August 18, 2015

SINGAPORE

STRATEGY

Prefer large-caps on recent falls

Notes from the Field

—————————————————————————————————————————

Kenneth NG, CFA T (65) 6210 8610 E [email protected]

The Singapore market feels like a Mission Impossible stunt. Analysts chop their earnings post-1Q and hold their heads down for three months (instead of three minutes) hoping for a bottom, only to find another set of results that is below water. Worse, a RMB devaluation spooks outflows, so banks (resilient earnings) and property (cheap) turn out to be the hardest hit. So much for Singapore being defensive! Figure 1: Earnings changes in the past three months, by sector (%) Sector

Recom.

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‘‘

The weak Chinese economy seems to require a competitive devaluation against other Asian producers which points to weak global growth, lower commodity prices and again, lower inflation worldwide. The disinflationary-deflationary effect will keep 10- and 30-year Treasuries well-bid.” Bill Gross

Highlighted Companies DBS DBS has seen a sharp selldown despite delivering a solid set of results and having no signs of NPLs. We deem that the focus on banks will shift from their NIM upside potential to their downside risks from credit costs. We are most concerned with ASEAN NPLs and in this regard, DBS has more protection with its lack of an ASEAN presence. ST Engineering The benefits of a stronger dollar are not really showing but STE does have credible MRO demand and strong orders for its electronics divisions, the two biggest divisions of the conglomerate. OCBC Synergies from the integration of OCBC Wing Hang are coming through, showing up in wealth management fees to Hong Kong SME customers, a good quarter for stockbroking, and also collection of USD and RMB deposits. Risks lie in the potential of ASEAN seeing a steep rise in NPLs. GuocoLeisure Evidence of earnings growth from its efforts to refurbish its UK hotels and reverse the previous poor performance will be the key driver. A bonus would be a privatisation bid by the owner.

Financials Property REITS Telco Transport CapitalGoods Commodities Gaming Consumer Others Average

Overweight Overweight Overweight Underweight Neutral Neutral Neutral Underweight Underweight -

Core Net Profit (US$m) (2Q15) CY2015 CY2016 9,067 9,788 2,221 2,447 2,433 2,582 3,215 3,275 691 1,055 3,200 3,503 1,590 1,823 453 605 1,539 1,732 1,247 1,396 25,656 28,206

Core Net Profit (US$m) (1Q15) CY2015 CY2016 9,371 10,194 2,340 2,629 2,483 2,632 3,302 3,524 1,350 1,836 3,678 3,894 1,892 2,155 601 693 1,668 1,876 1,273 1,450 27,958 30,882

Earnings Change QoQ CY2015 CY2016 -3.2% -4.0% -5.1% -6.9% -2.0% -1.9% -2.6% -7.1% -48.8% -42.5% -13.0% -10.0% -15.9% -15.4% -24.7% -12.7% -7.7% -7.7% -2.1% -3.7% -8.2% -8.7%

SOURCE: CIMB RESEARCH

The current environment is fragile for risk assets, and Singapore’s poor corporate reporting season does little to improve matters. For investors who need to choose between Singapore stocks in a portfolio, our preference would be the large-cap stocks, after the sell-down in banks and property. Our large-cap picks are CAPL, CIT, DBS, IHH, OCBC, SCI, SPOST, STE and THBEV.

Trends seen in 2Q We highlight some of the trends we have seen in the last three months. 1) The weak ASEAN currencies and A$ have dragged down the results of banks, REITs, telcos and consumer companies. Depreciating currencies have slashed the translated earnings of Singapore corporates’ overseas units. 2) Banks are starting to see NPLs, not so much from domestic loans, but rather, from ASEAN. 3) Weak oil prices are hitting the order flow, utilisation rates and charter rates of oil & gas vessels, even if they do not come through immediately. 4) A change in accounting treatment for CPO stocks can still hit share prices hard, even if it is just an accounting

impact. 5) When external demand is weak, there is just no pricing power for anyone. All these factors are driving our earnings cuts.

Our thoughts ahead The recent market sell-down, driven by the RMB devaluation, bring out some value in large-cap stocks like DBS, CAPL, CIT, CT, CCT, and SCI. Tactically, this deserves a trade and some switching into these stocks is warranted, even if some of their prospects are hardly attractive. On a longer-term view, we think it would be good to use the sell-down to add structurally-attractive stocks (IHH, SPOST), as greater comfort with long-term earnings prospects is paramount in this environment.

Top picks changes Banks and property look the most attractive. We add CMT, SCI, City Dev as trading stocks, switching out of resilient stocks that have not fallen (CD, Sheng Siong). A variation to this bottom-picking stance is to add FR into the mix, on a wild bet on El Nino. We also take the chance of adding IHH and SPOST.

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA

Strategy │ Singapore August 18, 2015

KEY CHARTS Corporate earnings look bad

2.5

Corporate earnings momentum trends remained poor. 2Q disappointments were aplenty, including: UOB (weak revenue, high provisions); Capitaland, City Developments (weak residential and hotel contributions); SGX (one-off costs, derivative fees did not fire up); Keppel Corp and Sembmarine (slow O&M revenue recognition); Genting Singapore (investment losses); SMRT (rising maintenance costs); plantation companies (weak CPO prices); and Venture (heightened tax rates). All in, data points allude to a difficult environment to deliver topline growth, while susceptibility to provisions is rising and overseas earnings get hit with translation effects, as ASEAN currencies fall.

Positive-negative surprise ratio 2.0

1.5

1.0

0.5

2Q15

1Q15

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

0.0

Lean towards large-caps after the selldown Main changes in our sector calls are to upgrade property (OW) and commodities (N), downgrade transport (N) and gaming (UW). Banks look attractive after the recent selldown on Rmb devaluation when fundamentally, they should benefit. REITs have a tricky September to get past, else it looks like safety with its high yields in a period where interest rate hikes are unlikely to be aggressive and alternative sectors’ earnings are getting killed. Property look cheap again after recent falls. Plantation stocks arguably cheaper, but justified; given the declines, any unexpected El Nino catalyst could spur share prices. Transport is downgraded as CD (our top pick) has been resilient, when others are crashing.

Sector ratings

OVERWEIGHT

NEUTRAL

UNDERWEIGHT

Financials

Capital Goods

Consumer

Property

Commodities

Gaming

REITs

Transport

Telcos

CIMB’s sector calls and stock picks

Few catalysts, only valuation support We find ourselves leaning towards more large-cap picks after the selldown. The changes to our large-cap model portfolio include: 1) adding City Dev as a second property pick, replacing ComfortDelgro; 2) adding SPOST back to replace SIA, as SPOST’s delivery of e-commerce revenues is encouraging while SIA has doused optimism on any big earnings turnaround; 3) adding CMT, SCI as cheap valuations stand out; and 4) adding IHH after some weakness recently. Among our small-cap picks, CDL-HT and PACRA are chopped on worsening industry dynamics and Sheng Siong gets chopped as it looks to be full value.

TOP PICKS

LEAST PREFERRED

Financials

OW

OCBC, DBS

UOB, SGX

Property

OW

CAPL, CIT, GLL, HOBEE

Wing Tai

REITs

OW

MAGIC, CMT, FCT, CCT

ART, KREIT, CREIT, SUN

Telcos

UW

ST

M1, Starhub

Transport

N

CD, SIA, SPOST

SMRT, NOL, Tiger

Capital Goods

N

STE, SCI, PACRA

EZRA, Vard, SMM

Commodities

N

FIRST

Wilmar, IFAR, GGR

Gaming/Healthcare UW

Performance since the RMB started to fall

2.0%

A check on share price performance in the past week (since China started to devalue the Rmb) showed that large-cap, well-owned stocks seem to have borne the brunt of the selldown. As such, we think there are trading opportunities in the banks, large-cap REITs, SCI, CAPL and City Developments. Among the stocks that have fallen most, we are still apprehensive about UOB (ASEAN NPLs), AREIT and SMM (valuations still not cheap). Overall, our large-cap picks are CAPL, CT, CIT, DBS, IHH, OCBC, SCI, SPOST, STE and THBEV. Our small-cap picks are FR, GLL, HOBEE, MAGIC, TIAN and VMS.

