DAILY MORNING NOTE | 25 October 2022

Singapore stocks closed below the 3,000 level on Friday (Oct 21) for the first time since March 2021, amid recession fears with the US Federal Reserve seemingly persistent in its aggressive rate hikes. The Straits Times Index (STI) fell 1.8 per cent or 52.75 points to close at 2,969.95, its lowest closing level since February 2021. Losers outnumbered gainers 316 to 193, with 1.3 billion securities worth S$1 billion changing hands in the day. Most STI counters ended in the red on Friday, with just Emperador gaining 1 per cent to close at S$0.49, and Yangzijiang Shipbuilding climbing 0.8 per cent to close at S$1.22. Real estate investment trusts led the decline on the STI. The biggest loser was Mapletree Pan Asia Commercial Trust, which lost 6.1 per cent to S$1.55 at the close. This was followed by Mapletree Logistics Trust which fell 4 per cent to close at S$1.43. The trio of local banks also ended lower on Friday. DBS was down 0.9 per cent to S$32.39, UOB fell 0.7 per cent to S$25.99, while OCBC closed 1 per cent lower at S$11.53.

Wall Street stocks powered higher for a second straight session on Monday, cheered by signs of greater political normalcy in Britain and optimism about corporate earnings. Analysts pointed to the election of British politician Rishi Sunak as Conservative party leader and Britain’s next prime minister, turning the page on the rocky tenure of outgoing leader Liz Truss, whose tax cut proposal had plunged markets into turmoil. Investors are also hopeful about the upcoming deluge of earnings reports, particularly from large tech companies that have often outperformed earnings expectations. “Earnings season is coming in much less badly than I think the market was anticipating,” said Andy Kapyrin, co-chief investment officer at RegentAtlantic. “That’s giving people some encouragement to anticipate some better things ahead.” The Dow Jones Industrial Average finished up 1.3 per cent, or more than 415 points, at 31,499.62. The broad-based S&P 500 gained 1.2 per cent to 3,797.34, while the tech-rich Nasdaq Composite Index advanced 0.9 per cent to 10,952.61.

Week 43 strategy: We remain bearish this quarter. The recent rally in US equities the market is “front running” a Fed pivoting to smaller interest rate hikes. In our opinion, it is too early as inflation remains hot and volatile due to stubborn petroleum prices. And a pivot does not resolve the current weak economic conditions. Nevertheless, a counter trend rally is possible in Singapore. We expect bank results to surprise on the upside from net interest margins.

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

SG

iX Biopharma Ltd announced that its novel sublingual medicinal cannabidiol (CBD) wafer, Xativa™, has won the “Best CBD (Sublingual) Edible” award” at the 2022 World CBD Awards ceremony in Barcelona, Spain, on 20 October 2022. The CBD industry is one of the fastest growing sectors, propelled by rising public demand and the rapidly changing perceptions about the therapeutic potential of the cannabis plant.

Comment: The award follows up from being accorded “CBD Product of the Year” award at the Australian Cannabis Industry Awards 2020. iX Biopharma continues to expand the marketing reach of its cannabis product (Xativa) into Europe and the United States. iX Biopharma (BUY, Target Price S$0.25) is also planning to launch Hypera, a tetrahydrocannabinol cannabis wafer, in 1HFY23. No change in our recommendation or forecast.

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

William Tay, chief executive officer of the manager of CapitaLand Ascendas Reit (Clar), wants to increase the proportion of overseas assets in the Singapore-listed real estate investment trust (S-Reit)‘s portfolio, with the intent of gaining resilience through diversification. As of end June, some 61 per cent of Clar’s S$16.6 billion portfolio of investment properties are based in Singapore. The United States accounts for 15 per cent of its portfolio by asset value, with another 14 per cent based in Australia, and the remaining 10 per cent in the United Kingdom and Europe. This geographical diversification into developed markets, Tay said, has given Singapore’s largest industrial S-Reit by market capitalisation and assets under management (AUM) “a very strong base”. “In the past few years, where there was a lot of uncertainty, we didn’t see a big move in terms of negative impact to the Reit because the overseas markets provide a very different profile to Singapore’s leases.,” Tay said. For example, he pointed out that one of the merits of having overseas assets for the Reit is the inclusion of annual rental escalations in the leases – unlike the flat rate leases typically signed in Singapore – which provides a boost in income each year. “Singapore offers leasehold (properties) and is very stable in terms of lease rates and all that. But if you want to make sure that this continues to be resilient, we need to build up a different platform. The overseas platform offers freehold and escalation per annum in the lease,” Tay said.

Food and beverage (F&B) operators are wooing local hires with higher starting salaries, four-figure joining bonuses and other benefits amid an acute labour crunch, while raising pay to keep existing staff from being poached. From hawker centres to restaurant chains, some starting salaries have risen more than a fifth in recent months. Min jiang kueh (traditional pancake) chain Munchi Pancakes is offering S$2,669 for stall assistants at its two hawker centre outlets, with additional overtime pay of S$14 per hour. Weekly working hours have been cut to 44 hours from 54 hours previously. Before June, the same position paid S$2,200 including fixed overtime. From November, the chain will also provide corporate insurance for its employees. “There is a sense of disbelief,” said Munchi Pancakes director Calvyn Ng, who also runs two other F&B outlets. “Interested people who call us up ask a lot of questions, like whether there’s a trick to (the offer).” Similarly, fast casual Mexican chain Stuff’d has raised salaries by an average of 25-35 per cent since July, for both new and existing staff, said head of operations Matthew K George. Crew members get S$2,400 a month, up from S$1,800 previously; supervisor pay is now S$2,600, up from S$2,200. An outlet manager can command up to S$3,000, from S$2,500 before; an area manager, up to S$4,500, from S$3,200 before. Such increments have also been applied at Ordinary Burgers and Hugabo, two other quick-service restaurant (QSR) brands George oversees. Stuff’d was “forced” to review its salaries to match higher market rates and prevent their staff from being poached by competitors, said George. “We were not getting applications and the manpower shortage was severe. Even if your business is good, with a manpower crunch, you cannot expand.” Stuff’d has also doubled its “welcome bonus” – a one-off payout for new hires – to S$2,000. On job portal Fastjobs, such joining bonuses for hospitality and F&B positions range mostly from S$500 to S$3,600, with a top-end outlier being the S$5,000 bonus offered by in-flight caterer and ground handler Sats for Singaporeans in kitchen roles. Meanwhile, a recruitment flyer from bubble tea chain LiHo Tea touts a joining bonus of S$1,200.

