DAILY MORNING NOTE | 8 November 2023

Trade of the Day

PDD Holdings Inc. (NASDAQ: PDD)

Analyst: Zane Aw

(Current Price: US$107.13) – TECHNICAL SELL
Sell stop: US$106.33 Stop loss: US$112.80 (-6.08%)
Take profit 1: US$98.00 (+7.83%) Take profit 2: US$92.80 (+12.72%)

Summary of Trades Initiated in Past Week

Singapore stocks closed lower on Tuesday (Nov 7), tracking a broader fall across regional markets as investors anticipated clarity on US rate cuts. US Federal Reserve officials, including chairman Jerome Powell, are scheduled to give speeches in the coming days, and investors are on the lookout for indications of whether rate hikes will continue. It shed 0.2 per cent or 6.72 points to close at 3,173.81. Across the broader market, decliners outnumbered advancers 340 to 282, with 1.3 billion securities worth S$889.8 million having changed hands. Across the region, markets were in the red. The Nikkei 225 was down 1.3 per cent, and the Hang Seng Index fell by 1.7 per cent. The Kospi was down by 2.3 per cent and the ASX 200, by 0.3 per cent.

Wall Street stocks ended the day higher on Tuesday, with the tech-heavy Nasdaq rising while Treasury yields pulled back. The Nasdaq Composite Index climbed 0.9 per cent to end at 13,639.86, as the broad-based S&P 500 advanced 0.3 per cent to 4,378.38. The Dow Jones Industrial Average edged up 0.2 per cent to finish at 34,152.60. This comes as the yield on the 10-year US Treasury note slipped to around 4.6 per cent. Yields are seen as an important proxy for interest rates.

SG

SIA reported 1H24 net earnings of S$1.4bn (+56% YoY). This is 82% of our estimates for FY24. The beat came from a S$244mn in fuel hedging gain (1H23: S$417mn), which we did not expect. Even excluding this, fuel cost was 18.8% lower YoY despite the higher capacity. 2Q24 net profit fell 3.7% over 1Q.

Passenger yields were flat at 10.7 cents/available seat km. The larger load brought unit passenger cost down 13.7% to 8.8 cents/ASK. Cargo yield is 46% lower at 41.8 cents/load tonne-km. Cargo unit cost was 23.9% lower at 20.4 cents/ltk.

Much of the improvement in earnings came from capacity expansion and higher load factors. Passenger revenue declined in Europe (-7% YoY) and Americas (-3.5%), while East Asia (+8.0%) and South West Pacific (+21.4%) were strong. This could imply lower capacity and load growth going forward given the higher proportion of short haul routes.

SIA announced the redemption of 50% of the remaining MCBs for S$1.71bn. Together with the redemption of a S$600mn 3.16% 5-year fixed-rate notes in October, total outlay of S$2.3bn would lower cash in 2H24. It has net debt (including lease liabilities) of S$1.2bn as at end Sep 2023 or a gearing of 6.6%. Book value at end Sep was S$5.83. Share is trading at 1.07x P/B. There will be a results briefing at 10am on 8 Nov.

Peggy Mak
Research Manager
peggymak@phillip.com.sg

Prime US Reit’s distributable income for the third quarter ended Sep 30, 2023 fell 23.4 per cent to US$14.7 million from US$19.2 million a year ago, said the manager on Tuesday (Nov 7) in a business update. Net property income fell 3.3 per cent to US$23.4 million, from US$24.2 million in the corresponding year-ago period. Gross revenue was down 0.9 per cent to US$40.2 million, from US$40.6 million a year ago. Overall occupancy stood at 85 per cent, with occupancy at eight of the Reit’s 14 assets posting rates above the sub-market, which stood at 81.3 per cent. The portfolio had a weighted average lease expiry of 3.8 years as at Sep 30. Rental reversion for the third quarter came in negative at 2 per cent. This was predominantly affected by one lease, which was at a rate lower than the prior short-term extension rate, said the manager.

It will be business as usual at WeWork Singapore’s 14 locations, even as the co-working giant files for bankruptcy protection in the United States. WeWork has filed for a Chapter 11 petition under the US Bankruptcy Code, which will involve rationalising its commercial office lease portfolio and improving its balance sheet. As part of its restructuring process, WeWork is requesting the ability to reject leases at certain locations which are largely non-operational. All affected members have received advance notice. “WeWork’s locations outside the United States and Canada are not part of this process. WeWork’s franchisees around the world are similarly not affected by these proceedings,” the New York Stock Exchange-listed company said on Tuesday (Nov 7).

