DAILY MORNING NOTE | 30 October 2023

Week 44 equity strategy: This week’s focus will be on the FOMC meeting on 1 November. Similar to the futures market, we are not expecting any rate hikes this year. The jump in bond yields of 50 bps since the last FOMC meeting in September has done the tightening for the Fed, in our opinion. Core PCE inflation for September is in line with market expectations. It is trending down towards 2.5% by mid-2024. The rise in US Treasury yields is also pulling emerging market interest rates. Indonesia, the Philippines and Turkey have reacted by raising their rates to defend their currencies. Higher rates will further restrict global growth.

In Singapore, RevPAR rose 14% YoY to a record S$271 in September. Although, occupancy was lower at 83%, average room rates soared to a record S$325. Residential property transaction volumes remain sluggish. 3Q23 volumes are down 15% YoY, dragged down by an 18% fall in resale volumes. We initiated coverage on China Aviation with a BUY rating and target price of S$1.01. We expect earnings to double over the next two years as international flights in China lift off. Valuation is attractive at 10x forward PE and 2/3 of the market cap is net cash.

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

Singapore shares shed 0.3 per cent, or 9.46 points, to 3,061.85, even as major markets in Asia rose on Friday (Oct 27). Major markets in the region were in the black. Japan’s Nikkei 225 index gained 1.3 per cent, while Hong Kong’s Hang Seng index rose 2.1 per cent and South Korea’s Kospi rose 0.2 per cent.

S&P 500 fell into correction territory on Friday (Oct 27), concluding a downcast week as markets weighed instability in the Middle East and uncertainty over monetary policy.

SG

Rents of retail space in Singapore’s central region edged up by 0.5 per cent in the third quarter of this year, extending the 0.3 per cent increase in Q2, as the tourism sector recovered further and retail activity picked up pace.

Office rents in the central region of Singapore continued rising in the third quarter of 2023 as the stock of office space decreased by 42,000 square metres (sq m), data released by the Urban Redevelopment Authority (URA) showed.

CapitaLand Ascendas Reit (Clar) reported on Friday (Oct 27) a slight increase in portfolio occupancy for its third quarter, as it also continued to register positive portfolio rental reversions. Portfolio occupancy as at Sep 30, 2023, rose to 94.5 per cent, from 94.4 per cent three months earlier. No details on revenue or distributions were provided in the third-quarter update.

STARHILL Global Reit reported net property income (NPI) of S$37.4 million for the first quarter ended Sep 30, 2023, up 0.4 per cent from S$37.2 million a year earlier. This was due mainly to higher contributions from Starhill’s properties in Singapore and from the Myer Centre Adelaide mall in Australia.

Kenangan entered the Singapore market in September this year, marking its second overseas venture after it debuted in Malaysia in October 2022. The company said its first two outlets here have performed “better than expected”, selling up to 600 cups per store per day. Global franchising plans could start as early as this quarter for the chain, which directly owns all of its current outlets. Kenangan hopes to have at least five franchisees by next year.

Korea Investment Partners Southeast Asia (KIPSEA) has closed a US$60 million fund to invest in South-east Asian startups, the venture firm announced on Monday (Oct 30). KIPSEA is the Singapore-based unit of Korea Investment Partners (KIP), one of South Korea’s largest venture firms with over US$3 billion in assets under management.

US

The US and China will work towards setting up a meeting between President Joe Biden and Chinese leader Xi Jinping next month in San Francisco, according to senior administration officials. Both sides agreed to maintain open lines of communication to build on this week’s visit by Chinese Foreign Minister Wang Yi, according to the officials, who spoke on condition of anonymity to discuss the plans.

US dollar edged down against a basket of currencies on Friday (Oct 27), pulled down by portfolio rebalancing, but was on track to end the week higher as fresh data reinforced the view the US economy remains on a firm footing.

Google has committed to invest US$2 billion in the artificial intelligence (AI) company Anthropic, solidifying its relationship with the startup darling and stoking the Silicon Valley frenzy for AI. The deal is structured as a convertible note, a type of debt that will convert to equity at the startup’s next funding round, an Anthropic spokesperson confirmed. The deal closely follows another large convertible note investment into Anthropic from Amazon.com for up to US$4 billion earlier this year.

Talks between General Motors and the United Auto Workers went on until the early hours of the morning on Friday (Oct 27) as they engage in intensive bargaining to try to reach a labour contract deal to end a six-week-old strike. Ford Motor on Wednesday was the first of Detroit’s Big Three car manufacturers to negotiate an agreement to settle strikes joined by 45,000 Detroit Three auto workers since mid-September. The deal will likely set a pattern for new contracts with GM and Chrysler parent Stellantis.

China Evergrande Group faces a make-or-break moment on Monday (Oct 30) at a court hearing, where the troubled developer must defend itself against creditor requests for liquidation. The much-awaited case in Hong Kong’s High Court follows a years-long saga that has epitomised the rise and fall of China’s real estate industry. If a wind-up order is delivered, Evergrande, with about US$327 billion of liabilities, could become the biggest-ever developer to face such a fate under Hong Kong law.

