DAILY MORNING NOTE | 20 November 2023
Summary of Trades Initiated in Past Week
Week 47 strategy: The market perked up on news that the CPI was 0.1% better than expectations. Not a very firm foundation for a rally. Core-CPI of 4.0% is declining at a glacial pace primarily due to shelter inflation still close to 7%. Current data shows the US economy is entering a soft patch. Retail sales (ex-motor vehicles) are slowing down, marking a three-month low at 2.3% YoY, retail inventories re-accelerating and the fiscal deficit is coming back down. A key feature of recessions is not solely the GDP contracting. Also, the economy enters a negative spiral of falling sales, output and employment. We believe an extended period of shrinking fiscal deficits can spark this vicious loop.
We think there is a trading opportunity on China. Firstly, economic data is poised to appear more favourable in contrast to the challenging fourth quarter last year when pandemic restrictions were at their peak. Retail sales in October, for instance, are accelerating toward 8% YoY. Secondly, the government has been actively unveiling additional support measures. These include RMB1tr (US$137bn) bonds for local government to support infrastructure rebuilding and another planned RMB1tr loan for property developers. China has room to stimulate the economy. The government fiscal deficit to GDP is 4% (US: 7%) and real interest rates are hovering near record levels despite the recent rate cuts. Property remains the Achilles heel, with residential home sales still declining 21% YoY in October. Sluggish property reverberates throughout the economy. It will contract demand for building materials and household goods and push down bank collateral values and local government revenue.
Head Of Research
Singapore shares struggled to advance at Friday’s (Nov 17) open, as a mixed performance on global stock markets clashed with a better-than-expected performance of the Republic’s October non-oil domestic exports (NODX). Stocks headed down 0.6 per cent. Across the broader market, losers outnumbered gainers 75 to 49, after 36.5 million securities worth S$48.3 million changed hands. The most active counter by volume was Seatrium, which rose 0.9 per cent or S$0.001 to S$0.109. Other heavily traded securities included Rex International and UMS. Banks were mixed. UOB lost 0.9 per cent or S$0.24 to S$27.18, OCBC declined 0.5 per cent or S$0.07 to S$12.91, while DBS added 0.1 per cent or S$0.04 to S$32.68.
Wall Street stocks concluded a positive week on a benign note on Friday, shrugging off early losses and extending a rally amid hopes a slowing US economy will avert a recession. Major indices secured a third straight week of gains after benign inflation data earlier in the week boosted expectations that the Federal Reserve will not enact additional interest rate increases. The broad-based S&P 500 ended at 4,514.02, up 0.1 per cent for the day and 2.2 per cent for the week. The Dow Jones Industrial Average eked out a gain of less than 0.1 per cent at 34,947.28, while the tech-rich Nasdaq Composite Index added 0.1 per cent at 14,125.48.
Singapore’s non-oil domestic exports (NODX) shrank 3.4 per cent year on year in October, continuing to ease from steeper falls in the preceding months, data from Enterprise Singapore (EnterpriseSG) showed on Friday (Nov 17). The October figure marked an easing from September’s 13.2 per cent fall, and was also better than the 6 per cent contraction that private-sector economists polled by Bloomberg were expecting. Both electronics and non-electronics exports continued to fall on a year-on-year basis, but less sharply.
A SUBSIDIARY of OCBC is proposing to pay 2.2 trillion rupiah (S$191 million) to acquire Bank Commonwealth – the Indonesian subsidiary of the Commonwealth Bank of Australia (CBA). CBA said it entered into a binding agreement to sell its 99 per cent shareholding in Bank Commonwealth to Bank OCBC NISP, an OCBC subsidiary in Indonesia. In a separate statement, the Singapore lender said it also intends to acquire the remaining 1 per cent of Bank Commonwealth from its other shareholders. OCBC expects to merge Bank Commonwealth into Bank OCBC NISP after the acquisition is completed.
Singapore-listed real estate investment trusts (S-Reits) mostly reported weaker distributions for the financial period ended September as higher financing costs weighed on performance. The subdued showing came even as most Reits posted higher gross revenue and positive rental reversions.
