Singapore Market Focus Singapore Strategy Singapore Market Focus Singapore Strategy Refer to...

ed: TH / sa: YM

STI : 2,815.04

Analysts Janice CHUA +65 6682 3692 YEO Kee Yan +65 6682 3706 [email protected] [email protected]

LING Lee Keng +65 6682 3703 Singapore Research Team [email protected]

Key Indices

Current % Chng 1 day STI Index 2,815.04 -0.7% FS Small Cap Index 392.52 -1.4% USD/SGD Curncy 1.41 -0.3% Daily Volume (m) 1,033 Daily Turnover (S$m) 904 Daily Turnover (US$m) 646

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

(%) EPS Gth Div Yield

2015E (1.6) 3.9 2016F 8.2 4.1 2017F 7.8 4.1 (x) PER EV/EBITDA

2015E 14.1 11.4 2016F 13.1 10.5 2017F 12.1 10.3

Source: DBS Bank Stock Picks

Price ($)

14 Dec 15 Target Price

($) Rcmd

Capitaland 3.120 3.73 BUY

City Developments 7.030 10.26 BUY Ezion Holdings 0.555 1.00 BUY

Frasers Centrepoint Ltd 1.690 2.05 BUY

Japfa Ltd 0.465 0.90 BUY

Mapletree Greater China 0.890 1.11 BUY

Sheng Siong Group 0.840 1.01 BUY

ST Engineering 2.920 3.60 BUY

Thai Beverage 0.675 0.82 BUY

Venture Corporation 8.300 9.00 BUY

Source: Bloomberg Finance L.P; DBS Bank

DBS Group Research . Equity 17 Dec 2015

Singapore Market Focus

Singapore Strategy

Refer to important disclosures at the end of this report

Ride the hike Lift off in interest rates, currency volatility, oil prices,

changes in domestic policies and restructuring initiatives will be key drivers for 2016

Overweight Transport, a beneficiary of low oil prices and Property developers, which are trading at distressed valuations with upside catalyst from potential policy relaxation

We pick smart nation proxies, beneficiaries of domestic policy changes and companies in value unlocking mode, generating upside in dividend payout

Stock picks: Capitaland, City Devt, Ezion, Frasers Centrepoint Ltd, Japfa, Mapletree Greater China, ST Engineering, Sheng Siong, Thai Bev and Venture Corp

5 key drivers in 2016. The pace of rate hikes vs economic recovery will drive volatility. Beyond the initial knee jerk reaction, history has shown that the first 1-3 months could be negative for equities once the Fed starts its rate hike cycle, but would improve as the economic recovery gathers momentum. Currency took a hit in 2015, and will be less of a worry as 2016 progresses if Asian growth recovers. The oil price, at a seven year low, is close to the bottom, and offers rebound opportunities although recovery is still some way off. Potential changes in domestic policies offer upside catalysts in Land Transport, Property while a fourth player in the Telecoms sector, if successful, will impact incumbents. Restructuring and M&A opportunities will gather momentum; the market is trading at only 1.2x Price-to-Book.

Inexpensive valuation, pricing in nascent growth. The shadow of higher interest rates, more earnings disappointments during the upcoming 4QFY15 results season and uncertain growth outlook next year could be a near-term drag for equities. The consolation is that after the dismal YTD decline of more than 17%, STI’s valuation is inexpensive. At 2800, STI trades at 11.46x (-1.5SD) FY16F PE vs EPS growth of 5.9%. We expect a trading range of 2650-3100 over the next 6 months.

Look for opportunity to buy in 1Q16 on further weakness. We see weakness in 1QCY16, throwing up opportunities to accumulate for a tradable rally because: 1) market valuation is inexpensive, 2) history shows the inflexion point for the negative stock market reaction after the initial US rate hike is within a 3-month period, and 3) the period from mid-March till end-April is traditionally positive for equities as investors position ahead of stocks going ex-dividend.

Smart nation proxies and companies in value unlocking mode: Despite low oil prices, Ezion is a valuation trade to ride on any oil price rebound, which we believe is near its bottom. Prefer Property developers (Capitaland, Frasers Centerpoint Ltd, City Devt) to REITS (selective on companies with resilient earnings and growth – Mapletree Greater China (MAGIC)). We pick smart nation proxies (ST Engineering) and companies in value unlocking mode generating upside in dividend payout. Venture is backed by an attractive dividend yield and strengthening US$; Thai Bev and Sheng Siong offer steadily growing cash flows. Japfa’s valuation is bombed out while earnings are poised for recovery.

Singapore Strategy

2016 Outlook

Table of Contents 5 key drivers for the market 3

Outlook 4

Strategy 7

Sector Preferences 8

Stock Picks 10

What Drives Stocks in 2016? 12

1) Interest Rates – the lift off, finally 12

2) Currency – less of a worry 14

3) Oil prices – lower for longer 16

4) Watch for changes in domestic policies 16

5) Restructuring, M&A activities gathering momentum 19

Sector Outlook

Banks - Neutral 22

Consumer Goods - Underweight 24

Offshore & Marine - Underweight 26

Oil Services & Equipment Providers - Underweight 28

Plantation - Neutral 30

Property Developers - Overweight 32

Singapore REITs - Neutral 34

Telecommunication - Neutral 36

Transport - Overweight 38

Stock Profiles

CapitaLand 41

City Developments 47

Ezion Holdings 53

Frasers Centrepoint Ltd 60

Japfa Ltd 66

Mapletree Greater China 72

Sheng Siong Group 78

ST Engineering 84

Thai Beverage 90

Venture Corporation 98

Analysts Janice CHUA +65 6682 3692 [email protected] YEO Kee Yan +65 6682 3706 [email protected] LING Lee Keng +65 6682 3703 [email protected]

LIM Sue Lin +65 6682 3711 [email protected] Andy SIM +65 6682 3718 [email protected] Alfie YEO +65 6682 3717 [email protected] HO Pei Hwa +65 6682 3714 [email protected] Suvro SARKAR +65 6682 3720 [email protected] Ben SANTOSO +65 6682 3707 [email protected] Derek TAN +65 6682 3716 [email protected] Mervin SONG +65 6682 3715 [email protected] Sachin MITTAL +65 6682 3699 [email protected] Paul YONG +65 6682 3712 [email protected] Singapore Research Team [email protected]

Singapore Strategy

2016 Outlook

5 key drivers for the market

Driver Our View Impact on Equity Market

US interest Rates

Imminent rate hike expected, ‘how fast’

matters next

2016: DBS Research sees FFR rising

100bps, consensus sees just 50bps

Our view for 100-bp hike next year to FFR

1.5% still falls within the context of ‘more

gradual’ increase compared to previous

three rate hike cycles

Initial volatility if our view for a 100-bp hike next year eventually

becomes more ‘consensus’

Historically, equity markets have been weak in first two months

post rate hike but would stabilise & improve beyond that

January dip - Capricorn rally short-lived on rate hike uncertainties

& concerns of a weak 4Q15 results season

STI – Opportunity to accumulate if 1Q16 decline towards 2650

Currency Currency weakness less of a worry as 2016

progresses if Asian growth recovers. The

hit was taken last year, expecting a gradual

slope of appreciation for US$ vs Asean

currencies this year.

Historically, USD weak in the months

following the first rate hike

Currency strategist expects strengthening

US$. USD/SGD rise to 1.47 with a possible

3Q top. Look for US$ trend to reverse in

2016

Further strength in USD as rate hike cycle progresses is a sign of

US recovery that also benefits Asian economies

A growth recovery should eventually see funds returning to this

region

Oil Oil price to average US$50pbl in 2016,

near-term rebound off Brent US$36pbl is

possible

Supply/demand equilibrium unlikely to be

restored till 2017 earliest

Wild card for upside risk geopolitical,

Middle East a hot spot.

Singapore rigbuilders face multi-year downturn, OSV players are

struggling to stay afloat

Value emerging – SCI, and Ezion

KepCorp, SCI , SMM and YZJ’s weightage on STI is small at

<6%

Oil price volatility impact on SG equity market ‘indirect’ through

regional currencies & fund flows

Domestic policy changes Land transport sector – Awaiting

Government Buys Contracting Model,

New Financing Framework for rail,

regulation for 3rd party taxi booking apps

Property – Potential policy relaxation

Telecom – Threat of a 4th player

Land Transport – SMRT & ComfortDelgro have risen ahead of

reform expectations, positives mostly priced in

Property – Policy tweaks to come if physical prices fall 13-15%

from peak (current drop about 9%), estimated by the end of

2016. Positive for CityDev with 27% exposure to SG properties

Telco – New 4th player could garner 7% revenue share by 2022,

negative for M1 & Starhub Restructuring /M&A Restructuring/M&A activities to gather

momentum as SG market valuation

attractive at 1.2x P/BV post stock market

correction

OSV – Depressed valuation, better capital access & move up

value chain. Potential targets Ezion, Triyards, Dyna-Mac, EMS

Offshore

Rising pressure on shipyards Keppel Corp & SMM to

restructure/merge to derive cost benefits and combat global

competition

Structural challenges in aircraft maintenance sector could push

for consolidation - STE and SIE may consider merger funded by

STE’s strong balance sheet Source: DBS Bank

Singapore Strategy

2016 Outlook

Outlook & Valuation

2016 outlook is challenging

Our Singapore economist sees a challenging growth outlook over the next 6-9 months with significant risks to global growth and trade flows. Our GDP growth forecast of 2.1% for 2016 is only a marginal improvement from 2015’s 1.8%. Signs of stabilisation will probably emerge only in the latter part of 2016 when the impact of the Fed's monetary normalisation is fully digested by financial markets and the uncertainty about China’s deceleration is addressed. Domestic restructuring measures may also turn more accommodative

with new emphasis on helping companies boost revenues and internationalise.

Earnings – no respite to downside

Earnings cut momentum in 2015 accelerated as the year progressed, affected by uncertainties leading to interest rate hikes in US, weak regional currencies against USD, low oil prices, the slowdown in China economy and geopolitical risks. As at end-3Q15, we had cut our earnings estimates by about 12% for both FY15 and FY16.

Earnings revision trend

-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%-3.6%

-4.6%

-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%-3.2%

-6.4%-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

Yr 1 Forecast Yr 2 Forecast

As at 3Q15, earnings cut of about 12% in 2015

Source: DBS Bank

Looking for a 5.9% earnings rebound for STI stocks.

Going into 2016, with expectation of muted GDP growth of 2.1%, we expect earnings growth of 8% for our basket of stocks, driven by growth in Healthcare and Oil & Gas. Though we expect the Healthcare sector to deliver double-digit growth for FY16F, led by IHH, we are overall Neutral on the sector given the rich valuations. The higher rate of growth seen for IHH in FY16F arises from a lower base in FY15F, due to the FX translation loss. The Oil & Gas sector is expected to rebound from negative growth of 34% for FY15, a kitchen-sinking year. However, downside risk to the Oil & Gas sector remains, especially if oil prices remain low for a prolonged period of time and that could lead to more deferments, cancellations and asset deflation. For the Industrial sector, growth is mainly led by the China water plays - China Everbright Water, SIIC Environment – on the back of the robust development in the water sector. F&N is also another key contributor to the 15% growth for the Industrial sector.

We expect earnings growth for Banks to moderate in 2016 to 6% from an expected 12% in 2015. Rate hikes may not translate into a significant NIM spike. With loan growth likely to stay in the low single digits, top-line growth will be slower. Non-interest income is unlikely to excite as well and may be volatile depending on markets. As we exit the benign credit cycle, credit costs will start to accelerate.

At the other end of the spectrum, S-REITs' performance is likely to be capped as interest rates rise over 2016. We believe that selective S-REITs in the retail sector such as Mapletree Greater China Commercial (MAGIC ), Frasers Centrepoint Trust (FCT) and Mapletree Commercial Trust (MCT) can still deliver decent growth in net property income, supported by resilient tenant sales performance and strong asset positioning. Potential downside risks come from the commercial hotel and office subsectors due to demand/supply imbalances and weak GDP growth outlook in Singapore.

Singapore Strategy

2016 Outlook

For Consumer Goods sector, we project earnings to recover from negative growth in 2015, premised on our expectations that regional GDP growth will be better in 2016, volatility in regional currencies will ease, stimulus packages announced by authorities will come into effect, and 2015 will be “kitchen sunk” to derive a lower earnings base for companies to register growth. Based on our bottom-up forecasts, we expect to see earnings turnaround for Del Monte, Super Group, Petra Foods and F&N.

FY16 earnings growth by sector

0

5

10

15

20

25

30%

Source: DBS Bank

Sector Valuation

Eps Growth (%) CAGR PER (x) Div Yld

Sector 2015F 2016F 2017F 15-17 2015F 2016F 2017F 2015 Banking 12.1 5.4 8.0 6.7 9.2 8.8 8.1 3.9

Consumer Goods -4.4 4.8 10.8 7.8 14.4 13.8 12.4 2.5

Consumer Services -2.7 13.6 5.8 9.6 20.0 17.6 16.6 3.1

Financials 1.4 4.6 3.7 4.2 22.4 21.4 20.6 5.7

Health Care 10.7 26.7 13.7 20.1 47.7 37.6 33.1 0.9

Industrials -6.1 15.1 16.3 15.7 18.1 15.8 13.6 3.5

Oil & Gas -36.3 19.8 8.2 13.8 10.5 8.8 8.1 5.3

Real Estate -22.3 9.5 7.0 8.3 15.4 14.0 13.1 2.1

REITS 5.5 3.6 3.0 3.3 14.2 13.7 13.3 7.1

Technology 8.7 9.4 6.8 8.1 9.7 12.2 11.4 6.0

Telecommunications -0.1 6.2 5.7 5.9 16.0 15.0 14.2 4.8

DBS Coverage -1.6 8.2 7.8 8.0 14.1 13.0 12.1 4.0

Ex-property -0.3 8.1 7.9

STI DBSV Forecast Avg (Before EI)

-2.4 6.1 7.2 6.6 12.3 11.6 10.8

STI Consensus Avg -3.8 5.0 7.0 12.5 11.9 10.9 Source: DBS Bank

‘Capricorn Rally’ likely short-lived or MIA

The shadow of higher interest rates, risk of more earnings disappointments during the 4QFY15 results season and uncertain growth outlook next year continue to be a near-term drag for equities. Furthermore, history has shown that the initial 1-3 months would be negative for equities once the Fed starts its rate hike cycle. We believe that any attempt at a ‘Capricorn Rally’, if any at all, will be short-lived or unsuccessful. Stocks could start the New Year with a ‘thud’ rather than a ‘BOOM’.

Low valuation is a consolation amid uncertainties

The consolation is that after the dismal YTD decline of more than 17%, STI’s valuation is inexpensive. At 2800, STI trades at 11.46x (-1.5SD) FY16F PE. EPS growth is at a comfortable 6.1% although the figure risks getting tweaked lower. Still, these provide some cushion to downward pressure.

Accumulate weakness around STI 2650

We see weakness in 1QCY16 on interest rates and earnings uncertainties. We look to accumulate stocks upon this weakness for a tradable rally because: 1) market valuation is inexpensive, 2) history shows the inflexion point for the negative stock market reaction off the initial US rate hike is within a 3-mth period, and 3) period from mid-March till end-April is traditionally positive for equities as investors position ahead of stocks going ex-dividend.

Singapore Strategy

2016 Outlook

Target range of 2650 – 3100 over next 6 months. We peg a range of 2650 to 3100 over the next six months. The lower 2650 level is pegged to 10.71x (-2SD) 12-mth forward PE while the upper 3100 level is pegged to 12.22x (-1SD) blended FY16/17 forward PE.

Our end-2016 target for the STI is 3200 based on 12.22x (-1SD) FY17F PE.

STI forward PE levels

-2sd 10.71x PE

-1.5sd 11.46x PE

-1 sd 12.22x PE

-0.5 sd 12.98x PE

Avg 13.74x PE

FY16 2,624 2,808 2,994 3,181 3,367

FY17 2,814 3,011 3,210 3,410 3,610

Avg 16 & 17 2,719 2,909 3,102 3,295 3,488 Source: DBS Bank

Straits Times Index (Daily)

Source: DBS Bank

Singapore Strategy

2016 Outlook

Strategy Prefer beneficiaries of low oil prices but distressed valuation of oil and gas stocks offer trading opportunities near its low. While the recovery in oil prices has been pushed back to 2017, oil price volatility will rule the day, offering trading opportunities as we approach the bottom. Airlines should see a stronger earnings turnaround as its expensive hedges expire. Rigbuilders and asset owners in the oil and gas value chain will be overshadowed by continued flush of bad news unfolding, as the ill effects of the downcycle takes its toll.

That said, oil prices are near their bottom and the wild card from geopolitical uncertainties could provide upside swings for a valuation trade. We believe Ezion is able to weather the current crisis with strong cash flows as the group diversifies its customer base to non-oil and gas-based, venturing into alternative energy projects. Earnings recovery is underpinned by the resumption of vessels entering the fleet and maiden charter income from new vessels.

Prefer Property developers to REITs. With the impending rate hike finally coming through, this will limit share price performances of Singapore REITs. Closely watched will be the pace of rate hike, the rising cost of capital will limit acquisition growth. Add this to operational headwinds against a lacklustre GDP growth, S-REITs’ current yield spread of 4% above 10-year bond yield is fair. We are selective on REITs and pick only those with superior growth in the sector. Mapletree Greater China Commercial (MAGIC) is undervalued, trading at 0.8x book, and offers the highest growth in the sector with a decent yield of 7.4.%.

Current distressed valuation of property developers, at P/BV of 0.7x, similar to valuations during the Asian Financial crisis and global crisis, points to potential upside. The upside catalyst could come from a possible easing of government policies to relax cooling measures. We pick Capitaland and Frasers Centrepoint Ltd which are diversified property plays with growth from China. City Developments, trading at -2SD, will see top-line growth from the South Beach integrated development project in Singapore and consistent and regular cashflows from its commercial and hotel segments.

Smart nation proxies. With Singapore’s ruling party securing a resounding victory at the 2015 general elections, the government returns its focus on preparing the country for the long-term challenges ahead. One key trust is Singapore’s push towards becoming the world’s first Smart Nation, which will improve the quality of life for individuals and business opportunities for enterprises by harnessing IT, networks and

data. In implementing the Smart Nation infrastructure, the government is keen to promote Heterogeneous Network (HetNet), which will mitigate capacity crunch, optimise overall network capacity to improve quality of service, and facilitate intra-operator roaming that would improve network resiliency. The Smart Nation services will revolve around five main areas of focus involving healthcare, transport, logistics, Smart HDB town framework and Smart Tech Challenges.

Singapore is poised to be among the global leaders in adoption of Internet of Things and big data as it pushes its Smart Nation programme to resolve challenges in the utilities, transport and healthcare space through technology. Given the government’s proactive approach, we believe ST Engineering’s electronics division is well positioned to secure Smart Nation projects worth more than S$1bn in the near future. ST Electronics has already secured 7out of 15 pilot projects in Jurong Lake district for the Smart Nation project, including 1) Smart Traffic Management System, 2) Location Information in Urban Environment, 3) Estate Energy Management System, 4) Smart Outdoor Lighting, 5) Smoke Detection, 6) Smart Walk, and 7) Smart Phone as Sensor.

Look for companies with dividend upside potential. One resounding theme in 1H16 will be companies with upside in dividend yield. In the process of restructuring to raise ROE, companies could speed up their efforts to divest non-core assets and unlock value for shareholders. The Temasek stable of companies have led the way with several moves to enhance earnings and returns – Keppel Corp privatising Keppel Land, Sembcorp Industries' sale of SembSita for a capital gain of S$350m, Capitaland divesting its stake in Bedok Mall to CMT, to name a few. City Developments has just announced a deal to monetize 3 office properties via a JV investment platform with Keppel Land. Our bets on companies with potential dividend upside are SIA Engineering, ST Engineering, Capitaland, SembCorp Industries, SATS, and Comfort Delgro.

We like Sheng Siong and Venture Corp for their steady businesses and sustainable yields while Venture offers upside from a strengthening US$. Thai Bev will ride on its dominant position as a leading spirits player in Thailand while seeking new avenues of growth to transform into a regional beverage player. Japfa is poised for earnings recovery, as DOC prices have stabilised above breakeven cost, the company is riding on strong growth in China’s raw milk output, Rupiah stabilisation, recovery in purchasing power and low soybean meal prices. Backed by 25% EBITDA CAGR over the next three years, JAPHA remains undervalued at 7.4x forward PE.

Singapore Strategy

2016 Outlook

Sector Preferences Sector Highlight Outlook Transport-related Overweight

• Airlines beneficiary of lower oil prices

• All eyes on Singapore land transport reform

Airlines to further alleviate costs in 2016 as jet fuel price stays benign and expensive fuel hedges expire. Even with yields under pressure, we expect earnings for airlines to improve in 2016. Land transport : The positive impact of the New Rail Financing Framework for SMRT and potential upside from bus reforms for ComfortDelgro are largely priced in. ST Engineering – Good visibility as order book of S$12.2bn covers close to two years' revenue. Strength in Electronics will help offset weakness in Marine division next two years. Expect steady earnings and dividends in the near term. Yield 4.5%. CMH Pacific - Unique combination of yield (>8%) and growth, driven by both organic traffic growth and acquisitions. Potential re-rating from further China toll road acquisitions.

Property Overweight

Trades at attractive 0.7x P/BV, implying attractive risk/reward ratios

SG developers substantially de-risked residential portfolio and diversified earnings base

Expect policy easing if prices fall 13-15% from peak

Most negatives priced in as current low PB valuation occurred only during economic stress in 1997, 2003 & 2009, which we believe is not the case going forward. Catalysts could come from potential policy relaxation, which we think will come post a peak-to-trough fall in prices of 13-15%, estimated by the end of 2016. Currently, the drop in PPI is 9% from the peak. Our picks are CapitaLand and Frasers Centrepoint Limited. We prefer diversified companies with a multi-sourced income profile, with strong recurrent cashflows. We like developers with exposure to China (retail sector, Tier 1/Tier 2 residential sector) where we see increasingly stronger data-points on a sustained recovery in performance. City Developments is a valuation trade, at P/BV of 0.7x, below GFC valuation.

Banks Neutral

Rate hikes may not translate into significant NIM spike

Earnings growth moderated from 12% in 2015 to 5% in 2016

Higher credit costs expected as we reach the end of a benign credit cycle

Asset quality relatively healthy

We see SIBOR heading to 1.95% by 4Q16 from current 1.08%. But NIM uptick may be muted given rising funding costs, high S$ loan-to-deposit ratio of 87%. Loan growth likely to stay in the low single digits, top-line growth even slower. Asset quality capitulation appears remote but be watchful of the labour market as further weakening may impair its asset quality. OCBC is our pick on solid asset quality and Greater China traction. Our S$10.00 TP is derived from the Gordon Growth Model and implies 1.1x FY16F P/BV. The potential reach of its differentiated non-interest income franchise should support valuation. A turn in the interest rate cycle with minimal disruption to asset quality will be testimony of its robust credit position.

REITs Neutral

Performance to be capped as interest rate rise over 2016

Retail and selected S-REITs with overseas exposure best positioned against interest rate risk

Consensus expectation of 50bps may be underestimating pace of Fed hikes in 2016. Current yield spread of 4.0% (compared to forward 10-year yield of 3.0%) is fair given moderating growth prospects & rising operational headwinds. Greatest obstacle is rising cost of capital. Opportunities for portfolio expansion limited as investors likely to frown on S-REITs gearing up to acquire assets. Uncertainties from increased forex volatility and tax leakages mutes S-REITs' ability to drive accretion. Our picks remain on S-REITs with superior/growth or in sectors leveraged to economic growth. These are MAGIC, CRCT, FCT and MCT.

Telco Neutral

Potential threat of 4th mobile player entry partially priced in

Pay-TV sector likely mid-term resilient despite 2016 Netflix's entry; but pay-TV business model under long term threat

Potential 4th player could gain 7% revenue share in five years. We anticipate earnings to start falling at M1 and StarHub from 2017 onwards. Singapore Pay-TV players are likely mid-term resilient as Netflix is likely to partner with existing pay-TV players due to the small size of the market. However, the channel aggregator model of Pay-TV players at risk in the long term as individual channels such as HBO and CBO go online.

Source: DBS Bank

Singapore Strategy

2016 Outlook

Sector Preferences Sector Highlight Outlook Plantation Neutral

Watch out for steeper-than-normal drop in 1Q16 FFB yields, flood of Argentine soybeans

Upside risks are pronounced El Nino impact, Indonesia/US biodiesel blending, recovery in crude oil prices

Expect Malaysian palm oil output to ease 0-4% next year. Lower output and ramp-up in biodiesel blending should normalise global palm oil stockpile quickly. Prospective El Nino mostly priced in. Uncertainties to CPO price are (1) potential release of Argentine old-crop soybean inventories, (2) size of South American soybean crop, (3) US biodiesel demand, (4) crude oil price, and (5) USD strength. We continue to recommend Wilmar International as large processing capacities, the Indonesian B15/20 programme, favourable consumer product margins and strong oilseed crushing margins should work to boost its FY16F earnings.

Consumer Goods Underweight

Uncertain start to 2016, potential kitchen-sinking 4Q15 results

Economic stimulus & regional currencies stabilisation may drive 2H16 earnings recovery

Advocate safer bets initially before looking to add /switch stocks as 2016 progresses

Regional consumer confidence remains soft. However, economic stimulus in Indonesia, Malaysia and Thailand in 2016 may provide some reprieve. Expect recovery, if any, to be back-end loaded as stimuli permeate the economies in 1H16, before results kick in from 2H16. Marginally optimistic in 2016 compared to 2015. We project an aggregate net profit growth of 7% in 2016 vs -3% in 2015. We are initially adopting a more prudent stance given the risk of ‘kitchen-sinking’ in 4QCY15 and US rate hikes, before taking on a more “risk-on” approach. Sheng Siong Group - Has earnings visibility and steady earnings profile. Margins should improve sequentially in 4Q15 post supply chain disruptions during the haze. Growth to be driven by margin expansion and addition of up to a total network of 50 stores. Yield of c.4%. Thai Beverage - Dominant position as the leading spirits player in Thailand gives it ample firepower and serves as a bastion for the company while it invests in new avenues of growth. Dairy Farm - We believe share price correction since our downgrade in early August has been overdone and has priced in structural cost challenges as well as weaker margins going forward. Attractive valuation of 19x FY16F PE, representing -1.5 to -1SD of its 7-year mean. Current share price values DFI’s core business at under 18x PE.

O&M/oil services Underweight

Prefer shipbuilders to rigbuilders, as rigbuilders face multiple headwinds while shipbuilders on bumpy recovery

OSV companies with strong balance sheets, cost advantages, long-term charters at decent rates and more exposure to production side of value chain have an edge

Oil prices expected to average US$50/bbl next year as OPEC continues to pump at a record rate and the anticipated decline in US shale production net off by incremental oil supply from Iran. Modest recovery in oil price deferred to 2017. Rigbuilders affected by oil majors’ capex cut, rig supply glut. The flow of bad news on project cancellations, legal suits on non-payment will intensify. Orders are few and far between, the downward spiral in earnings will continue. Speculation is rife on mergers of big yards, marking the final leg of sector consolidation. Shipbuilders’ ordering activities could slow further in 2016 but newbuild prices should stabilise at current low levels. Saving grace is that orderbook-to-fleet ratio has moderated to a reasonable 20% and yard overcapacity shrunk. 2016 could be the darkest before dawn as more yards go belly up, setting the stage for recovery beyond 2016. Expect OSV utilisation in 2016 to drop further to 60-70%, from ~70-80% currently, pushing more asset owners into the red. Prefer companies with stronger balance sheets, cost advantages, more exposure to production side of value chain, longer-term contract coverage. Sector’s depressed valuations could catalyse more M&A activity. Ezion and Dyna-Mac are potential candidates. Yangzijiang is our pick for yards. It is one of the most well-run and profitable Chinese yards and beneficiaries of sector consolidation. Its valuation is undemanding at <7x PE and 0.8x P/BV despite offering 4-5% dividend yield and 12% ROE. Ezion - Able to weather crisis with strong cash flows. Earnings recovery with resumption of vessels under repair/upgrade and deliveries of new rigs; as well as diversification of customer base into non-O&G sector are key re-rating catalysts.

Source: DBS Bank

Singapore Strategy

2016 Outlook

Stock Picks Company Rec & Target Price Point of View & Valuation

CapitaLand

(CAPL SP)

BUY

Last Traded Price: S$3.12

Price Target: S$3.73

(20% upside)

Driven by an improved outlook in China. We maintain our BUY call with a target price of S$3.73 based on a 25% discount to our RNAV. We believe that CAPL offers value, trading at an attractive 0.8x P/Bk and 0.6x P/RNAV. We expect the group’s strategy to focus on growing its commercial portfolio, and coupled with opportunistic asset recycling of mature assets into its listed REITs/funds will present upside to our earnings. Our target price of S$3.73 is based on a 25% discount to our RNAV of S$4.97/share. Our RNAV is based on our estimates of the market valuation of its various property developments and investment property assets across its various divisions.

City Developments

(CIT SP)

BUY



(46% upside)

Attractive valuations with stock trading below GFC low. With the residential transaction market still slow in Singapore, top-line drivers will mainly come from the completion of the South Beach integrated development in Singapore and consistent and regular cashflows from its commercial and hotel segments. Despite the soft sentiment in the residential market, we believe that most negative news have been priced in and we see attractive valuations at 0.7x P/Bk which is below the GFC low of 0.83x. We maintain our BUY call and TP of S$10.26 pegged to a 20% discount to our RNAV of S$12.82. Supported by a strong balance sheet and diversified earnings base, CDL should be able to weather the current uncertain market conditions well.

Ezion Holdings

(EZI SP)

BUY



(81% upside)

Ezion remains our O&G top pick. We reiterate our BUY call on Ezion, TP is unchanged at S$1.00, pegged to 0.8x P/BV. Re-rating catalysts stem from earnings recovery with the resumption of service rigs currently under repair/upgrades in 1H16, delivery of newbuild liftboats, and successful diversification of customer base to win new charter contracts, while minimising rate reduction pressure from O&G customers. We value Ezion based on 0.8x FY15 P/BV, arriving at a target price of S$1.00. This implies 81% upside potential.

Frasers Centrepoint

Ltd

(FCL SP)

BUY



(21% upside)

Strong income visibility from locked-in residential sales. Frasers Centrepoint Limited (FCL) continues to offer strong earnings visibility by having locked in almost c.S$3.5bn sales across its various major markets of Singapore, China and Australia. The group has executed well which enables it to substantially de-risk its exposures in the slowing residential market in Singapore, while its development projects in Australia are mainly in the mass- to mid-end segments which continue to deliver consistent sales. We have a BUY recommendation on FCL, with a revised target price of S$2.05 based on a 30% discount to RNAV. We think that FCL is attractive at 0.7x P/Bk NAV and believe that the stock is trading at this level largely due to its tight liquidity constraints.

Japfa Ltd

(JAP SP)

BUY



(91% upside)

Better 3Q15 EBITDA expected. We believe the steep share price correction YTD has more than priced in Day Old Chicks (DOC) oversupply in Indonesia and softer raw milk prices in China. We expect Japfa’s 3Q15 earnings to show a sequential improvement, given higher feed prices and relatively resilient broiler and DOC prices despite steeper translation FX losses from subsidiary, Japfa Comfeed’s US$225m bonds. We expect 3Q15 EBITDA to come in at US$70.9-76.0m (+20-28% y-o-y) and earnings (ex. fair value changes in biological assets) of US$7.4-10.1m (16-38% lower y-o-y). Our SOP-based TP is S$0.90. With Rupiah stabilising, we expect reduced FX losses and recovery in purchasing power in Indonesia next year. Our BUY rating for the counter is reiterated on 91% upside potential.

Mapletree Greater

China Commercial

Trust

(MAGIC SP)

BUY



(25% upside plus 7.9% yield)

While acknowledging the concerns over the slowdown in the HK retail market, we believe this is overplayed near term, given the delivery of a 12.6% y-o-y increase in 2Q16 DPU to 1.808Scts, which was in line with expectations. Moreover, this risk is accounted for by the 24% discount to MAGIC’s NAV per share of S$1.192. To account for the deceleration in the Hong Kong retail scene, we recently trimmed our FY17F DPU by 2% and reduced our DCF-based TP to S$1.11 from S$1.12. Notwithstanding, with 25% potential capital upside and 8% yield, we reiterate our BUY call.

Source: DBS Bank

Singapore Strategy

2016 Outlook

Stock Picks Company Rec & Target Price Points of View

Sheng Siong

Group

(SSG SP)

BUY



(21% upside)

We continue to like SSG as its earnings are firing on all cylinders. SSG is on track towards its 50-store target, margin expansion trend is performing to our expectations, and there is no let up in SSSG. The company is one of the most well-run grocery retailers in ASEAN, leading regional peers in profitability, cashflow generation and working capital management. Dividend continues to be attractive at 4.3% based on FY16F DPS of 3.6 Scts. Our target price for Sheng Siong is S$1.01 based on 25x FY16F PE. Valuation is pegged to below +1SD of its historical mean and below regional peers' average of 27x PE.

ST Engineering

(STE SP)

BUY



(23% upside)

The Electronics division is positioned to capitalise on the Smart Nation revolution in Singapore, with projects worth more than S$1bn in the near future, according to our estimates. The division has a long track record of providing both hardware and system integration solutions as part of its Smart City capability build-up, which breeds optimism. Additionally, recent focus on space-related technology and robotics hold promise as longer-term growth drivers for the company. We maintain our BUY call with TP of S$3.60, based on a blended valuation framework (blend of price-earnings, dividend yield and discounted cash flows) to factor in both earnings growth and cash-generative nature of the business.

Thai Beverage

Public Company

(THBEV SP)

BUY



(22% upside)

We believe ThaiBev is taking steps to transform into a regional beverage player. In our view, we believe ThaiBev should have an advantage over its peers given its dominant position as the leading spirits player in Thailand, providing it with ample firepower and serve as a bastion for the company while it invests in new avenues of growth. Our target price is revised marginally to S$0.82 as we roll our valuations over to FY16F. Our TP is based on sum-of-parts valuation, derived via discounted cashflows of its core operations, coupled with fair values of its stakes in F&N and Frasers Centrepoint Limited.

Venture

Corporation

(VMS SP)

BUY



(8% upside)

Consensus FY16F earnings have room to rise further. Street forecasts are not fully factoring in the impact of a 15% decline in SGD/MYR exchange rate over the last year. Almost 60% of staff costs for Venture are denominated in MYR. According to our sensitivity analysis, every 2% decline in MYR would have a 1.5% positive impact on Venture’s profits. Our target price of S$9.00 is based on a historical mean PE of 15x on average FY15F-16F earnings. The stock offers potential returns of 8% in addition to a 6% yield and is a safe haven from declining Asian currencies.

Source: DBS Bank

Singapore Strategy

2016 Outlook

What Drives Stocks in 2016?

1) Interest Rates – the lift off, finally

Stock market fall in the initial 1-3 months post rate hike is a Buy opportunity

Our view is that equity markets have downside risk in the initial 1-3 months after the Fed starts its rate hike cycle. But the decline is an opportunity to buy.

The initial decline is not surprising. Just like today, equity investors were also ‘informed ahead’ during previous rate hike cycles. Still, the natural thing for investors to do once the rate hike actually got started is to seek assurance that the economy and corporate earnings are not negatively affected by rising rates, before returning to risky assets. There is no reason why this time should be any different, with rates set to go higher for the first time in more than a decade.

Rate hike imminent, it is ‘how fast’ that matters

The D-day for the Fed to initiate the next rate hike cycle draws close. Financial markets are well prepared. Investors believe with a high degree of confidence, 87% probability sourced from CME Group 30-day Fed Funds Futures, that the Fed will make its move this week. Beyond the initial salvo, views differ on how rapid Fed funds rate (FFR) should ascend. Consensus currently sees Fed funds rate heading to 1% by end-2016. DBS Bank chief economist expects a faster pace, rising 25bps per calendar quarter that lifts rates to 1.5% by end-2016.

How fast US interest rate rises is an important factor that will drive Asian equities next year. Too fast, regional currencies will succumb to volatility and equity markets will fall as funds flee the region. For Singapore companies, we estimate that every 1% increase in interest rates will cut earnings by 3.6%.

History shows ‘down first’ before ‘going back up’

The table below shows the characteristics of the past three US rate hike cycles. The fastest climb rate was 300bps over 13 months in 1994 while the slowest was 175bps over 12 months in 1999. It is “down first before going up” for equities.

We observe the following from the previous three rate hike cycles:

1. Our current forecast for FFR to rise 100bps over the course of next year is in line with a more ‘gradual and measured’ pace of increase compared to previous rate hike cycles. During the previous three rate hike cycles, the average initial Fed funds rate was 2.9% (higher than current 0.25%) while the average 1-year increase was 220bps (faster than our forecast of 100bps next year). Could consensus view of just a 50-bp hike next year be underestimating the Fed?

2. Three out of three times, the S&P500 Index fell within the initial 2-3 months following the initial rate hike. The average decline is 7.6%. History also shows that this decline provides an excellent opportunity to buy stocks as the S&P500 reclaims back the loss and more in the subsequent months.

3. STI was also affected by volatility in the initial 1-3 months

following the initial rate hike. The decline was more than 10% during both 1993 and 1999. The only exception was 2004 when the STI was at the early phase of the 2003-2007 bull market. History also shows that the initial decline provides an excellent opportunity to buy stocks as losses are recovered in the subsequent months.

