www.dbsvickers.com Ed: JS / sa: AS

STI : 3,267.4

Analysts Janice CHUA +65 6682 3692 YEO Kee Yan +65 6682 3706 janicechuast@dbs.com keeyan@dbs.com

LING Lee Keng +65 6682 3703 Singapore Research Team leekeng@dbs.com

Key Indices

Current % Chng 1 day STI Index 3,267.40 -0.5% FS Small Cap Index 461.95 0.2% USD/SGD Curncy 1.35 0.0% Daily Volume (m) 1,546 Daily Turnover (S$m) 1,208 Daily Turnover (US$m) 895

Source: Bloomberg Finance L.P. Market Key Data – DBS Coverage

(%) EPS Gth Div Yield

2014 7.7 3.6 2015F 6.7 3.6 2016F 9.9 3.8 (x) PER EV/EBITDA

2014 15.6 12.0 2015F 14.6 11.6 2016F 13.3 10.5

Source: DBS Bank Stock Picks

Price ($) 9 Jul 15

Target Price ($)

Rcmd

Defensive /Yield

China Merchants Hldgs 0.985 1.54 Buy

Frasers Commercial Trust 1.52 1.79 Buy

M1 3.33 3.60 Buy

Sheng Siong 0.835 0.91 Buy

Mapletree Greater China Commercial Trust*

1.00 1.12 Buy

ST Engineering 3.26 3.80 Buy

Earnings Recovery

Singapore Airlines* 10.95 12.80 Buy

Del Monte* 0.365 0.50 Buy

Asset Recycling

Capitaland 3.35 4.11 Buy

Frasers Centrepoint Ltd 1.75 2.36 Buy

Source: Bloomberg Finance L.P; DBS Bank

DBS Group Research . Equity 13 Jul 2015

Singapore Market Focus

Singapore Strategy

Refer to important disclosures at the end of this report

Navigating through uncertainties Bumpy ride ahead, watch for potholes

Decelerating earnings growth, downside risks remain

Stay with yield plays and stocks with high earnings visibility

Go for earnings recovery and asset recycling plays

Fraught with uncertainties. Resumption in earnings downward revision trend, sharp correction in China equities and heightened worries of ‘Grexit’ saw the Singapore market returning back YTD gains in the last 2 months of 1H. With Singapore’s growth prospects looking uncertain, we do not rule out the possibility of further earnings downgrades for Singapore companies. In the absence of domestic catalysts, Singapore market will continue to be driven by external events, spanning from a more volatile China equity market, developments in Greece, oil price fluctuations and shifts in expectations for timing of US rate hikes. 3Q is a seasonally volatile quarter, given that major corrections in the past 10 years tended to take place in August/September. We peg a broad trading range from 3150 to 3550 for the STI in 2H, based on 12.25x (-1SD) to 13.4x (-0.25SD) 12-mth forward PE.

Flight to safety. We advocate a safe and defensive stance, and classify our picks into 3 overlapping broad categories – stocks generating high dividend yield, backed by high earnings visibility and attractive valuations. Companies with high earnings visibility should outperform given the uncertainty ahead and the downward corporate earnings revision trend in 1QFY15. Frasers Centrepoint Limited hits a bull’s eye - earnings visibility is underpinned by 59% recurring revenue base, reasonable dividend yield of 3.4% while valuation is attractive at less than 0.7x P/Bv NAV. Earnings for Sheng Siong and M1 are resilient and their dividend yields are backed by high dividend payout ratios. Toll road owner and operator China Merchants Holdings generates an attractive dividend yield of 7% while growth will be driven by recent acquisitions. We are selective on REITS; our top picks are Frasers Commercial Trust and MAGIC, which are supported by resilient rental income base.

Earnings recovery and asset recycling. We like companies that are recovery plays and those that have demonstrated an ability to raise returns via asset recycling. Del Monte’s earnings are expected to post a turnaround, after two years of losses due to acquisition related expenses of US-based Del Monte Foods Inc. (DMFI). SIA’s earnings will fly high on lower jet fuel cost, as it unwinds its hedge positions. Capitaland will benefit from easier monetary policies in China, and is in a sweet spot to recycle some of its stable assets to its REITs, unlocking value and gains for the group. ST Engineering is a proxy to recovery in US, and benefits from the stronger US$. A steady orderbook of S$12.2bn covers two years of revenue, and the stock is underpinned by strong operating cash flows, healthy balance sheet and dividend yield of 4.6%.

