singapore market focus singapore strategy market focus 2017 outlook page 3 10 drivers for 2017 five...

ed: JS, TH, CK / sa: YM, PY

STI : 2,958.86

Analyst Janice CHUA +65 6682 3692 Yeo Kee Yan CMT +65 6682 3706 [email protected] [email protected]

Lee Keng LING +65 6682 3703 Singapore Research Team [email protected] [email protected]

Key Indices

Current % Chng STI Index 2,956.13 -0.1% FS Small Cap Index 386.92 0.0% USD/SGD Curncy 1.43 0.5% Daily Volume (m) 2,661 Daily Turnover (S$m) 1,225 Daily Turnover (US$m) 856

Source: Bloomberg

Market Key Data

(%) EPS Gth Div Yield 2015 (6.9) 3.9 2016F (4.7) 3.8 2017F 12.1 4.0 (x) PER EV/EBITDA 2015 15.7 13.3 2016F 16.4 13.5 2017F 14.6 12.2

Source: DBS Bank STOCKS

Closing price as of 9 Dec 2016

Source: DBS Bank, Bloomberg Finance L.P.

DBS Group Research . Equity 14 Dec 2016

Singapore Market Focus

Singapore Strategy Refer to important disclosures at the end of this report

Back on growth track Watch for 10 domestic and external drivers

Bottoming signals and prospects of earnings

recovery in an inexpensive market

4 themes to ride the volatility

Top 10 picks : Global Logistics, City Developments,

OCBC, ST Engineering, Genting Singapore, Comfort

Delgro, Thai Beverage, Venture Corp, Ezion, MM2

Domestic drivers are positive. Bottoming signals in key economic sectors point to a cyclical upturn, while the unveiling of proposals from the Committee of Future Economy will chart Singapore’s longer term sustainability. Rising interest rates could move the government’s hands to relax property tightening measures. We expect M&A deals to be sweetened by inexpensive valuation as bargain hunters seek higher returns.

Brace for volatility spiked by external headwinds. Market volatility will be spiced up as the world watches Trump’s policies unfold. The threat of anti-globalization, rise of populism impacting results of several upcoming elections in Europe, and possible liquidity outflows are negative headwinds to watch for. Oil price recovery could provide a breather, sustaining banks and oil and gas stocks.

Earnings recovery, inexpensive valuation. With October bank loan growth finally turning positive after a year of contraction, regional PMIs on the uptick, the Singapore government offering financial aid to the beleaguered O&G sector, oil and commodity prices heading for recovery, we are optimistic that the worst of the earnings cut cycle has passed. After two years of earnings contraction, we project earnings growth of 8.7%, a reversal from the 7.6% earnings contraction this year. Valuations are undemanding at 12.8x on FY07 earnings. We peg an STI objective of 3150 based on 13.64x (average) blended FY17/18F PE by mid-2017.

4 themes to ride the volatility. We pick a) proxies to growth and earnings turnaround (Genting, Ezion, OCBC, MM2), b) companies with sustainable dividend yield and cash flow (Comfort Delgro) c) Beneficiaries of US recovery and strong US$ (Venture, ST Engg) and d) M&A plays (GLP, Thai Bev). City Developments is undervalued, and will be re-rated if the government relaxes the property cooling measures.

Price Mkt Cap Target Price Performance (%)

S$ US$m S$ 3 mth 12 mth Rating

City Developments 8.42 5,379 9.90 (7.6) 18.4 BUY ComfortDelgro 2.59 3,924 3.09 (8.8) (13.1) BUY Ezion Holdings 0.41 590 0.56 39.7 (20.7) BUY Genting Singapore 0.98 8,228 1.15 25.7 24.8 BUY Global Logistic

i 2.23 7,343 2.47 20.4 11.4 BUY

mm2 Asia 0.41 296 0.56 9.1 106.1 BUY OCBC Bank 9.19 27,004 10.30 3.6 5.9 BUY ST Engineering 3.41 7,447 3.68 1.2 17.7 BUY Thai Beverage 0.84 14,818 1.09 (9.1) 26.9 BUY Venture Corp 9.83 1,922 10.90 4.1 16.4 BUY

Market Focus

2017 Outlook

Table of Contents 10 Drivers for 2017 3

Four Themes for Investment – heat map 6

Sector Overview 8

What Matters in 2017 9

Domestic Factors 9

External Factors 13

Growth & Valuation 18

Optimistic that worst of earnings cut has passed 18

Low- to mid-single-digit earnings recovery for 2017 18

Themes for investment 20

2016 review 28

Sector Outlook

Bank (Overweight) 30

Consumer Goods Sector (Overweight) 32

Healthcare (Neutral) 38

Offshore & Marine / China Yards (Neutral) 40

Oil Services & Equipment Providers (Underweight) 42

Plantations (Neutral) 45

Property (Overweight) 47

REITs (Underweight) 49

Telecom (Underweight) 52

Transport Related (Overweight) 54

Company Guides

City Developments 57

ComfortDelgro 66

Ezion Holdings 75

Genting Singapore 83

Global Logistics Properties 93

mm2 Asia 101

OCBC 109

ST Engineering 116

Thai Beverage Public Company 122

Venture Corporation 134 Industry Focus

Analysts

Janice CHUA +65 6682 3692 [email protected] YEO Kee Yan +65 6682 3706 [email protected] LING Lee Keng +65 6682 3703 [email protected] Singapore Research Team [email protected]

Page 2

Market Focus

2017 Outlook

10 Drivers for 2017 Five Domestic Drivers

SG loan growth (y-o-y)%

Singapore October loan growth turned positive, global PMIs turning up, oil price bottomed out Source: DBS Bank

Signs of green shoots 2017 GDP forecast to stabilize at 1.3% (from 1.2%

2016) 2017 STI EPS growth of +8.7% from -7.6% this year

(DBSf) Banks - 11.8% EPS growth on higher NIM and loans

growth recovery (OCBC) Consumer goods - 28% EPS growth on output growth

and currency trends for plantation stocks (Bumitama Agri, Indofood Agri)

O&G - 24.3% EPS growth on oil price recovery and earnings ‘low-base’ effect post FY16 slump (SembCorp Industries, Ezion)

Consumer services - 13.4% EPS growth for the consumer services from Genting Singapore, Cityneon, mm2 Asia and Jumbo Seafood

The Five Futures

Source: DBS Bank

Committee on Future Economy & fiscal policy shift Room for more support to help weather slowdown (eg.

Oil and gas, offshore and marine sector) Committee on Future Economy report in late Jan 2017: Develop innovative capacities & use technology to create

value Macro & technological trends that drives future global

economy Connected as a competitive hub in the future global

economy Enhance infrastructure, overcome resource constrains &

ensure highly liveable environment Prepare Singaporean workers for the future

Unemployment rate & property prices

Source: URA, HDB, DBS Bank

Possible relaxation of property cooling measures Conditions for possible relaxation: Negative on mortgage affordability if interest rates jump

to 3% (from 2% currently) 15% price drop from peak (vs 11% currently) Spike in unemployment to 4% ABSD and/or down payment ratios could be tweaked

Future CorporateCapabilities & Innovation

Future GrowthIndustries & Markets

Future of Connectivity

Future City

Future Jobs & Skills

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7.0%Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

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(%) Index Value

Property Price Index

Unemployment Rate (Inverse)

Page 3

Market Focus

2017 Outlook

3m SGD SOR& 3m SIBOR vs 3m USD Libor

Source: DBS Bank

Rising interest rates MAS 2yr & 10yr SGS yields to reach 1.95% and 3.05%

respectively by end-2017 (DBSf) 1% interest rates increase SREITs dividend

distribution 2.9% reduction, 5-15% valuation drop 1% mortgage rates increase S$500 increase for

S$1mil loan & 25yrs tenure

Source: Temasek Review 2016

Restructuring potential of Temasek linked companies Temasek’s inclusion in Net investment return

framework to push for higher returns for Temasek linked companies

TSR weighed down by weak performances of Chinese banks, oil and gas investment and lack of growth catalysts for Singapore companies

2016 saw the divestment of NOL, privatisation of SMRT and Tiger Airways by SIA.

Restructuring could gather pace to raise returns via optimisation of capital structure, acquisitions, mergers or divestments.

15%

15%

14%

6%

6%

3%

-9%

9%

9%

9%

9%

9%

8%

8%

-15% -10% -5% 0% 5% 10% 15% 20%

Since 1974

40

30

20

10

3

1

Risk-adjusted hurdle rate Temasek TSR in S$ (%)

*As at 31 march 2016**Total Shareholder Return (TSR) is a compounded and annualised measure, which includes dividends paid to Temasek's shareholder (Ministry of Finance) and excludes capital injections from their shareholder.

Page 4

Market Focus

2017 Outlook

Five External Factors


“America First” Trump Fiscal stimulus over accommodative policies – US GDP 2.7% in 2017 vs 1.7% in 2016 (DBSf) Financial sector deregulation TPP withdrawal Cancel restriction on American energy production Higher interest rates – 4 rate hikes next year will lift the FED funds rate to 1.75%

by end 2017 SGD weakening against USD – USD/SGD 1.48 by end 2017, projected band 1.40

to 1.51

Singapore NODX key markets, 2015


Threat of anti-globalization Trump threats

- Withdrawal from TPP & TTIP - Brands China a currency manipulator - Imposes tariffs of 35% on Mexico & 45% on China - 35% tax on US companies for shifting jobs overseas

US-China trade war will create the worst impact on Singapore’s small-open economy

US & China 25% of Singapore NODX

EUR/USD below 1.05 is plausible

EURUSD


Rise of populism 40% of EU’s GDP heads for polls in 2017 France - Presidential elections (Apr), 15% EU GDP, risk is if far-right

anti-EU National Front Party led by “Madam FREXIT” seizes power Germany – Parliamentary elections (Sept), 20% EU GDP, right-winged AFD made

significant gains (14.2%) against Angela Merkel’s CDU (17.6%) at local elections Italy – PM resigns, GE may be brought fwd to 2017, 11% of EU GDP, populist

anti-EU 5-star movement gains advantage EURUSD 1.04 by end-2017, projected band 1.01-1.08 Affects SGD companies with business/currency exposure to Europe

Total non-resident flows to EM


Liquidity outflow

Nov EM non-resident portfolio outflow of US$24.2b comprising US$8.1b from equities & US$16.1b from debt

US number one FDI contributor to Singapore at S$243b or 21% of total

OPEC supply cut rebalancing brought forward


Worst is over for oil price, expect moderate recovery Positive - OPEC 1.2m bpd, non-OPEC 0.558m bpd production cut Negative - Strong USD, revival of US shale production and Trump’s intent to cancel restrictions on energy production 2017 Brent forecast – US$55-60pbl, US$65 pbl mid-long term cap Positive for Singapore equities

- Less pressure on banks (4-6% loan book exposure) - Upstream E&P players are first hand beneficiaries - Yards & offshore services providers see impact later

88.00

90.00

92.00

94.00

96.00

98.00

100.00

World production - previous IEA forecastWorld production - adjusted forecast assuming 12-month OPEC cutsWorld consumption

Rebalancing could be broughtforward from 3Q17 to 1Q17

Page 5

Market Focus

2017 Outlook

Four Themes for Investment – heat map

Stocks Earnings recovery growth

Sustainable dividend M&A / Privatization; takeover

Beneficiaries of US recovery

Bukit Sembawang

Bumitama

Cityneon

ComfortDelgro

Delfi

Ezion

F&N

GLP

Genting

HPH Trust

Jumbo

Manulife

Mermaid Maritime

mm2 Asia

OCBC

PACC Offshore

S’pore O&G

Semb Marine

SIA Eng

ST Engineering

Thai Beverage

United Engineers

Venture

Source: DBS Bank Top ten stock picks :-

Thai Beverage (BUY; TP: S$1.09) We see Thai Beverage in a transformational mode to morph into a regional player. We expect ThaiBev to leverage on its Singapore-listed associate company, Fraser and Neave Ltd (FNN) to seek inorganic growth for the Group. On the earnings front, Spirits, beer growth and non-alcoholic beverage turnaround would be a key driver of stock price. Dividend payout ratio has been >50% in the last few years. ST Engineering (BUY; TP: S$3.68) We expect reasonable earnings rebound in FY17, following a kitchen sinking year in FY16 associated with a management transition. ST Engineering will also benefit from an increase in defense spending in the US. Its investments in the US will benefit from any cut in corporate tax rate, and the strengthening US$. With a healthy balance sheet to boot, we believe the total dividend payout for FY16 should be similar to FY15 levels of 15 Scts.

Venture (BUY; TP: S$10.90) Fixed dividend commitment of 50Scts (5.3% yield) coupled with high digit earnings growth prospects in FY17F is attractive. Venture will also benefit from both a recovery in the US, with 55% of exports to the US, and the strengthening US$. Cost are in ringgit while almost all of sales are in US$. A well-managed company with fragmented ownership, it is an attractive takeover target. OCBC (BUY; TP: S$10.30) Expectations on rising interest rates from December 2016 should start to spell a new phase for higher NIM. We expect credit costs to decline in FY17F as the bulk of NPL issues have been addressed. Asset quality is expected to stabilise in 2017. All these factors should drive earnings higher. Dividend payout has been sustainable; with attractive forward yield of about 4%.

Page 6

Market Focus

2017 Outlook

Genting (BUY, TP: S$1.15) Genting’s cashflow generation and net cash of c.S$3.7bn, balanced against the redemption of its perpetual securities and potential bid for a Japanese casino, we estimate that Genting has the ability to increase its dividend to 6 Scts per annum in FY18F, (translating to a 6.2% yield) up from our FY16F DPS 3 Scts. Following two tough years, we believe 2017 will mark a recovery in earnings. ComfortDelgro (BUY; TP: S$3.09) With lower capex needs, we are expecting dividend payout ratio to conservatively creep up to 66% and 68% in FY17F/18F, and thus yielding 4.4% and 4.8%, respectively. In the current climate, CD is one of few companies projected to have an increase in DPS. We project earnings growth of 5%/ 8% for FY16F/17F driven by higher ridership, rental rates for its taxis, coupled with lower energy costs (on the back of lower oil prices). Global Logistics Properties (BUY; TP: S$2.47) GLP could be a M&A / privatization or takeover play. The attractiveness in GLP is in its leading position in the warehouse logistics space in key markets of China, USA, Japan. GLP is also a beneficiary of the strengthening USD via its stake in three US funds.

mm2 Asia (BUY, TP S$0.56) mm2 has a high-margin business model (gross margin: 40-50%, net margin: c.20%) with an impressive growth outlook. We expect mm2 to grow at an EPS CAGR of 50% from FY16-FY19, underpinned by growth in local productions, expansion into the China market, and contribution from cinema operations and entertainment company, UnUsUal Group. City Developments (BUY; TP: S$9.90) City Developments remains one of the best proxies to ride on any possible relaxation of property cooling measures in Singapore. Trading at 30% discount to its RNAV, it has one of the largest land bank among local developers, while earnings are augmented by hotel operations, which account for 54% of its revenue. Diversification into China, UK, Australia, Japan, Korea and US are bearing fruit as projects are expected to complete from 2017 onwards. Ezion Holdings (BUY; TP: S$0.56) We believe Ezion is one of the best proxies to ride the recovery, given its earnings resiliency and growth potential. Besides the delivery rescheduling, ten of Ezion’s service rigs have been withdrawn from its fleet for repairs/upgrades/ conversions. The resumption of these rigs in 2016 should drive earnings recovery. Its balance sheet has been strengthened by rights issues of US$100m completed in July 2016. With a positive operating cash flow and lower gearing, Ezion is among the stronger players with good assets, decent cash balances and successful diversification of its customer base (windfarm contracts) to win new charter contracts.

Page 7

Market Focus

2017 Outlook

Sector Overview

Sector Recommendation Key points Stock picks

Banking Overweight NIM expansion phase in FY17 on rising interest rates; keeping tab on slow loan growth

Bulk of NPL issues should be over Prefer OCBC to UOB

OCBC

Consumer Goods Overweight Expect 2017 to be driven by pick-up in consumer sentiment outside Singapore

Acquisitions could catalyse earnings accretion and growth Still selective as valuations are at 22x PE or +0.5SD of 10-year

historical mean

Thai Beverage, Sheng Siong, Courts Asia, Jumbo

Healthcare Neutral Expansion plans unfolding in phases, driving medium-term growth

M&A and ‘corporatisation’ of medical practices could continue Long-term positive outlook; near term potential macroeconomic

headwinds and cost pressures

IHH Healthcare, Singapore O&G, Parkway Life REIT

Offshore & Marine / China Yards

Neutral Further consolidation is on the cards for regional shipyards Facing structural downturn with new orders and margins

normalising Cost competitive industry leaders will emerge stronger BUY diversified proxy Sembcorp Industries, and most cost efficient

Chinese yard Yangzijiang

Sembcorp Industries, Yangzijiang

Plantations Neutral Yield recovery and steady prices to boost FY17F earnings Demand to be supplemented by biodiesel blending in Indonesia Beneficiary of strong USD

Bumitama, Indofood Agri

Property Overweight Trading near multi-year lows, implying attractive risk/reward ratios Policy relaxation and potential M&A activities could lift sentiment

City Developments, UOL

REITS Underweight Expectation of four FED rate hikes in 2017; unlikely to see repeat of sector’s past outperformance

Potential risk to 1.3% growth if domestic economy slows further; while prospects of higher refinancing costs in the medium term is a headwind

Focus on S-REITs with superior growth visibility and valuations.

AREIT, Keppel REIT, MCT, Keppel DC REIT, FLT, Croesus Retail Trust

Oil Services & Equipment Providers

Underweight 2017 to remain challenging for oil services operators despite gradual oil price recovery

We prefer OSV players with positive operating cash flows and no near-term bond maturities

Ezion remains our preferred pick on favourable industry positioning and strong cash flows

Privatisation theme in play – provides support for Mermaid Maritime and POSH

Mermaid Maritime, POSH, Ezion

Telecom Underweight Two players pre-qualified for the reserved spectrum Earnings to shrink for local telcos from 2017 onwards Trading at 12-14x FY17F PE as earnings are likely to see

structural decline on the emergence of a new entrant

Nil

Transport Related Overweight Favour names that have a defensive or resilient business model, and a strong balance sheet

Sector trading above STI at 17.4x FY17F PE with modest EPS growth, but stocks in this space mostly in a net cash position and offer attractive dividend yield of over 4.5%

ST Engineering, ComfortDelgro, China Aviation Oil

Source: DBS Bank

Page 8

Market Focus

2017 Outlook

What Matters in 2017?

Domestic Factors 1. Signs of green shoots

It’s not all doom and gloom despite the slowdown in growth this year. While macro risks will likely see the slow growth drags on, our Singapore economist sees early signs of a bottom. Our FY GDP growth forecast for 2016 is 1.2% (down from 2% in 2015) and stabilising at 1.3% next year. The electronics cluster grew by 15.9% y-o-y in September, a possible initial sign that the US consumers are starting to loosen their purse strings. PMIs of all key markets are beginning to turn north while oil prices, which have been a key drag on the marine engineering cluster over the past two years, have turned higher. PMIs off the bottom

Source: DBS Bank, Bloomberg Finance L.P. The services sector, a key driver of the economy, could see a reversal out of recession if the financial services cluster (that accounts for one-third of GDP growth) shows an improvement. The U-turn in October bank loans to +1% y-o-y, the first positive reading in a year as growth in business lending turned positive, is a good sign.

Loan growth turned positive in October


While business conditions may stabilise or improve slightly, our Singapore economist believes that the labour market is still unravelling from the effects of the economic slowdown and domestic structural transitions. Essentially, the labour market cycle lags behind the growth cycle. Though the business growth cycle may have bottomed, there will still be pain in the labour market, as companies continue to streamline processes and re-calibrate their strategies for the medium term. Consumer sentiment may remain downbeat for now unless economic conditions improve significantly. With October bank loan growth finally turning positive after a year of contraction, regional PMIs on the uptick and oil price underpinned by the latest OPEC supply cut, we are optimistic that the worst of the earnings cut has passed. Moving forward to 2017, we forecast an overall earnings growth of 12.1% for stocks under our coverage, reversing from the 4.7% earnings contraction this year Recovery should be led by (1) 11.8% EPS growth for banks (pick OCBC) on higher NIM and loans growth recovery (2) 28% EPS growth for consumer goods (picks Bumitama Agri, Indofood Agri) sector lifted by the anticipated earnings recovery in plantation stocks on output growth and currency trends (3)24.3% EPS growth for the O&G (picks SembCorp Industries, Ezion) sector on oil price recovery and earnings ‘low-base’ effect post FY16 slump due to write-downs and asset impairments (4) 13.4% EPS growth for the consumer services (picks Genting Singapore, Cityneon, mm2 Asia and Jumbo Seafood) sector

Oct loan growth finally turned positive after a year

Page 9

Market Focus

2017 Outlook

2. Committee on the Future Economy and fiscal policy

shift

Our Singapore economist expects a shift to fiscal policy with the aim of soothing the present labour market pain and mitigate against potential risk in the domestic sector. Policy measures on skills upgrading and workers retraining as well as ensuring ample liquidity for companies can be expected. Although the next budget will be expansionary in nature, policymakers will also have to balance against the needs to keep the fiscal powder dry and focus on mid-term restructuring. The Singapore government recently narrowed its 2016 GDP forecast to 1-1.5% and expects 2017 growth to remain modest at 1-3%. The MTI cited uncertainties such as BREXIT and China debt default risks that could threaten the fragile recovery next year. Furthermore, an emerging anti-globalisation trend could dampen global trade that is already weak, worst affecting small and open economies such as Singapore and further threatening the softening labour market.

We think there is room for the Singapore government to announce support measures next year to help specific sectors weather the slowdown. For example, the MTI recently re-introduced the Bridging Loan scheme at a max loan quantum of S$15m/group and expanded the Internationalisation Finance Scheme (IFS) from S$30m to S$70m/group for the Marine & Offshore Engineering sector. It’s anyone's guess whether there will be more help to come. Still, a positive signal was sent as these new finance schemes mark the first time that the government is providing such sector-specific intervention. On a country perspective, the Committee on the Future Economy (CFE) will release its much awaited report in late January 2017. The CFE was formed to keep the Singapore economy competitive by helping to position the country for the future, as well as identify areas of growth with regard to regional and global developments. CFE will make recommendations in the following areas (refer to table below) and the upcoming budget will look to implement its recommendations:

Committee on the Future Economy – The Five Futures

The Five Futures Review and recommendations Future Corporate Capabilities and Innovation

Strategies to enable companies and industry clusters to develop innovative capacities, and use technology as well as new business models and partnerships to create value

Future Growth Industries and Markets

Macroeconomic and technological trends, and Singapore’s comparative advantages in industries and markets that will drive the global economy of the future

Future of Connectivity How Singapore can remain well connected as a competitive key hub in the future global economy, taking into account trends that will affect how the global economy is configured

Future City How Singapore can continue to sustain new growth opportunities as a leading global city and endearing home, by enhancing its infrastructure, overcoming resource constraints, and ensuring a highly liveable environment

Future Jobs and Skills Trends (including demographic and technological) that affect the landscape for jobs and the requirements for workers, and recommend ways to prepare Singaporean workers for the future

Source: https://www.gov.sg/microsites/future-economy 3. Stars are aligning for possible relaxation of

property cooling measures

One of the Singapore government’s key focus is the overall health of the Singapore’s economy and its intertwining relationship with property prices. With property forming close to 45% of total household wealth as of 3Q16, it is not in the government’s interest to have a rapidly declining property market. We believe that government policy relaxation could be on the cards in 2017, especially with emerging data-points and risk in the

horizon stemming from rising interest rates coupled with a weak rental outlook due to heightened supply in 2017. Possible scenarios that could result in a government policy reversal could be (i) an unprecedented hike in interest rates to 3.0% (vs current 2%) will have a negative impact on mortgage affordability, (ii) a drop in prices of 15% from peak (vs 11% currently) or a (iii) spike in unemployment rate closer to 4.0%. These all pointed to a fall in prices previously. Amongst the measures, we believe that the additional buyer stamp duty (ABSD) and/or down payment ratios for investment properties could be tweaked to support demand.

Page 10

Market Focus

2017 Outlook

Unemployment spikes to close to 4% typically result in a slide in property prices


4. Rising interest rates

Domestic interest rates will rise in tandem with higher US FED funds rate in 2017. Post Trump victory, the MAS 10-year yield has risen 40bps to 2.34% over the past month, following the rise in US bond yields with the 2-year up 28bps to 1.1% and the 10-year higher by 54bps to 2.31%. DBS Research expects the MAS 2-year yield to rise to 1.95% (current 1.17%) and the 10-yr yield to head for 3.05% (current 2.34%) by end 2017. Interest rates sensitive sectors are reacting to the spike in inflation expectations post Trump victory. Sectors which are highly geared are oil and gas, REITS, Property and commodity. Every 1% rise in interest rates could shave earnings by 2-3% from overall growth. Banks have outperformed, riding on

expectations of higher NIM and financial deregulation. Conversely, S-REITs fell in tandem with the 40bps rise in MAS 10-year bond yield to 2.34%. Every 1% change in interest rates will reduce dividends distribution by 2.9% and between 5% to 15% drop in valuation of REITS. The physical property market, already negatively affected by government cooling measures, a weak rental market, increasing supply and the concern of rising unemployment will be dealt another blow as rising interest rates negatively affect affordability. Every 1% rise in mortgage rates will lead to a S$500 increase in monthly payments assuming a S$1m loan amount repayable in 25 years. Existing mortgage rates are low at 2+% and a >1% rise in interest rates may trigger more sub sale activities.

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Measures that government tweaked during previous fall in the Singapore Property Price Index


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Sept 02: ECdownpayment ‐ 10% cash and 10% CPF

Dec 02: 2 yrs property tax exempt on land under dev; 30% reduction in

stamp duty

Jun 98: deferralof buyer stamp duty

1997: seller stamp duty

suspended

Nov 98: 10%CPF housing grant cut

May 99: 2nd CPF housing grant cut

Feb 00: taxexemption on land dev

removed; DC rates on resi land increased

Jun 00: HDBtightened regulations

Oct 01: CGT lifted; foreigners can use SGD loans; property

tax exempted for land under dev

Jul 05: LTV raised from 80% to 90%; cash payment reduced fr 10% to 5%; relax foreign

ownership rules; relaxation on non‐related singles joint purchasesNov 05: Waived security

requirement of developers on DPS

Dec 06: buyer stamp duty concession

removed

Oct 07: DPS removed

Series of tightening measures

Page 11

Market Focus

2017 Outlook

Sensitivity of interest rates to mortgage payments

Monthly Mortgage Payments** Typical Property Type

Price S$’000

Loan S$’000*

2.0% 3.0% 4.0% 5.0%

HDB BTO 500 400 $1,695 $1,897 $2,111 $2,338

Resale 600 480 $2,035 $2,276 $2,534 $2,806

Resale/EC 800 640 $2,713 $3,035 $3,378 $3,741

EC / Private 1,000 800 $3,391 $3,794 $4,223 $4,677

Private 1,250 1,000 $4,239 $4,742 $5,278 $5,846

Private 1,500 1,200 $5,086 $5,691 $6,334 $7,015

Private 1,750 1,400 $5,934 $6,639 $7,390 $8,184

Private 2,000 1,600 $6,782 $7,587 $8,445 $9,353

Assuming 80% loan and 25-year tenure Source: DBS Bank, URA, HDB

5 Restructuring potential for Temasek linked

companies Temasek’s Total shareholder returns (TSR)

Source: Temasek Review 2016 Restructuring to gather momentum with pressure to raise returns from Temasek-linked companies Temasek reported a 9% or S$24b drop in net portfolio value in FYEMar 16, a stark contrast to the sterling TSR of +19% a year ago. This was caused by the sharp drop in market capitalisation of its investments in Chinese banks and insurance companies, oil and gas companies (Repsol Energy) and Telecoms holdings (Bharti, Airtel and Intouch). Closer home, shares of Singapore Inc companies were beaten by the absence of growth catalysts, and cyclical downturn in the offshore and marine sector.

Following Temasek’s inclusion in the Net Investment Returns framework in the 2015 budget, the focus will be on raising shareholders’ returns for Temasek-linked companies. This can be achieved through a) optimal use of capital structure, b) seeking inorganic earnings growth, c) restructuring, mergers and acquisition to sustain long term competitiveness in the global arena, divestment of non performing sectors which face long term challenges and d) higher dividend payout for cash rich companies. Over the past 12 months, Temasek has announced the privatization of SMRT at S$1.68 per share, sale of NOL, and SIA has already taken Tiger Airways private. We expect restructuring to gather momentum, with the pressure to raise TSR for the group. Other Temasek-link companies with potential to further optimize their capital structures include ST Engineering, while Capitaland’s more aggressive stance on asset recycling would unlock value and lead to higher returns for the group. Temasek's Portfolio by sector (US$180 bn)

Source: Temasek Annual Report as of March 2016

15%

15%

14%

6%

6%

3%

-9%

9%

9%

9%

9%

9%

8%

8%

-15% -10% -5% 0% 5% 10% 15% 20%

Since 1974

40

30

20

10

3

1

Risk-adjusted hurdle rate Temasek TSR in S$ (%)

*As at 31 march 2016**Total Shareholder Return (TSR) is a compounded and annualised measure, which includes dividends paid to Temasek's shareholder (Ministry of Finance) and excludes capital injections from their shareholder.

Telecommunications, Media & Technology

25%

Financial Services 23%

Transportation & Industrials

18%

Consumer & Real Estate17%

Life Sciences & Agriculture

4%

Energy & Resources3%

Multi-sector Funds7% Others (Including

Credit) 3%

Page 12

Market Focus

2017 Outlook

External Factors 1. ‘America First’ Trump

Investors will get a clearer picture if US president-elect Donald Trump will keep his election promises after being sworn into office on 20 January next year. In a recent video, Trump sets out to fulfil several of his campaign promises in his first 100 days as president, one of which is to withdraw from the TPP.

Trump’s 1st 100-day policy plans

Policy Area Trump's first 100-day policy plans

Trade Issue notification of intent to withdraw from the Trans-Pacific Partnership and replace it with negotiations for fair bilateral trade deals

Energy Cancel restrictions on production of American energy, including shale energy and clean coal

Regulation For every one new regulation, two old regulations must be eliminated

National security

Develop a comprehensive plan to protect America's vital infrastructures from cyber and all other forms of attacks

Immigration Investigate all abuses of visa programmes that undercut American workers

Ethics reform 5-year ban on executive officials becoming lobbyists after they leave the administration

Source: DBS Bank, Bloomberg Finance L.P. Financial markets have reacted over the past one month. Investors see the following impact from Trump’s upcoming term as president: 1. Fiscal stimulus over accommodative monetary policies -

Trump advocates investing in infrastructure, reducing trade deficit, lowering corporate/individual taxes and removing regulations so that companies will hire. These pro-growth policies will lift inflation pressures and give FED the space to start normalising rates at a faster pace. Trump aims to create 25 million jobs over 10 years and achieve an annual GDP growth of 3.5%. Our economist expects US GDP growth of 2.7% next year, up from 1.7% in 2016.

2. Higher interest rates - FED funds rate has been suppressed at an artificially low level for years to accommodate the weak recovery and a lack of fiscal stimulus. With Trump, investors bet that the FED will finally get the headroom to start normalising interest rates at a faster pace.

A December rate hike is all but certain and consensus sees the likelihood of two more rate hikes next year when there was at best just one before Trump. US bond yields rallied with the 2-year up 28bps to 1.1% and the 10-year higher by 54bps to 2.31%. The USD has also strengthened against major currencies with the USD Index up 3.3%. Against the SGD, the greenback is higher by more than 3% to 1.43. DBS Research expects a December rate hike followed by another 4 next year, lifting the FED funds rate to 1.75% by end 2017. 2. Threat of anti-globalization

It is in all likelihood that the US will withdraw from the Trans-Pacific partnership (TPP). The Transatlantic Trade and Investment Partnership (TTIP), a planned FTA between the US and the EU, as well as the NAFTA that has been in existence for 22 years, are also in jeopardy. Trump has also threatened to brand China a currency manipulator and impose tariffs of 35% on Mexico and 45% on China. While withdrawal from the TPP is an easy hurdle to cross as Trump does not need congressional approval, slapping import tariffs on other countries is a different matter. Firstly, he will have to convince congress that raising the cost to the American consumers of Chinese imports by as much as 45% is the wise thing to do. Goods from China account for one-fifth of US imports. Trump will also have to contend with corporate America. American MNCs have more than US$228bn in Chinese investments (source: Bloomberg Finance L.P.). Much is at stake if a trade war erupts between the two countries; American MNCs will likely fight back hard against Trump’s proposed trade tariffs to remain competitive in China, which is one of the world’s fastest-growing consumer markets. Global trade will suffer if a trade war erupts between US and China. Small and open economies such as Singapore will be worst impacted as exports to both countries suffer. The US and China contribute a total of 25% to Singapore’s NODX. Trade with the other Asian countries will also be indirectly impacted as a result of trade tensions between US and China.

Page 13

Market Focus

2017 Outlook

Singapore NODX share to key markets, 2015

Source: Department of Statistics, Singapore 3. Rise of populism

BREXIT and Donald Trump’s unexpected victory have raised the question – Are Boris Johnson and Donald Trump the exceptions or do they signal the start of a global trend in populism and anti-globalisation? Europe is the region to monitor next year as countries accounting for about 40% of the EU's GDP go to the polls. Populists and right-wing parties have been gaining support as the populace face a migrant crisis, a spate of terrorist attacks and weak economies. Volatility will erupt in financial markets if right-wing parties seize power in the major European economies that may pave the way for more countries to leave the EU and threaten its very existence.

Key political events in Eurozone in 2017

Source: DBS Bank, Bloomberg Finance L.P. Italy is a developing story following the resignation of its PM after suffering a defeat in a referendum over his plan to reform the constitution. The general elections in Italy, not due till mid-2018, may be brought forward to 2017 as a result. Populist parties have gained the advantage as the referendum is regarded as a barometer of anti-establishment sentiment. For example, the 5-star movement has promised that if it eventually wins power, it will offer a referendum on whether to exit the EU. Pay attention to the French presidential election during the April/May period. Expect financial markets to react if the far-right, anti-EU and anti-immigration National Front party led by Marine le Pen a.k.a. "Madam FREXIT" seizes power. With France contributing nearly 15% to the EU's GDP, the country’s exit from the bloc would increase its break-up risk. Le Pen is leading the polls for the first round in the presidential race, though widely forecast to lose in any second-round scenario. But Boris Johnson and Donald Trump have proven the polls wrong.

Page 14

Market Focus

2017 Outlook

Restez à l'écoute Key European elections to watch in 2017

Source: DBS Bank, Bloomberg Finance L.P. The Euro is likely to remain pressured due to the political uncertainties next year. DBS Research sees risks for the EURUSD to fall below its 1.05-1.15 range that has existed for 2 years. We see downside risk for the EURUSD to 1.04

(currently 1.06) by 3Q17. Singapore companies with currency and business exposure to Europe can be affected if the Euro weakens sharply.

Singapore companies with Euro exposure

* FY17F and FY18F Source: DBS Bank

Country % of

EU GDP Event Month Comments

Holland 4.6 General Election

March 15 Far-right populist Geert Wilders and his Dutch Freedom Party (PVV) will contest. He has called for a Dutch referendum on leaving the EU and campaigned to stop the alleged “Islamisation of the Netherlands”. Polls reveal that PVV’s intention to hold a referendum to leave the EU does not have popular support. Still, the PVV continues to fare well in polls, second place behind the incumbent’s People's Party for Freedom and Democracy.

France 14.8 Presidential election

First round in April, runoff in early May

The ruling Republican party will have to face National Front’s Marine le Pen, who has called herself "Madam FREXIT". Her far-right, anti-EU and anti-immigration base has rallied on her call for shuttering borders, deporting non-French citizens and exiting the EU. Le Pen is leading the polls for the first round in the presidential race, though widely forecast to lose in any second-round scenario.

Germany 20.6 Parliamentary elections

September Presidential election Right-wing, AfD made significant gains against Angela Merkel's CDU at the local elections earlier this year. AfD won 14.2% of the votes to secure its first parliamentary seats, the first far-right party to do so since German reunification. The CDU polled just 17.6% of the votes.

Italy 11.1 General elections

Not later than May 2018, may be brought forward to 2017 with Matteo Renzi’s resignation

Italian PM resigns after suffering a defeat in a referendum over his plan to reform the constitution. Populist parties have gained the advantage as the referendum is regarded as a barometer of anti-establishment sentiment. For example, the 5-star movement has promised that if it eventually wins power, it will offer a referendum on whether to exit the EU. The general elections in Italy may be brought forward to 2017 in light of the latest political development.

Clos ing 12-mth Div Yld EPSPric e Ta rge t Yie ld PE Growth % of Eur

Compa ny 9/12 Pri c e Rc md 16F 16F 17F 16F 17F e xposure

Ascott Residence Trust S$ 1.13 1.32 BUY 7.3% 17.9x 17.9x 33% (0%) 21% of NPI is from Europe (France, Germany, Belgium, Spain)

Capitaland S$ 3.07 3.60 BUY 2.9% 19.8x 17.4x (38%) 14% estimated via Ascott REIT, 8% of revenue

City Development Ltd S$ 8.29 9.90 BUY 1.4% 13.8x 13.1x 26% 5% Europe & Others: 21% of revenue, via M&C Hotel Room

Frasers Centrepoint Ltd S$ 1.53 2.00 BUY 5.6% 12.0x 11.5x (24%) 5% <5% of revenue. Mainly coming from its hospitality division.

Frasers Hospitality Trust S$ 0.65 0.84 BUY 9.2% 15.3x 15.1x na na 5% of NPI

Hutchison Port Holdings Trust US$ 0.42 0.48 BUY 10.5% 19.8x 19.4x 3% (15%) 20-30% of outbound cargo to Europe, the rest from USA. Weaker Euro could affect China/Europe trade.

IREIT Global S$ 0.72 0.75 HOLD 8.8% 12.4x 13.2x 90% (5%) 100% of NPI

Midas Holdings S$ 0.23 0.38 BUY 2.2% 23.1x 12.7x 0% 82% around 5% of sales

Noble Group S$ 0.16 0.20 HOLD 0.0% nm 10.0x (132%) (363%) 13% of FY15 revenue

Olam International S$ 2.02 1.94 HOLD 2.0% 17.1x 15.5x (8%) 10% 27% of FY15 revenue

Riverstone S$ 0.88 0.97 HOLD 2.2% 17.4x 15.5x (7%) 12% Europe currently makes up about 35% of Riverstone’s glove sales - 80% of w hich are sold in USD

Sembcorp Industries S$ 2.95 3.10 BUY 2.3% 13.2x 13.7x 223% (3%) 30% of revenue are coming from European customers but are denominated in USD (largely from SMM). Utilities operations are predominantly in Asia, Middle East, Africa, Americas and UK.

Singapore Airlines * S$ 9.67 10.20 HOLD 4.1% 17.9x 16.4x (22%) 9% around 5% of receipts are in Euros

Venture Corporation S$ 10.02 10.90 BUY 5.0% 15.7x 14.6x 13% 8% <15% of sales to Europe but transactions in US$

Page 15

Market Focus

2017 Outlook

4. Liquidity outflow

According to the Institute of International Finance (IIF), non-resident portfolio outflows from EMs are estimated to have been a hefty US$24.2bil in November with EM equities and debt seeing outflows of US$8.1bil and US$16.1bil, respectively. The outflows started right after the US presidential elections as the “Trump Trade” favoured a stronger USD, higher bond yields, and US domestic-oriented stocks at the expense of EM assets. Total non-resident portfolio inflow/outflow to EM

Source: IIF Just days before the US presidential election, Trump singled out Singapore as one of the countries taking jobs away from America. Trump is wasting no time in turning to reality his election campaign promise to keep jobs in America. Earlier this month, he stopped Carrier Corp from moving a plant to Mexico, thus saving around 1100 American jobs in a deal that purportedly costs the government USD7mil. Trump also warns of imposing a 35% tax on companies that shifts jobs and operations to overseas. US is the number one FDI contributor to Singapore. US FDI stood at S$243bil (21% of total) in 2015. Once again, Singapore with its small and open economy will suffer if Trump carries through his policy intentions.

2015 Singapore FDI by Top 20 countries

Source: Singapore Department of Statistics 5. Recovery in oil prices

Oil prices boosted as supply-side pressures abate on OPEC deal. With the successful conclusion of OPEC’s meeting on 30th November, which saw the group agreeing to cut output by c.1.2mmbpd beginning in January 2017 for six months. the global crude oil demand-supply rebalancing could be brought forward to as early as 1Q17. Oil prices have thus received a welcome boost to this year’s high of US$54/bbl. Non-OPEC producers have also agreed in early December to reduce their combined output by 558,000 barrels per day (bpd). On the flipside, the US Presidential election outcome and consequent US dollar appreciation have added some uncertainty to the market. Meanwhile, US shale production levels have revived in recent months with investments in the Permian Basin leading to higher rig counts, and the decline in shale production seen in 2016 may very well be stalled in 2017.

Country S$mil Percentage

(%)

United States 243,653 21%

Japan 110,709 9%

British Virgin Islands 101,490 9%

Cayman Islands 98,279 8%

Netherlands 91,828 8%

United Kingdom 59,063 5%

Bermuda 50,698 4%

Luxembourg 47,365 4%

Switzerland 45,423 4%

Hong Kong 44,047 4%

Malaysia 33,140 3%

India 25,818 2%

Ireland 24,249 2%

Norway 24,204 2%

Mauritius 22,023 2%

Germany 18,501 2%

China 18,497 2%

Australia 15,676 1%

France 14,783 1%

Taiwan 14,382 1%

Page 16

Market Focus

2017 Outlook

We upgrade our forecast of Brent crude oil prices to average at US$55 bpd, The OPEC agreement, if executed, could be the key trend changer for oil prices in this cycle. We expect prices to be off the bottom and average between US$55-60/bbl in 2017. The key hiccup in long term trajectory would be the response from the US shale drillers if prices move towards more lucrative levels of US$60/bbl. We are already seeing US rig counts increasing and output starting to inch up over the last two months, as price optimism mounts. That could lead to oil prices capping off around US$60-65/bbl in the medium to long term. Oil price trends

Source: Blooomberg Finance L.P., DBS Bank Oil supply-demand rebalancing likely to be hastened nonetheless. As a result of the aforementioned planned output cuts, and based on adjustments to the International Energy Agency’s (IEA) latest forecasts, we think the global crude oil rebalancing process could be brought forward to 1Q17, ceteris paribus, if implementation of the deal is smooth. This augments our view that Brent crude oil price could average between US$50-60 per barrel (bbl) in 2017, depending on the implementation of the cuts. Higher output from US tight oil producers should cap oil prices at the US$60-65/bbl range in the medium-to-long term, as these players are likely to ramp-up production quickly as oil prices approach US$60/bbl. Rebalancing should be brought forward on OPEC supply

cut

Source: IEA, DBS Bank Estimates

In the medium to long term, US policies need to be watched. There is uncertainty regarding the energy policy of the new US President, which could add more pressure on supply side in the medium to long term, given his policy to boost employment in the energy sector, revive investments in fossil fuel businesses, and lower incentives to promote green energy and renewable energy businesses. President-elect Donald Trump has vowed to “cancel job-killing restrictions on the production of American energy, including shale energy and clean coal, creating many millions of high-paying jobs.” US shale oil producers have been cautiously redeploying cash, rigs and workers and US shale rig count has gone up by 40% from the lows of 262 rigs in May 2016 to 367 rigs currently. Positive for Singapore equities. With the worst likely to be over for oil prices, heading for modest recovery as supply and demand reaches equilibrium, this will be net positive for Singapore equities. Firstly, there will be less pressure on banks, which have exposure to the sector with loans accounting for 4 to % to 6% of their loan book. While upstream E&P players (Kris Energy) will be the first hand beneficiaries, shipyards and offshore service providers will see a lag impact as they are at the bottom of the value chain. Notwithstanding, these sub sectors have been sold down to bomb out valuations over the last two years and should see a re-rating on lower risk premium, as this recovery scenario pans out. In addition, we expect M&A activities to gather momentum, as several smaller cap asset owners are operating at negative cash flow with weak balance sheet.

88.00

90.00

92.00

94.00

96.00

98.00

100.00

World production - previous IEA forecastWorld production - adjusted forecast assuming 12-month OPEC cutsWorld consumption

Rebalancing could be broughtforward from 3Q17 to 1Q17

Page 17

Market Focus

2017 Outlook

Growth & Valuation Optimistic that worst of earnings cut has passed The prolonged earnings recession trend extended into 2016, affected by the weak global growth environment, slowdown in China, uncertainty of BREXIT and falling consumer sentiment as unemployment rate rises. The O&G sector was the main drag as the poor operating environment resulted in a wave of impairments and provisions as well as rising bankruptcies. Earnings for banks were also revised down due to NPL risks from O&G exposure, weak business sentiment and a sluggish property market that led to a contraction in loans.

On a positive note, there are early indications that the earnings cut may have peaked in 2Q16, when the FY16F and FY17F earnings were slashed by 7.4% and 6.8% respectively, the deepest post GFC. 3Q16 earnings downward revision decelerated to a much tamer 2.2% for FY16F and 2% for FY17F. With October bank loan growth finally turning positive after a year of contraction, regional PMIs on the uptick, the Singapore government offering financial aid to the beleaguered M&OE sector, and oil price underpinned by the latest OPEC supply cut, we are optimistic that the worst of the earnings cut has passed.

Earnings cut peaked in 2Q16 and decelerated sharply in 3Q16

Source: DBS Bank

Low- to mid-single-digit earnings recovery for 2017 Moving forward to 2017, we forecast an overall earnings growth of 12.1% for stocks under our coverage, reversing from the 4.9% earnings contraction this year. While the earnings recession risks extending into next year, we are cautiously optimistic that with the economic slowdown showing signs of bottoming out, the 2017F EPS growth figure will remain positive as the new year progresses.

The consumer goods sector is lifted by the anticipated earnings recovery in plantation stocks. Planters’ earnings will be primarily driven by output growth and diverging trends in currency movements over the next two years. We expect earnings for Bumitama Agri to expand at a 19% CAGR between FY16F and FY19F, driven by a 9% expansion in CPO production over the same period. Earnings for Indofood Agri is underpinned by the anticipated recovery in FFB yields, maturing estates and higher sugar prices, The recent strengthening of the USDIDR also bodes well for both stocks as their earnings are in USD while about 50% of costs are denominated in Rupiah. Double-digit EPS growth is in sight for Wilmar International riding on a ‘low-base’ effect in 2016.

-9.0%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

Yr 1 Forecast Yr 2 Forecast

Earnings cut peaked in 2Q16 and decelerated sharply in 3Q16

Page 18

Market Focus

2017 Outlook

The consumer services sector is forecasted to grow by double digits next year. We expect 2017 to be a recovery year for Genting Singapore, driven by a 3% improvement in VIP volumes, normalisation of VIP win rate to 2.85% and easing of bad debts. Cityneon is riding on its recent VHE acquisition that transforms it into a creator of innovative and interactive exhibitions. We project mm2 Asia to grow at an EPS CAGR of 50% from FY16-FY19, underpinned by growth in productions, expansion into the China market and contributions from the UnUsUal Group. Meanwhile, outlet expansion in China is seen driving up earnings for Jumbo Seafood by nearly 20% in FY17.

The O&G sector is expected to recover next year due to a ‘low-base’ effect after an anticipated 22% slump in earnings for FY16. A recovery in margins is seen lifting earnings for SembCorp Marine while an increase in vessel deliveries should boost earnings for Ezion. Earnings for banks are seen improving 11.8% next year following a 2.6% decline forecasted for this year. An increase in NIM tracking higher interest rates going forward and a recovery in loan growth are potential catalysts for the sector.

Sector growth and valuation

Source: DBS Bank Earnings recovery year sees STI heading to 3150 by mid-2017 Moving to 2017, we see the STI trading up to 13.64x (average) forward PE as the business cycle slowdown bottoms, the aggressive earnings cut suffered this year tapers off, and earnings recover from contraction to a high-single-digit 8.6%

growth. Consensus currently expects STI EPS growth of 4.3% for 2017F compared to a 7.7% contraction this year. We peg an STI objective of 3150 based on 13.64x (average) blended FY17/18F PE by mid-2017.

