Refer to important disclosures at the end of this report BreadTalk Group Ltd 151 CDL Hospitality...

ed: TH, JS / sa: YM, AS, PY, CS

STI : 3,423.17 Analyst Janice Chua +65 6682 3692 Yeo Kee Yan CMT +65 6682 3706 [email protected] [email protected]

Lee Keng LING +65 6682 3703 [email protected]

Key Indices

Current % Chng

STI Index 3,423.17 -0.2%

FS Small Cap Index 409.93 -0.9%

USD/SGD Curncy 1.41 4.8%

Daily Volume (m) 2,635

Daily Turnover (S$m) 958

Daily Turnover (US$m) 680

Source: Bloomberg Finance L.P.

Market Key Data

(%) EPS Gth Div Yield

2017E 11.4 3.6

2018F 8.4 3.6

2019F 8.6 3.5

(x) PER EV/EBITDA

2017E 16.5 15.4

2018F 15.2 14.8

2019F 14.0 14.4

DBS Group Research . Equity

27 Nov 2017

Singapore Market Focus

Singapore Strategy Refer to important disclosures at the end of this report

Recovery, Revision, Re-rating

Economic Recovery – gathering momentum,

broader based

Revision – upside to earnings growth of 8.4%

Re-rating - base target 3688, re-rate potential at

3800 for STI

Sweet spot – lowest valuation, highest dividend yield

and decent earnings growth among ASEAN-5

All boats rise with the tide. The synchronised global recovery

will continue to drive economic growth in this region.

Singapore, an open and small economy, was an early

beneficiary of this recovery since end-2016. We believe this

turn is powerful, and will continue to drive a more sustainable

earnings growth going forward.

Stronger growth, broader recovery. The improvement in

Singapore’s real economy will broaden from the manufacturing

sector to the rest of the economy next year. The U-shaped

recovery in the services sector, which accounts for two-thirds

of GDP, is gaining strength. This could translate to upside in

GDP growth, revised up to 3% for 2018. 3QFY17 results

provided a positive upward revision, pointing to potential

upside as more legs are added to the recovery.

Stars are aligned. The MSCI Singapore Index currently trades

at 14x (slightly below +0.5SD). This is attractive compared to

16.1x 12-mth fwd PE (+1.5SD) for the MSCI World Index, and

16.7x (+2SD) for the MSCI South East Asia. Within ASEAN-5,

Singapore is the destination of choice that offers the strongest

combination of earnings growth (+8.4%), lowest valuation

(14x) and highest dividend yield (3.2%).

STI target of 3688. Our STI year-end objective is 3688 pegged

to 13.89x (+0.25SD) FY19F PE. We do not rule out a re-rating

catalyst pushing up STI’s target valuation to 3800, pegged to

+0.5SD at 14.3x on FY19 earnings.

Five themes for investment in 2018. Our top picks are

centred around five themes – a) Growth stocks at reasonable

pricing, spiced with near-term catalyst or topped with dividend

yield, b) Recovery in oil and gas, c) Beneficiaries of higher

interest rates, d) Tech sector – more legs to the rally, and e)

Rotation into mid-cycle economic cycle proxies.

TOP Picks for 2018

12-mth

Price Mkt Cap Target Price Performance (%)

S$ US$m S$ 3 mth 12 mth Rating

Large Cap City Developments 12.11 8,174 14.03 5.4 41.8 BUY Genting Singapore 1.36 12,156 1.51 14.3 38.1 BUY OCBC Bank 11.97 37,224 13.50 8.5 37.0 BUY Sembcorp Marine 1.83 2,842 2.30 14.0 29.8 BUY Singtel 3.70 44,907 4.30 (1.3) 2.8 BUY Thai Beverage Public Company

0.94 17,544 1.07 1.1 8.7 BUY UOB 25.83 31,884 27.50 8.7 31.2 BUY UOL Group 8.83 5,523 10.15 8.6 54.9 BUY Venture Corporation

21.11 4,460 26.00 36.3 115.4 BUY

Small Mid Cap APAC Realty 0.88 232 1.12 N.A N.A BUY BreadTalk Group Ltd

1.61 337 2.01 (0.6) 48.4 BUY CDL Hospitality Trusts

1.63 1,450 1.75 0.3 30.8 BUY China Aviation Oil 1.53 984 2.08 (1.3) 14.6 BUY Cityneon Holdings Ltd

1.05 191 1.45 10.5 (3.7) BUY Hi-P International 1.92 1,153 2.30 29.7 291.8 BUY

Source: DBS Bank, Bloomberg Finance L.P.

Closing price as of 23 Nov 2017

Market Focus

2018 Outlook

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

Rachel TAN +65 6682 3713 [email protected] William SIMADIPUTRA +62 21 3003 4939 [email protected] Sachin MITTAL +65 6682 3699 [email protected] Paul YONG +65 6682 3712 [email protected] Glenn NG +65 6682 2657 [email protected] Carmen TAY +65 6682 3719 [email protected] Singapore Research Team [email protected]

Table of Contents

Top 15 stock picks 6

Sector Overview 8

Market Outlook 10

Growth & Valuation 15

Strategy 17

Sector Outlook

Overweight:

Singapore Banks 27

Consumer Goods 29

Offshore & Marine 32

Singapore Property 34

Neutral

Healthcare 37

Plantation 39

Singapore REITs 41

Underweight 24

Telecommunication 44

Transport 47

Company Guide

Large Cap

City Developments 50

Genting Singapore 59

OCBC Bank 68

Sembcorp Marine 78

Singtel 87

Thai Beverage 103

UOB 114

UOL Group 124

Venture Corporation 133

Small Mid Cap

APAC Realty 143

BreadTalk Group Ltd 151

CDL Hospitality Trusts 160

China Aviation Oil 169

Cityneon Holdings Ltd 176

Hi-P International 183

Market Focus

2018 Outlook

Drivers World GDP Median Forecast (Annual y-o-y%)


Median forecast for 2018 World GDP growth +3.61% y-o-y,

higher than the +3.5% y-o-y figure in 2017

Consumer confidence in major economies of US, Europe,

China and Japan on strengthening path

Being a small and open economy, Singapore is in a great

position to benefit from the continued global recovery

Stronger regional economies

Source: Bloomberg finance L.P.

3Q17 ASEAN-5 GDP recovered to +5.32% y-o-y

Malaysia’s 2017 GDP forecast lifted to +5.7% y-o-y (prev.

+5.2%). Philippines’ 2017 GDP forecast lifted to +6.7% y-o-y

(prev. +6.4%)

Elections in Malaysia and Indonesia over the next 1-2 years

could see ruling parties dishing out and execute pro-growth

as well as pro-consumption policies

Services sector to lead broad-based recovery

Source: DBS Bank

Singapore’s 2017 GDP forecast lifted to +3.2% y-o-y (from

+2.8% y-o-y) and that for 2018 to +3% y-o-y (from +2.5% y-

o-y)

Services sector’s U-shaped recovery this year will gain strength

next year. Services sector accounts for two-thirds of GDP and

almost 70% of employment

Beleaguered construction sector to benefit from large-scale

public-sector projects

Stars aligned for growth, valuation and yield

MSCI Indices

EPS Gth (%)

PE (x) Div Yld

(%) Total Score

18F Score 18F Score 18F Score

Singapore 9.0 3 14.0 5 3.2 5 13

Malaysia 7.0 1 15.5 3 3.1 4 8

Thailand 8.3 2 15.0 4 2.8 3 9

Indonesia 13.4 5 15.6 2 2.4 2 9

Philippines 11.9 4 18.8 1 1.4 1 6

Source: Source: Thomson Reuters, Bloomberg Finance L.P., DBS Bank

MSCI Singapore trades at 14x (slightly below +0.5SD) -

attractive both from an absolute and historic perspective

compared to 16.1x 12-mth fwd PE (+1.5SD) for the MSCI

World Index, 16.7x (+2SD) for the MSCI South East Asia and

13.6x (+1SD) for the MSCI Asia Pac X-Jap

Within ASEAN-5, Singapore is the destination of choice that

offers the strongest combination of growth (modest),

valuation (most attractive) and yield (highest)

Consumer sentiment lifted by stronger equity property markets


3Q17 uptick in the URA property price index the first in four

years with all three regions (i.e. CCR, RCR, OCR) turning up

Physical property prices seen rising 6-10% over next two years

while STI has 7% upside potential next year

Rising property and equity markets positive for consumer

sentiment

ASEAN 5 GDP (y-o-y) country weighted

Market Focus

2018 Outlook

Risks Interest rates rise faster than expected

Source: US Federal Reserve

Inflation pressures could rise faster than expected as global

recovery drives up commodity prices and improving labour

market puts upward pressure on wages

CPI could rise beyond the comfortable 2% level that may

pressure the FED to hike more than three times

In Singapore, there is speculation of GST hike that could affect

consumption. If external inflationary pressure picks up over the

next 1-2 years, raising domestic taxes will further worsen the

situation

High global debt levels

Source: IIF, BIS, Haver. *includes government, households, and non-financial corporates

Global debt hit a new record high of US$226tr in 2Q17 (source:

Institute of International Finance)

IIF notes that even with low global rates, many non-financial

corporates are running into trouble with debt service

Rollover risk is high as the FED tightening continues with

US$1.7tr of EM bonds and syndicated loans coming due

through end-2018

Little room for earnings disappointment

Source: DBS Bank, Thomson Reuters

MSCI World Index trades near a 10-yr fwd PE valuation high at

16x (+1.5SD) 12-mth forward PE

Little room for earnings disappointment especially among the

developed markets

Complacency is high as VIX, a measure of institutional

sentiment and useful as contrarian indicator, falls to multi-year

low level of around 10

Geopolitics


In Europe, the immediate concern is the failure of Angela

Merkel to form a new German government that dampens near-

term confidence

Italy elections to be held by May next year. The anti-Euro 5 Star

Movement currently has the slight edge. If they win, besides

doubts about Italy’s Euro membership, there will also be

heightened uncertainty over sustainability of the country’s debt

Inflationary concerns could arise if further political manoeuvres

by the Saudi government cause a giant up spike in oil price

FED’s dot plot

Market Focus

2018 Outlook

Five Themes for Investment – heat map

Source: DBS Bank

Stock Picks Valuation


Stocks

Growth at

reas onable

price

Higher oi l

price

Higher interes t

ra te

Technology -

more ups ide

Early to mid -

cycle plays

APAC Realty

BreadTalk

CDL HT

China Aviation Oil

City Devt

Cityneon

Genting Singapore

Hi-P

OCBC

Sembcorp Marine

Singtel

Thai Beverage

UOB

UOL

Venture

Mkt Price

12-mth

Target

EPS/DPU

CA GR

Cap (S$) Price % 17-19

Company (US$m) 23-Nov (S$) Upside Rcmd 18F 18F 18F 18F (%)

Large Cap

City Developments 8,185 S$ 12.11 14.03 16% BUY 18.7x 1.1x 6% 1.3% -13.7

Genting Singapore 12,156 S$ 1.36 1.51 11% BUY 22.2x 2.0x 9% 2.6% 6.1

OCBC Bank 37,271 S$ 11.97 13.50 13% BUY 10.7x 1.2x 12% 3.5% 11.7

Sembcorp Marine 2,842 S$ 1.83 2.30 25% BUY 34.5x 1.4x 4% 1.0% 381.5

Singtel 44,907 S$ 3.70 4.30 16% BUY 15.8x 1.9x 20% 6.7% 0.2

Thai Beverage 17,544 S$ 0.94 1.07 14% BUY 19.9x 4.1x 21% 3.1% 10.2

UOB 31,924 S$ 25.83 27.50 6% BUY 10.9x 1.1x 11% 3.2% 9.9

UOL Group 5,523 S$ 8.83 10.15 15% BUY 15.9x 0.8x 5% 1.7% 1.2

Venture Corporation 4,460 S$ 21.11 26.00 23% BUY 16.4x 2.5x 16% 2.6% 9.2

Small Mid Cap

ARAC Realty 232 S$ 0.88 1.12 27% BUY 11.8x 2.2x 19% 4.2% 9.4

BreadTalk Group Ltd 337 S$ 1.61 2.01 25% BUY 20.7x 2.9x 15% 1.9% 19.7

CDL Hospitality 1,451 S$ 1.63 1.75 7% BUY 17.2x 1.1x 6% 6.1% 7.3

China Aviation Oil 984 S$ 1.53 2.08 36% BUY 10.0x 1.3x 13% 3.0% 9.1

Cityneon Holdings Ltd 191 S$ 1.05 1.45 38% BUY 10.4x 2.3x 25% 0.0% 34.7

Hi-P International 1,153 S$ 1.92 2.30 20% BUY 12.9x 2.5x 21% 1.6% 12.2

ROA E

Div

Y ield

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

Market Focus

2018 Outlook

Top 15 stock picks :-

City Development (BUY, TP $14.03)

With the Singapore property market in the nascent stages of

an upturn, City Dev is largely seen as a key proxy to upward

trends in the Singapore residential market and has historically

traded up to 1.2-1.3x P/NAV, which our TP implies. City Dev is

gearing up to launch four projects in Singapore over

2018/1Q19. The successful take-up will lift valuations higher.

Genting Singapore (BUY, TP $1.51)

We were early in our upgrade of Genting Singapore (GENS),

and recommended the stock at the low of S$0.80 in August

2016. The stock has rallied, generating returns of 70% on the

back of earnings recovery from lower bad debts and the effects

of its cost-cutting measures. Despite the rally, GENS still offers

compelling value as it trades at 9.5x FY18F EV/EBITDA, which is

slightly above –1SD of its mean of 9.2x. In addition, it trades at

c.40% discount to its Macau peers on an EV/EBITDA basis

which is close to -1SD of its mean EV/EBITDA differential.

Recovery in the VIP rolling chips, evident since the previous

quarter, will power the next leg of growth. Together with the

potential of winning the Japanese casino bid in the medium

term, we believe GENS can re-rate closer to its average

EV/EBITDA multiple of c.12x, and grow earnings by 11% in

FY18F. Dividend yield is decent at c. 2.5% for FY18F.

OCBC Bank (BUY, TP $13.50)

Apart from its sustained strong showing of its non-interest

income franchise (wealth management and insurance), its

banking operations are picking up well. NIM is gradually

improving and such trends should hold up going into 2018.

Positively, loan growth is strong with YTD loan growth at 5.5%

vs our FY17 forecast of 7%. Management is now guiding for

7-8% loan growth for FY17-18. Wealth management and

insurance operations are holding up well, and will remain a key

differentiator of growth vs peers. Asset quality indicators have

clearly stabilised; a visible recovery would stage a strong re-

rating catalyst for the bank.

Sembcorp Marine (BUY, TP $2.30)

We expect a recovery in earnings with rising order wins

translating to higher revenue, cost savings from the return of

old facilities to the government, and potential profits from

delivery of jackup rigs. The re-rating on SMM will continue,

driven by: 1) SMM is a pure play to ride the oil price recovery;

2) potential sizeable new orders for non-drilling solutions; 3)

the reactivation of Sete’s projects; and 4) SMM as a potential

M&A play arising from a consolidation of Singapore yards.

Singtel (BUY, TP $4.30)

Singtel’s core plus digital business is trading at only 5.6x FY18F

EV/EBITDA versus 7x for M1, 9x for StarHub and 7.5x regional

telco average. Despite the ~38% rise in the valuation of

regional associates over the last three years, the stock has been

flattish, due to mounting losses in the digital businesses

perhaps. However, with digital advertising arm Amobee

achieving an earlier-than-expected EBITDA breakeven in 1Q18,

and official guidance for narrower digital losses in FY18F, we

expect the valuation discount to disappear.

Thai Beverage (BUY, TP $1.07)

Following the end of the mourning period for the King in

October 2017, consumption of beverages should resume,

driving recovery in Thai Bev’s beer and spirits segments. This

will underpin earnings recovery of 11% in 2018. We retain our

positive view on Thai Bev, with the group leveraging on its

dominant market position in Thailand to expand regionally. On

a longer-term horizon, we believe its ongoing transformation

into a regional beverage player will help to further re-rate the

counter. Thai Bev is expected to register EPS CAGR of 10.2%

during FY17F-19F, with dividend yield of c.3%.

UOB (BUY , TP $27.50)

With probably the last leg in classifying NPLs from the oil & gas

stress, we believe UOB should enter FY18 on a cleaner slate.

We reiterate our three catalysts for the stock: 1) The property

market recovery bodes well for UOB as it is perceived to be a

proxy – UOB has the largest proportion of property-related

loans vs peers; this should see loan growth improve as early as

3Q17, 2) Imminent NIM improvement albeit backloaded;

SIBOR/SOR finally edged up more visibly over the quarter which

should see some repricing as early as 3Q17. The repricing

effect typically takes approximately up to 90 days and as such,

firmer NIM levels could be expected in 4Q17, spilling over to

FY18, and 3) While asset quality concerns may still linger, the

quantum of new NPLs (9M17 vs 9M16) has eased; the end to

asset quality woes should warrant a re-rating, which we believe

would be the case in FY18.

Market Focus

2018 Outlook

UOL Group (BUY, TP $10.15)

UOL is trading at an attractive valuation of c.0.8x P/NAV with

the consolidation of UIC. UOL has strengthened its control

over UIC, inching up its stake to 49.78%. This is a significant

move, positioning it to unlock value in UIC (owns a larger

portfolio of investment and development properties, if it

succeeds in gaining full control of UIC. The new property

launches of recently purchased land sites in the en-bloc market

will drive momentum for the stock in 2018. UOL is a key

beneficiary of the robust residential property market, being one

of the more aggressive developers to replenish its land bank

over the last two years. In addition, the turnaround in the

hospitality segment bodes well for UOL’s hotel properties, and

now with UIC’s hotel properties.

Venture (BUY, TP $26.00)

Venture is set to achieve record earnings in FY17F. Though its

share price has gained over 110% YTD, fuelled by positive

industry backdrop and excellent execution, we believe there is

still room to run as Venture continues to deliver superior

earnings performance. Venture’s tactical switch to a high-mix

low-volume strategy, and diversification into new segments has

led to margin improvements. Expectations of double-digit

growth at key industry clusters provide strong visibility for

Venture’s revenue growth prospects. We continue to like

Venture, which stands out for its unique positioning at the

forefront of innovation and has a proven track record.

APAC Realty (BUY, TP $1.12)

APAC is the purest proxy to Singapore residential volumes. ERA

Realty, a wholly-owned subsidiary of APAC Realty, is one of

Singapore’s largest real estate agencies with approximately

6,176 registered agents, as at 10 July 2017. We believe that

APAC Realty remains poised to deliver a robust 10% 2-year

CAGR in EPS on the back of a turn in Singapore residential

market.

BreadTalk Group (BUY, TP $2.01)

We remain positive on BreadTalk as ongoing consolidation of

underperforming outlets would yield better margins going

forward. A near-term catalyst would be the sale of stakes in

properties such as CHIJMES and AXA Tower to unlock

shareholder value. Based on 3Q17 results, growth drivers

remain intact and the turnaround in Bakery division, led by

store growth and better profitability in FY18F, will drive

earnings growth next year. BreadTalk’s valuation, based on its

core business (ex-property investments), is compelling at 17x

FY18F PE. We expect 20% EPS CAGR during FY17F-19F.

CDL Hospitality (BUY, TP $1.75)

With supply expected to ease over the next three years, we

project a recovery in the Singapore hospitality market with

revenue per available room (RevPAR) potentially growing by

3% p.a. or higher. This combined with CDREIT’s recent

acquisitions should result in DPU CAGR of 7% between 2017

and 2019 based on CDREIT’s 90% payout ratio which

compares favourably against flattish or modest 1-2% growth

for many other REITs.

China Aviation Oil (BUY, TP $2.08)

We continue to like China Aviation Oil given its monopolistic

position as the sole importer of bonded jet fuel into China, and

for its 33% stake in the exclusive jet fuel refueller (SPIA) in

Shanghai Pudong International Airport. It also has a growing

international jet fuel supply and trading business that will

increasingly benefit from CAO’s greater scale. It is a beneficiary

of growing air travel demand both in China and globally as

well.

Cityneon Holdings (BUY, TP $1.45)

With the acquisition of Jurassic World, Cityneon is now on a

stronger and firmer growth path. Together with the existing

two Intellectual Property rights (IPs) – Avengers and

Transformers - Cityneon has added a third growth leg to help

the group to propel to even greater heights. We continue to

expect Cityneon to deliver explosive FY16-19F EPS CAGR

growth of 165%. Trading at a low PE to growth ratio of 0.2x

based on FY2018F earnings, Cityneon is attractive to investors

seeking unique ideas in the entertainment industry. An

expanding project pipeline, and focus on higher margin

projects for the traditional business are catalysts.

Hi-P International (BUY, TP $2.30)

Hi-P is riding on strong earnings momentum, driven by new

products in the Wireless and IoT segments, supported by a

bigger and more stable customer base for the Consumer

Electronics division. We are expecting EPS CAGR of 34% for

FY16-FY19F. Hi-P is in a sweet spot now as more than half of

its earnings are derived from the Wireless (smartphone) and

Computer Peripherals (IoT segment, e.g. smart home)

segments, which are expected to continue to do well in the

next 1-2 years.

Market Focus

2018 Outlook

Sector Overview

Sector Recommendation Key points Stock picks

Banking Overweight Riding on NIM improvement in 2018 following sustained rise in SIBOR coupled with loan growth recovery amid positive macro indicators

Lower credit costs expected as bulk of oil & gas exposures have been settled; keep tab on changes expected from the implementation of IFRS9/SFRS109

Long term revenue growth still hinges on wealth management business and regional agenda

OCBC, UOB

Consumer Goods

Overweight Improvement in global economic outlook bodes well for consumer sentiment

FY18F earnings growth to accelerate to 12% vs 4% in FY17F

Upturn in Singapore retail sales to benefit domestic consumer and selected regionally exposed companies

Thai Beverage, BreadTalk,

Offshore & Marine

Overweight Expecting higher US$60-65/bbl Brent crude in 2018 to drive oil majors’ capex and stimulate offshore activities

Asset owners could see more significant upswing towards 2H18 as the capex effect filters through

Shipyards are poised for stronger order flow ahead with robust order pipeline

Sembcorp Marine, Yangzijiang, POSH

Property Overweight Developers to continue to re-rate on the back of improving property fundamentals; transaction volume velocity to remain high and prices will turn up for the first time since 2013

Strong project sell-through rates in 2018 a key re-rating catalyst

Successful land-banking activities to result in RNAV upside for developers

City Developments UOL Group Frasers Centrepoint Ltd

Healthcare Neutral Short-term pain for long-term gain in investing for the future; overseas expansion plans rolling out progressively but gestation period may keep growth muted

M&A and ‘corporatisation’ of medical practices continues to drive growth

Long-term positive outlook; near- to medium-term potential drag to growth from start-up and pre-operating losses

IHH Healthcare, Singapore Medical Group, Parkway Life REIT

Plantations Neutral Maintain our CY18/CY19 CPO price forecast of US$616/US$608 per MT

Modest CPO output expansion in Malaysia and Indonesia in 2018 will help to reduce Malaysia’s high CPO stockpile, which is estimated at 2.1m MT at the end of 2017

CPO price competitiveness vs. other edible oils will continue to drive global demand for CPO

Indonesia biodiesel consumption will provide cushion for CPO prices in 2018

BUY planters with strong CPO yield outlook which should lead to sound revenue growth and profitability performance

Bumitama, First Resources

Source: DBS Bank

Market Focus

2018 Outlook

Sector Recommendation Key points Stock picks

REITS Neutral • Improving demand prospects as Singapore property market enters into a cyclical upturn to outweigh risk of interest rate hikes

• Office and hotel sector to lead the Singapore property market recovery given expectations of accelerating market rents; Industrial (Business Park and Warehouse space) to see a stronger take-up as supply risk falls

• Interest rate risk substantially hedged with impact of a 1% rise to be modest in the immediate term. .

Ascendas REIT Keppel REIT Mapletree Logistics Trust Mapletree Industrial Trust CDL Hospitality Trust Far East Hospitality Trust

Telecom Underweight

Negative industry outlook amid potential elevation of competition with the entry of MyRepublic in early 2018 through an MVNO deal

Singtel and Starhub’s efforts to stabilise industry ARPUs through unlimited data plans could be undercut by M1’s new mySIMe plans

M1’s MySIMe plans represent a new reality of low data prices and higher transparency for Singaporean telcos

Singtel

Transport Related

Underweight Companies in the sector face numerous challenges including competition, structural changes and the always looming threat of higher oil prices

The sector offers decent yields but not much else

China Aviation Oil (TP S$2.08) is our only BUY call in the sector

China Aviation

Source: DBS Bank

Market Focus

2018 Outlook

Market Outlook

Stronger Growth, Broader Recovery

Global recovery extends into 2018

The global recovery this year looks set to continue into 2018

on the back of falling unemployment and improving consumer

demand, albeit a slight moderation in manufacturing activity.

The median forecast for 2018’s world GDP growth has

improved from +3.4% y-o-y at the start of this year to +3.61%

y-o-y currently. This is also higher than the +3.5% y-o-y figure

in 2017 (source: Bloomberg).

Being a small and open economy, Singapore is in a sweet spot

to benefit from the continued recovery. Our economist has

lifted Singapore’s 2017 GDP forecast to +3.2% y-o-y (from

+2.8% y-o-y) and that for 2018 to +3% y-o-y (from +2.5% y-

o-y).

World GDP Median Forecast (Annual % growth y-o-y)

Source: Bloomberg Finance L.P

US GDP growth is expected to strengthen further to +2.4% y-o-y next year from +2.2% y-o-y in 2017 on the back of improving consumer sentiment and labour market. The European Commission’s index of industry and consumer sentiment rose to a reading of 114 in October, a 17-year high. The Eurozone’s path to recovery remains stable, albeit a slight moderation in GDP to +1.9% y-o-y in 2018 from +2.1% y-o-y this year.

Rising consumer confidence in the US, Eurozone, China and Japan


Stronger regional economies

ASEAN countries have benefited from the global recovery this

year. Our economist has lifted Malaysia’s 2017 GDP growth to

+5.7% y-o-y from +5.2% y-o-y, driven by an improving labour

market, healthy pipeline of infrastructure projects, and

increased government spending ahead of the election. The

2017 GDP forecast for the Philippines has also been tweaked

higher to +6.7% y-o-y from +6.4% y-o-y.

Regional elections over the next 1-2 years could continue to

underpin growth in Malaysia and Indonesia as ruling parties are

expected to dish out and execute pro-growth as well as pro-

consumption policies. In Thailand, the general election to be

held in November next year will see a return to democracy

after the military seized power in a coup back in 2014.

Regional elections 2018/19

Country Election Period

GDP growth (% y-o-y)

2017F 2018F

Malaysia not later than

Aug-18 5.7 5

Thailand Nov-18 3.5 3.6

Indonesia Apr-19 5.1 5.3

Source: DBS Bank

Market Focus

2018 Outlook

Some drag could come from China where GDP growth is

expected to moderate to +6.4% y-o-y in 2018 from +6.8% y-

o-y this year. This ‘engineered’ slowdown by the Chinese

government through deleveraging and containing financial

risks is meant to increase focus on the quality rather than the

pace of economic expansion.

Singapore to enjoy broader-based recovery led by services

sector

Our economist expects the improvement in Singapore’s real

economy to broaden steadily from the manufacturing sector to

the rest of the economy next year. The manufacturing sector,

which has been leading this turnaround since 4Q16, is

expected to remain in expansion mode, albeit at a marginally

slower pace. In contrast, the U-shaped recovery in the services

sector, which accounts for two-thirds of GDP and almost 70%

of employment, is gaining strength. Hence, when the services

sector turns, the economy follows.

Even the beleaguered construction sector should benefit from

large-scale public-sector projects such as the 21.5 km North-

South Corridor next year and the stream of progress payments

from earlier rail-related contracts awarded in 2016.

Services to become key growth driver

Source: DBS Bank

Singapore market – Stars aligned for growth, valuation and

yield

With the 2017 earnings recovery set to continue next year, the

Singapore equity market is attractive from an earnings

perspective compared to global and regional equity markets.

The MSCI Singapore Index currently trades at 14x (slightly

below +0.5SD). This is attractive both from an absolute and

historic perspective compared to 16.1x 12-mth fwd PE

(+1.5SD) for the MSCI World Index, 16.7x (+2SD) for the MSCI

South East Asia and 13.6x (+1SD) for the MSCI Asia Pac X-Jap.

Within ASEAN-5, Singapore is the destination of choice that

offers the strongest combination of growth, valuation and yield

(refer to table below). Based on our score card, assigning 5 to

the highest score and 1 being the lowest, Singapore emerged

top with a score card of 13, underpinned by the highest

dividend, cheapest valuation and moderate earnings growth

prospect. With a stable currency leaning on the upside (we

expect MAS to push for an appreciating NEER come October

2018), this will be an added ingredient for the Singapore

market to outperform.

As the global and regional recovery continues in 2018, we

expect Singapore to be a prominent beneficiary of liquidity

inflow seeking fair earnings growth at a reasonably attractive

PE valuation. ASEAN 5 – 2018 growth, valuation & dividend

MSCI Indices

EPS Gth (%)

PE (x) Div Yld (%) *Total Score

18F *Score 18F *Score 18F *Score

Singapore 9.0 3 14.0 5 3.2 5 13

Malaysia 7.0 1 15.5 3 3.1 4 8

Thailand 8.3 2 15.0 4 2.8 3 9

Indonesia 13.4 5 15.6 2 2.4 2 9

Philippines 11.9 4 18.8 1 1.4 1 6

*EPS growth - highest 5, lowest 1 *PE - lowest 5, highest 1 *Div yld – highest 5, lowest 1 *Total score is sum of Scores Source: Source: Thomson Reuters, Bloomberg Finance L.P., DBS Bank

Market Focus

2018 Outlook

MSCI Singapore 14.1x 12-mth fwd PE (+0.5SD)


MSCI World Index 16.1x 12-mth fwd PE (+1.5SD)


MSCI Asia Pac Ex-Jap 13.6x 12-mth fwd PE (+1SD)


MSCI South East Asia 16.7x 12-mth fwd PE (+2SD)


Improving property market lifts consumer sentiment

The 3Q17 uptick in the URA property price index was the first

since the physical market topped out in 2Q13. For the first time

in 4 years, prices in all 3 regions (i.e. core central region, rest of

central region and outside central region) turned up.

The upturn in Singapore’s residential property market looks

poised to continue in 2018, powered by strong en-bloc

activities, pent-up demand still unfolding, unsold inventories at

16-year low, and possible return of foreigners’ purchases. We

see physical property prices rising 6-10% over the next 2 years.

The residential property market’s upturn should also lift

consumer sentiment and spur spending that in turn will

underpin the services sector. Residential market upturn just started


Risks that can derail the positive view

1. Acceleration in inflationary pressure pushes interest rates

up faster-than-expected

The steady economic growth coupled with a tame

inflation outlook provided equity markets with a big boost

in 2017. The assumption is that this Goldilocks scenario

should continue next year. The CPI for G3 economies are

forecast to stay tame, below +2% y-o-y. Markets have

priced in 1 more FED rate hike this year followed by

another 3 next year that lifts the FED funds rate to 2.25%

by end 2018 as rates normalise.

The risk to this ‘consensus’ view is that inflation pressures

could rise faster-than-expected as the global recovery

eventually drives up commodity prices and the improving

labour market puts upward pressure on wages. Add in a

dose of geopolitical uncertainty in the Middle East that

8.0

10.0

12.0

14.0

16.0

18.0

20.0

02 03 04 05 06 07 08 09 10 11 12 12 13 14 15 16 17

MSCI SINGAPORE - 12MTH FWD P/E RTIO

-2sd: 10.8x

-1sd: 12.3x

Avg: 13.7x

+1sd: 15.1x

+2sd: 16.5x

(x)

Market Focus

2018 Outlook

lifts the price of oil, inflationary pressure risks heading up

beyond the comfortable 2% level that may in turn

pressure the FED to hike rates 4 times next year instead of

3. A faster-than-anticipated hike in US interest rates is

negative for companies with high debt levels.

Closer to home, businesses and individuals are speculating

for the GST to go up as soon as next year after Prime

Minister Lee said Singapore will be raising its taxes as

government spending grows. The government could also

be exploring alternative tax revenue, including that on e-

commerce spending. A higher GST rate could deter

consumers from spending more. Another concern is that if

external inflationary pressure picks up over the next 1-2

years, raising domestic taxes will further worsen the

situation.

2. High global debt levels

According to the Institute of International Finance (IIF),

global debt hit a new record high of USD226tril in 2Q this

year. IIF notes that even with low global rates, many non-

financial corporates are running into trouble with debt

service. The percentage of “stressed” firms that cannot

cover interest expense has reached some 15%-25% of

corporate assets in countries such as Brazil, India, Turkey,

and China. Many mature markets too have seen a rise in

stressed firms, including Canada, Germany, France and

the US. Rollover risk is high as the FED tightening

continues with USD1.7tril of EM bonds and syndicated

loans coming due through end-2018. Any major default in

the debt market could ignite volatility in global equity

markets.

3. High DM PE valuation little room for earnings

disappointment

The backdrop for global equities has improved in recent

years as global economies recover from the shadows of

the Global Financial Crisis and the European sovereign

debt crisis. But the equity markets of G3 economies have

also priced in much of the economic recovery in recent

years.

MSCI World 12-month forward PE at 10-year high


The MSCI World Index currently trades near a 10-year high

at 16x (+1.5SD) 12-mth forward PE. This leaves little room

for earnings disappointment especially among the

developed markets. In the US, the VIX, a measure of

institutional sentiment and useful as a contrarian indicator,

has fallen to multi-year low level at around 10. Any

correction or volatility in the G3 equity markets, especially

the US, will also resonate to Asian equities, including

Singapore.

CBOE Volatility Index (VIX)


4. Geopolitics

The Eurozone, Middle East and North Korea are 3

potential risk regions. In Europe, the immediate concern is

the failure of Angela Merkel to form a new German

government. The uncertainty dampens near-term

confidence but fortunately, the country’s strong

underlying economic momentum should limit economic

consequences.

Market Focus

2018 Outlook

Watch the Italy elections to be held by May next year. The

anti-establishment Euro sceptic 5 Star Movement currently

has a slight edge over the ruling Democratic Party. Italy

has the second highest debt in the Euro area after Greece

at more than 130% of GDP. If the 5 Star Movement wins

next year’s election, besides raising doubts about Italy’s

Euro membership, there will also be heightened

uncertainty over the sustainability of the country’s debt.

The Middle East risk factor moved a notch higher in early

November following the surprise arrest of princes, high

profile businessmen and government officials on suspicion

of corruption. Oil price reacted with Brent headed to

about USD65 per barrel. A steady or gradual increase in oil

price is positive for the Offshore & Marine (O&M) sector.

However, inflationary concerns could arise if further

political manoeuvres by the Saudi government cause

investors to flee the country resulting in a giant spike up in

oil price.

Ipsos Italy election polls – Euro sceptic 5 Star Movement currently has an edge


Market Focus

2018 Outlook

Growth & Valuation

From earnings recovery to sustainability

2017 was about earnings recovery with the Singapore

economy forecast to strengthen +3.2% y-o-y. Corporate

earnings are recovering from their 2016 trough, benefitting

from a ‘low base’ effect. EPS growth for STI component stocks

is expected to rise by 9.9% y-o-y in FY17F, reversing the 7.3%

y-o-y decline in FY16. Likewise, EPS growth for stocks under

our coverage is expected to rise, +11.4% y-o-y in FY17F,

reversing the -5.1% y-o-y decline in FY16.

We expect the earnings recovery to extend into 2018 as

Singapore’s economic recovery turns broader based. We

anticipate EPS growth in the high single digit at 7.3% y-o-y for

the benchmark Straits Times Index in 2018, and stocks under

our coverage as an aggregate is also expected to deliver a very

decent 8.4% y-o-y EPS growth next year. The recently

concluded 3QFY17 results season also saw the negative

earnings revision trend turning positive. We keep our fingers

cross that this positive reversal can continue in 2018 as more

sectors join the recovery.

The index heavyweight bank stocks should continue to

underpin the STI with mid-teens EPS growth of 14.8% in 2018.

We like both UOB and OCBC.

With the oil market stabilised, earnings growth for the O&G

sector is expected to pick up to 21.8% y-o-y from 4.4% in

2017. Our picks are Sembcorp Marine for shipyards and PACC

Offshore Services (POSH) for Offshore Support services sector.

An anticipated recovery in IHH Healthcare’s earnings should

reverse EPS growth for the healthcare sector to a positive

38.3% y-o-y in 2018. Meanwhile, having enjoyed a strong

cyclical recovery this year, EPS growth for the technology sector

is poised to moderate significantly to 12% y-o-y next year from

54% y-o-y in 2017.

Earnings revision trend turns up

Source: DBS Bank

Sector growth and valuation

Earnings Growth

(% y-o-y) EPS

CAGR PER (x)

Div Yld (%)

17E 18F 19F 17-19 17E 18F 19F 18F

Banking 12.4 14.8 9.5 12.2 12.7 11.1 10.1 3.1

Consumer Goods 13.1 15.4 6.1 10.7 17.2 14.9 14.1 2.7

Consumer Services 34.9 2.9 5.2 4.0 21.0 20.4 19.4 3.0

Financials -14.6 11.6 6.4 9.0 23.8 21.3 20.1 4.9

Health Care -11.7 38.3 7.9 22.1 53.3 38.5 35.7 1.0

Industrials 41.7 1.6 12.7 7.0 21.3 21.0 18.6 3.5

Oil & Gas 4.4 21.8 39.9 30.6 20.8 17.1 12.2 2.3

Real Estate 15.6 -11.8 -0.3 -6.2 14.8 16.8 16.9 2.5

REITS 5.1 3.4 2.1 2.8 17.5 17.0 16.6 5.8

Technology 53.9 12.2 7.4 9.8 20.0 17.8 16.6 3.5

Telecoms -4.3 2.1 10.1 6.0 15.7 15.4 14.0 5.0

DBS Coverage 11.4 8.4 8.6 8.5 16.5 15.2 14.0 3.6

STI DBS forecast 9.9 7.3 8.6 8.0 14.9 13.9 12.8

STI consensus 8.7 7.8 7.2 7.5 15.0 13.9 13.0

Source: DBS Bank

Earnings revision trend turns positive

Market Focus

2018 Outlook

Straits Times Index upside to 3688

True to our earlier call, STI attained our 2017 year-end

objective of 3400 in November. At 3430, STI currently trades

between 13.89x (+0.25SD) to 14.27x (+0.5SD) FY18F PE. Our

STI year-end objective for 2018 is 3688 pegged to 13.89x

(+0.25SD) FY19F PE.

Base case target 3688, potential upside on re-rating – 3800.

With the earnings revision trend just turning positive, there is a

likelihood that the 3688 level could be reached as early as the

middle of 2018 should the Singapore market re-rate towards

14.64x (+0.75SD) FY18/19F PE over the next 6 months. We do

not rule out a re-rating catalyst pushing up STI’s target

valuation to 3800, pegged to +0.5SD at 14.3x on FY19

earnings. Stay tuned as 2018 progresses.

STI at various forward PE levels

-0.5 sd 12.76x

PE

Avg 13.51x

PE

+0.25sd 13.89x

PE

+0.5sd 14.27x

PE

+0.75sd 14.64x

PE

+1 sd 15.02x PE

FY18 3,120 3,303 3,396 3,489 3,580 3,673

FY19 3,388 3,587 3,688 3,789 3,887 3,988

Avg 18/19 3,254 3,445 3,542 3,639 3,733 3,830

Source: DBS Bank

STI objective 3688

Source: DBS Bank

Market Focus

2018 Outlook

Strategy

1. Growth at reasonable pricing

The ST Index has gained about 20% YTD, mainly driven by

Banks, Property and Technology stocks. The top 10 gainers are

asset plays, property stocks riding on asset reflation theme or

earnings recovery. The easy money has been made in 2017,

our bullish stance since Dec 2016 has generated fruitful trades.

We believe the recovery is sustainable, expecting corporate

earnings growth to extend from 11.4% in 2017 to 8.5% for

the next two years, based on DBS’ coverage.

For 2018, we look for growth stocks that could outperform the

broad market’s earnings growth of 8.6%, while offering

decent dividend yield (>3%) or those with catalysts in place to

propel the stocks to the next growth stage. Based on our

screen, stocks which generate both growth and yield are

Frasers Centrepoint Ltd, Thai Beverage, Genting Singapore,

CDL Hospitality Trust and Keppel DC REIT.

Sector Performance

change

Sector 1 yr (%)

Technology 71.4

Banking 40.5

Real Estate 32.6

Oil & Gas 29.3

REITS 17.0

Industrials 15.2

Consumer Services 12.9

Financials 6.4

Telecommunications 1.2

Consumer Goods 0.0

Health Care -11.5

DBS Coverage 18.4

STI 21.8

Source: DBS Bank

Growth + Yield

Source: Bloomberg Finance L.P., DBS Bank

CDL Hospitality (BUY, TP $1.75)

With supply expected to ease over the next three years, we

project a recovery in the Singapore hospitality market with

revenue per available room (RevPAR) potentially growing by

3% p.a. or higher. This combined with CDREIT’s recent

acquisitions should result in DPU CAGR of 7% between 2017

and 2019 based on CDREIT’s 90% payout ratio which

compares favourably against flattish or modest 1-2% growth

for many other REITs.

Frasers Centrepoint Ltd (BUY, TP $2.35)

Frasers Centrepoint Ltd (FCL) is poised to benefit from the

positive sentiment in the Singapore property market. FCL owns

Frasers Tower, which is one of the few office buildings in the

Central Business District completing in 2018. Despite its

diminishing land bank in Singapore, we believe that any

potential land-banking activities will be a positive catalyst.

Earnings surprise and NAV upside could come from potential

recycling of assets from Waterway Point, Northpoint City and

industrial assets in Australia to its REITs, which are not priced in

at this moment. The company is heading for a bumper year in

2018 with forecast earnings growth of 68% driven by

completions of residential projects in China and Australia

(tends to be lumpy as profits are booked on completion).

Closer home, an expected rise in hospitality income,

completions from Frasers Tower and Northpoint Shopping

Centre, and full year contribution post the renovation of The

Centrepoint will contribute to 40% of the income growth.

Mkt Price

12-mth

Target

EPS/DPU

CA GR


Company F YE (US$m) 20-Nov (S$) Upside Rcmd 18F 19F 18F 19F 18F 19F 18F 19F 17E 18F (%)

CDL Hospitality Dec 1,448 1.64 1.75 7% BUY 17.3x 16.5x 1.1x 1.1x 19.2x 18.1x 10% 4% 5.5% 6.1% 7.3

Frasers Centrepoint Ltd Sep 4,454 2.08 2.35 13% BUY 10.6x 10.8x 0.8x 0.8x 15.3x 15.7x 68% (3%) 4.1% 4.1% 27.9

Genting Singapore Dec 11,963 1.35 1.51 12% BUY 22.0x 21.7x 2.0x 1.9x 10.6x 10.1x 11% 2% 2.2% 2.6% 6.1

Keppel DC Reit Dec 1,155 1.39 1.44 3% BUY 19.3x 18.9x 1.5x 1.5x 20.0x 18.8x 9% 3% 5.1% 5.6% 1.5

Thai Beverage Sep 17,856 0.965 1.07 11% BUY 20.3x 18.5x 4.2x 3.8x 14.9x 13.5x 11% 10% 2.9% 3.0% 10.2

EPS/DPU Gth Div Y ield

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

Market Focus

2018 Outlook

Valuations remain attractive at 0.8x P/NAV. The stock still lags

the other large-cap developers, which are trading close to 1x

P/NAV. FCL's dividend yield remains the highest among

developers at c.4%. We expect earnings CAGR for FCL of

27.9% for FY17F to FY19F.

Genting Singapore (BUY, TP $1.51)

We were early in our upgrade of Genting Singapore (GENS),

and recommended the stock at the low of S$0.80 in August

2016. The stock has rallied, generating returns of 70% on the

back of earnings recovery from lower bad debts and the effects

of its cost cutting measures. Despite the rally, GENS still offers




which is close to -1SD of its mean EV/EBITDA differential.

Recovery in the VIP rolling chips, evident since the previous

quarter, will power the next leg of growth. Together with the

potential of winning the Japanese casino bid in the medium

term, we believe GENS can re-rate closer to its average

EV/EBITDA multiple of c.12x, and grow earnings by 11% in

FY18F. Dividend yield is decent at c. 2.5% for FY18F.

Keppel DC Reit (BUY, TP: $1.44)

Keppel DC REIT (KDC REIT) remains one of the few REITs in

Singapore that can acquire at a lower cost of capital. The REIT

is projected to deliver a solid 5% CAGR in distributions

supported by a series of acquisitions. Over the last 12 months,

KDC REIT has acquired four new properties, located at Cardiff,

Singapore, Milan and Dublin. We believe with stable growth in

the existing portfolio, DPU growth will be led inorganically by

acquisitions. Given the REIT’s low cost of capital, the world is

its playground for accretive acquisitions.

Thai Beverage (BUY, TP $1.07)

Following the end of the mourning period for the King in

October 2017, consumption of beverages should resume,

driving recovery in Thai Bev’s beer and spirits segments. This

will underpin earnings recovery of 11% in 2018. We retain our

positive view on Thai Bev, with the group leveraging on its

dominant market position in Thailand to expand regionally. On

a longer-term horizon, we believe its ongoing transformation

into a regional beverage player will help to further re-rate the

counter. Thai Bev is expected to register EPS CAGR of 10.2%

during FY17F to FY19F, with dividend yield of c.3%.

Growth + Catalyst

Source: Bloomberg finance L.P., DBS Bank

BreadTalk (BUY, TP $2.01)

We remain positive on BreadTalk as ongoing consolidation of

underperforming outlets would yield better margins going

forward. A near term catalyst would be the sale of stakes in

properties such as CHIJMES and AXA Tower to unlock

shareholder value. Based on 3Q17 results, growth drivers

remain intact and the turnaround in Bakery division, led by

store growth and better profitability in FY18F, will drive

earnings growth next year. BreadTalk’s valuation, based on its

core business (ex-property investments), is compelling at 17x

FY18F PE. We expect 20% EPS CAGR during FY17F to FY19F.

Cityneon (BUY, TP $1.45)

With the acquisition of Jurassic World, Cityneon is now on a

stronger and firmer growth path. Together with the existing

two Intellectual Property rights (IPs) – Avengers and

Transformers - Cityneon has added a third growth leg to help

the group to propel to even greater heights. We continue to

expect Cityneon to deliver explosive FY16-FY19F EPS CAGR

Mkt Price Target EPS CA GR


Company F YE (US$m) 20-Nov (S$) Upside Rcmd 18F 19F 18F 19F 18F 19F 17E 18F 19F 17E 18F (%)

Breadtalk Dec 330 1.59 2.01 27% BUY 20.5x 19.1x 2.9x 2.6x 5.6x 5.1x 90% 33% 7% 3.1% 1.9% 19.7

Cityneon Dec 193 1.07 1.45 35% BUY 10.6x 8.8x 2.4x 1.9x 5.9x 4.4x 149% 51% 20% 0.0% 0.0% 34.2

mm2 Asia Mar 497 0.58 0.73 25% BUY 24.3x 18.4x 3.8x 3.1x 11.6x 11.4x 98% 33% 32% 0.0% 0.0% 32.5

Sembcorp Marine Dec 2,741 1.78 2.30 29% BUY 33.5x 17.4x 1.4x 1.3x 12.7x 9.3x (88%) 1102% 93% 0.5% 1.0% 381.5

UOL Dec 5,414 8.73 10.15 16% BUY 15.7x 20.0x 0.8x 0.8x 14.1x 17.0x 6% 30% (21%) 1.7% 1.7% 1.2

EPS Growth Div Y ield


Market Focus

2018 Outlook

growth of 165%. Trading at a low PE to growth ratio of 0.2x

based on FY2018F earnings, Cityneon is attractive to investors

seeking unique ideas in the entertainment industry. An

expanding project pipeline, and focus on higher margin

projects for the traditional business are catalysts.

mm2 Asia (BUY, TP $0.73)

mm2 is on track to deliver solid growth ahead. Having a strong

presence in the entire value chain of content creation and

distribution further cements mm2's status as the leader in the

media/entertainment industry. With a much larger and

stronger operating scale, especially with the expected

completion of the Cathay cinema acquisition, mm2 can now

enjoy the synergistic benefits from the entire value chain. We

continue to project mm2's EPS to grow at a CAGR of 65%

from FY16-FY19, underpinned by growth in productions,

expansion into the China market, and contribution from

UnUsUaL. The cinema arm, on the other hand, helps the group

build a recurring income base.

Sembcorp Marine (BUY, TP $2.30)

We expect a recovery in earnings with rising order wins

translating to higher revenue, cost savings from the return of

old facilities to the government, and potential profits from

delivery of jackup rigs. The re-rating on SMM will continue,

driven by: 1) SMM is a pure play to ride the oil price recovery;

2) potential sizeable new orders for non-drilling solutions; 3)



UOL (BUY, $10.15)

UOL is trading at an attractive valuation of c.0.8x P/NAV with

the consolidation of UIC. UOL has strengthened its control

over UIC, inching up its stake to 49.78%. This is a significant

move, positioning it to unlock value in UIC (owns a larger

portfolio of investment and development properties, if it

succeeds in gaining full control of UIC. The new property

launches of recently purchased land sites in the en bloc market

will drive momentum for the stock in 2018. UOL is a key

beneficiary of the robust residential property market, being one

of the more aggressive developers to replenish its land bank

over the last two years. In addition, the turnaround in the



2. Oil price beneficiaries and losers

Oil price trends

Source: Blooomberg Finance L.P., DBS Bank

We remain optimistic on the direction of Brent crude oil

prices. We are forecasting US$60-65/barrel (bbl) for Brent in

2018 (18% higher versus US$53/bbl average YTD in 2017). We

see healthy growth in oil consumption of around 1.4-1.5

million barrels per day in 2018, with signs of increasing

consumption in the US and Europe owing to prolonged period

of low oil prices, apart from growing demand from usual

suspects China and India. Demand growth could indeed

surprise on the upside in the near term as macro-economic

data points remain bullish. This is well complemented by lower

supply-side pressure from US shale drillers, as horizontal rig

numbers have started to decline slowly with capex levels

moderating in the face of muted drilling productivity gains,

and rising onshore drilling and operating costs. Recent rhetoric

from OPEC countries and key non-OPEC partners like

Russia also point towards an agreement towards

likely extension of the production cuts beyond March 2018 in

the upcoming general meeting, lending support to oil prices.

Of course, any failure on the part of the cartel to come to an

agreement or to enforce one, owing to escalation of regional

rivalries in the Middle East region remains a risk, as geopolitical

tensions continue to flare and remains unpredictable.

Inventory drawdowns will continue to catalyse gradual oil price

increase. As we had expected earlier, crude oil market

rebalancing was achieved in 2017 and global inventory

drawdowns – as evidenced by US inventory numbers – picked

up in 2H17. As evident from the US inventory data, the pace of

inventory declines in 2017 has been faster than in 2016, and

latest inventory readings are lower than the corresponding

number last year, despite refinery closures during the hurricane

season. This can only decline further during the peak winter

demand months. We believe this is a promising signal as far as

Market Focus

2018 Outlook

overall market rebalancing is concerned and will continue to

support positive oil price trajectory hereon, as long as the

supply side is wilfully capped by market participants.

Beneficiaries of higher oil prices

Singapore rigbuilders – back in the game. Both the

Singapore yards’ breakthrough into high-value non-crude

solutions (>US$200m each) brightens up the order outlook.

We expect order wins of Singapore rigbuilders to recover from

S$1-2bn in 2017 to S$4-5bn in 2018. The improving rig

market in light of oil price and capex recovery could

“motivate” rig owners to take delivery of existing orders and

facilitate the disposal of cancelled units in the second hand

market, removing a key overhang on Singapore rigbuilders.

Sete Brasil’s rig orders at Singapore yards could be reactivated,

pending the approval of a new restructuring plan. We expect

the re-rating on Sembcorp Marine will continue, driven by: 1)

pure play stock to ride the oil price recovery; 2) sizeable new

orders for non-drilling solutions with c.S$3bn order pipeline; 3)



Sembcorp Industries will also ride on SMM’s recovery, as it

accounts for 30% of its sum of the parts valuation and 20% of

its earnings.

More selective in OSV (offshore supply vessel) space, POSH is

our top pick. We believe OSV-to-rig ratios have peaked in

2017, and the market has bottomed. Due to an easing supply-

side glut, as well as signs of a pick up in the working offshore

rig count, we anticipate that 2018 will be the start of a long

and gradual recovery in the OSV space. However, most of the

OSV owners are still struggling with high debt problems and

liquidity remains a challenge, as recovery in charter rates and

utilisation are too nascent to make an impact on earnings. Our

top pick in this segment is PACC Offshore Services Holdings

(POSH). With no bonds outstanding, positive OCF YTD in FY17,

and strong backing by majority shareholder Kuok Group, we

see POSH as a safe name to ride the gradual offshore service

sector upturn. POSH has made the largest impairments as a

percentage of fleet assets over FY15/16 (c.32% of fleet value),

and thus remains less vulnerable to further asset impairments.

In addition, it is a privatisation candidate, trading at 0.5x Price

to book.

Another oil price recovery beneficiary is China Aviation Oil

Services (CAO). It benefits from rising oil prices due to 1) mark-

to-market gains for fuel inventories held at its jet refuelling

businesses in Shanghai Pudong Airport and Hong Kong

Airport, and 2) easier trading profits due to contango.

Losers of higher oil prices

Key losers are Singapore Airlines and Hutchison Port Holding

Trust (HPH Trust). Assuming 50% hedge and all else being

equal, each US$1 per barrel increase in jet fuel price will

negatively impact SIA’s FYE Mar ’19 earnings by 5%. The

degree to which SIA can mitigate this impact would depend on

its ability to pass on the increase to consumers in the form of

higher air fares. We estimate that energy costs account for

about 15% of HPH Trust’s total operating costs, and a

significant increase in fuel prices could pressure its margins.

Lesser for ComfortDelGro. Energy and fuel costs currently

account for less than 6% of cost of revenue, and will have a

lesser impact given the transition of its Singapore bus

operations to the Bus Contracting model. In the model, fuel

cost is indexed and passed on to the authorities, similar to

majority of its overseas bus operations.

Valuation


* FY19 & 20 forecast

Mkt Price

12-mth

Target EPS CA GR


Company (US$m) 23-Nov (S$) Upside Rcmd 18F 19F 18F 18F 19F 18F 19F 18F (%)

Benef ic iaries

Sembcorp Marine 2,839 S$ 1.830 2.30 25% BUY 34.5x 17.9x 1.4x 13.0x 9.5x 4% 8% 1.0% 381.5

Sembcorp Industries 4,067 S$ 3.070 4.20 37% BUY 13.2x 11.5x 0.8x 10.3x 5.3x 6% 6% 2.4% 12.4

Losers

Singapore Airlines* 9,331 S$ 10.630 10.30 -3% HOLD 20.4x 20.0x 0.9x 5.0x 4.9x 4% 4% 2.4% -2.2

ComfortDelgro 3,340 S$ 2.080 2.18 5% HOLD 15.5x 14.8x 1.7x 5.6x 5.2x 11% 11% 5.1% -0.7

HPH Trust 3,659 US$ 0.420 0.39 -7% HOLD 24.6x 22.3x 0.7x 10.8x 10.0x 3% 3% 6.1% 12.7

ROA E

Div

Y ield


Market Focus

2018 Outlook

3 Beneficiaries and losers of higher interest rates

Banks as beneficiaries of rising Interest rates. The first signs of

SIBOR picking up was apparent in 3Q17 as the pass-through

effect from USD rate hikes start to normalise. DBS Economist

expects 3-month SIBOR to rise from 1.4% to 2.15% in 2018

and 2.65% in 2019. We should see early signs of NIM (net

interest margin) uplift in 4Q17, and the trend is expected to

flow into 2018.

NIM uplift will be more visible in 2018. With rate hikes almost a

certainty in the coming quarters, the 3M SIBOR/SOR have

broken out of their trading range, reaching their highest levels

so far. With a greater pass-through expected from the USD rates

to SIBOR/SOR, the Singapore banks are expected to deliver

higher NIM. We expect a NIM uplift of 5bps in 2018 taking into

account some element of competition and rise in funding costs

outside Singapore operations.

Strong catalyst to accelerate banks’ earnings growth by 14.8%

in 2018. Our sensitivity analysis shows that every 25bps rise in

interest rates that reprices the SS$, HK$ and US$ books

collectively will lift average NIM by 3bps (UOB: +1bps; OCBC:

+3bps) with a corresponding 2% increase (UOB: +1%; OCBC:

+2%) in sector earnings. Together with sustained loan growth

of 7% and lower provisions, we expect banks’ earnings to

accelerate from 12.4% to 14.8% in 2018.

Singapore Banks: NIM and SIBOR quarterly trends; NIM

gradually picking up since end-2016

Source: Companies, Bloomberg Finance L.P., DBS Bank

Singapore Banks: NIM forecasts - on an uptrend

Note: No forecasts for DBS

Source: Companies, DBS Bank

Losers – commodities, oil and gas, Property and REITS. Sectors

impacted by the rise in interest rates are asset heavy companies

in the commodities, oil and gas, property and REIT sectors.

Appended below are companies with the highest net debt to

equity ratios, based on our coverage.

Oil and gas companies’ net debt to equity ratio shot up from

0.29x (2014) to 0.78x (2016), mainly due to the 40-50% plunge

in values of their fleet of offshore support vessels, caused by the

crash in oil prices and oversupply situation. Their problems

spiraled following the drop in vessel utilisation rates and charter

rates, affecting cash flow of these owner/operators. The latest

oil price crisis saw a number of oil and gas services companies in

financial distress – Ezra, Ezion, Nam Cheong, Marco Polo,

Ausgroup, Swiber, KS Energy, Swissco, Miclyn Offshore – and

they had to resort to financial restructuring to survive.

Property companies have been paring down gearing, down from

51% (2014) to 40% (2016) due in part to insufficient land

banking in the past 3 years.

1.45

1.50

1.55

1.60

1.65

1.70

1.75

1.80

1.85

1.90

-

0.50

1.00

1.50

2.00

2.50

3.00

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

3m SIBOR %

3M Sibor (LHS) DBS NIM UOB NIM OCBC NIM

Bank NIMs %

1.50%

1.60%

1.70%

1.80%

1.90%

2.00%

2.10%

2.20%

2.30%

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 2015 2016 2017F 2018F

DBS OCBC UOB Average (RHS)

NIM (Banks) NIM (Average/Industry)

Market Focus

2018 Outlook

REITS are in a better position. REITS’ gearing have been at a

manageable level of 32%, with stable asset values. In fact, with

GDP growth turning up, demand push will lead to higher rentals

and capital values, supporting valuations. Over the past three

years, most listed SREITS have hedged their financial and

currency exposure, given the push to normalise interest rates,

which finally materialised in 2017. Our sensitivity analysis

indicates a 1% rise in interest rates will lead to -5% on

valuation, and -2% on DPU growth. The least impacted by

interest rates rise are those which have hedged 100% of their

interest rate exposure - Parkway Life REIT, Ascott Residence

Trust, Ascendas India REIT, Capitaland Mall Trust and ESR Reit.

The REITS which are most affected by higher interest rates -

>3% on earnings - are Sabana REIT, CDL HT (hedged 60% of

loans), Starhill Global REIT and Suntec REIT.

Net debt to equity ratios by sector 2017 (E)

Source: DBS Bank

Valuation


* FY19 & 20 forecast

0.93

0.79

0.52

0.400.32 0.32 0.29 0.29

0.13

-0.03-0.07-0.20

0.00

0.20

0.40

0.60

0.80

1.00

x

Mkt Price

12-mth

Target

EPS/DPU

CA GR


Company (US$m) 23-Nov (S$) Upside Rcmd 18F 19F 17E 18F 18F 19F 17E 18F (%)

OCBC 37,224 S$ 11.970 13.50 13% BUY 10.7x 9.7x 1.3x 1.2x 12% 12% 3.1% 3.5% 11.7

UOB 31,884 S$ 25.830 27.50 6% BUY 10.9x 9.9x 1.2x 1.1x 11% 11% 3.0% 3.2% 9.9

Parkway Life REIT 1,271 S$ 2.830 3.10 10% BUY 22.3x 22.1x 1.7x 1.7x 7% 7% 4.6% 4.3% -2.4

Ascott Residence Trust 1,881 S$ 1.180 1.28 8% BUY 20.4x 20.0x 1.0x 1.0x 5% 5% 5.8% 6.1% 3.2

Ascendas India Trust* 797 S$ 1.150 1.15 0% HOLD 18.5x 17.2x 1.4x 1.4x 8% 8% 5.2% 5.6% 3.5

CapitaLand Mall Trust 5,396 S$ 2.050 2.19 7% BUY 17.6x 18.0x 1.1x 1.1x 6% 6% 5.3% 5.4% 0.8

City Development 8,174 S$ 12.110 14.03 16% BUY 18.7x 24.4x 1.1x 1.1x 6% 4% 1.3% 1.3% -13.7

CDL Hospitality Trusts 1,450 S$ 1.630 1.75 7% BUY 17.2x 16.4x 1.1x 1.1x 6% 7% 5.6% 6.1% 7.3

Starhill Global REIT 1,214 S$ 0.750 0.82 9% BUY 14.8x 14.5x 0.8x 0.8x 6% 6% 6.6% 6.6% 0.8

Suntec REIT 3,874 S$ 1.970 1.95 -1% HOLD 29.5x 28.8x 0.9x 0.9x 3% 3% 5.1% 5.1% 0.0

ROA E Div Y ield

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

Market Focus

2018 Outlook

5. Tech bull still has legs

A synchonised global recovery, adding to the proliferation of

disruptive technologies, will continue to boost demand for the

technology sector. The IMF raised its forecasts for global

economic growth to 3.6% this year and 3.7% in 2018,

compared with 3.2% in 2016. The Technology sector in

Singapore is riding on this uptrend. Other than the traditional

stronghold of semiconductor and manufacturing hardware,

Singapore electronics sector is also riding on the proliferation

of the disruptive technologies - Artificial Intelligence, Virtual

Reality, Big Data, Internet-of-Things (IoT), and Robotics.

