2023 Singapore Stock Market Outlook & Strategy - DBS Research 2023-01-03: Riding The Second Wind From China

2023 Singapore Stock Market Outlook & Strategy - Riding The Second Wind From China

Singapore Stock Market Focus - DBS Group Research | SGinvestors.ioSINGAPORE AIRLINES LTD (SGX:C6L) GENTING SINGAPORE LIMITED (SGX:G13)
  • Benefiting from China’s refocus on growth.
  • STI 2023 year-end target of 3600 based on conservative valuation, backed by 12% earnings growth.
  • 3 investment themes for 2023:
    1. Greater China reopening beneficiaries.
    2. FED pivot beneficiaries.
    3. Resilience amid economic slow down.

Benefiting from China’s refocus on growth

  • We expect China’s great reopening to hit more bumps compared to Hong Kong. But reopening is inevitable and will benefit Singapore. The refocus on employment, income growth and consumer spending benefits companies with HK/China assets (eg. malls, F&B, developers).
  • The anticipated influx of Chinese tourists from 2H23 is a powerful second wind for Singapore’s services sector to sustain the momentum of the current recovery.

STI 2023 year-end target: 3,600

  • Equity markets spent the most of last year pricing in escalating inflation, rapidly rising interest rates and recession worries. It was only in the final weeks of 2022 that stocks reacted to positive developments from China’s shift from its zero-COVID policy and an end in sight to the FED rate hike cycle.
  • STI currently trades near 11.3x (-2 standard deviation) FY23F P/E despite a healthy 12.4% earnings growth outlook. We see a more benign year ahead with 2023 year-end target of 3,600 despite uncertainties over a slower growth and higher inflation environment.

2023 Investment Theme 1: Greater China’s reopening beneficiaries

  • We maintain our positive stance on the reopening theme. Borders reopening beneficiaries such as SIA (SGX:C6L), SIA Engineering (SGX:S59) and Genting Singapore (SGX:G13) outperformed the broader market in 2022. With border restrictions for Hong Kong and most countries already lifted, we believe that the recovery momentum for aviation and tourism related sectors will continue as the anticipated reopening of China’s air borders provide a powerful second wind.
  • With Chinese tourists contributing 50% of tourism receipts on shopping in 2019, their anticipated return will ignite a strong revival to retail sales, which benefits retail REITs with centrally located shopping malls as well as hospitality REITs.
  • A decisive shift from the zero-COVID policy will also remove a major overhang for stocks with exposures to assets and/or operations in Greater China too. The resumption of operations to business-as-usual and improvements in consumer and business spending/sentiments should augur well for these companies.
  • The anticipated full reopening of HK-China borders in Jan-23 benefits Mapletree Pan Asia Commercial Trust (SGX:N2IU) and DFI Retail Group (SGX:D01) while the while China’s top focus to boost domestic consumption going forward is positive for CapitaLand China Trust (SGX:AU8U) and Sasseur REIT (SGX:CRPU), given that consumer sentiment and retail sales were the most negatively impacted from these policies.