1.0%

UW

GENS, Raffles Med

DFI, THBEV

F&N, Super, Petra Foods

Venture

Silverlake

0.7% 0.0%

Comsumer

IHH, Tianjin Zhongxin

(2.0%) (3.0%) (4.0%)

(5.0%) (6.0%) (7.0%)

(0.3%) (0.3%) (0.5%) (1.1%) (1.2%) (1.3%) (1.8%) (2.6%) (2.8%) (2.9%) (3.1%) (3.3%) (3.4%) (3.6%) (3.7%) (3.8%) (3.8%) (4.1%) (4.3%) (5.0%) (5.3%) (5.9%) (6.5%) (6.6%) (7.0%) (7.1%) (7.5%) (7.6%) (7.7%)

0.0% (1.0%)

(9.0%)

THBEV OLAM FCL CD SPOST UOL ST SGX SATS SPH STE CIT STH KEP GLP GENS FSSTI SIA SUN SMM CAPL WIL DFI OCBC SCI AREIT IHH YZJSGD CT DBS UOB

(8.0%)

SOURCE: CIMB, COMPANY REPORTS

2

Strategy │ Singapore August 18, 2015

Figure 2: CIMB’s top picks for 2015 Bloomberg Ticker

Recom.

CAPL SP CT SP CIT SP DBS SP IHH SP OCBC SP SCI SP SPOST SP STE SP THBEV SP

Add Add Add Add Add Add Add Add Add Add

3.08 1.92 9.00 18.78 2.00 9.60 3.48 1.92 3.17 0.77

4.06 2.37 10.47 23.54 2.43 11.65 4.02 2.07 3.70 0.87

9,334 4,711 5,811 33,407 11,678 27,615 4,409 2,927 7,001 13,729

18.2 17.1 14.4 9.9 48.5 9.7 10.0 27.8 18.2 19.7 13.1

17.8 16.5 13.1 9.1 39.4 8.7 9.0 26.7 16.8 18.3 12.0

70.5% -4.6% 15.8% 7.1% 20.6% 5.9% -3.4% 2.7% 3.1% 3.7% 8.9%

0.76 1.06 0.97 1.16 2.35 1.14 1.03 2.65 4.41 4.42 1.33

0.73 0.96 0.92 1.09 2.25 1.06 0.96 2.63 4.19 4.04 1.25

4.3% 6.3% 7.1% 12.3% 5.0% 12.5% 11.0% 10.4% 25.6% 24.2% 10.7%

4.2% 6.1% 7.2% 12.3% 5.8% 12.6% 11.2% 9.9% 25.6% 23.1% 10.8%

4.6% 6.1% 11.9% 12.5% 6.3% 12.5% 11.7% 10.6% 26.6% 22.6% 11.3%

24.7 na 11.4 na 21.1 na 5.3 13.8 11.0 15.9 14.7

20.0 na 10.9 na 18.6 na 4.4 12.7 10.8 15.2 13.1

4.2% 5.8% 2.1% 3.9% 0.4% 3.8% 3.6% 3.6% 4.7% 3.4% 3.5%

2.8% 6.0% 2.3% 4.4% 0.5% 4.2% 4.0% 3.7% 4.7% 3.5% 3.7%

First Resources Ltd FR SP Guocoleisure GLL SP Ho Bee Land HOBEE SP Mapletree Greater China Commercial Trust MAGIC SP Tianjin Zhongxin Pharmaceutical Group TIAN SP Venture Corporation VMS SP Average

Add Add Add Add Add Add

1.74 0.87 2.04 1.00 1.38 8.15

2.23 1.18 2.68 1.20 1.57 8.56

1,957 845 966 1,931 2,843 1,597

15.1 16.7 20.7 19.4 19.2 14.7 17.1

11.7 15.3 17.3 18.5 16.5 13.3 14.8

6.1% 8.2% 38.9% 4.0% 7.6% 7.4% 12.0%

1.70 0.73 0.52 0.76 1.75 1.19 0.96

1.54 0.72 0.51 0.72 1.66 1.17 0.92

11.7% 4.3% 2.6% 4.2% 10.6% 8.3% 5.9%

13.8% 4.7% 3.0% 4.0% 10.3% 8.9% 6.4%

15.4% 5.1% 4.2% 3.8% 10.6% 9.5% 8.1%

9.7 11.2 28.1 na 10.7 8.6 11.9

7.2 10.6 24.0 na 10.4 8.0 10.1

2.0% 2.6% 3.1% 7.2% 1.7% 6.1% 4.2%

2.6% 2.6% 3.1% 7.7% 1.7% 6.1% 4.4%

Company

Price Target Price (local curr) (local curr)

Market Cap (US$ m)

Core P/E (x) CY2015 CY2016

3-year EPS CAGR (%)

P/BV (x) CY2015 CY2016

Recurring ROE (%) CY2015 CY2016 CY2017

EV/EBITDA (x) Dividend Yield (%) CY2015 CY2016 CY2015 CY2016

Top picks CapitaLand CapitaLand Mall Trust City Developments DBS Group IHH Healthcare OCBC Sembcorp Industries Singapore Post Ltd ST Engineering Thai Beverage Average

Small-cap picks

SOURCE: CIMB Research

Calculations are performed using EFA™ Monthly Interpolated Annualisation and Aggregation algorithms to December year ends

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Strategy │ Singapore August 18, 2015

Prefer large-caps on recent falls 1. 2Q15 RESULTS SUMMARY

Table of Contents 1. 2Q15 RESULTS SUMMARY 2. SECTOR VIEWS

p.4 p.5

3. VALUATION AND RECOMMENDATIONS

p.13

1.1 Weak corporate reporting trends keep up The 2Q15 results were not good again. The ratio of disappointments vs. earnings beat was 9-20. Noteworthy earnings setbacks came from Genting Singapore (portfolio investment losses), UOB (higher provisions, slow income growth), SMRT (high repair and maintenance costs), Sembmarine and Keppel Corp (lower O&M revenue, unexpected provisions) and Wilmar (weak commodity prices). The banks’ new avenues of extra provisioning came mostly from their ASEAN operations. Only UOB had rising Singapore mortgage provisioning; that stoked some concerns over the entire banking sector. In the property sector, rents in the industrial, office and hotel sectors all seem to be trying in vain to resist the pull of gravity. Residential prices have fallen 6-7% on average, but rents are now falling more. We believe the government will try to engineer a soft landing as average price declines hit 10%, or else more mortgage NPLs in the banking sector will inflate further. Among the other domestic business, SMRT was weighed down by rising maintenance costs. Genting Singapore sprang a negative surprise with its portfolio losses. In the external sectors, the lack of orders in the capital goods sector was already known, but trends such as lower revenue recognition and provisions are new worries. Other stocks which had notable change in guidance were: 1): GLP (cutting China development starts), 2) SIA (telling the market that it does not envision a turnaround), and 3) Venture (citing higher effective tax rates as new product programmes are slow to roll out). One side effect notable in 2Q was the effect of currencies. As the S$ rose against most ASEAN currencies and A$, the banks saw translation effects eat up any muted asset growth they had. REITs with overseas property exposure (CDL-HT) got hit badly and consumer companies suffered both from the translation angle and margins. It was not a pretty sight.

