DAILY MORNING NOTE | 22 May 2023

Week 21 equity strategy. There are increasing signs that US consumer demand is weakening. Retail sales, excluding volatile auto, is up only 2.1% YoY, the slowest pace of growth since the pandemic began. With inflation stubbornly high and the Fed reluctant to cut interest rates, breaking free of the negative spiral in slower growth will be difficult. What started as an inventory correction has now evolved into credit tightening and softer consumer confidence, creating a worrying negative feedback loop. Given this scenario, we would avoid cyclicals such as electronics and commodities. Keeping us cautious is also the asymmetric risk of debt ceiling talks failing. We would stick to defensive dividend paying sectors such as banks and REITs. We are optimistic on China as the economy is accelerating, in contrast to global growth. Retail sales in China jumped 18% YoY in April. While this comparison is against a lockdown-impacted month from a year ago, it is 5% growth when compared to a normalized 2021. An exposure to accelerating China will be CapitaLand Investments with their malls, service apartments and fund management businesses.

Shifting gears to a different topic, we believe management treatment of investors can be reflected by their disclosure standards. Piquing our interest was a disclosure of results by a SE Asia-based company listed on Nasdaq. We all know EBITDA is already an abomination metric because it assumes capex, taxes and interest expense does not matter. Tell that to any businessman. In adjusted EBITDA the typical share-based compensation of $103mn was excluded. But to show that they were profitable in a press release, segment adjusted EBITDA was announced. It excludes S$216mn worth of regional corporate cost encompassing R&D, marketing and admin cost. Fortunately, Singapore corporates have not reached this level of reporting guile.

Paul Chew
Head Of Research
paulchewkl@phillip.com.sg

SINGAPORE shares rose on Friday (May 19), fuelled by optimism over upbeat macro data out of the US and easing fears over the debt-ceiling crisis, which spurred overnight gains in Wall Street. Singapore shares advanced 20.04 points or 0.63 per cent to 3,202.59 alongside gains in key gauges across the region, although Hong Kong and China bucked the upward trend to finish lower. Over the choppy trading week, the index shed nearly six points or 0.2 per cent.

US STOCKS closed out the trading week on a soft note on Friday (May 19) as early gains dissipated after US debt ceiling negotiations in Washington were paused, denting optimism a deal could be reached in coming days to dodge a default. Stocks had rallied over the past two sessions on growing confidence a deal to raise the US$31.4 trillion debt limit could be reached in coming days, with the benchmark S&P 500 climbing more than 2 per cent. But an initial advance on Friday reversed on reports of the pause in talks while Federal Reserve Chair Jerome Powell spoke at a monetary policy panel.

SG

SINGAPORE banks will not facilitate the sale and transfer of arms to Myanmar, in line with a government ban, and these lenders will take further action if necessary, the Monetary Authority of Singapore (MAS) said on Friday (May 19). The regulator’s statement follows a report by United Nations (UN) Special Rapporteur Tom Andrews, which found that Singapore companies have been involved in trade in arms and related materials worth US$254 million to the Myanmar military.

Investment flows between Greater China and the Asean region are looking robust – particularly since China’s reopening post-Covid. And the Singapore bank OCBC sees a golden opportunity. OCBC is in a good position to capture wealth and trade flows given its strong links between the two regions, said chief press release, segment adjusted . OCBC’s cross-border income grew 29 per cent in 2022; the group’s wealth business also saw net funds inflow of S$25 billion in the year, despite volatility in global markets amid the war in Ukraine. Together with a record net interest income amid the rising rates environment, the lender registered a record net profit of S$5.8 billion for FY2022. China’s reopening may have given an additional boost to the lender’s wealth business.

CapitaLand Ascendas Reit announced the proposed acquisition of an integrated high-specification research and development (R&D) facility and business park property from Seagate Singapore International Headquarters for a purchase consideration of S$218.2 million. The purchase represents a 5.1 per cent discount to the independent market valuation of the property of S$230.0 million. This brings the total count to five acquisitions which have been announced this year to date ending May 18, with a combined value exceeding S$2 billion.

