebound in Oct

0

600

1,200

1,800

2,400

3,000

Jan

-95

Feb

-96

Ma

r-97

Ap

r-98

May

-99

Jun

-00

Jul-0

1

Aug

-02

Sep

-03

Oct

-04

Nov

-05

Dec

-06

Jan

-08

Feb

-09

Ma

r-10

Pre-sale volume (units)

Historical mthly avg


Exhibit 44. Secondary sales: above historical average

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1Q9

54Q

95

3Q9

62Q

97

1Q9

84Q

98

3Q9

92Q

00

1Q0

14Q

01

3Q0

22Q

03

1Q0

44Q

04

3Q0

52Q

06

1Q0

74Q

07

3Q0

82Q

09

1Q1

0

Secondary sales volume (units)

Historical mthly avg


Exhibit 45. More Indonesians, Malaysians buying S$1.5mn & below in 3Q10

% of total purchases 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

By Chinese nationals

Less than S$1.5mn 87.9 79.8 78.7 71.4 72.9 71.9 71.5

Above S$1.5mn 12.1 20.2 21.3 28.6 27.1 28.1 28.5

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

By Indonesians

Less than S$1.5mn 77.8 54.2 42.5 47.6 37.1 37.3 53.6

Above S$1.5mn 22.2 45.8 57.5 52.4 62.9 62.7 46.4

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

By Malaysians

Less than S$1.5mn 95.1 78.4 71.5 69.9 71.4 71.9 75.6

Above S$1.5mn 4.9 21.6 28.5 30.1 28.6 28.1 24.4

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Note: Based on caveats lodged


Exhibit 46. Top picks: UOL, AG, WINGT

Share Price CY11F CY11F CY11F Net

Bloomberg price Mkt cap NAV P/NAV target P/PT P/E P/BV Div yield debt/asset

Developers ticker Rating S$/shr ($mn) (S$/shr) (x) (S$/shr) (x) (x) (x) (%) (%)

UOL Group UOL SP BUY 4.63 3,600 7.11 0.65 5.55 0.83 10.5 0.8 2.2 22.3

Keppel Land KPLD SP BUY 4.84 7,019 5.50 0.88 5.50 0.88 18.6 1.9 1.7 19.9

Allgreen Properties AG SP BUY 1.16 1,845 2.12 0.55 1.42 0.82 7.7 0.7 3.4 18.6

Wing Tai Holdings WINGT SP BUY 1.70 1,350 2.16 0.79 2.16 0.79 7.7 0.8 2.9 20.8

City Developments CIT SP NEUTRAL 12.62 11,475 13.00 0.97 13.00 0.97 16.4 1.8 0.6 18.9

Bukit Sembawang BS SP NEUTRAL 4.65 1,135 7.57 0.61 5.17 0.90 18.8 1.3 0.4 35.1

SC Global SCGD SP NEUTRAL 1.57 631 1.85 0.85 1.85 0.85 7.1 1.0 1.3 55.8

Total/Wtd avg 27,054 0.85 0.90 15.0 1.5 1.4 22.9

Source: Bloomberg, Nomura estimates. Pricing on 1 December

Strategy | Singapore Lisa Lee


Capital goods/O&M

Action Against the backdrop of a bullish oil price (Nomura Brent forecast: US$95/bbl in

2011F), we expect active offshore drilling activities to trigger an upturn in the rig newbuild cycle, which is underpinned by: i) replacement of old jack-ups, ii) rig upgrades arising from stricter regulations, iii) emergence of more deepwater programs. Reiterate BUY on both KEP and SMM.

Catalysts Petrobras’ upcoming 28-rig order announcement and continued new order

momentum outside of Brazil.

Anchor themes

We maintain our positive view on Singapore shipyard-related groups with robust balance sheets and low solvency risks. With oil prices well above capex-positive levels, a resurgence of new orders, both in shallow and deepwater units, is likely.

New rigs for old Replacement of older jack-ups to gather pace in 2011

We expect more high-spec jack-up orders in 2011, underpinned by robust day-rates and utilization at the drilling market where drillers are witnessing a distinct divergence – utilization of high-spec jack-ups is trending high at 96%, compared to 72% for older jack-ups (delivered before 2000, 2/3 of current fleet). Nomura’s 2011 Brent forecast of $95/bbl suggests a favourable backdrop for drilling activities and with newbuild prices down 15~20% from peak, we expect the jack-up replacement cycle to continue over the medium term.