History of the previous three rate hikes

DateSize (bps)

Length (months)

Size (bps)

3 4-Feb-94 25 13 300 7 6

1994 rate hike cycle was anticipated. But timing for the first hike and magnitude of increase over the course of the next 13 mths surprised markets. The bond market crashed, 10-yr US T-yield jumped, market volatility spiked and Orange County filed for bankruptcy.

4.75 30-Jun-99 25 12 175 6 6.5"Textbook" case for the FED. Financial markets understood the FED's intentions and did not rock the bond nor stock markets.

1 30-Jun-04 25 25 425 17 5.2510-yr US T-yield failed to follow FED funds rate increase. Liquidity condition did not tighten as desired that eventually led to the blow up and collapse of the US housing bubble

CommentsFirst Rate hike Complete CycleInitial FED

funds rate (%)

Number of hikes

Final FED funds rate

(%)

Source: DBS Bank

Singapore Strategy

2016 Outlook

History of the previous three rate hikes

Source: DBS Bank S&P500 & STI swings within 3 & 6 mths after first rate hike

Lowest (%) Highest (%) Lowest (%) Highest (%) Lowest (%) Highest (%) Lowest (%) Highest (%)

30‐Jun‐04 ‐6.8 0 ‐6.8 6.4 0 8.3 0 11.6

30‐Jun‐99 ‐7.6 3.4 ‐9.1 7 ‐10.5 2 ‐10.5 14.4

4‐Feb‐94 ‐8.5 0 ‐8.5 0 ‐17.1 0 ‐17.1 0

Average ‐7.6 1.1 ‐8.1 4.5 ‐9.2 3.4 ‐9.2 8.7

+6 mth

S&P500 STIStart of US rate

hike cycleChange in +3 mth Change in +6 mth +3 mth

Source: DBS Bank

Impact of 1994 rate hike cycle on S&P500 and STI over a 1year period

Source: DBS Bank

Singapore Strategy

2016 Outlook

Impact of 1999 rate hike cycle on S&P500 and STI over a 1-year period

Source: DBS Bank

Impact of 2004 rate hike cycle on S&P500 and STI over a 1-year period

Source: DBS Bank

2) Currency – less of a worry

Currency weakness less of a worry as 2016 progresses

Our view is that while the USD should head higher next year, albeit at a more moderate pace compared to 2015, with a possible top in early 2H. A recovery in Asian growth would see funds returning to this region and underpin regional currencies.

Asian equities and regional currencies declined in 2H15 as funds fled the region following the surprise devaluation of the CNY, growth slowdown and political uncertainties. Currency swings will continue to be a factor that drives equities in 2016.

The table and charts below show that during the past three rate hike cycles, the USD had a strong tendency to decline in the months that followed the first rate hike. Against the SGD, the USD’s decline was as modest as 2.6% in 2004 but went as deep as 8.45% in 1994.

Technicals point to a pullback in the USD/SGD to 1.36 over the next 1-2 months. But beyond this, views on the USD are mixed.

Our currency strategist sees the USD strengthening further next year. This is driven by monetary policy divergences, upside risk to Fed rate hike expectation from the current consensus of just 50bps and numerous Asian currencies considered still overvalued. He expects the USD/SGD to head for 1.47 by end-3Q16 before tapering off.

Singapore Strategy

2016 Outlook

Market view on the USD is mixed as some do not see the USD strengthening as much. For one, the long USD/EUR is an overcrowded trade that risks unwinding once the Fed starts to hike rates. Next, a rising US interest rate trend is a sign of recovery that also benefits Asian economies. A growth recovery would see funds returning to this region.

USD Index swings within 3 & 6 mths after first rate hike

Lowest (%) Highest (%) Lowest (%) Highest (%)

30‐Jun‐04 ‐2.3 0.7 ‐10 0.7

30‐Jun‐99 ‐4.3 1.5 ‐5.8 1.5

4‐Feb‐94 ‐4.4 1.1 ‐9.1 1.1

Average ‐3.7 1.1 ‐8.3 1.1

+6 mthStart of US rate

hike cycle+3 mth

USD Index

Source: DBS Bank

Impact of 1994 rate hike cycle on USD/SGD over a 1-year period

Source: DBS Bank


Source: DBS Bank

Singapore Strategy

2016 Outlook


Source: DBS Bank

3) Oil prices – lower for longer

Oil prices expected to stay lower for a longer period. OPEC’s reaffirmation of market share strategy and abolishment of official production ceiling in its Dec 4th OPEC meeting dampened sentiment further, sending prices below US$40/bbl levels. Oil prices are expected to remain volatile, and with the supply tap overflowing against soft demand, oil prices are not expected to recover till 2017. Oil prices are likely to average US$50/bbl in 2016, similar to 2015 levels, as OPEC continues to pump at a record rate and the anticipated decline in US shale production would be net off by the incremental supply from Iran. Supply/demand equilibrium is unlikely to be restored till 2017, at the earliest. With continued strength in the US$ - our economist expects US$ to strengthen by 4-5% through 3Q16, this will be an added negative for oil prices. The wild card for upside risk on oil prices is geopolitical risks, the Middle East remains a hot spot.

Near the bottom, recovery pushed back to 2017. We cannot completely rule out the possibility of oil price hitting a new low on poor sentiment or unforeseen circumstances. At US$36/bbl, oil prices are at Global crisis low, which could provide temporary support for a rebound. Longer term, market forces will eventually drive oil prices to fair and sustainable levels, which should cover production costs at the minimum. Oil majors are planning their investments based on a lower long-term oil price of US$65/bbl. The impact of low rig count, evident since mid-2015, should lead to lower production and pave the way for oil prices to normalise. Recovery in oil prices is likely from 2H16, as low oil prices drive out the marginal producers and demand continues to grow, closing the surplus gap in 2017.

Low oil prices dragging down ASEAN, and Singapore O&G equipment plays. The domino impact of low oil prices on ASEAN economies, particularly Malaysia and Indonesia, which saw currencies go into a tailspin, remains a challenge. Weak currencies, slower growth and capital outflow from this region will indirectly be a drag on Singapore equities. While Singapore’s major Offshore and Marine companies – Keppel, SMM, SCI and Yangzijiang, account for only c.6% of STI, there are a cluster of smaller-cap oil & gas equipment plays and asset owners which have seen market values hammered to below global crisis levels. The oil crisis has led to the collapse of stock prices of O&G-related companies. Rigbuilders have lost over 30% of their market cap while the smaller OSV players have lost 60-80% of their value. Singapore rigbuilders could face a multi-year downturn amidst the supply glut and depressed oil price while the OSV players are struggling to stay afloat with day rates falling to cost levels while utilisation could fall below 70%. Nevertheless, we see value emerging and advocate investors to bottom-fish the quality names with better positioning – SembCorp Industries and Ezion.

4) Changes in domestic policies

Property sector – close to inflexion point

While there are calls by developers (represented by REDAS – Real Estate Developers Association of Singapore) to the government to relax some of the property anti-speculation curbs amid concerns of oversupply, we believe that timing remains uncertain and the Government will tinker only if “material stress” is seen in the system.

What are the key triggers for the government to relax its cooling measures? Historically, a drop of 13-15% in property prices and vacancy rates of more than 7.5% could trigger a first round of unwinding. The chart below shows that during the Asian Financial Crisis (AFC) in 1998 and the dot com collapse in 2000, the Singapore government intervened when

Singapore Strategy

2016 Outlook

property prices fell c.13% from the peak over approximately a period of one year. The government’s initial responses to cushion the drop in property prices were: 1) suspend the seller's stamp duty during the AFC; and 2) tax exemptions (capital gains tax and property tax for land under development) were given and the government re-opened the market to foreigners by allowing foreigners to obtain loans in SGD during the dot com collapse. Currently, while vacancy rates have risen close to 8%, the fall in property prices has been more gradual (falling c.9% from the recent peak). Hence, we need to see further weakening in property prices before the government steps in.

While timing is uncertain, we believe we are drawing close to the inflexion point which will move the government’s hand.

Our expectation is for property prices to continue their decline -15% (another 5%) from their peak by year end, as the influx of completed units pushes up vacancy rates to 10% by 2017. That said, we are positive on property developers, as we believe the bad news have been priced in with the sector trading at a 45% discount to its RNAV and Singapore developers have largely de-risked their residential exposure and build up recurrent income stream from commercial portfolio. City Development, trading at below GFC valuation - P/BV of 0.7x is cheap and is worth a valuation trade ahead of policy easing. We prefer diversified proxies – Capitaland and Frasers Centrepoint Limited which have a multi-sourced income profile with strong recurrent cashflows and growth from China.

Major property measures from 1997 – 2007 vs Property Price Index

Source: URA, MND, News Reports

Legend: Box – first easing measure implemented Black font – easing measures Blue font – tightening measures

Singapore Strategy

2016 Outlook

Major property measures from 1997 – 2007 Vs Vacancy Rates (%)

Source: URA, MND, News Reports

Singapore Land Transport Sector – poised for

transformation

Big payout for buses? 2016 could see the transformation of the land transport system unfolding. All eyes will be on the transport reform in Singapore, with regards to bus, rail and taxi. For the public scheduled buses, the reform taken under the banner of Government Bus Contracting Model (GCM) continues. Of the three planned packages (the total bus services will be segregated into 12 packages), the first packaged (located out of the Bulim bus depot) has been tendered and successfully awarded to London-based Tower Transit, while the second package was awarded to UK operator, Go Ahead in November 2015. The government will own the buses under the Government Bus Contracting Model (GCM) framework, a change from the current model where the operators own the assets.

There have been no details with respect to the mode or valuation of this development. Speculation has been rife that both the incumbents (SMRT and SBSTransit) will see a huge cash inflow arising from this. Based on the latest annual report, we estimate that the net carrying values of buses for both operators stood at S$1.06bn (SBSTransit – S$826m; SMRT – S$231m). We hold the opinion that instead of a lump sum payout, there could be a “reverse lease” arrangement, or one that involves a small lump sum payment (e.g. 20%), coupled with an amortisation over the remaining life of the assets. While Comfort Delgro will be the key beneficiary of this change, share prices have partly factor this positive spin, the stock has been resilient over the past 12 months, outperforming STI by 12%.

Net carrying values of bus assets for the respective

operator

(S$ m) SMRT SBS Transit Net carrying amount (as at end FY) 304 952

BSEP 73 126 Net carrying amount ex-BSEP 231 826

Note: SMRT figures are based on FYE Mar'15; SBSTransit based on FYE Dec'14

Source: Companies' annual report

Rail needs a revamp. The other key event would be the anticipated changes to operating model for rail, which is commonly referred to as the New Financing Frawework (NFF). The market is expecting it to happen sooner rather than later, as the discussion between SMRT and the LTA has been ongoing for several years now. While it is hard to pin down the timing, we believe the outcome will see SMRT benefitting from a relief in the heavy future capex requirements. However, to compensate for this, the net financial impact may be muted as the removal of depreciation charges may be offset by a licensing charge for the use of the assets.

Disrupting taxi operations. For the Taxi segment, with the entry of third-party booking apps such as Uber and GrabTaxi, there have been views being voiced that the playing field is not level between these apps and the traditional taxi drivers/ operators. The main grouse is that these apps are not subjected to the onerous regulations that traditional taxi companies are subjected to. Going into 2016, we believe there could be regulations put in place for 3rd party booking

Singapore Strategy

2016 Outlook

apps and the private car hire. In our view, it seems like the most obvious would be the requirement for drivers under private hire car/booking apps to also hold a vocational taxi drivers’ licence.

Arising from the expectations of reform in the sector, both Comfort Delgro and SMRT have performed relatively well. We believe the market has already priced in the positives from the potential reforms with valuations at 26x for SMRT and 19x for CD.

Singapore Telecom sector

Potential entry of 4th player

The Singapore telecommunications landscape faces the potential threat of a 4th player. IDA has proposed to set aside 60 MHz of spectrum across 2.3GHz, 900MHz and 700MHz bands at a reserve price of S$40m. Existing telcos have 2-years to adjust their offerings and cost structure.

Based on our estimates, the potential 4th mobile player could gain 7% revenue share in five years. Actual operations could start from April 2017. 60 MHz of reserved spectrum across 900 MHz, 2.3 GHz and 2.5 GHz bands will be auctioned in early 2016. MyRepublic and Consistel are likely to bid for it. Based on UMobile’s performance in Malaysia, we expect the new player to garner 7% revenue share by 2022. We anticipate earnings to start falling at M1 and StarHub from 2017 onwards. M1 could be most impacted due to its more price-sensitive customer base. We estimate that 13-16% of M1’s group top line is at risk in the long term. The adverse impact on StarHub could be 6-7% of group topline. While the market has partially priced in this potential threat, we maintain our Fully Valued call on M1 and Starhub as they have little capacity to invest during uncertain times after paying out almost all of their free cash flows as dividends.

At this juncture, there are still a lot of uncertainties. An inability to raise funding may not allow MyRepublic (the frontrunner) to bid for the spectrum. Without special concessions, MyRepublic’s capex budget of only US$250-300m seems low versus IDA’s capex estimate of US$300m-700m for initial years. There are also other operational issues. 4th telco business case is built on the use of Heterogenous network. Any technical issues with Hetnet may haunt the new player.

5) Restructuring, M&A activities to inject excitement in

the market

2016 could herald more restructuring and M&A activities, injecting some excitement in a market short of catalysts. We expect restructuring/M&A opportunities to gather momentum following the sharp correction in equity markets, especially in 3Q15. The STI has shed 17% YTD, bringing valuation down to PE of 11.7x and P/BV of 1.2x.

We believe the pressure on SG companies to drive shareholders’ returns higher will intensify. Companies will be looking for ways to a) employ capital discipline and optimise the use of capital structure, b) seek acquisition growth , c) merge to cut cost and sustain global competitiveness, d) unlock value through the sale of non-core assets, and e) raise dividend payout for cash rich companies.

Keppel Corp has started the ball rolling by privatising Keppel Land at the start of the year. SIA has announced the privatisation of Tigerair and CMA CGM has launched a takeover offer for NOL.

Tumble in oil prices creates M&A and restructuring opportunities

In the Oil & Gas space, we have seen the rise of M&A activities since the collapse of the oil price, as major players shed non-core assets and smaller companies merge in an attempt to scale up and survive. The tumble in oil prices also opens up opportunities for deep-pocketed private equity firms to push for restructuring or buy assets as O&G firms look to lighten balance sheet and enhance cash flows.

The OSV sector, especially in the Asia Pacific region, is fragmented with a number of players offering similar services and vessel types. Hence, consolidation makes sense in order to gain better access to capital and move up the value chain. We expect the depressed valuations in the sector to lead to consolidation in the market, with companies having stronger balance sheets taking the opportunity to enhance their market shares while some players exit the market. We identify potential takeover targets to be Ezion, Dyna-Mac (25% owned by Keppel), Triyards (60% owned by Ezra) and EMAS Offshore. We also identify companies with high cash hoards, such as Baker Tech, as good privatisation candidates.

Singapore Strategy

2016 Outlook

Singapore shipyards are also bracing for tough times ahead – absence of new rigbuilding orders, dwindling order book, low book-to-bill ratio, high fixed cost, project cancellations and deferments. These will place rising pressure on shipyards to restructure or merge to derive cost benefits and create a formidable player against global competition. The phase-out of uncompetitive small yards and mergers of big players should eventually accelerate the sector's recovery. We currently have a HOLD call on Keppel Corp (TP S$7.40) and FULLY VALUED call for Sembcorp Marine (TP S$1.85) in the absence of clear re-rating catalysts and lacklustre rigbuilding outlook.

Singapore rigbuilders’ order wins

2.2 3.1 6.5 7.3 7.3 5.9

1.7 3.2

9.9 10.0 6.9

5.0 2.0 3.0 3.0

2.2 2.1

4.2 3.1 5.4

5.7

1.2

3.0

3.7

11.0

4.2 4.2

3.2 2.5 3.0

0

20

40

60

80

100

120

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142015F2016F2017F

US$/bblS$ bn Annual order wins

KEP order wins (LHS) SMM order wins (LHS) Oil price (RHS)

Source: Rigzone, DBS Bank

Aerospace MRO – ST Engineering a strong acquirer

Structural challenges in Aircraft maintenance sector could push for consolidation. While the global airline maintenance, repair and overhaul (MRO) industry is in a steady growth mode supported by the increase in aircraft fleets, structural changes in airframe and engine MRO market is posing challenges for premier operator SIA Engineering as growth in wide body models slows down and maintenance cycles lengthen. On the other hand, ST Engineering (STE)’s aerospace arm has been more resilient as it focuses on older models and narrow body aircraft, but it has not made efficient use of its balance sheet to pursue accretive inorganic growth opportunities. We believe this sets the stage for STE and SIE to consider a merger funded by STE’s strong balance sheet with net cash of close to S$600m to better exploit complementary capabilities and create synergies in terms of cost savings to consolidate Singapore’s position as an aviation hub.

F&B – seeking acquisitions

Flushed with cash, the focus for F&N is on re-investment, to make up for the sale of its 55% stake in Myanmar Brewery Limited (MBL). The group ended the year with net cash of S$865m, largely from its disposal of MBL. We believe it is on the prowl for acquisitions to make up for the void left by the higher-margin beer business represented by its stake in MBL.

Singapore Strategy

2016 Outlook

Sector Outlook

Singapore Strategy

2016 Outlook

ed: JS sa: YM

Banks

Neutral

Analyst LIM Sue Lin +65 6682 3711 [email protected]

Price Target

Price PE

2016F

DivYld

2016F

EPS CAGR

2014-16 (S$) (S$) Rec (x) (%) (%)

DBS* 16.41 NR NR 9.2x 3.9% 4.8 OCBC 8.62 10.00 BUY 8.5x 4.8% 6.0 UOB 19.16 19.20 HOLD 9.0x 4.0% 3.6

Source: DBS Bank; Bloomberg Finance L.P. * Bloomberg consensus

Closing price as of 11 Dec 2015

Singapore Banks: Earnings growth trend

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

-30.0%

-10.0%

10.0%

30.0%

50.0%

2008 2009 2010 2011 2012 2013 2014 2015F 2016F

DBS OCBC UOB Total

*No forecasts for DBS; cumulative forecasts for the sector uses Bloomberg consensus forecasts for DBS Source: Companies, DBS Bank

Singapore Banks: NIM trend

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

2.20%

2.40%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

2.20%

2.40%

2.60%

2008 2009 2010 2011 2012 2013 2014 2015F 2016FDBS OCBC UOB Average

NIM (Banks) NIM (Average/Industry)

*No forecasts for DBS Source: Companies, DBS Bank

Singapore Banks: Credit costs trend

0.24% 0.28%0.33%0.34%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F2016FDBS OCBC UOB Average 12-year average

Provision charge-off rate (Banks) Provision charge-off rate (average)

*No forecasts for DBS Source: Companies, DBS Bank

Limited engines to fire

Rate hikes may not translate to significant NIM spike

Moderated earnings growth expected

Expect higher credit costs as we reach the end of a benign credit cycle

OCBC remains our preferred pick over UOB

Outlook

Muted NIM impact despite rate hikes. Expectations are rife for the first Fed rate hike in years - 25bps by mid-Dec and another 25bps in 1Q16. This should push SIBOR further up to 1.4% by 1Q16. We have imputed slightly higher NIM in 2016 to account for the expected rate hike but we believe the NIM uptick may be muted as: (1) we expect funding costs to catch up, dampening the impact of loan yield increases on NIM; (2) in addition, with the S$ loan-to-deposit ratio now at a high of 87% from 79% two years ago, there may be little room left for banks to leverage on; and (3) the wildcard on whether Singapore banks still carry surplus US$ liquidity may dampen overall asset yields and hence NIM.

Moderated earnings growth. If the excitement of the NIM spike for the Singapore banks cools off, there leaves hardly any drivers for growth in 2016. Judging from the trends we have seen in 2015, we believe that even with the Fed rate hikes, there is not much room for NIM to rise significantly. With loan growth likely to stay in the low single digits, topline growth will be slower. Non-interest income is unlikely to excite as well and may be volatile depending on markets, and to some extent, be the wildcard to earnings. As we exit the benign credit cycle, credit costs will start to accelerate. We forecast 2016 earnings growth of 6%. Upside surprise could come from higher than expected NIM increase. Every 10bps increase in NIM translates to 4-7% rise in earnings. Elsewhere, there is little to worry about capital levels in our view, as Singapore banks are among the highest capitalised in the region.

Asset quality still relatively healthy. So far, an asset quality capitulation appears remote. But banks have been prudently setting aside additional provisions where required. Stress tests have been carried out on selected portfolios particularly the commodities and oil & gas sectors, but so far, there has been little stress. OCBC’s oil and gas exposures were at 6% of total loans while commodities were at 7% of total loans as at 3Q15. Meanwhile, UOB’s exposure to commodities is less than 8% of total loans while the sub-segment, oil & gas is c.5% of total loans. Stay

Singapore Strategy

2016 Outlook

watchful on unemployment trends; this would spell a change in asset quality direction should the labour market weaken.

Risks Smaller NIM increase could dampen earnings growth.

We have conservatively imputed 4bps increase in NIM for 2016. This is the key driver to earnings growth given that loan growth is expected to be sluggish, non-interest income likely to lose momentum, expenses to be high and credit costs to escalate. Thus, if the increase in NIM falls short of expectations, there would be risks to earnings. Note that every 10bps increase in NIM translates to a 4-7% rise in earnings and vice versa.

Asset quality capitulation. While we are expecting NPLs to remain fairly stable despite imputing higher credit costs as we reach the end of a benign credit cycle, a repeat of a GFC scenario could throw our forecasts out of the window, pushing credit costs up by an additional 10bps and NPL ratios up by almost 50bps from current levels. This could result in a 21-24% downside to our FY16F earnings.

Valuation & Stock Picks Trading at -1.5 SD of the 10-year mean PBV. Singapore

banks have performed poorly vs ASEAN peers, with an 18% contraction in market cap YTD-2015. While share prices of the banks have rebounded from their lows in early October, this only reflected the good news that asset quality was unlikely to deteriorate significantly. Although we believe the banks remain fundamentally strong (no significant deterioration in asset quality, strong capital position), the market appears to be pricing in the slower loan growth and higher credit costs in the coming quarters and does not seem positive on any potential NIM spikes from rate hikes. Singapore banks are currently trading at 1.0x FY16 BV, which is at -1.5 SD of its 10-year mean P/BV multiple.

Still prefer OCBC to UOB. OCBC remains a BUY on solid asset quality and Greater China traction. Our S$10.00 TP is derived from the Gordon Growth Model and implies 1.1x FY16F BV. The potential reach of its differentiated non-interest income franchise should support valuation. A turn in the interest rate cycle with minimal disruption to asset quality will be testimony of its robust credit position.

Singapore banks’ peer table

Mkt Price T arget EPS CA GR

Cap (S$) Price % 14-16

Company (US$m) 11-Dec (S$) Upside Rcmd 15F 16F 15F 16F 15F 16F 15F 16F (%)

DBS Bank * 29,050 16.41 NA NA NA 9.5x 9.2x 1.0x 1.0x 11% 11% 3.7% 3.9% 4.8

OCBC 25,104 8.62 10.00 16% BUY 8.9x 8.5x 1.0x 0.9x 12% 12% 4.6% 4.8% 6.0

UOB 21,719 19.16 19.20 0% HOLD 9.4x 9.0x 1.0x 1.0x 11% 11% 3.8% 4.0% 3.6

ROA E Div Y ield

PE (x ) P/BV (x) (%) (%)

* Based on Bloomberg consensus Source: DBS Bank, Bloomberg Finance L.P.

Singapore Strategy

2016 Outlook

ed: JS sa: YM

Consumer Goods

Underweight

Analyst Andy SIM +65 6682 3718 [email protected] Alfie YEO +65 6682 3717 [email protected]

Price Target

Price PE

2016F

Div Yld

2016F

EPS CAGR 2014-2016

(S$) (S$) Rec (x) (%) (%)

Stock universe Sheng Siong Group 0.845 1.01 BUY 20.9 4.3 9

Thai Beverage 0.67 0.82 BUY 17.1 3.9 (5)

Dairy Farm 5.89 7.34 BUY 18.1 3.9 6

Super Group Ltd 0.835 0.85 HOLD 19.7 2.5 8

F & N 2.22 2.26 HOLD 36.0 1.4 29

Del Monte Pacific 0.42 0.35 HOLD 16.3 0.0 nm

Courts Asia 0.385 0.41 HOLD 9.5 4.2 31

OSIM International 1.04 1.22 FV 12.0 5.8 3

Petra Food 2.20 2.05 FV 34.4 2.6 54

Source: DBS Bank

Closing price as of 11 Dec 2015 Earnings growth to recover in 2016

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2012 2013 2014 2015E 2016F 2017F

* Stock universe’s net profit (pre-ex) weighted earnings growth Source: Bloomberg Finance L.P., DBS Bank

GDP growth to pick up in most ASEAN-5 economies

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2012 2013 2014 1Q15 2Q15 3Q15 4Q15F 1Q16F 2Q16F 3Q16F

SGTH

MY

PH

ID

GDP yoy% In general, our economists projectquarterly GDP growth to pick up towards latter part of 2016

Source: DBS Bank

Hopeful of a better 2016

Possible rocky start to the year with uncertainties and potential kitchen-sinking 4Q15 results

Advocate safer bets initially before looking to add /switch stocks as the year progresses

Economic stimulus, stabilisation of regional currencies may drive 2H16 earnings recovery

Stock picks: Thai Beverage (THBEV), Sheng Siong (SSG), Dairy Farm (DFI)

Outlook

More misses than hits. The recent results for the quarter ended Sept 2015 generally saw more earnings disappointment. SUPER, F&N, OSIM and PETRA missed our forecasts, while SSG, THBEV and COURTS met our expectations. Regional consumer confidence remains soft, which led to lower sales and margins, yet companies (FNN, THBEV, SUPER) continue to invest in new capacities, marketing campaigns and products. However, economic stimulus measures in Indonesia, Malaysia and Thailand in 2016 may provide some reprieve. We see stimulus permeating the economies in 1H16, before results kicking in from 2H16. Thus, we expect recovery if any to be back-end loaded.

Hopeful of a better 2016 on improvement in GDP

growth. As we enter 2016, we are marginally optimistic compared to 2015. We have projected an aggregate net profit growth of 7% in 2016 vs -3% in 2015. This is premised on our expectations that regional GDP growth will be better in 2016, volatility in regional currencies will ease, stimulus packages announced by authorities will come into effect, and 2015 will be “kitchen sunk” to derive a lower earnings base for companies to register growth. Our economists’ regional 2016 GDP growth projections are on a gradual upward trend, signalling an economic improvement.

Bottom-up forecasts show a better 2016. 2016’s growth rate for Singapore-listed consumer universe is in the range of -5% to 9%. This is a more marginal growth trajectory after previous rounds of earnings disappointment and downward revisions. Based on our bottom up forecasts, we expect to see earnings turnaround for DELM, SUPER, PETRA, FNN and DFI. This is generally on the back of a dismal 2015 earnings and some slight positive on the macro front. Our 2016 earnings growth range is largely in line with our economics desk’s ASEAN-5’s 2016 GDP forecasts of 2-6%.

Advocate safer strategy initially as start to the year could

still be rocky. We think the start of 2016 could still be rocky even as (i) the recent quarter’s (Sept end) results continued to see downward earnings revisions (-3%) on higher than

Singapore Strategy

2016 Outlook

expected costs, weaker regional currencies and slower than expected consumption; (ii) we believe there could still be earnings risks for 4QCY15 (to be released around Feb/Mar-16) as companies may try to “kitchen-sink”; and (iii) the pace of potential Fed rate hikes may delay an immediate recovery. We therefore advocate for a safer strategy in terms of stock picks.

Stable and safer plays. We are initially adopting a more prudent stance before taking on a more “risk-on” approach. In Singapore, we like THBEV and SSG for their earnings resilience and visibility, and dividend yields. We also have a BUY on DFI for its attractive valuations. But as the year progresses, we believe there should be opportunities to undertake a more “risk-on” approach. We would monitor for signs of earnings recovery for SUPER as it is a key beneficiary of regional economic stimulus, with its extensive exposure to ASEAN markets.

Valuation & Stock Picks Earnings may bottom by 2H16. Earnings

disappointments have not done valuations any favour. While valuations are more attractive at 19x FY16F PE, down from 23x four months ago, lowered expectations could set a low base for subsequent recovery. Economic stimulus to spur demand could help support some initial recovery later next year. But for now, companies are navigating through tepid regional consumption. We prefer fundamentally stronger plays - SSG, THBEV, DFI over PETRA, OSIM, DELM, FNN, SUPER, DELM and COURTS.

Sheng Siong Group (SSG; BUY, TP S$1.01). We like SSG for its earnings visibility and steady earnings profile. 3Q15 saw robust earnings growth of c.19% y-o-y, driven by higher revenue and margin expansion. Going forward, it will have a total of 39 stores by year-end, in line with our expectations. Margins should improve sequentially in 4Q15 post supply chain disruptions during the haze and less aggressive pricing post SG50 celebrations. We expect growth to be driven by margin expansion and addition to up

to a total network of 50 stores. The stock pays a dividend yield of c.4%.

Thai Beverage (THBEV; BUY, TP S$0.82). We believe THBEV is taking steps to transform into a regional beverage player. In our view, we believe THBEV should have an advantage over its peers given its dominant position as the leading spirits player in Thailand, providing it with ample firepower and serving as a bastion for the company while it invests in new avenues of growth. 3Q15’s core operating profit showed resilience in our view even though it was down y-o-y in a slow quarter. Chang Beer was relaunched and Non-Alcoholic Beverage saw higher losses given that it is in an investment phase. THBEV has a dominant position in the Thai spirits market, and has a wide repertoire in its brand portfolio, which we believe will continue to support earnings resilience in the near term.

Dairy Farm (DFI; BUY, TP US$7.34). We have a BUY rating and SOTP-based TP of US$7.34. The stock currently trades at an attractive valuation of 19x FY16F PE, representing -1.5 to -1SD of its 7-year mean. We believe its share price correction since our downgrade in early August has been overdone and has priced in structural cost challenges as well as weaker margins going forward. The current share price values DFI’s core business at under 18x PE.

Super Group (SUPER; HOLD, TP S$0.85). We maintain our HOLD call for SUPER with a lower TP of S$0.85, pegged to 20x FY16F PE, in line with its average valuation over the last four years. We believe earnings recovery momentum will be slow, led by weaker ASEAN economic growth. Consumer confidence is low particularly in Malaysia, Thailand and Indonesia. This will dampen growth prospects going forward. However, SUPER will be launching new products and we expect this to mitigate the full impact of slowing growth and consumption in ASEAN. With improving macro prospects and its extensive exposure to ASEAN markets (Singapore, Malaysia, Myanmar, Thailand, Philippines), we look to turn positive with SUPER once we have ascertained signs that a more “risk on” approach is in place.

Peers Valuation Mkt Pric e Ta rge t

Compa ny Ca p (S$) Pric e %(US$m) 11-De c (S$) Ups ide Rcmd 15F 16F 15F 16F 15F 16F 15f 16F

Sheng Siong Group 899 0.845 1.01 20% BUY 22.7x 20.9x 5.3x 5.1x 4.0% 4.3% 19% 9%Thai Beverage 11,902 0.67 0.82 23% BUY 16.3x 17.1x 3.8x 3.6x 3.7% 3.9% 22% (5%)Dairy Farm (US$) 7,964 5.89 7.34 25% BUY 19.3x 18.1x 5.2x 4.8x 3.9% 3.9% (17%) 6%Super Group 659 0.835 0.85 2% HOLD 21.3x 19.7x 1.8x 1.7x 2.3% 2.5% (25%) 8%F & N 2,268 2.22 2.26 2% HOLD 46.7x 36.0x 1.4x 1.4x 1.1% 1.4% (30%) 29%Del Monte Pacific* 578 0.42 0.35 -18% HOLD nm 16.3x 2.1x 1.7x 0.0% 0.0% (14%) nmCourts Asia* 144 0.385 0.41 5% HOLD 12.4x 9.5x 0.7x 0.7x 3.2% 4.2% (39%) 31%OSIM International 553 1.04 1.22 17% FV 12.3x 12.0x 1.8x 1.7x 5.8% 5.8% (40%) 3%Petra Food 951 2.20 2.05 -7% FV 52.8x 34.4x 3.7x 3.5x 1.6% 2.6% (64%) 54%

EPSPE (x) P/B (x) Div Yld Growth

* FY16 & FY17 forecast Source: DBS Bank

Singapore Strategy

2016 Outlook

ed: TH / sa: YM

Offshore & Marine / China Yards

Underweight

Analyst HO Pei Hwa +65 6682 3714 [email protected]

Price Target

Price PE

2016F

Div Yld

2016F

EPS CAGR 2014-2016

(S$) (S$) Rec (x) (%) (%)

Keppel Corporation 6.36 7.40 HOLD 9.3 5.4 2

Sembcorp Industries 3.02 3.80 BUY 8.6 4.0 18

Yangzijiang 1.11 1.55 BUY 7.1 4.9 (1)

Sembcorp Marine 1.735 1.85 FV 9.4 4.8 67

Cosco Corporation 0.375 0.32 FV nm 0.0 45

Source: DBS Bank

Closing price as of 11 Dec 2015 Singapore rigbuilders’ order wins

2.2 3.1 6.5 7.3 7.3 5.9

1.7 3.2

9.9 10.0 6.9

5.0 2.0 3.0 3.0

2.2 2.1

4.2 3.1 5.4

5.7

1.2

3.0

3.7

11.0

4.2 4.2

3.2 2.5 3.0

0

20

40

60

80

100

120

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142015F2016F2017F

US$/bblS$ bn Annual order wins

KEP order wins (LHS) SMM order wins (LHS) Oil price (RHS)

Source: Rigzone, DBS Bank

World shipbuilding orders and newbuild price trend

100

110

120

130

140

150

160

170

180

190

200

0

5

10

15

20

25

30

35

Jan‐05

Jul‐05

Jan‐06

Jul‐06

Jan‐07

Jul‐07

Jan‐08

Jul‐08

Jan‐09

Jul‐09

Jan‐10

Jul‐10

Jan‐11

Jul‐11

Jan‐12

Jul‐12

Jan‐13

Jul‐13

Jan‐14

Jul‐14

Jan‐15

Jul‐15

New contracting (LHS) Newbuilding Price Index (RHS)

m dwt

Source: Clarksons, DBS Bank

In the doldrums

Rigbuilders face multiple headwinds; shipbuilders at the darkest before dawn?

Spurring new wave of M&A

Prolonged oil slump, customer default and macro turmoil pose risks to the sector

Prefer shipbuilders to rigbuilders; top pick is Yangzijiang

Outlook

Lower-for-longer oil price is a drag on O&G players. OPEC’s reaffirmation of market share strategy and abolishment of official production ceiling in its Dec 4th OPEC meeting dampened sentiment further, sending prices to US$40/bbl levels. Oil prices are expected to remain volatile and average US$50-60/bbl next year similar to 2015 levels as OPEC continues to pump at a record rate and the anticipated decline in US shale production would be net off by the incremental Iran supply. Supply/demand equilibrium is unlikely to be restored till 2017, at the earliest.

Rigbuilders remain in the doldrums. Rigbuilders could be facing a multi-year downturn. The low oil prices and capex cuts by oil majors add to the woes of rigbuilders that were already struggling with a slowdown in orders amid rig supply glut with rising deliveries and keener competition. These have led to 20-30% declines in day rates and utilisation of drilling rigs, lifting deferment/cancellation risks and dampening newbuild demand. We expect order wins of Singapore rigbuilders to decline from S$9-10bn to S$5-6bn p.a. in 2015-2017, leading to a downtrend in orderbooks and earnings.

Shipbuilders on the bumpy recovery path. The shipbuilding sector has gone through two mini-cycles post GFC. Ordering activities have slowed from 2013 peak, down over 20% y-o-y in 10M15 and newbuild prices have also softened by c.5% amidst depressing shipping market. Looking into 2016, ordering activities could slow further after the wave of ordering for large oil tankers and mega containerships in 2015, but newbuild prices should stabilise at current low levels. The saving grace is that orderbook-to-fleet ratio has moderated to a reasonable 20% and yard overcapacity has shrunk with massive yard closures and consolidation. 2016 could be the darkest before dawn as more yards go belly up, setting the stage for recovery beyond 2016.

Sector consolidation goes on. Speculation rife on mergers of big yards, marking the final leg of sector consolidation – Chinese CSSC and CSIC; Singapore Keppel O&M and

Singapore Strategy

2016 Outlook

SMM; Korean DSME and Samsung. The phase-out of uncompetitive small yards and mergers of big players should eventually accelerate the sector's recovery.

Risks Prolonged dip in oil prices. Further capex cut is expected

in the event oil prices sustain below US$50/barrel, and if the global economy dives into an unexpected recession.

Risks of default payment and deferment. While Singapore rigbuilders have a strong clientele, we see heightened default / cancellation risks from some of the smaller and opportunistic customers in a low oil price environment. For shipbuilders, recovery can be bumpy as freight rates can be volatile and risks of bankruptcies in shipping companies remain, though lower than previously.

Financing constraints could affect order momentum. Financing institutions might be more prudent with their lending to O&G companies following the recent oil price weakness. Potential funding constraints faced by customers as a result of lack of financing options and/or higher funding costs, which could impact order momentum.

