Tat Hong

OCBC on 10 Jul 2014

Since a disappointing FY14, Tat Hong has undertaken a series of disposals totalling S$72.9m. We believe the disposals will make Tat Hong more asset-light and allow the company to refocus on sustainable core business in the face of a faltering Australian mining economy. We note that the disposals consist of both non-core (Kian Ho Bearings and Australian properties) and less profitable core (Hup Hin Transport) assets. Based on management outlook, Hong Kong and Thailand will be growth areas, whereas Singapore and Malaysia are likely to see flat growth. Despite the re-strategizing, we do not anticipate core earnings to bounce back to FY13 levels given that combined revenue from SE Asia and Hong Kong is only about a third of that from Singapore and Australia. Maintain HOLD with S$0.89 fair value estimate; we look to accumulate if share price drops below S$0.81.

S$72.9m of disposals after a lacklustre FY14
Since a disappointing FY14 that saw PATMI dropping 53.4% to S$32.8m, Tat Hong has undertaken a series of disposals totalling S$72.9m – a sizable amount that is 124.4% of cash balance as of Mar-14. The disposal deals comprise: 1) a S$17.2m cash consideration for 31.27% interest in Kian Ho Bearings Ltd, 2) cash consideration of S$20.6m for 70% interest in Hup Hin Transport Co Pte Ltd, and 3) cash consideration of A$30.0m (~S$35.1m) for a conditional sale and leaseback agreement with TransLinQ Income Pty Ltd in relation to five Australian properties. 

Focusing on sustainable core business
We believe the disposals will make Tat Hong more asset-light and allow the company to refocus on its core business in the face of a faltering Australian mining economy (44.0% of total revenue in FY14). We note that the disposals consist of both non-core (Kian Ho Bearings and Australian properties) and less profitable core (Hup Hin Transport) assets. Based on the management outlook from last results briefing, Hong Kong and Thailand will be growth areas, whereas Singapore and Malaysia are likely to see flat growth. This would be consistent with their divestment of Hup Hin, a Singapore and Malaysia heavy transport service solution provider. We think there might be further divestments of non-core or less profitable assets, with investments made in growth regions instead. However, we do not anticipate core earnings to bounce back to FY13 levels given that combined revenue from SE Asia and Hong Kong (19.3% of total revenue in FY14) is relatively small compared to that from Singapore and Australia (67.6% of total revenue in FY14).

Proceeds likely used for debt reduction
We think most of the proceeds will be used for debt reduction due to: 1) elevated net gearing of 0.71x as of Mar-14 (vs. 5-year historical average of 0.57x), and 2) little capex needs for subdued fleet expansion. We maintain HOLD with S$0.89 fair value estimate. We re-iterate accumulation if it drops below S$0.81 (10% below our FV and 26% discount to FY15F book value).

Kim Heng Offshore & Marine

OCBC on 9 Jul 2014

With over 40 years of experience, Kim Heng Offshore & Marine Holdings Limited offers a one-stop comprehensive range of products and services that caters to the offshore oil and gas industry, with its core competencies in rig repair and maintenance, refurbishment of rigs, and supply chain management. The group enjoys good relationships with established players in the industry, counting Transocean and Seadrill as a few of its key customers. The ongoing requirement for rig maintenance and repair also means that it is less cyclical than the newbuild business, and ad-hoc jobs with urgent client requirements present opportunities for higher margin work as well. As the group seeks further avenues of growth post IPO in Jan this year, we see the potential for acquisitions ahead. At the same time, its proven track record and established relationships with clients lend confidence that it can weather downturns and be a beneficiary during up-cycles. Initiate with BUY and S$0.34 fair value estimate (based on 11.5x FY14/15F earnings).

Long-time player in the O&M industry
With over 40 years of experience, Kim Heng Offshore & Marine Holdings Limited offers a one-stop comprehensive range of products and services that caters to different stages of offshore oil and gas projects from oil exploration to field development and oil production. Its core competencies lie in rig repair and maintenance, refurbishment of rigs, offshore fabrication and supply chain management.

Core business delivers good returns
The group enjoys good relationships with established players in the industry, counting Transocean and Seadrill (amongst others) as a few of its key customers. The ongoing requirement for rig maintenance and repair also means that it is less cyclical than the newbuild business, and ad-hoc jobs with urgent client requirements present opportunities for higher margin work as well. This has allowed the group to deliver ROEs of 30-50% in FY11-13 and ROICs of 27-33% over the same period, and is expected to buttress the group’s earnings as it seeks further avenues of growth.

Seeking next leg of growth
The group used to be entirely controlled by the Tan family, and though it remains a major shareholder with several members of the family in senior management, there is now also the presence of a private equity fund, Credence Partners, that aims to grow with the company. We expect to hear about acquisitions to boost the group’s capabilities (such as in the subsea business), and perhaps an expansion beyond Singapore. 

Under-priced; initiate with BUY
We value Kim Heng based on 11.5x FY14/15F P/E, close to the industry average for offshore service providers. The group’s proven track record and established relationships with clients lends confidence that it can weather downturns and be a beneficiary during up-cycles. The current outlook for the O&M industry is also positive, and well-executed acquisitions may result in a re-rating of the stock. Initiate with BUYand S$0.34 fair value estimate.

SIIC Environment

Kim Eng on 9 Jul 2014

• Placing out 1b new shares at SGD0.158 apiece, at a reasonable 7.6% discount to pre-suspension price.
• An unexpected move given lowly-geared balance sheet; building up its war chest for future acquisitions.
• Maintain BUY. TP lowered to SGD0.20 from SGD0.22, after incorporating an enlarged share base.

Raising SGD158m cash by placing out 1b new shares
SIIC announced a share placement of 1b new shares, issued at SGD0.158 apiece, priced at a reasonable 7.6% discount to its pre-trading halt price of SGD0.171. These new shares represent 11.6% of its current share base. With SGD158m cash in hand, SIIC’s FY14E net gearing ratio is expected to improve to 18.0% from 49.3%.

Building up its war chest for more acquisitions ahead
While fund raising is a necessary evil as SIIC embarks on an acquisition path, this share placement came as a surprise to us considering its comparatively more lowly-geared balance sheet. We had earlier expected SIIC to raise debt instead. In our view, SIIC could be building up its war chest for future acquisitions. Part of the proceeds could be used to finance the recent acquisition of Longjiang Environmental Protection Group costing CNY405m.

Given its 1m ton/day capacity increase target, more acquisitions could be on the cards. Without this, the EPS dilution could be as much as 11%.

We maintain our BUY rating on SIIC. This share placement, albeit dilutive, will strengthen SIIC’s balance sheet, providing it the ammunition for future acquisitions. We lower our TP to SGD0.20 (previously SGD0.22), after adjusting for an 11% increase in share base, pegged to an unchanged 30x FY15E P/E.

OCBC Bank

Kim Eng on 10 Jul 2014

• With Elliott Capital Advisors in the picture, the privatisation bid for Wing Hang Bank looks challenging.
• A higher offer price for WHB would be negative; we think OCBC is likely to keep its stake at 75% before embarking on its second privatisation bid for WHB a year from now.
• Negative view reinforced; reiterate HOLD.