Figure 3: Highlights of positive and negative surprises in 2Q15 Above expectations SPH DBS Group Neptune Orient Lines OCBC Yangzijiang Shipbuilding Riv erstone Holdings Fraser & Neav e Sw issco Holdings Courts Asia

Below expectations

Abov e. Due to gain on inv estments, and redemption of MTN notes, else inStronger IB-related fees, wealth management, treasury and lower Ceased loss-making inland transportation segment. Gains from GEH's sale of New China Life Gains from the sale of inv estments, forex and subsidy Higher GPM on strong US$ and low raw material price Stronger Malay sian soft drinks & Thai dairy Higher than ex pected contribution from w holly -ow ned drilling rigs Grow th in Malay sia and higher serv ice charge income

Tiger Airw ay s Keppel Corporation Raffles Medical Group MTQ Corporation CDL Hospitality Trust Singapore Exchange Sembcorp Marine SMRT Corporation United Overseas Bank Indofood Agri Resources United Env irotech Ltd Dairy Farm International CWT limited Sembcorp Industries Wilmar International Venture Corporation Capitaland Ltd Sarine Technologies Ltd Super Group Boustead Singapore Wing Tai Holdings Genting Singapore Nam Cheong City Developments

Rate of y ield improv ement, below Lower O&M revenue and S$200m provision for the Doha project Slow er grow th from healthcare serv ices. Cost from upcoming projects. Low er activ ity for the Singapore oilfield engineering business Weaker SG, Aus, NZ hotel contribution. Higher debt costs. Lower derivatives fees. One-off costs Lower revenue, higher interest cost, losses from Cosco Weak rail segment. Higher repair and maintenance expenses and Low trading income, slow core income, rising costs and provisions Higher than ex pected losses from Brazil JV Slow er membrane sales, higher financing costs Margin pressures. Drag in ASEAN, Normalization of grow th in HK Low er commodity logistics v olumes, higher start-up costs (new logistics Slightly below. Weaker marine and utilities Only at 38% FY forecast, due to weaker commodity prices Higher effectiv e tax rate Slower China completions, expect a backloaded 2H Tight credit conditions, higher rough diamond prices Declines in both branded consumer, and Ingredient segments Broad-based w eakness Weaker dev elopment earnings and low er ov erseas contributions Lower VIP GGR and fair value loss on portfolio investments Low er- than-ex pected order book recognition Lower residential and hotel income

Memtech International

Unex pected delay s in customer orders , higher admin ex penses.

Pacific Radiance

Subsea losses w idened

Petra Foods

Sales decline in Indonesia, falling Rp and rising costs on a falling Rp

=

SOURCE: CIMB, COMPANY *bold denotes large-cap stocks

4

Strategy │ Singapore August 18, 2015

2. SECTOR VIEWS 2.1 Financials - Overweight Figure 4: Financials - Overweight POSITIVE CATALYSTS TO LOOK FOR TOP PICKS:

TOP SHORTS:

DBS

OCBC

NIM expansion as interest rates rise. Banks are beneficiaries of rising rates. They can price up loans faster than funding costs rise, and expand NIMs. The higher the bank's CASA ratio, the more sticky the funding cost, hence the wider the NIM expansion. We expect SIBOR to continue on an uptrend as the USD continues to strengthen against the SGD.

UOB

SGX

Diversified fee income growth. Trade fees and loan fees may be curtailed in this environment, as China's trade finance activity falls. The banks have been able to drive wealth management fees and customer treasury-related fees, based on a combination of product sales and bancassurance fees. DBS has lucrative bancassurance fees from Manulife in 2016.

20x

Intra-regional trade flows. As domestic loan demand remains weak, the banks are turning to intra-regional trade flows to drive loan growth. For DBS and OCBC, the focus remains on funding HK/China corporates' expansion and investments in the region. UOB's focus still remains on ASEAN, which places it in a weak spot as ASEAN slows.

12-mth Fwd Rolling FD Core P/E (x)

18x 16x

+1 SD

14x Mean

NEGATIVE CATALYSTS TO FEAR

12x -1 SD

10x 8x 6x 04

2.3x 2.1x

05

06

07

08

09

10

11

12

13

14

P/BV (x) Current ROE (RHS)

15

13.5% 13.0%

1.9x 12.5%

1.7x 1.5x

12.0%

1.3x

11.5%

1.1x

11.0%

0.9x

0.7x

10.5% 04 05 06 07 08 09 10 11 12 13 14 15 16

Rising NPLs and credit costs. NPLs have started to show up in a variety of places: 1) Thai loan books for UOB, 2) property loans, 3) oil & gas loans for OCBC, and 4) Indian SME loans for DBS. While oil prices have been low for some time, we believe the stresses in oil & gas loans are only starting to show. Another area of concern is ASEAN as the economy slows. Slowing loan growth. Domestic S$ lending opportunities have been very limited as mortgage applications fell 40-50% last year, and there are no major infrastructure investments in Singapore. Also, China-related trade loans have slowed significantly, as the onshore-offshore rates' gap closes. System loan growth expectations are guided down to midsingle digits. Jul-06 Aug-06

Technology threats. In addition to various regulatory Sep-06 requirements slapped onto the Oct-06 banks, the banks now also have to worry about e-commerce, alternative payment channels Nov-06 Dec-06 DBS announced a big capex and the threat these pose to the relevance of traditional banks. Jan-07 investment last year to digitise the bank. Feb-07 Mar-07 SOURCE: CIMB RESEARCH

Banks remain one of our Overweight sectors; they have been sold down most after Rmb devaluation concerns stoked fears of currency wars. The banks’ recent results season was characterised by no asset growth, rising NIMs, slow fee growth (differentiated between banks with SE Asia exposure and North Asia) and rising credit costs (again, differentiated between SE Asia and North Asia exposure). Overall loan demand throughout Asia is weak, so a slowdown in trade fees and other institutional banking activities must be expected. The stronger fee streams were wealth management, stockbroking and investment banking. Part of this is due to buoyant Chinese equity markets in 2Q, so it is reasonable to expect these to taper also. While a slowdown in all manner of topline is true, the bigger swing factor is provisions and we are increasingly concerned about banks that have ASEAN exposure. Our top banking pick has swung to DBS, following its results delivery and recent share price weakness. As a pair-trade, we advocate shorting UOB, as the trend of rising credit costs in ASEAN looks unavoidable. The recent concern of Rmb devaluation has caused Singapore banks to be sold down significantly. In our view, these moves are more due to global investment flows, as worries of Asian currencies devaluation (in line with Rmb) are causing a flight to safety back to US assets. The actual fundamental effects on bank earnings are positive. Rmb weakness will add fuel to the dollar strength theme and push up the S$ SIBOR. This can only aid margin expansion. Separately, we are also bearish on SGX with the view that the stock’s expensive valuations stemming from its ability to benefit from the China A50 derivative contracts must now rescind after results show that derivatives volumes and fees are not in a one-for-one relationship. 5

Strategy │ Singapore August 18, 2015

2.2 Developers - Overweight Figure 5: Developers – Overweight POSITIVE CATALYSTS TO LOOK FOR CAPL

TOP PICKS:

City Dev

UOL

TOP SHORTS:

Wing Tai

60%

Valuation-driven. Valuations have been depressed by a slew of external factors and the sector is trading at a 38% discount to RNAV or at the -1s.d. to average discount level and is at the lowest level since mid 2014. From this level, we think downside risks could be limited. Recovery in residential volumes. While there have been signs of clearing levels in the high-end residential market, this had not spread to other market segments. On the other hand, affordably priced projects such as High Park Residences, continue to enjoy decent take up. Though we anticipate the price trend will remain down this year, these buying responses indicate that there is a pricing support in developers' RNAVs.

Disc to NAV 40%

20%

0%

NEGATIVE CATALYST TO FEAR

-20%

-40%

-60%

-80% 90 91 92 94 95 96 98 99 00 02 03 04 06 07 08 10 11 12 14 15

2.5

P/bk

Negative real mortgage rates. The key negative risk for the sector remains interest rate hikes. With rental yields declining due to falling rents, rising interest rates would erode the yield gap and may lead to more property owners off-loading their investments. In addition, rising incoming supply, particularly in the Outside Central Region, is expected to continue to drag on capital values.

2.0

1.5

1.0

0.5

0.0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

SOURCE: CIMB RESEARCH

We upgrade our rating on developers from neutral to Overweight, after recent share price weakness. Following the retracement in share prices, the sector is now trading at a 38% discount to RNAV or at -1s.d. discount to mean. This is the lowest level since mid-2014. The key risk to the sector is the prospect of rising interest rates and the knock-on impact on financing and mortgage instalments. Jan-July residential sales (ex-ECs) totalled 5,153 units or 2% higher than a year ago but volumes were driven purely by specific developments. Vacancies are still rising and rents are falling. Record-high completions expected in 2016-17, expecially in the mass market segment, are likely to pressure rents and further narrow rental yield spreads. The weak performance of property stocks was largely due to macro reasons such as devaluation of the Rmb which affected those with Greater China exposure and possibly, lowered expectations of any lifting of property cooling measures in the near term. With these factors largely factored into share prices, our property team’s top picks are Capitaland (ROE improvements), City Dev (cheap valuations, asset divestments) and smaller-cap names such as Ho Bee Land (strong recurrent rental income base).