Asset deflation and margin contraction. Newbuild prices are set to fall given the drop in material cost, and potentially low-balled pricing with the dearth of new orders in an attempt to keep yards busy. This might also be exacerbated by fire sales triggered by desperate owners/shipyards on the verge of bankruptcies. As a result, margins could normalise further.

Valuation & Stock Picks

Prefer shipbuilders to rigbuilders. We believe stock performance of rigbuilders would be overshadowed by oil price uncertainty in the next 6-12 months. A short-term reprieve may be seen if oil prices rebound, but excess rig supply will take a while to be absorbed. The surviving shipbuilders will benefit from ongoing consolidation and hence, we advocate investors to bottom-fish good yards with proven track records and strong balance sheets.

Our top pick is Yangzijiang (TP S$1.55), one of the most well-run and profitable Chinese yards and beneficiaries of sector consolidation. Its valuation is undemanding at <7x PE and 0.8x P/BV despite offering 4-5% dividend yield and 12% ROE.

We reiterate our BUY call on Sembcorp Industries (TP S$3.80), where earnings are relatively more resilient as 60% of its profits are from Utilities and is not affected by changes in oil prices. We believe its current low valuation of 0.8x P/BV, dragged by bleak marine outlook, is unwarranted as SCI offers 10% ROE and 4% yield.

We have HOLD ratings on Keppel (TP S$7.40),FULLY VALUED call on Sembcorp Marine (TP S$1.85) and Cosco (TP S$0.32). While valuations of Singapore rigbuilders are appealing, we expect the offshore sector to get worse before it gets better, and no clear re-rating catalysts in the near term.

Peers Valuation

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

(US$m) 11-De c (S$) Ups ide Rc md 15F 16F 15F 16F 15F 16F 15F 16F

Keppel Corporation 8,149 6.36 7.40 16% HOLD 9.5x 9.3x 1.1x 1.0x 6.3% 5.4% (15%) 2%

Sembcorp Industries 3,815 3.02 3.80 26% BUY 10.1x 8.6x 0.9x 0.8x 5.3% 4.0% (34%) 18%

Yangzijiang 3,009 1.11 1.55 40% BUY 7.0x 7.1x 0.9x 0.8x 4.9% 4.9% (20%) (1%)

Sembcorp Marine 2,564 1.735 1.85 7% FV 15.7x 9.4x 1.2x 1.1x 3.2% 4.8% (59%) 67%

Cosco Corporation 594 0.375 0.32 -14% FV nm nm 0.7x 0.7x 0.0% 0.0% 45%


Source: DBS Bank, Bloomberg Finance L.P.

Singapore Strategy

2016 Outlook

ed: TH sa: YM

Oil Services & Equipment Providers

Underweight

Analyst Suvro SARKAR +65 6682 3720 [email protected] HO Pei Hwa +65 6682 3714 [email protected]

Price Target

Price PE

2016F

Div Yld

2016F

EPS CAGR 2014-2016

(S$) (S$) Rec (x) (%) (%)

Ezion Holdings 0.565 1.00 BUY 3.0 0.2 74

Mermaid Maritime 0.154 0.27 BUY 5.6 4.4 (1)

Nam Cheong Ltd 0.122 0.15 HOLD 9.6 3.1 23

PACC Offshore Services Holdings

0.325 0.35 HOLD 11.9 3.2 15

Vard Holdings 0.260 0.27 FV nm 0.0 65

Source: DBS Bank

Closing price as of 11 Dec 2015 AHTS-to-rig ratio in the hypothetical situation that rig fleet remains static in 2015/16 is still below crisis levels

Source: Clarkson Research, ODS Petrodata, DBS Bank

Orderbook-to-fleet ratio of OSVs remains benign

Source: Clarkson Research, DBS Bank

Survival of the fittest

2016 a test of survival for oil & gas service companies

OSV companies with strong balance sheets, cost advantages, long-term charters at decent rates and more exposure to production side of the value chain would have an edge

Ezion and Mermaid are our preferred picks, for better growth prospects and favourable industry positioning

Outlook

A sustained lower oil price averaging US$50-60/bbl

will make 2016 a test of survival for oil & gas service

companies. Most players in the market are bracing for ‘lower for longer’ oil price range of US$40-60/bbl in 2016. Oil majors slashed 2016/17 capex and opex budgets further, setting the stage for a poorer offshore service sector outlook. In 2015, OSV owners responded to weakness by cutting dayrates to keep utilisation high, with some AHTS charters priced near the rock-bottom US$1/bhp level. Further rate reduction is possible and utilisation could be next in line. We expect OSV utilisation in 2016 to drop to 60-70%, from ~70-80% currently. Built-to-stock shipyards for OSVs should remain significantly affected while built-to-order shipyards could also see lower order wins.

Supply dynamics for OSV sector still benign though. Unlike the last crisis when oil prices crashed in 2009, the orderbook-to-fleet ratio of OSVs is much lower – AHTS orderbook-to-fleet is only 7% currently compared to 38% in Feb-08. Hence, the supply situation is more reassuring and should prevent utilisation from falling too drastically.

Positioning is paramount. We prefer companies with stronger balance sheets, cost advantages, more exposure to the production side of the value chain, longer-term contract coverage, and higher exposure to National Oil Companies (NOC). We reckon these stocks will be a better bet to ride out the current volatility.

M&A activity could accelerate. The sector’s depressed valuations could catalyse more M&A activity, which has been brisk this year. Ezion and Dyna-Mac are potential candidates: Ezion offers access to an under-penetrated liftboat segment in Asia Pacific, while Dyna-Mac could be strategically bought over by Keppel Corp, which holds a 24% stake. 0.0%

5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

Jan-

97

Jul-9

8

Jan-

00

Jul-0

1

Jan-

03

Jul-0

4

Jan-

06

Jul-0

7

Jan-

09

Jul-1

0

Jan-

12

Jul-1

3

Jan-

15

AHTS PSV

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

+

Ratio

of v

esse

ls to

rigs

(x)

AHTS (<8,000 BHP) vs. jackups AHTS (>8,000 BHP) vs. Floaters

Total AHTS to rigs

Singapore Strategy

2016 Outlook

Risks Prolonged dip in oil prices. If oil prices remain

depressed at below US$50/bbl, offshore E&P spending will remain low, intensifying the weakness in the offshore service sector, putting severe strain on companies with high debt and negative cashflows.

Risks of contract deferment and cancellations. This risk is most salient to the shipbuilders given the low front-end payment terms seen in recent years. We think shipbuilders would not hesitate too much in agreeing to delivery deferrals given the current climate, in order to avoid outright cancellations. There is also risk around OSV charter cancellations as oil majors scale back on their offshore rig count.

Balance sheet strength will be tested. The average gearing of SGX-listed oil & gas companies has risen over the last few years as companies took advantage of the upcycle to expand their OSV fleets. That leverage will create risk in this environment. Nam Cheong and Swiber are the most vulnerable, with bond/perpetual maturities due through 2017 that should put strain on their cash flows; Swiber also has deteriorating credit metrics. On the flipside, we think Ezion and Mermaid Maritime are relatively well placed to weather the crisis in terms of lower leverage ratios and no immediate debt maturities.

Asset impairment. SGX-listed OSV owners could follow in the footstep of their regional peers, writing down vessel book values, which have been scarce in 2015 despite global OSV newbuild prices falling by ~14% since end-2014.


Are we near the bottom? The small-mid cap oil & gas services stocks have been sold down sharply over the last months as oil prices nosedived. We reckon most of the bad news has been factored in, with most of the stocks losing 60-80% of their market values.

BUY Ezion (TP S$1.00). We believe Ezion would be able to weather the crisis with strong cash flows backed by medium-term charters (3-year revenue coverage), and its exposure to the more stable accommodation/maintenance requirements of producing fields. The earnings recovery with resumption of vessels under repair/upgrade and deliveries of new rigs; as well as diversification of customer base into non-O&G sector are key re-rating catalysts. While we see new entrants coming into the liftboat space, demand growth should outpace supply growth given the under-penetration of liftboats in the region. Key risks lie in the rate reduction for renewals, as well as customer-initiated rate renegotiations.

BUY Mermaid Maritime (TP S$0.27). The stock is among the cheapest Oil & Gas plays at 5.5x FY16F PE 0.3x P/BV, which does not do justice to its exposure to the maintenance and repair phase of the value chain – one of the few brighter spots in this industry. Mermaid had managed to keep its subsea fleet utilisation high at 80% as of 3Q15. Its associate, Asia Offshore Drilling (AOD) has contracts with Saudi Aramco that extend until 2017, including options, which provide a steady stream of income.

P/B valuation band for oil & gas services stocks

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

+2sd: 2.3x

+1sd: 1.8x

Avg: 1.4x

-1sd: 0.9x

-2sd: 0.5x

(x)

Source: Clarkson Research, DBS Bank Sector Valuations

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

(US$m) 11-De c (S$) Ups ide Rcmd 15F 16F 15F 16F 15F 16F 15F 16F

Ezion Holdings 631 0.565 1.00 78% BUY 5.2x 3.0x 0.5x 0.4x 0.2% 0.2% (33%) 74%

Mermaid Maritime 154 0.15 0.27 76% BUY 5.6x 5.6x 0.3x 0.3x 4.5% 4.4% (46%) (1%)

Nam Cheong Ltd 181 0.122 0.15 24% HOLD 11.9x 9.6x 0.7x 0.6x 2.5% 3.1% (78%) 23%

PACC Offshore Serv ices Holdings

417 0.325 0.35 6% HOLD 13.7x 11.9x 0.3x 0.3x 3.2% 3.2% (43%) 15%

Vard Holdings 217 0.26 0.27 6% FV nm nm 0.5x 0.6x 0.0% 0.0% nm 65%


Source: DBS Bank

Singapore Strategy

2016 Outlook

ed: TH / sa: YM

Plantations

Neutral

Analyst Ben SANTOSO +65 6682 3707 [email protected]

Price Target

Price PE

2016F

Div Yld

2016F

EPS CAGR 2015-2017

(S$) (S$) Rec (x) (%) (%)

Bumitama Agri 0.735 0.86 HOLD 14.8 1.2 4

First Resources 1.980 1.85 HOLD 17.7 1.4 14

Golden Agri 0.335 0.29 NR 23.7 1.1 32

Indofood Agri 0.485 0.52 HOLD 15.2 0.0 98

Wilmar International 2.910 3.70 BUY 12.4 1.6 6

Source: DBS Bank

Closing Price as of 9 Dec 2015 Dry weather impact is partly priced in

Source: Bloomberg Finance L.P., DBS Bank, DBS Vickers CPO, soybean and soybean oil price forecasts

Source: Bloomberg Finance LP, DBS Bank, DBS Vickers

A better year for prices CY16F CPO ASP of RM2,340 is under review – as we

reassess impact from CY15 dry weather and soybean

supply/exchange rate forecasts Watch out for steeper-than-normal drop in 1Q16 FFB

yields, flood of Argentine soybeans Upside risks: pronounced El Nino impact, Indonesia/US

biodiesel blending, recovery in crude oil prices Top BUY: Wilmar, with a TP of S$3.70 Outlook A better year for prices. Bearing the lagged impact of dry weather seen in Sabah and Johor this year, we expect Malaysian palm oil output to ease 0-4% next year. Much of the drop is expected to occur during the seasonally low 1Q16. Yet with most of Indonesian oil palm-growing provinces receiving far less than 100mm for more than three consecutive months in 2H15, we anticipate a more pronounced impact to palm oil supply there (partly offset by large new maturities). Lower output and a ramp-up in biodiesel blending through Apr-16 should therefore normalise global palm oil stockpile fairly quickly from current record levels. Four key issues to watch. We believe the market has mostly priced in prospective El Nino and B15/B20 impacts (as evident in the wide divergence between futures and spot prices). But continued strength in CPO prices remains subject to notable uncertainties, namely: (1) potential release of Argentine old-crop soybean inventories (now estimated at 19.8m MT or 3.6m MT of soybean oil equivalent), (2) size of South American soybean crop (expected to reach 172.6m MT), (3) US biodiesel demand, (4) crude oil prices, and (5) USD strength. There remains a possibility that severe dry weather and forest fires would return in 1Q16 – as was the case in the previous strong CY97/98 El Nino occurrence. CY16F CPO price under review. While YTD spot palm oil prices have averaged in line with our expectations, CY16F palm oil price of RM2,340 is under review as we reassess palm oil supply/demand (i.e. on impact of CY15 dry weather) as well as soybean supply/exchange rate forecasts. Valuations & Stock Picks Planters with significant presence in Indonesia would continue to see the impact of B15/B20 export levies. We also expect weaker CY16 FFB yields of planters with large estates in Sabah – which would weigh on earnings. As positive CY16 earnings drivers are increasingly reliant on exogenous factors (i.e. Indonesia’s biodiesel implementation, crude oil prices), we believe any exposure in this sector should be based on strong balance sheet and strong pipeline of maturing estates. We continue to recommend Wilmar International – as large processing capacities, the Indonesian B15/20 programme, favourable consumer product margins and strong oilseed crushing margins should work to boost its FY16F earnings.

14 15F 16F 17F 18F 19F 20FCPO price (RM/MT FOB P.Gudang) 2,413 2,200 2,340 2,450 2,610 2,740 2,880CPO price (US$/MT FOB P.Gudang) 738 546 537 561 596 627 659

Soybean price (US$/MT FOB Chicago) 457 334 322 318 321 335 350Soybean oil price (US$/MT FOB Chicago) 812 639 655 681 717 748 780

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

5/20

11

7/20

11

9/20

11

11/

2011

1/20

12

3/20

12

5/20

12

7/20

12

9/20

12

11/

2012

1/20

13

3/20

13

5/20

13

7/20

13

9/20

13

11/

2013

1/20

14

3/20

14

5/20

14

7/20

14

9/20

14

11/

2014

1/20

15

3/20

15

5/20

15

7/20

15

9/20

15

CPO price (RHS)

Combined palm oil inventory in Malaysia, India, China (LHS)

Malaysia palm oil stockpile (LHS)

Combined China, India, Malaysia palm oil consumption (LHS)

MT RM/MT

Singapore Strategy

2016 Outlook

Peer Valuations

* Including rubber and other crops ** Excluding effective stake in associates land bank Sources: Companies, Bloomberg Finance L.P., DBS Bank, AllianceDBS estimates

Es t. la nd ba nk

15F own ma t.

15F own

p la nte dSha re p ric e Ma rke t c a p

Adjuste d 15F

EV/p la nte d

Adjus te d 15F

EV/ma ture

15F-17F own FFB vo l

CAGR

15F-17F EPS

CAGR Re cTa rge t pric e Ba s i s

(ha .) (ha .) (ha .) 12-09-2015 (m) (own) (own) 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F % %

Indone s ia

Astra Agro L. n/a 196,177 236,311 17,450Rp 1,968US$ 9,923US$ 11,953US$ 31.6 16.4 4.1 1.4 -65.2 92.6 42.1 32.9 14.1 9.0 5.5 45.6 FV 15,800Rp DCF

Eagle High P. 419,006 101,241 139,606 123Rp 278US$ 5,890US$ 8,121US$ neg NM 0.0 0.0 NM NM 103.7 100.8 12.8 9.0 21.4 NM FV 180Rp DCF

London Sum.* 215,917 79,976 93,135 1,360Rp 665US$ 6,290US$ 7,325US$ 15.2 16.0 4.0 2.7 -33.4 -5.1 NC NC 10.5 11.2 4.5 1.1 FV 1,260Rp DCF

Sampoerna A. 246,873 56,823 79,141 1,440Rp 195US$ 3,978US$ 5,540US$ 9.7 11.5 3.1 2.6 -17.4 -16.1 53.1 53.1 5.5 5.7 3.8 (24.4) B 1,760Rp DCF

Simple a vg 3,105US$ 6 ,520US$ 8 ,235US$ 18.8 14.6 10.7 8.7

Ma la ys ia

Felda Global V. 355,864 272,805 329,683 1.63RM 1,393US$ 7,101US$ 8,581US$ -55.4 29.0 1.2 1.9 NM NM 19.4 29.9 13.0 10.0 1.4 #NUM! FV 1.50RM DCF

Genting Plant. 150,912 92,457 126,251 10.02RM 1,826US$ 19,098US$ 26,078US$ 44.2 36.5 0.5 0.6 -53.7 21.2 NC 4.6 29.1 25.7 7.7 23.4 H 9.60RM SOP

IJM Plant. 78,484 44,340 58,389 3.48RM 718US$ 13,351US$ 17,582US$ 28.5 24.1 1.5 1.9 -6.8 25.4 21.2 24.3 18.0 14.3 12.9 20.8 H 3.25RM DCF

IOI Corp** 220,593 149,568 178,765 4.22RM 6,226US$ 11,100US$ 13,267US$ 61.2 30.3 1.2 1.3 -95.0 324.7 92.6 92.9 33.4 20.7 -0.1 152.2 FV 3.40RM DCF

KL Kepong 245,905 174,523 190,952 22.78RM 5,682US$ 11,540US$ 12,626US$ 26.9 23.7 2.1 2.5 -12.3 16.4 24.8 12.9 16.2 14.0 0.8 11.0 H 20.00RM DCF

Sime Darby 647,373 526,052 595,139 7.53RM 10,954US$ 6,452US$ 7,300US$ 20.2 19.1 2.5 2.5 -32.6 -0.2 46.4 38.7 13.8 12.0 3.3 5.9 H 7.60RM SOP

TSH Res. 82,841 27,177 45,301 1.99RM 632US$ 11,182US$ 18,639US$ 26.9 22.6 0.9 1.1 -19.5 18.9 80.8 83.8 19.5 17.3 12.3 15.0 H 1.90RM DCF

Simple a vg 27,431US$ 11,404US$ 14,868US$ 21.8 26.5 20.5 16.3

Singa pore

Bumitama A. 191,561 91,731 116,413 0.74S$ 918US$ 11,073US$ 14,052US$ 14.9 14.8 1.6 1.2 -26.2 0.2 59.9 64.7 11.3 9.8 13.5 3.7 H 0.86S$ DCF

First Resources 312,488 122,918 176,858 1.98S$ 2,228US$ 14,202US$ 20,434US$ 18.9 17.7 1.7 1.4 -30.7 7.0 8.2 2.5 10.4 9.1 8.3 13.6 H 1.85S$ DCF

Golden Agri R. 558,000 356,115 372,951 0.34S$ 3,028US$ 15,325US$ 16,049US$ 31.9 23.7 0.3 1.1 -18.7 34.6 26.1 63.3 12.9 9.6 4.7 32.3 NR 0.29S$ DCF

Indofood Agri* 541,224 199,187 247,483 0.49S$ 482US$ 4,818US$ 5,986US$ NM 15.2 0.0 0.0 -82.3 231.3 29.7 38.3 13.1 7.8 7.0 98.4 H 0.52S$ DCF

Wilmar Int'l 573,401 216,663 243,287 2.91S$ 13,054US$ 2,599US$ 2,918US$ 13.1 12.4 1.6 1.6 -11.2 6.1 69.4 68.2 12.0 10.8 2.3 6.4 B 3.70S$ DCF

Simple a vg 19,711US$ 11,354US$ 14,130US$ 19.7 16.7 12.0 9.4* Including rubber and other crops** Excluding effective stake in associates land bank

CY PER, x

FY Div. yie ld ,

%

EPS growth (inc . BA

ga ins ), %

FY Ne t ge a ring,

%FY EV/

EB ITDA, x

Singapore Strategy

2016 Outlook

ed: TH sa: YM

Property Developers

Overweight

Analyst Derek TAN +65 6682 3716 [email protected] Mervin SONG +65 6682 3715 [email protected]

Price Target

Price P/Bk

2016F

Div Yld

2016F

EPS CAGR 2014-2016F

(S$) (S$) Rec (x) (%) (%)

CapitaLand 3.14 3.73 BUY 0.8 2.5 7

Frasers Centrepoint Ltd

1.70 2.05 BUY 0.8 5.1 24

Source: DBS Bank

Closing price as of 11 Dec 2015 Historical P/Bk range for SG Developers

Source: Bloomberg Finance L.P., DBS Bank

SG Developers P/Bk vs Property Price Index

Source: DBS Bank

Time for a relook Trading near multi-year lows, implying attractive

risk/reward ratios SG developers have substantially de-risked

residential portfolio and diversified earnings base Pick diversified plays like CapitaLand and Frasers

Centrepoint Limited Outlook

Developers trading near multi-year lows. The SG Developers (FSTREH Index) is down by c.8% YTD, in line with S-REITs and marginally outperforming the Straits Times Index (STI). The sector is now trading at an attractive P/Bk ratio of 0.7x, which is close to multi-year lows. SG Developers last traded at similar P/Bk levels in periods of economic stress in 1997, 2003 and 2009, which we believe is not the case going forward, especially with the Singapore GDP projected to grow by c.2.1% in 2016. As such, we believe that most negatives have already been priced into share prices. We see attractive risk/reward ratios at this level for SG developers with catalysts coming from a potential policy relaxation, which we believe will lift sentiments for SG developers. This, in our view, will likely come post a peak-to-trough fall in prices of close to 13-15% (current drop is close to 9% from the peak), estimated by the end of 2016.

SG developers de-risked residential exposure and have a

higher % from recurring cashflows from its commercial

portfolio. SG developers under our coverage have over the past few years – (i) de-risked their SG residential exposure by pre-selling a substantial portion of their unsold inventories and thus reduced their exposure to an average of 9% of RNAV, and (ii) diversified their earnings base into other key gateway cities in Australia, Japan and the UK, and (iii) relied more on their commercial portfolios to offer consistent cashflows. Thus, the expected further drop in residential prices is not likely to drastically impact SG developers’ earnings. With the commercial segment, we are positive on the retail sector, with rental reversions projected to remain stable while the office sector should weaken further on the back of demand-supply imbalances.

‐

0.50

1.00

1.50

2.00

2.50

Jan‐97

Jan‐98

Jan‐99

Jan‐00

Jan‐01

Jan‐02

Jan‐03

Jan‐04

Jan‐05

Jan‐06

Jan‐07

Jan‐08

Jan‐09

Jan‐10

Jan‐11

Jan‐12

Jan‐13

Jan‐14

Jan‐15

P/Bk (w/o GLP) Mean ‐ 1 SD +1 SD P/Bk (with GLP)

-

0.50

1.00

1.50

2.00

2.50

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0 Property Price Index Developer P/Bk NAV

Singapore Strategy

2016 Outlook

Risks Persistent high land cost to eat into margins. The risk

to our view is if residential land prices remain high and this would translate into higher completion costs and hence, potentially ‘sticky’ residential prices in the near term and delay potential relaxation measures from the government.

Commercial portfolio is also seeing weaker outlook. The commercial segment, especially the office sector, is expected to see weakening rents which could mean downside to estimates for SG developers going forward.


SG developers to see price firm higher as the market

looks towards policy relaxation as a sentiment boost. We believe that negatives from a weakening residential outlook in SG have been priced in and expect further declines in market residential prices to mean a step closer to government’s eventual easing of selective speculative measures currently in place. This is expected to be a sentiment boost to SG developers.

The sector is trading at a 45% discount to RNAV currently, close to -1SD of the mean and downside could be limited at this level.

Prefer diversified plays. Under the above scenario, we prefer diversified companies with a multi-sourced income profile, with strong recurrent cashflows. We like developers with exposure to China (retail sector, Tier 1/Tier 2 residential sector) where we are seeing increasingly stronger data-points on a sustained recovery in performance. Our top picks are CapitaLand, Frasers Centrepoint Limited.

P/RNAV

Source: DBS Bank

Peers Valuation ( to be included)

Mk t Price T arget

Company F YE Cap 11-Dec-15 RNA V *A ssumed Price Upside P/RNA V

(S$m) (S$) (S$) Discount (%) (S$) % Rcmd (x)

Resident ial Dev elopers

Capitaland Dec 13,339 3.14 4.97 -25% 3.73 19% BUY 0.63

City Dev Dec 6,474 7.12 12.82 -20% 10.26 44% BUY 0.56

Fraser Centrepoint Ltd Sep 4,922 1.70 3.37 -39% 2.05 21% BUY 0.50

Ho Bee Dec 1,332 2.00 3.50 - NR - - 0.57

Perennial Real Estate Holdings Dec 1,598 0.965 2.16 -39% 1.32 37% BUY 0.45

Wheelock Dec 1,717 1.44 2.57 - NR - - 0.56

Landlords

Global Logistics Properties Mar 9,526 2.01 3.52 -23% 2.73 36% BUY 0.57

UOL Dec 4,817 6.05 11.29 -25% 8.47 40% BUY 0.54

Source: DBS Bank

-80%

-60%

-40%

-20%

0%

20%

40%

Mar-90 Mar-95 Mar-00 Mar-05 Mar-10 Mar-15

Disc to RNAV Mean +1 SD -1 SD

Singapore Strategy

2016 Outlook

ed: TH sa: YM

Singapore REITs

Neutral

Analyst Derek TAN +65 6682 3716 [email protected] Mervin SONG +65 6682 3715 [email protected]

Price Target Price P/BK

Div Yld

2016F

DPU CAGR 2014-2016

(S$) (S$) Rec (x) (%) (%)

Stock picks CapitaRetail China Trust

1.475 1.69 BUY 0.9 7.4 4

Frasers Centrepoint Trust

1.84 2.05 BUY 1.0 6.5 2

Mapletree Greater China Commercial Trust *

0.90 1.11 BUY 0.8 8.6 7

Mapletree Logistics Trust *

0.99 1.15 BUY 1.0 7.9 4

Source: DBS Bank * FY 17 forecast

Closing price as of 11 Dec 2015 S-REIT yield Chart

Source: Bloomberg Finance L.P., DBS Bank

S-REIT P/Bk Chart

Source: DBS Bank

Coping with higher interest rates S-REITs' performance to be capped as interest rate

rise over 2016 Retail and selected S-REITs with overseas exposure

best positioned against interest rate risk Picks MAGIC, CRCT, FCT and MCT Outlook

S-REITs' performance to be capped as interest rate rise;

market is underestimating pace of FED hikes over 2016. The liftoff in rates come Dec-15 and four additional hikes in 2016 (per DBS economist forecasts) which is 1-2 hikes implied in the FED funds futures, will mean limited upside to share prices for the S-REITs come 2016. With moderating growth prospects rising operational headwinds, we believe that the S-REITs will continue to trade at an above-historical average yield spread against 10-year bonds. Thus, we believe that current share prices for the S-REITs are fair, in our view, given a yield spread of 4.0% (compared against forward 10-year yield of 3.0%).

Retail and selected REITs with overseas exposure best

positioned against interest rate risks. We project distributions to grow by 3.3% in FY16F, but see potential downside to DPU estimates from the office and hotel subsectors, given demand-supply imbalances and downside to GDP forecasts.

We believe that selective S-REITs in the retail sector such as Frasers Centrepoint Trust (FCT) and Mapletree Commercial Trust (MCT) can still deliver decent growth in net property income, supported by resilient tenant sales performance and strong asset positioning. In addition, S-REITs like Mapletree Greater China Trust (MAGIC) and Capitaland Retail China Trust (CRCT) can surprise on the upside due to favourable currency tailwinds.

Rising cost of capital to limit acquisitions. We believe that the greatest obstacle that S-REITs will face is the rising cost of capital, given the sector’s reliance on both debt and equity markets to support its growth initiatives. Opportunities for portfolio expansion are likely to remain limited as investors are likely to frown upon S-REITs that are gearing up to acquire assets. While S-REITs have been heading overseas in search of higher returns, the uncertainties from increased forex volatility and tax leakages will mean that S-REITs' ability to drive accretion is likely to turn more muted.

0%

2%

4%

6%

8%

10%

12%

14%

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Sector Yield spread

Sector Yield

Mean Yield Spread

MAS 10 Year

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15Ju

l-15

Sector P/BV P/BV Mean +1 SD -1 SD

Singapore Strategy

2016 Outlook

Risks Faster-than-expected rate hike momentum. A stronger-

than-expected Fed rate hike momentum in 2016 will mean higher-than-projected interest rates (for both shorter- and longer-term rates across the yield curve), posing risks to our estimates. As such, investors are also likely to require higher yields (and thus lower S-REIT prices) for investing in yield-sensitive instruments like S-REITs.

Valuation & Stock Picks Picks with ability to deliver earnings surprise. While

valuations of the office and hotel REITs are attractive at 0.8x and 0.7x P/BK respectively, we see a lack of catalysts from increasing operational sector headwinds. Our picks remain S-REITs with superior/growth or in sectors leveraged to economic growth; MAGIC, CRCT, FCT and MCT.

S-REIT Peers Valuation Mkt Pric e Ta rge t

Compa ny Ca p (S$) Pri c e %(US$m) 11-De c (S$) Ups ide Rcmd 15F 16F 15F 16F 15F 16F

Off ice

CapitaCommercial Trust 2,735 1.310 1.48 13% BUY 0.8x 0.8x 6.6% 6.8% 2% 3%

Fraser Commercial Trust 716 1.290 1.53 19% BUY 0.8x 0.8x 7.5% 7.7% 15% 2%

Keppel Reit 2,140 0.945 1.12 19% BUY 0.7x 0.7x 7.3% 7.6% (4%) 3%

OUE Commercial Trust 599 0.660 0.67 2% HOLD 0.7x 0.7x 6.3% 7.2% 14% 15%

Retail

Capitamall Trust 4,703 1.880 2.05 9% BUY 1.0x 1.0x 6.0% 6.1% 3% 3%

CapitaRetail China Trust 879 1.475 1.69 14% BUY 0.9x 0.9x 7.2% 7.4% 8% 4%

Croesus Retail Trust * 357 0.795 0.86 8% HOLD 0.9x 0.9x 8.9% 9.1% (2%) 3%

Frasers Centrepoint Trust 1,194 1.840 2.05 11% BUY 1.0x 1.0x 6.3% 6.5% 4% 2%

SPH REIT** 1,673 0.935 0.99 6% HOLD 1.0x 1.0x 5.8% 5.9% 1% 1%

Mixed (Retail & Of f ice)

Starhill Global REIT 1,142 0.740 0.84 13% BUY 0.8x 0.8x 10.3% 7.2% 52% (30%)

Suntec REIT 2,729 1.530 1.58 3% HOLD 0.7x 0.8x 6.5% 6.6% 5% 2%

Mapletree Commercial Trust* 1,947 1.300 1.40 7% BUY 1.1x 1.1x 6.3% 6.5% 2% 4%

Mapletree Greater China Commercial 1,744 0.900 1.11 24% BUY 0.8x 0.8x 8.0% 8.6% 11% 7%

Indust rial

A-Reit * 3,850 2.260 2.52 12% BUY 1.1x 1.1x 6.6% 6.8% 2% 2%

Ascendas India Trust * 562 0.860 0.90 5% HOLD 1.3x 1.3x 6.5% 6.8% 15% 4%

Mapletree Industrial Trust * 1,935 1.545 1.62 5% BUY 1.2x 1.2x 7.1% 7.2% 5% 1%

Mapletree Logistics Trust * 1,736 0.990 1.15 16% BUY 1.0x 1.0x 7.6% 7.9% (0%) 4%

Cambridge Industrial Trust 512 0.560 0.61 9% HOLD 0.8x 0.8x 8.9% 9.0% (0%) 1%

Cache Logistics Trust 497 0.895 1.11 24% HOLD 0.9x 0.9x 9.5% 9.8% (0%) 3%

Soilbuild Business Space Reit 485 0.735 0.88 20% BUY 0.9x 0.9x 8.6% 8.7% 2% 1%

Hospitalit y & Healthcare

Ascendas Hospitality Trust* 509 0.645 0.74 15% BUY 0.9x 0.9x 8.8% 8.8% 12% 1%

Ascott Residence Trust 1,268 1.160 1.38 19% BUY 0.9x 0.9x 7.1% 7.2% 0% 1%

CDL Hospitality Trust 896 1.285 1.65 28% BUY 0.8x 0.8x 7.7% 7.5% (10%) (3%)

Far East Hospitality Trust 808 0.640 0.71 11% HOLD 0.7x 0.7x 7.2% 6.7% (10%) (7%)

Frasers Hospitality Trust 715 0.745 0.83 11% HOLD 0.9x 0.9x 10.1% 7.9% 28% (23%)

OUE Hospitality Trust 716 0.760 0.98 29% BUY 0.8x 0.9x 8.6% 8.7% (3%) 1%

Parkway Life 972 2.270 2.56 13% BUY 1.3x 1.3x 5.8% 5.4% 14% (7%)

Religare Health Trust * 560 0.995 0.97 -2% HOLD 1.1x 1.1x 8.0% 8.7% 9% 9%

Others

IREIT Global 285 0.660 0.77 17% BUY 1.1x 1.1x 7.7% 9.7% 146% 25%

Keppel DC REIT 634 1.015 1.14 13% BUY 1.2x 1.1x 6.3% 6.7% 18% 6%

P/B (x) Div Yld GrowthEPS / DPU

Source: DBS Bank * FY16 & 17 forecast

Singapore Strategy

2016 Outlook

ed: TH sa: YM

Telecommunication

Neutral

Analyst Sachin MITTAL +65 6682 3699 [email protected]

Price Target

Price PE

2016F

Div Yld

2016F

EPS CAGR 2014-2016

(S$) (S$) Rec (x) (%) (%)

M1 2.71 2.60 FV 14.2 6.4% 0

Starhub 3.57 3.30 FV 16.6 5.7% 0 Source: DBS Bank Closing price as of 11 Dec 2015 Post-paid ARPU have been falling even before the entry of new player

8178 79 79 78

76 7578

73 74 73

68

7270 69

6668 69

7168

70 71

5254 53 54 55 56 55

5755 55 54

50

55

60

65

70

75

80

85

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

S$ ARPU ‐ postpaid

Singtel Starhub M1

Source: Companies, DBS Bank

Risks are partially priced in

Market has partially priced in the potential threat of 4th mobile player entry; Spectrum award in early 2016 to bring clarity on new entrant

Pay-TV sector likely to be resilient in the medium term despite Netflix's entry in 2016; pay-TV business model under threat in the long term though

Maintain Fully Valued on M1 and StarHub as they have little capacity to invest during uncertain times after paying out almost all of their free cash flows as dividends

Outlook

Potential 4th player could gain 7% revenue share in five

years. 60 MHz of reserved spectrum across 900 MHz, 2.3

GHz and 2.5 GHz bands will be auctioned in early 2016.

MyRepublic and Consistel are likely to bid for it. Actual

operations could start from April 2017. Based on UMobile’s

performance in Malaysia, we expect the new player to garner

7% revenue share by 2022. We anticipate earnings to start

falling at M1 and StarHub from 2017 onwards.

Pay TV is not a concern in the medium term. Netflix has

adversely affected Pay-TV players in US, less so in UK.

Singapore Pay-TV players are likely to be resilient in the

medium term as Netflix is likely to partner with existing pay TV

players due to the small size of the market. This will allow

customers to stream Netflix content on TV through their

existing set-top box, without needing to invest in a smart TV or

a separate streaming device. However, the channel aggregator

model of Pay-TV players is at risk in the long term as individual

channels such as HBO and CBO go online.

Risks

Non-entry of 4th mobile player. An inability to raise funding

may not allow MyRepublic (the frontrunner) to bid for the

spectrum.

Operational issues of HetNet. 4th telco business case is built

on the use of Heterogenous network. Any technical issues with

Hetnet may haunt the new player.

Singapore Strategy

2016 Outlook


Maintain Fully Valued on M1 and StarHub. We forecast

flattish earnings for both the companies in FY16F followed

by a low-single-digit earnings decline from FY17F onwards.

Our DCF-based TPs of S$3.30 for StarHub and S$2.60 for M1

imply target dividend yields of 6% (5.5% currently) and 6.6%

(6.1% currently) respectively, given weak growth prospects.