STI at various PE valuation levels

-1 sd

12.09x

PE

-0.5 sd

12.87x

PE

-0.25 sd

13.26x

PE

Avg

13.64x

PE

+0.25 sd

14x

PE

+0.5 sd

14.41x

PE

FY17 2,709 2,884 2967 3,056 3143 3,229

FY18 2,860 3,045 3113 3,227 3318 3,409

Avg 17 & 18 2,785 2,964 3050 3,142 3230 3,319

Source: DBS Bank

EPSs Grow th (% ) PER (x ) D iv Y ld

Sector 2016F 2017F 2018F 2016F 2017F 2018F 2016 Banking -2.6 11.8 4.6 11.0 9.8 9.4 3.5

Consumer Goods -16.2 28.3 9.2 20.5 16.0 14.6 2.3

Consumer Services -6.0 13.4 11.4 23.5 20.7 18.6 3.5

Financials -6.7 0.0 6.7 21.1 21.1 19.7 5.7

Health Care 1.7 11.9 14.8 43.1 38.6 33.6 1.0

Industrials 13.3 33.6 9.8 25.7 19.2 17.5 3.6

Oil & Gas -21.9 24.3 29.9 20.8 16.7 12.9 2.4

Real Estate -13.2 9.4 7.3 17.7 16.1 15.0 2.9

REITS 2.0 3.7 2.1 15.6 15.0 14.7 6.5

Technology 8.7 8.2 4.2 15.2 14.0 13.4 4.8

Telecommunications -0.3 2.9 4.9 15.7 15.2 14.5 4.9

DBS Coverage -4 .7 12.1 7.0 16.4 14.6 13.7 3.8

STI DBSV Forecast Avg (Before EI)

-7 .6 8 .6 5.6 13.9 12.8 12.1

STI Consensus Dec -7 .7 4 .3 5.6 13.8 13.2 12.5

Page 19

Market Focus

2017 Outlook

Themes for investment 1. Earnings recovery / Growth

Post US election, near-term jitters on bond yields and currencies are likely to weigh on the stock market. However, looking beyond the volatility and the uncertainty on the impact of Trump policies, our regional strategist has upgraded Singapore to Overweight, as a cyclical upturn may be forthcoming. The bottoming signals have emerged from the uptick in loan growth which bounced back into positive territory after a year – the longest stretch of contraction. Singapore’s manufacturing PMI, in line with the global ones, are also firmly in expansion mode. Conservatively, one can expect a lesser drag from the marine transport sector which is down 40% in 2016 due to the fallout in the oil & gas sector.

All suggest that the worst may be over for the Singapore economy, according to our regional strategist. With this backdrop, we attempt to look for companies on earnings recovery path, or those with strong earnings growth. Our selection criteria are based on BUY calls with >10% earnings growth for small-mid cap (SMC) and >5% for large caps in FY17F. SMCs tend to outshine large caps in terms of earnings growth. Among our coverage, SMC (<US$2bn) are estimated to generate earnings growth of -1% for FY16F and +34% for FY17F, outpacing the -3% and +3% growth for the large caps. Our picks are: Genting, Thai Beverage, ComfortDelgro, Venture, OCBC, ST Engineering, Jumbo, Ezion, mm2 Asia and Singapore O&G.

Earnings recovery / growth


Mkt La s t 12-mth FY16F FY17F FY18F FY17F FY18F FY16F

Ca p Pric e Ta rge t Ta rge t PE PE Yld

Company (S$m) ($ ) Pri c e ($ ) Re turn Re c 'n (x) (x) (%)

Yoma Strategic 1,025.2 0.59 0.80 35% BUY nm 181.0 (5.5) 37.9 40.1 1.5

Cityneon 249.5 1.02 1.37 34% BUY 679.7 161.1 24.2 12.7 10.2 4.3

Genting 11,772.4 0.98 1.15 17% BUY (13.3) 83.1 47.7 32.2 21.8 1.6

Midas Holdings 377.9 0.23 0.38 69% BUY 0.3 82.4 14.3 12.7 11.1 0.5

Ezion Holdings 777.7 0.38 0.56 50% BUY (82.1) 63.5 60.2 14.8 9.2 0.4

Procurri Corp 113.4 0.41 0.56 38% BUY (28.4) 56.3 19.1 8.2 6.9 1.5

Thai Beverage 21,594.6 0.86 1.09 27% BUY (28.5) 49.8 9.3 19.0 17.4 4.5

Indofood Agri 781.7 0.56 0.58 4% BUY 542.6 39.1 56.6 14.6 9.3 0.8

Starhilll Global REIT 1,646.8 0.76 0.87 15% BUY (48.7) 36.2 4.2 14.1 13.5 0.8

MM2 Asia 432.1 0.42 0.56 33% BUY 78.6 34.9 20.8 17.7 14.7 6.1

Mapletree Commercial Trust 4,161.1 1.45 1.62 12% BUY (8.3) 22.7 2.2 17.3 16.9 1.1

Jumbo Group 400.8 0.63 0.77 23% BUY 74.0 19.3 13.1 18.7 16.5 6.2

iFAST Corp 220.4 0.84 1.20 43% BUY (50.8) 16.3 11.5 31.6 28.4 2.8

Singapore O & G 273.0 1.15 1.50 31% BUY 59.6 14.8 15.2 25.5 22.1 7.2

Global Logistic Properties 10,498.9 2.24 2.47 10% BUY nm 14.3 9.6 24.1 22.0 0.9

IHH Healthcare 17,039.4 6.40 7.15 12% BUY (1.9) 14.2 18.9 50.7 42.6 2.3

CapitaLand 13,135.9 3.10 3.60 16% BUY (38.0) 14.0 3.4 17.5 16.9 0.7

Bumitama Agri 1,448.1 0.83 0.95 15% BUY (7.6) 13.0 30.2 14.7 11.3 2.3

Katrina Group 50.9 0.22 0.43 94% BUY 6.4 12.8 16.5 9.3 8.0 3.5

Manulife US REIT 733.8 0.82 0.93 14% BUY 4.1 12.1 9.3 17.1 15.7 1.0

Keppel Infrastructure Trust 1,870.7 0.49 0.56 15% BUY 92.7 11.5 (20.1) 47.0 58.8 1.5

Sheng Siong Group 1,518.6 1.01 1.19 17% BUY 13.2 10.9 2.1 21.3 20.8 6.1

ComfortDelgro 5,607.0 2.60 3.09 19% BUY 5.2 8.1 4.9 16.2 15.5 2.3

Dairy Farm (US$) 14,546.7 7.52 7.18 -5% BUY 2.7 7.9 9.2 21.7 19.8 6.7

Venture Corporation 2,744.6 9.86 10.90 11% BUY 13.3 7.5 2.5 14.4 14.1 1.4

OCBC 38,730.4 9.26 10.30 11% BUY (9.0) 7.0 4.3 9.9 9.5 1.1

ST Engineering 10,506.8 3.38 3.68 9% BUY (8.1) 6.6 2.8 20.2 19.7 5.0

CapitaLand Commercial Trust 4,637.9 1.57 1.70 9% BUY (21.8) 5.7 (2.4) 18.2 18.6 0.9

Mapletree Logistics Trust 2,549.3 1.02 1.15 13% BUY (9.8) 5.5 3.3 14.0 13.5 1.0

City Development 7,720.0 8.49 9.90 17% BUY 25.7 5.3 13.2 13.4 11.8 0.8

Frasers Centrepoint Ltd 4,480.5 1.55 2.00 29% BUY (23.9) 5.0 7.2 11.6 10.8 0.7

EPS Growth (%)

(%)

Page 20

Market Focus

2017 Outlook

2. Sustainable dividend with strong cashflow

In the current environment where economic growth is uncertain, we continue to prefer companies that not only offer attractive yields but with sustainable dividend payout and also in net cash position. With an average dividend payout ratio of 55% and dividend yield of 4%, Singapore remains an attractive haven for yield plays. With the reality of

interest rates hike pushing nearer, we would prefer non-REITS yield plays. Below is a list of high dividend yield stocks which we believe are sustainable, based on their earnings model, free cash flow and payout ratio. Our top dividend yield picks are Genting, ST Engineering, ComfortDelgro, Venture, OCBC and Thai Beverage. .

Sustainable dividend

Source: DBS Bank, Bloomberg Finance L.P. 3. Beneficiaries of US recovery and strong US$

Positive macro indicators in the US are likely to draw out the bulls. US GDP growth is running at full potential, and home prices have re scaled to pre-crisis peaks. The economy is now at full employment, core inflation and wage growth have been accelerating for 18 months. Trump’s push for fiscal stimulus will put the economy on a stronger recovery track – DBS forecasts at above consensus of 2.7% GDP growth in 2017. Along with this optimistic backdrop for the US, spiced by our expectations of 4 FED rate hikes next year, DBS currency strategist expects S$ to weaken to 1.48 vs the US$ by 4Q17. The improving US economy driven by higher consumer confidence, lower unemployment rate, and boost to infrastructure spending is positive for Singapore, as US is the third largest trading partner accounting for 7% of exports and 8% of Singapore’s GDP. Transport and related stocks (SIA, ST Engineering, SIA Engg, Hutchison Port), Supply chain companies (Noble, OLAM), technology companies (Venture, Innovalues, UMS) and entertainment plays (Cityneon) are key beneficiaries of an expected rise in consumer spending and/or corporate capital expenditure.

The stronger US$ is positive for companies with investments in the US or exporters with revenue in USD, found mainly in the commodities, shipping, logistics, transport, technology and CPO plantation sectors. Key beneficiaries are Hutchison Port, Riverstone, Innovalue, UMS, Venture, Riverstone, CNMC Goldmine and ST Engineering. Commodity and CPO companies benefit from higher US$ revenue as all products are US$-based and translated to local currency (Rupiah or Ringgit), although this is partly offset by lower CPO prices. Conversely, companies with US$ denominated loans may be affected, although in most cases, they are hedged by US$ revenue and there are few companies in Singapore with US$ denominated loans. Key stock picks are : ST Engineering, which will benefit from an increase in defense spending in the US, its investments in the US will benefit from any cut in corporate tax rate, and the strengthening US$. Venture offers an attractive dividend yield of 5%, will benefit from both a recovery in the US, with 55% of exports to the US, the strengthening US$. Cost are in ringgit while almost all of sales are in US$. A well managed company with fragmented ownership, it is an attractive takeover target.

Mkt La st 12-mth FY16F FY17F

Ca p Pric e Ta rge t Yld Yld

Compa ny (S$m) ($) Pric e ($ ) (%) (%) Re c 'n 2014A 2015A 2016F 2017F 2015A 2016F 2017F

HPH Trust 5,358.7 0.43 0.48 8.9 8.0 BUY - 171.7 145.2 170.7 539.0 529.4 657.6

Keppel Infra Trust 1,870.7 0.49 0.56 7.7 7.7 BUY 862.5 777.6 403.5 361.8 145.2 110.0 160.4

Venture Corporation 2,744.6 9.86 10.90 5.1 5.1 BUY 98.1 89.0 78.6 73.1 219.3 158.1 144.3

Yangzijiang 3,333.9 0.87 0.95 4.5 4.5 BUY 30.3 31.5 43.1 39.8 728.8 660.0 192.1

ST Engineering 10,506.8 3.38 3.68 4.4 4.4 BUY 87.9 87.9 109.5 89.8 192.4 335.9 456.1

Sheng Siong Group 1,518.6 1.01 1.19 3.9 4.4 BUY 92.1 92.7 92.7 92.7 43.1 (1.1) 57.6

OCBC 38,730.4 9.26 10.30 3.9 4.1 BUY - - - - - - -

ComfortDelgro 5,607.0 2.60 3.09 3.8 4.2 BUY 63.8 66.0 68.0 70.0 212.5 374.7 503.8

Genting 11,772.4 0.98 1.15 3.1 4.6 BUY 23.4 239.4 244.8 146.8 1,087.7 932.3 893.5

Thai Beverage 21,594.6 0.86 1.09 2.8 3.2 BUY 70.6 57.9 79.6 60.2 744.6 629.3 987.1

Fre e Ope ra ting Ca shflow

Divide nd pa yout ra tio Fre e Ope ra ting Ca shflow

Page 21

Market Focus

2017 Outlook

Impact on net profits on strong US$ rate of 1US$ to S$1.43

Name

% of Sales

In US$

% of Cost in

US$

Amount of loan

in US$

Sensitivity Analysis %chg in net profits /

10% chg in US$ Comments

Beneficiaries

ART 20% n/a 255 2% change in DPU 10.1% of assets in USD, 18% of debt in USD

Cityneon 30% 45% n.a. 5.0% Contribution from permanent site in Las Vegas in USD

Ezion 90% 80% US$1.2bn US$13-14m pa from 2018-2021

Natural hedge as bulk of the receipt and cost are denominated in US$ as well as bank borrowings. The main

exposure is the SGD bonds totaling S$545m maturing in 2018-2021; as well as S$150m PERPs which will be subject to

300bps step up rate in 2018.

GLP 6% n/a 600 0.6% GLP's 10% stake in three US funds

Innovalues 90% 35% na 26.3% Close to 90% of revenues are in USD, while USD-denominated costs only represents c. 35% of revenue. All

else equal, we estimate that every 10% depreciation of the Ringgit/SGD vs USD could lift FY17F profit by 26.3%.

However, actual impact will likely be lower as forex gains beyond a certain threshold are passed on to customers.

Manulife 100% 100% 100% NA- 100% of assets and revenues from US and in USD. Assuming a stronger US economy, Manulife should benefit from higher

demand for office space and an increase in rents.

Noble 66% n/a >70% The majority of commodities are priced in USD.

Typically commodity prices are negatively

correlated to movements in USD.

North America represents 66% of FY15 revenues. Noble does not provide a split between US and Canada but the North America business will relate primarily to the US. Note with the sale of Noble Americas Energy Solutions recently, the

exposure to the US will drop from the 66% level.

Olam 21% n/a >70% The majority of commodities are priced in USD.

Typically commodity prices are negatively

correlated to movements in USD.

21% of revenues from Americas. Olam does not provide a breakdown between North America and South America and

how much is directly related to the US. The majority of commodities are priced in USD with Olam reporting in SGD,

so it should benefit from a stronger USD.

Riverstone 85% 35% na 13.3% Generates a surplus in USD - every 10% depreciation of the Ringgit vs USD could boost earnings (in Ringgit terms) by

13%. Bulk of revenues in USD but raw material costs only represents 30% of revenues, on average. Actual impact

might be lesser as the company might be under pressure to lower ASPs (in USD terms ) in the event of a strong USD rally.

SIA Engineering 20% 30% NA 5.0% US$ exposure is via its Associates and JVs, which contribute close to 50% of net profit. 100% of Assoc/JV sales is in US$

but about 30% to 50% of cost is naturally hedged via materials. Full currency translation benefits as SIE reports in

S$.

ST Engineering 25% 20% US$560m 2.0% About 25% of sales from US customers and 29% of assets in US. This is offset by US$ bond coupon payments.

UMS Holdings 95% 40% na 21.7% Almost all of UMS' revenues are denominated in USD, while costs incurred in USD only represents <40% of revenue, as

operating costs are mainly denominated in the Ringgit. Reporting currency is in SGD. 10% depreciation of the

Ringgit vs USD could boost earnings (in SGD terms) by 22%.

Source: DBS Bank

Page 22

Market Focus

2017 Outlook

Impact on net profits on strong US$ rate of 1US$ to S$1.43 (Cont’d)

Name

% of Sales

In US$

% of Cost in

US$

Amount of loan

in US$

Sensitivity Analysis %chg in net profits /

10% chg in US$ Comments

Venture 100% 77% n.a. 10% Every 10% depreciation of SGD versus USD will have 10% positive impact on the bottom-line. Actual impact may be

slightly lower as strong USD hurts demand in Europe which accounts for an estimated 30-40% of total sales. Also over

60% of Venture’s labour costs are in MYR so every 10% depreciation of MYR versus SGD will have 7.5% positive

impact on its bottom-line.

Yangzijiang 80% 50% US$1bn Up to 16% if unhedged

Typically hedge the net exposure for coming 1-2 years depending on forex expectation. Strengthening US$ could

boost margins but with 1 year lag.

Losers

CNMC Goldmine 100% <10% 0.1m -8% Benefits from stronger US$ as sales are in US$, converted to Ringgit at point of sales while the bulk of costs are in Ringgit.

However this would be offset by translation losses on its net cash holdings, which are all held in Ringgit.

Delfi 5% 60% na 6.7% Every 10% depreciation of IDR vs USD has a 10% impact on forecasts. Almost all its revenue are booked in IDR and PHP, while 60% of costs are in USD. Actual impact may be lower

as company is likely to adjust selling prices in response to weaker currencies.

Venture 100% - NA 10% 55% of exposure to US market, bulk of sales in US$ while cost is in ringgit.

HPH Trust 100% 85% 4,240m +5% Benefits from stronger US$ as all of its revenue is in US$ or HK$ while some costs are in RMB. May also benefit from

stronger US$, which may help exports from China to the US. Reporting currency is US$, and dividends are also in US$

SIA 15% 60% S$100m -8.0% A stronger US$ typically sees weaker oil prices, which may help to offset the impact

Source: DBS Bank

Page 23

Market Focus

2017 Outlook

4. M&A

2016 has seen a rise in M&A / privatization deals. Cheap valuations, low liquidity and strong brand names are some of the factors propelling this move. A handful of these companies, like OSIM, Select Group, Eu Yan Sang and Super

Group are in the Consumer Goods space. More deals could be expected from this segment. For one, we expect to see Thai Beverage leveraging on its Singapore-listed associate company, Fraser and Neave Ltd (FNN) to seek inorganic growth for the Group. Along with this, we believe ThaiBev will take the opportunity to restructure, increase and consolidate its holdings in FNN.

Privatisation and takeover deals announced in 2016

Source: DBS Bank, SGX

Compa nyDa te

a nnounce d Offe r de ta i l sOffe r pric e

La st c lose prior to offe r Pre mium

Lantrovision 27-Jan-16 MIRAIT Singapore announced the proposed acquisition of Lantrovision by way of a scheme of arrangement.

S$3.250 S$2.200 48%

China Yongsheng 24-Feb-16 Voluntary conditional cash offer by Chairman and directors. Offeror owns 68.06% stake.

S$0.032 S$0.021 52%

Xinren Aluminum Holdings

25-Feb-16 Voluntary conditional cash offer at S$0.60 in cash per share. S$0.600 S$0.360 67%

OSIM 07-Mar-16 Chairman and CEO made a voluntary unconditional cash offer, with a view to delisting and privatising the company.

S$1.390 S$1.225 13%

Select Group 23-Mar-16 Voluntary conditional cash offer at S$0.525 in cash per share. 53.57% provided irrevocable undertakings to accept offer.

S$0.525 S$0.425 24%

Pteris Global 21-Apr-16 Voluntary conditional cash offer at S$0.735 in cash per share. Offeror owns 54.34% stake

S$0.735 S$0.635 16%

China Merchant 09-May-16 Privatization by parent company China Merchants Group at S$1.02 cash per offer share. Currently, Offeror owns 75.9% of shares.

S$1.020 S$0.830 23%

Eu Yan Sang 16-May-16 A consortium consisting of Tower Capital, Temasek and certain members of the Eu family has made a voluntary conditional cash offer of S$0.60 per share. Offerer has about 63.2% stake.

S$0.600 S$0.585 3%

Otto Marine 08-Jun-16 Executive chairman and controlling shareholder Yaw Chee Siew made a voluntary delisting at S$0.32 per share. He has a total interest of 61.2% stake.

S$0.320 S$0.230 39%

SMRT 20-Jul-16 Privatization offer by majority shareholder Temasek at S$1.68 cash per share.

S$1.680 S$1.545 9%

Sim Lian Group 08-Aug-16 Founder made voluntary conditional cash offer at S$1.08 per share.

S$1.080 S$0.940 15%

Vard Holdings 13-Nov-16 Majority shareholder Fincantieri made voluntary conditional cash offer at S$0.24 per share.

S$0.240 S$0.230 4%

Page 24

Market Focus

2017 Outlook

5. Potential M&A, takeovers and privatization candidates

Delfi could be a potential takeover target. The owner already had a history of spinning off its upstream cocoa processing business. In 2013, Delfi sold the division to Barry Callebaut AG for US$950m. Delfi is now left with a strong branded consumer business in Indonesia. The business has a strong market share of c.50% and is a market leader for branded chocolates in Indonesia. Its competitive advantage lies in its extensive network across Indonesia for general trade. It has a first-mover advantage and considerable reach into suburban and rural areas. Global players have already been competing in the market but mainly in the modern channels. We believe its strong brands and network will be attractive to investors who are keen to dominate the chocolate space in Indonesia. However, Petra’s valuation is pricy which can be a stumbling block for any deal to be done. The owner and his family own 50.5% of Delfi. Market capitalisation of the stock is approximately US$1b currently. Based on our analysis of successful takeovers on the SGX, it normally takes a 30% premium to succeed in buyouts. The cost would potentially be at least US$1.3b from the current market cap. It also means valuation is a whopping 31x FY17F PE or more. In the Oil & Gas space, the depressed oil prices have led to rising impairment charges and default in loans. Companies are facing high debt levels and declining revenues. To date, companies like Swiber and Swissco have already started filing for bankruptcy restructuring while others like Rickmers Maritime and Ausgroup, are seeking to defer / refinance loans. Vard has recently announced a privatization offer by majority shareholder Fincantieri. The sector’s prolonged oil crisis and depressed valuations could catalyse more M&A activity. This presents opportunities for cash-rich upstream players to acquire resource-rich but financially distressed E&P assets / companies. We also expect to see a wider consolidation scale in the O&G industry as the players face further financial pain. Two possible privatization candidates are Mermaid Meritime and Pacc Offshore (POSH). Mermaid is c.87.3% held by the Thoresen group and its related management, leaving only S$36.6m in free-float market capitalization on the table. With c.S$250m in cash on hand, the Thoresen group has the necessary ammunition to take Mermaid private. Additionally, Mermaid has very low debt levels versus peers, with a net gearing of only 0.04x as of 2Q16, this adds to its attractiveness as a privatization candidate. POSH is 81.89%-owned by the Kuok group, and is a more stable long-term bet versus peers with no immediate debt concerns (as committed undrawn bank lines cover capex requirements) and positive operating cash flows YTD. The company has also demonstrated an ability to secure work for its vessels amidst

an anaemic market (e.g. long term contracts recently inked for work in the Middle-East for 13 vessels). Singapore shipyards are bracing for tough times ahead – absence of new rigbuilding orders, dwindling order book, low book-to-bill ratio, high fixed cost, project cancellations and deferments. These will place rising pressure on shipyards to restructure or merge to derive cost benefits and create a formidable player against global competition. Other potential candidates that could unlock value include United Engineers, SIA Engineering, HPH Trust, GLP, and Bukit Sembawang. Major shareholders, OCBC, Great Eastern and affiliates, have announced a potential sale of their combined stake of c.32% of United Engineers (UE), which will spark a general offer, based on SGX listing rules. We believe UE will be of interest to prospective acquirers given the group’s strong recurring income and well-positioned assets – UE Bizhub City (UE Square), One North mixed development, as well as UE Bizhub West which are strategically located at the fringe of the Central Business District (CBD) or in key suburban commercial districts. SIA Engineering (SIE) is a potential privatization by parent SIA, who has a cash balance of about S$4bn as of end-June 2016, and would effectively have to fork out only c.S$390m cash to take SIE private. HPH Trust’s share price is trading near historic lows, offering a prospective yield of 8.7% in 2017F and at 0.6x FY16 P/B, could be attractive as an acquisition target given its strategic assets. Notably, major shareholders CK Hutchison and Temasek themselves are no strangers to privatisations. Despite trading at 0.88x P/NAV, 0.7x P/RNAV after the recent run-up in share price due to ongoing rumours of a possible offer for the company from CIC and other investors, we believe that Global Logistics Properties (GLP) remains cheap. The attractiveness in GLP is in its leading position in the warehouse logistics space in key markets of China, USA, Japan. In China, through its joint venture companies and key shareholders, the group has access to valuable land resources

Page 25

Market Focus

2017 Outlook

to grow its operational footprint. Through its various development and income funds, the group’s fund management business has also been a regular source of income and has also built up substantial amount accrued interest upon exit of the funds in the medium term. Plans to also realise value from its China warehouses through an income fund/REIT will enable the group to close the NAV/RNAV gap. Bukit Sembawang (BS) is one of the few developers in Singapore that still have substantially un-developed landbank in Singapore and could be an interesting target for investors looking to land-bank. The group is 44% owned by the Lee Family, who is rumoured to be keen to sell off their stake in

another listed company – United Engineers. Key properties in Bukit Sembawang’s portfolio are mainly high-end residential projects (Paterson Suites, St Thomas Walk and Skyline Residences) which could be subject to block sales to investors given the improved sentiment amongst buyers (both individual and institutional) in the luxury end of the residential market. The group have also substantial land resource to build landed-homes in Ang Mo Kio and Sembawang area which could last at least 10 years in terms of sales. Stock is trading at 0.9x P/NAV but at a substantial discount to its market value as a majority of its assets are marked to historical cost.

Potential M&A, takeovers and privatization candidates


Mkt La st 12-mth

Ca p Pric e Ta rge t % FY16F FY16F

Compa ny (S$m) ($) Pric e ($ ) Ups ide Rc md 17F 18F 17F 18F Yld (%) P/B (x)

Consume r

Thai Beverage 21,594.6 0.86 1.09 27% BUY 19.0 17.4 49.8 9.3 2.8 4.5

F&N 3,036.1 2.10 2.36 13% HOLD 32.9 31.6 (15.3) 4.3 2.1 1.1

Delfi 1,393.4 2.28 2.16 -5% HOLD 27.4 24.1 20.1 13.6 2.2 5.0

Oil & Gas

Mermaid Maritime 219.1 0.16 0.12 -24% HOLD 54.1 425.3 (81.1) (87.3) - 0.5

PACC Offshore 579.8 0.32 0.41 27% BUY nm nm nm nm - 0.4

Semb Marine 3,029.5 1.45 1.55 7% HOLD 24.7 19.4 66.8 27.6 1.4 1.2

Others

United Engineers 1,670.0 2.62 2.75 5% NOT RATED n.a. n.a. n.a. n.a. n.a. n.a.

SIA Eng 3,833.5 3.42 3.53 3% HOLD 26.3 25.4 (0.7) 3.4 3.5 2.3

HPH Trust 5,358.7 0.43 0.48 12% BUY 19.9 19.6 2.1 1.4 8.9 0.7

GLP 10,498.9 2.24 2.47 10% BUY 24.1 22.0 14.3 9.6 3.1 0.9

Bukit Sembawang 1,178.0 4.55 n.a. - n.a. n.a. n.a. n.a. n.a. n.a. n.a.

P/E (x) EPS Growth (%)

Page 26

Market Focus

2017 Outlook

ST Index event chart

Source:DBS Bank

‐2,500

2,550

2,600

2,650

2,700

2,750

2,800

2,850

2,900

2,950

3,000

Volume STI Index

RMB devaluation

catch-up with regional markets' loss after CNY

Weak China trade data; Lower FED rate hike expectation before Fed meeting

US rate hike worries

Oil price decline RMB depreciationWeak earnings outlook

STI valuation attractive at -2SD

Expectations of further monetary policies easing Pullback in USD Rebound in oil price

ST Index @ 9 Dec: 2956; +6.0% m-o-m; +2.5% YTDSTI

Average daily volume YTD: 1.67bn

PBOC cut requirement ratio rates by 50 basis points

USDSGD pullback

STI valuation moved up to -1SD

Weak 1Q earnnigs,Return of US rate hike worries

Poor US May non-farm payrollsExpectation of a delay in rate hikePullback in USD

Uncertain outlook; selling ahead of BREXIT Fl ight to

safety -rebound led by REITS and Telco

Britain exit EU

Weak corporate results; O&G companies not meeting loan obligations

Rebound led by Banks (expectation of rate hike) and O&G (rebound in oil price)

US presidential election

Page 27

Market Focus

2017 Outlook

2016 review V-shape recovery in 1Q; rangebound thereafter

The ST Index saw a steep drop in January on the back of the RMB devaluation, sliding oil prices and anticipation of weaker corporate results. As swift as the fall, the index started its rebound soon after the Lunar Year of the Monkey in early February from the 2530 support level. Expectations that central banks stand ready to ease monetary policies further, the pullback in the USD, rebound in oil price and attractive valuation of the Singapore market triggered short-covering and bargain hunting activities. For the rest of the year, the index has been rangebound trading within the 2950 to 2750 band. Other key events affecting the market in 2016 include BREXIT and the US presidential election. Downbeat global macro data, declining corporate earnings and expectation of a rate hike continued to plague the market. Corporate earnings continue to disappoint. As of 3Q16, we have cut FY16F and FY17F earnings by slightly over 10% each, from the start of the year, with the steepest cut in 2Q16.The BREXIT referendum caused the STI to dip slightly below the 2750 level but it rebounded swiftly, led by telcos and SREITs as investors sought the safety of defensive and yield stocks. Towards the end of the year, sentiment was affected by the US presidential election. A trump victory is perceived as negative by the market as risk aversion increases. Trump’s policies are likely to lead to inflationary pressure and lift rate hike expectations. However, the preference for index heavyweight bank stocks managed to support the index as banks are beneficiaries of rising interest rate. The market is expecting the FOMC meeting in mid-December to lift the FED funds rate for the first time this year to 0.75%. Sector performance – Oil & Gas worst hit; Consumer

Goods shine

In terms of the FTSE sector performance, Oil & Gas, Basic Materials and Utilities were among the worst performing sectors, mainly affected by the weak oil prices, rising impairment charges and default in loans. Some, like Swiber and Swissco, have started filing for bankruptcy restructuring

while others are facing high debt levels and declining revenues. The dire situation for oil & gas companies in Singapore has reached a point where the government has decided to step in. The Ministry of Trade and Industry (MTI) has announced financing support for the marine and offshore engineering companies in the country to weather through the current storm. The relatively defensive sectors – Telecommunication and Healthcare, did well in 1H16 but eased towards the second half of the year. Telco stocks were affected by the likely entrance of a fourth player as both MyRepublic and TPG were pre-qualified by the regulator to bid for the reserved spectrum. Yield plays like REITS outperformed the market as investors turned to yield plays on the back of the global uncertainties. Financials, especially the banks, surged in the last two months of 2016, on expectation of a rate hike, which is positive for banks. Consumer Goods sector was the best performer, as food is a basic necessity, needed in both good and bad times. Positive M&A newsflow also help to propel the sector. Companies like OSIM, Super Group, Eu Yan Sang have announced privatization plan at higher price compared to the last trading price. FTSE Sector Performance

Source: Bloomberg Finance L.P.

Sector Perform anceClosed as

at 9 Dec1 m th (% )

9 Nov3 m ths (% )

9 Sep YTD (% )

STI 2,956 6.0 2.9 2.5FTSE Mid Cap 693 0.7 0.0 3.8FTSE Small Cap 387 0.2 0.1 -4.1

FTSE Consumer Goods 524 2.2 3.7 22.0FTSE Industrials 712 0.7 0.1 6.9FTSE Re Invest Trust 731 -1.0 -4.9 5.1FTSE Financials 803 7.2 4.2 4.1FTSE Healthcare 1,458 -2.5 -5.0 -0.9FTSE Telecommunication 962 -2.0 -6.1 0.8FTSE Consumer Services 767 3.1 0.7 -0.8FTSE Real Estate Hold & Dev 719 3.8 2.5 -0.3FTSE China 206 5.2 6.2 -1.4FTSE Basic Materials 99 7.6 5.0 -8.2FTSE Oil & Gas 339 11.2 9.9 -11.0FTSE Utilities 363 -4.3 -6.6 -13.1FTSE Technology 234 -9.9 -18.3 -26.1

Page 28

Market Focus

2017 Outlook

Page 28

Sector Outlook

Market Focus

2017 Outlook

Page 76

Bank (Overweight)

Analyst Sue Lin LIM +65 8332 6843 [email protected]

Price

12-mthTarget

Price PE

2017F

Div Yld

2017F

EPS CAGR 2015-2017

(S$) (S$) Rec (x) (%) (%)

Large Caps OCBC 9.26 10.30 BUY 9.9 4.1 6 UOB 20.90 21.80 HOLD 9.8 3.6 8

Source: DBS Bank Closing price as of 9 Dec 2016 Singapore Banks: NIM trends

Note: No forecasts for DBS Source: Companies, DBS Bank

Singapore Banks: Credit cost trends

Note: No forecasts for DBS Source: Companies, DBS Bank

Singapore Banks: Rolling forward P/BV band

Source: Compani es, DBS Bank

There is hope NIM expansion phase in FY17 on rising interest

rates; keeping tab on slow loan growth

Bulk of NPL issues should be over but there are still lingering concerns albeit on a smaller scale; relatively high credit costs and NPL ratios to prevail for another 1-2 quarters

Prefer OCBC (BUY, TP S$10.30) over UOB (HOLD, TP S$21.80)

Outlook Rising rates, higher NIM. With rate hikes almost a

certainty in the coming quarters, the Singapore banks are almost surely to deliver higher NIM. We have imputed 8-10bps rise in NIM for FY17F. Our sensitivity analysis suggests that every additional 25bps increase SIBOR/SOR translates approximately to a 6bps increase in NIM (ceteris paribus), and will lift earnings by another 4%. Loan growth however will likely remain sluggish at low single digits, limiting net interest income growth.

Bulk of the NPL issues behind us; but there are still lingering concerns. The Ministry of Trade and Industry announced enhanced support measures for the oil and gas sector in the form of new incremental loan facilities from SPRING Singapore and IE Singapore to Singapore-based industry players. We believe this has brought some relief to companies which are experiencing tight cash flow, and hence extend some respite to banks in terms of NPL incidences. However, we remain watchful on some spillover effects to the construction sector and loans to individuals in the near term should the macro environment remain sluggish and unemployment levels become a concern. As such, credit costs may remain relatively elevated in FY17 (vs 5-year historical trends) albeit lower than FY16’s. Possible earnings surprises could emerge if asset quality recovers quicker than expected in FY17. Every 5bps decline in credit cost will lift earnings by 3%.

In need for a more sustainable earnings and growth trends. A more sustainable earnings and growth trends to watch would be what banks can do over the longer term, especially in the wealth management space. The banks’ regional agenda remains intact.

0.00%

0.40%

0.80%

1.20%

1.60%

2.00%

2.40%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

2.20%

2.40%

2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017FDBS OCBC UOB Average 3m SIBOR

NIM (Banks) NIM (Average/Industry)

0.24

%

0.20

%

0.34

%

0.33

%

0.68%

0.97%

0.37%0.30%

0.23% 0.23% 0.24% 0.27% 0.31%0.27%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F

DBS OCBC UOB Average

Provision charge-off rate (Banks) Provision charge-off rate (average)

Mean, 1.31

+1SD, 1.58

+2SD, 1.86

-1SD, 1.03

-2SD, 0.75

0.50.70.91.11.31.51.71.92.12.3

06 07 08 09 10 11 12 13 14 15 16

PBV (X)

ed: CK sa: YM, PY

Market Focus

2017 Outlook

Page 30

Risks Over-optimism on rate hike impact. The Singapore

banks’ share prices have had a good rally since Trump’s victory and with more certainty of rate hikes. This is even before any real numbers have filtered through. A more sustainable earnings and growth trends to watch would be what banks can do over the longer term, especially in the wealth management space. The banks’ regional agenda remains intact.

Prolonged tail risk to NPL issues. The market appears

to be disregarding any downside risk to further NPL issues. There may be some tail risk to NPL issues albeit on a smaller scale given the sluggish economy. Every 5bps increase in credit cost will drift earnings down by 3%.

Valuation & Stock Picks Trading at a discount to regional peers. Singapore

banks have been trading at a discount by virtue of lower NIM and growth prospects vs ASEAN peers. The Singapore banks were shunned since early 2016 and it has been a consensus underweight call vs ASEAN peers because it lacked catalysts, coupled with NPL issues it dabbled with for the large part of 2016. But with more certainty of rate hikes, Singapore banks have re-emerged on investors’ radars. The Singapore banks have rallied over a month because of this. We believe there is still another leg to go, albeit not a significant jump further from here. Rising NIM which will drive earnings higher in 2017 is the key catalyst for the share price performance of the Singapore banks.

Prefer OCBC to UOB. OCBC would be our preferred

bet for three reasons: 1) its ability to maintain lower-than-peers credit cost trends, 2) it serves as a better wealth management play, and 3) possible earnings surprises from its insurance business in a rising interest rate environment – BUY; TP at S$10.30. UOB has kept its buffer for NPLs but it still lacks the allure for a wealth management play; higher NIMs should drive earnings – HOLD; TP at S$21.80, maintain HOLD. Our forecasts are now above consensus estimates for FY17-18F.

Singapore Banks: Peer comparison

Banking Group

Market cap

Price 9 Dec 16

12-mth Target Price Rating PE (x) CAGR PBV (x)

ROE (%)

Net div (%)

(US$m) ($S/s) ($S/s) FY15A FY16F FY17F ^ (%) FY15A FY16F FY17F FY17F FY17F

DBS* 31,622 17.83 NA NA 10.1x 10.5x 10.2x -0.8 1.1x 1.0x 1.0x 9.8% 3.4%

OCBC 27,073 9.26 10.30 BUY 9.7x 10.6x 9.9x -1.4 1.1x 1.1x 1.0x 10.7% 4.1%

UOB 23,889 20.90 21.80 HOLD 10.6x 11.1x 9.8x 3.9 1.2x 1.1x 1.0x 10.3% 3.6%

Weighted average 10.1x 10.7x 10.0x 1.1x 1.1x 1.0x 10.3% 3.7%

Simple average 10.1x 10.7x 10.0x 1.1x 1.1x 1.0x 10.3% 3.7%

* Based on Bloomberg consensus

^ Refers to 2-year EPS CAGR for FY15-17F

Source: Companies, Bloomberg Finance L.P., DBS Bank

Market Focus

Page 76

Consumer Goods Sector (Overweight)

Analyst

Andy SIM CFA +65 6682 3718

[email protected]

Alfie YEO +65 6682 3717

[email protected]

Price

12-mthTarget

Price PE

2017F

Div Yld

2017F

EPS CAGR 2015-2017

(S$) (S$) Rec (x) (%) (%)

Sheng Siong Group Ltd 1.01 1.19 BUY 21.3 4.4 6 Thai Beverage Public Company 0.86 1.09 BUY 19.0 3.2 28 Dairy Farm 7.52 7.18 BUY 21.4 3.1 9

Super Group Ltd 1.27 1.30

ACCEPT THE

OFFER 29.2 1.7 4 F & N 2.10 2.36 HOLD 32.9 1.5 (6)

Del Monte Pacific 0.34 0.37 HOLD 12.4 0.0 (3)

Courts Asia 0.45 0.50 BUY 9.1 3.6 14

Jumbo Group 0.63 0.77 BUY 18.7 2.9 16

Delfi Ltd 2.28 2.16 HOLD 27.1 2.8 17

Katrina Group 0.22 0.43 BUY 9.3 6.5 15

Source: DBS Bank Closing price as of 9 Dec 2016 Singapore consumer PE trading band

Source: Bloomberg Finance L.P., DBS Bank GDP expected to accelerate in most of ASEAN

Markets 2016F 2017F Note

Singapore 1.2 1.3 Flat

Malaysia 4.2 4.5 Accelerate

Thailand 3.3 3.5 Accelerate

Indonesia 5.1 5.3 Accelerate

Philippines 6.6 6.3 Decelerate

Source: DBS Bank

Next serving, a regional recovery Expect 2017 to be driven by pick-up in consumer

sentiment outside Singapore

Acquisitions could catalyse earnings accretion and growth

Still selective as valuations are at 22x PE or +0.5SD of 10-year historical mean

Stock picks: Thai Beverage (THBEV), Sheng Siong (SSG), Courts Asia (COURTS), Jumbo (JUMBO)

Earnings Outlook Growth driven by exposure outside of Singapore. We

are projecting Singapore Consumer sector (for stocks under our coverage) to post earnings growth of 8.6% y-o-y in FY17F, driven mainly by companies’ exposure and growth outside of Singapore. This is underpinned largely by expectations of a continued pick-up in consumer sentiment in regional economies, such as Thailand and Indonesia. We expect domestic demand in Singapore to remain relatively lacklustre on the back of subdued GDP growth and macro uncertainties.

Based on 3Q16 results posted by Singapore-listed consumer companies (as at time of writing), performance has been generally robust arising from gross margin expansion. As per our earlier expectations, we are seeing companies enjoy the benefits of lower raw material prices. For instance, Fraser and Neave (FNN) and Delfi have benefitted from lower sugar and milk powder prices which reached a low in 2015. That said, top-line growth was largely lacklustre on the back of uncertain consumer sentiment across the region.

Acquisitions could further boost earnings. Potential acquisitions could provide a boost to growth. Several companies have available cash and debt resources to undertake acquisitions. For instance, the majority of companies under our coverage - FNN, Delfi, Super, Jumbo and Sheng Siong - are in net cash positions while Thai Beverage (ThaiBev)’s gearing has reverted to c.0.2x net debt/equity. We believe M&A and/or inorganic growth opportunities for these companies to leverage on their strong balance sheets could provide a catalyst for the sector.

ed: TH sa: YM, PY

Market Focus

Page 32

Malaysia consumer sentiment index Thailand consumer confidence index

Source: MIER, Bloomberg Finance L.P. Source: Thomson Reuters Datastream

Indonesia consumer confidence index Philippines consumer confidence index

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

2017 consumer sentiment, GDP largely positive.

Regional consumer sentiment is largely on the uptrend in 2016 with the exception of Thailand and will likely continue for 2017. Philippines’ consumer confidence has been strong on the back of the presidential election year. Malaysia’s consumer confidence has seen gradual recovery post GST implementation in 2015. Consumption consumer confidence has also recovered in 2016 for Indonesia. Meanwhile, domestic demand has remained lacklustre in Thailand. We also expect most ASEAN economies’ GDP growth to accelerate into 2017 on the back of better regional consumption. Malaysia, Thailand and Indonesia’s GDP growth are expected to accelerate from 2016, while Singapore’s GDP growth is expected to be largely flat. Philippines’ GDP is expected to decelerate. But this is due to a high base from the election year.

Risks Higher margin compression from rising raw material

prices, absence of pick-up in consumer sentiment. Our central theme for the sector in general is stronger regional top line on consumption recovery and pick-up in sentiment, such as in Indonesia and Thailand. At the same time, we expect margins to take a back seat in 2017, compared to 2016. We are already cognisant of rising raw material prices and are expecting some margin compression. That said, in the event of spikes in raw material prices and further weakening of regional currencies against the US dollar, this may erode margins more than expected, particularly so if the expected pick-up in sentiment does not materialise.

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Consumer Sentiment Index: Ma laysia

Market Focus

Page 76

Valuation & Stock Picks Focus on growth, value, and earnings. Our picks for

2016 are centred around growth, earnings resilience and value. Stocks with the strongest fundamentals and earnings resilience and growth continue to be Thaibev and Sheng Siong. Both Jumbo and Courts are offering regional growth at compelling valuations.

Top picks

Stocks Rating Strategy

Thaibev BUY Growth and potential restructuring

Sheng Siong BUY Defensive, earnings resilience, yield

Courts BUY Regional growth, value play

Jumbo BUY Growth in China, JVs in new markets

Source: DBS Bank Valuations slightly above average. Sector valuation is

currently at about 22x PE, which is +0.5SD above its 10-year historical average. This has tapered off marginally, particularly with the recent uncertainty in regional markets and slower-than-expected improvement in top line year-to-date. That said, there is potential for re-rating should top-line growth in 2017 come in stronger than expected and/or accretive acquisitions by made by specific companies.

ThaiBev (THBEV SP, S$0.86, BUY, TP: S$1.13) We like

ThaiBev for its exposure in Thailand, resilient and dominant Spirits operations, providing the bulk of the group's cashflow. In addition, Beer operations should continue to retain its market share gains after the rebranding of Chang Beer. With the rebranding and increase in brand awareness, this puts management in a better position to manage its margins.

We see ThaiBev in a transformational mode to morph

into a regional player. We believe its earnings momentum, coupled with its ongoing transformation into a regional beverage player, will aid in further re-rating of the counter. In addition, a key catalyst could arise from the corporate restructuring of its associate,

FNN coupled with potential acquisitions (leveraging on its net cash position) to expand into the Indochina region. In our view, this would provide a further boost to earnings and stock price re-rating.

Sheng Siong (SSG SP, S$1.01, BUY, TP: S$1.19) We like

Sheng Siong for its earnings growth traction, efficient operations, strong ROE, defensive earnings qualities, dividend yield and net cash balance sheet. Although store closures are expected for FY17F, we see continued margin expansion through 1) direct sourcing from suppliers which include farmlands in Malaysia; 2) higher sales of house brands, which currently constitute less than 10% of turnover; 3) higher fresh mix from the displacement of wet markets in Singapore; 4) more bulk handling as it expands and adds another 45,000 sqft of warehouse space at its Mandai distribution centre. The stock has a dividend yield of c.4%.

Jumbo (JUMBO SP, S$0.63, BUY, TP: S$0.77) We like

Jumbo for its rapid growth in China, close to 30% ROE in FY16F, relatively higher margin than peers, cash generative business, and strong net cash balance. We see no signs of margin pressure as crab costs vs revenue per head remains consistent. While Jumbo is growing rapidly in China, new JVs and franchise partnerships in other parts of Asia will help add to earnings growth going forward.

Courts Asia (COURTS SP, S$0.45, BUY, TP: S$0.50)

Courts is a earnings recovery and value play. We expect earnings to recover on the back of better cost management and margins. We forecast top line to remain robust driven by accelerating GDP growth, store expansion and consumer sentiment recovery in Malaysia and Indonesia. Focus on bundled value-added services and cost management will help improve margins and reduce operating expenses. Valuation is compelling at 9x FY17F PE (near -1SD of its forward PE valuation) and 0.7x P/BV. The stock also offers a dividend yield of close to 4%.

Market Focus

Page 34

Sugar Coffee

Source: Thomson Reuters Datastream, DBS Bank Source: Thomson Reuters Datastream, DBS Bank

Cocoa Palm Oil


Milk Rice - Thailand


Market Focus

Page 76

Barley Wheat


PET Aluminium


Tin WTI

Source: Thomson Reuters Datastream, DBS Bank

Market Focus

Page 36

Peer Valuations

Source: DBS Bank

Company Rat ing

12-mth Target price Count ry

Market Cap

(US$m)Px Last

9 Dec 16PE

(A ct )PE

(Yr 1)PE

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ROE (%)

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(%)

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(%)

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(x )

Singapore Consumer peers

Thai Beverage PCL BUY 1.09 SGX 15,095 0.86 28.1x 18.8x 17.2x 4.1x 2.6x 23% 15.7% 14.0% 3.2% 0.22

Dairy Farm International Holdings Ltd BUY 7.18 SGX 10,168 7.52 22.6x 21.0x 19.2x 5.7x 0.8x 29% 3.8% 4.0% 3.1% 0.36Fraser and Neave Ltd HOLD 2.36 SGX 2,122 2.10 27.8x 32.8x 31.4x 1.1x 1.5x 3% 5.4% 4.5% 1.5% cash

Sheng Siong Group Ltd BUY 1.19 SGX 1,061 1.01 23.4x 21.1x 20.6x 5.9x 1.8x 28% 9.1% 8.7% 4.4% cash

Delfi Ltd HOLD 2.16 SGX 974 2.28 32.6x 27.2x 23.9x 4.6x 2.2x 18% 12.7% 8.0% 2.8% cash

Super Group Ltd ACCEPT OFFER 1.30 SGX 989 1.27 29.3x 29.3x 27.3x 2.5x 2.7x 9% 12.1% 9.4% 1.7% cash

Del Monte Pacific Ltd HOLD 0.37 SGX 455 0.34 8.7x 12.2x 9.2x 1.4x 0.2x 12% 6.3% 1.5% 0.0% 2.43

Hour Glass Ltd NOT RATED N/A SGX 330 0.67 9.7x na na 1.1x 0.7x 12% 8.5% 7.4% 3.0% cash

JUMBO Group Ltd BUY 0.77 SGX 280 0.63 22.1x 18.5x 16.4x 5.3x 2.5x 31% 14.9% 13.6% 2.9% cashBreadTalk Group Ltd NOT RATED N/A SGX 217 1.11 38.4x 26.6x 18.5x 2.5x 0.5x 6% 4.1% 1.2% 1.4% 0.90

Courts Asia Ltd BUY 0.50 SGX 160 0.45 11.6x 9.0x 8.9x 0.7x 0.3x 8% 7.1% 3.4% 3.7% 0.73

Challenger Technologies Ltd NOT RATED N/A SGX 106 0.44 9.0x na na 2.0x 0.4x 24% 5.7% 5.2% 6.0% cash

Parkson Retail Asia Ltd NOT RATED N/A SGX 61 0.13 na na na 0.6x 0.2x 19% 23.8% 7.8% 3.9% cash

Katrina Group Ltd BUY 0.43 SGX 36 0.22 10.4x 9.3x 8.0x 3.0x 0.7x 35% 9.5% 7.9% 6.5% cash

Japan Foods Holding Ltd NOT RATED N/A SGX 51 0.42 18.1x na na 2.3x 1.1x 12% 6.5% 6.0% 4.8% cash

F J Benjamin Holdings Ltd NOT RATED N/A SGX 21 0.05 na na na 0.5x 0.1x -37% -7.9% -9.1% 0.0% 0.51

EpiCentre Holdings Ltd NOT RATED N/A SGX 8 0.09 na na na 10.3x 0.1x -748% -3.2% -3.5% 0.0% 2.15Regional av erage 20.9x 20.5x 18.2x 3.2x 1.1x (30%) 7.9% 5.3% 2.9% 1.0x

Market Focus

Page 76

Healthcare Sector (Neutral)

Analyst Rachel TAN +65 6682 3713 [email protected] Andy SIM CFA +65 6682 3718 [email protected]

Price

12-mthTarget

Price PE

2017F

Div Yld

2017F

EPS CAGR 2015-2017

(S$) (S$) Rec (x) (%) (%)

Large Caps IHH Healthcare * 6.40 7.15 BUY 50.3 0.5 11 Parkway Life REIT 2.39 2.75 BUY 19.0 5.0 2 Raffles Medical 1.44 1.43 HOLD 32.3 1.6 6 RHT Health Trust ^ 0.88 0.95 HOLD 12.9 10.1 6 Singapore O&G

d 1.15 1.50 BUY 25.5 3.4 15

*currency in RM

^FYE Mar 18 forecast

Source: DBS Bank Closing price as of 9 Dec 2016 Healthcare sector trades at 43x PE, close to historical average (post-IHH’s listing)

Source: Bloomberg Finance L.P., DBS Bank Large cap healthcare stocks trade at 24x EV/EBITDA, below the higher end of historical range.