6

Strategy │ Singapore August 18, 2015

2.3 Capital Goods - Neutral Figure 6: Capital Goods – Neutral POSITIVE CATALYSTS TO LOOK FOR STE

TOP PICKS:

Return of aircraft maintenance and engine overhaul. Lower oil price could lead to lower breakeven for airlines, hence the willingness to spend on aircraft maintenance and cabin retrofit.

SCI

PACRA

Increased spending security solutions. The heightened internet hacks and terror threats could spur regional government spending on security/e-security which could benefit ST Engineering's Electronics.

Ezra

TOP SHORTS:

24x

12-mth Fwd Rolling FD Core P/E (x)

22x 20x 18x

+1 SD

16x 14x

Mean

NEGATIVE CATALYSTS TO FEAR

12x -1 SD

10x

Order cancellations/shorter contract tenure. Order cancellations by speculative investors (risks for jack-up builders) and/or shorter contract tenure (with poorer economics) $A$1:$G$18 companies could knock the wind out of the sector's sails. for the oil services

8x

6x 4x 04

05

06

07

08

09

10

5.0x

11

12

13

14

30%

Rolling P/BV (x) ROAErecurring

4.5x

15

26% 4.0x

3.5x

22%

3.0x 18%

2.5x 2.0x

14% 1.5x

1.0x

$A$24:$G$41 Ripple effect of bankruptcy risk . Weak utilisation, rates cut are likely to dereriorate operating cash burn in 2016 among the smaller players. We believe all it takes for further derating among the oil service companies is for one to go under restrucuturing to meet financing liablities.

Oil prices retreat. The sector will take another beating if Jul-06 oil prices retreat to US$40/bbl. Aug-06 Large shale producers such as EOG and Pioneer Natural Resources are prepared to boost Sep-06 Oct-06 production if oil prices recover. As long as production grows faster than consumption, we Nov-06 believe a 'W' volatility of oil prices could remain in the mediumDec-06 term. Jan-07 Feb-07 Mar-07

10% 04

05

06

07

08

09

10

11

12

13

14

15

16

SOURCE: CIMB RESEARCH

We maintain a Neutral on the capital goods sector, premised more on its inexpensive valuations, with the big-caps trading at -1 s.d. and small caps at -2 s.d. of their 5-year average Our analyst Lim Siew Khee’s top pick is still ST Engineering, relative to its peers that are seeing earnings decline. MRO outlook in the medium term is positive as sustained low fuel costs could lead to better breakeven cost for airlines to spend on maintenance and retrofitting cabins. Electronics growth will be driven by regional government spending on infrastructure, security, communications and software solutions. Exiting construction vehicle business in China could be a wild card and potentially yield a gain of c. S$230m from the land sale. We also like Sembcorp Industries after a severe de-rating; we recently upgraded from hold to Add as we believe that the negatives have been priced in. Potential catalysts are stronger Singapore power prices and higher profit from TPCIL 1. The unit was operating at more than 90% load factor in Jun/Jul, suggesting that the teething phase is over. On a short-term basis, we would avoid the small-mid caps, mainly due to depressed newsflow from weaker earnings in 3Q15. However, if we stretch our horizon to 12 months, our analyst, Yeo Zhi Bin thinks PACRA is worth a bet. At 0.4x CY15 P/BV, we lean on the value proposition argument despite the apparent lack of catalysts. OSV performance has offered scope for optimism that FY16 would be dramatically better, with subsea as the wild card. More importantly, we deem that the stock offers compelling value, at a c.20% discount to conservative liquidation value.

7

Strategy │ Singapore August 18, 2015

2.4 Plantations – Neutral Figure 7: Commodities – Neutral POSITIVE CATALYSTS TO LOOK FOR First Res

TOP PICKS:

TOP SHORTS:

Slower palm oil output growth. In 1H15, palm oil output from some parts of Malaysia and Indonesia was negatively impacted by drought experienced in 2014 This has resulted in lower FFB yields from the some estates, resulting in weaker supply.

Wilmar

Rising biodiesel mandates. Malaysia and Indonesia have raised their mandatory biodiesel blend to 7% and 15%, respectively in 2015. This could boost palm oil usage for biodiesel. Malaysia is expected to consume 575k tonnes of biodiesel under its B7 mandate and Indonesia could consume up to 4.8m tonnes of biodiesel under B15, based on our estimates.

GGR

IFAR

25x

12-mth Fwd Rolling FD Core P/E (x)

23x

El Nino impact. Australia's Bureau of Meteorology has recently confirmed the El Nino event. This could result in lower-than-expected rainfall in Indonesia and Malaysia in 2H15 and negatively impact CPO yields and supply in 2016.

21x +1 SD

19x 17x

Mean

15x

NEGATIVE CATALYSTS TO FEAR

13x 11x

-1 SD

CPO levy. Indonesia has imposed a new levy of US$50 per tonne on CPO and US$10-30 per tonne on processed palm oil . This will be negative for upstream planters in the near term $A$1:$G$18 as they will receive lower CPO price. However, this could help boost prices in the medium term if the CPO levy fund is successful in raising domestic biodiesel usage.

9x

7x 5x 04

05

06

07

08

09

10

3.5x

11

12

13

14

25%

P/BV (x) Current ROE (RHS)

3.0x

15

20%

2.5x 15% 2.0x

$A$24:$G$41

Weak CPO price. Planters posted weak 1H earnings due to weaker CPO price achieved and production. We expect CPO price to trend lower in 3Q due to high soybean stocks, rising palm oil inventory and weak demand. Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07

10%

1.5x 5%

1.0x 0.5x

0% 04

05

06

07

08

09

10

11

12

13

14

15

16

Overcapacity issues in refining industry. Current overcapacity issues in Malaysia's and Indonesia's refining industries are likely to squeeze future refining margins for the palm oil industry. SOURCE: CIMB RESEARCH

The plantation sector has suffered the worst selldown of all sectors in the past two months, partly on new accounting changes. While we are not bullish on CPO prices overall, recent share price performances probably necessitate a shift from an ultra-bearish stance to a toned-down negative stance. From a country’s sector weight perspective, we move commodities from underweight to Neutral. Slower palm oil output growth and a potential El Nino bode well for prices next year. However, this is more than offset by weaker demand in the near term and rising stockpiles. The 2Q results of the planters were broadly in line with our forecasts but below consensus estimates, due to weaker CPO price and in some cases, lower output. Our plantations analyst, Ivy Ng, expects CPO prices to weaken in 3Q due to seasonally higher production, record soybean stocks and lower biodiesel demand. On top of these, we are concerned about overcapacity issues in the refining industry in Malaysia and Indonesia, the imposition of additional CPO levy (effective 15 July 2015) and the changes in IAS 41 (accounting for biological assets, which is negative for FY16 earnings of Singapore planters as it will result in higher depreciation charges). First Resources stays as our top pick while Golden Agri is least preferred. The sector is cheap even on P/BV valuations but lacks strong catalysts.

8

Strategy │ Singapore August 18, 2015

2.5 Consumer / Healthcare / Gaming - Underweight Figure 8: Consumer - Underweight / Healthcare - Overweight / Gaming – Underweight CONSUMER - POSITIVE CATALYSTS TO LOOK FOR T ia n jin g Zh on gxin g

TOP PICKS:

IHH

New products drive sales. The environment for retail sales in Asia is difficult. Despite the environment, 2Q showed that success of new product launches will be appreciated by the market, as evidenced by OSIM's quarterly pickup on uMagic launch.

Da ir y Fa r m

Gen t in g SG

Pet r a Foods

TOP SHORTS: Super Grp

60x

Staples should be resilient: Despite concerns about a ban on alcohol sales near university and schools, and a drought in Thailand up-country, management indicated that off-trade sales should not be affected (by the ban) and the drought will not affect up-country white spirits sales either. They are more concerned with the slow tourism economy.