The Information Technology sector is the champion this year,

doubling its returns on a 12-month basis, after trading at

depressed valuations over the last one to two years. Within the

sub-sector, semiconductor stocks are riding on the cyclical

upturn, while demand for smartphone is still strong, especially

with more new launches. The proliferation of disruptive

technologies is driving IoT spending.

Semiconductor stocks are riding on the cyclical upturn

Semiconductor shipments are at record levels, driven by the

proliferation of connected devices required for automotive,

medical, wearables, and high-performance computing

applications. According to SEMI’S Forecast, 2017 fab

equipment spending (new and refurbished) is expected to

increase by 37%, reaching a new annual spending record of

about US$55 billion. The World Fab Forecast also forecasts that

fab equipment spending in 2018 will rise further by another 5

percentage points to a new high of about US$58 billion.

Similarly, World Semiconductor Trade Statistics (WSTS)

predicted worldwide semiconductor market growth of 17% in

2017 after 1.1% growth in 2016. 2018 is forecasted to be up

another 4.3% to US$414 billion.

Smartphone – new launches driving demand higher

In a recent study by the International Data Corporation (IDC),

the worldwide smartphone market will reach a total of 1.5

billion units shipped in 2017, up 1.7% from the 1.47 billion

units shipped in 2016. From there, shipments will reach 1.73

billion units in 2021, representing CAGR of 3.3%. The IDC also

expects average selling prices of smartphones to increase by

over 7% in 2017.

In a separate report by Gartner, worldwide shipments of PCs,

tablets and smartphones are predicted to exceed 2.35 billion

units in 2018, an increase of 2% from 2017. This would be the

highest y-o-y growth since 2015.

Proliferation of disruptive technology driving IoT spending

On the IoT segment, the IDC also expects global spending on

IoT to grow 16.7% in 2017 reaching just over US$800 billion

in total expenditure. By 2021, global IoT spending is expected

to total nearly US$1.4 trillion as organisations continue to

invest in the hardware, software, services, and connectivity that

enable the IoT.

Singapore NODX and manufacturing output still in expansion

mode

Back home, October NODX jumped 20.9% y-o-y, the highest

growth rate since February, due to the rise in both electronic

and non-electronics exports. Manufacturing output increased

14.6% y-o-y in September 2017, the 14th straight month of

growth. Momentum for the electronics cluster remains strong,

and continues to see the strongest growth with output

expanding 33.2% in September. The strong data has led to an

upward revision of the GDP numbers. Our economist is now

expecting GDP growth of 3.2% and 3.0% for 2017 and 2018,

respectively.

NODX and manufacturing output (y-o-y growth %)

Source: The Economic Development Board

-20

-15

-10

-5

0

5

10

15

20

25

%

NODX

Manufacturingoutput

Market Focus

2018 Outlook

Our picks – Venture and Hi-P

Technology stocks in our coverage


Venture (BUY, TP $26.00)

Venture is set for record earnings in FY17F. Though its share

price has gained over 110% YTD, fueled by positive industry

backdrop and excellent execution, we believe there is still room

to run as Venture continues to deliver superior earnings

performance. Venture’s tactical switch to a high mix low

volume strategy, and diversification into new segments has led

to margin improvements. Expectations of double-digit growth

at key industry clusters provides strong visibility for Venture’s

revenue growth prospects. We continue to like Venture, which

stands out for its unique positioning at the forefront of

innovation and has a proven track record.

Hi-P (BUY, TP$2.30)

Hi-P is riding on strong earnings momentum, driven by new

products in the Wireless and IoT segments, supported by a

bigger and more stable customer base for the Consumer

Electronics division. We are expecting EPS CAGR of 34% for

FY16-FY19F. Hi-P is in a sweet spot now as more than half of

its earnings are derived from the Wireless (smartphone) and

Computer Peripherals (IoT segment, e.g. smart home)

segments, which are expected to continue to do well in the

next one to two years.

5. Rotating into early to mid-cycle plays

Singapore’s economic recovery moving into mid-expansion

phase

We believe Singapore’s economic recovery has started to

transit from the early expansion to the mid expansion phase.

This occurs when the recovery broadens from the late

contraction to early expansion outperformers such as banks,

residential property and technology to other sectors such as

industrials, capital goods (e.g. yards, machinery) and

construction sectors. MAS’ recent comments that Singapore’s

recovery has broadened from electronics to other segments

and that even the marine/offshore engineering and

construction sectors are turning better reinforces our view.

Stock prices of shipyards (example of capital goods) Sembcorp

Marine and Sembcorp Industries - and construction related

companies (e.g. Yong Nam, Chip Eng Seng, Lian Beng) sprang

to life in the past 2 months. We expect interest in these sectors

to extend into 2018. As the economic recovery progresses

further next year, interest in mid to late cycle expansion

outperformers such as basic materials, commodities followed

by consumer staples and consumer services should show an

upturn as well.

Typical sector outperformers in various economic phases

Source: DBS Bank

Mkt Price Target EPS CA GR


Company F YE (US$m) 20-Nov (S$) Upside Rcmd 18F 19F 18F 19F 18F 19F 18F 19F 17E 18F (%)

Venture Dec 4,399 21.00 26.00 24% BUY 16.3x 15.4x 2.5x 2.3x 11.2x 10.2x 16% 16% 2.6% 2.6% 9.2

Hi-P International Dec 1,167 1.96 2.30 17% BUY 13.1x 12.2x 2.6x 2.2x 6.4x 5.6x 21% 20% 10.7% 1.5% 12.2

Sunningdale Dec 269 1.94 2.70 39% BUY 9.3x 8.3x 0.9x 0.8x 3.8x 3.2x 10% 11% 3.1% 3.1% 15.8

UMS Holdings Dec 451 1.14 1.21 6% BUY 11.3x 10.6x 2.7x 2.4x 8.1x 7.2x 25% 24% 5.3% 5.3% 9.5

PE (x) EV /EBITDA (x) (%)

Div Y ield

P/BV (x) (%)

ROA E

Market Focus

2018 Outlook

ST Index event chart (2017)


2,800

2,900

3,000

3,100

3,200

3,300

3,400

3,500STI

Geopolitical risks, particularly concerns on US missile attack on Syria and news surrounding North Korea

ST Index broke the 3000 level after being capped for more than 14 months. The c.20% YTD gain was mainly led by Banksand Property. Attractive valuations, stable oil prices, and improved economic data also help to propel the index higher

Fed raises interest rate by a quarter point

Fed raises interest rate by another quarter point

M&A plays fuelled by the takeover of GLP

Tension between North Korea and the US as well as a more hawkish FED at the September FOMC meeting affected market sentiment

Better than expected economic data leads to upgrade in GDP

Market Focus

2018 Outlook

Sector Outlook

Market Focus

2018 Outlook

ed: TH sa: JC, PY, CS

Singapore Banks

Overweight

Analyst Sue Lin LIM +65 8332 6843 [email protected] Singapore Research Team [email protected]

Price

12-mthTarget

PricePE

2018F

Div Yld

2018F

EPS CAGR 2016-2018

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

DBS 24.62 NR NR 11.5 2.9 1.3 OCBC 11.97 13.50 BUY 10.7 3.5 12 UOB 25.83 27.50 BUY 10.9 3.2 10

Source: DBS Bank Closing price as of 23 Nov 2017

Singapore Banks: NIM trends

1.50%

1.60%

1.70%

1.80%

1.90%

2.00%

2.10%

2.20%

2.30%

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 2015 2016 2017F 2018F

DBS OCBC UOB Average

NIM (Banks) NIM (Average/Industry)

No forecasts for DBS Source: Companies, DBS Bank

Singapore Banks: Loan growth

13.3%

1.0%

13.7%

24.1%

10.4%

19.5%

9.3%

0.0% 0.5%

7.4% 7.0%

1.4%

-1.3%

15.2%

6.2%

3.4%4.4%

2.9%1.8% 2.0%

3.2% 3.0%

-6.0%

0.0%

6.0%

12.0%

18.0%

24.0%

30.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F

Loan growth % GDP growth %

GDP growth Loan growth %


Singapore Banks: Credit costs

0.68%

0.97%

0.37%0.30%

0.23% 0.23% 0.24% 0.27%0.35% 0.34%

0.29%

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%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018FDBS OCBC UOB Average

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


Repeat the sounding joy

NIM and loan growth as key drivers

Asset quality issues should be out of the way

Assessing implementation of IFRS9/SFRS109

Prefer OCBC over UOB

Outlook

Adding a second growth engine - loans. Loan growth hassurprised on the upside in 2017 with banks in generallyguiding for a 7-8% loan growth. The momentum is expectedto continue in 2018, still driven by property-related (mainlydomestic) as well as domestic and regional corporate loans.Sensitivity of loan growth to earnings is marginal. Focus onsensitivity should be on NIM.

Backloaded NIM acceleration to 2018. NIM was touted asthe main growth engine in 2017 but the impact of higher FedFund rates (two hikes in 2017) translating to LIBOR andSIBOR/SOR has been slow mainly due to flushed Singaporedollar liquidity. The SIBOR/SOR have finally accelerated inrecent months. Consensus is currently expecting three ratehikes in 2018. With rate hikes almost a certainty in the comingquarters, the 3M SIBOR/SOR have broken out of their tradingrange, reaching their highest level so far. With a greater pass-through expected from the US rates to SIBOR/SOR, theSingapore banks are almost surely to deliver higher NIM. Theexpected sustained rise in SIBOR should see the Singaporebanks' NIM on a firmer rise in 2018. With hardly much NIMmovement in 2017, we expect a backloaded NIM uplift in2018 by 5bps. Our sensitivity analysis indicates that every 25-bp rise in SIBOR would raise sector average NIM by 3bps (UOB:+1bps; OCBC: +3bps) leading to an average 2% (UOB: +1%;OCBC: +2%) increase in earnings.

Starting on a clean sheet; oil & gas woes largely

accounted for. While it may be too early to call for a recoveryof the oil & gas sector, there are early signs of charteringactivities picking up but charter contracts are still very shortterm in nature. Banks have largely accelerated NPOLclassification in 3Q17; UOB stated that there is one more bigname to be classified in 4Q17, while at OCBC, asset qualityhas largely stabilised with lower new NPL formation. Marketappears to be disregarding any downside risk to further NPLissues, anticipating that the bulk of NPL issues and necessaryprovisions should have been largely dealt with.

Market Focus

2018 Outlook

Assessing impact of IFRS9/SFRS109. The question now begs as to how much credit costs will be booked in FY18 with the implementation of IFRS9/SFRS109. Banks are assessing considerations in dealing with their excess general provision reserves. There are also tax implications the banks will need to consider. It appears that smoothening out earnings by adding or using general provision reserves will no longer be allowed; this could pose upside risk to UOB’s FY18-19F earnings from its sticky 32-bp credit cost guidance. We gauge that the impact would be neutral to mildly positive to capital and P/L. There will be more clarity in the next 4Q/FY17 briefing.

Risks

Relapse of oil & gas woes. While the banks have

articulated that the oil & gas NPL issues are largely behind them, risks of these companies running out of cash flow as their funding instruments (bonds) mature remain a risk. We understand that most of these have been restructured or are undergoing restructuring, which means these accounts would have been classified as NPLs. The remnants of these may still trickle into some NPL formation in 2018.

NIM and loan growth fail to deliver. We have

continuously been positive on NIM uplift and now loan growth. A disappointment in macro indicators could temper the better loan growth expectations. Although loan growth is less sensitive to earnings, sentiment of loan deceleration could dent top-line prospects. A slower-than-expected pass-through of Fed rate hikes to SIBOR/SOR could also derail the NIM uptrend. Competition in loan rates could be an added dent to NIM.

Valuation & Stock Picks

Trading close to 10-year historical mean. The Singapore

banks have had a fantastic rally in 2017, starting from the first rate hike at end-2016. The banks have collectively appreciated by >30% over 2017, one of the best sector performances for the year. Sustained momentum of NIM, loan growth and lower credit costs with contained NPLs should lift valuations at least to mean P/BV multiples. To see a further re-rating, we would need to see stronger and sustainable revenue drivers and a clear path for asset quality.

OCBC preferred although UOB is also a BUY. Although we

have BUY ratings on both UOB and OCBC, the latter would be our preferred bet for three reasons: 1) its ability to maintain lower-than-peer credit cost trends, 2) it serves as a better wealth management play, and 3) possible earnings surprises from its insurance business in a rising interest rate environment. Our BUY rating on UOB is premised on (1) the property market recovery (UOB has the largest proportion of property-related loans vs peers), (2) imminent NIM improvement albeit backloaded, (3) end to asset quality woes, which we believe would be the case in FY18.

Singapore Banks: Rolling forward P/BV band (10-year)

Mean, 1.29

+1SD, 1.57

+2SD, 1.85

-1SD, 1.02

-2SD, 0.74

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

06 07 08 09 10 11 12 13 14 15 16 17

PBV (X)


Peer Valuation

Mk t Price12-mth Target EPS CA GR


Company (US$m) 23-Nov (S$) Upside Rcmd 18F 19F 18F 19F 18F 19F 17E 18F (%)

DBS Bank* 46,803 S$ 24.62 NR - NR 11.5x 10.3x 1.3x 1.2x 11% 12% 2.7% 2.9% 17.8

OCBC 37,271 S$ 11.97 13.50 13% BUY 10.7x 9.7x 1.2x 1.1x 12% 12% 3.1% 3.5% 11.7

UOB 31,924 S$ 25.83 27.50 6% BUY 10.9x 9.9x 1.1x 1.0x 11% 11% 3.0% 3.2% 9.9

PE (x) (%)

Div Y ield

P/BV (x) (%)

ROA E

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

Market Focus

2018 Outlook

ed: JS / sa: JC, PY, CS

Consumer Goods

Overweight

Analyst Andy SIM CFA +65 6682 3718 [email protected]

Alfie YEO +65 6682 3717 [email protected]

Price

12-mthTarget

PricePE

2018F

Div Yld

2018F

EPS CAGR 2016-2018

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

BreadTalk Group 1.61 2.01 BUY 20.7 1.9 20 Dairy Farm (US$) 8.31 9.89 BUY 21.5 2.8 10 Sheng Siong 0.95 1.19 BUY 20.0 3.5 6 Thai Beverage 0.94 1.07 BUY 19.9 3.1 10 Courts Asia 0.33 0.36 HOLD 8.8 3.7 (12) Del Monte Pacific 0.30 0.32 HOLD 16.8 0.0 15 Jumbo Group 0.58 0.67 HOLD 20.0 2.7 8


DBS Singapore Consumer historical PE trading band


Earnings growth to accelerate in FY18F


Long awaited spring

Improvements in global economic outlookbodes well for consumer sentiment

Margins have bottomed, with expectations ofexpansion by mid-2018

Valuations near mean; focus on beneficiariesof domestic consumption uptick

Stock picks: Thai Beverage (THBEV SP),BreadTalk (BREAD SP)

Outlook

Pick up in Singapore’s GDP and sentiment bodes well.We are more optimistic of Singapore consumercompanies’ outlook in 2018 vis-à-vis 2017. DBSeconomist’s upward revision of Singapore’s GDPgrowth to 3.2% and 3.0% for 2017 and 2018, from2.8% and 2.5%, respectively, should trickle down andtranslate to better prospects for domestic consumercompanies.

Regional improvement benefits companies withexposure. Improvements in the global macro outlook,coupled with the passing of country specific uniqueevents are positive for those with a regional exposure.For instance, Thailand’s consumer sentiment is expectedto improve post a year-long mourning period, while weexpect the Indonesian government to supportconsumers’ purchasing power via stimulus, ahead ofthe upcoming president election in 2019.

FY18F earnings growth to accelerated to 12% from 4%in FY17F. We project consumer companies under ourcoverage to post accelerated earnings growth of 12%in FY18F, up from 3.6% in FY17F (as at time ofwriting). This is on the back of margin improvements,coupled with contribution from JV/associates.

Margins bottomed out; projecting expansion in 2018.As per our earlier expectations when we transited into2017, we had expected margins to slide down afterpeaking in mid-2016. This was on the back of higherraw material prices seen in the course of 2016. Withcommodity prices largely down in 2017 (e.g. sugar,coffee, cocoa, palm oil, milk powder, etc), this shouldhave a positive effect on food manufacturers’ marginsin 2018. There tends to be a 6-9months lag betweenspot prices and margins.

Market Focus

2018 Outlook

Risks

Sentiment, macro outlook. Our central theme for thesector in general is stronger bottomline growth onimproved economic prospects and pick-up insentiment. With the sector valuation at historicalmean, absence of the expected improvement insentiment may render our thesis of outperformancefor the sector invalid.

Raw material price and currency weakness. At thesame time, we expect margins to improve. However,in the event of spikes in raw material prices,weakening of regional currencies against the USdollar, and/or heightened competition, these eventsmay erode margins, particularly so if the expectedpick-up in sentiment does not materialise.


Valuations just marginally above average. The sectorvaluation is currently at about 21x PE, which is awhisker above its 10-year historical average. As adeparture from the downward growth trend in retailsales since 2012, overall retail sales (ex-motorvehicles) in Singapore has registered positive growthsince mid-2017. A sustained improvement bodes wellfor domestic focused consumer companies,particularly the smaller cap ones.

ThaiBev (THBEV SP, S$0.94, BUY, TP: S$1.07).ThaiBev is our large cap top pick in consumer sector.We like its exposure in Thailand, resilient anddominant Spirits operations, providing the bulk of thegroup's cashflow. We believe that uncertaintiessurrounding slower consumption from the mourning

period has passed and the outlook should turn better in the year ahead. Any pullback in share price is a chance to accumulate, in our view.

On a longer-term horizon, we believe its ongoing transformation into a regional beverage player will help to further re-rate the counter. It has recently embarked on acquisitions (with its healthy balance sheet) and acquired a 75% stake in Grand Royale, the dominant whisky player in Myanmar, extending its presence further outside of Thailand. Its associate, Fraser & Neave Ltd (FNN) now owns 18.74% in Vinamilk, and has stated an intention to increase this further.

BreadTalk (BREAD SP, S$1.61, TP: S$2.01). We remainpositive on BreadTalk’s outlook as it continues toconsolidate its underperforming outlets, which shouldresult in better margins going forward. The sale ofstakes in properties such as CHIJMES and AXA Towerwould unlock shareholder value if they materialise.Based on 3Q17 results, growth drivers remain intactand a turnaround in the Bakery division led by storegrowth and better profitability in FY18F will driveearnings growth next year. BreadTalk’s valuation, basedon its core business (ex-property investments), iscompelling at 17x FY18F PE.

Growth should continue to be led by its Bakery Division and improving Food Atrium business. Post restructuring of Bakery franchisees in China this year, we expect store openings and revenue growth to resume from FY18F onwards. More efficient management of Food Atrium Business post removal of non-performing foodcourts in China will also contribute to bottom line growth.

Upturn in growth of retail sales (ex-motor) Supermarket Retail sales driven by online players

Source: ThomsonReuters, DBS Bank Source: ThomsonReuters, DBS Bank

Market Focus

2018 Outlook

ed: JS / sa: JC, PY, CS

Peers Valuation

Mk t Price12-mthTarget EPS CA GR


Company (US$m) 23-Nov (S$) Upside Rcmd 18F 19F 18F 19F 18F 19F 18F 19F 17E 18F (%)

BreadTalk Group 337 S$ 1.61 2.01 25% BUY 20.7x 19.3x 2.9x 2.7x 5.7x 5.2x 15% 14% 3.1% 1.9% 19.7

Dairy Farm 11,239 US$ 8.31 9.89 19% BUY 21.5x 19.7x 5.9x 5.2x 13.3x 12.0x 29% 28% 2.8% 2.8% 9.6

Sheng Siong Group Ltd 1,062 S$ 0.95 1.19 25% BUY 20.0x 18.6x 4.9x 4.5x 14.5x 12.9x 25% 25% 3.4% 3.5% 5.8

Thai Beverage 17,544 S$ 0.94 1.07 14% BUY 19.9x 18.1x 4.1x 3.7x 14.6x 13.2x 21% 22% 2.9% 3.1% 10.2

Courts Asia * 126 S$ 0.33 0.36 8% HOLD 9.3x 9.1x 0.7x 0.7x 6.8x 6.7x 8% 7% 3.7% 3.6% -1.3

Del Monte Pacific * 433 S$ 0.30 0.32 6% HOLD 13.5x 11.7x 0.8x 0.7x 9.2x 8.6x 6% 6% 0.0% 0.0% 19.8

Jumbo Group 277 S$ 0.58 0.61 5% HOLD 20.0x 18.7x 4.6x 4.1x 11.3x 10.2x 25% 23% 2.5% 2.7% 8.4

PE (x) EV /EBITDA (x) (%)

Div Y ield

P/BV (x) (%)

ROA E

Source: DBS Bank, Bloomberg Finance L.P. * FY19 & 20 forecast

Market Focus

2018 Outlook

ed: JS sa: JC, PY, CS

Offshore & Marine

Overweight

Analyst Pei Hwa HO +65 6682 3714 Glenn NG +65 6682 2657 [email protected] [email protected]

Suvro SARKAR +65 6682 3720 [email protected]

Price

12-mthTarget

PricePE

2018F

Div Yld

2018F

EPS CAGR 2016-2018

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

PACC Offshore 0.34 0.41 BUY nm 0.0 (42) Sembcorp Marine 1.83 2.30 BUY 34.5 1.0 381 Yangzijiang 1.67 1.82 BUY 15.6 2.7 (3) Cosco Shipping 0.47 0.33 HOLD nm 0.0 nm Mermaid Maritime 0.131 0.14 HOLD 28.6 0.0 nm Vard Holdings Ltd 0.25 0.25 HOLD nm 0.0 nm Ezion Holdings 0.197 0.13 FV 11.5 0.0 nm Pacific Radiance 0.11 0.07 FV nm 0.0 (20)

Source: DBS Bank; Closing price as of 23 Nov 2017

SMM’s valuation vs contract win

Source: IHS Petrodata

Global OSV utilisation rates

Source: IHS Petrodata

Position for recovery

Expecting higher US$60-65/bbl Brent crude in 2018to drive oil majors’ capex

Stronger order flow ahead will be a strong catalystfor shipyards

Asset owners could see more significant upswingtowards 2H18

BUY the industry stalwarts – SMM (TP S$2.30),Yangzijiang (TP S$1.82), POSH (TP S$0.41)

Shipyards: Order win momentum to pick up BUY Sembcorp Marine (SMM; TP S$2.30) as proxy to

O&G recovery. We expect recovery in earnings ahead withrising order wins translating to higher revenue, cost savingsfrom returning old facilities to the government, andpotential profit from delivery of jackup rigs. The re-ratingon SMM will continue, driven by: 1) SMM is a pure play toride the oil price recovery; 2) sizeable new orders for non-drilling solutions with c.S$3bn potential order pipeline; 3)the reactivation of Sete’s projects; and 4) SMM as apotential M&A play arising from a consolidation ofSingapore yards.

Yangzijiang (BUY, TP S$1.82) to benefit from shipping

turnaround. As the largest and most cost efficient privateshipbuilder in China, Yangzijiang is well-positioned to ridethe anticipated shipping and shipbuilding recovery. It has asolid balance sheet, sitting on net cash of 68 Scts per share(includes Held-to-Maturity investments), representing~50% of NTA.

Offshore Support Services: cherry-pick the strong names POSH is our OSV top pick (BUY; TP S$0.41): With no

bonds outstanding, positive OCF in FY17F, and strongbacking by majority shareholder Kuok Group, we see POSHas a name to ride the gradual offshore service sectorupturn. In the near-term, 4Q17 should be stronger assemisubmersible accommodation vessel (SSAV) POSHArcadia sees a full quarter of contribution, and more OSVsunder long-term contracts are deployed in the Middle East.We are cognizant of the fact that POSH made the largestimpairments as a percentage of fleet assets over FY15/16(c.32% of fleet value). Its equity base is thus more eroded,and P/B valuation looks inflated vs. peers, but they are not.

40%

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West Africa Asia Pacific US GoM North Sea

Market Focus

2018 Outlook

Macro view – oil prices look firmer; service sector has

bottomed but lacks visibility of a significant recovery

US$60-65/bbl Brent in 2018 driven by robust oil

demand, a likely extension to OPEC cuts, and

stalling of US shale productivity gains. We areforecasting US$60-65/bbl for Brent in 2018 (versusUS$53/bbl average YTD in 2017). We see healthy growthin oil consumption of around 1.4-1.5mmbpd in 2018,coupled with lower supply-side pressure from US shaledrillers, who seem to have left the days of sharp costreductions behind them – drilling productivity (bpd perwell) has stalled and cash operating costs per barrel areinching upwards. Rhetoric from OPEC of late has alsopointed towards an extension of oil production cuts pastMarch 2018, lending support to oil prices.

Singapore Rigbuilders: Brighter prospects. Both yards have made a breakthrough into high-value non-crude solutions (>US$200m each), and this has brightened the order outlook. We expect order wins of Singapore rigbuilders to recover from S$1-2bn in 2017 to S$4-5bn in 2018. The improving rig market could “motivate” rig owners to take delivery of existing orders and facilitate the disposal of cancelled units in the second hand market, removing a key overhang on Singapore rigbuilders. Sete Brasil’s rig orders at Singapore yards could be reactivated in the near future if the submission of a new restructuring plan at end-Aug is approved.

OSV-to-rig ratios likely to peak in 2017. Due to aneasing supply-side glut as well as signs of a bottomingout of demand (measured in terms of the working

offshore rig count), we anticipate that 2018 will be the start of a long and gradual recovery in the OSV space.

Shipping recovery. Global orderbook-to-fleet ratio hasdropped to a low of less than 10%, of which c.75% isscheduled for delivery by 2018, implying much lower newsupply thereafter. On the scrapping side, the new BallastWater Management Convention rule, that took effect inSept-2017, would also accelerate the demolition of oldvessels. This is expected to drive the recovery in theshipping market, led by dry bulk segment, thus giving aboost to newbuild demand.

Risks and Catalysts Lower oil prices. While oil prices have recovered this year, a

bear scenario of lower oil prices would defer any uptick in oilcompany spending, and derail a recovery in the services andnewbuilding sectors.

Execution risk is salient for shipyards. As the Singaporerigbuilders diversify their orderbooks away from the drilling rigmarket (e.g. Sembcorp Marine’s modularised LNG terminals),execution of the fabrication of new product types will becrucial for margins and earnings.

Restructuring risk remains for highly-geared service

players or those with bonds. We have seen numerousoffshore & marine companies in Singapore such as NamCheong launch restructuring schemes with their creditors inorder to defer or reduce principal and interest payments,enabling them to better survive the prolonged downturn. Forthose who have yet to secure approval for these schemes (e.g.Nam Cheong) or launch a planned restructuring (e.g. PacificRadiance), the results of these exercises will be key to theirshare prices in 2018.

Peers Valuation

Mk t Price12-mthTarget

Cap (S$) Price %

Company (US$m) 23-Nov (S$) Upside Rcmd 17E 18F 17E 18F 17E 18F 17E 18F

PACC Offshore 458 S$ 0.34 0.41 21% BUY nm nm 0.7x 0.7x 23.2x 19.1x 0.0% 0.0%

Sembcorp Marine 2,839 S$ 1.83 2.30 25% BUY 414.1x 34.5x 1.5x 1.4x 22.3x 13.0x 0.5% 1.0%

Yangzijiang 4,920 S$ 1.67 1.82 9% BUY 12.9x 15.6x 1.3x 1.2x 6.6x 6.9x 2.7% 2.7%

COSCO Shipping Int'l 781 S$ 0.47 0.33 -29% HOLD nm nm 3.9x 4.7x 23.6x 19.4x 0.0% 0.0%

Mermaid Maritime 137 S$ 0.131 0.14 7% HOLD 62.8x 28.6x 0.4x 0.4x 4.6x 3.7x 0.0% 0.0%

Vard Holdings Ltd 219 S$ 0.25 0.25 -2% HOLD nm nm 0.8x 0.9x 38.2x 28.2x 0.0% 0.0%

Ezion Holdings 300 S$ 0.197 0.13 -32% FV nm 11.5x 0.3x 0.2x 9.2x 7.1x 0.0% 0.0%

Pacific Radiance 58 S$ 0.11 0.07 -36% FV nm nm 0.2x 0.3x 82.8x 75.0x 0.0% 0.0%

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

Div Y ield

P/BV (x )


Market Focus

2018 Outlook

ed: TH / sa: JC, PY, CS

Singapore Property

Overweight

Analyst Derek TAN +65 6682 3716 [email protected]

Rachel TAN +65 6682 3713 [email protected]

Price

12-mthTarget

PricePE

2018F

Div Yld

2018F

EPS CAGR 2016-2018

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

City Developments 12.11 14.03 BUY 18.7 1.3 (14) UOL Group 8.83 10.15 BUY 15.9 1.7 1


Market Tranactions to hit 5 year high

Source: URA, DBS Bank

Property market absorption rate remains at a low level

Source: URA, DBS Bank

The Way is Up Developers to continue to re-rate on the back

of improving property fundamentals

Strong sell-through rates in 2018 a key re-rating catalyst for the sector

Pick residential-focused players like CityDevelopments and UOL

Outlook

Property prices on a multi-year recovery trend; luxuryend of the market to lead the recovery. We remainproperty bulls and continue to see higher transactionvelocity and prices for the Singapore property market in2018. We expect a price recovery to the tune of c.3-5%per annum over the next two years. With only c.2,700 ofunsold residential units as of 3Q17(unsold units inlaunched projects) representing one of the lowest supplyin recent years, coupled with the rebound in residentialsales, put the pricing power back to developers andlandlords.

In addition, we see further upside from supplywithdrawals from en blocs and low level of new unitcompletions in 2018 to support higher asking prices.Lastly, a potential acceleration in price might come fromthe return in buying interest from foreigners, which atthis point is only less than 5% of total transactions.

Developers invested S$12.7bn in Singapore land bank;strong sell-through rates a catalyst for stocks to close theNAV/RNAV gap. Land-hungry developers invested closeto S$12.7bn to acquire land through the Governmentland sales (GLS) and collective sales market (en bloc) in2017, representing one of the most active years since2013. Despite an active year, we expect developers toremain hungry for more land, given continued need tore-stock dwindling inventories on their books. Developerswill continue to look at opportunities within the ongoingpipeline of reportedly 40 further en-bloc projects,coupled with various sites on the GLS.

While the medium supply that will enter the marketappears to high at close to 18,000 units (c.6,200 unitsfrom GLS and 12,000 from en bloc) and could potentiallyincrease further with new supply from 1H18 GLS, we donot believe that supply increase is excessive. Assumingcurrent year transaction volume of 10,000-12,000 unitsin primary sales means that the supply/ transaction

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Unsold inventory Absorption rate - no. of years (RHS)

‐

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 9M16 9M17

New Sales Resale Sub‐sales

Market Focus

2018 Outlook

multiple remains at a low of c.2x, a level still supportive of price increases.

Most property segments in Singapore seeing stronger operating outlook. We project most property sub-segments in Singapore to approach a cyclical upturn, led by improved demand (stronger Singapore GDP prospects) and a drop in competitive supply. We believe that the recovery will be led by the Hospitality sub-sector, office sub-sector and Industrial sub-sector (warehouse and business park). The retail sub-sector, while expected to see a cyclical uptick in demand in the near term, will continue to see high supply completions as an overhang in terms of near-term operational performance.

Risks

Higher interest rates and high market vacancy ratecould reel in price increase momentum. With globalinterest rates expected to be on an uptrend in 2018-2019, a key uncertainty will be the pace of increasenegatively impacting home buyers’ affordability. Inaddition, the high vacancy rates of c.8.4% could alsocap further price increases especially when investorsare unable to find tenants and thus have to take onthe additional mortgage burden.

Government intervention only when property pricesrise at an unabated pace. The government has beenclosely monitoring the robust demand in thecollective sales market (en bloc) which has become analternative means for developers to replenish theirland banks. While the government is wary of apotential bubble in land price forming, we believe it isunlikely to introduce tightening measures unlessproperty price momentum shoots up at an unabatedpace.

However, indirect measures such as introducing moresupply in the government land sales (GLS) or curbingbank lending are potential avenues to limit over-leverage in the system.


Sentiment boost if developers are able to achievestrong pre-sales in 2018. Market transaction volumesand prices have historically been key drivers ofdevelopers’ stock prices, with investors looking forproxies to leverage the potential upswing/downcycle ofthe property market. According to our analysis, propertyprices (measured by the PPI) and developers’ P/NAVhave a 0.6x positive correlation while volumes werepositively correlated at the 0.5x level.

Therefore, in view of market transactions turning up in2018, we see reasons to remain vested in developersdespite a c.40% rise in prices. At a P/NAV of 0.95x, at –0.5SD level, we see developers trading close to their+1SD of c.1.05x, implying an upside of close to 10%.After a year of strong volume sales and restocking ofinventories, we believe that 2018 will be a year wherestrong take-up rates will enable developers to achievequick-asset turns to realise RNAVs.

Developers leveraged to the Singapore property marketto do well. We like property developers who haveincreased leverage into the recovery of the Singaporeproperty market. Developers who had land bankedahead of the current red-hot demand for sites includethe likes of UOL Group (UOL) and City DevelopmentsLtd (City Dev) whose margins are likely to expand whenprojects are launched in 2018. Base on estimates, UOLand City Dev have close to c. 30% of RNAVs in theSingapore residential market, one of the largest amongpeers.

Market Focus

2018 Outlook


Price-to-Book Valuation for Developers/ Discount to RNAV for developers

0.95x0.90 x

0.77 x

(1.40)

(1.20)

(1.00)

(0.80)

(0.60)

(0.40)

(0.20)

-

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(X) Discount

Discount to RNAV P/NAV P/NAV (mean) P/NAV (+1 SD) P/NAV (-1 SD)

Source: DBS Bank

Peers Valuation Mkt Price 12-mth

Company Cap 23-Nov -17 RNA V *A ssumed T arget Price Upside P/RNA V Latest Qt r

(S$m) (S$) (S$) Discount (%) (S$) % Rcmd (x) P/NBV 1M 3M 6M 12M

Resident ial Dev elopers

Capitaland 15,162 3.57 4.81 -10% 4.35 22% BUY 0.74 0.93 4.1 0.0 1.9 11.2

City Dev 11,012 12.11 12.63 0% 12.63 4% BUY 0.96 1.31 7.4 1.9 -4.1 5.7

Frasers Centrepoint Ltd 5,986 2.06 2.91 -19% 2.35 14% BUY 0.71 0.97 3.8 -3.2 -9.9 0.0

Perennial Real Estate Holdings 1,415 0.855 2.08 -50% 1.05 23% BUY 0.41 0.25 4.1 0.0 1.9 11.2

Landlords

UOL 7,430 8.83 10.90 -20% 8.73 -1% BUY 0.81 1.04 5.3 4.8 -0.2 12.0

Share Price Performance (%)


Market Focus

2018 Outlook

ed: TH, sa: JC, PY, CS

Page 76

Healthcare

Neutral

Analyst Rachel TAN +65 6682 3713 [email protected]

Andy SIM CFA +65 6682 3718 [email protected]

12-mthTarget

PE 2018F

Div Yld

2018F

EPS CAGR 2016-2018

Price Price Rec (x) (%) (%)

RM RM IHH Healthcare 5.65 6.81 BUY 52.1 0.5 40

S$ S$Parkway Life REIT 2.83 3.10 BUY 22.5 4.3 0 Singapore Medical 0.59 0.75 BUY 20.9 0.0 22 RHT Health Trust 0.84 0.85 HOLD 12.3 6.1 11 Singapore O&G 0.485 0.52 HOLD 23.4 3.6 15 Raffles Medical 1.09 1.00 FV 28.3 1.8 (9)


Large cap healthcare stocks trade at 22x FY18E EV/EBITDA, below the higher end of historical range.

Source: DBS Bank

Healthcare sector trades at 42x FY18E PE, below historical average (post-IHH’s listing)


Reality kicks in

Riding out gestation period for future growth

M&A and ‘corporatisation’ of medical practicescontinue to drive growth

Long-term positive outlook but potentialmacroeconomic headwinds and cost pressuresmay moderate near-term growth prospects

Top picks: IHH Healthcare, Singapore MedicalGroup, and Parkway Life REIT

Outlook

Short-term pain for long-term gain. As we had highlightedlast year, among the large-cap healthcare service providers, wesaw start-up costs and pre-operating costs of expansion planshitting the numbers for IHH in FY17 with the opening ofGleneagles HK and Acibadem Altunizade Hospital.Subsequently, this has partially led the market to expect start-up loss and pre-operating costs from the opening of hospitalsin China by both IHH and Raffles from 2018 onwards. Whilewe believe in the potential future growth driven by theseexpansion plans as they begin to unfold in phases over thenext 3-5 years, near term earnings growth will continue to beweighed down by start-up costs and pre-operating costs.

M&A and the ‘corporatisation’ of medical practices continue todrive growth. Among the smaller-cap healthcare serviceproviders, we continue to see and expect M&As to be one ofthe key drivers of growth as the ‘corporatisation’ of medicalpractices continues while organic growth appears to be a tadmuted. Stocks which have continued to deliver on M&As hasoutperformed in FY17.

Risks Higher-than-expected start-up/pre-operating costs. Following

China’s healthcare reform, we have seen an interest especiallyfrom the larger-cap healthcare companies to expand intoChina. While the market is promising, the operatingenvironment of private healthcare is relatively uncertain withthe possibility of longer-than-expected period to stabilise theoperations. Higher-than-expected start-up/pre-operating costsare another risk that could derail earnings growth.

Macroeconomic headwinds. While healthcare demand is seenas resilient and defensive in the midst of macroeconomicuncertainties, private healthcare demand is not fully shelteredfrom macroeconomic headwinds. With expectations of risinginterest rates, costs, taxes and potential risks tounemployment, patients may turn to public healthcare forcheaper alternatives. In addition, growth in medical tourismmay remain slow moving.

ed: TH sa: YM, PY

15.0

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EV/E

BITD

A (x

)

+ 1sd = 25.3x

A verage = 22x

-1sd = 18.8x

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list

ing

of IH

H:

P/E

(x) +1sd: 57.6x

A vg: 47.4x

-1sd: 37.2x

Market Focus

2018 Outlook

Potential pressure to manage healthcare cost inflation. Ashealthcare is seen as a social good, there could be potentialpolitical pressure to manage healthcare cost inflation.Following recent concerns from insurance service providersand industry stakeholders, the Singapore governmentconducted a study and has published guidelines to managehealthcare cost inflation. While there have not been anymajor changes to the healthcare system and regulations onprivate healthcare, potential pressure from stakeholders maychange the ‘landscape’ of private healthcare sector in thelonger term.

Valuation & Stock Picks Large-cap healthcare service providers trade at 22x FY18E

EV/EBITDA, at historical average. Large-cap healthcare serviceproviders are trading at 22x FY18E EV/EBITDA, at historicalaverage. The sector trades at 42x FY18E PE, below historicalaverage, however we expect potential downside risk toearnings from higher costs/depreciation of Turkish Lira. Thesector continues to trade at a premium to the market,currently at c.3x premium (historical average). While we arepositive on the long-term prospects of the healthcare sectordriven by an ageing population and growing affluent society inAsia, we are selective on our stocks and prefer those withgood near- to medium-term growth prospects.

Top picks are IHH, Singapore Medical Group and Parkway LifeREIT. Our top picks are i) IHH for its larger size and diversifiedportfolio that could better cushion the drag in start-up lossesand pre-operating costs; ii) Singapore Medical Group oncontinued robust growth driven by recent and potentialacquisitions, and scaling-up of its businesses; and iii) ParkwayLife REIT for its steady earnings stream, defensive profile and abeneficiary to potential upward trends in CPI.

Peers Valuation




IHH Healthcare 11,331 RM 5.650 6.81 21% BUY 52.1x 45.4x 2.0x 1.9x 19.4x 17.0x 4% 4% 0.6% 0.5% 39.9

Parkway Life REIT 1,273 S$ 2.830 3.10 10% BUY 22.5x 22.1x 1.7x 1.6x 24.3x 24.0x 7% 7% 4.6% 4.3% -0.4

Singapore Medical Group 198 S$ 0.590 0.75 27% BUY 20.9x 18.6x 2.6x 2.2x 14.3x 12.6x 13% 13% 0.0% 0.0% 21.9

RHT Health Trust 504 S$ 0.840 0.85 1% HOLD 12.3x 10.6x 1.0x 1.0x 14.9x 13.8x 5% 5% 7.1% 6.1% 11.0

Singapore O&G Ltd 172 S$ 0.485 0.52 7% HOLD 23.4x 20.6x 5.7x 5.4x 17.5x 15.1x 25% 27% 3.1% 3.6% 14.5

Raffles Medical 1,435 S$ 1.090 1.00 -8% FV 28.3x 32.9x 2.6x 2.5x 19.9x 20.9x 9% 8% 1.8% 1.8% -9.3

PE (x) EV /EBITDA (x (%)

Div Y ield

P/BV (x) (%)

ROA E


Market Focus

2018 Outlook

ed: CK sa: JC, PY, CS

Plantations

Neutral

Analyst William SIMADIPUTRA +62 2130034939 [email protected]

Regional Research Team [email protected]

Price

12-mthTarget

PricePE

2018F

Div Yld

2018F

EPS CAGR 2016-2018

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

Bumitama Agri 0.795 0.94 BUY 11.8 1.5 11 First Resources 1.88 2.18 BUY 13.3 2.0 17 Indofood Agri 0.40 0.48 HOLD 10.2 0.0 (1) Wilmar Int'l 3.16 3.50 HOLD 13.6 2.6 6


CPO, soybean, and soybean oil price forecasts

15 16 17F 18F 19F 20F 21FCPO price (RM/MT FOB P.Gudang) 2,168 2,652 2,760 2,620 2,600 2,630 2,640 CPO price (US$/MT FOB P.Gudang) 560 640 645 616 608 616 618

Soybean price (US$/MT FOB Chicago) 346 360 352 340 340 345 351 Soybean oil price (US$/MT FOB Chicago) 667 696 753 727 727 737 750

STR20 price (US$/MT) 1,337 1,392 1,497 1,516 1,555 1,595 1,638

Sugar price (US$/MT) 300 400 400 400 400 400 398

Source: DBS Bank

Steady demand supports CPO price

Minimal downside risk to our forecast CY18F/19FCPO price of US$616/US$608 per MT

Global output expected to expand 4% y-o-y inCY18

Steady CPO demand will support price

Top picks : BAL, FR

Outlook

CY18F/19F CPO price of US$616/US$608 per MT. We retainour view that the current steady CPO price performance willpersist in 2018 on the back of 1) seasonally low production inthe first semester of 2018, and 2) steady demand outlookgiven CPO’s price competitiveness vs. other edible oils. Basedon our 2018 supply and demand forecasts, we believe there islimited downside risk for CPO prices.

Output will expand at lower pace – global output expected toexpand 6% y-o-y in CY18. The uptrend for global CPO outputwill continue next year, albeit at a slower pace. Moreover,Indonesia’s CPO output will be impacted by the relativelylimited expansion for smallholder estates and heavy rain inseveral Kalimantan areas that will affect tree production in2018. We anticipate a steadier monthly production pattern onm-o-m basis in 1H18, to be followed by seasonally strongoutput in the rest of the year.

Steady demand will support prices. The steady food-baseddemand outlook is also supported by competitive CPO pricesvs. other edible oils, and a buoyant soybean oil priceperformance. We also see a firmer trajectory for Indonesia’sbiodiesel allocation after the government has recentlyannounced the biodiesel quota of 1.4m KL for Nov 2017–Apr2018, which will provide additional volume demand cushionnext year.

Strong volume planters still preferred. Amid the lack ofsignificant catalysts for CPO prices to rally to above US$700per MT next year, we still prefer companies with strongorganic CPO volume growth prospects that can help boostprofitability. Thus, we maintain BAL and FR picks in 2018.

Risks Weather. We believe the primary short-term risk for CPO prices

is driven by weather. The La Nina phenomenon has a 55%-65% chance of occurring in 2018, according to several mediareports. La Nina will affect rain density and hinder thepollination of male and female fruits. With the potential forlower-than-expected output, there is upside risk to our CPOprice assumption.

Market Focus

2018 Outlook

Stronger than expected Indonesia’s smallholders

output expansion. Output is a key variable fordetermining CPO prices but Indonesia seems to lackaccurate data disclosure. Stronger- than-expectedsmallholder estate yields moving forward may underpin arobust CPO output expansion in Indonesia that could trumpexpectations.

Valuation & Stock Picks Strong volume planters. Amid the lack of significant

catalysts for CPO prices to rally to above US$750 per MT next year, we still prefer companies with strong organic CPO volume growth prospects that can help boost profitability. Thus, we maintain BAL and FR as our picks in 2018 for Singapore listed CPO companies.

Undemanding valuation. BAL and FR are trading at 11.0x-12.0x FY18F PE, below their five years average P/E at 14.0xon average. We believe the market has not priced in theirpotential earnings growth on CPO volume expansion andstable CPO price outlook.

CPO price vs. soybean oil price trend

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Spread (US$/MT)‐RHS CPO (US$/MT)‐LHS Soybean oil (US$/MT)‐LHS


Singapore listed plantation stocks forward PE band

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Singapore 1-year Forward PE

+1sd: 17.4x

Avg: 11.7x

+2sd: 23x

-1sd: 6x


Peers Valuation

Mkt Price12-mthTarget EPS CA GR



Bumitama Agri 1,030 S$ 0.795 0.94 19% BUY 11.8x 11.2x 1.6x 1.5x 6.8x 6.2x 15% 14% 0.8% 1.5% 10.9

First Resources 2,214 S$ 1.880 2.18 16% BUY 13.3x 11.5x 2.0x 1.8x 7.2x 6.1x 16% 16% 1.8% 2.0% 16.6

Indofood Agri Resources 415 S$ 0.400 0.48 19% HOLD 10.2x 9.9x 0.4x 0.4x 6.7x 6.6x 4% 4% 0.0% 0.0% -1.1

Wilmar International 14,856 S$ 3.160 3.50 11% HOLD 13.6x 13.4x 0.9x 0.9x 11.1x 10.8x 7% 7% 2.3% 2.6% 5.9

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

Div Y ield

P/BV (x ) (%)

ROA E

Source: DBS Bank, DBSVI, Bloomberg Finance L.P.

Market Focus

2018 Outlook


Singapore REITs

Neutral

Analyst Derek TAN +65 6682 3716 [email protected]

Mervin SONG CFA +65 6682 3715 [email protected]

Price

12-mthTarget

PricePE

2018F

Div Yld

2018F (S$) (S$) Rec (x) (%)

Ascendas REIT 2.65 2.85 BUY 17.8 6.1 CDL Hospitality 1.63 1.75 BUY 16.5 6.1

Far East Hospitality 0.695 0.76 BUY 18.1 6.0

Keppel REIT 1.19 1.28 BUY 19.6 4.8

Mapletree Logistics Trust 1.26 1.38 BUY 15.9 6.0

Mapletree Industrial Trust 1.96 2.15 BUY 17.0 6.1


S-REIT yield Chart


S-REIT DPU Growth momentum

Source: DBS Bank

Cyclical upturn vs Interest hikes

Improving demand prospects as Singaporeproperty market enters a cyclical upturn tooutweigh risk of interest rate hikes

Interest rate risk substantially hedged withimpact of a 1% rise to be modest in theimmediate term

Focus on S-REITs with superior growthvisibility and valuations. Top picks areAscendas REIT, Keppel REIT, MapletreeLogistics Trust, Mapletree Industrial Trust, CDLHospitality Trust and Far East Hospitality Trust

Outlook

Most property segments in Singapore seeing strongeroperating outlook. We project most property sub-segments in Singapore to approach a cyclical upturn, ledby improved demand (stronger Singapore GDPprospects) and a drop in competitive supply. We believethat the recovery will be led by the Hospitality sub-sector, office sub-sector and Industrial sub-sector(warehouse and business park). The retail sub-sector,while expected to see a cyclical uptick in demand in thenear term, will continue to see high supply completionsas an overhang in terms of near-term operationalperformance.

DPU growth of close to 2% as market conditionsimprove. Our DPU growth is projected to rise to anaverage of 2% per annum over the next two years, upfrom the 3% fall in FY17. The improvement is mainlycoming from the hospitality (3-5% growth) andindustrial (2% growth) REITs. DPU growth for the officeREITs is flattish owing to the fact that spot rents, whilerecovering, may still be below expiring rents in FY18.Meanwhile, the modest DPU growth for retail REITs isdue to supply headwinds pressuring retail rents.

Interest rate risk is substantially hedged. 2018 willanother year where S-REITs will have to negotiate pastroadbumps of another three rate hikes, implying thatrefinancing costs will likely head higher. However, theimpact will be mitigated by having on average close toc.80% of interest cost hedged into fixed rates. Inaddition, a weighted average debt expiry of 3.5 yearsimply that the actual impact of a 1% hike in rates willtake time to filter through to distributions.

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2017 2018 2019

Market Focus

2018 Outlook

Acquisition driven growth to complement organicgrowth. Post an active year where S-REITs investedclose to S$4bn to acquire new properties, raisingS$3.3bn in equity as a result, keeping gearing levels ata stable 35% (vs 45% cap), implying that there is stillheadroom for debt-funded growth. Based on currentshare price levels, acquisitions, when executed uponare likely to be accretive to distributions.

Given limited assets in Singapore, we expect S-REITsto continue diversifying overseas in search of higherreturns and to diversify their earnings base with REITsin the hospitality and industrial space more likelycandidates to execute on acquisition opportunities.Sponsor-related REITs with a more visible acquisitionpipeline might tap their sponsors’ for acquisitionopportunities.

Risks Faster-than-expected rate hike momentum. A

stronger-than-expected Fed rate hike momentum in2018 will mean higher-than-projected interest rates(for both shorter- and longer-term rates across theyield curve), posing risks to our estimates. As such,investors are also likely to require higher yields (andthus lower S-REIT prices) for investing in yield-sensitiveinstruments like S-REITs.

Valuations. A weaker-than-projected operatingperformance resulting in higher vacancies could meanlower book valuations for S-REITs going forward. Inaddition, a period of sustained higher interest ratesthan current levels could also prompt valuers to raisecap rate assumptions although we see this as amedium-term risk.


S-REITs’ share prices to remain resilient. The SingaporeREITs (FSTREI index) is trading at close to 13% year todate (YTD), which is in line with the Straits Times Index(FSSTI). Current dividend yields of close to 6.0% imply ayield spread of 3.9% when compared against the 10-year bond rate of 2.1%, an attractive level in our view.

Forward yield spreads are expected to fall to c. 3.3% byend-2018 on the back of a projected c.55bps increase in10-year yields to 2.65%. We note that levels aresustainable in view of tighter spreads of <3.0% inperiods of higher growth (2006-2007) prospects.

Pick S-REITS with leverage to improving macro prospectsand inorganic growth potential. Our strategy is to go forS-REITs that have the ability to still grow in the currentenvironment, offer superior growth visibility and/or tradeat a substantial discount to market transactions(Ascendas REIT, Mapletree Logistics Trust, MapletreeIndustrial Trust and Keppel REIT). In addition, we seeprospects for hospitality REITs to trade above book givenexpectations of a recovery in RevPAR over the next threeyears. A premium to book is in line with historicalexperience during an upturn in the hospitality market.Our picks in the office space are CDL Hospitality Trustand Far East Hospitality Trust. We also like Croesus for itsvaluations and higher yields.

Market Focus

2018 Outlook


Peers Valuation

Last Price 12-mth %Gearing

Rat io BV Per Sh P/B rat io

F YE 23-Nov -17 Price Target Upside 2017 2018 2017 2018 Recom'd F Y17 F Y17 (x)

Singapore (S$)Of f iceCapitaLand Commercial Trust Dec 1.830 1.80 -2% 9.1 9.1 5.0% 5.0% BUY 38% 1.71 1.07Fraser Commercial Trust Sep 1.440 1.55 8% 9.8 9.8 6.8% 6.8% BUY 35% 1.60 0.90Keppel Reit Dec 1.190 1.28 8% 5.7 5.7 4.8% 4.8% BUY 39% 1.40 0.85OUE Commercial Trust Dec 0.710 0.73 2% 4.7 4.7 6.6% 6.6% HOLD 38% 0.88 0.81Suntec REIT Dec 1.970 1.95 -1% 10.0 10.0 5.1% 5.1% HOLD 37% 2.16 0.91Retail 0% 0.00 0.00CapitaLand Mall Trust Dec 2.050 2.19 7% 11.0 11.1 5.3% 5.4% BUY 33% 1.90 1.08CapitaLand Retail China Trust Dec 1.680 1.80 7% 10.1 10.2 6.0% 6.0% BUY 37% 1.73 0.97Frasers Centrepoint Trust Sep 2.180 2.37 9% 11.9 12.6 5.5% 5.8% BUY 29% 2.02 1.08SPH REIT Aug 1.040 1.07 3% 5.5 5.5 5.3% 5.3% BUY 25% 0.94 1.10Mapletree Commercial Trust * Mar 1.560 1.62 4% 8.8 8.8 5.6% 5.6% HOLD 36% 1.38 1.13Mapletree Greater China Commercial Mar 1.150 1.30 13% 7.4 7.4 6.5% 6.5% BUY 39% 1.29 0.89Starhill Global REIT Jun 0.750 0.82 9% 4.9 4.9 6.6% 6.6% BUY 36% 0.92 0.81

Indust rial

Ascendas India Trust * Mar 1.150 1.15 0% 6.0 6.0 5.2% 5.2% HOLD 33% 0.81 1.42

Ascendas Reit * Mar 2.650 2.85 8% 15.7 15.6 5.9% 5.9% BUY 35% 2.05 1.29

Cache Logistics Trust Dec 0.860 0.83 -3% 6.8 6.4 7.9% 7.4% HOLD 36% 0.75 1.15Frasers Logistics & Industrial Trust Sep 1.090 1.18 9% 9.2 6.9 8.4% 6.4% BUY 29% 0.96 1.14Mapletree Industrial Trust * Mar 1.960 2.15 10% 11.9 11.9 6.1% 6.1% BUY 30% 1.47 1.33

Mapletree Logistics Trust * Mar 1.260 1.38 9% 7.6 7.6 6.0% 6.0% BUY 39% 1.16 1.08

Soilbuild Business Space Reit Dec 0.645 0.62 -4% 5.4 4.7 8.4% 7.2% HOLD 37% 0.72 0.90

Hospitalit yAscendas Hospitality Trust * Mar 0.860 0.88 2% 5.8 5.8 6.7% 6.7% BUY 32% 0.92 0.94Ascott Residence Trust Dec 1.180 1.28 8% 7.2 7.2 6.1% 6.1% BUY 36% 1.22 0.96CDL Hospitality Trust Dec 1.630 1.75 7% 10.0 10.0 6.1% 6.1% BUY 33% 1.50 1.08Far East Hospitality Trust Dec 0.695 0.76 9% 4.2 4.2 6.0% 6.0% BUY 32% 0.90 0.77OUE Hospitality Trust Dec 0.825 0.85 3% 5.1 5.1 6.2% 6.2% BUY 38% 0.76 1.09

Healthcare & Others

Parkway Life Dec 2.830 3.10 10% 12.3 12.3 4.3% 4.3% BUY 36% 1.71 1.65

RHT Health Trust* Mar 0.840 0.85 1% 5.1 5.1 6.1% 6.1% HOLD 29% 0.85 0.99IREIT Global Dec 0.750 0.75 0% 6.0 6.0 8.0% 8.0% HOLD 41% 0.67 1.12Keppel DC REIT Dec 1.430 1.44 1% 7.7 7.7 5.4% 5.4% BUY 37% 0.95 1.50Manulife US Real Estate Inv (US$) Dec 0.890 0.99 11% 7.1 7.1 8.0% 8.0% BUY 34% 0.89 1.00

DPU cents Y ield

Source: DBS Bank, Bloomberg Finance L.P. * FY18 & 19 forecast

Market Focus

2018 Outlook

ed: JS, TH / sa: JC, PY, CS

Telecommunication

Underweight

Analyst Sachin MITTAL +65 6682 3699 [email protected]

Price

12-mthTarget

PricePE

2018F

Div Yld

2018F

EPS CAGR 2016-2018

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

Singtel 3.70 4.30 BUY 15.8 6.7 0 M1 1.78 1.49 FV 14.5 5.5 (13) StarHub 2.83 2.20 FV 19.4 5.7 (7)


Singtel’s EBITDA is growing on an annual basis versus a ~6% decline at peers, not reflected in its valuation yet


Chart 2 - M1 has reversed the trend of revenue share loss, possibly on the back of Circles.Life since 3Q16


M1 takes cue from Circles.Life to raise competition

M1's new mySIM plans will dilute ARPU further,thwarting efforts by other players to stabiliseARPU

Our top pick is Singtel as its core plus digitalbusinesses is trading at an unwarranted 20-40%discount to M1 and StarHub. No visibility ofearnings bottoming out for M1 and StarHub.Maintain FULLY VALUED on StarHub and M1 withlower TPs

Outlook

Negative – Intensifying competition with the entry of Circle.Lifein 2017 and MyRepublic and TPG in 2018 to aggravate pricecompetition and contract growth of industry revenues.

Risks TPG struggling to roll out a network. Any potential delay in

TPG’s rollout due to operational challenges or failure ofMyRepublic to gain traction could stabilise industry revenuesand data yields faster than our expectations.

Valuation & Stock Picks Singtel remains our top pick. Discounted valuation to peers

despite Singtel’s resilient business model makes it a strongcandidate to be re-rated. Maintain BUY with a TP of S$4.30.

Maintain FULLY VALUED calls on Starhub and M1, with lowerTPs of S$2.20 and S$1.49 respectively.

M1 is undercutting efforts of its peers to stabilise ARPU, taking a cue from Circles.Life. Singtel and StarHub attempted to stabilise postpaid ARPUs in August-September 2017 by offering more bundled data with upward revision in package pricing. However, M1’s handset-based MySIM* plans launched in October offer more bundled data at a lower package price. This effectively reduces the pricing of packages by 16-22% versus its older plans based on our estimates, and would lead to a dilution of postpaid ARPU. This may help M1 garner higher revenue share, provided that Singtel and StarHub do not react. We believe that M1, as the network provider for Circles.Life, is painfully aware of the ~1% market share gained by Circles.Life by virtue of its low-touch business model and cheaper data pricing. While the market is concerned about TPG’s entry in late 2018, Circles.Life is quietly chipping away market share.

Market is valuing Singtel’s core + digital business at 5.6x EV/EBITDA versus 7x for M1 and 9x for StarHub. With breakeven in 1Q18, the market is likely to appreciate its

Market Focus

2018 Outlook

resilient business (see side chart) and its early lead in digital transformation. Singtel is trading at a 20-40% discount vs. peers in Singapore.

Cost escalations to weigh on M1 while StarHub continues to lose pay TV and broadband subscribers. Despite revenue share gains since 3Q16 (see side chart), we expect M1’s earnings to trend downwards due to adverse impact of fair value accounting (FVA) for iPhone (iPhone 8 take-up is rather slow) and higher staff costs to grow its enterprise business. Even in the unlikely scenario of M1’s EBITDA stabilising over FY18F/19F, its earnings will still decline due to high network and spectrum investments leading to higher depreciation, thus impacting dividends adversely. StarHub, on the other hand, is also facing pressure in the pay TV and broadband businesses, which are critical factors for earnings and the stock’s performance. StarHub needs to lever up to sustain its annual 16-Sct DPS, in our view.