Possible scenarios for WHB acquisition
The move by Elliott Capital Advisors to accumulate up to 7.8% stake in Wing Hang Bank (WHB) could throw a spanner on OCBC's bid to take WHB private, which requires at least 90% acceptances.
In our view, the two possible outcomes are:

Outcome #1: OCBC receives less than 90% acceptances but more than 75%. OCBC is required to sell anything in excess of 75% as per the listing requirement that stipulates a minimum 25% free float.
We expect WHB's share price to collapse to HKD83 (1.2x P/BV), its last traded price before the M&A excitement emerged. This represents a 33.6% downside from the offer price of HKD125. OCBC could incur losses as much as SGD311m, equivalent to 1.4% of its core equity Tier 1. From a P&L standpoint, the impact is modest but it could reduce management flexibility.

Outcome #2: Under a worse-case scenario, OCBC raises the offer price such that WHB can be taken private. In our view, this is an unlikely outcome as it could put management's credibility at risk.
Already, the share price of OCBC has suffered and the earlier guidance of EPS and ROE accretion by FY17E could be pushed back. We think OCBC is more likely to keep its shareholding at 75% before embarking on its second privatisation bid a year later. This saga reinforces our negative view on the stock Our SGD9.63 TP is based on 1.24x FY14E P/BV, equivalent to 1SD below its historical P/BV average since Jan 2005.

OUE Ltd

Kim Eng on 10 Jul 2014

• One Raffles Place mall reopened after a major revamp, with new tenants such as H&M and UNIQLO.
• Works continue at OUE Downtown and Downtown Gallery, which could be recycled for capital into OUE Hospitality Trust (OUEHT) and OUE C-REIT by 2017.
• Incorporating our TP for recently-initiated OUEHT and adjustments for the distribution in specie, we trim our TP to SGD2.80, pegged to a 35% discount to RNAV. Maintain BUY.

Rejoice for downtown shoppers
One Raffles Place (ORP) mall - the largest mall in Raffles Place - has 98,500 sq ft of NLA with H&M and UNIQLO among its tenants. We estimate that ~70% of the stores are in operation. Based on management’s estimates, OUE’s 41% stake in ORP (including Towers 1 & 2) may be ready for injection into OUE C-REIT by 2015. The next focus will be the conversion works at OUE Downtown, where ~264,794 sq ft of office space at Tower 1 is being converted into serviced apartments. The podium is in the process of being converted into a 159,307 sq ft retail mall called Downtown Gallery. With the conversion works expected to be completed by 2016, the serviced apartments may then be injected into OUE Hospitality Trust (OUEHT), while the remaining office space and Downtown Gallery are expected be divested to C-REIT.

Model updated; TP trimmed to SGD2.80
We adjust our model for the deconsolidation of OUEHT following its distribution in specie and incorporate the expected conversion of OUE Downtown to derive a TP of SGD2.80, pegged to a 35% discount to RNAV. Due to the deconsolidation, our FY14E-16E EPS forecasts are cut by 12.6%, 9.4% and 6.3% respectively. Further upside is possible pending more details of the Incheon integrated resort JV with Caesars Entertainment. Maintain BUY.

Ascott Residence Trust

UOBKayhian on 8 Jul 2014

FY14F PE (x): 8.5
FY15F PE (x): 9.2
Ascott Residence Trust (ART) announced the acquisition of three serviced residences
in Malaysia (1) and China tier-2 cities (2) from its sponsor The Ascott Limited for a total
purchase consideration of S$174m.
Yield-accretive acquisitions done at a slight discount to valuations. The acquisition of
three serviced residences is yield-accretive with a blended average pro-forma EBITDA
yield of 5.1% and will result in a proforma DPU increase of 1.2% assuming the
transaction was done at the beginning of 2013. Management guided that the China
properties are still ramping up and expects 2014 EBITDA yields to be better than last
year. In terms of valuation, the portfolio is being acquired at a slight 1% discount to the
average of two independent valuations. The overall funding cost for the acquisition is
expected to be slighlty lower than 4%.
Upgrade to BUY and increase target price by 7% to S$1.40. The acquisition clears the
overhang on the deployment of the funds raised through placement proceeds and
offers scope for organic yield improvement. ART is currently trading at an attractive
2015F yield of 7.4% (peers average: 7%). Thus, we upgrade the stock from HOLD to
BUY with a target price of S$1.40. Our valuation is based on a two-stage DDM model
(required rate of return: 8.1%; terminal growth rate: 2.0%).

Q&M Dental Group

Kim Eng on 8 Jul 2014

• Deal completed. Largest acquisition so far, Aoxin Stomatology now part of Q&M China. Maintain BUY, TP SGD0.55.
• Aoxin-style earnings-accretive acquisitions are what to expect. We expect more such deals in the pipeline.
• When acquisitions fully kick in next year, FY15E P/E valuation will be reduced from 37x to as low as 27x.

What’s New
Q&M has successfully completed the acquisition of a 60% stake in Aoxin Stomatology Group in Shenyang, Liaoning province, its largest acquisition in China to-date. With this, the stock has almost recovered back to its placement price of SGD0.48 to Heritas Helios Investments in early June. We maintain BUY with SGD0.55 TP.

What’s Our View
Aoxin will be earnings accretive as its acquisition valuation of 11x P/E is far below Q&M's P/E of 43x FY14E core earnings. Based on the first year profit guarantee of RMB6.6m pa, Aoxin is expected to contribute a prorated SGD1m to FY14E net profit - in line with our expectations. The full impact will come in FY15E when it contributes SGD1.5m on top of the current forecasted net profit. Q&M’s FY14E and FY15E P/Es of 43.4x and 37.3x look expensive now because we have not yet included contributions from any acquisition in the pipeline in our forecasts, be it Aoxin or five other M&A deals that have been announced. We will be adjusting them to include Aoxin when 1H14E results are released, as we expect to have its full proforma figures by then.

Based on our estimates, FY15E P/E will be reduced from 37.3x now (42.3x if rights issue included) to 35.8x (with Aoxin) and as low as 27.1x (all-in). At the same time, FY15E EPS growth is expected to rise from 16.3% (organic growth only) to 23.6% (with Aoxin) to as high as 53.5% (all-in). With Aoxin in the bag, Q&M has proven that it is able to execute on its acquisition strategy, and with a string of deals to come, the stock is still attractive in the next 12 months.

Raffles Medical Group

Kim Eng on 7 Jul 2014

• Downgrade to HOLD as surge in share price has closed the valuation discount to peers. DCF-based TP is SGD3.94.
• China catalyst not in sight yet despite a year-long gestation, while local competition could rise in the near-term.
• However, premium valuation justified by resilient corporate customer base and diversified foreign patient base.