Robust deepwater fundamentals, despite near term oversupply

The contracting of deepwater newbuilds has been relatively slow given the near term oversupply, partly a result of the GoM moratorium. Over the longer term, we believe deepwater fundamentals remain robust, underpinned by: i) emergence of more ultra-deepwater drilling programs in regions like West Africa and the Mediterranean, ii) rig upgrade cycle with stricter regulations arising from the GoM incident, iii) incremental demand from Petrobras.

Petrobras orders – key stock driver in the near term

SMM’s share price declined by 3% since the Petrobras bids were unveiled on 26 Nov, which we believe reflects the market’s scepticism on its winning chances with its fourth lowest bid; Keppel held up relatively well in an overall flattish market (-1% relative to STI). While our PTs did not price in any Petrobras contracts, we expect the final outcome to drive investor sentiments in the near term. SMM’s intent to build a new yard on Brazil’s move to spur its rig-building industry makes it too early to rule out, in our view.

Reiterate BUY – KEP & SMM; Risk: intensifying competition

At the initial recovery stage of the cycle, shipyard competition is unavoidably intense with rig-builders offering financing in the form of attractive pre-delivery payment terms. While SMM appears to be more aggressive in pursuing orders thus far, we believe Keppel remains equally well-positioned to benefit from the rig replacement/upgrade cycle and Petrobras’ capex plans. Reiterate BUY on both Keppel and SMM.

Analysts Lisa Lee

+65 6433 6979

[email protected]

Yuan Yiu Tsai

+65 6433 6964

yuanyiu,[email protected]

Spandan Sharma (Associate)

Stocks for action We reiterate our BUY ratings for KEP and SMM, two of the leading rig-builders globally.

NEUTRAL


target




Strategy | Singapore Lisa Lee


Exhibit 47. Global jack-up age profile

16

78

17 7 620

218

111

39

0

50

100

150

200

250

<1 y

r

1-5

yr

6-10

yr

11-1

5 yr

16-2

0 yr

21-2

5 yr

26-3

0 yr

30+y

r

Unde

r con

stru

ctio

n

(# of units)

Source: Rigzone, Company data, Nomura research

Exhibit 48. Global deepwater floater age profile

923

142 5

21

5367

288

109

7 0

2

6

13

32

0102030405060708090

<1 y

r

1-5

yr

6-10

yr

11-1

5 yr

16-2

0 yr

21-2

5 yr

26-3

0 yr

30+y

r

Und

er c

onst

ruct

ion

(# of units) Semisub Drillship

Source: Rigzone, Company data, Nomura research

Exhibit 49. Current jack-up utilization by category

# of rigs Utilization

(%) % of global

Jack-up fleet

350 ft IC+ 133 87 28

300 ft IC 127 72 27

<= 250 ft IC 124 72 27

IS 24 58 5

MC + MS 62 34 13

High Spec 29 93 6

Total 470 70 100

Source: Rowan Companies, ODS-Petrodata

Exhibit 50. Jack-up utilization – historical trend

Source: Rowan Companies, ODS-Petrodata

Exhibit 51. Sector stock view – capital goods

Price (S$) P/E (x) P/BV (x) Yield %

1 Dec Rating 2011F 2011F 2011F Comments

Keppel Corp (KEP SP)

10.96 BUY 15.8 2.5 3.4 Well-positioned to benefit from high-spec jackup orders in the near term, and potential Petrobras orders in Brazil

SembCorp Industries (SCI SP)

4.93 NEUTRAL 15.1 1.9 4.1 Improved earnings from utilities and strong project pipeline are positives, although we highlight that significant contributions will only be over the medium to longer term

SembCorp Marine (SMM SP)

4.88 BUY 16.3 3.7 3.1 Well-positioned to benefit from high-spec jackup orders in the near term; appears more aggressive in pursuing orders at this stage.

ST Engineering (STE SP)

3.29 BUY 17.2 4.9 4.7 A robust recovery in the commercial aviation sector will be positive for STE’s aircraft MRO segment in the medium term

Yangzijiang (YZJ SP)

1.83 BUY 12.0 3.1 2.8 Strong execution track record; well-positioned to benefit from containership order recovery. Key pick within China shipbuilding space.

Source: Nomura Singapore

Strategy | Singapore Jim Wong


Airlines

Action Although SIA is highly geared to the current recovery in premium air passenger

traffic, we believe it will be more resilient than most regional airlines in any downturn given its flexible staff cost structure, minimal oil hedging and net cash position. With the overhang of a possible overpriced acquisition diminished, we now find SIA’s existing valuation of just 1.2x FY12F P/B attractive, especially as the peer group is averaging a P/B multiple of 1.6x. BUY maintained.

Catalysts With recent confirmation on sustained strong volumes and/or yield numbers in

Oct10, there is possibility that full-year 2010 will surprise on the upside.

