MICA (P) 057/11/2011 Ref No: SGMN2012_0126 1 of 15 Morning Note Phillip Securities Research Pte Ltd Singapore 2 July 2012 Market Commentary - STI: +1.11% to 2878.5 - MSCI Far East ex-Japan: +2.25% to 455.2 - Euro Stoxx 50: +4.96% to 2264.7 - S&P500: +2.49% to 1362.2 MARKET OUTLOOK: Tactical rally got a revival as the EZ has bought itself some time, time that we can only hope will be well spent in putting itself on the road to fiscal & political union. So no, the summit did not produce anything related to debt-mutualisation (common deposit insurance, European Redemption Fund) as Germany rationally demands fiscal union first, but we did get the ESM bailout fund having its mandate changed to allow lending directly to banks, rather than thru govts which would swell their debt levels in the process. The avoidance of this is good for the immediate refinancing risk posed to Spain and Italy, but as the ESM's is under- firepowered - 500b euros versus potential bailouts in the trillions - the market's next expectation would be to expanding it. One possible idea is to convert the ESM into a bank, so that it can tap the ECB's unlimited printing press. So watch for it, potentially another market boosting event. We're still left with the unfavourable dynamic of debt compounding at a faster rate than nominal GDP growth. Thus to address the lack of growth issue, 120b euros will be set aside for peripheral nations to boost output and jobs. The money will come from unspent EU funds, 10b of which will go to the European Investment Bank to boost its capital base so that it can raise 60b for SME investment and infrastructure. Given that this is puny with respect to 3tr euro PIIGS economies, the truth is that refinancing risk is still the underlying trend, regardless of the ESM's changed mandate. The EZ crisis is not over yet. We still need a roadmap to fiscal union, fiscal union, fiscal union. As a reminder, we have always maintained that this rally is tactical, as the underlying fundamentals is a slowing global economy with recession risks rising. US consumption data (see Macro Data below) continues to slow as there is hardly any income growth, and durable goods orders last weak on a 3m rolling basis still points to an investment cycle that is peaked out. EZ in recession is a given, and China's rebalancing slowdown continues (see PMIs below). Any stimulus from Beijing is merely for stabilization to prevent a hard landing, not necessarily to re-accelerate the economy. The larger trend for equities (S&P500, STI) then, is still down. So get your shorts out when this rally begins to sell into strength. In the meantime, the tactical rally is still on. For our larger trend outlook: Global Macro & Markets, 12 Apr. Singapore Sector Strategy: Sector Strategy, 1 June Singapore Sector Reports: Banks / Transport / Telcos / Property / REITS / Thematic Regional Strategy: HK, 22 June / Thai, 18 June / S'pore, 8 June / M'sia, 30 May / China, 24 May / Indon, 29 March MACRO DATA: US personal consumption expenditure in May stalled at 0%m-m saar as topline personal income continues to slow, 0.2%m-m. We have warned since last year that the US economy will stall on an incomeless recovery (see Strategy 27th Jan 2012). In Vietnam, economic growth accelerated 4.7% y-y in 2Q12, faster than the 4.0% pace recorded in the preceding quarter. Inflation eased from double-digit pace of 16% in 1Q12 to 8.6% in 2Q12. In view of softer inflation, State Bank of Vietnam has already cut its policy interest rate by 4pp since the start of this year to support growth. In Thailand, exports grew by 6.7% in May, reversing from the contraction of 3.5% in the preceding month. As we have guided in our Thai strategy report, the recent improvement in manufacturing output as well as exports might be largely due to the easing of supply-chain disruptions as well as resumption of plant operations. Going forward, industrial production should continue to recover as manufacturing industries that were severely hit by the floods (such as the autos and electronics) are expected to gradually resume to pre-flood production levels by 3Q12. However, softer external demand as well as global macro uncertainties are likely to slow down the pace of this recovery and weigh on exports. In the Eurozone, inflation held steady at 2.4% in June (16-month low), similar to the pace registered in the preceding month. While inflation has remained above ECB’s target of 2%, odds are skewed towards a rate cut this week in view of declining commodity