Valuation no longer appealing; cut to HOLD
With a change in analyst coverage, we cut Raffles Medical to HOLD following its recent share price rally that has pushed valuations to record levels. At 33x FY14E P/E, the stock looks fairly valued relative to FY13-16E EPS CAGR of 12.3%. The relative valuation discount vs sector peers has also evaporated. In our view, much of the positives are already in the price. Our DCF-based target price is lowered slightly to SGD3.94 (8% WACC, 2% Tg).

China catalyst not in sight
Raffles Medical announced its initial plans to expand into China in Feb 2013. Up until now however, details have remained sketchy and the preliminary agreements signed in 2013 have yet to solidify into more concrete joint venture agreements. Management said that the company remains committed to the China expansion, but cautioned of possible delays. Even if the projects are confirmed, it would still take 2-3 years for operations to begin.

New private hospital could rock the boat
A new privately-owned hospital – Connexion at Farrer Park – is expected to open its doors next month. The new hospital has a strong Indonesian financial backer. Connexion chairman Dr Maurice
Choo, a cardiologist, has been quoted in the press as saying that they plan to “disrupt the market” with lower prices.

Premium valuation justified
For now, we think Raffles Medical’s premium valuation is justified given its resilient corporate customer base and diversified foreign patient base.

Ascott Residence Trust

OCBC on 8 Jul 2014

Ascott Residence Trust (ART) announced yesterday that it has entered into conditional agreements to acquire its first serviced residence in Kuala Lumpur, Malaysia and two serviced residences in Wuhan and Xi’an in China. At a total property value of S$173.9m, management estimates the blended EBITDA yield to be 5.1% and expects the acquisitions to increase its pro forma FY13 DPU by 0.1 S cents or 1.2%. This is in line with our acquisition yield of 5.5% we have projected for transactions made by ART in 2014 in our view, given that operating metrics at the three assets have improved over the past year. As the acquisitions constitute interested party transactions, ART will have to seek unitholders’ approval at an EGM to be held on 31 Jul 2014. We maintain BUY on ART with an unchanged fair value of S$1.33.

Acquires three assets in Malaysia and China
Ascott Residence Trust (ART) announced yesterday that it has entered into a conditional agreement to acquire its first serviced residence in Kuala Lumpur, Malaysia from its sponsor The Ascott Limited for MYR175m (S$67.4m). It also proposed to acquire two serviced residences in Wuhan and Xi’an in China from Ascott Serviced Residence (China) Fund, in which Ascott holds a 36.1% stake, for S$106.5m. At a total property value of S$173.9m, management estimates the blended EBITDA yield to be 5.1% and expects the acquisitions to increase its pro forma FY13 DPU by 0.1 S cents or 1.2%. This is in line with our acquisition yield of 5.5% we have projected for transactions made by ART in 2014 in our view, given that operating metrics at the three assets have improved over the past year.

Investment merits of the properties
We understand that the Malaysia property is strategically located in the prime Golden Triangle of nation’s capital city – a major business, shopping and entertainment hub, and enjoys good inter-city and intra-city connectivity. ART is upbeat that the property is well positioned to benefit from the expected increase in corporate activities, which have already seen foreign direct investment rose by 25% in 2013. Management also believes Wuhan and Xi’an properties will enable ART to expand its footprint in China and tap into robust growth in these cities. All three properties, we note, are new as they are only opened in 2011.

Maintain BUY
ART intends to fund the acquisitions wholly by debt from its existing debt facilities, which should increase its gearing ratio from 35.9% as at 31 Mar 2014 to c. 40.2% upon completion of the transactions. This would also effectively utilize all the proceeds from its rights issue raised in Dec 2013. As the acquisitions constitute interested party transactions, ART will have to seek unitholders’ approval at an EGM to be held on 31 Jul 2014. We are making minor adjustments to our forecasts, and keeping our fair value of S$1.33 fair value intact. Maintain BUY on ART.

Wilmar

OCBC on 7 Jul 2014

Wilmar International Limited (WIL), together with 50-50 JV partner First Pacific Company Limited (FPCL), has reduced its offer for Goodman Fielder from A$0.70 to A$0.675 via a scheme of arrangement. Goodman directors have also unanimously recommended that shareholders vote in favour of the scheme in the absence of a superior proposal. Separately, the tighter credit conditions in China in the wake of the commodity financing fraud in China could also impact WIL, but we believe that it should weed out a lot of the financial speculators in the oilseeds & grains, thus improving crush margins for genuine importers like WIL in the medium term. But for now, we maintain our HOLD rating with an unchanged fair value of S$3.36 (12.5x blended FY14F/FY15F EPS).

New offer of A$0.675/share
Wilmar International Limited (WIL), together with 50-50 JV partner First Pacific Company Limited (FPCL), will now pay A$0.675/share to for all Goodman Fielder (listed on ASX and NZX) shares not already owned by the JV. Recall that WIL had to improve the offer to A$0.70 after the initial A$0.65 offer was rejected by Goodman’s board as being too low and “materially undervalues” the company.

Board conditionally agreed to scheme
However, the Goodman directors have now unanimously recommended that shareholders vote in favour of the scheme in the absence of a superior proposal, subject to an independent expert opining that the scheme is in the best interest of shareholders. If the scheme does proceed, the WIL-JV will need to pay A$1,057.4m (~US$994.7m) as opposed to A$1.37b under the revised offer. The scheme meeting is expected to be held in Nov 2014.

Move will expand WIL’s downstream capabilities
As before, we believe that the move makes sense as the range of products will advance WIL’s strategy of broadening its product range to take advantage of its extensive distribution network, especially in China. We also believe that WIL should be able to capitalize on its brand recognition in China to market these Made in NZ food products as not only safer alternatives but at a premium to locally-made brands.

Maintain HOLD 
Separately, the concerns over commodity financing fraud in China have forced banks to impose more controls in the country’s massive commodity financing business, leading to credit drying up for most but large firms and state-owned companies. While WIL may feel some of the impact, we believe that the tighter credit conditions would weed out a lot of the financial speculators in the oilseeds & grains, thus improving crush margins for genuine importers like WIL in the medium term. But for now, we maintain our HOLD rating with an unchanged fair value of S$3.36 (12.5x blended FY14F/FY15F EPS).

Keppel Corporation

OCBC on 4 Jul 2014

Keppel Corporation’s (KEP) conditional contract with Golar Hilli Corp to perform a FLNG conversion has turned effective. The contract is worth about US$735m (delivery in 1Q17), and there are also the options for two more similar units. Should the options be exercised at a later date (deliveries will then be in 3Q17 and 1Q18), this could add about US$1.4b worth of new orders for KEP. Also, being the world’s first-of-its-type conversion job, this reaffirms KEP’s leadership in complex offshore conversion projects. The group has secured orders of about S$3.2b YTD, accounting for close to half of our full-year new order win estimate, and we maintain our BUY rating with S$12.25 fair value estimate on the stock. Meanwhile, the forecasted dividend yield of about 4.7% should provide support to the share price.

Golar contract turns effective
After announcing on 25 Jun 2014 a conditional contract with Golar Hilli Corp to perform a FLNG conversion, Keppel Corporation (KEP) has revealed more details on this project, which has turned effective. The contract is worth about US$735m (delivery in 1Q17), and there are also the options for two more similar units. Should the options be exercised at a later date (deliveries will then be in 3Q17 and 1Q18), this could add about US$1.4b worth of new orders for KEP. 