City Developments Limited (CDL) saw sales slow in the first quarter ended Mar 31 due to the absence of a new launch during the period. The group and its joint venture associates sold 88 units with a total sales value of S$213.2 million in Q1, compared with 188 units at S$477.9 million in the same period last year, CDL said in an operational update on Friday (May 19).

DAIWA House Logistics Trust on Friday (May 19) announced that Takeshi Fujita, executive director and chief executive of the trust’s manager Daiwa House Asset Management Asia, will step down from both roles on May 31.

US

THE US dollar fell on Friday (May 19) after posting gains for most of the week, as optimism over a breakthrough in US debt ceiling talks boosted risk sentiment and spurred buying of currencies that benefit from positive economic and market conditions.
The euro, sterling, and commodity currencies such as the Australian, New Zealand and Canadian dollars all rallied at the expense of the greenback.
The dollar index eased 0.2 per cent to 103.31, after hitting seven-week peaks the previous session. On the week, the dollar posted a 0.6 per cent gain.

US Treasury Secretary Janet Yellen on Sunday (May 21) said that Jun 1 remains a “hard deadline” for raising the federal debt limit, with the odds quite low that the government will collect enough revenue to bridge to Jun 15, when more tax receipts are due. Less than two weeks remain until Jun 1, when the Treasury Department has warned that the federal government could be unable to pay all its debts. That would trigger a default that could cause chaos in financial markets and spike interest rates.

CHINA’S cybersecurity watchdog said on Sunday (May 21) that US chipmaker Micron had failed a national security probe and told “operators of critical information infrastructure” to stop purchasing its products. The probe was the latest escalation in the ongoing chip war between the United States and China, with Washington looking to cut off Beijing’s access to the most advanced semiconductors.

ALIBABA Group’s surprise move to fully spin out a potentially transformative US$12 billion cloud business is stirring speculation about whether the Chinese e-commerce leader bowed to market or political realities. Chief executive officer Daniel Zhang dropped a bombshell on Thursday (May 19) when he unveiled the contours of Alibaba’s historic six-way shakeup for the first time. Included among the listing and financing of a plethora of businesses was a plan to fully relinquish control of the business known as Alibaba Cloud, a once-thriving operation that harboured the potential to supercharge the company the way Amazon Web Services grew to signify Amazon.com Inc.

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

RESEARCH REPORTS

NetLink NBN Trust – Stable but higher rates start to nibble

Recommendation: NEUTRAL (Maintained); TP S$0.87, Last close: S$0.90; Analyst Paul Chew

– FY23 revenue and EBITDA were within expectations, at 101%/103% of our FY23e forecasts. A diversion revenue spike of 130% YoY in 4Q23 surpassed our expectations.

– Core residential revenue was stable at S$61.4mn, up 1.4% YoY. Interest expense almost doubled to S$5.4mn due to higher interest rates and capital expenditure.

– The new fibre rates NetLink can charge its customer is expected to be announced soon. Our base case is that fibre rates will be nudged marginally lower. Any impact on dividends is muted due to the ability to raise borrowings. Our FY24e EBITDA is raised by 2% and DCF target price nudged up to S$0.87 (prev. S$0.85). Our NEUTRAL recommendation is maintained. The distribution yield is sustainable from stable operating cash-flows and access to financing.

Sea Ltd. – Shopee picking up the slack

Recommendation : BUY (Maintained); TP: US$100.00, Last Close: US$70.16

Analyst: Jonathan Woo

– 1Q23 revenue missed expectations marginally due to decline in gaming revenue. Earnings were above our expectations, but negatively impacted by a 121% YoY increase in loan provisions. 1Q23 revenue was at 21% our FY22e forecasts, with PATMI ~US$670mn better than our FY23e forecasts due to better monetization and lower marketing spend.

– Shopee growth is re-accelerating on better monetization and resilient GMV trends in Southeast Asia. Expenses continued to decline, increasing operating profitability across all business segments.

– We cut our FY23e/FY24e revenue by 9%/12% respectively to reflect slower growth as Garena continues to drag, while increasing FY23e PATMI/EBITDA by US$940mn/US$838mn on profitability across all segments. We maintain BUY with a reduced DCF target price of US$100.00 (prev. US$120.00), using a WACC of 7.6%, and a terminal growth rate of 3.0%.

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