Consumer 12-mth Fwd Rolling FD Core P/E (x)

50x +1 SD

40x 30x

Mean

CONSUMER - NEGATIVE CATALYSTS TO FEAR

-1 SD

ASEAN consumers to see strong headwinds. As the rupiah fell and commodity prices turned soft, weak retail sales in Indonesia is dragging on (Petra Foods, Japfa). As the dollar $A$1:$G$18 strengthens against ASEAN currencies, businesses are struggling to price up to pass on higher dollar costs while competition is rising (Super Group).

20x 10x 0x 05

06

07

08

09

10

11

12

13

14

15

70x

160%

P/BV (x) Current ROE (RHS)

60x

$A$24:$G$41

140% 120%

50x

100% 40x 80%

Rising competition in the supermarket sector. Dairy Farm is cutting prices in ASEAN to match the competition. Although Sheng Siong's potential for store growth is still present, lacklustre local economic conditions pose as a drag to same store sales growth. Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07

30x 60% 20x

40%

10x

20%

0x

0% 06

07

85x

08

09

10

11

12

13

14

15

16

HEALTHCARE - POSITIVE CATALYSTS TO LOOK FOR Increasing bed capacity. ASEAN hospitals are aggressively expanding capacity. IHH will operate ~10k beds by 2017 (+42%, current ~7k beds) across its core markets Singapore, Malaysia and Turkey, while building up its presence in India and China. Raffles Medical will almost double its capacity in Singapore with its hospital extension, and plans to develop a hospital in Shanghai (mid-2018 completion). M&A. M&A growth is a driver for Q&M and IHH

Healthcare 12-mth Fwd Rolling FD Core P/E (x)

75x 65x 55x

+1 SD

45x

Mean

35x

HEALTHCARE - NEGATIVE CATALYST TO FEAR

25x -1 SD

15x 5x 04

05

06

07

08

09

10

60x

11

12

13

14

Gaming 12-mth Fwd Rolling FD Core P/E (x)

55x 50x 45x 40x

+1 SD

35x

30x

-1 SD

15x 10x 2010

2011

GAMING - POSITIVE CATALYST TO LOOK FOR Better 2H on higher mass visitation and win rate. GENS has suffered four consecutive quarters of poor VIP win rates; we expect mean reversion to the property's average of 2.85% to temper falling rolling chip volume. The official opening of Genting Hotel Jurong in Jul should also drive higher mass visitation to RWS, and boost non-gaming revenue. GAMING - NEGATIVE CATALYST TO FEAR

Mean

25x 20x

15

Waning medical tourism. A weak macro backdrop coupled with weak regional currencies has hit medical tourism in Singapore. While Singapore hospitals are citing new demand from $A$1:$G$18 non-traditional markets (Middle East and Russia), traditional demand from Indo has slowed.

2012

2013

2014

2015

No respite for the VIP business in the next 12 months. GENS has turned even more cautious in extending credit to VIPs in view of the worsening economic conditions in China and the rest of Asia. We expect this to continue to drive down rolling chip volume over the next 12 $A$1:$G$18 months. Furthermore, the depreciation of ASEAN currencies against the SGD may deter players from Malaysia and Indonesia, adding on to woes of falling visitation from the Chinese. SOURCE: CIMB RESEARCH

We remain bearish on the sectors as gaming and consumer are littered with disappointments. With share prices of consumer staples that deliver (existing top pick Sheng Siong) having done well, choices are limited. We swing back to expensive healthcare (IHH) and keep our unloved supermarket giant, Dairy Farm. 9

Strategy │ Singapore August 18, 2015

2.6 Telcos - Underweight Figure 9: Telco – Underweight POSITIVE CATALYSTS TO LOOK FOR Boost from tariff hikes. All three Singapore telcos raised postpaid prices by S$2-5/month in Sep 2014. The positive impact on mobile revenues will be felt over the next two years as postpaid subscribers progressively recontract into these new plans. We expect this to drive decent low single-digit mobile revenue growth in FY15-17.

SingTel

TOP PICK:

M1

TOP SHORT:

19x

Healthy dividend yields. We believe M1 is likely to pay out 100% of net profit as dividends vs. historical payout of 80%, with a special dividend from excess cash build-up possibly in FY17. SingTel will likely maintain a close to 75% payout ratio as it raises its network investments at Optus. We expect StarHub's DPS to stay at S$0.20 due to high capex (including Media Hub) and spectrum payments.

12-mth Fwd Rolling FD Core P/E (x)

18x 17x

+1 SD

16x 15x

Mean

NEGATIVE CATALYSTS TO FEAR

14x 13x

-1 SD

12x 11x 10x 04

05

06

07

08

09

3.6x

10

11

12

13

14

P/BV (x) Current ROE (RHS)

3.4x

15 22%

18%

2.8x

16%

2.6x

$A$24:$G$41

20%

3.2x

3.0x

Little growth in broadband and pay TV. While ARPU appears to be stabilising, we believe there are few growth prospects for home broadband given already-high penetration $A$1:$G$18 and keen competition from new NBN players. For pay-TV, the market is seeing only modest growth in subscribers and competition from alternative online sources of entertainment.

14%

New mobile entrant could apply for spectrum. The IDA could set aside some spectrum for a new entrant in the upcoming spectrum auction at end-2015/early-2016. We think that the risk of a new entrant has risen given IDA’s initiative to put up 15k AG boxes, Jul-06 which makes a more favourable business case for nationwide HetNet deployment . Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07

2.4x

12%

2.2x

2.0x

10% 04

05

06

07

08

09

10

11

12

13

14

15

SOURCE: CIMB RESEARCH

From a country perspective, we keep the sector as a non-consensus Underweight. As share prices start to retrace, our analyst, Foong Choong Chen, believes that they only fairly reflect the risk of a fourth mobile operator entering the market by mid-2017. We think mobile ARPUs could be impacted by 15%, lesser than the 30% ARPU decline seen for fixed broadband, based on our belief that the new entrant's mobile network will remain inferior to the incumbents in the first five years after launch. Valuation-wise, the Singapore telcos are trading at 10-15% premium over the average EV/OpFCF for ASEAN telcos but offer higher than average yields of 5-6%. Our top pick for Singapore telcos is SingTel, which will be least impacted by the entry of the fourth mobile operator as the Singapore mobile business makes up only 11% of group EBITDA. Associates earnings continue to grow, while Optus is gaining market traction on the back of its new 4G-700MHz network. Key risks are forex risks and more intense competition in Australia.

10

Strategy │ Singapore August 18, 2015

2.7 REITs - Overweight Figure 10: REITS - Overweight POSITIVE CATALYSTS TO LOOK FOR CMT

FCT

CCT

MAGIC

ART

KREIT

CREIT

SUN

TOP PICKS:

TOP SHORTS:

Fundamentally stable. Most REITs, with the exception of hospitality REITs, remained fundamentally stable. On a yoy basis, industrial, office and retail REITs posted growth in DPU of 1.9%, 3.7% (excluding KREIT, -0.7% if included) and 3.0% respectively while occupancies remained stable ranging between c.89%-99%. Well prepared for potential interest hikes. Over the last few quarters, REIT managers have been actively refinancing their debts. With an average <20% of the total debt due to be refinanced in 2015, c.75% of debt hedged under a fixed rate and 3-5 years of debt maturity profile, the S-REITs are well positioned to weather any interest rate hikes.

23x

21x

Retail to be resilient. Retailers were previously hit by both sluggish retail sales and labour crunch. We think the labour crunch issue is abating, with all firms set to comply with the reduced Dependancy Ratio Ceiling (DRC) by Jul 2015. Retail S-REITs should outperform general market with stable occupancy and positive rental reversions.

+1 SD

19x Mean

17x 15x

NEGATIVE CATALYSTS TO FEAR

13x

-1 SD

11x

12-mth Fwd Rolling FD Core P/E (x)

9x 7x 04

05

06

07

08

09

10

2.5x

11

12

13

14

15 16%

P/BV (x) Current ROE (RHS)

14%

2.0x 12% 1.5x

10%

Rising interest rates expected to compress yield spread. With interest rates expected to rise in 2H15, the S-REITs' yield spread could be compressed when the market $A$1:$G$18 starts factoring in the impact of rising interest rates. The S-REITs are now trading at an average yield spread of 425bp vs. the historical average of 380bp. At this level, on the back of the impending rising interest rate cycle, we do not consider this sector to be cheap. $A$24:$G$41 Hospitality remains challenged. On the back of higher than expected supply of hotel rooms in 1H15, sluggish recovery of visitor arrival rates and weak regional currencies, the outlook for the hotel sector remains uncertain. Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07

8%

1.0x

6% 0.5x 4%

0.0x

Debt headroom tighter now than before.With the maximum allowable leverage lowered to 45% recently, S-REITs now have lesser headroom than before for future acquisitions.