Source: DBS Bank

Healthy growth prospects Expansion plans unfolding in phases, driving

medium-term growth

M&A and ‘corporatisation’ of medical practices could continue

Long-term positive outlook but potential macroeconomic headwinds and cost pressures may moderate near-term growth prospects

Top picks: IHH Healthcare, Singapore O&G, and Parkway Life REIT

Outlook Expansion plans unfolding in phases, driving medium-term

growth. While revenue growth (among the large cap healthcare service providers) in 2016 has remained resilient (partly due to acquisitions and contributions from new hospitals), earnings growth was weighed down by start-up costs and pre-operating costs of expansion plans, both in home markets and new markets. We expect these expansion plans would begin to unfold in phases over the next three to five years, starting in 2017. IHH is expected to open three new hospitals in HK, China and Turkey and the Raffles Hospital Extension is expected to complete by mid-2017. While we believe these expansion plans will drive medium-term growth, near-term earnings growth could remain subdued.

M&A and the ‘corporatisation’ of medical practices could continue. In recent years, we have seen a series of M&As and listings of new healthcare companies, especially among the smaller cap healthcare service providers. The sector has performed strongly, rising 24% year-to-date vs STI’s 2.1%, led by selective smaller cap healthcare service providers. We believe ‘corporatisation’ of medical practices could continue following the successful listings of a few medical practices and acquisition transactions.

Risks Macroeconomic headwinds. While healthcare demand is seen

as resilient and defensive in the midst of macroeconomic uncertainties, private healthcare demand is not fully sheltered from macroeconomic headwinds. With expectations of rising interest rates and potential risks to unemployment, patients may turn to public healthcare for cheaper alternatives. In addition, growth in medical tourism may remain slow-moving.

Higher than expected start-up / pre-operating costs. Following China’s healthcare reform, we have seen an interest especially from the larger cap healthcare companies to expand into China. While the market is promising, the operating environment of private healthcare is relatively uncertain with

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Market Focus

Page 38

the possibility of longer than expected period to stabilise the operations. Higher than expected start-up / pre-operating costs is another risk that could derail earnings growth.

Potential pressure to manage healthcare cost inflation. As

healthcare is seen as a social good, there could be potential political pressure to manage healthcare cost inflation. Following recent concerns from insurance service providers and industry stakeholders, the Singapore government conducted a study and has published guidelines to manage healthcare cost inflation. While there have not been any major changes to the healthcare system and regulations on private healthcare, potential pressure from stakeholders may change the ‘landscape’ of private healthcare sector in the longer term.

Valuation & Stock Picks Sector trades at 43x FY17 PE, close to historical average. The

sector trades at 43x FY17 PE, close to historical average. The sector continues to trade at a premium to market, currently at 3x premium (historical average). Large cap healthcare service providers are trading at 24x FY17 EV/EBITDA, marginally below the higher end of the historical range. While we are positive on the long term prospects of the healthcare sector driven by an ageing population and growing affluent society in Asia, we are selective on our stocks and prefer those with good medium-term growth prospects.

Top picks are IHH, Singapore O&G and Parkway Life REIT. Our

top picks are i) IHH as its medium term growth potential is led by Gleneagles HK and its pipeline of new hospitals; we would look to buy the shares on any share price weakness; ii) Singapore O&G amongst the smaller cap healthcare for its specialised focused on women’s health; and iii) Parkway Life REIT for its steady earnings stream and defensive profile.

Peers Valuation

* FYE Mar 18 Forecast Source: DBS Bank

12-mthShr Mkt Price Target EPS /

Company FYE Cap Cap (S$) Price % PE (x) P/B Div Grow(m) (US$m) 09-Dec (S$) Upside Rcmd 17F 18F 17F 18F 17F 18F 17F 18F

IHH Healthcare Dec 8,229 11,911 6.40 7.15 12% BUY 50.3x 42.3x 2.2x 2.1x 0.5% 0.6% 14% 19%

Parkway Life REIT Dec 605 1,032 2.44 2.75 13% BUY 19.0x 19.4x 1.4x 1.4x 5.0% 5.0% 2% (2%)

Raffles Medical Dec 1,747 1,777 1.46 1.43 -2% HOLD 32.3x 29.9x 3.7x 3.5x 1.6% 1.7% 6% 8%

RHT Health Trust * Mar 800 495 0.89 0.95 7% HOLD 12.9x 11.1x 1.0x 1.1x 10.1% 10.8% 6% 16%

Singapore O&G Dec 238 191 1.15 1.50 31% BUY 25.5x 22.1x 7.0x 6.7x 3.4% 3.9% 15% 15%

Singapore Strategy

2016 Outlook

Offshore & Marine / China Yards Neutral

Analyst HO Pei Hwa +65 6682 3714 [email protected]

Price

12-mthTarget

Price PE

2017F

Div Yld

2017F

EPS CAGR 2015-2017

(S$) (S$) Rec (x) (%) (%)

Sembcorp Industries 2.91 3.10 BUY 13.5 2.4 5 Yangzijiang Shipbuilding ings) Lt 0.87 0.95 BUY 9.5 4.6 (5)

Sembcorp Marine 1.45 1.55 HOLD 24.7 1.4 46

Cosco Corporation 0.27 0.27 HOLD nm 0.0 (64)

Source: DBS Bank

Closing price as of 9 Dec 2016 Singapore rigbuilders’ order wins

Source: Rigzone, DBS Bank

World shipbuilding orders and newbuild price trend

Source: Clarksons, DBS Bank

Consolidation wave Further consolidation is on the cards for regional

shipyards

Facing structural downturn with new orders and margins normalising

Cost competitive industry leaders will emerge stronger

BUY diversified proxy Sembcorp Industries, and most cost efficient Chinese yard Yangzijiang

Outlook

Oil price recovery lifts hope for rig deliveries; but newbuild orders unlikely to make a comeback any time soon. OPEC’s game-changing move to initiate production cuts at the end of Sept-2016 reinforces our view that oil prices will recover in 2017, alongside the expected oil rebalancing led by the lack of investments over the past 2-3 years. Oil prices are expected to average US$50-55 per barrel next year, and above US$60 per barrel thereafter. We believe the improving oil market prospects may “motivate” rig owners to take delivery of existing orders, removing a key overhang on rigbuilders and freeing up their working capital. Nonetheless, it is unlikely to stimulate a big wave of newbuild orders as the oversupply of rigs could take a few years to clear. Singapore rigbuilders have seen the flow of new orders dwindling from the peak of over S$10bn per annum to less than S$1bn year-to-date, and are now reliant on orders for production related facilities, LNG solutions and specialised vessels. The speculation of a merger between Keppel O&M and Sembcorp Marine is again rife.

Shipbuilders in advance stages of consolidation. Ordering activities have slowed from the 2013 peak, down by over 20% y-o-y in 2015 and 60% y-o-y year-to-date. Newbuild prices have also softened by c.5% per annum over the past two years amid a depressing shipping market. Looking into 2017, outlook for newbuild orders remains lacklustre, though newbuild prices should stabilise at current low levels. The saving grace is that orderbook-to-fleet ratio has moderated to a reasonable 15% and yard overcapacity has shrunk with massive yard closures and consolidation.

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Page 26 ed: JS / sa: YM, PY

Singapore Strategy

2016 Outlook

The Chinese shipbuilding industry shrunk from over 3,000 yards in early 2012 to 1,600 as of end-2014 and is less than 100 currently. Further consolidation is underway, 20-30 survivors eventually. There has been market talk that the merger between two largest Chinese shipbuilding state-owned enterprises (SOEs) – China Shipbuilding Industry Corporation (CSIC) and China State Shipbuilding Corporation (CSSC) could take place in the light of this protracted industry downturn.

Risks Prolonged dip in oil prices. Further capex cuts can be

expected in the event oil prices are sustained below US$50 per barrel, and if the global economy dives into an unexpected recession. US’s energy policy is another key development to watch in 2017. Nevertheless, the longer that oil prices remain low and O&G investments are postponed, could eventually lead to a steeper spike in oil prices.

Heightened risks of cancellations. Following massive deferments over the past two years, rigbuilders face heightened default / cancellation risks in the event of an unexpected fall in oil prices. For shipbuilders, recovery can be bumpy as freight rates are volatile and risks of bankruptcies in shipping companies remain.

Financing constraints could affect order momentum. Financing institutions might be more prudent with their lending to O&G companies following this oil crisis. Potential funding constraints faced by customers as a result of lack of financing options and/or higher funding costs, could impact order momentum.

Asset deflation and margin contraction. Newbuild prices are set to fall given the drop in material costs, and potentially low-balled pricing with the dearth of new orders in an attempt to keep yards busy. This might also be exacerbated by fire sales triggered by desperate owners/shipyards on the verge of bankruptcies. As a result, margins could drop further.

Valuation & Stock Picks Rigbuilders to lag oil recovery. While valuations of

Singapore rigbuilders are not demanding, we believe the stock performance will lag oil price recovery as we do not expect newbuild order flow to be strong. We believe pure E&P players and the service providers are better proxies to O&G sector.

We prefer more diversified Sembcorp Industries (SCI; TP S$2.90), where earnings are relatively more stable as c.70% of its profits are from Utilities (remaining 30% Marine through 61%-owned Sembcorp Marine) and is not affected by changes in oil prices. We believe the utilities business is undervalued at 0.6-0.7x, dragged by a bleak marine outlook. This is unwarranted as SCI offers 6% ROE and 3% yield.

We continue to like Yangzijiang (TP S$0.95), one of the most well-run and profitable Chinese yards and a beneficiary of sector consolidation. Its valuation is undemanding at 0.6x P/BV and 8-9x PE despite offering 4-5% dividend yield and 8% ROE.

We have HOLD ratings on Cosco (TP S$0.27); FULLY VALUED call on Sembcorp Marine (TP S$1.15).

Peers Valuation


12-mthMkt Pric e Ta rge t

Compa ny Ca p (S$) Pric e %(US$m) 09-De c (S$) Ups ide Rc md 16F 17F 16F 17F 16F 17F 16F 17F

Sembcorp Industries 3,633 2.91 3.10 7% BUY 13.0x 13.5x 0.8x 0.8x 2.3% 2.4% 223% (3%)

Yangzijang Shipbuilding (Holdings) 2,330 0.87 0.95 9% BUY 8.9x 9.5x 0.7x 0.7x 4.6% 4.6% (5%) (6%)

Sembcorp Marine 2,118 1.45 1.55 7% HOLD 41.2x 24.7x 1.2x 1.2x 1.4% 1.4% nm 67%

Cosco Corporation 423 0.27 0.27 1% HOLD nm nm 1.0x 1.1x 0.0% 0.0% 65% 76%

PE (x) P/B (x) Div Yld GrowthEPS

Page 27

Market Focus

2017 Outlook

Page 76

Oil Services & Equipment Providers Underweight

Analyst Suvro SARKAR +65 6682 3720 [email protected] HO Pei Hwa +65 6682 3714 [email protected]

Price Target

Price PB

2017F

Div Yld

2017F

EPS CAGR 2015-2017

(S$) (S$) Rec (x) (%) (%)

Ezion Holdings 0.375 0.56 Buy 0.43 0.00 (38) POSH 0.320 0.41 Buy 0.40 0.00 nm

Vard Holdings 0.240 N/A Accept

Offer 0.46 0.00 nm Mermaid Maritime 0.155 0.14 Hold 0.45 0.00 (25) Nam Cheong 0.063 0.04 FV 0.32 0.00 nm Ezra Holdings 0.044 0.036 FV 1.21 0.00 nm Pacific Radiance 0.144 0.16 Hold 0.28 0.00 nm

Source: DBS Bank; Closing price as of 9 Dec 2016 OSV-to-rig ratio has risen to new highs

Source: Clarksons, ODS Petrodata, DBS Bank

Global OSV utilisation rates by region

Source: Clarksons, ODS Petrodata, DBS Bank

Still caught in the doldrums 2017 to remain challenging for oil services

operators despite gradual oil price recovery

We prefer OSV players with positive operating cash flows and no near-term bond maturities

Ezion remains our preferred pick on favourable industry positioning and strong cash flows

Privatisation theme in play – provides support for POSH and Mermaid Maritime

Outlook

Oil prices to edge higher in FY17, but oil services sector could remain work-starved. Despite oil prices having received a welcome boost from the recent OPEC-led agreements to cut supply, we believe price levels could be capped at around US$60-65/bbl in the medium to long term, as US shale producers would ramp up production in response to higher oil prices. The latest capex budgets for 2017 for the global oil majors – announced back in October/November before the OPEC meeting – are up to 15% below 2016’s budgets, and about 43% below the pre-crisis spend in 2014 by our estimates. Capex budgets for national oil companies (NOCs) in SE Asia for 2017 also show no growth. We think it is unlikely that the current rebound in oil prices above US$50/bbl would catalyse a significant upward revision to 2017 budgets. Thus, there is no immediate rebound expected for OSV owners, though we could see a recovery from mid-2018 onwards if capex budgets for 2018 are revised upwards. Cutthroat competition has reduced day rates for AHTS vessels to below US$1/bhp (vs. ~US$2 in good times) while mid-sized PSVs now go for US$8-12k/day (vs. >20k/day in good times). While downside risks in rates are limited, utilisation rates – currently around 50-60% for our coverage companies – could dip further in 2017. OSV yards should also remain significantly affected by low order wins as well as deferment of delivery dates.

Supply-side pressure intensifies downturn. Despite

orderbook-to-fleet ratios having retreated substantially from their peaks, the associated deliveries of OSVs into the global fleet, coupled with a comparatively slower pace of vessel retirements, have pushed the AHTS-to-rig and PSV-to-rig ratios to their all-time highs, creating an unfavourable supply-side dynamic for OSV owners.

Positioning is paramount. We prefer companies with i)

stronger balance sheets, ii) no bonds outstanding, iii) more exposure to production activities, iv) longer-term contract coverage, and v) higher exposure to NOCs.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

1996

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Orderbook to fleet ratio (%) - RHS OSV-to-rig ratio (x) - LHS

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100%

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3

Sep-

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-13

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14

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-14

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-14

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Sep-

14

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-14

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-15

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-15

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-16

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-16

Jul-1

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Sep-

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West Africa Asia Pacific US GoM North Sea

Page 28 ed: TH / sa: YM, PY

Market Focus

Page 22

M&A more likely for asset-light players and shipyards;

privatisation could be a theme in 2017. Outright M&A activity in the service asset segment has been close to non-existent, as firms conserve cash and significant price gapping remains; we think M&A in 2017 would be more likely for asset-light players and shipyards due to synergies achievable and lack of asset-ageing risk. Privatisation could be a theme in 2017. We have already seen some privatisation moves (e.g. Otto Marine and Vard) this year, and going forward, we think POSH and Mermaid Maritime are potential candidates.

Risks Liquidity positions will be tested. Negative operating cash

flows at many of the SGX-listed oil & gas players have whittled down companies’ cash balances. As we do not expect a significant improvement in the operating environment in 2017, we expect to see another year of strain on cash balances. The immediate plug will be higher bank debt or asset sales, though the former is dependent on lenders’ risk appetites and the latter has proved difficult amid thin second-hand markets. Companies with bonds coming due in 2017/2018 are particularly at risk; among our coverage, these are Nam Cheong, Ezra, and PACRA.

Risks of contract deferment and cancellations. This risk is most salient for the shipbuilders given the low front-end payment terms seen in recent years. Additionally, given the current climate, shipbuilders are largely agreeing to delivery deferrals in order to avoid outright cancellations. There is also risk around OSV charter cancellations as oil majors continue scaling back on their offshore rig count.

Further asset impairments. SGX-listed OSV owners have generally taken impairments in the c.10% range in terms of book value. With vessel utilisation and day rates having weakened further within the year, additional impairments may need to be taken.

Valuation & Stock Picks Are we near the bottom? Valuation in the current

context is tricky as the market seems to be pricing in a certain degree of default, but sector stocks also seem to have troughed since mid-2016 at the 0.2x-0.5x P/BV valuation range. We believe the market has priced in much of the risk at this point, but at the same time we are cognisant that insolvency is a real risk for some of the weaker names given the expected prolonged drought of work and impending bond maturities. Funds seeking to position for the long term should look at the less leveraged names with long-term contracts in place and good management.

BUY Ezion (TP S$0.56). Ezion is among the stronger layers with good assets, positive operating cash flow and decent cash balances. Re-rating catalysts stem from oil price rebound, earnings recovery with the resumption of service rigs currently under repair/upgrades in 2017, and successful diversification of its customer base to win new charter contracts. The key risk is further rate reduction for contract renewals; we have assumed a 15% rate cut in 2016 and a further 10% in 2017.

BUY POSH (TP S$0.41). POSH is a more stable long-term bet versus peers, with no immediate debt concerns and positive operating cash flows YTD. The company has also demonstrated its ability to secure work for its vessels amid an anaemic market (e.g. long-term contracts in the Middle East for 13 vessels). Additionally, POSH is a potential privatisation candidate with high ownership of 81.89% by majority shareholder, Kuok (Singapore) Ltd.

P/B valuation band for oil & gas services stocks

Source: Clarkson Research, DBS Bank

0.0

0.2

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0.6

0.8

1.0

1.2

1.4

1.6

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+1sd: 1.3x

Avg: 0.9x

-1sd: 0.5x

-2sd: 0.2x

(x)

Market Focus

2017 Outlook

Page 76

Sector Valuations

PE (x ) PB (x )Div idend Y ield

(%) EPS Growth

F Y16F F Y17F F Y16F F Y17F F Y16F F Y17F F Y16F F Y17F

Ezion Holdings SGD 544 0.375 0.6 50% Buy 24.2 14.8 0.44 0.43 0.0 0.0 -0.8 0.6Pacc Offshore Serv ices Holdings SGD 405 0.320 0.41 27% Buy nm nm 0.39 0.40 0.0 0.0 nm nm

Vard Holdings SGD 198 0.240 N/A N/A

Accept Offer nm nm 0.46 0.46 0.0 0.0 nm nm

Mermaid Maritime SGD 153 0.155 0.14 -10% Hold 10.3 54.2 0.46 0.45 0.0 0.0 2.0 -0.8

Nam Cheong SGD 92 0.063 0.04 -37% FV nm nm 0.31 0.32 0.0 0.0 nm nm

Ezra Holdings SGD 90 0.044 0.04 -18% FV nm nm 0.39 1.21 0.0 0.0 nm nm

Pacific Radiance SGD 72 0.144 0.16 11% Hold nm nm 0.23 0.28 0.0 0.0 nm nm

Source: DBS Bank

Company

Mk t Cap

(US$m)

Price (S$)

9 Dec

T arget Price (S$)

% upside RcmdCurrency

Page 29

Market Focus

Page 24

Plantations Sector (Neutral)

Analyst Ben SANTOSO +65 6682 3707 [email protected]

Price

12-mthTarget

Price PE

2017F

Div Yld

2017F

EPS CAGR 2015-2017

(S$) (S$) Rec (x) (%) (%)

Large Caps Bumitama Agri 0.83 0.95 BUY 14.5 1.1 21 First Resources 1.98 1.90 HOLD 15.5 1.4 25 Golden Agri

0.43 0.39 NR 12.9 2.8 (14)

Indofood Agri

0.56 0.58 BUY 14.4 0.0 48 Wilmar

i l 3.61 3.39 HOLD 14.9 2.3 14

Source: DBS Bank

Closing price as of 9 Dec 2016 No respite in palm oil inventory

Source: Bloomberg Finance L.P., DBS Bank CPO, soybean and soybean oil price forecasts

Source: DBS Bank

Improving fundamentals Yield recovery and steady prices to boost FY17F

earnings

Demand to be supplemented by biodiesel blending in Indonesia

Beneficiary of strong USD

Top picks: BAL, IFAR

Outlook Neutral. Three key issues will shape the sector over the

next 12 months: (1) tight inventory; (2) higher biodiesel blending; and (3) strong US Dollar. We have recently upgraded our view to Neutral; premised on reduced downside risk to prices.

Tight inventory continues. A significant 8% y-o-y

recovery in global palm oil supply next year (low-base effect) to 64.3m MT is no relief, as we expect biodiesel blending in Indonesia to pick up – together with export levy collection. Demand is forecast to expand towards 64.5m MT.

Watch out for strong US Dollar. We expect palm oil

prices to average US$618/MT next year – 2% y-o-y lower – on record US soybean harvests. Yet, in local currencies, we expect prices to increase. Together with yield recovery, we believe quarterly earnings have bottomed in 2Q16

Risks Weather. Given La Nina conditions, there could be

supply disruptions in soybean production in South America in 1Q17; this may have higher price implications on palm oil.

Yield recovery. Stronger-than-anticipated yield recovery

would be bearish for prices. Tariffs. India is the largest consumer of palm oil. Should

the Indian government raise import tariffs, there may be lower demand for palm oil. Headwinds from demonetisation reform are expected to temporary curb demand through 1Q17.

Volatility in crude oil prices/US Dollar.

15 16F 17F 18F 19F 20F 21FCPO price (RM/MT FOB P.Gudang) 2,168 2,600 2,610 2,720 2,770 2,820 2,880CPO price (US$/MT FOB P.Gudang) 560 633 618 622 626 637 652

Soybean price (US$/MT FOB Chicago) 346 364 335 335 340 349 359Soybean oil price (US$/MT FOB Chicago) 667 732 711 717 728 747 768

TSR20 price (US$/MT) 1,337 1,237 1,342 1,360 1,395 1,431 1,469

Sugar price (US$/MT) 300 350 350 360 360 360 364

Opening stock

('000 MT)

Supply ('000 MT)

Demand ('000 MT)

Ending st ock

('000 MT)

Stock/usage rat io

2007 5,521 38,673 37,906 5,961 15.73%2008 5,961 43,014 42,373 6,758 15.95%2009 6,758 45,127 45,451 7,127 15.68%2010 7,127 45,914 46,448 7,327 15.77%2011 7,327 50,792 48,727 9,656 19.82%2012 9,656 53,883 52,392 11,676 22.29%2013 11,676 56,314 57,746 10,775 18.66%2014 10,775 59,931 59,385 11,651 19.62%2015 11,651 62,563 60,857 12,903 21.20%2016 12,903 59,594 62,186 10,297 16.56%2017 10,297 64,280 64,535 10,042 15.56%2018 10,042 67,269 66,581 10,729 16.11%

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Market Focus

2017 Outlook

Page 76

Valuation & Stock Picks Focus on yields. Empirical studies suggest that CPO

yields have been a key driver for plantation share prices outside Bursa. Based on our analysis, First Resources (FR) yields have underperformed peers since 2013 – so did its share price.

Top picks. In Singapore, we recommend Bumitama Agri (BAL) and Indofood Agri (IFAR). We believe both stocks have the highest upsides based on our current target prices.

Near-term catalysts for Wilmar - We expect Wilmar’s near-term oilseeds crush margin to remain strong on record US harvests. Spillover from delayed sugarcane harvesting will also contribute to 4Q16 earnings, while decent refining margin in 3Q16 is expected to continue. We understand the group will likely book tax credit in 4Q16 from Indonesian tax incentive on property, plant and equipment revaluation.

Market Focus

Page 26

Property Sector

Overweight

Analyst Derek TAN +65 6682 3716 [email protected] Rachel TAN +65 6682 3713 [email protected]

Price

12-mthTarget

Price PE

2017F

Div Yld

2017F

EPS CAGR 2015-2017

(S$) (S$) Rec (x) (%) (%)

UOL Group 6.22 7.20 BUY 13.3 2.4 4 City Developments 8.49 9.90 BUY 13.4 1.4 9

Source: DBS Bank Closing price as of 9 Dec 2016 Developers trading at – 1 SD on a P/NAV basis

Source: Bloomberg Finance L.P., DBS Bank

Positive sales transactions YTD 10M16

Source: URA, DBS Bank

Attractive Valuation Trade Trading near multi-year lows, implying attractive

risk/reward ratios

Policy relaxation and potential Merger & Acquisition (M&A) activities could lift sentiment

Pick diversified plays like City Developments and UOL.

Outlook

Property prices to remain on a downtrend, luxury end of the market is bottoming. We maintain our view that prices for Singapore's luxury end property market will continue to remain stable given expected continued higher transaction activity in a finite supply space. Prices for homes in the suburban regions are expected to still moderate by 3-5% on the weight of high supply completion coupled with rising vacancy risk going forward. We expect developers with exposure in the high-end residential market to continue clearing existing unsold inventories given improved sentiment.

Land banking in Singapore to pick up, opportunities through collective sales and potential Merger & Acquisition (M&A) activities could pick up. With a close to c.20% increase in total property transactions YTD, we have seen SG developers clearing a substantial portion of their unsold inventories on their balance sheets and we believe that most will be looking to acquire once again to replenish their land banks. While we expect opportunities in the upcoming 1H17 government land sales (GLS) to be competitive, a possible avenue to add to their land banks could be collective sales sites and potential M&A activities among the listed developers. These will be driven by pressure to sell off inventories given additional buyer stamp duties (ABSD) and Qualifying Certificate (QC) deadlines.

Diversification strategy to take a breather given currency

volatility. Developers are expected to seek opportunities to diversify their earnings base geographically and will likely continue seeking higher returns overseas. We expect capital cities of Sydney, Melbourne and the UK to remain high on developers’ horizon as these cities are offering the highest currency adjusted returns despite recent heightened currency volatility.

Mean: 1.0x

-1 SD: 0.6x

+1 SD: 1.3x

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Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

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500

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Units Transacted

Resale New Sale

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Market Focus

2017 Outlook

Page 76

Uncertainty of pace of interest rate increases probability of a policy relaxation. We believe that negatives from a weakening residential outlook in SG are priced in and expect further declines in market residential prices to push towards the government’s eventual easing of selective speculative measures currently in place. This is expected to lift investors’ sentiment towards SG Developers.

Risks Macro uncertainties could impact on buyer sentiment

and sustainability of transaction volumes. The expected slowdown in domestic economy might lead to potential job losses, and could result in an abrupt stop to the current positive property transaction momentum, which might weigh on buyer sentiment going forward. A scenario where unemployment rate rises closer to 4.0% (vs 3.0% currently) might result in a >10% further fall in home prices.

A key uncertainty is the prospect of higher interest rates from 2017 onwards, which will have a negative impact on home affordability.

Commercial portfolio to provide earnings stability but might see downside if domestic economy weakens. The commercial segment, especially the office sector and retail sectors, have also been weak and will likely see weakening rents which could mean downside to estimates for SG developers going forward.

Valuation & Stock Picks Sentiment boost if government tinkers; developers’

valuations offer attractive risk/reward ratio. We see attractive risk/reward ratios at this level for SG developers at a P/NAV of 0.7x, which is close to the -1SD level. We believe that sentiment could improve upon a potential policy relaxation, as uncertainties of the pace of interest rate increase in 2017 impact future price direction. This, in our view, will likely come post a peak-to-trough fall in prices of close to 13-15% (current drop is close to 9% from the peak), estimated by the end of 2017.

The SG developers are trading at an average 45% discount to RNAV currently, close to -1SD of the mean and downside could be limited at this level.

Prefer diversified plays. Under the above scenario, we

prefer diversified companies with a multi-sourced income profile, with strong recurrent cashflows that will remain more resilient than others. Our top picks are City Developments and UOL.

Peers Valuation

Source: DBS Bank

Mkt Price 12-mth

Company F YE Cap 9-Dec-16 RNA V *A ssumed Target Price Upside P/RNA V

(S$m) (S$) (S$) Discount (%) (S$) % Rcmd (x)

Resident ial Dev elopers

Capitaland Dec 13,136 3.10 4.80 -25% 3.60 16% BUY 0.65

City Dev Dec 7,720 8.49 11.90 -17% 9.90 17% BUY 0.71

Frasers Centrepoint Ltd Sep 4,480 1.55 2.86 -30% 2.00 29% BUY 0.54

Ho Bee Dec 1,385 2.08 - - - - - na

Perennial Real Estate Holdings Dec 1,357 0.820 2.20 -40% 1.32 61% BUY 0.37

Wheelock Dec 1,795 1.50 - - - - - na

Wing Tai Dec 1,273 1.65 - - - - - na

Landlords

Global Logistics Properties Mar 10,499 2.24 3.53 -30% 2.47 10% BUY 0.63

UOL Dec 5,004 6.22 10.23 -30% 7.20 16% BUY 0.61

Market Focus

Page 28

REITs Sector

(Underweight)

Analyst Derek TAN +65 6682 3716 [email protected] Mervin SONG CFA +65 6682 3715 [email protected]

Price

12-mthTarget

Price PE

2017F

Div Yld

2017F

EPS CAGR 2015-2017

(S$) (S$) Rec (x) (%) (%)

Keppel REIT 1.055 1.23 BUY 17.8 6.2 2 Ascendas REIT 2.4 2.65 BUY 16.2 6.5 5 Mapletree Commercial Trust

1.45 1.62 BUY 18 6 4

Frasers Logistics & Industrial Trust

0.94 1.1 BUY N/A 7.5 nm

Keppel DC REIT 1.25 1.33 BUY 17.5 5.7 5 Croesus Retail Trust

0.86 0.99 BUY 14.5 9.1 -2

Source: DBS Bank Closing price as of 9 Dec 2016 S-REIT yield Chart

Source: Bloomberg Finance L.P., DBS Bank

S-REIT P/Bk Chart

Source: DBS Bank

Interest Rates Deja-Vu DBS economist expects four FED rate hikes in

2017 (above consensus), implying that we are unlikely to see a repeat of the sector’s past outperformance

Potential risk to 1.3% growth if domestic economy slows further while prospects of higher refinancing costs in the medium term is a headwind

Focus on S-REITs with superior growth visibility and valuations. Top picks are Ascendas REIT, Keppel REIT, Mapletree Commercial Trust, Keppel DC REIT, Frasers Logistics and Industrial Trust, and Croesus Retail Trust

Outlook

Market may be underestimating pace of FED hikes in 2017; DBS economist expects four hikes next year. Heightened expectations of a faster rate hike momentum in 2017 under new US President Trump’s administration will likely cast a shadow on Singapore REITs’ ability to maintain its share price outperformance going forward. Since the beginning of November 2016, the probability of a further 50bps hike in FED funds to 1.25% by the end of 2017 now stands at 58.7%. DBS expects four hikes in 2017, more aggressive compared to the 1-2 hikes implied in the FED funds futures.

Headwinds to growth as rental outlook weakens on the back of demand contraction. Our DPU growth projection is a modest 1.3% (vs 5-year historical average of c.3.0%), but there is downside risk from a slowing domestic outlook. This is likely to have an impact on rentals and occupancy rates for most real estate subsectors. We project market rentals to decline by 5%-10% year-on-year, and rental reversion trends to be slightly negative or flattish.

Rising cost of capital a hurdle to inorganic growth; REITs may look to divest assets to fund acquisitions. Based on current share price levels, expected higher interest costs and optimal gearing levels of close to 35%, we see there is limited flexibility for S-REITs to grow their portfolios, given the sector’s reliance on both debt and equity markets to support their growth initiatives. While S-REITs have been heading overseas in search for higher returns, the uncertainties from heightened forex volatility in recent times could cap returns and thus corporate

0%

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8%

10%

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14%Sector Yield spread

Sector Yield

Mean Yield Spread

MAS 10 Year

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ed: TH sa: YM, PY

Market Focus

Page 76

activity level could be subdued. As such, S-REITs may look to recycle assets to re-invest proceeds into newer, higher yielding properties with a longer operational runway.

Interest obligations are generally hedged. The risk to distributions in 2017 is manageable in our view. There is only c.20% of total debt in the sector that is up for renewal. As such, we estimate that a 1% increase in refinancing cost will impact distributions by only c.1.8% in 2017. The key defence to further hikes in refinancing further down the road is the REIT’s ability to grow revenues to lessen the impact from higher interest costs in the medium term.

Risks Faster-than-expected rate hike momentum. A

stronger-than-expected Fed rate hike momentum in 2017 will mean higher-than-projected interest rates (for both shorter- and longer-term rates across the yield curve), posing risks to our estimates. As such, investors are also likely to require higher yields (and thus lower S-REIT prices) for investing in yield-sensitive instruments like S-REITs.

Valuations. Weak operating performance resulting in higher vacancies could mean lower book valuations for S-REITs going forward. In addition, a period of sustained higher interest rates than current levels could also prompt valuers to raise cap rate assumptions although we see this as a medium term risk.

Valuation & Stock Picks S-REITs’ share prices have priced in two rate hikes. We

estimate that current prices have already priced in two hikes and we believe that S-REITs will likely trade at an above-historical average yield spread against 10-year bonds in the immediate term. Yield spreads of close to 4.7% (average yield of 7.0% minus 10-year bond yield of 2.3%) on a 1-year forward DPU yield imply that forward spreads are already at historical mean levels of 4.0% (compared against forward 10-year yield of 3.0%).

Favour S-REITS with good earnings growth and attractive valuations. Our strategy is to go for S-REITs with the ability to still grow in the current environment and offer superior growth visibility (Ascendas REIT, Mapletree Commercial Trust, Frasers Logistic and Industrial Trust and Keppel DC REIT). In addition, valuations of the office REITs are attractive at 0.8x P/NAV with catalysts coming from the expected bottoming out of the office sector. Our pick in the office space is Keppel REIT. We also like Croesus for its valuations and higher yields.

Market Focus

Page 30

Peers Valuation

Source: DBS Bank

Last Price 12-mth Gearing Rat io BV Per Sh P/B

09-Dec-16 Price Target % 2016 2017 2016 2017 F Y16F F Y16F rat io

F YE S$ S$ Upside Recom'd (%) cent s (x)

Singapore (S$)

Of f ice

CapitaLand Commercial Trust Dec 1.565 1.70 9% 9.0 9.3 5.7% 5.9% BUY 37% 1.77 0.88

Frasers Commercial Trust Sep 1.270 1.49 17% 9.8 9.8 7.7% 7.7% BUY 36% 1.55 0.82

Keppel Reit Dec 1.055 1.23 17% 6.5 6.5 6.2% 6.2% BUY 39% 1.40 0.76

OUE Commercial Trust Dec 0.690 0.74 7% 5.3 5.2 7.7% 7.6% HOLD 38% 0.95 0.73

Suntec REIT Dec 1.710 1.71 0% 10.0 10.0 5.8% 5.9% HOLD 37% 2.10 0.81

Retail

CapitaLand Mall Trust Dec 1.970 2.25 14% 11.2 11.2 5.7% 5.7% BUY 33% 1.89 1.04

CapitaLand Retail China Trust Dec 1.390 1.60 15% 10.3 10.5 7.4% 7.6% HOLD 36% 1.60 0.87

Croesus Retail Trust * Mar 0.860 0.99 15% 7.1 7.8 8.3% 9.1% BUY 45% 0.95 0.90

Frasers Centrepoint Trust Sep 1.975 2.29 16% 11.8 11.8 6.0% 6.0% BUY 28% 1.93 1.02

SPH REIT Aug 0.960 1.00 4% 5.5 5.7 5.8% 5.9% HOLD 26% 0.94 1.03Mixed (Retail & Of f ice) 0% 0.00 0.00Mapletree Commercial Trust * Mar 1.450 1.62 12% 8.1 8.7 5.6% 6.0% BUY 35% 1.30 1.12Mapletree Greater China Commercial Trust * Mar 0.965 1.11 15% 7.2 7.2 7.5% 7.4% BUY 39% 1.24 0.78YTL Starhill Global REIT Jun 0.755 0.87 15% 5.2 5.2 6.9% 6.9% BUY 36% 0.92 0.82

Indust rial

Ascendas India Trust * Mar 1.070 1.13 6% 5.5 5.9 5.1% 5.5% BUY 27% 0.69 1.55

Ascendas Reit * Mar 2.400 2.65 10% 15.4 15.7 6.4% 6.5% BUY 37% 2.07 1.16

Cache Logistics Trust Dec 0.810 0.93 15% 7.9 7.5 9.7% 9.3% HOLD 39% 0.91 0.89

Cambridge Industrial Trust Dec 0.535 0.54 1% 4.1 4.2 7.7% 7.8% HOLD 38% 0.67 0.80

Frasers Logistics & Industrial Trust Sep 0.940 1.10 17% 2.0 7.0 2.1% 7.5% BUY 29% 0.93 1.01

Mapletree Industrial Trust * Mar 1.655 1.90 15% 11.2 11.3 6.7% 6.8% BUY 30% 1.37 1.21

Mapletree Logistics Trust * Mar 1.020 1.15 13% 7.4 7.2 7.2% 7.1% BUY 40% 1.02 1.00

Soilbuild Business Space Reit Dec 0.650 0.75 15% 6.1 6.1 9.4% 9.4% BUY 36% 0.85 0.77

Hospitalit y & Healthcare

Ascendas Hospitality Trust * Mar 0.710 0.84 18% 5.4 5.5 7.6% 7.8% BUY 33% 0.86 0.83

Ascott Residence Trust Dec 1.160 1.32 14% 8.2 8.1 7.1% 7.0% BUY 39% 1.37 0.85

CDL Hospitality Trust Dec 1.340 1.59 18% 9.4 8.9 7.0% 6.7% BUY 36% 1.59 0.84

Far East Hospitality Trust Dec 0.600 0.62 3% 4.3 4.0 7.1% 6.6% HOLD 33% 0.94 0.64

Frasers Hospitality Trust Sep 0.645 0.84 30% 5.9 6.0 9.2% 9.4% BUY 37% 0.84 0.76

OUE Hospitality Trust Dec 0.650 0.72 10% 4.3 4.5 6.6% 6.9% BUY 38% 0.80 0.81

Parkway Life Dec 2.440 2.75 13% 12.1 12.2 5.0% 5.0% BUY 38% 1.69 1.44

RHT Health Trust* Mar 0.885 0.95 7% 7.7 8.3 8.7% 9.4% HOLD 16% 0.92 0.96

Others

IREIT Global Dec 0.720 0.77 7% 6.2 6.2 8.7% 8.7% HOLD 42% 0.63 1.14Keppel DC REIT Dec 1.250 1.22 -3% 6.8 7.2 5.5% 5.7% BUY 40% 0.92 1.36Manulife US Real Estate Inv (US$) Dec 0.820 0.93 14% 8.0 8.7 9.8% 10.6% BUY 36% 1.17 0.70

DPU Yield

* FY 17 and FY18 respectively

cent s

Market Focus

2017 Outlook

ed: TH sa: YM, PY

Page 76

Telecom Sector (Underweight)

Analyst Sachin MITTAL +65 6682 3699 [email protected]

Price

12-mthTarget

Price PE

2017F

Div Yld

2017F

EPS CAGR 2015-2017

(S$) (S$) Rec (x) (%) (%)

Large Caps StarHub 2.95 2.80 FV 14.7 6.7 (4) M1 2.04 1.97 FV 13.0 6.2 (5)

Source: DBS Bank Closing price as of 9 Dec 2016 Singapore mobile revenue share forecast

Source: DBS Bank

Structural loss of revenue share ahead • Two players pre-qualified for the reserved spectrum

• Earnings to shrink for local telcos from 2017 onwards

Trading at 12-14x FY17F PE as earnings are likely to see structural decline on the emergence of a new entrant

Outlook MyRepublic and TPG Telecom will compete for the

reserved spectrum in 1Q17. The spectrum winner is expected to enter the sector in late 2017 or early 2018 depending on the spectrum auction conditions. Our projections so far, assume a niche player like MyRepublic to enter the sector. With competitive battles ahead, we project mobile revenue in Singapore to drop by 7% in 2022 versus 2015 while the new player could capture up to 7% revenue share. However, if a well-funded player like TPG enters the sector, there could be downside to our estimates for M1 and StarHub.

Significant long-term impact on earnings in case of a new entrant. We project M1’s mobile revenues to contract by 24% from 2015 levels with a 31% drop in earnings by 2022. We expect StarHub’s mobile revenues to decrease by 15% (8% drop in total revenue) and earnings to contract by 16% in 2022 versus 2015. revenue share by 2022 on our estimates.

Earnings likely to shrink for local telcos from 2017 onwards. Firstly, mobile revenue is under pressure as roaming revenue (9-10% of total) has been declining sharply as evident in 3Q16 results. Secondly, telcos have introduced upsized-data plans whereby a user can double his or her data limit by paying only S$3 each month instead of S$10 for each GB previously. There are company-specific issues too. M1 has S$67m of accrued handset revenue on its balance sheet which will hurt its service revenue in 2017. StarHub will see sharply lower adoption grant for National Broadband Network in 2017. These grants comprised ~12% of StarHub’s earnings in 2015.

30% 30% 30% 30% 29% 29% 28% 28%

18% 18% 18% 17% 17% 16% 15% 15%

1% 2% 3% 4% 6% 7%

0%

10%

20%

30%

40%

50%

60%

2015 2016 2017 2018 2019 2020 2021 2022

StarHub M1 4th player

Singapore MobileRevenue Share %

Market Focus

Page 32

Risks Lack of mandatory domestic roaming may result in

lower revenue share loss. A newcomer in Singapore will be facing the difficult task of competing with three players with mature 4G infrastructure (island-wide coverage and 70%+ postpaid subscribers already on 4G) and keen on retaining market share (see below).

Valuation & Stock Picks Trading at -2SD of historical average. Current valuation is

cheap compared to the past but we are likely to see a structural decline in earnings on the emergence of a new entrant.

Peers Valuation

Source: DBS Bank

12-mth EPSMkt Pric e Ta rge t CAGRCa p (S$) Pri c e % 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 16-18

Compa ny (US$m) 09-De c (S$) Ups ide Rcmd (%)

M1 1,326 2.04 1.97 -3% FULLY VALUED 13.7x 13.7x 4.1x 4.1x 6.9x 6.9x 30% 30% 5.8% 5.8% (2.8)

Starhub 3,567 2.95 2.80 -5% FULLY VALUED 14.7x 15.2x 23.1x 24.0x 8.1x 8.2x 159% 155% 6.7% 6.7% (3.8)

PE (x)

(%)

P/BV ROE

(x) (x) (x) (%)

Div YldEV/EB ITDA

Singapore Strategy

2017 Outlook

Transport Related Overweight Paul YONG CFA +65 6682 3712 Andy SIM CFA +65 6682 3718 [email protected] [email protected] Suvro SARKAR +65 6682 3720 [email protected]

12-mth Div EPS Target PE Yld CAGR

Price Price 2017F 2017F 15-'17F Company (S$) (S$) Rec (x) (%) (%)

Singapore Airlines * 9.76 10.20 HOLD 18.0 4.1 (8)

ST Engineering 3.38 3.50 BUY 20.2 4.4 5

ComfortDelgro 2.60 3.09 BUY 16.2 4.2 6

SIA Engineering 3.42 3.53 HOLD 26.1 3.5 (10) Hutchison Port Holdings Trust 0.43 0.48 BUY 19.9 8.1 2

China Aviation Oil 1.42 1.70 BUY 10.0 3.0 7

Source: DBS Bank; * FYE Mar 18 Forecast Net Gearing (Cash) for Transport Related Sector

Source: DBS Bank estimates

Transport companies acquired or privatised in 2016

Name Acquirer P/B

Neptune Orient Lines CMA CGM SA 1.05

SMRT Temasek Holdings 2.74

Tiger Airways Singapore Airlines 6.12

China Merchants Holdings

China Merchants Group 1.06

Source: Company, DBS Bank

Focus on Defense In a low growth environment, we favour names

that have a defensive or resilient business model, and have a strong balance sheet to withstand uncertainty or fund potential inorganic growth

While the sector is trading above the STI at an 17.4x FY17F PE with modest EPS growth, stocks in this space are mostly in a net cash position and offer an attractive dividend yield of over 4.5%

Our top picks are ST Engineering (BUY, TP S$3.50) ComfortDelgro (BUY, S$3.09) and China Aviation Oil (BUY, TP S$1.70)

Real organic growth will be hard to come by Demand environment remains soft amidst tepid global

economic outlook. While the World Bank expects global GDP growth to pick up slightly from 2.4% growth in 2016 to 2.8% in 2017, we see the overall demand continuing to be soft in the sub-3% environment. Furthermore, savings from lower fuel costs are also being passed on to consumers in the form of lower fares (ComfortDelgro) and ticket prices (SIA), and all these mean that top line growth should continue to be fairly muted.

Strong balance sheets allow for acquisition-driven growth potential. An avenue for growth could come from acquisitions as balance sheets are strong across the sector. Companies with net cash position include SIA, SIA Engineering, China Aviation Oil and ComfortDelgro while ST Engineering and HPH Trust have relatively low net gearing of 0.1x and 0.4x respectively. We believe that many of these companies are on an active lookout for inorganic opportunities to boost their medium and long term earnings growth.

Attractive yields offset tepid earnings outlook Yield of over 4% on offer across the sector. All of the six

companies featured in our sector offer a prospective dividend yield of at least 3% (China Aviation Oil), to as much as 8.7% for HPH Trust. Meanwhile, two of our top picks ST Engineering and ComfortDelgro are offering an attractive prospective dividend yield of 4.6% and 4.5% respectively.

FY17 earnings growth projected to be at modest mid-single digit pace. On a simple average basis, the sector is projected to post a modest 5.4% y-o-y growth in EPS (7.1% on a market cap weighted basis) in 2017. Notably, this follows a 5.4% decline in 2016. On simple average, the sector is trading at 18.4x FY16 PE, declining to 17.4x FY17 PE.

‐0.6 ‐0.4 ‐0.2 0 0.2 0.4 0.6

Singapore Airlines *

ST Engineering

ComfortDelgro

SIA Engineering*

HPH Trust

China Aviation Oil

Page 38 ed: TH sa: YM, PY

Singapore Strategy

2016 Outlook

Could there be more privatisations/offers? Could HPH Trust be an M&A candidate? A number of

companies in the transport sector, including NOL, SMRT, Tigerair and China Merchants Pacific, were privatised or acquired in 2016. HPHT’s share price is trading near historic lows, offering a prospective yield of 8.7% in 2017F and at 0.6x FY16 P/B, could be attractive as an acquisition target given its strategic assets. Notably, major shareholders CK Hutchison and Temasek themselves are no strangers to privatisations.