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

RESEARCH REPORTS

China Aviation Oil – Lift-off in international flights

Recommendation: BUY (Initiation); Last Done: S$0.765

Target Price: S$1.01; Analyst: Peggy Ma

– International passenger traffic in China is up 18 fold YTD September 2023 and only 33% of pre-pandemic levels. We expect international travel volume recovery to gain pace in FY24e, fuelling demand for jet fuel at international airports.

– China’s jet fuel consumption has risen by CAGR of 8.4% over the last 10 years. More airports have been added over the years to cope with the rise in air travel demand. We think CAO could potentially expand its footprint to international airports in other Chinese cities.

– We initiate coverage with a BUY recommendation and discounted cash flow TP of S$1.01. We expect earnings to double over the next two years and around 64% of the market cap is in net cash of US$308mn (as at end 2022).

United Overseas Bank Limited – NIM growth stagnates while fee income recovers

Recommendation: Buy (Maintained), Last done: S$27.03, TP: S$35.90, Analyst: Glenn Thum

– 3Q23 adjusted earnings of S$1,479mn were slightly above our estimates due to higher fee income and higher NII offset by lower-than-expected other non-interest income growth and higher allowances. 9M23 adjusted PATMI was 77% of our FY23e forecast.

– Positives include NII growth of 9% YoY and fee income rising by 14% YoY, while negatives were the flat other non-interest income growth and allowances increasing 12% YoY. Management has maintained its FY23e guidance, while providing FY24e guidance of mid-single digit loan growth from a growing customer franchise and focus on high-quality customers, NIM to remain at current levels as funding costs have stabilised and expectations for rates to maintain till 2H24, double-digit fee income growth from the Citi acquisition, stable cost-to-income ratio and credit cost at around 25-30bps.

– Maintain BUY with an unchanged target price of S$35.90. Our FY23e estimates remain unchanged. We assume 1.48x FY23e P/BV and ROE estimate of 12.9% in our GGM valuation. Continued NIM and NII improvement and fee income recovery will boost earnings.

Sheng Siong Group Ltd – Same-store sales inching up

Recommendation: BUY (Maintained; TP S$1.80, Last close: S$1.47; Analyst Paul Chew

– 3Q23 results were within expectations. 9M23 revenue and PATMI were 75%/74% of our FY23e forecast. Despite, the spike in salaries and electricity cost, PATMI grew 6% YoY on improving gross margins and interest income.

– Same-store sales in 3Q23 grew 1.8% YoY, inching up from 2Q23 by 1.5%. We believe the improvement is from market share gains. Visible promotions in the community and a reputation as a cost leader helped push revenue growth.

– We expect higher earnings growth in FY24e from new stores, lower utility costs, increase in same-store sales and interest income. Our FY23e earnings and BUY recommendation is maintained. However, we are lowering our target price to S$1.80 (prev. S$1.98). Historical valuations have been creeping downward from 22x PE to 20x PE. Post- pandemic there has been a de-rating of growth expectations.

Amazon.com Inc. – Margins expansion still the main story

Recommendation: BUY (Maintained); TP: US$190.00; Last Close: US$127.74

Analyst: Maximilian Koeswoyo

– 3Q23 revenue was in line with our expectation, while earnings exceeded. 9M23 revenue/PATMI was at 73%/98% of our FY23e forecasts. Earnings outperformance was due to higher-than-expected gross margins and lower-than-expected operating expenses.

– Operating income more than tripled YoY due to the benefits of network regionalisation in the US, easing inflation, strong advertising growth, and lower headcount. AWS growth has stabilised as the rate of customer cost-optimisation continues to attenuate.

– We maintain a BUY rating with an increased DCF target price of US$190.00 (prev. US$175.00), with a WACC of 6.4% and terminal growth rate of 5%. We increase our FY23e revenue/PATMI forecasts by 2%/31% to account for the higher-than-expected operating leverage.

Meta Platforms Inc. – Reaping the benefits of efficiency

Recommendation : BUY (Upgraded); TP: US$375.00, Last Close: US$296.73

Analyst: Jonathan Woo

– 3Q23 results were within expectations. 9M23 revenue/PATMI were at 72%/73% of our FY23e forecasts. Earnings grew ~2.5x YoY as expenses declined despite the jump in revenue.

– Advertising trends continued to accelerate (24% YoY), with Reels monetisation no longer a headwind on ranking improvements and higher ad supply.

– Wide 4Q23e revenue guidance (13%-24% YoY) implying concerns over volatility in the Middle East. FY24e total expense growth reaccelerating to 10% YoY.

– We nudge our FY23e revenue estimates higher by 2% on better advertising revenue, and widen EBITDA/net margins by 1% on lower total expenses. We expect META to benefit from the recovery in digital advertising, and sustain 30+% margins given its lower cost-structure. We upgrade to a BUY rating from ACCUMULATE, with a raised DCF target price of US$375.00 (prev. US$360.00).

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