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Page | 1 | PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 118/10/2015 Ref. No.: US2016_0009

US Elections

Do you have the “Trump” card USA | | NON-RATED

Election Season USA election season is upon us and 2016 has been a truly interesting year. The candidates this year are the most disliked candidates in history. On one hand, you have the Republican candidate, Donald Trump, whose campaign can be described, at best, as anti- politically correct, and, at worst, as racist and bigoted. On the other hand, you have Hillary Clinton, who has been marred with scandal after scandal and the electorate in general just does not see as particularly trustworthy. With barely more than a month to go, one of these two people will be the new president of the USA.

Investment Action? With each party having their own agenda and points of view when it comes to driving policy, it can be natural to assume that the presidency, being able to affect policy decisions, would also be able to affect the stock market.

However, history shows that the S&P 500 has risen an average of 6.5% in the first year of the presidential term, regardless of a sitting Democrat or Republican. Despite the general held belief that a Republican, with their Big Business approach, being good for the market, there is no evidence of a Republican president being better for the stock market. In fact, Democrat presidents seem to have a slight edge over their counter parts, although other macro events would do better to explain the rise and fall of the stock markets.

Historically, during an election year, the S&P 500 has risen 81% of the time.

23 September 2016

Ho Kang Wei (+65 6212 1855) Investment Analyst [email protected]

Page | 2 | PHILLIP SECURITIES RESEARCH (SINGAPORE)

US Elections Non- Rated

Source: Time



Sector Performance

During the election year itself, the highly regulated industries like Financials and Utilities seem to perform best, which is not surprising, as the election year is typically a lame duck session, with the current government unable to pass many new regulations.

The year after the election year, Consumer Discretionary, IT, Industrials, Energy and Healthcare does tend to perform, as the market recovers from the uncertainty of which party will be in power.

Chances of winning? Currently, Fivethirtyeight, a poll aggregation website, puts the chances of Hillary winning at 57.6% and Donald Trump at 42.4%, a little better than a coin toss for either party. The past few weeks have not been good for Hillary and if the current momentum continues, her chances to win might equal Trump’s by November. There will be three presidential debates and one vice presidential debates in the next few weeks and the performance of the candidates at each might help determine who ends up winning the presidency.

Source: Fivethirtyeight



Candidates’ platform The party platforms are in general proposals for how the candidate intends to run the country. While it is not a guarantee that the proposals in the platforms will eventually materialize, it does give a general sense of the direction the candidate will want to take the country. In this note, we will focus on Energy and Healthcare, as these are the sectors where the candidates differ greatly and are likely to have market impacts.

In terms of Energy, Donald Trump favours more traditional energy sources, and advocates a rescinding of the Climate action plan and Waters of the US rule, effectively allowing the drilling for oil and other fossil fuels in currently protected areas. He has also promised to invest heavily in the coal industry. In contrast, Clinton has pledged to expand investments in renewable energy, proposing that over half a billion solar panels to be installed by the end of her first term, a nearly 700% increase in solar capacity by 2020.

For Healthcare, Clinton proposed to increase the Affordable Care Act (ACA), also colloquially known as Obamacare, promising to reduce out of pocket cost ( deductibles) for citizens. Trump however, has promised to repeal the ACA, proposing a state level Medicaid for citizens instead. Both parties do agree that rising drug cost is an issue and have promised to fight to keep drug cost down. Clinton will legislate to keep excessing cost down, while Trump says he will negotiate aggressively with drug companies and remove barriers to entry for generic, non-patent alternative products.

Both parties’ platforms can be found respectively:

https://www.hillaryclinton.com/issues/

https://www.donaldjtrump.com/positions

With the platform of each candidate in mind, we have tried to identify some companies that would likely benefit from a Trump or Clinton presidency and the list is as follows:

1. Energy Exxon Mobil (NYSE:XOM) & First Solar (NASDAQ:FSLR)

Exxon Mobil Corporation is one of the world’s largest oil producers and refiners. A Trump presidency will likely be good for the fossil fuel industry and we believe that XOM will be able to benefit from it as well as a number of other factors. XOM is currently trading at USD 83.54 per share, with a PER of 33.19 and a Dividend yield of 3.59%.

