DAILY MORNING NOTE | 21 August 2023

Week 34 equity strategy: Amidst the prevailing pessimism, we are hopeful about China. The macro data is not great but it is far from catastrophic. Indicators such as retail sales, fixed asset investment, property and loans are all slipping. Private sector and consumer sentiment is poor and perhaps pulling back on expectations of government stimulus, especially for larger ticket purchases such as property and cars. Amidst these dim signals, steel production, electricity consumption and online spending continue to grow at a healthy clip. Steel production was up 11% YoY in July. The weaker renminbi is helping steel exports reach their highest in 7 years. Online goods and services climbed 11% and 31%, respectively, in July. And China is still easing monetary policy contrary to many other countries.

We think China possesses the fiscal levers to stimulate the economy. Government debt to GDP is 21% with domestic savings at 45%. In comparison, advanced economies are 115% and 18%, respectively. The issue is timing. The new government line-up was only installed in March and the sharper downward spiral in the economy largely occurred in June. The government recently reaffirmed that the 2023 GDP target of 5% is not optional. The epicentre of any stimulus will be the property sector and local government balance sheets. Possible support could be subsidies to incentivise home buyers to debt swap with the local government entities. Sentiment is poor but we are not yet at the lows experienced in October 2022 when the Hang Seng China Enterprises Index touched a low of 5028, or 18% below current levels. A recovering China benefits a slew of Singapore large caps we cover including CapitaLand Investment, DBS, OCBC, Keppel Corp, ComfortDelGro, HRnet, Raffles Medical and Sasseur REIT.

Paul Chew
Head Of Research

Singapore stocks ended the week in the red on Friday (Aug 18), booking declines for the sixth straight session. It retreated 22.82 or 0.7 per cent to 3,173.93. Losers outnumbered gainers 372 to 246 in the broader market, as 1.2 billion securities worth S$1.1 billion were traded on the exchange. Regional indices were largely down on Friday. Hong Kong’s Hang Seng Index slid 2 per cent in its final hour of trade, while FTSE Bursa Malaysia KLCI edged down 0.1 per cent. South Korea’s Kospi finished 0.6 per cent lower, marking a sixth straight day of losses. Japan’s Nikkei 225 slipped 0.6 per cent as Japan’s July core inflation fell to 3.1 per cent, down from 3.3 per cent in June.

The S&P 500 ended nearly flat on Friday as gains in defensive sectors and energy offset weakness in megacap growth stocks, while investors looked toward next week’s speech by Federal Reserve Chair Jerome Powell. Megacap technology-related growth stocks dipped, with Alphabet down 1.9 per cent and Tesla falling 1.7 per cent, as investors fretted that interest rates could stay higher for longer. The tech-heavy Nasdaq posted the biggest weekly decline of the three major indices, losing 2.6%. The S&P 500 lost 0.65 points, or 0.01 per cent, to 4,369.71 and the Nasdaq Composite dropped 26.16 points, or 0.2 per cent, to 13,290.78. The Dow Jones Industrial Average rose 25.83 points, or 0.07 per cent, to 34,500.66 points.

Top gainers & losers





Public transport operator SBS Transit has been awarded the Bukit Merah Bus Package – a five-year contract comprising 17 bus services – for a second consecutive term. This marks the third bus tender award that SBS Transit has won under the new bus contracting model, the mainboard-listed company announced on Friday (Aug 18). The contract can be extended by between two and five years. The bus services under the contract are supported by the Ulu Pandan Bus Depot and originate from two bus interchanges – Bukit Merah and HarbourFront – and four bus terminals – Kampong Bahru, Marina Centre, Queen Street and Shenton Way. It includes two cross-border services to Johor Bahru. With the latest contract win, SBS Transit remains the biggest public bus operator holding a 55 per cent market share. It operates 192 bus routes in Singapore under eight bus packages, of which two are tendered and six are negotiated.

Cost cuts helped Creative Technology narrow losses in its latest half-year results, but macroeconomic challenges cast a pall on the full-year showing of the electronics maker. For the second half ended Jun 30, Creative posted a US$6.1 million net loss, an improvement from the year-ago loss of US$12.2 million. This was thanks to a restructuring exercise in December 2022 that slashed costs. Total expenses for H2 fell 22 per cent to US$14.3 million, with research and development costs in particular down 32 per cent. Meanwhile, the company’s net sales for the half year inched up 3 per cent to US$28 million.