Lendlease Global Commercial Reit (Lendlease Global Reit) on Tuesday (Nov 7) posted a committed portfolio occupancy of 99.9 per cent for the first quarter ended Sep 30, unchanged from the previous quarter. Weighted average lease expiry (WALE) stood at eight years when adjusted by net lettable area (NLA) and 5.3 years when adjusted by gross rental income (GRI). It also noted that leases expiring in FY2024 have been de-risked to 3.9 per cent by NLA and 7.8 per cent by GRI in the first three months of FY2024. The Reit posted a positive retail rental reversion of 16.3 per cent on the back of healthy leasing activities and uplift in market sentiment, said the Reit manager.

Nanofilm Technologies on Tuesday (Nov 7) posted a 29 per cent year-on-year decline in group revenue, to S$128 million for the nine months ended Sep 30, 2023. In its third-quarter business update, the nanotechnology solutions provider said: “The operating environment for Q3 2023 continued to be challenging, exacerbated by macro headwinds and the dampening of overall consumer sentiment.” Nanofilm noted that there was an uptick in operational activity in the third quarter, driven by the seasonal peak period for the computer, communication and consumer (3C) segment. Still, this was lower than the corresponding increase a year earlier. It added that gross profit declined 28 per cent year on year over the same period as lower production volumes led to reduced economies of scale.

EC World Real Estate Investment Trust (Reit)’s distribution per unit (DPU) fell 32.8 per cent to 0.916 Singapore cent for its third quarter ended Sep 30, from 1.364 cents a year ago. Gross revenue was down 9.5 per cent to S$27 million for the quarter, from S$29.8 million a year ago. Net property income (NPI) was down 8.5 per cent to S$24.7 million, from S$27.1 million a year ago. This was mainly due to a weakening of the renminbi against SGD by 8.7 per cent year on year and straight-line rental adjustment, offset by organic rental escalations and higher late fees, the Reit manager said in a bourse filing on Tuesday (Nov 7). Distributable income to unitholders declined 32.9 per cent year on year to S$7.4 million, from S$11 million. No distribution has been declared for the period Jul 1 to Sep 30, 2023.

US

Contract chipmaker GlobalFoundries forecast fourth-quarter profit above analysts’ estimates on Tuesday (Nov 7), providing the latest sign that a supply glut in the semiconductor industry was easing. The forecast feeds into recent signals that the slump in the industry may have bottomed out as customers such as electronics makers rebuild inventory after several quarters of clearing excess stock caused by a sudden post-pandemic demand drop. Both Intel and Advanced Micro Devices have indicated that a recovery is afoot in the personal computer market, a key source of revenue for semiconductor makers. GlobalFoundries said it expects adjusted profit per share to be in the range of 53 cents to 64 cents in the three months to December, above estimates of 52 cents. The company, whose customers range from mobile phone chip designer Qualcomm to the US Department of Defence, said net revenue fell 11 per cent to US$1.85 billion in the third quarter, but came in line with estimates. Adjusted earnings of 55 cents per share beat estimates of 49 cents.

Intel has shelved a planned investment in Vietnam that could have nearly doubled the US chipmaker’s operation there, one source briefed on the plans said, in a blow to the country’s growing ambitions in the chips industry. The South-east Asian electronics manufacturing hub is home to Intel’s largest factory worldwide for assembling, packaging and testing chips, and has been banking on the company further expanding there especially after Joe Biden announced deals to support Vietnam’s chips industry during a visit in September. Vietnam is keen to position itself as an alternative to China and Taiwan, amid political risks and trade tensions with the United States.

Uber reported third-quarter results Tuesday that missed analysts’ expectations on the top and bottom lines but showed strength in other areas, like gross bookings, which exceeded the company’s guidance from the second quarter. Uber’s revenue for the quarter was up 11% from the same quarter last year. In an interview with CNBC’s “Squawk Box” on Tuesday, CEO Dara Khosrowshahi said revenue growth would have been 8% higher, but the company reclassified certain incentive spends for Uber Eats as contra revenue instead of marketing expenses this quarter. The company reported net income of $221 million, or 10 cents per share, compared with a net loss of $1.2 billion, or 61 cents per share, in the same quarter last year. That includes a $96 million headwind from revaluations of Uber’s equity investments.

Coupang slid in late US trading after third-quarter profit missed analysts’ estimates, overshadowing a better-than-expected 21 per cent revenue surge and a record number of active customers. Net income in the period was little changed at US$91.3 million, compared with an average projection of US$119 million. The company, South Korea’s largest online retailer, reported net revenue of US$6.2 billion for the September quarter, beating an average analyst estimate of US$5.9 billion.

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

RESEARCH REPORTS

NetLink NBN Trust – Stable as usual

Recommendation: NEUTRAL (Maintained); TP S$0.87, Last close: S$0.84; Analyst Paul Chew

-1H24 results were within expectations. Revenue and EBITDA were 49%/50% of our FY24e forecast, respectively. DPU increased 1.1% YoY to 2.65 cents.

-1H24 EBITDA grew 2.4% YoY to S$149mn, in line with the revenue growth of 2.9%. Residential connections during the quarter were 4,023, below our trendline growth of 5,500 per quarter.