Gearing up for a new paradigm

Telcos have started to introduce unlimited data plans. Since late August 2017, Singapore’s incumbent telcos started offering unlimited data plans to re-contracting/new users. M1 introduced 4G mySIM3 SIM-only plans which offer higher data allocation compared to previous mySIM plans including an unlimited data plan at S$88 while StarHub’s new plans limit unlimited data to weekends, with an increase in monthly package prices of S$2-6. Singtel offers unlimited data plans for its higher-end postpaid packages (starting from S$68.90/month) as an add-on for S$39.90. As a reaction to Singtel’s unlimited data plan, M1 is now offering mySIMe plans at S$20-40 premium with handset subsidies compared to SIM-only plans.

StarHub and Singtel's plans are ARPU accretive, but undercut by M1’s new mySIMe plans. We believe StarHub’s new plans, with higher prices and weekend only unlimited data, would encourage users to re-contract at higher monthly prices. Similarly, by eliminating Data X2 and Data X3 plans, Singtel is leaving its subscribers to sign up for the more expensive Data X Infinity add-on. As a result, despite the lower per unit revenue for data, the new unlimited plans are likely to increase postpaid ARPUs of StarHub and Singtel, indicating that incumbents are less concerned about potential competition from TPG’s entry.

However, M1 may undercut with cheaper data plans which could allow subscribers to switch to a cheaper smartphone or SIM-only plan. The new SIM-only plans are 20-70% cheaper compared to previous SIM-only plans while the new mySIMe plans allow re-contracting subscribers to switch down and enjoy the same data allowances, albeit with lower voice and SMS allocation.

M1 is adjusting to the new paradigm of lower data pricing in the long term. We believe Singtel and StarHub's data plans are mostly focused on improving near-term revenues by pushing up ARPUs. However, in contrast, the new M1 plans seem like a part of M1’s long-term strategy of gaining market share while adjusting to the new paradigm of lower data prices, higher transparency and subscriber choice, which will inevitably surface once the fourth player enters the market. M1’s MySIMe plans offer higher data allowances at comparable prices while also showing a clear distinction between what the customers are paying for service and smartphones. Similarly, by having comparable SIM-only plans as well as retaining the legacy heavy bundled packages, M1 leaves subscribers with a choice unlike other telcos.

Though this is likely to cause near-term pain in the market with potential ARPU dilution, M1 could end up gaining market share in the near term if Singtel and StarHub do not retaliate by introducing new plans of their own.

Despite market share gains, M1’s earnings are set to decline. With competition in the mobile segment, M1 is looking to expand its headcount in the enterprise segment with the intention of generating new revenue streams. The higher project-related expenses have resulted in an increase in overall operating expenses for M1. Enterprise revenues are yet to show a significant improvement and mobile revenues are likely to contract industry-wide due to the new MySIM plans which may lower M1’s revenues going forward. Furthermore, M1’s ongoing network investments and the expanded asset base is likely to increase deprecation costs for M1, which would reduce M1’s earnings in the coming quarters. This would negatively impact M1’s dividend payment, which is set at 80% of earnings. Handset subsidies and dividend payments, being critical factors for M1, should therefore have a negative impact on M1’s share price, in our view.

StarHub is trying to grow its enterprise business to offset the decline of other businesses. Since 2H16, StarHub has been showing signs of weaker revenue with mobile and pay TV posting weaker figures. Though enterprise fixed revenues had a bumper 4Q16, masking underlying weakness of the other segments, it has not been enough to offset declining pay TV and mobile revenues. We believe StarHub’s hubbing strategy is starting to weaken with a number of households downgrading from double-play and triple-play services. As this is a critical success factor for StarHub, there could be near-term impact on the company's share price as the structural decline is unlikely to reverse.

Singtel’s Singapore operations remain superior to peers which is not reflected in its valuations. Singtel’s Singapore operations generate over 50% of revenues from enterprise

Market Focus

2018 Outlook

ed: JS, TH / sa: JC, PY, CS

which should enable it to fare better in the near term compared to its peers M1 and StarHub. EBITDA from Singtel’s Singapore operations has shown much better resilience in 9M17, declining only 2% compared to its peers M1 and StarHub which posted declines of 5% and 7% respectively. With EBITDA in Australia growing, Singtel’s total EBITDA was up 4% over the same period. However, despite this, the counter trades at 20-40% discounts to its Singapore-listed peers.

Entry of MyRepublic to cause further disruptions in an already heated marketplace. MyRepublic confirmed that it has secured a deal, potentially with Starhub, to purchase airtime, allowing the telco to enter the Singapore mobile space in early 2018 as a Mobile Virtual Network operator. MyRepublic also managed to raise ~S$70m from Singapore-based Makara Capital which puts the telco, known for its aggressive pricing strategies and generous data allowances, on a strong footing to compete with the incumbents after its entry. MyRepublic's entrance would cause further pricing pressure and accelerate data yield declines of the incumbents, exacerbating pressure on the industry's top-line growth.

Peer Valuations

Mkt Price12-mthTarget EPS CA GR



Singtel 44,907 S$ 3.70 4.30 16% BUY 15.8x 15.3x 1.9x 1.9x 8.5x 8.5x 20% 13% 4.7% 6.7% 0.2

M1 1,224 S$ 1.78 1.49 -16% FV 14.5x 17.1x 3.9x 3.9x 7.5x 7.4x 27% 23% 6.2% 5.5% -13.5

Starhub 3,637 S$ 2.83 2.20 -22% FV 19.4x 21.2x 34.1x 37.1x 10.0x 10.1x 162% 168% 5.7% 5.7% -7.0

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

Div Y ield

P/BV (x ) (%)

ROA E


Market Focus

2018 Outlook

ed: TH sa: JC, CS

Transport

Underweight

Analyst Paul YONG CFA +65 6682 3712 Andy SIM CFA +65 6682 3718 [email protected] [email protected]

Suvro SARKAR +65 6682 3720 [email protected]

Price

12-mthTarget

PricePE

2018F

Div Yld

2018F

EPS CAGR 2016-2018

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

China Aviation Oil 1.53 2.08 BUY 10.0 3.0 9 ComfortDelgro 2.08 2.18 HOLD 15.5 5.1 (1) HPH Trust 0.42 0.39 HOLD 24.6 6.1 13 SIA Engineering 3.18 3.48 HOLD 22.8 4.1 (4) Singapore Airlines 10.63 10.30 HOLD 19.6 2.4 31 ST Engineering 3.27 3.70 HOLD 20.1 4.4 5


Jet Fuel and Brent Prices (US$ per barrel) since 2014

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Sector FY18F ROE and 2-year EPS CAGR

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Source: DBS Bank

Tough flight

Combating strong headwinds from increasingcompetition, structural changes and the threat ofhigher oil prices

The sector offers decent yields but lack catalyst

China Aviation Oil (TP S$2.08) is our only BUY callin the sector

Aviation: Travel growth is firm but yields under pressure HOLD call for SIA (TP S$10.30) as yield outlook is

subdued amid stiff competition. While air traveldemand growth is projected to be robust for many years,competition is especially keen in the Asia-Pacific regionwhere many carriers are increasing capacity. We expectSIA’s flagship passenger segment to continue facingpressure on its yields and hence operating earnings areprojected to remain subdued. SIA’s 3-year transformationplan could pay off in the longer term but we remaincautious on its near-term earnings outlook.

CAO (BUY, TP S$2.08) is a more attractive proxy for

air travel growth. We prefer China Aviaiton Oil (CAO)given its monopolistic position as the sole importer ofbonded jet fuel into China, and for its 33% stake in theexclusive jet fueller SPIA at Shanghai Pudong InternationalAirport. CAO should also benefit in a rising oil priceenvironment from a) mark-to-market gains on fuelinventories held at its jet refuelling businesses in Shanghaiand Hong Kong, and b) easier trading profits due tocontango.

Defense and MRO: Lack of upside catalysts HOLD call (TP S$3.70) for ST Engineering as no

visibility on near-term catalysts. With managementturning more cautious on the Electronics segment, andwith a more tempered order win outlook for 2018, we aremaintaining our HOLD call on the stock. Initiatives intoareas such as Smart City products, robotics and aircraftleasing while positive, will take time to gain traction.

Limited upside catalysts for SIA Engineering, HOLD

(TP S$3.48). Structural headwinds persist in the form ofOEM encroachment in the aftermarket space, longer heavymaintenance cycles for newer aircraft models and keencompetition from emerging lower-cost regionalcompetitors. Recent earnings were also impacted by adecline in aircraft under fleet management, as well as

Market Focus

2018 Outlook

margin erosion. A yield of about 4% should support share price.

Decent yield of over 5% for both HPH Trust and

Comfortdelgro HOLD (TP S$2.18) for CD as challenges persist; 5.1%

yield is decent. While headwinds persist for its taxibusiness, this should be partially mitigated byimprovements in its public transport business.Furthermore, CD’s current yield at ~5% could providesupport for its share price. We expect DPS to be at leastmaintained, if not nudged up, given its lower capexrequirements. A stabilisation of taxi fleet contraction, orpositive fruition of its strategic alliance with Uber andperceived benefits could be catalysts for the stock.

HK operations a drag for HPH Trust (HOLD, TP

US$0.39). We are neutral on HPH Trust despite a quiteattractive 6.1% yield being on offer as we see its HongKong operations struggling to improve its profitabilitysignificantly. This is partly due to the formation of largershipping alliances being able to negotiate better terms

and also due to competition remaining stiff in the transshipment business.

Risks and Catalysts Significantly higher oil prices would impact SIA and HPH

Trust directly. Assuming 50% hedge and all else beingequal, each US$1 per barrel increase in jet fuel price willnegatively impact SIA’s FYE March 2019 earnings by 5%. Thedegree to which SIA can mitigate this impact would dependon its ability to pass on the increase to consumers in the formof higher air fares. We estimate that energy costs account forabout 15% of HPH Trust’s total operating costs, and asignificant increase in fuel prices could pressure its margins.

Stronger demand from a pick-up in economic activity

could help lift earnings across the sector. A stronger-than-anticipated acceleration in economic growth and activityglobally would help improve both demand volume and pricingfor companies in the transport sector. This should in turn helpenhance ROEs, which have been under pressure for the lastfew years.

Peers Valuation




China Aviation Oil 984 S$ 1.53 2.08 36% BUY 10.0x 9.1x 1.3x 1.1x 5.6x 5.8x 13% 13% 2.8% 3.0% 9.1

ComfortDelgro 3,345 S$ 2.08 2.18 5% HOLD 15.5x 14.8x 1.7x 1.7x 5.6x 5.2x 11% 11% 5.1% 5.1% -0.7

HPH Trust 3,659 US$ 0.42 0.39 -7% HOLD 24.6x 22.3x 0.7x 0.7x 10.8x 10.0x 3% 3% 6.1% 6.1% 12.7

SIA Engineering * 2,643 S$ 3.18 3.48 9% HOLD 22.4x 20.6x 2.3x 2.3x 13.9x 13.1x 11% 11% 4.1% 4.1% 5.2

Singapore Airlines * 9,343 S$ 10.63 10.30 -3% HOLD 20.4x 20.0x 0.9x 0.9x 5.0x 4.9x 4% 4% 2.4% 2.4% -2.2

ST Engineering 7,573 S$ 3.27 3.70 13% HOLD 20.1x 18.8x 4.5x 4.3x 11.6x 11.0x 23% 23% 4.3% 4.4% 5.5

PE (x ) EV /EBITDA (x ) (%)

Div Y ield

P/BV (x ) (%)

ROA E

*FYE Mar ‘19F and ‘20F


Market Focus

2018 Outlook

Company Guide

ed: JS / sa: AS, PY

BUYLast Traded Price ( 9 Nov 2017): S$12.14 (STI : 3,423.91)

Price Target 12-mth: S$14.03 (16% upside) (Prev S$12.63)

Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN +65 6682 3716 [email protected]

What’s New 3Q17 earnings in line

Strong take-up in existing residential projects in

Singapore and China

Gearing up to launch 4 projects in Singapore over

2018/1Q19; successful take-up will lift valuations higher

TP raised to S$14.03

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2016A 2017F 2018F 2019F

Revenue 3,905 3,983 3,452 3,311 EBITDA 1,050 1,259 1,218 966 Pre-tax Profit 914 960 924 675 Net Profit 640 604 591 459 Net Pft (Pre Ex.) 474 604 591 459 Net Pft Gth (Pre-ex) (%) 7.2 27.5 (2.3) (22.2) EPS (S cts) 70.4 66.5 65.0 50.5 EPS Pre Ex. (S cts) 52.1 66.5 65.0 50.5 EPS Gth Pre Ex (%) 7 28 (2) (22) Diluted EPS (S cts) 67.1 63.3 61.9 48.1 Net DPS (S cts) 17.4 16.0 16.0 16.0 BV Per Share (S cts) 1,022 1,071 1,120 1,155 PE (X) 17.2 18.3 18.7 24.0 PE Pre Ex. (X) 23.3 18.3 18.7 24.0 P/Cash Flow (X) 9.3 12.0 20.2 24.9 EV/EBITDA (X) 14.5 12.0 12.5 16.0 Net Div Yield (%) 1.4 1.3 1.3 1.3 P/Book Value (X) 1.2 1.1 1.1 1.1 Net Debt/Equity (X) 0.2 0.2 0.2 0.2 ROAE (%) 7.0 6.4 5.9 4.4

Earnings Rev (%): 0 0 0 Consensus EPS (S cts): 60.3 69.6 72.2 Other Broker Recs: B: 13 S: 1 H: 6

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

Gearing up for new launches

Maintain BUY; TP at S$14.03. We maintain our BUY call on City

Dev with TP of S$14.03 mainly on re-pegging the valuation on

M&C to NAV. With the Singapore property market in the

nascent stages of an upturn, City Dev is largely seen as a key

proxy to upward trends in the Singapore residential market and

has historically traded up to 1.2x-1.3x P/NAV, which our TP

implies.

Where we differ. Amongst the highest TP in the street. We

believe that catalysts abound for the group after its successful

land-banking activities. With a robust pipeline of 4 residential

projects for launch in 2018/1Q19, a better than projected sell-

through rates at these new launches will be a re-rating price

catalyst. In addition, strong sales momentum at its existing

unsold inventories (in Singapore and China) offer strong

earnings visibility in the medium term.

Catalyst: Strong pre-sales at launch projects/land-banking

activities.

Completion of the privatisation of Millennium & Copthorne.

City Dev announced a possible cash offer to acquire all the

outstanding Millennium & Copthorne Hotels (M&C) shares for

552.5 pence per share (cash + special dividend). The offer price

is currently below the last traded price of 610 pence, which is a

potential hurdle to a marriage of this deal.

Valuation:

We maintain our BUY call, TP of S$14.03, based on a parity to

RNAV, which implies 1.2x P/NAV.

Key Risks to Our View:

Non-completion of privatisation. The inability to complete the

privatisation exercise could limit potential upside to RNAV.

At A Glance Issued Capital (m shrs) 909

Mkt. Cap (S$m/US$m) 11,039 / 8,123

Major Shareholders (%)

Davos Investments Holdings Ltd 16.3

Hong Leong Investment 15.4

Standard Life Aberdeen 7.9

Free Float (%) 60.3

3m Avg. Daily Val (US$m) 18.5

ICB Industry : Real Estate / Real Estate


10 Nov 2017

Singapore Company Guide

City Developments Version 10 | Bloomberg: CIT SP | Reuters: CTDM.SI Refer to important disclosures at the end of this report

Company Guide

City Developments

WHAT’S NEW

Gearing up for new launches

Net earnings down 8.3%: City Developments Limited

(CDL) has reported a 8.3% drop in earnings to

S$156.1m. Revenues were 6.5% lower y-o-y at

S$863.1m. CDL reported 9M17 net profit of

S$351m, a 14% drop y-o-y. This was due to (i) lower

revenue (-9% y-o-y), mainly from lower revenue

recognition from property development, (ii) lower

other operating income (-44%) where gains from

disposal of an office building in Osaka in 3Q17 were

lower than the gains recognised in 1H16, iii) lower

share of profit from JVs (S$1.4m in 9M17 vs S$27m

profit in 9M16) due to absence in contribution from

Echolon and Bartley Ridge which had TOP in FY16,

and iv) lower net finance costs (-17% y-o-y) from

lower borrowing costs.

The lower revenue was mainly due to lower

recognition from property development (-22% y-o-y)

as Lush Acres EC and Jewel@Buangkok had received

TOP in 2Q16 and 3Q16 respectively. 9M17 revenue

from property development was mainly from

Gramercy Park (88% sold), Coco Palms (98%) and

The Venue Residences (100%) in Singapore, and

progressive handover of units at Phase 1 Suzhou

Hong Leong City Center (HLCC), Hongqiao Royal

Lake, Shanghai.

Hotel revenue and PBT grew 5% y-o-y and 18% y-o-

y respectively, supported by contribution from Grand

Millennium Auckland and M Social Hotel which were

added to the portfolio, and increased contribution

from ONE UN New York whose East Tower was

closed for refurbishment in 1H16. The higher PBT

was mainly due to write-back of impairment loss of

S$22m in 2Q17.

Rental Properties revenue fell 6% y-o-y while PBT

increased 21% y-o-y. The fall in revenue was largely

due to the absence of rental income following the

disposal of equity interest in Exchange Tower Limited

which owned a commercial building in Oct16, and

closure of Le Grove Serviced Apartments for a major

revamp but this was partially offset by maiden

contribution from Pullman Hotel Munich, acquired by

CDLHT in Jul17. The higher PBT was mainly due to

gains on disposal of the office building in Osaka,

partially offset by higher exchange losses (CDLHT)

following a repayment of an NZD intercompany

loan.

3Q17 net profit fell 8% y-o-y to S$156m on lower

revenue (-7% y-o-y) following the absence of

recognition from Jewel@Buangkok (TOP in 3Q16),

Hanover House in Reading, UK, and lower

contributions from D’Nest and Coco Palms, lower

other operating income (-22%) offset by lower net

finance costs (-32%) and higher share of profits of

associates and JVs (+10%).

Outlook:

Singapore – strong pipeline of projects

Good sales momentum in Singapore residential projects:

YTD Sept 2017, CDL and its associates have sold close to

1,056 units (including Executive Condominiums (ECs)

amounting to S$$1.8bn, which is almost triple that when

compared to a year ago (YTD 9M16 sold 482 units with

a sales value of S$622m).

Demand for the group’s projects in China remained

healthy with CDL booking in sales 32 villas with a total

sales value of RMB 1.03bn. HLCC, in Suzhou continued

to see strong sales momentum. Phase 1 saw 83% sold of

1,374 units with a sales value of RMB2.5bn while Phase

2 saw 49% of the 212 units sold at RMB 671m.

Healthy interest in recently launched projects in

Singapore. Gramercy Park along Grange Road is now

88% sold (153 units) while the 513-unit Forest Woods is

over 90% sold while Coco Palms is now close to 98%

sold. The 845-unit Commonwealth Towers is also fully

sold. The group’s ECs are substantially sold (638-unit The

Brownstone, 99% sold while The Criterion is c. 90%

sold).

Four project launches planned in 2018/1Q19. Looking

ahead, CDL has a robust line-up of projects to be

launched in 1H18. First to hit the market will be New

Futura (124-unit freehold development at Leonie Hill,

District 9) in 1Q18 and 861-unit suburban condominium

in Tampines Avenue 10.

CDL is also preparing the soft launch of South Beach

Residence (190 units) in 1H18.

The recent acquisition of Amber Park condominium is

expected to complete by 1H18, and launched in 1Q19.

Overseas – forming strategic collaborations

JV to enter luxury senior housing sector. In 3Q17, the

group entered into a collaboration with Waterbrook

Lifestyle Resorts to develop a retirement village in Bowral,

New South Wales. The group will be participating

through debt financing of A$22m.

In 3Q17, the group completed the divestment of a non-

core office asset in Osaka, Japan for S$38m.

JV with Vanke in China. Expected to complete by

Dec’17, CDL and Vanke will work-together to jointly

manage the sale of two properties in Chongqing –

Company Guide

City Developments

Chongqing Huang Huayuan (30% stake held by CDL)

and Eling Residences (50% stake held by CDL). The

paring down of the stake will see CDL reap lose to RMB

986m in capital and de-risk their exposure in the city.

Working with Vanke, CDL is able to tap on the former’s

local expertise and networks to enhance positioning and

marketability of the projects.

TP increased to S$14.03. Our TP is adjusted upwards to

S$14.03 as we marked to market the group’s listed

associate (CDLHT) and assumed NAV for its existing

c.65.2% stake in Millennium & Copthorne. Maintain our

BUY call.

Quarterly / Interim Income Statement (S$m)

FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq

Revenue 923 854 863 (6.5) 1.1

Cost of Goods Sold (493) (438) (437) (11.4) (0.3)

Gross Profit 430 416 427 (0.8) 2.5

Other Oper. (Exp)/Inc (50.6) (85.2) (60.5) 19.6 (28.9)

Operating Profit 245 203 238 (2.8) 17.6

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - -

Associates & JV Inc 16.5 (1.9) 18.2 10.6 nm

Net Interest (Exp)/Inc (22.7) (15.5) (15.5) 31.8 (0.1)

Exceptional Gain/(Loss) 0.0 0.0 0.0 - -

Pre-tax Profit 239 185 241 0.9 30.0

Tax (35.6) (30.8) (39.0) 9.5 26.5

Minority Interest (33.1) (44.7) (45.9) (38.7) 2.7

Net Profit 170 110 156 (8.3) 42.2

Net profit bef Except. 170 110 156 (8.3) 42.2

EBITDA 313 255 312 (0.5) 22.2

Margins (%)

Gross Margins 46.6 48.7 49.4

Opg Profit Margins 26.6 23.7 27.6

Net Profit Margins 18.5 12.9 18.1

Source of all data: Company, DBS Bank

Company Guide

City Developments

CRITICAL DATA POINTS TO WATCH

Critical Factors

Deployment of capital in key markets in 2017. Weighed down

by a lack of sizable investable deals in Singapore, one of the key

focus areas for the group has been to deploy capital overseas

into 5 countries (Australia, China, UK, Japan, and the US) as key

markets that the group sees attractive adjusted returns. The

group has invested close to S$770m so far in 2017.

Expect City Dev to reap the fruits of its past investments from

2017 onwards. In London – City Dev will progressively complete

projects at Belgravia and Knightsbridge in 2017 while the

Teddington Riverside development is expected to be launched

progressively from 2H17. Other projects like the Stag Brewery

Mortlake site and the recently acquired site at Ransomes Wharf

(acquired for GBP58m, GDV of GBP 222m) is projected to be

launched in the medium term.

In China, City Dev will continue to focus on the execution and

delivery of Hong Leong City Center. Phase 1 is 83% sold (sales

value RMB 2.5bn) and phase 2 is 49% sold with sales value of

RMB 607m adds to earnings visibility.

In Australia, the group’s JV residential project in Brisbane is

95% sold (Ivy and Eve, two 30-storey towers comprising 472

apartments), and will be booked in 2018. The group’s

developments in Tokyo will likely be launched in the medium

term.

New launches in Singapore in 2017. As at end 3Q17, City Dev’s

existing unsold inventory of its various launched projects in

Singapore amounted to close to 345 units, representing close to

5% of total units. It’s effective stake in this unsold inventory is

close to 254 units. The group is gearing up for new launches

which are notably in the high-end residential segment in 2018-

2019. This includes 124-unit New Futura at Leonie Hill Road,

Tampines Ave 10 site, South Beach Residences in 2H18 and the

launch of a development at the Amber Park site (en bloc

acquisition).

Funds management platform. City Dev remains on track to hit

its S$5bn AUM target by 2018. Over the past 3 years, it has

injected close to S$3.5bn in assets into its funds management

platform through 3 separate profit participating securities (PPS)

structures, seeded by various assets across its portfolio. The

launch of these PE funds is expected to drive regular income

stream through fund management fees and promotion fees

when these funds exit.

Revenue growth (FY15A-19F)

Breakdown in revenues (FY17F)

Revenue growth from hotel segment

RNAV

RNAV S$'m

Investment Portfolio (office) 3,434.5

Investment Portfolio (mixed Development ) 1,505.1

Investment Portfolio (hotels) 1,071.5

Investment Portfolio (retail) 934.4

Investment Portfolio (industrial and others) 137.4

GDV of residential portfolio 4,250.7

Listed Stakes in

M&C 1,785.0

CDL HT 412.0

Others 0.0

Gross Asset Value 13,530.6

Less: pref conversion (211.8)

Less: Net debt (1,264.7)

RNAV of CDL 12,054.1

No of shares 954.3

RNAV/share 12.63

Discount 0%

TP 12.63

Source: Company, DBS Bank

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

2015A 2016A 2017F 2018F 2019F

S$'m

Others Hotel operations Rental income Property devt

Property devt

46%

Rental income

9%

Hotel operations

41%

Others

4%

0%

10%

20%

30%

40%

50%

60%

1,560.0

1,580.0

1,600.0

1,620.0

1,640.0

1,660.0

1,680.0

1,700.0

1,720.0

2015A 2016A 2017F 2018F 2019F

S$'m

Revenue % of topline

Company Guide

City Developments

Appendix 1:

City Dev’s absolute performance vs Property sales volume Remarks

Share price performance is

positively correlated to

property sales volume.

Source: DBS Bank, Thomson Analytics, Company, Bloomberg Finance L.P.

City Dev’s absolute performance vs % change in PPI Remarks

While increase in

property prices led share

price performance in

2009-2010, we did not

see any major

correlation thereafter.


60

80

100

120

140

160

180

200

220

Dec

-08

May-

09

Oct

-09

Mar-

10

Aug-1

0

Jan-1

1

Jun-1

1

Nov-

11

Apr-

12

Sep-1

2

Feb-1

3

Jul-13

Dec

-13

May-

14

Oct

-14

Mar-

15

Aug-1

5

Jan-1

6

Jun-1

6

Nov-

16

Apr-

17

Sep-1

7

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Sh

are

price

abs

per

f (IN

dex

)

Sale

s vo

lum

e (units)

Sale volume (units) - RHS Abs Price Perf - LHS

60

80

100

120

140

160

180

200

220

Dec

-08

May-

09

Oct

-09

Mar-

10

Aug-1

0

Jan-1

1

Jun-1

1

Nov-

11

Apr-

12

Sep-1

2

Feb-1

3

Jul-13

Dec

-13

May-

14

Oct

-14

Mar-

15

Aug-1

5

Jan-1

6

Jun-1

6

Nov-

16

Apr-

17

Sep-1

7

-20

-15

-10

-5

0

5

10

15

20

Sh

are

price

abs

per

f (IN

dex

)

% c

hange

in P

PI (%

)

% change in PPI - RHS Abs Price Perf - LHS

Company Guide

City Developments

Balance Sheet:

Undervalued Net Asset Value (NAV). 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

City Dev’s properties are much higher than carrying values.

Low gearing of 13%. City Dev’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 management’s comfortable range. This provides greater

financial flexibility and debt headroom for the group to acquire

opportunistically.

Share Price Drivers:

Replenishing land bank is key to income sustainability. The

ongoing tight government measures have taken a toll on the

group’s residential business segment, with the group staying

selective on land banking activities while continuing to clear

existing land-bank in its portfolio. This year, the group

successfully tendered for Amber Park for S$906.7m which will

be re-developed into an 800-unit development.

Successful launch of new residential projects. The successful

take-up of its pipeline projects especially the high-value projects

in New Futura and South Beach Residences will drive positive

investor sentiment on property stocks, which we believe will

enable City Dev to maintain its premium to NAV valuation.

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. Unsold inventories are mainly in the high-end and

executive segments whose unsold stock typically take time to

clear.

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 (City Dev) 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 facility

management.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Company Guide

City Developments

Segmental Breakdown

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (S$m)

Property devt 1,037 1,745 1,833 1,234 1,032

Rental income 405 367 376 395 408

Hotel operations 1,698 1,634 1,613 1,661 1,711

163 160 160 160 160

Others 0.0 0.0 0.0 0.0 0.0

Total 3,304 3,905 3,983 3,452 3,311

Income Statement (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 3,304 3,905 3,983 3,452 3,311

Cost of Goods Sold (1,648) (2,148) (1,948) (1,650) (1,734)

Gross Profit 1,656 1,758 2,035 1,802 1,578

Other Opng (Exp)/Inc (1,024) (1,001) (1,029) (892) (856)

Operating Profit 632 757 1,005 910 722

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 107 70.5 31.8 86.2 21.8

Net Interest (Exp)/Inc (72.2) (80.1) (77.7) (71.8) (68.6)

Exceptional Gain/(Loss) 318 166 0.0 0.0 0.0

Pre-tax Profit 985 914 960 924 675

Tax (119) (151) (188) (170) (132)

Minority Interest (92.7) (109) (154) (151) (70.6)

Preference Dividend (12.9) (12.9) (12.9) (12.9) (12.9)

Net Profit 760 640 604 591 459

Net Profit before Except. 442 474 604 591 459

EBITDA 954 1,050 1,259 1,218 966

Growth

Revenue Gth (%) (12.2) 18.2 2.0 (13.3) (4.1)

EBITDA Gth (%) 1.6 10.1 20.0 (3.3) (20.7)

Opg Profit Gth (%) (7.6) 19.8 32.8 (9.5) (20.7)

Net Profit Gth (Pre-ex) (%) 10.2 7.2 27.5 (2.3) (22.2)

Margins & Ratio

Gross Margins (%) 50.1 45.0 51.1 52.2 47.6

Opg Profit Margin (%) 19.1 19.4 25.2 26.4 21.8

Net Profit Margin (%) 23.0 16.4 15.2 17.1 13.9

ROAE (%) 8.7 7.0 6.4 5.9 4.4

ROA (%) 3.8 3.2 3.0 2.9 2.2

ROCE (%) 3.1 3.5 4.4 3.9 3.0

Div Payout Ratio (%) 20.8 24.7 24.1 24.6 31.7

Net Interest Cover (x) 8.8 9.5 12.9 12.7 10.5


Driven by locked in sales and overseas development projects

Company Guide

City Developments


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 923 1,167 784 854 863

Cost of Goods Sold (493) (637) (418) (438) (437)

Gross Profit 430 530 366 416 427

Other Oper. (Exp)/Inc (50.6) (66.3) (101) (85.2) (60.5)

Operating Profit 245 322 133 203 238


Associates & JV Inc 16.5 31.0 0.20 (1.9) 18.2


Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 239 332 115 185 241

Tax (35.6) (63.8) (15.6) (30.8) (39.0)

Minority Interest (33.1) (24.0) (13.8) (44.7) (45.9)

Net Profit 170 244 85.5 110 156

Net profit bef Except. 170 244 85.5 110 156

EBITDA 313 418 186 255 312

Growth

Revenue Gth (%) (15.5) 26.5 (32.8) 9.0 1.1

EBITDA Gth (%) 12.0 33.3 (55.5) 37.1 22.2

Opg Profit Gth (%) 14.6 31.2 (58.7) 52.6 17.6

Net Profit Gth (Pre-ex) (%) 27.3 43.1 (64.9) 28.6 42.2

Margins Gross Margins (%) 46.6 45.4 46.7 48.7 49.4

Opg Profit Margins (%) 26.6 27.6 16.9 23.7 27.6

Net Profit Margins (%) 18.5 20.9 10.9 12.9 18.1

Balance Sheet (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 5,175 5,136 5,314 5,492 5,670

Invts in Associates & JVs 1,307 1,462 1,539 1,672 1,740

Other LT Assets 2,949 3,120 3,120 3,120 3,120

Cash & ST Invts 3,597 3,690 3,990 3,933 3,773

Inventory 11.2 11.8 9.74 8.25 8.67

Debtors 1,762 1,166 1,328 1,151 1,104

Other Current Assets 5,519 5,213 4,888 5,173 5,542

Total Assets 20,319 19,797 20,188 20,547 20,955

ST Debt

1,911 1,783 1,783 1,783 1,783

Creditor 1,602 1,575 1,429 1,210 1,272

Other Current Liab 319 301 238 219 182

LT Debt 4,572 3,955 3,955 3,955 3,955

Other LT Liabilities 702 774 774 774 774

Shareholder’s Equity 8,996 9,294 9,740 10,185 10,499

Minority Interests 2,217 2,115 2,269 2,420 2,491

Total Cap. & Liab. 20,319 19,797 20,188 20,547 20,955

Non-Cash Wkg. Capital 5,371 4,515 4,559 4,902 5,201

Net Cash/(Debt) (2,885) (2,047) (1,748) (1,804) (1,965)

Debtors Turn (avg days) 185.0 136.8 114.3 131.0 124.2

Creditors Turn (avg days) 390.3 301.1 317.6 337.3 299.6

Inventory Turn (avg days) 2.9 2.2 2.3 2.3 2.0

Asset Turnover (x) 0.2 0.2 0.2 0.2 0.2

Current Ratio (x) 2.8 2.8 3.0 3.2 3.2

Quick Ratio (x) 1.4 1.3 1.5 1.6 1.5

Net Debt/Equity (X) 0.3 0.2 0.2 0.2 0.2

Net Debt/Equity ex MI (X) 0.3 0.2 0.2 0.2 0.2

Capex to Debt (%) (13.0) 7.5 7.0 7.0 7.0

Z-Score (X) 1.8 2.0 2.0 2.1 2.0


Gearing remains conservative

Company Guide

City Developments

Cash Flow Statement (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 985 914 960 924 675

Dep. & Amort. 215 222 222 222 222

Tax Paid (194) (157) (252) (188) (170)

Assoc. & JV Inc/(loss) (107) (70.5) (31.8) (86.2) (21.8)

Chg in Wkg.Cap. (712) 330 19.2 (325) (261)

Other Operating CF (110) (57.4) 0.0 0.0 0.0

Net Operating CF 77.8 1,181 917 548 444

Capital Exp.(net) 843 (433) (400) (400) (400)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (227) (113) (100.0) (100.0) (100.0)

Div from Assoc & JV 16.9 53.9 53.9 53.9 53.9

Other Investing CF (113) 810 0.0 0.0 0.0

Net Investing CF 520 318 (446) (446) (446)

Div Paid (271) (237) (171) (158) (158)

Chg in Gross Debt (310) (664) 0.0 0.0 0.0

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (333) (440) 0.0 0.0 0.0

Net Financing CF (914) (1,341) (171) (158) (158)

Currency Adjustments (16.6) (49.7) 0.0 0.0 0.0

Chg in Cash (333) 108 300 (56.9) (160)

Opg CFPS (S cts) 86.8 93.6 98.8 95.9 77.6

Free CFPS (S cts) 101 82.3 56.9 16.2 4.85


Target Price & Ratings History

Source: DBS Bank

Analyst: Rachel TAN

Derek TAN

ed: JS / sa: JC, PY



Analyst Mervin SONG CFA +65 6682 3715 [email protected]

What’s New 3Q17 adjusted EBITDA up 37% y-o-y to S$320m,

above expectations

VIP rolling chip volumes rose for the first time in 12

quarters (+28% y-o-y) with an above average win rate

GENS now focused on growing its top line by selectively

extending credit to suitable customers

Price Relative


Revenue 2,228 2,420 2,450 2,541 EBITDA 779 1,189 1,237 1,247 Pre-tax Profit 497 916 935 951 Net Profit 266 650 739 751 Net Pft (Pre Ex.) 257 667 739 751 Net Pft Gth (Pre-ex) (%) 10.7 159.8 10.8 1.7 EPS (S cts) 2.21 5.39 6.13 6.23 EPS Pre Ex. (S cts) 2.13 5.53 6.13 6.23 EPS Gth Pre Ex (%) 11 159 11 2 Diluted EPS (S cts) 2.22 5.41 6.15 6.25 Net DPS (S cts) 3.00 3.00 3.50 4.50 BV Per Share (S cts) 60.1 63.9 67.8 71.5 PE (X) 55.8 22.9 20.2 19.8 PE Pre Ex. (X) 57.9 22.3 20.2 19.8 P/Cash Flow (X) 12.8 12.6 12.9 12.0 EV/EBITDA (X) 17.2 10.3 9.5 9.0 Net Div Yield (%) 2.4 2.4 2.8 3.6 P/Book Value (X) 2.1 1.9 1.8 1.7 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 3.7 8.7 9.3 9.0

Adj. EBITDA Rev (%): 12 11 6 Consensus EPS (S cts): 5.1 5.5 6.2 Other Broker Recs: B: 12 S: 1 H: 7


Stay on the winning table

Rally not over. We maintain our BUY call on Genting Singapore

(GENS) with a revised TP of S$1.51. While GENS’ share price has

rallied by over 45% since our upgrade to BUY in August last

year, we believe the rally can continue. Our view is underpinned

by expected positive newsflow including the continued recovery

in earnings, details of a more efficient capital structure, refresh

of Resorts World Sentosa, and bid for a Japanese casino.

Where we differ – Sustainable earnings recovery. Consensus has

a TP that is close to GENS’ current share price on concerns

about the sustainability of its earnings recovery. We differ in this

as GENS has been able to grow its earnings despite soft VIP

rolling chip and mass business volumes for 1H17, led by cost

reductions and lower bad debts on the implementation of a

more conservative credit policy last year. This structurally lower

cost base provides a strong platform when volumes eventually

bounce. To that end, management guided that it is seeking to

grow its business and will look to extend credit to VIP customers

selectively which has started to occur in 3Q17.

Attractive valuations. Despite the recent rally, GENS still offers




which is close to -1SD of its mean EV/EBITDA differential. With

earnings turnaround and the potential of winning the Japanese

casino bid in the medium term, we believe GENS can re-rate

closer to its average EV/EBITDA multiple of c.12x.

Valuation:

On the back of a stronger than expected 3Q17 results, we

raised our DCF-based TP to S$1.51 from S$1.45. Our valuation

excludes the Japan casino.


Decline in VIP and mass businesses. The key risk to our positive

view is a slower-than-expected recovery or decline in GENS’s

VIP and mass divisions.

At A Glance

Issued Capital (m shrs) 12,025

Mkt. Cap (S$m/US$m) 14,851 / 10,880


Genting Bhd 52.8

RWL 8.0

GHL 6.0

Free Float (%) 47.2


ICB Industry : Consumer Services / Travel & Leisure


7 Nov 2017


Genting Singapore Version 11 | Bloomberg: GENS SP | Reuters: GENS.SI Refer to important disclosures at the end of this report

Company Guide

Genting Singapore

WHAT’S NEW

First rebound in VIP chip volumes in 12 quarters

3Q17 results above expectations

Continuing from the rebound in earnings in 1H17,

GENS had another strong quarter, with 3Q17

revenue and adjusted EBITDA increasing by 8% and

37% y-o-y to S$630m and S$320m respectively.

This was ahead of expectations, with 9M17 adjusted

EBITDA representing c.85% and c.80% of our and

consensus FY17F estimates.

Underpinning the rebound in earnings was the first

increase in VIP rolling chip volumes in 12 quarters.

Rolling chips grew an estimated 28% y-o-y and

24% q-o-q to US$5.5bn. While we had expected a

recovery as GENS selectively extended credit, VIP

rolling chip came in stronger versus our US$5.1bn

estimate. We understand a large contribution to the

growth was from new customers versus just

increased volumes from GENS existing customer

base.

The results were also boosted by a higher than

average VIP win rate of 3.1% (versus 3.3% in

3Q16). Assuming a normalised theoretical win rate

of 2.85%, hold adjusted EBITDA would still have

increased by 43% y-o-y.

The overall mass business remains flattish, with

gross gaming revenue (GGR) estimated to be flat y-

o-y. However, slot handle was up around 10% y-o-y

as we understand GENS opened a new high limit

slot room offset by slightly weaker mass drop.

Meanwhile, the non-gaming business maintained its

steady contribution, with 3Q17 revenue increasing

by 2% y-o-y.

Growth now the focus

Having brought its bad debts under control, with

3Q17 impairment for receivables now at S$14m

maintaining the S$14-15m per quarter run rate from

1H17 and down from the peak quarter of c.S$92m in

1Q16, GENS maintained its guidance that it intends

to grow it business by cautiously extending credit to

its VIP customers.

To reflect this and the better than expected 3Q17

performance, we now assume GENS maintains the

US$5.5bn VIP rolling chip volume run rate over the

next few quarters. Consequently, we now project

FY17 VIP rolling volumes to be flat y-o-y versus a 5%

decline previously. For FY18, we raised our growth

assumptions from 3% to 7%.

However, this is partially offset by lowering our

assumptions over the coming year for the mass

business to flattish growth versus 3% increase

previously.

On the back of changes in our assumptions, we have

raised our FY17-19F adjusted EBITDA by 6-12%.

This also leads us to raise our DCF-based TP from

S$1.45 to S$1.51. Our TP implies a EV/EBITDA

multiple of 12.1x in line with GENS’s average

EV/EBITDA multiple.

Strong balance sheet maintained

As at balance date, GENS remains in a strong

financial position with net cash of c.S$3.1bn

(S$4.1bn of cash and restricted cash less gross debt

of S$1.0bn) despite redeeming c.S$1.8bn worth of

perpetual securities. GENS also has another

c.S$500m worth of perpetual securities which it will

redeem in 4Q17.

Updates on Sentosa redevelopment and Japan casino

GENS guided that it remains in discussions with the

Singapore authorities about the redevelopment of its

Resorts World Sentosa (RWS) property. However,

details for this project will only be disclosed towards

1Q18.

On Japan, GENS noted that the Japanese government

would likely only table the implementation bill in

summer next year due to other budget priorities.

Thus, the passing of the bill will only occur in the

autumn session in 2018. This is a delay to market

expectations of the bill being passed in mid-2018. In

addition, to build relationships with bond investors

ahead of GENS potentially winning the bid to build

an integrated resort, it recently issued JPY20bn

(c.S$240m) worth of Samurai bonds. Proceeds from

the bond issuance will be used to fund the expected

tendering costs for an integrated resort.

Maintain BUY call with revised TP of S$1.51

With a stronger than expected 3Q17 results and 22%

upside to our revised TP of S$1.51, we reiterate our

BUY call.

We believe with GENS now focused on growing its

business, the continued earnings recovery should

further re-rate GENS’s share price with GENS trading

up to its average EV/EBITDA multiple of c.12x. The

reasons for GENS trading at a discount to its average

multiple over the past 18 months, namely rising bad

debts and falling earnings are no longer present.

Company Guide

Genting Singapore



Revenue 581 596 630 8.3 5.7

Cost of Goods Sold (367) (321) (326) (11.3) 1.3

Gross Profit 215 275 304 41.8 10.8

Other Oper. (Exp)/Inc (54.6) (53.8) (53.3) (2.5) (0.9)

Operating Profit 160 221 251 56.9 13.6

Other Non Opg (Exp)/Inc (7.7) (2.1) (6.7) 12.7 212.9

Associates & JV Inc 3.29 1.08 0.73 (77.7) (31.8)

Net Interest (Exp)/Inc 11.3 12.3 10.2 (9.9) (17.1)

Exceptional Gain/(Loss) 8.73 (14.3) (37.3) nm 159.8

Pre-tax Profit 176 218 218 24.1 0.1

Tax (39.1) (45.2) (49.3) 26.2 9.2

Minority Interest (29.7) (29.4) (24.9) 16.2 (15.2)

Net Profit 107 143 144 34.6 0.3

Net profit bef Except. 98.1 158 181 84.5 14.8

EBITDA 234 293 320 37.0 9.3

Margins (%)





Company Guide

Genting Singapore


Critical Factors

Recovery in VIP business. Over the past couple of years, with the

Chinese government embarking on an anti-corruption and

austerity drive, VIP players have generally shunned casinos

across Asia to avoid the scrutiny of government officials. This

resulted in VIP gross gaming revenue (GGR) in Macau and

Singapore falling 40% and 34% in CY15 and 7% and 27% in

CY16 respectively. For GENS, in combination with its greater

focus on credit quality, its market share has declined from mid-

50’s in 2014 to mid-30% by end 2016. Nevertheless, with

Macau’s GGR on an upward trend since August 2016, we are

potentially at the start of a recovery. Assuming Singapore

follows the trends in Macau with a lag and with management

now focused on growing its top line, these bode well for

GENS's business. We expect VIP rolling chip volumes to bottom

out in 2017 before a 7% bounce in 2018. This follows c.35% y-

o-y fall in 2016.

Decline in bad debts. GENS’s de-rating in 2015 and early 2016

was partially due to concerns over rising bad debts. However,

going into FY17, we believe pressure on earnings from bad

debts will ease given GENS's more conservative extension of

credit to its VIP customers over the past 9-12 months. This can

be seen in bad debts falling to S$14-15m per quarter for 1Q17-

3Q17 and 2Q17 from around S$92m in1Q16. Going forward,

we estimate GENS’s impairments on receivables to be at S$15m

per quarter down from average S$59m per quarter last year.

Volatility in regional currencies. In late 2016 and early 2017, the

strength of the SGD against other regional currencies such as

CNY, MYR and IDR was a headwind. This is because China,

Malaysia and Indonesia are key markets for GENS. However,

with a relative stability in regional currencies, headwinds from a

stronger SGD should dissipate.

Steady contribution from the mass business. The market for

mass players has declined over the last couple of years, with

mass drop declining from c.US$8.7bn in 2012 to US$6.5bn in

2016. However, with a projected increase in tourist arrivals in

2017 and management’s focus on growing the top line rather

than cost management, we believe the mass business will

provide a steady contribution going forward. We project flattish

gross gaming revenues for the mass business over 2017-2018.

Expansion into Japan. The Japanese recently approved the

development of integrated resorts. Should GENS successfully

win the bid for such a project, this will boost the long term

earnings of the group.

Recovery in Macau’s gross gaming revenue

VIP win rate above the normalised range

Bad debts now under control

Recent strengthening of SGD a potential near term headwind

Forward EV/EBITDA chart


-60%-50%-40%-30%-20%-10%

0%10%20%30%40%50%y-o-y growthy-o-y growth

1.5%

2.0%

2.5%

3.0%

3.5%

1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17

VIP win rate Lower bound - 2.7% Upper bound - 3.0%

0%

5%

10%

15%

20%

25%

0

10

20

30

40

50

60

70

80

90

100

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

Impairment loss on receivables % of trade receivables

Bad debts remaining low

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15Mar-16Jun-16Sep-16Dec-16Mar-17Jun-17Sep-17

CNY MYR IDR USD

IDR

MYR

USD

CNY

5.5

7.5

9.5

11.5

13.5

15.5

17.5

19.5

Jan-

201

1

Jul-

20

11

Jan-

201

2

Jul-

20

12

Jan-

201

3

Jul-

20

13

Jan-

201

4

Jul-

20

14

Jan-

201

5

Jul-

20

15

Jan-

201

6

Jul-

2016

Jan-

201

7

Jul-

2017

(x)

-2sd: 6.2x

-1sd: 9.2x

Avg: 12.1x

+2sd: 18.0x

+1sd: 15.1x

Company Guide

Genting Singapore

Balance Sheet:

Net cash position. GENS is in a strong financial position, with

net cash of c.S$3.1bn (S$4.1bn of cash and restricted cash less

gross debt of S$1.0bn) as at 30 September 2017. With

operating cashflows of S$800m to S$1.2bn per annum, GENS

should remain in a healthy financial state despite its plans to

redeem its S$2.3bn worth of perpetual securities. In addition,

the strong balance sheet in our view allows GENS to raise

sufficient debt should it be awarded the right to develop an

integrated resort in Japan which could cost US$7-12bn.


Sustained recovery ahead. The anti-corruption and austerity

measures in China led to a slowdown in the Asian casino

market in both Macau and Singapore. With the Macau market

on the path of recovery (GGR rising between 1-29% since

August 2016 following 25 consecutive months of declines),

GENS's successful cost containment initiatives as well as

projected fall in bad debts following stricter credit criteria for its

VIP customers, we believe GENS’s earnings are on sustained

recovery path which should translate to the share price rally

continuing.

Moving towards a more efficient capital structure. GENS has

indicated that it plans to move towards a more efficient capital

structure, the first step of which was the announcement that it

plans to redeem its perpetual securities. We believe GENS will

eventually gear up its balance sheet to a modest level from a

net cash position, which should result in better ROEs, triggering

a further re-rating of the stock.

Key Risks:

Hard landing in China. A hard landing in China would present

further downside risk to our earnings estimates as this will

impact the confidence and ability of GENS’s Chinese customers

to gamble at its properties.

Credit risks. GENS extends credit to its VIP customers. In the

event it is unable to recover its receivables, GENS may face

higher levels of bad debts.

Competition from other markets. Other markets in Asia

including Macau and Philippines have been developing new

integrated resorts which may compete with GENS for the same

customers.

Company Background

Genting Singapore Plc (GENS) operates Resorts World

Singapore which is one of the largest fully integrated resorts in

Southeast Asia. The company is also in the process of

developing an integrated resort in Jeju, South Korea in

partnership with Landing International Development Limited.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


13.0

18.0

23.0

28.0

33.0

38.0

43.0

48.0

53.0

58.0

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

Jan-

16

Jul-1

6

Jan-

17

Jul-1

7

(x)

+1sd: 45.2x

+2sd: 56.2x

-1sd: 23.0x

-2sd: 11.9x

Avg: 34.1x

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

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

Jan-

16

Jul-1

6

Jan-

17

Jul-1

7

(x)

+1sd:

+2sd: 3.7x

-1sd: 1.4x

-2sd: 0.6x

Avg: 2.1x

Company Guide

Genting Singapore

GENS share price versus Macau GGR y-o-y growth Remarks

Source: Bloombeg Finance L.P., DICJ, DBS Bank

GENS’s share price typically

tracks the direction of

Macau’s GGR performance

Following the recovery in

the Macau market, GENS’s

share price also started to

rebound

Gaming peer comp*

Closing 12-mth Mkt PE EV/EBITDA

Company FYE Curncy Price Rec Target Cap FY17/ 18F

FY18/ 19F

FY17/ 18F

FY18/ 19F Price US$m

Macau

Galaxy Ent Dec HKD 54.70 NR N/A 30,184 25.8 23.3 16.8 15.3

Sands China Dec HKD 37.50 NR N/A 38,803 25.2 22.0 17.2 15.8

SJM Holdings Dec HKD 6.58 NR N/A 4,771 20.7 22.2 12.9 13.3

Wynn Macau Dec HKD 20.70 NR N/A 13,785 29.2 22.0 16.8 14.5

MGM China Dec HKD 18.50 NR N/A 9,010 30.5 24.7 21.0 14.7

Singapore

Genting Singapore Dec SGD 1.24 BUY 1.51 10,865 22.9 20.2 10.3 9.5

* Macau stocks based on consensus estimates with Genting Singapore based on DBS Bank estimatesSource: Bloomberg Finance L.P., DBS Bank

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Macau GGR y-o-y growth - LHS GENS share price (S$) - RHS

Company Guide

Genting Singapore


FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 2,401 2,228 2,420 2,450 2,541


Gross Profit 693 690 1,252 1,273 1,288

Other Opng (Exp)/Inc (122) (207) (341) (313) (319)


Other Non Opg (Exp)/Inc (138) (28.3) (27.0) (27.0) (27.0)

Associates & JV Inc (3.8) (6.2) 4.00 0.0 0.0

Net Interest (Exp)/Inc 7.15 39.3 43.8 2.42 8.78

Exceptional Gain/(Loss) (157) 9.58 (16.5) 0.0 0.0

Pre-tax Profit 279 497 916 935 951

Tax (86.2) (112) (180) (196) (200)

Minority Interest (118) (118) (84.9) 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 75.2 266 650 739 751


EBITDA 915 779 1,189 1,237 1,247

Growth

Revenue Gth (%) (16.1) (7.2) 8.6 1.2 3.7

EBITDA Gth (%) (21.0) (14.9) 52.6 4.1 0.7

Opg Profit Gth (%) (22.7) (15.5) 89.0 5.3 1.0

Net Profit Gth (Pre-ex) (%) (45.4) 10.7 159.8 10.8 1.7

Margins & Ratio

Gross Margins (%) 28.8 30.9 51.7 52.0 50.7



ROAE (%) 1.0 3.7 8.7 9.3 9.0

ROA (%) 0.6 2.3 5.8 6.5 6.4

ROCE (%) 3.4 3.3 6.8 7.0 6.8

Div Payout Ratio (%) 239.4 135.3 55.4 56.9 72.0

Net Interest Cover (x) NM NM NM NM NM


Recovery in FY17-19 earnings due to recovery in the VIP rolling chip volumes, lower bad debts and successful reduction in operating expenses.

Company Guide

Genting Singapore


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 581 558 587 596 630


Gross Profit 215 211 261 275 304



Other Non Opg (Exp)/Inc (7.7) (11.6) (6.0) (2.1) (6.7)

Associates & JV Inc 3.29 (4.5) 0.93 1.08 0.73

Net Interest (Exp)/Inc 11.3 11.4 10.3 12.3 10.2

Exceptional Gain/(Loss) 8.73 66.6 35.1 (14.3) (37.3)

Pre-tax Profit 176 223 253 218 218

Tax (39.1) (33.7) (43.1) (45.2) (49.3)


Net Profit 107 159 181 143 144

Net profit bef Except. 98.1 92.6 146 158 181

EBITDA 234 234 283 293 320

Growth

Revenue Gth (%) 20.9 (4.1) 5.2 1.6 5.7

EBITDA Gth (%) 101.3 0.0 21.2 3.4 9.3

Opg Profit Gth (%) 277.0 0.4 32.5 3.8 13.6

Net Profit Gth (Pre-ex) (%) 11,694.1 (5.6) 57.6 8.0 14.8

Margins

Gross Margins (%) 36.9 37.8 44.5 46.1 48.3



Balance Sheet (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 5,487 5,242 5,188 5,134 5,080

Invts in Associates & JVs 130 50.9 54.9 54.9 54.9

Other LT Assets 559 313 289 266 242

Cash & ST Invts 5,002 4,963 5,280 5,817 6,316

Inventory 57.2 61.5 56.0 55.1 58.8

Debtors 646 198 172 187 219

Other Current Assets 145 618 30.4 30.4 30.4

Total Assets 12,027 11,446 11,069 11,543 12,001

ST Debt 167 186 186 186 186

Creditor 412 350 331 327 345

Other Current Liab 68.0 97.4 97.4 97.4 97.4

LT Debt 1,464 978 2,478 2,478 2,478



Minority Interests 0.01 0.0 0.0 0.0 0.0

Total Cap. & Liab. 12,027 11,446 11,069 11,543 12,001

Non-Cash Wkg. Capital 368 431 (170) (151) (134)

Net Cash/(Debt) 3,371 3,799 2,616 3,153 3,652




Asset Turnover (x) 0.2 0.2 0.2 0.2 0.2

Current Ratio (x) 9.0 9.2 9.0 10.0 10.6

Quick Ratio (x) 8.7 8.2 8.9 9.8 10.4

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) 10.7 6.0 7.5 7.5 7.5

Z-Score (X) 4.6 5.5 3.7 3.7 3.8


Company Guide

Genting Singapore


FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 279 497 916 935 951

Dep. & Amort. 344 297 278 278 278

Tax Paid (127) (64.4) (180) (196) (200)

Assoc. & JV Inc/(loss) 3.83 6.23 (4.0) 0.0 0.0

Chg in Wkg.Cap. 267 382 12.8 (87.9) (22.1)

Other Operating CF 774 545 1,076 1,164 1,185

Net Operating CF 1,262 1,165 1,182 1,158 1,240

Capital Exp.(net) (174) (69.6) (200) (200) (200)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (138) (177) 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 768 (23.8) 588 0.0 0.0

Net Investing CF 455 (270) 388 (200) (200)

Div Paid (121) (360) (360) (421) (541)

Chg in Gross Debt (88.8) (475) 1,500 0.0 0.0

Capital Issues (112) 0.0 0.0 0.0 0.0

Other Financing CF (136) (145) (2,393) 0.0 0.0

Net Financing CF (458) (980) (1,254) (421) (541)

Currency Adjustments 45.1 46.8 0.0 0.0 0.0

Chg in Cash 1,305 (38.6) 316 537 500

Opg CFPS (S cts) 8.23 6.51 9.69 10.3 10.5

Free CFPS (S cts) 9.00 9.10 8.14 7.94 8.62



Source: DBS Bank

Analyst: Mervin SONG CFA

Redemption of perpetual securities

ed: TH / sa: YM, PY

BUYLast Traded Price ( 26 Oct 2017): S$11.57 (STI : 3,356.25) Price Target 12-mth: S$13.50 (17% upside) (Prev S$12.80)


What’s New • Sounding even more positive; loan growth guidance

tuned up to 7-8% over FY17-18F; NIM improvementsustainable

• Asset quality issues have clearly stabilised; impact onIFRS9 under evaluation; more details during 4Q17results

• FY18-19F earnings revised up by 3-5% mainly fromtop-line changes (NIM, loan growth)

• Maintain BUY, TP raised to S$13.50

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2016A 2017F 2018F 2019F Pre-prov. Profit 4,605 5,298 5,947 6,488 Net Profit 3,433 4,126 4,672 5,148 Net Pft (Pre Ex.) 3,433 4,126 4,672 5,148 Net Pft Gth (Pre-ex) (%) (10.2) 20.2 13.3 10.2 EPS (S cts) 84.0 98.6 112 123 EPS Pre Ex. (S cts) 84.0 98.6 112 123 EPS Gth Pre Ex (%) (12) 17 13 10 Diluted EPS (S cts) 82.1 98.6 112 123 PE Pre Ex. (X) 13.8 11.7 10.4 9.4 Net DPS (S cts) 35.7 36.9 41.7 44.7 Div Yield (%) 3.1 3.2 3.6 3.9 ROAE Pre Ex. (%) 9.9 11.1 11.7 11.9 ROAE (%) 9.9 11.1 11.7 11.9 ROA (%) 0.9 1.0 1.1 1.1 BV Per Share (S cts) 861 923 993 1,071 P/Book Value (x) 1.3 1.3 1.2 1.1 Earnings Rev (%): - 3 5 Consensus EPS (S cts): 93.9 102.5 111.5 Other Broker Recs: B: 9 S: 0 H: 16


Radiating positive vibes Tuning an even more positive tone; reiterate BUY. OCBC’s 3Q17 results is testimony to our positive view on the bank. Apart from its sustained strong showing of its non-interest income franchise (wealth management and insurance), its banking operations are picking up well. NIM is gradually improving and such trends should hold up going into 2018. Positively, loan growth is strong with YTD loan growth at 5.5% vs our FY17 forecast of 7%. Management is now guiding for 7-8% loan growth for FY17-18. Wealth management and insurance operations are holding up well, and will remain a key differentiator of growth vs peers. Asset quality indicators have clearly stabilised; a visible recovery would stage a strong re-rating catalyst for the bank. There needs to be a further evaluation on the impact to the implementation of the IFRS9/SFRS109, pending clarity on certain aspects especially with regards to the tax treatment on general provisions. Capital enhancement measures are underway and should be made clear during the release of its FY17 results.

Where we differ: Staying above the rest. Our FY17 earnings forecasts are left largely intact even after we marginally tweaked NIM and loan growth (-1bp for NIM, raised loan growth to 7.6% from 6.8%) but FY18-19 earnings forecasts are raised by 3-5% on stronger NIM traction (+4-5bps) and loan growth (from 5% to 7%). Sustained upward trajectory of SIBOR/SOR should re-rate NIM higher. Our earnings forecasts remain above consensus. We reiterate our BUY rating and nudged up our TP to S$13.50.

Potential catalyst: The end of asset quality woes. Asset quality issues pertaining to the oil & gas segment have been dealt with, and sufficient provisions are said to have been made. There may be some tweaks necessary when IFRS9/SFRS109 is implemented. More importantly, a visible improvement in asset quality contrary to stabilisation could mark a strong re-rating catalyst apart from better NIM, loan growth and non-interest income prospects.

Valuation: Reiterate BUY, TP at S$13.50. Our TP of S$13.50 (12% ROE [raised], 4% growth, 9.5% cost of equity) following our earnings adjustments is equivalent to 1.3x FY18 BV, its 10-year mean P/BV multiple.

Key Risks to Our View: Faltering NIM and non-interest income traction. Inability to see revenue generation from improved NIM as well as better wealth management and insurance income contribution could pose downside to our earnings forecasts.

At A Glance Issued Capital (m shrs) 4,189 Mkt. Cap (S$m/US$m) 48,469 / 35,626 Major Shareholders (%) Selat Pte Ltd 11.0

Free Float (%) 89.0 3m Avg. Daily Val (US$m) 36.8 ICB Industry : Financials / Banks


26 Oct 2017


OCBC Version 10 | Bloomberg: OCBC SP | Reuters: OCBC.SI Refer to important disclosures at the end of this report

79

99

119

139

159

179

199

219

6.7

7.7

8.7

9.7

10.7

11.7

12.7

Oct-13 Oct-14 Oct-15 Oct-16 Oct-17

Relative IndexS$

OCBC (LHS) Relative STI (RHS)

Company Guide

OCBC

WHAT’S NEW

Tuning an even more positive tone

3Q17 results highlights

3Q17 earnings above consensus; in line with our expectations. OCBC's 3Q17 net profit came in at S$1,057m (-2% q-o-q; +12% y-o-y) – above consensus; in line with our expectations. Earnings were driven by strong top-line growth with improved NIM (+1bps q-o-q, +4bps y-o-y) and strong loan growth (+2% q-o-q, +11% y-o-y). YTD loan growth stood at 5.5%, on track to meet our 7% FY17 forecast. Deposits grew 1% q-o-q, +8% y-o-y. Expenses were kept in check with cost-to-income ratio at 42.4%, within its 40-45% guidance. Staff costs were slightly lower q-o-q while other costs were largely flat.