US

Apple Inc on Monday increased monthly and annual subscription prices in the U.S. for its streaming services Apple TV+ and Apple Music. It also raised prices for Apple One, its bundle. Now, a monthly individual subscription to Apple Music costs $10.99, versus the previous price of $9.99. Competitor Spotify currently starts at $9.99 a month. Access to Apple TV+ costs $6.99 per month, more than the previous price of $4.99 per month. Apple TV+ has been competitively priced against other streaming services, some of which have also raised prices in recent months. It also has a smaller library of content. Competitor Disney+ starts at $7.99 a month while Netflix starts at $9.99 a month but has an ad-supported service at $6.99 a month in the works. Apple also raised annual subscription prices for those services, and raised the entry-level cost for Apple One, which adds storage and the Arcade gaming service, from $14.95 to $16.95. International markets and some other bundles will see similar price increases. The price hikes come during a period of rapid inflation around the world that is forcing businesses to raise prices while still attempting to preserve consumer demand. The increases could also bolster the revenue from Apple’s rapidly growing services business, which reported $16.9 billion in sales during the June quarter. But Apple also warned that the services business growth would slow in the September quarter, partially because of a strong dollar. Apple Music and Apple TV+ are a small part of Apple’s services business, which also includes search licensing fees, hardware warranties, App Store sales, and other businesses.

Shares of Chinese companies listed in the U.S. dropped sharply Monday after Beijing tightened President Xi Jinping’s grip on power, souring investor sentiment for non-state-driven companies. The Invesco Golden Dragon China ETF, which tracks the Nasdaq Goldman Dragon China Index, plunged 14.5% to hit its lowest level since 2009. The ETF slumped more than 20% at one point Monday. The index holds 65 companies whose common stocks are publicly traded in the U.S. and the majority of whose business is conducted within the People’s Republic of China. Tech giant Alibaba was down more than 12% after earlier dropping over 19% to a new 52-week low. Tencent Music Entertainment fell 5%, paring an earlier decline of 18%. Another tech name Pinduoduo ended the day 24.6% lower after earlier falling a whopping 34% on Monday. The moves come after Xi paved the way for an unprecedented third term as leader and packed the Politburo standing committee, the core circle of power in the ruling Communist Party of China, with loyalists. Under Xi’s leadership, China has implemented a raft of policy that has tightened regulation on the tech sector in areas from data protection to governing the way in which algorithms can be used. Meanwhile, Xi has stuck to the strict “zero-Covid” policy which has seen cities, including the mega financial hub of Shanghai, locked down this year, even as most of the world has opened their economies. “Stocks based in the world’s second largest economy are ‘uninvestable’ again,” Bernstein sales trading desk’s Mark Schilsky said in a note Monday. Hong Kong’s Hang Seng index spiraled down 6.36% to its lowest levels since April 2009. The Shanghai Composite and the Shenzhen Component in mainland China both lost about 2%. Wall Street’s top strategist, Marko Kolanovic of JPMorgan believes the sell-off in Chinese stocks is disconnected from fundamentals, presenting a buying opportunity.

U.S.-traded shares of Chinese electric vehicle makers were among those hit by a dramatic sell-off Monday, as investors soured on non-state-run Chinese companies following a weekend of dramatic political developments in China. Shares of Li Auto ended the day down 17%, Nio’s closed nearly 16% lower, and Xpeng Motors’ dropped 12% in trading in New York, while shares of larger BYD closed down over 8%. Other prominent Chinese companies including Alibaba and Tencent Music Entertainment suffered similarly dramatic declines. The sell-off followed a weekend in which President Xi Jinping appeared poised for an unprecedented third term as China’s leader after naming a series of loyalists to the Politburo standing committee, the inner circle of power in China’s ruling Communist Party. Under Xi’s leadership, China’s government has increased restrictions on speech and movement and tightened regulations on technology companies. Xpeng separately on Monday debuted a new version of its advanced driver-assist system, called XNGP. The new system, a direct rival to Tesla’s Autopilot, allows for limited hands-free driving in some urban environments as well as on highways.

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

RESEARCH REPORTS

Netflix Inc. – Re-acceleration in membership growth

Recommendation: BUY (Maintained); TP: US$346.00, Last Close: US$268.16

Analyst: Jonathan Woo

– 3Q22 revenue beat expectations even with 7% FX headwinds; earnings beat by 45%. 9M22 revenue/PATMI at 73%/82% of our FY22e forecasts. Earnings beat due to US$348mn EUR debt remeasurement and shift in spend from 3Q22 to 4Q22.

– Membership additions beat expectations (2.4mn actual vs 1mn expected). Initial demand from advertisers has been strong for the new ad-supported subscription plan.

– We maintain a BUY recommendation with a lowered DCF target price of US$346.00 (prev. US$399.00) as we lower FY22e revenue/PATMI forecasts by 3%/17% on the back of increasing FX headwinds, offset slightly by a raised terminal growth rate of 3% as we account for a longer-term improvement in revenue from advertising.