Risks

Oil prices remain low but a spike would affect operators. Crude oil prices have moved off the bottom since the beginning of 2016, and have traded between US$45 to US$55 per barrel in the last 6 months, at an average of US$47. While our house view projects that Brent will average around US$50-US$55 per barrel in 2017, representing a modest increase, any unexpected and sustained spike in oil prices would impact operators such as airlines and could also hurt demand.

Growing threat of protectionism. Recent major election

results, not least the vote for ‘Brexit’ and the US elections, suggest growing support for protectionism and the anti-globalisation movement. Increased protectionism globally would be negative for global trade and travel, and perhaps even impact cross-border acquisitions.

Valuations & Stock Picks

We offer three picks for 2017: ST Engineering (BUY, TP: S$3.50). STE is a relatively defensive stock with a healthy balance sheet and secure dividend payouts, and the recent share price retreat creates a better entry point for the stock. Its Aerospace segment has positioned itself well by investing in growth markets such as narrow-body aircraft Passenger-to-Freighter (PTF) conversions, the Chinese MRO market, and cabin interior solutions, to name a few. The Electronics segment should also benefit from the ‘Smart City’ trend, not only in Singapore but various overseas markets as well. ComfortDelgro (BUY, TP: S$3.09). We like the Group’s fundamentals and its business and geographical diversification. At current price, it is trading at 16.6x/ 15.3x FY16F/17F PE, which is below its 5-year historical average. Despite the weak global outlook, we expect CD’s DPS to grow with its lower capex requirements. In addition, its strong balance sheet avails it the capacity to undertake acquisitions to supplement growth. China Aviation Oil (BUY, TP S$1.70). With the backing of its SOE parent, CNAF, and monopoly in the supply of bonded jet fuel in China, we like CAO as a proxy to the long-term growth of China's international air travel market, growing international presence, and for its exposure to Pudong International Airport's firm outlook through 33%-owned associate, SPIA. Currently trading at <10x FY17F PE, we believe that the group is poised to see a structural re-rating to 12x on sustained earnings growth, especially if CAO can utilise its strong net cash balance of US$203m to further accelerate growth via M&A.

Sector Valuations

* FY17 & FY18 Forecast

Source: DBS Bank estimates, Bloomberg Finance L.P.

12-mthMkt Pri c e Ta rge t CAGRCa p (S$) Pric e % 16F 17F 16F 17F 16F 17F 16F 17F 16F 17F 15-17

Compa ny (US$m) 09-De c (S$) Ups ide Rcmd (%)

Singapore Airlines * 8,060 9.76 10.20 5% HOLD 18.0x 16.6x 0.9x 0.9x 3.9x 3.9x 6% 5% 4.1% 4.1% (8)

ST Engineering 7,344 3.38 3.50 4% BUY 21.6x 20.2x 5.0x 4.9x 12.9x 12.2x 20% 25% 4.4% 4.4% (1)

ComfortDelgro 3,919 2.60 3.09 19% BUY 17.5x 16.2x 2.3x 2.1x 7.0x 6.5x 13% 14% 3.8% 4.2% 7

SIA Engineering* 2,683 3.42 3.53 3% HOLD 26.1x 26.3x 2.3x 2.3x 15.7x 16.4x 19% 9% 3.5% 3.5% (10)

HPH Trust 2,618 0.43 0.48 11% BUY 20.3x 19.9x 0.7x 0.7x 10.8x 10.5x 4% 4% 9.0% 8.1% (8)

China Aviation Oil 855 1.42 1.70 20% BUY 10.8x 10.0x 1.3x 1.2x 7.3x 5.9x 13% 13% 2.8% 3.0% 18

Average 19.1 18.2 2.1 2.0 9.6 9.2 13% 11% 4.6% 4.6% (0.5)

PE (x)

(%)

P/BV ROE

(x) (x) (x) (%)

Div YldEV/EB ITDA

Page 39

Singapore Strategy

2017 Outlook

Company Guide

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC, PY

BUY Last Traded Price ( 10 Nov 2016): S$8.60 (STI : 2,834.09) Price Target 12-mth: S$9.90 (15% upside) Potential Catalyst: Further injections into PPS structure Where we differ: Below consensus Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN +65 6682 3716 [email protected]

What’s New • 9M16 net profit grew 13% on one-off gains

• Property development continues to record strong growth offset by hotel operations

• South Beach to TOP by year-end

• Expect international properties to drive property sales/revenue in 2017/2018

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 3,304 3,654 3,875 4,437 EBITDA 948 1,092 1,135 1,246 Pre-tax Profit 985 787 830 937 Net Profit 760 548 577 653 Net Pft (Pre Ex.) 436 548 577 653 Net Pft Gth (Pre-ex) (%) 8.6 25.7 5.3 13.2 EPS (S cts) 83.6 60.2 63.5 71.8 EPS Pre Ex. (S cts) 47.9 60.2 63.5 71.8 EPS Gth Pre Ex (%) 9 26 5 13 Diluted EPS (S cts) 79.7 57.4 60.5 68.4 Net DPS (S cts) 16.0 11.5 12.1 13.7 BV Per Share (S cts) 989 1,034 1,085 1,145 PE (X) 10.3 14.3 13.6 12.0 PE Pre Ex. (X) 17.9 14.3 13.6 12.0 P/Cash Flow (X) 100.5 8.2 11.6 5.5 EV/EBITDA (X) 13.6 11.6 11.2 9.6 Net Div Yield (%) 1.9 1.3 1.4 1.6 P/Book Value (X) 0.9 0.8 0.8 0.8 Net Debt/Equity (X) 0.3 0.3 0.3 0.2 ROAE (%) 8.7 6.0 6.0 6.4 Earnings Rev (%): - - - Consensus EPS (S cts): 63.1 64.0 70.3 Other Broker Recs: B: 18 S: 2 H: 3

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Solitaire PPS Club member Attractive valuations. We continue to see good value at 0.8x FY17F P/NAV, at 1SD below historical average. Key catalysts are: i) potential injection of assets into Profit Participation Securities (PPS), ii) improvement in hotel operations, and iii) accretive acquisitions/land banking. 9M16 net profit grew 13% on one-off gains. 9M16 net profit grew 13% y-o-y to S$409m (68% of consensus’ full-year estimates) driven by revenue growth of 12% y-o-y (largely contributions from property development), one-off gains from disposal of 53% stake in City E-Solutions (CES) and insurance claims. Property development continues to record strong growth coupled with a 24% y-o-y increase in 9M16 property sales value (number of units sold was stable y-o-y). Weak performance from the hotel properties continue to weigh down earnings. Some light from overseas investments. CDL’s decision to diversify into the overseas property market amid a challenging outlook in the Singapore property market is finally coming to fruition. With most of its Singapore property projects having been completed or are soon-to-be-completed, we expect international properties (UK and China) to drive property sales/revenue recognition in 2017/2018. We believe this could partly offset the impact of a weak property market in Singapore. Valuation: We maintain our BUY call and raise TP to S$9.90 (from S$9.60), pegged to a 20% discount to our revised RNAV of S$11.90. Supported by a strong balance sheet and diversified earnings base, CDL should be able to navigate well around the current uncertain market conditions. Key Risks to Our View: Decline in residential prices in Singapore. As a proxy to Singapore’s residential market, a deteriorating operating environment will cap share price performance. At A Glance Issued Capital (m shrs) 909 Mkt. Cap (S$m/US$m) 7,820 / 5,589 Major Shareholders (%) Davos Investments 16.4 Hong Leong Investment 15.4 Aberdeen Asset Management 14.0

Free Float (%) 54.2 3m Avg. Daily Val (US$m) 8.5 ICB Industry : Real Estate / Real Estate

DBS Group Research . Equity

10 Nov 2016

Singapore Company Guide

City Developments Version 5 | Bloomberg: CIT SP | Reuters: CTDM.SI Refer to important disclosures at the end of this report

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide

City Developments

WHAT’S NEW Solitaire PPS Club member

9M16 net profit grew 13% on one-off gains from disposal. CDL's 9M16 net profit grew 13% y-o-y to S$409m, 68% of street’s FY16 estimates. This was mainly driven by revenue growth of 12% y-o-y (largely contributions from property development), S$49m gains from disposal of its 53% stake in City E-Solutions (CES) and one-off gain on insurance claims in relation to Millennium Hotel Christchurch (due to the earthquake in New Zealand) and realisation of an investment in a private real estate fund, offset by a 4-ppt lower GP margin and smaller profits from JV projects (-59%) mainly due to lower contributions from Bartley Ridge and The Inflora and timing difference between completion of older projects and recognition of new sales. 9M16 EBIT margins improved 2ppt to 22% (2Q16 EBIT margins dropped 3.4ppt q-o-q) mainly supported by gains from disposal. Segmental review: Growth in property development was offset by weaker performance from hotel division. - Property development: 9M16 property development

revenue and PBT grew 44% and 15% y-o-y respectively, led by sales from Gramercy Park (completed units with take-up rates of 90%), Jewel@Buangkok that obtained TOP in September 2016, fully-sold completed Hanover House project in Reading, UK, fully-sold Lush Acres (Executive Condo) which had TOP in 2Q16, and ongoing JV projects such as The Venue, D’Nest and Coco Palms. In 9M16, CDL sold 482 Singapore residential units (+1% y-o-y) on higher sales value of S$622m (+24% y-o-y) driven by sales from The Brownstone EC (165 units), The Criterion EC (82 units), The Venue Residential (51 units) and Jewel@Buangkok (46 units). Sales from its recently launched Forest Woods which has garnered strong buying interests (take-up rate of 71% to-date) should be recognised in 4Q16. The South Beach project is expected to receive final TOP for the whole development by year-end. To date, 70% of the retail outlets have commenced business. The rebranded JW Mariott Hotel is expected to open in January 2017 with ongoing efforts to lease out its 510k sqft of office space. Its 190-unit South Beach Residences could be launched soon pending management’s guidance. In UK, management targets to launch three of its London projects (Belgravia, Knightsbridge and Chelsea) in 1Q17 and 2018 upon completion. In addition, CDL targets to launch Teddington, Riverside, London in 1Q17 (54 units).

Australia’s Ivy and Eve project has also recorded sales of 150 units in 9M16, increasing its take-up rate to 93% from 60% as at end-FY15. Profits from this project will be realised in early 2018, upon completion. In China, Hong Leong City Center (Phase 1) and Hongqiao Royal Lake continued to see demand, and recorded total sales of 337 units in 9M16 (total estimated sales value of S$228m). CDL launched Hong Leong City Center (Phase 2) in Suzhou and all 156 units were sold within an hour while Eling Residences, Chongqing that was launched in October 2016 saw softer interests with only five units sold. Below is a list of new, recent and targeted property launches (from 2017 onwards).

Recent / Expected new property launches

Target launch

Saleable Area / units (sqft /

units)

% take up

Singapore

Forest Wood Launched in Oct'16 519 units 71%

Gramercy Park

Soft launched in May'16 174 units 90%*

China

HLCC, Suzhou - Tower 2

Launched in 4Q16

448,844 sqft / 430 units 100%

Eling Residences, Chongqing

Launched in Oct'16

354,814 sqft / 126 units 4%

UK

Belgravia, London 1Q2017 12,375 sqft Knightsbridge, London 1Q2017 5,193 sqft

Chelsea, London 2018 16,143 sqft Teddington Riverside 1Q2017

240,000 sqft / 220 units

Tokyo

Park Court Aoyama The Tower

Launched in 4Q16

299k sqft / 163 units na

Source: Company, *launched 40 units only


Company Guide

City Developments

- Investment properties: 9M16 revenue fell 4% but pretax from investment properties grew 11% y-o-y mainly due to one-off gains such as S$49m gains from disposal of its 53% stake in City E-Solutions (CES). Lower earnings from investment properties were mainly due to M&C’s weak performance from its hotel operations (revenue on constant currency: -2.8%; PBT: -2.9%), offset by increased land sales in New Zealand, increased contribution from Millennium Mitsui Garden Hotel Tokyo and better results from CDL Hospitality Trust following the acquisition of Hilton Cambridge City Centre. Global RevPAR (at constant currency) fell 3.2% with key gateway cities such as New York (-14.8%), Singapore (-9.6%) and London (-2.2%) recording largest declines, mitigated by Australasia (+16.2%). Occupancy and average room rate fell 0.5ppt and 2.4% respectively.

Hotel properties - The ongoing asset enhancement initiatives (AEI) are on track and are expected to complete/commence operations again by end-2016 and early 2017. New developments such as serviced apartments in Seoul are now expected to commence construction works by early 2017 (end-2016 previously), subject to obtaining all relevant approvals expected by year-end. The Millennium M Social hotel at Sunnyvale, US is undergoing improvements in design, space planning and costing. Rental properties – Revenue and PBT from rental properties fell 7% and 4% y-o-y respectively largely due to the sale of three properties into PPS II in December 2015, mitigated by higher share of rental contribution from South Beach Tower and higher contribution from First Sponsor Group Limited.

Soon-to-be-completed international properties are expected to drive property sales/revenue recognition in 2017/2018. With most of its Singapore property projects having been completed or are soon-to-be-completed except its South Beach project, we expect international properties to drive property sales/revenue recognition in 2017/2018. These properties include its China properties - Hong Leong City Center (Phase 1 by 4Q16 and Phase 2 by 4Q17); UK properties - Belgravia (1Q17), Knightsbridge (1Q17), Chelsea (2018) and Teddington Riverside (2018/2019); and its recent acquisition of a 20% stake in a Japan property project - Park Court Aoyama The Tower (1H18). PPS for Nouvel 18 announced on 12 October 2016; flushed with cash to deploy. On 12 October 2016, CDL announced its PPS for Nouvel 18 (City Developments: PPS 3 for Nouvel 18 at last). Management will continue to unlock the value of its assets to inject its assets into the PPS structure. Following the executions of three PPS structures, CDL is now flushed with cash with the lowest net gearing ratio among peers at 0.3x.

We maintain our BUY rating. Despite a challenging property market, we believe the completion of partially/fully sold projects (especially overseas projects) would support CDL’s earnings in FY16-18. The injection of assets into the PPS structure allows CDL to unlock the value of its assets and potentially clears any QC charges. CDL currently trades at 0.8x FY17F P/NAV, at 1SD below its historical average. Key catalysts are: i) potential injection of assets into PPS structure, ii) improvement in hotel operations, and iii) accretive acquisitions/ land banking.

https://researchwise.dbsvresearch.com/ResearchManager/DownloadResearch.aspx?E=cchjekhea

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Company Guide

City Developments

Quarterly / Interim Income Statement (S$m)

FY Dec 3Q2015 2Q2016 3Q2016 % chg yoy % chg qoq

Revenue 809 1,092 923 14.0 (15.5)

Cost of Goods Sold (396) (652) (493) 24.5 (24.5)

Gross Profit 413 440 430 4.0 (2.3)

Other Oper. (Exp)/Inc (258) (98.5) (50.6) (80.3) (48.6)

Operating Profit 156 214 245 57.3 14.6

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - -

Associates & JV Inc 20.6 12.5 16.5 (19.9) 31.8

Net Interest (Exp)/Inc (22.0) (21.4) (22.7) (3.5) (6.2)

Exceptional Gain/(Loss) 0.0 0.0 0.0 - -

Pre-tax Profit 155 205 239 54.7 16.6

Tax (24.4) (37.6) (35.6) 45.9 (5.2)

Minority Interest (23.7) (33.7) (33.1) (39.8) (1.7)

Net Profit 106 134 170 60.1 27.3

Net profit bef Except. 106 134 170 60.1 27.3

EBITDA 234 280 313 34.1 12.0

Margins (%)

Gross Margins 51.1 40.3 46.6

Opg Profit Margins 19.3 19.6 26.6

Net Profit Margins 13.1 12.2 18.5

Source of all data: Company, DBS Bank


Company Guide

City Developments

CRITICAL DATA POINTS TO WATCH Earnings Drivers: Aiming for a higher proportion of recurring earnings base. Weighed down by weak sentiment and depleting land bank for its development projects, CDL’s focus in 2015-2016 has been to focus on its commercial portfolio; building up a recurring income base in order to sustain profitability. In 2015, CDL had close to 64% of its revenues from recurring and stable segments. Hotel operations are the largest revenue contributor (49%) among all divisions despite showing some signs of weakness, which implies a substantial proportion of stable income. Potential headwinds in this segment are further deterioration of RevPAR especially in Asian hotels and further depreciation of GBP. The group’s investment property division (office and retail malls mainly in Singapore) is projected to offer steady returns. In total, the hotel and investment property divisions contribute c. 64-67% of revenues. Looking overseas to sustain growth. We continue to see good progress for the group’s overseas investments. London – CDL recorded strong sales at its 82-unit Reading project, and is expected to book in revenues of c. GBP18.4m (S$36m), while its other projects will be launched progressively in the coming quarters. The Teddington Studios and Stag Brewery sites (planning approvals expected in 1Q18) are expected to be launched in phases in the medium term. CDL has also signed a contract to purchase 56-64 Leonard Street in Shoreditch for GBP37.4m (S$73.5m), to be redeveloped into an office tower block. In China, CDL has launched some projects in Suzhou (Hong Leong City Center continues to see steady sales). Phase 1 of the project (30-storey, 462-unit residential tower and 912-unit Soho Tower) has seen good sales momentum, selling 995 units to date, locking in sales proceeds of over RMB2.12bn (S$424m) which will be booked when completed. Tower 2 of the project was launched and fully sold in an hour. The group’s Hongqiao Royal Lake project also moved 32 units (out of 85), locking in sales of RMB634m (S$127m). CDL’s other projects in Chongqing and Suzhou will likely take more time before they can be launched. In Australia, the group’s JV residential project in Brisbane is 93% sold (Ivy and Eve, two 30-storey towers comprising 472 apartments), and will be booked in 2018. The group’s developments in Tokyo will likely be launched in the medium term. New PPS structure. Post the successful launch of three PPS structures, management is keen to continue unlocking value through fund management and/or new private equity structures. The successful launch will enable the group to book in substantial gains given that assets are recorded at cost.

Revenue growth (FY14A-18F)

Breakdown in revenues (FY16F)

Revenue growth from hotel segment

RNAV breakdown RNAV S$'m Investment Portfolio (office) 3,122.2 Investment Portfolio (mixed Development ) 1,505.1 Investment Portfolio (hotels) 1,071.5 Investment Portfolio (retail) 893.5 Investment Portfolio (industrial and others) 137.4 GDV of residential portfolio 4,757.6 Listed Stakes in

M&C 1,856.7 CDL HT 338.1 Others 86.7 Gross Asset Value 13,768.8 Less: pref conversion (211.8) Less: Net debt (1,835.9) RNAV of CDL 11,721.2 No of shares 954.3 RNAV/share 12.3 Discount -20% TP 9.90


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

5,000.0

2014A 2015A 2016F 2017F 2018F

S$'m

Others Hotel operations Rental income Property devt

Property devt36%

Rental income11%

Hotel operations

49%

Others4%

40%

42%

44%

46%

48%

50%

52%

1,350.0

1,400.0

1,450.0

1,500.0

1,550.0

1,600.0

1,650.0

1,700.0

1,750.0

1,800.0

1,850.0

2013A 2014A 2015A 2016F 2017F

S$'m

Revenue % of topline


Company Guide

City Developments

Balance Sheet: Undervalued Net Asset Value (NAV). As the group has chosen to account for investment properties on a historical cost basis, its NAV is conservative as we estimate that current fair values of CDL’s properties are much higher than carrying values. Low gearing of 26%. CDL’s gearing is estimated to remain low at <30% (and closer to mid-teens assuming that its investment property values are marked-to-market) which is within management’s comfortable range. This provides greater financial flexibility and debt headroom for the group to acquire opportunistically. Share Price Drivers: Replenishing land bank is key to income sustainability. The ongoing tight government measures have taken a toll on the group’s residential business segment, with the group staying selective on land banking activities. However, CDL has been active in the Executive Condos (ECs) segment; The Brownstone EC and The Criteron saw brisk sales when launched. CDL launch 40 units in Gramercy Park, a high-end condominium in May 2016 and has achieved 90% sales. The group has been marketing the project regionally and is understood to have received positive responses from investors. The successful launch of its ongoing project will be positive to investor sentiment on property stocks, which we believe will enable CDL to close the gap between its stock price and NAV. Key Risks: Decline in residential prices in Singapore. Seen as a proxy to Singapore’s residential market, a worsening of the operating environment is expected to cap any upside potential for the stock. Unsold inventories are mainly in the high-end and executive segments whose unsold stock typically take time to clear. Interest rate risk. A rise in interest rates will have a negative impact on property transactions, given lower affordability and thus could adversely affect the group’s outlook. Company Background City Developments Limited (CDL) is one of the pioneers in Singapore's property sector. It is a property and hotel conglomerate involved in real estate development and investment, hotel ownership and management, and facility management.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

City Developments

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (S$m) Property devt 1,581 1,037 1,324 1,478 1,960 Rental income 385 405 394 420 428 Hotel operations 1,678 1,698 1,773 1,814 1,885 120 163 163 163 163 Others 0.0 0.0 0.0 0.0 0.0 Total 3,764 3,304 3,654 3,875 4,437

Income Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 3,764 3,304 3,654 3,875 4,437 Cost of Goods Sold (2,132) (1,648) (1,888) (2,003) (2,316) Gross Profit 1,632 1,656 1,766 1,872 2,121 Other Opng (Exp)/Inc (948) (1,030) (926) (982) (1,124) Operating Profit 684 626 840 891 997 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 54.8 107 37.3 30.1 33.9 Net Interest (Exp)/Inc (90.5) (72.2) (90.8) (90.7) (94.4) Exceptional Gain/(Loss) 356 325 0.0 0.0 0.0 Pre-tax Profit 1,004 985 787 830 937 Tax (95.1) (119) (135) (144) (163) Minority Interest (139) (92.7) (91.3) (96.0) (108) Preference Dividend (12.9) (12.9) (12.9) (12.9) (12.9) Net Profit 757 760 548 577 653 Net Profit before Except. 401 436 548 577 653 EBITDA 939 948 1,092 1,135 1,246 Growth Revenue Gth (%) 17.1 (12.2) 10.6 6.1 14.5 EBITDA Gth (%) (7.4) 1.0 15.3 3.9 9.8 Opg Profit Gth (%) (12.8) (8.5) 34.2 6.0 12.0 Net Profit Gth (Pre-ex) (%) (40.4) 8.6 25.7 5.3 13.2 Margins & Ratio Gross Margins (%) 43.4 50.1 48.3 48.3 47.8 Opg Profit Margin (%) 18.2 18.9 23.0 23.0 22.5 Net Profit Margin (%) 20.1 23.0 15.0 14.9 14.7 ROAE (%) 9.4 8.7 6.0 6.0 6.4 ROA (%) 4.1 3.8 2.7 2.7 3.0 ROCE (%) 3.6 3.0 3.7 3.8 4.2 Div Payout Ratio (%) 19.2 19.1 19.1 19.1 19.1 Net Interest Cover (x) 7.6 8.7 9.3 9.8 10.6


Recognition of locked-in sales


Company Guide

City Developments


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 809 855 723 1,092 923 Cost of Goods Sold (396) (392) (365) (652) (493) Gross Profit 413 463 358 440 430 Other Oper. (Exp)/Inc (258) (3.9) (82.9) (98.5) (50.6) Operating Profit 156 459 209 214 245 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 20.6 29.2 10.6 12.5 16.5 Net Interest (Exp)/Inc (22.0) (17.1) (14.8) (21.4) (22.7) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 155 471 205 205 239 Tax (24.4) (44.1) (14.5) (37.6) (35.6) Minority Interest (23.7) (16.8) (18.6) (33.7) (33.1) Net Profit 106 410 172 134 170 Net profit bef Except. 106 410 172 134 170 EBITDA 234 546 272 280 313 Growth Revenue Gth (%) (1.9) 5.7 (15.4) 51.0 (15.5) EBITDA Gth (%) (8.9) 133.5 (50.2) 3.1 12.0 Opg Profit Gth (%) (18.0) 194.5 (54.4) 2.2 14.6 Net Profit Gth (Pre-ex) (%) (20.3) 285.8 (58.1) (22.2) 27.3 Margins Gross Margins (%) 51.1 54.2 49.5 40.3 46.6 Opg Profit Margins (%) 19.3 53.7 28.9 19.6 26.6 Net Profit Margins (%) 13.1 48.0 23.8 12.2 18.5

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 4,918 5,175 5,260 5,346 5,431 Invts in Associates & JVs 1,128 1,307 1,527 1,740 1,957 Other LT Assets 3,324 2,949 2,949 2,949 2,949 Cash & ST Invts 3,933 3,597 3,913 3,988 4,799 Inventory 11.2 11.2 12.9 13.7 15.8 Debtors 1,589 1,762 1,948 2,066 2,366 Other Current Assets 4,797 5,519 5,312 5,509 5,067 Total Assets 19,701 20,319 20,921 21,610 22,584 ST Debt

2,233 1,911 1,911 1,911 1,911 Creditor 1,463 1,602 1,836 1,948 2,251 Other Current Liab 261 319 195 204 222 LT Debt 4,466 4,572 4,572 4,572 4,572 Other LT Liabilities 501 702 702 702 702 Shareholder’s Equity 8,410 8,996 9,398 9,870 10,413 Minority Interests 2,365 2,217 2,309 2,405 2,513 Total Cap. & Liab. 19,701 20,319 20,921 21,610 22,584 Non-Cash Wkg. Capital 4,672 5,371 5,242 5,438 4,975 Net Cash/(Debt) (2,766) (2,885) (2,569) (2,495) (1,684) Debtors Turn (avg days) 156.6 185.0 185.3 189.1 182.3 Creditors Turn (avg days) 263.6 390.3 375.0 386.1 364.7 Inventory Turn (avg days) 1.9 2.9 2.6 2.7 2.6 Asset Turnover (x) 0.2 0.2 0.2 0.2 0.2 Current Ratio (x) 2.6 2.8 2.8 2.9 2.8 Quick Ratio (x) 1.4 1.4 1.5 1.5 1.6 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 0.2 Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.3 0.2 Capex to Debt (%) 14.0 (13.0) 4.6 4.6 4.6 Z-Score (X) 1.7 1.7 1.7 1.8 1.8


Weaker property development division, rental and hotel divisions

Conservative gearing


Company Guide

City Developments

Cash Flow Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 1,004 985 787 830 937 Dep. & Amort. 200 215 215 215 215 Tax Paid (188) (194) (259) (135) (144) Assoc. & JV Inc/(loss) (54.8) (107) (37.3) (30.1) (33.9) Chg in Wkg.Cap. (482) (712) 252 (204) 444 Other Operating CF (187) (110) 0.0 0.0 0.0 Net Operating CF 292 77.8 957 675 1,418 Capital Exp.(net) (936) 843 (300) (300) (300) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 828 (227) (200) (200) (200) Div from Assoc & JV 17.9 16.9 16.9 16.9 16.9 Other Investing CF 47.6 (113) 0.0 0.0 0.0 Net Investing CF (41.8) 520 (483) (483) (483) Div Paid (275) (271) (158) (118) (123) Chg in Gross Debt 172 (310) 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 842 (333) 0.0 0.0 0.0 Net Financing CF 739 (914) (158) (118) (123) Currency Adjustments 189 (16.6) 0.0 0.0 0.0 Chg in Cash 1,178 (333) 316 74.6 811 Opg CFPS (S cts) 85.1 86.8 77.5 96.7 107 Free CFPS (S cts) (70.7) 101 72.3 41.3 123


Target Price & Ratings History

Source: DBS Bank

Analyst: Rachel TAN, Derek TAN

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:JC, PY

BUY Last Traded Price ( 11 Nov 2016): S$2.46 (STI : 2,814.60) Price Target 12-mth : S$3.09 (26% upside) (Prev S$3.17) Potential Catalyst: Acquisitions, higher DPS growth Where we differ: Marginally conservative growth assumptions Analyst Andy SIM CFA +65 6682 3718 [email protected]

What’s New 3Q16 results in line excluding larger than expected

forex translation impact

Expect better growth in 4Q on recent strength of

GBP, AUD against SGD, and bus contract model

Recent correction puts valuation at below 5-year

average; reiterate BUY, S$3.09 TP

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 4,112 3,971 4,154 4,313 EBITDA 845 847 878 911 Pre-tax Profit 452 483 516 541 Net Profit 302 318 343 360 Net Pft (Pre Ex.) 302 318 343 360 Net Pft Gth (Pre-ex) (%) 6.5 5.2 8.1 4.9 EPS (S cts) 14.1 14.8 16.0 16.8 EPS Pre Ex. (S cts) 14.1 14.8 16.0 16.8 EPS Gth Pre Ex (%) 6 5 8 5 Diluted EPS (S cts) 14.1 14.8 16.0 16.8 Net DPS (S cts) 9.00 9.80 10.9 11.8 BV Per Share (S cts) 109 115 121 127 PE (X) 17.4 16.6 15.3 14.6 PE Pre Ex. (X) 17.4 16.6 15.3 14.6 P/Cash Flow (X) 8.8 7.3 6.5 6.3 EV/EBITDA (X) 6.8 6.6 6.1 5.6 Net Div Yield (%) 3.7 4.0 4.4 4.8 P/Book Value (X) 2.3 2.1 2.0 1.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 13.3 13.2 13.6 13.5 Earnings Rev (%): (2) (4) (5) Consensus EPS (S cts): 15.0 16.1 17.1 Other Broker Recs: B: 10 S: 1 H: 4

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Growth despite translation headwinds

Maintain BUY, TP lowered slightly to S$3.09. The recent share price weakness further reinforces our recommendation on the counter despite the market’s perceived challenges for the group. We reiterate our BUY recommendation on ComfortDelgro (CD) as valuations of 16.6x/ 15.3x FY16F/ 17F PE are below its historical 5-year average. With lower capex requirements, we believe there is potential for a higher dividend payout.

3Q16 results in line excluding larger-than-expected FX translation. CD’s 3Q16 net profit grew 2.5% y-o-y to S$87.3m, even though revenue slipped by 3.1% to S$1.02bn. This was slightly below our expectations of c.6% growth, due to the larger than expected translational effect. The group’s EBIT margins improved by 22bps to 12.5% in 3Q16 (3Q15: 12.3%) arising largely from lower energy and fuel costs (-24% y-o-y), and materials and consumables (-27%).

4Q16 should show stronger growth vis-à-vis 3Q16. While 3Q16 recorded only 2.5% net profit growth, 9M16 earnings increased 5.2% y-o-y to S$246m. We expect 4Q16 to register stronger growth on the back of the weakening SGD against AUD and GBP in recent days. That said, we trimmed our forecasts by 2%/ 4%/ 5% for FY16F/ 17F/ 18F to factor in a larger than expected fare decrease of 4% and 2% in Singapore for 2017/18 (vs our earlier expectations of 1%), coupled with marginally higher cost assumptions. Despite the weak global outlook, we expect CD to post DPS growth with its lower capex requirements.

Valuation:

Our target price is adjusted to S$3.09, based on average of discounted cash flow (DCF) and price-earnings ratio (PE) valuation methods.

Key Risks to Our View:

Loss of bus contracts, changes in regulations on operations, and currency swings may impact our forecast. At A Glance Issued Capital (m shrs) 2,157 Mkt. Cap (S$m/US$m) 5,305 / 3,755 Major Shareholders (%) Blackrock 6.8 Capital Group Companies 6.0

Free Float (%) 87.2 3m Avg. Daily Val (US$m) 15.6 ICB Industry : Consumer Services / Travel & Leisure

DBS Group Research . Equity 14 Nov 2016


ComfortDelgro Version 8 | Bloomberg: CD SP | Reuters: CMDG.SI Refer to important disclosures at the end of this report


Company Guide

ComfortDelgro

WHAT’S NEW

Growth despite translation headwinds

Reiterate BUY, TP: S$3.09; translation may have lesser impact in 4Q16. The recent weak share price further reinforces our recommendation on the counter despite the market’s perceived challenges for the group. While 3Q16 results were a tad slower vis-à-vis expectations, this was largely due to FX translation impact. We think the results were credible in light of current business environment. We expect 4Q to show better y-o-y growth going by the current GBP, AUD strength against SGD quarter-to-date. In addition, with the Singapore Bus operations fully in the Government Bus Contracting model (BCM), we believe this bodes well for the group. Current price implies yield of 4% and 4.4% for FY16F/17F. We are expecting the group’s dividend payout ratio to increase to at least 66%, from 64% in FY15, implying a final DPS of 5.5 Scts (4Q15: 5 Scts) or a yield of 4% (inclusive of interim 4.25 Scts paid) at current price. With lower capex needs, we are expecting dividend payout ratio to conservatively creep up to 66% and 68% in FY17F/18F, and thus yielding 4.4% and 4.8%, respectively. In the current climate, CD is one of few companies projected to have an increase in DPS. 3Q16 results in line excluding larger-than-expected FX translation. CD’s 3Q16 net profit gree 2.5% to S$87.3m, even though revenue slipped by 3.1% y-o-y to S$1.02bn. This was a slightly below our expectations – we were looking at c.6% growth, and in our view, this would have been achieved if not for the larger than expected translational effect. In 3Q16, the weaker GBP and RMB shaved S$4.9m (c.4%) off the operating profits for the group. Revenue dipped by 3.1%. The underlying business recorded a S$15.5m (+1.5%) improvement in topline, but this was totally negated by FX translational loss amounting to S$47.9m arising mainly from translational effects of the weaker GBP (-$45.1m) and RMB (-$4.1m), offset by a slightly stronger AUD (+$1.5m). Among its business segments, bus and taxis still contribute bulk of the group’s revenue at c.83% in 3Q16. Overseas business contributed 36.6% and 41.3% of the group’s revenue and operating profit in 3Q16, down from 40.7% and 49.4%, respectively. The drop in overseas earnings largely came about from translation as well as a stronger contribution from Singapore. EBIT margins improved on lower energy costs. The group’s EBIT margins improved by 22bps to 12.5% in 3Q16 (3Q15: 12.3%) arising largely from lower energy and fuel costs (-24% y-o-y), and materials and consumables (-27%). This was offset partially by staff costs (+0.7%), payment for contract

services (+1.7%) and repair and maintenance (+4.3%), among others. Operating profit dipped marginally by 1.4% y-o-y (or $1.8m) to S$127.2m due to the lower revenue, mitigated partially by a slower rise in operating costs. The net impact of FX translation was S$4.9m, without which, operating profit would have registered a growth of 2.4% instead of a decline. Bus: Impacted by translation as per 2Q. Bus revenue showed a decline of 7.3% y-o-y to S$506.4m vs S$546.2m last year largely due to FX translational impact of S$38.7m. Operating profit dipped by 13% y-o-y to S$47.1m. We estimate the drop came largely from its UK bus operations arising from translation. In fact, its 75% owned subsidiary, SBSTransit, reported a robust set of bus segment profits of S$9.2m (+35.1% y-o-y). Taxis: Results shows resilience. The group’s taxi revenue posted a marginal growth of 0.2% y-o-y to S$335.9m and operating profit of S$47.3m (+1.5% y-o-y). Currency effects eroded S$8.3m of revenue gain. Overall, taxi operating margins continued to expand to 14.1%, up 20bps from 13.9% in 3Q15, attributed to fleet renewal, higher cashless transactions and cost control. Taxi utilisation in Singapore at 99%. Management indicated that despite the challenges, its taxi utilisation is at 99% and revenue grew on the back of its fleet renewal programme. Going forward, we still expect to see revenue growth on the back of this as the group still has around 9k of its total fleet in the Hyundai Sonata model, and yet to be upgraded to the i40 which commands higher a higher daily rental rate. Rail: still subsidising DTL start up costs. While ridership growth for rail was strong, with NEL/ LRT/ DTL(North-East Line/ Light Rail Train/ Downtown Line) registering 5.3%/ 14.7%/ 199% to 577k/ 118k/ 234k trips per day, operating profit dipped by 20% y-o-y to S$0.8m. This came about from continued start up costs in preparation of the DTL3 and higher repair & maintenance. Management indicated that DTL has yet to break even. In preparation of DTL3, hiring of additional staff will continue though it was noted that the key and more senior roles have been filled. We expect costs to creep up, but moderated by higher ridership. Net cash improves to S$259m. The group’s net cash position improved to S$259m, from S$229.2m as of Dec-15. This was despite an increase in receivables arising from timing of service payments by transport regulators in Singapore and the UK. As seen in previous quarter and in line with expectations, net capex continues to trend down and amounted to S$108.9m in 3Q16, from S$123.2m a year ago. The


Company Guide

ComfortDelgro

reduction arose from lower capex for buses, offset by an increase for taxis. Along with this trend, we continue to believe the group has capacity to further increase its dividend payout ratio, leading to higher DPS growth. Acquisitions. The group continues to work on pursuing acquisitions and will continue to stay within its current geographical and business areas, given its familiarity. In our view, we believe it would continue to be in overseas buses, and deal size would likely be bite-sized and bolt-on, as per its past practice rather than huge ones. Valuation and forecasts 4Q16 should show stronger growth vis-à-vis 3Q16’s growth. While 3Q16 showed only a 2.5% net profit growth, 9M16 earnings grew 5.2% y-o-y to S$246m. We expect 4Q16 to register a stronger growth on the back of the weakening of SGD against AUD and GBP in recent days. That said, we

trimmed our forecasts back by 2%/ 4%/ 5% for FY16F/ 17F/ 18F to factor in a larger than expected fare decrease of 4% and 2% in Singapore for 2017/18 (vs our earlier expectations of 1%), coupled with marginally higher cost assumptions. Reiterate BUY, TP adjusted marginally to S$3.09. We reiterate our BUY recommendation. Although share price has taken a beating in recent days, we believe this may have been overdone. We still believe in the company’s fundamentals and like its business and geographical diversification. At current price, it is trading at 16.6x/ 15.3x FY16F/17F PE, which is below its 5-year historical average. Despite the weak global outlook, we expect CD’s DPS to grow with its lower capex requirements. In addition, its strong balance sheet avails it the capacity to undertake acquisitions to supplement growth. Our TP is revised to S$3.09, still based on average of 17x FY17F PE and DCF (WACC: 9.1%, t=1%).



Revenue 1,048 1,022 1,015 (3.1) (0.7)

Other Oper. (Exp)/Inc (919) (899) (888) (3.3) (1.2)

Operating Profit 129 123 127 (1.4) 3.5

Other Non Opg (Exp)/Inc 4.60 4.30 3.80 (17.4) (11.6)

Associates & JV Inc 0.40 0.70 0.20 (50.0) (71.4)

Net Interest (Exp)/Inc (4.8) (3.7) (3.5) 27.1 5.4

Exceptional Gain/(Loss) 0.0 0.0 0.0 - -

Pre-tax Profit 129 124 128 (1.2) 2.8

Tax (26.1) (23.3) (24.5) (6.1) 5.2

Minority Interest (17.9) (15.7) (15.9) 11.2 1.3

Net Profit 85.2 85.2 87.3 2.5 2.5

Net profit bef Except. 85.2 85.2 87.3 2.5 2.5

EBITDA 233 225 230 (1.3) 2.0

Margins (%)





Company Guide

ComfortDelgro

Segmentals – Revenue and Operating Profit (S$m)

Operating profits (S$m) 3Q15 2Q16 3Q16 3Q yoy 3Q qoq 9M15 9M16 %chg yoy

Bus 54.1 46.7 47.1 -12.9% 0.9% 139.5 130.4 -6.5% Bus Station 3.7 3.2 3.5 -5.4% 9.4% 10.3 10.3 0.0% Rail 1.0 0.2 0.8 -20.0% 300.0% 5.8 4.7 -19.0% Taxi 46.6 46.6 47.3 1.5% 1.5% 127.3 132.4 4.0% Automotive Engineering 10.2 13.5 15.4 51.0% 14.1% 28.8 41.5 44.1% Vehicle Inspection and Testing 9.0 8.1 8.5 -5.6% 4.9% 28.3 25.5 -9.9% Car Rental and Leasing 2.3 2.1 2.2 -4.3% 4.8% 6.6 6.4 -3.0% Driving Centre 2.1 2.5 2.4 14.3% -4.0% 6.4 8.3 29.7%

Total 129.0 122.9 127.2 -1.4% 3.5% 353.0 359.5 1.8% Source of all data: Company, DBS Bank

Operating costs (S$m)

Source: Company

Business segments revenue (S$m) 3Q15 2Q16 3Q16 3Q yoy 3Q qoq 9M15 9M16 %chg yoy

Bus 545.5 512.8 505.8 -7.3% -1.4% 1,560.8 1,510.3 -3.2% Bus Station 8.0 7.0 7.5 -6.3% 7.1% 23.3 22.3 -4.3% Rail 54.7 65.1 69.1 26.3% 6.1% 157.8 199.2 26.2% Taxi 335.2 340.2 335.9 0.2% -1.3% 987.8 1,009.8 2.2% Automotive Engineering 59.1 52.0 51.9 -12.2% -0.2% 179.5 156.4 -12.9% Vehicle Inspection and Testing 25.6 26.1 26.0 1.6% -0.4% 81.3 77.7 -4.4% Car Rental and Leasing 9.9 9.2 9.3 -6.1% 1.1% 28.9 27.9 -3.5% Driving Centre 9.8 9.9 9.9 1.0% 0.0% 29.1 29.7 2.1%

Total 1,047.8 1,022.3 1,015.4 -3.1% -0.7% 3,048.5 3,033.3 -0.5%


Company Guide

ComfortDelgro

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Bus operations in Singapore and overseas. Bus operations account for c.50% and c.37% of the group’s revenue and operating profit respectively. The major profit contribution from its bus operations comes from the UK, followed by Australia. Within these areas of operations, the revenue and earnings drivers are based on tenders for routes, coupled with CD meeting the service requirements set forth by the authorities. Over in Singapore, the model has just transited over to the Bus Contracting Model since 1 Sep 2016 where the fare revenue risks has been transferred over to the government. Taxis hired out and rental rates. Taxi operations account for about one-third of the group’s operating profit, with Singapore operations accounting for the majority. It has a fleet of over 17,000 taxis in Singapore with a market share of 65%. The hired out and rental rates of taxis has a direct impact on profitability, while the cost of certificates of entitlement in Singapore would also have an impact on margins (impacting depreciation). In the immediate term, we do not expect significant impact from the private car booking apps, such as Uber or Grabcar, and we believe that private car hire and taxis would co-exist over the longer term. Oil prices. Fuel and electricity historically accounts for c.8% of CD’s sales historically and a surge in oil price may impact margins. Management seeks to hedge its exposure to oil prices by entering into forward contracts, thus mitigating volatile fluctuations. We are projecting that fuel and electricity as a percentage of revenue to dip to c.5% in FY16F on lower oil prices. Overseas presence through acquisitions. Since 2003, revenue contribution from overseas has increased from 35% to 40% (as of end-2014), while operating profit contribution stands at 49% (from 26%) a decade ago. Management has indicated a target of further increasing overseas revenue contribution to 70%. This is likely to be achieved through organic growth (winning of tenders) and inorganic sources, such as bite-sized acquisitions. Earnings growth of 5%/ 8% for 16F/17F. CD’s growth has been stable, posting average CAGR of 6% in the past five years (2011 to 2015). We project earnings growth of 5%/ 8% for FY16F/17F driven by higher ridership, rental rates for its taxis, coupled with lower energy costs (on the back of lower oil prices).