Softer q-o-q non-interest income from insurance and trading; strong trends noted y-o-y. Non-interest income was a tad lower q-o-q, dragged by lower insurance and trading income but remained well supported by wealth management income. Bank of Singapore's (BOS) AUM grew 6% q-o-q, 53% y-o-y to US$95bn.

Provisions were lower q-o-q and y-o-y. General provisions were lower q-o-q and y-o-y but specific provisions were higher at 24bps. However, specific provisions increased, driven by a number of restructured accounts which were continuing to service their repayment obligations but exhibited ongoing weakness and declining collateral values, particularly from the oil & gas segment. The reassessment on collateral values are carried out every quarter. Notably, one of the specific provisions were made in relation to a China State Owned Enterprise (SOE) from the steel industry, had requested for their facility to be restructured.

Asset quality has stabilised. NPL ratio stood stable at 1.3%. New NPLs eased to S$409m (2Q17: S$445m; 3Q16 S$497m) indicating that trends are stabilizing, of which 38% or S$156m were related to the oil & gas sector. The oil & gas exposure stood at 7% of total loans but its NPL ratio has stayed stable. The oil & gas sector NPLs are approximately half of OCBC’s total NPLs. Overall loan loss coverage stood at 101%. Strong capital levels. Capital levels stayed robust with CET1 (fully loaded) at 12% and Total CAR at 16.2%. No interim dividend was declared. Among peers, OCBC is the only bank that has turned off its scrip dividend tap. It prefers to wait for clarity on Basel 4. However, there would be some capital uplift when OCBC-Wing Hang and OCBC NISP adopts the Internal Ratings-Based (IRB) Approach for its capital computation, potentially lifting capital ratios by 20-30bps by the end of the year.

Regional operations doing well. OCBC's regional operations saw improvements q-o-q and y-o-y, except OCBC NISP which saw a slight dip in earnings q-o-q due to higher provisions. OCBC-WHB, which contributes 8% to group pre-tax profit saw its earnings soar in 3Q17, thanks to a significant rise in its non-interest income. The narrowing of the 1-month and 3-month HIBOR gap helped cushion NIM but its overall NIM fell due to its treasury book from its China operations. Asset quality indicators were benign. OCBC Malaysia, which contributes 16% to the group pre-tax profit, also saw improved performance as NIM stabilised and provisions eased. Its asset quality indicators were stable. OCBC NISP, which contributes 6% to group pre-tax profit however, saw a dip in earnings q-o-q from higher provisions and lower revenues.

Outlook

Sounding even more positive; earnings raised further. We sensed a strong stance of optimism from the analyst briefing, even more positive compared to 2Q17 which prompted us then to upgrade our rating to a BUY. We reiterate our BUY rating with TP lifted to S$13.50 after raising FY18-19F earnings by 3-5%.

Asset quality woes related to oil & gas has stabilised; waiting for a recovery. It feels too early to call for a recovery of the sector although early signs have been seen with chartering activities picking up. The oil & gas cycle should see a trough soon. However, capital expenditure for this sector has yet to be visible. OCBC was one of the earlier banks to start classifying NPLs from as early as 3Q15. No new names have been identified and additional provisions were mostly related to declining collateral values. The bank has not taken possession of any of the collateral and over time, cash flows are expected to improve. There could be one more account from the oil & gas sector that may be classified in 4Q17.

Improving loan demand; raising loan growth guidance to 7-8%. Loan growth has been strong YTD at 5.5%, driven by housing loans, trade finance, overseas loan demand and Hong Kong-based companies (from OCBC-WHB). The first three quarters of 2016 were extremely volatile and the bank took a cautious stance. Loan growth started to pick up in 4Q16, and the momentum has stayed strong till now. Management has toned up loan growth guidance to 7-8% for FY17 and is expecting this trend to continue to 2018. We had raised our loan growth forecast to 6.8% but are now tuning it up further to 7.6% for FY17; we are now raising loan growth for FY18-19 to 7% each year (from 5% previously).

Company Guide

OCBC

NIM to gradually improve. NIM traction has been sluggish up to 3Q17 as SIBOR/SOR has finally only edged up meaningfully in recent months. The re-pricing effect takes approximately 90 days. As such, NIM uplift would be more meaningful in the coming quarters. Sustained upward trajectory of SIBOR/SOR should re-rate NIM higher. While we toned our NIM for FY17 by 1bps, we raised it by 4-5bps for FY18-19.

Events/items to watch by year-end

Implementation of IFRS9/SFRS109; impact to be evaluated; clarify during 4Q17 results. The Monetary Authority of Singapore (MAS) has released the proposed amendment to regulatory requirements pertaining to credit loss under the IFRS9/SFRS109. Singapore is the first in the region to clarify its methodology. The SFRS 109 requires banks to maintain a minimum of 1% collective impairment allowance and specific allowance will be set aside on a case-by-case basis. The Expected Credit Loss (ECL) model includes more forward-looking information to assess credit quality of the bank’s underlying financial assets. OCBC has excess general provision reserves but it has not deliberated what it will do with it at this point – either to claw it back to retained earnings or to set it aside as additional provisions prior to the implementation of this accounting standard. OCBC has never reduced general provisions to offset specific provisions. It appears that smoothening out earnings by adding or using general provision reserves will no longer be allowed. Impact to OCBC is still under evaluation as the shift of excess general provision reserves into equity may have tax implications. Possible changes to the provision run rate will be clearer from 1Q18 trends.

GEH exploring options for its Malaysian operations, as reported. Great Eastern Holdings (GEH) is reported to have engaged at least one Malaysian bank to explore selling its stake in its Malaysian operations. It has also been noted that

several other foreign insurance companies operating in Malaysia (including Prudential Malaysia and Tokio Marine Insurance Malaysia) could be exploring similar options. This move is in reaction to Bank Negara Malaysia’s (BNM) stricter enforcement of the 70% foreign ownership cap on insurers, which was issued back in 2009. We understand the timeline could be fluid, and negotiations could be managed on a case-by-case basis. In our view, there are three viable options for these companies to pare down their stakes: 1) List (IPO) 30% of their shares to the public; 2) joint-venture with a local partner; or 3) divest to local institutional investors. OCBC’s official stance on this is “GEH is exploring options to meet the necessary requirements”.

NAB acquisition; disposal of HK Life to be completed by 4Q17. Its acquisition of National Australian Bank’s (NAB) portfolio will likely only be completed and fully consolidated by end-FY17 but the impact would be small. Separately, the disposal of HK Life to be also likely be concluded by year-end.

Valuation and recommendation

Maintain BUY, TP raised to S$13.50. Corresponding to our earnings upgrade, our revised TP of S$13.50 is based on the Gordon Growth Model (12% ROE [raised], 4% growth [raised], 9.5% cost of equity) which is equivalent to 1.3x FY18 BV, its 10-year mean P/BV multiple, OCBC’s key differentiating factor lies in its insurance business which gives it a more holistic wealth management platform, which we believe is still under-appreciated by the market. Solid 2Q17 earnings was testimony to its non-interest income franchise. Asset quality issues pertaining to the oil & gas segment have been dealt with, and sufficient provisions are said to have been made. A visible improvement in asset quality contrary to stabilisation could be an added re-rating catalyst apart from better NIM, loan growth and non-interest income prospects.

Company Guide

OCBC



Net Interest Income 1,234 1,345 1,382 12.0 2.8

Non-Interest Income 970 1,053 978 0.8 (7.1)

Operating Income 2,204 2,398 2,360 7.1 (1.6)

Operating Expenses (976) (1,019) (1,027) 5.2 0.8

Pre-Provision Profit 1,228 1,379 1,333 8.6 (3.3)

Provisions (166) (169) (156) (6.0) (7.7)

Associates 105 119 127 21.0 6.7

Exceptionals 0.0 0.0 0.0 - -

Pretax Profit 1,167 1,329 1,304 11.7 (1.9)

Taxation (175) (185) (192) 9.7 3.8

Minority Interests (49.0) (61.0) (55.0) (12.2) (9.8)

Net Profit 943 1,083 1,057 12.1 (2.4)

Growth (%)

Net Interest Income Gth (2.1) 5.7 2.8

Net Profit Gth 6.6 11.3 (2.4)

Key ratio (%)

NIM 1.62 1.65 1.66

NPL ratio 1.2 1.3 1.3

Loan-to deposit 83.1 85.2 85.3

Cost-to-income 44.3 42.5 43.5

Total CAR 17.6 16.1 16.2


Company Guide

OCBC

CRITICAL DATA POINTS TO WATCH Critical Factors NIM uplift more visible in FY18 but muted in FY17F. It is possible for the Fed rate hike pass-through to eventually spill over to SIBOR, hence positively repricing loans but the caveat to this is that competitive pressures are there and credit spreads are unlikely to widen, therefore limiting any significant positive impact on NIM. OCBC’s loan profile is largely variable rate based (>90%), with one-third prime-rate based, one-third SIBOR based and 25% SOR based. Our sensitivity analysis implies that for every 25-bp increase in SIBOR/SOR, HK$ and US$ loan rates (collectively), OCBC’s NIM could rise by 2bps with an accompanying 1.4% impact to net profit, holding everything else constant. The bonus to its NIM uplift could lie in its treasury operations, where in a rising rate environment, there would be more opportunities to rebalance its securities portfolio given the steepened yield curve.

Loan growth to pick up; guiding for 7-8% in FY17-18. Loan demand started to pick up in 4Q16, tracked well up to 3Q17 and is expected to spill over into 2017. Management is guiding for loan growth of 7-8% for FY17-18. Loan demand appears apparent for Singapore companies investing abroad. Every 1-ppt rise in loan growth leads to 0.9% increase in net profit. We are forecasting FY17F loan growth at 7.6%, and 7% for FY18-19.

Non-interest income drivers remain its key differentiator, especially wealth management and insurance. OCBC differentiates itself from peers when looking at its non-interest income composition. Its focus is on growing its non-interest income franchise, especially its wealth management business. Its insurance business, 87.75%-owned subsidiary, Great Eastern Holdings (GEH), remains a dominant part of its non-interest income. OCBC has no plans to sell its stake in GEH as it remains complementary to its non-interest income franchise. Management believes it is still logical and beneficial to keep the insurance product manufacturing in-house. However, in view of the need to meet regulatory requirements in Malaysia, GEH may look to divest part of its operations in Malaysia. It is currently exploring options to meet this requirement. GEH tends to exhibit earnings volatility due to fluctuations of interest rates. It is best to track GEH’s underlying business trends i.e. total weighted new sales and new business embedded values. These metrics have been growing robustly for GEH. Since the acquisition of Bank of Singapore in 2010, its wealth management income has been growing steadily; and this trend is expected to be sustainable. The acquisition of the wealth and investment business of Barclays Bank in Singapore and Hong Kong, completed in December 2016, added US$13bn to OCBC's AUM. In May 2017, OCBC further acquired National Bank of Australia’s wealth business in Singapore and Hong Kong.

Regionalisation is a key item on its agenda. Malaysia remains OCBC’s second largest contributor. Its business proposition in Malaysia has a track record of over 80 years and its added advantage lies in its Islamic banking franchise. Management feels bullish about its operations in Indonesia. While still a small contributor, opportunities are aplenty for further growth. We see the wealth management income line as the key indicator to watch for sustained synergies in OCBC-Wing Hang.

Margin Trends

Gross Loan& Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure


1.6%

1.6%

1.7%

1.7%

1.8%

1.8%

1.9%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2015A 2016A 2017F 2018F 2019F

S$ m

Net Interest Income Net Interest Income Margin

0%1%2%3%4%5%6%7%8%9%10%

0

50,000

100,000

150,000

200,000

250,000

2015A 2016A 2017F 2018F 2019F

S$ m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%1%2%3%4%5%6%7%8%9%10%

0

50,000

100,000

150,000

200,000

250,000

300,000

2015A 2016A 2017F 2018F 2019F

S$ m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

74%

79%

84%

89%

94%

187,396

237,396

287,396

337,396

387,396

2015A 2016A 2017F 2018F 2019F

S$ bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

40%

41%

42%

43%

44%

45%

46%

47%

0

2,000

4,000

6,000

8,000

10,000

12,000

2015A 2016A 2017F 2018F 2019F

S$ m

Net Interest Income Non-interest Income Cost-to-income Ratio

Company Guide

OCBC

Appendix 1: A look at Company's listed history – what drives its share price?

Interest rates as critical factor Remarks

Interest rates, particularly SIBOR, is linked to loan pricing and hence NIM, which in turn drives earnings and share price performance. The Fed rate hikes which should lead to SIBOR uplift was historically 60% correlated. The relationship has somewhat broken down since late 2016 due to the relative strength of the SGD. Nevertheless, expectations of Fed rate hikes, which are expected to pass through to SIBOR does have a positive correlation to banks’ share prices.

GEH’s earnings as critical factor Remarks

GEH’s profit contributes approximately 20-25% of non-interest income, translating to 8-10% of OCBC’s net profit. While not being directly correlated, GEH’s profits do indicate OCBC’s overall non-interest income trends. GEH also forms part of OCBC’s wealth management offerings.

Share price movement (10-years historical trends)


-

2.0

4.0

6.0

8.0

10.0

12.0

-

1.00

2.00

3.00

4.00

5.00

6.00

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

3M SIBOR (LHS) Fed funds rate (LHS) Share price (RHS)

% S$

-

50.0

100.0

150.0

200.0

250.0

300.0

Jan-

09A

pr-0

9

Jul-0

9

Oct

-09

Jan-

10A

pr-1

0

Jul-1

0

Oct

-10

Jan-

11A

pr-1

1

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13A

pr-1

3

Jul-1

3

Oct

-13

Jan-

14A

pr-1

4

Jul-1

4

Oct

-14

Jan-

15A

pr-1

5

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Index = 100

Share price GE net profit

-

2.00

4.00

6.00

8.00

10.00

12.00

Dec-

07

Jun-

08

Dec-

08

Jun-

09

Dec-

09

Jun-

10

Dec-

10

Jun-

11

Dec-

11

Jun-

12

Dec-

12

Jun-

13

Dec-

13

Jun-

14

Dec-

14

Jun-

15

Dec-

15

Jun-

16

Dec-

16

Jun-

17

Dec-

17

Global Financial Crisis; plagued by rising provisions (loans and CDOs)

Recovery phase -OCBC's NPLs and credit cost tends to decline faster than peers in a recovery phase

Jan 2010: OCBC acquires ING Asia Private Bank (now Bank of Singapore)

2015 - Market starts to price in expectations of Fed rate hikes (which did not happen); SIBOR moved up ahead of Fed rate hike expectations. SIBOR popped from a low of 38bps to 65bps in Jan 2015; OCBC appears to have de-coupled from this; there was hardly any NIM movement

Jun 2011 ; Basel III rules announced; OCBC plagued by punitive capital deduction for its insurance subsidiary

Positive macro prospects; strong loan growth momentum

Apr 2016 - OCBC announcesacquisition of Barclays Wealth Management and Investments in HK and SG

Apr 2014 - OCBC announces acquisition of Wing Hang Bank, HK

Nov 2016 - Fed rate hike lift off; expectations of NIM uplift expounded

2Q15 - Oil & gas NPL woes begin; peak of provisions in 2Q-3Q16

Driven by low credit costs and benign NPL formation; positve trends from insurance and non-interest income

S$

Company Guide

OCBC

Balance Sheet: Asset quality concerns should ease. OCBC’s NPL ratio rose to 1.3% as new NPL formation was higher up to 9M16, largely from the oil & gas segment. Its credit cost has stayed lower compared to peers. Despite concerns of an unsustainably low credit cost level, OCBC has successfully weathered through the storm as seen during several crises over the past ten years. OCBC started recognising troubled accounts as early as 3Q15 and classified them as NPLs. OCBC practices a reclassification of such restructured accounts as performing after monitoring them over a period of 6-12 months. Once management is convinced of a sustainable payment record over that period, the account will be reclassified.

Capital ratios to remain strong. OCBC halted its scrip dividend in 2Q16. It had previously used the scrip dividend to help shore up capital. Separately, while there are still some non-core assets the bank can divest, these are not large and not an immediate priority. There has been a continuous debate on whether OCBC should divest its insurance business, GEH, as it is perceived to be capital punitive once Basel III is fully enforced. But we believe that without majority control of the business, integrating it as part and parcel of its wealth management offerings would be challenging.

Share Price Drivers: Rising interest rates lift NIM and possibly better insurance business revenues. Rising NIM and hence earnings will be key drivers to share price. Barring volatility in its insurance contribution due to accounting reasons, higher interest rates bode well for its life insurance business to build longer-term revenues. Successful credit costs and NPL containment could provide an added catalyst. Ability to demonstrate these should see the stock re-rate above its 5-year mean P/BV multiple.

Key Risks: Inability to deliver NIM uplift. Expectations are rife that the Singapore banks will deliver strong NIM trends following sequential Fed rate hikes. Slower-than-expected SIBOR/SOR pass-through could upset NIM uplift trends

Asset quality trend reversal. Banks are already on a recovery trend for their NPLs. A larger-than-expected NPL incidence could unwind expectations of credit cost and NPL declines, posing risks to earnings.

Company Background The OCBC Bank group of businesses comprises a family of companies owned by Singapore's longest-established local bank. Its banking business franchise includes OCBC Bank, Bank OCBC NISP and Bank of Singapore, with branches in over 15 countries. OCBC has strategic stakes in other financial service businesses operating under independent brands such as Great Eastern, Bank of Singapore and Lion Global Investors.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2015A 2016A 2017F 2018F 2019F

NPL Ratio Provision Charge-Off Rate

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

2015A 2016A 2017F 2018F 2019F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2015A 2016A 2017F 2018F 2019F

Avg: 10.2x

+1sd: 11x

+2sd: 11.7x

-1sd: 9.5x

-2sd: 8.7x

7.8

8.8

9.8

10.8

11.8

12.8


(x)

Avg: 1.2x

+1sd: 1.36x

+2sd: 1.51x

-1sd: 1.05x

-2sd: 0.9x

0.7

0.9

1.1

1.3

1.5

1.7


(x)

Company Guide

OCBC

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Gross Loans Growth 0.4 4.3 7.6 7.2 7.1 Customer Deposits Growth 0.3 6.2 5.0 5.0 5.0 Yld. On Earnings Assets 2.7 2.8 2.7 2.8 2.8 Avg Cost Of Funds 1.1 1.2 1.2 1.2 1.2

Income Statement (S$ m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Net Interest Income 5,189 5,052 5,732 6,483 7,082 Non-Interest Income 3,533 3,437 3,753 3,979 4,185

Operating Income 8,722 8,489 9,485 10,462 11,267 Operating Expenses (3,762) (3,884) (4,187) (4,514) (4,779)

Pre-provision Profit 4,960 4,605 5,298 5,947 6,488 Provisions (488) (726) (625) (650) (653) Associates 353 396 477 541 596 Exceptionals 0 0 0 0 0

Pre-tax Profit 4,825 4,275 5,151 5,838 6,431 Taxation (717) (629) (766) (877) (970) Minority Interests (205) (173) (219) (248) (273) Preference Dividend (82) (40) (40) (40) (40)

Net Profit 3,821 3,433 4,126 4,672 5,148 Net Profit before Except. 3,821 3,433 4,126 4,672 5,148 Growth (%) Net Interest Income Gth 9.6 (2.6) 13.5 13.1 9.2 Net Profit Gth bef Except 13.4 (10.2) 20.2 13.3 10.2 Margins, Costs & Efficiency (%) Spread 1.6 1.6 1.5 1.6 1.6 Net Interest Margin 1.7 1.7 1.7 1.7 1.8 Cost-to-Income Ratio 43.1 45.8 44.1 43.2 42.4 Business Mix (%) Net Int. Inc / Opg Inc. 59.5 59.5 60.4 62.0 62.9 Non-Int. Inc / Opg inc. 40.5 40.5 39.6 38.0 37.1 Fee Inc / Opg Income 18.8 19.3 18.9 18.4 18.2 Oth Non-Int Inc/Opg Inc 21.7 21.2 20.6 19.6 19.0 Profitability (%) ROAE Pre Ex. 12.1 9.9 11.1 11.7 11.9 ROAE 12.1 9.9 11.1 11.7 11.9 ROA Pre Ex. 1.0 0.9 1.0 1.1 1.1 ROA 1.0 0.9 1.0 1.1 1.1


Provisions could stay at these levels if there are no further asset quality upsets; barring further necessary provisions required under SFAS109

Gradual uplift in NIM with SIBOR/SOR on a sustainable improved trend

Company Guide

OCBC

Quarterly / Interim Income Statement (S$ m)

FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Net Interest Income 1,234 1,251 1,272 1,345 1,382 Non-Interest Income 970 926 977 1,053 978

Operating Income 2,204 2,177 2,249 2,398 2,360 Operating Expenses (976) (1,005) (999) (1,019) (1,027)

Pre-Provision Profit 1,228 1,172 1,250 1,379 1,333 Provisions (166) (305) (168) (169) (156) Associates 105 82 114 119 127 Exceptionals 0 0 0 0 0

Pretax Profit 1,167 949 1,196 1,329 1,304 Taxation (175) (114) (169) (185) (192) Minority Interests (49) (46) (54) (61) (55) Net Profit 943 789 973 1,083 1,057

Growth (%) Net Interest Income Gth (2.1) 1.4 1.7 5.7 2.8 Net Profit Gth 6.6 (16.3) 23.3 11.3 (2.4)

Balance Sheet (S$ m) FY Dec 2015A 2016A 2017F 2018F 2019F

Cash/Bank Balance 21,180 16,559 27,456 28,829 30,270 Government Securities 21,001 24,364 25,582 26,861 28,204 Inter Bank Assets 35,791 39,801 46,610 54,882 58,725 Total Net Loans & Advs. 208,218 216,830 233,048 249,466 266,932 Investment 22,786 23,157 27,966 29,936 32,032 Associates 2,248 2,415 2,892 3,433 4,029 Fixed Assets 4,605 4,572 4,707 4,845 4,987 Goodwill 5,195 5,473 5,473 5,473 5,473 Other Assets 12,183 14,740 13,983 14,968 16,016 Life Ass Fund Inv Assets 56,983 61,973 61,973 61,973 61,973 Total Assets 390,190 409,884 449,689 480,666 508,641

Customer Deposits 246,277 261,486 274,560 288,288 302,703 Inter Bank Deposits 12,047 10,740 34,764 47,651 56,424 Debts/Borrowings 23,479 19,947 19,947 19,947 19,947 Others 14,282 16,107 16,010 17,195 18,430 Minorities 2,558 2,635 2,854 3,102 3,375 Shareholders' Funds 34,553 37,007 39,591 42,520 45,800 Life Ass Fund Liabs 56,994 61,962 61,962 61,962 61,962

Total Liab& S/H’s Funds 390,190 409,884 449,689 480,666 508,641


Strong top-line growth from NIM and loan growth offset by softer insurance contribution in 3Q17 but this was expected

FY17-18 loan growth guided at 7-8%

Company Guide

OCBC

Financial Stability Measures (%)

FY Dec 2015A 2016A 2017F 2018F 2019F

Balance Sheet Structure Loan-to-Deposit Ratio 84.5 82.9 84.9 86.5 88.2 Net Loans / Total Assets 53.4 52.9 51.8 51.9 52.5 Investment / Total Assets 5.8 5.6 6.2 6.2 6.3 Cust . Dep./Int. Bear. Liab. 87.4 89.5 83.4 81.0 79.9 Interbank Dep / Int. Bear. 4.3 3.7 10.6 13.4 14.9 Asset Quality NPL / Total Gross Loans 0.9 1.3 1.3 1.3 1.2 NPL / Total Assets 0.5 0.7 0.7 0.7 0.6 Loan Loss Reserve Coverage 122.9 102.7 108.4 116.4 133.2 Provision Charge-Off Rate 0.2 0.3 0.3 0.3 0.2 Capital Strength Total CAR 16.8 17.1 17.0 17.2 17.6 Tier-1 CAR 14.8 14.7 15.3 15.5 16.0



Source: DBS Bank Analyst: Sue Lin LIM

Singapore Research Team

S.No.Date of Report

Closing Price

12-mthTarget Price

Rat ing

1: 27 Oct 16 8.58 8.60 HOLD

2: 07 Dec 16 9.30 10.30 BUY

3: 14 Feb 17 9.43 10.30 HOLD

4: 06 Mar 17 9.48 10.30 HOLD

5: 09 May 17 10.46 10.30 HOLD

6: 27 Jul 17 11.49 12.80 BUY

7: 20 Sep 17 11.01 12.80 BUY

8: 25 Oct 17 11.55 12.80 BUY

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

1

2

3

4

5

6

7

8

8.00

8.50

9.00

9.50

10.00

10.50

11.00

11.50

12.00

Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17

S$

NPL ratio to ease over time

ed: JS / sa:YM, PY

BUYLast Traded Price ( 31 Oct 2017): S$1.93 (STI : 3,374.08)

Price Target 12-mth: S$2.30 (19% upside)

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

What’s New 3Q17 earnings affected by the revenue reversal of two

cancelled Perisai jackups and expected inventory write

down post Borr-Drilling transaction

Net orderbook revised up to S$7.97bn, adding in the

nine jackup contracts with Borr Drilling

Contract wins momentum to pick up and earnings to

recover from 2018

Reiterate BUY; TP S$2.30

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016A 2017F 2018F

Revenue 4,968 3,545 2,390 3,996 EBITDA (216) 312 272 427 Pre-tax Profit (378) 90.5 54.9 141 Net Profit (290) 78.8 56.0 111 Net Pft (Pre Ex.) (290) 78.8 9.23 111 Net Pft Gth (Pre-ex) (%) nm nm (88.3) 1,102.0 EPS (S cts) (13.9) 3.77 2.68 5.31 EPS Pre Ex. (S cts) (13.9) 3.77 0.44 5.31 EPS Gth Pre Ex (%) (152) (127) (88) 1,102 Diluted EPS (S cts) (13.9) 3.77 2.68 5.31 Net DPS (S cts) 6.00 2.50 0.97 1.86 BV Per Share (S cts) 120 123 123 127 PE (X) nm 51.2 72.0 36.3 PE Pre Ex. (X) nm 51.2 436.8 36.3 P/Cash Flow (X) nm 7.1 8.6 4.9 EV/EBITDA (X) nm 22.3 24.6 14.0 Net Div Yield (%) 3.1 1.3 0.5 1.0 P/Book Value (X) 1.6 1.6 1.6 1.5 Net Debt/Equity (X) 1.0 1.1 1.0 0.7 ROAE (%) (10.6) 3.1 2.2 4.3

Earnings Rev (%): (61) (26) Consensus EPS (S cts): 3.50 4.80 Other Broker Recs: B: 8 S: 6 H: 6


On recovery track

Maintain BUY; TP S$2.30, based on 1.8x FY17 P/BV (1SD below mean). Sembcorp Marine (SMM)’s 3Q17 earnings was barely at the break-even level. However, we expect a recovery in earnings ahead with rising order wins translating to higher revenue, cost savings from returning of old facilities to the government, and potential profits from delivery of jackup rigs. The re-rating on SMM will continue, driven by: 1) SMM is a pure play to ride the oil price recovery; 2) sizeable new orders for non-drilling solutions; 3) the reactivation of Sete’s projects; and 4) SMM as a potential M&A play arising from a consolidation of Singapore yards.

Where we differ: more bullish on SMM’s contract wins. Order wins, a critical leading indicator for earnings recovery, is set to rise in the next 12 months. We believe SMM’s strong order pipeline would translate to >S$2bn new orders in 2018, which could potentially include 1) two large Compressed Gas Liquid carriers for SeaOne Caribbean valued at S$800m in total; 2) a semi-submersible production unit for Shell’s Vito at S$400m; and 3) a Gravifloat (SMM’s proprietary technology) modularised LNG exporting terminal for Poly-GCL at c.S$1bn.

Reactivation of Sete Brasil rig orders. The landmark deal to sell all nine terminated jackup rigs to Borr Drilling eliminates a key overhang on SMM. The restructuring of customer Sete Brasil is also seemingly closer to a resolution, pending approval of the revised restructuring proposal submitted at end-Aug. We believe Singapore rigbuilders are well positioned to deliver at least four rigs each (which are in the advance stages of construction) out of Sete Brasil’s existing 6/7 orders (c.S$1bn each). The reactivation of rig construction will be another re-rating catalyst. Valuation: Our target price of S$ 2.30 is based on 1.8x FY17 P/BV, in line with mean valuation at below 1SD since 2004. SMM’s book value was already written down after the massive S$609m provisions taken in FY15.

Key Risks to Our View: Key downside risks are sustained low oil prices which would affect rig count and newbuilding activities, execution risks in new product types, and disposal of jackup rigs at a loss. Upside risk could come from privatisation or M&A activities, as well as the write-back of provisions from successful deliveries or vessel sales.

At A Glance Issued Capital (m shrs) 2,090

Mkt. Cap (S$m/US$m) 4,033 / 2,959


Sembcorp Industries Ltd 61.0

Franklin Resources 5.0

Free Float (%) 34.0


ICB Industry : Oil & Gas / Oil Equipment; Services & Dist


1 Nov 2017


Sembcorp Marine Version 14 | Bloomberg: SMM SP | Reuters: SCMN.SI Refer to important disclosures at the end of this report

28

48

68

88

108

128

148

168

188

208

1.1

1.6

2.1

2.6

3.1

3.6

4.1

4.6


Relative IndexS$

Sembcorp Marine (LHS) Relative STI (RHS)

Company Guide

Sembcorp Marine

WHAT’S NEW

Looking beyond results

SMM reported headline net profit of S$2.7m in 3Q17, below

expectations of S$30-40m. Stripping out forex gains of

c.S$30m, partially offset by the expected S$13m loss from

Borr-Drilling deal in the form of inventory write-downs, SMM

could have reported a small loss of S$14m in the quarter.

However, the results are inconclusive as earnings was also

affected by the reversal of revenues and costs previously

recognised for the two cancelled Perisai jack up rigs, which

we estimate to be around S$350m. The net impact from the

reversals was not disclosed, except broad guidance that they

would largely be offset against each other.

In 4Q17, SMM will reverse the revenues and costs associated

with the three Oro Negro jackup units that were terminated

in Oct. This is expected to be offset by revenue recognition

for the first delivery to Borr Drilling. The last three units are

currently under construction.

Net orderbook lifted to S$7.97bn (incl S$3.1bn Sete orders),

from S$6.7bn a quarter ago, after adding back the nine

terminated jack up rigs totaling S$1.77bn that were disposed

to Borr Drilling. Excluding the Borr Drilling transaction, YTD

wins stood at c.S$270m.

Order win momentum to pick up. SMM has a strong order

pipeline, potentially translating to firm orders over the next

12 months, including 1) LOIs signed with SeaOne Caribbean

for two large Compressed Gas Liquid carriers valued at

S$400m each; 2) Preferred bidder to build a semi-submersible

production unit, estimated to cost S$400m, for Shell’s Vito

project; and 3) finalisation of its long-awaited first Gravifloat

modularized LNG exporting terminal for Poly-GCL at c.S$1bn.

Upstream reported on 25 Oct that SMM’s talks with Chinese

independent Poly-GCL Petroleum is set to wrap up by the end

of this year, leading to a possible contract signing early next

year.

We believe SMM’s Gravifloat LNG terminals provide a unique

modular option to customers, and will be the key driver of

order wins in the near term. The value of these units can

range from S$200-$300m for importing LNG terminals, and

up to c.S$1bn for exporting LNG terminals. In addition,

enquiries for production related facilities have also been

rather active.

Potential profit from cost optimisation of the nine jackup rigs.

Revenue and margins might be rather lumpy for the next six

quarters. SMM will recognise revenue of the jackup rigs upon

delivery to Borr Drilling from 4Q17 to 1Q19. While a slight

loss is expected from the transaction, which is projected to be

c.S$13m, this has been recognised in advance in 3Q17,

resulting in zerorised profit for these jackup units.

Management does not rule out upside potential from cost

optimisation.

Further cost savings from the return of old yard facilities to

the government. SMM will be progressively returning the

older yard facilities to the government, and moving core

operations to Tuas Boulevard Yard. SMM is in the process of

returning the Shipyard Road Yard and the Tuas Road Yard to

the government. In addition, it is also targeting to return the

Tanjong Kling Yard before the expiry of its lease period. This

will provide room for further cost savings next year.

Lower gearing. Taking into account the US$500m

downpayment from Borr Drilling received in Oct, net gearing

would have reduced from the reported 1.33x as of end Sept,

to 1.04x.

Earnings revision. We have lowered our FY17/18F recurring

net profit forecasts from S$105m/150m to S$9m/S$111m to

reflect 3Q17’s performance, Borr Drilling transaction, and

lower FY17 order wins of S$500m (vs S$1.5bn previously).

Company Guide

Sembcorp Marine



Revenue 888 655 317 (64.3) (51.7)

Cost of Goods Sold (817) (579) (304) (62.7) (47.4)

Gross Profit 71.0 76.3 12.4 (82.5) (83.7)

Other Oper. (Exp)/Inc (38.0) (47.8) 9.58 (125.2) (120.0)

Operating Profit 32.9 28.5 22.0 (33.2) (22.7)

Other Non Opg (Exp)/Inc (3.9) (4.6) (1.1) 73.1 (77.3)

Associates & JV Inc (27.7) (0.5) (0.7) 97.5 35.0



Pre-tax Profit (18.3) 3.52 (1.8) 90.3 nm

Tax (3.5) 0.19 3.42 (197.2) 1,729.9

Minority Interest 0.02 1.89 1.06 nm (44.0)

Net Profit (21.8) 5.59 2.72 nm (51.4)

Net profit bef Except. (21.8) 5.59 2.72 nm (51.4)

EBITDA 36.8 71.6 69.9 90.1 (2.3)

Margins (%)



Net Profit Margins (2.5) 0.9 0.9


Company Guide

Sembcorp Marine


Critical Factors

Oil price rebound and reversal in capex trend. OPEC’s output

cut effective 1 January 2017 brought forward oil equilibrium to

2Q17, and led to an oil price recovery and capex increase after

2-3 years of contraction. The injection of cashflow, through oil

majors’ capex into the O&G ecosystem, is much needed to

stimulate O&G activity.

Order-book replenishment. Order wins and order-book trends

are often the key drivers of rig-builders’ share prices and

earnings. Based on existing capacity, SMM requires ~S$4bn

worth of order replenishments every year in an ideal case. We

expect new orders to recover in FY18 from the dismal ~S$300m

in FY16 and FY17-YTD, driven by the new Gravifloat

modularised LNG terminal solutions. SMM’s net order-book

stood at S$7.97bn as at Sept 2017, with c.39% from the

drillship projects with Sete Brasil. This translates into a book-to-

bill ratio of over 2x based on the existing delivery schedule.

Disposal of West Rigel. Besides the BOT Lease unit, SMM inked

an agreement to sell all nine terminated jackup rigs to Borr

Drilling for US$1.3bn in early Oct-2017. The only other ex-Sete

Brasil unit, which SMM is seeking a potential buyer is West Rigel

- the harsh-environment ultra-deepwater semi-submersible rig

with an original contract value of US$568m, jointly owned with

North Atlantic Drilling that is financially distressed. Successful

disposal of this rig at decent pricing will free up capital and

lower gearing of SMM.

Rig utilisation and day rates bottoming out, uptick in offshore

rig count since January 2017. Utilisation and day rates have

fallen by around 40-50% from June 2014 levels. On a positive

note, utilisation rates seem to be bottoming out. Offshore rig

count saw a first uptick in January 2017. We believe a gradual

recovery in oil prices and the rig market in 2017 will set the

stage for rising newbuild demand thereafter.

Pace of rig-building recovery is dependent on oil price rebound,

retirement of old fleets, and cancellations at Chinese yards. Oil

price rebounding above US$60/bbl will stimulate E&P activities

and thus rig demand, while rig attribution and cancellations will

soothe the supply pressure and eventually bring the sector back

to equilibrium.

Shipyard merger on the cards? While the macro outlook has

improved, the rig-building sector continues to face structural

issues with yard overcapacity and rig oversupply. Both

Singapore rig-builders have been rationalising their operations

since early 2015 to cope with the lower activity level. A merger

could make sense to further streamline their operations, achieve

cost synergies and eliminate competition in the medium term.

Sales Trend

Asset Trend

Profitability Trend

Margin Trends (%)


-30.0%

-10.0%

10.0%

30.0%

50.0%

70.0%

0

1,000

2,000

3,000

4,000

5,000

2014A 2015A 2016A 2017F 2018F

S$ m

Total Revenue Revenue Growth (%) (YoY)

2,000

4,000

6,000

8,000

10,000

2014A 2015A 2016A 2017F 2018F

S$ m

Net Fixed Assets (Tangible) Total Current Assets

(378)

(178)

22

222

422

622

2014A 2015A 2016A 2017F 2018F

S$ m

Operating EBIT Pre tax Profit Net Profit

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2014A 2015A 2016A 2017F 2018F

EBITDA Margin % EBIT Margin % Net Income Margin %

Company Guide

Sembcorp Marine

Appendix 1:

Singapore Offshore Marine vs Oil Price Comments

Strong correlation between

Singapore O&M’s performance and

oil prices

Source: DBS Bank, Bloomberg Finance L.P., Company

SMM’s valuation vs contract wins Comments

Order wins is the leading indicator

for shipyards; a key re-rating catalyst

during recovery phase

Source: DBS Bank, Bloomberg Finance L.P., Company

0

100

200

300

400

500

600

700

800

900

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

DBS Singapore O&M Index vs Oil Price

O&M Index Oil Px

0

1000

2000

3000

4000

5000

6000

0

1

2

3

4

5

6

7

8

Annual orders P/B

Mean = 3.0x

-1SD = 1.8x

Annual orders (S$ m)P/B (x)

+1SD = 4.1x

Company Guide

Sembcorp Marine

Balance Sheet:

Net gearing stood at 1.3x as at end-Sept 2017, but would have

been lower at 1.04x factoring in Borr’s S$500m downpayment

received in Oct. Gearing level should decline to below 1x with

the delivery of the jackup rig and collection from Borr Drilling. In

addition, the completion of the new yard in 2016 should reduce

yard capex to a more normalised level of S$100-200m going

forward. Most of current projects are non-drilling solutions,

which are largely on progressive payment terms, and thus have

lower working capital requirements


Recovery in oil prices. Rising oil prices typically lift sentiment on

rig-builders. We believe SMM would benefit if oil prices recover

and are sustained at least at the US$60/bbl level, which would

trigger more offshore oil & gas capex spending.

Order win momentum. Shipyards are orderbook-driven. Strong

order flows could push up their share prices, as investors reward

greater visibility on revenues and earnings.

Restructuring of Sete Brasil. The successful restructuring of Sete

Brasil will allow the rig owner to obtain financing for its rig-

building programme. This will eliminate an overhang on the rig-

builders.

Key Risks:

Sustained low oil price. Brent crude oil prices of below

US$60/bbl would defer investments into deepwater projects,

and higher-cost oilfield projects. This could dampen newbuild

demand for drilling rigs, especially floaters.

Rig supply glut and competition. A slower order flow is

expected, as the market takes time to absorb about 160 rigs

scheduled for delivery in the next two years, representing

c.20% of its existing fleet. Competition has intensified with the

low order backlog of Korean yards and emergence of Chinese

shipyards in the offshore space.

Company Background

Sembcorp Marine (SMM) is a pure play in the offshore &

marine sector. Its principal activities are rig-building and

offshore engineering, ship conversion, ship repair and building

of specialised vessels.


Capital Expenditure

ROE (%)

PB Band (x)


0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2014A 2015A 2016A 2017F 2018F

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

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

2014A 2015A 2016A 2017F 2018F

Capital Expenditure (-)

S$m

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016A 2017F 2018F

Avg: 1.96x

+1sd: 2.71x

+2sd: 3.45x

-1sd: 1.22x

-2sd: 0.47x0.4

0.9

1.4

1.9

2.4

2.9

3.4

3.9


(x)

Company Guide

Sembcorp Marine

Key Assumptions

FY Dec 2014A 2015A 2016A 2017F 2018F

New order wins (S$ m) 4,192 3,128 320 500 2,500

Segmental Breakdown

FY Dec 2014A 2015A 2016A 2017F 2018F

Revenues (S$m)

Rigs & Floaters 4,207 3,319 1,887 1,100 2,585

Offshore Platforms 925 1,017 1,116 679 745

Repairs & Upgrades 622 557 460 531 586

Specialised Shipbuilding 0.0 0.0 0.0 0.0 0.0

Others 78.6 75.8 82.1 80.0 80.0

Total 5,833 4,968 3,545 2,390 3,996


FY Dec 2014A 2015A 2016A 2017F 2018F

Revenue 5,833 4,968 3,545 2,390 3,996


Gross Profit 844 131 293 148 368

Other Opng (Exp)/Inc (137) (281) (67.5) (55.0) (128)

Operating Profit 707 (150) 225 92.7 240

Other Non Opg (Exp)/Inc 1.19 (18.2) (18.9) 0.0 0.0

Associates & JV Inc 9.86 (174) (35.1) 3.00 5.00

Net Interest (Exp)/Inc (11.3) (36.0) (80.7) (87.6) (104)


Pre-tax Profit 707 (378) 90.5 54.9 141

Tax (106) 77.6 (15.4) 0.55 (25.4)

Minority Interest (41.2) 10.3 3.62 0.55 (4.6)


Net Profit 560 (290) 78.8 56.0 111

Net Profit before Except. 560 (290) 78.8 9.23 111

EBITDA 829 (216) 312 272 427

Growth

Revenue Gth (%) 5.6 (14.8) (28.6) (32.6) 67.2

EBITDA Gth (%) 11.4 nm nm (12.7) 57.0

Opg Profit Gth (%) 12.3 nm nm (58.9) 158.8

Net Profit Gth (Pre-ex) (%) 4.1 nm nm (88.3) 1,102.0

Margins & Ratio

Gross Margins (%) 14.5 2.6 8.3 6.2 9.2

Opg Profit Margin (%) 12.1 (3.0) 6.4 3.9 6.0

Net Profit Margin (%) 9.6 (5.8) 2.2 2.3 2.8

ROAE (%) 19.9 (10.6) 3.1 2.2 4.3

ROA (%) 7.2 (3.3) 0.8 0.6 1.2

ROCE (%) 13.2 (2.6) 2.8 1.3 2.8

Div Payout Ratio (%) 48.5 N/A 66.3 36.0 35.0

Net Interest Cover (x) 62.9 (4.2) 2.8 1.1 2.3


Company Guide

Sembcorp Marine


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 888 830 760 655 317


Gross Profit 71.0 34.7 19.9 76.3 12.4

Other Oper. (Exp)/Inc (38.0) 32.4 (6.4) (47.8) 9.58

Operating Profit 32.9 67.1 13.6 28.5 22.0

Other Non Opg (Exp)/Inc (3.9) (16.2) 0.02 (4.6) (1.1)

Associates & JV Inc (27.7) (5.3) (0.7) (0.5) (0.7)



Pre-tax Profit (18.3) 21.3 36.8 3.52 (1.8)

Tax (3.5) 9.36 2.77 0.19 3.42

Minority Interest 0.02 3.66 0.0 1.89 1.06

Net Profit (21.8) 34.3 39.6 5.59 2.72

Net profit bef Except. (21.8) 34.3 (7.3) 5.59 2.72

EBITDA 36.8 98.7 59.9 71.6 69.9

Growth

Revenue Gth (%) (2.3) (6.5) (8.4) (13.8) (51.7)

EBITDA Gth (%) (51.7) 168.5 (39.4) 19.6 (2.3)

Opg Profit Gth (%) (38.5) 103.7 (79.7) 109.7 (22.7)

Net Profit Gth (Pre-ex) (%) (290.3) (257.4) (121.2) (177.1) (51.4)



Net Profit Margins (%) (2.5) 4.1 5.2 0.9 0.9

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 3,009 3,541 3,987 3,960 3,878

Invts in Associates & JVs 470 312 74.8 77.8 82.8

Other LT Assets 192 231 335 335 335

Cash & ST Invts 1,093 690 1,269 1,638 2,145

Inventory 3,005 3,833 3,067 2,656 2,854

Debtors 469 590 492 332 533

Other Current Assets 0.20 3.89 191 191 191

Total Assets 8,238 9,201 9,415 9,189 10,019

ST Debt

434 915 1,364 1,664 1,664

Creditor 1,826 2,519 2,120 1,839 2,664

Other Current Liab 1,189 463 264 217 325

LT Debt 1,308 2,465 2,791 2,591 2,391



Minority Interests 167 153 45.6 45.1 49.7

Total Cap. & Liab. 8,238 9,201 9,415 9,189 10,019

Non-Cash Wkg. Capital 459 1,445 1,365 1,123 588

Net Cash/(Debt) (648) (2,690) (2,886) (2,617) (1,910)




Asset Turnover (x) 0.8 0.6 0.4 0.3 0.4

Current Ratio (x) 1.3 1.3 1.3 1.3 1.2

Quick Ratio (x) 0.5 0.3 0.5 0.5 0.6

Net Debt/Equity (X) 0.2 1.0 1.1 1.0 0.7


Capex to Debt (%) 42.4 27.6 10.1 3.5 2.5

Z-Score (X) 2.0 1.2 1.2 1.3 1.3


Company Guide

Sembcorp Marine


FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 707 (378) 90.5 54.9 141

Dep. & Amort. 115 132 159 177 183

Tax Paid (82.8) (104) (28.0) (36.8) 0.55

Assoc. & JV Inc/(loss) (9.9) 174 35.1 (3.0) (5.0)

Chg in Wkg.Cap. (1,267) (291) 284 280 509

Other Operating CF 29.5 (521) 27.5 0.0 0.0

Net Operating CF (508) (989) 569 471 828

Capital Exp.(net) (738) (932) (421) (150) (100.0)

Other Invts.(net) (26.5) 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 (3.3) 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (5.4) 0.0 (65.9) 0.0 0.0

Net Investing CF (770) (932) (490) (150) (100.0)

Div Paid (285) (265) (73.7) (52.2) (20.2)

Chg in Gross Debt 964 1,744 768 100 (200)

Capital Issues (10.8) (11.3) (3.0) 0.0 0.0

Other Financing CF 1.99 2.02 (157) 0.0 0.0

Net Financing CF 670 1,469 534 47.8 (220)

Currency Adjustments (7.2) 4.71 (22.7) 0.0 0.0

Chg in Cash (616) (447) 590 369 507

Opg CFPS (S cts) 36.3 (33.4) 13.6 9.17 15.3

Free CFPS (S cts) (59.7) (92.0) 7.05 15.4 34.8



Source: DBS Bank

Analyst: Pei Hwa HO

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 31 Oct 16 1.30 1.15 FULLY VALUED

2: 01 Dec 16 1.47 1.55 HOLD

3: 23 Feb 17 1.82 1.78 BUY

4: 13 Mar 17 1.86 1.78 BUY

5: 02 May 17 1.65 1.78 BUY

6: 03 Jul 17 1.66 1.78 BUY

7: 20 Jul 17 1.74 2.30 BUY

8: 26 Jul 17 1.76 2.30 BUY

9: 28 Jul 17 1.70 2.30 BUY

10: 20 Sep 17 1.66 2.30 BUY

11: 04 Oct 17 1.75 2.30 BUY

12: 09 Oct 17 1.82 2.30 BUY


1

2

3

4

5

67

89

1011

12

1.21

1.31

1.41

1.51

1.61

1.71

1.81

1.91

2.01

2.11

Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17

S$

ed: TH / sa:YM , PY

BUY (Resume coverage)

Last Traded Price ( 29 Sep 2017): S$3.68 (STI : 3,219.91)


Analyst Sachin MITTAL +65 6682 3699 [email protected]

What’s New Market valuing Singtel core + digital segments at 5.6x

EV/EBITDA versus 7x for M1 & 9x for StarHub

With Amobee achieving EBITDA breakeven, market is

likely to appreciate core business (more resilient than

peers) and improving digital business.

Singtel could potentially pay S$600mn-1.5bn in special

dividends with 1H18 results

Resume coverage with BUY at S$4.30 TP

Price Relative

Forecasts and Valuation FY Mar (S$ m) 2016A 2017A 2018F 2019F

Revenue 16,961 16,711 17,521 17,713 EBITDA 7,845 8,017 8,118 8,403 Pre-tax Profit 5,444 5,364 7,328 5,536 Net Profit 3,871 3,853 5,787 3,943 Net Pft (Pre Ex.) 3,814 3,929 3,827 3,943 Net Pft Gth (Pre-ex) (%) (0.6) 3.0 (2.6) 3.0 EPS (S cts) 24.3 23.6 35.4 24.1 EPS Pre Ex. (S cts) 23.9 24.1 23.4 24.1 EPS Gth Pre Ex (%) (1) 1 (3) 3 Diluted EPS (S cts) 24.3 23.6 35.4 24.1 Net DPS (S cts) 17.5 17.5 24.8 18.1 BV Per Share (S cts) 157 173 191 190 PE (X) 15.2 15.6 10.4 15.2 PE Pre Ex. (X) 15.4 15.3 15.7 15.2 P/Cash Flow (X) 17.8 16.4 12.3 16.1 EV/EBITDA (X) 8.7 8.8 8.5 8.4 Net Div Yield (%) 4.8 4.8 6.7 4.9 P/Book Value (X) 2.3 2.1 1.9 1.9 Net Debt/Equity (X) 0.4 0.4 0.3 0.3 ROAE (%) 15.6 14.5 19.5 12.7

Consensus EPS (S cts): 24.2 25.8 Other Broker Recs: B: 16 S: 1 H: 6


Unsustainable discount for the core and the digital business

20-40% valuation discount versus peers is an opportunity to

accumulate. Singtel’s core plus digital business is trading at only

5.6x FY18F EV/EBITDA versus 7x for M1, 9x for StarHub and

7.5x regional telco average. Despite the ~38% rise in the

valuation of regional associates over the last three years, the

stock has been flattish, due to mounting losses in the digital

businesses perhaps. However, with digital advertising arm

Amobee achieving an earlier-than-expected EBITDA breakeven

in 1Q18, and official guidance for narrower digital losses in

FY18F, we expect the valuation discount to disappear.

Where we differ. Investors ought to value core and digital

business separately with Singtel improving its execution of

digital businesses. Currently, investors bundle the core and

digital businesses together whereby digital losses dilute the total

EBITDA, leading to a lower EV/EBITDA multiple. In our view,

robust digital offerings on top of network access will be a major

competitive advantage in the Internet of Things (IoT) era. We

argue that investors ought to value the core business at 7x and

value the digital business separately based on revenue multiple

even though it is not profitable yet.

Potential for special dividends with 1H18F results. According to

our analysis, Singtel could pay special dividends of S$600mn-

1.5bn (1.0-2.5% yield) taking total FY18F yield to 6.0-7.5%

without exceeding 2x net debt-to-EBITDA.

Valuation:

We use a sum-of-the-parts (SOTP) valuation for Singtel to

derive a target price of S$4.30. The stock offers ~17% upside

potential in addition to 6.0-7.5% yield.


Core business EBITDA from FY19F onwards. If core EBITDA

were to decline 4% each over FY19-24 due to the new mobile

entrants in Singapore and Australia versus our base case

projection of stable EBITDA, our TP will be lowered to S$3.40.


Mkt. Cap (S$m/US$m) 60,091 / 44,263


Temasek Holdings 52.3

Free Float (%) 47.7


ICB Industry : Telecommunications / Telecommunications


2 Oct 2017


SingTel Version 2 | Bloomberg: ST SP | Reuters: STEL.SI Refer to important disclosures at the end of this report

Company Guide

SingTel

WHAT’S NEW

Special dividends and improving digital businesses

Potential special dividend post Net Link Trust IPO could be a

catalyst for share price: Singtel successfully divested 75%

stake in Netlink NBN Trust through an IPO in July 2017. The

divestment is expected to result in a cash inflow of S$2.2bn in

FY18 for Singtel.

Singtel has committed to make ~S$1bn in spectrum

payments on top of S$2.4bn capex in FY18. Singtel has also

guided for 60-75% dividend payouts on underlying profits in

the near term for its investors. Given the reduction in capex in

FY19 due to Optus’s 3-year investment drive winding down

and the inflows from the Net Link Trust IPO, we believe

Singtel has the ability to issue ~S$600m-1.5bn in special

dividends (on top of 75% payout) without hurting its credit

metrics. Singtel’s net debt-to-EBITDA should remain ~2.0x,

even after the special dividends, according to our calculations.

If Singtel does not plan to acquire more digital businesses, it

could pay S$1.5bn in special dividends. If it plans to invest

another S$1bn in digital businesses, it could pay S$500m in

special dividends.

With Amobee achieving breakeven, Singtel is ramping up

HOOQ and DataSpark. Amobee, Digital Life’s largest

contributor, achieved EBITDA breakeven in 1Q18 ahead of its

full year target of EBITDA breakeven. With Singtel guiding for

narrower EBITDA losses for S$100m, most of the losses are

expected to come from HOOQ- over-the-top (OTT) video

offering and DataSpark – Advanced analytics offering. HOOQ

and DataSpark contributed only S$3mn in revenue in 1Q18

versus S$290mn by Amobee, however these offerings could

really differentiate Singtel’s consumer and enterprise telco

offerings as well.

Digital business should be awarded a positive valuation.

Digital business should be valued over S$2bn based on EV to

revenue multiple of recent acquisitions. Currently, market is

valuing them negatively due to EBITDA losses of S$120m in

FY17 and giving lower EV/EBITDA multiple to core plus digital

business due to stagnant EBITDA.

Sum-of-the parts valuation for Singtel

.

Source: Reuters, DBS Bank

Group Digital Life EBITDA loss (S$) is narrowing

Source: Company data

Amobee achieved EBITDA breakeven in 1Q18

Source: Company data, DBS Bank

-16

-13

-5

-12

-16

-9

-1

-7

01Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

-200

-180

-160

-140

-120

-100

-80

-60

-40

-20

0

FY13 FY14 FY15 FY16 FY17 FY18F

Company Guide

SingTel

Digital Businesses

Group Digital Life, coupled with Cyber Security, contributed

9% of Singtel’s revenue in 1Q18. Group Digital Life, coupled

with Cyber Security, is already contributing over 9% to

Singtel’s top line. Singtel has guided for Digital Life segment

to more than double its revenues to S$1.2-1.3bn with the

acquisition of Turn. The company has guided for Cyber

Security division to generate revenues of ~S$550-650m in

FY18 versus S$473m in FY17, implying 16-37% growth.

Digital Advertising

Amobee has moved away from competitive supply side

platform business: In October 2016, Amobee shut down its

supply side platform business (except for video) to focus on its

core ad-network related functions such as ad monitoring and

cross platform targeting tools which can be utilised to

improve the effectiveness of advertising campaigns. Its Brand

Intelligence tool, which analyses digital content engagement

trends, is already used by major bands such as IKEA and Lexus

to shape their marketing strategies.

Digital Advertising Ecosystem

Source: DBS Bank

Company Guide

SingTel

In addition, Amobee INK, Amobee’s cross device audience

targeting tool is being used in their media activation

strategies. We believe these businesses could be more

lucrative for Amobee in the medium to long term as these

segments face less direct competition form large tech players

such as Google and Facebook.

Amobee achieved EBITDA breakeven following Turn

acquisition. Following the acquisition of Turn in February

2017, Amobee is able to perform programmatic buying

without relying on third parties which has resulted in

improvement of gross margins. Turn operates a demand side

platform (DSP) and data management platform. The DSP adds

programmatic buying capabilities to Amobee which will

automate the process of buying digital ads in real time across

multiple platforms. Furthermore, the scale benefits stemming

from the acquisition has allowed Amobee to manage costs

better, resulting in EBITDA breakeven in 1Q18. With these

savings and Amobee focusing on niche areas where it does

not face direct competition from large tech players such as

Google and Facebook, we should see Amobee improving its

financial performance post FY18. In addition to acquisition-

led growth, the rising global digital ad spending is expected

to drive Amobee’s growth in the near to medium term.

Global digital ad spend is expected to grow by 13.5% in

2017 according to MAGNA, IPG Mediabrands' research arm.

Turn remains a market leader in multi-channel DSP. Turn was

recognised as a leader in the 2017 Omnichannel demand-side

platform evaluation for 2Q17 by market research firm,

Forrester, primarily for the platform’s ability to provide

extensive analytics both at a granular and a modular level.

Technology research firm, Gartner also upgraded Turn from

been a “Visionary” to a “Challenger” in an evaluation of

digital marketing hubs, signifying that the platform’s

capabilities are becoming more in line with customer needs.

Gartner also recognised the strong eco-system of over 200

partners and customised advisory services provided by the

firm to be some of the key strengths of the company.

Amobee is gaining traction in leveraging Singtel’s presence in

Asia. Amobee faces direct competition from a range of ad-

tech companies such as AppNexus, Sizmek and market

leaders like Google and Facebook. However, Amobee’s key

strength lies in its ability to leverage Singtel’s regional

presence to gain traction in Asia, where SMEs remain hesitant

on partnering with big names in digital advertising due to

hefty fee structures and the lack of an understanding of the

regional market. Amobee, on the other hand, is capable of

utilising Singtel’s regional networks, reputation and clientele

to offer more attractive and customised solutions to local

firms. For example, last year Amobee, in partnership with

Optus, launched “Optus Xtra” an app that provides free data

quotas and credit to users in return for allowing ads to be

displayed on their phones. Securing this level of collaboration

with regional telcos remains a challenge even for the biggest

names in digital advertising.

Other digital business ex Amobee

Subscription Video on Demand (SVOD) OTT market hot in the

APAC region. According to Research and Markets, SVOD

revenue in APAC region is expected to reach US$18bn by

2021 with a CAGR of 22% over 2015-2021. Though the bulk

of the revenue will be generated by markets such as China

and Japan, India and Indonesia are expected to see some of

the fastest growth. According to Digital TV research forecasts,

Indonesia and India are expected to see SVOD subscriber

CAGRs of 87% and 31% respectively from 2016-2021, well

above the regional average.

HOOQ expanding its operations: HOOQ, Singtel’s OTT video

platform targeting emerging markets, has already started

operating in the fast-growing markets of India, Indonesia,

Thailand and Philippines, in addition to Singtel’s home market

Singapore. The management considers HOOQ’s operations to

be still at a startup level and is investing on ramping it up.

Similar to its peer iflix, HOOQ is looking to partner with

potential telcos in its markets to increase subscriber

penetration with HOOQ provided by Singtel (Singapore),

Globe (Phillipines) and Vodafone (India). Further, HOOQ has

been able to capture exclusive content from media producers

such as Disney while it has already started to invest in its own

content, albeit at a relatively small scale.

DataSpark growth driven by unique data repository of

Singtel. DataSpark is Singtel’s data analytics business created

to provide business and government agencies insights

leveraging SingTel's anonymised geolocation data. Given

Singtel’s unique ability to capture location data from its

subscribers, the company is able to provide insights that are

difficult to be matched by external players. In addition, with

Singapore government’s investment in smart nation

initiatives, Singtel may see opportunities to use its knowledge

in more varied contexts.

Digital Life initiatives (ex Amobee) still in early days. Given the

relative immature nature of its operations, we believe that it is

too early to comment on HOOQ and DataSpark’s profitability.

However, the segment could yield significant growth in the

medium to long term for Singtel and remain strategic

investments for the firm.

Company Guide

SingTel

Ongoing investments resulting in losses

Source: Company data

Digital Life is worth S$1.1bn. We have valued Singtel’s

Digital Life business at S$1.1bn using a mix of Singtel’s ad-

tech acquisition prices and EV/Revenue multiples of recent

industry acquisitions. To be conservative, we have used a

25% discount to account for any valuation premium for

Singtel’s ad tech acquisition prices. Similarly, we apply 25%

discount to EV/revenue multiple of 1.31x for recent industry

acquisitions in order to be conservative. Using the average

value of the two methods, we have arrived at an enterprise

value of S$1.1bn for Singtel’s Digital Life business.

