Strategy & Stock Picks 1Q2021- 2021 Strategy (13 Jan 2021) questions

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    Research Department

    Please find the questions posed during the Outlook in the thread below.


    Research Department

    Question: What are the risks with First sponsor property financing ?

    Answer: From their latest update in 3Q20, property financing is doing well in china, Europe is doing fine. Amid COVID-19, FSG has given consent to two borrowers of a RMB580mn loan and RMB330mn loan respectively for the short-term deferral of their interest payments.

    a)       The RMB580mn loan is secured on a Guangzhou city hotel with a 44% LTV. The borrower could defer 50% of its monthly interest payments for a few months from 2Q2020, on condition that it contributes additional equity to a bank account jointly controlled by the borrower and FSG. There has been no issue arising from the repayment of this loan.


    b)       The RMB330m loan is secured on a residential villa (RMB50m @ 46% LTV) and a 5-floor retail mall (RMB280m @ 55% LTV) in Shanghai. The related borrower group has been given consent to defer interest payments for one month. For this loan, borrower paid the interest in full but was late by a month. Hence, the borrower paid penalty interest on the late fee as well.

    In China, FSG only lends in first-tier and second-tier cities where it has a presence in, and leverages on the entrusted loan system governed by PBOC. All loans are booked with PBOC, which provides a level of protection for FSG as it takes on borrower and/or guarantor risks.

    It is key to note that though FSG started its property-financing business in 2012, it has not incurred any bad-debt losses to date. Also, although there were two cases of default in 2015 and 2016, FSG recovered both its principal and interest in both circumstances. We believe that FSG has the network and know-how to succeed in this business.

    Another risk that we see, will be the cutting of interest rates that shadow banks can charge for default penalties. In July 2020, China’s Supreme Court has announced to limit the penalty rate to 4x the Loan Prime Rate (4.35%) + a court-judged default rate (6%). This means FSG’s return on default loans is now capped at 23.4%, versus no limits previously. The Group had ever recovered defaulted loans at 30.4% p.a. penalty rates in the past. Profitability of this segment will be impacted, should interest rates be cut again.


    Research Department

    Question: With regards to prices of banking stocks:

    1) DBS, UOB and OCBC are still a buy, hold or sell? What are the upside target price and downside cut loss price? Your views and comments please. Thank you.

    2) Why do the Spore Banks really move up in the last 2 days?

    3) Will uob price still able to hold or any upside as it will continue to run up for the upcoming month’s? Thanks

    Answer: The positive share price movement of the Singapore banks were a result of a brighter economic outlook. The official rollout of the vaccine in Singapore also contributed to the positive market sentiments. As such, the SG banks, which make up roughly 35% of the STI, benefited from improving sentiments. Fundamentally, the better economic outlook also paves the way for improving credit outlook that can see credit costs drop drastically from the front-loaded provisions in FY20. This can lift some pressures off earnings in FY21.


    Research Department

    Question: With regards to disruptions by new digital banks on the industry:

    1) When can we expect the real impact of the digital bank licenses on thr traditional banks? How will that be impacted? Can you also comment on the potential of Singtel-Grab and Sea Limited due to them acquiring the digital bank licenses?

    Answer:We believe that the local banks have a head start in the race to digitalisation. The successful applicants for the digital banking licences are expected to turn operational only in FY22. Furthermore, new entrants have to build new infrastructure from the ground up, which will likely mean higher costs in the short-term, where the banks have already been embracing the move towards digitalisation since a few years back. For a well-banked society such as Singapore, the pockets of opportunities remain low.


    Research Department

    Questions: With regards to SGX

    1) Was the recommendation up to date as SGX share price was already $10 (Recommendation indicated to accumulate SGX share w TP: $9.45)?

    Answer: The TP generated was based on the last results released from June 2020. However, we do note that trading and clearing revenue should be up 10-15% over the past 6 months based on monthly data provided by SGX, and more upside from their Data, Connectivity and Index (DCI) business from the consolidation of Scientific Beta and BidFX business which we have taken into account for our model. Our valuation currently is pegged at -1 standard deviation below the 5-year average PE of SGX.

    Please note that SGX will be announcing their 1H21 results on Friday, 22 January, and we will be revising our figures again. 

    • This reply was modified 2 years, 4 months ago by Research Department.

    Research Department

    Question: Miscellaneous questions in relation to financial/healthcare sector

    1) How far can Nanofilm and IFAST move up to and time frame?

    iFast: We do not cover iFast, but we note that they continue to trade at more than 77 times (trailing 12-month). Even with, growth potential coming from Hong Kong MPF investment scheme (Hong Kong’s equivalent of CPF), the premium seems to be on the high side. Nevertheless, the company benefited from high growth over the past year and they have yet to see earnings stabilise.


    2) your view on new listings please :  Nonofilm ,Lion OCBC SecHST,  Credit Bureau Asia ,GHY Culture .  Are they buy now ?

    Answer: Credit Bureau Asia: We do not cover Credit Bureau Asia, but we like their business model. However, they are also trading at a high PE ratio of about 50x compared to industrial average of 22x. Nevertheless, they have just expanded into Myanmar, and they are likely to benefit from the scalability of the business model which can provide a growth catalyst in the near term.


    Research Department

    Questions: What is your outlook on aims apac reit?

    Answers: While we do not have coverage of Aims APAC REIT (AAREIT), we think that AAREIT’s asset mix will provide stability and some upside in the 2021. 73% of GRI is derived from assets catering to new economy sectors – 47% logistics, 17% business parks and 9% Hi-tech assets. Tenant mix appears favourable as well, with 70% of tenants in the biomedical, engineering, telecommunications and logistics sectors which we believe will remain resilient


    Research Department

    Question: Hi, what is outlook for ARA Logos Logistics Trust?

    Answer: We do not have coverage of  ARALOGOS. ARALOGOS is currently trading about 5% below pre-COVID prices thanks to its portfolio of logistics assets. Demand for logistics-type of assets has increased in 2H20 and expected to heighten further given the higher e-commerce cannibalisation post-pandemic. Acquisition of stake in 5 Australia properties (announced in Oct 2020) will increase the composition of Australia assets from 32.5% to 47.6% on a pro-forma basis, as well as extend the land lease tenor from 24 to 29 years. This will mitigate the erosion of NAV from land lease decay in the SG portfolio.


    Research Department

    Question: You mentioned about the merger of KC and SMM, how is ths merger likely be done ?

    Answer: We believe the most likely outcome of the strategic review of Keppel O&M is the merger of Keppel O&M and Sembcorp Marine. This will likely be done through the divestment of the Keppel O&M unit to Sembcorp Marine. Sembcorp Marine will acquire the Keppel O&M unit into the group through a combination of equity and debt.


    Research Department

    Question: What is the impact on SembMarine if they acquire Keppel O&M

    Answer: We believe there are long-term positives for the SembMarine and Keppel Corporation shareholders in this scenario. This is because of the revenue and cost synergies associated with the merger of the two units.

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