Peers Valuation

Mk t Price T arget CA GR

Company Cap LCL Price % 14-16

(US$m) 11-Dec LCL Upside Rcmd (%) 15F 16F 15F 16F 14F 15F 15F 16F 15F 16F

M1 1,796 2.71 2.60 -4% FV 0 14.1 14.2 6.4% 6.4% 6.4x 6.4x 8.1x 8.1x 0.8x 0.7x

Starhub 4,364 3.57 3.30 -8% FV 0 16.8 16.6 5.6% 5.7% 41.2x 33.1x 8.6x 8.6x 0.5x 0.5x

PE (x ) Div idend Y ield (%) P/BV EV /EBITDA Net Debt /Ebitda

Source: DBS Bank

Singapore Strategy

2016 Outlook

ed: JS sa: YM

Transport Overweight Paul YONG CFA +65 6682 3712 Andy SIM CFA +65 6682 3718 [email protected] [email protected] Suvro SARKAR +65 6682 3720 [email protected]

Price Target

Price PE

2016F

DivYld

2016F

EPS CAGR 2014-

(S$) (S$) Rec (x) (%) (%)

Singapore Airlines* 10.99 NR NR 15.3 4.0 51.1

HPHT US$0.535 US$0.63 BUY 23.4 8.2 -0.8 ComfortDelgro 2.97 3.00 HOLD 18.4 3.4 10.3

SMRT * 1.48 1.24 FV 26.0 2.2 -2.5

SIA Engineering * 3.58 3.84 HOLD 22.4 3.9 0.4

ST Engineering 2.89 3.60 BUY 16.8 5.2 0.4

NOL 1.225 1.00 HOLD nm 0.0 nm

Tiger Airways * 0.41 NR NR 21.6 0.0 nm

China Merchant 0.89 1.45 BUY 10.7 7.7 -9.7

CWT Limited 1.87 NR NR 9.1 2.1 4.6

Source: DBS Bank; * FY17 Forecast SIA, Tiger Airways & CWT estimate from Bloomberg Consensus Closing price as of 11 Dec 2015 Low fuel price environment continues

0

100

200

300

400

500

600

700

0

20

40

60

80

100

120

140

160

180

200

Jan 2007

Jan 2008

Jan 2009

Jan 2010

Jan 2011

Jan 2012

Jan 2013

Jan 2014

Jan 2015

US$

per

MT

US$

per

bbl

Jet Fuel (LHS) Brent (LHS) Bunker (RHS)

Source: DBS Bank estimates

SIA Parent Airline Fuel Price before and after hedging

Source: Company

Persistent low oil prices a boon

With oil prices likely to stay low, operators should continue to see relief on the cost side, especially airlines, as expensive hedges expire

Neutral on land transport names though there is upside risk for SMRT if the rail reforms come sooner than expected and if terms are better for SMRT than anticipated

Our top picks are ST Engineering (BUY, TP S$3.60) and CMH Pacific (BUY, TP S$1.45)

Land Transport: CD (HOLD, TP S$3.00), SMRT (FULLY

VALUED, TP S$1.24) All eyes on transport reforms in Singapore. We have a

Fully Valued rating on SMRT as we believe the market has been overly optimistic on the possible impact of the NEW Rail Financing Framework, with the stock trading at over 26x PE. The risk to our call is if rail reforms and/or terms are better than expected. Trading at higher than 1.5x standard deviation above its 5-year average at 19x FY16 PE currently, we believe potential upside from bus reforms has been largely priced-in, and this underlines our HOLD call for ComfortDelgro.

Airlines – Lower fuel costs ex-hedging to offset pressure

on yields Look forward to substantially lower hedging losses,

but yields still under pressure. With jet fuel prices likely to stay fairly benign in 2016 (we expect oil prices to move up modestly from 2H16 onwards), airlines can expect to alleviate costs further from 2015 as expensive fuel hedges expire. Even with yields under pressure (partly from passing on lower fuel costs to consumers), we expect earnings for airlines to improve in 2016.

Container Shipping – NOL (ACCEPT THE OFFER)

Accept CMA-CGM’s offer of S$1.30 per share. The proposed offer price of S$1.30 values NOL at 16.1x EV/LTM EBITDA and a P/BV of 0.96x; NOL’s listed peers are valued at an average of 12.3x EV/LTM EBITDA and 0.66x P/BV. Thus, in terms of valuation, the offer represents a 30% premium compared to peers on an EV/LTM EBITDA basis and a 44% premium on a P/BV basis. It also represents a 30% premium over our latest target price of S$1.00, which was based on 0.8x P/BV to reflect deteriorating earnings.

Infrastructure and Logistics: High yields

Attractive dividend yields on offer for both HPH Trust

and CMH (Pacific). We expect HPH Trust’s earnings to grow at a modest pace, driven by low single digit gains in both volumes and ASPs. Meanwhile, for China Merchants Holdings Pacific (CMH (Pacific)), the contribution from newly acquired roads should help drive substantial gains at the bottom line. Both companies should generate strong

Singapore Strategy

2016 Outlook

cash flows to help sustain an attractive dividend yield for investors.

MRO: Prefer ST Engineering over SIA Engineering

Could SIA Engineering be an M&A candidate? We have a BUY rating on ST Engineering for its diversified portfolio and strong order book of S$12.2bn, which provides firm earnings visibility and sustainability. While SIA Engineering is a HOLD, it should be interesting for investors to keep an eye on it as a potential candidate for merger or take-over, especially given the spate of M&A activities in 2015.

Risks Could high oil prices make a comeback? With Brent

crude at just US$40/bbl, and not likely to rebound soon, transport operators are enjoying some halcyon days. However, there is always a risk that oil prices could spike up (for example due to geo-political events) and impact margins. Additionally, much of the cost savings from lower oil prices could also eventually be passed on to consumers and customers.

Tepid demand, excess capacity and weak prices

remain key concerns. For shipping and airlines, competition and excess capacity remain key challenges to overcome in a bid for sustained profitability. At the same time, rates and yields are also under pressure as a result of both over-capacity and weak demand growth.

Valuations & Stock Picks We offer three picks for 2016:

ST Engineering (BUY, TP: S$3.60). The group has an order book of S$12.2bn, which covers close to two years of revenue, and provides good visibility ahead. We believe the strength in the Electronics division will help to offset weakness in Marine division over the next 2 years and allow STE to report steady earnings and dividends in the near term. Given the healthy orderbook, strong balance sheet and dividend yield of 4.5%, we maintain our BUY call on the counter. Share price should be supported by the upcoming final dividend. CMH Pacific (BUY, TP S$1.45). We continue to like CMH (Pacific) for its unique combination of yield (>8%) and growth, driven by both organic traffic growth and acquisitions. A potential re-rating catalyst for the stock would be further toll road acquisitions in China to boost its long term earnings growth prospects. HPH Trust (BUY, TP US$0.63). While DPU is projected to be lower at around 4.4 UScts p.a. in FY15 and FY16 from 5.3 US cts in FY14 as HPHT restarts its capital expenditure programme, the stock still offers an attractive yield of c.8% at its current price level. The upcoming potential final DPS in Feb of 2.4 UScts also presents a good reason to get in early.

Sector Valuations

Mkt Price T arget EPS CA GR

Cap (S$) Price % 14-16

Company (US$m) 11-Dec (S$) Upside Rcmd 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F (%)

Large Cap

Singapore Airlines * 9,052 10.99 NR - NR 20.0x 15.3x 1.0x 1.0x 4.0x 3.5x 5% 7% 3.2% 4.0% 51.1

Hutchison Port Holdings Trust 4,660 US$0.535 US$0.63 18% BUY 23.8x 23.4x 0.8x 0.9x 11.8x 11.6x 3% 4% 8.2% 8.2% -0.8

ComfortDelgro 4,517 2.97 3.00 1% HOLD 20.9x 18.4x 2.7x 2.6x 8.5x 8.0x 14% 14% 3.0% 3.4% 10.3

SMRT * 1,596 1.48 1.24 -16% FV 26.3x 26.0x 2.5x 2.4x 9.7x 9.8x 10% 9% 2.2% 2.2% -2.5

SIA Engineering * 2,845 3.58 3.84 7% HOLD 22.8x 22.4x 3.0x 2.9x 15.7x 15.5x 13% 13% 3.9% 3.9% 0.4

ST Engineering 6,345 2.89 3.60 25% BUY 17.0x 16.8x 4.1x 4.0x 10.1x 9.9x 25% 24% 5.2% 5.2% 0.4

NOL 2,254 1.225 1.00 -18% HOLD nm nm 0.9x 1.0x 15.9x 16.7x 33% (8%) 0.0% 0.0% nm

Small / Mid Cap

Tiger Airways * 725 0.41 NR - NR 205.0x 21.6x 4.6x 3.9x 15.9 11.5x 6% 19% 0.0% 0.0% nm

China Merchant Holdings 1,130 0.89 1.45 63% BUY 9.4x 10.7x 0.8x 0.8x 8.4x 7.5x 8% 8% 6.6% 7.7% -9.7

CWT Limited 794 1.87 NR - NR 10.4x 9.1x 1.4x 1.3x 14.1 12.4x 13% 14% 3.7% 2.1% 4.6

ROA E Div Y ield

PE (x ) P/BV (x ) EV /EBIT DA (x (%) (%)

* FY16 & FY17 Forecast SIA, Tiger Airways, CWT based on Bloomberg consensus estimates

Singapore Strategy

2016 Outlook

Stock Profile

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: YM

BUY Last Traded Price: S$3.12 (STI : 2,815.04) Price Target : S$3.73 (20% upside) Potential Catalyst: Asset Recycling, strong operating results Where we differ: Different estimates of % completion Analyst Derek Tan +65 6682 3716 [email protected] Mervin Song CFA +65 6682 3715 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2014A 2015F 2016F 2017F Revenue 3,925 3,728 4,187 5,363 EBITDA 2,444 1,662 1,763 2,044 Pre-tax Profit 1,997 1,161 1,238 1,498 Net Profit 1,161 714 762 921 Net Pft (Pre Ex.) 1,161 714 762 921 EPS (S cts) 27.3 16.8 17.9 21.6 EPS Pre Ex. (S cts) 27.3 16.8 17.9 21.6 EPS Gth (%) 33 (38) 7 21 EPS Gth Pre Ex (%) 33 (38) 7 21 Diluted EPS (S cts) 36.9 16.8 17.9 21.6 Net DPS (S cts) 9.00 8.00 8.00 8.00 BV Per Share (S cts) 394 401 411 425 PE (X) 11.4 18.6 17.4 14.4 PE Pre Ex. (X) 11.4 18.6 17.4 14.4 P/Cash Flow (X) 13.3 27.3 31.1 8.6 EV/EBITDA (X) 13.4 20.3 19.6 16.9 Net Div Yield (%) 2.9 2.6 2.6 2.6 P/Book Value (X) 0.8 0.8 0.8 0.7 Net Debt/Equity (X) 0.6 0.6 0.6 0.6 ROAE (%) 7.1 4.2 4.4 5.2 Earnings Rev (%): - - - Consensus EPS (S cts): 16.3 17.7 19.5 Other Broker Recs: B: 19 S: 0 H: 4

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

Towards An Optimal Mix

Driven by an improved outlook in China. We maintain our BUY call with a target price of S$3.73 based on a 25% discount to our RNAV. We believe that CAPL offers value, trading at an attractive 0.8x P/Bk and 0.6x P/RNAV. We expect the group’s strategy to focus on growing its commercial portfolio, and coupled with opportunistic asset recycling of mature assets into its listed REITs/funds will present upside to our earnings. Growing recurring revenues from its retail malls portfolio

and Ascott. Its current property portfolio has up to 75% of its assets in retail malls, and commercial integrated developments, including Ascott Group, which offer strong income visibility in the medium term. We see improved operating performance for its malls, as the properties reach maturity, boosted by the completion of four Raffles City mega developments in China in the medium term. Launch of new PE funds to boost returns. Leveraging on its fund management expertise, CAPL aims to launch 5-6 private equity funds with funds under management of S$8bn-10bn by 2020. We think that by tapping on third party capital, CAPL would be able to leverage on its larger scale to achieve better economies of scale, capitalise on market opportunities and at the same time de-risk its property level exposure. Valuation:

Our target price of S$3.73 is based on a 25% discount to our RNAV of S$4.97/share. Our RNAV is based on our estimates of the market valuation of its various property developments and investment property assets across its various divisions. Key Risks to Our View:

Slowdown in Asian economies. The risk to our view is if there is a slowdown in Asian economies, especially China, which could dampen demand for housing and private consumption expenditure and retail sales. At A Glance Issued Capital (m shrs) 4,248 Mkt. Cap (S$m/US$m) 13,254 / 9,406 Major Shareholders Temasek Holdings Pte Ltd (%) 39.6 Blackrock (%) 6.0 Free Float (%) 54.4 3m Avg. Daily Val (US$m) 26.7 ICB Industry : Real Estate / Real Estate


Singapore Company Guide

CapitaLand Edition 1 Version 1 | Bloomberg: CAPL SP | Reuters: CATL.SI Refer to important disclosures at the end of this report

86

106

126

146

166

186

206

2.0

2.5

3.0

3.5

4.0

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Relative IndexS$

CapitaLand (LHS) Relative STI INDEX (RHS)

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

CapitaLand

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Growing recurring revenues from its retail malls

portfolio and Ascott. While trading properties (residential development and strata offices) comprise 25% of assets, we see continued strength from CAPL’s retail malls division (CapitaMalls Asia) and commercial integrated developments, including Ascott Group and its successful serviced residence brand, which forms a significant 75% of total assets and is expected to contribute to growing recurring income for the group. Looking ahead, CapitaMalls Asia continues to perform steadily. There are 88 operating properties across Asia (54 of it in China). As of Sep-15, the group’s shopping malls continue to see healthy sales and occupancy. Shopper traffic at its malls in Singapore and China rose 4.1% and 9.2% y-o-y in 9M15 respectively. Looking ahead, CAPL is expected to open another 17 properties (10 in China) in the coming years. In addition, Raffles City integrated developments in China will continue to offer stable returns (7-8% for stabilised properties in Shanghai and Beijing, c.3% for stabilising properties in Chengdu and Ningbo). Looking ahead, the group will be opening 4 more Raffles City developments in 2015-2018, which will boost the group’s returns and profitability when completed. The Ascott Limited remains on the fast track to achieve its 80,000 units target by year 2020. Ascott recently invested over S$120m in China’s largest and fastest growing online apartment sharing platform, Tujia which we believe enables the group to extract synergies and leverage on Tujia’s platform to reach out to a wider addressable market. The group also recently launched a US$600m joint venture fund with Qatar Investment Authority to invest in value-added opportunities globally. This fund, when fully vested, will offer its REIT, Ascott Residence Trust (ART) a viable acquisition pipeline in the medium term.

Launch of new PE funds. Leveraging on its fund management expertise, CAPL aims to launch 5-6 private equity funds with funds under management of S$8-10bn by 2020. We think that by tapping on third party capital, CAPL would be able to leverage on larger economies of scale, better capitalise on market opportunities and at the same time de-risk its property level exposure. This strategy will be able to deliver medium term shareholder ROE of 8-12%.

Revenue growth

% Breakdown of assets by segments

Breakdown of Mall portfolio (% by country)

RNAV breakdown

Segments S$’m

Value of CapitaLand Singapore 7,141.1

Value of CapitaLand China 10,871.3

CapitaMalls Asia 17,303.4

Ascott 4,222.9

Others 846.8

GDV of CAPL Group 40,385.5

Less: Net Debt (11,552.3)

Less: devt capex (7,775.8)

RNAV of CAPL 21,177.5

Total Shares 4,247.6

RNAV per share 4.97

Discount to RNAV 25%

Target price 3.73

Source: Company, DBS Bank

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

13A 14A 15F 16F 17F

S$'m

Residential & Strata Sales,

25%

Commercial & Integrated Devt,

35%

Shopping Malls, 23%

Serviced Residences ,

16%

Others, 1%

Singapore, 41%

China, 52%

Malaysia, 4%

Japan, 1% India, 2%


Company Guide

CapitaLand

Balance Sheet:

Balance sheet remains strong. We forecast debt/equity ratio to remain stable at c.0.6x over the coming years (0.51x as of end-3Q15). Debt maturity profile remains long at 3.3 years (as of 3Q15) with an average cost of 3.5%. Approximately 70% of the interest cost is hedged into fixed rate debt. Share Price Drivers:

De-risking its Singapore residential exposure/

replenishing landbank. CAPL has been actively de-risking its Singapore residential exposure through active marketing of its unsold units, which as of 3Q15, stands at S$2.7bn in value. This is only c. 3% of its total asset value, and is not likely to have a major impact on earnings. Looking ahead, while the group has not been an active investor in Singapore’s residential market, winning any new land tenders will imply improved confidence in the outlook for Singapore’s residential market in the medium term. Relaxation of government policies. Expectations of policy relaxation (especially cyclical measures like the Buyers’ and Sellers’ stamp duties) may improve buyers’ market sentiment and spark a revival in transactional volumes in the Singapore residential market. This is also expected to lift sentiment on property stocks, which we believe will enable CAPL to close the gap between stock price and its NAV. Asset recycling into listed S-REITs CAPL will continue to demonstrate its ability to crystallise value through strategic divestments of mature assets to its listed REITs, which are market leaders in their respective subsectors of retail, office and hospitality. The ability to recycle capital efficiently will enable the group to free up capital, improve its balance sheet position and deploy capital to projects with higher returns. Key Risks:

Slowdown in Asian economies. The risk to our view is a slowdown in Asian economies which could dampen demand for housing and private consumption expenditure and retail sales. This in turn could result in slower-than-expected projections. Company Background

CapitaLand is one of Asia’s largest real estate companies headquartered and listed in Singapore. Its two core markets are Singapore and China, while Indonesia, Malaysia and Vietnam have been identified as new growth markets.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0

0.0

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0.1

0.1

0.1

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0.2

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0.80

2013A 2014A 2015F 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

100.0

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400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure (-)

S$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2013A 2014A 2015F 2016F 2017F

Avg: 15.8x

+1sd: 18.7x

+2sd: 21.6x

‐1sd: 12.8x

‐2sd: 9.9x8.9

10.9

12.9

14.9

16.9

18.9

20.9

22.9

Dec-11 Dec-12 Dec-13 Dec-14

(x)

Avg: 0.85x

+1sd: 0.95x

+2sd: 1.04x

‐1sd: 0.76x

‐2sd: 0.66x

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3


(x)


Company Guide

CapitaLand

Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (S$m) CapitaLand Singapore 1,237 1,242 1,002 1,021 1,213 CapitaLand China 899 638 1,140 1,452 2,227 CMA 641 1,178 761 842 999 Ascott 635 683 681 725 775 Others 99.0 185 144 147 149 Total 3,511 3,925 3,728 4,187 5,363

Income Statement (S$m)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 3,511 3,925 3,728 4,187 5,363 Cost of Goods Sold (2,274) (2,543) (1,761) (2,093) (2,962) Gross Profit 1,237 1,382 1,967 2,095 2,401 Other Opng (Exp)/Inc 72.5 27.7 (539) (566) (594) Operating Profit 1,310 1,410 1,428 1,529 1,807 Other Non Opg (Exp)/Inc 0.0 0.0 0.48 0.48 0.48 Associates & JV Inc 903 970 168 169 171 Net Interest (Exp)/Inc (402) (382) (436) (460) (481) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,811 1,997 1,161 1,238 1,498 Tax (205) (238) (209) (223) (270) Minority Interest (731) (599) (238) (254) (307) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 875 1,161 714 762 921 Net Profit before Except. 875 1,161 714 762 921 EBITDA 2,275 2,444 1,662 1,763 2,044 Growth Revenue Gth (%) 6.4 11.8 (5.0) 12.3 28.1 EBITDA Gth (%) 25.3 7.4 (32.0) 6.1 15.9 Opg Profit Gth (%) 40.3 7.6 1.3 7.0 18.2 Net Profit Gth (Pre-ex) (%) 12.8 32.7 (38.5) 6.6 21.0 Margins & Ratio Gross Margins (%) 35.2 35.2 52.8 50.0 44.8 Opg Profit Margin (%) 37.3 35.9 38.3 36.5 33.7 Net Profit Margin (%) 24.9 29.6 19.2 18.2 17.2 ROAE (%) 5.6 7.1 4.2 4.4 5.2 ROA (%) 2.1 2.6 1.6 1.7 2.1 ROCE (%) 3.0 3.0 2.9 3.0 3.4 Div Payout Ratio (%) 39.0 33.0 47.7 44.7 37.0 Net Interest Cover (x) 3.3 3.7 3.3 3.3 3.8


Driven by locked-in sales from China and

Retail Malls, Ascott to deliver consistent returns


Company Guide

CapitaLand

Quarterly / Interim Income Statement (S$m)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 919 1,518 915 1,031 1,076 Cost of Goods Sold (610) (1,080) (553) (637) (738) Gross Profit 309 438 362 394 338 Other Oper. (Exp)/Inc (91.6) (173) (116) (88.0) (30.2) Operating Profit 218 265 245 306 308 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 124 331 126 236 140 Net Interest (Exp)/Inc (96.5) (97.6) (107) (112) (105) Exceptional Gain/(Loss) 0.0 248 0.0 322 0.0 Pre-tax Profit 245 747 263 753 343 Tax (47.5) (104) (50.6) (144) (64.4) Minority Interest (67.6) (227) (51.6) (146) (85.6) Net Profit 130 416 161 464 193 Net profit bef Except. 130 168 161 142 193 EBITDA 342 596 371 543 448 Growth Revenue Gth (%) 5.0 65.2 (39.7) 12.7 4.3 EBITDA Gth (%) (40.8) 74.6 (37.8) 46.3 (17.4) Opg Profit Gth (%) 7.5 21.9 (7.6) 24.9 0.5 Net Profit Gth (Pre-ex) (%) (43.6) 29.1 (3.9) (12.2) 36.1 Margins Gross Margins (%) 33.7 28.9 39.5 38.2 31.4 Opg Profit Margins (%) 23.7 17.5 26.8 29.7 28.6 Net Profit Margins (%) 14.1 27.4 17.6 45.0 17.9

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 666 1,047 1,922 2,021 2,121 Invts in Associates & JVs 12,673 12,781 13,040 13,300 13,561 Other LT Assets 16,583 18,705 18,430 18,930 19,430 Cash & ST Invts 6,393 2,941 2,489 2,201 3,017 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 1,167 963 909 1,021 1,308 Other Current Assets 7,579 7,676 7,043 6,830 6,093 Total Assets 45,063 44,113 43,833 44,304 45,529 ST Debt 1,280 3,469 3,469 3,469 3,469 Creditor 2,889 3,070 1,956 1,292 1,130 Other Current Liab 478 463 527 606 733 LT Debt 14,656 12,517 13,017 13,517 14,017 Other LT Liabilities 1,305 1,386 1,386 1,386 1,386 Shareholder’s Equity 16,109 16,758 17,089 17,510 18,090 Minority Interests 8,346 6,451 6,389 6,524 6,704 Total Cap. & Liab. 45,063 44,113 43,833 44,304 45,529 Non-Cash Wkg. Capital 5,379 5,107 5,469 5,954 5,538 Net Cash/(Debt) (9,543) (13,045) (13,997) (14,785) (14,469) Debtors Turn (avg days) 137.9 99.1 91.7 84.1 79.3 Creditors Turn (avg days) 433.2 438.9 541.0 292.3 152.6 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1 Current Ratio (x) 3.3 1.7 1.8 1.9 2.0 Quick Ratio (x) 1.6 0.6 0.6 0.6 0.8 Net Debt/Equity (X) 0.4 0.6 0.6 0.6 0.6 Net Debt/Equity ex MI (X) 0.6 0.8 0.8 0.8 0.8 Capex to Debt (%) 0.5 0.8 5.7 1.0 0.9 Z-Score (X) 1.2 1.1 1.0 1.1 1.1


Gearing to remain stable


Company Guide

CapitaLand

Cash Flow Statement (S$m)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 1,811 1,997 1,161 1,238 1,498 Dep. & Amort. 62.8 64.6 65.0 65.0 65.0 Tax Paid (223) (256) (145) (144) (143) Assoc. & JV Inc/(loss) (903) (970) (168) (169) (171) Chg in Wkg.Cap. (53.7) 51.9 (427) (564) 289 Other Operating CF 262 111 0.0 0.0 0.0 Net Operating CF 956 999 487 427 1,538 Capital Exp.(net) (76.6) (127) (939) (164) (164) Other Invts.(net) (190) (1,357) 275 (500) (500) Invts in Assoc. & JV 57.0 841 (150) (150) (150) Div from Assoc & JV 439 406 58.9 59.0 59.9 Other Investing CF 141 (102) 0.0 0.0 0.0 Net Investing CF 370 (339) (756) (755) (755) Div Paid (688) (705) (683) (460) (468) Chg in Gross Debt 280 177 500 500 500 Capital Issues 1.64 1.38 0.0 0.0 0.0 Other Financing CF (464) (3,746) 0.0 0.0 0.0 Net Financing CF (869) (4,272) (183) 40.3 32.4 Currency Adjustments 352 55.0 0.0 0.0 0.0 Chg in Cash 809 (3,557) (452) (288) 816 Opg CFPS (S cts) 23.8 22.2 21.4 23.3 29.3 Free CFPS (S cts) 20.7 20.5 (10.6) 6.17 32.3


Target Price & Ratings History

Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 26 Jan 15 3.53 3.84 BUY

2: 18 Feb 15 3.68 3.88 BUY

3: 17 Mar 15 3.50 3.88 BUY

4: 04 May 15 3.76 4.11 BUY

5: 25 Jun 15 3.46 4.11 BUY

6: 14 Jul 15 3.38 4.11 BUY

7: 15 Jul 15 3.40 4.11 BUY

8: 10 Aug 15 3.22 4.11 BUY

9: 31 Aug 15 2.82 3.73 BUY

10: 12 Oct 15 3.13 3.73 BUY

11: 05 Nov 15 3.20 3.73 BUY12: 23 Nov 15 3.10 3.73 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

5

6

7 8

9

10

1112

2.54

2.74

2.94

3.14

3.34

3.54

3.74

3.94

Dec-14 Apr-15 Aug-15

S$

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: AS

BUY Last Traded Price: S$7.03 (STI : 2,815.04) Price Target : S$10.26 (46% upside) Potential Catalyst: Better than expected operational updates Where we differ: Forecasts driven mainly by higher income from hotel segment Analyst Derek Tan +65 6682 3716 [email protected] Mervin Song CFA +65 6682 3715 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2014A 2015F 2016F 2017F Revenue 3,764 3,194 3,636 3,847 EBITDA 1,294 1,042 1,083 1,116 Pre-tax Profit 1,004 749 793 826 Net Profit 757 581 616 642 Net Pft (Pre Ex.) 757 581 616 642 EPS (S cts) 83.2 63.9 67.8 70.6 EPS Pre Ex. (S cts) 83.2 63.9 67.8 70.6 EPS Gth (%) 12 (23) 6 4 EPS Gth Pre Ex (%) 12 (23) 6 4 Diluted EPS (S cts) 79.3 60.9 64.6 67.3 Net DPS (S cts) 16.0 12.3 13.0 13.6 BV Per Share (S cts) 925 973 1,028 1,086 PE (X) 8.4 11.0 10.4 10.0 PE Pre Ex. (X) 8.4 11.0 10.4 10.0 P/Cash Flow (X) 21.9 13.0 15.0 9.3 EV/EBITDA (X) 8.9 11.3 11.1 10.8 Net Div Yield (%) 2.3 1.7 1.9 1.9 P/Book Value (X) 0.8 0.7 0.7 0.6 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 ROAE (%) 9.4 6.7 6.8 6.7 Earnings Rev (%): - - - Consensus EPS (S cts): 61.4 67.0 70.1 Other Broker Recs: B: 16 S: 2 H: 5


Diversification to pay dividends Attractive valuations with stock trading below GFC low. With the residential transaction market still slow in Singapore, topline drivers will mainly come from the completion of the South Beach integrated development in Singapore and consistent and regular cashflows from its commercial and hotel segments. Despite the soft sentiment in the residential market, we believe that most negative news have been priced in and we see attractive valuations at 0.7x P/Bk which is below the GFC low of 0.83x.

Hotel operations offer cashflow stability. City Developments (CDL) derives close to 63%-69% of topline from its hotel and commercial portfolio, which deliver stable cashflows. Its hotel division, together with M&C is expected to perform strongly from 2015 onwards. This will mainly come from contribution from acquisitions and completed refurbishments across its properties, which are expected to result in a 3% rise in portfolio RevPAR going forward.

3Q15 results in line. Net earnings for 3Q15 dropped 16% to S$106.4m, in line, due to lower contribution from the property development segment on lower project milestone completions. Close to 72% and 59% of pretax earnings came from recurring income segments. Operating margins were steady at c. 19%. Valuation:

We maintain our BUY call and TP of S$10.26 pegged to 20% discount to our RNAV of S$12.82. Supported by a strong balance sheet and diversified earnings base, CDL should be able to weather the current uncertain market conditions well. Key Risks to Our View:

Decline in residential prices in Singapore. As a proxy to Singapore’s residential market, a deteriorating operating environment will cap share price performance. At A Glance Issued Capital (m shrs) 909 Mkt. Cap (S$m/US$m) 6,392 / 4,537 Major Shareholders Hong Leong Holdings (%) 19.0 Aberdeen Asset Management (%) 16.4 Hong Leong Investment (%) 15.4 Free Float (%) 49.2 3m Avg. Daily Val (US$m) 8.1 ICB Industry : Real Estate / Real Estate



City Developments Edition 1 Version 1 | Bloomberg: CIT SP | Reuters: CTDM.SI Refer to important disclosures at the end of this report

67

87

107

127

147

167

187

207

6.4

7.4

8.4

9.4

10.4

11.4

12.4

13.4

14.4


Relative IndexS$

City Developments (LHS) Relative STI INDEX (RHS)


Company Guide

City Developments


Earnings Drivers:

South Beach integrated development to drive revenues

in 2016. The progressive completion of the South Beach integrated development is a key milestone for CDL and contributor to increased profitability going forward. The group has secured strong leasing commitments for the office tower (close to 100%) and the retail podium while the 654-room hotel (5-star) is on track to open by the end of 2015. CDL will launch the 190-unit South Beach Residences in 2Q16 when completed. Boost in Hotel revenues to provide steady cashflows. M&C’s revenue and profits (c. 46-52% of topline in FY15-16F) are expected to perform strongly from 2015 onwards. This will mainly come from contribution from acquisitions in 2014 while completed refurbishments across its properties are expected to give a boost to RevPAR. Looking ahead, overall RevPAR is expected to increase by 3%-5% y-o-y with hotels in Europe and the US moving ahead in terms of performance. In addition, there is an additional c.6,445 rooms in the pipeline (mainly management contracts) which will boost total rooms under management by 18%. The group’s investment property division (office and retail malls mainly in Singapore) is projected to offer steady returns. In total, the hotel and investment property divisions contribute c. 63-69% of revenues. Looking overseas to sustain growth. The ongoing tight government measures have taken a toll on transaction volumes for its residential business segment in Singapore.CDL has in recent years deployed capital to China and UK to boost returns. CDL has invested GBP242m in seven projects in the UK, which are in various stages of obtaining government approvals to be re-launched as high-end residential projects from 2016. In China, there are various residential projects that are already ready for launch and should perform well given improved buyers’ sentiment. Singapore residential outlook still muted. The ongoing tight government measures have taken a toll on the group’s residential business segment, with group staying selective on landbanking activities. However, CDL has been active in the Executive Condos (ECs) segment; The Brownstone EC and The Criteron saw brisk sales when launched.

Revenue Growth (%)

% Contribution to topline (by segments)

Hotel Segment growing strongly


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

2013A 2014A 2015F 2016F 2017F

S$'m

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013A 2014A 2015F 2016F 2017F

Hotel operations Rental income Property devt

40%

42%

44%

46%

48%

50%

52%

54%

1,350.0

1,400.0

1,450.0

1,500.0

1,550.0

1,600.0

1,650.0

1,700.0

1,750.0

1,800.0

1,850.0

2013A 2014A 2015F 2016F 2017F

S$'m

Revenue % of topline


Company Guide

City Developments

Balance Sheet:

Undervalued Net Asset Value (NAV). As at end-3Q15, NAV per unit rose to S$9.53. As the group has chosen to account for investment properties on a historical cost basis, its NAV is conservative as we estimate that current fair values of CDL’s properties are much higher than carrying values. Low gearing of 27%. CDL’s gearing is estimated to remain low at < 30% (and closer to mid-teens assuming that its investment property values are marked-to-market) which is within the management’s comfortable range. This provides greater financial flexibility and debt headroom for the group to acquire opportunistically. Share Price Drivers:

Replenishing land bank key to income sustainability. Currently the group has 2.6 sq ft of development space in local and overseas (China and UK) markets. The group is actively looking to replenish its land bank especially in Singapore and has been selective given the sustained high land prices seen in recent government land tenders. The ability to secure additional land bank at lower prices will mean upside to RNAVs and could re-rate the stock. Relaxation of property cooling measures in Singapore. Expectations of policy relaxation (especially cyclical measures like the Buyers’ and Sellers’ stamp duties) may improve sentiment and spark a revival in transaction volumes in the Singapore residential market. This would also lift sentiment on property stocks, which we believe will enable CDL to close the gap between stock price and its NAV. Key Risks:

Decline in residential prices in Singapore. Seen as a proxy to Singapore’s residential market, a worsening of the operating environment is expected to cap any upside potential for the stock. Interest rate risk. A rise in interest rates will have a negative impact on property transactions, given lower affordability and thus could adversely affect the group’s outlook. Company Background

City Developments Limited is one of the pioneers in Singapore's property sector. It is a property and hotel conglomerate involved in real estate development and investment, hotel ownership and management, and facilities management.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.2

0.2

0.3

0.3

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2013A 2014A 2015F 2016F 2017F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

2013A 2014A 2015F 2016F 2017F


S$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2013A 2014A 2015F 2016F 2017F

Avg: 14.6x

+1sd: 16.4x

+2sd: 18.2x

‐1sd: 12.7x

‐2sd: 10.9x

9.4

11.4

13.4

15.4

17.4

19.4


(x)

Avg: 1.21x

+1sd: 1.4x

+2sd: 1.59x

‐1sd: 1.02x

‐2sd: 0.83x

0.6

0.8

1.0

1.2

1.4

1.6

1.8


(x)


Company Guide

City Developments

Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (S$m) Property devt 1,198 1,581 997 1,294 1,436 Rental income 379 385 402 449 477 Hotel operations 1,529 1,678 1,675 1,773 1,814 Others 107 120 120 120 120 Total 3,213 3,764 3,194 3,636 3,847 Pre-tax Profit (S$m) Property devt 388 487 370 338 378 Rental income 300 149 116 166 159 Hotel operations 163 317 313 332 339 Others 97 50 (50) (43) (50) Total 948 1,004 749 793 826 Pre-tax Profit Margins Property devt 32.4 30.8 37.1 26.1 26.3 Rental income 79.1 38.9 29.0 37.0 33.4 Hotel operations 10.7 18.9 18.7 18.7 18.7 Others 38.3 41.7 13.3 19.2 13.3 Total 27.8 26.7 25.5 23.6 23.2


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 3,213 3,764 3,194 3,636 3,847 Cost of Goods Sold (1,552) (2,132) (1,567) (1,864) (1,982) Gross Profit 1,661 1,632 1,627 1,771 1,865 Other Opng (Exp)/Inc (877) (593) (805) (916) (969) Operating Profit 784 1,039 822 855 895 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 41.4 54.8 20.5 28.1 20.6 Net Interest (Exp)/Inc 123 (90.5) (93.5) (90.5) (90.4) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 948 1,004 749 793 826 Tax (69.6) (95.1) (69.0) (72.4) (76.3) Minority Interest (192) (139) (85.9) (91.0) (94.7) Preference Dividend (12.9) (12.9) (12.9) (12.9) (12.9) Net Profit 673 757 581 616 642 Net Profit before Except. 673 757 581 616 642 EBITDA 1,014 1,294 1,042 1,083 1,116 Growth Revenue Gth (%) (4.2) 17.1 (15.2) 13.8 5.8 EBITDA Gth (%) (0.2) 27.7 (19.5) 3.9 3.1 Opg Profit Gth (%) 0.4 32.6 (20.9) 4.0 4.7 Net Profit Gth (Pre-ex) (%) 25.8 12.4 (23.2) 6.0 4.2 Margins & Ratio Gross Margins (%) 51.7 43.4 50.9 48.7 48.5 Opg Profit Margin (%) 24.4 27.6 25.7 23.5 23.3 Net Profit Margin (%) 21.0 20.1 18.2 16.9 16.7 ROAE (%) 9.0 9.4 6.7 6.8 6.7 ROA (%) 4.1 4.1 2.9 3.1 3.1 ROCE (%) 4.8 5.5 4.1 4.1 4.2 Div Payout Ratio (%) 21.6 19.2 19.2 19.2 19.2 Net Interest Cover (x) NM 11.5 8.8 9.4 9.9


Growth mainly from locked-in residential sales, recurring income from investment portfolio

Stable returns from hotel and commercial portfolio.