Oil Price mild recovery – Since hitting a low of USD 28.50 in January 2016, WTI Crude oil prices have rebounded above the USD 40 per barrel mark and is

trading at USD 46.46. The US Energy Information Administration estimates that

https://www.hillaryclinton.com/issues/

https://www.donaldjtrump.com/positions



production and consumption will level out in Q1 2017. Further reduction in Capex for the sector seems to point to a likely slowdown in supply.

XOM Low development cost and High Inventory – XOM has been focusing on low cost production during this period of low oil prices, being able to cut the development cost from above USD 20 per barrel to below USD 10 per barrel. It also has an estimated 9 years of inventory sustainable at the WTI USD 40 per barrel.



First Solar is producer of photovoltaic (PV) solar energy solutions. The company designs, manufactures and sells PV solar modules and if Clinton wins and goes ahead with her plan to expand solar capacity in the USA, we believe that FSLR will greatly benefit from that. Of all the USA listed solar panel producers, we believe FSLR to be the most financially sound, being able to generate a profit and also having more cash

equivalent than debt. FSLR is currently trading at USD 35.42 with a PER of 5.20. It is not currently paying out a dividend. The sector has been beaten down significantly recently due to supply of cheap solar panels from China. We believe that FSLR is undervalued as a result of the following factors:

Trading below book value – FSLR’s book value per share is USD 56.71, its tangible book value is 52.61. While FSLR’s PPE is highly specialized and there might be some difficulty in the event of liquidation, FSLR’s current trading price implies a 40% discount to book value.

Competitive CdTe Tech – The solar panel industry is primarily manufacturing and selling the same technology; Crystalline Silicone(C-Si). However, C-Si wafers are relatively expensive to produce due to raw material costs. FSLR on the other hand, manufactures and sells what is known as thin film solar cells, based on cadmium telluride (CdTe) technology. CdTe panels are cheaper to produce compared to C-Si. FSLR currently produces panels at USD 0.40 per watt, while China’s Trina Solar’s (currently the world’s top solar panel maker) average production cost is USD 0.46 per watt. FSLR’s panels are theoretically 5% more efficient as well, under the right conditions. Given the oversupply, it is unsustainable without government intervention for Trina Solar to keep supplying at current prices. If FSLR is able to ride out the current over supply, it could be in a good position to rebound.



2. Healthcare HCA Holdings (NYSE:HCA) & Unitedhealth Group Inc (NYSE:UNH)

Regardless of candidate, we believe that pharmaceuticals are likely to be beaten down due to the spotlight on high drug cost. As such, we believe that hospitals or private insurance companies would be more likely to be impacted positively depending on the candidate.

HCA Holdings is a healthcare services company, they operate hospitals and related healthcare entities. Expansion of the ACA under Clinton might generate more traffic to hospitals. HCA is currently trading at USD 76.38 with a PER of 13.18. The

company currently does not pay a dividend. We feel that the stock is undervalued based on:

Aging Demographic – HCA has been able to select key geographic markets with aging populations, which led to about a 2% growth in same facility equivalent admissions

Expansion of ACA – since the introduction of the ACA, the percentage of uninsured in America has fallen drastically. This is significant because uninsured people do not typically pay their medical bills, leading to high doubtful revenue. If Clinton is able to expand the ACA further, Healthcare providers may be able to collect more revenue for the services they provide.



UnitedHealth Group Inc is a diversified healthcare company. UNH’s private insurance business is its biggest source of value. UNH is currently trading at USD 141.04 with a PER of 22.07. The company has a dividend yield of 1.77%. While the ACA has expanded the number of people with insurance, it has also

forced UNH to take on unprofitable business. Under a Trump presidency, if the ACA is repealed, UNH might be able to be more discerning and pick more profitable clients.

USA’s market leader – UNH is the market leader in private health insurance. If Trump becomes president, it is highly unlikely a Public Option will become available as an option. As such, UNH should maintain its position as the market leader.



Source: Bloomberg

Withdrawing from ACA – UNH announced that it was withdrawing from most of the ACA state exchanges by 2017. 2015 ACA related losses came up to USD475 mn and 2016 is estimated at USD 650 mn. UNH is looking to reduce ACA related businesses from 1,200 counties to 156. With the reduction in unprofitable business, UNH should be able to increase its margins.