Market Focus

Singapore Strategy

Page 2

Market Outlook

Outlook

Resumption in earnings downward revision trend, sharp correction in China equities and heightened worries of ‘Grexit’ saw the Singapore market returning back YTD gains in the last 2 months of 1H. With Singapore’s growth prospects looking uncertain, we do not rule out the possibility of further earnings downgrades for Singapore companies. Under such a backdrop, we expect the Singapore equity market to be influenced more than ever by external events spanning from a more volatile China equity market, developments in Greece, oil price fluctuations and shifts on expectations on timing of US rate hikes. We peg a range from 3150 to 3550 for the Straits Times Index for the remainder of the year, based on 12.25x (-1SD) to 13.4x (-0.25SD) 12-mth forward PE. Weak Singapore economic outlook

The signs for the Singapore economy are not looking bright. The manufacturing sector remains in the doldrums despite a slight improvement in May. Headline industrial production growth fell by 2.6% y-o-y even as manufacturing PMI inched back into expansion territory after 6 consecutive months of contraction. Singapore industrial production & manufacturing PMI

48

48.5

49

49.5

50

50.5

51

51.5

52

52.5

‐20

‐15

‐10

‐5

0

5

10

15

1/1/2013

2/1/2013

3/1/2013

4/1/2013

5/1/2013

6/1/2013

7/1/2013

8/1/2013

9/1/2013

10/1/2013

11/1/2013

12/1/2013

1/1/2014

2/1/2014

3/1/2014

4/1/2014

5/1/2014

6/1/2014

7/1/2014

8/1/2014

9/1/2014

10/1/2014

11/1/2014

12/1/2014

1/1/2015

2/1/2015

3/1/2015

4/1/2015

5/1/2015

Industrial production (y‐o‐y %)

Manufacturing PMI

Source: DBS Bank

First contraction in loan growth since Oct-10. In the finance sector, overall loan growth for banks declined by a slight 0.1% y-o-y in May, the first drop since Oct-10. The labour market suffered its first quarterly fall since the Lehman crisis, with employment contracting by 6,100 in 1Q15. Core inflation dipped to near zero, at 0.1% y-o-y in May, the lowest since Jan-10.

There is also uncertainty on the macro front with China’s economic slowdown seen as having a potential lasting impact on the prospects of local manufacturers as China is the largest export market for Singapore. In Europe, uncertainty about Greece causes another drag on Eurozone’s already sluggish economic performance. Cut GDP Growth to 2.4%(2015F) and 2.9%(2016F) With growth outlook turning south, our Singapore economist has warned about the likelihood that 2Q GDP could contract from the 3.2% q-o-q expansion in 1Q15. 2Q advance GDP estimates due this week will likely show a contraction of 2.0% QoQ, saar (+2.1% YoY). We have revised down our 2015 and 2016 growth forecasts to 2.4% (from 3.2%) and 2.9% (from 3.5%) respectively. This year should record the slowest growth since the US / global financial crisis in 2008/09. Singapore GDP 2010-2016F

0

2

4

6

8

10

12

14

16

2010 2011 2012 2013 2014 2015f 2016f

GDP growth 2010‐2016 (% y‐o‐y)

Source: DBS Bank

Low earnings growth, downside risks remain

Earnings cut resumes Optimism at the start the year about an upturn in corporate earnings revision trend for Singapore failed to materialise thus far. The conclusion of the 1QFY15 results season witnessed resumption in earnings downward revision with earnings cuts of 3.6% and 2.9% for FY15F and FY16F respectively. Low earnings growth of 3.2% for 2015. Our earnings forecast for the benchmark FSSTI currently stands at a meagre 3.2% for FY15F. Growth in FY16F is forecast to be higher at 9.2%, but the important question to ask is whether there is downside risk to this figure. Recall that at the start of 2015, the forecast earnings growth for FY15F was 8.6% before downward revisions over the past six months pulled the figure down to just 3.2%.

Market Focus

Singapore Strategy

Page 3

Earnings growth by sector

CAGR PER (x) Div Yld

Sector 2014A 2015F 2016F 14-16 2014A 2015F 2016F 2014

Banking 14.0 13.7 9.3 11.5 12.5 11.0 10.1 3.1

Consumer Goods 1.9 1.4 14.3 7.6 15.9 15.7 13.7 2.7

Consumer Services -3.5 13.1 13.4 13.2 20.9 18.4 16.3 2.8

Financials -5.1 3.1 5.2 4.2 25.6 24.8 23.6 5.5

Health Care 17.5 20.3 16.3 18.3 49.7 41.3 35.5 0.9

Industrials 8.8 19.9 14.9 17.3 18.9 15.8 13.7 3.5

Oil & Gas 11.8 -3.8 10.2 3.0 9.1 9.5 8.6 4.4

Real Estate 5.9 -9.4 9.3 -0.5 13.8 15.3 14.0 2.3

REITS 5.5 4.7 4.8 4.7 16.7 15.9 15.2 6.0

Technology 14.2 10.8 11.5 11.1 14.5 16.6 14.9 5.1

Telecommunications 5.2 4.1 6.4 5.2 18.0 17.3 16.3 4.2

DBS Cove ra ge 7.7 6.7 9.9 8.3 15.7 14.7 13.4 3.5

Ex-prope rty 7.6 8.5 10.0

STI DBSV Fore c a st Avg (Be fore EI )

7 .0 3.2 9.1 6.1 13.9 13.5 12.4

STI Conse nsus Avg 7.0 0.4 8.9 4.6 13.9 13.8 12.7

Eps Growth (%)

Source: DBS Bank, Bloomberg Finance L.P. Downward earnings revision trend resumes

Source: DBS Bank

Indications are that the downward earnings revision trend will continue given the uncertain growth outlook for the Singapore economy. The labour crunch and rising costs amid the government’s restructuring efforts have added to the woes facing many local companies. Next is the impact on earnings with the anticipated rise in interest rates. For companies under our coverage, we estimate that every 1ppt change in interest rates will reduce earnings by 3.6%. Our economist expects the FED to start its rate hike cycle in 4QCY15 at a pace of 25bps per quarter, lifting the FED funds rate from the current 0.25% to 1% by 2QCY16.