2% 04

05

06

07

08

09

10

11

12

13

14

15

16

SOURCE: CIMB RESEARCH

On a top-down country basis, we keep an Overweight rating on the REITs due to the lack of clear investment alternatives in most other sectors. Yield stocks have a tricky September to clear (when the Fed is expected to hike rates) but beyond that, appear to have a clear path to outperform. S-REITs have recently corrected quite significantly, particularly the larger REITs (CCT, CMT, MCT). Historically, dollar strength is correlated with REIT weakness. If the Rmb were to lead Asian currencies on a weakening path against the US$, there are some headwinds for REITs; yet valuations are starting to be attractive. S-REITs are trading at 395bp yield spread vs. a historical yield spread of 367bp. Though still not outright bargains, valuations are not demanding either. Aside from potential interest rate hike fears, risks to the S-REITs sector could come from deleveraging. The recent lowering of the maximum allowable leverage of S-REITs to 45% means that gearing limits are a concern. Several REITs managers recently hinted at potentially deleveraging and/or indicated slower growth on the acquisition front. Rising interest rates, a soft rental market outlook and the need for deleveraging all sound bad but our strategist views them as challenges that are less problematic than some of the other sectors, especially as one gets 6-7% dividend yield in this climate. Within the sector, it is paramount to focus on REITs that have some sort of organic/inorganic DPU growth capability as rental reversions take place. With deleveraging as a new concern, we have further narrowed down our picks to REITs with strong balance sheets. Our unchanged REIT picks remain FCT and MAGIC. New picks for this quarter include CMT and CCT. We like CMT for its focus on necessity shopping (76% of portfolio) and valuation (yield spread of 349bp vs historical 280bp). We like CCT for its strong balance sheet, recent share price correction (c.23% YTD) and relatively low lease expiry profile in FY16 (c.15% of gross income). We chop all hotel REITs from our list. 11

Strategy │ Singapore August 18, 2015

2.8 Transport - Neutral Figure 11: Transport – Neutral POSITIVE CATALYSTS TO LOOK FOR TOP PICKS:

TOP SHORTS:

CD

SIA

Singapore Airlines should see improved earnings in the years ahead from the combination of lower oil prices, the introduction of premium economy in Aug 2015 which should help improve yields, and the fleet renewal exercise at SIA, SilkAir, and Scoot which will help reduce non-fuel unit operating costs.

NOL

SMRT

Neptune Orient Lines' saw lower 2Q15 losses despite weak spot rates as it walked away from loss making intermodal business, in addition to benefitting from lower bunker prices. Catalysts driving ComfortDelgro (CD) include 1) the potential S$1.0bn-1.2bn capital unlocking from the bus sale and higher operating margin under the new bus model; 2) earnings tailwinds from low energy prices; 3) fresh fare income contribution from MRT Downtown Line stage II (slated to commence operations by Dec-15); and 4) prospective earnings & valuation accretive overseas M&As, supported by its strong balance sheet.

32x

12-mth Fwd Rolling FD Core P/E (x) 27x +1 SD 22x

Mean

NEGATIVE CATALYSTS TO FEAR

17x -1 SD

12x

7x 04

05

06

07

08

09

10

2.0x

11

12

13

14

P/BV (x) Current ROE (RHS)

1.8x

15

16% 14% 12%

1.6x

10%

1.4x

8% 6%

1.2x

4%

1.0x

2%

0.8x

0% 04

05

06

07

08

09

10

11

12

13

14

15

16

Singapore Airlines is currently seeing strong yield pressures in its long-haul markets to Europe and the US, as well as weakening cargo yields as a result of overcapacity $A$1:$G$18 and the weak cargo volumes this year. SIA's new ventures into Scoot and Vistara may also take time to mature. The transpacific $A$24:$G$41 container shipping freight market's annual contracts for 2015/16 were renewed at higher rates, but with spot rates so weak, customers are now agitating for lower rates. Carriers are defending the contract rates, but success is not assured. Meanwhile, Asia-Europe spot rates continue to be in free-fall. CD and SMRT would continue facing upward cost pressure in efforts to meet the Jul-06 tightened regulary standards. Expanding depeciation expenses Aug-06 and labour cost are expected Sep-06 start-up cost in 2H15 due to to cater to the larger bus and train fleets. CD would incur higher Oct-06 Nov-06 the headcount build-up for the DTL stage II. SMRT's profitability would be undermined by Dec-06 the increasing repair and maintenance expenses related to its aging rail network; it could also Jan-07 Feb-07 Mar-07 face a fine from the authorty for the severe rail disruption occurred in Jul 15. SOURCE: CIMB RESEARCH

From a country strategy perspective, we cut our sector weighting from overweight to Neutral. The sector (land transport) has been resilient. SIA and NOL are cheap but lack catalysts and ComfortDelGro is looking relatively expensive after the beating that most large-caps took recently. In the transport sector, SMRT is starting to feel the weight of higher costs while SIA’s bearish guidance means that there is little to be optimistic about. From a country portfolio perspective, both SIA and ComforDelGro have been removed from our Singapore top picks as: 1) SIA lacks a clear earnings turnaround catalyst, and 2) ComfortDelGro has outperformed and now looks expensive relative to quite a number of blue-chip stocks. SIA’s bearish guidance is reflected in its low trading P/BV (0.86x P/BV, below its traditional support of 0.9x P/BV). Despite SIA’s competitive pressures in the long-haul market and its cautious guidance, our analyst Raymond Yap believes earnings will improve as its average fuel cost will drop significantly in 2HFY16, new premium economy products will help shore up yields and a rebound in trade next year will help lift cargo. We have an Add on SIA and it is one of our picks in the sector. For NOL, although its 1H15 results were better than expected, the outlook could worsen in 2H15 due to freight rate pressure on the Asia-Europe trade, as well as potential downward renegotiation of the transpacific annual contracts. In the land transport space, 2Q15 results were in line and the positive view continues to be underpinned by sector reforms. The implementation of the new bus model is progressing smoothly with the first bus package (Bulim) having been tendered out at a reasonable price; the tender for the second package (Loyang) is ongoing and the third is likely by early next year. The Downtown Line (DTL) stage II operated by ComfortDelGro will commence operations in Dec 15, ahead of schedule. ComfortDelGro is another pick of the sector, mainly on the basis of a strong balance sheet that provides ammunition to fund overseas growth initiatives via M&As. 12

Strategy │ Singapore August 18, 2015

3. VALUATION AND RECOMMENDATION Figure 12: Corporate earnings growth (% chg qoq) Sector Financials Property REITS Telco Transport CapitalGoods Commodities Gaming Consumer Others Average

Recom. Overweight Overweight Overweight Underweight Neutral Neutral Neutral Underweight Underweight -

Earnings Change QoQ CY2015 CY2016 -3.2% -4.0% -5.1% -6.9% -2.0% -1.9% -2.6% -7.1% -48.8% -42.5% -13.0% -10.0% -15.9% -15.4% -24.7% -12.7% -7.7% -7.7% -2.1% -3.7% -8.2% -8.7%

Core P/E (x) CY2015 CY2016 10.2 9.3 17.5 15.6 16.7 15.7 17.0 16.3 28.9 18.7 11.4 10.2 12.6 11.0 21.6 15.9 20.8 18.1 27.3 24.1 14.8 13.3