Digital Life valuation

Method - 1 (based on Ad-tech acquisition price)

Amobee acquisition price (USD Mn) 321

Adconion acquisition price (USD Mn) 235

Kontera acquisition price (USD Mn) 150

Turn acquisition price (USD Mn) 310

Acquisition price (USD Mn) 1,016

Exchange rate 1.4

Acquisition price (SGD Mn) 1,422

Acquisition discount 25%

Valuation (SGD Mn) 1,067

Method - 2 (based on recent industry acquisitions)

Revenue (SGD Mn, FY18F) 1,130

Sector EV/EBITDA 1.31


Acquisition discount 25%


Method - 1 1,067

Method - 2 1,110

Valuation (Average, SGD Mn) 1,088

Source: DBS Bank

Recent ad tech acquisition multiples


Cyber Security Business

Managed security services providers (MSSPs) are on an

upward growth trajectory: Singtel strengthened its managed

security services with the acquisition of Trustwave in 2Q16, a

leading MSSP based in the US. The global demand for

MSSPs is expected to grow robustly at a CAGR of 13% from

2014-2018, according to research firm Frost & Sullivan,

backed by the increasing complexities of cyber-attacks,

shortage of cyber-security professionals and rising demand

from Small and Medium Enterprises. Demand from the

APAC region is set to outpace global growth with a CAGR

of 15% reaching US$ 3.77bn by 2018. Singtel would be

able to capitalise on this trend by combining its position as a

leading network service provider in the region with the

capabilities of Trustwave. As a likely provider of network

infrastructure facilitating the Smart Nation programme,

which is expected to be data intensive, Singtel would

naturally be among the favorite candidates for monitoring

and managing the cyber-security assets of the Smart Nation

programme, further boosting growth prospects for the

telco’s cyber-security division.

Singtel is expanding cybersecurity operations: Singtel and

Trustwave are expanding their cybersecurity operations with

new Security Operations Centres in selected countries.

Trustwave announced an Advanced Security Operations

Centre in Japan and Australia in late 2016 and expanded its

facilities in Chicago in 2017. In addition, the company

started operations of a new Security Operations Centre with

Globe telecom in Philippines in 2017. The expansions offer

Singtel the ability to drive cybersecurity revenues, supported

by regional partners such as Globe (Philippines) and TIS

(Japan).

0.0

0.5

1.0

1.5

2.0

2.5

Postmedia Adelphic YuMe Rocket fuel

EV/revenue

Average

-15

-21

-28 -27

-20-18

-22

-29

-24

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

EBITDA of Digital Life businesses ex.

Amobee

Company Guide

SingTel

However, the increased headcount from the expansions have

also resulted in higher costs and EBITDA losses, especially in

seasonally low revenue quarters such as 1Q18. To minimise

the losses, Singtel is looking to improve cost savings by

shifting work offshore to its low-cost bases in Manila and

Warsaw where possible, and by increasing automation,

thereby saving on manpower costs. Further, the management

expects better costing for third-party solutions to be achieved

as the cybersecurity business scales up. As a result, as these

investments mature and cybersecurity revenues expand, we

are likely to see these investments turning EBITDA positive.

Cybersecurity revenues tend to be cyclical


Cybersecurity EBITDA has been volatile too

Source: DBS Bank, Companies

Peer trajectory suggests Cyber Security could achieve ~10%

EBITDA margin in the medium term. Trustwave’s slightly

larger peer in the MSSP space, SecureWorks has been less

successful in achieving positive EBITDAs. We believe this is

mostly due to the higher sales and marketing expenses the

company incurs (25-35% of revenue). However, Singtel (&

Trustwave) is unlikely to maintain such high marketing costs

in the near to medium term due to its higher reliance on the

upcoming Smart Nation projects and regional partners such

as Globe and TIS. As a result, Singtel’s Cyber Security business

is likely to achieve a similar growth trend with much lower

sales and marketing costs, in our view.

Adjusting for a more reasonable sales and marketing costs

(~5-10% of revenue), SecureWorks’s trends indicate MSSP

operations could reach a 10% EBITDA margin as investments

mature.

Adjusted EBITDA for SecureWorks

Source: Company data, DBS Bank

Singtel cybersecurity business is worth S$1.1bn. We have

valued Singtel’s cybersecurity business at S$1.1bn using a mix

of Trustwave acquisition price and Industry EV/Revenue

multiples. To be conservative, we have used a 25% discount

to account for any valuation premium for Trustwave’s

acquisition price. Similarly, we have used a 10% liquidity

discount on the industry EV/revenue multiple of 2.51x to be

conservative. Using the average value of the two methods,

we have arrived at an enterprise value of S$1.1bn for Singtel’s

cybersecurity business.

90

95

100

105

110

115

120

125

130

135

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

S$ m

n

Cybersecurity revenue Cybersecurity costs

32

-5

3

-11

-4

-13

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

Cybersecurity EBITDA

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

$ '000

EBITDA (LHS) EBITDA margins (RHS)

Company Guide

SingTel

Cyber security valuation

Source: DBS Bank

EV to sales of Cyber Security peers


Core Business in Singapore and Australia

Singapore core business is more resilient than peers, which

should be reflected in its valuations. Singapore’s mobile sector

is expected to face headwinds in 2018 with the entry of TPG.

Hence, telcos have already increased data prices to reduce

customer churn and maintain market share. However, Singtel’s

Singapore operations generate over 50% of revenues from the

enterprise segment which should enable it to fair better in the

near term compared to its peers M1 and StarHub. Even with

the competition heating up in the recent quarters, EBITDA

from Singtel’s Singapore operations had shown much better

resilience in the first half of 2017, declining only 3% compared

to its peers M1 and StarHub which saw declines of 8% and

9% respectively. Singapore telcos M1 and StarHub are

currently trading at FY18F EV/EBITDA of 7x and 9x respectively,

despite their higher exposure to the declining mobile markets.

However, considering this, we have conservatively valued

Singtel’s Singapore operations at FY18F EV/EBITDA of 7.5x.

Singapore operations – revenue breakdown


Cyber security valuationMethod - 1 (based on Trustwave acquisition price)Trustwave acquisition price (USD Mn) 810Exchange rate 1.4Trustwave acquisition price (SGD Mn) 1,134Acquisition discount 25%Valuation (SGD Mn) 851

Method - 2 (based on industry multiples)Revenue (SGD Mn, FY18F) 600Sector EV/EBITDA 2.51Valuation (SGD Mn) 1,506Liquidity discount 10%Valuation (SGD Mn) 1,355

Method - 1 851Method - 2 1,355Valuation (Average, SGD Mn) 1,103

29%

52%63%8%

24%18%

57%

17%

6% 6%19%

Singtel StarHub M1

Mobile Fixed BB and PayTV Enterprise Other

*Enterprise revenue excluding mobile**does not disclose enterprise revenue separately

Company Guide

SingTel

Singapore operations - EBITDA growth y-o-y 1H17


Optus is on a much better footing than Telstra which should

be reflected in at least 20% premium versus Telstra. Telstra is

facing headwinds due to the implementation of National

Broadband Network (NBN) as the market expects NBN to

change the way broadband is delivered and priced. Telstra

faces pressure from lost wholesale revenue, access fees it will

have to pay NBN, and competition pressures that will reduce

the premium it can charge for retail mobile services. Optus,

on the other hand, is able to gain access to more homes via

NBN as it did not have the required infrastructure to compete

with Telstra previously.

In the mobile space, Optus has been investing in networks to

narrow its gap with Telstra who charges a premium price

which we estimate is 10-30% premium for SIM only plans.

Optus has poured over A$3.7bn in network infrastructure

since 2015 increasing 4G coverage from 75% of metro

population to 96% total population coverage by 2017 versus

98% for Telstra. Optus also plans to invest A$1bn on rural

coverage to improve its market share outside metro areas

over the next 12 months in reducing coverage gaps and

upgrading existing 3G sites to 4G. While TPG’s entry in the

mobile space in mid-2019 is a concern for the sector, Optus’s

redced coverage gap with Telstra places it in a positon to gain

market share.

Consensus expects Telstra to see ~10% EBITDA drop in FY20

and gradual EBITDA decline thereafter once NBN rollout is

completed in 2020. Recently after cutting it payout ratio to

75% from 100%, Telstra’s stock price took a hit and is

trading at only 5.4x FY18F EV/EBITDA. On the other hand, we

expect Optus to register stable to low-single digit growth in

EBITDA over the next couple of years, which justifies at least

20% premium versus Telstra, leading to 6.5x FY18F

EV/EBITDA.

-3%

-9%

-8%

Singtel StarHub M1

Company Guide

SingTel

Valuations

Sum-of-the parts valuation for Singtel based on market price of associates


Valuation of regional associates


Singtel’s core plus digital EV/EBITDA is far below regional

peers


Singtel’s core + digital business as a superior FCF yield to its

peers


5.66.9

8.8

3.2

7.15.7

13.7

11.8

7.0 7.69.1

5.7

Sin

gte

l

M1

Star…

Indo…

Telk…

XL

Dig

i

Max

is

TM

Axi

ata

AIS

DTA

C 0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Singtel* StarHub M1 TM Axiata TLKM

FCF Yield

*Core + Digital operations

Company Guide

SingTel

Peers Valuation

Singapore Telecom 18 & 19 forecast respectively

Source: DBS Bank; DBS Vickers

Mkt Price 12-mth CA GR

Company Cap S$ Target Price % 16-18

(US$m) 28/9/2017 LCL Upside Rcmd (%) 17F 18F 16A 17F 16A 17F 17F 18F

China / Hong Kong SHCOMP Index 3,340

China Mobile 208,235 79.45 114.00 43% BUY 4 12.3 11.8 3.5% 7.8% 1.4x 1.4x 3.2x 2.9x

China Telecom 7,106 4.00 5.10 28% BUY 8 13.8 13.0 2.7% 3.0% 0.9x 0.8x 3.7x 3.5x

China Unicom 33,474 10.92 11.30 3% HOLD 289 45.1 23.6 0.0% 0.8% 1.0x 1.0x 3.8x 3.4x

Smartone Telecom 1,309 9.25 7.50 -19% FV -8 15.0 14.7 6.4% 6.4% 2.3x 2.3x 5.1x 4.9x

Hutchison Telecom 1,739 2.82 3.30 17% HOLD -1 20.0 19.7 3.9% 3.7% 1.2x 1.2x 7.1x 6.8x

HKT Trust 9,275 9.57 12.80 34% BUY 0 15.2 14.9 6.5% 6.6% 1.8x 1.8x 8.5x 8.3x

Malay sia KLCI Index 1758.06

Digi.Com 9,001 4.90 4.20 -14% FV -4 25.8 25.4 4.3% 3.9% 73.4x 73.4x 14.0x 13.7x

Maxis Bhd 10,685 5.79 5.15 -11% HOLD 0 22.9 22.1 3.5% 3.8% 9.2x 6.8x 11.9x 11.9x

Telekom 5,629 6.34 7.10 12% BUY 9 27.6 23.8 3.4% 3.3% 3.1x 3.1x 7.4x 7.0x

Axiata Group 11,076 5.21 4.75 -9% HOLD 1 36.5 32.3 1.5% 1.4% 2.0x 1.9x 8.2x 7.8x

Singapore ST I Index 3227.14

M1 1,223 1.79 1.78 0% FV -12 13.0 14.3 7.2% 6.1% 4.1x 4.0x 6.8x 7.5x

SingTel 44,133 3.67 4.30 17% BUY 0 16.3 15.2 4.8% 7.0% 2.1x 1.9x 8.5x 8.5x

Starhub 3,323 2.61 2.33 -11% FV -12 17.0 17.6 7.7% 6.1% 23.0x 27.0x 8.8x 9.3x

Thailand SET Index 1666.36

Advanced Info Serv ice 17,232 193.50 162.00 -16% HOLD 6 19.4 17.0 5.2% 3.6% 13.5x 11.7x 10.0x 9.1x

Total Access Comm. 3,989 56.25 37.90 -33% SELL 19 78.4 36.7 0.7% 0.3% 5.0x 4.8x 5.7x 5.6x

Indonesia J CI Index 5841.047

Indosat 2,543 6,300 6,800 8% HOLD nm 26.2 nm 0.0% 0.0% 2.6x 2.3x 4.0x 3.9x

PT Telekom 35,270 4,710 4,800 2% HOLD 18 19.9 17.5 2.9% 3.5% 5.6x 5.3x 7.6x 7.1x

XL Axiata 2,938 3,700 3,900 5% HOLD nm -1441.9 84.0 0.6% 0.0% 1.9x 1.9x 6.2x 5.5x

EV /EBITDAPE (x) Div idend Y ield (%) P/BV

Company Guide

SingTel


Critical Factors

Associate profits expected to grow despite weakness in Bharti

and AIS. We have revised down our expectations for Bharti and

AIS as both the companies are facing earnings headwinds due

to competitive pressures and industry trends. We expect Bharti’s

profitability to decline in FY18F due to Reliance Jio-led

competition. Further deterioration of profits can be expected

with the reduction in interconnection usage charges, which

favours the new entrant. Similarly, AIS is expected to see

reductions in profit generation due to cost pressures stemming

from network expansion and network sharing agreement with

TOT.

However, we do expect this to be offset by the growth in

Telkomsel. Despite increasing competition outside Java,

Telkomsel has market leadership and is enjoying robust profit

growth from the fast-growing usage seen in Indonesia. As a

result, we expect associate profits to improve in FY18/FY19 by

1%/7.0%.

Low single-digit EBITDA growth due to Australia growth and

lower losses on Digital Life. Singtel has guided for its core

business (Singapore + Optus) to see low single-digit EBITDA

growth in FY18. The mild decline in Singapore operations due

to the challenging mobile business is expected to be offset by

the growth in Optus which is seeing healthy growth fueled by

mobile subscriber additions. In addition, Digital Life segment is

expected to make significant reductions on their EBITDA losses,

which should boost Singtel’s overall EBITDA.

Singapore Revenue (S$m)

Singapore EBITDA Margin (%)

Optus Revenue (A$m)

Optus EBITDA Margin (%)

Associate pre-tax earnings (S$m)


Company Guide

SingTel


Associate profits were quite critical in the past but not over the last three years. In the critical factor

analysis, we conducted over the past ~10 years, Singtel’s share price seems to follow Associate profits

and EBITDA. Singtel’s share price change had a positive correlation of 0.65 with the associates’ profit,

and a positive correlation of 0.59 with EBITDA. However, the correlation with associates’ profit has

been weaker in the last three years possibly due to investors worrying about digital losses.

Share price vs associate profits

Share price vs EBITDA


Company Guide

SingTel

Balance Sheet:

Proceeds from Net Link Trust further strengthen the balance

sheet. Singtel’s spectrum payout for Singapore and Australia is

expected to be S$1bn for FY18, higher than our initial estimate

of ~S$350-400m. This is in addition to the relatively high levels

of capex (A$~2.4bn in FY18) the company expects to maintain

in Singapore and Australia in FY18. However, with its strong

cash generation and proceeds from Link Net IPO being realised

in 2Q18, we believe Singtel should have no problems in making

the investments.


Net Link trust IPO bumps FY18 earnings up. We expect ~S$2bn

one-off gains to be recorded in FY18 which should bump up

earnings for FY18. However, when excluding one-off gains,

erosion of earnings in Bharti and AIS has resulted in pre-tax

earings contribution increasing by only 1% in FY18F.

Investors will also be monitoring core EBITDA especially in

Singapore as Singapore’s mobile segment is seeing declining

revenues due to lower roaming revenues and heightened

competition. Roaming revenues accounted for 16% of Singtel’s

Singapore mobile revenues in 1Q18 (down from 18% in 4Q17)

which has been steadily declining due to data substitution.

Singtel has guided for low-mid single digit growth in core

EBITDA without specifying the breakdown in Singapore and

Australia.

Key Risks:

Bear-case valuation for Singtel is S$3.40. In our bear case, we

have assumed core EBITDA to decline 4% each over FY19-24

due to the new mobile entrants in Singapre and Australia

versus our base case projection of stable EBITDA.

Bull-case valuation for Singtel is S$4.60. In our bull-case, we

have assumed core EBITDA to grow 3% each over FY19-24

despite new mobile entrants in Singapre and Australia versus

our base case projection of stable EBITDA.

Company Background

Singtel is the largest telecom operator in Singapore and its

Australian subsidiary Optus is the second largest operator in

Australia. Besides, SingTel has substantial stakes in telcos in the

region - Telkomsel in Indonesia, Bharti in India, AIS in Thailand

and Globe in Philippines.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Company Guide

SingTel

Key Assumptions

FY Mar 2015A 2016A 2017A 2018F 2019F

Singapore Revenue (S$m) 7,348 7,663 7,927 8,497 8,597 Singapore EBITDA Margin (%)

29.2 28.5 27.9 26.8 26.7

Optus Revenue (A$m) 8,790 9,106 8,425 8,678 8,765

Optus EBITDA Margin (%) 29.9 30.4 0.0 0.0 0.0

Associate pre-tax earnings (S$m)

2,616 2,788 2,942 2,971 3,209


FY Mar 2015A 2016A 2017A 2018F 2019F

Revenue 17,223 16,961 16,711 17,521 17,713


Gross Profit 4,939 4,864 4,782 4,932 4,979

Other Opng (Exp)/Inc (2,010) (2,001) (2,024) (2,186) (2,320)

Operating Profit 2,929 2,864 2,759 2,745 2,658


Associates & JV Inc 2,616 2,788 2,942 2,971 3,209

Net Interest (Exp)/Inc (263) (309) (337) (348) (331)

Exceptional Gain/(Loss) (54.3) 56.9 (76.6) 1,960 0.0

Pre-tax Profit 5,275 5,444 5,364 7,328 5,536

Tax (1,490) (1,586) (1,533) (1,532) (1,583)

Minority Interest (3.0) 12.5 21.7 (10.0) (10.0)


Net Profit 3,782 3,871 3,853 5,787 3,943

Net Profit before Except. 3,836 3,814 3,929 3,827 3,943

EBITDA 7,754 7,845 8,017 8,118 8,403

Growth

Revenue Gth (%) 2.2 (1.5) (1.5) 4.8 1.1

EBITDA Gth (%) 5.3 1.2 2.2 1.3 3.5

Opg Profit Gth (%) (3.1) (2.2) (3.7) (0.5) (3.2)

Net Profit Gth (Pre-ex) (%) 6.3 (0.6) 3.0 (2.6) 3.0

Margins & Ratio

Gross Margins (%) 28.7 28.7 28.6 28.1 28.1



ROAE (%) 15.6 15.6 14.5 19.5 12.7

ROA (%) 9.3 9.0 8.4 11.5 7.4

ROCE (%) 5.9 5.5 4.9 5.0 4.2

Div Payout Ratio (%) 73.7 72.1 74.2 70.0 75.0



Growth due to mobile sub additions

Link net divestment gains

Company Guide

SingTel


FY Mar 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017

Revenue 4,094 3,908 4,086 4,410 4,308


Gross Profit 1,229 1,176 1,186 1,174 1,247

Other Oper. (Exp)/Inc (513) (483) (502) (515) (524)



Associates & JV Inc 721 767 737 718 720


Exceptional Gain/(Loss) (34.7) (19.0) (6.3) (22.0) (25.0)

Pre-tax Profit 1,312 1,375 1,344 1,314 1,336

Tax (371) (435) (376) (347) (381)


Net Profit 946 944 972 973 963

Net profit bef Except. 980 963 979 995 988

EBITDA 1,438 1,460 1,421 1,377 1,443

Growth

Revenue Gth (%) (8.5) (4.5) 4.6 7.9 (2.3)

EBITDA Gth (%) 4.1 1.5 (2.6) (3.1) 4.8

Opg Profit Gth (%) 4.9 (3.4) (1.2) (3.7) 9.7

Net Profit Gth (Pre-ex) (%) 2.8 (1.7) 1.6 1.7 (0.7)




Balance Sheet (S$m)

FY Mar 2015A 2016A 2017A 2018F 2019F Net Fixed Assets 10,683 11,154 11,893 12,283 12,654


Other LT Assets 15,770 16,160 16,249 16,991 16,584

Cash & ST Invts 563 462 534 2,260 1,556

Inventory 290 320 352 369 373

Debtors 3,885 4,366 4,924 5,163 5,219

Other Current Assets 29.8 17.5 107 107 107

Total Assets 42,067 43,566 48,294 52,707 53,717

ST Debt

174 686 3,134 2,134 2,134

Creditor 4,464 4,597 4,922 5,161 5,217

Other Current Liab 1,118 1,257 1,216 2,452 2,503

LT Debt 8,804 9,255 8,052 9,052 10,052

Other LT Liabilities 2,738 2,768 2,756 2,756 2,756



Total Cap. & Liab. 42,067 43,566 48,294 52,707 53,717

Non-Cash Wkg. Capital (1,378) (1,151) (755) (1,973) (2,021)

Net Cash/(Debt) (8,416) (9,479) (10,652) (8,926) (10,630)




Asset Turnover (x) 0.4 0.4 0.4 0.3 0.3

Current Ratio (x) 0.8 0.8 0.6 0.8 0.7

Quick Ratio (x) 0.8 0.7 0.6 0.8 0.7

Net Debt/Equity (X) 0.3 0.4 0.4 0.3 0.3


Capex to Debt (%) 40.5 31.8 22.2 31.1 20.5

Z-Score (X) 3.6 3.4 3.2 3.0 2.9


Company Guide

SingTel


FY Mar 2015A 2016A 2017A 2018F 2019F

Pre-Tax Profit 5,275 5,444 5,364 7,328 5,536

Dep. & Amort. 2,161 2,149 2,239 2,402 2,536

Tax Paid (598) (658) (834) (296) (1,532)

Assoc. & JV Inc/(loss) (2,616) (2,788) (2,942) (2,971) (3,209)

Chg in Wkg.Cap. 69.3 (1,031) (492) (17.2) (4.1)

Other Operating CF 280 182 323 (1,564) 414

Net Operating CF 4,571 3,297 3,659 4,882 3,741

Capital Exp.(net) (3,638) (3,157) (2,488) (3,474) (2,500)

Other Invts.(net) 51.9 42.7 40.4 0.0 0.0

Invts in Assoc. & JV 4.60 (200) (2,410) 0.0 0.0

Div from Assoc & JV 1,215 1,351 1,656 1,407 1,520

Other Investing CF 24.2 574 26.1 2,165 0.0

Net Investing CF (2,342) (1,389) (3,177) 98.0 (981)

Div Paid (2,683) (2,794) (2,821) (2,857) (4,051)

Chg in Gross Debt 737 1,129 1,158 0.0 1,000

Capital Issues 0.0 0.0 1,602 0.0 0.0

Other Financing CF (365) (378) (362) (396) (414)

Net Financing CF (2,311) (2,044) (422) (3,254) (3,465)


Chg in Cash (59.7) (101) 72.0 1,726 (704)

Opg CFPS (S cts) 28.3 27.2 25.4 30.0 22.9

Free CFPS (S cts) 5.86 0.88 7.17 8.62 7.60



Source: DBS Bank

Analyst: Sachin MITTAL

Higher capex due to spectrum payments

ed: JS / sa:YM, PY, CS



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

What’s New Sequential growth projected, moving on to a better

year post mourning period

4Q17 results in line, showed y-o-y improvement

Growth to normalise back to 10%

Reiterate BUY, TP: S$1.07; our top large cap consumer

stock

Price Relative

Forecasts and Valuation FY Sep (Bt m) *2016A 2017A 2018F 2019F

Revenue 139,153 189,997 200,709 212,129 EBITDA 27,801 36,767 40,983 44,689 Pre-tax Profit 22,679 39,812 35,366 39,129 Net Profit 18,920 34,510 28,740 31,709 Net Pft (Pre Ex.) 18,920 26,013 28,740 31,709 Net Pft Gth (Pre-ex) (%) (28.5) 37.5 10.5 10.3 EPS (S cts) 3.10 5.66 4.71 5.20 EPS Pre Ex. (S cts) 3.10 4.27 4.71 5.20 EPS Gth Pre Ex (%) (29) 37 10 10 Diluted EPS (S cts) 3.10 5.66 4.71 5.20 Net DPS (S cts) 2.47 2.76 2.88 3.05 BV Per Share (S cts) 19.7 21.1 23.0 25.1 PE (X) 31.3 17.1 20.6 18.6 PE Pre Ex. (X) 31.3 22.7 20.6 18.6 P/Cash Flow (X) 32.0 20.0 22.1 19.0 EV/EBITDA (X) 22.8 17.0 15.1 13.6 Net Div Yield (%) 2.5 2.8 3.0 3.1 P/Book Value (X) 4.9 4.6 4.2 3.9 Net Debt/Equity (X) 0.3 0.2 0.2 0.1 ROAE (%) 16.0 27.7 21.4 21.6

Earnings Rev (%): - - - Consensus EPS (S cts): 4.8 5.1

Other Broker Recs: B: 12 S: 1 H: 0

*Note: 2016A financials are based on 9-month period, from 1 Jan 2016 to 30 Sep 2016, due to a change in financial year end Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Toast to a better year ahead

Maintain BUY, TP: S$ 1.07. We reiterate our BUY

recommendation on ThaiBev and it remains as one of our large

cap top picks in the consumer sector. We expect performance

to improve in FY18 on the back of recovery in consumption,

post a year-long mourning period. We have been advocating to

accumulate ThaiBev upon share price pullbacks; and, continue

to maintain this stance. On a longer-term horizon, we believe its

ongoing transformation into a regional beverage player will help

to further re-rate the counter. Recently, the group has

embarked on acquisitions, which will supplement growth and

enable it to diversify outside of Thailand and/or alcoholic

beverages.

Where we differ? Regional expansion. Since last year, we

highlighted our thoughts that its associate company is likely to

be the regional expansion vehicle for ThaiBev (ex-Spirits), and an

outright swap with TCC Assets for a higher stake in that

associate using Frasers Centrepoint Ltd (FCL) shares is unlikely.

Instead, we believe ThaiBev will increase its stake only when it is

opportune, but could look to partially divest/monetise its stake

in FCL. We are still sticking to this view.

Potential catalyst. Margin expansion from excise tax increase,

market share gains in beer and non-alcoholic beverages, faster

turnaround in non-alcoholic beverages, corporate restructuring

– monetisation/partial divestment of FCL’s stake.

Valuation:

Our TP is maintained at S$1.07, based on sum-of-parts

valuation, derived via discounted cashflows of its core

operations, and imputing higher fair values for its stakes in

listed associates.


Large quantum in excise tax hikes. Increase in excise duties

without a commensurate increase in ASP and/or large

quantum increase, may crimp consumption drastically.


Mkt. Cap (S$m/US$m) 24,357 / 18,092


Siriwana Co.Ltd 45.3

MM Group Limited 20.6

The Capital Group Companies 5.1

Free Float (%) 29.1


ICB Industry : Consumer Goods / Beverages


27 Nov 2017


Thai Beverage Public Company Version 8 | Bloomberg: THBEV SP | Reuters: TBEV.SI Refer to important disclosures at the end of this report

Company Guide

Thai Beverage Public Company

WHAT’S NEW

Toast to a better year ahead



cap top picks in the consumer sector. Moving into FY18F, we

expect performance to improve on the back of recovery in

consumption, post a year-long mourning period. We have been

advocating to accumulate ThaiBev on share price pullbacks; and,

continue to maintain this stance. On a longer-term horizon, we

believe its ongoing transformation into a regional beverage

player will help to further re-rate the counter. Recently, group

has embarked on acquisitions, which will supplement growth

and enable it to diversify outside of Thailand and alcoholic

beverages.

FY17/ 4Q17 results within expectations. ThaiBev’s FY17 headline

net profit surged by 82% y-o-y to THB34.5bn, partly due to

one-off fair value gains (THB8.5bn) recognized by its associate

FNN for its investment in Vinamilk. Excluding this and comparing

on a similar 12-months period for FY16, core net profit was up

by 4.6% y-o-y to THB26bn, which is within our expectations.

This was despite a relatively slow first 9M17 due to the

mourning period in Thailand.

4Q17 operating profit surged by 73.5% y-o-y to THB6.4bn on

the back of 23.4% increase in revenue to THB47.5bn. The

strong surge in operating profit is as per our earlier

expectations, given the anticipated trade loading prior to excise

duty increases in September. 4Q17 net profit at THB5bn

registered a smaller growth vis-à-vis operating profit due to

losses registered by its associates in the quarter.

Final DPS of THB0.47 proposed. A final dividend per share

(DPS) of THB0.47 was proposed. Including the interim DPS of

THB0.20 paid, total DPS amounted to THB0.67 (vs FY16:

THB0.60), implying a payout ratio of 65% on core profits

(excluding fair value gains).

Group revenue played catch up in 4Q17 registering 23%

growth. Revenue in 4Q17 registered a strong growth of

23.4% y-o-y and 5% q-o-q to THB47.5bn, mainly driven by all

business segments, despite being a seasonally weaker quarter.

This, in our view, is largely due to trading loading by

distributors in anticipation of excise increases, and in part on

expectations of recovery in consumer sentiment.

Our reading of the various business segments and salient points

from the post-results conference call is as follows:

1) Spirits

Spirits posted strong 38% net profit growth in 4Q17, with

segment net profit at THB5bn. Revenue was up by 35% y-o-y to

THB28.6bn, on the back of 28.7% y-o-y increase in volume to

154m litres, along with an estimated 4.8% implied ASP

increase. For FY17 (and comparing to similar 12-month period a

year back), revenue for Spirits increased by 2.6% to

THB106.5bn, while net profit grew by 2.1% to THB20.4bn.

Operating profit margins slipped marginally by 30 bps to 23.3%

in FY17 due partly to higher advertising and promotional

expenses.

Excess inventory at trade should be absorbed in quarter ending

Dec. With the excise increase in Sep, distributors had stocked up

inventory about 4 weeks prior to the increase. Management

estimated that distributors are carrying an additional two weeks

of inventory; and, assuming no change in consumer sentiment,

it is estimated that the excess inventory should be absorbed

within 1QFY18 (or last calendar quarter of 2017).

Not much impact from new competition. Management updated

that the entry of Tawandang 1999 into the white spirits market

has had very limited impact. Distribution is still limited.

Nonetheless, ThaiBev is monitoring the situation closely.

2) Beer

Beer posted a dip in profits but maintains share. The beer

segment experienced a dip in revenue of 4.7% to THB57.3bn in

FY17 led by a 6.8% drop in sales volume to 8.45m hectolitres,

mitigated partially by higher ASP. Notwithstanding lower

volume, gross profit increased by 6.4% for the year to

THB13bn, due to lower packaging and raw material costs. Net

profit for the segment, however, dipped by 4% to THb3.13bn

due to higher advertising and promotion expenses.

Market share maintained at c.40%. Management updated that

market share remained at c.40% in the quarter with minor

variations of +/- 1% within the months. ThaiBev has increased

its selling prices by 3.5% to 3.7%, passing on the increase in

excise taxes. It noted the competition has increased promotional

activities. Management indicated that it would be looking to

maintain its A&P spend as per previous years.

Company Guide


High stock levels of competitor beers. In clarifying the

phenomenon seen in the past quarter – beer production

volumes based on Bank of Thailand statistics, management

indicated that stock levels for competitor beers were high. This

confirms our earlier deduction as indicated in our 3Q17 post-

results note on 14 Aug (Thai Beverage Public Company: On

track for stronger y-o-y growth).

While there could be concerns of pricing pressure to clear

stocks, we continue to opine that ThaiBev could then utilise this

opportunity to hold its fort to maintain its price and brand

image. This should help widen the brand’s perception against

competition as older beer will not taste fresh, compared to

freshly brewed ones. Although a price competition could

undermine market share for Chang in the immediate term, we

view it as positive for the overall brand and profitability in the

medium and longer term.

3) Non-Alcoholic Beverages (NAB)

NAB posted smaller losses. Tracking within our expectations,

the group’s NAB segment continued to post lower losses,

amounting to THB855m in FY17, which was an improvement

from a loss of THB1,570m over the period a year ago. The

improvement was helped by a better gross profit due to lower

packaging costs, coupled with lower A&P expenses. As such,

this segment turned EBITDA positive for the year; and, we

continue to maintain our view that losses should narrow and

achieve a net profit by FY19F.

In the post-results conference call, management shared that it’s

A&P as a percentage of sales for NAB should trend lower on

expectations of higher sales volume. Market share for its

products remain healthy. In terms of breakeven, management

shared that it should reach it within the Year 2020 timeframe,

but was unable to commit on a firm timeline.

4) Food

KFC franchise acquisition to be completed expected in Dec as

per prior guidance. There were no further details shared on the

KFC, except that completion is still expected in Dec as per prior

indication. With respect to strategy for food, ThaiBev

management maintained its rhetoric that it will continue to be

on the lookout for strategic acquisitions.

Our views

Gearing remains healthy, even with recently announced

proposed acquisitions. The group’s gearing continues to

improve with net debt to equity ratio at 0.23x as of 30 Sep

2017, an improvement from 0.33x a year ago. We estimate that

even with the recently announced proposed acquisition of the

KFC franchise in Thailand (c.THB11bn) and 75% stake in Grand

Royal whisky in Myanmar (c. US$742m), the group’s gearing

would only increase to ~0.4x as of end FY18F.



cap top picks in the consumer sector. We expect performance to

improve on the back of recovery in consumption, post a year-

long mourning period. We have been advocating accumulation

upon share price pullbacks; and, continue to maintain this

stance. On a longer-term horizon, we believe its ongoing

transformation into a regional beverage player will help to

further re-rate the counter.

Projecting EPS growth of 10% for FY18F/19F; upside potential

from acquisitions. We retain our projections for FY18F/19F at

the current moment but have yet to factor in the recent

announced acquisitions, pending further details. Potential

upside potential could arise from better than expected

contribution or new acquisitions.

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Company Guide


Quarterly / Interim Income Statement (Btm)

FY Sep 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq Comments

Revenue 38,528 45,284 47,537 23.4 5.0 4Q17 helped by excise increase

Cost of Goods Sold (26,874) (31,189) (33,381) 24.2 7.0

Gross Profit 11,654 14,095 14,156 21.5 0.4

Other Oper. (Exp)/Inc (7,939) (7,854) (7,712) (2.9) (1.8)

Operating Profit 3,715 6,241 6,443 73.5 3.2 Strong opg profit growth

Other Non Opg (Exp)/Inc 303 138 124 (59.1) (10.1)

Associates & JV Inc 1,568 1,770 (42.1) nm nm Lower contribution from associates in 4Q

Net Interest (Exp)/Inc (271) (212) (237) 12.6 (11.7)

Exceptional Gain/(Loss) (31.4) 8,498 (32.0) (1.9) nm 3Q17 saw fair value gains

Pre-tax Profit 5,283 16,434 6,256 18.4 (61.9)

Tax (729) (1,141) (1,190) 63.3 4.4

Minority Interest (0.3) (60.7) (60.8) nm 0.1

Net Profit 4,554 15,233 5,005 9.9 (67.1) Within expectations

Net profit bef Except. 4,585 6,735 5,037 9.9 (25.2)

EBITDA 5,586 8,148 6,525 16.8 (19.9)

Margins (%)





Company Guide



Critical Factors

In our study of the historical share price movements and events

surrounding it, ThaiBev’s share price can be marked by several

key periods (as indicated in Chart A1). In fact, prior to May

2012, its share price had been relatively muted given a relatively

subdued growth profile. In fact, we note that ThaiBev tends to

be viewed as a defensive counter, outperforming when the

market corrects and underperforming in an economic recovery.

Earnings growth is a critical factor. In our view, EPS growth is a

main driver of share price, as can be seen in Chart A2, where

we plot share price vs 12-month forward EPS. In fact, the

correlation is 0.98 between the two variables. Going forward,

we are projecting increased segmental profits from beer’s

contribution, coupled with turnaround in its Non-Alcoholic

Beverage segment.

Leading beer market share by 2020. ThaiBev’s management

aims to achieve leading market share for beer by 2020, implying

a share of about 45%. This was set in 2015 in its Vision 2020

plans. Since the relaunch of Chang Beer, its beer market share

has jumped from c.30% to about 40% currently. In fact, based

on the previous target set in 2015 (when market share was at

about 30%), a proportionate linear increase is about 3-ppt

share increase per year. Within a year of Chang relaunch, it had

gained 10% points, faster than expectations. Going forward,

we project continued increase driven by consistent and targeted

marketing activities, and leveraging on its widespread

distribution.

Turnaround in NAB will aid in growth. Management targets to

achieve EBIT breakeven for NAB by FY18F. We are forecasting

earnings turnaround for NAB in FY19, which will aid in overall

profit growth. This segment still incurred net losses as of FY17F,

but it has narrowed on an y-o-y basis. We expect this trend to

continue into FY18F, before achieving marginal profit in FY19F.

An achievement of breakeven will contribute to bottom-line

growth for the group.

Catalyst for share price performance. (i) Increased profits from

Spirits segment due to margin expansion from excise duty

increase and up-selling; (ii) further traction in beer segment

gains to be leading market player by 2020; (iii) turnaround in

Non-Alcoholic Beverages; (iii) monetisation and/or partial

divestment of stake in Frasers Centrepoint Limited; (iv) increased

stake in FNN, when the latter undertakes inorganic growth

opportunities and when in need of funds.

Sprits vol gwth (%)

Spirits ASP gwth (%)

Beer vol gwth (%)

Beer ASP gwth (%)

Non-Alc Bev rev gwth (%)


Company Guide



Chart A1: Summary of significant events driving ThaiBev’s share price

Legend

A. Post-IPO in 2006, share price trades range bound due to muted growth. Outperformed peers heading into GFC till Oct’08 given defensive

profile (strong cashflow, >5% yield). Bottomed in Mar’09, but recovery lag peers with defensive profile. Lack of widespread interest given

slow growth profile. Acquired Thai consumer companies (Oishi, Serm Suk), but stock price fail to perform.

B. Acquired stake in FNN in July’12; with interest on counter up on surprise factor. Strong EPS growth on stocking up prior to excise duty

increase, corporate tax rate cuts. Share price up on clearer signs FNN taken private by TCC/ ThaiBev. Surged to high on cash distribution,

helping to deleverage ThaiBev.

C. Uncertainties on drivers post FNN acquisition, writ of summons by MBL partner, surprise excise duty increase in Nov’13 (just one year

following from Aug’12 increase), political uncertainty, effects of corporate tax cuts wears off.

D. Resilient results despite excise hikes. Signs of limited impact from political uncertainty, coup, expectations of corporate restructuring on

FNN/ FCL.

E. In absolute terms, share price flat but remain resilient vs peers. Uncertainty on corporate restructuring angle (dilutive) and expected excise

duty (based on alternate year timeline), extent of impact from beer relaunch.

F. Success of beer brand relaunch, with strong gains in beer market share seen and beer operations post strong earnings turnaround.

G. Correction post strong share price performance, and concerns of competitive reaction on beer, coupled with impact on consumption from

mourning period. ThaiBev announced two acquisitions – KFC franchise in Thailand and acquisition of 75% stake in Grand Royal whisky in

Myanmar.

E (Aug 09) – Excise duties increase (Dates): Aug’07, May’09, Aug’12, Nov’13, Sep’17

#A (Oishi) – Acquisitions (selected) undertaken by ThaiBev

Source: ThomsonReuters, DBS Bank

Company Guide


Chart A2: ThaiBev’s share price vs EPS

Share price tracks 12-month forward EPS forecasts. Re-rating from 2012, driven by EPS growth expected from margins expansion after excise tax increase, coupled with acquisition of stake in FNN.

Source: ThomsonReuters, DBS Bank

Chart A3: Further re-rating of share price to be driven by segmental profits – increased beer contribution, NAB turnaround

Source: ThomsonReuters, Company, DBS estimates

Company Guide


Balance Sheet:

Gearing has improved since acquisition of FNN stake. The

group’s net gearing has improved significantly, and reduced to

0.22x (as of end-FY17) from the high of 1.2x immediately

following its 28.5% stake acquisition in FNN. Even with its

recently announced acquisitions of KFC franchise in Thailand

and 75% majority equity stake in Myanmar’s Grand Royale

whisky, we estimate net debt to equity will only be around 0.4x.

Going forward, its healthy balance sheet will put it in a good

position for inorganic growth opportunities within the region.


Changes in excise taxes. More than 50% of the group’s revenue

goes into excise duties. A change in excise tax would impact on

the share price, and depending on whether the group is able to

pass on the cost increases to consumers, its share price could be

positively or negatively affected.

Corporate restructuring. There has been constant talk of the

eventual consolidation of FNN as a subsidiary, coupled with a

monetisation of its stake in Frasers Centrepoint Limited. In our

view, these 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%.

Turnaround in NAB. We project NAB to continue in the current

investment mode in the foreseeable future. However, in the

event that NAB turns around faster than expected, it could

provide a catalyst to share price, underlining management’s

ability to create value for the group.

Key Risks:

Prolonged slump in consumer sentiment. A prolonged slump

in the Thai economy could impact consumption, and hence

our forecasts. Vice-versa, a pick-up 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. It has 28.5% associate stakes in both Singapore-

listed Fraser & Neave Ltd (FNN) and Frasers Centrepoint Limited

(FCL).


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Company Guide


Key Assumptions

FY Sep 2015A 2016A 2017A 2018F 2019F

Sprits vol gwth (%) 1.20 (1.8) 6.30 1.00 2.00

Spirits ASP gwth (%) 0.20 (1.8) 0.60 3.00 2.00

Beer vol gwth (%) 17.5 32.9 (5.3) 5.00 6.00

Beer ASP gwth (%) 4.20 3.30 2.20 4.00 3.00

Non-Alc Bev rev gwth (%) 4.50 7.50 (5.3) 5.00 5.00

*2016A based on 9-months (from Jan-Sep). Key assumptions growth rates are annualized. Segmental Breakdown

FY Sep 2015A *2016A 2017A 2018F 2019F Revenues (Btm)

Spirits 105,991 76,649 109,297 113,702 118,295

Beer 43,112 44,397 57,326 62,600 68,347

Non-Alcoholic Bev. 16,488 13,290 16,777 17,616 18,497

Food 6,578 4,993 6,742 6,944 7,153

Others (120) (176) (145) (153) (162)

Total 172,049 139,153 189,997 200,709 212,129

Operating profit (Btm) Spirits 25,191 18,081 25,468 26,720 27,799

Beer 1,290 3,060 3,533 5,133 6,493

Non-Alcoholic Bev. (3,461) (1,811) (1,727) (881) 185

Food 52.0 37.0 95.0 139 143

Others 120 16.0 155 155 155

Total 23,192 19,383 27,524 31,266 34,775

Operating profit Margins (%)

Spirits 23.8 23.6 23.3 23.5 23.5

Beer 3.0 6.9 6.2 8.2 9.5

Non-Alcoholic Bev. (21.0) (13.6) (10.3) (5.0) 1.0

Food 0.8 0.7 1.4 2.0 2.0

Others (100.0) (9.1) (106.9) (101.2) (95.7)

Total 13.5 13.9 14.5 15.6 16.4

Income Statement (Btm)

FY Sep 2015A 2016A 2017A 2018F 2019F

Revenue 172,049 139,153 189,997 200,709 212,129


Gross Profit 50,219 41,562 58,098 62,577 67,867

Other Opng (Exp)/Inc (26,839) (22,130) (30,539) (31,311) (33,092)


Other Non Opg (Exp)/Inc 1,162 647 622 640 620

Associates & JV Inc 7,774 3,375 4,073 4,398 4,449

Net Interest (Exp)/Inc (1,344) (776) (939) (938) (715)

Exceptional Gain/(Loss) 0.0 0.0 8,497 0.0 0.0

Pre-tax Profit 30,972 22,679 39,812 35,366 39,129

Tax (4,508) (3,643) (5,132) (6,503) (7,283)

Minority Interest (0.3) (117) (171) (122) (137)


Net Profit 26,463 18,920 34,510 28,740 31,709

Net Profit before Except. 26,463 18,920 26,013 28,740 31,709

EBITDA 36,496 27,801 36,767 40,983 44,689

Growth

Revenue Gth (%) 6.2 (19.1) 36.5 5.6 5.7

EBITDA Gth (%) 16.1 (23.8) 32.3 11.5 9.0

Opg Profit Gth (%) (0.3) (16.9) 41.8 13.5 11.2

Net Profit Gth (Pre-ex) (%) 22.0 (28.5) 37.5 10.5 10.3

Margins & Ratio

Gross Margins (%) 29.2 29.9 30.6 31.2 32.0



ROAE (%) 24.4 16.0 27.7 21.4 21.6

ROA (%) 15.0 10.2 18.1 14.5 15.4

ROCE (%) 12.3 9.6 13.7 14.1 15.2

Div Payout Ratio (%) 57.9 79.6 48.8 61.2 58.6



Fair value gains in associate, FNN, from reclassification of investment (Vinamilk) as an associate due to increase in stake to 18.74%

Based on 9-months, from Jan-Sep.

Recognition of one-off gains in the divestment of MBL by its associate, FNN.

Company Guide


Quarterly / Interim Income Statement (Btm)

FY Sep 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017 Revenue 38,528 46,829 50,348 45,284 47,537


Gross Profit 11,654 14,297 15,550 14,095 14,156

Other Oper. (Exp)/Inc (7,939) (6,847) (8,125) (7,854) (7,712)


Other Non Opg (Exp)/Inc 303 126 235 138 124

Associates & JV Inc 1,568 1,813 532 1,770 (42.1)

Net Interest (Exp)/Inc (271) (257) (232) (212) (237)

Exceptional Gain/(Loss) (31.4) 18.4 12.2 8,498 (32.0)

Pre-tax Profit 5,283 9,150 7,972 16,434 6,256

Tax (729) (1,407) (1,394) (1,141) (1,190)


Net Profit 4,554 7,715 6,557 15,233 5,005

Net profit bef Except. 4,585 7,696 6,545 6,735 5,037

EBITDA 5,586 9,389 8,192 8,148 6,525

Growth

Revenue Gth (%) (15.2) 21.5 7.5 (10.1) 5.0

EBITDA Gth (%) (23.3) 68.1 (12.7) (0.5) (19.9)

Opg Profit Gth (%) (41.9) 100.6 (0.3) (16.0) 3.2

Net Profit Gth (Pre-ex) (%) (21.0) 67.9 (15.0) 2.9 (25.2)




Balance Sheet (Btm)

FY Sep 2015A 2016A 2017A 2018F 2019F Net Fixed Assets 46,921 47,871 48,532 48,410 48,121


Other LT Assets 11,231 11,216 11,415 11,358 11,302

Cash & ST Invts 3,494 5,063 9,930 11,820 15,072

Inventory 35,204 38,145 37,761 40,219 42,016

Debtors 3,906 2,588 2,627 4,564 4,824


Total Assets 182,017 187,653 194,240 202,544 209,757

ST Debt

17,374 18,996 30,654 30,654 23,654

Creditor 4,851 4,532 4,797 3,766 3,934

Other Current Liab 10,865 9,290 12,219 15,269 16,049

LT Debt 24,883 25,089 8,000 3,000 3,000

Other LT Liabilities 4,778 6,033 6,057 6,057 6,057


Minority Interests 3,380 3,642 3,733 3,855 3,992

Total Cap. & Liab. 182,017 187,653 194,240 202,544 209,757


Net Cash/(Debt) (38,763) (39,022) (28,724) (21,834) (11,582)




Asset Turnover (x) 1.0 0.8 1.0 1.0 1.0

Current Ratio (x) 1.5 1.5 1.2 1.3 1.5

Quick Ratio (x) 0.2 0.2 0.3 0.3 0.5

Net Debt/Equity (X) 0.3 0.3 0.2 0.2 0.1


Capex to Debt (%) 9.3 6.4 13.8 13.4 16.9

Z-Score (X) 7.5 7.0 7.6 8.1 8.7


Fair value gains recognized by FNN on its stake in Vinamilk.

We have not factored in acquisitions of KFC franchise and Grand Royal. Even with that, net debt to equity still healthy at ~0.4x.

Company Guide


Cash Flow Statement (Btm)

FY Sep 2015A 2016A 2017A 2018F 2019F Pre-Tax Profit 30,972 22,679 39,812 35,366 39,129

Dep. & Amort. 4,452 3,295 4,360 4,681 4,847

Tax Paid (5,003) (4,314) (3,635) (3,453) (6,503)

Assoc. & JV Inc/(loss) (7,774) (3,375) (4,073) (4,398) (4,449)

Chg in Wkg.Cap. (1,236) (1,750) 506 (5,426) (1,889)

Other Operating CF 1,074 1,955 (7,396) 0.0 0.0

Net Operating CF 22,486 18,490 29,575 26,770 31,135

Capital Exp.(net) (3,946) (2,822) (5,351) (4,500) (4,500)

Other Invts.(net) 0.0 0.0 3.66 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 2,276 2,356 2,273 2,200 2,200

Other Investing CF 1,552 20.0 21.0 0.0 0.0

Net Investing CF (118) (446) (3,053) (2,300) (2,300)

Div Paid (15,378) (16,670) (15,162) (17,577) (18,581)

Chg in Gross Debt (3,728) 2,009 (5,615) (5,000) (7,000)

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (1,378) (942) (791) 0.0 0.0

Net Financing CF (20,484) (15,603) (21,568) (22,577) (25,581)

Currency Adjustments (622) (870) (81.6) 0.0 0.0

Chg in Cash 1,262 1,571 4,872 1,893 3,254

Opg CFPS (S cts) 3.89 3.32 4.77 5.28 5.42

Free CFPS (S cts) 3.04 2.57 3.97 3.65 4.37



Source: DBS Bank

Analyst: Andy SIM CFA

Alfie YEO

ed: TH / sa: JC, PY




What’s New 3Q17 results reaffirm our positive stance; NIM and loan

growth were better than expected

Asset quality woes should see an end from here

Three critical factors to watch going forward: (1)

property market recovery, (2) NIM improvement, (3)

end to its asset quality woes

Maintain BUY; TP lifted to S$27.50 after further positive

earnings revisions on NIM and loan growth

Price Relative

Forecasts and Valuation FY Dec (S$m) 2016A 2017F 2018F 2019F

Pre-prov. Profit 4,365 4,949 5,412 5,913 Net Profit 2,986 3,415 3,748 4,127 Net Pft (Pre Ex.) 2,986 3,415 3,748 4,127 Net Pft Gth (Pre-ex) (%) (3.6) 14.4 9.8 10.1 EPS (S cts) 190 217 238 262 EPS Pre Ex. (S cts) 190 217 238 262 EPS Gth Pre Ex (%) (4) 14 10 10 Diluted EPS (S cts) 183 203 216 231 PE Pre Ex. (X) 13.1 11.4 10.4 9.5 Net DPS (S cts) 72.1 76.5 81.6 89.9 Div Yield (%) 2.9 3.1 3.3 3.6 ROAE Pre Ex. (%) 10.1 10.6 10.6 10.7 ROAE (%) 10.1 10.6 10.6 10.7 ROA (%) 0.9 1.0 1.0 1.1 BV Per Share (S cts) 1,954 2,141 2,346 2,572 P/Book Value (x) 1.3 1.2 1.1 1.0

Earnings Rev (%): 2 2 4 Consensus EPS (S cts): 200 218 238

Other Broker Recs: B: 7 S: 4 H: 13


Wow after the woe Reiterating positive signals; maintain BUY. UOB’s 3Q17 earnings

reaffirms our positive stance on the bank with NIM and loan

growth picking up strongly, better than what we had expected.

With probably the last leg in classifying NPLs from the oil & gas

stress, we believe UOB should enter FY18 on a cleaner state. We

reiterate our three catalysts for the stock: (1) The property market

recovery bodes well for UOB as it is perceived to be a proxy - UOB

has the largest proportion of property-related loans vs peers; this

should see loan growth improve as early as 3Q17. (2) Imminent

NIM improvement albeit backloaded; SIBOR/SOR finally edged up

more visibly over the quarter which should see some repricing as

early as 3Q17. The repricing effect typically takes approximately

up to 90 days and as such, firmer NIM levels could be expected in

4Q17, spilling over to FY18. (3) While asset quality concerns may

still linger, the quantum of new NPLs (9M17 vs 9M16) has eased;

the end to asset quality woes should warrant a re-rating, which

we believe would be the case in FY18.

Where we differ. Staying above consensus. Our earnings remain

above consensus after our additional 2-4% FY17-19F earnings

upgrade with a further boost to NIM and loan growth. Our TP is

also at the higher end of consensus.

Potential catalyst: A better year ahead. With asset quality issues

largely dealt with by end FY17, we should expect a better year

ahead. There would likely be another large NPL classification in

4Q17, this should mark the end of massive asset quality upsets.

Further improvement in NIM and more importantly, a pickup in

loan growth due to the recovery of the property market should

support earnings strongly. Separately, with the implementation of

IFRS9, banks may no longer be able to continuously build up

general provisions; this could pose upside risk to UOB’s FY18-19F

earnings from its sticky 32-bp credit cost guidance.

Valuation:

Maintain BUY, TP raised further to S$27.50. Our revised TP of

S$27.50 is based on the Gordon Growth Model (11% ROE, 4%

growth and 9.5% cost of equity), equivalent to 1.3x FY18 P/BV,

almost at its 10-year average P/BV multiple.


Relapse in NIM and asset quality trends. A relapse in SIBOR

movement could also pose risks to our NIM forecast. If NPL issues

start to spread further from here, more specific provisions might

be required.

At A Glance

Issued Capital (m shrs) 1,663

Mkt. Cap (S$m/US$m) 41,221 / 30,330


Wee Investment Pte Ltd 7.7

Wah Hin & Co Pte Ltd 5.0

Free Float (%) 87.3


ICB Industry : Financials / Banks


3 Nov 2017


UOB Version 12 | Bloomberg: UOB SP | Reuters: UOBH.SI Refer to important disclosures at the end of this report

85

105

125

145

165

185

205

15.1

17.1

19.1

21.1

23.1

25.1

27.1

Nov-13 Nov-14 Nov-15 Nov-16 Nov-17

Relative IndexS$

UOB (LHS) Relative STI (RHS)

Company Guide

UOB

WHAT’S NEW

Reaffirmed positive signals

3Q17 results highlights:

Trumping expectations; better-than-expected NIM and loan

growth in 3Q17. UOB’s 3Q17 net profit came in at S$883m

(+5% q-o-q, +12% y-o-y). Earnings were driven by strong

top-line growth with improved NIM (+4bps q-o-q, +10bps y-

o-y) and strong loan growth (+3% q-o-q, +8% y-o-y). YTD

loan growth stood at 5.6%, ahead our FY17 forecast. The

improved NIM arose from a combination of better loan

pricing in Singapore as well as better utilisation of its excess

funds, in which it has lengthened its portfolio duration.

Deposits also grew strongly at 3% q-o-q, +7% y-o-y. Non-

interest income was flat overall. Stronger fee income from

loan-related fees and wealth management was offset by

lower gains from investment securities. Expenses were lower

q-o-q but higher y-o-y from staff costs. Because of strong

revenues, cost-to-income ratio eased to 43.5%.

Higher provisions and NPL, but expected. Provisions were

higher q-o-q and y-o-y. Specific provisions were 25% higher

q-o-q although lower y-o-y while the bank continued to

release general provisions. UOB articulated that its general

allowance reserves of S$2.6bn is above the expected credit

loss requirements under the new FRS109 which will take

effect from 1 January 2018. NPL ratio rose to 1.6%. New

NPLs shot up to S$799m (2Q17: S$537m; 3Q16 S$424m), of

which half was from the oil & gas sector, and within this,

90% of this was related to one large account. There was a

small commodity-related account classified in Indonesia.

UOB's oil & gas exposure stood at 5% of total loans as at

end-3Q17. Loan loss coverage stood at 108%, highest

among peers.

Strong capital levels. Capital ratios stood firm with fully

loaded CET1 ratio at 13.8% and Total CAR at 17.8%. No

dividends were declared this quarter. UOB saw its risk-

weighted assets edge lower as a result of a recalibration of its

foreign exchange risk. This was partially offset by a

redemption of its old-style Tier-2 subordinated debt.

Mixed regional operations. Regionally, its operations were

mixed with its Malaysian operations showing a slight decline

q-o-q from higher provisions, Thai operations were better,

Indonesian operations were loss making mainly due to high

provisions, while its Greater China operations were stable. Its

Malaysian operations remain the second largest profit

contributor after Singapore.

Outlook:

A better year ahead. With asset quality issues largely to be

dealt with by end-FY17, we should expect a better year

ahead. There would likely be another large NPL classification

in 4Q17, but this should mark the end of massive asset

quality upsets. Further improvement in NIM and more

importantly, a pickup in loan growth due to the recovery of

the property market should support earnings strongly.

Separately, with the implementation of IFRS9, banks may no

longer be able to continuously build up general provisions;

this could pose upside risk to UOB’s FY18-19F earnings from

its sticky 32-bp credit cost guidance.

Last leg of oil & gas stress; aggressive provisions made. UOB

had previously identified up to S$3.7bn vulnerable accounts

within the oil & gas space. Of which, the bank is comfortable

with >S$1bn of its portfolio as these are from the national oil

majors. Another >S$1bn lies with 6-7 obligors which are all

familiar names; of this, there is one more big name which

needs to be classified and provided for in 4Q17. After this,

the coast should be largely cleared. A look at UOB’s special-

mention loans (SML) which are only disclosed once a year in

the annual report. As at end-2016, the SMLs had risen mainly

from the oil & gas exposures. As most, if not all, of these

have been classified as NPLs, the SML by end-2017 should be

much lower. Management reiterated that they are

comfortable with the level of provisions they have made and

taking into account the coverage/collateral (which the bank

has marked down by 70-80%), the question now lies in how

much more it would want to set aside (aggressively) ahead

before the implementation of IFRS9/SFRS109 which will take

effect from 1 January 2018.

Improved loan growth outlook but still cautious on NIM.

UOB’s 9M17 YTD loan growth already stands at 5.6%. We

are raising our FY17 loan growth forecast to 6.2%. Judging

from the loan momentum, there is even a chance UOB could

outpace this. Our FY18-19F loan growth forecasts is now

tuned up to 6% per year from 5% in light of a better

operating environment. UOB operates almost purely like a

commercial bank (less reliant on capital markets), and it

would need to compete in the loan space more aggressively

vs peers. Similarly for its wealth management business, which

unlike peers, UOB targets the mass affluent space. Although

its private banking business is small, we believe UOB will still

be able to grow comfortably in the wealth management

space. With competition a key consideration, NIM uplift,

although should be expected, may be dampened. Even then,

9M17 YTD NIM has done well. We have lifted our NIM

forecast a little more, expecting the bank to end FY17 at

1.77% (+6bps y-o-y). We expect NIM to rise by 3bps each in

FY18 and FY19. With our revised NIM and loan growth

forecasts, our FY17-19 earnings are raised by another 2-4%.

Company Guide

UOB

Considerations post IFRS9/SFRS109. Although the Monetary

Authority of Singapore (MAS) has released the proposed

amendment to regulatory requirements pertaining to credit

loss under the IFRS9/SFRS109, UOB is still assessing

considerations in dealing with its excess general provisions

reserves. The considerations include how much the bank will

need going forward post IFRS9/SFRS109, whether it should

take advantage of its excess reserves and bump up specific

provisions and whether it should transfer the excess into P/L

or keep it in retained earnings. There are also tax implications

it will need to consider. We gauge that the impact would be

neutral to mildly positive to capital and P/L. There will be

more clarity in the next 4Q/FY17 briefing.

Current high capital levels; what can be done. UOB’s capital

ratios are by far the highest vs peers now. It will have to be

sustainable core earnings that will be the key consideration to

pay higher dividends. UOB’s strong capital position enables it

to compete aggressively to grow its top line. At this juncture,

management has not finalised plans to deploy excess capital.

Hengfeng Bank disposal. UOB announced on 26 October that

it will be disposing its 12% stake in Hengfeng Bank

(Evergrowing Bank). It is in exclusive talks with Shangdong

Lucion Investment Holdings (Lucion). Lucion is wholly-owned

by Shandong Provincial State-owned Assets Supervision and

Administration Commission and Shandong Provincial Council

for Social Security. Talks are still at preliminary stages and it is

too early to speculate on the potential pricing. It is however

safe to say that if and when this transaction is completed, it

will be mildly positive to capital given that this investment

carries a high risk-weight in its assets.

Board changes. UOB announced Board changes on 2

November as part of its ongoing renewal and succession plan.

The Board of Directors has nominated Mr Wong Kan Seng to

succeed incumbent Independent Non-Executive Chairman Mr

Hsieh Fu Hua who will be retiring next year. UOB said

Chairman Emeritus Dr Wee Cho Yaw will also retire from the

UOB Board at the Bank’s Annual General Meeting in April

2018 after six decades. Dr Wee, who turns 89 next January,

will relinquish all his Board responsibilities next April. He will

retain his Chairman Emeritus title and will also be appointed

Honorary Adviser to the Board.

Valuation and recommendation

Maintain BUY, TP raised further to S$27.50. Our revised TP

of S$27.50 is based on the Gordon Growth Model (11%

ROE, 4% growth and 9.5% cost of equity), equivalent to 1.3x

FY18 P/BV, almost at its 10-year average P/BV multiple.

Three catalysts to watch. We reiterate our three catalysts for

the stock: (1) The property market recovery bodes well for

UOB as it is perceived to be a proxy for the bank's share price

movement. UOB has the largest proportion of property-

related loans vs peers; this should see loan growth improve as

early as 3Q17. (2) Imminent NIM improvement albeit

backloaded; SIBOR/SOR finally edged up more visibly over the

quarter which should see some repricing as early as 3Q17.