Anchor themes

Strong Asian domestic demand has helped Asian transport stocks weather the global economic downturn better than most global peers. We see this trend continuing for the foreseeable future.

Sustained recovery expected Oct10 numbers reaffirm recovery

We remain bullish on airlines’ growth prospects in 2011. While SIA may not be able to achieve record high earnings in CY2011, it should come very close to doing so. With the confirmation of the air cargo traffic rebound in Oct2010, we believe cargo outlook in CY2011 may not be as bad as some in the market may believe. Hence we expect that any negatives on the air cargo front should be more than offset by positives on the passenger front in CY2011.

Singapore air passenger yields to continue to improve

We note that SIA's 2QFY11 results continued to show improving passenger yields (at S$11.8cts/RPK in 2QFY10 from S$11.7cts/RPK in 1QFY11) and declining passenger breakeven load factors. In fact SIA targets passenger yields to continue to move steadily up on a sequential basis to a level around 5% below pre-crisis levels by end-FY11 (an estimated passenger yield of S$12.2 cents/RPK from S$11.8cts/RPK in 2QFY11). This is based on a continued improvement in premium passenger traffic as well as higher real yields.

SIA to fare well despite larger competitive pressures

As shown below, SIA faces more competitive pressures than some of its peers given the more open air regulations in Singapore vis-à-vis other Asian locations. We note that SIA commands an air passenger market share of 36% in its home base of Singapore whereas close comparable Cathay Pacific (293 HK; Buy) commands a 49% market share in its home base of the Hong Kong.

Here while SilkAir is 100% held by SIA and Tiger Air 33% geld by SIA, both are Low Cost Carriers which have significantly different yield profiles than SIA, whereas Dragonair and CX have much more similar branding and yields. Further we note that while LLCs have a market share of over 27% in Singapore, LCCs have a market share of less than 5% in Hong Kong.

Analyst Jim Wong (Regional Transport &

Infrastructure)

+852 2252 2195

[email protected]

Stocks for action We continue to be Buyers of SIA and remain bullish on Singapore’s Airline sector.

NEUTRAL


target

Singapore Airlines (SIA SP)

BUY 15.84 18.25




Exhibit 52. Comparative market shares of encumbent airlines

Market share in Singapore hub (%) Market share in Hong Kong hub (%)

Singapore Airlines 36.3 Cathay & Dragonair 49.3

Tiger Airways 6.3 China Airlines 5.4

SilkAir 6.2 China Eastern Airlines 4.8

AirAsia 5.4 Singapore Airlines 2.4

Qantas Airways 4.6 EVA Airways 2.3

Jetstar Asia 4.2 Thai Airways Intl 2.2

Cathay Pacific Airways 3.4 Air China 2.2

Emirates Airlines 2.3 Hong Kong Airlines 2.0

Lion Air 1.7 Hong Kong Express 1.9

Thai Airways Intl 1.6 Qantas Airways 1.7

Malaysia Airlines 1.6 United Airlines 1.6

Garuda Indonesia 1.6 China Southern Airlines 1.4

Air India 1.3 Korean Air 1.3

China Eastern Airlines 1.2 All Nippon Airways 1.3

Lufthansa German Air 1.2 Philippine Airlines 1.1

Cebu Pacific Air 1.1 Others 19.1

Valuair 1.1

Others 18.9

Source: OAG

Attractive-looking valuations on a regional basis

Nevertheless, given SIA’s strong brand name, young fleet and superior product offering (in the A380s), it is arguably best positioned to take advantage of the projected sustained premium traffic recovery. Hence, we would argue that SIA should at least trade at similar, if not higher, P/B than other full service airlines in the region.

Exhibit 53. Comparison of 2011F P/BV of regional airlines

Airlines 2011 P/BV (x)

Singapore Airlines 1.2*

Air China 2.1

Cathay Pacific 1.7

China Southern Airlines 1.3

China Eastern Airlines 2.0

Korean Air 1.2

Malaysia Airlines 1.6

Eva Airways 1.4

* FY12 number used given Mar Year-end




Exhibit 54. Singapore Airlines (SIA SP): RPK trend

a) Long-term trend

2,500

3,500

4,500

5,500

6,500

7,500

8,500

9,500

Jan-00

May-01

Sep-02

Jan-04

May-05

Sep-06

Jan-08

May-09

Sep-10

(60)(50)(40)(30)(20)(10)010203040

RPK (LHS) Growth rate (RHS) (%)(mn)

