Daily Morning Note – 13 September 2021

Dear valued client,

Asian stocks look set to dip as the risk of a slower economic recovery from the pandemic amid elevated inflation saps sentiment. Futures fell in Japan, Australia and Hong Kong. U.S. stocks last week chalked their biggest decline since mid-June on investor caution over the challenges for economic reopening highlighted by the delta virus strain. Treasury yields have advanced as traders assess price pressures and their impact on the likely timeline for a reduction in Federal Reserve stimulus. An update on U.S. consumer prices this week will feed into the debate about whether elevated costs are transient. And a raft of key Chinese data is set to show weakening growth.

House Democrats are set to propose raising the corporate tax rate to 26.5%, people familiar with the matter said. The plans fall short of President Joe Biden’s target, in a bid to help improve chances of passing a major social-spending package. Democrats on the House Ways and Means Committee plan to put forward an increase in the business rate that’s currently 21%, compared to the 28% Biden sought. The top rate on capital gains would rise from 20% to 25%, instead of the 39.6% the president proposed.

BREAKING NEWS

SG News

Analysts sanguine on City Developments Limited’s (CDL’s) decision to sell Sincere Property for US$1. Market observers generally view as mildly positive CDL’s move to exit its ill-fated investment in China-based Sincere Property Group for US$1 while increasing its stake in a Shenzhen tech park from about 55 per cent to 65 per cent. CDL is increasing its stake in a company that owns 65 per cent of Shenzhen Longgang Tusincere Tech Park (Shenzhen Tech Park). A Shenzhen Longgang District state-owned enterprise holds the remaining 35 per cent. The transfer represents partial repayment of a loan owed by Sincere to a wholly-owned subsidiary of CDL. CDL had in February acquired 84.6 per cent of Shenzhen Tusincere Technology Park Development Co (Shenzhen Tusincere) from Sincere for 850 million yuan or S$174 million at the time.

Global companies from noodle makers to semiconductor giants are spending on new plants and machinery in ways they haven’t done for years. On the supply side, blockages brought on by the Covid-19 pandemic are forcing businesses to invest in new production facilities; calls for a cleaner environment are spurring spending on electric vehicles, batteries and alternative energy; and the big semiconductor crunch has prompted a wave of investment. On the demand side, pent-up consumer spending is convincing executives that capital is worth outlaying – a sign that business is buying into the world’s economic recovery prospects even as the Delta strain casts a shadow. Fuelling it all are low interest rates and bets they’ll stay that way. Globally, corporate capital expenditure, or capex, will jump by 13 per cent this year, according to S&P Global Ratings, with growth in all regions and broad sectors – especially in semiconductors, retail, software and transportation.

Cash swelled by record coal prices, Geo Energy plans earlier redemption of bonds to pare down debt . acked by lofty coal prices, Geo Energy Resources will be making an early redemption of its outstanding US dollar-denominated bond, which will help save annual financing costs of US$4.8 million and leave the company largely debt-free. The coal miner, which calls this a “win-win” opportunity, plans to redeem the bonds on Oct 10 at a price equal to 102% of the principal, plus accrued and unpaid interest. The bonds carry an interest rate of 8% and will mature next year. Coal prices, driven by steady demand, has reached record levels, swelling the company’s cash balance to US$120 million as at Sept 5, up from US$84 million as at June 30.

Sembmarine’s battered shares may look cheap now, but there are major risks ahead for investors. Positive news flow could trigger a bounce in the stock, but investors should wait until its merger with Keppel O&M is done and dusted. Sembcorp Marine (Sembmarine)’s board and top executives probably heaved a sigh of relief after shareholders of the beleaguered offshore and marine (O&M) company voted on Aug 23 to approve its controversial rights issue. Clearing this crucial hurdle removed any doubt that Sembmarine would receive the S$1.5 billion it needs to see it through the next year – thanks to the support of the company’s largest shareholder Temasek Holdings and rights issue underwriter DBS. It remains to be seen how Sembmarine’s minority shareholders respond to the rights issue, though. They have until Tuesday, Sept 14, to accept and pay for their rights shares. The rights shares are expected to be allotted, issued and credited on Sept 22. Trading is expected to begin the same day. There appeared to be only modest participation by minority shareholders at the extraordinary general meeting (EGM) on Aug 23.