World’s first-of-its-type; reaffirms KEP’s leadership 
KEP will perform the world’s first-of-its-type conversion of an existing Moss LNG carrier, the Hilli, into a Floating Liquefaction Vessel, and this reaffirms the group’s leadership in complex offshore conversion projects. This is also a good opportunity to offer solutions to help address the growing midstream needs in bringing small and mid-scale LNG to market to meet the rising global demand for energy. In particular, a mid-sized FLNG offering such as this offers a faster and more cost effective liquefaction solution. According to Golar, the 1Q17 delivery date means that it will be several years ahead of any potential competitors. Recall that Keppel Shipyard had successfully delivered to Golar the world’s first Floating Storage and Regasification Unit (FSRU) back in 2008, which was followed by two more similar units.

Also secures more contracts
Keppel also announced recently that it has secured another FPSO conversion contract and a subsea construction vessel (SCV) contract worth a total of S$368m. The customer of the FPSO conversion contract is Bumi Armada, while the customer for the SCV contract is Baku Shipyard. 

4.7% dividend yield on a quality stock
KEP has secured orders of about S$3.2b YTD, accounting for close to half of our full-year new order win estimate, and we maintain our BUY rating with S$12.25 fair value estimate on the stock. Meanwhile, the forecasted dividend yield of about 4.7% should provide support to the share price.

Silverlake Axis

UOBKayhian on 4 Jul 2014

FY14F PE (x): 27.8
FY15F PE (x): 23.5
Stricter regulations, regional expansion and digitisation keep orderbook backlog at RM250m as at end-Mar 14, which would be recognised over the next 12-18 months. While negotiations for new contract wins remain ongoing, existing customers continue to supply new projects to the group. Stricter regulations have led to enhancement and upgrading services. Banks have been extending the scope of work required from SAL as they expand their market coverage and engage in M&As. Increasing pressure to ride the trend in digital solutions has led to many customers actively seeking ebusiness applications. In 3QFY14, the group secured RM60m worth of new contracts from existing customers and mitigated the delay in major contract wins.

Downgrade to HOLD but maintain target price at S$1.20, based on our DCF model. Our target price implies 24.8x FY15F PE, slightly above its historical PE band of 1.2- 24.1x. Peers are trading at an average forward PE of 18x but offer lower ROE of 21% vs SAL’s 41%. We continue to like the group’s business model and outlook and would look to accumulate closer to S$1.05.

Pacific Radiance

UOBKayhian on 4 Jul 2014

FY14F PE (x): 11.1
FY15F PE (x): 9.8
Mexico beckons. Pacific Radiance and Consultoria y Servicios Petorleros, S.A. de
C.V. (CSP) is forming a 49: 51 JV offshore support vessel chartering company, CR
Offshore S.A.P.I. de C.V. (CRO). Management said its Mexican JV partner is an
offshore support vessel (OSV) operator with a fleet of less than 10 chartered-in
vessels. Pacific Radiance’s strategy in Mexico will be similar to its JV in Indonesia via
Logindo, but it will proceed carefully as the conditions in Mexico are different. The
Mexican JV entity is looking to deploy more vessels in 2H14.
Maintain BUY and target price of S$1.55, based on 11.5x 2015F PE, which is about a
20% premium to the long-term (2004-current) 1-year forward PE mean of 9.5x for the
OSV- owner segment. Looking at the big picture, Malaysian stocks are the most
expensive, followed by international peers and then Singapore stocks. Indonesian
stocks are still the cheapest but are catching up.

Tianjin Zhongxin Pharmaceutical Group

CIMB Research, July 2

BEING a time-honoured brand name with a number of exclusive products under China's national essential drug catalogue, Tianjin Zhongxin is in a privileged position to capitalise on China's ageing population. Its flagship product, Su Xiao Jiu Xin pill, is well recognised for its efficacy in treating cardio-vascular diseases. We initiate coverage with an "add" rating and a target price of US$1.46 that is based on CY2014-DCF (WACC: 8 per cent, g: 3 per cent).

China's Ministry of Health requires all primary medical and health institutions to use essential drugs. Sales of essential drugs should form 40-50 per cent of total sales in secondary hospitals and 25-30 per cent of total sales in tertiary hospitals.

A number of Tianjin Zhongxin's exclusive products fall under the essential drugs catalogue, allowing it to capitalise on the vast customer base while having some economic moats to fend off downward pricing pressure from the open tendering procurement.

Produced exclusively by the company, the Su Xiao Jiu Xin pill is a cardio-vascular drug that is well recognised for its fast efficacy in body and lack of side-effects. Sales have been growing rapidly at 14.5 per cent CAGR over the last five years. We think its high growth is sustainable, given the sharply rising incidence rate that correlates with China's ageing population.

The price gap between S- and A-share has been narrowing over the last five years (from 80 per cent to 56 per cent discount). The company recently proposed a private placement of 90 million A-shares, at the price of 12.83 yuan (S$2.58) per share, to finance the upgrading of marketing network, logistics as well as forays into other complementary businesses.

Given the huge disparity in pricing, S-share investors are entitled to the economic benefits from these investments, at only half the cost for potential subscribers of the A-share placement.

ADD

Keppel Corporation

DMG & Partners Research, July 3

KEPPEL Corp announced that its conditional contract with Golar LNG for the conversion of a floating liquefaction vessel (FLNGV) is now firm. The contract value of U$735 million came as a surprise, and is 22 per cent above our S$750 million estimate.

This boosts Keppel's YTD order wins to S$3.15 billion, on track to hit our S$6.5 billion estimate. This contract comes with two options for the conversion of another two similar units, likely worth an additional S$1.8 billion. Last week, Golar successfully priced its follow-on offering of 110 million shares of common stock at US$54 per share, raising about US$6 billion to: i) fully fund initial milestone payments under a conditional agreement with Keppel, and ii) partly fund future scheduled payments.

With financing now in place, the lights turn green for converting two additional FLNGVs, the Gimi and the Gandria, which appear to be sister vessels to the Hilli.

According to the Douglas-Westwood World FLNG Market Forecast, the global floating liquefied natural gas (FLNG) industry is expected to attract over US$65 billion of investments through 2020. The Asia-Pacific has been singled out to draw the majority of investments in this sector, with its strong pipeline of regasification and liquefaction projects.

We continue to maintain our "buy" recommendation on Keppel with an S$12.50 target price based on the sum-of-parts model. We see Keppel's strong design capability yielding long-term competitive advantages. Key risks include a slowdown in global gas projects amid burgeoning cost pressures in both the floating and onshore LNG industry.