SGP bus ridership growth (%)

SGP fare chg (%)

Avg oil price (US$)

Chg in staff strength (%)

Operating profit contribution 3Q16 (by country)


Singapore58.7%

UK17.6%

Australia12.5%

China10.9%

Vietnam and

Malaysia0.3%


Company Guide

ComfortDelgro

Balance Sheet:

Low gearing provides opportunities for inorganic growth. The group’s balance sheet remains strong with gross debt-to-equity at <0.2x while net debt-to-equity hovers near zero. This provides the group with ample headroom for overseas acquisitions to supplement growth and further diversify its geographical exposure out of Singapore. Capex to taper from FY16F. We expect capex requirements to taper from FY16F with a step down in its bus assets enhancement in Singapore as new buses will be funded by the authorities. This could provide a lift to available cash for acquisitions and/or higher dividend payout. Share Price Drivers:

Higher dividend payout. With the new Government Bus Contracting model to be in place from 1 September 2016, new buses will be funded by the authorities and this will raise the free cash flow for CD and further add to its strong cash horde. Whilst we have factored in a gradually increasing payout ratio by 2% each year to 70% by FY18F (from 64% in FY15), we believe the group has potential to further raise its payout ratio faster and more aggressively. This could be an added catalyst. Acquisitions. CD has successfully diversified its operations outside of Singapore over the past decade through bite-sized acquisitions. Further accretive acquisitions to leverage on its strong balance sheet could provide further catalysts to its share price. Key Risks:

Oil price surge. Energy and fuel costs historically accounts for about 8% of CD's sales and a surge in oil price may impact margins and vice versa, though this is partially mitigated by its hedging policies. Regulatory risks. Lower-than-expected fare increase, and or changes in regulations to the operations, may impact our forecasts. Company Background

ComfortDelGro Corporation Limited (CD) is a land transport service company. Its business includes bus, taxi, rail car rental and leasing, automotive engineering services, testing services, etc. Besides being a market leader for buses and taxis in Singapore, its business spans across other geographies such as UK, Australia, China, Vietnam and Malaysia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

ComfortDelgro

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F SGP fare chg (%) 5.04 0.08 (2.0) (4.0) (1.9) Avg oil price (US$) 90.0 70.0 45.0 50.0 50.0 Chg in staff strength (%) 4.00 1.00 (1.0) 2.00 1.00

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (S$m) Bus & Bus Station 2,084 2,148 1,941 2,000 2,041 Rail 197 213 261 292 336 Taxi 1,284 1,327 1,428 1,501 1,570 Automotive Engn 303 239 156 177 181 Others 184 185 184 184 184 Total 4,051 4,112 3,971 4,154 4,313 EBIT (S$m)

Bus & Bus Station 177 187 185 217 225 Rail 7.60 3.20 3.92 7.30 16.8 Taxi 151 164 171 180 188 Automotive Engn 51.4 41.2 45.4 44.3 45.2 Others 55.1 55.4 70.7 53.9 45.6 Total 442 451 477 502 521 EBIT Margins (%) Bus & Bus Station 8.5 8.7 9.6 10.8 11.0 Rail 3.9 1.5 1.5 2.5 5.0 Taxi 11.8 12.4 12.0 12.0 12.0 Automotive Engn 17.0 17.3 29.0 25.0 25.0 Others 29.9 30.0 38.3 29.3 24.8 Total 10.9 11.0 12.0 12.1 12.1


FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 4,051 4,112 3,971 4,154 4,313 Other Opng (Exp)/Inc (3,609) (3,661) (3,494) (3,652) (3,791) Operating Profit 442 451 477 502 521 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 4.30 4.90 5.39 5.93 6.52 Net Interest (Exp)/Inc (10.1) (3.4) 1.03 7.35 12.9 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 436 452 483 516 541 Tax (92.3) (88.4) (101) (103) (108) Minority Interest (60.5) (61.9) (64.1) (69.3) (72.7) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 284 302 318 343 360 Net Profit before Except. 284 302 318 343 360 EBITDA 800 845 847 878 911 Growth Revenue Gth (%) 8.1 1.5 (3.4) 4.6 3.8 EBITDA Gth (%) 4.2 5.6 0.3 3.7 3.7 Opg Profit Gth (%) 3.7 1.9 5.8 5.4 3.8 Net Profit Gth (Pre-ex) (%) 7.7 6.5 5.2 8.1 4.9 Margins & Ratio Opg Profit Margin (%) 10.9 11.0 12.0 12.1 12.1 Net Profit Margin (%) 7.0 7.3 8.0 8.3 8.3 ROAE (%) 13.1 13.3 13.2 13.6 13.5 ROA (%) 5.5 5.8 6.1 6.5 6.7 ROCE (%) 8.2 8.6 8.9 9.5 9.6 Div Payout Ratio (%) 62.2 63.8 66.0 68.0 70.0 Net Interest Cover (x) 43.8 132.6 NM NM NM



Company Guide

ComfortDelgro


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 1,048 1,063 996 1,022 1,015 Other Oper. (Exp)/Inc (919) (965) (886) (899) (888) Operating Profit 129 97.7 109 123 127 Other Non Opg (Exp)/Inc 4.60 3.10 3.20 4.30 3.80 Associates & JV Inc 0.40 2.50 1.70 0.70 0.20 Net Interest (Exp)/Inc (4.8) (4.4) (4.0) (3.7) (3.5) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 129 98.9 110 124 128 Tax (26.1) (17.2) (21.9) (23.3) (24.5) Minority Interest (17.9) (13.5) (15.0) (15.7) (15.9) Net Profit 85.2 68.2 73.4 85.2 87.3 Net profit bef Except. 85.2 68.2 73.4 85.2 87.3 EBITDA 233 206 210 225 230 Growth Revenue Gth (%) 1.0 1.5 (6.3) 2.7 (0.7) EBITDA Gth (%) 4.9 (11.3) 1.9 7.0 2.0 Opg Profit Gth (%) 6.7 (24.3) 12.0 12.3 3.5 Net Profit Gth (Pre-ex) (%) 5.3 (20.0) 7.6 16.1 2.5 Margins Gross Margins (%) 100.0 100.0 100.0 100.0 100.0 Opg Profit Margins (%) 12.3 9.2 11.0 12.0 12.5 Net Profit Margins (%) 8.1 6.4 7.4 8.3 8.6

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 2,895 2,909 2,894 2,824 2,741 Invts in Associates & JVs 8.00 10.2 15.6 21.5 28.0 Other LT Assets 1,088 1,017 1,017 1,017 1,017 Cash & ST Invts 826 788 811 906 1,208 Inventory 72.3 75.1 72.2 75.5 78.4 Debtors 120 140 142 148 154 Other Current Assets 221 277 277 277 277 Total Assets 5,231 5,216 5,230 5,269 5,504 ST Debt 243 126 100 100 100 Creditor 837 833 764 799 829 Other Current Liab 178 177 229 231 236 LT Debt 494 432 300 100 100 Other LT Liabilities 640 635 635 635 635 Shareholder’s Equity 2,190 2,335 2,460 2,594 2,720 Minority Interests 649 678 742 811 884 Total Cap. & Liab. 5,231 5,216 5,230 5,269 5,504 Non-Cash Wkg. Capital (601) (519) (502) (529) (556) Net Cash/(Debt) 88.7 229 411 706 1,008 Debtors Turn (avg days) 10.8 11.5 12.9 12.7 12.8 Creditors Turn (avg days) 84.2 93.2 93.1 86.9 87.2 Inventory Turn (avg days) 8.0 8.2 8.6 8.2 8.2 Asset Turnover (x) 0.8 0.8 0.8 0.8 0.8 Current Ratio (x) 1.0 1.1 1.2 1.2 1.5 Quick Ratio (x) 0.8 0.8 0.9 0.9 1.2 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 63.9 69.4 87.5 150.0 150.0 Z-Score (X) 3.0 3.3 3.4 3.7 3.7



Company Guide

ComfortDelgro


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 436 452 483 516 541 Dep. & Amort. 354 389 365 370 383 Tax Paid (83.1) (81.8) (49.1) (101) (103) Assoc. & JV Inc/(loss) (4.3) (4.9) (5.4) (5.9) (6.5) Chg in Wkg.Cap. 23.8 (23.4) (69.1) 25.4 21.9 Other Operating CF (87.4) (131) 0.0 0.0 0.0 Net Operating CF 639 600 725 804 836 Capital Exp.(net) (471) (388) (350) (300) (300) Other Invts.(net) (28.7) (1.3) 0.0 0.0 0.0 Invts in Assoc. & JV (0.5) 0.0 0.0 0.0 0.0 Div from Assoc & JV 3.00 2.90 0.0 0.0 0.0 Other Investing CF 12.5 14.1 0.0 0.0 0.0 Net Investing CF (485) (372) (350) (300) (300) Div Paid (165) (183) (193) (210) (233) Chg in Gross Debt (61.5) (190) (159) (200) 0.0 Capital Issues 22.6 17.7 0.0 0.0 0.0 Other Financing CF 41.7 85.4 0.0 0.0 0.0 Net Financing CF (163) (269) (351) (410) (233) Currency Adjustments 3.40 2.80 0.0 0.0 0.0 Chg in Cash (4.8) (38.0) 23.6 94.2 302 Opg CFPS (S cts) 28.8 29.1 37.1 36.4 38.0 Free CFPS (S cts) 7.86 9.93 17.5 23.5 25.0



Source: DBS Bank

Analyst: Andy SIM CFA

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: AS, PY

BUY Last Traded Price ( 24 Nov 2016): S$0.33 (STI : 2,843.72) Price Target 12-mth : S$0.56 (71% upside) (Prev S$0.58) Potential Catalyst: Oil price recovery, vessel delivery Where we differ: More conservative on revenue and margins Analyst Pei Hwa HO +65 6682 3714 [email protected]

What’s New Cut FY16-17 earnings by 32-37% after pushing

back deliveries and lowering margins

Recurring PATMI (excluding forex) made a new

low of US$5.9m

Positive OCF and lower gearing provide buffer to

weather through the downturn

BUY Ezion as one of the best proxies to ride oil

recovery; TP adjusted to S$0.56

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 387 351 328 378 EBITDA 309 267 213 239 Pre-tax Profit 226 38 48 46 Net Profit 224 37 45 44 Net Pft (Pre-Ex, Aft Pref Div)* 179 95 22 37 EPS (S cts) 20.3 3.3 3.1 3.0 EPS Pre Ex, Aft Pref Div (S cts) 16.2 8.6 1.5 2.5 EPS Gth (%) 26 (84) (6) (3) EPS Gth Pre Ex, Aft pref div 21 (47) (82) 63 Net DPS (S cts) 0.1 0.0 0.0 0.0 BV Per Share (S cts) 97.7 99.8 84.4 86.9 PE (X) 1.6 9.9 10.5 10.8 PE Pre Ex, Aft Pref Div (X) 2.0 3.8 21.3 13.0 P/Cash Flow (X) 1.7 1.7 3.3 2.9 EV/EBITDA (X) 5.6 7.0 8.7 7.8 Net Div Yield (%) 0.3 0.0 0.0 0.0 P/Book Value (X) 0.3 0.3 0.4 0.4 Net Debt/Equity (X) 0.9 1.1 0.9 0.9 ROAE (%) 24.5 2.1 3.2 3.0 Earnings Rev (%): (52) (37) Consensus EPS (S cts): 2.9 4.4 Other Broker Recs: B: 7 S: 2 H: 3


Fortified balance sheet

Maintain BUY on Ezion; TP adjusted to S$0.56, following earnings revisions, still based on 0.6x FY16 P/BV. We trimmed FY16-17 forecasts by 32-37% after pushing back vessel deliveries and lowering margins. Nonetheless, we believe core earnings are near bottom and comforted by Ezion’s positive OCF and lower gearing which are much needed in this environment. Ezion is among the stronger players with good assets, positive operating cash flow and decent cash balances. Re-rating catalysts stem from oil price rebound, earnings recovery with the resumption of service rigs currently under repair/upgrades in 2017, and successful diversification of its customer base to win new charter contracts.

3Q16 earnings disappointed on lower revenue and margins. Revenue fell 4.7% q-o-q to US$79.8m and gross margin contracted to 17.5% in 3Q16 (vs 21.3% in 2Q16 and 29.0% in 3Q15). As a result, recurring PATMI (excluding forex) made a new low of US$5.9m. The lower revenue was due to the off hire of one service rig, which outweighed the commencement of a new service rig in September for windfarm. Depreciation expense crept up to US$38.1m, from US$36.9m (2Q16).

Windfarm venture shaping up. China had set a target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5-year plan. It is behind schedule with only approximately 2.5GW offshore wind capacity installed. A liftboat could facilitate installation of 200MW offshore wind capacity a year. Assuming 27.5GW wind capacity to be installed over the next five years or 5.5GW per year, 25-30 liftboats would be required in China. Ezion has signed an MOU with one of the top five IPPs in China – Huadian – and several partners to speed up the installation of offshore windfarms using liftboats. The first service rig for China windfarm is expected to commence in 1Q17.

Valuation:

We value Ezion based on 0.6x FY16 P/BV, arriving at a target price of S$0.56. This implies 71% upside potential.


Rate reduction and contract terminations We estimate that every 1% decline in average day rates will reduce Ezion’s bottom line by 7% due to low-base effect. We have prudently assumed that rates will reduce by 15%/10% p.a. in FY16/17. Five service rigs are due for charter renewals in FY17. Besides, the Mexican contracts appear to be at risk of termination as these consist of the few units that are deployed for drilling and there have been several cancellations in that region. Competition may be keener ahead with more new entrants attracted to the growing liftboat market.

At A Glance Issued Capital (m shrs) 2,074 Mkt. Cap (S$m/US$m) 684 / 478 Major Shareholders (%) Thiam Keng Chew 13.4 Prudential Plc 9.1 Macarios Pte Ltd 6.9

Free Float (%) 70.6 3m Avg. Daily Val (US$m) 5.7 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist



Ezion Holdings Version 10 | Bloomberg: EZI SP | Reuters: EZHL.SI Refer to important disclosures at the end of this report

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Ezion Holdings

WHAT’S NEW

3Q16 earnings continued to slide

Results review: 3Q16 earnings disappointed on lower revenue and margins. Revenue fell 4.7% q-o-q to US$79.8m and gross margin contracted to 17.5% in 3Q16 (vs 21.3% in 2Q16 and 29.0% in 3Q15). As a result, recurring PATMI (excluding forex) made a new low of US$5.9m. The lower revenue was due to the off hire of one service rig, which outweighed the commencement of a new service rig in September for windfarm. Depreciation expense crept up to US$38.1m, from US$36.9m (2Q16) with the new delivery. Outlook: Expects recovery in 2H17. Oil majors have yet to feel the full impact of oil price recovery to US$50/bbl level due to a lag effect and continue to run on a very tight budget for OPEX. Management expects the situation to last for another 6-9 months before a meaningful recovery in activity level as the market awaits more indicators on oil price stability. Rate reduction pressure. Customers are pestering for a further reduction to charter rates for contract renewals. We have assumed a 15% rate cut in 2016 and a further 10% in 2017. Mexican units. Ezion is in the midst of redeploying the two 100%-owned service rigs for windfarm/MOPU. As for the three JV units with Swissco, Ezion’s contracts with PEMEX’s contractor remain valid though the contractor’s charter contract with PEMEX has ended. These units are likely to be redeployed as well. PEMEX has not been paying the contractors. Ezion is working with the other division of PEMEX to supply a customised vessel and is hoping that this PEMEX counterpart could help to accelerate PEMEX’s payments.

Acquisition of remaining stake in three drilling rigs (50:50 JV Ezion-Swissco). The purchase seems to be a bargain given Swissco is in financial distress and the charter will be off hire soon. Ezion will only be paying US$3.2m in cash to Swissco, as it will take over the outstanding borrowing for the units totalling US$60-70m. Both parties have sunk in loans to the JV, which Swissco announced that its portion was US$27.8m and has been written off. We estimate the carrying book value for the three units to be around US$180m. Ezion will also have the full rights on the outstanding receivables from PEMEX totalling c.US$60m, which we see as the sweetener of the deal. Possible impairment/provisions in 4Q16? In view of the prolonged downturn and possible downward revision in the cash flow projection for the vessels in the near-to-medium term, we believe service providers including Ezion might be under pressure to impair their assets in 4Q16. On average, the OSV owners under our coverage have marked down their asset values by c.10%. This is non-cash item, and current valuation at a steep discount to book has probably priced in the impairment risks. Deliveries pushed back. Ezion has pushed back six out of nine new vessels scheduled for deliveries by 2017-2018, in view of market conditions and the rising need for cash conservation. As for service rigs taken out for repair/upgrades, we expect 3-4 units to return to the operating fleet each year in 2017-2018. Rescheduling of repayment is still in progress, pending consent from the last of the five banks. The new repayment schedule will match the lowered cash flow generation for individual asset post rate reduction. The company hopes for the exercise to be completed by end of the year.


Company Guide

Ezion Holdings

Quarterly / Interim Income Statement (US$m)


Revenue 86.2 83.7 79.8 (7.4) (4.7)

Cost of Goods Sold (61.3) (65.9) (65.8) 7.4 (0.2)

Gross Profit 25.0 17.8 14.0 (43.9) (21.3)

Other Oper. (Exp)/Inc 2.68 (6.2) (1.8) (165.4) (71.6)

Operating Profit 27.6 11.6 12.3 (55.7) 5.5

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm

Associates & JV Inc 9.03 2.54 5.32 (41.1) 109.1

Net Interest (Exp)/Inc (5.9) (6.5) (7.2) (22.2) (10.2)

Exceptional Gain/(Loss) 0.0 1.48 0.0 nm nm

Pre-tax Profit 30.8 9.09 10.4 (66.4) 13.9

Tax (0.4) (1.0) (1.0) 121.1 2.6

Minority Interest 0.0 0.0 0.0 nm nm

Net Profit 30.3 8.14 9.38 (69.1) 15.3

Net profit bef Except. 30.3 6.66 9.38 (69.1) 40.9

EBITDA 73.1 51.0 55.7 (23.9) 9.1

Margins (%)






Company Guide

Ezion Holdings


Earnings Drivers:

Charter-backed fleet expansion. Since the delivery of its first liftboat, the Lewek Leader, in January 2010, Ezion has expanded its fleet rapidly to 26 service rigs (excluding unit #10 that was taken out for conversion into MOPU). Based on the existing schedule, management expects another 2/7/2 units to come on stream in 2016/17/18. All the vessels under construction have already secured back-to-back contracts and will start contributing to earnings upon delivery to customers. Rate reduction and uncertainty. While we expect sequential improvement from the maiden contribution of the ten new service rigs to be delivered the next three years and resumption of the ten vessels currently under repair/upgrade/conversion at the yards, the pace of earnings growth is dependent on the magnitude of rate reduction. With oil price hovering at current levels, rate renegotiation is inevitable. Against this backdrop, we have factored in a rate reduction of 15/10% p.a. in 2016-2017. Pick-up in offshore logistic revenue. Ezion’s Australian offshore logistic fleet comprises ten tugs and 30 ballastable barges. Ballastable barges, which have specially reinforced decks, have been modified to carry heavy offshore platforms and jackets. Demand for such high-end vessels has fallen off the cliff since 4Q14, with the construction of major Australian LNG projects coming to an end. This was exacerbated by depressed oil prices that have discouraged customers from exercising charter options after the initial term of 18 months. We estimate overhead costs to be around US$15-20m a year, taking into account depreciation, crew costs and interest expenses. Upside potential would come from a stronger-than-expected demand or disposal of the fleet, which has a carrying value of around US$250m. However, we believe it is not easy to find buyers in the current climate. Contract wins from windfarm expansion to fuel growth. During the peak of its contract wins, Ezion won 12/9/7 new charter contracts in 2012/13/14 respectively. The contracting pace is expected to slow down, constrained by Ezion’s stretched balance sheet. But the unexpected collapse in oil prices has accelerated the decline as some customers have held back the award of new contracts or have negotiated down charter rates. We believe demand will continue to grow in this region as liftboats/service rigs are in early stages of the industry cycle, to substitute workboats and barges that are traditionally used to support offshore production platforms. Ezion enjoys first-mover advantage to tap the industry’s growth. In addition, its recent venture into offshore windfarm could be a medium-term growth engine as well.

Total fleet

Operating fleet



Company Guide

Ezion Holdings

Balance Sheet:

Net gearing improved to 0.93x post right issues in July. Ezion completed the rights issue (which saw subscription of 2.06x for each rights issued) in July 2016, raising c.US$100m worth of equity in this capitalisation exercise. In 3Q16, Ezion reported a net repayment of debt of c.US$39.9m which also contributed to the slight improvement in gearing.

Relatively better financial health in current climate. Net debt/EBITDA is expected to hover around 6x in 2016. The current ratio of c.1.0x indicates Ezion’s ability to service short-term financing needs that may arise. Ezion should be able to meet its interest payments with c.1.5x net interest coverage ratio. Share Price Drivers:

Oil price rebound. Oil price is a leading indicator and key re-rating catalyst for O&G sector as the market has widely priced in the weak earnings and new lower norm of oil prices. We believe Ezion is one of the best proxies to ride the recovery, given its earnings resiliency and growth potential.

Vessel deliveries. Besides the delivery rescheduling, ten of Ezion’s service rigs have been withdrawn from its fleet for repairs/upgrades/conversions. The resumption of these rigs in 2016 should drive earnings recovery. In addition, Ezion is expected to take delivery of 2/1/8 vessels in 2016/17/18, driving recovery into 2017. Management could potentially dispose of four newbuild liftboats in early construction stages. Key downside risk is a rate reduction greater than the 10-15% p.a. factored into our model.

New contracts/renewals at good rates. Securing new/renewal of charter contracts at good rates would alleviate concerns over contract cancellations and rate reductions and thus lower the risk premium ascribed to the company. Key Risks:

Rising interest rates. About 50% of its debts have been are either on fixed rates or swapped to fixed rates, lowering the sensitivity. We estimate that every 100-bp increase in interest rates could reduce Ezion's net profit by approximately 8%.

Rate reduction and contract terminations. Five service rigs are due for charter renewals in FY16. In terms of termination, the Mexican contracts appear to be at risk as these consist of the few units that are deployed for drilling and PEMEX has exercised early termination clauses on a couple of drilling rigs last year and is facing a liquidity crunch because of the oil price collapse.

Keener competition. The rising acceptance and growing demand for liftboats have attracted new entrants to the market. We estimate that there are c.20 new liftboats currently under construction to be delivered largely in 2017. We believe demand growth should outpace supply growth in the under-penetrated Asia-Pacific region. Company Background

Ezion provides service rigs and offshore logistics support services to the offshore oil & gas industry. It was one of the first companies to introduce liftboats in Asia and the Middle East regions. Ezion had a total of 26 service rigs delivered and 17 service rigs in operation as of September 2016. The fleet is expected to grow to 28 vessels by end-2016, 29 by end-2017 and 33-37 by end-2018.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

Ezion Holdings

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F Total fleet 18.0 21.0 26.0 28.0 29.0 Operating fleet 18.0 18.0 18.0 N/A N/A

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (US$ m) Production and 376 312 273 298 Exploration and 10 38 54 79 Others 0 0 1 1 Total 387 351 328 378 Operating profit (US$ m) Production and 195 26 23 36 Exploration and (8) 0 11 10 Others (8) 83 11 11 Total 179 109 45 57 Operating profit Margins Production and 51.8 8.4 8.5 12.0 Exploration and (78.6) 0.1 20.4 13.2 Others 99.7 100.0 100.0 100.0 Total 46.2 31.1 13.7 15.0

Income Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 282 387 351 328 378 Cost of Goods Sold (149) (191) (233) (254) (304) Gross Profit 133 196 118 74 73 Other Opng (Exp)/Inc (14) (17) (9) (29) (16) Operating Profit 119 179 109 45 57 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 31 28 23 19 24 Net Interest (Exp)/Inc (7) (17) (22) (30) (35) Exceptional Gain/(Loss) 20 36 (72) 15 0 Pre-tax Profit 163 226 38 48 46 Tax (3) (2) (2) (2) (2) Minority Interest 0 0 0 0 0 Net Profit 160 224 37 45 44 Net Profit before Except. 141 188 109 31 44 Preference Dividend (8) (9) (14) (8) (8) Net Pft Pre-Ex, Aft Pref Div 133 179 95 22 37 EBITDA 195 309 267 213 239 Growth Revenue Gth (%) 77.7 37.1 (9.1) (6.7) 15.3 EBITDA Gth (%) 115.7 58.3 (13.6) (20.3) 12.1 Opg Profit Gth (%) 108.5 49.9 (38.9) (59.0) 26.9 Net Profit Gth (%) 103.4 39.4 (83.6) 23.7 (2.8) Net Pft Pre-Ex Aft Perf Div Gth (%) 103.1 34.8 (46.7) (76.4) 63.5

Margins & Ratio Gross Margins (%) 47.2 50.7 33.6 22.6 19.4 Opg Profit Margin (%) 42.3 46.2 31.1 13.7 15.0 Net Profit Margin (%) 56.9 57.9 10.5 13.9 11.7 ROAE (%) 27.2 24.5 2.1 3.2 3.0 ROA (%) 9.4 8.6 0.8 1.2 1.2 ROCE (%) 7.8 7.5 3.7 1.5 1.9 Div Payout Ratio (%) 0.6 0.5 0.0 0.0 0.0 Net Interest Cover (x) 17.5 10.7 5.0 1.5 1.6



Company Guide

Ezion Holdings

Quarterly / Interim Income Statement (US$ m)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 86 85 82 84 80 Cost of Goods Sold (61) (65) (61) (66) (66) Gross Profit 25 20 21 18 14 Other Oper. (Exp)/Inc 3 (2) (19) (6) (2) Operating Profit 28 18 2 12 12 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 9 9 8 3 5 Net Interest (Exp)/Inc (6) (6) (8) (7) (7) Exceptional Gain/(Loss) 0 (84) 13 1 0 Pre-tax Profit 31 (63) 16 9 10 Tax 0 0 0 (1) (1) Minority Interest 0 0 0 0 0 Net Profit 30 (64) 15 8 9 Net profit bef Except. 30 21 2 7 9 Preference Dividend 0 0 0 0 0 Net Pft (Pre-Ex, Aft Pref Div) 30 21 2 7 9

EBITDA 73 62 46 51 56 Growth Revenue Gth (%) (4.3) (1.7) (3.1) 2.0 (4.7) EBITDA Gth (%) 6.9 (15.1) (26.6) 11.8 9.1 Opg Profit Gth (%) 6.7 (35.6) (89.8) 541.6 5.5 Net Profit Gth (%) 4.8 nm nm (47.5) 15.3 Margins Gross Margins (%) 29.0 23.8 25.2 21.3 17.5 Opg Profit Margins (%) 32.1 21.0 2.2 13.9 15.3 Net Profit Margins (%) 35.2 (74.9) 18.9 9.7 11.8

Balance Sheet (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 1,464 2,136 2,284 2,238 2,243 Invts in Associates & JVs 194 173 204 211 235 Other LT Assets 5 14 12 12 12 Cash & ST Invts 166 372 230 264 108 Inventory 0 0 0 0 0 Debtors 107 160 193 234 252 Other Current Assets 107 128 186 186 186 Total Assets 2,043 2,981 3,108 3,144 3,035 ST Debt 223 288 375 375 375 Creditor 69 70 116 130 133 Other Current Liab 84 69 109 105 105 LT Debt 863 1,208 1,230 1,135 986 Other LT Liabilities 4 33 36 36 36 Shareholder’s Equity 800 1,313 1,241 1,364 1,400 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 2,043 2,981 3,108 3,144 3,035 Non-Cash Wkg. Capital 60 148 153 185 200 Net Cash/(Debt) (920) (1,125) (1,375) (1,245) (1,253) Debtors Turn (avg days) 106.5 125.9 183.4 238.0 234.7 Creditors Turn (avg days) 181.0 288.9 345.8 432.7 327.4 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.2 0.2 0.1 0.1 0.1 Current Ratio (x) 1.0 1.5 1.0 1.1 0.9 Quick Ratio (x) 0.7 1.2 0.7 0.8 0.6 Net Debt/Equity (X) 1.1 0.9 1.1 0.9 0.9 Net Debt/Equity ex MI (X) 1.1 0.9 1.1 0.9 0.9 Capex to Debt (%) 67.3 34.9 23.8 6.9 12.0 Z-Score (X) 0.8 0.8 0.6 0.7 0.7



Company Guide

Ezion Holdings

Cash Flow Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 163 226 38 48 46 Dep. & Amort. 45 103 135 150 158 Tax Paid (2) (2) (4) (7) (2) Assoc. & JV Inc/(loss) (31) (28) (23) (19) (24) Chg in Wkg.Cap. (5) (62) (32) (27) (14) Other Operating CF (15) (23) 94 0 0 Net Operating CF 155 214 209 145 163 Capital Exp.(net) (731) (522) (382) (104) (164) Other Invts.(net) 22 (19) (4) 0 0 Invts in Assoc. & JV (19) 15 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (5) 6 8 0 0 Net Investing CF (733) (520) (378) (104) (164) Div Paid (1) (1) (1) 0 0 Chg in Gross Debt 532 290 180 (95) (149) Capital Issues 97 272 (87) 97 0 Other Financing CF (14) (30) (38) (8) (8) Net Financing CF 614 530 54 (7) (156) Currency Adjustments (6) (18) (27) 0 0 Chg in Cash 31 206 (142) 35 (157) Opg CFPS (S cts) 11.3 17.5 15.2 8.3 8.5 Free CFPS (S cts) (40.5) (19.5) (10.9) 2.0 0.0



Source: DBS Bank

Analyst: Pei Hwa HO

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:AS, PY

BUY Last Traded Price ( 23 Nov 2016): S$0.96 (STI : 2,839.69) Price Target 12-mth: S$1.15 (20% upside) (Prev S$0.91) Potential Catalyst: Increasing dividend payout ratio, recovery in earnings and/or opening of Japanese markets Where we differ: Below consensus on lower top line but higher projected dividends Analyst Mervin SONG CFA +65 6682 3715 [email protected]

What’s New Ample capacity to raise dividends as GENS

becomes an attractive yield stock

Redemption of S$2.3bn worth of perpetual

securities expected in 2017

But still in strong position to bid for Japanese

casino

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 2,401 2,193 2,326 2,413 EBITDA 915 718 898 1,013 Pre-tax Profit 279 368 604 725 Net Profit 75.2 147 368 544 Net Pft (Pre Ex.) 232 201 368 544 Net Pft Gth (Pre-ex) (%) (45.4) (13.4) 83.1 47.7 EPS (S cts) 0.62 1.22 3.05 4.50 EPS Pre Ex. (S cts) 1.92 1.66 3.05 4.50 EPS Gth Pre Ex (%) (45) (13) 83 48 Diluted EPS (S cts) 0.63 1.23 3.07 4.53 Net DPS (S cts) 1.50 3.00 4.50 6.00 BV Per Share (S cts) 61.0 60.9 63.1 64.8 PE (X) 154.3 78.8 31.5 21.3 PE Pre Ex. (X) 50.0 57.7 31.5 21.3 P/Cash Flow (X) 9.2 10.7 10.6 10.6 EV/EBITDA (X) 11.5 14.3 10.4 9.1 Net Div Yield (%) 1.6 3.1 4.7 6.3 P/Book Value (X) 1.6 1.6 1.5 1.5 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 1.0 2.0 4.9 7.1 Earnings Rev (%): 0 0 0 Consensus EPS (S cts): 2.00 3.10 3.70 Other Broker Recs: B: 11 S: 3 H: 7


Double up

Potential doubling of dividend to trigger further re-rating. We maintain our BUY call on Genting Singapore (GENS) with a revised TP of S$1.15. Based on our analysis of GENS's cashflow generation and net cash of c.S$3.7bn, balanced against the redemption of its perpetual securities and potential bid for a Japanese casino, we estimate that GENS has the ability to increase its dividend to 6 Scts per annum up (translating to a 6.3% yield) from our FY15F DPS 3 Scts. We believe the positive market response following the declaration of a 1.5-Sct interim dividend will encourage GENS’s management to return more cash back to its shareholders. This in turn should continue the rerating post the 3Q16 results.

BUY ahead of earnings recovery in FY17. Following two tough years, we believe now is the opportune time to buy into a highly cash-generative business in a two-player oligopoly. We believe 2017 will mark a recovery in earnings (22% jump in adjusted EBITDA) due to (i) recovery in VIP volumes as volumes bottom out this year (we have penciled in a 3% improvement), (ii) normalising VIP win rate to the 2.85% theoretical rate from c.2.6% in 9M16, and (iii) easing of bad debts given GENS’s more selective and conservative credit policy over the past year.

Still on depressed valuations. Despite the recent rally, GENS still offers compelling value, as it trades at 10.6x FY17F EV/EBITDA, which is below –1SD of its mean of 10.9x. In addition, it trades at a c.30% discount to its Macau peers on an EV/EBITDA basis which close to -1SD of its mean EV/EBITDA differential. With increasing dividends, earnings turnaround in sight and potential Japanese casino in the medium term, we believe GENS can rerate closer to its average EV/EBITDA multiple of 13.1x.

Valuation:

As GENS is expected to increase dividends, thereby optimising its balance sheet, we raise our DCF-based TP to S$1.15 from S$0.91 as we impute a lower beta of 1.0x from 1.05x and increase the target gearing to 30% from 12% previously. Our valuation excludes any Japan casino.


Decline in VIP and mass businesses. The key risk to our positive view is a slower-than-expected recovery or decline in GENS’s VIP and mass divisions.

At A Glance Issued Capital (m shrs) 12,013 Mkt. Cap (S$m/US$m) 11,532 / 8,054 Major Shareholders (%) Genting Bhd 52.6 RWL 8.0 GHL 6.0

Free Float (%) 46.9 3m Avg. Daily Val (US$m) 12.7 ICB Industry : Consumer Services / Travel & Leisure



Genting Singapore Version 7 | Bloomberg: GENS SP | Reuters: GENS.SI Refer to important disclosures at the end of this report

55

75

95

115

135

155

175

195

215

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

Relative IndexS$

Genting Singapore (LHS) Relative STI (RHS)


Company Guide

Genting Singapore

WHAT’S NEW

Increasing dividends

Capacity to double dividends. Based on our estimates, GENS has the ability to double its dividends to 6 Scts (6.3% yield) from our FY15F DPS estimate of 3 Scts. With the positive market reaction to its first interim dividend of 1.5 Scts, we believe this will incentivise and encourage management to raise its payout ratio and return more cash to shareholders. Increasing dividend payout does not jeopardise ability to bid for a Japanese casino. While it is unclear whether the Japanese government will pass legislation to legalise casinos and the exact details of an eventual integrated resort (IR) such as number of tables and non-gaming attractions required are unknown, based on press reports, an IR could cost US$5-10bn. Assuming 50% gearing, GENS's equity contribution could amount to US$2.5-5.0bn or S$3.55-7.1bn. Based on our estimates, we believe GENS will be able to accumulate up to S$7.1bn worth of cash in five years' time even after raising its annual dividend to 6 Scts. This is premised on (1) S$900-1,200bn in annual operating cashflows over the next five years, (2) S$200m in annual capex. and (3) recent disposal of 50% interest in the Jeju project for S$588m, as well as (4) redemption of its outstanding perpetual securities, and (5) raising debt at GENS's holding company level with its net debt/(net debt + equity) still comfortable at 24% or 40% level in five years' time. For more details on our calculation, please see the tables overleaf. Redemption of outstanding perpetual securities. GENS has two outstanding perpetual securities worth S$1.8bn and S$500m that it has the option to call/redeem at par on 12 September 2017 and 18 November 2017 respectively. Assuming the perpetual securities are not redeemed, in September 2022, the distribution rate will step up from the current 5.125% to 6.125% (initial distribution rate of 5.125% plus step-up margin of 1%). While the 1% step-up penalty is low considering the current demands of fixed income investors and GENS is unlikely to be able to issue another perpetual security at such favourable terms, in our view GENS will still likely redeem the perpetual securities as failure to do so will negatively impact its reputation and the future ability for the group and its parent company Genting Berhad to issue other fixed income instruments. In addition, the market is already pricing in GENS calling back its perpetual securities. Doubling FY18 DPS to 6 Scts. Given our analysis of GENS's strong cashflow generation and potential funding needs for a Japanese casino, we forecast GENS to distribute 4.5

Scts in dividends ahead of a 6.0-Sct dividend in FY18. While GENS has the ability to pay a 6.0-Sct dividend in FY17, we expect GENS's management to be more conservative with its dividend payout to assess the strength of the turnaround of its underlying business. DPS ahead of EPS sustainable. While our projected FY17 and FY18 DPS of 4.5 and 6.0 Scts are higher than our estimated FY17 and FY18F EPS of 3.1 and 4.5 Scts respectively, we believe the dividend payout is sustainable. This is because of GENS’s large retained earnings of S$1.7bn, strong cashflow generation and the ability to distribute dividends as a return of capital as its share capital base stands at S$5.5bn. Raising TP to S$1.15. With our base-case scenario of GENS redeeming its perpetual securities, raising its dividend and optimising its capital structure, we raised our DCF-based TP to S$1.15 from S$0.91. Our higher valuation is a result of a lower beta of 1.0x from 1.05x as a consequence of investors rewarding GENS for increasing its dividends. GENS was previously trading a high free cash flow yield but this can now be realised with an increase in dividends. In addition, we also raised GENS’s target gearing to 30% from 12% currently, as the company optimises its balance sheet. Our TP valuation of S$1.15 implies a EV/EBTIDA multiple of 12.9x, close to GENS's average forward EV/EBITDA multiple of 13.1x.

Continues to trade at a discount to historical valuation range and Macau peers. While GENS's share price has rallied over 25% since its 3Q16 results on the back of its maiden interim dividend and signs of potential turnaround in its underlying business, we believe the rally has further legs to run. This is because GENS still trades at 10.3x FY17F EV/EBITDA, which is below –1SD of its mean of 10.9x and average EV/EBITDA multiple of 13.1x. In addition, GENS trades at a c.30% discount to its Macau peers on a forward EV/EBITDA basis which is -1SD of its mean EV/EBITDA differential. With prospects of increased dividends going forward, recovery in earnings and optionality from a potential Japanese casino in the medium term, in our view GENS can rerate closer to its average EV/EBITDA multiple of 13.1x and narrow its discount to its Macau peers. Reiterate BUY. With a revised TP of S$1.15, we reiterate our BUY call. We believe the recent share price rally can continue given the double act of higher dividends as well as prospects of an earnings recovery following a two-year downturn.


Company Guide

Genting Singapore

Potential GENS equity contribution for an integrated resort in Japan

Low range Upper range

Value of project (US$m) 5,000 10,000

Gearing 50% 50%

Equity contribution (US$m) 2,500 5,000

USDSGD 1.42 1.42

Equity contribution (S$m) 3,550 7,100

Source: DBS Bank Cash balance and gearing post increase in dividend without redeeming the perpetual securities

2017F 2018F 2019F 2020F 2021F

DPS (Scts) 6 6 6 6 6

Shares on issue (m) 12,002 12,002 12,002 12,002 12,002

Dividends (S$m) 720 720 720 720 720

Profit after tax (S$m) 453 544 604 646 674

Perpetual security coupon (S$m) (118) (118) (118) (118) (118)

Profit after tax and perpetual security coupon (S$m) 335 426 486 529 556

Equity (S$m)* 9,228 8,933 8,699 8,508 8,344

Debt (S$m)* 1,033 1,033 1,033 1,033 2,633

Debt/Equity 11% 12% 12% 12% 32%

Debt/(Debt+Equity) 10% 10% 11% 11% 24%

Operating cashflow ($m) 1,094 1,095 967 1,084 1,134

Extra Interest Expense (S$m) 0 (17)

Capex (S$m) (200) (200) (200) (200) (200)

Dividends (S$m) (720) (720) (720) (720) (720)

Perpetual securities coupon (S$m) (118) (118) (118) (118) (118)

Proceeds from disposal of Jeju project (S$m) 588

Debt issuance (S$m) 1,650

Net Cash Inflow/(Outflow) (S$m) 644 57 (71) 46 1,729

Gross cash (S$m)* 5,336 5,393 5,322 5,368 7,097

Maximum equity contribution required (S$m) 7,100 7,100 7,100 7,100 7,100

Shortfall (S$m) (1,764) (1,707) (1,778) (1,732) (3)

* We have used our estimated equity, debt and gross cash values as at end December 2016 as the starting point of our calculations

Source: DBS Bank


Company Guide

Genting Singapore

Cash balance and gearing post increase in dividend and redeeming the perpetual securities

2017F 2018F 2019F 2020F 2021F

DPS (Scts) 6 6 6 6 6

Shares on issue (m) 12,002 12,002 12,002 12,002 12,002

Dividends (S$m) 720 720 720 720 720

Profit after tax (S$m) 453 544 604 646 640

Perpetual security coupon (S$m) - - - - -

Profit after tax and perpetual security coupon (S$m) 453 544 604 646 640

Equity (S$m) 7,045 6,869 6,753 6,679 6,599

Debt (S$m) 1,033 1,033 1,033 1,033 4,483

Debt/Equity 15% 15% 15% 15% 68%

Debt/(Debt+Equity) 13% 13% 13% 13% 40%

Operating cashflow ($m) 1,094 1,095 967 1,084 1,134

Extra Interest Expense (S$m) (35)

Capex (S$m) (200) (200) (200) (200) (200)

Dividends (S$m) (720) (720) (720) (720) (720)

Perpetual securities coupon (S$m) (85) - - - -

Proceeds from disposal of Jeju project (S$m) 588

Debt issuance (S$m) 3,200

Redeem perpetual securities (S$m) (2,300)

Net Cash Inflow/(Outflow) (S$m) (1,623) 175 47 164 3,663

Gross cash (S$m)* 3,069 3,244 3,290 3,454 7,118

Maximum equity contribution required (S$m) 7,100 7,100 7,100 7,100 7,100

Shortfall (S$m) (4,031) (3,856) (3,810) (3,646) 18

* We have used our estimated equity, debt and gross cash values as at end December 2016 as the starting point of our calculations

Source: DBS Bank Forward EV/EBITDA chart

Source: Bloomberg Finance L.P., GENS, DBS Bank

GENS EV/EBITDA premium/(discount) to Macau Peers

Source: Bloomberg Finance L.P., GENS, DBS Bank

5.5

7.5

9.5

11.5

13.5

15.5

17.5

19.5

Jan

-20

11

Jul-

201

1

Jan

-20

12

Jul-

201

2

Jan

-20

13

Jul-

201

3

Jan

-20

14

Jul-

201

4

Jan

-20

15

Jul-

201

5

Jan

-20

16

Jul-

201

6

(x)

-2sd: 8.8x

-1sd: 10.9x

Avg: 13.1x

+2sd: 17.4x

+1sd: 15.2x

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Jan-

2011

Jul-2

011

Jan-

2012

Jul-2

012

Jan-

2013

Jul-2

013

Jan-

2014

Jul-2

014

Jan-

2015

Jul-2

015

Jan-

2016

Jul-2

016

Avg: -2%

+1sd: 31%

+2sd: 63%

-1sd: -34%

-2sd: -66%


Company Guide

Genting Singapore

Gaming peer comp*

Closing 12-mth Mkt PE EV/EBITDA Company FYE Curncy Rec Target Cap FY16/

17F FY17/ 18F

FY18/ 19F

FY16/ 17F

FY17/ 18F

FY18/ 19F 23 Nov 16 Price US$m

Macau Galaxy Ent Dec HKD 36.70 NR N/A 20,209 27.5 27.0 25.1 14.9 13.9 12.9 Sands China Dec HKD 37.90 NR N/A 39,436 28.9 25.2 22.5 20.3 18.1 17.0 SJM Holdings Dec HKD 6.04 NR N/A 4,406 16.6 25.4 23.7 8.4 13.6 10.2 Wynn Macau Dec HKD 13.24 NR N/A 8,869 33.9 25.5 21.5 19.3 13.9 12.6 MGM China Dec HKD 16.50 NR N/A 8,084 23.4 32.4 20.7 19.4 17.8 12.7 Melco Crown Dec USD 19.12 NR N/A 9,406 50.7 45.5 34.7 12.9 11.8 10.1

Singapore Genting Singapore Dec SGD 0.96 BUY 1.15 8,081 57.7 31.5 21.3 14.3 10.4 9.1 * Macau stocks based on consensus estimates with Genting Singapore based on DBS Bank estimates Source: Bloomberg Finance L.P., DBS Bank


Company Guide

Genting Singapore


Earnings Drivers:

VIP potentially bottoming out. Over the past couple of years, with the Chinese government embarking on an anti-corruption and austerity drive, VIP players have generally shunned casinos across Asia to avoid the scrutiny of government officials. This resulted in VIP gross gaming revenue (GGR) in Macau and Singapore falling 40% and 34% in CY15 respectively. For GENS, in combination with its greater focus on credit quality, its VIP GGR fell 49% y-o-y, leading to its market share declining from mid-50’s in 2014 to low 40% in 2015. Nevertheless, with Macau’s GGR turning positive y-o-y over the past three months, we are potentially approaching an inflection whether GGR may bottom later this year with a recovery from 2017 onwards. Should Singapore follow the trends in Macau, this will bode well for GENS's business next year. To reflect the potential recovery in FY17, we have pencilled in a 3% bounce in VIP rolling chips next year following a projected 37% y-o-y fall in FY16. Concerns over bad debts. GENS’s de-rating over the past year has been due to concerns over rising bad debts. However, going into FY17, we believe pressure on earnings from bad debts will ease given GENS's more conservative extension of credit to its VIP customers over the past 9-12 months. In addition, GENS has been more conservative with its provision policies over the past few quarters and has already written off the debts related to receivables before 2015. Going forward, we estimate GENS’s impairments on receivables to fall to around S$50m per quarter down from peak of S$92m experienced over the past few quarters. This is based on S$476m worth of receivables overdue at end-December 2015 which is to be potentially written off by end-FY17; GENS has already provided for S$196m in 9M16. Boost from new Jurong hotel. The market for mass players has declined over the last couple of years, with mass drop declining from c.US$8.7bn in 2012 to US$7.2bn in 2015. This has largely been due to maturing of the market during the five years since the opening of the integrated resorts in Singapore, as well as a decline in tourist arrivals. While the mass market continues to lag in 9M16, we remain positive on GENS’s medium-term prospects, as its recently opened 550-room Jurong hotel should help drive its mass business. The hotel is targeted towards GENS’s Malaysian customer base and the company offers a shuttle bus service from the hotel to Sentosa. Expansion into new markets. GENS has been exploring opportunities to develop integrated resorts in other markets such as Japan. In fact, it is currently developing a resort in Jeju, Korea which will provide incremental earnings to the group as the project progressively opens from end-2017. Volatility in regional currencies. The recent strengthening of the SGD against regional currencies such as CNY and MYR as well as any potential volatility in IDR may curtail GENS's business going forward. This is because China, Malaysia and Indonesia are key markets for GENS.

