Market: STI was down only 0.5% in March. But this masked broader weakness in the market. Of its 30 component stocks, only eight posted positive returns. Half were banks and electronics. The market had a whiff of President Trump’s stance on international trade when he withdrew the US from the TPP shortly after his nomination. Since then, he has played down his trade rhetoric. It is now back on. He has declared trade wars as good and that they can be won. He has also exercised the US’ so-called nuclear option in trade by invoking national security as the reason for import tariffs. This is supposed to be used in times of emergency or war. While steel and aluminium only comprise 2% of the US’ imports and nothing concrete has been rolled out, his rhetoric has fanned new uncertainties. The fear is retaliation and an escalation of trade protectionism. Of concern will be the current US investigation into China’s violation of intellectual-property rights. It may result in the US restricting Chinese investments in US companies, tariff penalties on imports, and visa controls. What could hold back the President would be his own Republican Party members who have no interest in dialling back the current economic momentum as they head out to the 2018 mid-term elections.

A Peterson Institute for International Economics policy brief laid out the advantages of cross-border trade. Trade allows industries to exploit economies of scale and generate technological spillovers (spread of innovation), import competitiveness (curtailment of monopolies) and comparative advantages (through specialisation). Studies suggest a $0.24 gain for GDP for every $1 rise in two-way trade. Admittedly, there are adjustment costs from jobs lost. However, the ratio of economic gains from trade to the cost of displaced workers is 5 to 1. Any gains for the domestic steel sector in the US will be at the expense of steel-consumption sectors such as auto, construction and machinery.

In Singapore, the headline news was the FY18 budget and completion of the reporting season. Most impactful was an incremental rise in buyers’ stamp duties for property and an extension of tax transparency to REIT ETFs. Increases in GST have been deferred. Banks surprised the market with a large jump in ordinary dividends. The three raised their aggregate ordinary dividends by 25% or S$1bn, 90% alone from DBS. Electronic companies beat expectations with sales and earnings growth of 30% and 100% respectively in 2017.

Recommendation:   We remain Overweight on banks, property, electronics and the consumer sector. DBS’ strong performance has tilted our preference to OCBC. The latter’s insurance business is another beneficiary of rising interest rates. Its Hong Kong loan growth remains above trend. The property sector succumbed to some weakness after the recent rise in stamp duties. Still, we are positive, as en-bloc liquidity has yet to surface. Electronics continues to enjoy a positive outlook, though USD weakness may take a bite off their earnings. The consumer sector still reels from sluggish consumption in the region. A stock we upgraded was SGX. It will be a beneficiary of the recent spike in volume and volatility. In addition, it pays a 4% dividend yield. Our STI target of 3900 has been maintained.

PHILLIP SINGAPORE SECTOR UNIVERSE

Best performing sectors in Feb18 were Industrial, Banks and Healthcare. The gains in industrials came from electronics names such as Hi-P (+29.3%), AEM (+28%) and Venture (19.5%). Positive returns on financials was predominantly due to DBS (+8.7%). The other two banks were up less than 2%. SGX dropped 7.9%. Healthcare was virtually flat due to rise in Raffles Medical (+3.6%).

Worst performing sectors in Feb18 were Shipping, REIT- Others and Consumer. Shipping faced weakness from SembCorp Marine (-15.2%) and PACC Offshore (-14.8%). REIT-Others tumbled on the back of selling in Hutchinson Port (-12%), and Accordia (7.2%). Leading the losses in consumer were Genting Singapore (-14.1%) and Thai Beverage (-9.2%).

SUMMARY OF SECTOR AND COMPANY VIEWS

SECTOR COMMENTARY

PROPERTY

Real Estate Developers’ Association of Singapore: BSD tweak unlikely to derail housing recovery

As part of Budget 2018, the government has raised the Buyer Stamp Duty (BSD) rate on the portion of residential property value in excess of S$1 million. The existing 1 to 3 per cent BSD rates still apply to the portion of residential property valued at S$1 million and below.