-1.3%

-3.6%

-1.5%

0.9%

-3.1%

-2.5%

-3.0%

-1.4%

-2.1%

-0.5%-0.7%-0.7%

-3.6%

-2.4%

-4.3%

-2.7%

1.0%

-1.4%-1.7%

-2.9%

0.0%

-1.5%

0.2%

0.9%

-1.6%

-2.9%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15

Yr 1 Forecast Yr 2 Forecast

Market Focus

Singapore Strategy

Page 4

Earnings upside vs downside potential Sector Comments Potential earnings upgrade

Transport If oil prices continue to hover around current levels for the rest of the year, we believe there is earnings upside risk for transport operators in particular as our fuel price assumptions are above current price levels. Hence, there could be bigger cost savings for airlines, shipping liners and land transport companies.

The strength of the US$ eroded fuel savings and increased other operating costs in the first half of 2015, and a continued but milder strengthening in the second half of the year could provide less pressure to the sector.

Potential earnings downgrade

Consumer discretionary and staples

Consumer sentiment continues to slide on the back of macro uncertainties and policies factors in the countries the companies are operating in. We expect earnings downside as topline growth could fall short of expectations.

The weakness in regional currencies against the US$ could also undermine margins and potential costs savings from a benign raw materials and energy/ fuel cost environment.

Possible earnings downside for Petra, OSIM, FNN and Courts. Offshore and Marine Rigbuilders are vulnerable to downward earnings revisions due to customers’ requesting for deferments and

heightened default risk in the current challenging O&G operating environment. However, cancellation risks remain low for Singapore rigbuilders given the reputable clientele base.

We also see downside risk to order win assumptions given the slow contract flows YTD. Singapore rigbuilders secured just S$531m worth of new orders in 1H15, representing only 11% of our full year expectation of S$5bn (down from S$9.2bn last year). So far, there has been a lack of new rig orders for Singapore rigbuilders YTD. The declining orderbook is a harbinger of earnings downtrend for next 2-3 years

Shipbuilders’ outlook continues to be plagued by the overcapacity issues in both shipping and shipbuilding sectors, though vast improvement has been seen the past 2-3 years. The ongoing consolidation, ship demolition, and slower supply growth should drive sector recovery in 2016.

Property Developers continue to remain watchful and selective in terms of their land-banking activities, and are cautious in timing future property launches given weak market demand.

Most developers have locked in sales to support 2015-2016 earnings. But, as developers draw down on locked-in sales, we project topline to decline y-o-y due to lack of substantial new launches in recent months.

Oil & Gas Services & Equipment

Downside risks to our earnings assumptions for OSV owner/ operators from further slide in shallow water day rates and continued delays in exploration and development projects, pending stability in oil prices

Downside risk to order win assumptions for OSV yards like Vard and Nam Cheong, especially in terms of order flows for deepwater vessels and PSVs.

SREIT We project the sector to deliver 5% p.a. growth in DPU for 2015-2016. Growth will mainly come from acquisitions; close to S$1.8bn in deals have been announced YTD.

Looking ahead, rental reversions are moderating given supply/demand imbalances (office and industrial), high business costs (retail) and a weak demand outlook (hospitality).

Among the REITs, we believe that earnings with potential downside risk will be the hospitality REITs, where the recovery is slower than previously anticipated due to weak travel demand from main markets of Indonesia, Malaysia in the midst of 5% growth in supply

REITs with exposures in AUD/EUR/JPY are expected to continue to see the impact of translation losses on conversion of monies back to SGD

Source: DBS Bank

Market Focus

Singapore Strategy

Page 5

Keeping a watchful eye on macro developments

Lacking domestic catalysts and under the shadow of further earnings downgrades, we expect the Singapore equity market to be driven by external events in 2H. These are: Shifts to US rate hike expectations

There are 2 variable factors to this. The first is when, the other is how fast. Consensus expectation is for the FED to start raising rates at the December FOMC meeting at a gradual and steady pace of 25bps per quarter that lifts the FED fund rates to 1% by June 2016. Financial markets have had ample time to prepare for the lift off in interest rates. Macro uncertainties such as ‘Grexit’, an uncertain global economy and a tame US PCE inflation could delay US rate hikes. Consensus currently sees a 43% (down from 55%) chance of a FED rate hike at the December FOMC meeting and a 32% (down from 51%) chance that the FED funds rate will reach 1% by June 2016. Watch Dow Jones. There may be uneasiness ahead of upcoming FOMC meetings on concerns that the FED ignores developing macro uncertainties by raising rates ‘too soon’ or at a ‘faster pace’ than expected. For US investors, the concern is that the strengthening of the USD amid a rising rates environment will negatively affect the competitiveness of US corporations. With US equities hovering at a lofty PE valuation at 17.1x (+2SD), this could trigger a correction in US equity markets that have held up thus far. US equity market valuation

