OSK Research

2 Jan 2013

SINGAPORE EQUITY Investment Research

Terence Wong, CFA 65 6232 3896

terence.wong@sg.oskgroup.com

Strategy

ASEAN SMALL/MID CAPS

Market returns 2012
% Singapore Indonesia Malaysia Thailand Benchmark 23.5 15.5 14.4 40.4 Small Cap 36.6 8.7 2.6 49.6

Home $weet Home

Back in 2008, I said that ASEAN is the new China. I believe that over the past few years, my strong faith in the region has been validated, as it saw a revival of the heady growth days, driven by politics, demographics and geopolitics. After a sterling year in 2012, which saw the ASEAN markets under our coverage rise by an average of over 20%, we think that there are still legs to this run, particularly for the stocks riding on their respective domestic growth stories. ASEAN, the comeback kid. ASEAN was the investment destination of choice back in the 1980s till the mid-1990s, but it has lost a fair bit of lustre since then. However, prospects have once again brightened in the past few years given (1) sound political system that has attracted foreign investments and boosted the wages of the general populace; (2) attractive demographics with a young population that will support growth for years to come (Singapore, with one of the fastest ageing population, dont fall into this category); (3) geopolitical concerns as the likes of US and Japan firms look to diversify their businesses/manufacturing facilities away from an increasingly ambitious and aggressive China. ASEAN is a key beneficiary of this outflow. Home sweet home. Home is where the heart is, and where the money can be made. For domestic driven stories, infrastructure and consumer firms will intuitively be in one of the best positions to ride the revival of ASEAN. This applies to all of the geographies that we cover with the exception of Singapore. The latters economy will be going through a period of restructuring, which means some tough years ahead. But that said, there are still pockets of strength in the local stock market. Check out the infrastructure/construction boys, given big building programmes in Indonesia, Thailand and Malaysia. But mind the valuations, as many have already popped up to fair values. As well, consumer plays should look interesting, given massive wage jumps in Indonesia and Thailand in 2013 (40% and above!). While I think both these sectors will do poorly in Singapore, there are opportunities. Adventurous investors should look at some of the solid S-chips (yes, there are some around) that are in the infrastructure and consumer spaces given the turnaround in the Chinese economy. REITs, particularly those in Singapore which were the best performers globally in 2012, may see the run continue with Thailand jumping on the bandwagon. Rounding up the list, I think the small cap offshore & marine players will see interest pile up, leading to a P/E expansion.

Figure 1 Regional picks

Sector Infrastructure/ Construction Company Wijaya Karya Gamuda Sriracha Construction Midas Holding Consumer Mitra Adiperkasa Premier Marketing OSIM Sino Grandness QL Resources Offshore & Marine Nam Cheong Dayang Wintermar Offshore REIT FCOT Country Indonesia Malaysia Thailand Singapore Indonesia Thailand Singapore Singapore Malaysia Singapore Malaysia Indonesia Singapore Mkt Cap (USDm) 937.1 2488.7 379.6 418.5 1145.4 143.9 1029.8 136.7 845.4 414.9 429.1 179.8 698.7 Share Price* 1480 3.58 38.25 0.42 6650 7.35 1.715 0.64 3.1 0.26 2.38 480 1.305 Target Price* 1850 4.90 51.25 0.50 7500 8.80 2.04 0.68 4.05 0.30 2.90 640 1.51 FY13 PE (x) 20.6 13.0 10.8 34.4 26.0 11.1 14.4 3.2 16.3 9.5 13.2 8.3 22.0 FY14 PE (x) 17.6 11.4 11.2 26.1 20.3 9.7 13.3 2.7 14.1 7.4 10.8 7.1 20.0 FY13 ROE (%) 19.0 14.4 52.6 2.2 20.8 34.4 41.8 32.6 17.1 24.9 18.5 18.4 6.4 FY13 Yield (%) 1.2 3.8 5.2 0.0 0.5 6.3 2.4 0.0 1.7 1.5 4.2 2.0 5.8