The repricing effect typically takes approximately up to 90

days and as such, firmer NIM levels could be expected in

4Q17, spilling over to FY18. (3) While asset quality concerns

may still linger, the quantum of new NPLs (9M17 vs 9M16)

has eased; the end to asset quality woes should warrant a re-

rating, which we believe would be the case in FY18.

Company Guide

UOB



Net Interest Income 1,230 1,355 1,408 14.5 3.9

Non-Interest Income 810 828 829 2.3 0.1

Operating Income 2,040 2,184 2,238 9.7 2.5

Operating Expenses (918) (995) (973) 6.0 (2.2)

Pre-Provision Profit 1,122 1,189 1,265 12.8 6.4

Provisions (185) (180) (221) 19.2 22.8

Associates 25.4 24.0 29.0 14.2 20.8

Exceptionals 0.0 0.0 0.0 - -

Pretax Profit 962 1,033 1,073 11.6 3.9

Taxation (169) (184) (187) 10.9 1.9


Net Profit 791 845 883 11.7 4.4

Growth (%)

Net Interest Income Gth 1.7 4.0 3.9

Net Profit Gth (1.3) 4.8 4.4

Key ratio (%)

NIM 1.69 1.75 1,79

NPL ratio 1.6 1.5 1.6

Loan-to deposit 85.0 86.1 85.8

Cost-to-income 45.0 45.6 43.5

Total CAR 16.6 17.8 17.8


Company Guide

UOB


Critical Factors

Slower loan growth but improved NIM. Expect loan momentum to drift

towards low single digits in FY17F. We expect UOB’s NIM to rise by

6bps in FY17F and another 3bps going into FY18F, taking into account

competition. Our sensitivity analysis indicates that for every additional

25-bp increase in SIBOR, UOB’s NIM will rise by 1bp, holding other

variables constant, and this would lead to a further 1.1% uplift to

earnings. We note that UOB’s S$ loan-to-deposit ratio remains the

highest among peers and that itself could even pressure S$ funding

cost; S$ deposits forms close to half of UOB’s total deposit base.

Non-interest income driven more by loan activities. Contrary to peers,

UOB’s non-interest income focuses more on loan activities, which is its

core business. While there is increasing traction from wealth

management income, it remains small vs peers. Fee income should be

consumer-business driven from credit cards and private banking rather

than from capital markets. UOB’s wealth management business

continues to pick up albeit at a smaller proportion of non-interest

income vs its peers.

Costs skewed to business growth. We expect operating expenses to

stay high with costs skewed towards business expansion and

technology which is required particularly for digital banking and cyber

security. Other investments to further enhance regional operations are

still ongoing but the increase should not be high. Cost-to-income ratio

may ease with stronger revenue growth amid its tight cost control

strategies despite having to invest to grow its business but the target is

40% over the longer term.

Credit costs remain at the higher end; potential reversal in trends with

IFRS9. Compared to peers, UOB’s credit costs tend to hover at higher

levels largely due to its conservative stance towards setting aside higher

general provisions (1.2% of total loans). Management continues to

guide for 32-bp credit costs. General provisions will be added back to

replace the reversals it had made in 2016. However, when IFRS9 is

implemented, banks may no longer be allowed to build such general

provision buffers. As such, there could be upside risk to FY18-19

earnings.

Regionalisation remains core to UOB’s strategy. UOB’s regionalisation

agenda remains intact. The bank is relooking at its operations in

Indonesia, given the current challenging operating environment. In

Malaysia, growth remains cautious but asset quality is at a comfortable

position. Its Thai operations remain small, while its Greater China

operations are still smaller than peers. UOB has not been aggressively

acquiring to add new revenue streams but has chosen to grow

organically.

Margin Trends

Gross Loan& Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure


1.6%

1.7%

1.7%

1.8%

1.8%

1.9%

1.9%

2.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

2015A 2016A 2017F 2018F 2019F

S$ m

Net Interest Income Net Interest Income Margin

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

50,000

100,000

150,000

200,000

250,000

2015A 2016A 2017F 2018F 2019F

S$ m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

50,000

100,000

150,000

200,000

250,000

2015A 2016A 2017F 2018F 2019F

S$ m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

76%

81%

86%

91%

96%

183,250

203,250

223,250

243,250

263,250

283,250

303,250

323,250

343,250

2015A 2016A 2017F 2018F 2019F

S$ bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

39%

40%

41%

42%

43%

44%

45%

46%

47%

0

2,000

4,000

6,000

8,000

10,000

2015A 2016A 2017F 2018F 2019F

S$ m

Net Interest Income Non-interest Income Cost-to-income Ratio

Company Guide

UOB


Interest rates as critical factor Remarks

Interest rates, particularly SIBOR,

are linked to loan pricing and

hence NIM, which in turn drives

earnings and share price

performance. The Fed rate hikes,

which should lead to SIBOR uplift,

has been 60% correlated

historically. The relationship has

somewhat broken down since late

2016 due to the relative strength

of the SGD. Nevertheless,

expectations of Fed rate hikes,

which are expected to pass

through to SIBOR, do have a

positive correlation to banks’ share

prices.

Property price index as critical factor Remarks

UOB has the largest proportion of

its loans related to mortgages, at

27% of total loans. Inclusive of

building and construction loans of

another 23%, UOB’s total

property-related loans make up

50% of total loans. Historically,

UOB’s share price has been

correlating well with the property

price index. The deviation in 2017

is due to the stronger influence of

interest rate movements (the

critical factor highlighted above).

Share price movement (10-year historical trends)


0

5

10

15

20

25

30

(2.0)

(1.0)

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

SGD%

3M SIBOR 3M LIBOR

SOR Fed Fund Rate

UOB

-

50.0

100.0

150.0

200.0

250.0

Jan-0

4

Jul-04

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Jul-10

Jan-1

1

Jul-11

Jan-1

2

Jul-12

Jan-1

3

Jul-13

Jan-1

4

Jul-14

Jan-1

5

Jul-15

Jan-1

6

Jul-16

Jan-1

7

Jul-17

Index = 100 Share price Property price index

-

5.00

10.00

15.00

20.00

25.00

30.00

Dec

-07

Jun

-08

Dec

-08

Jun

-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12

Dec

-12

Jun

-13

Dec

-13

Jun

-14

Dec

-14

Jun

-15

Dec

-15

Jun

-16

Dec

-16

Jun

-17

Dec

-17

Global Financial Crisis; plagued by rising provisions (loans, European corporate exposures and CDOs)

Recovery phase -UOB's NPLs and credit cost tends to decline faster than peers in a recovery phase

Jan 2010: UOB disposes UOB Insurance; signs bancassurance arrangement with Prudential

2015 - Market starts to price in expectations of Fed rate hikes (which did not happen); SIBOR moved up ahead of Fed rate hike expectations. SIBOR popped from a low of 38bps to 65bps in Jan 2015; UOB appears to have de-coupled from this; there was hardly any NIM movement

Jun 2011 ; Basel III rules announced; limited impact to UOB due to its conservative capital buffers

2012: Unfolding its regional aspirations -ASEAN-centric

Apr 2014 - AFter OCBC acquires Wing Hang Bank, rumours were rife that UOB could expand into Greater China in a smiimar manner

Nov 2016 - Fed rate hike lift off; expectations of NIM uplift expounded

2Q15 - Oil & gas NPL woes begin; peak of provisions in 2Q-3Q16

4Q11: Contained its European corporate bond exposures

S$

Company Guide

UOB

Balance Sheet:

Asset quality concerns are easing. UOB’s NPL ratio is higher vs peers,

sitting at 1.6%. Exposure to oil & gas comprises 5% of total loans while

other commodity segments make up another 3%. Collectively, these

account for 8% of total loans. These accounts are mostly secured;

hence the impact on P/L should be limited. While there will likely be

another 1-2 NPLs that need to be classified in FY17, we believe

concerns on further NPL blow-ups should ease. Specific provisions may

tilt higher in the final quarter of FY17 for newly classified NPLs and any

further deterioration of collateral. UOB is the only bank that has

disclosed that it has taken a 70-80% haircut to the value of its oil & gas

collateral. Other commodity segments include metal, mining and

agriculture. There is little concern on these.

Strong capital position. Its CET1 comfort zone is 11-12%. We expect

absolute DPS (excluding special dividends) to remain stable. UOB has,

however, turned on its scrip dividend option to shore up capital in view

of stricter capital requirements ahead. However, the take-up of its scrip

dividend has been low in the recent quarter as it has not offered a

discount to the scrip dividend when priced.


Strong property market recovery. The strong property market recovery

would bode well for UOB’s share price as it is seen to be a proxy. UOB

has the largest proportion of property-related loans vs peers.

The eventual finale of asset quality issues. With asset quality issues

largely to be dealt with by end-FY17, we should expect a better year

ahead. There would likely be another large NPL classification in 4Q17,

this should mark the end of massive asset quality upsets. Separately,

with the implementation of IFRS9, banks may no longer be able to

continuously build up general provisions; this could pose upside risk to

UOB’s FY18-19F earnings from its sticky 32-bp credit cost guidance.

Key Risks:

Further deterioration in asset quality. While management articulated

that only part of its oil & gas exposure (c.S$14bn) is vulnerable,

sustained low charter rates could add pressure to more provisions being

set aside and higher NPL ratios to be seen. In addition, should other

sectors see some form of deterioration, asset quality issues may be back

in the limelight.

NIM trend reversal. Hopes on NIM improvement could dissipate if

SIBOR/SOR movements turn south from here. NIM movements are more

sensitive to earnings compared to loan growth. If NIM trends stop

improving, earnings growth would be at risk.

Company Background

UOB provides a wide range of financial services through its global

network of branches, offices, subsidiaries and associates: personal

financial services, private banking, commercial and corporate banking,

investment banking, corporate finance, capital market activities,

treasury services, futures broking, asset management, venture capital

management, insurance and stockbroking services.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2015A 2016A 2017F 2018F 2019F

NPL Ratio

Provision Charge-OffRate

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

2015A 2016A 2017F 2018F 2019F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2015A 2016A 2017F 2018F 2019F

Avg: 10.5x

+1sd: 11.5x

+2sd: 12.6x

-1sd: 9.4x

-2sd: 8.3x

7.4

8.4

9.4

10.4

11.4

12.4

13.4

Nov-13 Nov-14 Nov-15 Nov-16

(x)

Avg: 1.18x

+1sd: 1.34x

+2sd: 1.5x

-1sd: 1.03x

-2sd: 0.87x

0.7

0.9

1.1

1.3

1.5

1.7


(x)

Company Guide

UOB

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Gross Loans Growth 4.0 8.8 6.2 6.0 6.0

Customer Deposits Growth 2.9 6.1 5.0 5.0 5.0

Yld. On Earnings Assets 2.8 2.8 2.9 2.9 3.0

Avg Cost Of Funds 1.1 1.2 1.2 1.2 1.2


FY Dec 2015A 2016A 2017F 2018F 2019F

Net Interest Income 4,926 4,991 5,592 6,050 6,519

Non-Interest Income 3,122 3,071 3,250 3,446 3,660

Operating Income 8,048 8,061 8,843 9,496 10,179

Operating Expenses (3,597) (3,696) (3,893) (4,084) (4,266)

Pre-provision Profit 4,451 4,365 4,949 5,412 5,913

Provisions (672) (593) (694) (754) (798)

Associates 90.0 6.00 6.77 7.41 8.14

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 3,869 3,778 4,262 4,666 5,123

Taxation (649) (669) (725) (793) (871)


Preference Dividend (110) (110) (110) (110) (110)

Net Profit 3,099 2,986 3,415 3,748 4,127

Net Profit bef Except 3,099 2,987 3,415 3,748 4,127

Growth (%)

Net Interest Income Gth 8.1 1.3 12.0 8.2 7.8

Net Profit Gth (1.3) (3.6) 14.4 9.8 10.1

Margins, Costs & Efficiency (%)

Spread 1.7 1.7 1.7 1.7 1.8

Net Interest Margin 1.8 1.7 1.8 1.8 1.8

Cost-to-Income Ratio 44.7 45.9 44.0 43.0 41.9

Business Mix (%)

Net Int. Inc / Opg Inc. 61.2 61.9 63.2 63.7 64.0

Non-Int. Inc / Opg inc. 38.8 38.1 36.8 36.3 36.0

Fee Inc / Opg Income 23.4 24.0 23.3 23.1 23.1

Oth Non-Int Inc/Opg Inc 15.4 14.1 13.5 13.2 12.9

Profitability (%)

ROAE Pre Ex. 11.1 10.1 10.6 10.6 10.7

ROAE 11.1 10.1 10.6 10.6 10.7

ROA Pre Ex. 1.0 0.9 1.0 1.0 1.1

ROA 1.0 0.9 1.0 1.0 1.1


Potential upside risk to earnings post IFRS9 implementation likely to see banks shoring up less general provisions

Gradual improvement in NIM; stronger trends expected in FY18-19

Company Guide

UOB


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Net Interest Income 1,230 1,276 1,303 1,355 1,408

Non-Interest Income 810 752 819 828 829

Operating Income 2,040 2,028 2,123 2,184 2,238

Operating Expenses (918) (957) (957) (995) (973)

Pre-Provision Profit 1,122 1,071 1,166 1,189 1,265

Provisions (185) (131) (187) (180) (221)

Associates 25.4 (21.0) 34.0 24.0 29.0

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax Profit 962 919 1,013 1,033 1,073

Taxation (169) (177) (203) (184) (187)


Net Profit 791 739 807 845 883

Growth (%)

Net Interest Income Gth 1.7 3.7 2.1 4.0 3.9

Net Profit Gth (1.3) (6.5) 9.2 4.8 4.4

Balance Sheet (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Cash/Bank Balance 32,306 24,322 32,170 33,778 35,467

Government Securities 19,509 17,515 18,391 19,310 20,276

Inter Bank Assets 28,646 40,033 35,268 37,309 39,490

Total Net Loans & Advs. 203,611 221,734 235,121 248,724 263,269

Investment 11,839 14,767 19,742 20,858 22,049

Associates 1,106 1,109 1,116 1,123 1,131

Fixed Assets 2,847 2,990 2,849 2,849 2,849

Goodwill 4,144 4,151 4,151 4,151 4,151

Other Assets 12,003 13,407 18,810 19,898 21,062

Total Assets 316,011 340,028 367,617 388,001 409,744

Customer Deposits 240,524 255,314 268,080 281,484 295,558

Inter Bank Deposits 11,986 11,855 17,583 20,171 23,037

Debts/Borrowings 20,288 26,143 26,143 26,143 26,143

Others 12,290 13,674 19,824 20,968 22,195

Minorities 155 169 182 196 211

Shareholders' Funds 30,768 32,873 35,806 39,040 42,600

Total Liab& S/H’s Funds 316,011 340,028 367,617 388,001 409,744


Top-line growth driven; earnings partially offset by higher provision; flat non-interest income

Loan growth likely to exceed mid-single-digit growth guidance; our forecasts are at 6% p.a. for FY17-19

Company Guide

UOB

Financial Stability Measures (%)

FY Dec 2015A 2016A 2017F 2018F 2019F

Balance Sheet Structure

Loan-to-Deposit Ratio 84.7 86.8 87.7 88.4 89.1

Net Loans / Total Assets 64.4 65.2 64.0 64.1 64.3

Investment / Total Assets 3.7 4.3 5.4 5.4 5.4

Cust . Dep./Int. Bear. Liab. 88.2 87.0 86.0 85.9 85.7

Interbank Dep / Int. Bear. 4.4 4.0 5.6 6.2 6.7

Asset Quality

NPL / Total Gross Loans 1.4 1.5 1.5 1.4 1.3

NPL / Total Assets 0.9 1.0 1.0 0.9 0.9

Loan Loss Reserve Coverage 129.5 118.0 127.9 149.9 174.4

Provision Charge-Off Rate 0.3 0.3 0.3 0.3 0.3

Capital Strength

Total CAR 15.6 16.2 16.9 17.2 17.6

Tier-1 CAR 13.0 13.0 13.7 14.1 14.4



Source: DBS Bank

Analyst: Sue Lin LIM


S.No.Date of

Report

Clos ing

Price

12-mth

Target

Price

Rat ing

1: 07 Dec 16 20.83 21.80 HOLD

2: 15 Feb 17 20.75 21.80 HOLD

3: 20 Feb 17 21.11 22.70 BUY

4: 17 Mar 17 21.95 22.70 BUY

5: 28 Apr 17 21.80 22.70 BUY

6: 28 Jul 17 24.05 24.80 HOLD

7: 24 Oct 17 24.25 26.90 BUY


1

2

3

4

5

6

7

17.48

18.48

19.48

20.48

21.48

22.48

23.48

24.48

25.48

Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17

S$

NPL ratios should ease from FY18

ed: JS / sa:AS, PY



Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN +65 6682 3716 [email protected]

What’s New 3Q17 results boosted by gains on consolidation of UIC

Post-consolidation impact – higher depreciation and

lower development profits in the future

Property launches in FY18-FY19 with estimated GDV of

S$1.4bn or more

Possibility to raise its stake in UIC without general offer

Price Relative


Revenue 1,441 1,286 1,192 1,164 EBITDA 483 558 679 560 Pre-tax Profit 354 422 542 425 Net Profit 287 343 447 352 Net Pft (Pre Ex.) 324 343 447 352 Net Pft Gth (Pre-ex) (%) (5.3) 5.8 30.2 (21.3) EPS (S cts) 35.7 42.7 55.5 43.7 EPS Pre Ex. (S cts) 40.3 42.7 55.5 43.7 EPS Gth Pre Ex (%) (6) 6 30 (21) Diluted EPS (S cts) 35.7 42.7 55.5 43.7 Net DPS (S cts) 15.0 15.0 15.0 15.0 BV Per Share (S cts) 1,010 1,038 1,078 1,107 PE (X) 24.7 20.6 15.8 20.1 PE Pre Ex. (X) 21.8 20.6 15.8 20.1 P/Cash Flow (X) 13.1 26.2 25.0 30.6 EV/EBITDA (X) 20.0 17.4 14.2 17.1 Net Div Yield (%) 1.7 1.7 1.7 1.7 P/Book Value (X) 0.9 0.8 0.8 0.8 Net Debt/Equity (X) 0.2 0.2 0.2 0.2 ROAE (%) 3.6 4.2 5.2 4.0



Growing big slowly and steadily

Valuations remains attractive post UIC consolidation. We

maintain our BUY rating on UOL Group (UOL), now trading at

an attractive valuation of c.0.8x P/NAV with the consolidation of

UIC. The successful launches of recently purchased land sites in

the enbloc market will be re-rating catalysts for the stock. We

have lifted our TP to S$10.15, factoring in higher stakes in UIC

and raising our ascribed value based on market price previously

to NAV.

Where we differ. More positive than consensus as UOL stands

to benefit from improved sentiment in the Singapore property

and hospitality segments. As the earliest to landbank at a lower

price, UOL stands to benefit from the improved sentiment in

Singapore property segment. In addition, the turnaround in the



Potential catalysts: More landbanking, strong sales take-up,

potentially gaining more control on UIC to unlock value.

3Q17 results boosted by gain from acquisition / consolidation of

UIC. 3Q17 net profit of S$618m (vs S$87m in 3Q16), included

gain on acquisition and consolidation of S$542m but partially

offset by S$15m of business acquisition costs. Excluding the

effects of consolidation, 3Q17 net profit fell 13% y-o-y to

S$76m. Key positives: i) property launches in FY18-FY19 with

potential gross development value(GDV) of S$1.4bn or more,

and ii) potential to raise its stake in UIC without general offer.

Key negatives i) higher depreciation and less development

profits in the future post consolidation.

Valuation:

Maintain BUY on attractive valuations. We raised our TP to

S$10.15, pegged to a 20% discount to our RNAV of S$12.70,

taking into higher stakes in UIC and raising our ascribed value

from market price to NAV.


Economic slowdown. The downside risk to our projections is if

residential sales are slower than our projections or if

commercial properties and hotels operations are impacted by

slower-than-projected growth in rental/room rates.


Mkt. Cap (S$m/US$m) 7,405 / 5,449


CY Wee & Co Pte Ltd 13.9

Wee Investment Pte Ltd 13.7

Haw Par Corp 8.5

Free Float (%) 56.7


ICB Industry : Real Estate / Real Estate


10 Nov 2017


UOL Group Version 9 | Bloomberg: UOL SP | Reuters: UTOS.SI Refer to important disclosures at the end of this report

85

105

125

145

165

185

205

4.7

5.7

6.7

7.7

8.7

9.7


Relative IndexS$

UOL Group (LHS) Relative STI (RHS)

Company Guide

UOL Group

WHAT’S NEW

Growing big slowly and steady

3Q17 results boosted by gains on acquisition and

consolidation of UIC. UOL reported a net profit of S$618m (vs

S$87m in 3Q16), recognising gains on acquisition and

consolidation of S$542m following the acquisition of 60m

United Industrial Corporation (UIC) shares from Haw Par on

31 Aug 17 but partially offset by S$15m of business

acquisition costs for Hilton Melbourne South Wharf in Jul17.

Excluding the one-off gains / costs, 3Q17 net profit grew 8%

y-o-y.

Excluding consolidation impact, 3Q17 recorded lower net

profit from one-off expense items. Excluding the gains on

acquisition and consolidation, 3Q17 net profit fell 13% y-o-y

to S$76m. The lower profit was mainly due to a couple of

one-off expenses items including i) accelerated depreciation

of Pan Pacific Orchard of S$15.3m which is scheduled to

cease operation for redevelopment in 2Q18, and ii) S$15m

business acquisition costs for Hilton Melbourne South Wharf

(renamed to Pan Pacific Melbourne) in Jul17.

Lower revenue from project development offset by

contributions from newly acquired hotel in Melbourne. Group

revenue grew 37% y-o-y to 538m mainly due to the

consolidation of UIC. Excluding the effects of consolidation,

revenue from project development division fell 3% y-o-y as

Riverbank@Fernvale was completed in Mar17. This was offset

by 5% y-o-y improvement in the hotel operations division,

largely due to new contribution from Pan Pacific Melbourne.

Clement Canopy and Holborn Island boosted share of profits

from JV but contributions to be consolidated in 4Q17. The

share of profits from JV companies improved to S$4m from

S$4m losses in 3Q16, mainly due to contributions from The

Clement Canopy (UOL’s latest residential project launched)

and Holborn Island (investment property). However, both the

project / property will be consolidated in 4Q17.

Post consolidation, higher progressive depreciation and lower

recognition of development profits in the future. Of the

S$542m gains on acquisition and consolidation recognised,

S$421m were fair value uplifts mainly for UIC’s hotel

properties (the 3 Marina Mandarin Hotels) and S$82m

attributable to its development properties, of which S$56m

was related to Park Eleven and S$19m on The Clement

Canopy. Post consolidation, the higher asset value will result

in higher depreciation (estimated at S$6m to S$7m p.a). For

development properties, there could be less development

profits to be recognised in the future.

Outlook.

New launches from 2018 onwards: While UOL’s existing

projects are mostly sold, it has gained some inventories from

UIC’s projects such as Mon Jervois (62.5% sold), Pollen & Bleu

(74.2% sold), V on Shenton (73% sold) and Alex Residences

(87.8% sold).

The group will be looking to launch Amber Road and Raintree

Gardens projects in 2018 while its latest acquired site, Nanak

Mansions will be launched in 2019. We estimate the GDV for

these 3 projects could be S$1.4bn and above.

On its overseas projects, UOL expects to launch Bishopsgate

Plaza in 2018 while management continues to seek approval

to launch phase 2 of Park Eleven, Shanghai in 1H18.

Hotel properties remain challenging but 2 major markets

seeing positive RevPar. While hotel properties are seeing

positive 1% to 2% increases in RevPar in Singapore and

Melbourne, 2 of its major market - China and Myanmar-

continue to face competitive pressures and oversupply of

rooms.

Performance of UOL’s commercial portfolio remained stable

as supply pressure could be abating, which points to a

possible bottoming of the office sector. The group has

committed 80% and/or more of the renewals with rental

reversions mostly flat for office properties while retail

properties remain challenging.

Ability to unlock value in UIC if successful in gaining full

control. During the results briefing, management explained

and cleared the doubt that a mandatory general offer will not

be triggered if UOL’s shareholdings in UIC crosses the 50%

mark if UOL maintains its progressive acquisition of <1%

every 6 months. We believe UOL is likely to slowly raise its

shareholding to take more control over UIC. UOL currently

owns close to 49% while the Wee Concert Party owns slightly

above 49%. If UOL is successful in gaining full control over

UIC eventually, we believe UOL could unlock a larger portfolio

of investment / development properties held by UIC.

Maintain BUY; raise TP to S$10.15. We maintain our BUY

rating on UOL Group (UOL), now trading at an attractive

valuation of c.0.8x P/NAV with the consolidation of UIC.

As the earliest to landbank at a lower price, UOL stands to

benefit from the improved sentiment in the Singapore

property segment. In addition, the turnaround in the

hospitality segment bodes well for UOL’s hotel properties and

now with UIC’s hotel properties. We have lifted our TP to

S$10.15, factoring in higher stakes in UIC and raising our

ascribed value from market price to NAV.

Company Guide

UOL Group



Revenue 393 399 538 36.7 34.8

Cost of Goods Sold (263) (267) (370) 40.5 38.4

Gross Profit 130 132 168 29.1 27.5

Other Oper. (Exp)/Inc (56.5) (54.5) (72.8) 28.9 33.7


Other Non Opg (Exp)/Inc 6.75 3.94 5.60 (17.0) 42.1

Associates & JV Inc 29.1 45.4 37.2 27.7 (18.0)


Exceptional Gain/(Loss) 0.0 13.7 527 - -

Pre-tax Profit 104 132 657 532.3 395.9

Tax (12.3) (10.6) (17.0) 37.8 60.3


Net Profit 87.1 109 618 609.4 464.9

Net profit bef Except. 87.1 95.8 90.9 4.3 (5.1)

EBITDA 123 144 175 42.7 22.1

Margins (%)





Company Guide

UOL Group


Critical Factors

Retail and office sub-segments to offer stable returns. UOL

Group Limited (UOL) derives a significant 47%-58% of its

revenues from retail, office and hotel segments which should

continue delivering stable cashflows in the coming years.

While we see headwinds in both the retail and office segments

ahead, we believe that the positioning and location of UOL’s

portfolio of commercial properties mainly along the fringe areas

of the CBD will result in lower volatility in rents. Thus,

operational performance is likely to remain stable going

forward.

Its retail malls - United Square and Novena Square - are located

in the Novena area, close to the emerging medical hub. The

malls have formed a niche, which should result in high tenant

stickiness. This is especially so for United Square, which houses

tenants well known for providing various children’s education

programs. On the other hand, Novena Square’s tenant mix

mainly caters to necessity shopping and the needs of the

vicinity’s growth as a medical hub.

Hotel performance – weakness in Asia; overall outlook stable.

Growth will be driven by the addition of close to 1,582 rooms

(6 hotels), implying 16% growth in total rooms under

management. Performances from hotels and serviced residences

are expected to remain mixed. We expect the operational

performance of the group’s hotels & residences in Singapore

and Malaysia to be weak, but partially offset by a better

performance from its hotels in Australia. We project portfolio

RevPAR to remain fairly flattish.

Presales for residential projects doing well amid muted

residential outlook. As at 9M17, the Group has substantially

sold most of its projects that are completed or currently under

development. UOL sold 484 residential units (S$558m in value)

in FY16 which was half of the sales made in FY15. However,

management has turned positive on the Singapore property

market but expects the landbanking market to remain

competitive. Management believes that the Singapore property

market has found a steady state at current levels and the

increase in industry sales volume has been encouraging. The

launch of the recently acquired sites at 45 Amber Road, Nanak

Mansions and Raintree Gardens will be keenly watched given

the group’s dwindling land-bank.

Revenue (S$’m)

PATMI growth

Operating Margins (%)

RNAV (S$’m) Properties OMV ($m) Investment Properties 3,481 less book value -4,300Surplus/deficit -819 (a)NPV of devt profits 324 (b)Mark to TP value of quoted holdings Listed equities/Strategic Holdings 4,518 Hotel operations 2,402 Total 6,920 less book value -4,355Surplus 2,565 (c)

Book NAV 8,127 (d)

RNAV 10,197 SUM Total Shares 805 RNAV/share ($) 12.67 Discount 20% Price Target ($) 10.14


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

15 16 17F 18F

S$'m

Investments Management Services Hotel Operations

Property Investments Property Development

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

15 16 17F 18F

S$'m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

FY13 FY14 FY15F FY16F FY17F FY18

Company Guide

UOL Group

Appendix 1:

UOL’s absolute performance vs Property sales volume Remarks

Share price performance is

positively correlated to the

property sales volume.


UOL’s absolute performance vs % change in PPI Remarks

While we saw some

positive correlation in

the period 2006 to

2014, we did not see

any major correlation

thereafter.


60

110

160

210

260

310

360

410

460

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Sh

are

price

abs

per

f (IN

dex

)

Sale

s vo

lum

e (units)

Sale volume (units) - RHS Abs Price Perf - LHS

60

110

160

210

260

310

360

410

460

Dec

-96

Nov-

97

Oct

-98

Sep-9

9

Aug-0

0

Jul-01

Jun-0

2

May-

03

Apr-

04

Mar-

05

Feb-0

6

Jan-0

7

Dec

-07

Nov-

08

Oct

-09

Sep-1

0

Aug-1

1

Jul-12

Jun-1

3

May-

14

Apr-

15

Mar-

16

Feb-1

7

-20

-15

-10

-5

0

5

10

15

20

Sh

are

price

abs

per

f (IN

dex

)

% c

hange

in P

PI (%

)

% change in PPI - RHS Abs Price Perf - LHS

Company Guide

UOL Group

Balance Sheet:

Balance sheet remains strong. Debt to equity ratio is expected

to remain stable at 0.3x from FY17F-FY18F. This leaves UOL

with sufficient headroom to acquire projects / new sites when

such opportunities come by.


Replenishing land bank key to income sustainability. The Group

turns around its projects quickly and has little land bank on its

balance sheet. UOL has always been active in land tenders to

replenish its land bank especially in Singapore but remains

selective given the high competitive environment seen in recent

government land tenders. The ability to secure additional land

bank at lower prices will mean upside to RNAVs and this 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 market

sentiment and spark a revival in transacted volumes in the

Singapore residential market. This would also lift sentiment on

property stocks, which should enable UOL to close the gap

between its stock price and its NAV.

Deep value from its hotel business. We believe that deep value

lies in the group’s portfolio of well located hotels and serviced

residences in Singapore, Malaysia and Australia. These hotels

are held on a historical cost basis, which we believe are

conservative compared to potential realisable value. We

estimate potential upside of more than S$1bn if these

properties are valued on marked-to-market basis.

Key Risks:

Economic slowdown. The downside risk to our projections is if

residential sales are slower than projected or if its hotel

operations are impacted by slower-than-projected RevPAR

performance. The upside risks to our view and target price

would be higher-than-expected selling prices or upgrades to

the target prices of its listed investment holdings.

Company Background

With a track record of nearly 50 years, UOL Group's impressive

list of property development projects includes best-selling

residential units, office towers, shopping centres, hotels and

serviced suites.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

2015A 2016A 2017F 2018F 2019F

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

0.0

50.0

100.0

150.0

200.0

250.0

300.0

2015A 2016A 2017F 2018F 2019F


S$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2015A 2016A 2017F 2018F 2019F

Avg: 15x

+1sd: 16.4x

+2sd: 17.7x

-1sd: 13.6x

-2sd: 12.2x

10.9

12.9

14.9

16.9

18.9

20.9


(x)

Avg: 0.67x

+1sd: 0.75x

+2sd: 0.83x

-1sd: 0.6x

-2sd: 0.52x

0.4

0.5

0.6

0.7

0.8

0.9

1.0


(x)

Company Guide

UOL Group

Segmental Breakdown

FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (S$m)

Property Development 578 734 621 520 484

Property Investment 219 225 241 245 249

Hotel Operations 419 430 371 374 377

Investments 42.3 30.2 30.2 30.2 30.2

Others 20.2 22.0 22.6 23.3 24.0

Total 1,279 1,441 1,286 1,192 1,164


FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 1,279 1,441 1,286 1,192 1,164


Gross Profit 504 485 524 497 470




Associates & JV Inc 156 136 157 288 193


Exceptional Gain/(Loss) 48.8 (37.3) 0.0 0.0 0.0

Pre-tax Profit 460 354 422 542 425

Tax (47.2) (48.3) (50.7) (65.0) (51.0)



Net Profit 391 287 343 447 352


EBITDA 514 483 558 679 560

Growth

Revenue Gth (%) (6.0) 12.7 (10.7) (7.3) (2.3)

EBITDA Gth (%) (14.8) (6.2) 15.7 21.5 (17.5)

Opg Profit Gth (%) (26.6) (3.8) 21.1 (3.6) (7.6)

Net Profit Gth (Pre-ex) (%) (5.9) (5.3) 5.8 30.2 (21.3)

Margins & Ratio

Gross Margins (%) 39.4 33.7 40.7 41.7 40.3



ROAE (%) 5.0 3.6 4.2 5.2 4.0

ROA (%) 3.4 2.5 2.9 3.7 2.9

ROCE (%) 2.2 2.0 2.4 2.3 2.1

Div Payout Ratio (%) 30.5 42.0 35.2 27.0 34.3



Locked-in residential sales to drive topline

Commercial portfolio remains stable

Company Guide

UOL Group


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 393 354 351 399 538


Gross Profit 130 115 116 132 168




Associates & JV Inc 29.1 35.0 34.4 45.4 37.2


Exceptional Gain/(Loss) 0.0 (11.0) 0.92 13.7 527

Pre-tax Profit 104 77.0 97.6 132 657

Tax (12.3) (12.9) (11.3) (10.6) (17.0)


Net Profit 87.1 54.0 80.3 109 618

Net profit bef Except. 87.1 65.0 79.4 95.8 90.9

EBITDA 123 117 119 144 175

Growth

Revenue Gth (%) 8.2 (10.1) (0.8) 13.8 34.8

EBITDA Gth (%) (4.3) (4.7) 1.2 21.1 22.1

Opg Profit Gth (%) 5.1 (18.9) 4.4 24.1 23.1

Net Profit Gth (Pre-ex) (%) (8.5) (25.4) 22.0 20.7 (5.1)

Margins

Gross Margins (%) 33.1 32.6 33.0 33.1 31.3



Balance Sheet (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 1,179 1,166 1,299 1,282 1,266


Other LT Assets 4,981 5,312 5,312 5,312 5,312

Cash & ST Invts 276 302 251 364 425

Inventory 0.73 0.65 0.58 0.54 0.53

Debtors 197 99.6 88.9 82.4 80.5


Total Assets 11,501 11,558 11,787 12,144 12,380

ST Debt 523 728 728 728 728

Creditor 238 203 181 168 164


LT Debt 1,980 1,614 1,614 1,614 1,614



Minority Interests 507 508 537 567 589

Total Cap. & Liab. 11,501 11,558 11,787 12,144 12,380


Net Cash/(Debt) (2,227) (2,041) (2,091) (1,979) (1,918)




Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1

Current Ratio (x) 2.5 1.6 1.6 1.7 1.8

Quick Ratio (x) 0.6 0.4 0.4 0.5 0.5

Net Debt/Equity (X) 0.3 0.2 0.2 0.2 0.2


Capex to Debt (%) 1.9 10.6 8.5 2.1 2.1

Z-Score (X) 2.4 2.5 2.5 2.5 1.2


Conservative gearing

Company Guide

UOL Group


FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 413 354 422 542 425

Dep. & Amort. 67.2 66.6 66.6 66.6 66.6

Tax Paid (66.7) (33.5) (50.7) (50.7) (65.0)

Assoc. & JV Inc/(loss) (156) (136) (157) (288) (193)

Chg in Wkg.Cap. 259 260 (11.1) 13.7 (2.0)

Other Operating CF (0.1) 27.7 0.0 0.0 0.0

Net Operating CF 517 539 271 283 232

Capital Exp.(net) (47.0) (248) (200) (50.0) (50.0)

Other Invts.(net) 0.68 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 79.8 (61.7) 0.0 0.0 0.0

Div from Assoc & JV 42.0 57.4 0.0 0.0 0.0

Other Investing CF (12.3) 3.12 0.0 0.0 0.0

Net Investing CF 63.2 (249) (200) (50.0) (50.0)

Div Paid (64.3) (66.3) (121) (121) (121)

Chg in Gross Debt (466) (105) 0.0 0.0 0.0

Capital Issues 7.93 1.10 0.0 0.0 0.0

Other Financing CF (62.1) (88.2) 0.0 0.0 0.0

Net Financing CF (584) (259) (121) (121) (121)


Chg in Cash (10.1) 25.1 (50.1) 112 61.0

Opg CFPS (S cts) 32.4 34.6 35.0 33.5 29.0

Free CFPS (S cts) 59.0 36.1 8.77 29.0 22.6



Source: DBS Bank

Analyst: Rachel TAN

Derek TAN

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 11 Nov 16 5.66 7.20 BUY

2: 06 Jan 17 6.20 7.20 BUY

3: 16 Feb 17 6.55 7.20 BUY

4: 27 Feb 17 6.51 7.64 BUY

5: 13 Mar 17 6.94 7.64 BUY

6: 17 Mar 17 6.98 7.64 BUY

7: 19 Apr 17 6.99 7.64 BUY

8: 15 May 17 7.09 8.73 BUY

9: 16 May 17 7.00 8.73 BUY

10: 26 May 17 6.94 8.73 BUY

11: 02 Jun 17 7.08 8.73 BUY

12: 14 Jun 17 7.61 8.73 BUY

13: 27 Jun 17 7.69 8.73 BUY

14: 30 Jun 17 7.64 8.73 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 03 Jul 17 7.64 8.73 BUY

16: 12 Jul 17 7.46 8.73 BUY

17: 26 Jul 17 7.92 8.73 BUY

18: 28 Jul 17 7.83 8.73 BUY

19: 28 Aug 17 8.13 8.73 BUY

20: 12 Sep 17 8.06 8.73 BUY

21: 07 Nov 17 8.82 8.73 BUY

1

23

45

6

7

8

9

10

11

12

13

14

15

1617

1819

2021

5.32

5.82

6.32

6.82

7.32

7.82

8.32

8.82

9.32


S$

ed: JS / sa:JC, PY



Analyst Carmen TAY +65 6682 3719 [email protected] Suvro SARKAR +65 8189 3144 [email protected] Singapore Research Team [email protected]

What’s New 3Q17 surpasses expectations with profit surging to a

record S$111.4m (+135% y-o-y, +60% q-o-q)

Margin guidance is at a higher range

Potential for higher dividends in FY17F underpinned by

record earnings and imminent disposal gains

Raise our earnings estimates; Maintain BUY with TP

lifted to S$26.00

Price Relative


Revenue 2,874 4,004 4,351 4,619 EBITDA 263 425 475 505 Pre-tax Profit 216 409 443 470 Net Profit 181 339 367 389 Net Pft (Pre Ex.) 181 326 367 389 Net Pft Gth (Pre-ex) (%) 17.3 80.4 12.5 6.0 EPS (S cts) 64.8 119 129 137 EPS Pre Ex. (S cts) 64.8 115 129 137 EPS Gth Pre Ex (%) 15 77 13 6 Diluted EPS (S cts) 64.8 119 129 137 Net DPS (S cts) 50.0 55.0 55.0 55.0 BV Per Share (S cts) 703 760 834 915 PE (X) 29.8 16.2 15.0 14.1 PE Pre Ex. (X) 29.8 16.8 15.0 14.1 P/Cash Flow (X) 23.3 18.0 17.3 15.2 EV/EBITDA (X) 18.9 11.6 10.1 9.2 Net Div Yield (%) 2.6 2.8 2.8 2.8 P/Book Value (X) 2.7 2.5 2.3 2.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 9.4 16.4 16.2 15.6



Setting a scorching pace Scaling new heights with unique positioning at the forefront of innovation. Venture’s earnings surpassed expectations in 3Q17 with net profit surging 135% y-o-y and c.60% q-o-q to hit an all-time high of S$111.4m, and is set for a record FY17F. Fuelled by positive industry backdrop and excellent execution, Venture’s share price has gained over 95% YTD in 2017, but we believe there is still room to run as it continues to deliver superior earnings performance. Margin improvement was the key story in 3Q17 and demonstrates the group’s continued success in value-creation through increased design content and uniqueness in the broader Electronic Manufacturing Services (EMS) space, with exposure to attractive end-markets such as genome sequencing and networking and communications. Expectations of double-digit growth at key industry clusters provides strong visibility for Venture’s revenue growth prospects. Management guidance of a higher net margin range also raises our confidence in Venture’s ability to sustain margins at a historical high level.

Where we differ: We currently have the highest TP on the street. We remain positive on Venture’s growth trajectory and believe the market has yet to fully price in the group's unique offerings, know-how and hard-to-replicate ecosystems.

Potential catalysts: New products and continued expansion into non-traditional markets with higher margins, and new customer acquisitions are potential near term catalysts. In the medium to long term, acquisition of companies along the manufacturing value chain could increase Venture’s capabilities.

Valuation: Maintain BUY with a revised TP of S$26.00. We raise our TP to S$26.00, on the back of higher earnings estimates driven by better sales and margin expectations, still pegged to a PE multiple of 19.5x on blended FY18/19F earnings, which implies around 10% premium to peer average of 17.5x forward PE.

Key Risks to Our View: Weakening global growth prospects. A broad global slowdown is likely to impact Venture due to its vulnerability to business cycles. Potential weakening of the USD could also dampen revenue growth.

At A Glance

Issued Capital (m shrs) 284

Mkt. Cap (S$m/US$m) 5,486 / 4,019


Ngit Liong Wong 7.1

Standard Life Aberdeen Plc 5.0

Schroders Plc 5.0

Free Float (%) 73.1


ICB Industry : Industrials / Electronic & Electrical Equipment


6 Nov 2017


Venture Corporation Version 10 | Bloomberg: VMS SP | Reuters: VENM.SI Refer to important disclosures at the end of this report

Company Guide

Venture Corporation

WHAT’S NEW

Venture continues to wow in 3Q17; profits rise solidly to a record S$111.4m

Record quarterly profit a result of strong sales momentum

and improved mix. Venture’s earnings surpassed expectations

in 3Q17 with net profit surging 130% y-o-y and 59.5% q-o-q

to a record S$111.4m on the back of quarterly revenue of

S$1,061.9m (+50% y-o-y, 4.8% q-o-q). Top-line growth was

supported by broad-based growth across all segments, with

revenue increases across c.60 customers.

Meanwhile, the higher-than-expected earnings beat was

driven by a combination of (1) sustained strong sales

momentum, and (2) margin improvements. While sales

growth momentum was similar in 2Q and 3Q17 – both

growing substantially by c.50% y-o-y – EBITDA margin and

net margin improved significantly on a sequential basis from

8.8% and 6.9% in 2Q17 to 12.2% and 10.5% in 3Q17,

respectively.

Margin story is the key takeaway this quarter. Apart from

efficiency gains and an improved sales mix featuring higher

design content compared to the previous quarter, the margin

boost is also likely to have been supported by a higher

proportion of R&D recoveries recognised during the quarter.

While this quarterly net margin of 10.5% may not be

repeated, we expect net margins to sustain at previously

historical high levels of 8.4-8.5% in FY17/18/19 owing to

higher proportion of high value-add design contracts and

benefits of operating leverage as sales continue to grow.

Guidance for higher margins gives us comfort. Management

guided for higher net margins of 6-10% (vs 6-8%

historically), which suggests increasing confidence in

delivering sustainably higher margins ahead through greater

value-add and design content.

Working capital management improves further. Venture’s

focus on lean and efficient work processes continued to bear

fruit as its cash conversion cycle further improved to 75 days

in 3Q17, compared to 80 and 93 days in 2Q17 and 1Q17,

respectively. Going forward, room for further optimisation

remains. Separately, we also note that Venture’s net cash

position has strengthened significantly over the quarter,

+46% to S$535m (or S$1.88 per share) as at end-3Q17.

Further support for expectations of a higher dividend of 55

Scts vs 50 Scts historically. With Venture set for a record

FY17F, and further gains of S$12.7m (or c. 5 Scts per share)

to be recognised in the upcoming quarter following the

recent conclusion of the disposal of its stake in Fischer Tech,

we see potential for a higher dividend payout for FY17F.

Venture typically pays a fixed 50 Sct dividend p.a. but history

shows that it did reward shareholders with a higher dividend

of 58 Scts back in FY07 when earnings performance had

peaked. We believe that Venture could take a similar

approach to distributions in FY17F and are optimistic of a

higher payout of c.55 Scts (or more) – as highlighted in an

earlier report. At current price, this represents a prospective

2.8% yield.

Maintain BUY with higher TP of S$26.00 after raising

earnings projections for FY17F-19F. We continue to like

Venture, which stands out for its unique positioning at the

forefront of innovation and has a proven track record.

Supported by still-positive industry backdrop, expectations of

broad-based growth across its diversified client pool and

imputing benefits of resultant operating leverage, we raise

our earnings projections for FY17F/18F/19F by

30%/24%/23%.

Pegging to a PE multiple of 19.5x on FY18/19F earnings, we

arrive at a revised TP of S$26.00 for Venture. This implies

around 10% premium to the average forward PE for high-mix

low-volume EMS peers of 17.5x. While Venture’s share price

has re-rated significantly this year, gaining over 95% YTD, we

believe continued superior earnings performance going

forward will give the stock more legs to run.

Company Guide

Venture Corporation



Revenue 706 1,013 1,062 50.5 4.8

Cost of Goods Sold (529) (791) (801) 51.4 1.3

Gross Profit 177 223 261 47.8 17.4

Other Oper. (Exp)/Inc (121) (140) (130) 8.1 (7.0)

Operating Profit 56.1 82.3 131 133.2 59.0


Associates & JV Inc 0.12 1.67 0.0 - -



Pre-tax Profit 56.7 84.5 131 131.7 55.4

Tax (9.2) (14.7) (19.9) 115.9 36.1

Minority Interest 0.0 0.0 0.0 - -

Net Profit 47.4 69.8 111 135.0 59.5

Net profit bef Except. 47.4 69.8 111 135.0 59.5

EBITDA 67.2 91.8 140 108.9 53.0

Margins (%)





Company Guide

Venture Corporation

CRITICAL FACTORS

Net margins is a critical factor driving share price, which is

currently well supported by changing business mix. According

to our critical factor analysis (see next page), Venture’s net

margins have a direct correlation with its share price. Venture's

evolving business mix, with increasing contribution from the

Test, Measurement, Medical and Life Science segment and

declining contribution from Computer Peripherals and Printing

is likely to improve its margins.

We believe that the specialised nature of the Medical and Life

Science segment permits Venture to realise better margins on

contracts.

Growth in Test, Medical and Life Science segment. Venture has

established strong relationships with companies researching on

Genome sequencing, which could see healthy growth over the

medium term with increasing investments and use of MedTech.

Further, an increased focus on lower-cost technologies in

healthcare is likely to boost the Test, Measurement, Medical and

Life Science segment.

The segment contributed 43.2% to the top line in FY16

compared to 34.0% in FY15, which has helped to offset the

weak performance from the Computer Peripherals & Data

Storage segment.

Weakening MYR to benefit Venture. MYR has continued to

depreciate against the SGD, which should benefit Venture in

FY17. We estimate that 50-55% of Venture’s cost base,

excluding COGS, is denominated in MYR. DBS Group Research

forecasts the SGD/MYR to move to 3.04 by the end of FY2017

(compared to 2.82 in FY2016).

Our sensitivity analysis shows that every 1% appreciation of

MYR against SGD will increase net profit by slightly more than

2%.

Newly acquired site a catchment area for high-tech companies,

which could benefit Venture. Venture completed the acquisition

of a 60-year leasehold land site for S$13.0m in 2Q16, of which

S$5.7m was paid in 1H16. Development of the land is expected

to start in 2017.

The land is located in the Batu Kawan Industrial park near

Penang Island, well known for its high-tech electronics

manufacturing industry. We believe that Venture could benefit

from the proximity to leading tech/manufacturing companies,

specialised labour, and improved supply chain networks with its

presence in this area.

Net margin (%)

% of SGA (%)

USD/SGD

SGD/MYR


Company Guide

Venture Corporation


Chart 1: EPS, Net Margins as Critical Factors Remarks

For the last 15 years, share price has tracked 12-month forward EPS forecasts (correlation +0.76), which is largely driven by changes in margins.

Re-rating from 2H2016 is primarily driven

by EPS growth expected from margin

expansion following a shift in product

segment mix.

Chart 2: R&D, Innovation are Possible Leading/ Critical Factors

*Comprises of the most innovative companies in the US across sectors and market cap.Source: Thomson Reuters, DBS Bank

Remarks

Collaborating closely with its diversified

pool high-tech customers at the forefront

of innovation, Venture’s share price

performance has also demonstrated a

strong correlation (+0.90) to the NYSE

R&D Innovation Index*.

Since FY2000, the peaks seen in R&D

expenditure are followed by two

subsequent peaks in share price, due to

strong operating performance. Spending

on R&D is critical for high-tech companies

as knowledge, know-how, and skills

allow companies to differentiate their

offerings. Successful R&D can often lead

to increased and better offerings,

allowing companies to gain customer

base. R&D expenditure may be a leading

indicator of future share price

performance, if a higher expenditure

translates into successful product

developments.

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VentureNYSE R&D Innovation Index

Correlation: +0.90

*

Company Guide

Venture Corporation

Chart 3: Summary of significant events driving Venture’s share price

a) Rebound in demand for computers and electronics; rally across Asian computer-related stocks

b) Concerns over US consumer sentiment, slow job growth

c) Venture reported first decline in annual earnings since 1992

d) Venture bids for GES International Ltd, world’s biggest producer of made-to-order electronic cash registers

e) US retail sales eased, concerns across Asian electronic manufacturers

f) Venture reported declining profit on investment losses; margins under pressure

g) Fed cuts benchmark interest rate, improving US macroeconomic outlook

h) Venture switches to full turnkey for HP, continues to retool business mix

i) Series of acquisitions of Venture’s customers (e.g. Verifone acquisition of Hypercom) begins; macroeconomic uncertainty, USD weakness

j) Venture’s Industrial and Test & Measurement products slated for release in 2H12

k) Continued shift in business segment mix, move towards higher-margin industrial products

l) Venture reported >35% growth in net profit

m) CEO Mr Wong bought shares in open market transactions in Jul and Sep 2017, worth >S$8m

Source: Thomson Reuters, DBS Bank

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Company Guide

Venture Corporation

Balance Sheet:

Strong balance sheet position. The company has maintained a

strong net cash position of c. S$535m, which should support its

current dividend payout that offers a yield of slightly less than

3%. Anticipated land development could strain cash flows to an

extent but we do not foresee any dividend cutbacks over the

medium term.


Consistent quarterly revenue and profit growth over last four

years. Venture has posted consistent revenue and profit growth

(excluding exceptional items) over the past 16 quarters (on a y-

o-y basis), despite the weak economic conditions of its

customers' markets.

The grou’s strategy of pursuing the more resilient Test,

Measurement, Medical and Life Science segment has been

successful in generating revenue and profits. We believe the

recent successes would result in a more bullish market

perception for Venture, and re-rate the stock. In addition, the

better-than-expected revenue performance has prompted us to

revise up our forecast for FY17F/18F/19F, resulting in a

30%/24%/23% increase in earnings respectively.

Key Risks:

Dependent on global market conditions. As Venture has

exposure to customers in the US, EU and Asia, a broad global

slowdown is likely to impact Venture due to its vulnerability to

business cycles. Possible weakness in the Eurozone arising from

political instability or the adoption of restrictive trading policies

by the US could weaken global growth prospects. We note

that most electronic products do not carry tariffs in the US.

Deterioration in the world economy could affect corporate

spending, which will in turn adversely impact Venture's results.

Weakening USD could impact the top line. A weakening USD

against SGD and a prolonged accommodative monetary policy

could impact Venture’s earnings. DBS Group Research

forecasts the USD/SGD to move to 1.39 by FY2017YE. Our

sensitivity analysis shows that every 1% appreciation of USD

against SGD will increase net profit by ~1.9%.

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)


Company Guide

Venture Corporation

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Net margin (%) 5.80 6.29 8.46 8.43 8.42

% of SGA (%) 16.5 17.2 13.3 12.5 12.5

USD/SGD 1.37 1.42 1.39 1.40 1.40

SGD/MYR 2.72 2.82 3.04 3.03 3.03

Segmental Breakdown

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (S$m)

Printing & Imaging 255 180 178 176 176

Computer Peripherals/Data Storage

277 197 193 189 186

Networking/Comms 473 533 672 706 741

Retail Store solutions 746 720 734 742 749

Others 906 1,244 2,227 2,538 2,767

Total 2,657 2,874 4,004 4,351 4,619


FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 2,657 2,874 4,004 4,351 4,619


Gross Profit 616 702 921 979 1,039







Pre-tax Profit 182 216 409 443 470

Tax (27.6) (35.2) (70.8) (76.7) (81.3)

Minority Interest (0.1) 0.0 0.0 0.0 0.0


Net Profit 154 181 339 367 389


EBITDA 229 263 425 475 505

Growth

Revenue Gth (%) 7.7 8.2 39.3 8.7 6.1

EBITDA Gth (%) 14.7 15.0 61.5 11.7 6.5

Opg Profit Gth (%) 18.2 18.6 85.7 11.9 6.1

Net Profit Gth (Pre-ex) (%) 10.2 17.3 80.4 12.5 6.0

Margins & Ratio

Gross Margins (%) 23.2 24.4 23.0 22.5 22.5



ROAE (%) 8.2 9.4 16.4 16.2 15.6

ROA (%) 6.1 6.8 11.5 11.3 11.0

ROCE (%) 7.4 8.6 15.1 15.5 15.0

Div Payout Ratio (%) 89.0 77.1 46.2 42.6 40.2



Growth to be led by Test & Measurement / Medical & Life Sciences / Other segments

Projecting higher sustained net margins at 8.4-8.5% levels

Company Guide

Venture Corporation


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 706 855 843 1,013 1,062


Gross Profit 177 211 189 223 261

Other Oper. (Exp)/Inc (121) (148) (129) (140) (130)

Operating Profit 56.1 63.2 59.4 82.3 131





Pre-tax Profit 56.7 65.1 60.0 84.5 131

Tax (9.2) (11.1) (11.4) (14.7) (19.9)


Net Profit 47.4 54.1 48.6 69.8 111

Net profit bef Except. 47.4 54.1 48.6 69.8 111

EBITDA 67.2 78.9 66.9 91.8 140

Growth

Revenue Gth (%) 3.3 21.1 (1.3) 20.2 4.8

EBITDA Gth (%) 7.9 17.4 (15.2) 37.2 53.0

Opg Profit Gth (%) 13.4 12.7 (6.1) 38.6 59.0

Net Profit Gth (Pre-ex) (%) 9.2 14.0 (10.1) 43.7 59.5

Margins

Gross Margins (%) 25.0 24.7 22.4 22.0 24.6



Balance Sheet (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 186 203 205 205 210

Invts in Associates & JVs 19.4 20.3 23.2 26.2 29.1

Other LT Assets 703 661 661 661 661

Cash & ST Invts 459 500 618 748 911

Inventory 556 623 770 837 888

Debtors 570 713 801 870 924

Other Current Assets 33.4 38.3 38.3 38.3 38.3

Total Assets 2,528 2,759 3,117 3,385 3,662

ST Debt 109 92.6 75.2 75.2 75.2

Creditor 353 491 667 725 770

Other Current Liab 141 211 211 211 211

LT Debt 26.5 0.0 0.0 0.0 0.0

Other LT Liabilities 3.14 1.80 1.80 1.80 1.80



Total Cap. & Liab. 2,528 2,759 3,117 3,385 3,662

Non-Cash Wkg. Capital 666 673 731 809 870

Net Cash/(Debt) 324 407 543 672 836




Asset Turnover (x) 1.1 1.1 1.4 1.3 1.3

Current Ratio (x) 2.7 2.4 2.3 2.5 2.6

Quick Ratio (x) 1.7 1.5 1.5 1.6 1.7



Capex to Debt (%) 10.8 36.2 39.9 39.9 53.2

Z-Score (X) 7.0 6.1 5.9 5.8 5.7


Remarkable NPAT growth of 135% y-o-y/ 60% q-o-q

Company Guide

Venture Corporation


FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 182 216 409 443 470

Dep. & Amort. 46.1 46.4 27.7 30.7 34.7

Tax Paid (9.6) (33.5) (70.8) (76.7) (81.3)

Assoc. & JV Inc/(loss) (2.0) (3.0) (3.0) (3.0) (3.0)

Chg in Wkg.Cap. 48.7 (8.2) (58.5) (78.3) (60.3)

Other Operating CF (31.0) 13.6 0.0 0.0 0.0

Net Operating CF 234 231 305 316 360

Capital Exp.(net) (14.6) (33.5) (30.0) (30.0) (40.0)

Other Invts.(net) 2.37 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 1.05 0.0 0.0 0.0

Other Investing CF (1.5) 2.06 0.0 0.0 0.0

Net Investing CF (13.7) (30.4) (30.0) (30.0) (40.0)

Div Paid (138) (138) (139) (156) (156)

Chg in Gross Debt (33.5) (42.0) (17.5) 0.0 0.0

Capital Issues 0.0 17.7 0.0 0.0 0.0

Other Financing CF 0.0 (1.1) 0.0 0.0 0.0

Net Financing CF (172) (164) (157) (156) (156)


Chg in Cash 66.0 40.5 118 130 164

Opg CFPS (S cts) 67.5 85.9 128 139 148

Free CFPS (S cts) 80.0 71.0 96.7 101 113



Source: DBS Bank

Analyst: Carmen TAY

Suvro SARKAR

Assumes higher dividend payout of 55 Scts vs 50 Scts historically

ed: TH / sa:AS, PY

BUYLast Traded Price ( 10 Nov 2017): S$0.91 (STI : 3,420.10) Price Target 12-mth: S$1.12 (24% upside) (Prev S$1.12)

Analyst Derek TAN +65 6682 3716 [email protected] Lee Keng LING +65 6682 3703 [email protected] Singapore Research Team [email protected]

What’s New • 3Q17 net profit ahead of our estimates as property

industry volumes continue to power on

• Strong pipeline of ten projects to be marketed throughthe ERA network in 2018F

• Raising earnings by 9-14%; TP revised to S$1.12

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2016A 2017F 2018F 2019F Revenue 288 380 404 425 EBITDA 20.8 30.3 33.4 36.5 Pre-tax Profit 18.1 28.9 31.9 35.1 Net Profit 15.9 24.3 26.5 29.1 Net Pft (Pre Ex.) 15.9 24.3 26.5 29.1 Net Pft Gth (Pre-ex) (%) 87.2 52.9 9.1 9.8 EPS (S cts) 4.47 6.84 7.46 8.19 EPS Pre Ex. (S cts) 4.47 6.84 7.46 8.19 EPS Gth Pre Ex (%) 87 53 9 10 Diluted EPS (S cts) 4.47 6.84 7.46 8.19 Net DPS (S cts) 0.0 0.85 3.73 4.09 BV Per Share (S cts) 22.2 36.6 40.4 44.5 PE (X) 20.2 13.2 12.1 11.1 PE Pre Ex. (X) 20.2 13.2 12.1 11.1 P/Cash Flow (X) 14.2 12.3 11.1 10.4 EV/EBITDA (X) 15.5 8.9 7.6 6.5 Net Div Yield (%) 0.0 0.9 4.1 4.5 P/Book Value (X) 4.1 2.5 2.2 2.0 Net Debt/Equity (X) 0.0 CASH CASH CASH ROAE (%) 22.4 23.2 19.4 19.3 Earnings Rev (%): 14 9 12 Consensus EPS (S cts): - - - Other Broker Recs: B: 0 S: 0 H: 0


All guns blazing

Purest proxy to Singapore residential volumes. ERA Realty, a wholly-owned subsidiary of APAC Realty, is one of Singapore’s largest real estate agencies with approximately 6,176 registered agents, as at 10 July 2017. We believe that APAC Realty remains poised to deliver a robust 10% 2-year CAGR in EPS on the back of a turn in Singapore residential market.

Where we differ: Only broker covering the stock; sizeable scale and leading market share a winning formula in our view. Having a sizeable agent base is important for ERA to perform well as it enables the agency to have a strong and wider reach to a diverse base of potential property buyers, renters and allows the group to capture the lion’s share of market transactions in Singapore. In 2016, ERA’s market share was approximately 38% in terms of transaction value in the Singapore residential market, up from approximately 32% in 2015 and 29% in 2014.

Stronger-than-projected volumes could surprise on the upside. Our initial estimates were conservative as transaction value continues to power on. We revise our industry transaction value upwards to S$40bn (40% y-o-y) while keeping our FY18/19 estimates at a further 5% growth. Given the upturn in buyer sentiment driving demand for homes, we believe that the opportunity to surprise on the upside is high. Every S$1bn in transaction adds 2% to EPS estimates and TP.