8.0

10.0

12.0

14.0

16.0

18.0

20.0

06 07 08 09 10 11 12 13 14 15

(x)

Avg: 13.9x

+1sd: 15.5x

+2sd: 17.1x

-1sd: 12.3x

MSCI NORTH AMERICA - 12MTH FWD P/E

-2sd: 10.7x

Source: DBS Bank, Datastream

For Singapore, there could be increased nervousness among sectors with high gearing (e.g. SREITs, shipping, O&G) as the year end draws closer. However, we do not expect heightened volatility unless the FED surprises with an earlier-than-expected rate hike in September or hints about a more aggressive tightening pace. Such shifts in rate hike expectations will trigger another round of ASEAN currency weakness against the USD that leads to an outflow of funds from the region. Fortunately, at the moment, both seem unlikely with the weak global economic backdrop and as core PCE inflation, currently at 1.2% y-o-y, continues to move further away from the FED’s 2% target. DBS Bank FED funds rate forecast

0

0.2

0.4

0.6

0.8

1

1.2

2QCY16 3QCY15 4QCY15 1QCY16 2QCY16

FED funds rate (%)

Source: DBS Bank China equity market volatility

Greed has turned to fear for the China A-share market. The multi-month rally in Chinese equities overstretched valuations and raised warnings of a stock market ‘bubble’ finally gave way from mid-June with the Shanghai Composite plunging 30% on panic unwinding of speculative and margin trades. Euphoria doesn’t last forever, neither does panic. It is only a matter of time before the Chinese authorities’ increasing efforts to halt the unwinding achieve their goal. Even so, we expect market gyrations going forward as investors struggle to find a balance between overvaluation amid a slowing economy and catalysts such as the potential inclusion of China A-shares in the MSCI EM Indices and the SZ-HK connect. While these anticipated events had created a lot of excitement in China recently, for the rest of Asia though, it means funds may pull away to China/HK markets. There will be a squeeze on the weights of other markets in the event of China A-shares’ inclusion into the MSCI Indices. For Singapore, further outflow will occur if South Korea is reclassified as a developed market.

Market Focus

Singapore Strategy

Page 6

Shanghai Composite

Source: DBS Bank, Bloomberg Finance L.P.

Hang Seng Index valuation

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

(x)

-2sd: 8.1x

-1sd: 10.6x

Avg: 13.1x

+1sd: 15.5x

+2sd: 18x

Source: DBS Bank, Bloomberg Finance L.P. HSCEI valuation

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jul‐05 Jul‐06 Jul‐07 Jul‐08 Jul‐09 Jul‐10 Jul‐11 Jul‐12 Jul‐13 Jul‐14 Jul‐15

(x)

-2sd: 3.4x

-1sd: 7.5x

Avg: 11.5x

+1sd: 15.5x

+2sd: 19.5x

Source: DBS Bank, Bloomberg Finance L.P. ‘Grexit’

The third macro uncertainty is the chance of Greece exiting the Eurozone. Should it occur, we think investors will stand ready to bargain hunt on the sell-down, once the downward negative reaction completes. The thinking is that financial markets have had ample time to prepare for such an event over the past 3-4 years.

MSCI Europe valuation

6.0

8.0

10.0

12.0

14.0

16.0

18.0

06 07 08 09 10 11 12 13 14 15

(x)

MSCI EUROPE - 12MTH FWD P/E RTIO

-2sd: 8x

-1sd: 9.8x

Avg: 11.6x

+1sd: 13.4x

+2sd: 15.2x

Source: DBS Bank, Datastream Greece contributes just 1.8% to Eurozone’s GDP. A ‘Grexit’ will devastate the Greek economy but hurt the Eurozone on a much lesser scale. The ECB and European governments have also put in place instruments to protect the Eurozone from contagion. For the rest of the world, the risk of a contagion through the banking system has diminished as banks have reduced or cut off exposure to Greece and the Eurozone. Singapore banks have minimal exposure to Europe while UOB has drastically reduced its corporate bond exposure in recent years to just 1% of total assets. Demand outlook weakens for NOL and Hutchison Even if Greece manages to reach a compromise with its creditors and escape getting booted out of the Eurozone, the uncertainty does not end there. The €1.5bil repayment to the IMF at the end of June that the country has defaulted on is just one of the numerous large loan repayments that are lined up over the next 3 months. The 2 largest tranches are the €3.5bil and €3.2bil owing to the ECB, due on 20 July and 20 August respectively. Greece’s debt woes will continue to keep financial markets on their toes in the months ahead. Prevailing uncertainties will continue to be a drag on demand, affecting the recovery outlook for Europe and selected stocks such as NOL, Hutchison Port, Olam and Noble.