  • Owners of Chinese assets/operations will also benefit from improvements in operations and/or positive asset revaluations. Examples include CapitaLand Investment (SGX:9CI), Mapletree Logistics Trust (SGX:M44U), Hutchison Port Holdings Trust (SGX:NS8U), Hongkong Land (SGX:H78), Aztech (SGX:8AZ) and NanoFilm (SGX:MZH).
  • Our picks are:
    • SIA (SGX:C6L) – We believe that consensus estimates for SIA are far too conservative and envisage the group’s passenger volumes to hit 83% and 104% of pre-COVID levels by end-FY23F/24F. Concerns on the impact of recessionary fears on travel demand should be allayed as SIA continues to report strong earnings, with healthy dividends as a bonus.
    • Genting Singapore (GENS, SGX:G13) – We see EPS growth of 95% and 45% for 2022F and 2023F, respectively. The imminent return of foreign tourists, which accounted for 75-80% of total attendance prior to the pandemic and higher average spending per visitor (due to pent-up demand) will give a significant boost to GENS’s earnings over the next two years. This is evidenced by gaming volumes reaching 90-95% of pre-COVID levels in 3QFY22, despite the absence of Chinese players.
    • CapitaLand China Trust (CLCT, SGX:AU8U) – Direct proxy and positive exposure to China reopening, with compelling forward FY23F yields of 7.9%. The relaxation of China’s zero- COVID policy will remove the overhang on China’s consumer sentiment and social unrest to boost consumer spending within the Trust’s retail exposure (~80% of portfolio). The resumption of business activity and easing of political risk would benefit new economy tenants, which make up ~20% of its China exposure.
    • DFI Retail Group (SGX:D01) – DFI Retail is a beneficiary as Hong Kong eases its domestic restrictions on dining-out, which should spur dining out spend and benefit Maxim’s. Further easing of Mainland-Hong Kong border restrictions should see an influx of Chinese tourists and boost its battered Health & Beauty segment. We believe that pessimism regarding the North Asian exposure may be overdone and ascribe earnings growth of 788% and 49% to 2023F and 2024F, respectively.
    • Mapletree Pan Asia Commercial Trust (MPACT, SGX:N2IU) – MPACT’s retail assets, VivoCity and Festival Walk, which contribute ~40% of FY22 NPI, could benefit from further recovery when Hong Kong and China reopen further. We estimate two-year DPU CAGR growth could be 7% should VivoCity and Festival Walk recover to pre-COVID levels. Valuations remain attractive at 5.5% FY23F dividend yield, and t 0.9x P/BV (-1 standard deviation levels).
    • CapitaLand Investment (CLI, SGX:9CI) – China reopening bodes well for the group’s private equity business and exposure, given its ~ 30% allocation in China; higher valuations may also be expected on the back of improving operational outlook. Ascott Limited may also ride the uplift in the hospitality sector, as border restrictions ease further and international travel recovers.
    • Mapletree Logistics Trust (MLT, SGX:M44U) – We are of the view that ‘new economy assets’ including logistics are expected to outperform again in FY23, given their resilience in the face of economic uncertainties and a potential slowdown. MLT’s logistics portfolio should continue to remain stable and even outperform once the China economy reopens. Other than its exposure to China, its portfolios in the other ASEAN economies will be a beneficiary of the reopening of China’s borders.