S-E Asia ESG funds record net inflows of US$368 million in Q3 2023, reversing two quarters of outflows. On a year-on-year basis, capital flows into ESG funds domiciled in Singapore, Thailand, Malaysia and Indonesia increased by 254 per cent from US$104.1 million in the same quarter last year. While ESG funds performed better in the last three quarters, they only managed an average quarterly return of -7.04 per cent this time. However, it is still a better performance than -8.44 per cent a year ago.
Property developers UOL Group and Singapore Land Group (SingLand) have sold 57 per cent, or 102 out of 180 units, at Watten House in District 10. At the end of a private preview on Saturday (Nov 18), UOL said that the units were sold at an average price of S$3,230 per square foot (psf). The company also noted that 96 per cent of the 102 buyers are Singaporeans and Singapore permanent residents. The showflat was closed after the preview and will reopen for the development’s public launch next year.
US dollar posted its second-steepest weekly decline versus other major currencies this year on Friday (Nov 17), while the yen strengthened sharply, and the dollar traded below 150 yen, as concerns grow about the weakening global economic outlook. Cooler-than-expected US inflation data hastened market expectations for how soon the Federal Reserve will cut rates. Such a move would weaken a major dollar support and could come as early as next year’s first quarter.
OpenAI’S biggest investors are pressing the company to reinstate Sam Altman as chief executive officer after the board’s stunning decision to fire him on Friday (Nov 17), according to people with knowledge of the matter. Microsoft, the startup’s biggest backer with a more than US$10 billion stake, is working with investors including Thrive Capital and Tiger Global Management to bring back Altman. As part of the effort to reinstate the CEO, investors are also pressing for the replacement of the current board. The directors have considered stepping down, though they’re currently balking at such a move. The situation is fluid and final plans have not been set.
Oil prices jumped more than 4 per cent on Friday, rebounding from a four-month low hit in the previous session, as investors who had taken short positions took profits and while US sanctions on some Russian oil shippers lent support. Brent crude futures settled up US$3.19, or about 4.1 per cent, at US$80.61 a barrel, while West Texas Intermediate crude (WTI) rose US$2.99, or 4.1 per cent, at US$75.89. Some of the losses were offset after the US imposed sanctions on maritime companies and vessels for shipping Russian oil sold above the Group of Seven’s price cap. Still, both benchmarks ended the week more than 1 per cent lower, their fourth straight weekly decline, mostly weighed down by a rise in US crude inventories and sustained record high production. China’s deepening property crisis and slowing industrial growth also weighed.
Amazon.com on Friday (Nov 17) announced it is trimming jobs at its Alexa voice assistant unit, citing shifting business priorities and a greater focus on generative artificial intelligence. The cuts affect several hundred employees working on Alexa. Amazon has been pulling back in a variety of divisions this month, including in its music and gaming divisions and some human resources roles.
Source: SGX Masnet, Bloomberg, Channel NewsAsia, Reuters, CNBC, WSJ, The Business Times, PSR
Recommendation: Fully Redeem , Last close: S$4.92; Analyst Paul Chew
– Vertex Technology Acquisition Corp is acquiring live streaming company 17LIVE Inc for S$800.8mn through the issuance of 160.162mn new shares. The valuation may rise another S$122mn from the issuance of new (earnout) shares by Aug24. Financial targets to issue these 24.4mn new (earnout) shares include EBITDA declining by an estimated 14% YoY in 2H23 (from US$11.14mn to US$9.6mn) and total revenue declining an estimated 12% YoY in FY23 (from US$363.7mn to US$320mn).
– Revenue for 17Live has been declining since 2021. Revenue has been dragged down by falling active users and weaker average spending. Earnings in 1H23 have improved with a net profit of US$9.4mn. This has been achieved through cost-cutting efforts.
– We recommend shareholders vote IN FAVOUR of the proposed acquisition and to FULLY REDEEM their shares at the Redemption price range of S$5.00-S$5.02 per share. Our Fair Value of VTAC post-acquisition is S$5.08, assuming no redemption. It declines to S$4.55 if Earnout shares are fully issued. We also believe the purchase cost of the shares issued to the vendors of 17LIVE Inc, promote shares and earnouts shares are significantly lower than the redemption price range. Based on our current fair value, we view the warrants as out of money and there is a risk it can expire at zero value.
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