Market Focus

Singapore Strategy

Page 7

Greece debt repayment schedule to creditors till September

Cre di tor Due da te Amount De sc ription

IMF 30-Jun €1.55bil Loan under the IMF's first bailout program for Greece, in 2010

IMF 13-Jul €455mil Loan under the IMF's first bailout program for Greece, in 2010

ECB 20-Jul €2.1bil Bonds held by ECB exempted from the 2012 defaultECB 20-Jul €1.4bil Bonds held by national central banks exempted from the 2012 defaultECB 20-Aug €3bil Bonds held by ECB exempted from the 2012 defaultECB 20-Aug €168mil Bonds held by national central banks exempted from the 2012 defaultIMF 4-Sep €303mil Loan under the IMF's first bailout program for Greece, in 2010IMF 14-Sep €341mil Loan under the IMF's first bailout program for Greece, in 2010IMF 16-Sep €569mil Loan under the IMF's first bailout program for Greece, in 2010

IMF 21-Sep €341mil Loan under the IMF's first bailout program for Greece, in 2010 Source: Greece’s Public Debt Management Agency; International Monetary Fund; European Commission Singapore companies with US and Europe exposure

Sha re Pri c e

Ta rge t Pric e

Compa ny Re c (S$ ) (S$) in US in Europe comme ntsAscott Residence Trust Buy 1.305 1.38 34% The majority of the revenues from Western Europe are under master

lease structure, with reduces exposure to the volatility in the European hospitality market

CapitaLand Buy 3.35 4.11 9% Data for Europe includes others such as Australia. CapitaLand's exposure mainly relates to serv iced apartments operated by Ascott

Cosco Corporation FV 0.455 0.49 8% 32% Based on origin of customers by orderbook. Remaining 60% come largely from Asian customers

Ezion Buy 0.975 1.50 10% Exposure mainly in Asia Pac and 15% in Mexico

Frasers Centrepoint Limited

Buy 1.75 2.36 11% FCL's European exposure mainly relates to its hospitality business

Frasers Hospitality Trust Buy 0.805 0.96 22% The European exposure relates to hotels in the UK, which thus far have outperformed IPO forecasts

Hutchison Port Holdings Trust

Hold US$0.615 US$0.654 25% 20% Underlying trade flows to the US and Europe

Keppel DC REIT Buy 1.055 1.12 30% Data centeres in Ireland, Netherlands and UK have inbuilt annual escalations of between 2-4%

Noble Group Hold 0.685 0.95 65% 9% North America accounts for about 65% of Group revenue, majority of which should be related to the US

NOL Hold 0.905 1.07 47% 20% Asia-US and Asia-Europe trades

Olam International Hold 1.84 2.16 17% 20% Exposure to Europe and US are related to food products where demand is generally resilient. US contribution is actually related to Americas which includes both North America and South America

ST Engineering Buy 3.26 3.80 24% 4% Based on geographical location of customer

Sembcorp Industrials

Hold 3.84 4.30 3% 16% Exposure to USA and Europe stems largely from Marine business; Utilities - small contribution from Teeside

operations in the UK

Sembcorp Marine Hold 2.81 2.89 5% 25% Based on geographical location of customer by orderbook. Brazil accounts for more than half of the

orderbook

Singapore Airlines Buy 10.95 12.80 20% 22% By route area

Venture Hold 7.73 8.40 55% 5% Shipment to US may not necessary means the end market. Venture supplied to MNCs who sells their products

globally

Yangzijiang Buy 1.32 1.62 51% Based on origin of customers by orderbook. North America - 28% (mainly Canadian Seaspan); Asia - 21%

% Re ve nue e xposure

Source: DBS Bank

Market Focus

Singapore Strategy

Page 8

Negatives to lower oil prices

The fourth macro uncertainty is the negative effect of low oil prices and the potential for oil prices to head south again. While lower oil price brings about the benefits of lower costs for both corporations and consumers, the positive effect was somewhat offset in Singapore as the government was quick to raise fuel tax in its budget early this year. Meanwhile, the O&G sector has borne the brunt of the downside to lower oil prices with earnings downgrades as a result of contract postponements or cancellations. Earnings for the O&G sector under our coverage saw cuts of 8.7% and 7% for FY15F and FY16F respectively during the 1QFY15 results season. Not the end of earnings downgrade cycle yet Brent crude has rebounded from a low of USD45pbl to USD62pbl YTD. However, the concern going forward is that a successful conclusion to the current negotiations for Iran to restrict its nuclear program that clears the path for international sanctions to be lifted could flood the oil market with up to 1mil bpd of addition oil or approx.1% of global consumption. This could worsen the already oversupplied global market next year and further suppress oil prices. If this occurs, O&G stocks could suffer further earnings cuts. Riding the seasonality factor

A look at STI’s historic monthly performance reveals that the 3-month period from August to September is historically volatile. Furthermore, August is the worst month of the year in terms of consistency (9 out of 10 years have been negative) and m-o-m % loss (average -3.3%). We think 2 macro events that could trigger a return of market weakness in August are market jitters ahead of the September’s FOMC meeting on interest rates and concerns about Greece’s ability to repay the ECB a sum of €3.2bil on August 20th.