P/BV CY2015 CY2016 1.2 1.1 0.7 0.7 0.9 0.9 2.7 2.6 1.3 1.2 1.2 1.1 0.7 0.7 0.9 1.0 3.7 3.4 2.1 2.1 1.3 1.2

SOURCE: CIMB RESEARCH

3.1 End-CY14 FSSTI target cut to 3,170 2Q was a period that saw our market earnings growth cut the most, by c.8-9%. Our earnings cuts came through as almost all large-cap sectors saw reduced estimates. Across-the-board cuts came from: bank (higher credit costs), telcos (weaker regional currencies), property (slower sales and development starts), gaming (lower win-rate), capital goods (delays in O&M earnings, lowered infrastructure profits), transport (lower yield, higher costs), commodities (accounting change for fair value recognition) and consumer (falling margins, weak sales). This is one of the most difficult times for corporate profits. Our FSSTI CY15 EPS growth expectation has now fallen to -3%. Our end-CY15 FSSTI target falls to 3,170 (previous 3,480 pts), with a larger drag from falling corporate profitability and a smaller drag from a lower applied fair market P/E, based on 12.4x CY16 P/E now (-1 s.d.) vs. 12.8x CY16 P/E previously. We recognise that the number of pitfalls (for risk assets) in the world is rising; they include: 1) the start of the US rate hike cycle, 2) the eventual exit of Greece from the euro, 3) China’s slowdown and its impact on ASEAN and its own domestic markets, 4) ASEAN currency devaluation, and 5) spillover effects on ASEAN SMEs and households. From various companies, we have seen the drag on corporate profit come through. The amount of challenges for corporate profitability currently suggest that valuation multiples could be in the range of 2H11, a period when the euro crisis broke out but no full-blown crisis erupted. The bottom-end of 2H11 valuation multiple was 11.4x P/E (equivalent to FSSTI of 2,910 today) while the top-end of 2H11 valuation multiple was 12.9x P/E, or FSSTI of 3,300 today. We expect the FSSTI to be range-bound within these levels for the rest of the year. Figure 13: FSSTI valuations STI Core P/E (x) FD Core P/E (x) Core EPS growth (%) Core Net Profit Growth (%) P/BV (x) Dividend yield (%) EV/EBITDA (x) P/FCF (x, equity) P/FCF (x, firm) Net gearing (%) ROE (%, recurring) FSSTI level CIMB/consensus (x)

CY2013

CY2014

CY2015

CY2016

CY2017

14.7x 14.7x -4% -3% 1.5x 3.6% 12.7x 11.9x 25.2x 12.8% 10.4% 3,167

14.7x 14.7x 6% 0% 1.5x 3.5% 12.4x 11.7x 20.7x 14.4% 10.1% 3,365

13.2x 13.2x 2% -3% 1.3x 3.8% 12.1x 12.4x 9.9x 11.9% 9.6% 3,067 1.02

11.9x 12.0x 11% 11% 1.2x 4.0% 10.8x 10.8x 10.3x 10.0% 10.3% 3,067 1.00

11.0x 11.0x 9% 9% 1.1x 4.3% 10.2x 8.7x 11.5x 9.3% 10.6% 3,067 1.01

SOURCE: CIMB Research

With the recent market sell-down led by the large-cap liquid stocks, we see value in some of them and our picks rotate back to a larger proportion of large-cap names. We think this strategy works well now, especially as many of the small-caps seemingly have increased earnings risk. 13

Strategy │ Singapore August 18, 2015

Figure 14: FSSTI’s 12M forward core P/E (x)

Figure 15: Core P/E (current) vs. EPS Growth

22.0

24.0x

20.0

22.0x

70% 60%

+2SD : 18.8

50% 20.0x

Current Core P/E

+1SD : 16.7 16.0

Mean : 14.5 14.0

-1SD : 12.4

40% 18.0x

30%

Current Core P/E

Mean : 14.5

20%

16.0x

10%

14.0x

0%

12.0 12.0x

-2SD : 10.2 10.0 8.0 Jan-05

EPS Growth

18.0

Apr-06

Jul-07

Oct-08

Jan-10

Apr-11

Jul-12

Oct-13

Jan-15

EPS Growth

-10%

10.0x

-20%

8.0x

-30%

12M Fwd Core P/E

SOURCE: CIMB Research

Figure 16: FSSTI’s P/BV (x) trading band

SOURCE: CIMB Research

Figure 17: FSSTI's P/BV vs ROE Title: Source:

2.6x

+2SD : 2.4 2.4

2.4x

2.2

2.2x

+1SD : 2.1

Current P/BV

Mean : 1.7

1.6 1.4 1.2

1.0 Jan-05

-1SD : 1.4

Jul-07

13.0%

2.0x Forecast period

1.8x 1.6x 1.4x

12.0%

11.0%

Current P/BV

10.0%

1.2x

-2SD : 1.1 Apr-06

14.0%in your report Please fill in the values above to have them entered

Core ROE

2.0 1.8

15.0%

Core ROE

2.6

Oct-08

Jan-10

Apr-11

Jul-12

Oct-13

1.0x

Jan-15

9.0%

P/BV

SOURCE: CIMB Research

SOURCE: CIMB Research

3.2 Large-cap top picks The following are our large-cap top picks for 2H15: 1. We like Capitaland for its more rapid pace of asset monetisation activities like Bedok Mall and recycling capital into new ventures such as the tie-up with Qatar Investment Agency to set up a US$600m global serviced residence fund. The group plans to set up 5-6 funds by 2020, with a total AUM of S$8bn-10bn. This will enable the group to grow its fee income platform. Meanwhile, its retail mall and serviced residence operations continue to perform well, and the roll-out of new malls should continue to buffer a slow residential performance. Valuations are attractive, at a 40% discount to RNAV of S$5.08, which is close to the -1s.d. discount to mean. 2. We like Capitamall Trust for its focus on necessity shopping (76% of portfolio), which should remain resilient despite flagging tourist arrivals. It is also attractively valued at a yield spread of 349 bps against the Singapore government 10-year bond, above historical average of 291 bps. 3. We like City Developments for its attractive valuations, following the recent share price retracement. The stock is trading at a 36% discount to its RNAV of S$13.95, which is at the -1s.d. discount to mean and is the widest RNAV discount gap since 2008/09. We believe catalysts for its share price would come from potential asset divestment activities and recycling of capital into new investments, thus further optimising its balance sheet capacity with a low gearing of 0.28x currently. In addition, it 14

Strategy │ Singapore August 18, 2015

plans a more active 2H15 launch pipeline, with the 505-unit The Criterion EC, in addition to The Gramercy development 4.

DBS is our top bank pick among the Singapore banks now. While it is the purest play on rising interest rates, we deem that the focus on banks will shift away from the upside of rising NIMs, to the downside of rising credit costs, as economic conditions deteriorate. DBS has the smallest exposure to ASEAN, which shelters it (relatively vs. peers) from the risk of rising NPLs from ASEAN. The weak spot in asset quality lies in its small India portfolio, but the worst seems over and NPLs have been well provided for.

5.

IHH Healthcare sneaks into our top picks list because it represents a safe haven in today's markets. Operationally, earnings in core markets are still growing as the company increases bed capacity in both existing and new hospitals. It is also trading at a rare discount to Raffles Medical and we see rerating catalysts in 1) its China expansion execution, and 2) M&A opportunities in India. While earnings risks stem from a weakening lira (Turkey forms ~37% of group revenue), these are accounting effects and do not detract from strong operational performance on the ground.

6.

We see OCBC continuing to reap the synergies of Wing Hang. Wealth management continues to be its key fee income driver, with growth coming from the cross-selling of wealth management services to Wing Hang’s SME customer base. The underserved SME segment is not just great for WM fee generation, but also helps collect USD and RMB deposit funding to fund regional flow business. Our only concern with OCBC is its ASEAN exposure, with 2Q15 already seeing NPLs from Malaysia and Indonesia related to the oil and gas industry.

7.

Sembcorp Industries is added to our list mainly due to its steep share price fall. The recent sell-down could be overly done as the implied CY16 P/E for Utilities of 6x is below the historical average of 7x. We think the current valuations have priced-in the weak Singapore power outlook and earnings decline in SMM. Potential catalysts are stronger Singapore power prices and higher profits from TPCIL 1.

8.