Semiconductor company Asti Holdings said it received a letter from the lawyers of four shareholders, which argued that an extraordinary general meeting (EGM) requisitioned by the shareholders to overhaul the board is valid. The shareholders, through their lawyers, said they had validly given notice of the proposed EGM to all relevant stakeholders. Asti has been sparring with the shareholders over the validity of the Aug 22 EGM, which was requisitioned to remove all five of Asti’s directors.


Oil prices rose about 1 per cent on Friday on signs of slowing US output, but both crude benchmarks also ended their longest weekly rally of 2023 on mounting concerns about global demand growth. West Texas Intermediate (WTI) crude futures gained 86 cents, or 1.1 per cent, to settle at US$81.25 a barrel, and Brent crude futures rose 68 cents, or 0.8 per cent, to settle at US$84.80 a barrel. Both benchmarks pushed higher on Friday after industry data showed that the US oil and natural gas rig count, an early indicator of future output, fell for the sixth week in a row. A slump in US production could exacerbate an anticipated supply tightness through the rest of this year.

WeWork, the office-sharing company once valued at $47 billion, said Friday it will undergo a 1-for-40 reverse stock split to try and keep its stock from being delisted. The shares fell 11% after the announcement, closing at 14 cents. They’ve been trading under $1 since late March, and the company’s market cap now sits at around $300 million. The reverse split will take effect after the close of trading on Sept. 1, the company said. The move will do nothing to improve the company’s financials or valuation but, based on Friday’s close, it would lift the stock price to $5.60. Failure to maintain a $1 share price for 30 days can trigger a delisting by the NYSE.

Palo Alto Networks shares jumped as much as 9% in extended trading on Friday after the security software vendor reported earnings that exceeded analysts’ estimates. Revenue in its fiscal fourth quarter increased 26% from $1.6 billion a year earlier. Net income climbed to $227.7 million, or 74 cents a share, from $3.3 million, or a penny a share, a year ago. For the first quarter, Palo Alto expects revenue of $1.82 billion to $1.85 billion, and sales for the year are expected to be $8.15 billion to $8.2 billion. That’s below analyst expectations of $1.93 billion for the fiscal first quarter and $8.38 billion for the full year, according to Refinitiv.

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


Singapore Exchange Limited – Treasury income surge to record high

Recommendation: BUY (Maintained), Last done: S$9.55, TP: S$11.71, Analyst: Glenn Thum

– FY23 revenue of S$1,194mn met our estimates, at 101% of FY23e, while adjusted PATMI of S$503mn was above our estimates, at 105% of FY23e. Variance came from higher-than-expected treasury income offset by lower listing revenue. FY23 DPS increased to 32.5 cents (FY22: 32 cents).

– Treasury income surged 177% YoY to S$137mn for FY23 and reached a record high, mainly due to higher yield on margin balances from the higher interest rate environment.

– FICC grew 32% YoY, led by continued growth in commodity and currency derivatives volumes, higher OTC FX revenue and higher treasury income. Equities revenue was flat as higher treasury income was offset by lower trading and clearing, and listing revenue.

We maintain BUY with an unchanged target price of S$11.71. Our target price is pegged to +1SD of its 5-year mean or 20x P/E. Catalysts include continued growth from derivatives volumes and fees and continued growth in treasury income as the higher interest rates start to kick in.

CapitaLand Investment Limited – Lodging business is the star performer

Recommendation: Buy (Upgraded), Last Done: S$3.09

Target price: S$3.68, Analyst: Darren Chan

– 1H23 revenue of S$1.345bn (-0.7% YoY) was slightly below our estimates, forming 41% of our FY23e forecast. This was due to a 3.6% decline in contribution from the Real Estate Investment Business (REIB) as there was loss of contribution from properties divested in 2022, as well as lower contribution from properties in China. It was partially offset by higher Fee Income-related Business (FRB), which was up 2.4% YoY supported by stronger fees from lodging management.

– 1H23 PATMI of S$351mn (-18.9% YoY) was below our FY23e estimates at 28% due to lower portfolio gains from asset recycling, higher finance costs and absence of event-driven performance fees from two private funds exited in 1H22.

– Upgrade to BUY with a lower SOTP TP of S$3.68. We lower FY23e/24e earnings by 17% to account for higher finance costs, lower portfolio gains, and lower margins from FRB. Our SOTP-derived TP of S$3.68 represents an upside of 22.9% and a forward P/E of 15x. We like CLI for its robust recurring fee income stream and asset-light model. Immediate catalyst for CLI is a stronger China recovery.

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