DAILY MORNING NOTE | 16 August 2023

Trade of the Day

Snowflake Inc (NYSE: SNOW)

Analyst: Zane Aw

(Current Price: US$152.86) – TECHNICAL BUY
Buy price: US$152.86 Stop loss: US$145.00
Take profit 1: US$166.00 Take profit 2: US$192.00

Singapore stocks continued to slide on Tuesday (Aug 15). It fell 0.5 per cent to 3,232.74. Across the broader market, losers outnumbered gainers 291 to 272, after 1.2 billion securities worth S$976.5 million changed hands. Regional indices were mixed. Japan’s Nikkei 225 climbed 0.6 per cent, while the FTSE Bursa Malaysia KLCI was up 0.2 per cent. Hong Kong’s Hang Seng Index slid 1 per cent, and South Korea’s Kospi Composite Index was down 0.8 per cent.

US stocks closed lower Tuesday (Aug 15), pulled down by fresh concerns over the US banking sector, stronger than expected economic data and worries over the health of the Chinese economy. Major US banks including JPMorgan Chase, Wells Fargo and Bank of America ended the day down by more than two per cent after an analyst at ratings agency Fitch warned of the risks of a downgrade on the American banking industry. A downgrade “would recalibrate all our financial measures and would probably translate into negative rating actions” for banks, Fitch analyst Chris Wolfe told CNBC. The Dow Jones Industrial Average fell more than 300 points to close 1.0 per cent lower at 34,946.39, while the broad-based S&P 500 dropped 1.2 per cent to 4,437.86. And the tech-rich Nasdaq Composite Index declined by 1.1 per cent to 13,631.05.

SG

SATS 1Q24 business update
SATS slipped into net loss of S$29.9mn in 1Q24, due to 1) cost for integration of WFS (S$12.6mn), 2) provision for amortization of intangible assets (S$9.1mn) and 3) interest expense on refinancing of WFS’ loans (S$0.6mn). Excluding these, net loss would be S$0.3mn. The enlarged group generated EBIT of S$10.2mn, or EBIT margin of 0.85%. Bottomline was weighed down by higher interest expense of about S$60mn, we estimate, as net debt rose to S$2.2bn (Mar 23: S$0.77bn). Free cash flow was negative S$10.7mn (1Q23: -S$29.6mn). WFS’ cargo volume has declined YoY, but the decline is moderating. Management said yields are holding up. They expect some S$40mn in annual interest savings from the integration. Food solutions expect to see gradual pick up when 1) airlines put back meal portions to pre-COVID levels; 2) airlines reduce double catering; and 3) recovery in China. (Neutral: TP S$2.51)

Peggy Mak
Research Manager
peggymak@phillip.com.sg

Two state land parcels at Clementi Avenue 1 and Pine Grove (Parcel B) have been released for sale, and are expected to draw bids of up to S$1,200 per square foot, and in the region of S$550 million to S$650 million for each site. Of the two sites, the Clementi plot is likely to draw stronger interest, as it sits where there have been few new projects recently, market watchers said. The Pine Grove site, meanwhile, is located next to UOL’s upcoming Pinetree Hill, which was marketed last month. Both sites, which come under the Urban Redevelopment Authority’s (URA) confirmed list for the Government Land Sales (GLS) programme in the second half of 2023, can yield a total of about 1,065 residential units.

The Monetary Authority of Singapore (MAS) on Tuesday (Aug 15) revised its stablecoin regulatory framework, as it aims to maintain a higher degree of stability within stablecoin issuers. MAS said it will also be moving on to the next phase of its legislative consultation to seek feedback from industry players, before finally proposing the changes to the Payment Services Act. The amendments, however, are not expected to come soon – at least not within the next year. The changes include allowing stablecoin issuers to segregate customers’ stablecoins in either financial institutions licensed in Singapore or overseas-based custodians, with a minimum credit rating of “A-”. These custodians must also have a branch in Singapore regulated by MAS to provide custodial services.

Singapore Airlines (SIA) and its budget carrier Scoot served about three million passengers in the month of July, 45.1 per cent higher than in the year before, as passenger traffic remained strong across all route regions amid the peak summer travel season in the northern hemisphere. Group passenger load factor, however, dipped slightly from 90.6 per cent in June to 89.4 per cent for July – though the 89.4 per cent is still 2.4 percentage points higher year on year, according to SIA’s operating results released on Tuesday (Aug 15). Singapore Airlines recorded a passenger load factor (PLF) of 89 per cent; Scoot had a PLF of 92.7 per cent in July. The figures were slightly lower than June’s, when PLFs were 89.7 per cent and 93.6 per cent for SIA and Scoot respectively. Meanwhile, its cargo loads recorded a 7.1 per cent year-on-year decline to 438.9 million tonne-km on the back of weaker demand. Cargo capacity, on the other hand, expanded 7.3 per cent, as increased passenger services resulted in higher belly-hold capacity.

US

Sea Ltd.’s 2Q23 revenue missed estimates (US$3.1bn vs est. US$3.2bn) after its e-commerce division, Shopee, posted its slowest growth on record as consumers held back spending on Internet and discretionary services, sending its U.S.-listed shares down 15% in trading before the bell. 2Q23 revenue grew only 5% YoY, dragged by a decline in gaming revenue, and decelerating growth in Shopee (21% YoY). Overall profitability continued to improve, with the company posting US$331mn in profits, a US$1.3bn improvement from a year ago. However, with Sea looking to boost growth through ramping its e-commerce investments, we could see some headwinds to increasing overall near-term profitability.