We retain ST Engineering as a top pick because its share price has been weak, earnings are delivering despite concerns, its US$ earnings can benefit from dollar strength, and it has good 4.5% dividend yields and a net cash balance. STE is still delivering yoy earnings growth, as it has successfully re-positioned its aerospace product offering while Electronic order flow continues to be very encouraging, backed by several favourable trends of government spending in city planning and cyber defence. Catalysts include stronger-than-expected orders across divisions.

9.

Singapore Post is added back to our top pick list as it is one of the few proxies for e-commerce growth in ASEAN. SPOST’s net cash of S$329m, together with Alibaba’s S$229m investment, will allow SPOST to pursue M&As at a more aggressive pace to scale up its network and weed out competitors. We believe M&As will drive earnings growth in the near-tomedium term, while volume growth will come from Alibaba’s expansion in the region in the longer-term. We see 3-5% earnings upside to our FY16 forecast for every S$100m spent on M&A

10. Thai Beverage has two strong free cash flow generating divisions to fund the fight in the non-alcoholic segments. Its spirits division continues to do well at the expense of premium foreign brands, while its beer EBITDA has turned firmly positive on a combination of price hikes and strong export volumes. 2Q15 results have been a little weaker, as it was a payback quarter for alcohol while non-alcoholic beverages required A&P to roll out new products, but these are for the development of future cash cows. The recent Bangkok bomb blast will naturally trigger fears of a decline in the tourist trade and consequent implications for Thai Bev; however, we point to FY14 to highlight that Thai Bev’s spirits and beer sales have been proven to deliver even in a weak tourist market.

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Strategy │ Singapore August 18, 2015

3.3 Small-cap top picks The following are our alpha picks for 2015: 1.

We like First Resources for its strong growth potential when CPO prices rebound. The group raised its guidance for FFB output growth from 5-10% to 10-15% for 2015 (better-than-expected FFB yield in 1H15) even as it cut its new planting plans to 5k-7k ha, from 5k-10k ha previously. With a young estate and the possibility of El Nino as a positive catalyst ahead, we deem it useful to have a plantation stock in our top picks, especially as all the planters have been severely de-rated on IAS41 concerns.

2.

GuocoLeisure has significant value to be unlocked in its hotel assets (prime locations in London). The new management team is successfully driving the hotel rebranding exercise and the efforts are starting to show. The latest results show the benefits of hotel refurbishment efforts and reduced financing costs. GuocoLeisure is trading at a wide RNAV discount of >40%; we expect bottomline delivery in 2016 to give confidence to the success of its repositioning and act as a major re-rating catalyst.

3.

We like Ho Bee at these levels because its earnings have bottomed out and it is expected to recover from FY16 with overseas development completions. Additionally, Singapore and London office make up 70% of its portfolio GAV and should form a stable stream of rental contributions with mid- to long-term upside potential. Lastly, it is attractively valued at a 47% discount to RNAV, against the Singapore developers' average of 39%. The possibility of privatisation is an added bonus.

4.

Mapletree Greater China Commercial Trust’s strength lies in its stable and resilient portfolio of Festival Walk (FW) in HK and Gateway Plaza in Beijing. Its latest results show an admirable operational performance from FW which managed to drive a 6.5% hike in tenant sales despite a sluggish Hong Kong retail market. New contributions from the recently-acquired Sandhill Plaza would also bolster DPU growth going forward. Lastly, with 69% of gross asset value exposed to HK$ through exposure to FW, we expect a rising HK$, in tandem with a strengthening US$, to help boost DPU and NAV.

5.

Tianjin Zhongxin Pharmaceutical Group is a play on China’s ageing population. Its flagship product Su Xiao Jiu Xin pills, a well-known cardiovascular drug, would benefit from the authority’s removal of price ceiling on low-priced drugs. The company’s S-share is trading at a 68% discount to its A-shares and its 16.1x CY16 P/E is cheaper than peers’ average of c.25x. Catalysts include sales and margin expansion. Rising raw material cost is the key risk.

6.

Venture Corporation is in steady hands with a conservative and cautious management; much-needed qualities in the current uncertain economic environment. A stronger US$, weak ringgit and RMB will have some net positive margin impact for Venture though so far, it has not shone through, washed out by higher tax rates. Its balance sheet remains robust with limited expansionary capex; its S$0.50 DPS payout has very little risk. Venture’s attractive qualities are its dividend yield, strong balance sheet, and low downside earnings surprise risk.

16

Strategy │ Singapore August 18, 2015

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17

Strategy │ Singapore August 18, 2015

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Strategy │ Singapore August 18, 2015

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90 - 100 Excellent

80 - 89 Very Good

70 - 79 Good

Below 70 or N/A

No Survey Result

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Strategy │ Singapore August 18, 2015

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Investment Banking clients (%)

Add

56.5%

6.7%

Hold

30.7%

4.5%

Reduce

12.6%

1.7%

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2014. AAV – Very Good, ADVANC – Very Good, AEONTS – not available, AMATA - Good, ANAN – Very Good, AOT – Very Good, AP - Good, ASK – Very Good, ASP – Very Good, BANPU – Very Good , BAY – Very Good , BBL – Very Good, BCH – not available, BCP - Excellent, BEAUTY – Good, BEC - Good, BECL – Very Good, BGH - not available, BH - Good, BIGC - Very Good, BJC – Good, BLA – Very Good, BMCL - Very Good, BTS - Excellent, CCET – Good, CENTEL – Very Good, CHG – not available, CK – Very Good, CPALL – not available, CPF – Very Good, CPN - Excellent, DELTA - Very Good, DEMCO – Good, DTAC – Very Good, EA - Good, ECL – not available, EGCO - Excellent, GFPT - Very Good, GLOBAL - Good, GLOW - Good, GRAMMY - Excellent, HANA Excellent, HEMRAJ – Very Good, HMPRO - Very Good, ICHI - not available, INTUCH - Excellent, ITD – Good, IVL - Excellent, JAS – not available, JUBILE – not available, KAMART – not available, KBANK - Excellent, KCE - Very Good, KGI – Good, KKP – Excellent, KTB - Excellent, KTC – Good, LH - Very Good, LPN – Very Good, M - not available, MAJOR - Good, MAKRO – Good, MBKET – Good, MC – Very Good, MCOT – Very Good, MEGA – Good, MINT Excellent, OFM – Very Good, OISHI – Good, PS – Very Good, PSL - Excellent, PTT - Excellent, PTTEP - Excellent, PTTGC - Excellent, QH – Very Good, RATCH – Very Good, ROBINS – Very Good, RS – Very Good, SAMART - Excellent, SAPPE - not available, SAT – Excellent, SAWAD – not available, SC – Excellent, SCB - Excellent, SCBLIF – Good, SCC – Very Good, SCCC - Good, SIM - Excellent, SIRI - Good, SPALI - Excellent, STA – Very Good, STEC - Good, SVI – Very Good, TASCO – Good, TCAP – Very Good, THAI – Very Good, THANI – Very Good, THCOM – Very Good, THRE – not available, THREL – Good, TICON – Good, TISCO - Excellent, TK – Very Good, TMB - Excellent, TOP - Excellent, TRUE – Very Good, TTW – Very Good, TUF - Good, VGI – Very Good, WORK – not available.

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Strategy │ Singapore August 18, 2015

CIMB Recommendation Framework Stock Ratings Definition: Add The stock’s total return is expected to exceed 10% over the next 12 months. Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months. Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months. The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months. Sector Ratings Overweight Neutral Underweight

Definition: An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation. A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation. An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Overweight Neutral Underweight

Definition: An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark. A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

*Prior to December 2013 CIMB recommendation framework for stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange were based on a stock’s total return relative to the relevant benchmarks total return. Outperform: expected to exceed by 5% or more over the next 12 months. Neutral: expected to be within +/-5% over the next 12 months. Underperform: expected to be below by 5% or more over the next 12 months. Trading Buy: expected to exceed by 3% or more over the next 3 months. Trading Sell: expected to be below by 3% or more over the next 3 months. For stocks listed on Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Outperform: Expected positive total returns of 10% or more over the next 12 months. Neutral: Expected total returns of between -10% and +10% over the next 12 months. Underperform: Expected negative total returns of 10% or more over the next 12 months. Trading Buy: Expected positive total returns of 10% or more over the next 3 months. Trading Sell: Expected negative total returns of 10% or more over the next 3 months.

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