Source: Company data

b) Short-term trend

2,500

3,500

4,500

5,500

6,500

7,500

8,500

9,500

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9S

ep-0

9O

ct-0

9N

ov-0

9D

ec-0

9Ja

n-10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

(25)(20)(15)(10)(5)

05101520

RPK (LHS) Growth rate (RHS) (%)(mn)


Exhibit 55. Singapore Airlines (SIA SP): passenger load factor trend

a) Long-term trend

0

10

2030

40

50

6070

80

90

Jan-00

May-01

Sep-02

Jan-04

May-05

Sep-06

Jan-08

May-09

Sep-10

(30)

(20)

(10)

0

10

20

30

Pax load factor (LHS)

Growth rate (RHS)


b) Short-term trend

-10

203040

506070

8090

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9S

ep-0

9O

ct-0

9N

ov-0

9D

ec-0

9Ja

n-10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

(15)

(10)

(5)

0

5

10

15Pax load factor (LHS)

Growth rate (RHS)

(ppt)(%)


Strategy | Singapore Andrew Lee


Shipping

Action We have a BUY rating on STX Pan Ocean (as we are relatively more bullish on

drybulk and low breakeven levels) and NEUTRAL on NOL. We are Bullish on drybulk shipping given strong demand; yet, supply is becoming a growing concern. We maintain our Bearish view on container shipping as margins are under pressure with declining freight rates coupled with higher oil prices.

Catalysts Upcoming catalysts include a higher and stronger rebound in dry bulk freight rates

and a continued decline in container freight rates.

Anchor themes

Bearish on container shipping as we believe container freight rates peaked and will decline into 2011F, leading to weaker earnings. Meanwhile, Bullish on drybulk shipping (for now) given seasonally stronger 4Q and forecast for earnings improvement in 2011F. However, drybulk supply becoming an increasing concern.

Concern on ship supply Container shipping — BEARISH

With container freight rates down 9% from a peak in end-August (as highlighted by the Shanghai Shipping Exchange), we expect this will continue into 1H11. We estimate slower container demand growth, but our concern is supply, especially since 62% of the orderbook are for +8,000 TEUs vessels which primarily only operate on Asia-Europe routes due to size restrictions. In addition, margins are set to decline from high oil prices, since we expect the average brent oil price to rise 14% to US$95/bbl in 2011F. While idled capacity could help ease the oversupply, we believe idled capacity is unlikely to reach the last peak (12% in December 2009) give the overall sector is profitable this year while newbuilding delivery slippages are likely to slow. We maintain a Bearish view on the sector; we estimate sector ROE will decline from 14% in 2010F to 6% in 2011F.

Drybulk shipping — BULLISH

While we maintain our Bullish view on the drybulk shipping sector, the orderbook is becoming an increasing concern, in our view. On the demand side, we estimate strong demand, driven mainly by global steel demand, especially from China. For example, China accounts for 45% of global steel production during 9M10 and Nomura have a Bullish view on the China steel sector. However, supply is becoming a growing concern, with YTD newbuilding slippages tracking below our forecast and Greenfield shipyards beginning to deliver. One positive catalyst could be port congestion during peak periods, which would cap effective capacity. In 2011F, we expect drybulk freight rates to remain volatile.

Singapore shipping — stock picks

Amongst the Singaporean shipping stocks under coverage, we have a BUY on STX Pan Ocean (STX SP) and a NEUTRAL on Neptune Orient (NOL.SP). For STXP, our positive view is due to 2011F Capesize revenue days already being fully covered and a lower breakeven. Further, it has continued to increase its long-term forward coverage ratio (more than 20 years), as highlighted by recent iron ore, coal and wood pulp customers (such as POSCO, Southern Power Co and Fibria Celulose). We view NOL as expensive given a current 1.3x 2011F P/B with ROE declining to 6% from 13%. Yet, NOL is one of the premium container shipping carriers, and hence, we have a NEUTRAL rating.

Analysts Andrew Lee

+852 2252 6197

[email protected]

Cecilia Chan

+852 2252 6181

[email protected]

Stocks for action Amongst the Singaporean shipping companies under coverage, we have a BUY rating for STX and a NEUTRAL for NOL. We like STX given relatively more positive outlook on the drybulk sector.