Recovery in Macau’s gross gaming revenue

Rebound in VIP win rate

GENS getting bad debts under control

Recent weakening of SGD a potential tailwind


-60%-50%-40%-30%-20%-10%

0%10%20%30%40%50%y-o-y growthy-o-y growth

1.5%

2.0%

2.5%

3.0%

3.5%

1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16

VIP win rate Lower bound - 2.7% Upper bound - 3.0%

0%

2%

4%

6%

8%

10%

12%

14%

0102030405060708090

100

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16

Impairment loss on receivables % of trade receivables

Bad debts trending down

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

CNY MYR IDR USD

IDR

MYR

USD

CNY


Company Guide

Genting Singapore

Balance Sheet:

In net cash position. GENS is in a strong financial position, with net cash of c.S$3.7bn (S$4.9bn of cash and restricted cash less gross debt of S$1.5bn). With operating cashflows of S$800m to S$1bn per annum, GENS should remain in a healthy financial state. Additional liquid assets. Beyond the group’s cash, GENS also has c.S$200m worth of available for sale financial assets. These assets are in gaming and hospitality related stocks and fixed income instruments and could be liquidated to fund any potential award of a Japanese casino which could cost US$5-10bn. Share Price Drivers:

Potential recovery ahead. The anti-corruption and austerity measures in China have caused a slowdown in the Asian casino market not only in Macau (CY15 GGR down 34% y-o-y) but also in Singapore (CY15 GGR: down an estimated 19%). With the Macau market showing signs of bottoming (GGR rising between 1-9% over the past three months following 25 consecutive months of declines), we believe we may be reaching a potential inflection point with a recovery from 2017 onwards. This is on top of GENS's cost containment initiatives as well as projected fall in bad debts following stricter credit criteria for its VIP customers. Key Risks:

Hard landing in China. A hard landing in China would present further downside risk to our earnings estimates as this will impact the confidence and ability of GENS’s Chinese customers to gamble at its properties. Credit risks. GENS extends credit to its VIP customers. In the event it is unable to recover its receivables, GENS may face higher levels of bad debts. Competition from other markets. Other markets in Asia including Macau and Philippines have been developing new integrated resorts which may compete with GENS for the same customers. Company Background

Genting Singapore Plc (GENS) operates Resorts World Singapore which is one of the largest fully integrated resorts in Southeast Asia. The company is also in the process of developing an integrated resort in Jeju, South Korea in partnership with Landing International Development Limited.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.2

0.2

0.3

0.3

0.00

0.05

0.10

0.15

0.20

0.25

2014A 2015A 2016F 2017F 2018F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

50.0

100.0

150.0

200.0

250.0

2014A 2015A 2016F 2017F 2018F

Capital Expenditure (-)

S$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2014A 2015A 2016F 2017F 2018F

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

(x)

+1sd: 3.0x

+2sd: 3.8x

-1sd: 1.4x

-2sd: 0.6x

Avg: 2.2x

13.0

18.0

23.0

28.0

33.0

38.0

43.0

48.0

53.0

58.0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

(x)

+1sd: 48.0x

+2sd: 56.7x

-1sd: 30.6x

-2sd: 21.9x

Avg: 39.3x


Company Guide

Genting Singapore


FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 2,862 2,401 2,193 2,326 2,413 Cost of Goods Sold (1,869) (1,708) (1,523) (1,462) (1,424) Gross Profit 994 693 670 863 989 Other Opng (Exp)/Inc (255) (122) (250) (264) (275) Operating Profit 739 571 420 599 714 Other Non Opg (Exp)/Inc (45.6) (138) (25.0) (30.1) (30.1) Associates & JV Inc 10.6 (3.8) (5.0) (5.0) 0.0 Net Interest (Exp)/Inc 8.28 7.15 32.3 39.6 41.0 Exceptional Gain/(Loss) 92.7 (157) (53.8) 0.0 0.0 Pre-tax Profit 805 279 368 604 725 Tax (170) (86.2) (103) (151) (181) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend (118) (118) (118) (84.9) 0.0 Net Profit 517 75.2 147 368 544 Net Profit before Except. 425 232 201 368 544 EBITDA 1,158 915 718 898 1,013 Growth Revenue Gth (%) 0.5 (16.1) (8.7) 6.1 3.8 EBITDA Gth (%) 0.0 (21.0) (21.5) 25.0 12.8 Opg Profit Gth (%) 0.4 (22.7) (26.5) 42.9 19.1 Net Profit Gth (Pre-ex) (%) 2.2 (45.4) (13.4) 83.1 47.7 Margins & Ratio Gross Margins (%) 34.7 28.8 30.6 37.1 41.0 Opg Profit Margin (%) 25.8 23.8 19.1 25.8 29.6 Net Profit Margin (%) 18.1 3.1 6.7 15.8 22.5 ROAE (%) 7.0 1.0 2.0 4.9 7.1 ROA (%) 4.0 0.6 1.3 3.6 5.8 ROCE (%) 4.9 3.4 2.7 4.5 5.9 Div Payout Ratio (%) 23.4 239.4 244.8 146.8 132.5 Net Interest Cover (x) NM NM NM NM NM


Recovery in FY17 earnings due to the improvement in the VIP segment from a recovery in the VIP win rate to 2.85%, lower bad debts and 3% growth in VIP rolling chip volumes following a projected 37% fall in FY16F


Company Guide

Genting Singapore


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 636 547 608 481 581 Cost of Goods Sold (448) (400) (437) (388) (367) Gross Profit 188 148 171 92.6 215 Other Oper. (Exp)/Inc (56.3) (51.6) (55.3) (50.2) (54.6) Operating Profit 131 96.0 116 42.5 160 Other Non Opg (Exp)/Inc (12.1) (2.7) (3.7) (5.3) (7.7) Associates & JV Inc (2.3) (0.6) (1.5) (3.6) 3.29 Net Interest (Exp)/Inc 1.00 3.10 7.09 9.53 11.3 Exceptional Gain/(Loss) (20.0) (67.6) (51.2) (11.4) 8.73 Pre-tax Profit 97.9 28.3 66.6 31.7 176 Tax (31.0) (6.3) (26.4) (12.9) (39.1) Minority Interest (29.7) (29.7) (29.4) (29.4) (29.7) Net Profit 37.2 (7.8) 10.8 (10.5) 107 Net profit bef Except. 57.2 59.8 62.0 0.83 98.1 EBITDA 209 181 193 116 234 Growth Revenue Gth (%) 10.0 (13.9) 11.1 (20.9) 20.9 EBITDA Gth (%) (29.4) (13.4) 6.2 (39.7) 101.3 Opg Profit Gth (%) (41.1) (26.9) 20.7 (63.4) 277.0 Net Profit Gth (Pre-ex) (%) (3.7) 4.5 3.7 (98.7) 11,694.1 Margins Gross Margins (%) 29.5 27.0 28.2 19.3 36.9 Opg Profit Margins (%) 20.7 17.5 19.1 8.8 27.5 Net Profit Margins (%) 5.8 (1.4) 1.8 (2.2) 18.4

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 5,809 5,487 5,362 5,287 5,211 Invts in Associates & JVs 133 130 125 9.97 9.97 Other LT Assets 425 559 702 201 177 Cash & ST Invts 5,011 5,002 4,692 3,240 3,416 Inventory 53.7 57.2 47.5 46.0 45.1 Debtors 1,101 646 295 396 516 Other Current Assets 139 145 145 145 145 Total Assets 12,672 12,027 11,368 9,324 9,520 ST Debt 519 167 167 167 167 Creditor 596 412 364 355 349 Other Current Liab 428 68.0 68.0 68.0 68.0 LT Debt 1,185 1,464 866 866 866 Other LT Liabilities 242 290 290 290 290 Shareholder’s Equity 9,703 9,626 9,613 7,578 7,780 Minority Interests 0.01 0.01 0.01 0.01 0.01 Total Cap. & Liab. 12,672 12,027 11,368 9,324 9,520 Non-Cash Wkg. Capital 270 368 54.9 164 289 Net Cash/(Debt) 3,308 3,371 3,659 2,207 2,382 Debtors Turn (avg days) 141.3 132.8 78.3 54.2 68.9 Creditors Turn (avg days) 170.5 134.9 115.8 112.8 114.2 Inventory Turn (avg days) 13.8 14.8 15.6 14.7 14.8 Asset Turnover (x) 0.2 0.2 0.2 0.2 0.3 Current Ratio (x) 4.1 9.0 8.6 6.5 7.1 Quick Ratio (x) 4.0 8.7 8.3 6.2 6.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 11.5 10.7 14.5 19.4 19.4 Z-Score (X) 3.4 3.9 4.8 4.9 5.0


Strong balance sheet with GENS in a net cash position despite repayment of perpetual securities


Company Guide

Genting Singapore


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 805 279 368 604 725 Dep. & Amort. 419 344 299 299 299 Tax Paid (153) (127) (103) (151) (181) Assoc. & JV Inc/(loss) (10.6) 3.83 5.00 5.00 0.0 Chg in Wkg.Cap. (358) 267 267 159 108 Other Operating CF 1,058 774 614 782 870 Net Operating CF 956 1,262 1,082 1,094 1,095 Capital Exp.(net) (195) (174) (150) (200) (200) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV (97.9) (138) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 363 768 (167) 588 0.0 Net Investing CF 69.6 455 (317) 388 (200) Div Paid (122) (121) (360) (540) (720) Chg in Gross Debt (531) (88.8) (597) 0.0 0.0 Capital Issues (169) (112) 0.0 0.0 0.0 Other Financing CF (159) (136) (118) (2,393) 0.0 Net Financing CF (982) (458) (1,075) (2,933) (720) Currency Adjustments 24.3 45.1 0.0 0.0 0.0 Chg in Cash 67.3 1,305 (310) (1,452) 175 Opg CFPS (S cts) 10.7 8.23 6.75 7.74 8.18 Free CFPS (S cts) 6.20 9.00 7.72 7.40 7.42



Source: DBS Bank

Analyst: Mervin SONG CFA

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 19 Feb 16 0.72 0.65 HOLD

2: 16 May 16 0.77 0.79 HOLD

3: 26 Jul 16 0.78 0.79 HOLD

4: 05 Aug 16 0.76 0.91 BUY

5: 05 Sep 16 0.74 0.91 BUY

6: 04 Nov 16 0.85 0.91 BUY

7: 07 Nov 16 0.90 0.91 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

5

67

0.62

0.67

0.72

0.77

0.82

0.87

0.92

0.97

1.02

Nov-15 Mar-16 Jul-16 Nov-16

S$

Repayment of perpetual securities

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM, PY

BUY Last Traded Price ( 8 Nov 2016): S$2.10 (STI : 2,820.24) Price Target 12-mth: S$2.47 (18% upside) Potential Catalyst: Better-than-expected results Where we differ: More positive than consensus in the medium-term Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN +65 6682 3716 [email protected]

What’s New 1H17 results driven by higher revenue and

development completions

Exceeded own expectations by meeting 64% of

full-year development profit target

Achieved close to 50% of full-year targets for

development starts and completions

Price Relative

Forecasts and Valuation FY Mar (US$ m) 2016A 2017F 2018F 2019F Revenue 777 851 946 1,029 EBITDA 735 615 688 746 Pre-tax Profit 1,343 473 540 592 Net Profit 690 269 311 341 Net Pft (Pre Ex.) (30.0) 269 311 341 Net Pft Gth (Pre-ex) (%) nm nm 15.6 9.6 EPS (S cts) 20.2 7.86 9.09 9.96 EPS Pre Ex. (S cts) (0.9) 7.86 9.09 9.96 EPS Gth Pre Ex (%) nm nm 16 10 Diluted EPS (S cts) 20.2 7.86 9.09 9.96 Net DPS (S cts) 6.07 6.78 7.83 8.59 BV Per Share (S cts) 243 245 249 252 PE (X) 10.4 26.6 23.1 21.0 PE Pre Ex. (X) nm 26.6 23.1 21.0 P/Cash Flow (X) 17.1 nm 14.1 13.7 EV/EBITDA (X) 21.5 27.4 25.2 24.1 Net Div Yield (%) 2.9 3.2 3.7 4.1 P/Book Value (X) 0.9 0.9 0.8 0.8 Net Debt/Equity (X) 0.3 0.4 0.4 0.4 ROAE (%) 8.4 3.2 3.7 4.0 Earnings Rev (%): - - - Consensus EPS (S cts): 7.4 8.2 9.3 Other Broker Recs: B: 11 S: 2 H: 3


In pursuit of growth

Value at current prices. We maintain BUY on Global Logistics Properties (GLP) with TP of S$2.47, pegged at 30% discount to RNAV to reflect ongoing uncertainties in the operating environment. Trading at 0.8x P/BV, below the lower end of historical range, we believe the cautious outlook is priced in. 1H17 results driven by higher rental income, management fees and development completions; core results in line. Core 1H17 net profit (excluding revaluation gains and one-off items) grew 36% y-o-y to S$137m, in line with street’s FY17 estimates, led by higher rental income mainly from Japan (+21%) and US (+67%) and higher management fees from Japan (+47%) and US (+165%). In 1H17, GLP recorded development profit of US$128m at 30% margin (vs 27% in FY16), achieving 64% (ahead) of its full-year target of US$200m. GLP achieved 42% and 46% of its development starts and completion targets respectively. Management has turned positive on Brazil, and cautiously positive on China, while Japan and US continue to show strong demand. AUM of fund management platform rose to US$38bn. As at 1H17, total AUM had risen to US$38bn, and the group has another US$12bn of uncalled capital, expected to be deployed in the next two years. Given that this business is a highly scalable and an ROE-enhancing business arm of the group, management is focusing on driving returns and operational scale by establishing new funds. Valuation:

We maintain our BUY call and target price of S$2.47, pegged at a 30% discount to RNAV. Despite a weaker outlook, we believe the current share price, which is at 0.8x P/BV, below the lower end of historical range, is attractive. Key Risks to Our View:

Faster-than-expected ramp-up in competing supply on the back of a slowdown in China's retail sector would impact demand for logistics warehouses. At A Glance Issued Capital (m shrs) 4,687 Mkt. Cap (S$m/US$m) 9,843 / 7,084 Major Shareholders (%) GIC Pte Ltd 36.9 Hillhouse Capital 8.2 Blackrock 6.0

Free Float (%) 43.5 3m Avg. Daily Val (US$m) 19.5 ICB Industry : Real Estate / Real Estate



Global Logistic Properties Version 7 | Bloomberg: GLP SP | Reuters: GLPL.SI Refer to important disclosures at the end of this report

62

82

102

122

142

162

182

202

222

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4


Relative IndexS$

Global Logistic Properties (LHS) Relative STI (RHS)


Company Guide

Global Logistic Properties

WHAT’S NEW

In Pursuit of Growth

1H17 results driven by higher rental income, management fees and development completions.

GLP’s 1H17 net profit fell 2% y-o-y to US$376m mainly led by forex losses of US$39m vs US$19m gains in 1H16, lower share of associates and JV (-17%) and lower revaluation gains (-5%) mitigated by an 11% increase in revenue led by higher rental income and management fees. Core 1H17 net profit (excluding revaluation gains and one-off items) grew 36% y-o-y to S$137m, in line with streets’ FY17 estimates, led by higher rental income mainly from Japan (+21%) and US (+67%) and higher management fees from Japan (+47%) and US (+165%).

2Q17 core net profit grew 53% y-o-y mainly due to higher management fees (+49%) from Japan and US, and rental income (+18%) partly due to development completions and growing fund management platform.

Revenue growth was led by a 45% increase in management fees to US$83m, mainly from the inclusion of GLP US Income Partners II, GLP Japan Development Venture II and growing Japan funds, and higher rental income which grew 15% y-o-y to US$335m.

Lower revaluation gains were mainly from China which fell 26% y-o-y to US$222m. Japan recognised a higher revaluation gain of US$103m vs US$42m in 1H16, partly due to development completions.

In 1H17, GLP recorded a development profit of US$128m (2Q17: US$63m; 1Q17: US$65m) at 30% margin (vs 27% in FY16), achieving 64% (ahead) of its full-year target of US$200m.

GLP achieved 42% of its development starts FY17 target of US$2.1bn, mainly from China at US$688m (50% of target; started US$406m in 2Q17). Japan achieved 24% of its development starts FY17 target and Brazil 38%. In this quarter, management has turned more positive on the China market. Management believes that the excess supply has been absorbed with some markets showing average lease ratio of above 90%. Thus, it has doubled its development starts in these markets this quarter.

GLP has also achieved 46% of its FY17 development completions with Japan having already met its full-year target and Brazil having achieved 144% of its target. China recorded 30% of its target.

AUM expanded to US$38bn in 2Q17 vs US$36.5bn in 1Q17 mainly from Japan, thus, growing its fund fees from US$42m in 1Q17 to US$47m in 2Q17. Management fees and development fees increased 11% and 14% q-o-q to US$31m and US$16m respectively. Uncalled capital remains at US$12bn and GLP expects to deploy the fund in the next two years. GLP has received strong interest on its US portfolio and expect to complete the syndication of its 3rd US portfolio by December 2016.

Operational highlights

The group’s lease ratio has improved back to 92% (1Q17: 91%; 4Q16: 92%), mainly due to China (87% vs 86% in 1Q17) and Japan (99% vs 98% in 1Q17). US and Brazil remained flat at 94% and 89% respectively.

The group’s 1H17 same-property net operating income grew 7.5% y-o-y, positive across all markets including Brazil. China recorded the highest growth at 16.7%, followed by Japan (+6.2%) and Brazil (+5.8%).

Effective rent upon renewal showed strong growth positive in all markets ranging from 7.3-8.5% (on cash basis), except Brazil which saw a 7.4% drop in rental. We note that the decrease is lower q-o-q (1Q17: -8.9%).

Outlook: Management turns positive on Brazil and cautiously positive on China, while it continues to expect strong demand from Japan

In China, management has recorded some positive data in 2Q17 and believes that some markets have absorbed some excess supply while demand remains strong. Thus, it has accelerated its development starts compared to 1Q17.

GLP has recorded some encouraging numbers in the Brazil market with lease ratio stabilising at 89% and cap rate compression of 25bps. Although effective rent on renewal leases continues to be on a downward trend, the rate of decrease has reduced q-o-q. Management believes the worst could be over for the Brazil market.

Japan market continues to see strong demand mainly driven by e-commerce. Lease ratio has improved to 90% (1Q17: 86%) in Tokyo and Osaka. Rental reversions grew 8.5% (cash basis) vs 2.8% in 1Q17. However, management believes the challenge is in cap rate compression and finding new supply.

US market showed strong rental reversions and leasing demand though retention ratio slipped to 75% from 77% in 1Q17 and NOI grew 6.2% y-o-y vs 7.2% in 1Q17. Management continues to seek attractive assets and new investors to grow its US portfolio.

News on potential takeover. Maintain BUY

Following the recent news on a potential takeover by CIC, Hopu Investment Management and Hillhouse Capital Management, we believe the stock price at 0.8x P/BV is attractive on the back of previous privatisation transactions which were done at an average of 1x P/BV.


Company Guide



FY Mar 2Q2016 1Q2017 2Q2017 % chg yoy % chg qoq

Revenue 189 207 214 12.9 3.4

Cost of Goods Sold (38.9) (38.2) (37.5) (3.5) (1.9)

Gross Profit 150 168 176 17.1 4.6

Other Oper. (Exp)/Inc (62.1) (54.3) (56.2) (9.6) 3.5

Operating Profit 88.3 114 120 35.8 5.2

Other Non Opg (Exp)/Inc 17.1 7.86 3.03 (82.3) (61.5)

Associates & JV Inc 34.3 57.3 70.7 106.1 23.4

Net Interest (Exp)/Inc (20.8) (70.0) (29.5) (41.4) 57.9

Exceptional Gain/(Loss) 110 208 117 6.3 (43.6)

Pre-tax Profit 229 317 281 22.8 (11.2)

Tax (52.9) (67.0) (60.6) 14.6 (9.5)

Minority Interest (62.3) (47.2) (47.8) 23.3 1.2

Net Profit 114 203 173 51.8 (14.7)

Net profit bef Except. 3.79 (5.0) 55.9 1,374.7 nm

EBITDA 91.3 114 120 31.4 5.2

Margins (%)






Company Guide



Earnings Drivers:

Riding on the growing demand from e-commerce players for logistics space. Riding on the tailwinds of China’s rising consumerism and thriving e-commerce sector, Global Logistics Properties (GLP) remains in the front seat to take advantage of China’s rapidly changing retail landscape. With an extensive portfolio of warehouses (11.8m sqm of space) in 35 cities in China, the group is one of the leading providers of modern logistics solutions to end-users. GLP’s network of warehouses enables customers to expand; this has been positively received by current users of its space. Its strong network of warehouses enables management to enjoy recurring demand from existing clients. Close to 90% of GLP’s portfolio is occupied by businesses geared towards domestic consumption. Strong operational momentum across markets. As expected, FY16 recorded a strong year largely led by positive effective rent growth on renewal and same-property net operating income. The group’s lease ratio remains relatively stable at 92% with WALE of 2.6-5.5 years. While management has turned cautious on China and Japan, hence reducing development targets, the US market appears to have strong growth potential. Fund management platform delivers superior returns at lower risk. GLP’s fund management platform delivers superior returns at lower risk. Management fees increased 80% to US$130m in FY16 and this segment is expected to potentially earn US$400m in the medium term. As of end-March 2016, total AUM had risen to US$35bn, with another US$11bn of uncalled capital to be deployed. We expect the fund management business to continue growing through new funds due to its scalable nature, boosting returns and ROEs for the group. Going forward, the group is looking to launch a new China fund with equity capital of c.US$3bn to increase its reach in China. Development starts and completion pipeline. In FY17, GLP has set lower targets for development starts and completions of US$2.1bn (vs US$2.8bn in FY16) and US$1.5bn (vs US$2.1bn in FY16) respectively as management turns cautious. Nevertheless, value creation margin at 27% remains above historical average of 25%. Deepening presence in US. We are positive on GLP’s announcement of a US$1.1bn (at valuation) logistics portfolio in the US from Hillwood, a property developer. The acquisition will be in various tranches – initial closing of US$700m is fully leased and income producing by end of December 2016 and the remaining US$400m, when the target properties under development complete and achieve pre-agreed lease ratios. GLP intends to pare down its effective stake in this portfolio to 10% upon syndication to third-party capital partners. Assets are located in key markets of Dallas, Chicago and Atlanta, which according to Colliers, have one of the brightest outlooks for absorption and rental growth in the US.

Top line and EIBT (US’m)

Revenue Breakdown by segment (US$’m)

EBIT Margins (%)

RNAV


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

FY15A FY16A FY17F FY18F

US

$'m

n

Revenue Operating profit (ex reval)

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

FY15A FY16A FY17F FY18F FY19F

US

$'m

n

China Japan US & Brazil

45.0

47.0

49.0

51.0

53.0

55.0

57.0

59.0

FY15A FY16A FY17F FY18F FY19F

EB

IT M

argi

ns (%

)

Valuation of GLP S$'m

Japan Logistics Business (Stabalized) 2,173.8

China Logistics Business (Stabalized) 4,953.7

China Landbank (NPB of future devt) 3,815.0

Other Assets 58.1

GLP J-REIT 413.5

Brazil 523.1

USA 337.0

Fee income business (15x P/E) 1,054.4

Gross Asset Value 13,296

Less: Estimated net debt -660.57

RNAV 12,668

RNAV/ share (US$) 2.62

RNAV/ share (S$) 3.53

Discount 30%

Target Price 2.47


Company Guide


Balance Sheet:

Low leverage ratio. Total debt-to-asset ratio is expected to remain fairly stable at c.0.40x, which is well within management's comfortable level. As such, this provides GLP with additional debt headroom for future debt-funded acquisitions. Currently, the group has 70% of its debt on fixed rate with a weighted average cost of debt of 3.0% and a long debt maturity of 5.2 years. Share Price Drivers:

Robust outlook for e-commerce in China. GLP has a large (11.8m sqm in completed properties) portfolio in China that is positioned strategically to benefit from growth in e-commerce through its modern logistics space, and it has another US$5.3bn slated for completion in FY17-19. We expect the group’s assets to hit higher occupancies and pricier leases, if e-commerce increases in scale (8-year CAGR was 80%) on the back of strong consumer demand (11-year CAGR was 63%, expected to double over the next three years). Incremental earnings contribution from China would be a share price catalyst. Realisation of value through its fund business. GLP continues to expand through its fund platform. Looking ahead, the potential conversion of its development funds in China and Japan into income funds could unlock performance fees, offering upside to the earnings that are currently not in our estimates. Additionally, GLP continues to look for opportunities in the US and potentially Europe to expand its fund management business. Key Risks:

Slowdown in Chinese economy If a slowdown in the Chinese economy leads to a reduced appetite for logistics warehouse space, there could be slower-than-projected revenue growth. Foreign currency risks Exposure to various currencies (CNY, JPY, BRL) could lead to volatility in the group's USD earnings. Company Background

Global Logistics Properties (GLP) is a leading provider of modern logistics facilities in China, Japan, Brazil and the US. The group develops, owns and manages c.41m sqm GFA of logistics properties, catering to growing domestic consumption.


Capital Expenditure

ROE (%)

PB Band (x)


0.0

0.0

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.1

0.00

0.10

0.20

0.30

0.40

0.50

2015A 2016A 2017F 2018F 2019F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2015A 2016A 2017F 2018F 2019F

Capital Expenditure (-)

US$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2015A 2016A 2017F 2018F 2019F

Avg: 1.13x

+1sd: 1.36x

+2sd: 1.6x

‐1sd: 0.89x

‐2sd: 0.66x

0.5

0.7

0.9

1.1

1.3

1.5

1.7


(x)


Company Guide


Income Statement (US$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Revenue 708 777 851 946 1,029 Cost of Goods Sold (139) (157) (137) (173) (204) Gross Profit 570 620 714 773 825 Other Opng (Exp)/Inc (165) (229) (241) (245) (250) Operating Profit 405 392 473 527 575 Other Non Opg (Exp)/Inc 0.0 91.1 23.6 25.4 26.6 Associates & JV Inc 71.4 241 107 124 133 Net Interest (Exp)/Inc (47.9) (101) (130) (136) (143) Exceptional Gain/(Loss) 434 720 0.0 0.0 0.0 Pre-tax Profit 862 1,343 473 540 592 Tax (194) (310) (50.3) (56.8) (62.6) Minority Interest (182) (314) (125) (144) (160) Preference Dividend (32.0) (28.7) (28.7) (28.7) (28.7) Net Profit 454 690 269 311 341 Net Profit before Except. 201 (30.0) 269 311 341 EBITDA 488 735 615 688 746 Growth Revenue Gth (%) 13.3 9.8 9.4 11.2 8.8 EBITDA Gth (%) (4.4) 50.7 (16.3) 11.9 8.4 Opg Profit Gth (%) 6.0 (3.2) 20.8 11.5 9.0 Net Profit Gth (Pre-ex) (%) (18.6) nm nm 15.6 9.6 Margins & Ratio Gross Margins (%) 80.4 79.8 83.9 81.7 80.2 Opg Profit Margin (%) 57.2 50.4 55.6 55.8 55.8 Net Profit Margin (%) 64.2 88.8 31.6 32.9 33.1 ROAE (%) 5.6 8.4 3.2 3.7 4.0 ROA (%) 2.9 3.4 1.2 1.3 1.4 ROCE (%) 2.1 1.7 2.2 2.4 2.5 Div Payout Ratio (%) 41.7 30.1 86.2 86.2 86.2 Net Interest Cover (x) 8.4 3.9 3.6 3.9 4.0


Top line driven mainly by development completions in China, supported by stable occupancy rates in Japan. In addition, top line is driven from increased fund management fees in US and Brazil


Company Guide



FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 Revenue 189 199 199 207 214 Cost of Goods Sold (38.9) (39.2) (41.3) (38.2) (37.5) Gross Profit 150 160 158 168 176 Other Oper. (Exp)/Inc (62.1) (57.3) (78.3) (54.3) (56.2) Operating Profit 88.3 102 79.6 114 120 Other Non Opg (Exp)/Inc 17.1 55.8 (0.4) 7.86 3.03 Associates & JV Inc 34.3 48.5 38.9 57.3 70.7 Net Interest (Exp)/Inc (20.8) (44.7) (39.6) (70.0) (29.5) Exceptional Gain/(Loss) 110 202 214 208 117 Pre-tax Profit 229 364 292 317 281 Tax (52.9) (94.6) (82.7) (67.0) (60.6) Minority Interest (62.3) (84.9) (78.1) (47.2) (47.8) Net Profit 114 184 131 203 173 Net profit bef Except. 3.79 (17.4) (82.2) (5.0) 55.9 EBITDA 91.3 105 82.6 114 120 Growth Revenue Gth (%) (0.4) 5.1 0.1 3.7 3.4 EBITDA Gth (%) (11.2) 15.2 (21.6) 38.2 5.2 Opg Profit Gth (%) (11.6) 15.9 (22.3) 43.4 5.2 Net Profit Gth (Pre-ex) (%) (89.8) nm (371.6) 93.9 nm Margins Gross Margins (%) 79.5 80.3 79.3 81.5 82.4 Opg Profit Margins (%) 46.7 51.5 40.0 55.2 56.2 Net Profit Margins (%) 60.2 92.6 65.9 98.2 81.0

Balance Sheet (US$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 52.2 52.9 52.9 52.9 52.9 Invts in Associates & JVs 1,544 1,954 2,485 3,034 3,592 Other LT Assets 12,479 14,656 14,856 15,053 15,368 Cash & ST Invts 1,446 1,025 350 301 112 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 475 548 709 788 858 Other Current Assets 1,467 4,895 4,895 4,895 4,895 Total Assets 17,462 23,129 23,348 24,124 24,878 ST Debt 371 1,021 1,021 1,021 1,021 Creditor 811 1,026 724 933 1,111 Other Current Liab 21.9 2,965 2,962 2,968 2,974 LT Debt 2,476 3,750 4,050 4,350 4,650 Other LT Liabilities 1,019 1,208 1,208 1,208 1,208 Shareholder’s Equity 8,780 8,888 8,987 9,103 9,214 Minority Interests 3,983 4,272 4,398 4,541 4,701 Total Cap. & Liab. 17,462 23,129 23,348 24,124 24,878 Non-Cash Wkg. Capital 1,109 1,451 1,917 1,782 1,667 Net Cash/(Debt) (1,402) (3,746) (4,720) (5,070) (5,558) Debtors Turn (avg days) 227.0 240.1 269.6 288.8 291.9 Creditors Turn (avg days) 2,092.7 2,307.7 2,547.5 1,872.9 1,939.8 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.0 0.0 0.0 0.0 0.0 Current Ratio (x) 2.8 1.3 1.3 1.2 1.1 Quick Ratio (x) 1.6 0.3 0.2 0.2 0.2 Net Debt/Equity (X) 0.1 0.3 0.4 0.4 0.4 Net Debt/Equity ex MI (X) 0.2 0.4 0.5 0.6 0.6 Capex to Debt (%) 53.5 0.2 4.0 3.7 5.6 Z-Score (X) 0.0 0.8 0.8 0.7 0.7


Gearing (D/E) to remain conservative at 0.4x


Company Guide


Cash Flow Statement (US$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 862 1,343 473 540 592 Dep. & Amort. 11.6 11.8 11.8 11.8 11.8 Tax Paid (28.5) (31.5) (53.5) (50.3) (56.8) Assoc. & JV Inc/(loss) (71.4) (241) (107) (124) (133) Chg in Wkg.Cap. 45.5 27.3 (463) 129 109 Other Operating CF (375) (691) 0.0 0.0 0.0 Net Operating CF 444 418 (138) 507 522 Capital Exp.(net) (1,523) (8.0) (204) (200) (318) Other Invts.(net) (1,467) 212 0.0 0.0 0.0 Invts in Assoc. & JV (422) (472) (425) (425) (425) Div from Assoc & JV 12.9 2.77 0.0 0.0 0.0 Other Investing CF (10.5) (4,672) 0.0 0.0 0.0 Net Investing CF (3,409) (4,937) (629) (625) (743) Div Paid (174) (200) (208) (232) (268) Chg in Gross Debt 687 1,964 300 300 300 Capital Issues 159 0.0 0.0 0.0 0.0 Other Financing CF 2,246 2,525 0.0 0.0 0.0 Net Financing CF 2,918 4,289 92.4 68.3 32.2 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (47.0) (230) (674) (49.6) (188) Opg CFPS (S cts) 11.4 11.4 9.49 11.1 12.1 Free CFPS (S cts) (30.9) 12.0 (10.0) 8.98 5.98



Source: DBS Bank

Analyst: Rachel TAN, Derek TAN

S.No.Date of Report

Closing Price12-mth Target Price

Rating

1: 05 Feb 16 1.68 2.47 BUY

2: 17 Feb 16 1.65 2.47 BUY

3: 20 May 16 1.83 2.47 BUY

4: 12 Aug 16 1.93 2.47 BUY

5: 14 Sep 16 1.83 2.47 BUY


1

23

4

5

1.51

1.61

1.71

1.81

1.91

2.01

2.11

2.21

2.31


S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC, PY

BUY Last Traded Price ( 14 Nov 2016): S$0.455 (STI : 2,787.27) Price Target 12-mth: S$0.56 (23% upside) Potential Catalyst: Earnings-accretive acquisitions Analyst Lee Keng LING +65 6682 3703 [email protected]

What’s New 1H17 earnings doubled; North Asia accounted for

71% of 1H17 revenue

UnUsUal to strengthen network

Cinemas to build recurring income base

Maintain BUY with TP of S$0.56

Price Relative

Forecasts and Valuation FY Mar (S$ m) 2016A 2017F 2018F 2019F Revenue 38.3 99.2 143 174 EBITDA 19.4 31.6 41.7 47.9 Pre-tax Profit 9.99 22.2 29.9 36.2 Net Profit 8.90 18.4 24.9 30.0 Net Pft (Pre Ex.) 8.90 18.4 24.9 30.0 Net Pft Gth (Pre-ex) (%) 73.4 107.1 34.9 20.8 EPS (S cts) 0.98 1.76 2.37 2.86 EPS Pre Ex. (S cts) 0.98 1.76 2.37 2.86 EPS Gth Pre Ex (%) 59 79 35 21 Diluted EPS (S cts) 0.98 1.76 2.37 2.86 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 4.00 6.93 9.31 12.2 PE (X) 46.2 25.9 19.2 15.9 PE Pre Ex. (X) 46.2 25.9 19.2 15.9 P/Cash Flow (X) nm 30.4 20.3 14.6 EV/EBITDA (X) 21.2 14.6 11.6 9.8 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 11.4 6.6 4.9 3.7 Net Debt/Equity (X) CASH CASH 0.1 CASH ROAE (%) 32.1 33.8 29.2 26.7 Earnings Rev (%): - - NEW Consensus EPS (S cts): 1.80 2.20 2.30 Other Broker Recs: B: 2 S: 0 H: 0


Growth intact

Growth supported by core business; cinemas to build recurring income. We project mm2 to grow at an EPS CAGR of 50% from FY16-FY19, underpinned by growth in productions, expansion into the China market, and contributions from cinema operations and entertainment company, UnUsUal Group. Contribution from the newly proposed acquisition of 13 cinemas in Malaysia, which would propel mm2 Asia to become a top four player in Malaysia, is expected to be from FY18F onwards. In terms of its core production business, we expect North Asia, including China, Hong Kong and Taiwan, to contribute >70% of core revenue from FY17F, up from 23% in FY16. Upside to earnings could come from more projects, especially in China where budgets are much higher. 1H17 earnings doubled. mm2 reported a net profit of S$8.9m (+97% y-o-y) for 1H17. We expect a stronger 2H, mainly from the full impact from UnUsUal and the Mega cinemas acquired. UnUsUal listing. The successful listing of UnUsUal, which mm2 acquired at 10.2x PE back in February 2016, would enable mm2 to crystallise gains and unlock value, and allow UnUsUal to tap on public funds for expansion. Valuation:

Maintain BUY and TP of S$0.56. We maintain our earnings forecasts for FY17F and FY18F but we have removed the revenue from the Distribution segment, to be in line with the group’s reporting format. We have also added forecasts for FY19F. Maintain BUY. Our TP of S$0.56 is pegged to FY18F earnings and peers’ average of 24x. Key Risks to Our View:

No long-term financing arrangements for productions. The commencement of each production is dependent on mm2’s ability to secure funding. Availability of good scripts. Lack of good scripts for production may lead to less support from stakeholders. At A Glance Issued Capital (m shrs) 1,029 Mkt. Cap (S$m/US$m) 468 / 331 Major Shareholders (%) Wee Chye Ang 45.9 Yeo Khee Seng 9.2 Starhbu Ltd 8.6

Free Float (%) 36.4 3m Avg. Daily Val (US$m) 1.2 ICB Industry : Consumer Services / Media



mm2 Asia Version 8 | Bloomberg: MM2 SP | Reuters: MM2A.SI Refer to important disclosures at the end of this report

68

168

268

368

468

568

668

768

868

968

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

0.5

Dec-14 Jun-15 Dec-15 Jun-16

Relative IndexS$

mm2 Asia (LHS) Relative STI (RHS)


Company Guide

mm2 Asia

WHAT’S NEW

mm2 Asia – 1H17 results in line

Results highlights

1H17 earnings doubled. mm2 reported a net profit of S$8.9m (+97% y-o-y) for 1H17, which accounted for 48% of our FY17F earnings of S$18.4m. We expect a stronger 2H, mainly from full impact from UnUsUal and the Mega cinemas acquired. Revenue surged 176% to S$35m. The increase in revenue was mainly due to newly acquired UnUsUal and additional revenue generated from the cinema business. On top of that, the revenue of its core business increased by 104.7% to approximately S$21.7m in 1H17.

In terms of segmental breakdown, the core business of production and distribution accounted for 62% of total revenue; 15% was contributed by UnUsUal; cinemas accounted for 17% and the balance 6% from post-production activities. In 1H16, there were only two segments – core business and post-production, which accounted for 83% and 17% of total revenue respectively.

North Asia accounted for 71% of 1H17 revenue. In terms of geographical breakdown for its core business, North Asia accounted for 71% of 1H17 revenue, which includes one TV series and two movies. The balance 29% were from Singapore and Malaysia, contributed by three movies. In 1H16, North Asia accounted for only 21% of total revenue.

Outlook

Increasing focus on North Asia. We expect North Asia, including China, Hong Kong and Taiwan, to contribute >70% of core revenue from FY17F, up from 23% in FY16. Of the 35 projects slated for production from April 2016 to September 2017, 18 are from North Asia. Production budgets and

margins in North Asia, especially China, are generally better than local productions.

UnUsUal to strengthen network. UnUsUal has a strong presence in Asia and a network of regional artistes to synergise with mm2’s growth in North Asia. The successful listing of UnUsUal, which mm2 acquired at 10.2x PE back in February 2016, would enable mm2 to crystallise gains and unlock value.

Cinemas to build recurring income base. On 7 November 2016, mm2 proposed the acquisition of 13 cinemas in Malaysia. Upon completion of the proposed acquisition, the group will own a total of 133 cinema screens in Malaysia, elevating it to the 4th largest cinema operator in the Malaysian market, with a market share of about 14% in terms of number of screens. Besides building recurring income, this acquisition would enable the group to scale up for better synergies and cost savings.

Expansion in area of new media. mm2 will continue to expand in the area of new media content. With an Over-the-top (OTT) content platform in development and the recent proposed acquisition of RINGS.TV to offer more diverse content and an additional platform for broadcast, mm2 is in a position to produce, distribute and exhibit transmedia content and enter new market segments.

Maintain BUY and TP of S$0.56. We maintain our earnings forecasts for FY17F and FY18F but we have removed the revenue from the Distribution segment, to be in line with the group’s reporting format. We have also added forecasts for FY19F. Maintain BUY. Our TP of S$0.56 is pegged to FY18F earnings and peers’ average of 24x.


Company Guide

mm2 Asia

Interim Income Statement (S$m)


1H16 2H16 1H17% chg

y oy % chg hoh

Revenue 12.7 25.6 35.0 175.9 36.6Cost of Goods Sold (4.3) (15.6) (15.3) 254.9 -2.4Gross Prof it 8 .4 10.0 19.8 135.4 97.7Other Oper. (Exp)/Inc (3.0) (5.4) (8.9) 195.1 64.3Operat ing Prof it 5 .4 4.6 10.9 102.2 136.9Other Non Opg (Exp)/Inc 0.0 (0.0) (0.0) -276.0 76.0Associates & JV Inc 0.0 0.0 0.0 - -Net Interest (Exp)/Inc 0.0 0.0 0.0 - -Exceptional Gain/(Loss) 0.0 0.0 0.0 - -Pre- tax Prof it 5 .4 4.6 10.9 100.4 137.2Tax (0.9) (0.2) (2.0) 118.7 1011.7Minority Interest 0.0 0.0 0.0 - -Net Prof it 4 .5 4.4 8.9 96.6 101.4Net profit bef Except. 4.5 4.4 8.9 96.6 101.4EBITDA 6.7 4.6 13.5 102.0 193.0

Growth

Revenue Gth (%) (13) 102 37EBITDA Gth (%) 45 (31) 193Opg Profit Gth (%) 161 (15) 137Net Profit Gth (Pre-ex) (%) 208 (2) 101Margins

Gross Margins (%) 66.1 39.0 56.4Opg Profit Margins (%) 42.4 17.9 31.1Net Profit Margins (%) 35.5 17.1 25.3


Company Guide

mm2 Asia


Earnings Drivers:

Acquisitions to strengthen competitive edge and build income base mm2 has made several acquisitions to maintain its competitive advantage. The latest is the acquisition of 13 cinemas in Malaysia. Upon completion likely in February next year, mm2 will own a total of 18 cinemas with a market share of about 14% in terms of number of screens, propelling the company to become a top four player in Malaysia. The ownership of cinemas will provide a source of recurring income to the group and cost savings in the longer term, as mm2 usually has to pay about 50% of its gross intake for rental of cinemas. Cinema operation is a profitable business, and could be profitable even with less than 50% of the seats occupied. Other than cinemas, mm2 has recently entered into an MOU to acquire up to 30% stake in RINGS.TV, a leading interactive live streaming broadcast platform for S$4.5m in a bid to beef up its OTT (over-the-top) platform. In February 2016, mm2 acquired a 51% stake in UnUsUal Group, one of Asia’s largest promoters and organisers of shows and entertainment acts, for S$26m. Consolidating its position in local market; tapping on StarHub’s strong brand name As the industry leader, mm2 is poised for more opportunities ahead. With the entry of StarHub with a 9.05% stake, mm2 can tap on the former's strong brand name and this could raise its profile and pave the way for bigger opportunities ahead. mm2 could also leverage on StarHub to attract more sponsorship for its productions. StarHub can choose to tap on mm2’s cineplex business to showcase its content, as well as gain access to top-rated concerts and artistes through UnUsUal, in which mm2 owns a 51% stake. Going for niche markets in North Asia; adaptation of successful movies. In terms of strategy in China, instead of competing directly with the local big boys, mm2’s strategy is to go for small, niche markets and replicate its proven business model that it has in Singapore. For example, remaking successful titles like “The Journey” or Jack Neo’s “I not Stupid” movie in a specific province like Sichuan, which has a population of about 80m, which is >10x bigger than Singapore. mm2 can adapt the movie to the local setting, which would be more appealing to the locals there. Besides production of movies, mm2 can also produce variety shows, either on its own or via tie-ups with one of its shareholders, Hesheng Media, which is one of the largest integrated media companies in China. Distribution of movies, another core competency of mm2 apart from production and advertising, is also another channel that can broaden mm2’s income in China.

Business Model – The Film Budget

Business Model – Gross Receipts (Box Office)

Revenue Breakdown by Segment

FY16 Revenue Breakdown by Country

Profitability Trend


S$29.8m

S$61.9m

S$66.7m S$82.7m

S$4.9m

S$14.0m

S$36.0m S$43.2m

S$18.3m S$35.8m S$42.9m

S$3.6m S$5.0m S$5.0m S$5.0m

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

16 17F 18F 19F

Vividthree

UnUsUal

Cinema

Core business

Singapore59%Malaysia

19%

China15%

Taiwan4%

Hong Kong3%

0

5

10

15

20

25

30

35

40

45

2014A 2015A 2016A 2017F 2018F 2019F

EBIT Pre tax Profit Net Profit

S$m

Net profit CAGR: 58%

Equals

less

less

less

less

Producer’s Fee

Script Rights

Director’s Fee

Production Team / Crew Fees

Production Cost

Post - Production Cost

Prints & Advertising Cost

Income to mm2

Box Office Receipts

Exhibitors’ Cost

Distribution Commission

Marketing Costs

Producer Bonus *

Net Receipts

Income to mm2

Return to Stakeholders (mm2 may also be a stakeholder)

* only when return is higher than stakeholders’ ROI


Company Guide

mm2 Asia

Balance Sheet:

Net cash position. mm2 was in a net cash position as at September 2016. Though we do not rule out the possibility of the group taking on more debt, as it is constantly on the lookout for acquisitions that can complement its existing business and also to build its recurring income base, the full impact from its recent acquisitions should lead to stronger earnings and equity base. Asset-light business model. More than half of its assets are current assets, comprising mainly cash and receivables, even with the acquisition of cinemas and UnUsUal. Share Price Drivers:

UnUsUal listing. The successful listing of UnUsUal, which mm2 acquired at 10.2x PE back in February 2016, would enable mm2 to crystallise gains and unlock value, and allow UnUsUal to tap on public funds for expansion. Growing production and distribution income. Its core business, which includes production, distribution and sponsorship, is expected to account for at least 70% of total revenue going forward. In terms of production project pipeline, we expect more than half of the production to come from North Asia. In China, we are expecting the group to also produce dramas, which will have a much bigger production budget than movies. Even for movies in China, their production budgets and margins are also better than local productions. mm2 has also entered into an agreement to acquire the exclusive licensed rights to produce and broadcast The Voice for the Singapore/Malaysia version. The Voice is a popular format show currently being watched by more than 500m viewers. mm2, together with Clover Films, has also clinched the distribution rights for 19 movies in Singapore and Malaysia. Though distribution margins are much lower than production, at about 3% vs ~40%, it is very scalable. Key Risks:

No long-term financing arrangements for productions. The commencement of each production is dependent on mm2’s ability to secure funding. Availability of good scripts. Lack of good scripts for production may lead to less support from stakeholders. Unable to predict the commercial success of movies produced. The commercial success of its productions is primarily determined by inherently unpredictable audience reactions. Company Background mm2 Asia is a leading producer of films and TV/online content in Asia. As a producer, mm2 provides services over the entire film-making process – from financing and production to marketing and distribution, and thus has diversified revenue streams. mm2 also owns entertainment company, UnUsUal Group, and cinemas in Malaysia.

Number of Titles (Production & Distribution)

Year Number of Titles

(Production) Number of Titles

(Distribution) FY Mar 2012 3 2 FY Mar 2013 6 8 FY Mar 2014 6 18 FY Mar 2015 9 26 FY Mar 2016 14 24

Apr 16 to Sep 17* 35 * projection

Details of cinemas acquired

Cinema Place Capacity

Cathay Cineplex City Square Johor Bahru 14 screens, 2,826 seats

Cathay Cineplex Damansara Damansara 16 screens, 2,472 seats

Mega Cineplex Prai Penang 6 screens, 1,420 seats

Mega Cineplex Langkawi Langkawi 3 screens 536 seats

Mega Cineplex Bertam Bertam 4 screens 756 seats

LFS 1 Plaza, Kuala Selangor Selangor 5 screens, 733 seats

LFS Seri Iskandar Perak 7 screens, 1,349 seats

LFS 1 Segamat Johor 8 screens, 1,703 seats

LFS Prangin Mall Penang 8 screens, 1,490 seats

LFS Bahau Negeri Sembilan

6 screens, 1,036 seats

LFS Shaw Centre, Point Klang

Selangor 4 screens, 875 seats

LFS Riverside, Kuching Sarawak 4 screens, 585 seats

LFS IOI Kulai Johor 6 screens, 920 seats

LFS Kerian Sentral Mall Perak 8 screens, 1,183 seats

LFS Summer Mall Sarawak 12 screens, 2,038 seats

LFS Mahkota Parade Malacca 4 screens, 645 seats

LFS Bukit Jambul Penang 6 screens, 1,167 seats

LFS Kampar Perak 6 screens, 846 seats

Forward PE Band (x)

PB Band (x)


Avg: 12.7x

+1sd: 17.4x

+2sd: 22x

‐1sd: 8x

‐2sd: 3.4x3.0

8.0

13.0

18.0

23.0


(x)

Avg: 5.31x

+1sd: 7.01x

+2sd: 8.71x

‐1sd: 3.62x

‐2sd: 1.92x1.7

2.7

3.7

4.7

5.7

6.7

7.7

8.7


(x)


Company Guide

mm2 Asia

Segmental Breakdown

FY Mar 2015A 2016A 2017F 2018F 2019F Revenues (S$m) Core Business 24.3 29.8 61.9 66.7 82.7 Production 51.9 56.7 72.7 TV Content 10.0 10.0 10.0 Cinema 4.9 14.0 36.0 43.2 UnUsUal 18.3 35.8 42.9 Vividthree 3.6 5.0 5.0 5.0 Total 24.3 38.3 99.2 143.4 173.8 Gross profit (S$m)

Core Business 9.6 13.1 22.3 24.2 30.6 Production 20.8 22.7 29.1 TV Content 1.5 1.5 1.5 Cinema 2.8 7.7 19.8 23.8 UnUsUal 6.8 13.2 15.9 Vividthree 2.5 3.5 3.5 3.5 Total 9.6 18.4 40.2 60.7 73.7 Gross profit Margins (%)

Core Business 39% 44% 36% 36% 37% Production 40% 40% 40% TV Content 15% 15% 15% Cinema 57% 55% 55% 55% UnUsUal 37% 37% 37% Vividthree 69% 70% 70% 70%

Total 39% 48% 41% 42% 42% Income Statement (S$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Revenue 24.3 38.3 99.2 143 174 Cost of Goods Sold (14.7) (20.0) (59.0) (82.7) (100) Gross Profit 9.58 18.4 40.2 60.7 73.7 Other Opng (Exp)/Inc (3.0) (8.0) (17.7) (28.0) (34.8) Operating Profit 6.62 10.4 22.6 32.7 38.9 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.00 (0.4) (0.4) (2.8) (2.8) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 6.58 9.99 22.2 29.9 36.2 Tax (1.5) (1.1) (3.8) (5.1) (6.1) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 5.08 8.90 18.4 24.9 30.0 Net Profit before Except. 5.13 8.90 18.4 24.9 30.0 EBITDA 9.92 19.4 31.6 41.7 47.9 Growth Revenue Gth (%) 50.7 57.9 158.8 44.5 21.2 EBITDA Gth (%) 38.5 95.2 63.0 32.2 14.9 Opg Profit Gth (%) 78.3 56.7 117.6 44.9 19.0 Net Profit Gth (Pre-ex) (%) 68.1 73.4 107.1 34.9 20.8 Margins & Ratio Gross Margins (%) 39.5 48.0 40.6 42.3 42.4 Opg Profit Margin (%) 27.3 27.1 22.8 22.8 22.4 Net Profit Margin (%) 20.9 23.2 18.6 17.3 17.3 ROAE (%) 44.5 32.1 33.8 29.2 26.7 ROA (%) 18.5 16.7 17.0 13.3 12.0 ROCE (%) 37.7 27.3 28.4 19.5 17.5 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) NM 26.8 58.3 11.7 14.0


Partial contributions from UnUsUal

Includes contribution from latest acquisition of Lotus cinemas


Company Guide

mm2 Asia


FY Mar 1H15 2H15 1H16 2H16 1H17 Revenue 9.7 14.6 12.7 25.6 35.0 Cost of Goods Sold (4.0) (10.7) (4.3) (15.6) (15.3) Gross Profit 5.7 3.9 8.4 10.0 19.8 Other Oper. (Exp)/Inc (1.2) (1.8) (3.0) (5.4) (8.9) Operating Profit 4.5 2.1 5.4 4.6 10.9 Other Non Opg (Exp)/Inc 0.0 (0.0) 0.0 (0.0) (0.0) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 4.5 2.0 5.4 4.6 10.9 Tax (0.9) (0.6) (0.9) (0.2) (2.0) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 3.6 1.5 4.5 4.4 8.9 Net profit bef Except. 3.6 1.5 4.5 4.4 8.9 EBITDA 5.3 4.6 6.7 4.6 13.5 Growth Revenue Gth (%) 51 (13) 102 37 EBITDA Gth (%) (13) 45 (31) 193 Opg Profit Gth (%) (54) 161 (15) 137 Net Profit Gth (Pre-ex) (%) (60) 208 (2) 101 Margins Gross Margins (%) 58.7 26.7 66.1 39.0 56.4 Opg Profit Margins (%) 46.7 14.1 42.4 17.9 31.1 Net Profit Margins (%) 37.4 10.0 35.5 17.1 25.3

Balance Sheet (S$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 0.10 3.65 4.84 18.3 23.8 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 6.36 26.1 33.2 57.3 62.9 Cash & ST Invts 5.76 4.74 29.6 36.5 49.1 Inventory 4.77 9.83 21.6 30.3 36.6 Debtors 20.6 24.4 58.2 84.2 102 Other Current Assets 0.0 0.26 0.26 0.26 0.26 Total Assets 37.6 69.0 148 227 275 ST Debt 0.22 0.20 0.20 0.20 0.20 Creditor 14.7 23.8 56.9 79.8 96.6 Other Current Liab 1.46 4.21 4.93 6.25 7.31 LT Debt 0.09 2.85 11.2 41.2 41.2 Other LT Liabilities 1.92 0.75 0.75 0.75 0.75 Shareholder’s Equity 19.2 36.2 72.6 97.5 128 Minority Interests 0.0 0.98 0.98 0.98 0.98 Total Cap. & Liab. 37.6 69.0 148 227 275 Non-Cash Wkg. Capital 9.19 6.49 18.2 28.6 35.0 Net Cash/(Debt) 5.45 1.69 18.2 (5.0) 7.64 Debtors Turn (avg days) 240.0 214.2 152.0 181.2 195.5 Creditors Turn (avg days) 417.3 640.7 294.6 338.5 353.4 Inventory Turn (avg days) 100.2 243.0 114.7 128.4 134.0 Asset Turnover (x) 0.9 0.7 0.9 0.8 0.7 Current Ratio (x) 1.9 1.4 1.8 1.8 1.8 Quick Ratio (x) 1.6 1.0 1.4 1.4 1.5 Net Debt/Equity (X) CASH CASH CASH 0.1 CASH Net Debt/Equity ex MI (X) CASH CASH CASH 0.1 CASH Capex to Debt (%) 645.4 279.3 150.7 112.4 48.3 Z-Score (X) 13.1 8.6 4.0 3.8 3.8


Volatile margins mainly due to different stages of revenue recognition


Company Guide

mm2 Asia


FY Mar 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 6.58 9.99 22.2 29.9 36.2 Dep. & Amort. 3.29 8.98 8.98 8.98 8.98 Tax Paid (1.5) (1.1) (3.1) (3.8) (5.1) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (12.0) (22.6) (12.5) (11.7) (7.4) Other Operating CF 1.00 0.0 0.0 0.0 0.0 Net Operating CF (2.6) (4.7) 15.7 23.4 32.6 Capital Exp.(net) (2.0) (8.5) (17.3) (46.6) (20.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (2.0) (8.5) (17.3) (46.6) (20.0) Div Paid 0.0 0.0 0.0 0.0 0.0 Chg in Gross Debt 2.94 2.35 8.40 30.0 0.0 Capital Issues 7.75 9.10 18.0 0.0 0.0 Other Financing CF (1.6) (0.7) 0.0 0.0 0.0 Net Financing CF 9.05 10.7 26.4 30.0 0.0 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 4.44 (2.5) 24.9 6.86 12.6 Opg CFPS (S cts) 1.13 1.98 2.68 3.35 3.82 Free CFPS (S cts) (0.6) (1.5) (0.2) (2.2) 1.21



Source: DBS Bank

Analyst: Lee Keng LING

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 05 Jan 16 0.19 0.26 BUY

2: 04 Feb 16 0.18 0.26 BUY

3: 23 Mar 16 0.27 0.26 BUY

4: 24 Mar 16 0.26 0.31 BUY

5: 25 May 16 0.31 0.37 BUY

6: 10 Jun 16 0.35 0.37 BUY

7: 01 Jul 16 0.34 0.41 BUY

8: 13 Sep 16 0.39 0.47 BUY

9: 09 Nov 16 0.47 0.56 BUY


1

2

3

4

5

6

7

89

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50


S$

Issue of shares to finance recent acquisitions

Assume partial debt financing for the acquisition of cinemas

FY17 and FY18 - Acquisition of cinemas and RINGS.TV

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM, PY

BUY (Upgrade from HOLD)

Last Traded Price (5 Dec 2016): S$9.20 (STI : 2,943.05)

Price Target 12-mth: S$10.30 (12% upside) (Prev S$8.60)

Potential Catalyst: Pick-up in earnings momentum on higher NIM with

rising interest rates; wealth management angle an added catalyst

Where we differ: Our FY17-18F earnings are above consensus likely on

higher NIM and lower credit costs

Analyst Sue Lin LIM +65 8332 6843 [email protected]

What’s New Upgrade to BUY, TP raised to S$10.30; earnings

raised by 5-8% on higher NIM

Rising rates also bode well for insurance business;

keep watch on its wealth management space

Loan growth to stay muted

Asset quality to stabilise in 2017; earlier-than-

expected recovery poses upside risk to earnings

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F

Pre-prov. Profit 4,960 4,715 5,014 5,176 Net Profit 3,821 3,558 3,894 4,062 Net Pft (Pre Ex.) 3,821 3,558 3,894 4,062 Net Pft Gth (Pre-ex) (%) 13.4 (6.9) 9.4 4.3 EPS (S cts) 95.7 87.1 93.1 97.1 EPS Pre Ex. (S cts) 95.7 87.1 93.1 97.1 EPS Gth Pre Ex (%) 6 (9) 7 4 Diluted EPS (S cts) 95.7 85.1 93.1 97.1 PE Pre Ex. (X) 9.6 10.6 9.9 9.5 Net DPS (S cts) 36.2 35.7 38.0 39.6 Div Yield (%) 3.9 3.9 4.1 4.3 ROAE Pre Ex. (%) 12.2 10.4 10.7 10.5 ROAE (%) 12.2 10.4 10.7 10.5 ROA (%) 1.0 1.0 1.0 1.0 BV Per Share (S cts) 830 842 897 955 P/Book Value (x) 1.1 1.1 1.0 1.0 Earnings Rev (%): 0 5 8 Consensus EPS (S cts): 84.3 85.5 90.9

Other Broker Recs: B: 8 S: 5 H: 10


Riding high on rising rates

Positive on rising rates for both banking and insurance business;

upgrade to BUY. Expectations on rising interest rates from

December 2016 should start to spell a new phase for higher

NIM. Our FY17-18F earnings are raised by 5-8% on higher NIM

expectation, bearing in mind loan growth will likely stay

sluggish and funding costs stay stable. We expect credit costs to

decline in FY17F as the bulk of NPL issues have been addressed.