Source: Company data, OSK research estimates *Local currency

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TABLE OF CONTENTS Theme #1: Infrastructure Boom Go with the (contract) flow .............................................. 3 Theme #2: Wage Inflation - Rise Of ASEAN consumers ...................................................... 4 Theme #3: Rising tide lifts small cap boats .......................................................................... 6 Theme #4: REIT Expansion in the Region ........................................................................... 7 Theme #5: Return of the Dragon China Plays Back in Play .............................................. 9

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THEME #1: INFRASTRUCTURE BOOM GO WITH THE (CONTRACT) FLOW We are in the midst of a building boom in this region, with billions of dollars expected to be doled out annually. The construction sector is a must watch for Indonesia, which despite a doubling in share price, still looks reasonably priced. On the flip side, we remain cautious on Singapore.
Figure 2 Sector Calls/Picks
Country Indonesia Malaysia Singapore Thailand
Source: OSK

Sector Call Overweight Overweight Underweight Neutral

Top Pick Wijaya Karya Gamuda Lian Beng Sriracha

Indonesias roads and railroads are generally in poor condition, and the capacity of its seaports is extremely limited. According to the Global Competitiveness Report in June 2011, Indonesias infrastructure, ranked 82nd globally, is in need of farreaching improvements and has been identified as one of most prohibitive factors for doing business in the sprawling archipelago. We expect the pace of Indonesias infrastructure development to accelerate, as the Indonesian government plans to increase its capital spending by 19% to IDR168trn from IDR141trn, mainly for infrastructure spending. Moreover, in May 2011, the Indonesian government launched a 15-year economic masterplan (MP3EI) to transform Indonesia into one of the world's Top 10 economies, by focusing on infrastructure development from 2010 to 2025. The government identified at least 22 economic activities to be developed across the nation, through 389 identifiable projects. The infrastructure required to support these activities would require a minimum of USD187bn (45% of total) of investments in roads, ports, power & energy. We think Wijaya Kurya (WIKA, BUY, IDR1,850) is in the best position to benefit from the strong growth in the sector, given its long-standing relationship with state oil & gas company Pertamina and the nations power company PLN spells solid growth in its EPC business, which is expected to see margin expansion. With its diversified operations, strong balance sheet and clear strategic direction, enhanced by its status as the most liquid construction company, WIKA deserves a premium over its competitors. More mega projects are in the works for Malaysia, which is expected to come through after the general election. We are likely to see further developments in relation to the remaining two lines of KV MRT, which we estimate to be worth over RM50bn. Other potential jobs are the RM7bn West Coast Expressway, the RM2bn-RM3bn Kuala Lumpur Outer Ring Road, the RM26bn Tun Razak Exchange, the Malaysia-Singapore high speed rail link, as well as the development of the RM2.3bn Rubber Research Institute (RRI) land in Sungei Buloh. We like Gamuda (BUY, TP RM4.90), which will likely see its earnings soar to record highs in the next two years on the back of the first KV MRT line. The group will likely add potential jobs such as the remaining two MRT lines, the Gemas-Johor Bahru double track, as well as the Langat 2 water treatment plant to its existing RM4.5bn-strong orderbook, which would in turn spur interest in the stock. For Thailand, the construction sector will benefit from heightened news flow in 2013. However, we have a NEUTRAL call on the sector due to the limited upside after a good run. As with the rest of the region, the sector is newsflow driven, and there may be trading opportunities given that some of the positive news may have yet to be priced in. One undervalued small cap is Sriracha Construction (BUY, TP THB51.25), a mechanical fabricator and erector of highly specialised products used mainly in petrochemicals and refinery. We feel that its potential as a modular fabricator for which there is huge demand hasnt been priced in, with the stock trading at about 11x 2013 P/E. The only dampener in the region for construction plays appears to be Singapore. While jobs are aplenty, margins are set to be crimped due to the productivity drive implemented by the government in 2012. Specifically, it calls for a cut in foreign workers as well as the upping of the foreign workers levy. Singapore is the most dependent on foreigners for construction in the region. Stocks in this sector are cheap, but will likely remain cheap for a while.