BEARISH


target

Neptune Orient Lines (NOL SP)

NEUTRAL 2.20 2.00

STX Pan Ocean (STX SP)

BUY 13.66 18.50


Strategy | Singapore Andrew Lee


Exhibit 56. Container shipping P/BV and ROE – bearish sector view as ROE declining in 2011

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(30)

(20)

(10)

0

10

20

30

40Price to Book (LHS) ROE (RHS)(x) (%)

Source: Datastream, Nomura estimates

Exhibit 57. Container shipping index and overall container freight rates

0

100

200

300

400

500

600

700

800

Dec

-98

Oct

-99

Jul-0

0

Apr

-01

Jan-

02

Oct

-02

Aug

-03

May

-04

Feb

-05

Nov

-05

Aug

-06

Jun-

07

Mar

-08

Dec

-08

Sep

-09

Jun-

10

700

800

900

1,000

1,100

1,200

1,300

Nomura container index (LHS)

CCFI average rate (RHS)

(US$/TEU)(Rebased 100)


Exhibit 58. Drybulk shipping P/BV and ROE

0

1

2

3

4

5

6

7

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(20)

(10)

0

10

20

30

40

50

60

70

Price to Book (LHS)

ROE (RHS)(x) (%)


Exhibit 59. Drybulk shipping index and BDI

0

20

40

60

80

100

120

140D

ec-0

0

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000Stock price (LHS) BDI (RHS)

(NT$)


Exhibit 60. NOL P/BV and ROE

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(160)(140)(120)(100)(80)(60)(40)(20)0204060

Price to Book (LHS) ROE (RHS)(x) (%)


Exhibit 61. STX Pan Ocean P/BV and ROE

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2004

2005

2006

2007

2008

2009

2010

2011

2012

(10)

0

10

20

30

40

50

60Price to Book (LHS) ROE (RHS)(%)(x)


Strategy | Singapore Sachin Gupta, CFA


Telecommunications

Action Last year we said that 2010 will be about 2011, and we have already seen the

carriers boost their integrated offers this year in the NBN environment. M1 now offers fixed broadband and pay-TV services too. The differences in content quality and NBN coverage will be addressed progressively and the imposition of cross-carriage of content could level the playing field further. Also watch for margin volatility from rising smart-phone/ touch-pad penetration along with the potential for M&A. M1 is our key pick in Singapore.

Catalysts Fixed broadband prices and net-add share, impact of smart-phones on margins,

capital management, and M&A.

Anchor themes

NBN will be a key focus across operators – better product variety, more bundles, and potential price pressure are likely as operators start to gain subscribers.

The year of the consumer Sector themes for 2011 – is M&A likely?

Key sector themes in 2011: 1) NBN rollout to become more ubiquitous leading to further pressure on retail / enterprise APRUs; 2) rising smart-phone and touch-pad penetration could hurt operating margins; 3) potential legislation of cross-carriage of content; and 4) potential M&A with M1 in the picture.

M1: is our key regional pick

In 2011, we expect M1 to surprise on net-adds in both wireless and broadband, and it could also win some share of the pay-TV customers later in the year. Execution will be the biggest challenge and no doubt the incumbents won’t cede share easily, but we think M1 will use a low-price strategy to win stand-alone broadband customers. Acquiring customers who are seeking bundled products will be a more difficult task. Either way, however, we see little revenue cannibalisation risks and incremental customers should add to the bottom line. Maintain BUY with S$2.65 price target.

SingTel: a diversified beast with overhangs

While SingTel remains a solid defensive franchise, we expect higher earnings volatility in all its Associate markets, with India and Indonesia providing the biggest delta. We don't see Singapore or Optus losing significant share in 2011, but margins will remain under pressure. A large capital return in May-2011 will be a key event; otherwise, we don't see other catalysts to break the trading range of S$3.00-3.50. Maintain NEUTRAL with S$3.45 price target.

StarHub: risks should outweigh the dividend appeal

It is difficult to see StarHub matching its strong outperformance of 2010 in 2011. Its strong 7.5% dividend yield could be overshadowed by earnings risks from: 1) NBN impact on retail broadband prices; 2) risks to pay-TV subs from competition along with the possible impact of content cross-carriage regulations; and 3) expensive-looking valuations of 16.5x FY11F P/E. We do expect it to win enterprise revenue share from NBN, but it is more likely to make meaningful contribution only from 2012F onwards. Maintain REDUCE with S$2.25 PT.

.

Stocks for action Our BUY for M1 is due to the potential revenue and earnings upside from NBN; Neutral for Singtel is due to limited near-term catalysts; and REDUCE for Starhub is on potential risks to its hubbing strategy, post EPL loss.