2023 Investment Theme 2: Beneficiaries of FED’s pivot

  • With the FED funds rate at 4.5%, the current interest rate hike cycle is 90% over. DBS Economist Research sees rates peaking at 5% in 1Q23 and holding steady through 2023. The FED funds futures currently prices in a similar terminal rate with a 2x25bps cut by end 2023.
  • Interest rates sensitive sectors such as REITs and technology were rate hike casualties in the rapidly rising interest rates environment of 2022. As a result, FTSE ST S-REITs and Technology indices underperformed the benchmark STI last year by 19% and 28% respectively but are now well off the lows for the year.
  • With the end of the current rate hike cycle in sight, we expect a more benign environment for last year’s rate hike casualties and seek out opportunities among this group.

Our 9 S-REITs picks for 2023

  • While interest rates will likely stay high for most of this year, our REITs analyst sees ample defences from high fixed-rate debt ratio and forward currency hedges until the situation turns in S-REITs favour, which could be sometime from late 2023 to 2024.
  • The 10-year US and SG yields have declined from their respective peaks of 4.2% and 3.6% respectively back in 4Q22, and these are projected to decline to 3.6% and 2.8% in 2023 respectively. Sector yield spread of 3.1% is fair and has substantially priced in interest rates risk.
  • Our S-REITs picks are
  • Summary of the 9 S-REITs picks for 2023:
    • CapitaLand China Trust (CLCT, SGX:AU8U) - A pure-play diversified China REIT that benefits from China’s reopening. The relaxation of zero-COVID policy boosts private consumption while the resumption of business activity and easing of political uncertainties will benefit its new economy tenants.
    • Frasers Centrepoint Trust (FCT, SGX:J69U) - Tenant sales should sustain above pre-COVID levels, from the current ~110% of normalised levels. We anticipate stronger reversions on renewals (+3% to +5%) alongside full-year contribution of ancillary income. The premiumisation of suburban retail offerings, together with government support and wage policies for low to middle-income workers will support suburban spending.
    • Lendlease REIT (LREIT, SGX:JYEU) – LREIT is set to benefit from the return of tourists and tourist receipts slated for 2023 alongside other Orchard malls. At ~125% of normalised levels, 313@Somerset has led the recovery in tenant sales amongst Orchard malls. At the same time, JEM’s recovery should sustain above normalised levels while the Grange carpark will start construction in 2023, completion by end-2024.
    • CapitaLand Integrated Commercial Trust (CICT, SGX:C38U) – CICT is poised to ride on the Singapore office upcycle and retail recovery. Its CBD malls will see another leg of growth driven by tourists from China’s post-border reopening. It’s also one of the few S-REITs with an opportunity to acquire newly completed prime Singapore office assets. We estimate CICT could deliver 6% two-year DPU CAGR, one of the stronger growth rates among its peers. Stock trades at 5.5% FY23F and 5.7% FY24F yield, 1x P/B or close to -0.5 standard deviation of historical range
    • Mapletree Pan Asia Commercial Trust (MPACT, SGX:N2IU) – Its CBD malls will see another leg of growth driven by tourists from China’s post-border reopening. Festival Walk should also see recovery back to pre-COVID levels (currently at ~20% to 30% below pre-COVID levels) as the Hong Kong – China borders reopen. Stock trades at 5.8% FY2 3F and 5.6% FY24F yield, 0.9x P/B or -1 standard deviation of historical range.
    • CapitaLand Ascott Trust (CLAS, SGX:HMN) – The long-stay segment that makes up ~19% of portfolio exposure will be generally well-sheltered in the face of an economic downturn amongst the broader lodging asset class. The high operational cost for European assets is shielded by a master lease structure. CLAS is best positioned to benefit from Japan reopening amongst the hotel S-REITs, with green shoots in around half of its geographical markets that are still operating at below pandemic levels. Portfolio REVPAR has recovered to ~87% of pre-COVID as at 3Q22, and the recovery trend should continue.
    • CapitaLand Ascendas REIT (CLAR, SGX:A17U) – Its myriad of structural tailwinds from e-commerce, data centres and office decentralisation drive earnings and capital values higher in the longer term. Its proactive rejuvenation of its portfolio offers further upside to earnings. There is also significant value from the potential redevelopment of its assets at Science Parks 1 and 2.
    • Frasers Logistics & Commercial Trust (FLT, SGX:BUOU) – We like FLT for its growth prospects given very low gearing of only ~27% and debt headroom of more than S$2 bn. Our forecast has yet to assume any future acquisitions that will be a major driver to earnings estimates. The stock currently trades at a forward yield of more than ~6.2%, making it one of the most attractively priced logistics play.
    • CapitaLand India Trust (CLINT, SGX:CY6U) – CLINT stands out for its very attractive yields of 7.7% - 8.7% over the next two years. Its various forward funded developments will be the main driver to earnings as they complete. However, its relative smaller market cap and pure-India exposure makes it a niche pick.
  • These 9 REITs have an average ICR ratio of 5.2x and gearing of 36.6%, well within the threshold set by MAS that S-REITs with ICR ratios of < 2.5x will have to keep gearing at < 45%. Their average % of debt expiring going forward is just 19% with a high 74% hedged to fixed rates. Frasers Logistics & Commercial Trust was the best all-rounder among the financial matrices.

More selective on technology

  • With the global economy slowing down and our economist expects the drag from the Singapore’s manufacturing and electronics cluster to continue, we are more selective on technology names. Consumer electronics demand weakness remains a concern even as supply chain should normalize as China shifts away from its zero-COVID policy.
  • Our picks are UMS (SGX:558) and Venture Corp (SGX:V03).
    • UMS (SGX:558) – Contribution from its new customer should kick in from 2H23 and grow significantly in 3 to 4 years’ time. UMS is also a key beneficiary of trade diversification with its main production facilities in Malaysia, and another new plant in Penang coming online by end of 2022.
    • Venture Corp (SGX:V03) – Venture is another key beneficiary of trade diversification, with its main manufacturing facilities in Malaysia. With its diversified customers and product mix, Venture Corp should be able to weather the current macro headwinds better than its peers. Furthermore, Venture Corp’s differentiating capabilities and strength put the group in a very good position to gain market share in this challenging environment.