Company Guide

City Developments


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 1,322 847 815 825 809 Cost of Goods Sold (862) (450) (444) (416) (396) Gross Profit 459 397 371 409 413 Other Oper. (Exp)/Inc (234) 57.1 (221) (219) (258) Operating Profit 225 454 149 190 156 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 15.4 14.2 38.5 14.9 20.6 Net Interest (Exp)/Inc (26.7) (30.9) (19.1) (14.1) (22.0) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 214 437 169 191 155 Tax (37.2) (24.0) (24.6) (26.2) (24.4) Minority Interest (49.4) (28.2) (21.0) (31.2) (23.7) Net Profit 127 385 123 133 106 Net profit bef Except. 127 385 123 133 106 EBITDA 287 523 242 257 234 Growth Revenue Gth (%) 53.5 (35.9) (3.8) 1.2 (1.9) EBITDA Gth (%) 11.7 82.2 (53.6) 5.9 (8.9) Opg Profit Gth (%) 13.7 101.5 (67.1) 27.4 (18.0) Net Profit Gth (Pre-ex) (%) (7.7) 202.6 (68.0) 8.5 (20.3) Margins Gross Margins (%) 34.8 46.8 45.5 49.6 51.1 Opg Profit Margins (%) 17.0 53.6 18.3 23.0 19.3 Net Profit Margins (%) 9.6 45.4 15.1 16.2 13.1

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 4,399 4,918 5,018 5,118 5,218 Invts in Associates & JVs 1,037 1,128 1,331 1,541 1,744 Other LT Assets 3,381 3,324 3,324 3,324 3,324 Cash & ST Invts 2,756 3,933 3,784 3,604 3,675 Inventory 8.42 11.2 8.22 9.78 10.4 Debtors 1,642 1,589 1,348 1,534 1,623 Other Current Assets 4,330 4,797 4,897 5,382 5,621 Total Assets 17,554 19,701 19,710 20,513 21,215 ST Debt 894 2,233 2,233 2,233 2,233 Creditor 1,327 1,463 1,075 1,280 1,360 Other Current Liab 224 261 136 140 144 LT Debt 4,401 4,466 4,466 4,466 4,466 Other LT Liabilities 493 501 501 501 501 Shareholder’s Equity 7,731 8,410 8,846 9,350 9,874 Minority Interests 2,484 2,365 2,451 2,542 2,637 Total Cap. & Liab. 17,554 19,701 19,710 20,513 21,215 Non-Cash Wkg. Capital 4,429 4,672 5,041 5,506 5,751 Net Cash/(Debt) (2,538) (2,766) (2,915) (3,095) (3,024) Debtors Turn (avg days) 160.4 156.6 167.8 144.7 149.8 Creditors Turn (avg days) 315.9 263.6 338.9 258.2 270.4 Inventory Turn (avg days) 2.3 1.9 2.6 2.0 2.1 Asset Turnover (x) 0.2 0.2 0.2 0.2 0.2 Current Ratio (x) 3.6 2.6 2.9 2.9 2.9 Quick Ratio (x) 1.8 1.4 1.5 1.4 1.4 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 0.3 Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.3 0.3 Capex to Debt (%) 2.4 14.0 4.5 4.5 4.5 Z-Score (X) 1.8 1.7 1.7 1.7 1.7


Balance sheet remains well capitalised


Company Guide

City Developments


FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 948 1,004 749 793 826 Dep. & Amort. 188 200 200 200 200 Tax Paid (221) (188) (194) (69.0) (72.4) Assoc. & JV Inc/(loss) (41.4) (54.8) (20.5) (28.1) (20.6) Chg in Wkg.Cap. (177) (482) (244) (469) (248) Other Operating CF (19.4) (187) 0.0 0.0 0.0 Net Operating CF 677 292 490 427 684 Capital Exp.(net) (125) (936) (300) (300) (300) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 14.1 828 (200) (200) (200) Div from Assoc & JV 88.0 17.9 17.9 17.9 17.9 Other Investing CF 12.0 47.6 0.0 0.0 0.0 Net Investing CF (11.1) (41.8) (482) (482) (482) Div Paid (320) (275) (158) (125) (131) Chg in Gross Debt 397 172 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (243) 842 0.0 0.0 0.0 Net Financing CF (166) 739 (158) (125) (131) Currency Adjustments 17.5 189 0.0 0.0 0.0 Chg in Cash 517 1,178 (150) (180) 70.9 Opg CFPS (S cts) 93.9 85.1 80.8 98.5 103 Free CFPS (S cts) 60.7 (70.7) 20.9 13.9 42.3



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rating

1: 17 Dec 14 9.84 10.71 HOLD2: 17 Feb 15 10.23 11.54 BUY3: 17 Mar 15 10.05 11.54 BUY4: 14 May 15 10.16 11.54 BUY5: 14 Aug 15 9.16 11.54 BUY6: 31 Aug 15 8.79 10.26 BUY7: 13 Nov 15 7.63 10.26 BUY


1

2

3

4

56

7

6.67 7.17 7.67 8.17 8.67 9.17 9.67

10.17 10.67 11.17

Dec- 14 Apr-15 Aug-15 Dec-15

S$

Estimated capex for development projects, AEIs

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: YM

BUY Last Traded Price: S$0.555 (STI : 2,815.04) Price Target : S$1.00 (81% upside) Potential Catalyst: Oil price and earnings recovery Where we differ: In line Analyst Pei Hwa Ho +65 6682 3714 [email protected]

What’s New Strategic partnership with a Chinese SOE

To ride the fast growing wind farm energy sector

in China

Expect first charter contract by 1H16

Earnings bottoming out in 4Q15

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015F 2016F 2017F Revenue 387 358 597 691 EBITDA 309 296 425 481 Pre-tax Profit 226 136 223 252 Net Profit 215 121 213 242 Net Pft (Pre Ex.) 179 121 213 242 EPS (S cts) 19.2 10.8 18.7 21.3 EPS Pre Ex. (S cts) 16.0 10.8 18.7 21.3 EPS Gth (%) 27 (44) 74 14 EPS Gth Pre Ex (%) 21 (33) 74 14 Diluted EPS (S cts) 19.2 10.6 18.7 21.3 Net DPS (S cts) 0.10 0.10 0.10 0.10 BV Per Share (S cts) 98.2 109 129 153 PE (X) 2.9 5.1 3.0 2.6 PE Pre Ex. (X) 3.5 5.1 3.0 2.6 P/Cash Flow (X) 2.9 2.6 2.0 1.7 EV/EBITDA (X) 6.3 7.3 5.0 3.9 Net Div Yield (%) 0.2 0.2 0.2 0.2 P/Book Value (X) 0.6 0.5 0.4 0.4 Net Debt/Equity (X) 0.9 0.9 0.8 0.6 ROAE (%) 24.1 10.4 15.9 15.1 Earnings Rev (%): - - - Consensus EPS (S cts): 11.4 17.4 19.8 Other Broker Recs: B: 11 S: 0 H: 1


Diversifying Customer Base Ezion remains our O&G top pick. We reiterate our BUY call on Ezion, TP is unchanged at S$1.00, pegged to 0.8x P/BV. Re-rating catalysts stem from earnings recovery with the resumption of service rigs currently under repair/upgrades in 1H16, delivery of newbuild liftboats, and successful diversification of customer base to win new charter contracts, while minimising rate reduction pressure from O&G customers.

Rising acceptance of liftboats. Ezion is well positioned to benefit from the rising popularity of liftboats in this region, capitalising on its first-mover advantage. We believe service rigs are in an early growth phase, buoyed by the substitution effect to replace typical work boats/barges in this region. Ezion has taken delivery of 26 service rigs and the fleet is expected to grow to 28 units by end of 2015, and 37 units by 2016, propelling earnings CAGR of 11% in 2015-2017.

Prudent business model. Ezion has a prudent business model. Fleet expansion is backed by long-term charters of 3-5 years. Demand is also relatively more resilient as service rigs are exposed to the production phase in the shallow water segment. Only 10-20% of Ezion’s fleet, largely in Mexico, are deployed for developmental drilling which see relatively higher risks of cancellations amid low oil prices.

Valuation:

We value Ezion based on 0.8x FY15 P/BV, arriving at a target price of S$1.00. This implies 81% upside potential.

Key Risks to Our View:

Rate reduction and contract terminations

We estimate that every 1% decline in average day rates will reduce Ezion’s bottomline by 2%. We have prudently assumed a 5% rate reduction in FY16. Five service rigs are due for charter renewals in FY16. Besides, the Mexican contracts appear to be at risk of termination as these consist of the few units that are deployed for drilling and there have been several cancellations in that region, though there is no such indication from PEMEX thus far.

Competition might be keener ahead with more new entrants attracted to the growing liftboat market. At A Glance Issued Capital (m shrs) 1,578 Mkt. Cap (S$m/US$m) 876 / 619 Major Shareholders Thiam Keng Chew (%) 14.3 Commonwealth Bank Of Austr (%) 9.1 Guoline Capital Limited (%) 8.2 Free Float (%) 55.1 3m Avg. Daily Val (US$m) 7.4 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist



Ezion Holdings Edition 1 Version 1 | Bloomberg: EZI SP | Reuters: EZHL.SI Refer to important disclosures at the end of this report

80

130

180

230

280

330

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3


Relative IndexS$

Ezion Holdings (LHS) Relative STI INDEX (RHS)


Company Guide

Ezion Holdings

WHAT’S NEW

Tapping on the fast growing offshore windfarm market

Ezion has entered into a strategic cooperation agreement with a Chinese SOE to support offshore wind power installation projects in China, which are mainly located along the coastal regions of China. What’s the impact The move is in line with Ezion’s strategy to diversify its customer base to include non-O&G players in view of the challenging near-to-medium term outlook of the sector. Ezion will be supplying its service rigs, be it redeployment of existing rigs or newbuild rigs, to the SOE for the loading, construction, transportation and installation aspects of the wind turbine development projects. This is not completely new for Ezion as one of its liftboats is currently chartered to a Chinese power company for its windfarm operations. We believe this is a positive shift for Ezion as clean and renewal energy is an up-and-coming sector. Offshore wind power development is part of the efforts to reduce air

pollution especially in key Chinese coastal cities which are currently reliant heavily on coal-fired electricity generation. The pace of offshore wind power installation is expected to accelerate over the next few years as China is way behind his target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5 year plan. As far as we understand, first charter contract with the SOE could be inked by 1H16. Though, it is still premature to estimate the level of demand from this new customer. Recommendation Reiterate our BUY call on Ezion, TP is unchanged at S$1.00, pegged to 0.8x P/BV. Re-rating catalysts stem from earnings recovery with the resumption of service rigs currently under repair/upgrades in 1H16, delivery of newbuild liftboats, and successful diversification of customer base to win new charter contracts while minimising rate reduction pressure from O&G customers.


Company Guide

Ezion Holdings


Earnings Drivers:

Charter-backed fleet expansion. Since the delivery of its first liftboat, the Lewek Leader, in Jan 2010, Ezion has expanded its fleet rapidly to 26 service rigs. Based on the existing schedule, management expects another two units and nine units to come onstream by end of 2015 and 2016 respectively. All the vessels under construction have already secured back-to-back contracts and will start contributing to earnings upon delivery to customers. This underpins our net profit 2-year CAGR of 11% in FY15-17. Pick-up in offshore logistic revenue. Ezion’s Australian offshore logistic fleet comprises 10 tugs and 30 ballastable barges. Ballastable barges, which have specially reinforced decks, have been modified to carry heavy offshore platforms and jackets. Demand for such high-end vessels has fallen off the cliff since 4Q14, with the construction of major Australian LNG projects coming to an end. This was exacerbated by depressed oil prices that have discouraged customers from exercising charter options after the initial term of 18 months. We estimate overhead costs to be around US$20m a year, taking into account depreciation, crew costs and interest expense. Upside potential would come from a stronger-than-expected demand or disposal of the fleet, which has a carrying value of around US$250m. However, we believe it is not easy to find buyers during the current climate. Contract wins to fuel growth. During the peak of its contract wins, Ezion won 12 / 9 / 7 new charter contracts in 2012 / 13 / 14 respectively. The contracting pace is expected to slow down, constrained by Ezion’s stretched balance sheet. But the unexpected collapse in oil prices has accelerated the decline as some customers have held back the award of new contracts or have negotiated down charter rates. We believe demand will continue to grow in this region as liftboats / service rigs are in early stages of the industry cycle, to substitute workboats and barges that are traditionally used to support offshore production platforms. Ezion enjoys first-mover advantage to tap the industry’s growth.

Est avg day rate: Offshore Logistics (US$)

Est utilisation: Offshore Logistics (%)

Est avg day rate: Liftboats (US$)

Est utilisation: Liftboats (%)


18,839 18,839 18,839 18,839

0

2,400

4,800

7,200

9,600

12,000

14,400

16,800

2013A 2014A 2015F 2016F

75.5 75.5 75.5 75.5

0.0

15.4

30.8

46.2

61.6

77.0

2013A 2014A 2015F 2016F

48,176 47,976

58,010

82,500

0

16,800

33,600

50,400

67,200

84,000

2013A 2014A 2015F 2016F

94.2

72.8

48.6 51.3

0.0

11.9

23.8

35.7

47.6

59.5

71.4

83.3

95.2

2013A 2014A 2015F 2016F


Company Guide

Ezion Holdings

Balance Sheet:

High net gearing of 1.1x; backed by long-term charters. Solid order backlog of approx. US$2bn translates into revenue coverage of >3x, almost doubling its net debt of US$1.1bn. Risks of defaults and cancellations are low, given its reputable clientele base that consists largely of NOCs and IOCs. Sound financial health. Net debt/EBITDA is reasonable at 3.0x. Current ratio of c.1.2x indicates Ezion’s ability to service short-term financing needs that may arise. Ezion could easily meet its interest payments with over 5x net interest coverage ratio. Share Price Drivers:

Oil price rebound. Oil price is a leading indicator and key re-rating catalyst for O&G sector as the market has widely priced in the weak earnings and new lower norm of oil prices. We believe Ezion is one of the best proxies to ride the recovery, given its earnings resiliency and growth potential. Vessel deliveries. Besides the delivery rescheduling, 6-8 of Ezion’s service rigs have been withdrawn from fleet for repair/upgrades. The resumption of these rigs in 1H16 should drive earnings recovery. In addition, Ezion is expected to take delivery of nine vessels in 2016, driving growth into 2017. Key downside risk is the rate reduction greater than the 5% factored in our model. New contracts/renewals at good rates. Securing new/renewal of charter contracts at good rates would alleviate concerns over contract cancellations and rate reductions and thus lower the risk premium ascribed to the company. Key Risks:

Rising interest rates. About 60-70% of its debts have been swapped to fixed rates, lowering the sensitivity. We estimate that every 100-bps increase in interest rates could reduce Ezion's net profit by approximately 1.8%. Rate reduction and contract terminations. Five service rigs are due for charter renewals in FY16. In terms of termination, the Mexican contracts appear to be at risk as these consist of the few units that are deployed for drilling and PEMEX has exercised early termination clauses on a couple of drilling rigs. Keener competition. The rising acceptance and growing demand for liftboats have attracted new entrants to the market. We estimate that there are c.20 new liftboats currently under construction to be delivered largely in 2017. We believe demand growth should outpace supply growth in the under-penetrated Asia-Pacific region. Company Background

Ezion provides service rigs and offshore logistics support services to the offshore oil and gas industry. It is one of the first companies to introduce liftboats in Asia and the Middle East regions. Ezion had a total of 26 service rigs delivered and 18 service rigs in operation as of Sept 2015. The fleet is expected to grow to 28 vessels by end-2015 and 37 by end-2016.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2013A 2014A 2015F 2016F 2017F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

2013A 2014A 2015F 2016F 2017F


US$

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015F 2016F 2017F

Avg: 10.6x

+1sd: 13.8x

+2sd: 16.9x

‐1sd: 7.4x

‐2sd: 4.2x

2.6

4.6

6.6

8.6

10.6

12.6

14.6

16.6

18.6


(x)

Avg: 2.33x

+1sd: 3.31x

+2sd: 4.29x

‐1sd: 1.36x

‐2sd: 0.38x0.3

0.8

1.3

1.8

2.3

2.8

3.3

3.8

4.3

4.8


(x)


Company Guide

Ezion Holdings

Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (US$m) Offshore Logistics Support 111 87.7 19.2 6.81 2.38 Liftboats & jackup rigs 171 299 339 590 687 Marine supply base 0.0 0.0 0.0 0.0 1.00 Others 0.0 0.0 0.0 0.0 0.0 Total 282 387 358 597 691 Operating profit (US$m) Offshore Logistics Support 34.1 24.2 (5.0) (15.0) (15.0) Liftboats & jackup rigs 93.0 162 117 238 274 Marine supply base 0.0 0.0 0.0 0.0 0.0 Others (8.0) (7.7) 15.0 8.00 8.00 Total 119 179 127 231 267 Operating profit Margins Offshore Logistics Support 30.6 27.6 (26.0) (220.4) (630.4) Liftboats & jackup rigs 54.6 54.2 34.4 40.4 39.8 Marine supply base N/A N/A N/A N/A 0.0 Others N/A N/A N/A N/A N/A Total 42.3 46.2 35.3 38.7 38.6

Income Statement (US$m)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 282 387 358 597 691 Cost of Goods Sold (149) (191) (220) (334) (387) Gross Profit 133 196 138 263 304 Other Opng (Exp)/Inc (14.0) (17.3) (11.1) (32.0) (36.9) Operating Profit 119 179 127 231 267 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 30.9 28.0 32.1 36.1 37.3 Net Interest (Exp)/Inc (6.8) (16.7) (22.9) (44.0) (52.3) Exceptional Gain/(Loss) 19.7 35.8 0.0 0.0 0.0 Pre-tax Profit 163 226 136 223 252 Tax (2.6) (2.0) (1.4) (2.2) (2.5) Minority Interest 0.06 (0.1) (0.1) (0.1) (0.1) Preference Dividend (7.8) (8.8) (13.6) (8.4) (7.5) Net Profit 153 215 121 213 242 Net Profit before Except. 133 179 121 213 242 EBITDA 195 309 296 425 481 Growth Revenue Gth (%) 77.7 37.1 (7.4) 66.8 15.6 EBITDA Gth (%) 115.7 58.3 (4.5) 43.9 13.2 Opg Profit Gth (%) 108.5 49.9 (29.2) 82.8 15.3 Net Profit Gth (Pre-ex) (%) 103.1 34.8 (32.6) 76.3 13.6 Margins & Ratio Gross Margins (%) 47.2 50.7 38.5 44.1 44.0 Opg Profit Margin (%) 42.3 46.2 35.3 38.7 38.6 Net Profit Margin (%) 54.1 55.6 33.7 35.6 35.0 ROAE (%) 27.2 24.1 10.4 15.9 15.1 ROA (%) 9.4 8.6 4.0 6.5 7.0 ROCE (%) 7.8 7.5 4.3 7.4 8.1 Div Payout Ratio (%) 0.6 0.5 0.9 0.5 0.5 Net Interest Cover (x) 17.5 10.7 5.5 5.3 5.1



Company Guide

Ezion Holdings

Quarterly / Interim Income Statement (US$m)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 94.9 105 90.1 90.1 86.2 Cost of Goods Sold (46.5) (51.7) (48.6) (58.7) (61.3) Gross Profit 48.4 52.9 41.5 31.4 25.0 Other Oper. (Exp)/Inc 0.05 (7.8) (3.7) (5.5) 2.68 Operating Profit 48.5 45.2 37.8 25.9 27.6 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 5.71 8.16 8.16 9.25 9.03 Net Interest (Exp)/Inc (3.7) (5.6) (4.7) (5.8) (5.9) Exceptional Gain/(Loss) 0.0 35.8 0.0 0.0 0.0 Pre-tax Profit 50.4 83.5 41.3 29.3 30.8 Tax (1.0) 0.18 (0.3) (0.4) (0.4) Minority Interest (0.2) 0.09 0.0 0.0 0.0 Net Profit 49.2 83.8 41.0 29.0 30.3 Net profit bef Except. 49.2 48.0 41.0 29.0 30.3 EBITDA 80.3 82.7 75.8 66.0 36.7 Growth Revenue Gth (%) 2.4 10.2 (13.8) (0.1) (4.3) EBITDA Gth (%) 8.0 2.9 (8.3) (12.9) (44.4) Opg Profit Gth (%) 15.2 (6.8) (16.3) (31.4) 6.7 Net Profit Gth (Pre-ex) (%) 8.2 (2.5) (14.6) (29.4) 4.8 Margins Gross Margins (%) 51.0 50.6 46.1 34.9 29.0 Opg Profit Margins (%) 51.1 43.2 41.9 28.8 32.1 Net Profit Margins (%) 51.9 80.1 45.5 32.2 35.2

Balance Sheet (US$m)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 1,464 2,136 2,429 2,551 2,528 Invts in Associates & JVs 194 173 205 241 278 Other LT Assets 5.17 13.8 13.8 13.8 13.8 Cash & ST Invts 166 372 200 213 306 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 107 160 143 239 276 Other Current Assets 107 128 128 128 128 Total Assets 2,043 2,981 3,118 3,386 3,530 ST Debt 223 288 288 288 288 Creditor 69.1 69.9 55.6 117 140 Other Current Liab 84.2 69.0 63.1 64.0 64.3 LT Debt 863 1,208 1,246 1,239 1,120 Other LT Liabilities 3.67 33.5 33.5 33.5 33.5 Shareholder’s Equity 800 1,313 1,432 1,644 1,884 Minority Interests (0.1) 0.0 0.04 0.11 0.20 Total Cap. & Liab. 2,043 2,981 3,118 3,386 3,530 Non-Cash Wkg. Capital 60.4 148 152 185 200 Net Cash/(Debt) (920) (1,125) (1,334) (1,314) (1,102) Debtors Turn (avg days) 106.5 125.9 154.3 116.8 136.1 Creditors Turn (avg days) 181.0 288.9 274.6 179.3 223.8 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.2 0.2 0.1 0.2 0.2 Current Ratio (x) 1.0 1.5 1.2 1.2 1.4 Quick Ratio (x) 0.7 1.2 0.8 1.0 1.2 Net Debt/Equity (X) 1.1 0.9 0.9 0.8 0.6 Net Debt/Equity ex MI (X) 1.1 0.9 0.9 0.8 0.6 Capex to Debt (%) 67.3 34.9 28.0 18.4 11.0 Z-Score (X) 1.0 1.0 0.9 1.2 1.2



Company Guide

Ezion Holdings

Cash Flow Statement (US$m)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 163 226 136 223 252 Dep. & Amort. 45.4 103 137 158 177 Tax Paid (2.3) (1.6) (7.2) (1.4) (2.2) Assoc. & JV Inc/(loss) (30.9) (28.0) (32.1) (36.1) (37.3) Chg in Wkg.Cap. (5.1) (62.3) 2.07 (34.0) (14.9) Other Operating CF (14.7) (23.0) 0.0 0.0 0.0 Net Operating CF 155 214 235 310 375 Capital Exp.(net) (731) (522) (430) (281) (155) Other Invts.(net) 22.4 (18.7) 0.0 0.0 0.0 Invts in Assoc. & JV (19.4) 14.6 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (4.7) 6.07 0.0 0.0 0.0 Net Investing CF (733) (520) (430) (281) (155) Div Paid (0.8) (1.0) (1.1) (1.1) (1.1) Chg in Gross Debt 532 290 37.9 (6.7) (119) Capital Issues 97.4 272 0.0 0.0 0.0 Other Financing CF (14.3) (30.4) (13.6) (8.4) (7.5) Net Financing CF 614 530 23.1 (16.3) (128) Currency Adjustments (5.8) (18.3) 0.0 0.0 0.0 Chg in Cash 31.1 206 (172) 13.2 92.4 Opg CFPS (US cts.) 15.9 24.6 20.8 30.3 34.3 Free CFPS (US cts.) (57.0) (27.5) (17.4) 2.60 19.4



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 17 Feb 15 1.19 1.58 BUY

2: 14 May 15 1.19 1.50 BUY

3: 19 May 15 1.13 1.50 BUY

4: 21 May 15 1.08 1.50 BUY

5: 22 Jun 15 1.09 1.50 BUY

6: 17 Aug 15 0.66 1.00 BUY

7: 18 Sep 15 0.72 1.00 BUY

8: 26 Oct 15 0.74 1.00 BUY

9: 13 Nov 15 0.66 1.00 BUY

10: 16 Nov 15 0.66 1.00 BUY


1 2

3

4

5

6

7

8

9

10

0.52

0.62

0.72

0.82

0.92

1.02

1.12

1.22

1.32

Dec-14 Apr-15 Aug-15 Dec-15

S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM

BUY Last Traded Price: S$1.69 (STI : 2,815.04) Price Target: S$2.05 (21% upside) (Prev S$2.36) Potential Catalyst: Better-than-expected results/acquisitions Where we differ: We have assumed higher % completion of projects sold in the initial years Analyst Derek Tan +65 6682 3716 [email protected] Mervin Song CFA +65 6682 3715 [email protected]

Price Relative

Forecasts and Valuation FY Sep (S$ m) 2014A 2015A 2016F 2017F Revenue 2,203 3,562 3,105 3,472 EBITDA 778 1,146 1,257 1,305 Pre-tax Profit 807 1,197 1,022 1,060 Net Profit 501 724 597 622 Net Pft (Pre Ex.) 415 483 597 622 EPS (S cts) 17.3 25.0 20.6 21.5 EPS Pre Ex. (S cts) 14.3 16.7 20.6 21.5 EPS Gth (%) (82) 44 (18) 4 EPS Gth Pre Ex (%) (73) 16 24 4 Diluted EPS (S cts) 17.3 25.0 20.6 21.5 Net DPS (S cts) 6.2 8.6 8.6 8.6 BV Per Share (S cts) 222.0 224.9 236.9 249.8 PE (X) 9.8 6.8 8.2 7.9 PE Pre Ex. (X) 11.8 10.1 8.2 7.9 P/Cash Flow (X) nm 7.2 41.9 40.5 EV/EBITDA (X) 21.3 15.6 14.7 14.6 Net Div Yield (%) 3.7 5.1 5.1 5.1 P/Book Value (X) 0.8 0.8 0.7 0.7 Net Debt/Equity (X) 0.9 0.8 0.8 0.8 ROAE (%) 8.4 11.2 8.9 8.8 Earnings Rev (%): - - Consensus EPS (S cts): 20.4 20.7 Other Broker Recs: B: 7 S: 0 H: 0


An Emerging Contender Strong income visibility from locked-in residential sales.

Frasers Centrepoint Limited (FCL) continues to offer strong earnings visibility by having locked-in almost c.S$3.5bn sales across its various major markets of Singapore, China and Australia. The group has executed well which enables it to substantially de-risk its exposures in the slowing residential market in Singapore, while its development projects in Australia are mainly in the mass- to mid-end segments which continue to deliver consistent sales.

Growing recurring revenues from its commercial and

hospitality divisions. The group has a long target to grow recurring revenues to 60% of total revenues in the medium term. To reach this target, FCL will be (i) completing a number of retail and office projects in Singapore by 2018, and (ii) Frasers Hospitality is also expected to see its footprint expand to 30,000 managed units by 2019. In addition, the recent acquisition of the Malmaison Hotel du vin Group (MHDV), which has a portfolio of 29 boutique lifestyle hotels and 2,082 keys within 25 regional cities in the UK, will further deepen its presence and clientele reach in Europe. Tapping on existing capital-recycling platforms. FCL currently performs capital recycling through its listed REITs which the group can opportunistically divest mature yield properties to free up capital and reinvest in other higher-ROE projects. Valuation:

We have a BUY recommendation on FCL, with a revised target price of S$2.05 based on a 30% discount to RNAV. We think that FCL is attractive at 0.7x P/Bk NAV and believe that the stock is trading at this level largely due to its tight liquidity constraints. Key Risks to Our View:

Dependent on the outlook of Australia's real estate

market, currency outlook. The group derives an estimated 30% of PBIT and 35% from Australia which is dependent on the real estate market and whose returns could be impacted by the weakening AUD/SGD exchange rate. At A Glance Issued Capital (m shrs) 2,895 Mkt. Cap (S$m/US$m) 4,893 / 3,472 Major Shareholders TCC Asets Ltd (%) 59.3 Interbev Investment Ltd (%) 28.5 Free Float (%) 12.2 3m Avg. Daily Val (US$m) 0.19 ICB Industry : Real Estate / Real Estate Investment & Services



Frasers Centrepoint Ltd Edition 1 Version 1 | Bloomberg: FCL SP | Reuters: FRCT.SI Refer to important disclosures at the end of this report

88

108

128

148

168

188

208

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

Jan-14 Jul-14 Jan-15 Jul-15

Relative IndexS$

Frasers Centrepoint Ltd (LHS) Relative STI INDEX (RHS)


Company Guide



Earnings Drivers:

Earnings supported by unrecognised revenue. Frasers Centrepoint Limited (FCL) has locked in S$3.5bn in development sales across its major markets of Singapore, China and Australia, which are expected to be recognised over the coming years. These are from its development projects in Singapore (S$1.3bn), China (S$0.6bn) and S$1.6bn from its residential development pipeline in Australia, underpinning strong income visibility in the medium term. Growing recurring revenues from its commercial and

hospitality divisions. While property development remains one of the key drivers to top line, we see continued strength from Frasers Centerpoint Limited's (FCL) investment property division, including its Frasers Hospitality business. The group has a long-term target to grow recurring revenues to 60% of revenues. Looking ahead, the investment property division will gain incremental income from the completions of Punggol Point (retail), Northpoint City (retail) and Frasers Towers (commercial), which will boost its earnings further while Centrepoint Mall is expected to undergo a S$50m makeover to boost traffic and revenues post completion in 2H16. Frasers Hospitality is also expected to see its footprint expand to 30,000 managed units by 2019. In addition, the recent acquisition of the Malmaison Hotel du vin Group (MHDV), which has a portfolio of 29 boutique lifestyle hotels and 2,082 keys within 25 regional cities in the UK, will further deepen its presence and clientele reach. We see cross-selling opportunities and synergies between MHDV and the Frasers brand, propelling the division’s performance to greater heights.

Asset recycling into its listed S-REITs FCL will continue to demonstrate its ability to capitalise value by strategically divesting matured assets to its listed REITs. The group is thus able to free up capital, improve its balance sheet position and recycle capital to projects with higher returns.

Revenue Trends

FY16F Revenue Breakdown (%)

Contribution from Hospitality & Investment Property Segments

Pretax Margin Trend (%)


‐

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

12 13 14 15F 16F 17F

S$'m

Investment Property

14%

Development Property

38%

Hospitality 11%

Frasers Australand

35%

Others 2%

0%

5%

10%

15%

20%

25%

30%

‐

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

1,000.00

FY14 FY15F FY16F FY17F

S$'m

Income (Hospitality & Investment Property) % of topline

0.0

10.0

20.0

30.0

40.0

50.0

60.0

12 13 14 15F 16F 17F

(%)


Company Guide


Balance Sheet:

Balance sheet remains strong. Debt/equity ratio is expected to remain fairly stable at between 0.85-0.9x over FY15F-17F which is within management's comfortable range. Debt maturity profile remains long at 3.3 years with an average cost of debt of 3.3%. Fixed rate percentage of its loans remains high at 73%. Share Price Drivers:

Replenishing land bank key to income sustainability. The group currently has 9.3m sq ft of development space, mainly in Australia. It is actively looking for efficient means to replenish its land bank especially in Singapore but remains selective, given the sustained high land prices seen in recent government land tenders. The ability to secure additional land banks at lower prices will mean upside to RNAVs and could re-rate the stock. Relaxation of property cooling measures in Singapore. Expectations of policy relaxation (especially cyclical measures like the Buyers’ and Sellers’ stamp duties) might improve buyers’ market sentiment and spark a revival in transactional volumes in the Singapore residential market. This is also expected to lift sentiment on property stocks, which we believe will enable FCL to close the gap between stock price and its NAV. Gains from asset recycling into its listed S-REITs to

boost share prices. Recycling activities are perceived positively by investors as FCL is able to free up capital by selling its matured assets to its listed REITs, which will improve the group’s balance sheet position and recycle capital to projects with higher returns.

Key Risks:

Small free float. The stock has a low free float with 87.9% of the company held by major shareholders TCC Group and Thai Beverage, thus leading to low liquidity. Dependent on the outlook of Australia's real estate market, currency outlook. The group derives an estimated 30% of PBIT and 35% from Australia which is dependent on the real estate market and whose returns could be impacted by the weakening AUD/SGD exchange rate. Company Background

FCL is a one of Singapore’s main real estate companies with assets exceeding S$23bn as of Jun-15. The group has four key core businesses focused on residential, commercial, hospitality and industrial sectors spanning 77 cities across Asia, Australasia, Europe and the Middle East.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

0.00

0.20

0.40

0.60

0.80

1.00

2013A 2014A 2015A 2016F 2017F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2013A 2014A 2015A 2016F 2017F


S$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013A 2014A 2015A 2016F 2017F

Avg: 9.6x

+1sd: 10.7x

+2sd: 11.8x

‐1sd: 8.4x

‐2sd: 7.3x

6.4

7.4

8.4

9.4

10.4

11.4

12.4

13.4


(x)

Avg: 0.64x

+1sd: 0.82x

+2sd: 0.99x

‐1sd: 0.47x

‐2sd: 0.29x

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1


(x)


Company Guide


Income Statement (S$ m)

FY Sep 2013A 2014A 2015A 2016F 2017F Revenue 2,053 2,203 3,562 3,105 3,472 Cost of Goods Sold (1,241) (1,432) (2,479) (1,740) (2,109) Gross Profit 812 771 1,082 1,366 1,363 Other Opng (Exp)/Inc (300) (151) (257) (213) (238) Operating Profit 512 620 825 1,153 1,125 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 60 145 279 63 139 Net Interest (Exp)/Inc (61) (44) (149) (194) (204) Exceptional Gain/(Loss) 322 86 241 0 0 Pre-tax Profit 832 807 1,197 1,022 1,060 Tax (97) (128) (184) (153) (159) Minority Interest (13) (179) (241) (207) (215) Preference Dividend 0 0 (47) (64) (64) Net Profit 722 501 724 597 622 Net Profit before Except. 400 415 483 597 622 EBITDA 579 778 1,146 1,257 1,305 Growth Revenue Gth (%) 45.4 7.3 61.7 (12.8) 11.8 EBITDA Gth (%) 45.6 34.3 47.2 9.7 3.8 Opg Profit Gth (%) 45.4 21.3 33.0 39.6 (2.4) Net Profit Gth (Pre-ex) (%) 58.6 3.6 16.6 23.6 4.1 Margins & Ratio Gross Margins (%) 39.5 35.0 30.4 44.0 39.3 Opg Profit Margin (%) 24.9 28.2 23.2 37.1 32.4 Net Profit Margin (%) 35.2 22.7 20.3 19.2 17.9 ROAE (%) 13.9 8.4 11.2 8.9 8.8 ROA (%) 6.9 3.2 3.3 2.5 2.4 ROCE (%) 5.3 3.7 3.4 4.4 4.1 Div Payout Ratio (%) 20.8 35.8 34.4 41.7 40.0 Net Interest Cover (x) 8.4 14.2 5.5 5.9 5.5


Top line driven by (i) steady growth of investment property division, new income from expanded portfolio from Fraser Hospitality and revenue recognition from its development projects


Company Guide


Quarterly / Interim Income Statement (S$ m)

FY Sep 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 815 1,072 442 1,010 1,037 Cost of Goods Sold (723) (631) (126) (547) (1,176) Gross Profit 91 441 316 464 (138) Other Oper. (Exp)/Inc 103 (161) (143) (202) 249 Operating Profit 194 280 173 262 110 Other Non Opg (Exp)/Inc (1) 0 0 0 0 Associates & JV Inc 43 41 24 52 162 Net Interest (Exp)/Inc (12) (44) (46) (22) (38) Exceptional Gain/(Loss) 96 18 43 0 180 Pre-tax Profit 320 294 195 292 416 Tax (58) (48) (20) (54) (63) Minority Interest (78) (60) (32) (57) (92) Net Profit 183 187 143 182 213 Net profit bef Except. 88 169 100 182 33 EBITDA 241 337 214 333 292 Growth Revenue Gth (%) 107.6 31.6 (58.8) 128.8 2.7 EBITDA Gth (%) 49.2 40.0 (36.4) 55.3 (12.3) Opg Profit Gth (%) 58.7 44.1 (38.1) 51.1 (57.9) Net Profit Gth (Pre-ex) (%) (9.3) 93.1 (41.2) 82.2 (81.9) Margins Gross Margins (%) 11.2 41.1 71.5 45.9 (13.3) Opg Profit Margins (%) 23.9 26.1 39.3 25.9 10.6 Net Profit Margins (%) 22.5 17.4 32.4 18.0 20.5

Balance Sheet (S$ m) FY Sep 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 32 1,415 1,991 1,951 1,911 Invts in Associates & JVs 1,056 806 585 649 788 Other LT Assets 3,396 12,652 14,150 14,299 14,449 Cash & ST Invts 507 904 1,393 1,547 1,704 Inventory 4 4 7 8 10 Debtors 303 812 844 1,035 496 Other Current Assets 5,148 4,700 4,096 6,110 7,949 Total Assets 10,445 21,291 23,067 25,599 27,307 ST Debt 629 1,538 1,020 1,020 1,020 Creditor 1,725 1,594 1,315 2,832 3,447 Other Current Liab 116 157 218 178 184 LT Debt 1,175 7,824 9,255 9,755 10,255 Other LT Liabilities 1,321 555 608 608 608 Shareholder’s Equity 5,451 7,012 7,803 8,151 8,524 Minority Interests 27 2,612 2,848 3,055 3,270 Total Cap. & Liab. 10,445 21,291 23,067 25,599 27,307 Non-Cash Wkg. Capital 3,614 3,764 3,415 4,144 4,825 Net Cash/(Debt) (1,298) (8,458) (8,882) (9,229) (9,571) Debtors Turn (avg days) 56.1 92.3 84.8 110.4 80.5 Creditors Turn (avg days) 510.7 410.1 196.8 608.3 608.3 Inventory Turn (avg days) 1.1 1.1 1.1 1.8 1.8 Asset Turnover (x) 0.2 0.1 0.2 0.1 0.1 Current Ratio (x) 2.4 2.0 2.5 2.2 2.2 Quick Ratio (x) 0.3 0.5 0.9 0.6 0.5 Net Debt/Equity (X) 0.2 0.9 0.8 0.8 0.8 Net Debt/Equity ex MI (X) 0.2 1.2 1.1 1.1 1.1 Capex to Debt (%) 0.3 10.8 0.4 0.0 0.0 Z-Score (X) 1.5 1.3 1.3 1.4 1.3


Boosted by gains from property development segment in the quarter

Gearing remains steady at 0.8x


Company Guide


Cash Flow Statement (S$ m)