On the domestic front, attention could turn to the MAS’ monetary policy meeting in October 2015. Our Singapore economist notes that the decline in core inflation merits a close watch. The central bank expects 2015 core inflation to fall between 0.5 and 1.5%. Should it dip below zero and remain there in the coming months, full year core inflation would fall short of MAS’ target range, raising the odds of central bank action. Our currency strategist currently expects the USDSGD currency cross to rise to 1.42 by mid-2016. A further weakening of the SGD from current expectations could lead to an outflow of funds. On a more positive note, we observe that historically over a 10 year period, July boasts the best monthly performance in terms of consistency (9 out of 10 years have been positive) and highest m-o-m% gain (average +3.9%). The STI is down 0.9% month-to-date. It remains to be seen whether the positive seasonality factor for July can be maintained. STI historic monthly performance heat map

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2005 0.9 0.8 1.1 (0.6) 1.9 3.8 5.9 (3.0) 0.3 (3.7) 3.8 2.5

2006 3.0 2.9 2.0 3.3 (8.3) 2.6 0.1 2.1 2.9 4.9 4.6 5.4

2007 4.3 (0.3) 4.2 3.9 4.7 1.0 0.1 (4.4) 9.5 3.2 (7.1) (0.9)

2008 (14.0) 1.5 (0.6) 4.7 1.4 (7.7) (0.6) (6.5) (13.9) (23.9) (3.4) 1.7

2009 (0.9) (8.7) 6.6 13.0 21.3 0.2 14.0 (2.5) 3.1 (0.8) 3.1 6.1

2010 (5.3) 0.2 5.0 3.0 (7.5) 3.0 5.4 (1.3) 5.0 1.5 0.1 1.4

2011 (0.3) (5.3) 3.2 2.4 (0.6) (1.2) 2.2 (9.5) (7.3) 6.8 (5.4) (2.1)

2012 9.8 3.0 0.5 (1.1) (6.9) 3.8 5.5 (0.4) 1.2 (0.7) 1.0 3.2

2013 3.6 (0.4) 1.2 1.8 (1.7) (4.9) 2.3 (6.0) 4.6 1.4 (1.1) (0.3)

2014 (4.4) 2.8 2.5 2.4 1.0 (1.2) 3.6 (1.4) (1.5) (0.1) 2.3 0.4

2015 0.8 0.3 1.3 1.2 (2.7) (2.2)

Average monthly

ga in/( los s )(0.2) (0.3) 2.4 3.1 0.2 (0.3) 3.9 (3.3) 0.4 (1.2) (0.2) 1.7

Source: DBS Research

Watch list - Calendar of Events

Da te Eve nt

14th July 2015 Singapore - 2Q (Advance) GDP results

15th July 2015 China - 2Q GDP

28 - 29 July 2015 FOMC Meeting

30th July 2015 US -2Q (Advance) GDP Price Index

17th August 2015 Singapore - 2Q (Final) GDP results

20th August 2015 Greece's repayment of €3bil bonds held by ECB exempted from the 2012 default

20th August 2015 Greece's repayment of €168mil bonds held by national central banks exempted from the 2012 default

27th August 2015 US -2Q (Second) GDP Price Index

4th September 2015 Greece's repayment of €303 mil loan under the IMF's first bailout program from Greece in 2010.

14th September 2015 Greece's repayment of €341 mil loans under the IMF's first bailout program from Greece in 2010.

16th September 2015 Greece's repayment of €569 mil loans under the IMF's first bailout program from Greece in 2010.

16-17 September 2015 FOMC Meeting

21st September 2015 Greece's repaymeny of €341 mil loans under the IMF's first bailout program from Greece in 2010. Source: DBS Bank

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Strategy Market mood swings are a characteristic of the present macro uncertainties that could stretch over the next 3 months. While nimble traders may choose to capitalize on these sentiment swings, the risks are high and cold-hearted discipline is needed. For investors, we advocate a safe and defensive stance given earnings downgrade risks and macro uncertainties.

We classify our picks into 3 broad overlapping categories – high dividend yield, high earnings visibility and attractive valuation. Firstly, we seek out companies with higher earnings visibility given the uncertainty arising from the corporate earnings revision trend that had resumed downwards in 1QFY15. We maintain our time-tested preference to seek out companies with high dividend yields as macro uncertainties linger.

We like companies that generate stable and growing recurrent earnings, supported by net cash positions and decent dividend yields. We also like recovery plays and companies that have demonstrated their ability to raise returns via asset recycling.. An added safety net will be if attractive valuations overlap these conditions.

Telco companies M1 and Starhub offer both high earnings visibility and dividend yield. Between the two, our preference is M1 with a higher yield of 6% FY15F and 6.3% FY16F versus Starhub’s 5% FY15F and 5.2% FY16F. China Merchants has a good track record in dividend payout and currently offers a 7% yield. Toll road acquisitions should drive the Group’s top and bottom lines in the medium to long term. CSE Global’s new order wins has been healthy at S$103.1m, and offers an attractive dividend yield of 4.9%.

Among our coverage, Frasers Centrepoint Limited hits the bull’s eye in satisfying our 3 selection criteria for investors seeking a safe and defensive profile. Earnings visibility is underpinned by 59% recurring revenue with a longer-term target of 60-70%. It offers a reasonable 3.4% yield while valuation is attractive at less than 0.7x P/Bv NAV.

