DAILY MORNING NOTE | 20 March 2023

Technical Pulse: SPDR Select Sector Fund – Industrial

Analyst: Zane Aw

(Current Price: US$98.28) – TECHNICAL Sell
Sell price: US$99.50 Stop loss: US$102.30 Take profit: US$91.20

Week 12 Equity Strategy: The focus this week will be the interest rate decision by the Federal Reserve on 22nd March. We expect a 25-bps hike but dovish comments of a possible pause. Higher interest rates will only cause further stress and liquidity events in the US banking system. The mark-to-market curse of falling Treasuries and mortgage securities has been evident over the past 1 week. The unknown is the contagion on commercial property and private equity funds. Higher rates would mark down collateral values and slow down economic conditions. And refinancing risk or default for all borrowers has just spiked. Another fallout from the recent US bank failures is the further tightening of lending standards from both recession worries and banks shoring up their balance sheets from edgy depositors. In an environment of peak rates and slower economic growth, tactical beneficiaries are Singapore REITs. ETFs to gain exposure to falling interest rates are Treasury Bonds (TLT) and Gold (GLD).

Singapore shares closed higher on Friday (Mar 17) in line with gains across the region as investors turned more optimistic to end a week of volatile trading. It climbed 0.9 per cent or 27.74 points to close at 3,183.28. The rebound also meant it was up 0.2 per cent from last Friday’s close. Across the broader market, gainers outnumbered losers 307 to 233, after 2.3 billion securities worth S$1.9 billion were traded.

US stocks ended lower on Friday (Mar 17) as banking shares resumed their sell-off, with embattled First Republic Bank closing down 33 per cent despite a US$30 billion rescue package unveiled on Thursday. The Dow Jones Industrial Average ended 1.2 per cent lower at 31,861.98 and the broad-based S&P 500 fell 1.1 per cent to 3,916.64. Meanwhile, the tech-heavy Nasdaq Composite Index declined 0.7 per cent to end at 11,630.51.

SG

Asian real-estate giant CapitaLand Group is in talks to acquire assets worth roughly US$1.5 billion from Vietnam’s biggest listed property firm Vinhomes, two sources familiar with the matter said. A deal of that size would mark one of the largest real-estate transactions in South-east Asia in the last few years. The talks come as Vietnam’s property sector is struggling with a cash crunch following an anti-graft campaign launched by the government last year.

Chinese private equity firm DCP Capital aims to sell its Singaporean portfolio firm MFS Technology, which makes flexible printed circuit boards, for at least US$550 million, two people with knowledge of the matter told Reuters. The firm, founded by former KKR dealmakers David Liu and Julian Wolhardt, started marketing the sale on Friday (Mar 17) and will send out confidential information memoranda next month, one of the sources said. The sale is targeting primarily financial sponsors, but also strategic buyers, according to the two sources and a separate person with knowledge of the transaction.

Yangzijiang Shipbuilding on Sunday (Mar 19) said its subsidiary, Yangzijiang Shipping, is considering appealing against the Singapore High Court’s order last Friday for it to wind up over US$4.8 million in unpaid debt. But even if the unit has to wind up, the group said that this would not materially impact operations and financial condition for its financial year ending Dec 31, 2023. This is because Yangzijiang Shipping is “dormant”, and its net asset value is “negligible” compared to the group’s, it stated in a bourse filing.

Manulife US Reit on Friday (Mar 17) denied reports of a 200 billion won (S$206.4 million) figure for the sale of its manager to Korean asset manager Mirae Asset Global Investments. In its latest statement, Manulife US Reit’s manager clarified that Mirae’s non-binding proposal “does not contain reference to such a figure” and that the only monetary amount in the proposal relates to the purchase price of the manager’s shares. The real estate investment trust’s (Reit) manager was responding to an earlier report by The Business Times, which quoted Maeil Business News Korea saying that Mirae is the preferred bidder to buy Manulife US Real Estate Management for 200 billion won, as well as part of a stake in the Reit. The 200 billion won amount appears significant.

Ho Bee Land said late on Friday (Mar 17) that the recent sale of its industrial assets for S$115 million is not related to its debt load. The disposal is in the group’s “ordinary course of business”, the real estate company said in a bourse filing, which set out to flag multiple inaccuracies in an article published on investment news platform Mingtiandi.com on Mar 15. The article with the headline “Singapore’s Ho Bee Land Sells Industrial Assets After SGX Queries Debt Load” alleged, among other things, that the group is disposing of HB Centre I on Tannery Road and HB Centre II on Tannery Lane as it faces a debt deadline, and is “paying to play”.