OCBC’s key differentiating factor lies in its insurance business

which gives it a more holistic wealth management platform,

which we believe the market may be under-appreciating.

Top-line driven; insurance business could surprise. We expect

NIM to rise by 8bps in FY17F and stabilise going into FY18F.

This will be the key driver to top line amid another expected

sluggish year for loan growth. Our sensitivity analysis indicates

that for every additional 25bps increase in SIBOR, OCBC’s NIM

will rise by 7bps, holding other variables constant, and this

would lead to a further 4% uplift to earnings. Positively, life

insurance businesses correlate positively to rising interest rates

but this may be balanced off by volatile unrealised mark-to-

market gains/losses along the way.

Asset quality to stabilise in 2017. New NPL formation has

reduced in 3Q16 but more negotiations are expected to emerge

from the oil & gas sector, hence new NPL formation would still

be prevalent for another 1-2 quarters. Management hinted that

NPL ratio would unlikely hit the high of 2.1% that it recorded at

the peak of the Global Financial Crisis (GFC). The SME portfolio

will be closely monitored as this segment tends to be vulnerable

in a prolonged soft economic environment.

Valuation:

Our TP is raised to S$10.30 after our earnings upgrade by 5-8%

over FY17-18F on higher NIM assumptions. This implies 1.1x

FY17F BV and is derived from the Gordon Growth Model (10.5%

ROE, 3% growth, 9.6% cost of equity). A new catalyst has

emerged – rising rates bode well for NIM and insurance business.


Further upset in asset quality. We have assumed that the peak of

NPLs would be seen in 2Q16. Overall credit costs should decline

from here but NPL ratio may stay at similar levels. A prolonged

deterioration in the oil & gas sector, coupled with additional

stress from SME, could pose downside risk to earnings. At A Glance Issued Capital (m shrs) 4,183

Mkt. Cap (S$m/US$m) 38,479 / 27,112

Major Shareholders (%)

Selat Pte Ltd 10.8

Free Float (%) 79.9

3m Avg. Daily Val (US$m) 33.7

ICB Industry : Financials / Banks


7 Dec 2016


OCBC Version 7 | Bloomberg: OCBC SP | Reuters: OCBC.SI Refer to important disclosures at the end of this report

83

103

123

143

163

183

203

6.7

7.7

8.7

9.7

10.7

11.7

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Relative IndexS$

OCBC (LHS) Relative STI (RHS)


Page 2

Company Guide

OCBC

WHAT’S NEW

Rising high on rising rates

Highlights:

Riding high on rising rates. We believe OCBC will benefit

from both a NIM uplift and an improved insurance business

revenues from a rising interest rate environment. We expect

OCBC’s NIM to rise by 8bps in FY17F and stabilise going into

FY18F. Our sensitivity analysis indicates that for every

additional 25bps increase in SIBOR, OCBC’s NIM will rise by

7bps, holding other variables constant, and this would lead to

a further 4% uplift to earnings. However, loan growth is

expected to stay muted at low single digits and this may be

the new normal given the state of its macro environment.

OCBC’s insurance business, a beneficiary in a rising interest

rate environment. OCBC’s insurance business could surprise

on the upside in a rising interest rate environment. Life

insurance businesses tend to be able to price new products

more attractively as interest rates rise. Investment income

tends to also increase from investing/reinvesting premiums

with higher yields. Such attractive returns would tend to see

net business embedded value (NBEV) and total weighted new

sales (TWNS) increase, positively benefitting GEH in the longer

term. From an accounting perspective, there could be some

risks when it comes to discounting the insurer’s liabilities at

higher rates vs assets, which may result in unrealised mark-to-

market losses or gains. We believe OCBC will keep its

majority stake in GEH. Management believes that it remains

logical and beneficial to keep the insurance product

manufacturing in-house. OCBC has increased its stake in

Great Eastern Holdings (GEH) over the years, from 48.9% in

2004 to 87.75% in 2016 (additional 0.02% stake acquired in

July 2016), reflecting the importance of an insurance

subsidiary to the group’s wealth management business.

Credit cost pressure to ease over time. We believe the

announcement by the Ministry of Trade and Industry on

enhanced support measures for the oil & gas sector has

brought some relief to companies which are experiencing

tight cash flows, and hence extend some respite to banks in

terms of NPL incidences. We believe the bulk of NPL issues

have been addressed, but there could be smaller accounts

which have yet to surface. We should have seen the peak of

credit cost in FY16. But as NPL formation has yet to peak, we

remain cautious on asset quality at least till 1H17, but this

should ease off by end-2017, in our view. A quicker-than-

expected recovery in NPL issues would pose upside risk to our

earnings forecasts. Every 1-ppt improvement in credit cost will

lift earnings by 0.5%.

Reiterating its aggressive provisioning practice. Note that

OCBC classifies loans that have been restructured, although

still performing, as NPL. Despite having a practice of

reclassifying NPLs into performing loans after six months,

management needs to be comfortable of the company’s cash

flow visibility over the subsequent 12 months before it

finalises the reclassification. Restructured loans declined q-o-q

as some of the non-oil & gas-related loans were upgraded.

Additional specific provisions are made after identifying the

company’s cash flow and the collateral value (current/latest

value).

Loan growth could pick up in 4Q16 and 2017, but

marginally. Loan growth YTD was virtually flat. The fallout

came mainly from the significant decline in trade-related

loans. Loan growth is expected to pick up marginally in the

coming months, largely from cross-border investment

activities.

Expenses well controlled. Discretionary expenses are carefully

monitored. YTD expense growth stood at 4%. The bank is

managing its recruitment tightly and hinted that there would

unlikely be job cuts. Headcount growth was at 1% y-o-y.

Voluntary attrition is generally not replaced. Business

segments with headcount growth are its revenue-driven

operations such as Bank of Singapore, OCBC NISP in

Indonesia and Great Eastern.

Valuation

Upgrade to BUY, TP raised to S$10.30. Our TP is raised to

S$10.30 after our earnings upgrade of 5-8% over FY17-18F

on higher NIM assumptions. This implies 1.1x FY17F BV and is

derived from the Gordon Growth Model (10.5% ROE, 3%

growth, 9.6% cost of equity). A new catalyst has emerged –

rising rates bode well for NIM and insurance business


Page 3

Company Guide

OCBC


Earnings Drivers:

NIM uplift from here. OCBC should stand out better than UOB

by virtue of its higher CASA and lower S$ loan-to-deposit ratio.

We expect OCBC’s NIM to rise by 8bps in FY17F and stabilise

going into FY18F. Our sensitivity analysis indicates that for every

additional 25-bp increase in SIBOR, OCBC’s NIM will rise by

7bps, holding other variables constant, and this would lead to a

further 4% uplift to earnings.

Muted loan growth expected. Loan demand remains weak and

2017 loan growth could stay at low single digits. OCBC believes

that in an uncertain market environment, new originations

should be carefully watched to contain the quality of its overall

portfolio. A pick-up in loan growth in 4Q16 going into 2017 is

expected but the quantum will be marginal.

Non-interest income drivers remain its key differentiator. OCBC

differentiates itself from peers when looking at its non-interest

income composition. Its focus on growing its non-interest

income franchise, especially its wealth management business, is

aimed at buffering potential moderation in net interest income

due to sluggish loan growth. Its insurance business, 87.75%-

owned subsidiary, Great Eastern Holdings, remains a dominant

part of its non-interest income. OCBC has no plans to sell its

stake in Great Eastern as it remains complementary to its non-

interest income franchise. Management believes it is still logical

and beneficial to keep the insurance product manufacturing in-

house. Since the acquisition of Bank of Singapore in 2010, we

have seen its wealth management income growing steadily; this

trend is expected to be sustainable. The acquisition of the

wealth and investment business of Barclays Bank in Singapore

and Hong Kong, completed in December 2016, adds US$13bn

to OCBC'S current AUM.

Minimal cost pressures. Expenses should remain stable with the

bulk of integration issues set aside. Ongoing initiatives for

digital banking could be a cost factor. We note that OCBC has

several key product differentiators vs peers, and its regional

digitisation plans are picking up speed.

Regionalisation is a key item on its agenda. Malaysia remains

OCBC’s second largest contributor. Despite a challenging year,

OCBC Malaysia posted decent earnings traction. Its business

proposition in Malaysia has a track record of over 80 years and

its added advantage lies in its Islamic banking franchise.

Management feels bullish about its operations in Indonesia.

While still a small contributor, opportunities are aplenty for

further growth. We see the wealth management line as the key

initial indicator to watch for synergies in the coming quarters for

OCBC-Wing Hang. Integration of its China business has been

finalised.

Margin Trends

Gross Loan& Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure


1.6%

1.6%

1.7%

1.7%

1.8%

1.8%

1.9%

0

1,000

2,000

3,000

4,000

5,000

6,000

2014A 2015A 2016F 2017F 2018F

S$ m

Net Interest Income Net Interest Income Margin

0%

5%

10%

15%

20%

25%

30%

0

50,000

100,000

150,000

200,000

2014A 2015A 2016F 2017F 2018F

S$ m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

5%

10%

15%

20%

25%

30%

0

50,000

100,000

150,000

200,000

250,000

2014A 2015A 2016F 2017F 2018F

S$ m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

69%

74%

79%

84%

89%

94%

186,782

206,782

226,782

246,782

266,782

286,782

306,782

2014A 2015A 2016F 2017F 2018F

S$ bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

0

0.1

0.2

0.3

0.4

0.5

0.6

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2014A 2015A 2016F 2017F 2018F

S$ m

Net Interest Income Non-interest Income Cost-to-income Ratio


Page 4

Company Guide

OCBC

Balance Sheet:

Asset quality on watch; concerns should ease. OCBC’s NPL ratio

rose to 1.2% as new NPL formation was higher up to 9M16

largely from the oil & gas segment (6% of total loans). Its credit

cost has stayed lower compared to peers. Despite concerns of

an unsustainably low credit cost level, OCBC has successfully

weathered through the storm as seen during several crises over

the past 10 years. OCBC started recognising troubled accounts

as early as 3Q15 and classified them as NPLs. OCBC practises a

reclassification of such restructured accounts as performing

after monitoring them over a period of 6-12 months. Once

management is convinced of a sustainable payment record over

that period, the account will be reclassified.

Capital ratios to remain stable. OCBC halted its scrip dividend in

2Q16. It had previously used the scrip dividend to help shore up

capital. Separately, while there are still some non-core assets the

bank can divest, these are not large and not an immediate

priority. There has been a continuous debate on whether OCBC

should divest its insurance business, Great Eastern Holdings, as

it is perceived to be capital punitive once Basel III is fully

enforced. But we think that without majority control of the

business, integrating it as part and parcel of its wealth

management offerings would be challenging.

Share Price Drivers:

Riding interest rates lift NIM and possibly better insurance

business revenues. Rising NIM and hence earnings will be key

drivers to share price. Barring volatility in its insurance

contribution due to accounting reasons, higher interest rates

bode well for life insurance business to build longer-term

revenues. Successful credit costs and NPL containment could

provide an added catalyst.

Key Risks:

Slower traction in wealth management business. As a growing

income contributor, stricter regulatory requirements for private

banking clients could slow growth. Additionally, weak and

volatile markets could cause risk-averse customers to reduce

investment activities.

Significant asset quality upset. While we have assumed higher

credit cost and NPL ratio in FY16F, a significant deterioration in

asset quality, especially those related to the oil & gas and

commodity segments, could pose downside risk to earnings.

Company Background

The OCBC Bank group of businesses comprises a family of

companies owned by Singapore's longest-established local

bank. Its banking business franchise includes OCBC Bank, Bank

OCBC NISP and Bank of Singapore, with branches in over 15

countries. OCBC has strategic stakes in other financial service

businesses operating under independent brands such as Great

Eastern, Bank of Singapore and Lion Global Investors.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2014A 2015A 2016F 2017F 2018F

NPL Ratio Provision Charge-Off Rate

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

2014A 2015A 2016F 2017F 2018F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2014A 2015A 2016F 2017F 2018F

Avg: 10.7x

+1sd: 11.8x

+2sd: 12.8x

-1sd: 9.6x

-2sd: 8.6x

7.6

8.6

9.6

10.6

11.6

12.6

13.6

14.6


(x)

Avg: 1.28x

+1sd: 1.46x

+2sd: 1.64x

-1sd: 1.1x

-2sd: 0.92x

0.8

1.0

1.2

1.4

1.6

1.8


(x)


Page 5

Company Guide

OCBC

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Gross Loans Growth 23.7 0.4 0.6 2.3 2.6

Customer Deposits Growth 25.3 0.3 5.0 5.0 5.0

Yld. On Earnings Assets 2.7 2.7 2.7 2.8 2.8

Avg Cost Of Funds 1.1 1.1 1.1 1.2 1.2

Income Statement (S$ m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Interest Income 4,736 5,189 5,235 5,689 5,966

Non-Interest Income 3,604 3,533 3,580 3,793 4,027

Operating Income 8,340 8,722 8,815 9,482 9,993

Operating Expenses (3,332) (3,762) (4,100) (4,467) (4,817)

Pre-provision Profit 5,008 4,960 4,715 5,014 5,176

Provisions (357) (488) (519) (458) (418)

Associates 112 353 331 360 376

Exceptionals 0 0 0 0 0

Pre-tax Profit 4,763 4,825 4,527 4,916 5,133

Taxation (687) (717) (694) (731) (771)

Minority Interests (234) (205) (192) (209) (218)

Preference Dividend (82) (82) (82) (82) (82)

Net Profit 3,760 3,821 3,558 3,894 4,062

Net Profit before Except. 3,369 3,821 3,558 3,894 4,062

Growth (%)

Net Interest Income Gth 22.0 9.6 0.9 8.7 4.9

Net Profit Gth bef Except 25.4 13.4 (6.9) 9.4 4.3

Margins, Costs & Efficiency (%)

Spread 1.6 1.6 1.6 1.6 1.7

Net Interest Margin 1.7 1.7 1.7 1.7 1.8

Cost-to-Income Ratio 40.0 43.1 46.5 47.1 48.2

Business Mix (%)

Net Int. Inc / Opg Inc. 56.8 59.5 59.4 60.0 59.7

Non-Int. Inc / Opg inc. 43.2 40.5 40.6 40.0 40.3

Fee Inc / Opg Income 17.9 18.8 20.0 20.0 20.5

Oth Non-Int Inc/Opg Inc 25.3 21.7 20.6 20.0 19.8

Profitability (%)

ROAE Pre Ex. 12.6 12.2 10.4 10.7 10.5

ROAE 14.1 12.2 10.4 10.7 10.5

ROA Pre Ex. 1.1 1.0 1.0 1.0 1.0

ROA 1.1 1.0 1.0 1.0 1.0


High credit costs in FY16; should moderate going into FY17

Improving NIM from rising interest rates


Page 6

Company Guide

OCBC

Quarterly / Interim Income Statement (S$ m)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Net Interest Income 1,317 1,341 1,307 1,260 1,234

Non-Interest Income 775 960 753 788 970

Operating Income 2,092 2,301 2,060 2,048 2,204

Operating Expenses (925) (999) (947) (956) (976)

Pre-Provision Profit 1,167 1,302 1,113 1,092 1,228

Provisions (150) (193) (167) (88) (166)

Associates 99 63 106 103 105

Exceptionals 0 0 0 0 0

Pretax Profit 1,116 1,172 1,052 1,107 1,167

Taxation (181) (160) (159) (181) (175)

Minority Interests (33) (52) (37) (41) (49)

Net Profit 902 960 856 885 943

Growth (%)

Net Interest Income Gth 2.7 1.8 (2.5) (3.6) (2.1)

Net Profit Gth (13.9) 6.4 (10.8) 3.4 6.6

Balance Sheet (S$ m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Cash/Bank Balance 25,314 21,180 25,859 27,152 28,510

Government Securities 22,249 21,001 22,051 23,154 24,311

Inter Bank Assets 41,220 35,791 35,936 42,716 48,175

Total Net Loans & Advs. 207,535 208,218 209,063 213,582 218,979

Investment 23,466 22,786 25,088 25,630 26,277

Associates 2,096 2,248 2,579 2,939 3,314

Fixed Assets 4,556 4,605 4,736 4,870 5,009

Goodwill 5,157 5,195 5,195 5,195 5,195

Other Assets 12,347 12,183 12,544 12,815 13,139

Life Ass Fund Inv Assets 57,286 56,983 56,983 56,983 56,983

Total Assets 401,226 390,190 400,033 415,036 429,892

Customer Deposits 245,519 246,277 258,591 271,520 285,096

Inter Bank Deposits 20,503 12,047 7,231 6,459 4,723

Debts/Borrowings 28,859 23,479 23,479 23,479 23,479

Others 14,936 14,282 14,370 14,702 15,095

Minorities 3,088 2,558 2,750 2,959 3,177

Shareholders' Funds 31,097 34,553 36,619 38,922 41,327

Life Ass Fund Liabs 57,224 56,994 56,994 56,994 56,994

Total Liab& S/H’s Funds 401,226 390,190 400,033 415,036 429,892


Higher provisions to address NPL issues

Better earnings traction from non-interest income trends

Loan growth to stay muted at low single digits


Page 7

Company Guide

OCBC

Financial Stability Measures (%)

FY Dec 2014A 2015A 2016F 2017F 2018F

Balance Sheet Structure

Loan-to-Deposit Ratio 84.5 84.5 80.8 78.7 76.8

Net Loans / Total Assets 51.7 53.4 52.3 51.5 50.9

Investment / Total Assets 5.8 5.8 6.3 6.2 6.1

Cust . Dep./Int. Bear. Liab. 83.3 87.4 89.4 90.1 91.0

Interbank Dep / Int. Bear. 7.0 4.3 2.5 2.1 1.5

Asset Quality

NPL / Total Gross Loans 0.6 0.9 1.4 1.2 1.0

NPL / Total Assets 0.3 0.5 0.7 0.6 0.5

Loan Loss Reserve Coverage 174.3 122.9 94.0 119.1 151.3

Provision Charge-Off Rate 0.2 0.2 0.2 0.2 0.2

Capital Strength

Total CAR 15.9 16.8 17.3 17.8 18.3

Tier-1 CAR 13.8 14.8 15.4 15.9 16.5

Source: Company, DBS Bank Target Price & Ratings History

Source: DBS Bank

Analyst: Sue Lin LIM

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 10 Dec 15 8.64 10.00 BUY

2: 17 Feb 16 7.78 9.40 BUY

3: 07 Apr 16 8.81 9.40 BUY

4: 03 May 16 8.60 9.40 HOLD

5: 04 Jul 16 8.77 9.40 HOLD

6: 29 Jul 16 8.60 8.40 HOLD

7: 17 Oct 16 8.40 8.40 HOLD

8: 27 Oct 16 8.58 8.60 HOLD


1

2

3

4

5

6

7

8

7.07

7.57

8.07

8.57

9.07

9.57

Dec-15 Apr-16 Aug-16 Dec-16

S$

Strong capital levels

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:JC, PY

BUY Last Traded Price ( 13 Dec 2016): S$3.41 (STI : 2,955.23) Price Target 12-mth: S$3.68 (8% upside) (Prev S$3.50) Potential Catalyst: Smart city-related contract wins, M&A Where we differ: Slightly more conservative on earnings than consensus Analyst Suvro SARKAR +65 6682 3720 [email protected] Singapore Research Team

What’s New FY16 final dividends should be unaffected by one-off

write-downs recorded during the year

Expect earnings recovery in FY17

STE is a beneficiary of the stronger US$

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 6,335 6,492 6,543 6,676 EBITDA 834 837 883 904 Pre-tax Profit 630 552 654 673 Net Profit 529 426 519 534 Net Pft (Pre Ex.) 529 487 519 534 Net Pft Gth (Pre-ex) (%) (0.5) (7.9) 6.6 2.8 EPS (S cts) 17.1 13.7 16.7 17.2 EPS Pre Ex. (S cts) 17.1 15.7 16.7 17.2 EPS Gth Pre Ex (%) 0 (8) 7 3 Diluted EPS (S cts) 17.1 13.7 16.7 17.2 Net DPS (S cts) 15.0 15.0 15.0 15.0 BV Per Share (S cts) 68.7 67.3 69.0 71.2 PE (X) 19.9 24.8 20.4 19.8 PE Pre Ex. (X) 19.9 21.7 20.4 19.8 P/Cash Flow (X) 22.7 19.7 16.1 16.0 EV/EBITDA (X) 12.9 13.0 12.3 12.0 Net Div Yield (%) 4.4 4.4 4.4 4.4 P/Book Value (X) 4.9 5.1 4.9 4.8 Net Debt/Equity (X) 0.0 0.1 0.1 0.1 ROAE (%) 24.8 20.2 24.5 24.5 Earnings Rev (%): 0 0 0 Consensus EPS (S cts): 15.3 17.2 18.3 Other Broker Recs: B: 6 S: 0 H: 6


Earnings should rebound in FY17 Maintain BUY; fundamentals remain strong. ST Engineering (STE) remains a relatively defensive stock with a healthy balance sheet and secure dividend payouts, and also looks set to resume its earnings recovery trajectory in FY17. Its Aerospace segment has positioned itself well by investing in growth markets such as narrow-body aircraft Passenger-to-Freighter (PTF) conversions, the Chinese MRO market, and cabin interior solutions, to name a few. The Electronics segment should also benefit from the ‘Smart City’ trend, not only in Singapore but various overseas markets as well. Expect earnings recovery in 2017. In 3Q16, STE reported S$61.1m in one-off write-downs and closure costs related to its Chinese specialty vehicles subsidiary that has ceased operations. But our core estimates remained largely unchanged for FY16/17. We expect a reasonable earnings rebound in FY17, following a kitchen-sinking year in FY16 associated with a management transition. Cessation of losses at the Chinese specialty vehicle subsidiaries, coupled with continued growth at Electronics division, should help offset weakness at the Marine division in FY17.Orderbook remained flattish at S$11.4bn as of end-3Q16, and the YTD announced order win trend is encouraging. Beneficiary of strong US$, no impact to dividends from one-off items. We believe dividends in FY16/17 should be maintained at 15 Scts, notwithstanding the one-off earnings impact in FY16. STE should also stand to benefit from the stronger US$ expectations as around 25% of sales are derived from the US. Valuation: Our TP is adjusted to S$3.68 as we roll over to FY17 numbers. Our TP is based on a blended valuation framework to factor in both earnings growth and long-term cash-generative nature of the business. Key Risks to Our View: A protracted slowdown in the shipbuilding and commercial vehicle businesses could hurt prospects, unless STE can offer niche products or streamline operations quickly. Also, the continued lack of action on the M&A front could lead to inefficient use of balance sheet and lower ROEs in the future. At A Glance Issued Capital (m shrs) 3,109 Mkt. Cap (S$m/US$m) 10,569 / 7,425 Major Shareholders (%) Temasek Holdings Pte Ltd (%) 51.2 Aberdeen Asset Management (%) 5.0 Capital Group (%) 4.2

Free Float (%) 39.6 3m Avg. Daily Val (US$m) 7.5 ICB Industry : Industrials / Aerospace & Defense

DBS Group Research . Equity 13 Dec 2016


ST Engineering Version 6 | Bloomberg: STE SP | Reuters: STEG.SI Refer to important disclosures at the end of this report


Company Guide

ST Engineering

CRITICAL DATA POINTS TO WATCH Earnings Drivers: Conglomerate with diverse interests in defense and commercial spheres. STE started out life as a defense contractor but has leveraged its technical knowhow over the years to penetrate the commercial market. It boasts multinational operations with a global presence in 23 countries and 41 cities, and hires more than 22,000 employees. The group has reduced its reliance on the defense sector over time from 57% of revenues in 2002 to the current 36%, with another 33% from government agencies and the balance from commercial businesses. STE's four key business divisions bring diversification benefits. Its Aerospace, Electronics, Land Systems and Marine businesses contributed 33%, 27%, 22% and 15% respectively to FY15 revenues, allowing the company to avoid reliance on any particular sector. This has engendered relatively stable revenues and earnings, weathering even crisis periods. Acquisitions have been a key driver, accounting for around 40% of revenue growth over the last decade. However, the dampening effect of a weakening US dollar and addition of lower-margin businesses meant earnings growth has not kept up with top-line growth. Utilisation of its strong balance sheet and steady cash flows to undertake acquisitions of high-ROE assets could boost future earnings. Healthy orderbook drives visibility. As of end-3Q16, STE's orderbook stood at S$11.4bn, down slightly from S$11.6bn at end-2Q16 but still provides healthy visibility on revenues over FY16/17 at a roughly 1.8x book-to-bill ratio. Aerospace MRO primed for steady growth. Continued initiatives by ST Aerospace to broaden its capabilities should propel its growth in the longer term. These include a partnership with Airbus for passenger-to-freighter conversion of its A320/A321 and A330 jets, marking a diversification of its conversion portfolio; a continued expansion of its cabin interior service solutions business, particularly for VIP aircraft completions; and expansion of its mid-life aircraft leasing business. Electronics division’s initiatives should be a key long-term growth driver. Within the Smart Nation framework, we estimate projects worth more than S$1bn in the near future, as the Singaporean government pushes for smart technology usage across the utilities, healthcare, housing and transport spaces. The recently launched TeLEOS-1 satellite is now ready to provide commercial imagery services and should herald a new space-centred growth channel for the division. We are also seeing increased importance being placed on robotics, which could be another future key growth driver.

Aerospace sales growth (%)

Electronics sales growth (%)

Land Systems sales growth (%)

Marine sales growth (%)



Company Guide

ST Engineering

Balance Sheet: Healthy balance sheet can drive M&A ambitions. STE has traditionally been in net cash position but ended FY15 in a minor gearing position due to channelling of cash into bonds and share buybacks to improve returns on capital. Nevertheless, its balance sheet remains very strong and STE has ample ammunition to pursue attractive acquisitions in growth areas. Dividend payout should remain steady. Strong operating cash flows provide support to healthy dividend yield levels of around 4.8% currently. Despite the fall in headline net profit expected in FY16, we believe the non-cash writedown recorded in 3Q16 should not have an effect on dividends, and total payout for FY16 should be similar to the FY15 level of 15 Scts. Share Price Drivers: Strong order wins. Total announced order wins in FY15 of S$4bn were slightly lower than previous years, as a result of the Land Systems and Marine divisions seeing some weak industry trends, while the Aerospace and Electronics divisions have announced steady order wins. YTD order wins in 2016 are trending slightly higher than 2015 order wins, and any further improvement in order win momentum would be beneficial to its stock price. Recovery in the Marine sector. The Marine sector is arguably facing the strongest industry headwinds on the commercial front, with low offshore oil & gas spending and broad overcapacity in shipping. Cost overruns in the US exacerbate the situation. An industry recovery, as well as better productivity in the US, would provide more confidence in the medium-term earnings of the business. Key Risks: Aerospace margins could come under pressure during transition period. As STE has consolidated the European EfW Airbus P2F operations, revenue will increase but margins will be low owing to the learning cost involved in new P2F programmes for the A330-300. STE also faces slowdown in its CFM-56B engine MRO operations owing to increased engine reliability and intense competition. Protracted slowdown in shipbuilding. The traditional shipping sector has been plagued by overcapacity for some time now, while the slide in oil prices also affects demand for offshore vessels. Visibility on demand recovery is low at this point. Company Background ST Engineering (STE) is an integrated engineering group in the aerospace, electronics, land systems and marine sectors. The company has over the years diversified its businesses and geographies.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

ST Engineering

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Aerospace sales growth (0.9) 1.41 14.1 4.64 3.92 Electronics sales growth (4.1) 7.96 8.79 6.75 6.78 Land Systems sales (5.3) (0.1) (14.3) (3.1) 0.0 Marine sales growth (%) 8.32 (28.6) (7.3) (16.6) (13.4)

Segmental Breakdown FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (S$m) Aerospace 2,061 2,090 2,384 2,494 2,592 Electronics 1,583 1,709 1,859 1,985 2,119 Land Systems 1,397 1,396 1,197 1,159 1,159 Marine 1,341 958 888 740 641 Others 157 182 164 164 164 Total 6,539 6,335 6,492 6,543 6,676 PBT (S$m) Aerospace 283 291 296 309 320 Electronics 184 191 188 205 220 Land Systems 56.2 65.0 10.1 89.9 81.2 Marine 123 88.3 68.7 53.2 50.1 Others 4.70 (4.6) (11.0) (3.3) 1.64 Total 651 630 552 654 673 PBT Margins (%) Aerospace 13.7 13.9 12.4 12.4 12.3 Electronics 11.6 11.2 10.1 10.3 10.4 Land Systems 4.0 4.7 0.8 7.8 7.0 Marine 9.2 9.2 7.7 7.2 7.8 Others 3.0 (2.5) (6.7) (2.0) 1.0 Total 10.0 9.9 8.5 10.0 10.1


FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 6,539 6,335 6,492 6,543 6,676 Cost of Goods Sold (5,221) (5,053) (5,193) (5,182) (5,274) Gross Profit 1,319 1,282 1,298 1,361 1,402 Other Opng (Exp)/Inc (711) (694) (712) (726) (750) Operating Profit 608 588 586 635 652 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 57.2 58.3 59.5 53.6 54.6 Net Interest (Exp)/Inc (14.3) (16.3) (32.9) (34.3) (34.0) Exceptional Gain/(Loss) 0.0 0.0 (61.1) 0.0 0.0 Pre-tax Profit 651 630 552 654 673 Tax (114) (98.7) (121) (131) (135) Minority Interest (5.0) (2.6) (4.3) (4.2) (4.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 532 529 426 519 534 Net Profit before Except. 532 529 487 519 534 EBITDA 835 834 837 883 904 Growth Revenue Gth (%) (1.4) (3.1) 2.5 0.8 2.0 EBITDA Gth (%) (6.4) (0.2) 0.3 5.5 2.4 Opg Profit Gth (%) (15.5) (3.2) (0.3) 8.3 2.7 Net Profit Gth (Pre-ex) (%) (8.4) (0.5) (7.9) 6.6 2.8 Margins & Ratio Gross Margins (%) 20.2 20.2 20.0 20.8 21.0 Opg Profit Margin (%) 9.3 9.3 9.0 9.7 9.8 Net Profit Margin (%) 8.1 8.4 6.6 7.9 8.0 ROAE (%) 25.0 24.8 20.2 24.5 24.5 ROA (%) 6.2 6.4 5.2 6.4 6.5 ROCE (%) 10.3 10.6 9.9 11.0 11.1 Div Payout Ratio (%) 87.9 87.9 109.5 89.8 87.4 Net Interest Cover (x) 42.7 36.2 17.8 18.5 19.2


Boost from Efw acquisition

Marine revenues likely to remain under pressure

Learning curve in Efw P2F programmes

One-off items related to closure of Chinese specialty vehicle subsidiary JHK


Company Guide

ST Engineering


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 1,500 1,779 1,627 1,623 1,613 Cost of Goods Sold (1,181) (1,441) (1,335) (1,294) (1,279) Gross Profit 319 338 292 330 334 Other Oper. (Exp)/Inc (175) (185) (180) (167) (177) Operating Profit 144 153 112 162 157 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 15.4 17.6 22.6 12.4 13.3 Net Interest (Exp)/Inc (4.6) (3.9) (4.2) (4.6) (3.1) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 (61.1) Pre-tax Profit 155 167 130 170 107 Tax (22.3) (23.4) (19.6) (37.3) (34.2) Minority Interest 0.81 (2.3) (0.6) (5.8) 4.21 Net Profit 133 141 110 127 76.7 Net profit bef Except. 133 141 110 127 138 EBITDA 207 221 190 231 236 Growth Revenue Gth (%) (2.9) 18.6 (8.5) (0.2) (0.6) EBITDA Gth (%) (0.6) 6.7 (13.7) 21.4 2.0 Opg Profit Gth (%) (2.8) 6.2 (26.7) 45.0 (3.1) Net Profit Gth (Pre-ex) (%) 6.6 5.7 (21.7) 15.5 8.2 Margins Gross Margins (%) 21.3 19.0 18.0 20.3 20.7 Opg Profit Margins (%) 9.6 8.6 6.9 10.0 9.8 Net Profit Margins (%) 8.9 7.9 6.8 7.8 4.8

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 1,578 1,709 1,718 1,724 1,726 Invts in Associates & JVs 478 462 491 515 539 Other LT Assets 937 1,208 1,208 1,208 1,208 Cash & ST Invts 1,590 1,134 1,035 1,055 1,079 Inventory 1,802 1,943 1,991 2,007 2,047 Debtors 1,319 1,320 1,298 1,309 1,335 Other Current Assets 615 394 394 394 394 Total Assets 8,319 8,169 8,135 8,210 8,328 ST Debt 74.7 195 195 195 195 Creditor 1,667 1,703 1,623 1,636 1,669 Other Current Liab 1,974 1,822 1,903 1,908 1,921 LT Debt 944 1,019 1,019 1,019 1,019 Other LT Liabilities 1,395 1,170 1,170 1,170 1,170 Shareholder’s Equity 2,132 2,132 2,093 2,146 2,213 Minority Interests 132 129 133 137 142 Total Cap. & Liab. 8,319 8,169 8,135 8,210 8,328 Non-Cash Wkg. Capital 94.8 132 158 166 187 Net Cash/(Debt) 571 (79.3) (179) (159) (135) Debtors Turn (avg days) 70.9 76.0 73.6 72.7 72.3 Creditors Turn (avg days) 118.2 126.4 121.3 119.2 118.8 Inventory Turn (avg days) 130.4 140.5 143.5 146.3 145.8 Asset Turnover (x) 0.8 0.8 0.8 0.8 0.8 Current Ratio (x) 1.4 1.3 1.3 1.3 1.3 Quick Ratio (x) 0.8 0.7 0.6 0.6 0.6 Net Debt/Equity (X) CASH 0.0 0.1 0.1 0.1 Net Debt/Equity ex MI (X) CASH 0.0 0.1 0.1 0.1 Capex to Debt (%) 22.0 22.5 16.5 16.5 16.5 Z-Score (X) 2.5 2.4 2.5 2.5 2.5


One-off items related to closure of Chinese specialty vehicle subsidiary JHK


Company Guide

ST Engineering


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 651 630 552 654 673 Dep. & Amort. 171 187 191 194 198 Tax Paid (133) (111) (121) (131) (135) Assoc. & JV Inc/(loss) (57.2) (58.3) (59.5) (53.6) (54.6) Chg in Wkg.Cap. (72.2) (227) (25.8) (8.0) (20.8) Other Operating CF 65.3 44.6 0.0 0.0 0.0 Net Operating CF 624 465 536 656 660 Capital Exp.(net) (224) (273) (200) (200) (200) Other Invts.(net) 79.0 (264) 0.0 0.0 0.0 Invts in Assoc. & JV 5.67 0.27 (5.0) (5.0) (5.0) Div from Assoc & JV 35.0 51.4 35.0 35.0 35.0 Other Investing CF (53.4) 7.98 0.0 0.0 0.0 Net Investing CF (157) (477) (170) (170) (170) Div Paid (499) (498) (465) (467) (467) Chg in Gross Debt (394) 109 0.0 0.0 0.0 Capital Issues 10.7 (75.9) 0.0 0.0 0.0 Other Financing CF (43.8) (55.1) 0.0 0.0 0.0 Net Financing CF (926) (520) (465) (467) (467) Currency Adjustments (0.3) 12.6 0.0 0.0 0.0 Chg in Cash (459) (519) (99.4) 19.6 23.8 Opg CFPS (S cts) 22.3 22.3 18.1 21.4 21.9 Free CFPS (S cts) 12.8 6.20 10.8 14.7 14.8



Source: DBS Bank

Analyst: Suvro SARKAR

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: PY

BUY Last Traded Price ( 22 Nov 2016): S$0.87 (STI : 2,822.20) Price Target 12-mth: S$1.09 (26% upside) Potential Catalyst: Acquisitions, restructuring Where we differ: Below, probably due to adjustment of FYE to Sep Analyst Andy SIM CFA +65 6682 3718 [email protected]

What’s New • Reiterate positive view of transformation into a

regional beverage player

• Restructuring unlikely to take “asset swap” route

• Accretive acquisition a key catalyst, along with restructuring; group has ample firepower

• Mourning period impact likely to be limited

Price Relative

*Note: Financial year end changed to Sep, from FY16. FY16 period is based on 9 months, from 1 Jan 2016 to 30 Sep 2016.

Forecasts and Valuation FY Dec/ Sep (Bt m) 2015A *2016A *2017F *2018F Revenue 172,049 139,153 202,542 212,442 EBITDA 36,496 27,801 40,475 43,849 Pre-tax Profit 30,972 22,679 34,949 38,227 Net Profit 26,463 18,920 28,344 30,982 Net Pft (Pre Ex.) 26,463 18,920 28,344 30,982 Net Pft Gth (Pre-ex) (%) 22.0 (28.5) 49.8 9.3 EPS (S cts) 4.23 3.03 4.53 4.96 EPS Pre Ex. (S cts) 4.23 3.03 4.53 4.96 EPS Gth Pre Ex (%) 22 (29) 50 9 Diluted EPS (S cts) 4.23 3.03 4.53 4.96 Net DPS (S cts) 2.45 2.41 2.73 2.89 BV Per Share (S cts) 18.5 19.2 21.0 23.1 PE (X) 20.5 28.6 19.1 17.5 PE Pre Ex. (X) 20.5 28.6 19.1 17.5 P/Cash Flow (X) 24.1 29.3 18.6 17.5 EV/EBITDA (X) 16.0 21.0 14.2 12.9 Net Div Yield (%) 2.8 2.8 3.2 3.3 P/Book Value (X) 4.7 4.5 4.1 3.8 Net Debt/Equity (X) 0.3 0.3 0.2 0.1 ROAE (%) 24.4 16.0 22.5 22.5 Earnings Rev (%): 0 0 Consensus EPS (S cts): 4.36 4.73 Other Broker Recs: B: 8 S: 1 H: 1


Identifying scenarios to unlock value Long-term BUY, TP: S$1.09. We see ThaiBev being in a transformational mode to morph into a regional player. While investors may be deterred with uncertainty surrounding the extent and impact from mourning period in Thailand, we believe its resilience and its ongoing transformation into a regional beverage player will aid in further re-rating of the counter. We would advocate accumulating on pullbacks.

Acquisition, restructuring and earnings accretion to be a re-rating catalyst. We see FNN as the vehicle for ThaiBev’s regional acquisition strategy. We estimate that ThaiBev/ FNN collectively have sufficient firepower to undertake acquisitions to the value of around S$4bn. On the back of this, we expect FNN to undertake equity fund raising, thereby allowing ThaiBev to raise its stake in FNN. In a scenario (pg 4), assuming a S$3bn acquisition by FNN, we estimate an EPS accretion of 16-35% and 8-10% for FNN and ThaiBev respectively (through a mix of cash, debt and rights issue at a multiple of 20-25x). The increasing talks of potential stakes in Vinamilk and Saigon Beer Company in Vietnam sets the stage for this, and the group will be key contenders, in our view.

Spirits, Beer growth and NAB turnaround a key driver of stock price. In our deep dive analysis, we found that EPS growth is a key trait for stock price re-rating. Its current Spirits operations and dominant position in Thailand should provide a stable earnings base, while a further gain in market share for beer and turnaround in Non-Alcoholic Beverage will further boost growth. With the passing of Thailand’s beloved King Bhumibol and the mourning period, we believe the impact on ThaiBev could be temporary. Through the interactive Trefis model, we showcase our estimates allowing for variations to our assumptions (link: Trefis model). Valuation: Our TP of S$1.09 is based on sum-of-parts valuation, derived via discounted cashflows of its core operations, and imputing fair values for its stakes in F&N and FCL. Key Risks to Our View: Further excise tax hikes. Further increase in excise duties without a commensurate increase in ASP. At A Glance Issued Capital (m shrs) 25,110 Mkt. Cap (S$m/US$m) 21,720 / 15,267 Major Shareholders (%) Siriwana Company Limited 45.3 MM Group Limited 20.6 Capital Group Companies Inc 5.3

Free Float (%) 28.8 3m Avg. Daily Val (US$m) 12.9 ICB Industry : Consumer Goods / Beverages


23 Nov 2016


Thai Beverage Public Company Version 5 | Bloomberg: THBEV SP | Reuters: TBEV.SI Refer to important disclosures at the end of this report

http://www.trefis.com/modelversion/dbs/27714/hx74e/Thai%20Beverage%20PCL?easyAccessToken=PROVIDER_936a18843c8b2e841308510ec7e47348dbde2e11


Company Guide

Thai Beverage Public Company

WHAT’S NEW Identifying scenarios to unlock value

Reiterate BUY; seeking LT growth through regional transformation. We reiterate our long-term BUY on ThaiBev as we believe the group will be able to deliver growth through its vision to be a regional beverage player. In our in-depth analysis on the drivers of the share price, we noted that ThaiBev’s positive trait is the defensive and resilient operations, providing outperformance in a declining market. However, the key to share price re-rating is earnings per share (EPS)/net profit growth as evidenced by its performance in the past couple of years, since 2012. Stable, defensive growth, cash generative. We like ThaiBev for its resilient and dominant Spirits operations, providing majority cashflow for the group. In addition, the Beer operations should continue to retain its market share gains post the rebranding of Chang Beer. With the rebranding and increase in brand awareness, this puts management in a better position to manage its margins. A key catalyst for ThaiBev is its regional expansion vision and strategy, to which we believe the market is not providing sufficient credit. Since the dividend-in-specie of FCL by FNN, the market has been expecting the restructuring of ThaiBev’s shareholdings in these two entities by way of an “asset swap” with TCC Assets (controlled by ThaiBev’s Chairman). However, the purported “swap” exercise imagined by the market is likely to result in earnings dilution for ThaiBev. FNN to be the investment vehicle. We believe ThaiBev will be using FNN as the regional expansion vehicle (for businesses not relating to spirits). Through the undertaking of an acquisition by FNN, we expect to see ThaiBev/TCC Assets leverage on the opportunity to restructure its holdings, with the eventual outcome of ThaiBev emerging as the majority shareholder. Sufficient firepower for acquisitions. Between ThaiBev and FNN, we estimate it has sufficient firepower to undertake acquisitions of up to around S$4bn, and possibly higher, in value. Based on an assumed scenario of S$3bn, we estimate that the eventual EPS accretion would be 16-35%, and 8-10% respectively, for FNN and ThaiBev (assuming acquisition PE of 20-25x, with mix of cash, debt and equity). Our assumptions and scenario are shown in later sections.

Vinamilk and Sabeco acquisitions sought after. With the privatisation drive, the Vietnamese government is looking to sell stakes in several companies such as Vinamilk, Saigon Beer Company (Sabeco) and Hanoi Beer Company (Habeco). We believe this should provide opportunities for ThaiBev/FNN to act as a consortium to bid for these assets. If successful, we believe this should mark another milestone for ThaiBev to further diversify its revenue and earnings outside of Thailand, since its acquisition of FNN back in 2012 Reiterate BUY, TP: S$1.09. We reiterate our BUY on ThaiBev as we believe in its long-term potential. We expect its core operations to remain resilient, and the recent pullback on concerns of consumption being affected by the mourning period could be temporary, in our view. Based on our sensitivity analysis, we believe the impact is limited (Thai Beverage Public Company: Sensitivity analysis, dated 17 Oct 2016). One could vary the sales volume and margin assumptions to test the impact on EPS through the interactive Trefis model through this link. FY16 results review In the recently announced FY16 results, Thai Beverage Public Company (ThaiBev) reported a 29% y-o-y drop in headline net profit to THB18.9bn on revenue of THB139.2bn (-19%) compared to THB172bn (FY15). The decline was mainly due to the change in its financial year end to September from December and, hence FY16 figures are based on nine months instead of 12 months. Comparing results based on a like-for-like 9-month period, ThaiBev would have reported a 15% y-o-y revenue growth, and a 7% drop in net profit compared to 9M15. The drop was mainly due to an absence of one-off disposal gain recognised by its associate, F&N, arising from the disposal of Myanmar Brewery Limited (gain of THB3.8bn). Excluding the gain, we estimate net profit would have increased by 13.9% instead. Our recent results note dated 21 November 2016, can be accessed via the link Thai Beverage Public Company: Impacted by higher opex.

https://researchwise.dbsvresearch.com/ResearchManager/DownloadResearch.aspx?E=ccghfk-b

http://www.trefis.com/modelversion/dbs/27714/hx74e/Thai%20Beverage%20PCL?easyAccessToken=PROVIDER_936a18843c8b2e841308510ec7e47348dbde2e11

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https://www.trefis.com/modelversion/dbs/27714/hx74e/Thai%20Beverage%20PCL?easyAccessToken=PROVIDER_936a18843c8b2e841308510ec7e47348dbde2e11




Company Guide


Scenarios to unlock value: How we expect ThaiBev to grow regionally and restructure its holdings in FNN In the following section, we discuss the key catalyst for ThaiBev and how we expect its acquisition strategy will tie in with the restructuring of its shareholding in FNN, while at the same time be accretive to earnings. Restructuring play comes along with M&A. We expect to see ThaiBev leveraging on its Singapore-listed associate company, Fraser and Neave Ltd (FNN) to seek inorganic growth for the Group. Along with this, we believe ThaiBev will take the opportunity to restructure, increase and consolidate its holdings in FNN. This could surprise the market as the general market expectation was for divestment of its stake in FCL and increase in its stake in FNN, which is deemed to be earnings dilutive.