US News

Apple’s lucrative App Store business received a major blow Friday thanks to a federal judge’s decision in the company’s legal battle with Epic Games. Judge Yvonne Gonzalez Rogers handed down the decision in the closely watched trial, and issued an injunction that said Apple will no longer be allowed to prohibit developers from providing links or other communications that direct users away from Apple in-app purchasing. Apple typically takes a 15% to 30% cut of gross sales. The decision would likely be appealed in a process that could likely take years to resolve.

PSR Comment: Majority of Apple’s App Store revenue (~5% of FY20 revenue) is generated from in-app purchases, accounting for >70% of App Store revenue. Therefore, the rule, which now allows software developers to inform users of alternative payment methods outside their apps, may dent this revenue stream because payment for in-app purchases can now be made outside the App Store where Apple won’t get a cut. However, this outcome is still uncertain as users may find the App Store more convenient to use for payments. Apple’s victory came from the ruling that it wasn’t a monopoly. “A market share of more than 55% wasn’t yet high enough to sustain a monopoly case.” the judge mentioned. As such, Apple won nine of 10 counts in the case, protecting the other App Store revenue streams. The App Store contributes about 9% to our FY21e gross profit.

U.S. Democratic lawmakers on Friday proposed an expansion of tax credits for electric vehicles that includes significantly higher subsidies for union-made zero emission models assembled in the United States. The proposal, a key part of President Joe Biden’s goal to ensure EVs comprise at least 50% of U.S. vehicle sales by 2030 and boost U.S. union jobs, will give Detroit’s Big Three automakers a big competitive edge and has drawn criticism from foreign automakers like Honda Motor Co (7267.T) and Toyota Motor Corp (7203.T). The tax credit for up to $12,500 per vehicle for U.S.-made union-made zero emission models compares with a $7,500 incentive for most other electric cars – an amount that has not changed. The bill, however, does away with phasing out automakers’ tax credits after they hit 200,000 electric vehicles sold, which would make General Motors Co (GM.N) and Tesla Inc (TSLA.O) eligible again.

Disney announced the remainder of its 2021 films will be released exclusively in theaters before streaming on Disney+. The decision by Disney on Friday shows that the company is optimistic about movie theater audiences returning, despite Covid-19 spikes caused by the Delta variant. “As confidence in moviegoing continues to improve, we look forward to entertaining audiences in theaters, while maintaining the flexibility to give our Disney+ subscribers the gift of Encanto this holiday season,” Disney Media & Entertainment Distribution Chairman Kareem Daniel said in a statement.

Facebook this week announced a $100 million commitment to a program that supports small businesses owned by women and minorities by buying up their outstanding invoices. By buying up outstanding invoices, the Facebook Invoice Fast Track program puts money in the hands of small businesses that would have otherwise had to wait weeks if not months to get paid by their customers. The program is the latest effort by Facebook to build its relationships and long-term loyalty among small businesses, many of whom rely on the social network to place ads targeted to niche demographics who may be interested in their services. Businesses can submit outstanding invoices of a minimum of $1,000, and if accepted, Facebook will buy the invoice from the small business and pay them within a matter of days. The customers then pay Facebook the outstanding invoices at the same terms they had agreed to with the small business. For Facebook, which generated nearly $86 billion in revenue in 2020, waiting for payments is much less dire than it is for small businesses.

Source: SGX Masnet, The Business Times, Bloomberg, Channel NewsAsia, Reuters, CNBC, PSR

TECHNICAL PULSE

Del Monte Pacific Ltd
Analyst: Chua Wei Ren

Recommended Action: Technical BUY

Del Monte Pacific Ltd (SGX: D03) major impulse wave movement has completed the intermediate wave (3). Currently, technical has shown sufficient proof that the corrective wave may have ended

Buy stop: 0.400 Stop loss: 0.325 Take profit 1: 0.500 Take profit 2: 0.525

>> Read more technical reports

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