BEARISH

Stock RatingPrice (S$)

Price target

(S$)

M1 (M1 SP) BUY 2.22 2.65

Singtel (ST SP) NEUTRAL 3.13 3.45

Starhub (STH SP) REDUCE 2.65 2.25

Pricing as on 1 Dec 2010

Analysts Sachin Gupta, CFA

+65 6433 6968

[email protected]

B Roshan Raj

+65 6433 6961

[email protected]

Neeraja Natarajan (Associate)



Exhibit 62. Singapore market – mobile trends

(%) Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

Mobile revenue market share

StarHub 34 34 34 34 35 34 34 34 34

M1 19 18 18 18 18 17 17 17 16

SingTel 46 47 48 48 48 49 49 50 50

ARPU

StarHub 48 47 46 46 46 46 46 45 44

M1 49 48 46 47 46 46 45 44 43

SingTel 51 52 50 50 50 51 51 53 53

Mobile revenue

StarHub 264 272 265 272 277 281 286 294 298

M1 149 146 140 142 141 143 143 145 144

SingTel 356 373 370 380 384 406 405 432 437

Mobile revenue y-y change %

StarHub (1) (1) (3) 1 5 3 8 8 8

M1 (2) (6) (8) (8) (6) (2) 2 2 2

SingTel 11 8 9 10 8 9 9 14 11

Mobile revenue q-q change %

StarHub (2) 3 (3) 3 2 1 2 3 1

M1 (3) (2) (4) 1 0 2 0 1 (1)

SingTel 3 5 (1) 3 1 6 0 7 1

Subscriber (k)

StarHub 1,742 1,766 1,815 1,849 1,884 1,918 1,975 2,056 2,121

M1 1,620 1,631 1,619 1,669 1,717 1,758 1,796 1,849 1,892

SingTel 2,874 2,942 2,976 2,991 3,100 3,181 3,116 3,113 3,167

Subscriber market share %

StarHub 28 28 28 28 28 28 29 29 30

M1 26 26 25 25.6 25.6 25.6 26.1 26.3 26.4

SingTel 46 46 46 46 46 46 45 44 44

Net - adds (k)

StarHub (54) 24 49 34 35 34 57 81 65

M1 9 11 (12) 50 48 41 38 53 43

SingTel 121 68 34 15 109 81 (65) (3) 54

Source: Company reports, Nomura research



Exhibit 63. Valuation methodologies and risks to PT

Company Valuation methodology Risks to PT

Banks

OCBC Our Gordon Growth-based fair value (13% sustainable ROE, 9% WACC, 5% long-term growth) is S$11.00, but better appreciation of GE generates a sum-of-the-parts PT of S$11.80, or 2.0x FY11F adjusted BV (1.8x stated book), or 15x FY11F P/E.

Renewed worsening in credit conditions and another knock-on lurch down in property prices and demand would impact loan growth and loan loss provisioning negatively, given that almost 50% of its loanbook is either mortgages or building & construction (largely property developer) loans. While we are relatively comfortable with the Singapore loan book (60% of total book) given the relative strength of domestic corporates and the broad lack of leverage in the system, the Malaysian book (18% of total) appears more vulnerable and could surprise negatively if there is poor official execution of the sizeable fiscal stimulus measures announced by the Malaysian government. Finally, in relation to the recent acquisition of IAPB, significant attrition of relationship managers (RMs) and/or clients would erode value creation expectations.

DBS Our PT of S$16.00 implies 1.4x stated FY11F P/BV (key assumptions: 12.0% ROE, 9.5% cost of capital, 5.0% long-term growth).

A double-dip scenario would, more so than ASEAN-centric peers, erode loan growth and asset quality associated with the group’s regional corporate and SME (largely HK/China-centric) client bases, while product and/or staff setbacks related to the many initiatives articulated by new CEO Piyush Gupta would necessitate a continuing “execution risk” discount for the group. Potential for competitors to disturb DBS’ current and savings accounts (CASA) dominance in Singapore, and hence place its fixed-rate lending strategy in jeopardy, is ever-present but is a low-probability event, in our view (it is much harder to build a deposit franchise than to grow assets via lending).

UOB Our Gordon growth-based valuation (methodology unchanged; 12.5% sustainable ROE, 9.5% cost of capital and 5% long-term growth) is S$21.30, or 1.7x FY11F adjusted book value (1.5x stated book value), or 13x FY11F earnings.

Upside risks include evidence of a sharp acceleration in loan growth and ability to sustain NIM at levels significantly higher than peers (as per recent trend) for a prolonged period. To the downside, while the long-term group strategy of building an integrated, synergy-rich Southeast Asian commercial banking and product distribution platform is intact, potential for negative political and economic news flow from these export-dependent countries (collectively around 35% of group operating income) could negatively impact earnings expectations and UOB’s premium P/BV multiple when compared with its less geographically diverse domestic peers.