FY Sep 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 786 721 955 1,022 1,060 Dep. & Amort. 8 13 781 41 41 Tax Paid (87) (128) (184) (193) (153) Assoc. & JV Inc/(loss) (60) (145) (279) (63) (139) Chg in Wkg.Cap. (164) 126 302 (689) (687) Other Operating CF (786) (1,080) (891) 0 0 Net Operating CF (303) (491) 684 117 121 Capital Exp.(net) (5) (1,007) (45) 0 0 Other Invts.(net) (36) (1,017) (1,501) (150) (150) Invts in Assoc. & JV (34) 164 (58) 0 0 Div from Assoc & JV 61 70 350 0 0 Other Investing CF 234 (3,103) 0 0 0 Net Investing CF 220 (4,892) (1,254) (150) (150) Div Paid (151) (119) (249) (249) (249) Chg in Gross Debt (462) 5,090 936 500 500 Capital Issues 0 1,598 649 0 0 Other Financing CF (1) (787) (111) (64) (64) Net Financing CF (613) 5,781 1,225 187 187 Currency Adjustments (3) (3) (3) 0 0 Chg in Cash (700) 394 651 153 158 Opg CFPS (S cts) (18.4) (21.4) 13.2 27.8 27.9 Free CFPS (S cts) (40.9) (51.8) 22.1 4.0 4.2



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 16 Feb 15 1.69 2.02 BUY

2: 28 Apr 15 1.90 2.36 BUY

3: 11 May 15 1.83 2.36 BUY

4: 11 Aug 15 1.65 2.36 BUY

5: 04 Nov 15 1.61 2.36 BUY


1

2

3

4

5

1.37

1.47

1.57

1.67

1.77

1.87

1.97

Dec-14 Apr-15 Aug-15

S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM

BUY

Last Traded Price: S$0.465 (STI : 2,815.52) Price Target : S$0.90 (91% upside) Potential Catalyst: Better-than-expected 3Q15 and 4Q15 results Where we differ: We have the lower earnings forecast of only two estimates in Bloomberg Analyst Ben Santoso +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015F 2016F 2017F Revenue 2,947 2,818 3,084 3,466 EBITDA 255 238 324 444 EBITEDA (ex. BA gains) 263 277 333 439 Pre-tax Profit 74 103 184 293 Net Profit 31 45 79 126 Net Pft (Pre Ex.) 71 45 79 126 Net Pft (ex. BA gains) 58 45 79 126 EPS (S cts) 2.5 3.6 6.3 10.1 EPS Pre Ex. (S cts) 5.7 3.6 6.3 10.1 EPS Gth (%) (91) 43 78 60 EPS Gth Pre Ex (%) (76) (38) 78 60 Diluted EPS (S cts) 2.5 3.6 6.3 10.1 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 52.8 60.2 66.5 76.6 PE (X) 18.8 13.2 7.4 4.7 PE Pre Ex. (X) 8.2 13.2 7.4 4.7 P/Cash Flow (X) 4.7 4.1 3.6 2.7 EV/EBITDA (X) 6.3 7.0 5.5 4.4 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 0.9 0.8 0.7 0.6 ROAE (%) 5.8 6.3 10.0 14.1 Earnings Rev (%): - - - Consensus EPS (S cts): 3.5 6.2 10.1 Other Broker Recs: B: 1 S: 0 H: 0


Normalising growth Better 3Q15 EBITDA expected. We believe the steep share price correction YTD has more than priced in Day Old Chicks (DOC) oversupply in Indonesia and softer raw milk prices in China. We expect Japfa’s 3Q15 earnings to show a sequential improvement, given higher feed prices and relatively resilient broiler and DOC prices despite steeper translation FX losses from subsidiary Japfa Comfeed’s US$225m bonds. We expect 3Q15 EBITDA to come in at US$70.9-76.0m (+20-28% y-o-y) and earnings (ex. fair value changes in biological assets) of US$7.4-10.1m (16-38% lower y-o-y) Weak purchasing power may linger in the short term. Continued weakness in the Rupiah would progressively raise Japfa’s feedstock costs, and at the same time lift cost of living for Indonesian consumers (implying weaker purchasing power). We expect the DOC oversupply situation to balance out and prices to recover as government-mandated nationwide cull of 6m parent stock takes place (expected in 4Q15). Long-term growth potential remains intact. Japfa is forecast to book EBITDA (excluding biological asset gains/loss and FX gains/losses) CAGR of 15% between 2014 and 2017 – mainly driven by higher dairy volumes. Japfa intends to double its dairy farm production capacity in China by constructing another five farm hubs in Inner Mongolia. In the Animal Protein segment, we expect Japfa’s combined regional DOC output to expand less aggressively by a 5% CAGR between 2014 and 2017, given DOC overcapacity and weak purchasing power in Indonesia. Demand will continue to be driven by rising per capita income. Valuation: Our SOP-based TP is S$0.90. With Rupiah stabilising, we expect reduced FX losses and recovery in purchasing power in Indonesia next year. Our BUY rating for the counter is reiterated on 78% upside potential. Key Risks to Our View: Japfa’s share price is driven by DOC, broiler and China raw milk price movements and to a certain extent, by USD/IDR exchange rate. A strong recovery in the group’s ASP and/or Rupiah would boost Japfa’s share price higher than our fair value, and vice versa. At A Glance Issued Capital (m shrs) 1,765 Mkt. Cap (S$m/US$m) 829 / 589 Major Shareholders Rangi Management Limited (%) 52.6 Morze International Limited (%) 16.0 Tasburgh Limited (%) 7.2 Free Float (%) 24.2 3m Avg. Daily Val (US$m) 0.3 ICB Industry : Consumer Goods / Food Producers



Japfa Ltd Edition 1 Version 1 | Bloomberg: JAP SP | Reuters: JAPF.SI Refer to important disclosures at the end of this report

34

54

74

94

114

134

154

174

194

214

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Aug-14 Jan-15 Jun-15

Relative IndexS$

Japfa Ltd (LHS) Relative STI INDEX (RHS)


Company Guide

Japfa Ltd

CRITICAL DATA POINTS TO WATCH Earnings Drivers: DOC capacity expansion in Indonesia. Hampered by oversupply in CY14-15, Japfa’s DOC production in Indonesia is due to fall, due to the government-mandated cull of c.960k Parent Stock (Japfa’s estimated share) by end of CY15. Post-culling, Japfa is expected to expand its Indonesian DOC output in line with GDP and population growth. As at end-Jun-15, Japfa has DOC capacity of 630m chicks per annum in Indonesia and 736m chicks per annum in total. Feedmill capacity expansion in Indonesia. Capital expenditure in poultry feedmill capacity is likewise expected to remain on hold until capacity utilisation rates are in excess of 90%. However, we expect continued expansion in fish and shrimp feeds. Volatility of raw material costs (as well as changes in government regulations with regards to importation of raw materials) and exchange rates may adversely affect profitability, if Japfa is unable to pass on cost pressures. Expansions of Animal protein operations in Vietnam, India and Myanmar. The group is expanding its geographical operations in Vietnam for both poultry and swine segments; swine profitability in Vietnam should improve next year on the back of improved genetics. The group has expanded is Myanmar poultry operations into Mandalay this year. Hence, we expect higher earnings vs. last year, following the purchase of the remaining 15% in minority interest earlier this year. Japfa’s operation in India is only marginally increasing its geographical presence, and is expected to expand its feedmill capacity there. Contribution of animal protein operations outside Indonesia is expected to grow at a 9% CAGR between CY14 and CY17F – thanks to steady pricing and capacity expansion. Expansion in dairy farms. The group intends to expand its dairy business in China through continued replication of its successful business model. The fifth farm of the first five-farm hub in Shandong province was completed early this year. A second five-farm hub is planned for construction between this year and CY18 in Inner Mongolia. Farm 6 in Inner Mongolia is expected to start milking by end of this year, and fully milking a quarter thereafter. When completed, the second hub would increase the group’s herd size in China to 120k heads of cattle by end of CY18. Japfa is also expanding its dairy capacity in Malang, East Java to hold an additional 9,000 heads. Completion is expected by the end of this year. Expansion of beef cattle feedlot. Japfa now has a beef cattle feedlot in Shandong province with production capacity of 10,000 heads per annum. The bull calves produced by Japfa’s five dairy farms in Shandong will be the livestock input for the new beef cattle feedlot in China. In Indonesia, imports of cattle are subject to government approvals and regulations, including quotas. Further investment in high-growth Consumer Food brands. The group intends to expand its manufacturing and processing capacities in Indonesia and Vietnam, as it seeks to expand the reputation and market reach of its brands, including Real Good for UHT milk and So Good, So Nice and Best Chicken for processed meats.

Raw & fresh milk output (k MT)

Broiler sales (mn birds)

Consumer foods volume (k MT)

China raw milk price (CNY/kg)

Average USD/IDR rate


151

224

307

457

567

0

72

143

215

286

358

429

501

572

2013A 2014A 2015F 2016F 2017F

288

351368

391412

0

84

168

252

336

2013A 2014A 2015F 2016F 2017F

85.677.7

82.988.8

95.5

0.0

19.5

39.0

58.5

78.0

97.4

2013A 2014A 2015F 2016F 2017F

4.514.9

4.4 4.5 4.55

0.00

0.62

1.24

1.86

2.47

3.09

3.71

4.33

4.95

2013A 2014A 2015F 2016F 2017F

10,84911,879

13,37613,995 13,920

0

2,800

5,600

8,400

11,200

14,000

2013A 2014A 2015F 2016F 2017F


Company Guide

Japfa Ltd

Balance Sheet: Japfa’s net debt-to-total equity ratio is forecast to arrive at 70% by end of this year and 68% next year on rising equity. We also assume that the group will refinance its US$225m bonds (due 2018) with Rp500bn bank borrowings Share Price Drivers: DOC oversupply issues. The Indonesian poultry industry is dominated by a few players, which collectively control more than 75% market share. Overinvestment and/or miscalculated demand often lead to depressed DOC and broiler prices on top of an already volatile market. Changes in prices would have instant impact on Japfa’s profitability even with cuts in Parent Stock (PS) numbers. Hence, we believe the completion of nationwide PS culling would send a positive signal to share prices. Rupiah movements. Japfa’s US$225m bonds have created translation FX losses in Japfa’s subsidiary, Japfa Comfeed, together with Rupiah depreciation YTD. Hence, Rupiah movements would impact reported earnings. Key Risks: Outbreak of diseases. Outbreak of diseases affecting livestock would have material effect on the group's business and financial status. Intense competition. Excess capacity and intense competition in Indonesia may continue to result in DOC oversupply and slower-than expected price growth Movements in raw material costs and currencies. Japfa is exposed to volatile movements in raw material costs and currencies. For example, weakness in Rupiah and consumer purchasing power caused delays in passing on raw material costs. Changes in regulations. Changes in government regulations/licensing/interventions/price or volume controls may adversely affect Japfa’s profitability. Vulnerable to liquidity and credit risks Company Background Japfa Ltd is a leading industrialised and vertically integrated producer of multiple animal proteins, dairy and consumer food products in Indonesia, Vietnam, Myanmar, India and China. The group is the second largest poultry feed and DOC (day-old-chic. The group is involved in production of animal feeds, poultry breeding, poultry commercial farms, beef cattle feedlots, swine breeding, swine commercial farms, dairy farms as well as frozen and ambient temperature consumer food products.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.2

1.3

1.3

1.4

1.4

1.5

1.5

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2013A 2014A 2015F 2016F 2017F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2013A 2014A 2015F 2016F 2017F


US$

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2013A 2014A 2015F 2016F 2017F

Avg: 16.2x

+1sd: 24x

+2sd: 31.9x

‐1sd: 8.3x

‐2sd: 0.4x0.3

5.3

10.3

15.3

20.3

25.3

30.3


(x)

Avg: 0.83x

+1sd: 1.04x

+2sd: 1.24x

‐1sd: 0.63x

‐2sd: 0.43x

0.3

0.5

0.7

0.9

1.1

1.3

1.5


(x)


Company Guide

Japfa Ltd

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Raw & fresh milk output (k 151 224 307 457 567 Broiler sales (mn birds) 288 351 368 364 389 Consumer foods volume 85.6 77.4 82.4 88.0 94.6 China raw milk price 4.51 4.90 4.00 4.10 4.14 Average USD/IDR rate 10,849 11,879 13,821 14,678 14,080 Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (US$ m) Dairy 122 223 246 382 492 Animal protein 2,347 2,513 2,375 2,497 2,737 Consumer foods 228 211 197 204 236 Total 2,697 2,947 2,818 3,084 3,466 EBITDA (US$ m) Dairy 39 70 56 106 153 Animal protein 183 180 212 217 276 Consumer foods 11 9 9 9 10 Total 234 260 277 333 439 EBITDA Margins (%) Dairy 32.0 31.5 22.7 27.7 31.1 Animal protein 7.8 7.2 8.9 8.7 10.1 Consumer foods 4.8 4.3 4.6 4.6 4.3 Total 8.7 8.8 9.8 10.8 12.7 Income Statement (US$ m)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 2,697 2,947 2,818 3,084 3,466 Cost of Goods Sold (2,198) (2,441) (2,293) (2,471) (2,713) Gross Profit 499 506 525 613 753 Other Opng (Exp)/Inc (297) (315) (319) (343) (379) Operating Profit 202 191 206 270 374 Other Non Opg (Exp)/Inc (29) 2 (34) (13) 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (64) (79) (69) (73) (80) Exceptional Gain/(Loss) 6 (40) 0 0 0 Pre-tax Profit 115 74 103 184 293 Tax (33) (15) (21) (37) (59) Minority Interest (40) (28) (38) (68) (108) Preference Dividend 0 0 0 0 0 Net Profit 42 31 45 79 126 Net Profit before Except. 43 58 45 79 126 Net Pft (ex. BA gains) 43 58 45 79 126 EBITDA 227 255 238 324 444 EBITDA (ex. BA gains) 257 263 277 333 439 Growth Revenue Gth (%) 16.2 9.3 (4.4) 9.4 12.4 EBITDA Gth (%) (3.8) 12.3 (6.6) 36.0 37.0 Opg Profit Gth (%) 5.4 (5.1) 7.7 30.8 38.6 Net Profit Gth (%) (21.5) (25.3) 42.6 78.0 59.5 Margins & Ratio Gross Margins (%) 18.5 17.2 18.6 19.9 21.7 Opg Profit Margin (%) 7.5 6.5 7.3 8.7 10.8 Net Profit Margin (%) 1.5 1.1 1.6 2.6 3.6 ROAE (%) 11.4 5.8 6.3 10.0 14.1 ROA (%) 2.3 1.5 1.9 3.2 4.6 ROCE (%) 9.1 8.2 7.9 9.8 12.1 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) 3.2 2.4 3.0 3.7 4.6



Company Guide

Japfa Ltd

Quarterly / Interim Income Statement (US$ m)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 785 705 676 704 695 Cost of Goods Sold (661) (580) (568) (582) (557) Gross Profit 123 126 107 122 138 Other Oper. (Exp)/Inc (80) (79) (76) (78) (73) Operating Profit 43 47 31 44 66 Other Non Opg (Exp)/Inc (3) (7) (13) (5) (21) Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (21) (20) (17) (18) (17) Exceptional Gain/(Loss) (2) (35) 7 (18) (9) Pre-tax Profit 17 (15) 9 3 18 Tax (2) (1) (4) (2) (8) Minority Interest (4) 3 2 2 (2) Net Profit 11 (14) 7 3 8 Net profit bef Except. 13 21 0 20 17 EBITDA 59 61 50 63 92 Growth Revenue Gth (%) 2.3 (10.1) (4.2) 4.2 (1.3) EBITDA Gth (%) (36.7) 3.3 (17.7) 25.8 45.3 Opg Profit Gth (%) (34.8) 7.4 (32.6) 40.2 49.3 Net Profit Gth (%) (48.2) nm nm (57.6) 169.5 Margins Gross Margins (%) 15.7 17.8 15.9 17.3 19.9 Opg Profit Margins (%) 5.5 6.6 4.7 6.3 9.5 Net Profit Margins (%) 1.4 (2.0) 1.0 0.4 1.1 Balance Sheet (US$ m) FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 653 834 886 941 1,073 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 275 310 409 507 591 Cash & ST Invts 225 287 180 218 239 Inventory 543 598 536 578 634 Debtors 135 151 136 149 168 Other Current Assets 133 148 179 182 225 Total Assets 1,964 2,327 2,326 2,575 2,929 ST Debt 457 476 414 516 622 Creditor 195 233 201 217 238 Other Current Liab 65 25 28 37 49 LT Debt 469 507 468 445 428 Other LT Liabilities 81 91 90 88 86 Shareholder’s Equity 406 662 754 833 960 Minority Interests 291 332 370 438 546 Total Cap. & Liab. 1,964 2,327 2,326 2,575 2,929 Non-Cash Wkg. Capital 550 639 621 655 740 Net Cash/(Debt) (701) (697) (702) (744) (811) Debtors Turn (avg days) 18.1 17.7 18.6 16.9 16.7 Creditors Turn (avg days) 27.9 32.9 35.6 31.7 31.4 Inventory Turn (avg days) 87.7 87.5 92.9 84.6 83.7 Asset Turnover (x) 1.5 1.4 1.2 1.3 1.3 Current Ratio (x) 1.4 1.6 1.6 1.5 1.4 Quick Ratio (x) 0.5 0.6 0.5 0.5 0.4 Net Debt/Equity (X) 1.0 0.7 0.6 0.6 0.5 Net Debt/Equity ex MI (X) 1.7 1.1 0.9 0.9 0.8 Capex to Debt (%) 22.2 29.8 21.8 20.8 26.9 Z-Score (X) 2.1 2.2 2.1 2.2 2.2



Company Guide

Japfa Ltd

Cash Flow Statement (US$ m)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 115 74 103 184 293 Dep. & Amort. 55 62 66 68 71 Tax Paid (33) (38) (21) (37) (59) Assoc. & JV Inc/(loss) 0 0 0 0 0 Chg in Wkg.Cap. (80) (88) (20) (73) (114) Other Operating CF 0 0 0 0 0 Net Operating CF 89 125 144 164 220 Capital Exp.(net) (206) (293) (192) (200) (282) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 1 (6) (3) (3) (3) Net Investing CF (205) (299) (195) (202) (285) Div Paid (9) (4) 0 0 0 Chg in Gross Debt 125 68 (101) 79 88 Capital Issues 131 198 48 0 0 Other Financing CF (63) (27) (2) (2) (2) Net Financing CF 183 235 (56) 77 86 Currency Adjustments 0 0 0 0 0 Chg in Cash 68 62 (107) 38 21 Opg CFPS (US cts.) 80.8 12.1 9.3 13.4 18.9 Free CFPS (US cts.) (55.7) (9.5) (2.7) (2.0) (3.5)



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 15 Dec 14 0.52 0.80 BUY

2: 02 Jan 15 0.64 0.80 BUY

3: 02 Feb 15 0.64 0.80 BUY

4: 02 Mar 15 0.53 0.76 BUY

5: 04 May 15 0.46 0.54 HOLD

6: 02 Jul 15 0.39 0.46 HOLD

7: 10 Aug 15 0.32 0.46 BUY

8: 18 Aug 15 0.31 0.46 BUY

9: 16 Sep 15 0.30 0.46 BUY

10: 28 Oct 15 0.40 0.46 BUY

11: 03 Nov 15 0.46 0.90 BUY12: 02 Dec 15 0.50 0.90 BUY13: 10 Dec 15 0.49 0.90 BUY


1

2 3

4

5 6

7

8

9

1011

12

13

0.26

0.31

0.36

0.41

0.46

0.51

0.56

0.61

0.66


S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC

BUY Last Traded Price: S$0.89 (STI : 2,815.04) Price Target : S$1.11 (25% upside plus 7.9% yield) (Prev S$1.12) Potential Catalyst: Delivery of positive rental reversions despite concerns over a downturn in the HK retail market Where we differ: Ahead of consensus due to impact of stronger SGD Analyst Mervin Song CFA +65 6682 3715 [email protected] Derek Tan +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Mar (S$ m) 2014A 2015A 2016F 2017F Gross Revenue 268 281 307 336 Net Property Inc 216 229 266 297 Total Return 387 319 146 167 Distribution Inc 168 178 199 216 EPU (S cts) 4.4 4.6 5.3 6.0 EPU Gth (%) 112 4 17 13 DPU (S cts) 6.3 6.5 7.2 7.7 DPU Gth (%) 136 4 11 7 NAV per shr (S cts) 105.8 119.8 118.4 116.9 PE (X) 20.3 19.6 16.7 14.8 Distribution Yield (%) 7.0 7.4 8.1 8.7 P/NAV (x) 0.8 0.7 0.8 0.8 Aggregate Leverage (%) 38.0 36.2 40.6 40.6 ROAE (%) 4.4 4.0 4.5 5.1 Distn. Inc Chng (%): 0 0 Consensus DPU (S cts): 7.2 7.3 Other Broker Recs: B: 6 S: 1 H: 2


Consistent Performer

Allaying market fears. We maintain our BUY call with a revised TP of S$1.11. While acknowledging the concerns over the slowdown in the HK retail market, we believe this is overplayed near term, given the delivery of a 12.6% y-o-y increase in 2Q16 DPU to 1.808Scts, which was in line with expectations. Moreover, this risk is accounted for by the 24% discount to MAGIC’s NAV per share of S$1.192. Currency tailwinds. With 70% and 30% of its assets by valuation located in HK and China respectively, MAGIC is a beneficiary of the strengthening HKD and CNY versus SGD We have conservatively assumed SGD/HKD and SGD/CNY exchange rate (including impact of hedges) of 5.8 and 4.8 respectively in FY16F, and 5.6 and 4.6 in the long term. This compares to the current SGD/HKD and SGD/CNY spot FX rates of 5.5 and 4.58 respectively. Full contribution from Sandhill Plaza yet to be realised. With the S$412m acquisition of Sandhill Plaza in Shanghai only completed in June15, MAGIC’s earnings should receive a boost over the coming year, which should offset any potential slowdown in HK. Combined with growth in its existing portfolio, this should translate to a 6% three year DPU CAGR. Valuation:

To account for the deceleration in the Hong Kong retail scene, we recently trimmed our FY17F DPU by 2% and reduced our DCF-based TP to S$1.11 from S$1.12. Notwithstanding, with 24% capital upside and 8% yield, we reiterate our BUY call. Key Risks to Our View:

The key risk to our view is a significant downturn in the HK and Chinese economy, causing a decline in rents at Festival Walk, Gateway Plaza and Sandhill Plaza. At A Glance Issued Capital (m shrs) 2,740 Mkt. Cap (S$m/US$m) 2,438 / 1,731 Major Shareholders Mapletree Investments (%) 31.0 Norges Bank (%) 10.2 Schroders Plc (%) 5.0 Free Float (%) 53.8 3m Avg. Daily Val (US$m) 2.3 ICB Industry : Real Estate / Real Estate Investment Trusts



Mapletree Greater China Commercial Trust

Edition 1 Version 1 | Bloomberg: MAGIC SP | Reuters: MAPE.SI Refer to important disclosures at the end of this report

80

100

120

140

160

180

200

220

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15

Relative IndexS$

Mapletree Greater China Commercial Trust (LHS)

Relative STI INDEX (RHS)


Company Guide



Earnings Drivers:

Festival Walk still the star. Investors have raised concerns over the slowing retail market in Hong Kong impacting MAGIC’s core property Festival Walk. However, we believe Festival Walk will continue to deliver, although achieving lower rental reversions (estimated at 10-15%) than the 20-21% delivered over the past two years. We believe, overall rental income will remain on an uptrend and not turn negative due to the following factors: (1) the mall’s prime location in Kowloon Tong offering tenants exposure to nearby established upscale residential area, students and staff from the nearby City University of Hong Kong, and high transit crowd as the mall is located next to Kowloon Tong Station which is an interchange between Kwun Tong Line (which serves Kowloon East) and East Rail Line (which connects to the Shenzhen border) and, (2) the malls strong track record and resiliency. During the SARS epidemic and GFC, tenant sales were flattish while during the current downturn with overall HK sales down 2.3% between April to August, retail sales at the mall were up 1.7% over April to September. Past rental reversions still supportive of Gateway Plaza’s earnings. Gateway Plaza has achieved 25-33% uplift in rents over the past two years. The benefits from the positive rental reversions, we believe will continue to flow through, despite potential headwinds in the near term due to increase in supply within the Lufthansa submarket upon the expected completion of the Air China Plaza (c.90,000 sqm according to Colliers) in 4Q15. In the medium/long term, Gateway Plaza should remain well placed given the recent decision in August 2015 by the Beijing Municipal Commission of Development and Reform to ban new large-scale public developments including office buildings within the East Fifth Ring Road, West Fifth Ring Road, North Fifth Ring Road and South Fourth Ring Road which covers the central area of six urban districts of Beijing. Full year contribution from Sandhill Plaza. Going into FY16-17F, MAGIC’s earnings should receive a boost from the full contribution of the Sandhill Plaza acquisition which was only completed in June 2015. MAGIC should also benefit from positive rental reversions as passing rents are approximately 10% below market rates. 2Q16 results inline. MAGIC delivered another pleasing set of results with 2Q16 DPU coming in at 1.808 Scts (+12.6% y-o-y). The results were in line with expectations and represented 25% of our FY16F DPU. Similar to the previous quarters, the healthy results was attributed to continued improvement NPI at Festival Walk (+21% y-o-y) and Gateway Plaza (+8.9%). In addition, MAGIC benefited from the first full quarter contribution from the recently acquired Sandhill Plaza. This was despite overall portfolio occupancy dipping marginally to 98.4% from 99% in Jun15 which was mainly due to a fall in occupancy at Gateway Plaza (96.3% from 98.6% in 1Q15). Overall, group NPI rose 26% y-o-y to S$69.5m which was partially offset by higher interest expenses on the back of the debt funded acquisition of Sandhill Plaza.

Net Property Income and Margins (%)

Net Property Income and Margins (%)

Distribution Paid / Net Operating CF

Interest Cover (x)

Festival Walk quarterly tenant sales y-o-y growth*

* 2QFY16 HK retail sales only for Jul-Aug15 Source: Company, DBS Bank

75.6%

77.6%

79.6%

81.6%

83.6%

85.6%

87.6%

89.6%

91.6%

0

50

100

150

200

250

300

2013A 2014A 2015A 2016F 2017F

S$ m

Net Property Income Net Property Income Margin %

79%

80%

80%

81%

81%

82%

82%

83%

83%

45

50

55

60

65

70

1Q20

14

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

Net Property Income Net Property Income Margin %

0.2

0.4

0.6

0.8

1.0

1.2

2013A 2014A 2015A 2016F 2017F

(x)

4.20

4.30

4.40

4.50

4.60

4.70

4.80

4.90

5.00

5.10

2013A 2014A 2015A 2016F 2017F

(x)

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16

HK retail sales Festival Walk tenant sales


Company Guide


Balance Sheet:

Optimised gearing levels. As at end Sep15, MAGIC’s stood at 41% which is at an optimised level. Nevertheless, given the new 45% gearing limit for S-REITs come Jan’16, MAGIC’s ability to pursue further acquisitions without further equity raisings is constrained. Moderate exposure to rising interest rates. Currently, 86% of the MAGIC’s borrowings are on fixed rates which partially insulates the REIT against rising interest rates in the near term. However, we have imputed 50bps increase in interest rates over the next couple of years as MAGIC is due to refinance approximately 30% and 29% of its outstanding debt in FY17 and FY18. Share Price Drivers:

Boost from strengthening HKD/CNY. We believe the strengthening of the HKD and CNY should continue to a tailwind for MAGIC’s NAV per share and in turn its share price. This has yet to be fully recognized by the market, which is an opportunity. Since end Dec15, NAV per share has risen 12% from S$1.06 to S$1.192 at end Sep15, while MAGIC’s share price has only fallen 5% from S$0.95 to S$0.92 over the same period. Delivery of growth in DPU despite headwinds. Investors have been concerned over the outlook for retail rents in Hong Kong and risk of negative rental reversions at Festival Walk. While acknowledging a moderating outlook, we think these fears are overplayed given Festival Walk’s suburban location, low exposure to tourists (c.10-15% of tenant sales) and lack of exposure to luxury products. Evidence of this can be seen by the ability to achieve 20% positive rentals reversions in 1H16. This and continued delivery of DPU growth over the coming few quarters should allay the growth fears and trigger a re-rating. Key Risks:

Foreign exchange risks. While FX is currently a tailwind, the depreciation of the HKD and CNY would be a negatively impact MAGIC’s DPU and NAV per share on a lagged basis. MAGIC hedges its income to smooth out the volatility from movement in FX rates Economic risks. A significant economic downturn in Hong Kong and China would cause a decline in rents for retail and office properties. This in turn would negatively impact MAGIC’s earnings and DPU. COMPANY BACKGROUND

MAGIC is a Singapore real estate investment trust (REIT) established with the investment strategy of principally investing, directly or indirectly, in a diversified portfolio of income-producing commercial real estate in the Greater China region.

Aggregate Leverage (%)

ROE (%)

Distribution Yield (%)

PB Band (x)


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2013A 2014A 2015A 2016F 2017F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2013A 2014A 2015A 2016F 2017F

Avg: 3.9%

+1sd: 7.1%

+2sd: 10.2%

‐1sd: 0.8%

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2011 2012 2013 2014 2015

(%)

Avg: 0.87x

+1sd: 0.97x

+2sd: 1.07x

‐1sd: 0.77x

‐2sd: 0.67x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15

(x)


Company Guide



FY Mar 2013A 2014A 2015A 2016F 2017F Gross revenue 113 268 281 307 336 Property expenses (23) (51) (52) (41) (39) Net Property Income 90 216 229 266 297 Other Operating expenses (7) (24) (25) (34) (31) Other Non Opg (Exp)/Inc 0 (2) (7) 0 0 Net Interest (Exp)/Inc (18) (42) (40) (50) (59) Exceptional Gain/(Loss) 0 0 0 0 0 Net Income 65 148 157 182 207 Tax (10) (30) (34) (37) (41) Minority Interest 0 0 0 0 0 Preference Dividend 0 0 0 0 0 Net Income After Tax 55 117 123 146 167 Total Return 55 387 319 146 167 Non-tax deductible Items 16 51 55 54 49 Net Inc available for Dist. 71 168 178 199 216 Growth & Ratio Revenue Gth (%) N/A 137.0 5.1 9.2 9.5 N Property Inc Gth (%) nm 140.7 6.1 16.2 11.5 Net Inc Gth (%) nm 113.4 4.9 18.4 14.4 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 79.5 80.8 81.6 86.8 88.4 Net Income Margins (%) 48.7 43.8 43.8 47.4 49.6 Dist to revenue (%) 62.8 62.9 63.3 64.9 64.2

Managers & Trustee’s fees to sales %) 6.0 9.1 8.9 11.1 9.2

ROAE (%) 4.5 4.4 4.0 4.5 5.1 ROA (%) 2.5 2.5 2.4 2.6 2.8 ROCE (%) 3.3 3.5 3.3 3.5 3.9 Int. Cover (x) 4.7 4.6 5.1 4.6 4.5


Increase in income on the back of positive rental reversions at Festival Walk and Gateway Plaza as well as contribution from the recent Gateway Plaza property


Company Guide



FY Mar 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 Gross revenue 67 74 76 76 85 Property expenses (12) (14) (14) (14) (15) Net Property Income 55 59 62 62 69 Other Operating expenses (6) (7) (7) (6) (7) Other Non Opg (Exp)/Inc 0 (4) (4) 35 0 Net Interest (Exp)/Inc (10) (10) (11) (14) (17) Exceptional Gain/(Loss) 0 0 0 0 0 Net Income 39 38 40 78 46 Tax (7) (7) (14) (7) (7) Minority Interest 0 0 0 0 0 Net Income after Tax 33 31 26 72 38 Total Return 33 31 223 72 38 Non-tax deductible Items 11 14 21 (25) 11 Net Inc available for Dist. 43 45 47 46 50 Growth & Ratio Revenue Gth (%) 6 9 4 0 11 N Property Inc Gth (%) 5 8 5 0 11 Net Inc Gth (%) 2 (4) (16) 171 (46) Net Prop Inc Margin (%) 81.7 80.5 81.7 82.2 82.1 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Balance Sheet (S$ m) FY Mar 2013A 2014A 2015A 2016F 2017F Investment Properties 4,342 4,722 5,349 5,770 5,774 Other LT Assets 1 8 1 1 1 Cash & ST Invts 125 133 125 134 141 Inventory 1 1 1 1 1 Debtors 3 8 11 12 13 Other Current Assets 0 1 1 1 1 Total Assets 4,472 4,873 5,488 5,918 5,930 ST Debt 0 0 274 274 274 Creditor 38 64 76 83 91 Other Current Liab 10 38 45 47 51 LT Debt 1,911 1,853 1,710 2,131 2,131 Other LT Liabilities 63 79 122 122 122 Unit holders’ funds 2,449 2,840 3,260 3,260 3,260 Minority Interests 0 0 0 0 0 Total Funds & Liabilities 4,472 4,873 5,488 5,918 5,930 Non-Cash Wkg. Capital (45) (92) (109) (117) (128) Net Cash/(Debt) (1,787) (1,720) (1,859) (2,270) (2,264) Ratio Current Ratio (x) 2.6 1.4 0.3 0.4 0.4 Quick Ratio (x) 2.6 1.4 0.3 0.4 0.4 Aggregate Leverage (%) 0.0 38.0 36.2 40.6 40.6 Z-Score (X) 0.8 0.9 0.8 0.7 0.7


Increase in gearing on the back of the debt funded acquisition of Sandhill Plaza

Improvement in earnings on the back of the recent Sandhill Plaza acquisition and increased contribution from MAGIC’s existing portfolio


Company Guide



FY Mar 2013A 2014A 2015A 2016F 2017F Pre-Tax Income 65 148 157 182 207 Dep. & Amort. 0 1 2 3 3 Tax Paid (10) (26) (27) (37) (41) Associates &JV Inc/(Loss) 0 0 0 0 0 Chg in Wkg.Cap. 0 (59) (59) 8 11 Other Operating CF 0 110 150 51 46 Net Operating CF 55 175 223 208 227 Net Invt in Properties (2) (2,034) (5) (421) (5) Other Invts (net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc. & JVs 0 0 0 0 0 Other Investing CF 0 0 0 0 0 Net Investing CF (2) (2,034) (5) (421) (5) Distribution Paid (71) (85) (169) (199) (216) Chg in Gross Debt 0 (297) (26) 421 0 New units issued 10 2,403 0 0 0 Other Financing CF 0 (33) (34) 0 0 Net Financing CF (61) 1,988 (229) 222 (216) Currency Adjustments 0 4 3 0 0 Chg in Cash (8) 133 (8) 8 6 Operating CFPS (S cts) 2.1 8.7 10.4 7.3 7.8 Free CFPS (S cts) 2.0 (69.4) 8.1 (7.8) 8.0



Source: DBS Bank

S.No. Da teClos ing

Pric e

Ta rget

Pric eRa ting

1: 29 Oct 14 0.96 1.04 BUY2: 30 Jan 15 1.02 1.12 BUY3: 10 Mar 15 1.04 1.12 BUY4: 27 Apr 15 1.09 1.15 BUY5: 16 Jun 15 1.04 1.12 BUY6: 20 Aug 15 0.93 1.12 BUY7: 07 Oct 15 0.97 1.12 BUY


1

2

3

4

5

6 7

0.83

0.88

0.93

0.98

1.03

1.08

1.13

Oct-14 Feb-15 Jun-15 Oct-15

S$

Acquisition of Sandhill Plaza


BUY Last Traded Price: S$0.84 (STI : 2,815.04) Price Target: S$1.01 (21% upside) Potential Catalyst: Margin expansion, store growth Where we differ: Below, on more muted growth Analyst Alfie Yeo +65 6682 3717 [email protected] Andy Sim +65 6682 3718 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2014A 2015F 2016F 2017F Revenue 726 782 846 816 EBITDA 63.0 71.5 79.7 79.5 Pre-tax Profit 57.1 68.2 74.1 74.4 Net Profit 47.0 56.1 60.9 61.2 Net Pft (Pre Ex.) 47.0 56.1 60.9 61.2 EPS (S cts) 3.13 3.73 4.05 4.07 EPS Pre Ex. (S cts) 3.13 3.73 4.05 4.07 EPS Gth (%) 11 19 9 0 EPS Gth Pre Ex (%) 11 19 9 0 Diluted EPS (S cts) 3.13 3.73 4.05 4.07 Net DPS (S cts) 2.88 3.36 3.64 3.66 BV Per Share (S cts) 15.7 16.1 16.5 16.9 PE (X) 26.9 22.5 20.7 20.6 PE Pre Ex. (X) 26.9 22.5 20.7 20.6 P/Cash Flow (X) 17.6 17.0 15.8 17.2 EV/EBITDA (X) 18.0 15.9 14.2 14.1 Net Div Yield (%) 3.4 4.0 4.3 4.4 P/Book Value (X) 5.3 5.2 5.1 5.0 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 24.3 23.4 24.9 24.4 Earnings Rev (%): - - - Consensus EPS (S cts): 3.80 4.10 4.50 Other Broker Recs: B: 9 S: 0 H: 0


Still Going Strong

Maintain BUY; margins, store expansion, revenue and earnings growth remain on track. We continue to like SSG as earnings are firing on all cylinders. SSG is on track towards its 50-store target, margin expansion trend is performing to our expectations, and there is no let up in SSSG. The company is one of the most well-run grocery retailers in ASEAN, leading regional peers in profitability, cashflow generation and working capital management. Dividend continues to be attractive at 4.3% based on FY16F DPS of 3.6 Scts. On track for store expansion, margins to improve going forward, longer-term drivers continue to develop. Sheng Siong will have 39 stores by year-end, in line with our expectations and eventual target of 50 stores. We see margins normalising going into 4Q15 as 1) input prices for fresh food should ease as logistical disruption and the haze clears up; and 2) pricing should be less aggressive post SG50 and seventh month promotions. Online initiative remains in the pilot phase. Online sales for grocery retail remain in its infancy in Singapore and we therefore believe Sheng Siong can afford to develop this business over a longer time frame. Developments in China continue to be on securing suitable sites in Kunming. As the grocery retail scene in China is facing intensifying competition, especially from online channels, we also believe time is on Sheng Siong’s side to land the ideal location. Valuation:

Our target price for Sheng Siong is S$1.01 based on 25x FY16F PE. Valuation is pegged to below +1SD of its historical mean and below regional peers' average of 27x PE. Key Risks to Our View:

Store openings, price competition. Revenue growth will be led by new store openings, since SSSG is low at <0.5%. Excessive discounts and promotions in the market by competitors will ultimately result in lower margins. At A Glance Issued Capital (m shrs) 1,504 Mkt. Cap (S$m/US$m) 1,263 / 896 Major Shareholders SS Holdings (%) 29.9 Lim Family (%) 34.0 Hock Leng Lim (%) 11.3 Free Float (%) 36.2 3m Avg. Daily Val (US$m) 1.2 ICB Industry : Consumer Services / Food & Drug Retailers



Sheng Siong Group Edition 1 Version 2 | Bloomberg: SSG SP | Reuters: SHEN.SI Refer to important disclosures at the end of this report

82

102

122

142

162

182

202

222

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Nov-11 Nov-12 Nov-13 Nov-14 Nov-15

Relative IndexS$

Sheng Siong Group (LHS) Relative STI INDEX (RHS)


Company Guide

Sheng Siong Group


Earnings Drivers:

Store expansion. Sheng Siong currently operates only 38 stores (39 by year-end). Compared to the other local operators, it has scope to expand its store network, particularly in areas such as Bukit Batok, Serangoon, Hougang and Seng Kang where it has a low presence. Management targets to ultimately operate 50 stores islandwide. In the past six years, store opening has ranged from 0-8 stores annually, largely a function of the supply of HDB shop space available for tender and Sheng Siong’s ability to win the tenders. Sheng Siong mainly operates in HDB estates. Gross margin expansion through better sales mix. The gross margin for fresh products is estimated to be >30%, and close to 20% for non-fresh grocery items. Sheng Siong’s product mix stands at approximately 40% fresh vs 60% non-fresh. We see headroom for sales mix to improve to 50% as it skews its store offering more towards fresh products. Margin expansion through bulk purchasing at its Mandai Distribution Centre. The Mandai Distribution Centre allows Sheng Siong to perform direct sourcing and bulk handling. This effectively drives down input costs, resulting in cost savings and better margins. We estimate that the facility is currently running at only 60% of capacity and expects it to achieve >80% ultimately as it secures more suppliers and products to trade through the distribution centre. Margins are expected to trend up as utilisation increases towards optimal capacity. Margin expansion through direct sourcing. Increasingly, Sheng Siong is sourcing directly from source such as farms instead of from middlemen. The company has the resources to place orders in cheaper but large quantities, which is welcomed by producers. Generating more same-store-sales growth to increase revenue. Sheng Siong has been able to maintain a positive SSSG since 4Q13 through longer operating hours and renovation of older stores, offering the correct products and effective marketing. Maintaining a positive SSSG will support earnings growth. Future earnings drivers, e-commerce and China JV (in Kunming). Both developments are at their initial stages. The market for e-commerce remains small and the business model in Kunming is still under trial. This is even though Sheng Siong already has 1) an up-and-running e-commerce operation which services selected areas in Singapore; and 2) the JV in Kunming has already secured the relevant licences to operate there. It targets to open its first Kunming store in 2H15. Downside for the JV is limited to US$6m paid-up capital which is sufficient to open 2-3 new stores.