BUY

Singapore Property

OCBC on 3 Jul 2014

With a dearth of upcoming projects in the Orchard retail space pipeline over 2015-17, we believe there could be a greater impetus for strategic redevelopments along the western end of Orchard Road - a neglected area with relatively dated assets. In particular, Hotel Properties Ltd (HPL), which owns a large combined site in that area, has been long reported in the media to be considering a mega-development and recently saw a general offer made by a consortium comprising strategic partners, Mr. Ong Beng Seng and Wheelock Properties Ltd. (Wheelock). Our research reveals the meaningful confluence of fundamental drivers supporting the revitalization of West Orchard ahead, and we identify four developers with key assets in the area. We initiate coverage on HPL with a BUY and fair value of S$5.32 (35% RNAV disc.), and on Wheelock with a BUY and fair value of S$2.38 (30% RNAV disc.). Other potential beneficiaries in West Orchard include Hong Fok (unrated) and Bonvests (unrated), which are trading at 35%-47% discounts to RNAV.

Dry retail space supply in Orchard pipeline over 2015-17 could set up a crunch ahead
A dearth of upcoming projects in the Orchard retail space pipeline over 2015-17 would likely set up a crunch for space over that period, in our view. From 2013-17, our base case is that occupancy rates will rise from 95.8% to 97.2%, and Orchard prime retail rents will grow at a CAGR of 2.0% p.a. to S$36.9 psf pm.

Turning our eyes to quiet western end of Orchard Rd for deep value
Given this, we believe forward-looking investors should turn their eyes to the western end of Orchard Road - from Far East Shopping Center to Tanglin Mall – a neglected area of relatively dated assets that holds significant potential for redevelopment and expansion. In particular, Hotel Properties Ltd (HPL), which owns a large combined site in that area, has been long reported in the media to be considering a mega-development and recently saw a general offer made by a consortium comprising strategic partners, Mr. Ong Beng Seng and Wheelock Properties Ltd. (Wheelock).

A meaningful confluence of drivers for West Orchard revitalization ahead
From our research, we believe there is a meaningful confluence of fundamental drivers supporting the revitalization of West Orchard ahead. For instance, authorities have planned comprehensive underground links from the key Orchard MRT station to the area, and also a new MRT station near Tanglin Mall, in addition to various incentives for redevelopments through the Master Plan.

Initiate with BUY ratings on HPL and Wheelock 
In this piece, we identify four developers with key assets in the West Orchard area. In addition, our estimates indicate that a potential HPL mega-development could yield as much as S$1.25bn in surplus net present value for the company. We initiate coverage on HPL with a BUY and fair value of S$5.32 (35% RNAV disc.), and also on Wheelock with a BUY and S$2.38 fair value (30% RNAV disc.). Other potential beneficiaries in West Orchard include Hong Fok and Bonvests, which are trading at 35%-47% discounts to RNAV.

Telecoms Sector

UOB Kay Hian, July 1

THE Infocomm Development Authority (IDA) has initiated industry consultation on enhancing competition and service innovation. It could adopt a more heavy-handed approach of implementing wholesale price regulations or setting a minimum allocation of network capacity for MVNOs.

An MVNO is a service provider that does not own a licensed frequency spectrum. Typically, it does not own the underlying wireless network over which its mobile services are provided, but procures wholesale access to network services from an incumbent MNO. The MVNO then resells voice minutes, SMS and data to its customers.

We have surveyed regulatory regimes across various jurisdictions and conclude that:

• Too little and too late: Some 150MHz of spectrum for the 1,800MHz frequency band and 90MHz of spectrum for the 2,500MHz frequency band for 4G were already auctioned and allocated to M1, StarHub and SingTel in July last year. The 900MHz frequency band, which expires in March 2017, is smaller, with only 60MHz of spectrum. Thus, implementing the framework for hosting MVNOs when re-allocating the 900MHz frequency band is unwieldy and unlikely to create the desired industry-wide impact.
• Fixing of wholesale pricing unlikely: The IDA is unlikely to set wholesale pricing at a pre-determined price or formula due to the administrative burden of implementation. Setting wholesale pricing too high is detrimental to MVNOs' survival. However, setting rates too low takes away the incentives for MNOs to invest in their networks. A more elegant approach is to supervise and monitor wholesale pricing to ensure fair access, similar to the practice within the EU.

Maintain "overweight". We see growth and innovation within the mobile space. These include wearable gadgets, such as Google Glass and Samsung Galaxy Gear. In future, all electronic gadgets would be linked by machine-to-machine connections via the "Internet of Things" (IOT). The low levels of gearing for all three telcos also provide potential upside from capital management over the longer term.

On average, the three telcos are trading at a healthy spread of 2.65 per cent above 10-year Singapore government bonds, in line with long-term mean of 2.69 per cent. SingTel's yield spread is 2.03 per cent, above mean of 0.88 per cent. Conversely, StarHub's yield spread is 2.34 per cent, below mean of 3.61 per cent. Our top picks are M1 and SingTel.

M1 ("buy", target price or TP: S$4.05): M1 reversed a declining trend and gained revenue market share from 2012 to Q1 2014. It benefits from growth in data usage and lower handset subsidies as mobile accounted for 78.3 per cent of its service revenue in Q1 2014. M1 hosts MVNO PLDT Singapore that provides SMART Pinoy pre-paid SIM cards.

StarHub ("hold", TP: S$4.33): StarHub faces intense competition for residential broadband services and a saturated pay-TV market. The challenges in residential broadband and pay-TV businesses prevent StarHub from declaring special dividends. Its dividend payout ratio is also stretched at an estimated 96.8 per cent for 2014.

SingTel ("buy", TP: S$4.30): SingTel benefits from consolidation and easing of price competition in Indonesia and India, the two largest markets for its regional mobile associates. It has hiked its dividend payout ratio twice to the current 60-75 per cent. The stock provides an attractive dividend yield of 4.7 per cent, which is almost one standard deviation above mean.

Sector - OVERWEIGHT

Singapore Airlines

OCBC Investment Research, July 2

SINGAPORE Airlines (SIA) has been seeking new revenue through geographical expansion as well as ancillary sources, of which some will start contributing modestly in FY2015. We note that equity participations (through JVs) are in the home region, whereas codeshare partnerships are formed to improve connectivity in other regions.

First, NokScoot, a Thailand- based low-cost carrier (LCC) JV with Nok Airlines, is expected to start operating in H2 2014. Second, newswires have reported that Tata-SIA JV is expected to be issued an air operators' permit - its final regulatory hurdle - this month and commercial operations are likely to start in September.

We expect adverse operating environment for NokScoot due to: 1) political uncertainty ahead in Thailand, which could depress tourism traffic, and 2) newly established medium- to long-haul LCC Thai AirAsia X, a direct competitor, likely engaging in aggressive pricing and marketing that NokScoot will have to keep up with at the expense of profitability.

As for the Tata-SIA JV, we acknowledge it will enable SIA to tap into India's growing air-travel volume. However, we think the JV will have a rocky start, given that: 1) political inertia to change current regulations will prevent it from operating international flights until five years later; and 2) an additional player will only add on to the intense competition among current players; according to Capa, IndiGo is expected to be the only carrier in India to report profit for FY2014.

We think the initiatives' boost to profits in the current environment will be limited, if any at all. Easing of pressure, albeit an insignificant factor, will come from: 1) cessation of loss-making Tigerair Mandala operations, and 2) Changi Airport's GAIN programme, which will alleviate airlines' operating costs.