Conglomerates

Fraser and Neave We value F&N on a SOTP valuation methodology - market prices for its listed stakes, Nomura NAV estimates for its property assets, 5x FY10 EV/EBITDA for Times Publishing and FNN Foods. Our price target of S$7.21/share is derived after applying a 5% conglomerate discount to our NAV.

Changes to equity market risk premiums, as well as any unexpected improvement/deterioration in the outlook for the economy and physical real estate markets could see the stock trade above or below our SOTP NAV estimate.

Keppel Our price target of S$13.10 remains pegged at a 5% discount to our SOTP value of S$13.80 (method unchanged, discount in line with Sembcorp Industries). We value the O&M division using a DCF over a 15-year period. This incorporates a drop in offshore and marine earnings from FY10F, and a WACC of 7.5% (in line with our WACC valuation for Sembcorp Marine). The group’s other businesses (ie, Keppel T&T, K1 Ventures) are valued at the current market price levels while Keppel Land is based on Nomura’s published price target.

Our price target could be hurt by a larger-than-expected fall in margins from the group’s O&M division; a significant and continued fall in orderbook build-up; a bigger-than-expected decline in the asset values and rents at its property division, or a collapse in margins at its infrastructure division.

SembMarine Our price target of S$6.03 is based on our sum-of-the-parts (SOTP) valuation, comprising a DCF valuation (WACC 7.5%, 0% terminal growth over a 15-year period and incorporating a forecast earnings decline from FY11F) of the group’s shipyard businesses, which includes the three Singapore yards, as well as earnings from overseas yards including Cosco Shipyard Group, and its remaining 4.8% stake in Cosco Corp.

A sharp downturn in oil prices could have a negative impact on potential offshore rig orders, as well as lead to potential further delivery delays. Extensive cancellations of the group's O&M orderbook, or significant losses incurred on these O&M projects, or more associate losses could also have a negative impact on our price target.

Commodities

Indofood Agri We value the company at 15x FY11F P/E (rolling forward). We believe this valuation peg of +0.7x SD above its mean is reasonable, given our bullish CPO view.

Higher-than-expected vegetable oil production (or oilseed production) globally including palm oil or lower-than-expected crude oil prices for 2011 are key negative risks to CPO prices (and in turn negative for the earnings of upstream palm oil companies).

Golden Agri We value the company at 15x FY11F P/E (rolling-forward). We believe this mid-cycle valuation of +0.7x SD above the stock’s mean is reasonable in the context of our bullish CPO view.

Risks include higher-than-expected oilseed production and lower-than-expected crude oil prices, which would impact CPO prices (and therefore earnings) negatively.

WIlmar We value Wilmar on a SOTP basis by ascribing the bracketed multiples to its FY11F earnings from plantation (16.5x), palm and laurics (16.5x), consumer pack (22x), oilseed processing (16.5x), and other business (15x). We also value the sugar businesses (Sucrogen and Indonesia) and the rice and flour business by DCF. Our new price target, after building in lower crush margins is S$7.60.

Any delay in execution of Indonesian sugar plantation can have downsides to our target price and earnings estimates. The acquisition of Sucrogen, meanwhile, is still subject to regulatory clearance. Shortage of raw materials (eg, palm oil, oilseed) could hurt trading volumes of Wilmar’s merchandising and processing businesses. Reduced bargaining power attributable to falling demand could hurt profitability. Underlying growth in volumes and profitability could be constrained by the regulatory framework. Major fluctuations in raw material and product prices also represent a risk to profitability.

Noble Group We value Noble using a residual dividend model, with a 9% cost of equity, 2.5% terminal growth rate and long-term ROE of 12% to arrive at our price target of S$2.52.

The key company-specific risk in our view would be execution of its targeted processing facilities to generate more trading volumes. On the funding side, the interest cost can always be the swing factor because of ~80% leverage.



Company Valuation methodology Risks to PT

Olam We still use a residual dividend model, with an 8.75% cost of equity, a 2.5% terminal growth rate and a long-term ROE of 12% for Olam’s existing business. Building in our earnings estimates arrives at our core business value of S$3.40 for Olam. We add back the DCF value of the urea venture (S$0.40) and palm (S$0.06) to get our price target of S$3.90 (rounded).

Any execution delay or substantial underperformance in the Gabon ventures can lead to downside to our price target. We are building in significant volume expansion in existing commodities. Any lower-than-expected contribution could negatively impact our estimates. Other downside risks include lower-than-expected contributions from associates and new investments; supply chain management; commodity and forex fluctuations; and a drop in world trade volumes.

REITS

CCT KREIT, Suntec CMT CDL H-REIT Ascendas REIT

Our price targets are based on our assessment of the intrinsic values of the underlying real estate owned by the REITs based on 10-year DCFs.