Comment: Bigger ticket purchases and en bloc purchases will be impacted more as the incremental 1% tax is only on the portion of home values above S$1mn. Over the last 2 years, the average transaction value was slightly below S$1.5mn, with average size condominium units sold at c.100sqm. For the average transaction, impact will be smaller – 0.3% or S$5,000 extra for a $1.5mn house. As the quantum goes higher, the closer the impact to the full 1% of purchase price. We do not expect a material negative impact on demand given the relatively small full impact vs purchase price for the average transaction. En bloc sales momentum, which has slowed lately with lower premiums paid vs reserve prices, could see further slowdown as the additional BSD eat into redevelopment margins.

TRANSPORT

SBS Transit lands Bukit Merah bus contract with S$472 million bid

SBS Transit, Singapore’s largest bus operator, has clinched an S$472 million deal to run 18 services in the Bukit Merah area, with three being cross-border routes into Johor Baru. It beat five other bidders in a competitive tender called by the Land Transport Authority last April. They were Singapore rail operator SMRT, the UK’s Go-Ahead and Australia’s Tower Transit – which operate existing bus routes here – as well as Chinese operator Shenzhen Bus Group and a consortium between Jiaoyun Group and Travel GSH.

Comment: SBS Transit is the incumbent for the Bukit Merah package, which started as one of the 11 negotiated packages since September 2016. The first three packages tendered through competitive bidding were the Bulim, Loyang and Seletar packages. The Bukit Merah package is now the fourth to be tendered through competitive bidding. With the award of the contract, there is continuity in the revenue stream for SBS Transit.

The next SBS Transit negotiated package to be up for tender is the Sengkang – Hougang package in 2021. The Bulim (Tower Transit Singapore) and Loyang (Go-ahead Singapore) packages will also be up for tender in 2021 if they are not extended. The next SMRT Buses package that will be up for tender is the Sembawang – Yishun package in 2020.

Phillip On The Ground – excerpts from our various conversations

Telecommunications

1. MVNOs (Circles Life, Zero Mobile, MyRepublic) in Singapore are already slashing prices before the fourth entrant TPG enters the market. MVNOs should target a particular niche but just competing onprice with limited differentiation.
2. Challenge for fourth operator will be indoor and outdoor site acquisition to install equipment. This will affect the efficiency in rolling out the network.
3. An interesting development is the eSIM in Apple Watch. eSIM allows the watch to act as a phone standalone without the need to bring the mobile phone. In effect, Apple could become the mobile operator. [Opportunity for manufacturers to become MVNOs. Customers can chose their operators dynamically, increase churn and reduces operator relationship and branding with customer. Also opens up the IOT market to connectivity without a physical SIM card.]

Utilities

1. Whole power industry losing S$1bn is not sustainable. Need to address the excess gas through the take-or-pay arrangement with LNG providers.
2. An industry letter to the authorities has been sent, signed by all 7 gencos.The whole industry is vulnerable to the present weak environment.
3. The situation in Middle East is challenging. Because of the low oil prices there are delays in announcing winners and making payments.

Consumer products

1. By 2019, Indonesia plans to implement a rule to mark all cosmetic products with halal certification. There is opportunity if able to get MUI of Indonesia to certify that the factory producing the product is halal. It also takes 1- 1.5 years to register a product.
2. Challenge of selling in Indonesia is the weak rupiah and can drastically change policy by banning products.
3. The relatively weaker purchasing power also means need to build affordable range of products for consumers. Skincare customers can also less loyal than nutritional. However, take-up rate of skin care is faster because so-called more “urgency” to look beautiful.

Coal

1. Indonesia government ruling requiring coal exporter to use Indonesia flagged vessels cannot be enforced. There just are not enough Indonesian flagged ships to move cargo.
2. If coal mine is near river, during the dry season the river is watered down and barge movement gets affected. Meanwhile, during wet season the river can get silted and need to be dredged and this will also slow down movement along the river.
3. On the rule to selling price on coal used for domestic power plants in Indonesia, coal companies are waiting to see how the policy take shape. Regulations appear to have been signed by the President but industry has yet to see it. Coal is technically a state asset and mining companies are merely contractors. However, regulations have stated in the past that coal has to be sold at market prices.