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THEME #2: WAGE INFLATION - RISE OF ASEAN CONSUMERS With the uncertain times, countries in the region are banking on domestic demand to make up for the shortfall, particularly Indonesia and Thailand. The impact is a lot less in small open economies like Singapore. Wages will be shooting up for some segments of the population in Indonesia and Thailand, and this spells good news for retailers.
Figure 3 Sector Calls/Picks
Country Indonesia Malaysia Singapore Thailand
Source: OSK

Sector Call Overweight Overweight Neutral Overweight

Top Pick Mitra Adiperkasa QL Resources OSIM Premier Marketing

The minimum wage is set to see the most aggressive rise in Indonesia. The Jakarta wage council recommended Jakarta minimum regional wage of IDR2.2m/month in 2013, up 44% y-o-y, from IDR1.5m/month in 2012. 2013s minimum regional wage recommendation is 12% higher than decent living needs of (IDR2.2m vs.IDR1.9m per month). In contrast, 2012s minimum regional wage was merely 2% higher than decent living needs (IDR1.53m vs. IDR1.50m per month). This significant increased minimum regional wage will benefit retailers which are targeting low-end consumers, such as Ramayana (RALS, BUY, TP IDR1,400). However, valuation appears to be fair for the stock as doubling in share price in 2012 brings it close to our target price. But it will not only be the low-income workers that will see a jolt in their earnings. Indonesias strong direct investment growth is spinning more jobs and indirectly pushing up general wages. We see winners among the consumer and retail companies targeting the middle to premium consumers, buoyed by the growth and spending resilience of the middle- income segment. We foresee retail companies maintaining strong revenue growth, with Mitra Adiperkasa (MAPI, BUY, TP IDR7,500) as our top pick. With its portfolio of premium brands and a robust medium-to-premium market, MAPI is able to offer competitively lower rental rates than other premium shopping malls. The company is also able to leverage on its brands via joint advertising with a number of financial institutions and thus lower its promotion costs. Not to be outdone, Thailand will also be raising its minimum wage by 40% next year, which like Indonesia, will lead to a consumer boom. In addition, our Thailand strategist Veena Naidu believes that the approval to establish REITs in Thailand in 2013 will be a boon to the retail industry as it will help accelerate branch expansion and reduce the risk of a cash call. Retailers will thus be able to expand their stores to cater to growing urbanisation more quickly. Our pick among the small caps in Thailand is Premier Marketing (BUY, TP THB8.80), a manufacturer and distributor of snacks, beverages, confectionary goods, nutrient foods and personal care & household products. It will benefit from huge growth in convenience stores in Thailand over the next few years, including 1,000 stores in 2013. PM makes its own fish snack which is chewy and not dissimilar to the flavour of a traditional Thai dry fish food. While the personal care business which has seen an uptake since 2H11, the key growth still comes from the snack business. PM was listed in 2008 and has been selected as one of Thailands Best Company and with the Best CEO by the SET in 2012. Minimum wage is a bad word in Singapore, but the government is pushing up the pay of some lower end jobs. Cleaners, for example, will now have to be paid at least S$1,000, when they previously commanded S$750-800. Business owners I spoke to claimed that costs have gone up quite a fair bit and even with hike in wages, it was difficult to get good staff (actually any staff at all). Restaurants and retail outlets are all facing the crunch, and hence there appears to be little investment opportunities in this sector. One of the few gems I see in this sector is OSIM International (BUY, TP S$2.04), a stock that I have been promoting for the past six months and continue to like despite a 50% jump in its share price since Jul 2012. The wage issue will not have as big an impact given that (1) it is already offering its staff a fair bit above the market and (2) it is diversified geographically, with focus on North Asia.

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Wages in Malaysia will not rise as rapidly as its neighbours, but we continue to be bullish on the sector. We expect the generous cash handouts to low-income households, personal tax rate reduction, and the special bonuses and incentives for the military forces and civil servants in the 2013 Budget to have some spillover effect on the overall consumer sector. Collectively, these should boost the disposable income of Malaysians, which will in turn spur consumption although it might not be enough to prop up purchases of big-ticket items. QL Resources (BUY, TP RM4.05), which is involved in basic food industry, is our top pick in Malaysia given the resilience for its core products as well its ability to deliver growth. The companys expansion into ASEAN countries with growing populations such as Indonesia and Vietnam is opening up vast market opportunities, which bodes well for its long-term growth.