prices (resulting in softer i nflation) as well as deteriorating economic conditions. South Korea’s industrial production rose by 2.6% y-y (1.1% m-m) in May, compared to 0.0% y-y (0.9% m-m) growth in April. Manufacturing rose by 2.7% y-y, compared to 0.0% in April. The nation’s export was supported by a weak currency. Shipment in May rose by 3.3% y-y, compared to the 1.0% y-y drop in April. Due to the worsening Europe crisis, the government has lowered it 2012 GDP growth forecast to 3.3% from previous 3.7%. Japan’s CPI growth slows slightly to 0.2% y-y, after April’s 0.4% y-y, calling for more stimuli as the government has an target inflation rate of 1.0% for the whole year. Core CPI fell slightly by 0.1% in May, compared to 0.2% gain in April. Real household income fell 1.5% m-m in May, a third straight monthly contraction, after April’s 0.8% m-m drop. A separate report shows that the nation’s industrial output fell the most since quake, by 3.1% m-m, after the 0.8% m-m drop in April. With the declining industrial output, the nation’s 2q12 GDP growth would likely slows down after the annualized 4.7% growth achieved in 1q12. China’s PMI fell slightly to 50.2 in June, compared to the reading of 50.4 in May, indicating slowing manufacturing activities. The nation’s Jan - May YTD industrial profit fell by 2.4% y-y, further the 1.6% y-y drop for the period Jan - Apr. To bolster growth, so far the government has conduct 3 RRR cuts (50 bp each) and a benchmark rate cut by 25 bp, and would likely stimulate more as inflation has stepped down to 3.0% in May, and Premier Wen said to “put growth in a more important position”. We expect two more RRR cuts for the rest of the year and even probably another benchmark rate cut. A separate report showed that the nation’s June final reading for MNI business sentiment index was 53.21, higher compared to the preliminary reading of 51.92, but still lower than May’s 54.40, indicating worsening business confidence. Source: Phillip Securities Research Pte Ltd
Transcript
MICA (P) 057/11/2011 Ref No: SGMN2012_0126 1 of 15
Morning Note
Phillip Securities Research Pte Ltd Singapore
2 July 2012
Market Commentary - STI: +1.11% to 2878.5 - MSCI Far East ex-Japan: +2.25% to 455.2 - Euro Stoxx 50: +4.96% to 2264.7 - S&P500: +2.49% to 1362.2 MARKET OUTLOOK: Tactical rally got a revival as the EZ has bought itself some time, time that we can only hope will be well spent in putting itself on the road to fiscal & political union. So no, the summit did not produce anything related to debt-mutualisation (common deposit insurance, European Redemption Fund) as Germany rationally demands fiscal union first, but we did get the ESM bailout fund having its mandate changed to allow lending directly to banks, rather than thru govts which would swell their debt levels in the process. The avoidance of this is good for the immediate refinancing risk posed to Spain and Italy, but as the ESM's is under-firepowered - 500b euros versus potential bailouts in the trillions - the market's next expectation would be to expanding it. One possible idea is to convert the ESM into a bank, so that it can tap the ECB's unlimited printing press. So watch for it, potentially another market boosting event. We're still left with the unfavourable dynamic of debt compounding at a faster rate than nominal GDP growth. Thus to address the lack of growth issue, 120b euros will be set aside for peripheral nations to boost output and jobs. The money will come from unspent EU funds, 10b of which will go to the European Investment Bank to boost its capital base so that it can raise 60b for SME investment and infrastructure. Given that this is puny with respect to 3tr euro PIIGS economies, the truth is that refinancing risk is still the underlying trend, regardless of the ESM's changed mandate. The EZ crisis is not over yet. We still need a roadmap to fiscal union, fiscal union, fiscal union. As a reminder, we have always maintained that this rally is tactical, as the underlying fundamentals is a slowing global economy with recession risks rising. US consumption data (see Macro Data below) continues to slow as there is hardly any income growth, and durable goods orders last weak on a 3m rolling basis still points to an investment cycle that is peaked out. EZ in recession is a given, and China's rebalancing slowdown continues (see PMIs below). Any stimulus from Beijing is merely for stabilization to prevent a hard landing, not necessarily to re-accelerate the economy. The larger