-We maintain our FY24e forecast and DCF target price of S$0.87. Our NEUTRAL rating is unchanged. The regulatory review of fibre rates is likely to be announced by this year. We believe the current distribution is sustainable. The repricing of the S$510mn interest rate hedges in 2026 will place some downward pressure on distributions.

Raffles Medical Group Ltd. – Pressure points everywhere

Recommendation: NEUTRAL (Downgraded); TP: S$1.02

Last Done: S$1.02; Analyst: Paul Chew

-3Q23 revenue and PAT collapsed 25% and 67% YoY, respectively. Results were below expectations. 9M23 revenue and PATMI were 70%/51% of our FY23 estimates.

-We had expected weaker earnings as pandemic-related revenue ends. But some of the weakness was to be offset by higher prices, foreign patients and TCF. Foreign patients’ admissions were softer than expected due to rising costs in Singapore and price increases were moderate.

-We cut our FY23e revenue and profit by 6% and 34%, respectively. We downgrade our recommendation from BUY to NEUTRAL. Our DCF target price is cut to S$1.02 (prev. S$1.76). The next few quarters will be challenging. Earnings are likely to trend back to pre-pandemic levels due to the multiple headwinds including (i) Weaker foreign patient numbers as cost is escalating compared with neighbouring countries; (ii) Softer margins at the transitional care facilities (TCF) due to competition; (iii) Elevated start-up cost in the China hospital; (iv) Higher insurance claims as customer visits normalise.

Sembcorp Industries – Investing S$14bn to build renewable portfolio

Recommendation: ACCUMULATE (Maintain) Last Done: S$5.23

Target Price: S$6.00; Analyst: Peggy Mak

-SCI announced a capex plan of S$14bn from 2024-2028, 75% of which would be invested in renewable energy assets to raise gross installed capacity to 25GW from 8.7 GW currently. This will be funded by operating cash flow from existing gas-based energy assets (50%), project debt (30%), corporate debt, capital recycling, and private credit from third parties. There is no need for equity raising at SCI level.

-EMA’s proposal to centralise gas procurement for the country will have minimal impact due to the long-term contracts it has secured for both procurement and sale.

-Maintain ACCUMULATE and TP of S$6.00. We estimate the renewable portfolio could account for 50% of net profit by FY28e. Though these assets generate lower ROE of 10% (vs 15% for conventional energy), the higher valuation multiples accorded to these assets could lift SCI’s valuation further down the road.

Block Inc – Focused on improving earnings

Recommendation: BUY (Maintained); TP: US$85.00

Analyst: Ambrish Shah

-9M23 revenue was within expectations but earnings were ahead. 9M23 revenue/adj. PATMI were 74%/84% of our FY23e forecasts. 3Q23 adj. PATMI spiked 31% YoY to US$346mn driven by higher operating leverage.

-For 4Q23e, Block expects consolidated gross profit growth of 19% YoY to US$2bn primarily driven by its Cash App segment led by growth in its monthly transacting active users and higher adoption of its banking products. For FY24e, adj. EBITDA is expected to grow by 44% YoY to US$2.4bn due to continued cost-saving initiatives.

-We maintain a BUY recommendation and nudge our DCF target price to US$85 (WACC 7.1%, g 4%), up from US$83. Our FY23e revenue estimates remain unchanged; while we have increased our adj. PATMI by 15% to account for lower expenses. We believe Block is well-positioned to benefit from its diversified portfolio of consumer banking solutions to a lower-income and underbanked demographic, resurgence of discretionary spend, and an ongoing shift to cashless payments.

DBS Group Holdings Ltd – Growth across the board offset by allowances

Recommendation: Buy (Maintained), Last done: S$33.79, TP: S$41.60, Analyst: Glenn Thum

-3Q23 adjusted PATMI of S$2.63bn was above our estimates due to higher NII, fee income and other non-interest income offset by higher allowances. 9M23 adjusted PATMI is 78% of our FY23e forecast. 3Q23 DPS is raised 14% YoY to 48 cents.

-NII rose 16% YoY on NIM expansion of 29bps despite loan growth dipping slightly. Fee income rose 9% YoY, while other non-interest income grew 21% YoY. DBS has maintained its FY23e guidance. It provided FY24e guidance of double-digit fee income growth (from wealth management and credit card fees), stable NII as higher NIMs from higher-for-longer rates will be offset by lower loan growth and total allowances to normalise to 17-20bps of loans. FY24e PATMI to be maintained at around the current levels in FY23.

–Maintain BUY with an unchanged target price of S$41.60. Our FY23e estimates remain unchanged. We assume 1.90x FY23e P/BV and ROE estimate of 16.6% in our GGM valuation. Continued NIM growth from higher-for-longer interest rates and a recovery in fee income will sustain earnings momentum.

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