3. Defense Northrop Grumman Corporation (NYSE:NOC) & Lockheed Martin Corporation (NYSE:LMT)

Regardless of candidate, National Security is a hot button topic that is in the spotlight. With increased fears of terrorism from ISIS, further destabilization of the Middle East and increased tensions with China and Russia, it is unlikely that either candidate will seek to reduce defense spending. Republicans generally are typically in favor of increased spending on the Military, and Clinton, historically, has also had hawkish stances.

Northrop Grumman Corporation is a global security company. It specializes in systems, products and solutions in unmanned systems. NOC is currently trading at USD 216.49 with a PER of 19.48. The company pays a dividend yield of 1.66%.

US Defense spending - Recently, the Missile Defense Agency forecasted expenditure on Missile Defense to reach USD 38 bn through to 2020. NOC have been developing a missile defense technology known as the Airborne laser Testbed, and as technology improves, NOC could possibly mount the laser technology on their unmanned drones for missile defense deployment

Long Range strike bomber contract – In Feb 2016, NOC won a contract to build a long range strike bomber, which was valued at USD 80 bn. The



contract was challenged by Boeing and Lockheed but the challenge was subsequently overturned. The contract will not have an impact on the company’s earnings until 2020, and as such may not be fully priced into the share price yet.

Lockheed Martin Corporation (NYSE:LMT) is also another global security and aerospace company. We believe that LMT is also in a position to benefit from expansion in US military spending. LMT is the largest US defense contractor with over 10 years of consecutive dividend increases. It is currently trading at USD 246.62 per share, with a PER of 20.51 and a dividend yield of 2.68%

Price tumble in August – LMT price fell in August following a spinoff of their IT business. The proceeds of the sale were meant to buy back their own shares. The proceeds were expected to repurchase 10mn shares, but only 9.4 mn were purchased in the end. The 0.6mn less shares amounted to a 0.2% lower EPS than originally guided by management. Following that, the price fell from a peak of USD 266.93 a share to a low of USD 237.41, before recovering to its current price. We believe that LMT is still slightly undervalued and has yet to fully recover from the tumble in August

4. Digital Media Facebook (NASDAQ:FB) & Alphabet Inc (NASDAQ:GOOGL) Election spending in the previous presidential election reached USD 9.4 bn and is expected to reach USD 11.7 bn. Of this, USD 1.2 bn is expected to go to online media and at least USD 570 mn is estimated to go to social media. In 2012, the social media spending was just USD 54 mn.



Of the two candidates, Clinton has so far outraised Trump by almost double.

Source: The Washington Post



Facebook remains the king of social media, and it is most likely to be the platform of choice when it comes to advertising, even political advertising. As such it is most likely to be the platform to benefit most from the increased spending on social media in this election cycle. Facebook’s current ad spending revenue from political spending in 2016 is estimated at about USD 350 mn. FB is currently trading at USD

130.08, with a PER of 62.31. It does not currently pay a dividend.

Alphabet Inc is also poised to capture a large share of the online/digital campaign spending. Google has their paid searches as well as YouTube ads, which is likely to be the main avenue for the candidates to advertise online. Google is estimated to get around USD 400 mn from political ads. GOOGL is currently trading at USD 815.95, with a PER of

31.02. It does not currently pay a dividend. Conclusion The above list is by no means exhaustive and is a brief look at companies that might benefit from the election cycle, with some benefiting more from the election of Trump and others from Clinton. At current polling, Clinton still has a slight edge over Trump to win the election, although if current momentum continues, it will be essentially a coin toss.

While the above has companies that might benefit from a republican presidency, it is important to note that Trump is unlike the conventional Republican candidates, in fact, he has been denounced by many previous republican candidates and even presidents. Given the similarities in messaging to the Brexit campaign, there exists the possibility of a period of great volatility if Trump were to be elected, similar to the aftermath of the Brexit vote, as foreign investors might be turned off and pull out of the US market. Should such a sell off occur, investors should be on the lookout for opportunities that will not have been impaired by a Trump presidency, such as the ones listed above.



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