An unexpected decline in economic activity and/or office demand could potentially negatively affect our rental and occupancy expectations, which could adversely impact our DPU estimates, as well as our valuation of the underlying real estate assets.

Developers

UOL Our price target is pegged to its intrinsic NAV, including its listed assets at market prices and applying 25% discount to its unlisted assets.

A worse-than-expected economic performance in Singapore is likely to cause housing demand and leasing demand to slow, which is likely to widen the discount to NAV that the stock trades at, in our view. As 36% of the stock’s intrinsic asset value is made up of stakes in listed entities, fluctuation in the market valuation of these entities will also have an impact on UOL’s stock performance, in our view.

Allgreen We ascribe a 25% discount to gross asset value to account for relatively slow monetisation of assets and cross-check the adjusted NAV/price target with the historical average P/B of 0.8x.

A worse-than-expected economic performance is likely to cause housing demand and leasing demand to slow, which is likely to widen the discount to NAV that the stock trades at, in our view.

Wingtai Our price target is pegged at parity to fully diluted NAV and we cross-check our price target with the historical average P/B of 0.9x that the stock has traded at in the past.

A worse-than-expected macroeconomic performance is likely to cause housing demand and leasing demand to slow, which is likely to widen the discount to NAV that the stock trades at, in our view; this is particularly so if the fall in demand is sharper in the prime luxury segment where WINGT has significant exposure.

Telcos

SingTel Our price target is S$3.45, which is based on our DCF sum-of-the-parts model. We use an average discount rate (WACC) of 8.26% for Singapore and Optus businesses, with a terminal growth rate of 2.5%. Our discount rates for associates are 10-12%, with terminal growth rates ranging from 2% to 4%.

More aggressive competition in Singapore and Australia, a macro slowdown, further appreciation of the Singapore dollar and slowing growth of the associates.

Starhub Our DCF-based 12-month price target assumes a WACC of 7.4% with a terminal growth rate of 1%.

Upside risks to our REDUCE rating include lower-than-expected loss of pay-TV subscribers, limited ARPU dilution, and higher-than-expected capital management.

M1 Our DCF-based price target uses a WACC of 7.7%, calculated using a 10% cost of equity, a 3% cost of debt and terminal growth rate of 1.0%.

Risks to our investment view include: 1) more aggressive competition in Singapore; 2) limited ability to offer fixed-mobile bundles and 3) a macro slowdown in Singapore

Transport

SIA Our price target of S$18.25/shr for SIA is based a FY12F P/B of 1.4x

Investment risks to our price target include higher- or lower-than-expected jet fuel prices which would impact our price target, as would higher-than-expected achieved passenger or cargo yields and loads. Also, capacity cuts both in passenger and cargo divisions would also impact earnings.

NOL Our price target of S$2.00 is based on 0.8x FY11F P/B for the shipping business and 15x EV/EBITDA for the terminal business

Potential terminal divestment and a sharper rebound in global economies

STX Pan Ocean Our price target of S$18.50 is based on mid-cycle P/B of 1.2x in FY10F, which is equivalent to a target EV/fleet of 1.3x

Aggressive fleet expansion plans and potential expansion into other non-core businesses

Others

Biosensors We value Biosensors on a SOTP methodology — DCF for its base business, Terumo royalties and BioMatrix (9.7% WACC), 9.2x exit P/E to account for DES business valuation. We value its 50% stake in JWMS at 22x P/E.

i) Potential termination of BioMatrix's distributorship with Krauth in Germany; ii) single-product company.

Venture Corp Our price target of S$11.50 is peer-derived P/BV adjusted for goodwill.

Downside risks to our price target could stem from delays in the ramp of enterprise IT budget spending.




Other Team Members:

Manjith Nair, Tushar Mohata, Vineet Verma, Spandan Sharma, Neeraja Natarajan (Associates) — All enquiries arising from this note should be directed to Jit Soon Lim.

Any Authors named on this report are Research Analysts unless otherwise indicated

ANALYST CERTIFICATIONS I, Jit Soon Lim, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company. Conflict-of-interest disclosures Important disclosures may be accessed through the following website: http://www.nomura.com/research/pages/disclosures/disclosures.aspx . If you have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877-865-5752) or email [email protected] for assistance. Online availability of research and additional conflict-of-interest disclosures Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. 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Distribution of ratings (Global) Nomura Global Equity Research has 1878 companies under coverage. 48% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this rating are investment banking clients of the Nomura Group*. 37% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with this rating are investment banking clients of the Nomura Group*. 13% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 September 2010. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'RS-Rating Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.



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A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.



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