Rev per sqft

Operation Area (sqft)

Number of stores

Same store sales growth

Gross margin


1,7181,815

1,935 1,890 1,890

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2013A 2014A 2015F 2016F 2017F

400,000 404,000436,500

476,500 466,500

0

97,200

194,400

291,600

388,800

486,000

2013A 2014A 2015F 2016F 2017F

33 34

39

4447

0.0

9.6

19.2

28.8

38.4

47.9

2013A 2014A 2015F 2016F 2017F

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

Affected by SG50 promotion and discounting

Uptick driven by seventh month festival,

18.7

20.521.8 22.1 22.1

23.024.2

15

16

17

18

19

20

21

22

23

24

25

08 09 10 11 12 13 14

GPM (%)

+5.5 ppt


Company Guide

Sheng Siong Group

Balance Sheet:

Net cash of over S$125m or 8 Scts per share. The excess cash allows for strategic store acquisitions if suitable real estate arises for it to expand its store presence in the future. The business generates positive working capital. Inventory is purchased on credit, turned quickly and sold for cash. Over the past seven years, the business has generated between S$20-75m of operating cashflow each year. Dividend payout is attractive at 90%. We expect this to be maintained as long as there is no significant requirement for cash funding.

Share Price Drivers:

Strong earnings growth performance. Sheng Siong’s financial performance has consistently met our expectations, delivering earnings growth (CAGR of 20.4% since FY11) through a combination of margin expansion, store growth and SSSG. It is this consistency, together with strong dividend payout of 90% and yield of 4%, that has led to the stock’s re-rating from 20x to 22x FY15F PE currently. We believe continued delivery of consistent performance and profit growth will support a strong share price. China to be a wildcard. We believe Sheng Siong’s JV in China is a wildcard. If operations prove to be successful in time to come, China will provide an alternate source of growth in the future. There is scope for the number of stores to increase should Sheng Siong’s business model work. Downside remains limited to US$6m for now should the JV fail.

Key Risks:

Revenue growth limited by store openings. Store expansion in Singapore is largely dependent on the supply of new supermarket retail space released by HDB and its ability to secure the tenders. Excessive discounts and promotions may erode margins. Heavier discounts and promotions vis-a-vis competitors would drive sales revenue, but this could be gained at the expense of margins.

Company Background

Sheng Siong is the third largest supermarket operator in Singapore, behind NTUC Fairprice and Dairy Farm International.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

0.00

0.01

0.01

0.02

0.02

0.03

0.03

0.04

0.04

0.05

0.05

2013A 2014A 2015F 2016F 2017F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2013A 2014A 2015F 2016F 2017F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015F 2016F 2017F

Avg: 19.9x

+1sd: 21.8x

+2sd: 23.7x

‐1sd: 18.1x

‐2sd: 16.2x

13.5

15.5

17.5

19.5

21.5

23.5

25.5


(x)

Avg: 5.03x

+1sd: 5.71x

+2sd: 6.39x

‐1sd: 4.35x

‐2sd: 3.67x

3.1

3.6

4.1

4.6

5.1

5.6

6.1

6.6

7.1


(x)


Company Guide

Sheng Siong Group

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Rev per sqft 1,718 1,815 1,935 1,890 1,890 Operation Area (sqft) 400,000 404,000 436,500 476,500 466,500 Number of stores 33.0 34.0 39.0 44.0 47.0

Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (S$m) Singapore 687 726 782 846 816 Total 687 726 782 846 816 Operating profit (S$m) Singapore 41.6 52.2 58.3 65.4 65.7 Total 41.6 52.2 58.3 65.4 65.7 Operating profit Margins Singapore 6.1 7.2 7.5 7.7 8.1 Total 6.1 7.2 7.5 7.7 8.1


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 687 726 782 846 816 Cost of Goods Sold (529) (550) (589) (637) (612) Gross Profit 158 176 192 209 204 Other Opng (Exp)/Inc (117) (124) (134) (143) (138) Operating Profit 41.6 52.2 58.3 65.4 65.7 Other Non Opg (Exp)/Inc 4.89 3.80 9.31 8.04 8.04 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 1.05 1.19 0.65 0.62 0.66 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 47.6 57.1 68.2 74.1 74.4 Tax (8.7) (10.2) (12.2) (13.2) (13.3) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 38.9 47.0 56.1 60.9 61.2 Net Profit before Except. 38.9 47.0 56.1 60.9 61.2 EBITDA 51.7 63.0 71.5 79.7 79.5 Growth Revenue Gth (%) 7.9 5.6 7.7 8.2 (3.5) EBITDA Gth (%) 19.8 21.9 13.4 11.5 (0.2) Opg Profit Gth (%) 19.8 25.3 11.7 12.3 0.5 Net Profit Gth (Pre-ex) (%) 24.7 20.8 19.3 8.6 0.5 Margins & Ratio Gross Margins (%) 23.0 24.2 24.6 24.7 25.0 Opg Profit Margin (%) 6.1 7.2 7.5 7.7 8.1 Net Profit Margin (%) 5.7 6.5 7.2 7.2 7.5 ROAE (%) 25.8 24.3 23.4 24.9 24.4 ROA (%) 15.9 15.8 15.9 16.6 16.3 ROCE (%) 22.3 22.0 19.8 21.8 21.3 Div Payout Ratio (%) 92.5 92.1 90.0 90.0 90.0 Net Interest Cover (x) NM NM NM NM NM


Lease of 40,000 sqft Woodlands store to expire


Company Guide

Sheng Siong Group


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 186 178 198 179 200 Cost of Goods Sold (141) (135) (150) (134) (151) Gross Profit 45.1 43.3 48.5 45.1 48.8 Other Oper. (Exp)/Inc (31.7) (29.6) (33.9) (31.5) (33.8) Operating Profit 13.4 13.7 14.6 13.6 15.0 Other Non Opg (Exp)/Inc 1.33 0.0 2.24 2.30 2.78 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.52 0.31 0.27 0.30 0.34 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 15.2 14.0 17.1 16.2 18.1 Tax (2.8) (2.2) (3.0) (2.6) (3.5) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 12.5 11.8 14.1 12.6 12.7 Net profit bef Except. 12.5 11.8 14.1 12.6 12.7 EBITDA 17.4 16.5 20.0 19.2 21.2 Growth Revenue Gth (%) 8.6 (4.3) 11.2 (9.8) 11.7 EBITDA Gth (%) 8.5 (5.4) 21.5 (4.2) 10.4 Opg Profit Gth (%) 7.8 2.0 6.6 (6.6) 10.5 Net Profit Gth (Pre-ex) (%) 12.6 (5.5) 19.2 (10.1) 0.2 Margins Gross Margins (%) 24.2 24.3 24.4 25.2 24.4 Opg Profit Margins (%) 7.2 7.7 7.3 7.6 7.5 Net Profit Margins (%) 6.7 6.6 7.1 7.1 6.3

Balance Sheet (S$m) FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 90.8 161 178 181 178 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 0.0 0.0 0.0 0.0 0.0 Cash & ST Invts 99.7 130 124 132 140 Inventory 45.6 43.1 46.1 49.8 47.8 Debtors 12.3 10.8 11.5 12.4 11.9 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 248 345 359 375 377 ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 88.2 95.9 103 112 108 Other Current Liab 7.94 10.7 12.2 13.2 13.3 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 2.29 2.20 2.20 2.20 2.20 Shareholder’s Equity 150 236 242 248 254 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 248 345 359 375 377 Non-Cash Wkg. Capital (38.4) (52.7) (57.8) (62.7) (61.2) Net Cash/(Debt) 99.7 130 124 132 140 Debtors Turn (avg days) 5.0 5.8 5.2 5.2 5.4 Creditors Turn (avg days) 59.0 62.3 63.1 63.0 66.9 Inventory Turn (avg days) 30.1 30.0 28.3 28.1 29.8 Asset Turnover (x) 2.8 2.4 2.2 2.3 2.2 Current Ratio (x) 1.6 1.7 1.6 1.6 1.6 Quick Ratio (x) 1.2 1.3 1.2 1.2 1.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) 10.7 9.9 9.5 9.1 9.3



Company Guide

Sheng Siong Group


FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 47.6 57.1 68.2 74.1 74.4 Dep. & Amort. 10.1 10.9 13.2 14.3 13.8 Tax Paid (8.7) (7.5) (10.7) (12.2) (13.2) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (2.6) 11.5 3.70 3.81 (1.5) Other Operating CF (1.2) (0.3) 0.0 0.0 0.0 Net Operating CF 45.1 71.7 74.4 80.0 73.5 Capital Exp.(net) (26.1) (80.8) (30.5) (17.5) (10.5) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 1.05 0.92 0.0 0.0 0.0 Net Investing CF (25.0) (79.9) (30.5) (17.5) (10.5) Div Paid (40.8) (40.1) (50.5) (54.8) (55.1) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 79.0 0.0 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF (40.8) 38.9 (50.5) (54.8) (55.1) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (20.7) 30.8 (6.5) 7.71 7.95 Opg CFPS (S cts) 3.45 4.00 4.70 5.07 4.99 Free CFPS (S cts) 1.38 (0.6) 2.92 4.16 4.19



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 18 Dec 14 0.67 0.78 BUY

2: 13 Jan 15 0.71 0.82 BUY

3: 26 Feb 15 0.74 0.83 BUY

4: 24 Apr 15 0.83 0.90 BUY

5: 22 Jul 15 0.88 0.98 BUY

6: 24 Jul 15 0.89 1.00 BUY

7: 23 Oct 15 0.88 1.01 BUY


1

23

4 5

6

7

0.61

0.66

0.71

0.76

0.81

0.86

0.91

0.96

Nov-14 Mar-15 Jul-15 Nov-15

S$


BUY

Last Traded Price: S$2.92 (STI : 2,815.04) Price Target : S$3.60 (23% upside) Potential Catalyst: Better earnings execution, strong order wins, M&A Where we differ: More conservative on FY16/17 earnings Analyst Suvro SARKAR +65 6682 3720 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2014A 2015F 2016F 2017F Revenue 6,539 6,345 6,194 6,155 EBITDA 835 852 861 883 Pre-tax Profit 651 660 666 686 Net Profit 532 531 536 545 Net Pft (Pre Ex.) 532 531 536 545 EPS (S cts) 17.1 17.0 17.2 17.5 EPS Pre Ex. (S cts) 17.1 17.0 17.2 17.5 EPS Gth Pre Ex (%) (9) 0 1 2 Diluted EPS (S cts) 17.1 17.0 17.2 17.5 Net DPS (S cts) 15.0 15.0 15.0 15.0 BV Per Share (S cts) 68.4 70.4 72.6 75.1 PE (X) 17.1 17.1 17.0 16.7 PE Pre Ex. (X) 17.1 17.1 17.0 16.7 P/Cash Flow (X) 14.6 13.3 13.1 13.0 EV/EBITDA (X) 10.4 10.2 10.0 9.7 Net Div Yield (%) 5.1 5.1 5.1 5.1 P/Book Value (X) 4.3 4.1 4.0 3.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 25.0 24.6 24.0 23.7 Earnings Rev (%): - - - Consensus EPS (S cts): 16.8 17.5 18.6 Other Broker Recs: B: 6 S: 1 H: 6


Invest for the long term The Electronics division is positioned to capitalise on the Smart Nation revolution in Singapore, with projects worth more than S$1bn in the near future, according to our estimates. The division has a long track record in providing both hardware and system integration solutions as part of its Smart City capability build up, which breeds optimism. Additionally, recent focus on space-related technology and robotics hold promise as longer-term growth drivers for the company. Targeted investments in Aerospace provide potential upside in the medium-term. The aerospace business’s investments into cabin interiors, VIP completions and configurations business in the US, as well as new partnerships with OEMs across the value chain, create new avenues for growth amidst a broadly stable industry environment. Orderbook remains healthy. The group’s orderbook of S$12.2bn remains relatively stable and covers almost two years of revenue, securing decent visibility going forward, despite a slowdown in Marine and Land division orders YTD in 2015. We believe the strength in the Electronics division will support STE over the next two years and allow the company to report steady earnings and dividends in the near term. Valuation:

We maintain our BUY call with TP of S$3.60, based on a blended valuation framework (blend of price-earnings, dividend yield and discounted cash flows) to factor both earnings growth and cash-generative nature of the business. Key Risks to Our View.:

The structural changes facing the aircraft MRO industry could hit harder than expected, as newer airframe and engines reduce maintenance spend and lengthen the cycle for checks and OEMs take a larger share of the aftermarket services. Also, continued lack of action on the M&A front could lead to inefficient use of balance sheet and lower ROEs in the future. At A Glance Issued Capital (m shrs) 3,103 Mkt. Cap (S$m/US$m) 9,062 / 6,432 Major Shareholders Temasek Holdings Pte Ltd (%) 51.4 Aberdeen Asset Management (%) 6.9 Capital Group (%) 5.0 Free Float (%) 36.7 3m Avg. Daily Val (US$m) 7.1 ICB Industry : Industrials / Aerospace & Defense



ST Engineering Edition 1 Version 1 | Bloomberg: STE SP | Reuters: STEG.SI Refer to important disclosures at the end of this report

ed: TH / sa: YM

88

108

128

148

168

188

208

2.2

2.7

3.2

3.7

4.2

4.7


Relative IndexS$

ST Engineering (LHS) Relative STI INDEX (RHS)


Company Guide

ST Engineering


Earnings Drivers:

Conglomerate with diverse interests in defense and commercial spheres. STE started out life as a defense contractor but has leveraged its technical knowhow over the years to penetrate the commercial market. It boasts multinational operations with a global presence in 23 countries and 41 cities, and hires more than 22,000 employees. The group has reduced its reliance on the defense sector over time from 57% of revenues in 2002 to the current 37%, with another 33% from government agencies and the balance from commercial businesses. STE's four key business divisions bring diversification benefits. Its Aerospace, Electronics, Land Systems and Marine businesses contributed 32%, 24%, 21% and 21% respectively to FY14 revenues, allowing the company to avoid reliance on any particular sector. This has engendered relatively stable revenues and earnings, weathering even crisis periods. Acquisitions have been a key driver, accounting for around 40% of revenue growth over the last decade. However, the dampening effect of a weakening US$ and addition of lower-margin businesses meant earnings growth has not kept up with top-line growth. Utilisation of its strong balance sheet and steady cash-flows to undertake acquisitions of high ROE assets could boost future earnings. Healthy order book drives visibility. As of 3Q15, the order book stood at S$12.2bn, down slightly from a high of S$13.2bn in FY13 but nonetheless giving visibility on revenues into FY16 at a c.1.9x book-to-bill ratio. Aerospace MRO primed for steady growth. Continued initiatives by ST Aerospace to broaden its capabilities should propel its growth in the longer term. These include a partnership with Airbus for passenger-to-freighter conversion of its A320 and A321 jets, marking a diversification of its conversion portfolio; a continued expansion of its cabin interior service solutions business, particularly for VIP aircraft completions; and an aircraft seating solutions JV with Tenryu Holdings set up in 1Q15. Electronics division’s initiatives should be a key long-term growth driver. Within the Smart Nation framework, we estimate there will be projects worth more than S$1bn in the near future, as the Singaporean government pushes for smart technology usage across the utilities, healthcare, housing and transport spaces. The launch of its TeLEOS-1 satellite this December will herald a new space-centered growth channel for the division. We are also seeing increased importance placed on robotics, which could be another future key growth driver. Proxy to a recovery in the US. Around 24% of STE's business is derived from the US, which has seen its currency surge by ~20% since mid-2014 against a basket of other currencies. STE is thus poised to benefit from USD-denominated orders.

Aerospace sales growth (%)

Electronics sales growth (%)

Land Systems sales growth (%)

Marine sales growth (%)


2.97

-0.87

-0.45

-1.21

0.96

-1.33-0.96-0.58-0.210.170.540.921.291.672.042.422.79

2013A 2014A 2015F 2016F 2017F

4.56

-4.06

7.35

5

6.18

-4.47

-2.97

-1.47

0.03

1.53

3.03

4.53

6.03

2013A 2014A 2015F 2016F 2017F

-2.51

-5.29

-2.2

-2.87

-5.82

-5.32

-4.82

-4.32

-3.82

-3.32

-2.82

-2.32

2013A 2014A 2015F 2016F 2017F

22.5

8.3

-20.5-17.7

-15.9

-22.5-19.7-16.9-14.0-11.2-8.4-5.5-2.70.13.05.88.6

11.514.317.220.0

2013A 2014A 2015F 2016F 2017F


Company Guide

ST Engineering

Balance Sheet:

Healthy balance sheet can drive M&A ambitions. STE was in a net cash position of about S$931m as of end-3Q15. It thus has ample ammunition to undertake attractive acquisitions in growth areas. Dividend payout should remain steady. Strong operating cash flows and a strong balance sheet provide support to healthy dividend yield levels of around 5.5% currently. STE has cut its payout ratio in recent years from 100% to around 80%, owing to cash locked up in overseas locations, which it prefers to invest for growth rather than pay withholding taxes on repatriation.

Share Price Drivers:

Strong order wins. Order wins YTD have been sluggish at around US$2.5bn, compared to the US$4-6bn seen in previous years, as a result of the land systems and marine divisions having had no major order wins this year. Meanwhile the Aerospace and Electronics divisions have announced US$1.3bn and US$1.2bn in order wins in 2015 respectively. More announced wins should boost the share price. Recovery in the Marine sector. The Marine sector is arguably facing the strongest industry headwinds on the commercial front, with low offshore oil & gas spending and broad overcapacity in shipping. Cost overruns in the US exacerbate the situation. An industry recovery, as well as better productivity in the US, would provide more confidence in the medium-term earnings of the business.

Key Risks:

Declining defense budgets in the West. Austerity programmes in Europe and planned US spending cuts create the risk of delays to some defense programmes that STE may be bidding for. Commercial vehicle businesses face headwinds. The growth of STE’s commercial vehicle operations in China has been affected by weak demand and high inventory levels. Its Brazil operations have also been affected by withdrawal of subsidies for purchases of construction equipment. Protracted slowdown in shipbuilding. The traditional shipping sector has been plagued by overcapacity for some time now, while the slide in oil prices also affects demand for offshore vessels. Visibility on demand recovery is low at this point.

Company Background

ST Engineering (STE) is an integrated engineering group in the aerospace, electronics, land systems and marine sectors. The company has over the years diversified its businesses and geographies.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.7

0.7

0.7

0.7

0.8

0.8

0.8

0.8

0.8

0.8

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2013A 2014A 2015F 2016F 2017F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

2013A 2014A 2015F 2016F 2017F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015F 2016F 2017F

Avg: 19.6x

+1sd: 22.2x

+2sd: 24.9x

‐1sd: 16.9x

‐2sd: 14.2x

11.6

13.6

15.6

17.6

19.6

21.6

23.6

25.6


(x)

Avg: 5.29x

+1sd: 5.88x

+2sd: 6.47x

‐1sd: 4.7x

‐2sd: 4.1x

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5


(x)


Company Guide

ST Engineering

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Aerospace sales growth 2.97 (0.9) (0.5) (1.2) 0.96 Electronics sales growth 4.56 (4.1) 7.35 5.00 6.18 Land Systems sales (2.5) (5.3) (2.2) (2.1) (2.9) Marine sales growth (%) 22.5 8.32 (20.5) (17.7) (15.9)

Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (S$m) Aerospace 2,079 2,061 2,052 2,027 2,046 Electronics 1,650 1,583 1,699 1,784 1,895 Land Systems 1,475 1,397 1,366 1,338 1,299 Marine 1,238 1,341 1,066 877 738 Others 191 157 162 168 177 Total 6,633 6,539 6,345 6,194 6,155 PBT (S$m) Aerospace 319 283 279 282 286 Electronics 170 184 196 200 213 Land Systems 112 56.2 76.4 80.5 82.9 Marine 146 123 100 93.4 91.3 Others (18.1) 4.70 8.09 10.1 12.4 Total 730 651 660 666 685 PBT Margins (%) Aerospace 15.4 13.7 13.6 13.9 14.0 Electronics 10.3 11.6 11.5 11.2 11.2 Land Systems 7.6 4.0 5.6 6.0 6.4 Marine 11.8 9.2 9.4 10.7 12.4 Others (9.5) 3.0 5.0 6.0 7.0 Total 11.0 10.0 10.4 10.8 11.1


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 6,633 6,539 6,345 6,194 6,155 Cost of Goods Sold (5,201) (5,221) (5,013) (4,863) (4,801) Gross Profit 1,432 1,319 1,333 1,332 1,354 Other Opng (Exp)/Inc (712) (711) (706) (694) (692) Operating Profit 720 608 626 638 662 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 31.1 57.2 52.0 46.6 41.0 Net Interest (Exp)/Inc (20.9) (14.3) (18.3) (18.3) (17.6) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 730 651 660 666 686 Tax (138) (114) (119) (120) (130) Minority Interest (10.7) (5.0) (9.8) (9.9) (10.1) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 581 532 531 536 545 Net Profit before Except. 581 532 531 536 545 EBITDA 893 835 852 861 883 Growth Revenue Gth (%) 4.0 (1.4) (3.0) (2.4) (0.6) EBITDA Gth (%) 1.9 (6.4) 1.9 1.1 2.6 Opg Profit Gth (%) 1.9 (15.5) 3.0 1.9 3.7 Net Profit Gth (Pre-ex) (%) 0.8 (8.4) (0.1) 0.9 1.6 Margins & Ratio Gross Margins (%) 21.6 20.2 21.0 21.5 22.0 Opg Profit Margin (%) 10.8 9.3 9.9 10.3 10.8 Net Profit Margin (%) 8.8 8.1 8.4 8.7 8.9 ROAE (%) 29.0 25.0 24.6 24.0 23.7 ROA (%) 6.9 6.2 6.4 6.4 6.5 ROCE (%) 12.4 10.3 10.9 10.9 11.0 Div Payout Ratio (%) 80.2 87.9 88.0 87.2 85.8 Net Interest Cover (x) 34.4 42.7 34.3 34.8 37.7



Company Guide

ST Engineering


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 1,553 1,848 1,511 1,545 1,500 Cost of Goods Sold (1,220) (1,530) (1,219) (1,212) (1,181) Gross Profit 333 318 292 333 319 Other Oper. (Exp)/Inc (190) (163) (149) (185) (175) Operating Profit 144 156 143 148 144 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 11.7 15.4 11.2 14.2 15.4 Net Interest (Exp)/Inc (3.6) (3.9) (4.0) (3.9) (4.6) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 152 167 151 159 155 Tax (31.6) (21.9) (19.0) (34.0) (22.3) Minority Interest 1.18 (5.2) (1.5) 0.44 0.81 Net Profit 121 140 130 125 133 Net profit bef Except. 121 140 130 125 133 EBITDA 196 203 199 208 207 Growth Revenue Gth (%) (2.1) 19.0 (18.2) 2.2 (2.9) EBITDA Gth (%) (5.1) 3.5 (2.1) 4.5 (0.6) Opg Profit Gth (%) (8.5) 8.5 (8.0) 3.3 (2.8) Net Profit Gth (Pre-ex) (%) (8.9) 15.6 (7.3) (3.8) 6.6 Margins Gross Margins (%) 21.5 17.2 19.4 21.5 21.3 Opg Profit Margins (%) 9.2 8.4 9.5 9.6 9.6 Net Profit Margins (%) 7.8 7.6 8.6 8.1 8.9

Balance Sheet (S$m) FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 1,520 1,578 1,654 1,678 1,698 Invts in Associates & JVs 462 478 500 517 528 Other LT Assets 963 937 937 937 937 Cash & ST Invts 2,065 1,590 1,586 1,642 1,702 Inventory 1,808 1,802 1,749 1,707 1,696 Debtors 1,222 1,319 1,280 1,249 1,241 Other Current Assets 667 615 615 615 615 Total Assets 8,707 8,319 8,322 8,345 8,418 ST Debt 434 74.7 74.7 74.7 74.7 Creditor 1,605 1,667 1,618 1,579 1,569 Other Current Liab 2,055 1,974 1,953 1,936 1,931 LT Debt 939 944 944 944 944 Other LT Liabilities 1,414 1,395 1,395 1,395 1,395 Shareholder’s Equity 2,116 2,132 2,196 2,264 2,342 Minority Interests 144 132 142 152 162 Total Cap. & Liab. 8,707 8,319 8,322 8,345 8,418 Non-Cash Wkg. Capital 37.3 94.8 73.2 56.4 52.0 Net Cash/(Debt) 692 571 568 623 683 Debtors Turn (avg days) 65.5 70.9 74.8 74.5 73.9 Creditors Turn (avg days) 119.0 118.2 123.9 124.5 124.3 Inventory Turn (avg days) 134.5 130.4 133.9 134.6 134.4 Asset Turnover (x) 0.8 0.8 0.8 0.7 0.7 Current Ratio (x) 1.4 1.4 1.4 1.5 1.5 Quick Ratio (x) 0.8 0.8 0.8 0.8 0.8 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 20.5 22.0 24.5 19.6 19.6 Z-Score (X) 2.4 2.5 2.5 2.5 2.5



Company Guide

ST Engineering


FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 730 651 660 666 685 Dep. & Amort. 142 171 173 177 180 Tax Paid (110) (133) (119) (120) (130) Assoc. & JV Inc/(loss) (31.1) (57.2) (52.0) (46.6) (41.0) Chg in Wkg.Cap. 154 (72.2) 21.6 16.8 4.41 Other Operating CF 44.8 65.3 0.0 0.0 0.0 Net Operating CF 930 624 684 693 698 Capital Exp.(net) (282) (224) (250) (200) (200) Other Invts.(net) 70.8 79.0 0.0 0.0 0.0 Invts in Assoc. & JV (19.3) 5.67 (5.0) (5.0) (5.0) Div from Assoc & JV 39.6 35.0 35.0 35.0 35.0 Other Investing CF (67.1) (53.4) 0.0 0.0 0.0 Net Investing CF (258) (157) (220) (170) (170) Div Paid (521) (499) (468) (468) (468) Chg in Gross Debt 28.2 (394) 0.0 0.0 0.0 Capital Issues 52.2 10.7 0.0 0.0 0.0 Other Financing CF (30.9) (43.8) 0.0 0.0 0.0 Net Financing CF (472) (926) (468) (468) (468) Currency Adjustments 17.7 (0.3) 0.0 0.0 0.0 Chg in Cash 218 (459) (3.6) 55.2 60.4 Opg CFPS (S cts) 25.0 22.3 21.2 21.7 22.2 Free CFPS (S cts) 20.9 12.8 13.9 15.8 16.0



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 20 Jan 15 3.31 3.80 BUY

2: 02 Mar 15 3.40 3.80 BUY

3: 14 May 15 3.59 3.80 BUY

4: 10 Aug 15 3.26 3.80 BUY

5: 17 Aug 15 3.17 3.80 BUY

6: 31 Aug 15 3.07 3.40 BUY

7: 04 Nov 15 3.30 3.60 BUY

8: 09 Nov 15 3.15 3.60 BUY


1

2 3

4

56

78

2.63

2.83

3.03

3.23

3.43

3.63

3.83


S$


BUY Last Traded Price: S$0.675 (STI : 2,815.04) Price Target : S$0.82 (22% upside) Potential Catalyst: M&A, corporate restructuring Where we differ: Higher forecasts in FY15 due to disposal gains, lower in FY16 due to higher opex assumed Analyst Andy Sim +65 6682 3718 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Btm) 2014A 2015F 2016F 2017F Revenue 162,040 166,933 175,728 184,605 EBITDA 31,427 36,510 35,871 38,465 Pre-tax Profit 25,984 31,275 30,647 32,938 Net Profit 21,694 26,359 25,079 26,959 Net Pft (Pre Ex.) 21,694 26,359 25,079 26,959 EPS (S cts) 3.37 4.10 3.90 4.19 EPS Pre Ex. (S cts) 3.37 4.10 3.90 4.19 EPS Gth (%) 13 22 (5) 7 EPS Gth Pre Ex (%) 13 22 (5) 7 Diluted EPS (S cts) 3.37 4.10 3.90 4.19 Net DPS (S cts) 2.38 2.46 2.57 2.65 BV Per Share (S cts) 15.7 17.4 18.7 20.2 PE (X) 20.0 16.4 17.3 16.1 PE Pre Ex. (X) 20.0 16.4 17.3 16.1 P/Cash Flow (X) 17.7 19.4 17.7 16.9 EV/EBITDA (X) 15.4 13.1 13.2 12.2 Net Div Yield (%) 3.5 3.7 3.8 3.9 P/Book Value (X) 4.3 3.9 3.6 3.3 Net Debt/Equity (X) 0.4 0.4 0.3 0.2 ROAE (%) 22.2 24.7 21.6 21.5 Earnings Rev (%): - - - Consensus EPS (S cts): 3.8 3.9 4.1 Other Broker Recs: B: 5 S: 2 H: 2


Positioning to be a regional player

Maintain BUY, TP at S$0.82. We maintain our BUY recommendation with a TP of S$0.82. We believe ThaiBev is taking steps to transform into a regional beverage player. In our view, we believe ThaiBev should have an advantage over its peers given its dominant position as the leading spirits player in Thailand, providing it with ample firepower and serve as a bastion for the company while it invests in new avenues of growth. 3Q15 results resilient despite weak sentiment. ThaiBev’s 3Q15 results were within expectations. While headline net profit surged by 115%, this was on the back of a disposal gain by its associate FNN. Excluding this, net profit would have grown c.12% largely on stronger associate’s contribution. Revenue grew by 3% while EBIT slipped 7% y-o-y. This was largely a result of higher costs relating to the relaunch of Chang Beer, as well as higher losses at its Non-Alcoholic Beverages given its investment phase. Growth is projected to continue. We raised FY15F forecasts by 9%, taking into account the one-off gain by F&N’s disposal of its 55% stake in MBL, offset partially by a lower operating profit. While consumer sentiment remains weak, we note that the Group’s operations remained relatively resilient. With the conclusion of F&N’s disposal of the latter’s stake in Myanmar Brewery Limited, this could possibly pave the way for the eventual consolidation of FNN as a subsidiary, coupled with the eventual monetisation of its stake in Frasers Centrepoint Limited. In our view, this tie in with the Group’s announced “Vision 2020” Strategic Roadmap, in which one of the targets is to increase NAB's revenue contribution to over 50%. Valuation: Our target price is revised marginally to S$0.82 as we roll our valuations over to FY16F. Our TP is based on sum-of-parts valuation, derived via discounted cashflows of its core operations, coupled with fair values of its stakes in F&N and Frasers Centrepoint Limited. Key Risks to Our View: Further excise tax hikes. Further increases in excise duties without a commensurate increase in ASP. At A Glance Issued Capital (m shrs) 25,110 Mkt. Cap (S$m/US$m) 16,949 / 11,995 Major Shareholders Siriwana Co.Ltd (%) 45.3 Maxtop Management Corp (%) 20.6 Capital Group (%) 5.0 Free Float (%) 29.1 3m Avg. Daily Val (US$m) 4.2 ICB Industry : Consumer Goods / Beverages



Thai Beverage Public Company Edition 1 Version 1 | Bloomberg: THBEV SP | Reuters: TBEV.SI Refer to important disclosures at the end of this report

87

137

187

237

287

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9


Relative IndexS$

Thai Beverage Public Company (LHS) Relative STI INDEX (RHS)


Company Guide

Thai Beverage Public Company

3Q15 Results Summary and Update

FY Dec (m) 3Q14 2Q15 3Q15 yoy % qoq % 9M14 9M15 yoy % Comments Sales 35,276 38,992 36,472 3.4 (6.5) 116,344 121,169 4.1 Higher spirits, beer and

non-al revenue, offset by drop in food contribution.

Cost of Goods Sold (24,884) (27,147) (25,851) 3.9 (4.8) (81,927) (85,050) 3.8 Gross Profit 10,392 11,845 10,621 2.2 (10.3) 34,416 36,119 4.9 Marginally lower margins

in 3Q Other Operating Income

22 (141) 44 101.9 (131.4) 44 (39) (188.3)

Selling expenses (3,188) (3,929) (3,520) 10.4 (10.4) (9,444) (10,839) 14.8 Administration Expenses

(2,518) (2,769) (2,765) 9.8 (0.1) (7,803) (8,447) 8.3

Others 0 71 0 nm (100.0) 22 71 214.9 Other Operating Expenses

(5,707) (6,627) (6,285) 10.1 (5.2) (17,246) (19,216) 11.4

EBIT 4,707 5,077 4,380 (7.0) (13.7) 17,214 16,864 (2.0) Higher A&P for Spirits and Beer due to relaunch of

Chang beer Non-Operating Income

74 613 169 130.1 (72.4) 371 891 140.2

Interest Income 20 9 1 (93.2) (84.3) 96 11 (88.5) Interest Expense (343) (269) (326) (4.9) 21.2 (1,147) (1,028) (10.4) Lower debt which was

refinanced earlier Share of Associates' or JV Income

91 1,585 4,565 4914.8 187.9 1,917 7,045 267.6 Boosted by FNN's MBL disposal gain THB3.8bn

Pretax Profit 4,548 7,015 8,789 93.2 25.3 18,451 23,784 28.9 Tax (914) (1,064) (802) (12.3) (24.6) (3,398) (3,316) (2.4) Minority Interests 84 (89) 9 (89.3) (110.1) 155 (34) (122.1)

Net Profit 3,718 5,862 7,996 115.1 36.4 15,208 20,434 34.4 Within expectations

Source: Company, DBS Bank Results comments

3Q15 results within expectations, headline boosted by associate’s gain. ThaiBev’s 3Q net profit surged 115% to THB8bn, arising from a gain of THB3.8bn recognised by FNN for its disposal of the latter’s stake in Myanmar Brewery Limited. Excluding this, we estimate that net profit would have been THB4.2bn, registering 12% growth y-o-y. Despite the overall subdued Thai economy and consumer sentiment, the Group posted a 3.4% revenue growth. This was contributed by all segments, except Food. EBIT margins for the Group dipped by 1.3ppts to 12% in 3Q15, arising from lower margins from Beer due to the relaunch of Chang Beer and higher A&P for Spirits. Spirits relatively resilient despite weak sentiment. Spirits registered a 2.7% increase in revenue arising from a change in product mix – higher proportion of higher priced brown spirits vs white spirits. In the quarter, we saw higher A&P expenses which management attributed to a push to increase fixtures and displays at point-of-sale to increase the products’ presence. Going forward and as we move into 4Q, we believe Spirits should see better sequential performance in 4Q, and as the recently announced government stimulus package works its way down.