Valuation: Blended DCF and PE valuation methodology. Our TP of S$1.12 is pegged to peers’ historical average of 15x FY18F earnings.

Key Risks to Our View: It is dependent on Singapore’s residential property market and macroeconomic conditions.

At A Glance Issued Capital (m shrs) 355 Mkt. Cap (S$m/US$m) 321 / 236 Major Shareholders (%) Choon Hong Tan 72.0

Free Float (%) 28.0 3m Avg. Daily Val (US$m) 1.0 ICB Industry : Financials / Real Estate Investment & Services


13 Nov 2017


APAC Realty Version 1 | Bloomberg: APAC SP | Reuters: APAC.SI Refer to important disclosures at the end of this report

Company Guide

APAC Realty

WHAT’S NEW

All guns blazing

What’s New 64.6% y-o-y jump in 9-month net profit to S$18m; above expectations. APAC reported a 64.6% y-o-y jump in net profit to S$18.0m for 9-month 2017, on the back of a 30.3% increase in revenue to S$270.9m. The 9-month net profit accounts for 85% of our FY17F numbers, above expectations. Excluding IPO expenses of S$1.1m (total IPO expenses amounted to S$1.9m, of which S$0.9m was capitalised against share capital), net profit would have been S$19.1m (+74.3% y-o-y). For 3Q17, net profit surged 7.2% y-o-y to S$5.5m on 30.3% gain in revenue to S$105.5m.

The increase in revenue is largely attributable to the increase in brokerage income from resale and rental of properties, and new home sales. APAC benefitted from a recovery in the Singapore residential market where there is a substantial increase in transaction volume for the private primary and secondary market.

Segmental revenue breakdown Segment 9-mth

17

9-mth

16

%

chg

3Q17 3Q16 %

chg

Resale &

Rental

186.9 153.9 +21.5 72.3 58.7 +23.2

New home

sales

76.9 47.7 +61.3 30.8 20.0 +54.0

Other

revenue

7.1 6.3 +12.3 2.4 2.2 +6.9

TOTAL 270.9 207.9 +30.3 105.5 81.0 +30.3

Source: Company

Margins in line. Net margins for the 9-month period was 6.7%, roughly in line with our expectation of 6.2% for FY17F. 3Q17 net margin was 5.2% (impacted by IPO expense).

Project pipeline. To date, ERA has already secured more than ten projects to be launched in 2018 with close to 10,000 residential units available for sale. This is double the 4,800 units (from eight projects) launched by ERA in the first nine months of 2017.

Outlook Singapore’s property market recovery is expected to be gradual in the next 12 months with more transactions across all segments of the real estate market. The 3Q17 private residential price index also registered its first increase after 15 consecutive

quarters of decline. APAC is expecting property transaction to reach 21,000-23,000 (excluding EC transactions) units for 2017 or an approximate 28% increase over 2016’s 16,378 units. Prices are expected to increase by up to 1% for 2017, a reversal of the 3.1% decline in 2016.

A recovery in the private rental market may happen in the next 12 months in the form of lower vacancy rates, as the expected number of completed units in 2018 is only half, or approximately 8,000 of the 16,000 expected completions in 2017. APAC is expecting an overall 2-3% decrease in rental prices for 2017.

HDB resale prices are expected to remain more or less stable, with transactions for the whole year projected to be in the range of 21,000-22,000 units. For HDB rental, APAC expects rental transactions for 2017 to range from 41,000-43,000; a decline from the 44,530 units that were rented out in 2016, as some of the demand is shifted to the private property market.

Declining stockpile but vacancy rate still high. The total number of unsold private residential units has been declining for the past two years and reached 17,178 (including ECs) as at 30 September 2017. However, the vacancy rate of completed private residential units remained high at 8.4% as at 30 September 2017.

More supply from en-bloc sites. As en-bloc sales have been very active over the past 1-2 years, the redevelopment of these en-bloc sites will add a significant number of housing units to the existing supply pipeline. The potential units from redevelopments of en-bloc sales (9,300) and available parcels on government land sales (7,400) could add up to 16,700. According to URA, a large part of this potential supply could be put up for sale in the next 1-2 years.

Revised Estimates. BUY with TP of S$1.12 based on 15x FY18F PE. YTD industry transaction value is estimated to be close to S$38bn (as of October 2017); ahead of our initial estimates of S$36bn for the full year. As such, we raise our industry transaction estimates to S$40bn; implying a c.40% growth y-o-y. We maintain our 5% y-o-y growth for FY19F. As such, our estimates are raised by 7-14%. TP is raised to S$1.12, based on 15x PE multiple on FY18Fearnings.

Company Guide

APAC Realty



Revenue 81.0 91.2 106 30.3 15.8

Cost of Goods Sold (69.6) (83.2) (91.9) 32.1 10.4

Gross Profit 11.4 7.94 13.7 19.7 72.2

Other Oper. (Exp)/Inc (5.2) 1.83 (7.1) 37.8 (486.7)

Operating Profit 6.28 9.78 6.59 4.8 (32.6)


Associates & JV Inc 0.0 0.0 0.0 - -

Net Interest (Exp)/Inc (0.3) (0.1) 0.0 83.7 52.9


Pre-tax Profit 6.04 9.69 6.55 8.4 (32.4)

Tax (0.9) (1.2) (1.0) 15.7 (13.8)


Net Profit 5.14 8.49 5.51 7.2 (35.1)

Net profit bef Except. 5.14 8.49 5.51 7.2 (35.1)

EBITDA 6.70 10.1 6.95 3.6 (31.5)

Margins (%)





Company Guide

APAC Realty


Critical Factors Transaction value expected to continue growing. We are expecting transaction value to hit S$40.0bn for FY2017F (+40% y-o-y), S$42.2bn for FY2018F (+5% y-o-y) and S$44.3bn forFY2019F (+5% y-o-y) for the total private residential market, including both primary and secondary markets. We see multiple catalysts for residential prices to head higher in the next two years. Prices in the residential market could rise by 6-10% by 2019. The rise in prices in the HDB resale segment is lower, at 10% and 4% for FY17F and FY18F respectively. Overall, for the whole residential market, including HDB segment, we expect transaction value to grow 20% in FY17F, 10% in FY18F, and 5% in FY19F.

Market share is critical. Market share in terms of volume expanded from 16% in 2011 to 41% in 2016, led by network expansion over the past six years. Market share based on value increased from 15% in 2011 to 43% in 2016. ERA has established itself as one of the market leaders in project marketing, alongside Huttons whose strength is in mass market projects, and Savills and Knight Frank which are both strong in luxury developments. In terms of project launches, ERA secured 12 projects out of 19 (47%) in 2015; 14 out of 23 (66%) in 2016 and eight projects or 91% for projects launched in the first nine months this year. To date, ERA has already secured more than ten projects to be launched in 2018 with close to 10,000 residential units available for sale. This is double the 4,800 units (from eight projects) launched by ERA in the first nine months of 2017.

Gross margins expected to improve. Gross margins largely reflect APAC’s revenue, net of agents’ commissions. While gross margins have decreased from 16.0% since FY14, APAC currently offers various tools such as mobile applications for its agents and customers to facilitate the execution of real estate transactions. It intends to continue to develop its technological capabilities and this should drive efficiencies and lead to better margins. We are expecting gross margins to remain in the range of 14.1-14.3% over FY17F-19F.

Number of agents. APAC has one of the largest numbers of registered real estate agents. APAC's agents are its primari sales force and are not employees of the group, through which units are transacted. APAC has grown its network of agents over the years, and has managed to gain market share. Market share in terms of volume expanded from 16% in 2011 to 41% in 2016, led by network expansion over the past six years. Market share based on value increased from 15% in 2011 to 43% in 2016.

Transaction value growth (%): Private residential - primary (%)

Transaction value growth (%): Private residential - secondary

Transaction value growth (%): HDB resale

Net profit trend

No. of agents


8.0

103

40.0

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15% 16% 16% 19% 20% 21% 21%

85% 84% 84% 81% 80% 79% 79%

0

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30000

35000

2012

2013

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2017

Mar

-17

ERA Others

30,577 31,040 31,783 30,83029,262 28,397 29,466

10.6

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S$m

Net Profit (LHS) Private Residential Price Index (RHS)

Company Guide

APAC Realty

Balance Sheet: Cash-generative business expected to turn net cash. Baring any major capital expenditure, APAC is a cash generative business with good cash conversion cycle as APAC only pays out to its agents after receiving payments from its debtors. We expect APAC to turn net cash in FY17F.

Intangibles, include goodwill and franchise rights, account for the bulk of total assets. Goodwill amounted to S$75.6m as at December 2016, derived from ERA Realty Network Pte Ltd, ERA Singapore Pte Ltd, Realty International Associates Pte Ltd and Coldwell Banker Real Estate (S) Pte Ltd. Franchise rights are held for the exclusive right of use of the brand names “ERA” and “Coldwell Banker”. The group acquired the exclusive ERA Regional master franchise rights for certain countries in the Asia-Pacific region for an initial term of 30 years from 19 November 1999, expiring in 2029, with the option to renew for another 30 years. The group also holds the ERA sub-franchise rights in Singapore for an initial term of 30 years from 28 June 1990, which expires in 2020, also with the option to renew for another 30 years.

Share Price Drivers: We believe that APAC is largely viewed by the market as a developer-agnostic proxy to Singapore’s private and HDB residential transaction volumes and values. As such, any newsflow in relation to the Singapore residential market should drive APAC’s share price.

Key Risks: APAC is highly dependent on Singapore’s residential property market and macroeconomic conditions. Any change in government policies might affect the property market, which will in turn affect APAC. For example, residential transaction volumes and values suffered a sharp decline in 2014 due to the cumulative effect of various measures introduced by the government. In the longer term, the real estate brokerage industry may also be disrupted by technology with increasing adoption of websites that facilitate private sales.

Company Background APAC Realty Limited (“APAC”) is one of the leading players in the real estate brokerage industry in Asia. APAC Realty operates three main business segments – the real estate brokerage services; franchise agreements; and training, valuation and other ancillary services.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Avg: 12.3x

+1sd: 12.4x

+2sd: 12.6x

-1sd: 12.1x

-2sd: 11.9x

11.5

11.7

11.9

12.1

12.3

12.5

12.7

12.9

Oct-17 Nov-17

(x)

Avg: 2.63x

+1sd: 2.68x

+2sd: 2.72x

-1sd: 2.59x

-2sd: 2.55x

2.5

2.6

2.6

2.7

2.7

2.8

2.8

Oct-17 Nov-17

(x)

Company Guide

APAC Realty

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Transaction value growth Private residential - primary 7.5% 103.2% 40.0% 5.0% 5.0%

Private residential - secondary 28.1% 17.0% 40.0% 5.0% 4.9% HDB resale 27.1% 15.6% 15.0% 10.0% 5.0%

Segmental Breakdown

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (S$m)

Brokerage 224 279 368 392 411

Training, valuation and other ancillary services

7.67 8.21 11.0 11.0 12.1

Franchise arrangements 0.61 0.41 1.00 1.10 1.21 Total 233 288 380 404 425Gross profit (S$m)

Brokerage 23.9 32.2 44.1 47.0 49.4


7.00 7.50 9.90 9.90 10.9

Franchise arrangements 0.33 0.16 0.40 0.44 0.48 Total 31.3 39.9 54.4 57.4 60.8Gross profit Margins (%)

Brokerage 10.7 11.5 12.0 12.0 12.0


91.3 91.4 90.0 90.0 90.0

Franchise arrangements 53.5 39.6 40.0 40.0 40.0 Total 13.4 13.9 14.3 14.2 14.3


FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 233 288 380 404 425 Cost of Goods Sold (201) (248) (325) (347) (364) Gross Profit 31.3 39.9 54.4 57.4 60.8Other Opng (Exp)/Inc (19.8) (20.7) (25.1) (25.0) (25.2) Operating Profit 11.5 19.2 29.3 32.4 35.6Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (1.2) (1.1) (0.4) (0.5) (0.5) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 10.3 18.1 28.9 31.9 35.1Tax (1.8) (2.2) (4.6) (5.4) (6.0) 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 8.49 15.9 24.3 26.5 29.1Net Profit before Except. 8.49 15.9 24.3 26.5 29.1 EBITDA 13.0 20.8 30.3 33.4 36.5 Growth

Revenue Gth (%) 6.6 23.7 31.9 6.5 5.1EBITDA Gth (%) (23.7) 59.6 45.3 10.3 9.4Opg Profit Gth (%) (27.4) 67.3 52.7 10.6 9.7 Net Profit Gth (Pre-ex) (%) (30.7) 87.2 52.9 9.1 9.8 Margins & Ratio

Gross Margins (%) 13.4 13.9 14.3 14.2 14.3Opg Profit Margin (%) 4.9 6.7 7.7 8.0 8.4Net Profit Margin (%) 3.6 5.5 6.4 6.6 6.8ROAE (%) 11.9 22.4 23.2 19.4 19.3ROA (%) 5.6 9.8 12.5 11.6 11.8ROCE (%) 6.9 14.3 19.5 17.3 17.4Div Payout Ratio (%) 0.0 0.0 12.5 50.0 50.0 Net Interest Cover (x) 9.8 17.1 73.3 64.8 71.1


Growth driven by higher growth assumptions for sales transactions

Company Guide

APAC Realty


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 81.0 103 67.2 91.2 106 Cost of Goods Sold (69.6) 0.0 (57.0) (83.2) (91.9) Gross Profit 11.4 103 10.2 7.94 13.7 Other Oper. (Exp)/Inc (5.2) (103) (5.3) 1.83 (7.1) Operating Profit 6.28 0.0 4.89 9.78 6.59 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (0.3) 0.0 (0.1) (0.1) 0.0 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 6.04 0.0 4.75 9.69 6.55 Tax (0.9) 0.0 (0.7) (1.2) (1.0) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 5.14 0.0 4.03 8.49 5.51 Net profit bef Except. 5.14 0.0 4.03 8.49 5.51 EBITDA 6.70 0.0 5.25 10.1 6.95

Growth Revenue Gth (%) 25.6 27.4 (34.9) 35.7 15.8 EBITDA Gth (%) 27.3 nm nm 92.9 (31.5) Opg Profit Gth (%) 29.2 (100.0) nm 99.8 (32.6) Net Profit Gth (Pre-ex) (%) 32.4 (100.0) nm 110.5 (35.1) Margins Gross Margins (%) 14.1 100.0 15.1 8.7 13.0 Opg Profit Margins (%) 7.8 0.0 7.3 10.7 6.2 Net Profit Margins (%) 6.3 0.0 6.0 9.3 5.2

Balance Sheet (S$m) FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 2.14 1.44 2.44 3.44 4.44 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 103 102 101 99.6 98.5 Cash & ST Invts 14.2 17.8 60.9 75.6 91.9 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 33.6 47.8 53.7 57.2 60.1 Other Current Assets 2.04 1.63 1.63 1.63 1.63 Total Assets 155 170 219 237 257

ST Debt 6.00 6.00 6.00 6.00 6.00 Creditor 39.0 55.6 62.1 66.2 69.5 Other Current Liab 10.5 13.2 13.3 14.1 14.7 LT Debt 31.0 12.0 3.00 3.00 3.00 Other LT Liabilities 5.14 4.67 4.67 4.67 5.56 Shareholder’s Equity 63.0 78.9 130 143 158 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 155 170 219 237 257

Non-Cash Wkg. Capital (13.9) (19.4) (20.1) (21.5) (22.4) Net Cash/(Debt) (22.8) (0.3) 51.9 66.6 82.9 Debtors Turn (avg days) 46.6 51.6 48.8 50.1 50.4 Creditors Turn (avg days) 67.6 70.1 66.3 67.7 68.2 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 1.5 1.8 1.9 1.8 1.7 Current Ratio (x) 0.9 0.9 1.4 1.6 1.7 Quick Ratio (x) 0.9 0.9 1.4 1.5 1.7 Net Debt/Equity (X) 0.4 0.0 CASH CASH CASH Net Debt/Equity ex MI (X) 0.4 0.0 CASH CASH CASH Capex to Debt (%) 4.9 0.8 11.1 11.1 11.1


Balance sheet remains strong with a net cash position

Company Guide

APAC Realty


FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 10.3 18.1 28.9 31.9 35.1 Dep. & Amort. 1.56 1.62 0.93 0.93 0.93 Tax Paid (2.6) (1.6) (4.2) (4.6) (5.4) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (3.8) 3.35 0.54 0.65 0.38 Other Operating CF 1.58 1.22 0.0 0.0 0.0 Net Operating CF 7.12 22.7 26.2 28.9 30.9 Capital Exp.(net) (1.8) (0.1) (1.0) (1.0) (1.0) 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 (0.3) 0.0 0.0 0.0 0.0 Net Investing CF (2.1) (0.1) (1.0) (1.0) (1.0) Div Paid 0.0 0.0 (3.0) (13.3) (14.5) Chg in Gross Debt 16.0 (19.0) (9.0) 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (25.0) 0.0 30.0 0.0 0.0 Net Financing CF (9.0) (19.0) 18.0 (13.3) (14.5) Currency Adjustments 0.0 0.0 0.0 0.0 1.00 Chg in Cash (4.0) 3.53 43.2 14.6 16.4 Opg CFPS (S cts) 3.06 5.44 7.23 7.95 8.60 Free CFPS (S cts) 1.50 6.34 7.10 7.85 8.43



Source: DBS Bank

Analyst: Derek TAN

Lee Keng LING


Minimal capex needs

ed: TH / sa: YM, PY


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

What’s New • 3Q17 earnings in line, Restaurants and Food Atrium

offset Bakery’s drag on operating profit

• Interim DPS of 1 Sct declared

• Sale of AXA Tower a potential catalyst

• Maintain BUY and S$2.01 TP

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2016A 2017F 2018F 2019F Revenue 615 603 630 658 EBITDA 80.0 82.3 84.7 89.0 Pre-tax Profit 29.7 44.8 39.1 42.0 Net Profit 11.4 24.4 21.8 23.5 Net Pft (Pre Ex.) 8.63 16.4 21.8 23.5 Net Pft Gth (Pre-ex) (%) (29.2) 89.7 33.3 7.4 EPS (S cts) 4.07 8.67 7.76 8.34 EPS Pre Ex. (S cts) 3.07 5.82 7.76 8.34 EPS Gth Pre Ex (%) (29) 90 33 7 Diluted EPS (S cts) 4.05 8.63 7.73 8.30 Net DPS (S cts) 3.85 5.00 3.00 3.00 BV Per Share (S cts) 46.9 50.6 55.4 60.7 PE (X) 39.5 18.5 20.7 19.3 PE Pre Ex. (X) 52.3 27.6 20.7 19.3 P/Cash Flow (X) 5.1 5.7 6.2 5.8 EV/EBITDA (X) 6.4 6.1 5.7 5.2 Net Div Yield (%) 2.4 3.1 1.9 1.9 P/Book Value (X) 3.4 3.2 2.9 2.6 Net Debt/Equity (X) 0.3 0.1 CASH CASH ROAE (%) 8.8 17.8 14.7 14.4 Earnings Rev (%): (4) (1) (1) Consensus EPS (S cts): 5.5 7.5 8.2 Other Broker Recs: B: 2 S: 0 H: 1


Dough is holding shape

Maintain BUY, TP raised to S$2.01. We remain positive on BreadTalk over continued consolidation of underperforming outlets that will yield better margins going forward and sale of stakes in properties such as CHIJMES and AXA Tower that will unlock shareholder value if they materialise. Based on 3Q17 results, growth drivers remain intact and turnaround in Bakery division led by store growth and better profitability in FY18F will drive earnings growth next year. BreadTalk’s valuation, based on its core business (ex-property investments), is compelling at 17x FY18F PE.

Where we differ. We believe consensus has yet to factor in the value of BreadTalk’s investment properties into its share price. BreadTalk’s core business is undervalued at 17x FY18F PE after stripping out the value of investment properties from the current share price. Applying a 22x PE valuation to the retail business and adding back the value of its investment properties, our derived a target price is S$2.01, which is above consensus.

Potential catalyst. We see potential for special dividends if Perennial sells AXA Tower. BreadTalk could pay c.4.5 Scts in special dividends upon the sale of AXA Tower based on our estimates.

Valuation: Our TP of S$2.01 is derived from a sum-of-parts (SOTP) valuation. On a per share basis, we value its retail business at 22x FY18F PE at S$1.71, investment properties at S$0.43 based on market value, net debt at -S$0.13 per share.

Key Risks to Our View: Operational risks include food safety and licences as well as negative publicity. In extreme cases, food operating licences can be revoked for lapse in food safety. Negative publicity may also result in weaker demand and poorer marketability when selling its franchises as the public and franchisees shy away from their association with BreadTalk.

At A Glance Issued Capital (m shrs) 281 Mkt. Cap (S$m/US$m) 452 / 332 Major Shareholders (%) Meng Tong Quek 34.0 Lih Leng Lee 18.6 Primacy Investment Ltd 14.0

Free Float (%) 3m Avg. Daily Val (US$m) 0.24 ICB Industry : Consumer Services / Food & Drug Retailers


7 Nov 2017


Breadtalk Group Ltd Version 4 | Bloomberg: BREAD SP | Reuters: BRET.SI Refer to important disclosures at the end of this report

Company Guide

Breadtalk Group Ltd

WHAT’S NEW

3Q17 results

3Q17 within estimates. Headline earnings of S$4m (+22% y-o-y) and revenue of S$154m (-2% y-o-y) were in line with our forecasts. Revenue declined 7.8% y-o-y due to lower sales across all divisions.

Lower revenue dragged by Bakery division. Bakery revenue declined 2% y-o-y to S$77.2m, affected by 1) the termination of underperforming franchisees in China and Shanghai; and 2) lower revenue from directly operated stores in Shanghaiand Beijing. Food Atrium revenue declined by 9.4% y-o-y toS$36.8m on lower number of outlets (decrease of threeoutlets). Restaurant sales (Din Tai Fung) improved 8.3% y-o-yto S$31.1m.

4orth, a separate segment carved out for F&B new concepts. BreadTalk reported separate segmentals for 4orth, a new F&B business concepts division. The division has the five operating outlets of Sō, a rebranded concept from RamenPlay, and 90%-owned Song Fa Bak Kut Teh in China and Thailand. EBITDA and EBIT for 9M17 were S$0.3m and -S$0.4m respectively. These numbers were carved out from the Restaurant segment which previously consolidated them. This leaves the Restaurant segment with just the Din Tai Fung operations.

Bakery division led to lower margins. Headline gross and operating margins declined to 55.2% (-1.1ppt) and 6.7% (-1.7ppt) on Bakery’s higher raw material costs and lower profitability from directly operated stores in Singapore and Shanghai, and rationalisation of underperforming franchisees. While group margins were lower, Food Atrium’s operating margin improved to 7.6% from an operating loss in 3Q16. Restaurant's operating margins remained at 21%.

Operating profit decline was within expectations. EBITDA was S$20.9m (-19.1% y-o-y) while EBIT was at S$10.4m (-21.2% y-o-y). Lower one-off items such as PPE write-offs anddisposals gain/loss helped PBT and PAT to reach S$9m(+8.4% y-o-y) and S$4m (+22.2% y-o-y) respectively. Aninterim dividend of 1 Sct was declared, in line withexpectations.

3Q17 tracking our estimates. We have anticipated lower operating profit led by lower revenue from the Bakery division undergoing store franchisee rationalisation. Therefore, this set of results is largely expected. While headline operating profit declined slightly due to ongoing restructuring of the Bakery Division, Restaurant Division and Food Atrium Division remained positive with revenue and operating profit growth respectively.

Asset sale remains a likely stock catalyst. We remain positive on the stock as 1) continued consolidation of underperforming outlets will contribute to better margins going forward; 2) sale of stake in properties such as CHIJMES and AXA Tower will unlock shareholder value if they materialise; 3) full-year headline earnings may even track slightly ahead due to comparatively lower one-off items.

Maintain BUY, S$2.01 TP. Our earnings remain largely unchanged and outlook continues to track our estimates. BreadTalk’s results are largely led by its Bakery division as seen in this 3Q17 numbers. Post restructuring of Bakery franchisees in China this year, we expect store opening and revenue growth to resume from FY18F onwards. No change to our recommendation since long-term growth drivers remain intact. Maintain BUY on the stock.

Company Guide

Breadtalk Group Ltd



Revenue 157 148 154 (2.0) 4.5

Cost of Goods Sold (68.8) (65.0) (69.2) 0.5 6.4

Gross Profit 88.5 82.6 85.1 (3.9) 3.1

Other Oper. (Exp)/Inc (79.6) (73.4) (74.7) (6.2) 1.8

Operating Profit 13.2 9.16 10.4 (21.2) 13.4

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm

Associates & JV Inc 0.56 (0.2) 0.0 nm (89.4)

Net Interest (Exp)/Inc (1.2) (0.8) (0.7) 40.5 17.8

Exceptional Gain/(Loss) (4.2) (1.3) (0.7) 84.7 (49.7)

Pre-tax Profit 8.32 6.81 9.02 8.4 32.4

Tax (3.0) (2.8) (2.9) (3.8) 1.5


Net Profit 3.26 2.11 3.98 22.2 88.3

Net profit bef Except. 7.50 3.41 4.63 (38.3) 35.8

EBITDA 25.9 19.4 20.9 (19.1) 7.7

Margins (%)





Company Guide

Breadtalk Group Ltd


Critical Factors Less aggressive store expansion to focus on driving higher operating efficiencies and margin improvement. The focus is to raise efficiency of its existing operations, lower operating costs, and expand margins. Store openings till year-end will therefore not be aggressive. We see margins improving at the group level, driven by the swing to profitability at the Food Atrium business, cost-saving initiatives at the Bakery, and improved sales mix from the Restaurant business. We expect store expansion to be more aggressive once cost efficiencies and margin improvements are realised from FY18F.

Driving margin improvement through cost efficiencies. Initiatives such as better demand planning, more efficient human resource planning, and tighter cost controls have helped to benefit operating margins. They have led to lower food wastage, and reduction in unnecessary payroll expenses. Management has also been spending less on capex, leading to some moderation in depreciation expenses going forward.

Non-performing legacy franchisees. We expect to see a stronger franchisee base with less drag from non-performing accounts post restructuring of franchisee accounts. As franchise outlets have higher net margins, and lower direct operational risk, there is potential for Bakery margins to increase as well given that franchise revenue is royalty income, recognised as a percentage of franchisee sales with minimal costs to BreadTalk. We expect margins to increase when a mix of franchise stores improves going forward.

Changes to management personnel, tenant-mix and tenant quality have enabled Food Atrium to turn profitable. Food Atrium division has made a marked turnaround in FY17F. While its Food Atriums in Singapore were profitable in FY16, Food Atrium in tier 2 cities in China were a drag. Changes were made to the China portfolio in FY16 by closing non-performing outlets especially in tier 3 cities. It also replaced China Food Atrium’s management team with new personnel which made changes to tenant quality and tenant mix, which led to improvements in performance and occupancy at its China Food Atriums. Food Atrium openings this year will include Shenzhen, Guangdong and Shanghai.

New outlet in London this year. BreadTalk has already planned for a new outlet in London this year through a JV (BreadTalk is the major shareholder of the JV) with Fairy Rise Development (Din Tai Fung franchise owner), Din Tai Fung Taiwan, a UK partner and a Taiwanese individual. We also see scope for more outlets in Thailand as there are currently only three Din Tai Fung restaurants. As restaurant margins are attractive, better sales mix from Restaurant business would improve overall profitability.

Bakery outlets

Restaurant outlets

Food court outlets

Total

Annual sales per outlet S$m


Company Guide

Breadtalk Group Ltd

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Share price has been driven by various factors including earnings, properties and strategic investors

Source: DBS Bank

Earnings turnaround,

potential sale of AXA Tower

Re-rated on new BreadTalk IHQ building and Minor International

taking a stake

Gain in Perennial CHIJMES investment, operating

margin expansion

Sale and earnings growth declined, higher interest costs, lower net margins

Company Guide

Breadtalk Group Ltd

Balance Sheet:

Cash business; balance sheet currently in net debt. As with all food service companies, BreadTalk is a cash business. The business generated S$65-90m of operating cashflows annually and S$28-54m of positive free cashflows in the last three years. Net debt as of end-September 2017 was about S$36m, equivalent to approximately S$0.13 per share, or net debt ratio of 0.25x. BreadTalk was in net cash till FY12 when it built its BreadTalk IHQ. In FY13 when it opened its IHQ, net debt was S$89m. It further issued S$75m of bonds in FY16 due 1 April 2019 at 4.6% coupon for general corporate purposes, including refinancing of existing borrowings, and financing capital expenditure and general working capital.


Changes to property holdings are likely to drive share price. Valuations for BreadTalk re-rated to an all-time high when it moved into its IHQ in 2013. Similarly, when it sold 112 Katong last year and declared special dividends, its share price re-rated as well. In 4Q16, BreadTalk announced the sale of 111 Somerset, which also lifted BreadTalk’s share price in anticipation of special dividends.

Key Risks:

Food safety and licences. As a restaurant operator, it is important to maintain food safety. Lapses would lead to reputational risks and in extreme cases, food operation licences could be revoked.

Negative publicity affects consumer confidence and the marketability of its franchise. BreadTalk has had some negative publicity, especially in 2015 over food safety and food preparation procedures in Singapore and China. Incidents such as these can generate negative response from the public which can potentially affect sales as well as the marketability of its franchise overseas.

Company Background

BreadTalk Group is a Singapore-based food and beverage (F&B) group engaged in the operations and franchising of bakery/confectionery outlets, food courts and restaurants across the region. BreadTalk’s portfolio currently has six brands – BreadTalk, ToastBox, Food Republic, Ramen Play, San Pou Teiand Din Tai Fung. It operates over 900 outlets across 17countries.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Company Guide

Breadtalk Group Ltd

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Bakery outlets 862 862 856 859 864 Restaurant outlets 30.0 32.0 34.0 36.0 38.0 Food court outlets 65.0 57.0 61.0 61.0 61.0 Total 957 951 951 956 963 Annual sales per outlet 0.65 0.65 0.63 0.66 0.68

Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (S$m) Bakery operations 308 306 296 303 311 Restaurant sales 143 150 154 166 179 Food Atrium income 173 159 153 161 169 Others 0.0 0.0 0.0 0.0 0.0

Total 624 615 603 630 658 Operating profit (S$m) Bakery operations 5.15 12.6 9.57 9.39 9.32 Restaurant sales 25.8 23.2 26.5 25.7 27.7 Food Atrium income (2.9) (7.5) 8.57 6.92 7.01 Others 4.51 4.18 (4.8) (0.3) 0.0

Total 32.6 32.5 39.9 41.7 44.0 Operating profit margin (%) Bakery operations 1.7 4.1 3.2 3.1 3.0 Restaurant sales 18.0 15.4 17.3 15.5 15.5 Food Atrium income (1.7) (4.7) 5.6 4.3 4.2 Others N/A N/A N/A N/A N/A Others N/A N/A N/A N/A N/A Total 5.2 5.3 6.6 6.6 6.7


FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 624 615 603 630 658 Cost of Goods Sold (294) (278) (268) (277) (290) Gross Profit 330 337 334 353 369 Other Opng (Exp)/Inc (298) (305) (295) (311) (325) Operating Profit 32.6 32.5 39.9 41.7 44.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (1.3) (0.8) 0.13 0.13 0.14 Net Interest (Exp)/Inc (1.3) (4.8) (3.2) (2.8) (2.2) Exceptional Gain/(Loss) (4.6) 2.80 8.01 0.0 0.0 Pre-tax Profit 25.4 29.7 44.8 39.1 42.0 Tax (10.8) (12.1) (11.4) (9.1) (9.7) Minority Interest (7.0) (6.2) (9.0) (8.2) (8.8) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 7.60 11.4 24.4 21.8 23.5 Net Profit before Except. 12.2 8.63 16.4 21.8 23.5 EBITDA 80.9 80.0 82.3 84.7 89.0 Growth Revenue Gth (%) 5.9 (1.5) (2.0) 4.5 4.5 EBITDA Gth (%) 0.6 (1.1) 2.9 2.9 5.1 Opg Profit Gth (%) 30.8 (0.2) 22.6 4.6 5.5 Net Profit Gth (Pre-ex) (%) (45.0) (29.2) 89.7 33.3 7.4 Margins & Ratio Gross Margins (%) 52.9 54.9 55.5 56.0 56.0 Opg Profit Margin (%) 5.2 5.3 6.6 6.6 6.7 Net Profit Margin (%) 1.2 1.9 4.0 3.5 3.6 ROAE (%) 6.0 8.8 17.8 14.7 14.4 ROA (%) 1.4 2.1 4.6 4.0 4.1 ROCE (%) 5.2 5.4 8.6 9.0 8.9 Div Payout Ratio (%) 55.6 94.7 57.7 38.7 36.0 Net Interest Cover (x) 24.7 6.8 12.5 15.1 20.3


Negative on 1) Higher expenses for corporate services, treasury functions; and 2) EBIT losses at new segment 4orth.

Company Guide

Breadtalk Group Ltd


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 157 153 148 148 154 Cost of Goods Sold (68.8) (67.8) (66.7) (65.0) (69.2) Gross Profit 88.5 85.5 80.9 82.6 85.1 Other Oper. (Exp)/Inc (79.6) (75.8) (75.3) (73.4) (74.7) Operating Profit 13.2 9.71 5.63 9.16 10.4 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.56 (1.0) 0.38 (0.2) 0.0 Net Interest (Exp)/Inc (1.2) (0.9) (1.0) (0.8) (0.7) Exceptional Gain/(Loss) (4.2) 2.40 9.95 (1.3) (0.7) Pre-tax Profit 8.32 10.1 15.0 6.81 9.02 Tax (3.0) (4.7) (2.6) (2.8) (2.9) Minority Interest (2.1) (1.4) (1.7) (1.9) (2.2) Net Profit 3.26 4.02 10.7 2.11 3.98 Net profit bef Except. 7.50 1.63 0.74 3.41 4.63 EBITDA 25.9 20.4 16.8 19.4 20.9

Growth Revenue Gth (%) 5.1 (2.6) (3.7) 0.0 4.5 EBITDA Gth (%) 18.0 (21.2) (17.6) 15.8 7.7 Opg Profit Gth (%) 28.4 (26.3) (42.0) 62.8 13.4 Net Profit Gth (Pre-ex) (%) 54.8 (78.3) (54.6) 361.2 35.8 Margins Gross Margins (%) 56.3 55.8 54.8 55.9 55.2 Opg Profit Margins (%) 8.4 6.3 3.8 6.2 6.7 Net Profit Margins (%) 2.1 2.6 7.2 1.4 2.6


Net Fixed Assets 206 181 179 177 172 Invts in Associates & JVs 33.9 35.3 35.4 35.5 35.7 Other LT Assets 126 105 105 104 103 Cash & ST Invts 102 138 140 165 195 Inventory 9.88 9.81 9.70 10.1 10.5 Debtors 60.0 59.2 58.4 61.1 63.8 Other Current Assets 7.28 6.46 6.46 6.46 6.46 Total Assets 545 534 534 559 587

ST Debt 82.0 31.5 45.2 45.2 45.2 Creditor 94.1 86.8 89.2 92.4 96.6 Other Current Liab 86.1 99.8 99.8 99.8 99.8 LT Debt 120 150 114 114 114 Other LT Liabilities 16.8 14.5 14.5 14.5 14.5 Shareholder’s Equity 129 132 142 156 171 Minority Interests 17.2 19.9 28.9 37.1 45.9 Total Cap. & Liab. 545 534 534 559 587

Non-Cash Wkg. Capital (103) (111) (114) (115) (116) Net Cash/(Debt) (99.6) (43.5) (18.7) 5.89 35.4 Debtors Turn (avg days) 33.5 35.4 35.6 34.6 34.6 Creditors Turn (avg days) 143.3 144.1 142.2 141.5 141.0 Inventory Turn (avg days) 15.3 15.7 15.8 15.4 15.3 Asset Turnover (x) 1.2 1.1 1.1 1.2 1.1 Current Ratio (x) 0.7 1.0 0.9 1.0 1.1 Quick Ratio (x) 0.6 0.9 0.8 1.0 1.1 Net Debt/Equity (X) 0.7 0.3 0.1 CASH CASH Net Debt/Equity ex MI (X) 0.8 0.3 0.1 CASH CASH Capex to Debt (%) 18.6 20.2 25.1 25.1 25.1 Z-Score (X) 2.0 2.3 2.3 2.4 2.4


Company Guide

Breadtalk Group Ltd


FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 25.4 29.7 44.8 39.1 42.0 Dep. & Amort. 49.6 48.3 42.4 42.9 44.9 Tax Paid (6.9) (9.1) (11.4) (9.1) (9.7) Assoc. & JV Inc/(loss) 1.31 0.83 (0.1) (0.1) (0.1) Chg in Wkg.Cap. 0.42 10.2 3.25 0.29 0.94 Other Operating CF (3.4) 9.20 0.0 0.0 0.0 Net Operating CF 66.5 89.2 78.8 73.0 77.9 Capital Exp.(net) (37.5) (36.7) (40.0) (40.0) (40.0) Other Invts.(net) (20.4) 16.3 0.0 0.0 0.0 Invts in Assoc. & JV (22.9) (2.8) 0.0 0.0 0.0 Div from Assoc & JV 1.19 0.46 0.0 0.0 0.0 Other Investing CF 21.7 (2.3) 0.0 0.0 0.0 Net Investing CF (57.9) (25.0) (40.0) (40.0) (40.0) Div Paid (4.2) (8.0) (14.1) (8.4) (8.4) Chg in Gross Debt 3.60 (20.6) (22.1) 0.0 0.0 Capital Issues (0.7) 0.0 0.0 0.0 0.0 Other Financing CF (8.7) (9.6) 0.0 0.0 0.0 Net Financing CF (10.0) (38.2) (36.2) (8.4) (8.4) Currency Adjustments 0.82 (0.4) 0.0 0.0 0.0 Chg in Cash (0.6) 25.7 2.69 24.6 29.5 Opg CFPS (S cts) 23.5 28.1 26.9 25.9 27.4 Free CFPS (S cts) 10.3 18.7 13.8 11.7 13.5



Source: DBS Bank

Analyst: Alfie YEO

Andy SIM CFA

ed: TH / sa:SM, PY

BUYLast Traded Price ( 27 Oct 2017): S$1.63 (STI : 3,386.44)

Price Target 12-mth: S$1.75 (7% upside and 6% yield)

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

What’s New 3Q17 DPU of 2.29 Scts (-4% y-o-y) impacted by

negative carry from recent rights issue

Singapore hotel contribution was flat y-o-y despite

RevPAR falling 1.2% as CDREIT benefitted from

increased F&B revenues

Announced AEIs in Singapore and Maldives to enhance

CDREIT’s competitive position

Price Relative

Forecasts and Valuation FY Dec (S$m) 2016A 2017F 2018F 2019F

Gross Revenue 181 198 217 229 Net Property Inc 138 153 168 177 Total Return 49.3 95.3 114 121 Distribution Inc 110 121 134 141 EPU (S cts) 7.15 8.67 9.47 9.93 EPU Gth (%) (13) 21 9 5 DPU (S cts) 9.67 9.07 10.0 10.4 DPU Gth (%) (1) (6) 10 4 NAV per shr (S cts) 155 150 151 151 PE (X) 22.8 18.8 17.2 16.4 Distribution Yield (%) 5.9 5.6 6.1 6.4 P/NAV (x) 1.0 1.1 1.1 1.1 Aggregate Leverage (%) 36.6 33.0 32.8 32.5 ROAE (%) 4.5 5.7 6.3 6.6

Distn. Inc Chng (%): 0 0 0 Consensus DPU (S cts): 9.20 9.70 10.1 Other Broker Recs: B: 6 S: 2 H: 7


The ace in your portfolio

Attractive growth profile. We maintain our BUY call on CDL

Hospitality Trusts (CDREIT) with a TP of S$1.75. With supply

expected to ease over the next three years, we project a

recovery in the Singapore hospitality market with revenue per

available room (RevPAR) potentially growing by 3% p.a. or

higher. This combined with CDREIT’s recent acquisitions should

result in DPU CAGR of 7% between 2017 and 2019 based on

CDREIT’s 90% payout ratio which compares favourably against

flattish or modest 1-2% growth for many other REITs.

Where we differ – Should trade at a higher premium to book.

Consensus has a HOLD recommendation with a target price at

CDREIT’s current share price which implies CDREIT’s Singapore

portfolio is valued at c.S$600,000 per key, below recent market

transactions of at least S$650,000, and other listed Singapore

hospitality REITs that are valued between S$700,000 and S$1m.

With a potential upturn in the Singapore market over the next

three years, this is too conservative in our view. Thus, we believe

CDREIT will re-rate closer to our TP which implies price per key

of S$650,000 for its Singapore portfolio.

Acquisition the ace in the pack. Post the recent rights issue and

announced acquisitions, CDREIT’s gearing is expected to

stabilise around the 33-34% level. With the additional debt

headroom, the expected accretion to any debt-funded

acquisition would act as the next boost to CDREIT’s share price.

Valuation:

We maintain our DCF-based TP of S$1.75. With 7% capital

upside and c.6% forward yield we reiterate our BUY call.


Weaker-than-expected demand supply outlook in Singapore.

The key risk to our view is a weaker-than-expected demand-

supply outlook for the Singapore hospitality market.


Mkt. Cap (S$m/US$m) 1,953 / 1,430


Hospitality Holdings Pte Ltd 31.7

M & C Reit Management Ltd 5.0

Aberdeen 4.9

Free Float (%) 58.4


ICB Industry : Real Estate / Real Estate Investment Trust


30 Oct 2017


CDL Hospitality Trusts Version 10 | Bloomberg: CDREIT SP | Reuters: CDLT.SI Refer to important disclosures at the end of this report

Company Guide

CDL Hospitality Trusts

WHAT’S NEW

Down but not out

3Q17 DPU down as expected due to the impact of the recent rights issue

CDREIT’s 3Q17 DPU was down 4% y-o-y to 2.29 Sctsand represented c.25% of FY17F DPU. The fall in DPUwas largely expected given the impact from the recentrights issue.

Nevertheless, underlying 3Q17 NPI was strong, up15.9% largely due to the increased contribution fromNew Zealand acquisition of The Lowry Hotel andPullman Hotel Munich as well as a relatively stableperformance from Singapore.

Singapore RevPAR down but NPI contribution flat

3Q17 NPI from the Singapore hotels was relatively flat,up 0.2% y-o-y. This was despite RevPAR falling 1.4%y-o-y to S$166 as the pricing competition remains onthe back of an increase in supply. Over the quarter,CDREIT focused on maximising its ADR which rose0.8% y-o-y to S$187 at the expense of occupancywhich fell 2ppts to 88.7%. In addition, CDREITbenefitted from an improvement in F&B earnings givena flattish NPI profile.

Going into 4Q17, CDREIT guided that it has had a softstart with RevPAR for the first 25 days of October2017, down 1.1% y-o-y.

Nevertheless, should the modest decline in RevPARcontinue into 4Q17, there is potential upside to ournumbers for the Singapore operations as 9M17RevPAR is only down 1.2% versus our projections for a3-4% fall for the whole of FY17.

Continued strong performance from New Zealand as well as boost from the UK and Australia

The New Zealand portfolio maintained its strongperformance with 3Q17 jumping 56.1% y-o-y, on theback of a 32% y-o-y increase in RevPAR (in NZDterms), appreciation of the NZD versus SGD andimpact from a new lease structure signed last year.The buoyant New Zealand market has benefitted fromstrong visitor arrivals (9M17 visitor arrivals rose 7.4%y-o-y to 2.6m visitors) and constrained supply.

Meanwhile, NPI from UK jumped 42.7% y-o-y mainlyattributed to the acquisition of The Lowry Hotel.Excluding this acquisition, we understand NPI in SGDfor the Hilton Cambridge City Centre was weaker dueto the depreciation of the GBP. Nevertheless, RevPARfor Hilton Cambridge City Centre was stable y-o-ypartially due to recent terror attacks and temporaryclosure of Manchester Arena until mid-September2017.

Contribution from Australia was also stronger over thequarter mainly due to a stronger AUD. NPI rose 4.3%y-o-y. Underlying performance in AUD was subduedwith CDREIT receiving a fixed rental with minimalvariable income owing to the increase in new hotelsupply in Brisbane and Perth.

Japan and Maldives remain soft

As expected, the Maldives resorts remain weak due topricing pressure as Chinese arrivals, a key sourcemarket, continue to be soft and there has been anincrease in new supply. RevPAR was down 24.6% y-o-y, resulting in NPI dropping 17.7% y-o-y.

Likewise, CDREIT’s Japanese properties faced increasedcompetition from new hotel supply, with 3Q17RevPAR registering a 2.5% y-o-y decline and NPIfalling 14.9% y-o-y. However, CDREIT guided that thedownward pressure on RevPAR should remain nearterm as competition is expected given an increase innew room supply.

Fall in gearing

Post the rights issue, gearing fell to 33.3% from

38.7% at end-2Q17.

The weighted average cost of debt also declined to

1.8% from 2.3% as CDREIT took on a EUR-

denominated bridge facility to fund its German

acquisition. CREIT’s borrowing costs is expected to

increase back above the 2% level once it refinances its

bridge facility.

Likewise, the proportion of fixed rate debt fell to

38.2% from 61% in the prior quarter due to the

impact of the bridge facility. Similar to the borrowing

costs, the percentage of fixed rate debt should

rebound to the 60-70% level once CDREIT secures a

longer-term debt facility.

NAV per unit dipped to S$1.47 from S$1.55 as at end-

December 2016 as a consequence of FX movements

and additional units on issue following the recent

rights issue.

Planned AEI’s to maintain CDREIT’s competitive position

CDREIT announced plans to refurbish the Orchard

wing of its Orchard Hotel property. Commencing in

late December, around 260 rooms will be refurbished

over a 3.5-month period.

Likewise, CDREIT also plans to enhance the positioning

of its Maldives properties ahead of heightened

competition. The Dhevanafushi property will undergo

enhancements in 2018 ahead of a rebranding into a

Raffles Hotels and Resorts property. This will likely

casuse some near term pressure on the property’s

earnings during the renovatoin period. In addition, 28

land villas at Angsana Velavaru will be renovated

during the low season in 2018.

The estimated costs for these renovations are yet to be

disclosed. We will revise our numbers once the full

costings are revealed.

Company Guide


Maintain BUY

With 3Q17 results in line with expectations, wemaintain our BUY call with a TP of S$1.75.

We continue to recommend investors to positionthemselves in CDREIT ahead of a potential recovery inthe Singapore hospitality market next year as supplypressures in Singapore ease.



Gross revenue 45.4 47.8 54.8 20.7 14.6

Property expenses (10.6) (12.9) (14.5) 36.8 11.9

Net Property Income 34.8 34.9 40.4 15.9 15.6

Other Operating expenses (6.5) (14.6) (7.4) 14.1 (49.5)


Net Interest (Exp)/Inc (5.8) (6.1) (5.7) 2.0 6.8


Net Income 22.6 14.2 27.3 20.9 92.2

Tax 0.0 (1.2) (1.6) nm 26.9


Net Income after Tax 22.6 13.0 25.8 14.2 98.3

Total Return 0.0 0.0 0.0 - -

Non-tax deductible Items 4.31 12.2 4.68 8.7 (61.6)

Net Inc available for Dist. 26.9 25.2 30.4 13.3 20.9

Ratio (%)

Net Prop Inc Margin 76.7 73.0 73.6

Dist. Payout Ratio 90.0 90.0 90.0


Company Guide



Critical Factors

Challenging near-term operating conditions in Singapore but

recovery on the horizon. CDREIT’s profitability is largely

dependent on earnings from its Singapore hotels. Near term,

we see headwinds to the group’s core operations due to the

growth in new hotel room supply in Singapore (6-7% of

existing supply). The more competitive landscape is likely to lead

to pressure on ADRs (average room rates) and occupancies,

which we estimate will result in a 3-4% decline in RevPAR in

2017. Nevertheless, as the Singapore government has not

released any land for hotel development in the past two years,

supply pressure should ease from 2018 onwards. Thus, with

only 1-2% growth in supply over the next three years, we

expect RevPAR to resume its upward trajectory.

Upside from New Zealand. CDREIT recently appointed

Millennium & Copthorne Hotels as the new operator at its

Auckland property with a more favourable lease structure.

Combined with strong performance of the Auckland hospitality

market on the back of limited supply and healthy inbound

tourists, CDREIT’s New Zealand operations should provide a

boost to earnings over the coming year.

Boost from recent acquisitions in UK and Europe. Over the past

18 months, CDREIT has acquired Hilton Cambridge Hotel and

The Lowry in the UK and Pullman Hotel in Munich, Germany.

This should provide the trust with additional growth legs ahead.

With CDREIT’s gearing expected to drop to 33-34%, we expect

further acquisitions to materialise to supplement CDREIT’s

earnings.

Japan remains a medium-term growth driver. Near term,

CDREIT’s operations face the challenge of a stronger JPY relative

to regional currencies which has tempered the growth in visitors

into Japan. Combined with an increase in supply, this has

resulted in some downside pressure on ADR. Nevertheless, in

the medium term and ahead of the Tokyo Olympics in 2020, we

expect the Japanese hospitality market to resume its growth

path as JPY stabilises. Thus, Japan will remain a key growth

driver for CDREIT going forward.

Softness from Maldives. The significant depreciation of the

Russian ruble has resulted in a decline in the number of high-

yielding Russian guests into the Maldives. Combined with a

recent slowdown in Chinese visitors and increased supply, we

expect softness in CDREIT’s Maldives operations on the back of

more aggressive price competition by other resorts over the next

couple of years.

Asset optimisation. In the medium term, we believe CDREIT can

further maximise the returns of its portfolio by undertaking AEIs

such as the recently completed refurbishments at Grand

Copthorne Waterfront Hotel and M Hotel in Singapore.

Net Property Income and Margins (%)

Net Property Income and Margins (%)

Distribution Paid / Net Operating CF

Interest Cover (x)


Company Guide


Balance Sheet:

Gearing within optimal range. CDREIT’s gearing is expected to

settle around 33-34% following the acquisition of the Lowry

Hotel and Pullman Munich as well as the recent rights issue.

Moderate exposure to rising interest rates. Approximately 38%

of CDREIT’s borrowings were on fixed interest rates as at 30

September 2017. However, this is expected to climb to 65-70%

once CDREIT converts the bridging loans into fixed rate debt.


Recovery in the Singapore hospitality market. We believe the

expected recovery in the Singapore hospitality market next year,

combined with the additional earnings from recent acquisitions,

should result in a healthy 7% DPU CAGR between 2017 and

2019. Delivery of this healthy DPU profile, we believe will re-rate

CDREIT going forward.

Unjustified discount to other hospitality REITs. Compared to

other hospitality S-REITs, CDREIT offers one of the cheapest

exposure to the eventual upturn in the Singapore market. The

implied price per key for other S-REITs stands at between

S$700,000 and S$1m versus c.S$600,000 for CDREIT. Given the

mid-tier to luxury category of CDREIT’s room inventory and its

successful track record, we believe this valuation discount is

unjustified.

Key Risks:

Interest rate risk. Any increase in interest rates will result in

higher interest payments, which could result in lower

distribution per unit (DPU) for unitholders.

Currency risk. As CDREIT earns rental income in various

currencies (AUD, GBP, JPY, NZD and USD), a depreciation of

any foreign currency against the SGD could negatively impact

distribution income, which is distributed in SGD.

Brexit. With the UK voting to exit the EU (Brexit), this may

negatively impact business activities in the UK and CDREIT’s

Hilton Cambridge property. In addition, Brexit may result in a

depreciation of the GBP versus SGD, which will negatively

impact distributions in SGD.

Company Background

CDL Hospitality Trusts (CDREIT) is a stapled group comprising

H-REIT and HBT. H-REIT is a real estate investment trust that

invests in a portfolio of income-producing hospitality-related

properties while HBT is a business trust.

Aggregate Leverage (%)

ROE (%)

Distribution Yield (%)

PB Band (x)


Avg: 6.8%

+1sd: 7.4%

+2sd: 8.1%

-1sd: 6.2%

-2sd: 5.5%

4.9

5.4

5.9

6.4

6.9

7.4

7.9

8.4

8.9

2013 2014 2015 2016

(%)

Avg: 0.93x

+1sd: 1.02x

+2sd: 1.12x

-1sd: 0.84x

-2sd: 0.75x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Oct-13 Oct-14 Oct-15 Oct-16

(x)

Company Guide


CDREIT share price versus RevPAR Remarks


CDREIT’s share price largely

anticipates an upturn or

downturn in the Singapore

hospitality market by 6-12

months.

With the market

anticipating a potential

recovery from 2018,

CDREIT’s share price has

started to rally since the

start of this year.

However, we believe this

rally is sustainable given the

rebound in RevPAR is likely

to last for 2-3 years given

the lack of supply over the

coming three years.

120

140

160

180

200

220

240

0.00

0.50

1.00

1.50

2.00

2.50

3.00

CDREIT share price (S$) - LHS

12 month rolling industry RevPar (S$) - RHS

Company Guide



FY Dec 2015A 2016A 2017F 2018F 2019F

Gross revenue 172 181 198 217 229

Property expenses (35.4) (43.3) (45.6) (49.6) (51.2)

Net Property Income 137 138 153 168 177

Other Operating expenses (32.9) (32.7) (24.1) (25.7) (26.4)




Net Income 81.8 72.0 99.8 120 126

Tax (0.9) (1.0) (4.4) (5.0) (5.1)

Minority Interest 0.0 0.0 (0.2) (0.4) (0.4)


Net Income After Tax 80.9 71.0 95.3 114 121

Total Return 50.7 49.3 95.3 114 121

Non-tax deductible Items 59.4 38.7 26.0 20.0 20.4

Net Inc available for Dist. 110 110 121 134 141

Growth & Ratio

Revenue Gth (%) 3.4 4.9 9.7 9.5 5.2

N Property Inc Gth (%) (2.5) 0.4 11.1 9.7 5.7

Net Inc Gth (%) (22.8) (12.3) 34.3 19.9 5.5

Dist. Payout Ratio (%) 90.0 90.0 90.0 90.0 90.0

Net Prop Inc Margins (%) 79.5 76.1 77.0 77.2 77.6

Net Income Margins (%) 46.9 39.2 48.0 52.6 52.8

Dist to revenue (%) 63.9 60.6 61.1 61.8 61.7

Managers & Trustee’s fees to sales %)

19.1 18.1 12.1 11.8 11.5

ROAE (%) 5.1 4.5 5.7 6.3 6.6

ROA (%) 3.2 2.8 3.6 4.0 4.2

ROCE (%) 4.2 4.1 4.7 4.9 5.2

Int. Cover (x) 4.7 3.2 4.5 6.3 6.1


Recovery in earnings on the back of an upturn in the Singapore hospitality market due to limited new room supply in 2018 as well as recent acquisitions such as The Lowry and Pullman Munich.

Company Guide



FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Gross revenue 45.4 48.3 46.4 47.8 54.8

Property expenses (10.6) (10.6) (10.5) (12.9) (14.5)

Net Property Income 34.8 37.7 35.9 34.9 40.4

Other Operating expenses (6.5) (14.5) (6.2) (14.6) (7.4)




Net Income 22.6 8.60 18.7 14.2 27.3

Tax 0.0 0.99 (1.1) (1.2) (1.6)


Net Income after Tax 22.6 9.59 17.6 13.0 25.8

Total Return 0.0 0.0 0.0 0.0 0.0

Non-tax deductible Items 4.31 42.6 9.20 12.2 4.68

Net Inc available for Dist. 26.9 30.6 26.8 25.2 30.4

Growth & Ratio

Revenue Gth (%) 7 6 (4) 3 15

N Property Inc Gth (%) 11 8 (5) (3) 16

Net Inc Gth (%) 26 (57) 84 (26) 98

Net Prop Inc Margin (%) 76.7 78.0 77.3 73.0 73.6

Dist. Payout Ratio (%) 90.0 90.0 90.0 90.0 90.0

Balance Sheet (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Investment Properties 2,177 2,175 2,432 2,437 2,444

Other LT Assets 278 251 251 251 251

Cash & ST Invts 72.0 82.2 112 127 141

Inventory 0.0 0.0 0.0 0.0 0.0

Debtors 19.1 25.7 23.8 26.1 27.5


Total Assets 2,547 2,535 2,819 2,843 2,865

ST Debt 219 0.0 0.0 0.0 0.0

Creditor 32.2 33.4 47.2 51.7 54.3


LT Debt 703 929 932 932 932


Unit holders’ funds 1,573 1,546 1,810 1,823 1,837


Total Funds & Liabilities 2,547 2,535 2,819 2,843 2,865

Non-Cash Wkg. Capital (12.1) (9.1) (29.0) (36.2) (42.6)

Net Cash/(Debt) (850) (847) (820) (804) (790)

Ratio

Current Ratio (x) 0.4 3.0 2.5 2.4 2.4

Quick Ratio (x) 0.4 3.0 2.5 2.4 2.4

Aggregate Leverage (%) 36.2 36.6 33.0 32.8 32.5

Z-Score (X) 1.3 1.4 1.5 1.6 1.6


Decline in gearing due to recent rights issue.

Company Guide



FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Income 81.8 72.0 99.8 120 126

Dep. & Amort. 0.0 0.0 0.0 0.0 0.0

Tax Paid (1.0) (0.8) 0.0 0.0 0.0

Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. 0.23 1.76 15.6 2.22 1.32

Other Operating CF 50.2 60.5 26.0 20.0 20.4

Net Operating CF 131 133 141 142 148

Net Invt in Properties (149) (14.2) (257) (5.4) (6.9)

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. & JVs 0.0 0.0 0.0 0.0 0.0

Other Investing CF (2.0) (3.9) 0.0 0.0 0.0

Net Investing CF (151) (18.1) (257) (5.4) (6.9)

Distribution Paid (103) (97.2) (109) (121) (127)

Chg in Gross Debt 138 15.0 2.70 0.0 0.0

New units issued 0.0 0.0 251 0.0 0.0


Net Financing CF 15.3 (105) 145 (121) (127)

Currency Adjustments 0.46 (0.6) 0.0 0.0 0.0

Chg in Cash (4.0) 9.63 29.3 15.5 14.0

Operating CFPS (S cts) 13.3 13.3 11.4 11.6 12.1

Free CFPS (S cts) (1.8) 12.0 (10.5) 11.3 11.6



Source: DBS Bank

Analyst: Mervin SONG CFA

Derek TAN

ed: JS / sa:YM, PY



Analyst Paul YONG CFA +65 6682 3712 [email protected]

What’s New On track to meet our FY17F expectations, having

posted 9M17 net earnings of US$71m

Solid medium term growth prospects, underpinned by

strong demand for air travel globally

Potential beneficiary of rising oil prices

Maintain BUY with TP of S$2.08

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2016A 2017F 2018F 2019F

Revenue 11,703 11,722 12,235 12,984 EBITDA 94.3 96.1 104 114 Pre-tax Profit 91.9 93.7 102 111 Net Profit 88.9 89.9 98.2 107 Net Pft (Pre Ex.) 88.9 89.9 98.2 107 Net Pft Gth (Pre-ex) (%) 45.1 1.1 9.2 8.9 EPS (S cts) 13.9 14.1 15.4 16.7 EPS Pre Ex. (S cts) 13.9 14.1 15.4 16.7 EPS Gth Pre Ex (%) 45 1 9 9 Diluted EPS (S cts) 13.9 14.1 15.4 16.7 Net DPS (S cts) 6.05 4.22 4.61 5.02 BV Per Share (S cts) 102 111 122 134 PE (X) 11.0 10.9 9.9 9.1 PE Pre Ex. (X) 11.0 10.9 9.9 9.1 P/Cash Flow (X) nm 238.0 52.1 56.1 EV/EBITDA (X) 8.4 7.9 6.8 5.8 Net Div Yield (%) 4.0 2.8 3.0 3.3 P/Book Value (X) 1.5 1.4 1.3 1.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 14.3 13.2 13.1 13.1

Earnings Rev (%): - - - Consensus EPS (S cts): 14.3 16.3 19.0 Other Broker Recs: B: 4 S: 0 H: 1


Bright prospects

Recommend BUY, TP of S$2.08, as CAO is an attractive proxy

for increasing air travel demand. We like China Aviation Oil

(CAO) given its monopolistic position as the sole importer of

bonded jet fuel into China, and for its 33% stake in the

exclusive jet fuel refueller (SPIA) in Shanghai Pudong

International Airport. It also has a growing international jet fuel

supply and trading business that will increasingly benefit from

CAO’s greater scale. It is a beneficiary of growing air travel

demand in both in China and globally as well.

Where we differ: We have lower than consensus forecast as

we do not expect mark-to-market gains in ‘17 and ‘18, which

is dependent on higher oil prices, to be as strong as in 2016.

Potential catalysts: CAO’s share price should re-rate as it

delivers steady earnings growth and/or if it can make value

accretive acquisitions using its strong balance sheet position.