Maintain S$9.50 fair value estimate.

HOLD

CapitaCommercial Trust

Kim Eng on 3 Jul 2014

• The new tenants for CapitaGreen are insurer Jardine Lloyd Thompson and a global law firm, Jones Day.
• Another 200,000 sq ft to go before reaching the targeted 50% pre-commitments by year-end.
• Reiterate BUY with an unchanged TP of SGD1.83.

What’s New
We attended the topping-out ceremony of CapitaGreen, which is on track to complete by year-end. CapitaCommercial Trust (CCT) also announced that it has secured YTD pre-commitment of 21% (150,800 sq ft) of total NLA for CapitaGreen vs 12% three months ago. The new leasees include Jardine Lloyd Thompson (an insurance/reinsurance firm; currently at One Raffles Quay) and Jones Day (a law firm; presently at Samsung Hub), alongside Cargill, Bordier & Cie (moving out of GB Building along Cecil Street) and an international gym operator. CCT had previously stated that it was in discussions with other prospects and was optimistic of achieving 50% (another 200,000 sq ft) pre-commitments by year-end.

What’s Our View
We expect the new insurance and business service tenants to be signing up at rentals north of SGD10-11 psf/month vs ‘loss-leader’ Cargill, who contracted for 51,000 sq ft at a likely rental of SGD9-10 psf/month. Being one of two major prime office developments (the other is the 527,000-sq-ft South Beach Development) in the CBD due to complete this year and next, we expect CapitaGreen to be fully occupied by end-2015, with higher rentals of SGD11-12 psf/month progressively signed in 2H14-2015. CCT is poised to benefit from higher office spot rents as it has one of the most favourable lease expiry profiles among office REITs: ~52% of office leases, by monthly gross rental income, are expiring in 2014-2016. Reiterate BUY with an unchanged DDM-derived TP of SGD1.83 (cost of equity = 6.8%; Tg = 2%).

Venture Corporation

Kim Eng on 3 Jul 2014

• Customer-related M&As are favouring Venture for a change. Maintain BUY, with SGD8.64 TP, based on 16x FY14E P/E.
• The latest two M&As will add heft to two smaller customers and see the entry of a strong backer for a top 20 customer.
• Lastly, Honeywell’s acquisition of Intermec may have positive rather than negative implications for Venture after all.

M&A winds now in Venture’s favour
Unlike in the past, the latest two customer M&As – involving two medical customers and a top 20 customer MICROS – could bring in some good. Also, a previously-announced M&A involving another top 20 customer, Intermec, may be more positive than expected for Venture. We raise our FY15E earnings forecast by 1% to account for Intermec. Maintain BUY with TP of SGD8.64 (16x FY14E P/E).
It’s different this time
Unlike M&As in the past which led to lower volumes for Venture, the current batch of M&As involves:

• A merger that will add heft to two small medical customers. The merger of two customers will create a much larger single customer, the biggest medical device company in the world,
• MICROS gets a strong backer in Oracle. Oracle’s entry will strengthen MICROS’s position without threatening its hardware POS business, for which Venture is a supplier, and 
• More honey for Intermec. Honeywell, which is not involved in the mobile printing category that Venture engages in with Intermec, wants to grow Intermec’s overall business.

Tracking to expectations
So far, customer volumes have tracked forecasts, setting Venture up well to deliver 12% EPS growth in FY14E. For 2Q14E, we expect revenue to rise 6% YoY/5% QoQ to SGD622m and net profits to rise 27% YoY/24% QoQ to SGD38m. 6MFY14E profits should account for 47% of our full-year forecast. Results will be announced on 8 Aug.

Property- Bottom in sight?

UOBKayhian on 2 Jul 2014

The Urban Redevelopment Authority’s (URA) latest flash estimates indicate private home prices fell 1.1% qoq in 2Q14, moderating from a 1.3% dip in 1Q14. Housing Development Board (HDB) data shows the correction in public housing prices also slowed to 1.3% qoq, following a 1.6% qoq decline in 1Q14.

Bottom in sight? The decline in private residential prices has moderated slightly to 1.1% qoq from 1.3% in 1Q14, bringing about a 3.2% correction from the peak. This is largely due to the mass-market (RCR) segment, which was the only segment to see the price decline slowed down to 0.6% qoq vs -3.3% in 1Q14, likely due to the smaller unit sizes which could have supported unit prices. The deceleration in the rate of fall could signal an approaching bottom for residential property prices.

While the government could start relaxing demand-side property curbs following an 8- 10% meaningful decline in property prices, the deceleration in the decline could signal an approaching bottom for residential property prices, un-warranting significant government intervention. Our preferred picks include deep value and diversified developers, such as Keppel Land, CapitaLand and Wing Tai.

Nam Cheong

DMG & Partners, July 1

NAM Cheong has sold four vessels worth US$92 million in total: three 3,000 deadweight tonne (dwt) platform supply vessels (PSVs) and an accommodation work boat (AWB). The three PSVs are of the 3,000dwt series being built in China and come equipped with dynamicpositioning system 2 (DP2).

We see such technology becoming a key requirement for offshore work today. The AWB, also being built in China, comes with room capacity for 200 men.

These wins raise Nam Cheong's orderbook to RM1.7 billion (S$661.3 milion) on a gross basis. We estimate a net orderbook of RM1.6 billionn before 2Q14 recognitions. The vessels are scheduled for delivery between FY14 and FY15.

The AWB was sold to a subsidiary of a new customer, North Africa-based Maridive and Oil Services SAE. We note that Nam Cheong has been successful in opening up the Middle East North Africa (MENA) market in recent years.

Nam Cheong is one of our top picks in the offshore and marine sector. We further note that consensus estimates imply almost zero growth between FY15-FY16F, with upgrade potential should the company exceed street expectations. Maintain S$0.53 TP, which is based on 10 times blended FY14/15F P/Es.

BUY

Singapore Banks

CIMB Research, June 30

MAS banking data for May showed healthy YTD domestic banking unit (DBU) loan growth of 4.1 per cent (April: 2.9 per cent), broadly in line with the banks' guidance of high single-digit to low-teens loan growth for the full year.

The 1.1 per cent month-on-month loan growth was led by business loans (plus 1.6 per cent m-o-m, plus 6.3 per cent YTD), building and construction loans (plus 1.1 per cent m-o-m, plus 3.1 per cent YTD) and mortgages (plus 0.7 per cent m-o-m, plus 2.5 per cent YTD). Meanwhile, consumer loans shrank 0.2 per cent m-o-m and 0.2 per cent YTD as demand for car loans and share financing continue to fall.

A worrying trend in May is that DBU deposits shrank (minus 0.8 per cent m-o-m, minus 0.2 per cent YTD), led by an outflow of fixed deposits. We have to go back to as far as March 2003 (Sars) to find a y-o-y decline in system deposits.

As loan growth continues to outpace deposit growth, DBU loan-deposit ratio is up (May:111 per cent, April:109 per cent), so is Sing dollar loan-deposit ratio (May:84 per cent, April: 83 per cent).