Beer – positioning for bigger share with relaunch. In 3Q15, the Group relaunched Chang Beer, and discontinued its other variants. There was a change of the bottle's colour to green, from amber, and this increased the cost of packaging and hence impacted on margins. In addition, the alcohol content was lowered to 5.5%, from 6% previously. Arising from higher costs due to the relaunch, the Beer segment registered a net loss of THB23bn, down from a profit of THB28bn a year ago. The impact was surprisingly less than we had envisaged. Cost of goods for beer higher due to new bottles. Management indicated that with the use of new green bottles, the cost of packaging has gone up. This was because it had to use completely new bottles, while previously there was a mix of old (returnables) and new bottles (for amber ones). It is envisaged that it could take up to a year for the trend to stabilise before we see the cost of packaging revert to normal. Non-Alcoholic Beverage – no surprises, still in investment mode. There were no major surprises on the non-alcoholic beverage front. In 3Q15, the segment registered a loss of THB532m, an increase from THB408m a year ago. This is not surprising to us given that there has been new product launches this year (Jubjai and 100Plus), while its est cola and the flavoured carbonated soft drinks are still in an investment mode.

Valuation and forecasts


Company Guide


FY15F/16F forecasts +9%/-4%. We adjusted our forecasts by +9%/-4% for FY15F/ 16F. The adjustment up for FY15 is to take into account the disposal gain from MBL (by its associate FNN), while we tune down our operating forecasts to account for higher costs of goods sold and A&P expenses, particularly for its beer. Maintain BUY, TP adjusted to S$0.82. While 3Q15 operating results registered a drop, this was a factor of higher operating expenses due to the overhaul and relaunch of Chang Beer. In our view, this is to position the brand for the longer term,

particularly the change in bottle colour to green, from amber, making it more contemporary. We revised our sum-of-parts TP slightly to S$0.82 as we roll our valuations over to FY16F, offset partially by a lower operating profit in FY16F. We retain our positive view of the company as it progressively transforms itself into a regional beverage player. In our view, we believe ThaiBev should have an advantage over its peers given its dominant position as the leading spirits player in Thailand, providing it with ample firepower and serve as a bastion for the company while it invests in new avenues of growth.

Chang Classic relaunch

Previous packaging New contemporary packaging

Source: Company


Company Guide



Earnings Drivers:

Spirits as the main earnings driver. Thai Bev derives earnings mainly from four key divisions – Spirits, Beer, Non-alcoholic beverages and Food. Spirits division is the largest revenue contributor, accounting for 64% (as of FY14) of the Group’s revenue. Earnings from Spirits division are particularly sensitive to excise tax – this accounts for 52.7% of Spirits’ revenue. Consumption of spirits has held up despite the poorer consumer sentiments in Thailand, in part due to the wide range of brands that cater to the wide spectrum of consumers – from low to high income. Building upon Chang’s popularity. Revenues from Beer division contribute to 22% of the Group’s revenue in FY14. Excise tax is also the largest cost component, accounting for 57% of the Group’s revenue. Input cost accounts for 17.4% of Beer revenue and is affected by the prices of raw materials such as barley, rice, tin and glass bottles. Chang Beer was recently re-launched with the streamline of its sub-brands into just Chang Classic and repackaged into emerald green bottles, from amber ones. Operating expenses recently ticked up arising from this, but the purpose is to accentuate the brand’s offering and to grow its market share. Alcohol sale restrictions. Alcohol sales have been subjected to restrictions in Thailand. Most recently, laws regarding banning the sale of alcoholic products in proximity of education institutions have been discussed in Thailand. Given that the alcoholic businesses – Spirits and Beer, contribute 86% of the Group’s revenue, any decline in sales revenue by the alcoholic divisions will be significantly felt by the Group. Expanding the Non-alcoholic Beverages (NAB) division. Revenues from non-alcoholic beverages make up 10% of Group revenue in FY14. The business unit is incurring operating losses due to its high SG&A expenses as it is focused on building brand awareness and gaining market share. With the launch of 100Plus in Thailand through a collaboration with FNN, it could take time for the brand to be built up. We project NAB's business segment to remain in the red over the medium term as management builds traction. Fortunately, this should not make a huge dent on Group earnings, given the strong contribution from Spirits.

Weaker macroeconomic conditions. The Group derives the majority of its sales from Thailand. In the near term, we expect a slowdown in consumption due to the political instability as well as a weakening tourism sector. The Group’s alcoholic beverage businesses are not expected to be significantly affected by the forecasted fall in tourist numbers given its biasness towards off-trade sales – 80% to 100%

Sprits vol gwth (%)

Spirits ASP gwth (%)

Beer vol gwth (%)

Beer ASP gwth (%)

Non-Alc Bev rev gwth (%)


-1.6

-0.3

4

2 2

-1.76-1.26-0.75-0.250.260.771.271.782.282.793.293.80

2013A 2014A 2015F 2016F 2017F

9

5

-1

3 3

-1.10

0.74

2.57

4.41

6.24

8.08

2013A 2014A 2015F 2016F 2017F

5.3

9.5

0

2

3

0.00

1.20

2.40

3.60

4.80

6.00

7.20

8.40

9.60

2013A 2014A 2015F 2016F 2017F

-39.9

-7.3

5 5 5

-44

-34

-24

-14

-4

2013A 2014A 2015F 2016F 2017F


Company Guide


depending on brands. NAB and the Food division will continue to face challenges with on-premise consumption volumes and the growth of these two divisions could be undermined in the near term.

Balance Sheet:

Gearing has improved since acquisition of F&N’s stake. The Group’s net gearing has improved significantly, and projected to be c.0.4x by end-FY15F, from the high of 1.2x immediately following its 28.5% stake acquisition in F&N. Going forward, its healthy balance sheet will put it in a good position for inorganic growth opportunities within the region. Share Price Drivers:

Changes in excise taxes. More than 50% of the Group’s revenue goes into excise duties. A change in excise tax would impact on share price, and depending on whether the company is able to pass on the increase costs to consumer, share price could be positively or negatively affected.

Corporate restructuring. With FNN’s arbitration and eventual disposal of its stake in Myanmar Brewery Limited, this could possibly pave the way for the eventual consolidation of FNN as a subsidiary, coupled with the eventual monetisation of its stake in Frasers Centrepoint Limited. In our view, this ties in with the Group’s recently announced “Vision 2020” Strategic Roadmap, in which one of the targets is to increase NAB's revenue contribution to over 50%.

Turnaround in NAB. We project NAB to continue in the current investment mode in the foreseeable future. However, in the event that this turns around faster than expected, it could provide a catalyst to share price, underlining management’s ability to create value for the company. Key Risks:

Prolonged slump in consumer sentiments. A prolonged slump in the Thai economy could impact consumption, and hence our forecasts. Vice-versa, a pickup in economic activity could offer upside potential.

Political situation in Thailand. A change or deterioration of the uncertain political situation in Thailand could have an adverse impact on the broader economy and private consumption.

Further excise tax hikes. Further increases in excise duties without a commensurate increase in ASP. Company Background

ThaiBev is a leading beverage producer in Thailand, with business segments spanning across spirits, beer, non-alcoholic beverages and food. Its key brands are Sangsom, Hong Thong and Chang.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.8

0.9

0.9

1.0

1.0

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2013A 2014A 2015F 2016F 2017F


4,350.0

4,400.0

4,450.0

4,500.0

4,550.0

4,600.0

4,650.0

4,700.0

4,750.0

4,800.0

4,850.0

2013A 2014A 2015F 2016F 2017F


Btm

0.0%

5.0%

10.0%

15.0%

20.0%

2013A 2014A 2015F 2016F 2017F

Avg: 15.7x

+1sd: 18.4x

+2sd: 21.1x

‐1sd: 12.9x

‐2sd: 10.2x

8.3

10.3

12.3

14.3

16.3

18.3

20.3

22.3


(x)

Avg: 3.79x

+1sd: 4.43x

+2sd: 5.06x

‐1sd: 3.16x

‐2sd: 2.53x

2.1

2.6

3.1

3.6

4.1

4.6

5.1

5.6


(x)


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Sprits vol gwth (%) (1.6) (0.3) 4.00 2.00 2.00 Spirits ASP gwth (%) 9.00 5.00 (1.0) 3.00 3.00 Beer vol gwth (%) (9.0) (2.4) 1.00 3.00 2.00 Beer ASP gwth (%) 5.30 9.50 0.0 2.00 3.00 Non-Alc Bev rev gwth (%) (39.9) (7.3) 5.00 5.00 5.00

Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Btm) Spirits 99,916 104,592 107,688 113,137 118,862 Beer 32,935 35,193 35,545 37,344 39,233 Non-Alcoholic Bev. 17,018 15,775 16,564 17,392 18,262 Food 5,976 6,602 7,262 7,988 8,388 Others (74.0) (122) (126) (132) (139) Total 155,771 162,040 166,933 175,728 184,605 Operating profit (Btm) Spirits 23,694 25,278 25,845 27,153 28,527 Beer (681) 334 71.1 560 785 Non-Alcoholic Bev. (2,276) (2,336) (2,485) (1,391) (913) Food 192 36.0 363 399 419 Others 73.0 68.0 68.0 68.0 68.0 Total 21,002 23,380 23,863 26,789 28,886 Operating profit Margins Spirits 23.7 24.2 24.0 24.0 24.0 Beer (2.1) 0.9 0.2 1.5 2.0 Non-Alcoholic Bev. (13.4) (14.8) (15.0) (8.0) (5.0) Food 3.2 0.5 5.0 5.0 5.0 Others (98.6) (55.7) (54.1) (51.4) (48.9) Total 13.5 14.4 14.3 15.2 15.6

Income Statement (Btm)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 155,771 162,040 166,933 175,728 184,605 Cost of Goods Sold (112,033) (114,710) (118,865) (123,459) (128,952) Gross Profit 43,738 47,330 48,068 52,270 55,654 Other Opng (Exp)/Inc (22,478) (23,886) (24,205) (25,481) (26,768) Operating Profit 21,260 23,443 23,863 26,789 28,886 Other Non Opg (Exp)/Inc 795 600 600 600 600 Associates & JV Inc 3,434 3,389 7,867 4,135 4,467 Net Interest (Exp)/Inc (2,251) (1,447) (1,055) (878) (1,015) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 23,238 25,984 31,275 30,647 32,938 Tax (4,236) (4,552) (4,916) (5,567) (5,979) Minority Interest 128 261 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 19,130 21,694 26,359 25,079 26,959 Net Profit before Except. 19,130 21,694 26,359 25,079 26,959 EBITDA 25,489 31,427 36,510 35,871 38,465 Growth Revenue Gth (%) (3.3) 4.0 3.0 5.3 5.1 EBITDA Gth (%) 13.1 23.3 16.2 (1.8) 7.2 Opg Profit Gth (%) 1.9 10.3 1.8 12.3 7.8 Net Profit Gth (Pre-ex) (%) 21.0 13.4 21.5 (4.9) 7.5 Margins & Ratio Gross Margins (%) 28.1 29.2 28.8 29.7 30.1 Opg Profit Margin (%) 13.6 14.5 14.3 15.2 15.6 Net Profit Margin (%) 12.3 13.4 15.8 14.3 14.6 ROAE (%) 21.8 22.2 24.7 21.6 21.5 ROA (%) 9.8 12.2 15.0 13.9 14.5 ROCE (%) 9.6 11.8 12.5 13.3 14.0 Div Payout Ratio (%) 57.8 70.6 60.0 66.1 63.3 Net Interest Cover (x) 9.4 16.2 22.6 30.5 28.5


Factored in gains by FNN (on disposal of MBL’s stake)


Company Guide


Quarterly / Interim Income Statement (Btm)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 35,276 45,696 45,704 38,992 36,472 Cost of Goods Sold (24,884) (32,783) (32,051) (27,147) (25,851) Gross Profit 10,392 12,914 13,653 11,845 10,621 Other Oper. (Exp)/Inc (5,685) (6,684) (6,245) (6,768) (6,241) Operating Profit 4,707 6,229 7,408 5,077 4,380 Other Non Opg (Exp)/Inc 73.5 229 108 613 169 Associates & JV Inc 91.0 1,472 895 1,585 4,565 Net Interest (Exp)/Inc (323) (397) (431) (261) (325) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 4,548 7,534 7,980 7,015 8,789 Tax (914) (1,154) (1,450) (1,064) (802) Minority Interest 83.7 106 45.8 (89.1) 8.99 Net Profit 3,718 6,485 6,575 5,862 7,996 Net profit bef Except. 3,718 6,485 6,575 5,862 7,996 EBITDA 4,872 7,931 8,411 7,275 9,114 Growth Revenue Gth (%) (11.9) 29.5 0.0 (14.7) (6.5) EBITDA Gth (%) (30.1) 62.8 6.1 (13.5) 25.3 Opg Profit Gth (%) (17.2) 32.3 18.9 (31.5) (13.7) Net Profit Gth (Pre-ex) (%) (32.7) 74.4 1.4 (10.8) 36.4 Margins Gross Margins (%) 29.5 28.3 29.9 30.4 29.1 Opg Profit Margins (%) 13.3 13.6 16.2 13.0 12.0 Net Profit Margins (%) 10.5 14.2 14.4 15.0 21.9

Balance Sheet (Btm)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 46,827 46,251 46,927 47,138 47,182 Invts in Associates & JVs 75,558 67,614 73,881 76,417 79,284 Other LT Assets 11,220 11,054 10,998 10,941 10,884 Cash & ST Invts 5,108 2,230 552 556 1,273 Inventory 34,837 35,084 36,134 37,529 39,207 Debtors 3,891 3,668 3,887 4,092 4,299 Other Current Assets 5,888 6,085 6,085 6,085 6,085 Total Assets 183,329 171,987 178,465 182,757 188,213 ST Debt 12,357 21,947 21,947 21,947 21,947 Creditor 5,202 4,803 3,456 3,590 3,750 Other Current Liab 8,671 9,286 11,570 12,222 12,634 LT Debt 54,343 26,555 21,555 16,555 11,555 Other LT Liabilities 4,763 4,720 4,720 4,720 4,720 Shareholder’s Equity 94,286 101,263 111,802 120,309 130,193 Minority Interests 3,707 3,414 3,414 3,414 3,414 Total Cap. & Liab. 183,329 171,987 178,465 182,757 188,213 Non-Cash Wkg. Capital 30,742 30,749 31,080 31,894 33,207 Net Cash/(Debt) (61,591) (46,272) (42,950) (37,947) (32,230) Debtors Turn (avg days) 8.8 8.5 8.3 8.3 8.3 Creditors Turn (avg days) 16.8 16.5 13.1 10.8 10.8 Inventory Turn (avg days) 110.5 115.3 113.3 112.9 112.5 Asset Turnover (x) 0.8 0.9 1.0 1.0 1.0 Current Ratio (x) 1.9 1.3 1.3 1.3 1.3 Quick Ratio (x) 0.3 0.2 0.1 0.1 0.1 Net Debt/Equity (X) 0.6 0.4 0.4 0.3 0.2 Net Debt/Equity ex MI (X) 0.7 0.5 0.4 0.3 0.2 Capex to Debt (%) 6.9 9.4 11.0 11.7 13.4 Z-Score (X) 4.8 5.8 6.2 6.6 6.6


Boosted by gains from FNN

Net debt-to-equity has dropped from 1.2x since its acquisition of a 28.5% stake in FNN


Company Guide


Cash Flow Statement (Btm)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 23,238 25,984 31,275 30,647 32,938 Dep. & Amort. 3,935 3,997 4,182 4,348 4,515 Tax Paid (5,005) (4,884) (2,631) (4,916) (5,567) Assoc. & JV Inc/(loss) (3,434) (3,389) (7,867) (4,135) (4,467) Chg in Wkg.Cap. (2,428) 1,135 (2,615) (1,466) (1,724) Other Operating CF 1,783 1,566 0.0 0.0 0.0 Net Operating CF 18,089 24,409 22,343 24,478 25,694 Capital Exp.(net) (4,619) (4,570) (4,800) (4,500) (4,500) Other Invts.(net) 40.0 6.50 0.0 0.0 0.0 Invts in Assoc. & JV 1.46 0.0 0.0 0.0 0.0 Div from Assoc & JV 34,998 6,903 1,600 1,600 1,600 Other Investing CF 2,378 268 0.0 0.0 0.0 Net Investing CF 32,798 2,607 (3,200) (2,900) (2,900) Div Paid (10,816) (11,359) (15,819) (16,573) (17,075) Chg in Gross Debt (38,561) (17,202) (5,000) (5,000) (5,000) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (1,772) (1,259) 0.0 0.0 0.0 Net Financing CF (51,148) (29,820) (20,819) (21,573) (22,075) Currency Adjustments 820 (65.0) 0.0 0.0 0.0 Chg in Cash 559 (2,869) (1,676) 5.10 719 Opg CFPS (Bt) 3.19 3.62 3.88 4.03 4.26 Free CFPS (Bt) 2.09 3.08 2.73 3.10 3.29



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1 18 Dec 14 0.68 0.80 BUY

2 27 Feb 15 0.70 0.80 BUY

3 15 May 15 0.76 0.81 BUY

4 14 Aug 15 0.77 0.81 BUY

5 31 Aug 15 0.71 0.81 BUY

6 13 Nov 15 0.68 0.82 BUY


1

2

3 4

5

6

0.63

0.68

0.73

0.78

0.83


S$


BUY Last Traded Price: S$8.30 (STI : 2,815.04) Price Target : S$9.00 (8% upside) Potential Catalyst: Broad economic recovery Where we differ: FY15/FY16 EPS 1%/3% above consensus Analyst Sachin Mittal +65 6682 3699 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2014A 2015F 2016F 2017F Revenue 2,465 2,642 2,796 2,972 EBITDA 199 217 235 246 Pre-tax Profit 156 180 201 215 Net Profit 140 155 173 185 Net Pft (Pre Ex.) 140 155 173 185 EPS (S cts) 51.0 56.5 63.1 67.5 EPS Pre Ex. (S cts) 51.0 56.5 63.1 67.5 EPS Gth (%) 7 11 12 7 EPS Gth Pre Ex (%) 7 11 12 7 Diluted EPS (S cts) 51.0 56.5 63.1 67.5 Net DPS (S cts) 50.0 50.0 50.0 50.0 BV Per Share (S cts) 679.0 685.5 698.6 716.1 PE (X) 16.3 14.7 13.1 12.3 PE Pre Ex. (X) 16.3 14.7 13.1 12.3 P/Cash Flow (X) 13.6 15.2 14.3 14.2 EV/EBITDA (X) 10.3 9.6 8.9 8.5 Net Div Yield (%) 6.0 6.0 6.0 6.0 P/Book Value (X) 1.2 1.2 1.2 1.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 7.6 8.3 9.1 9.5 Earnings Rev (%): - - - Consensus EPS (S cts): 56.2 61.2 67.6 Other Broker Recs: B: 8 S: 0 H: 2


Windfall From Strong US Dollar And Weak Ringgit

Consensus FY16F earnings have room to rise further. Street forecasts are not fully factoring in the impact of a 15% decline in SGD/MYR exchange rate over the last year. Almost 60% of staff costs for Venture are denominated in MYR. According to our sensitivity analysis, every 2% decline in MYR would have a 1.5% positive impact on Venture’s profits.

Positive forex movements and improved volumes result in gains. 3Q15 net profit of S$ 40.5m (+12% y-o-y, +12% q-o-q) was in line with our expectations. Revenue growth was driven by favorable forex movements and increased volumes. Test & Measurement/Life Sciences & Medical continued to see healthy growth. Healthy revenue growth and the slower growth in staff costs and depreciation helped to improve profitability despite higher tax expense.

USD appreciation provides a further boost. USD/SGD exchange rate had also appreciated by 7% over the last one year. We estimate that a 1% rise in USD/SGD rate would have a 1% positive impact on Venture’s profits. We have not factored in the impact of any additional orders which Venture could secure arising from the lower cost of production out of Malaysia due to the weak Ringgit. In constant currency terms, we expect Venture to register 4-5% earnings growth in FY16F as some of the weaker segments such as PC, Printing and Imaging have already declined. Valuation:

Our target price of S$9.00 is based on a historical mean PE of 15x on average FY15F-16F earnings. The stock offers potential returns of 8% in addition to a 6% yield and is a safe haven from declining Asian currencies. Key Risks to Our View:

A potentially weak USD or stronger MYR would be the key risk to our forecast. A severe deterioration in US and Europe's economies could affect corporate spending, which will in turn adversely impact Venture's results. At A Glance Issued Capital (m shrs) 277 Mkt. Cap (S$m/US$m) 2,295 / 1,629 Major Shareholders Aberdeen Asset Management (%) 9.0 Sprucegrove Investment (%) 7.0 Wong Ngit Liong (%) 6.9 Free Float (%) 70.7 3m Avg. Daily Val (US$m) 3.6 ICB Industry: Industrials / Electronic & Electrical Equipment



Venture Corporation Edition 1 Version 1 | Bloomberg: VMS SP | Reuters: VENM.SI Refer to important disclosures at the end of this report

80

100

120

140

160

180

200

220

5.4

5.9

6.4

6.9

7.4

7.9

8.4

8.9

9.4


Relative IndexS$

Venture Corporation (LHS) Relative STI INDEX (RHS)


Company Guide

Venture Corporation

3Q15 Result Summary

Positive forex movements and improved volumes result in gains. Revenue of S$ 692.9m (+16% y-o-y, +5% q-o-q) was in line with our expectations. Revenue growth was driven by favorable forex movements and increased volumes. Test & Measurement/Life Sciences & Medical continued to see healthy growth, remaining a key top line driver. Strong profitability despite higher tax expense. Net profit of S$ 40.5m (+12% y-o-y, +12% q-o-q) was in line with our expectations. In addition to healthy revenue growth, the slower growth in staff costs and depreciation helped to improve profitability, and had largely offset the increased tax expense.


Earnings Drivers: Weak MYR to reduce costs and boost earnings. MYR has depreciated 15% against the SGD over the last one year. Almost 60% of staff costs are incurred in Malaysia, 15% in China, 20% in Singapore and 5% in the US. Staff costs were c.S$247m in FY14 or 10.6% of group revenue. We expect 60% of this cost or S$148m to be favourably impacted by the weak MYR. Our in-house forecast for SGD/MYR rate is 3.16 by 3Q16, which implies that MYR will continue to remain weak. According to our sensitivity analysis, a 2% decline in MYR would have a 1.5% positive impact on Venture. Strengthening USD to boost revenue and earnings. 100% of Venture’s revenues are denominated in USD, about 50% of which come from US and the remaining 50% from EU and Asia. The USD has appreciated 7% against SGD over the last one year, which should result in higher recognised revenues. However, a strong USD can also dampen demand from the EU and Asia. Overall, we estimate that a 1% rise in USD/SGD rate would have a 1% positive impact on Venture’s profits. Going forward, with a potential increase in US policy rates, the US dollar is expected to appreciate further compared to regional currencies. Our in-house forecast for USD/SGD rate is 1.47 by 3Q16, implying that USD can appreciate further from current levels. Growth in Test, Medical and Life Science segment. An increased focus on lower-cost technologies in healthcare is likely to boost the Test, Medical and Life Science segment. The higher growth has also resulted in the segment gaining a larger share of revenues (over one-third now) while the revenue share from Computer Peripherals & Data Storage segment and Imaging & Printing segment has dropped off. This should benefit Venture.

Gross margin (%)

% of SGA (%)


Sharp Decline in Malaysia Ringgit SGD/MYR

US Dollar expected to appreciate further

Source: DBS Bank, Investing.com

23 23.2 23.1 23 23

0.0

2.9

5.9

8.8

11.7

14.6

17.6

20.5

23.4

2013A 2014A 2015F 2016F 2017F

17.3 17.1 16.6 16.1 16

0.0

3.5

7.0

10.6

14.1

17.6

2013A 2014A 2015F 2016F 2017F


Company Guide

Venture Corporation

Higher tax burden. Venture’s effective tax rate increased due to expiry of certain tax exemptions over the past few years. As a result, the rate is expected to rise to about 14% from FY15F onwards versus sub-10% level last year.

Balance Sheet:

Strong balance sheet position. The company has maintained a net cash position, which should support its current dividend payout that offers a yield of c.6%. With no major capital projects in the near term, we expect the company to maintain its net cash position. Share Price Drivers:

Top-line growth and improving margins support valuation. The strengthening of the USD is expected to improve top line as well as margins. In addition, positive economic indications from Venture’s largest market, the US, is also helping the company's prospects. However, a stronger US dollar could dampen the demand from EU and Asia. Key Risks:

A potentially weak USD or stronger MYR would be the key risk to our forecasts. A severe deterioration in US and Europe's economies could affect corporate spending, which will in turn adversely impact Venture's results. Cyclical business. A strong rebound in the world economies would re-rate the stock as Venture is a proxy to macro recovery and the subsequent recovery in business capital investments. A severe deterioration in the world economy could affect corporate spending, which will in turn adversely impact Venture's results. COMPANY BACKGROUND

Venture is a global provider of technology products and solutions. It is best known for its superior capabilities in Original Design Manufacturing (ODM) and in providing high-mix, high-value and complex manufacturing.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)

0.9

1.0

1.0

1.1

1.1

1.2

1.2

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2013A 2014A 2015F 2016F 2017F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

2013A 2014A 2015F 2016F 2017F


S$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2013A 2014A 2015F 2016F 2017F

Avg: 14.9x

+1sd: 16.2x

+2sd: 17.5x

‐1sd: 13.5x

‐2sd: 12.2x

10.5

11.5

12.5

13.5

14.5

15.5

16.5

17.5

18.5

19.5


(x)

Avg: 1.17x

+1sd: 1.24x

+2sd: 1.31x

‐1sd: 1.1x

‐2sd: 1.03x

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


(x)


Company Guide

Venture Corporation

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Gross margin (%) 23.0 23.2 23.1 23.0 23.0 % of SGA (%) 17.3 17.1 16.6 16.1 16.0

Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (S$ m) Printing & Imaging 272 275 275 275 275 Computer 291 240 288 274 260 Networking/Comms 394 417 459 482 506 Retail Store solutions 728 742 749 764 779 Others 642 792 871 1,002 1,152 Total 2,330 2,465 2,642 2,796 2,972


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 2,330 2,465 2,642 2,796 2,972 Cost of Goods Sold (1,793) (1,894) (2,032) (2,153) (2,288) Gross Profit 537 572 610 643 684 Other Opng (Exp)/Inc (401) (421) (436) (448) (474) Operating Profit 135 150 174 195 209 Other Non Opg (Exp)/Inc 1 3 3 3 3 Associates & JV Inc 4 5 5 5 5 Net Interest (Exp)/Inc (1) (1) (1) (1) (1) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 140 156 180 201 215 Tax (9) (17) (25) (28) (30) Minority Interest 0 0 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit 131 140 155 173 185 Net Profit before Except. 131 140 155 173 185 EBITDA 183 199 217 235 246 Growth Revenue Gth (%) (2.4) 5.8 7.2 5.8 6.3 EBITDA Gth (%) (3.1) 8.9 8.6 8.4 4.7 Opg Profit Gth (%) 2.0 11.1 15.7 12.2 7.1 Net Profit Gth (Pre-ex) (%) (6.1) 6.6 10.8 11.8 6.9 Margins & Ratio Gross Margins (%) 23.0 23.2 23.1 23.0 23.0 Opg Profit Margin (%) 5.8 6.1 6.6 7.0 7.0 Net Profit Margin (%) 5.6 5.7 5.9 6.2 6.2 ROAE (%) 7.2 7.6 8.3 9.1 9.5 ROA (%) 5.4 5.6 6.1 6.6 6.9 ROCE (%) 6.4 6.6 7.3 8.1 8.5 Div Payout Ratio (%) 104.6 98.1 88.6 79.2 74.1 Net Interest Cover (x) 115.6 148.1 167.7 188.2 201.7


Revenue share from Test/Life/Medical segment growing

Assumed slightly lower gross margins assuming increasing competition

Lower SG& A as % of revenue from weak Ringgit


Company Guide

Venture Corporation


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 599 675 609 661 693 Cost of Goods Sold (454) (521) (463) (510) (533) Gross Profit 145 154 146 151 160 Other Oper. (Exp)/Inc (106) (112) (108) (110) (112) Operating Profit 39 42 38 41 47 Other Non Opg (Exp)/Inc 1 1 1 0 1 Associates & JV Inc 1 2 0 1 0 Net Interest (Exp)/Inc 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 1 Pre-tax Profit 41 44 38 42 48 Tax (5) (5) (6) (6) (7) Minority Interest 0 0 0 0 0 Net Profit 36 39 33 36 41 Net profit bef Except. 36 39 33 36 40 EBITDA 51 55 49 53 58 Growth Revenue Gth (%) (0.4) 12.7 (9.8) 8.6 4.8 EBITDA Gth (%) 7.2 7.2 (10.5) 7.9 9.2 Opg Profit Gth (%) 7.6 8.0 (10.2) 9.7 13.0 Net Profit Gth (Pre-ex) (%) 7.8 8.8 (17.2) 10.7 9.7 Margins Gross Margins (%) 24.2 22.8 23.9 22.8 23.1 Opg Profit Margins (%) 6.5 6.2 6.2 6.2 6.7 Net Profit Margins (%) 6.0 5.8 5.4 5.5 5.9

Balance Sheet (S$ m) FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 153 188 198 213 230 Invts in Associates & JVs 75 81 86 91 95 Other LT Assets 733 720 703 686 669 Cash & ST Invts 391 393 377 368 361 Inventory 528 553 592 627 666 Debtors 520 557 597 632 671 Other Current Assets 42 36 36 36 36 Total Assets 2,442 2,528 2,589 2,652 2,730 ST Debt 162 169 169 169 169 Creditor 335 386 413 437 465 Other Current Liab 106 102 118 121 123 LT Debt 0 0 0 0 0 Other LT Liabilities 10 6 6 6 6 Shareholder’s Equity 1,827 1,862 1,880 1,916 1,964 Minority Interests 2 2 2 3 3 Total Cap. & Liab. 2,442 2,528 2,589 2,652 2,730 Non-Cash Wkg. Capital 649 658 694 736 786 Net Cash/(Debt) 229 224 208 199 192 Debtors Turn (avg days) 74.7 79.7 79.7 80.2 80.0 Creditors Turn (avg days) 65.0 71.0 73.0 73.2 72.9 Inventory Turn (avg days) 106.9 106.5 104.7 104.9 104.5 Asset Turnover (x) 1.0 1.0 1.0 1.1 1.1 Current Ratio (x) 2.5 2.3 2.3 2.3 2.3 Quick Ratio (x) 1.5 1.4 1.4 1.4 1.4 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 21.6 33.5 17.2 17.8 17.8 Z-Score (X) 4.5 4.3 4.2 4.2 4.2


Higher tax rate from expiry of tax concessions

Net cash position to support dividend payments


Company Guide

Venture Corporation


FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 140 156 180 201 215 Dep. & Amort. 42 42 35 32 29 Tax Paid (8) (6) (10) (25) (28) Assoc. & JV Inc/(loss) (4) (5) (5) (5) (5) Chg in Wkg.Cap. (61) (11) (52) (45) (52) Other Operating CF (2) (9) 0 0 0 Net Operating CF 106 168 150 159 160 Capital Exp.(net) (35) (57) (29) (30) (30) Other Invts.(net) 0 (14) 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 1 34 0 0 0 Net Investing CF (34) (37) (29) (30) (30) Div Paid (137) (137) (137) (137) (137) Chg in Gross Debt (6) 2 0 0 0 Capital Issues 0 0 0 0 0 Other Financing CF (2) 0 0 0 0 Net Financing CF (145) (135) (137) (137) (137) Currency Adjustments 10 7 0 0 0 Chg in Cash (63) 2 (17) (8) (7) Opg CFPS (S cts) 61.2 65.1 73.4 74.4 77.3 Free CFPS (S cts) 26.1 40.6 43.9 46.9 47.5



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 19 Dec 14 7.56 8.40 BUY

2: 02 Mar 15 8.16 8.40 BUY

3: 04 May 15 8.43 8.40 HOLD

4: 10 Aug 15 8.20 8.40 HOLD

5: 19 Aug 15 8.16 9.00 BUY


1

2 3 4

5

7.18

7.38

7.58

7.78

7.98

8.18

8.38

8.58

8.78

8.98


S$

Singapore Strategy

2016 Outlook

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, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) 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(s) 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 17 Dec 2015, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities).

Singapore Strategy

2016 Outlook

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have proprietary positions in Ascendas Hospitality Trust, Ascendas India Trust, Ascendas REIT, Ascott Residence Trust, Cache Logistics Trust, Cambridge Industrial Trust, CapitaLand, CapitaLand Commercial Trust, CapitaLand Mall Trust, CapitaLand Retail China Trust, CDL Hospitality Trusts, City Development, ComfortDelgro, Cosco Corporation, Croesus Retail Trust, DBS Bank Ltd., Ezion Holdings, Far East Hospitality Trust, Frasers Centrepoint Trust, Frasers Commercial Trust, Frasers Hospitality Trust, Global Logistic Properties, Golden Agri Resources, Hutchison Port Holdings Trust, Indofood Agri Resources, Keppel Corporation, Keppel DC REIT, Keppel REIT, M1, Mapletree Commercial Trust, Mapletree Greater China Commercial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust, Neptune Orient Lines, OCBC, OUE Hospitality Trust, Parkway Life Real Estate Investment Trust, Perennial Real Estate Holdings, SATS, Sembcorp Industries, Sembcorp Marine, SIA Engineering, Singapore Airlines, SMRT, Soilbuild Business Space Reit, SPH REIT, ST Engineering, StarHub, Suntec REIT, Thai Beverage Public Company, Triyards Holdings, UOB, UOL Group, Venture Corporation , Wilmar International, Yangzijiang Shipbuilding, YTL Starhill Global REIT recommended in this report as of 30 Nov 2015 2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. 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, Cache Logistics Trust, Croesus Retail Trust, Far East Hospitality Trust, Frasers Hospitality Trust, Keppel DC REIT, Soilbuild Business Space Reit, YTL Starhill Global REIT as of 30 Nov 2015.

4. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 5% of any class of common equity securities of Croesus Retail Trust as of 30 Nov 2015.

5. Compensation for investment banking services:

DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Ascendas REIT, Cache Logistics Trust, Croesus Retail Trust, Del Monte Pacific, Frasers Commercial Trust, Frasers Hospitality Trust, IREIT Global, Keppel Corporation, Keppel DC REIT, Keppel REIT, OUE Commercial REIT, Perennial Real Estate Holdings, Singapore Airlines, Soilbuild Business Space Reit, Tiger Airways Holdings as of 30 Nov 2015.

DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Ascendas REIT, Cache Logistics Trust, Croesus Retail Trust, Del Monte Pacific, Frasers Commercial Trust, Frasers Hospitality Trust, IREIT Global, Keppel DC REIT, Keppel REIT, OUE Commercial REIT, Soilbuild Business Space Reit, Tiger Airways Holdings in the past 12 months, as of 30 Nov 2015. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction 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.

6. Directorship

Peter Seah Lim Huat, Chairman of DBS Group Holdings, is a Deputy Chairman of Capitaland as of 28 Feb 2015. Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Director of Capitaland as of 28 Feb 2015.

Danny Teoh Leong Kay, a member of DBS Group Holdings Board of Directors, is a Director of CapitaMalls Trust Mgmt Ltd as of 28 Feb 2015.

Danny Teoh Leong Kay, a member of DBS Group Holdings Board of Directors, is a Director of Keppel Corporation as of 28 Feb 2015.

Woo Foong Pheng (Mrs Ow Foong Pheng), a member of DBS Group Holdings Board of Directors, is a Director of Mapletree Greater China as of 28 Feb 2015.

Wong Kai Yuan Jeanette, a member of DBS Group Executive Committee, is a Director and Group Executive Committee of Neptune Orient Lines as of 30 Nov 2015

Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Director of SATS as of 28 Feb 2015. Nihal Vijaya Devadas Kaviratne CBE, a member of DBS Group Holdings Board of Directors, is a Director of SATS as of 28 Feb 2015.

Peter Seah Lim Huat, Chairman of DBS Group Holdings, is a Deputy Chairman of Starhub as of 28 Feb 2015. Nihal Vijaya Devadas Kaviratne CBE, a member of DBS Group Holdings Board of Directors, is a Director of Starhub as of 28 Feb 2015.

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 located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Singapore Strategy

2016 Outlook

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by

the Hong Kong Securities and Futures Commission.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom

This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.

Dubai

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.

United States This report was prepared by DBS Bank Limited. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd.

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

Company Regn. No. 196800306E

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