trend for equities (S&P500, STI) then, is still down. So get your shorts out when this rally begins to sell into strength. In the meantime, the tactical rally is still on. For our larger trend outlook: Global Macro & Markets, 12 Apr. Singapore Sector Strategy: Sector Strategy, 1 June Singapore Sector Reports: Banks / Transport / Telcos / Property / REITS / Thematic Regional Strategy: HK, 22 June / Thai, 18 June / S'pore, 8 June / M'sia, 30 May / China, 24 May / Indon, 29 March MACRO DATA: US personal consumption expenditure in May stalled at 0%m-m saar as topline personal income continues to slow, 0.2%m-m. We have warned since last year that the US economy will stall on an incomeless recovery (see Strategy 27th Jan 2012). In Vietnam, economic growth accelerated 4.7% y-y in 2Q12, faster than the 4.0% pace recorded in the preceding quarter. Inflation eased from double-digit pace of 16% in 1Q12 to 8.6% in 2Q12. In view of softer inflation, State Bank of Vietnam has already cut its policy interest rate by 4pp since the start of this year to support growth. In Thailand, exports grew by 6.7% in May, reversing from the contraction of 3.5% in the preceding month. As we have guided in our Thai strategy report, the recent improvement in manufacturing output as well as exports might be largely due to the easing of supply-chain disruptions as well as resumption of plant operations. Going forward, industrial production should continue to recover as manufacturing industries that were severely hit by the floods (such as the autos and electronics) are expected to gradually resume to pre-flood production levels by 3Q12. However, softer external demand as well as global macro uncertainties are likely to slow down the pace of this recovery and weigh on exports. In the Eurozone, inflation held steady at 2.4% in June (16-month low), similar to the pace registered in the preceding month. While inflation has remained above ECB’s target of 2%, odds are skewed towards a rate cut this week in view of declining commodity prices (resulting in softer inflation) as well as deteriorating economic conditions. South Korea’s industrial production rose by 2.6% y-y (1.1% m-m) in May, compared to 0.0% y-y (0.9% m-m) growth in April. Manufacturing rose by 2.7% y-y, compared to 0.0% in April. The nation’s export was supported by a weak currency. Shipment in May rose by 3.3% y-y, compared to the 1.0% y-y drop in April. Due to the worsening Europe crisis, the government has lowered it 2012 GDP growth forecast to 3.3% from previous 3.7%. Japan’s CPI growth slows slightly to 0.2% y-y, after April’s 0.4% y-y, calling for more stimuli as the government has an target inflation rate of 1.0% for the whole year. Core CPI fell slightly by 0.1% in May, compared to 0.2% gain in April. Real household income fell 1.5% m-m in May, a third straight monthly contraction, after April’s 0.8% m-m drop. A separate report shows that the nation’s industrial output fell the most since quake, by 3.1% m-m, after the 0.8% m-m drop in April. With the declining industrial output, the nation’s 2q12 GDP growth would likely slows down after the annualized 4.7% growth achieved in 1q12. China’s PMI fell slightly to 50.2 in June, compared to the reading of 50.4 in May, indicating slowing manufacturing activities. The nation’s Jan - May YTD industrial profit fell by 2.4% y-y, further the 1.6% y-y drop for the period Jan - Apr. To bolster growth, so far the government has conduct 3 RRR cuts (50 bp each) and a benchmark rate cut by 25 bp, and would likely stimulate more as inflation has stepped down to 3.0% in May, and Premier Wen said to “put growth in a more important position”. We expect two more RRR cuts for the rest of the year and even probably another benchmark rate cut. A separate report showed that the nation’s June final reading for MNI business sentiment index was 53.21, higher compared to the preliminary reading of 51.92, but still lower than May’s 54.40, indicating worsening business confidence. Source: Phillip Securities Research Pte Ltd
Morning Note 2 July 2012
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Source: Bloomberg
STI - Index Members
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1.2
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Fundamental Call
Singapore Banking Sector - Update (Ken Ang Weiyu)
Singapore’s total DBU loans outstanding registered y-y growth of 22.5% to S$445.0 billion in May 2012. Business loans and Consumer loans reported growth of 28.0% y-y and 15.7% y-y respectively.