A shrinking deposit pool is worrying as banks will have to compete aggressively for a shrinking pie, hiking up funding costs for all.

The concern is accentuated with the new liquidty coverage ratio requirements, especially for the foreign banks who need to offer attractive rates to compete. If higher rates merely poached fixed deposits from the local banks, it would not be a worry.

However, recent current and savings (CASA) account packages suggest that the local banks are equally wary of CASA slippage.

We maintain our "overweight" call on the sector as the banks seem to be able to pass out higher funding costs to loans. DBS is our top pick, as its large CASA base (2.5 and 2.75 times that of UOB and DBS respectively) will allow it to remain relatively sheltered from impending deposit competition.

OVERWEIGHT

SIIC Environment

Kim Eng on 2 Jul 2014

• To acquire a 25.3% stake in Longjiang Environmental Protection Group for CNY405m cash. The asset is priced at a reasonable and normalised 23-27x FY13 P/E.
• The acquisition is a strategic move for SIIC to penetrate into the northeast China market.
• Reiterate BUY call with unchanged TP of SGD0.22.

To acquire a 25.3% stake in Longjiang Environmental
SIIC will pay CNY405m cash, pricing the asset at 23-27x normalised FY13 P/E. The transaction will be funded by internal sources, comprising proceeds from share placement in 2013 and loans from its parent Shanghai Industrial Holdings. We are positive on the deal given its reasonable valuation and at the same time allowing SIIC to penetrate into the northeast China market.

Positive on the deal
Longjiang engages in wastewater treatment, sludge treatment and tap water supply in the northern region of China, with total water treatment and supply design capacity of 2.2m ton/day and sludge treatment capacity of 1,000 ton/day. We note that SIIC’s parent Shanghai Industrial Holdings also has an effective interest of 16.8% in Longjiang. We will not be surprised if SIIC absorbs it parent’s stake in Longjiang in the future and uses it as a platform for expansion into northeast China.
This acquisition is in line with our full-year acquisition forecast of 1m ton/day of effective capacity. We continue to like SIIC for its strong government connections and lowly-geared balance sheet, which serve as powerful acquisition tool. We leave our earnings forecasts unchanged and reiterate our BUY call on the stock. Our TP is maintained at SGD0.22, pegged to 30x FY15E P/E.

Q&M Dental

Kim Eng on 2 Jul 2014

• The rights issue price of SGD0.10/rights share is very attractive, in our view. Maintain BUY.
• Beyond the six announced acquisitions, there could be more acquisitions coming that will offset the near-term dilution.
• Remain positive on Q&M’s vision to grow via (1) earnings-accretive acquisitions in the China dental market and (2) organic expansion in Singapore and Malaysia.

What’s New
Q&M has announced a 1-for-5 rights issue to raise SGD14.1m via the issuance of up to 140.5m new shares at SGD0.10/rights share. Major shareholders including Quan Min Holdings and the CEO Dr Ng, holding a combined 65.2% stake, have agreed to take up their rights entitlements. Dr Ng will also subscribe for any excess rights shares (up to 61.5m or 43-50% of the total rights shares).

What’s Our View
The rights issue price is very attractive given the stock’s outperformance since we initiated in late 2013 and the expected positive contributions from Q&M’s China acquisitions. The major shareholders’ decision to fully subscribe for their allotments is also a strong endorsement of the stock. We expect the funds raised to be used to complete the acquisitions of Aoxin and Aidite.
There will some near-term earnings dilution but this will be compensated by maiden contributions from its six proposed acquisitions. Based on the last closing price of SGD0.455, the theoretical ex-rights price will be SGD0.40. Our TP will be diluted from SGD0.55 to SGD0.455 post rights issue but we are sanguine on this as it is based on FY14E forecasts which do not fully factor in acquisition-related contributions and it still represents more than 10% potential share price upside.
We would remain buyers of Q&M as the full year impact from the acquisitions will be felt only in FY15E. Lastly, beyond the six announced acquisitions (five in China, one in Singapore), there could be more EPS-accretive acquisitions in the future.

SPH Reit

CIMB Research, June 30

USING DDM-based (discount rate of 7.7 per cent), we arrive at a target price of S$1.06, translating into implied CY2014 yields of 5.4 per cent for unitholders. We deem this fair against listed peers such as CMT, FCT and MCT, which trade at CY2014 yields of about 5.6-5.7 per cent.

SPH Reit is a retail Reit with two quality and well-located assets in Singapore valued at a total of S$3.2 billion. They are: 1) Paragon, a premier upscale mall and medical suites/office property in the heart of Orchard Road, and 2) Clementi Mall, a mid-market suburban mall located in the centre of Clementi town.

We believe that the portfolio offers a unique combination of prime Orchard Road and stable suburban retail, and an alternative play on rising medical tourism in Singapore.

We expect Paragon to benefit from the government's positioning of Singapore as a top luxury lifestyle destination and from the nation's expanding medical tourism. Meanwhile, Clementi Mall offers stable suburban retail exposure, further enhanced by a five-year income support.

With an asset leverage of 26.9 per cent, SPH Reit has a debt headroom of about S$415 million to 40 per cent asset leverage for acquisitions. Key pipeline asset includes The Seletar Mall, which is slated for completion by end-2014.

Given its good mix of stability and room for growth, we initiate coverage on SPH Reit with an "add" rating and target price of S$1.06.

ADD

Telecommunications Sector

UOBKayhian on 1 Jul 2014

Regulatory intervention could reinvigorate MVNOs. The Infocomm Development Authority (iDA) has initiated industry consultation on enhancing competition and service innovation, including measures to encourage the hosting of mobile virtual network operators (MVNOs) by mobile network operators (MNOs). It could provide incentives for voluntary hosting of MVNOs, such as discounts or rebates for regulatory fees. The iDA could also adopt a more heavy-handed approach of implementing wholesale price regulations or setting a minimum allocation of network capacity for
MVNOs.

Maintain OVERWEIGHT. We see growth and innovation within the mobile space. These include wearable gadgets, such as Google Glass and Samsung Galaxy Gear. In future, all electronic gadgets would be linked by machine-to-machine connections via "Internet of Things" (IOT). The low levels of gearing for all three telcos also provide potential upside from capital management over the longer term.

On average, the three telcos are trading at a healthy spread of 2.65% above 10-year Singapore government bonds, in line with the long-term mean of 2.69%. SingTel’s yield spread is 2.03%, above mean of 0.88%. Conversely, StarHub’s yield spread is 2.34%, below mean of 3.61%. Our top-picks are M1 and SingTel.