US

Berkshire Hathaway, run by billionaire Warren Buffett, on Friday (Mar 17) urged shareholders to reject proposals that it avoid discussing hot-button social and political issues, and competing proposals that it disclose more about its climate change and diversity efforts. The Omaha, Nebraska-based company also urged the rejection for a second straight year of a shareholder proposal that Buffett, 92, let someone else be chairman, while remaining chief executive. Berkshire’s recommendations were disclosed in its annual proxy filing, ahead of its May 6 annual meeting.

Some of the world’s largest central banks came together on Sunday to stop a banking crisis from spreading as Swiss authorities persuaded UBS Group AG on Sunday to buy rival Credit Suisse Group AG in a historic deal. UBS will pay 3 billion Swiss francs (S$4.33 billion) for 167-year-old Credit Suisse and assume up to US$5.4 billion in losses in a deal backed by a massive Swiss guarantee and expected to close by the end of 2023. Soon after the announcement late on Sunday, the US Federal Reserve, European Central Bank and other major central banks came out with statements to reassure markets that have been walloped by a banking crisis that started with the collapse of two regional US banks earlier this month.

US central bankers face an unenviable task when they gather in Washington this week: tackling persistent inflation without adding to financial sector turmoil after Silicon Valley Bank’s (SVB) rapid collapse. The US Federal Reserve has raised rates eight times since last year in the face of decades-high inflation as it looks to cool the economy without tipping it into a recession. While Fed chair Jerome Powell earlier signalled willingness to speed up interest rate hikes if needed, most analysts and traders see a small rise of 25 basis points as the most likely outcome on Wednesday (Mar 22) at the end of the Fed’s two-day meeting.

Former US president Donald Trump on Saturday (Mar 18) said he expects to be arrested on Tuesday as New York prosecutors consider charges over a hush money payment to a porn star, and called on his supporters to protest. “Illegal leaks from a corrupt & highly political Manhattan district attorney’s office … indicate that, with no crime being able to be proven … the far & away leading Republican candidate & former president of the United States of America, will be arrested on Tuesday of next week,” Trump wrote on Truth Social. A spokesman for Trump said the former president had not been notified of any arrest. Trump provided no evidence of leaks from the district attorney’s office and did not discuss the possible charges in his post.

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

RESEARCH REPORTS

Singapore Banking Monthly – A quick comparison with Credit Suisse

Recommendation: Overweight (Maintained)

Analyst: Glenn Thum

– On 14 March, Credit Suisse (CS) said in its 2022 annual report that it identified “material weaknesses” in internal controls over financial reporting and had not yet stemmed customer outflows. On 15 March, the bank’s top backer, Saudi National Bank, said that it was not able to give more money to the bank due to regulatory constraints. On 16 March, the bank exercised an option to borrow up to US$54bn from the Swiss National Bank.

– Singapore banks’ capital and leverage ratios are comparable to Credit Suisse. However, Singapore banks are profitable with a positive ROE of ~12.5% (CS: -16%). Singapore banks has a larger proportion of net interest income while CS is fee and commissions.

– Maintain OVERWEIGHT. We remain positive on Singapore banks. Bank dividend yields are attractive at 5.7% with possible upside surprise due to excess capital ratios and push towards higher ROEs. Singapore banks differ from Credit Suisse as they focus on NII growth and hence are able to post positive ROEs.

FAANGM Monthly Feb 23 – Market continues to reward cost-cutting

Recommendation: NEUTRAL (Maintained); Analysts: Jonathan Woo, Maximilian Koeswoyo, Zane Aw, Phillip Research Team

– FAANGM was down 1.6% in February, beating the S&P 500’s decline of 2.6%. Nasdaq outperformed, a decline of only 0.5%.

– META was the main outperformer, up 16% as it remained committed to reducing costs moving forward. GOOGL was the biggest laggard, down 10% due to weaker digital advertising trends, which are expected to continue.

– Weakness in digital advertising, consumer tech demand, and pullbacks in Cloud spending continue to weigh on revenue expectations for FAANGM LTM P/S. FY23e revenue growth for FAANGM is expected to be in the mid-high single digits (roughly half its 5-year CAGR of 15%). We remain NEUTRAL on FAANGM.

Meta Platforms Inc. – Further reduction in costs

Recommendation : NEUTRAL (Maintained); TP: US$200.00, Last Close: US$204.93

Analyst: Jonathan Woo

– META recently announced another round of job cuts, laying off ~10,000 (~12% of current workforce), and further removing ~5,000 vacant positions. META’s plans include removing multiple layers of management, and automating more functions to improve efficiency.

– We reduce FY23e OPEX by ~3% as a result of the planned job cuts. As a result, FY23e EBITDA/PATMI is increased by 3%/4% respectively. We maintain ACCUMULATE with a raised DCF target price of US$200.00 (prev. US$182.00), a WACC of 7.1%, and a terminal growth rate of 3.5%.

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