Jonathan Woo
Senior Research Analyst
jonathanwookj@phillip.com.sg

President Xi Jinping has resisted pulling the trigger on a major stimulus to revive the world’s second-biggest economy. The grim market reaction to a surprise rate cut shows investors want to see him take much bolder steps. The People’s Bank of China on Tuesday (Aug 15) lowered the rate on its one-year loans – or medium-term lending facility – by 15 basis points to 2.5 per cent, the steepest cut in three years. The move came shortly before the release of July data that showed weak consumer spending growth, sliding investment and rising unemployment. Zooming out, the economic picture looks even worse. Bank loans plunged to a 14-year low last month, while deflation is setting in and exports are contracting. One of China’s largest property developers is at risk of default and a financial conglomerate with US$138 billion under management missed payments on investment products, stoking fears about possible contagion.

US retail sales increased more than expected in July as Americans boosted online purchases and dined out more, suggesting the economy continued to expand early in the third quarter and keeping a recession at bay. The report from the Commerce Department on Tuesday (Aug 15) also showing consumers splurging on hobbies, sporting goods and clothing, underscoring their resilience despite the Federal Reserve’s aggressive interest rate hikes to tame inflation. Demand is being underpinned by strong wage gains from a tight labour market. Despite the signs of persistent strength in consumer spending, economists did not expect the Fed to raise interest rates next month, with inflation retreating. Retail sales jumped 0.7 per cent last month. Data for June was revised higher to show sales rising 0.3 per cent instead of the previously reported 0.2 per cent. Economists polled by Reuters had forecast retail sales would climb 0.4 per cent. Sales increased 3.2 per cent on year-on-year basis in July.

US business inventories were unchanged for a second straight month in June as companies continued to carefully manage stocks in anticipation of weak demand because of higher interest rates. Economists polled by Reuters had expected the Commerce Department would report a 0.1 per cent gain in business inventories on Tuesday (Aug 15). Inventories, a key component of gross domestic product, increased 2.0 per cent on a year-on-year basis in June. Private inventory investment was estimated to have made a small contribution to GDP in the second quarter after being a major drag in the first three months of the year. The economy grew at a 2.4 per cent annualized rate in the April-June period. Retail inventories increased 0.7 per cent in June, as estimated in an advance report published last month. They rose 0.6 per cent in May. Wholesale inventories fell 0.5 per cent while stocks at manufacturers were unchanged.

US import prices rebounded more than expected in July amid higher costs for petroleum products and food, but underlying imported inflation pressures remained muted. Import prices increased 0.4 per cent last month, the Labor Department said on Tuesday (Aug 15). Data for June was revised to show prices falling 0.1 per cent instead of the previously reported 0.2 per cent. Economists polled by Reuters had forecast import prices, which exclude tariffs, rising 0.2 per cent. In the 12 months through July, import prices dropped 4.4 per cent after declining 6.1 per cent in June. Annual import prices have now decreased for six straight months. The government reported last week that consumer and producer prices rose moderately in July.

First Solar, a leading US solar panel manufacturer, said on Tuesday (Aug 15) that an audit had found that migrant workers in its operations in Malaysia were victims of forced labour. The independent audit, which was included in a corporate sustainability report, found that four subcontractors in Malaysia had charged the workers recruitment fees in their home countries and withheld their pay and passports. US officials and human rights activists have become increasingly concerned about the use of forced labour in the manufacture of solar panels, most of which takes place in Asia. Global supply chains for solar panels have for years relied on China, in particular for polysilicon, a crucial component in most solar panels made around the world. But a recent ban on products from Xinjiang, a region where the US government and United Nations accuse the Chinese government of committing human rights violations, including forced labour, has led to a shift away from China.

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

RESEARCH REPORTS

City Developments Limited – Anticipating stronger growth in hospitality

Recommendation: BUY (Upgraded), Last Done: S$6.79

Target price: S$8.22, Analyst: Darren Chan

– 1H23 revenue of S$2.7bn (+83.6% YoY) was in line and formed 71% of our FY23e forecast due to the full revenue recognition of Piermont Grand Executive Condominium (EC) upon completion in 1H23. PATMI underperformed at S$66.4mn (-94.1% YoY) due to the absence of divestment gains in 1H22, as well as higher financing costs and impairment/ fair value losses in 1H23.

– Excluding divestment gains and impairment losses, EBITDA and PBT increased 48%; PATMI increased 1% YoY to S$104.3mn.

– Upgrade to BUY with a lower RNAV-derived TP of $8.22 from $8.33, a 45% discount to RNAV of S$14.94. We view CDL as a proxy for the Singapore residential market and hospitality recovery. Asset monetisation, unlocking value through AEIs and redevelopments, establishing a fund management franchise, and faster-than-expected recovery in the hospitality portfolio are potential catalysts for CDL, which could help narrow the discount between CDL’s share price and RNAV. CDL declared a special interim dividend of 4 Singapore cents per share.

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