Key question: Question: The market expectations of an asset swap, would result in earnings dilutive impact, and thus, not beneficial for ThaiBev? Answer: We had originally thought that post the dividend-in-specie of Frasers Centrepoint Limited (FCL), an “asset swap” would be the next step. We think this is not the case now, and we explain our reasoning as follows: “Asset swap” theory explained. Post the FCL dividend-in-specie, ThaiBev and TCC Assets each holds approximately 28.5% and 59.5% stakes, separately in each of FNN and FCL. The general idea was that ThaiBev would “swap” its stake in FCL to TCC Assets, and in return, gain a higher stake in FNN. This would streamline operations and result in ThaiBev being the main and largest shareholder of FNN (an F&B company), while divesting its stake in FCL which is a property company, and deemed as non-core for ThaiBev.

Current shareholdings in FCL and FNN

Source: Company, DBS Bank Purported “asset swap” of shareholding in FCL and FNN


28.5%

~66%

Current Shareholding in FCL

59.5%

Property

Public

12% 28.5%

~66%

Current Shareholding in FNN

59.5%

F&B

Public

12%

Market Cap = S$3.06bn (@2.13/share)Total shares = c.1.44bn shares

Market Cap = S$4.28bn (@1.49/share)Total shares = c.2.88bn shares

28.5% 0%

59.5% + 28.5% 88%

Property

Public

12%

ThaiBev’s 28.5% in FCL worth ~S$1.23bn

28.5% + 40% = 68.5%

59.5% - 40% 19.5%

F&B

Public

12%

Based on S$1.23bn, equates to c.40% stake in FNN at current market price


Company Guide


FNN forecasts and valuation FCL forecasts and valuation

FNN Share price (S$) 2.13

Share outstanding (m shares) 1,446 Market cap (S$ m) 3,080

FY17 FY18

Net profit (S$m) 96 101 BV (S$/share) 1.62 1.65 P/B (x) 1.31 1.29 P/E (x) 32.0 30.5

FCL Share price (S$) 1.49

Share outstanding (m shares) 2,900 Market cap (S$ m) 4,321

FY17 FY18

Net profit (S$m) 392 434 BV (S$/share) 2.39 2.45 P/B (x) 0.62 0.61 P/E (x) 11.0 10.0

Source: Bloomberg Finance L.P. (as of 1 Nov 2016), DBS Bank estimates

Source: Bloomberg Finance L.P. (as of 1 Nov 2016), DBS Bank estimates

We do not think the “swap” will happen now. We believe the focus has been incorrect on thinking that a “swap” could happen. Our argument is as follows:

1. Earnings dilutive for ThaiBev. An outright “swap” of shareholdings in FNN and FCL (assuming at current market price) is likely to result in earnings dilution for ThaiBev, and thus may not make sense financially. Given current valuation, we estimate that ThaiBev could see about 6% dilution to its net profit. FNN is trading at 32x and 1.3x PE and P/BV (FY17F) while FCL’s valuation is at 11x and 0.6x PE and P/BV respectively.

2. An interested party transaction. Given that TCC Assets

still holds the majority of FNN’s shares, and to effect the “swap” this would be considered and interested party transaction (IPT). We believe this puts the vote onto minority shareholders of ThaiBev, which, in our view, has a certain risk level of not being able to obtain approval from shareholders.

3. Operationally, ThaiBev and FNN are already

collaborating. Since the acquisition of FNN, the two entities have collaborated on operational matters and streamlined its strategies. For instance, FNN has launched Oishi ready-to-drink (RTD) range of teas in Malaysia and Singapore, while ThaiBev launched 100Plus in Thailand. Furthermore, the alignment of ThaiBev’s products together with the secondment of senior management from both entities to head each unit is also a testament to the operational relationship.

Hence, we believe the market should not be worried arising from such an exercise that could potentially be dilutive for ThaiBev.

Question: Would a restructuring still take place, and why is it taking so long? We believe a restructuring of its shareholding is contingent on any potential acquisition. In our view, ThaiBev should be relying on FNN for its regional ambition to expand outside of Thailand. This would aid in delivering growth for the group, and at the same time, enable an option for increasing its stake in FNN.

Answer: Awaiting acquisition by FNN. We believe FNN is likely to be used as the investment vehicle for the group’s regional expansion plans. We expect to see FNN undertake significant earnings-accretive acquisitions to pursue growth, and to “claw” back earnings loss from the divestment of its stake in Myanmar Brewery Limited. Based on our estimates, we believe FNN has the capacity to deliver acquisitions of up to about S$4bn, via a mix of cash, debt and equity. Opportunity to restructure on back of acquisitions. Our view is that restructuring and the potential increase of ThaiBev’s shareholding in FNN will be done via equity fund raising on the back of any mega-acquisitions undertaken. Scenario assuming S$3bn acquisition at 20-25x PE. Assuming FNN undertakes an acquisition amounting to S$3bn, the acquisition will be funded via a mixture of debt, internal cash and equity raising given the transaction size relative to itself. FNN's current market capitalisation is only about S$3bn, with a total equity value of S$2.6bn. Based on our scenario assumptions, the profit accretion to ThaiBev could range from 8-10% on our FY17F estimates. We made the following assumptions in our scenario: a) Transaction value of S$3bn, assuming an acquisition

PE multiple of 20-25x b) Funding – mix of cash, debt and equity. The funding is

assumed to be via mix of FNN’s internal cash, debt and equity fund raising, as follows:


Company Guide


Assumed acquisition value and funding mix

Comments

Transaction value (S$m) 3,000

Assumed acquisition

via:

% of total Cash 600 20% Internal resources

Debt 1,100 37% Assume 3% interest

Equity 1,300 43% Rights issue

3,000 100%


c) Rights issue, with ThaiBev underwriting the offering.

Equity fund raising via rights issue, assuming 3-for-5 rights at c.30% discount to assumed S$2.10 price and c.20% discount to Theoretical Ex-Rights Price (TERP). We also assume that TCC Assets will waive its rights entitlement, while ThaiBev will underwrite the issue, up to 90% of total outstanding share post-rights issue. This is to maintain the minimum float requirements.

Scenario analysis on assumed rights issue by FNN

Share price (S$) 2.10 Assumed FNN share price

Est. TERP (S$) 1.88 Estimated if rights price at S$1.50

Discount to share price

Rights share price

(S$/share) # of rt shares

(m) New share base (m)

5% 2.00 650 2,097 10% 1.90 684 2,131 14% 1.80 722 2,169 19% 1.70 765 2,212 24% 1.60 813 2,260 29% 1.50 867 2,314 33% 1.40 929 2,376


d) ThaiBev to leverage on its balance sheet and undertake loans to fund FNN’s rights issue. Since its acquisition of its FNN stake in 2012 and bringing its gearing to 1.2x then, ThaiBev has successfully deleverage and its net gearing stands at 0.3x only.

Changes in TCC and ThaiBev shareholding post our scenario of rights issue by FNN

Note: Assuming TCC abstains from subscribing to its rights issue, while ThaiBev underwrites up to 51% shareholding of the enlarged shares

outstanding. Given that TCC and ThaiBev are related parties, a General Offer will not be triggered.

Source: DBS Bank

28.5%

28.5%

~66%

59.5%

59.5%

28.5%

51%

~66%

59.5%

37%

Increase stake through rights issue


Company Guide


DBS estimated FY17F net profit and proforma profits with assumed acquisition and related fund raising

Proforma Proforma

Current

estimates

Based on 20x

PE

Based on 25x

PE

FY17F FY17F FY17F Comments

FNN (S$m)

PAT 96 246 216 Post acquisition

Less: additional interest (38) (38) Assume 3% interest and lower interest income (factoring in tax)

208 178

Current shares (m) 1,447 1,447 1,447

Rights shares (m) - 867 867 Assume 5-for-3 rights, at 30% discount to S$2.10, equating to

TERP of S$1.88/share

New share base (m) - 2,314 2,314

EPS (Scts) 6.6 9.0 7.7 Proforma based on expanded share base

FNN EPS accretion (%) - 35% 16% Accretion to FNN's EPS of 16-35%

Profit accretion for

ThaiBev (S$m)

125 98 Assume incremental profit for ThaiBev with acquisition and stake

increase to 88% in FNN (from 28.5%) and additional interest

costs to fund rights issue of FNN

in THB (m) 3,115 2,455 THB (based on fx at THB25/SGD)

ThaiBev net profit

estimates (THB m)

30,830 30,830 DBS estimate of ThaiBev's FY17F profit

Accretion to ThaiBev 10% 8% Estimated accretion to ThaiBev

Source: DBS Bank’ estimates

Earnings uplift for ThaiBev. In our scenario, we estimate that there will be a net profit accretion to ThaiBev ranging from 8-10% for ThaiBev, while for FNN, the EPS accretion would be between 16-35%, assuming an acquisition PE of 20-25x.


Company Guide


Appendix 1: A look at ThaiBev's listed history – what drives its share price? We looked at ThaiBev’s share price performance since its listing in 2006 and compared it against several factors. We arrived at the following conclusions:

1. ThaiBev is well regarded as a staple and defensive counter, outperforming in a weak market and underperforming in a economic recovery

2. EPS growth is well sought after, and corresponds with share price re-rating.

Observation 1: ThaiBev is regarded as a resilient and defensive counter

ThaiBev vs FTSE Consumer Goods Index ThaiBev vs SET Food & Beverages Index

Source: Thomson Reuters, DBS Bank Source: Thomson Reuters, DBS Bank Being listed on the Singapore Exchange, but with operations primarily from Thailand, we explored the counter’s relative performance against FTSE ST Consumer Goods Index (FTSECG) in Singapore and SET Food and Beverages Index (SETF&B) since 30 May 2006. Performance against FTSE ST Consumer Goods Index. Comparing against FTSE ST Consumer Goods Index, we noticed two primary observations marked by A and B in the chart above. Referencing to point A, we noticed that ThaiBev had significantly outperformed the index up to end-2008 as the Global Financial Crisis unfolded, even though forward EPS showed no upward revision or growth. Subsequently, it gradually lost its outperformance from end-2008 to mid-2009. Thereafter, in early 2012, its share price began to outperform the FTSECG along with EPS growth. Performance against SET Food & Beverages Index. Looking at ThaiBev’s share price performance against SETF&B Index, ThaiBev outperformed within a short span of time as the GFC unfolded in late 2008. Thereafter, it steadily lost its lustre and trailed the SETF&B Index over the next four years till mid-2012. We believe this could have arisen due to its steady, but low growth, profits. Interestingly, the counter has staged a comeback since mid-2012 and has regained its performance against the SETF&B Index. Share price movements reflect EPS projections. We also plotted ThaiBev’s share price against its 12-month forward EPS and correlation between both. We note that share price

trends followed EPS closely. The correlation of 0.98 also confirms our beliefs. In our opinion, this suggests that the re-rating of ThaiBev's share price is highly dependent on the growth of its bottom line.

ThaiBev’s share price vs 12-month forward EPS

Source: ThomsonReuters, DBS Bank

Conclusion: Outperformance in a weak market, but EPS growth the key to share price re-rating. Based on our observations, ThaiBev’s stable and defensive traits are preferred, but only in a weak market, given its resilient operations. However, the market seems to want more. For continued re-rating and performance, EPS growth is sought after.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

May-06 May-08 May-10 May-12 May-14 May-16

ThaiBev vs SET Food & Bev Index

ThaiBev vs SET Food & Bev Index

30 May 2006 = 1.0

C

D

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

0.0

1.0

2.0

3.0

4.0

5.0

6.0

May-06 May-08 May-10 May-12 May-14 May-16

ThaiBev vs FTSE ST Cons Gds 12-mth fwd EPS

30 May 2006 = 1.0

A B

Index Fwd EPS (THB)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

THAI BEVERAGE PUBLIC THAI BEVERAGE PUBLIC - 12MTH FORWARD EPS


Company Guide


CRITICAL DATA POINTS TO WATCH Critical Factors: Spirits as the main earnings driver. ThaiBev derives earnings mainly from four key divisions – Spirits, Beer, Non-alcoholic beverages and Food. The Spirits division is the largest revenue contributor, accounting for 55% (as of FY16) of the group’s revenue. Earnings from Spirits division are particularly sensitive to excise tax – this accounts for 52.7% of Spirits’ revenue. Consumption of spirits has held up despite the weak consumer sentiment in Thailand, due to the wide range of brands that cater to the wide spectrum of consumers – from low to high income. Building upon Chang’s popularity. Revenues from Beer division contributed 32% of the group’s revenue in FY16. Excise tax is also the largest cost component, accounting for 58.9% of the group’s revenue. Input cost accounts for 15.9% of Beer revenue and is affected by the prices of raw materials such as barley, rice, tin and glass bottles. Chang Beer was re-launched in August 2015 with the streamlining of its sub-brands into just Chang Classic and repackaged into emerald green bottles, from amber. The re-launch has been has well-received and its beer market share has jumped to c.40%, up from 30%. This has led to the re-rating of the counter in 2016. Alcohol sale restrictions. Alcohol sales have been subjected to restrictions in Thailand. Most recently, laws regarding banning the sale of alcoholic products in proximity to education institutions have been discussed in Thailand. Given that the alcoholic businesses – Spirits and Beer - contribute c.87% of the group’s revenue, any decline in sales revenue by the alcoholic divisions will be significantly felt by the group. Turnaround in its Non-Alcoholic Beverage. Revenues from non-alcoholic beverages made up almost 9% of group revenue in FY16. The business unit is incurring operating losses due to its high SG&A expenses as it is focused on building brand awareness and gaining market share. With the launch of 100Plus in Thailand through a collaboration with F&N, it could take time for the brand to be built up. We project NAB's business segment to remain in the red till FY18F, but progressively with smaller losses. Driving growth through associates’ acquisition. We believe the group is poised to leverage on its associate, FNN, to deliver on acquisition to expand regionally. On the back of that, and with an equity fund raising, it will provide ThaiBev an opportunity to consolidate its shareholding. Assuming a reasonable acquisition valuation (of 20-25x), this should be earnings accretive for both FNN and ThaiBev, and drive re-rating for the counter.

Sprits vol gwth (%)

*FY16 drop in volume due to 9-month period, vs 12-month for FY15. Like-for-like comparison shows a 2.3% increase.

Spirits ASP gwth (%)

Beer vol gwth (%)

Beer ASP gwth (%)

Non-Alc Bev rev gwth (%)



Company Guide


Balance Sheet: Gearing has improved since acquisition of F&N’s stake. The group’s net gearing has improved significantly, and is projected to further reduce to 0.22 (by end-FY17F) from the high of 1.2x immediately following its 28.5% stake acquisition in F&N. Going forward, its healthy balance sheet will put it in a good position for inorganic growth opportunities within the region. Share Price Drivers: Changes in excise taxes. More than 50% of the group’s revenue goes into excise duties. A change in excise tax would impact on the share price, and depending on whether the group is able to pass on the increase costs to consumers, share price could be positively or negatively affected. Corporate restructuring. There has been constant talk of the eventual consolidation of F&N as a subsidiary, coupled with a monetisation of its stake in Frasers Centrepoint Limited. In our view, these tie in with the group’s announced “Vision 2020” Strategic Roadmap, in which one of the targets is to increase NAB's revenue contribution to over 50%. Turnaround in NAB. We project NAB to continue in the current investment mode in the foreseeable future. However, in the event that NAB turns around faster than expected, it could provide a catalyst to share price, underlining management’s ability to create value for the group. Key Risks: Prolonged slump in consumer sentiment. A prolonged slump in the Thai economy could impact consumption, and hence our forecasts. Vice-versa, a pickup in economic activity could offer upside potential. Political situation in Thailand. A change or deterioration of the uncertain political situation in Thailand could have an adverse impact on the broader economy and private consumption. Further excise tax hikes. Further increases in excise duties without a commensurate increase in ASP. Company Background ThaiBev is a leading beverage producer in Thailand, with business segments spanning across spirits, beer, non-alcoholic beverages and food. Its key brands are Sangsom, Hong Thong and Chang. It has 28.5% associate stakes in both Singapore-listed F&N and Frasers Centrepoint Limited.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide


Key Assumptions

FY Dec / Sep * 2014A 2015A *2016A *2017F *2018F Sprits vol gwth (%) (0.3) 1.20 (26.3) 1.00 1.00 Spirits ASP gwth (%) 5.00 0.20 (1.8) 2.00 2.00 Beer vol gwth (%) (2.4) 17.5 (0.3) 5.00 5.00 Beer ASP gwth (%) 9.50 4.20 3.30 3.00 3.00 Non-Alc Bev rev gwth (%) (7.3) 4.50 (19.4) 40.0 5.00

Segmental Breakdown FY Dec / Sep * 2014A 2015A *2016A *2017F *2018F Revenues (Btm) Spirits 104,592 105,991 76,649 110,647 113,988 Beer 35,193 43,112 44,397 66,688 72,123 Non-Alcoholic Bev. 15,775 16,488 13,290 18,606 19,536 Food 6,602 6,578 4,993 6,857 7,063 Others (122) (120) (176) (256) (269) Total 162,040 172,049 139,153 202,542 212,442 Operating profit (Btm) Spirits 25,278 25,191 18,081 26,334 27,129 Beer 334 1,290 3,060 6,669 7,934 Non-Alcoholic Bev. (2,336) (3,461) (1,811) (1,302) (391) Food 36.0 52.0 37.0 103 106 Others 68.0 120 16.0 16.0 16.0 Total 23,380 23,192 19,383 31,819 34,794 Operating profit Margins

Spirits 24.2 23.8 23.6 23.8 23.8 Beer 0.9 3.0 6.9 10.0 11.0 Non-Alcoholic Bev. (14.8) (21.0) (13.6) (7.0) (2.0) Food 0.5 0.8 0.7 1.5 1.5 Others (55.7) (100.0) (9.1) (6.2) (6.0) Total 14.4 13.5 13.9 15.7 16.4

Income Statement (Btm)

FY Dec / Sep * 2014A 2015A *2016A *2017F *2018F Revenue 162,040 172,049 139,153 202,542 212,442 Cost of Goods Sold (114,710) (121,830) (97,591) (139,126) (144,507) Gross Profit 47,330 50,219 41,562 63,416 67,935 Other Opng (Exp)/Inc (23,886) (26,839) (22,130) (31,597) (33,141) Operating Profit 23,443 23,380 19,433 31,819 34,794 Other Non Opg (Exp)/Inc 600 1,162 648 648 648 Associates & JV Inc 3,389 7,774 3,375 3,496 3,729 Net Interest (Exp)/Inc (1,447) (1,344) (776) (1,013) (944) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 25,984 30,972 22,679 34,949 38,227 Tax (4,552) (4,508) (3,643) (6,605) (7,245) Minority Interest 261 (0.3) (117) 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 21,694 26,463 18,920 28,344 30,982 Net Profit before Except. 21,694 26,463 18,920 28,344 30,982 EBITDA 31,427 36,496 27,801 40,475 43,849 Growth Revenue Gth (%) 4.0 6.2 (19.1) 45.6 4.9 EBITDA Gth (%) 23.3 16.1 (23.8) 45.6 8.3 Opg Profit Gth (%) 10.3 (0.3) (16.9) 63.7 9.3 Net Profit Gth (Pre-ex) (%) 13.4 22.0 (28.5) 49.8 9.3 Margins & Ratio Gross Margins (%) 29.2 29.2 29.9 31.3 32.0 Opg Profit Margin (%) 14.5 13.6 14.0 15.7 16.4 Net Profit Margin (%) 13.4 15.4 13.6 14.0 14.6 ROAE (%) 22.2 24.4 16.0 22.5 22.5 ROA (%) 12.2 15.0 10.2 14.7 15.3 ROCE (%) 11.8 12.3 9.6 14.6 15.3 Div Payout Ratio (%) 70.6 57.9 79.6 60.2 58.4 Net Interest Cover (x) 16.2 17.4 25.1 31.4 36.9


Includes one-off gains from associate FNN from the divestment of stake in Myanmar Brewery Limited (THB3.8bn).

Based on a 9-month period. Like-for-like comparison would have shown a 14% increase in net profit, before disposal gain.


Company Guide


Quarterly / Interim Income Statement (Btm)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 36,472 50,880 55,175 45,450 38,528 Cost of Goods Sold (25,851) (36,780) (38,956) (31,761) (26,874) Gross Profit 10,621 14,100 16,219 13,689 11,654 Other Oper. (Exp)/Inc (6,241) (7,584) (6,863) (7,328) (7,939) Operating Profit 4,380 6,516 9,356 6,361 3,715 Other Non Opg (Exp)/Inc 169 271 143 201 303 Associates & JV Inc 4,565 728 1,115 692 1,568 Net Interest (Exp)/Inc (325) (328) (275) (229) (271) Exceptional Gain/(Loss) 0.0 0.0 0.0 31.4 (31.4) Pre-tax Profit 8,789 7,188 10,340 7,056 5,283 Tax (802) (1,192) (1,745) (1,169) (729) Minority Interest 8.99 34.0 (34.6) (81.8) (0.3) Net Profit 7,996 6,030 8,560 5,806 4,554 Net profit bef Except. 7,996 6,030 8,560 5,774 4,585 EBITDA 9,114 7,516 10,615 7,254 5,586 Growth Revenue Gth (%) (6.5) 39.5 8.4 (17.6) (15.2) EBITDA Gth (%) 25.3 (17.5) 41.2 (31.7) (23.0) Opg Profit Gth (%) (13.7) 48.8 43.6 (32.0) (41.6) Net Profit Gth (Pre-ex) (%) 36.4 (24.6) 42.0 (32.5) (20.6) Margins Gross Margins (%) 29.1 27.7 29.4 30.1 30.2 Opg Profit Margins (%) 12.0 12.8 17.0 14.0 9.6 Net Profit Margins (%) 21.9 11.9 15.5 12.8 11.8

Balance Sheet (Btm)

FY Dec / Sep * 2014A 2015A *2016A *2017F *2018F Net Fixed Assets 46,251 46,921 47,871 47,915 47,793 Invts in Associates & JVs 67,614 75,737 78,463 79,758 81,287 Other LT Assets 11,054 11,231 11,216 11,159 11,102 Cash & ST Invts 2,230 3,494 5,063 9,764 15,307 Inventory 35,084 35,204 38,145 40,568 42,140 Debtors 3,668 3,906 2,588 4,606 4,831 Other Current Assets 6,085 5,523 4,307 4,307 4,307 Total Assets 171,987 182,017 187,653 198,078 206,767 ST Debt

21,947 17,374 18,996 18,996 18,996 Creditor 4,803 4,851 4,532 3,799 3,946 Other Current Liab 9,286 10,865 9,290 14,179 14,819 LT Debt 26,555 24,883 25,089 20,089 15,089 Other LT Liabilities 4,720 4,778 6,033 6,033 6,033 Shareholder’s Equity 101,263 115,885 120,070 131,339 144,242 Minority Interests 3,414 3,380 3,642 3,642 3,642 Total Cap. & Liab. 171,987 182,017 187,653 198,078 206,767 Non-Cash Wkg. Capital 30,749 28,918 31,218 31,503 32,514 Net Cash/(Debt) (46,272) (38,763) (39,022) (29,321) (18,778) Debtors Turn (avg days) 8.5 8.0 8.5 6.5 8.1 Creditors Turn (avg days) 16.5 15.0 18.4 11.3 10.1 Inventory Turn (avg days) 115.3 109.0 143.6 106.7 107.9 Asset Turnover (x) 0.9 1.0 0.8 1.1 1.0 Current Ratio (x) 1.3 1.5 1.5 1.6 1.8 Quick Ratio (x) 0.2 0.2 0.2 0.4 0.5 Net Debt/Equity (X) 0.4 0.3 0.3 0.2 0.1 Net Debt/Equity ex MI (X) 0.5 0.3 0.3 0.2 0.1 Capex to Debt (%) 9.4 9.3 6.4 11.5 13.2 Z-Score (X) 7.0 7.5 7.0 7.7 8.2



Company Guide


Cash Flow Statement (Btm)

FY Dec / Sep * 2014A 2015A *2016A *2017F *2018F Pre-Tax Profit 25,984 30,972 22,679 34,949 38,227 Dep. & Amort. 4,038 4,452 3,295 4,515 4,681 Tax Paid (4,884) (5,003) (2,267) (1,716) (6,605) Assoc. & JV Inc/(loss) (3,389) (7,774) (3,375) (3,496) (3,729) Chg in Wkg.Cap. 1,135 (1,236) (1,750) (5,174) (1,650) Other Operating CF 1,524 1,074 (92.4) 0.0 0.0 Net Operating CF 24,409 22,486 18,490 29,078 30,924 Capital Exp.(net) (4,570) (3,946) (2,822) (4,500) (4,500) Other Invts.(net) 6.50 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 6,903 2,276 2,356 2,200 2,200 Other Investing CF 268 1,552 20.0 0.0 0.0 Net Investing CF 2,607 (118) (446) (2,300) (2,300) Div Paid (11,359) (15,378) (16,670) (17,075) (18,079) Chg in Gross Debt (17,202) (3,728) 2,009 (5,000) (5,000) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (1,259) (1,378) (942) 0.0 0.0 Net Financing CF (29,820) (20,484) (15,603) (22,075) (23,079) Currency Adjustments (65.0) (622) (870) 0.0 0.0 Chg in Cash (2,869) 1,262 1,571 4,703 5,545 Opg CFPS (S cts) 3.72 3.79 3.24 5.48 5.21 Free CFPS (S cts) 3.17 2.97 2.51 3.93 4.23



Source: DBS Bank

Analyst: Andy SIM CFA

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:YM, PY

BUY (Upgrade from Hold)

Last Traded Price ( 4 Nov 2016): S$9.50 (STI : 2,788.80) Price Target 12-mth: S$10.90 (15% upside) (Prev S$9.20) Potential Catalyst: Improvement in marco environment Where we differ: FY16 & FY17 EPS above concensus Analyst Sachin MITTAL +65 6682 3699 [email protected]

What’s New 3Q16 net profit of S$ 47.4m (+17% y-o-y, +9% q-o-

q) was 10% above our ~S$ 43m estimate due to

rising exposure to Test, Medical & Life Science

segment

Favourable SGD/MYR movement to benefit the

bottom line; Upgrade to BUY with TP of S$ 10.90

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 2,657 2,746 2,917 2,992 EBITDA 229 249 261 264 Pre-tax Profit 182 208 224 230 Net Profit 154 177 190 195 Net Pft (Pre Ex.) 154 177 190 195 Net Pft Gth (Pre-ex) (%) 10.2 14.7 7.5 2.5 EPS (S cts) 56.2 63.6 68.4 70.1 EPS Pre Ex. (S cts) 56.2 63.6 68.4 70.1 EPS Gth Pre Ex (%) 10 13 8 3 Diluted EPS (S cts) 56.2 63.6 68.4 70.1 Net DPS (S cts) 50.0 50.0 50.0 50.0 BV Per Share (S cts) 690 696 714 735 PE (X) 16.9 14.9 13.9 13.5 PE Pre Ex. (X) 16.9 14.9 13.9 13.5 P/Cash Flow (X) 11.1 14.0 15.1 12.9 EV/EBITDA (X) 10.0 9.2 8.8 8.5 Net Div Yield (%) 5.3 5.3 5.3 5.3 P/Book Value (X) 1.4 1.4 1.3 1.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 8.2 9.2 9.7 9.7 Earnings Rev (%): 6 9 9 Consensus EPS (S cts): 61.0 66.0 70.0 Other Broker Recs: B: 6 S: 0 H: 1


Re-rating from consistent revenue growth Consistent revenue growth over the past 12 quarters. Math works in Venture Corporation (Venture)'s favour as growing segments comprise over 40% while shrinking segments comprise only 11% of the total business. Venture's exposure to growing segments such as Test, Medical and Life Sciences segment coupled with the fact that Venture has added 100 new customers over the last six years (33% of its customer base) is likely to keep the momentum going. Fixed dividend commitment of 50Scts (5.3% yield) coupled with high digit earnings growth prospects in FY17F is attractive in our opinion. 3Q16 net profit was 10% above our expectations. Net profit of S$47.4m (+17% y-o-y, +9% q-o-q) was above our ~S$ 43m estimate due to strong improvement in gross margins. This was mainly due to favorable business mix. Revenue also saw steady growth reaching S$ 705.7m (+2% y-o-y, +3% q-o-q), due to the strong growth seen in the Test, Medical and Life Science segment which contributed 44% of the top line compared to 42% in 2Q16 and 39% in 1Q16. Stronger SGD vs MYR to benefit earnings. Our in-house forecast suggests that SGD/MYR rate will hover around 3.25 in FY17, up from 2.82 earlier. As bulk of the labour costs are sourced in Malaysia, this should benefit Venture’s margins despite higher foreign worker levies. We estimate that a 2% rise in SGD/MYR will have a 1.5% positive impact on Venture’s earnings. In light of improving margins and stronger than expected top line performance, we revise our earnings forecast upward for FY16F/17F by 6%/9%. Valuation: Upgrade to BUY with a revised TP of S$ 10.90. Our TP is based on 16x FY17 PE, which is +1 s.d. of its historical mean PE. We adjusted our target PE by +1 s.d. to 16x from 15x earlier as we expect the market to re-rate Venture following 11 consecutive quarters (y-o-y) of steady revenue and profit (ex-exceptional) growth. The counter also offers a dividend yield of 5.3% at the current price. Key Risks to Our View: Weakening global growth prospects. As Venture has exposure to the US, EU and Asia, a broad global slowdown is likely to impact Venture due to its vulnerability to business cycles. Potential weakening of the USD could also dampen growth in revenues. At A Glance Issued Capital (m shrs) 278 Mkt. Cap (S$m/US$m) 2,642 / 1,911 Major Shareholders (%) Schroders Plc 9.6 Aberdeen Asset Management 7.7 Ngit Liong Wong 6.9

Free Float (%) 69.8 3m Avg. Daily Val (US$m) 3.6 ICB Industry : Industrials / Electronic & Electrical Equipment



Venture Corporation Version 4 | Bloomberg: VMS SP | Reuters: VENM.SI Refer to important disclosures at the end of this report


Company Guide

Venture Corporation

WHAT’S NEW

Healthy bottomline growth backed by steady growth in

topline

3Q16 net profit was above expectations. Net Profit of S$ 47.4m (+17% y-o-y, 9% q-o-q) was above our ~S$ 43m estimate. The strong improvement in gross margins was the primary contributor for the higher bottomline. Gross margins improved nearly 1.5ppt q-o-q with the favorably evolving business mix. These gains were partially offset by the increase in staff costs, which grew 8% y-o-y (4% q-o-q) despite a weakening MYR against SGD. Higher foreign worker levies

imposed in March 2016, may have contributed to the increase in staff costs.

Steady growth in revenues: Revenue also saw steady growth, reaching S$ 705.7m (+2% y-o-y, +3% q-o-q), marginally above our expectations. This was primarily due to the growth seen in Test, Medical and Life Science segment. Strengthening USD against SGD may also have contributed to y-o-y growth as most of Venture revenues are USD denominated.



Revenue 693 683 706 1.8 3.3

Cost of Goods Sold (533) (523) (529) (0.8) 1.2

Gross Profit 160 161 177 10.5 10.0

Other Oper. (Exp)/Inc (112) (111) (121) 7.4 8.5

Operating Profit 46.6 49.5 56.1 20.4 13.4

Other Non Opg (Exp)/Inc 0.55 0.75 0.64 15.9 (14.0)

Associates & JV Inc 0.13 1.61 0.12 (11.4) (92.7)

Net Interest (Exp)/Inc (0.3) (0.2) (0.2) 24.4 11.0

Exceptional Gain/(Loss) 1.00 0.0 0.0 nm nm

Pre-tax Profit 48.0 51.6 56.7 18.0 9.8

Tax (7.5) (8.2) (9.2) 23.6 12.5

Minority Interest 0.0 0.0 0.0 nm nm

Net Profit 40.6 43.4 47.4 16.9 9.2

Net profit bef Except. 39.6 43.4 47.4 19.9 9.2

EBITDA 58.2 62.3 67.2 15.6 7.9

Margins (%)






Company Guide

Venture Corporation


Earnings Drivers:

Growth in Test, Medical and Life Science segment. Venture has established strong relationships with companies researching on Genome sequencing, which could see healthy growth over the medium term with increasing investments and use of MedTech. Further, an increased focus on lower-cost technologies in healthcare is likely to boost the Test, Medical and Life Science segment. The segment contributed 44% to the top line compared to 42% in 2Q16 and 39% in 1Q16, which has helped in covering for the weak performance of Computer Peripherals & Data Storage segment. Changing business mix could lead to better margins. The evolving business mix of Venture with increasing contribution from Test, Medical and Life Science segments and declining contribution from computer peripherals and printing is likely to improve gross margins for Venture. We believe that the specialised nature of the medical and life science segment permits Venture to realise better margins on contracts. Weakening MYR to benefit Venture. We revise our forecast of MYR/SGD exchange rate from 2.82 to 3.25 for FY17 with a resultant improvement in operating margins. Almost 60% of Venture’s staff cost is incurred in Malaysia and staff costs amount to c. 10% of group revenue. Along with the improvement in margins due to business mix, the impact of lower costs has resulted in the projected EBITDA margins for FY17 improving to 8.8% from 8.3%. Location of the newly acquired land could benefit Venture. Venture completed the acquisition of a 60-year leasehold land for a consideration of S$13.0m in 2Q16 of which S$5.7m was paid in 1H16. Development of the land is expected to start in 2017. The land is located in the Batu Kawan Industrial park with close proximity to the Penang Island, well known for its high tech electronics manufacturing industry. Venture could benefit from specialised labor and improved supply chain networks with its presence in this area.

Gross margin (%)

% of SGA (%)

USD/SGD

SGD/MYR



Company Guide

Venture Corporation

Balance Sheet:

Strong balance sheet position. The company has maintained a net cash position, which should support its current dividend payout that offers a yield of c.5%. Anticipated land development could strain cash flows mildly but we do not foresee any dividend cut backs over the medium term. Share Price Drivers:

Consistent revenue and profit growth over. Venture has seen consistent revenue and profit growth (excluding exceptional items) over the past 11 quarters (on a y-o-y basis), despite the weak economic conditions of their customer markets. The company’s strategy of pursuing the more resilient Test, Medical and Life Science segment has been successful in generating revenue and profits. We believe the recent successes would result in a more bullish market perception for Venture, re-rating the stock Key Risks:

Weakening global markets a concern. As Venture has exposure to the US, EU and Asia, a broad global slowdown is likely to impact Venture due to its vulnerability to business cycles. Possible weakness in the Eurozone due to the exit of Britain from the European Union or the adoption of restrictive trading policies by the US could weaken global growth prospects. Deterioration in the world economy could affect corporate spending, which will in turn adversely impact Venture's results. Weakening USD could impact the topline. A weakening USD against SGD amid weak US economic growth and a prolonged accommodative monetary policy could impact Venture’s earnings, almost 100% of which are denominated in USD. Company Background

Venture is a global provider of technology products and solutions. It is best known for its superior capabilities in Original Design Manufacturing (ODM) and in providing high mix, high value and complex manufacturing.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

Venture Corporation

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Gross margin (%) 23.2 23.2 23.4 23.4 23.4 % of SGA (%) 17.1 16.5 16.0 15.9 15.9 USD/SGD 1.28 1.37 1.42 1.42 1.42 SGD/MYR 2.57 2.72 2.82 3.25 3.25

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (S$m) Printing & Imaging 275 255 237 237 237 Computer 240 277 255 242 230 Networking/Comms 417 473 496 516 527 Retail Store solutions 742 746 761 776 784 Others 792 906 996 1,146 1,215 Total 2,465 2,657 2,746 2,917 2,992


FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 2,465 2,657 2,746 2,917 2,992 Cost of Goods Sold (1,894) (2,041) (2,103) (2,235) (2,292) Gross Profit 572 616 642 683 700 Other Opng (Exp)/Inc (421) (438) (438) (463) (475) Operating Profit 150 178 204 220 225 Other Non Opg (Exp)/Inc 2.52 2.99 2.99 2.99 2.99 Associates & JV Inc 4.62 2.03 2.03 2.03 2.03 Net Interest (Exp)/Inc (1.0) (1.0) (0.8) (0.8) (0.8) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 156 182 208 224 230 Tax (16.6) (27.6) (31.7) (34.1) (34.9) Minority Interest 0.0 (0.1) (0.1) (0.1) (0.1) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 140 154 177 190 195 Net Profit before Except. 140 154 177 190 195 EBITDA 199 229 249 261 264 Growth Revenue Gth (%) 5.8 7.7 3.4 6.3 2.6 EBITDA Gth (%) 8.9 14.7 8.7 5.1 1.0 Opg Profit Gth (%) 11.1 18.2 14.9 7.7 2.5 Net Profit Gth (Pre-ex) (%) 6.6 10.2 14.7 7.5 2.5 Margins & Ratio Gross Margins (%) 23.2 23.2 23.4 23.4 23.4 Opg Profit Margin (%) 6.1 6.7 7.4 7.5 7.5 Net Profit Margin (%) 5.7 5.8 6.4 6.5 6.5 ROAE (%) 7.6 8.2 9.2 9.7 9.7 ROA (%) 5.6 6.1 6.9 7.3 7.2 ROCE (%) 6.6 7.4 8.4 8.9 8.9 Div Payout Ratio (%) 98.1 89.0 78.6 73.1 71.3 Net Interest Cover (x) 148.1 181.9 246.5 265.4 272.1


Increasing contribution from Test, Medical and Life Sciences segment

Evolving business mix improving margins


Company Guide

Venture Corporation


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 693 694 631 683 706 Cost of Goods Sold (533) (535) (478) (523) (529) Gross Profit 160 159 153 161 177 Other Oper. (Exp)/Inc (112) (108) (111) (111) (121) Operating Profit 46.6 49.2 41.9 49.5 56.1 Other Non Opg (Exp)/Inc 0.55 1.01 0.81 0.75 0.64 Associates & JV Inc 0.13 1.11 0.0 1.61 0.12 Net Interest (Exp)/Inc (0.3) (0.3) (0.3) (0.2) (0.2) Exceptional Gain/(Loss) 1.00 2.00 0.0 0.0 0.0 Pre-tax Profit 48.0 53.1 42.5 51.6 56.7 Tax (7.5) (8.3) (6.6) (8.2) (9.2) Minority Interest 0.0 0.02 0.0 0.0 0.0 Net Profit 40.6 44.8 35.8 43.4 47.4 Net profit bef Except. 39.6 42.8 35.8 43.4 47.4 EBITDA 58.2 62.1 53.4 62.3 67.2 Growth Revenue Gth (%) 4.8 0.2 (9.1) 8.3 3.3 EBITDA Gth (%) 9.2 6.8 (14.0) 16.7 7.9 Opg Profit Gth (%) 13.0 5.5 (14.8) 18.1 13.4 Net Profit Gth (Pre-ex) (%) 9.7 8.3 (16.3) 21.1 9.2 Margins Gross Margins (%) 23.1 22.9 24.3 23.5 25.0 Opg Profit Margins (%) 6.7 7.1 6.6 7.2 8.0 Net Profit Margins (%) 5.9 6.5 5.7 6.4 6.7

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 188 186 194 204 218 Invts in Associates & JVs 81.3 19.4 21.4 23.5 25.5 Other LT Assets 720 703 686 669 652 Cash & ST Invts 393 459 480 486 521 Inventory 553 556 575 611 627 Debtors 557 570 590 626 642 Other Current Assets 36.3 33.4 33.4 33.4 33.4 Total Assets 2,528 2,528 2,580 2,654 2,720 ST Debt 169 109 109 109 109 Creditor 386 353 365 388 398 Other Current Liab 102 141 141 141 141 LT Debt 0.0 26.5 26.5 26.5 26.5 Other LT Liabilities 6.24 3.14 3.14 3.14 3.14 Shareholder’s Equity 1,862 1,893 1,933 1,984 2,040 Minority Interests 2.47 2.58 2.67 2.76 2.84 Total Cap. & Liab. 2,528 2,528 2,580 2,654 2,720 Non-Cash Wkg. Capital 658 666 692 742 764 Net Cash/(Debt) 224 324 345 351 386 Debtors Turn (avg days) 79.7 77.5 77.1 76.1 77.4 Creditors Turn (avg days) 71.0 67.6 63.5 62.5 63.5 Inventory Turn (avg days) 106.5 101.5 100.1 98.5 100.0 Asset Turnover (x) 1.0 1.1 1.1 1.1 1.1 Current Ratio (x) 2.3 2.7 2.7 2.8 2.8 Quick Ratio (x) 1.4 1.7 1.7 1.7 1.8 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 33.5 10.8 22.2 22.2 22.2 Z-Score (X) 4.5 4.8 4.8 4.8 4.8


Rising Staff costs impacted the bottom line

Healthy cash position to support dividends


Company Guide

Venture Corporation


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 156 182 208 224 230 Dep. & Amort. 41.9 46.1 39.4 36.4 33.4 Tax Paid (6.1) (9.6) (31.7) (34.1) (34.9) Assoc. & JV Inc/(loss) (4.6) (2.0) (2.0) (2.0) (2.0) Chg in Wkg.Cap. (10.5) 48.7 (26.0) (50.0) (21.8) Other Operating CF (9.3) (31.0) 0.0 0.0 0.0 Net Operating CF 168 234 188 174 204 Capital Exp.(net) (56.7) (14.6) (30.0) (30.0) (30.0) Other Invts.(net) (14.3) 2.37 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 33.9 (1.5) 0.0 0.0 0.0 Net Investing CF (37.2) (13.7) (30.0) (30.0) (30.0) Div Paid (137) (138) (137) (139) (139) Chg in Gross Debt 1.89 (33.5) 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF (135) (172) (137) (139) (139) Currency Adjustments 7.11 17.4 0.0 0.0 0.0 Chg in Cash 2.37 66.0 21.0 5.49 35.5 Opg CFPS (S cts) 65.1 67.5 77.1 80.8 81.4 Free CFPS (S cts) 40.6 80.0 57.0 52.0 62.8



Source: DBS Bank

Analyst: Sachin MITTAL

Market Focus

2017 Outlook

Page 36

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 14 Dec 2016 7:34:02 Dissemination Date: 14 Dec 2016 18:09:15

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.

Market Focus

2017 Outlook

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ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. As of 14 Dec 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in City

Developments, ComfortDelgro, Ezion Holdings, Genting Singapore, OCBC, ST Engineering, Venture Corp, Indofood Agri, SembCorp Marine, SIA Engineering, UOB, Sheng Siong, Yangzijiang Shipbuilding, Ascendas REIT, Croesus Retail Trust, Ascott Residence Trust, Hutchison Port Holdings Trust, SembCorp Industries, Wilmar International, Midas Holdings, Capitaland, Global Logistic Properties, CapitaLand Commercial Trust, Noble Group, DBS, Parkway Life REIT, Cosco Corp, First Resources, Golden Agri, UOL Group, Frasers Commercial Trust, Keppel REIT, Suntec REIT, CapitaLand Mall Trust, CapitaLand Retail China Trust, Frasers Centrepoint Trust, SPH REIT, Mapletree Commercial Trust, Mapletree Greater China Commercial Trust, YTL Starhill Global REIT, Cache Logistics Trust, Cambridge Industrial Trust, Frasers Logistics & Industrial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust, Soilbuild Business Space Reit, Ascendas Hospitality Trust, CDL Hospitality Trust, Far East Hospitality Trust, OUE Hospitality Trust, Frasers Hospitality Trust, RHT Health Trust, Keppel DC REIT, Manulife US REIT, Starhub, M1, Singapore Airlines, Ezra Holdigns, Thai Beverage recommended in this report as of 30 Nov 2016.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a net long position

exceeding 0.5% of the total issued share capital in ComfortDelgro, Ascendas REIT, Croesus Retail Trust, Ascott Residence Trust, Hutchison Port Holdings Trust, Capitaland, Frasers Commercial Trust, CapitaLand Retail China Trust, Mapletree Greater China Commercial Trust, YTL Starhill Global REIT, Frasers Logistics & Industrial Trust, Mapletree Logistics Trust, Soilbuild Business Space Reit, CDL Hospitality Trust, Frasers Hospitality Trust, RHT Health Trust, Keppel DC REIT, Manulife US REIT, M1, FJ Benjamin Holdings recommended in this report as of 31 Nov 2016.

4. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity

securities of Croesus Retail Trust, Ascott Residence Trust, Frasers Commercial Trust, YTL Starhill Global REIT, Frasers Logistics & Industrial Trust, Soilbuild Business Space Reit, CDL Hospitality Trust, Frasers Hospitality Trust, Keppel DC REIT, Manulife US REIT, M1, FJ Benjamin Holdings as of 31 Nov 2016.

5. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 5% of any class of common equity

securities of Croesus Retail Trust, FJ Benjamin Holdings as of 31 Nov 2016.

Compensation for investment banking services: 6. DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for

investment banking services from City Developments, Ezion Holding Limited, United Engineers, Courts Asia, Ascendas REIT, Croesus Retail Trust, Ascott Residence Trust, Midas Holdings, Procurri Corporation, CapitaLand Commercial Trust, Noble Group, Olam International, DBS Group Holdings, Parkway Life Real Estate Investment Trust, Perennial Real Estate Holdings, Fraser Commercial Trust, OUE Commercial Trust, CapitaLand Mall Trust, Mapletree Commercial Trust, Mapletree Greater China Commercial, YTL Starhill REIT, Frasers Logistics & Industrial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust, Soilbuild Business Space REIT, Ascendas Hospitality Trust, Frasers Hospitality Trust, OUE Hospitality Trust, Keppel DC REIT, Manulife US REIT, Starhub, Singapore Airlines, China Merchants Group, Ezra Holdings, Nam Cheong, as of 30 Nov 2016.

7. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek

compensation for investment banking services from DBS Group Holdings, China Merchants Holdings as of 30 Nov 2016.

Market Focus

2017 Outlook

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8. DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for City Development, Ezion Holdings, Courts Asia, Ascendas REIT, Croesus Retail Trust, Ascott Residence Trust, Midas Holdings, Procurri Corp, CapitaLand Commercial Trust, Noble Group, Olam International, DBS, Parkway Life REIT, Pacific Radiance, Frasers Commercial Trust, Suntec REIT, Mapletree Commercial Trust, Mapletree Greater China Commercial Trust, YTL Starhill Global REIT, Frasers Logistics & Industrial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust, Ascendas Hospitality Trust, Frasers Hospitality Trust, OUE Hospitality Trust, RHT Health Trust, Keppel DC REIT, Manulife US REIT, Singapore Airlines, China Merchants Holdings, Ezra Holdings, Nam Cheong, Otto Marine, Perennial Real Estate Holdings, Capitaland Mall Trust, Soilbuild Business Space REIT, Starhub, United Engineers in the past 12 months, as of 30 Nov 2016.

9. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Directorship/trustee interests: 10. Peter Seah Lim Huat, Chairman of DBS Group Holdings, is a Director / Deputy Chairman of Singapore Airlines and Director of Starhub as of 3

Aug 2016. 11. Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Non-Exec Director of CapitaLand as of 3 Aug 2016. 12. Nihal Vijaya Devadas Kaviratne CBE, a member of DBS Group Holdings Board of Directors, is a Director of Olam and Starhub International as

of 3 Aug 2016.

Disclosure of previous investment recommendation produced 13. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other

investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

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Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Market Focus

2017 Outlook

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Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

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Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

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DBS Bank Ltd

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

e-mail: [email protected] Company Regn. No. 196800306E

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