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THEME #3: RISING TIDE LIFTS SMALL CAP BOATS

Figure 4 Sector Calls/Picks

Country Indonesia Malaysia Singapore Thailand
Source: OSK

Sector Call Neutral Overweight Neutral No rating

Top Pick Wintermar Dayang Ezion -

With a strong uptick in orders in 2012, the Offshore & Marine sector has been very buoyant, particularly in Singapore. Given the strong performance, we downgraded the Singapore Offshore & Marine (O&M) big caps from Overweight to Neutral on 14 Nov 2012. This is due to: (1) intense competition from South Korean and Chinese yards will impact margins and order wins; (2) limited room for rise in rig prices given availability of rig slots will cap margin expansion; and (3) continuing earnings downgrades could weigh on stocks. Our FY13 -14F EPS estimates are 10-15% below street for the big caps, but continue to favour a few small/mid caps. We are positive on Ezion (BUY, TP S$2.20) for its undemanding valuation of 7.5x FY13F P/E and FY13 net profit is set to double from FY12 as more liftboats and service rigs commence their long-term charters. Nam Cheong (BUY, TP S$0.30) is our preferred OSV builder given their successful build-to-stock business model that appeals to some of its long-term partners. The stock is trading at 7.7x FY12F P/E and 6.5x FY13F P/E. We expect the stock to show 19% EPS growth in FY13. In Malaysia, Dayang (BUY, RM2.90) remains one of our top picks in the oil and gas sector. We believe that the stock could offer an additional upside of 20-30% to our current fair value if it manages to get jobs in the Pan Malaysia cluster worth RM2-4bn. To recap, Dayang is the front runner for at least RM1.8 worth of jobs. Backed by a strong balance sheet (net cash as at 3Q12), the company could also add on a marginal oilfield project, although if that is true, some fund raising exercise is expected. Over in Indonesia, our preferred pick is Wintermar Offshore (WINS, BUY, TP IDR640) given its first mover advantage in the OSV industry and large time charter exposure which enables the company to pass on fuel price to its customers. WINS should also see ample opportunities in the O&G offshore blocks. Despite the BP Migas takeover by Ministry of Energy and Mineral Resources (ESDM), we believe WINS would benefit as the ESDM appears to be pro-national.

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THEME #4: REIT EXPANSION IN THE REGION

Figure 5 Sector Calls/Picks

Country Indonesia Malaysia Singapore Thailand
Source: OSK

Sector Call Overweight -

Top Pick FCOT -

The Securities Exchange of Commission (SEC) of Thailand has issued regulations governing the establishment of Real Estate Investment Trust (REITs) effective 1 Jan 2013. Among the guidelines are a gearing limit of up to 60% and shareholding limit of 50%, which make them more favorable than property funds. This will pave way for the monetisation of rental properties. An unresolved issue is the one relating to property tax at the fund level. Currently, rental properties sold to REITs are subject to a 0.5% stamp duty tax, 3.35% special business tax, and a 2% transfer tax upon transfer of properties to a REIT. These taxes are almost nonexistent in the case of property funds.
Figure 6 REIT framework Regional Comparison
Singapore Malaysia Hong Kong Thailand

Year of introduction

2002

2005

2005

2013

Management

External/Internal

External/Internal

External/Internal

External/Internal

Overseas assets

Allowed

Allowed

Allowed

Allowed

Assets under development

Gearing limit

Dividend payout

< 10% of total Not allowed (but a property that is under property valuation construction can be acquired provided the total value of the property is <10% of total portfolio valuation 35%, 60% if 50% credit rating obtained (Moddy's, S&P or Fitch) > 90% > 90%

< 10% of total property valuation

A property that is under construction can be acquired provided the total value of the property is <10% of total portfolio valuation 35%, 60% if credit rating obtained (Moddy's, S&P or Fitch)