2023 Investment Theme 3: Resilience in an economic slowdown

  • We seek out companies with resilient earnings and/or fundamentals in a year of global slowdown and uncertainties. Even as the Greater China reopening is a positive driver in 2023, we remain mindful that the developed economies of the US (FY23F GDP +0.3% y-o-y) will slow down dramatically while Europe faces recession risk (FY23F GDP -0.4% y-o-y). Rates are also expected to remain elevated with the FED funds rate seen holding at 5% through 2023.
  • Specifically, we like companies that can
    1. sustain revenue growth in an economic slowdown
    2. protect margins amid cost increases (e.g., input costs, cost of debt) and
    3. keep gearing low.
  • Beyond operations, we also highlight stocks with potentially resilient share prices, i.e., supported by visible catalysts/drivers that could pan out this year.
  • In this regard, Thai Beverage (SGX:Y92), Raffles Medical (SGX:BSL) and Lendlease REIT (SGX:JYEU) are beneficiaries of China’s reopening. 2023 could also be a year for meaningful earnings turnaround for SIA Engineering (SGX:S59) and City Developments (SGX:C09), coupled with potential value to be unlocked through corporate actions. Lastly, share prices of UOB (SGX:U11) and ComfortDelGro (SGX:C52) should be supported by stable earnings and the potential for higher dividends in 2023.
  • Our picks are:
    • Thai Beverage (SGX:Y92) – While there are global uncertainties and potential headwinds on the macro front, DBS analysts expect resilient demand for its products. Thailand is expected to benefit from tourism revival and domestic demand, and while Vietnam has seen a strong revival in 2022, and its robust GDP growth should continue to drive alcohol consumption. Festivities should continue to drive alcohol consumption too. Refinancing risks are low with strong cash flows. Debentures amounting to only THB22-26bn are due, and can be repaid from its strong annual operating free cash flow of at least THB36bn.
    • Raffles Medical (SGX:BSL) – Notwithstanding the shift to “living-with-COVID”, Raffles Medical remains a key beneficiary of periods when public hospitals experience a bed crunch, while it continues to provide some COVID-19 related services for the government (booster vaccination, quarantine centres and COVID-19 testing for travel). In addition, we believe China reopening and progressive move away from zero-COVID policies is one key catalyst that will bode well for the ramp-up of China hospitals and hopefully reduce gestation losses.
    • Lendlease REIT (LREIT, SGX:JYEU) – LREIT is preferred for its exposure to 313@Somerset mall, while allowing for stability within the suburban retail space with mixed development JEM in Jurong. 313@Somerset has led the recovery amongst Orchard malls, as it saw a turnaround in tenant sales to above (~ 125% of) pre-COVID levels in 3Q22. Further upside could come from the return of Chinese tourists, and expansion in rental reversions given low occupancy cost and low rental rates.
    • SIA Engineering (SGX:S59) – With core profitability within sight, we are more sanguine on SIA Engineering’s earnings delivery in the coming quarters. Traffic in Changi Airport is anticipated to reach 75-80% of pre-pandemic levels by end-2022, and should normalise by end-2023, assuming China has sufficiently relaxed travel restrictions by that point. Another positive comes from SIA Engineering’s net cash balance sheet in a rising/elevated interest rate environment.
    • City Developments (SGX:C09) – Strong income visibility as close to 96% of its inventory is already presold. Catalysts will come from the strong presales of upcoming projects and rebound in operational metrics for the hospitality and commercial portfolios (i.e. CDL Hospitality Trusts (SGX:J85)). Valuations remain attractive as it trades at a deep discount to RNAV and NAV and 0.8x P/B. Potential NAV uplift – through unlocking value of legacy assets – come end of year results with special dividend can help to support prices.
    • UOB (SGX:U11) – Net interest income growth, albeit at a slower pace, is expected to continue into 1HFY23F as loans continue to reprice on higher interest rates. Management see terminal NIM at above 2%, with every 100bps Fed rate hike adding S$800 million to net interest income. Share price may be underpinned by
      • active provisioning with NPA coverage of 98%,
      • undemanding valuations at ~1x FY23F P/BV, and
      • possibility of higher dividends on a stronger earnings base.
    • ComfortDelGro (SGX:C52) – ComfortDelGro is expected to benefit from improved mobility with continued easing of restrictions, which will benefit their point-to-point operations and public transport operations in Singapore. DBS analysts are forecasting FY22F net profit (pre-ex) to rise ~14% y-o-y and return to 80%/94% of 2019 levels by 2023F/24F as ComfortDelGro’s key segments see increased ridership and demand. Strong balance sheet (net cash position ~ S$650 million as of 30- Sep-22) with limited capex, could support the resumption of dividend pay-out to pre-COVID range of between 70-80% of net profit.

Continue to read the 31-page report attached below for complete analysis on Singapore stock market outlook and strategy in 2023.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.

YEO Kee Yan CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbs.com/insightsdirect/ 2023-01-03

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