M-m, loans growth in May 2012 was higher compared to Mar 2012. Total loans grew 2.2%, compared to 0.6% in Apr 2012. Business loans grew 3.1% m-m, while Consumer loans grew by 1.1%.
We are neutral on the Singapore Banking Sector, and maintain our preference for DBS over UOB and OCBC.
Technical Analysis - Sakari Resources: The Pivots (Magdalene Choong)
Technicals: Buy above S$1.33, Short sell below S$1.15. Resistance at S$1.80, Supports at S$1.33 and S$1.15 (the 2 pivots to our trading decision)..
Fundamentals: 1Q12 results held 2 non-recurring events. 2Q and 3Q results should offer upside potential to share price.
Source: Phillip Securities Research Pte Ltd
Sector
Sector strategy – Update (Lee Kok Joo)
STI steady after steep fall in May, up 3.8% Lackluster market activities We are overweight on the Defensive sectors and opportunistic on the laggards Source: Phillip Securities Research Pte Ltd
Rokko Holdings Ltd announced that that the Group is expected to report a net loss for 1H2012. Rokko Holdings Ltd’s Leadframes division is expected to report an operating loss mainly due to negative margin incurred for ageing product inherited from the acquisition of Rokko Leadframes Pte Ltd which was completed on 28 February 2011. While orders have declined in tandem with slower economic growth and the weaker demand from customers, this division faces escalating labour and energy costs, amidst volatile prices of precious metals such as copper, silver and gold which are used as base materials for its finished products. (Closing Price: $0.081, unchanged) Boustead Singapore Limited announced that its Energy-Related Engineering Division secured approximately S$20 million in contracts within the past month from the oil & gas industries globally. The contracts involve the design, process engineering and construction of key largescale process systems and waste heat recovery units for downstream oil refineries and gas processing plants, and upstream offshore installations in Algeria, Bolivia, Canada, Hong Kong, Malaysia, Pakistan and Saudi Arabia. (Closing Price: $0.925, +2.210%) STX OSV Holdings Limited announces that it has secured new contracts for the construction of two Platform Supply Vessels for Island Offshore. The total value of the contracts amounts to approximately NOK 500 million. Deliveries are scheduled from STX OSV Brevik in Norway in Q4 2013 and Q2 2014. The hulls of the vessels will be delivered from STX OSV Braila in Romania. The vessels will be of Rolls-Royce’s UT 717 CD design. The overall length of each vessel will be 84.3 meters with a beam of 17 meters, and the deadweight will be approximately 3800 DWT. (Closing Price: $1.490, +1.706%) Directors of Castlemaine Goldfields Limited, an Australian-listed junior gold mining company, have unanimously recommended that its shareholders accept the all-share takeover offer by LionGold Corp Ltd. The statement was made on 28 June 2012 in the Target Statement issued by Castlemaine in response to LionGold’s proposed offering of two LionGold shares for every nine Castlemaine shares in the Bidder’s Statement lodged with the Australian Securities Exchange on 15 June 2012 by LionGold. The takeover proposal was announced on 16 April 2012 when LionGold committed to taking a preliminary 11.4% stake in Castlemaine, valuing the Australian company at approximately S$65m (A$65.2m). (Closing Price: $1.260, +1.205%) Creative Technology Ltd today announced that it expects the Company’s revenue for the current fourth quarter ending 30 June 2012 to come in below target, at approximately US$35 million, due primarily to lower than expected demand in Europe resulting from the ongoing Eurozone debt crisis. As previously announced, the Company expects to report an operating loss for the quarter. The Company also announced today that it has completed the divestment of its 51% interest in a subsidiary, Grandeye Limited, for US$3.5 million and expects to recognise an investment gain of approximately US$2.8 million in the current quarter. (Closing Price: $3.490, +0.867%) Advance SCT Ltd issued a profit guidance following a preliminary review of the financial results of the Group for 1H2012. The global economic turmoil has caused a significant slow-down in the Group’s operating units business activity, especially in Qingyuan, China, where the copper smelting operation had been scaled back amidst an uncertain domestic market and additional tax burdens. At the same time, the sudden and severe fall in the prices of some commodities in the past six months, in particular aluminium and nickel (which has an impact on the price of stainless steel), had further hit the bottom-line. The Group is conducting a review of the copper rods and wires business in order to reallocate the limited resources and focus on higher value-added copper products such as the production of copper balls. (Closing Price: $0.021, +5.000%) Source: SGX Masnet, BT Online