45%

> 90%

> 90%

Revaluation of portfolio

At least once a year

At least once every three years

At least once a year and whenever new units are to be issued

Info not available

Source: OSK

Will this have an impact on the Singapore REITs, which have been the best performing REIT sector globally in 2012? Unlikely in the near term. As Singapore continues to remain as one of the few countries globally with AAA credit ratings, the strong demand for its bonds have compressed the interest rate of Singapores 10-year government bond to a historical low point of 1.3%. As a result, despite the rally of S-REITs share price in 2012, the average 12-month forward dividend yield spread of the S-REITs sector is currently still trading at about c.50bps above the long term average. Going forward, as the macro picture continues to remain uncertain amid a prolonged low interest rate environment, we believe S-REITs will continue to stay favourable in the near future.
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Frasers Commercial Trust (FCOT, BUY, TP S$1.51) is our top pick. During 3Q12, FCOT successfully divested KeyPoint and all its properties in Japan. Since then, gearing has been pared down to a healthy level of 28.6% (vs 36.8% previously). In addition, by redeeming back 47.6% of the total issued CPPU (which is currently costing the trust 5.5% annually), we expect DPU for FY13 and FY14 to increase by c.10% and 13% respectively. With a high portfolio occupancy rate of 94.9%, we maintain our BUY rating on the counter with a DDM based TP of S$1.51 (COE: 7.1%; TGR: 2.0%).

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THEME #5: RETURN OF THE DRAGON CHINA PLAYS BACK IN PLAY Chinas economy seems to be making a comeback. Economic data over the past few months suggest that domestic demand is holding up well. In addition, the manufacturing sector also unexpectedly grew at the fastest pace in 19 months in Dec 2012. The best way to play the theme will be in the Singapore market, given that it is home to over 150 Chinabased companies. Some key sectors to look out for: Consumer and Infrastructure. My consumer pick is Sino Grandness (BUY, TP S$0.68), the market leader for canned asparagus, long beans and mushrooms in China. The Groups canned foods export business has seen strong demand backed by a shaky European economy which has prompted consumers to shop at discount stores. It currently supplies to two major discount stores in Europe (Lidl and Aldi) under OEM basis. Sino Grandness will see exciting growth in the beverage business, which has been the key driver since 2009. It has issued two tranches of convertible bonds (RMB270m due 2015 to Goldman Sachs and RMB100m due 2014) under its Hong Kong subsidiary Garden Fresh. This is meant to fund the Groups beverage expansion plans. The Group plans to spin off its beverage side for a HK listing by 2014, which if successful, will be a kicker to the stock price. Our TP of S$0.68 is pegged to 3x FY13F earnings (in line with its historical trading mean). However, when confidence returns to the sector, the true value could be worth a lot more. Midas Holdings (BUY, TP S$0.50) has one of the best exposure to the infrastructure space among the S-chips. In the last quarter, Midas secured a number of orders, with the bulk of delivery expected between 2013 and 2015. More contract-wins by Midas are likely to be announced as the Chinese government pushes through with its investment plans in rail development. Operations are likely to start recovering from FY13, supported by the Chinese governments plans to boost investment in railway infrastructure and that some contracts are due to be delivered from FY13. The Chinese government has approved plans for a total of 25 new subway and inter-city rail projects (worth over RMB800b) up till 2018, giving a clearer visibility for potential order wins from train makers, which would bode well for Midas. It has targeted to spend RMB67b / month on railway construction for the rest of this year. The Chinese government is also said to be increasing its targeted railway infrastructure investment to RMB496b this year, up from RMB470b. There is no indication on when new contracts would be open for tender, but we note the potential for Midas to grow its orders. With NPRTs contract wins in 2012 expected to be delivered between 2013 and 2015, NPRT should be able to record profits in FY13, versus a loss in FY12. This would contribute to Midas earnings growth in FY13. Given the potential order flows that it could secure, we think Midas should trade higher than its current 0.75x P/B. We have a TP of S$0.50, pegged to 1.0x FY13F P/B.

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OSK Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but OSK does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. 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