Vard Holdings

OCBC on 1 Jul 2014

Vard Holdings Limited (VARD) has clinched an estimated NOK2.7b worth of new contracts in 2Q14. This has further enhanced its revenue visibility from 2014 to 2016. Meanwhile, we believe the outlook on the OSV and subsea sectors remain robust, including the Arctic regions, of which VARD has a strong competitive advantage. However, there are also downside risks as highlighted by some of its key customers. We now forecast VARD to clinch NOK13b worth of contracts each in FY14 and FY15. Correspondingly, we raise our FY14 and FY15 PATMI projections by 0.7% and 6.4%, respectively. As we also raise our target PER peg from 9x to 10x blended FY14/15F EPS to reflect VARD’s improved earnings visibility, our fair value estimate is bumped up from S$0.97 to S$1.12. However, we maintain HOLD on VARD, as we believe the market has priced in its recovery prospects and orders momentum.

Estimated NOK2.7b of new order wins since 1Q14
Following Vard Holdings Limited’s (VARD) buoyant new orders intake of NOK5.5b in 1Q14 (39% of FY13’s total order wins) which boosted its order book to NOK21.8b (as at 31 Mar 2014), the group has followed up by securing another NOK2.7b of contracts in 2Q14, based on our estimates. This has further enhanced VARD’s revenue visibility from 2014 to 2016. We believe VARD is now in a solid position to exceed our FY14 order wins estimate of NOK11.5b. We now forecast VARD to clinch NOK13b worth of contracts each in FY14 and FY15. Correspondingly, we raise our FY14 and FY15 PATMI projections by 0.7% and 6.4%, respectively. 

OSV outlook still largely positive
Our revised forecast is premised on a still robust outlook on the OSV and subsea sectors, including the Arctic regions, of which VARD has a strong competitive advantage. According to major OSV operator Tidewater, the Arctic markets will be a key area for higher exploration and development activity over time. Meanwhile, the OSV-to-rig-ratio has stayed stable at 4.36 for the month of May, but may decline to 3.71 in the future if we take into account the number of OSVs and rigs currently under construction. However, there are also downside risks, as some of VARD’s key customers such as DOF ASA, Solstad and Siem Offshore had recently described the North Sea spot market as volatile, especially for the AHTS segment.

Maintain HOLD
Although we raise our valuation target PER peg from 9x to 10x blended FY14/15F EPS to reflect VARD’s improved earnings visibility and consequently bump up our fair value estimate from S$0.97 to S$1.12, we believe the market has already priced in VARD’s recovery prospects and orders momentum. The stock has appreciated by a stellar 29.4% YTD. In light of the aforementioned factors, we maintain our HOLDrating on VARD.

Singapore REITS

OCBC on 30 June 2014

Our assessment of the recent performance of S-REITs show that their fundamentals have generally remained sound, and S-REITs continue to benefit from their past investments and higher secured rentals within their existing portfolios. On the capital management front, S-REITs have again stepped up their efforts to repay/refinance their borrowings ahead of their maturities and over a longer term, as well as hedge their interest rate exposure in anticipation of the potential hike in interest rates. We are retaining Suntec REIT [BUY, S$1.85 FV] and Starhill Global REIT [BUY, S$0.90 FV] as our sector picks. However, we now replace CapitaCommercial Trust with Frasers Centrepoint Trust [BUY, S$2.08 FV] as our preferred pick due to the former’s strong unit price run-up. Retain NEUTRAL on broader S-REITs sector.

Selecting the winners
The S-REITs sector has rallied 7.3% and outperformed STI by 4ppt YTD on US Fed Chair Janet Yellen’s forward guidance that interest rates are likely to stay low “for a considerable time”. However, against this backdrop, we note that the Fed will continue to cut the bond purchases meant to suppress the long-term borrowing costs low, keeping it on track to end the stimulus programme late this year. Even the recent forecasts by the Fed officials point to a possibility that the interest rates may rise faster than previously expected. Given these developments, we now make a conscious effort to select the S-REITs that are likely able to withstand any potential correction better and outperform the rest.

Fundamentals still sound
Our findings show that the fundamentals of S-REITs have generally remained sound, and S-REITs continue to benefit from their past investments and higher secured rentals within their existing portfolios. On a relative basis, the office REIT subsector outlook looks the rosiest, as the uptrend in office rents is likely to be sustained amid strong leasing activity, low vacancy and limited supply in the near term. This is followed by retail REITs, which are poised to reap the returns of their AEIs and the positive operating landscape. For FY15, we note that Suntec REIT and CapitaCommercial Trust are expected to experience one of the fastest increases in DPU, according to Bloomberg consensus forecasts.

Assessing impact from interest rate hike
On the capital management front, S-REITs have again stepped up their efforts to repay/refinance their borrowings ahead of their maturities and over a longer term, as well as hedge their interest rate exposure in anticipation of the potential hike in interest rates. This has resulted in an improvement in gearing, debt duration and hedge ratio. In fact, for a 1ppt growth in interest rate, we estimate the greatest fall in DPU among the S-REITs is contained within 10%, while several S-REITs such as Starhill Global REIT are likely to be unscathed as a result of fixing 100% of their rates via hedges or fixed-rate notes.

Our sector picks
In view of all this, we retain Suntec REIT [BUY, S$1.85 FV] and Starhill Global REIT [BUY, S$0.90 FV] as our sector picks. CapitaCommercial Trust, our third preferred pick, has performed very well YTD, clocking a 15.9% increase in unit price. At current level, we believe most of the positives have been priced in. As such, we replace CapitaCommercial Trust with Frasers Centrepoint Trust [BUY, S$2.08 FV] as our preferred pick. The latter has a strong financial position, trades at an attractive yield of 6.1% and P/B of 1.06x and is expected to see relatively robust earnings growth over the next year. RetainNEUTRAL on broader S-REITs sector.

Singapore Banks

Kim Eng on 1 Jul 2014

•  Industry DBU loans slowed to 13.0% YoY in May, supported by business loan growth of 17.4%. But housing loan growth hovered at a seven-year low of 7.6%.
• Industry SGD deposits shrank 0.7% YoY, its first contraction since Mar 2003. SGD loan-to-deposit ratio continued to climb but still at a comfortable 86.9% in May.
• Maintain Overweight on Singapore banks with DBS our top sector pick. Shun OCBC given the uncertainty over its proposed bid for Wing Hang Bank.

May loan data supported by business loans
Business loan growth of 17.4% YoY in May continued to be the main pillar of support for industry domestic banking unit (DBU) loans (+13.0%) for the month. General commerce loans (+25.2% YoY) remained the key business loan driver. However, the general trend was dampened by a persistently weak housing loan growth of 7.6%, its slowest in almost seven years.

SGD LDR inching up but still comfortable
The industry SGD deposits shrank by 0.7% YoY in May, its first contraction since Mar 2003. The current depressed interest rates make holding cash unappealing. Although the SGD loan-to-deposit ratio (LDR) has been inching up, we are still comfortable with May’s figure of 86.9%. With deposit growth expected to remain lethargic, SGD LDR looks set to rise further in 2014. We expect industry loan growth to slow to 9-10% in 2014-2015, with housing loans rising 4-6% in tandem with a slowing property market. However, we believe the shortfall would be compensated by a reasonably strong business loan growth of 12-14%. Lending to the general commerce sector could prove to be the wild card. For exposure, DBS is our top sector pick as it is the best positioned to take advantage of a rising interest rate environment. We would stay cautious towards OCBC.