Potential beneficiary of higher oil prices. CAO could potentially

benefit from rising oil prices due to 1) mark-to-market gains

for fuel inventories held at its jet refuelling businesses in

Shanghai Pudong Airport and Hong Kong Airport, and 2)

easier trading profits due to contango.

Valuation:

Maintain BUY with TP of S$2.08, based on 13x FY18F PE.

CAO’s inclusion in the MSCI Singapore small cap index earlier

this year should lead to a sustained elevated valuation multiple,

and at 11x FY17F PE, it is still trading at a substantial discount

to peers’ average of 18x FY17F PE. We value the company

based on 13x FY18F PE to derive a 12-month TP of S$2.08.


Weaker demand for air travel and execution risk. A sustained

slowdown in demand for air travel could impact jet fuel

demand and volumes. Further, CAO could also face execution

risk in its trading business and on prospective M&A.


Mkt. Cap (S$m/US$m) 1,323 / 982


China National Aviation Fuel Grp 51.0

BP Plc 20.1

Free Float (%) 28.9


ICB Industry : Oil & Gas / Oil & Gas Producers


24 Nov 2017


China Aviation Oil Version 6 | Bloomberg: CAO SP | Reuters: CNAO.SI Refer to important disclosures at the end of this report

Company Guide

China Aviation Oil

WHAT’S NEW

9M17 Results: On track to meet expectations

CAO reported 3Q17 results that were marginally below expectations, with net earnings declining 7.7% y-o-y to US$21.4m despite a 26% jump in volumes and 33% increase in revenue to US$5.2bn as difficult trading conditions led to lower trading gains for the quarter. As a result, gross profit fell 58% y-o-y to US$4.3m. This was largely offset by continued strong performance by its associates (+10.4% y-o-y to US$21.5m) and in particular the crown jewel of the company SPIA, which recorded 8.2% y-o-y growth in profit contribution to US$18.9m. Contribution from other associates improved 29% y-o-y to US$2.66m.

On track to meet full year forecasts. As at 9M17, CAO recorded a net profit of US$71.3m or 0.4% gain y-o-y, versus our full year net profit growth expectation of 1.1%. Hence, we are maintaining our forecasts, target price and BUY recommendation as CAO remains on track to meet our forecasts. Our target price of S$2.08 is based on 13x FY18F earnings.

We continue to like China Aviation Oil given its monopolistic position as the sole importer of bonded jet fuel into China, and

for its 33% stake in the exclusive jet fuel refueller (SPIA) in Shanghai Pudong International Airport. It also has a growing international jet fuel supply and trading business that will increasingly benefit from CAO’s greater scale. It is a beneficiary of growing air travel demand both in China and globally as well.

Quarterly / Interim Income Statement (US$m)


Revenue 3,940 3,673 5,223 32.6 42.2

Cost of Goods Sold (3,929) (3,662) (5,219) 32.8 42.5

Gross Profit 10.4 10.6 4.33 (58.3) (59.0)


Operating Profit 5.08 7.77 1.75 (65.6) (77.5)



Net Interest (Exp)/Inc (0.7) (0.4) (0.4) 39.1 (0.7)


Pre-tax Profit 23.9 25.7 22.8 (4.3) (11.0)

Tax (0.7) (1.1) (1.4) 115.2 33.4


Net Profit 23.2 24.6 21.4 (7.7) (12.9)

Net profit bef Except. 23.2 24.6 21.4 (7.7) (12.9)

EBITDA 24.6 26.1 23.3 (5.3) (10.8)

Margins (%)





Company Guide

China Aviation Oil


Critical Factors

Sole importer of jet fuel into the PRC with growing international

presence… Leveraging on the network of its parent, China

National Aviation Fuel Group Corporation (CNAF) – a state-

owned enterprise and the largest aviation transportation

logistics services provider in the PRC – China Aviation Oil

(Singapore) Corporation Ltd (CAO) has monopoly in the supply

of imported jet fuel (or bonded jet fuel) to 17 international

airports in China. With the backing of its parent, CAO has also

expanded its business to the marketing and supply of jet fuel to

airline companies at 43 international airports outside of the

PRC, spanning across Asia Pacific, North America, Europe and

the Middle East.

Owing to its domestic monopoly, CAO should benefit from the

long-term growth of China’s international air travel market.

Coupled with its ongoing international expansion, we expect

middle distillates & jet fuel volumes supplied and traded to grow

to 16.5m by FY18F, and 17.3m tonnes by FY19F from 15m

tonnes in 2016.

Optimising margins through trading activities. As CAO enjoys

cost-plus pricing for its China jet fuel import business, and after

hedging downside risk, CAO will seek to further optimise

margins when viable trading opportunities arise. While

opportunities to improve margins are available in both

backwardation and contango markets, CAO generally prefers

contango markets as it allows for superior opportunities for

margin optimisation from the storing and trading of fuels

(which also includes gas oil, fuel oil and avgas).

We project that CAO’s average gross profit per tonne (on a

combined and blended basis) will rise gradually as it benefits

from economies of scale.

Steady contributions from associates, including prized asset

SPIA. Arguably CAO’s best-performing asset, 33% owned

associate SPIA has always been a significant contributor to

CAO’s bottom line, accounting for over 90% of total associate

contribution. With two new runways added in the last 18

months, which has doubled the capacity of the airport, and

additional satellite concourse expected to be completed by

2019, capacity at Shanghai Pudong, China’s second largest

airport, is expected to be raised from 60m to 80m passengers

p.a., which should underpin SPIA’s long-term growth prospects.

Given large mark to market gains in 2016, SPIA will do well to

maintain its contribution in 2017F, before resuming growth in

2018F. SPIA’s contributions in 2017F are also impacted by a

weaker RMB.

Jet Fuel Volumes (m tonnes)

Other Oil Product Volumes (m tonnes)

Implied Average Jet Fuel Price (USD/bbl)

Gross Profit per Tonne (US$)

Contribution from Associates (US$ m)


Company Guide

China Aviation Oil

Balance Sheet:

Strong balance sheet with a net cash position of US$187m as at

end-2016. With net cash of US$187.3m as at end-2016, we

believe the group has sufficient firepower with room to gear up

further to finance its M&A opportunities and grow the scale and

reach of its business and profits.


Progress on the M&A front. While CAO is armed with dry

powder for potential acquisitions and investments, it has yet to

announce significant M&A plans – its last major investment was

in 2013, when the company acquired a 39% stake in refueller

CNAF Hong Kong Refuelling Limited.

Management has shared that they will be looking at both

“asset-light” investments, which will allow the company to gain

access to air spaces, customer contracts, strategic alliances and

further trading synergies, as well as “asset-backed” investments

(or infrastructure assets), which may include airport refuelling

stations, pipelines going into airports and storage facilities.

We believe that the deployment of cash to fund value-accretive

opportunities should lead to a further rerating of the stock.

Key Risks:

Weaker demand for air travel. Given CAO’s exposure to the air

passenger market, events that could significantly dampen

travellers’ sentiment, such as the outbreak of diseases and acts

of terror, pose direct threats to the tourism and air travel

industry which in turn, could weigh on global demand for jet

fuel.

Potential mark-to-market losses for associates. As SPIA and

CNAF-HKR hold inventories of fifteen days and seven days

respectively, these have to be marked to market. In a declining

oil price environment, these would result in paper losses for

these associates, which add volatility to CAO’s bottom line.

Trading and execution risks. CAO is exposed to a myriad of

risks that are inherent in the lifecycle of trades, which include

market risk, credit risk, and operational risk.

Company Background

China Aviation Oil (Singapore) Corporation Ltd (CAO SP) is

principally engaged in the supply and trading of bonded jet

fuel, with monopoly in China and a growing international

presence. Apart from jet fuel, the group also trades and/or

supplies other transportation fuel (such as fuel oil, gas oil and

aviation gas) and has varying equity stakes in oil-related assets.

These assets include airport refuelling facilities (SPIA and CNAF

HKR), pipelines (TSN-PEKCL) and storage facilities (Xinyuan and

OKYC).


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Company Guide

China Aviation Oil

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Jet Fuel Volumes (m tonnes) 11.9 15.0 15.7 16.5 17.3

Other Oil Product Volumes (m tonnes)

8.28 18.6 17.6 18.2 18.7 Implied Average Jet Fuel Price (USD/bbl)

74.4 56.6 64.7 64.7 58.4

Gross Profit per Tonne (US$) 1.76 1.31 1.39 1.48 1.55

Contribution from Associates (US$ m)

42.3 66.4 66.7 72.0 78.2

Segmental Breakdown

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (US$m)

Middle distillates 7,010 7,754 8,059 8,462 9,033

Other oil products 1,978 3,949 3,663 3,773 3,950

Total 8,987 11,703 11,722 12,235 12,984

Income Statement (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 8,987 11,703 11,722 12,235 12,984


Gross Profit 35.4 44.1 46.4 51.2 55.9

Other Opng (Exp)/Inc (13.1) (17.3) (18.2) (19.6) (21.4)






Pre-tax Profit 63.6 91.9 93.7 102 111

Tax (2.3) (3.0) (3.8) (4.1) (4.5)



Net Profit 61.3 88.9 89.9 98.2 107

Net Profit before Except. 61.3 88.9 89.9 98.2 107

EBITDA 66.2 94.3 96.1 104 114

Growth

Revenue Gth (%) (47.3) 30.2 0.2 4.4 6.1

EBITDA Gth (%) 19.1 42.5 1.9 8.6 8.7

Opg Profit Gth (%) 104.8 19.7 5.6 11.7 9.3

Net Profit Gth (Pre-ex) (%) 24.7 45.1 1.1 9.2 8.9

Margins & Ratio

Gross Margins (%) 0.4 0.4 0.4 0.4 0.4



ROAE (%) 10.7 14.3 13.2 13.1 13.1

ROA (%) 5.5 8.1 6.5 6.8 6.9

ROCE (%) 3.7 3.8 3.4 3.6 3.6

Div Payout Ratio (%) 29.8 43.5 30.0 30.0 30.0



Company Guide

China Aviation Oil

Quarterly Income Statement (US$m)

FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 3,940 3,276 3,311 3,673 5,223


Gross Profit 10.4 10.6 15.5 10.6 4.33







Pre-tax Profit 23.9 18.3 26.4 25.7 22.8

Tax (0.7) (0.4) (1.1) (1.1) (1.4)


Net Profit 23.2 17.9 25.3 24.6 21.4

Net profit bef Except. 23.2 17.9 25.3 24.6 21.4

EBITDA 24.6 18.5 27.0 26.1 23.3

Growth

Revenue Gth (%) 30.3 (16.9) 1.1 10.9 42.2

EBITDA Gth (%) (1.7) (24.6) 45.6 (3.4) (10.8)

Opg Profit Gth (%) (9.7) 2.6 132.0 (35.7) (77.5)

Net Profit Gth (Pre-ex) (%) (1.7) (22.8) 41.1 (2.8) (12.9)

Margins

Gross Margins (%) 0.3 0.3 0.5 0.3 0.1



Balance Sheet (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 6.21 5.65 5.36 5.07 4.78

Invts in Associates & JVs 266 281 291 301 313

Other LT Assets 9.43 9.18 8.68 8.48 8.28

Cash & ST Invts 171 287 321 372 423

Inventory 56.8 171 195 203 215

Debtors 337 591 586 612 649


Total Assets 846 1,344 1,406 1,501 1,613

ST Debt 0.0 100 100 100 100

Creditor 247 588 584 609 646


LT Debt 0.0 0.0 0.0 0.0 0.0


Shareholder’s Equity 593 650 713 781 856


Total Cap. & Liab. 846 1,344 1,406 1,501 1,613

Non-Cash Wkg. Capital 147 173 193 202 214

Net Cash/(Debt) 171 187 221 272 323




Asset Turnover (x) 8.1 10.7 8.5 8.4 8.3

Current Ratio (x) 2.3 1.5 1.6 1.7 1.7

Quick Ratio (x) 2.1 1.3 1.3 1.4 1.4



Capex to Debt (%) N/A 0.4 0.4 0.4 0.4

Z-Score (X) 14.4 10.6 12.8 12.2 12.2


Company Guide

China Aviation Oil

Cash Flow Statement (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 63.6 91.9 93.7 102 111

Dep. & Amort. 1.56 1.21 1.19 0.89 0.89

Tax Paid (2.2) (1.9) (0.6) (3.8) (4.1)

Assoc. & JV Inc/(loss) (42.3) (66.4) (66.7) (72.0) (78.2)

Chg in Wkg.Cap. 33.1 (25.8) (23.5) (8.7) (12.6)

Other Operating CF (1.7) (1.4) 0.0 0.0 0.0

Net Operating CF 52.1 (2.4) 4.11 18.8 17.4

Capital Exp.(net) (0.3) (0.4) (0.4) (0.4) (0.4)

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 37.2 38.1 57.0 61.6 66.5

Other Investing CF 0.19 1.47 0.0 0.0 0.0

Net Investing CF 37.2 39.2 56.6 61.2 66.1

Div Paid (12.8) (19.3) (27.0) (29.5) (32.1)

Chg in Gross Debt 0.0 100 0.0 0.0 0.0

Capital Issues 0.0 0.0 0.0 0.0 0.0


Net Financing CF (13.0) 80.4 (27.0) (29.5) (32.1)


Chg in Cash 76.2 117 33.8 50.5 51.4

Opg CFPS (S cts) 2.97 3.65 4.31 4.29 4.70

Free CFPS (S cts) 8.11 (0.4) 0.58 2.87 2.66



Source: DBS Bank

Analyst: Paul YONG CFA

ed: TH / sa:YM, PY, CS



Analyst Lee Keng LING +65 6682 3703 [email protected]

What’s New On stronger footing for growth with a broader IP

platform

Full schedule for Jurassic World till 2019; second set in

the pipeline. Avengers and Transformers doing well

Assume six exhibition sets for FY17F and nine in total

for FY18F and FY19F

Maintain BUY; TP S$1.45

Price Relative


Revenue 96.8 117 140 154 EBITDA 12.4 29.9 42.5 48.6 Pre-tax Profit 7.33 20.0 31.2 36.8 Net Profit 6.61 16.4 24.7 29.6 Net Pft (Pre Ex.) 6.61 16.4 24.7 29.6 Net Pft Gth (Pre-ex) (%) 658.8 148.6 50.6 19.6 EPS (S cts) 2.70 6.72 10.1 12.1 EPS Pre Ex. (S cts) 2.70 6.72 10.1 12.1 EPS Gth Pre Ex (%) 585 149 51 20 Diluted EPS (S cts) 2.70 6.72 10.1 12.1 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 28.3 35.0 45.2 57.3 PE (X) 38.9 15.6 10.4 8.7 PE Pre Ex. (X) 38.9 15.6 10.4 8.7 P/Cash Flow (X) 147.6 18.2 8.3 6.9 EV/EBITDA (X) 21.2 8.7 5.7 4.6 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 3.7 3.0 2.3 1.8 Net Debt/Equity (X) 0.1 0.0 CASH CASH ROAE (%) 11.1 21.2 25.2 23.6

Earnings Rev (%): - NEW Consensus EPS (S cts): 9.20 9.20 Other Broker Recs: B: 3 S: 0 H: 0


Building growth platform

On stronger footing with the acquisition of a third IP. With the

acquisition of Jurassic World, Cityneon is now on a stronger and

firmer growth path. Together with the two existing Intellectual

Property rights (IPs) – Avengers and Transformers - Cityneon has

added a third growth leg, to help propel the group to even

greater heights. We continue to expect Cityneon to deliver

explosive FY16-FY19F EPS CAGR growth of 165%. Trading at a

low PE-to-growth ratio of 0.2x FY18F earnings, Cityneon is

attractive to investors seeking unique ideas in the entertainment

industry.

Where we differ: Assuming more travelling sets. Including the

new Jurassic World, we now assume six exhibition sets for

FY17F (four for Avengers, one each for Transformers and

Jurassic World) and nine sets for FY18F and FY19F (five

Avengers, two each for Transformers and Jurassic World), vs

consensus of five sets for FY17F and seven sets for FY18F.

Potential catalyst: An expanding project pipeline, and focus on

higher-margin projects for the Traditional business are catalysts.

Valuation:

Maintain BUY; TP S$1.45. Our earnings forecast is based on six

exhibition sets for FY17F and nine in total for FY18F and

FY19F. We have assumed the construction of an additional

Jurassic World travelling set in FY18F. Our target price of

S$1.45 is based on PE valuation peg of 14.4x, which is at a

20% discount to peers’ average PE of 18x on FY18F earnings.


VHE’s limited track record. Victory Hill Exhibitions (VHE) was

formed in 2012 and its first exhibition was held in New York in

2014.

Earnings dependent on number of visitors, especially for the

permanent set in Las Vegas.


Mkt. Cap (S$m/US$m) 257 / 191


Lucrum1 69.0

Free Float (%) 31.1


ICB Industry : Consumer Services / Media


24 Nov 2017


Cityneon Holdings Version 8 | Bloomberg: CITN SP | Reuters: CNHL.SI Refer to important disclosures at the end of this report

77

177

277

377

477

577

677

0.1

0.3

0.5

0.7

0.9

1.1

1.3


Relative IndexS$

Cityneon Holdings (LHS) Relative STI (RHS)

Company Guide

Cityneon Holdings


Critical Factors

IPs secured. To date, Cityneon has secured three IP rights – with

Marvel Entertainment to use Avengers S.T.A.T.I.O.N. till 2024,

with HASBRO Studios for the Transformers franchise till 2023

and the latest Jurassic World – The Exhibition from Universal

Studios till 2027. With more IP rights, Cityneon would be able

to build various exhibition sets to cater to different demand.

Scalable business model. The first sets for Avengers and

Transformers had each cost around US$8-9m to build, but

subsequent sets had cost only about one-third of the original

cost per set. Though the cost for Jurassic World is higher,

subsequent sets are also expected to be lower. Thus, Cityneon is

able to achieve operational leverage with every subsequent set

built. We believe that more sets would be needed to fulfil the

overwhelming demand. We assume six sets for FY17F (four

Avengers, one each for Transformers and Jurassic World) and

nine sets for FY18F and FY19F (five Avengers, two each for

Transformers and Jurassic World).

The 6-9 exhibition sets would enable Cityneon to hold

exhibitions in various parts of the world. Only the Las Vegas set

in the US is permanent, while the rest are travelling sets, and

will be moved from one location to another after the exhibition

ends, which usually lasts for a few months. For every location or

project, Cityneon would be able to book revenues that include

licensing fees, minimum guarantees from the operator and also

merchandise sales. Assuming that an exhibition lasts for about

3-4 months, theoretically, a set can be used 2-3 times per year

based on a back-to-back schedule.

Project pipeline

We assume that Transformers in China will be launched

towards end of 2017. Besides China, VHE also intends to

venture into Europe, US and the rest of Asia for both the

Avengers and Transformer sets. For the newly acquired Jurassic

World set, the schedule is full till 2019. It is slated to tour

another two cities in the US after Chicago in 2018, before it

moves on to Europe and Asia. Cityneon is planning to build a

second travelling set in 2018.

Manageable execution risk with upfront licensing fees.

Execution risk is minimal for the travelling exhibits as the bulk of

the risk is borne by the operator. There is operating risk for only

the permanent set in Las Vegas.

Avengers S.T.A.T.I.O.N.

Transformers

Jurassic World – The Exhibition

Project pipeline and assumption Avengers S.T.A.T.I.O.N

Transformers Jurassic Park

A1* Las Vegas

TF1 China: Dec 2017 – Dec 2019

JW1 Chicago: 26 May 2017 – 7 Jan 2018

A2 China till end 2019

TF2 Asia: 3 years

JW1 2 cities in USA 2018

A3 Taiwan: Jun 17 – Sep 17 Country Europe 1 Europe 2

JW1 Europe / Asia

A4 Australia: Dec 17 – Mar 18

JW2 Europe

A5 Asia: 3 years

*permanent set started in June 2016


Company Guide

Cityneon Holdings


Source: DBS Bank; Bloomberg Finance L.P.

Company Guide

Cityneon Holdings

Balance Sheet:

Expansion should increase debt levels, but group still in net

cash/low debt position. We believe the group will take on

incremental debt of ~S$10-20m in the near term to fund the

building of new exhibits, but the group is expected to remain in

a net cash/low debt position, barring other unexpected capex

outlays.


Securing new exhibition locations. There are no limits on

locations for its IP rights. Cityneon can venture into any part of

the world with the three existing franchises. Though it makes

more business sense to target the larger cities first, VHE has vast

opportunities as there are >30 large cities globally, each with a

population of >10m.

Moving up the value chain for the traditional business. For the

Traditional business, the focus would be on the theme park

build projects, which generally command higher margins.

Cityneon has already established a successful track record with

the completion of the multi-million international theme park

project in Shanghai, which gives it a competitive advantage to

secure other theme park-related projects. It now aims to move

up the value chain, instead of just being a contractor.

Key Risks:

Limited track record for VHE. VHE was formed in 2012 and its

first exhibition was held in New York in 2014.

Earnings dependent on number of visitors. The permanent set

in Las Vegas is dependent on the number of visitors. For the

travelling sets, though Cityneon will usually receive upfront

payment fees from operators to use its exhibits, but a higher

number of visitors would enable the group to generate higher

royalties in excess of the minimum guarantees on royalties.

Furthermore, ancillary sales like merchandise, photos, food &

beverage are also dependent on the number of visitors.

Low free float of c.30%. Cityneon shares are tightly held, with

a free float of about 30%. Post the general offer, Lucrum1,

which is majority-owned by Chinese parties and led by

Executive Chairman & Group CEO Mr Ron Tan, holds 69%.

Ron Tan has a 15.5% stake in Lucrum1.

Company Background

With the acquisition of Victory Hill Exhibitions (VHE) in

September 2015, Cityneon has evolved to become a creator of

innovative and interactive exhibitions, focusing on creating

captivating cutting-edge content, and delivering engaging and

interactive exhibitions to audiences. To date, it has secured

three IP rights – with Marvel Entertainment to use Avengers

S.T.A.T.I.O.N. till 2024, HASBRO Studios for the Transformers

franchise till 2023 and Universal Studios for the Jurassic World

– The Exhibition, expiry in 2027.

Capital Expenditure

ROE (%)

Forward PE Band (x)

Victory Hill Exhibitions – two distinct models


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2015A 2016A 2017F 2018F 2019F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2015A 2016A 2017F 2018F 2019F

Avg: 15.4x

+ 1sd: 17x

+ 2sd: 20x

-1sd: 10.9x

-0.3

9.7

19.7

29.7

39.7

49.7


(x)

Las Vegas (permanent sets)

Ticket sales (incl. processing charges)

Merchandise sales / Photo ops

Sponsorship revenue

Naming rights

Sources of revenue:

Depreciation of the set

Sources of expenditure:

COGS (merchandise)

Rental expense

SG&A/ other opex

Royalties to Marvel/Hasbro (10% of net ticket sales)

Travelling sets (operated by partners)

20% cut of ticket sales

Upfront license fee from partner for usage of set

Merchandise (sales to partner + cut of final sales to customer)

Sources of revenue:

Depreciation of the set

Sources of expenditure:

COGS (merchandise)

SG&A/ other opex(minimal)

Royalties to Marvel/Hasbro (10% of ticket sales)

Ha

lf of th

e 2

0%

go

es to

Ma

rvel o

r Ha

sbro

Risk-reward profile:No execution risk; partner runs the operations

High margins (DBS estimate 25-35% net margin) but lower nominal take

Risk-reward profile:Cityneon takes on execution risk.

Lower margin (DBS estimate of 25% net margin) but higher nominal take

Minimum guarantees reduce risk

of non-performance

Risk-reward profile Cityneon takes on execution risk.

Lower margin (DBS estimate of mid-teen net margin) but higher nominal take.

Risk-reward profile No execution risk; partner runs the operations.

High margins (DBS estimates 30-40% net margin) but lower nominal take.

Company Guide

Cityneon Holdings

Segmental Breakdown

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (S$m)

Old Business 96.5 75.0 79.9 80.7 84.5

Victory Hill Exhibitions (VHE)

0.0 21.7 37.1 59.5 69.6

Total 96.5 96.8 117 140 154

Operating profit (S$m) Old Business 0.87 (0.5) 6.50 5.78 7.25


0.0 7.07 9.93 19.0 22.4

Total 0.87 6.61 16.4 24.7 29.6

Operating profit Margins (%) Old Business 0.9 (0.6) 8.1 7.2 8.6


N/A 32.6 26.8 31.9 32.1

Total 0.9 6.8 14.0 17.6 19.2


FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 96.5 96.8 117 140 154

Cost of Goods Sold (73.2) (63.4) (64.8) (69.3) (73.8)

Gross Profit 23.3 33.3 52.1 70.9 80.3

Other Opng (Exp)/Inc (22.2) (25.2) (31.1) (38.1) (42.0)



Associates & JV Inc 0.02 (0.1) 0.0 0.0 0.0



Pre-tax Profit 0.79 7.33 20.0 31.2 36.8

Tax 0.04 (0.7) (3.1) (6.1) (6.8)

Minority Interest 0.04 0.0 (0.4) (0.4) (0.4)


Net Profit 0.87 6.61 16.4 24.7 29.6

Net Profit before Except. 0.87 6.61 16.4 24.7 29.6

EBITDA 2.63 12.4 29.9 42.5 48.6

Growth

Revenue Gth (%) 23.7 0.3 20.9 19.9 9.9

EBITDA Gth (%) (34.4) 371.4 140.5 42.2 14.5

Opg Profit Gth (%) (58.8) 606.2 159.9 55.7 17.0

Net Profit Gth (Pre-ex) (%) (62.9) 658.8 148.6 50.6 19.6

Margins & Ratio

Gross Margins (%) 24.1 34.4 44.6 50.5 52.1



ROAE (%) 2.3 11.1 21.2 25.2 23.6

ROA (%) 1.2 6.4 11.8 14.3 14.6

ROCE (%) 1.0 7.4 13.1 15.7 16.0

Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0



Full contribution from Jurassic World

Higher contribution from VHE with the acquisition of the third IP

Company Guide

Cityneon Holdings


FY Dec 1H15 2H15 1H16 2H16 1H17

Sales 40.7 55.8 46.3 50.4 49.7

Cost of Goods Sold (31.1) (42.1) (28.3) (35.1) (26.5)

Gross Profit 9.6 13.7 18.0 15.3 23.3

Other Operating Expenses (10.3) (12.5) (12.2) (14.9) (14.5)

Non-Operating Income 0.0 0.0 0.0 0.0 0.0

Interest Income 0.02 0.02 0.00 0.00 0.00

Interest Expense (0.2) (0.2) (0.4) (0.2) (0.5) Share of Associates' or JV Income

0.0 0.0 (0.1) (0.0) (0.1)

Exceptional Gains/(Losses) 0.0 0.0 0.0 0.0 0.0

Pretax Profit (0.7) 1.5 5.7 1.6 8.6

Tax 0.0 0.0 (1.0) 0.3 (0.8)


Net Profit (0.7) 1.6 4.7 1.9 7.7

Growth

Revenue Gth (%) 34 17 14 (10) 7

EBIT Gth (%) n.m. (32) n.m. 8 47

Pretax Profit Gth (%) n.m. (36) n.m. 5 49

Net Profit Gth (Pre-ex) (%) n.m. (29) n.m. 21 64

Margins

Gross Margins (%) 23.5 24.6 38.8 30.4 46.8

Pretax Profit Margins (%) -1.8 2.7 12.4 3.2 17.2

Net Profit Margins (%) -1.8 1.3 10.1 3.8 15.5

Balance Sheet (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 16.0 43.4 46.1 52.8 58.9

Invts in Associates & JVs 0.38 0.26 0.14 0.14 0.14

Other LT Assets 10.7 10.4 9.04 7.58 6.12

Cash & ST Invts 24.3 22.6 46.7 62.5 84.7

Inventory 0.19 0.73 0.37 0.39 0.42

Debtors 26.0 28.7 41.6 49.9 54.9


Total Assets 87.6 120 158 187 219

ST Debt 11.7 28.2 28.2 28.2 28.2

Creditor 23.8 19.6 17.9 19.1 20.4


LT Debt 0.0 0.04 20.0 20.0 20.0


Shareholder’s Equity 49.6 69.3 85.7 110 140


Total Cap. & Liab. 87.6 120 158 187 219

Non-Cash Wkg. Capital 11.4 22.0 33.6 37.6 40.7

Net Cash/(Debt) 12.6 (5.7) (1.6) 14.2 36.5




Asset Turnover (x) 1.3 0.9 0.8 0.8 0.8

Current Ratio (x) 1.7 1.3 2.0 2.3 2.7

Quick Ratio (x) 1.4 1.0 1.7 2.1 2.5

Net Debt/Equity (X) CASH 0.1 0.0 CASH CASH

Net Debt/Equity ex MI (X) CASH 0.1 0.0 CASH CASH

Capex to Debt (%) 38.8 104.0 20.7 31.1 31.1

Z-Score (X) 5.7 4.7 4.2 4.3 4.3


Debt to fund acquisition and/or building of new exhibits

Company Guide

Cityneon Holdings


FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 0.79 7.33 20.0 31.2 36.8

Dep. & Amort. 1.47 4.44 8.84 9.73 10.3

Tax Paid (0.2) (0.4) (0.4) (3.1) (6.1)

Assoc. & JV Inc/(loss) 0.0 0.12 0.0 0.0 0.0

Chg in Wkg.Cap. 0.80 (9.7) (14.3) (7.1) (3.7)

Other Operating CF 0.07 0.0 0.0 0.0 0.0

Net Operating CF 2.89 1.74 14.1 30.8 37.2

Capital Exp.(net) (4.5) (29.4) (10.0) (15.0) (15.0)

Other Invts.(net) (1.1) 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (0.4) 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 (10.0) (0.9) 0.0 0.0 0.0

Net Investing CF (16.0) (30.3) (10.0) (15.0) (15.0)

Div Paid (0.9) 0.0 0.0 0.0 0.0

Chg in Gross Debt (3.1) 15.8 20.0 0.0 0.0

Capital Issues 15.7 12.5 0.0 0.0 0.0

Other Financing CF 0.87 (0.6) 0.0 0.0 0.0

Net Financing CF 12.6 27.7 20.0 0.0 0.0


Chg in Cash 0.39 (0.7) 24.1 15.8 22.2

Opg CFPS (S cts) 0.95 4.68 11.6 15.5 16.7

Free CFPS (S cts) (0.7) (11.3) 1.67 6.45 9.09



Source: DBS Bank

Analyst: Lee Keng LING

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 06 Jan 17 0.86 1.26 BUY

2: 16 Jan 17 0.91 1.26 BUY

3: 24 Feb 17 0.84 1.26 BUY

4: 14 Mar 17 0.80 1.26 BUY

5: 15 May 17 0.90 1.26 BUY

6: 30 May 17 0.94 1.23 BUY

7: 21 Sep 17 1.14 1.45 BUY


1

2

34

5

6

7

0.74

0.84

0.94

1.04

1.14

1.24


S$

Part finance acquisition of Jurassic World and to build new sets

Assume 6 sets by end-2017 and 9 sets in total for 2018 and 2019

ed: TH / sa: JC, YM, PY


Analyst Lee Keng LING +65 6682 3703 [email protected]

What’s New • Expect strong earnings momentum to continue

• Addressing succession planning, a key concern to themarket

• Raised FY17F and FY18F earnings by 16% and 18%respectively

• Maintain BUY; TP raised to S$2.30

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2016A 2017F 2018F 2019F Revenue 1,305 1,439 1,607 1,684 EBITDA 158 211 241 257 Pre-tax Profit 71.2 129 150 162 Net Profit 52.5 103 120 130 Net Pft (Pre Ex.) 52.5 103 120 130 Net Pft Gth (Pre-ex) (%) nm 96.3 16.6 8.0 EPS (S cts) 6.28 12.8 14.9 16.1 EPS Pre Ex. (S cts) 6.28 12.8 14.9 16.1 EPS Gth Pre Ex (%) (213) 104 17 8 Diluted EPS (S cts) 5.88 11.5 13.5 14.5 Net DPS (S cts) 0.80 21.0 2.99 3.22 BV Per Share (S cts) 69.2 63.6 75.5 88.4 PE (X) 30.7 15.1 12.9 12.0 PE Pre Ex. (X) 30.7 15.1 12.9 12.0 P/Cash Flow (X) 6.0 9.1 8.6 7.4 EV/EBITDA (X) 10.1 7.6 6.3 5.5 Net Div Yield (%) 0.4 10.9 1.5 1.7 P/Book Value (X) 2.8 3.0 2.6 2.2 Net Debt/Equity (X) CASH 0.1 CASH CASH ROAE (%) 9.3 18.9 21.5 19.7 Earnings Rev (%): 16 18 NEW Consensus EPS (S cts): - - - Other Broker Recs: B: 1 S: 0 H: 0


Strong earnings momentum

Earnings momentum to remain strong. After a few consecutive quarters of strong results, we expect earnings momentum to remain strong in 4Q17, on the back of the new products in the Wireless and IoT segments. Our FY17F and FY18F earnings were raised by 16% and 18% respectively, after factoring in further ramp-up in production. We have also added FY19F forecasts. We are now expecting EPS CAGR of 34% for FY16-FY19F. Hi-P is in a sweet spot now as more than half of its earnings are derived from the Wireless (smartphone) and Computer Peripherals (IoT segment, e.g. smart home) segments, which are expected to continue to do well in the next one to two years.

Optimising capacity utilisation. Capacity utilisation has improved from <40% in 1Q17 to about 70% now. With the continued ramp-up in production, we expect utilisation rate to remain high at about 70% (based on 24/7 basis) in 4Q17.

Where we differ: We are the only broker covering Hi-P. We believe the market under-appreciates the potential of the capacity ramp-up, the strong cash-generating capabilities and strong earnings momentum. Hi-P has also guided for a stronger 4Q17, as compared to 3Q17 and 4Q16.

Potential catalyst: Stronger-than-expected production ramp-up and demand would help to boost sales while better operational efficiency would help to improve margins.

Valuation: Reiterate BUY; TP raised to S$2.30. We apply a 10% premium to peers' PE of 14x on FY18F earnings, on the back of the strong earnings momentum, to arrive at our revised target price of S$2.30, up from S$1.67 previously.

Key Risks to Our View: Volatile industry with shorter product life cycle. This presents risks on margins and inventories. Forex exposure. Bulk of revenue in USD but overheads are mainly in RMB and the reporting currency is in SGD.

At A Glance Issued Capital (m shrs) 808 Mkt. Cap (S$m/US$m) 1,559 / 1,145 Major Shareholders (%) Hsiao Tung Yao 83.0

Free Float (%) 17.0 3m Avg. Daily Val (US$m) 2.5 ICB Industry : Industrials / Industrial Engineering


8 Nov 2017


Hi-P International Version 3 | Bloomberg: HIP SP | Reuters: HIPI.SI Refer to important disclosures at the end of this report

Company Guide

Hi-P International

WHAT’S NEW

Strong earnings momentum; addressing succession planning

Expecting stronger 4Q17. Hi-P is guiding for higher revenue and profit for 4Q17, as compared to 4Q16 and 3Q17, after delivering strong quarterly earnings since 2H16. Revenue and profit for 2H17 and FY17 are also expected to be stronger as compared to 1H17 and FY16 respectively.

Going forward, we expect Hi-P to deliver earnings CAGR of 34% for FY16 to FY19F, on the back of new products in the Wireless and IoT segments. The group will also continue its strategy of diversifying its customer base while margin improvement can be achieved by enhancing operational efficiency, effective cost controls and boosting productivity.

Addressing succession planning. Hi-P has addressed one of the key concerns in the market – succession planning, by appointing Mr Yong Inn Nam as Chief Operating Officer. Mr Yong has been working in Hi-P for a few years and has demonstrated a deep appreciation of Hi-P’s culture and practices. In addition to Mr Yong, the team that will form the next-generation leadership is also being identified to ensure long-term sustainability.

NDR key takeaways. We have also highlighted here key takeaways from the recent Non-Deal Roadshow (NDR) in USA and Hong Kong.

NDR in USA and Hong Kong well received We recently brought Hi-P to a NDR in the US – New York, Boston, California, Chicago and San Francisco, followed by Hong Kong.

We met about 30 clients. Generally, feedback was positive as this is the first time the company has done a roadshow of this scale post listing on SGX in 2003. Key questions revolved around the product mix, key customers, especially in the Wireless segment, competitive strength and growth strategy.

Concerns were mainly related to the short product life cycle especially in the Wireless segment, volatile earnings in the past, low liquidity and also the recent steep run-up in share price.

Key takeaways:- What are your key segments and the products for each segment? Hi-P’s business can be broadly classified into six key segments. The table below shows the breakdown for each segment.

Wireless Computing & Peripherals

Consumer Electronics

% of total revenue 20% 20% 38% Margins (vs group) Comparable

/ lower Comparable Comparable

Growth rate (%) Depending on number of projects

Flat to single digit

Single digit to low teens

% from top customer

Slightly < 20%

~15% 6% to 7%

Medical & Industrial

Internet of Things (IoT)

Accessories

% of total revenue 2% 20% Margins (vs group) Higher Higher Higher Growth rate (%) Double-digit Double-digit Double-digit % from top customer

n.a. n.a. n.a.

Source: DBS Bank, Company

What is your involvement with your key customer in the Wireless segment? Hi-P is still a relatively small player among all the suppliers for this key customer. Hi-P started working with this customer a few years back. Over the years, the number of projects awarded by this customer has been growing. Hi-P is now involved in more and more projects. For the Smartphone segment, revenue from this customer accounts for <20% of the group’s total revenue. Including other products from the Computing & Peripherals and the Accessories segments, total revenue from this customer accounts for about 40% of the group’s total revenue.

Company Guide

Hi-P International

What are your key growth areas? 1) More projects from existing key customer in the

wireless segment. Hi-P has been servicing thiscustomer in the past few years. Over the years, thenumber of projects awarded by this customer hasbeen increasing and Hi-P expects this trend tocontinue.

2) More projects from existing key customer in the IOTsegment. Hi-P has been servicing this customer for afew years already. Going forward, Hi-P is expected tosecure more projects from this customer.

3) New customer in the IOT segment. Hi-P has secureda new customer in the IOT segment and has beenramping up production since 2Q17. Hi-P expectsincreasing orders from this customer.

4) M&A in the automotive segment. Hi-P has identifiedthe Automotive segment as one of the key growthareas. Thus, it is looking for acquisition target in thissegment.

5) Medical segment. The medical segment is alsoanother area that Hi-P intends to explore.

What is your competitive strength? 1) Expert in both plastics and metals. Hi-P is one of the

few companies of this size (staff strength ~13,000 to15,000) that is capable of handling both plastic andmetal. Being well versed in both areas enables thegroup to cut down on outsourcing requirement andto improve efficiency and productivity.

2) Niche player, able to service smaller customers well.Though Hi-P is much smaller in size as compared toits global peers, it is still able to provide some of theservices offered by the bigger players. Some smallercustomers would prefer to go to Hi-P instead as theirproject size may be too small for the bigger players.

3) Able to provide total solution. Hi-P provides totalsolution for some of its customers in the ConsumerElectronics segment, including design, manufacturingand assembly. This would help to forge long-termrelationship as it creates stickiness with its customersas it is not cost effective to switch suppliers.

4) Servicing the top customer in the Wireless segment.Hi-P has been servicing this top customer in theWireless segment in the last few years, and is alsoable to secure more projects. With its good trackrecord, other customers are willing to pay a premiumfor Hi-P’s services.

5) Good corporate governance. Being incorporated andlisted in Singapore, which has a relatively strictcorporate governance, customers are more willing totrust Hi-P with their technology know-how andintellectual property rights.

Why does Hi-P have so many plants, especially in China? Hi-P has six plants in China:-

1) Tianjin plant, which was started off with a keycustomer in the Wireless segment, but this customerhas since scaled down production

2) Chengdu plant, which started off as a tooling house3) Nantong plant. This plant is catered for future

expansion, as the government may take back theland in Shanghai for other developments

4) Shanghai plant, which started off as a tooling house,and is also for its key customer in the Wirelesssegment

5) Suzhou plant, mainly for its key customers in theWireless and IoT segments

6) Xiamen plant, mainly for the Consumer Electronicssegment

Some of the company's key customers require dedicated plants. Moreover, they also do not want the plant that is manufacturing their products to be close to their competitors. Thus, Hi-P needs to have different plants in different locations to cater to them. Next year, Hi-P will build a new plant in Suzhou for its key customer in the IOT segment.

Singapore is the headquarters with one manufacturing plant, mainly for a key customer in the Computer Peripherals segment. It also has one plant in Thailand (Rayong), mainly to support the Singapore operations. The plant in Poland (Wroclaw) is mainly for the Consumer Electronics segment as a handful of its customers from this segment are in Europe. Among the 13 manufacturing plants, Hi-P only owns three plants – in Nantong, Suzhou and Singapore.

Other than manufacturing plants, Hi-P has three sales offices, one in Taipei and the other two in the US – Chicago and San Francisco. The US is one of the gateways to high-tech research and innovation. Thus, it is essential for Hi-P to have offices there in order to keep itself in the frontline of technology, and also to be closer to its customers in the US.

How Hi-P has evolved over the years Hi-P has evolved from a tooling house in the 90s into a component manufacturer in year 2000 and subsequently into a contract manufacturer ten years ago. Hi-P is now an original design manufacturer (ODM) and electronic manufacturing services (EMS) solution provider, servicing mainly the top-tier customers in each segment it services.

In recent years, Hi-P has reduced the number of turnkey projects in the Wireless segment to focus on manufacturing smaller parts. Though the contract value for turnkey projects is higher, parts offer better margins.

Company Guide

Hi-P International

Exploring new segment to seek growth Hi-P is exploring the possibility of entering the automotive segment via M&A, likely next year. In the past few years, Hi-P has been trying in vain to enter this segment as it requires certain certification in order to qualify as a supplier for the key customers in this segment. But Hi-P lacks a track record in this area. Thus, the fastest way is to look for M&A targets. Hi-P also reckons that automotive, especially the sensory segment, is a growth area and it needs to constantly look for new growth areas for the group.

Moving towards automation Hi-P is moving towards automation to improve operational efficiencies. In terms of staff strength, it was reduced from a peak of 20,000 a few years back to between 12,000 and 15,000 now, depending on the season. It has also set up a company, solely in charge of automation.

Areas of concern:-

Liquidity issue, free float too small Hi-P is aware that the free float in the market is small as Mr Yao now owns an 83% stake, after acquiring the 22% stake from the second largest shareholder, Molex in mid-June at S$0.98 per share, a 10% premium to its last closing price. Hi-P has been actively buying back shares in the past one year, and has accumulated about 80m treasury shares, which could be used to improve the liquidity of the shares in the market.

The small free float could make Hi-P a takeover target. With its entrenched relationship with key customers, which include some of the world’s biggest names in mobile phones, tablets, household & personal care appliances, Hi-P could be an attractive target for global companies looking to build a base in Asia.

Volatility in earnings, as seen in the past few years In the past, key customers from the Wireless segment like Motorola, Nokia and Blackberry account for >50% of the group’s total revenue. Thus, the diminishing market share for

these key players affected Hi-P’s performance. In 2015/2016, Hi-P was also badly affected by another key customer in the Wireless segment, Yota Device, a Russian company. Yota failed to take delivery of the mobile handset manufactured by Hi-P and this has led to a net loss of about S$100m for Hi-P. In the past ten years, its share price was mainly affected by the diminishing market share of its key customers in the Wireless segment.

Volatile share price in the past ten years


Hi-P has since learnt from its experience from the Wireless segment, and has been diversifying its customer base, especially in the Consumer Electronics segment. The Consumer Electronics segment now accounts for about 38% of total revenue, as compared to about 20% a few years ago.

Other than customer diversification, Hi-P has also strengthened its internal risk control. It has set up a total exposure limit framework, whereby all business units are involved in controlling the levels of exposure and risk to the group through 1) Customer & project business outlook; 2) Credit risk; and 3) Inventory & open purchase order management. This framework would enable the group to better manage cashflow and also to optimise capacity utilisation.

For some of its new customers, Hi-P now requires them to make an upfront payment before starting production. This would help to prevent the Yota Device saga from reoccurring.

Company Guide

Hi-P International


Critical Factors Ramp-up in production. Capacity utilisation has improved from <40% in 1Q17 to about 70% now. With the continued ramp-up in production, we expect utilisation rate to remain high at about 70% (based on 24/7 basis) in 4Q17. Hi-P is expected to expand production, in particular at its Suzhou plant, to prepare for new product launches from existing customers from the mobile and IoT segments. Construction of the Suzhou plant should begin in 1H18.

Macroeconomic trend and consumer sentiment. According to independent research firm International Data Corporation (IDC), the Smartphone and IoT segments are expected to continue to do well in the next one to two years. The worldwide smartphone market in 2017 is expected to grow 1.7% y-o-y; thereafter, shipments will register a compound annual growth rate (CAGR) of 3.3% in 2021. For the IoT segment, global IoT spending will experience a CAGR of about 15% in 2021.

The positive outlook for the various segments bodes well for Hi-P as a handful of its key customers are in these two segments. The more stable Consumer Electronics segment with a longer product life cycle (where Hi-P derives about 30-40% of group revenue), helps to neutralise the impact from the more volatile Smartphone and IoT segments.

Operational efficiency and cost-control measures to improve margins. To mitigate the impact of the uncertain business landscape, Hi-P strives to drive operational efficiency and strengthen its business model to improve margins. Despite the challenging environment, especially rising labour costs in the region in the past few years and margin pressure from customers, total operating expenses as a percentage of sales has been trending down, from about 12% in FY10 to 5.9% in 3Q17, while net margins improved to 9.3% in 3Q17, from 4% in FY16.

M&A activities. Hi-P could be a takeover target as the free float in the market is small. Executive Chairman & Chief Executive Officer, Mr Yao Hsiao Tung, now has an 83% stake in the company, after buying the second largest shareholder Molex’s 22% stake in June this year.

Furthermore, with its entrenched relationship with key customers, which include some of the world’s biggest names in mobile phones, tablets, household & personal care appliances, Hi-P could be an attractive target for global companies looking to build a base in Asia.

Net margin

Annual Revenue and Net Profit Trend

Quarterly Revenue and Net Profit Trend

Geographical breakdown – FY2016 revenue

Total operating expense as a percentage of revenue


Company Guide

Hi-P International



Company Guide

Hi-P International

Balance Sheet: Strong operating cashflow. Hi-P is able to generate strong positive operating cash flows, amounting to S$192.8m for 9-month 2017. Cash balance amounted to S$294m as at 30 September 2017, after providing for the special dividend of 19 Scts per share declared in 2Q17.

Share Price Drivers: Expect strong earnings momentum to continue. We expect the strong earnings momentum since 2H16 to continue, on the back of operational efficiency, new customers and new product launches. The latest set of 3Q17 results further reinforces our conviction. Earnings for FY17F is expected to surge 96% y-o-y to S$103m, and another 17% in FY18F to S$120m and 8% in FY19F to S$130m.

Management guidance: Hi-P is guiding for higher revenue and profit for 4Q17, as compared to 4Q16 and 3Q17. Revenue and profit for 2H17 and FY17 are also expected to be stronger as compared to 1H17 and FY16 respectively.

Expansion of customer base to other industries. Hi-P’s existing customers are mainly from the Wireless (smartphones), Consumer Electronics and Computer Peripherals (IoT) segments. We would not rule out the possibility of the group expanding to other industries like automotive and medical devices, in order to diversify and reduce customer concentration risk, and to smooth out the seasonality effect, especially for smartphones.

Key Risks: Volatile industry with shorter product life cycle. The Wireless (smartphones) segment is getting more competitive with shorter product life cycles, and presents risks on margins and inventories.

Forex exposure. About 90% of Hi-P’s total revenue is in USD, but overheads are mainly in RMB and the reporting currency is SGD.

Macroeconomic uncertainty. Any prolonged macroeconomic uncertainty would postpone consumer consumption, which in turn would drive down revenue further.

Company Background Hi-P provides one-stop solutions - from product development, component manufacturing to complete product assembly - to customers in various industries. Hi-P’s products can be classified into three broad categories: Wireless (smartphones), Computer Peripherals (Internet of Things [IoT]) and Consumer Electronics.


Capital Expenditure

ROE (%)

PB Band (x)


Company Guide

Hi-P International

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Net margin (3.4) 4.02 7.16 7.49 7.71 SGA as % of sales 8.34 7.65 6.90 6.50 6.20


FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 1,363 1,305 1,439 1,607 1,684 Cost of Goods Sold (1,292) (1,149) (1,219) (1,359) (1,424) Gross Profit 70.9 156 221 247 259 Other Opng (Exp)/Inc (102) (81.7) (89.3) (94.4) (94.4) Operating Profit (31.2) 74.1 131 153 165 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.55 0.29 0.0 0.0 0.0 Net Interest (Exp)/Inc (2.1) (3.2) (2.5) (2.5) (2.5) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (32.8) 71.2 129 150 162 Tax (12.6) (16.7) (25.8) (30.1) (32.5) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend (1.0) (2.0) 0.0 0.0 0.0 Net Profit (46.4) 52.5 103 120 130 Net Profit before Except. (46.4) 52.5 103 120 130 EBITDA 70.8 158 211 241 257 Growth Revenue Gth (%) 43.2 (4.2) 10.3 11.6 4.8 EBITDA Gth (%) (24.8) 123.2 33.2 14.6 6.7 Opg Profit Gth (%) (309.9) (337.6) 77.2 16.3 7.8 Net Profit Gth (Pre-ex) (%) nm nm 96.3 16.6 8.0 Margins & Ratio Gross Margins (%) 5.2 11.9 15.3 15.4 15.4 Opg Profit Margin (%) (2.3) 5.7 9.1 9.5 9.8 Net Profit Margin (%) (3.4) 4.0 7.2 7.5 7.7 ROAE (%) (8.0) 9.3 18.9 21.5 19.7 ROA (%) (3.6) 4.4 9.6 10.5 10.4 ROCE (%) (3.7) 7.3 14.9 16.4 16.1 Div Payout Ratio (%) N/A 12.7 164.1 20.0 20.0 Net Interest Cover (x) (14.7) 22.9 52.6 61.1 65.9


Expect margin improvement from better operational efficiency and improved product mix

Special DPS of 19 Scts declared and paid after a strong set of 2Q17 results, and another 2 Scts declared during 3Q17 results announcement

Company Guide

Hi-P International


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 387 357 244 280 411 Cost of Goods Sold (333) (293) (211) (245) (343) Gross Profit 54.6 63.8 33.4 34.2 68.1 Other Oper. (Exp)/Inc (19.2) (28.5) (21.5) (16.9) (21.2) Operating Profit 35.5 35.8 11.9 18.4 46.9 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.07 0.06 0.08 0.04 (0.2) Net Interest (Exp)/Inc (0.9) (1.0) (0.1) (0.7) (0.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 34.7 34.8 11.9 17.8 46.5 Tax (4.0) (6.3) (3.5) (2.7) (8.2) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 30.7 28.5 8.40 15.1 38.4 Net profit bef Except. 30.7 28.5 8.40 15.1 38.4 EBITDA 35.6 35.8 12.0 18.4 64.2

Growth Revenue Gth (%) 35.7 (7.9) (31.6) 14.5 47.2 EBITDA Gth (%) 227.1 0.6 (66.5) 53.4 248.2 Opg Profit Gth (%) 228.6 0.7 (66.6) 54.1 155.0 Net Profit Gth (Pre-ex) (%) 301.8 (7.1) (70.6) 79.7 154.1 Margins Gross Margins (%) 14.1 17.9 13.7 12.2 16.5 Opg Profit Margins (%) 9.2 10.0 4.9 6.6 11.4 Net Profit Margins (%) 7.9 8.0 3.4 5.4 9.3


Net Fixed Assets 451 360 340 332 309 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 44.9 36.4 36.4 36.4 36.4 Cash & ST Invts 126 111 156 181 295 Inventory 243 143 158 176 184 Debtors 480 362 399 445 467 Other Current Assets 9.63 18.3 18.3 18.3 18.3 Total Assets 1,354 1,030 1,108 1,189 1,310

ST Debt 315 95.5 200 150 150 Creditor 377 245 270 301 316 Other Current Liab 96.2 101 115 119 122 LT Debt 0.91 0.08 0.08 0.08 0.08 Other LT Liabilities 6.75 9.46 9.46 9.46 9.46 Shareholder’s Equity 557 578 512 608 712 Minority Interests 1.04 0.99 0.99 0.99 0.99 Total Cap. & Liab. 1,354 1,030 1,108 1,189 1,310

Non-Cash Wkg. Capital 259 177 190 219 232 Net Cash/(Debt) (190) 15.3 (44.4) 31.2 145 Debtors Turn (avg days) 114.3 117.7 96.5 95.9 98.9 Creditors Turn (avg days) 109.8 106.6 82.4 82.0 84.6 Inventory Turn (avg days) 71.4 66.1 48.1 47.9 49.4 Asset Turnover (x) 1.0 1.1 1.3 1.4 1.3 Current Ratio (x) 1.1 1.4 1.2 1.4 1.6 Quick Ratio (x) 0.8 1.1 0.9 1.1 1.3 Net Debt/Equity (X) 0.3 CASH 0.1 CASH CASH Net Debt/Equity ex MI (X) 0.3 CASH 0.1 CASH CASH Capex to Debt (%) 45.4 52.9 30.0 53.3 46.6 Z-Score (X) 2.3 3.9 3.7 4.6 4.6


Strong recovery from 3Q16, mainly due to manufacturing efficiency, new customers and new product launches

Company Guide

Hi-P International


FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit (32.8) 71.2 129 150 162 Dep. & Amort. 101 83.6 80.2 90.4 94.6 Tax Paid (12.4) (12.9) (11.9) (25.8) (30.1) Assoc. & JV Inc/(loss) (0.5) (0.3) 0.0 0.0 0.0 Chg in Wkg.Cap. (179) 93.0 (26.8) (33.3) (15.4) Other Operating CF 101 33.2 0.0 0.0 0.0 Net Operating CF (21.7) 268 170 182 211 Capital Exp.(net) (143) (50.6) (60.0) (80.0) (70.0) 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 0.15 0.0 0.0 0.0 Other Investing CF 5.97 14.6 0.0 0.0 0.0 Net Investing CF (137) (35.8) (60.0) (80.0) (70.0) Div Paid (10.6) (5.7) (169) (24.1) (26.0) Chg in Gross Debt 83.6 (220) 104 (50.0) 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (0.2) (18.2) (1.1) (2.0) (2.0) Net Financing CF 72.8 (243) (65.7) (76.1) (28.0) Currency Adjustments 4.42 (3.8) 0.0 0.0 0.0 Chg in Cash (82.0) (15.2) 44.7 25.6 114 Opg CFPS (S cts) 18.8 20.9 24.5 26.7 28.2 Free CFPS (S cts) (19.8) 26.0 13.7 12.6 17.6



Source: DBS Bank

Analyst: Lee Keng LING

Assume higher capex in FY18 for new production plant in Suzhou

Strong operating cashflow

Market Focus

2018 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

Completed Date: 27 Nov 2017 08:45:09 (SGT) Dissemination Date: 27 Nov 2017 11:49:29 (SGT)

Sources for all charts and tables are DBS Bank unless otherwise specified.

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This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated

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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”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other

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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

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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

Market Focus

2018 Outlook

(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.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

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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

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primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the

issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real

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COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBSV HK or their subsidiaries and/or other affiliates have

proprietary positions in OCBC, Venture Corporation, Sembcorp Marine, Genting Singapore, City Developments, Thai Beverage Public

Company, Singtel, UOB, CDL Hospitality Trusts, UOL Group, Parkway Life Real Estate Investment Trust, Yangzijiang Shipbuilding, Cosco

Shipping, Ascendas REIT, Keppel REIT, Mapletree Logistics Trust, Mapletree Industrial Trust, Far East Hospitality Trust, Frasers Centrepoint Ltd,

Keppel DC REIT, Sembcorp Industries, Singapore Airlines Limited, Hutchison Port Holdings Trust, ComfortDelgro, Ezra Holdings, Ezion

Holdings, Ascott Residence Trust, CapitaLand Mall Trust, Soilbuild Business Space Reit, Starhill Global REIT, Suntec REIT, SATS, Midas

Holdings, Wilmar International, Indofood Agri Sheng Siong Group, M1, StarHub, RHT Health Trust, ST Engineering, CapitaLand, CapitaLand

Commercial Trust, Frasers Commercial Trust, CapitaLand Retail China Trust, SPH REIT, Mapletree Commercial Trust, Mapletree Greater China

Commercial Trust, Cache Logistics Trust, Frasers Logistics & Industrial Trust, Ascendas Hospitality Trust, OUE Hospitality Trust, Manulife US

Real Estate Inv, DBS Bank Ltd., recommended in this report as of 31 Oct 2017.

2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research

Report.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of

which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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2018 Outlook

3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued

share capital in CDL Hospitality Trusts, Mapletree Logistics Trust, ComfortDelgro, Ascott Residence Trust, Soilbuild Business Space Reit, Starhill

Global REIT, RHT Health Trust, Frasers Commercial Trust, CapitaLand Retail China Trust, SPH REIT, Mapletree Greater China Commercial Trust,

Cache Logistics Trust, Frasers Logistics & Industrial Trust, Ascendas Hospitality Trust, Manulife US Real Estate Inv, recommended in this report

as of 31 Oct 2017.

4. DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, DBSV HK, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of

common equity securities of CDL Hospitality Trusts, Ascott Residence Trust, Soilbuild Business Space Reit, Starhill Global REIT, Frasers

Commercial Trust, Mapletree Greater China Commercial Trust, Cache Logistics Trust, Frasers Logistics & Industrial Trust, Ascendas Hospitality

Trust, Manulife US Real Estate Inv, as of 31 Oct 2017.

5. DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, DBSVHK, their subsidiaries and/or other affiliates beneficially own a total of 5% of any class of

common equity securities of Manulife US Real Estate Inv, as of 31 Oct 2017.

Compensation for investment banking services:

6. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past

12 months for investment banking services from Cityneon Holdings, APAC Realty Limited, CDL Hospitality Trusts, Keppel REIT, Mapletree

Logistics Trust, Keppel DC REIT, mm2 Asia, Sembcorp Industries, Singapore Airlines Limited, Ascott Residence Trust, CapitaLand Mall Trust,

Soilbuild Business Space Reit, Suntec REIT, Chip Eng Seng Corporation, Midas Holdings, Olam International, Wilmar International, StarHub,

RHT Health Trust, CapitaLand, CapitaLand Commercial Trust, Frasers Commercial Trust, OUE Commercial REIT, Frasers Centrepoint Trust,

Mapletree Commercial Trust, Cache Logistics Trust, Frasers Logistics & Industrial Trust, Manulife US Real Estate Inv, DBS Bank Ltd., as of 31

Oct 2017.

7. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or

intend to seek compensation for investment banking services from Mapletree Industrial Trust, ESR REIT, DBS Bank Ltd., as of 31 Oct 2017.

8. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of

securities for APAC Realty Limited, CDL Hospitality Trusts, Keppel REIT, Mapletree Logistics Trust, Mapletree Industrial Trust, Keppel DC REIT,

mm2 Asia, Sembcorp Industries, Singapore Airlines Limited, Ascott Residence Trust, CapitaLand Mall Trust, ESR REIT, Suntec REIT, Chip Eng

Seng Corporation, Midas Holdings, Olam International, Wilmar International, StarHub, RHT Health Trust, CapitaLand, CapitaLand Commercial

Trust, Frasers Commercial Trust, OUE Commercial REIT, Frasers Centrepoint Trust, Mapletree Commercial Trust, Cache Logistics Trust, Frasers

Logistics & Industrial Trust, Manulife US Real Estate Inv, in the past 12 months, as of 31 Oct 2017.

9. 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.

Directorship/trustee interests:

10. Peter Seah Lim Huat, Chairman & Director of DBS Group Holdings, is a Director / Chairman of Singapore Airlines as of 29 Sep 2017.

11. Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Non-Exec Director / Chairman of SATS as of 29 Sep 2017.

12. Nihal Vijaya Devadas Kaviratne CBE, a member of DBS Group Holdings Board of Directors, is a Director of Olam International as of

29 Sep 2017.

13. Danny Teoh Leong Kay, a member of DBS Group Holdings Board of Directors, is a Director of M1 as of 29 Sep 2017.

14. Nihal Vijaya Devadas Kaviratne CBE, a member of DBS Group Holdings Board of Directors, is a Director of Starhub as of 29 Sep 2017.

15. Lim Sim Seng, a member of DBS Group Executive Committee, is an Independent Non-Executive Director of ST Engineering as of 1 Nov 2017

16. Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Non-Exec Director of CapitaLand as of 29 Sep 2017.

17. Tan Su Shan, a member of DBS Group Executive Committee, is a Director of Mapletree Greater China Commercial Trust as of 1 Nov 2017

Disclosure of previous investment recommendation produced:

18. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other

investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12

months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

Market Focus

2018 Outlook

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