Flight to safety

High Dividend Yield

Cheap

High Valuations

Earnings wrt History

Visibility

SATS, SPH, Yangzijiang, Sembcorp Marine,

Sembcorp Industries, Venture, Silverlake, Amtek, ST Engineering, Pan-United,

Mapletree Ind'l Trust, MAGIC,ART, ASCHT, FCOT, CRT

Sheng Siong,ComfortDelgro,

ARA, iFAST

China Merchants,Parkway Reit, M1,

StarHub

SIA, Noble Group, Del Monte, Yoma, City Dev, Wing Tai, UOL, CapitaLand

Keppel REIT, CSE Global

Ezion

FCL

Source: DBS Bank Top 10 Stock Picks

China Merchant (Price: S$0.99, TP: S$1.54) We like China Merchants Holdings (Pacific) for its stable earnings outlook, as a pan-China toll roads operator, and potential acquisition-driven expansion, given its strong China Merchants Group parentage. The recently completed Jiurui Expressway acquisition and proposed acquisition of three toll roads in Guangxi Zhuang Autonomous Region should help propel the Group’s top and bottom lines in the medium to long term, and possibly pave the way for CMHP to seek a dual-listing in HK in the future. The stock offers an attractive dividend yield of 6.5%, and our TP of S$1.54 is based on DCF. Frasers Commercial Trust (Price: S$1.52, TP: S$1.79) FCOT’s portfolio enjoys high occupancy of 96.5% and a long WALE of 3.9 years. In addition, >30% of leases have annual rental escalations of c.3%, which provides in-built income growth. With no debt expiring until FY17, and close to 80% of interest costs hedged into fixed rates, the Trust is well positioned to ride out the economic downturn in Australia, as well as near-term interest rate volatility. FCOT offers investors compelling dividend yields of 6.6-6.9%.

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M1(Price: S$3.33, TP: S$3.60) Mobile data re-pricing is expected to benefit M1 as 61% of its postpaid customers are on tiered data plans (vs 58% in 2Q14) with 22% of users exceeding their data bundles. The continued adoption will be crucial in supporting M1’s postpaid ARPU. On the entry of a fourth telco, we assumed 100% probability and modelled 10% adverse impact on M1’s revenue in 2022. The stock offers attractive yield of c.6%. Sheng Siong (Price: S$0.835, TP: S$0.91) We believe that SSG will deliver higher margins as fresh product sales mix improves over time. SSG is on course to open four new stores this year (ahead of our expectation), bringing its store network to 38 in 2H15. Longer-term growth opportunities lie in China. New income stream in FY15F will come from its newly acquired property in Tampines. Supermarket businesses are non-cyclical and therefore provide stable earnings and dividends to shareholders. SSG offers an attractive dividend yield of about 4%, as it pays out 90% or more of its earnings as dividends. Mapletree Greater China Commercial Trust (Price: S$1.00, TP: S$1.12) MAGIC will benefit from positive outlook for Festival Walk on the back of continued interest from new brands and limited exposure to Chinese tourists. Over 4QFY15 (FYE Mar15), the trust achieved healthy rental reversions, up 22% for Festival Walk (Retail) and 30% at Gateway Plaza. Meanwhile, 4Q15 tenant sales at Festival Walk jumped 11% y-o-y with footfall registering a 7% increase. Going forward, despite an expected decline in the number of mainland Chinese tourists to HK on the back of tighter visa restrictions, Festival Walk should continue to do well as it is positioned as a suburban mall, and has limited exposure to mainland tourists (estimated 11-13% of its sales). ST Engineering (Price: S$3.26, TP: S$3.80) ST Engineering is a proxy to recovery in US, as about 24% of total sales is derived from the US. A stronger US dollar is also positive to STE's earnings. Orderbook of about S$12.2bn remains relatively stable and covers close to two years of revenue and secures visibility. We expect earnings performance to improve in FY15 after a weak FY14. Attractive dividend yield of around 4.6% remains the key positive support for the stock, and is underpinned by strong operating cash flows and a healthy balance sheet (net cash of around S$713m as of end-1Q15). SIA (Price: S$10.95, TP: S$12.80) SIA‘s ROE has been low, averaging 3.5% in the last 5 years, hit by high fuel cost, low yields and intense competition in the industry. With net cash of S$3.9bn, there is potential upside to ROE from optimisation of its capital structure. Near term, fuel savings would kick in and drive SIA’s earnings performance in future quarters, raising ROE to 5.8% in FY16.