Morning Note 2 July 2012
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FSSTI 2,878.45 +1.11% 12,880.09 +2.20%
9.47 19,441.46 +2.19%
81.70 +0.09% 1,597.40 +0.03%
84.96 +0.75% 1.643 +0.08%Crude oil US Treasury 10yr Yield
HSIFSSTI (P/E)
Dollar Index Gold
DJI
Source: Bloomberg
2500
2700
2900
3100
3300
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-11
Jul-1
1
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r-12
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y-12
6
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9
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11
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1
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1
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1
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-12
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b-1
2
Ma
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2
Ma
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72
74
76
78
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82
84
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Ap
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Nov-1
1
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2
Ma
r-12
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3
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-11
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Morning Note 2 July 2012
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Phillip Securities Research - Singapore Stocks Coverage
Company Analyst RatingTarget Price
(S$)
Current Price
(S$)
Difference to
Target Price (%)
DBS GROUP HOLDINGS LTD Ken Ang Accumulate M 14.900 13.870 7.4%
OVERSEA-CHINESE BANKING CORP Ken Ang Neutral M 8.200 8.790 -6.7%
UNITED OVERSEAS BANK LTD Ken Ang Neutral U 17.500 18.660 -6.2%
GENTING SINGAPORE PLC Magdalene Choong Accumulate M 1.890 1.410 34.0%
SINGAPORE EXCHANGE LTD Ken Ang Accumulate M 7.340 6.310 16.3%
COMFORTDELGRO CORP LTD Derrick Heng Buy M 1.650 1.545 6.8%
SMRT CORP LTD Derrick Heng Sell M 1.330 1.690 -21.3%
7/5/2012 Continuing Claims 23-Jun -- 3296K 7/17/2012 Non-oil Domestic Exp SA (MoM) Jun -- -2.10%
7/5/2012 Bloomberg Consumer Comfort 1-Jul -- -36.1 7/18/2012 Automobile COE Open Bid Cat A 18-Jul -- --
Source: Bloomberg
US Singapore
Economic Announcement
Source: Bloomberg
Morning Note 2 July 2012
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Important Information
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Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this publication, and may have performed services for or solicited business
Morning Note 2 July 2012
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from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this publication.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment. To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold a interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this publication. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, which is not reflected in this material, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the preparation or issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the preparation or issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this material. The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction. Section 27 of the Financial Advisers Act (Cap. 110) of Singapore and the MAS Notice on Recommendations on Investment Products (FAA-N01) do not apply in respect of this publication. This material is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this material may not be suitable for all investors and a person receiving or reading this material should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products. Please contact Phillip Securities Research at [65 65311240] in respect of any matters arising from, or in connection with, this document. This report is only for the purpose of distribution in Singapore.
Morning Note 2 July 2012
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Contact Information (Singapore Research Team)
Chan Wai Chee Lee Kok Joo, CFA Joshua Tan CEO, Research Head of Research Strategist