We project SIA to pay out DPS of 40Scts for FYE Mar 16, given the improved profit outlook and its strong cash position. This equates to c. 60% payout and translates to a decent dividend yield of 3.4%. Potential upside could come from capital reduction or bonus dividend payout. SIA’s share price has lagged behind its regional peers due to the drag on earnings from fuel hedging losses. Share price should re-rate as benefits from the lower cost of fuel flows through its earnings. Del Monte (Price: S$0.37, TP: S$0.50) Following the acquisition of US-based Del Monte Foods Inc. (DMFI), DMPL has posted two consecutive years of losses arising from transaction charges, acquisition-related expenses, and high interest expenses amid a softening US business. These are now behind us and we expect DMPL to post a turnaround in FY16F to register a net profit of US$52m. We expect re-rating and valuation discount gap against peers to narrow as performance materialises. We currently peg its S$0.50 TP to a conservative 12x PE. Risks exist but low valuation for a well-known brand seems too attractive to ignore. CapitaLand (Price: S$3.35, TP: S$4.11) CAPL, positioned mainly in Tier 1/2 cities in China, expects a steady return in buyers and is looking to launch close to c.7,600 units to capture the recovery in price trend. With 45% of its assets in China, Capitaland is a clear proxy to benefit from the easing monetary policy in China. Management has highlighted opportunities within its integrated developments across its key markets of China and Singapore. Its ongoing retail mall developments remain on track to complete over 3 years, and will underpin a steady growth in recurring earnings. We believe that 2015 is an appropriate time for the company to look at asset recycling of some of the stable assets (Westgate Mall, CapitaGreen upon TOP and retail malls in China) in its portfolio to its REITs to optimize capital values and lock in gains. This should also help to close the gap between share price and RNAV. The stock is undervalued, with upside to its ROE from value unlocking and recycling. Fraser Centrepoint Ltd (Price: S$1.75, TP: S$2.36) FCL has good brand visibility and strong market niche in core markets in Singapore, China and Australia. 59% of its revenue is recurring, with a longer term target of 60% - 70%. It enjoys strong income visibility from locked-in sales from development projects, with 15% of its assets in China. With a stable of listed REITs which are trading at/above NAVs, we believe that its asset recycling strategy will be a key driver for NAV growth. The group has a good portfolio of stabilised assets in hospitality, office and retail sectors which can be sold to its REITs. The group has proposed the sale of 357 Collins Street to Frasers Commercial Trust. Stock is undervalued, trading at 0.7x P/BV.

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Stock Picks

FYE Mkt Pric e Ta rge tCompa ny Ca p (S$) Pric e %

(US$m) 9-Ju l (S$) Ups ide Rcmd 15F 16F 15F 16F 15F 16F 15F 16F

Defensive Yield

China Merchants Hldgs Dec 849 0.99 1.54 56% Buy 10.4x 10.2x 0.8x 0.9x 7.1% 7.1% (3%) 2%

Frasers Commercial Trust Sep 770 1.520 1.79 18% Buy 17.4x 16.8x 0.9x 0.9x 6.6% 6.8% 18% 4%

M1 Dec 2,311 3.33 3.60 8% Buy 16.7x 16.0x 7.7x 7.5x 6.0% 6.3% 4% 5%

Sheng Siong Dec 930 0.835 0.91 8% Buy 23.7x 21.4x 5.2x 5.1x 3.8% 4.2% 13% 11%

Mapletree Greater China Commercial Trust*

Mar 2,024 1.000 1.12 12% Buy 18.0x 17.4x 0.8x 0.9x 7.2% 7.5% 11% 4%

ST Engineering Dec 7,511 3.26 3.80 17% Buy 18.0x 16.8x 4.6x 4.3x 4.6% 4.8% 6% 7%

Yangzijiang Dec 3,745 1.32 1.62 23% Buy 7.2x 6.7x 1.0x 0.9x 4.5% 4.5% (7%) 8%

Recovery

Singapore Airlines* Mar 9,499 10.95 12.80 17% Buy 16.9x 11.7x 0.9x 0.9x 3.7% 5.5% 129% 45%

Del Monte* Apr 526 0.37 0.50 38% Buy 10.2x 7.6x 1.6x 1.3x 0.0% 2.6% 35%

Asset Recycling

Capitaland Dec 10,592 3.35 4.11 23% Buy 20.0x 18.3x 0.8x 0.8x 2.4% 2.4% (38%) 9%

Frasers Centrepoint Ltd Sep 3,753 1.75 2.36 35% Buy 6.6x 5.9x 0.7x 0.6x 3.0% 3.4% 59% 12%

EPS / DPUPE (x) P/B (x) Div Yld Growth

Source: DBS Bank * FY16 & 17 forecast

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DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 31 May 2015 except Ascendas Hospitality Trust, Ascott Residence Trust, CapitaLand, City Development, ComfortDelgro, Cosco Corporation, Croesus Retail Trust, Ezion Holdings, Frasers Commercial Trust, Frasers Hospitality Trust, Hutchison Port Holdings Trust, Keppel DC REIT, M1, Mapletree Greater China Commercial Trust, Mapletree Industrial Trust, Neptune Orient Lines, Noble Group, Parkway Life Real Estate Investment Trust, SATS, Sembcorp Industries, Sembcorp Marine, Singapore Airlines, SPH, ST Engineering, StarHub, UOL Group, Venture Corporation , Wing Tai, Yangzijiang Shipbuilding, Yoma Strategic Holdings.

2. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of Ascott Residence Trust, Croesus Retail Trust, Frasers Hospitality Trust, Keppel DC REIT, Mapletree Greater China Commercial Trust. and 5% of Croesus Retail Trust as of 31 May 2015.

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3. Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from Ascott Residence Trust, Croesus Retail Trust, Del Monte Pacific, Del Monte Pacific, Frasers Hospitality Trust, iFAST Corp Ltd, Keppel DC REIT, Yoma Strategic Holdings.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or

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Wong Ming Tek, Executive Director, ADBSR

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This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

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