Singapore's home sales plunged in October

Business receipts of services sector up 8% in Q3

Banks - 2014: A clearer coast ahead

By Lim Siyi 
Wed, 27 Nov 2013, 10:20:33 SGT

We expect the first half of 2014 to be an uneventful one for the consumer sector, and we maintain our UNDERWEIGHT rating. We feel that revenue growth is likely to be challenging given the recent spate of bearish data points both domestically and abroad, which indicate that consumer spending is likely to be subdued in 2014, and that companies will also continue to face margin pressures from rising operating expenses (i.e. higher staff and rental expenses). In addition, ongoing concerns over the overall macro environment and the focus on rising inflation will also keep a lid on consumer spending. Within our sector coverage our top picks are Sheng Siong Group [BUY FV: S$0.78] as we like its defensive qualities in the face of weaker domestic sales, and Petra Foods [BUY FV:S$3.95] for its dominant leadership position in chocolate confectionary products.

2013 recap: a see-sawing year
At the start of the year, we had called for allocation into counters with exposure to EM Asia consumer demand. While that call did fairly well for the first half of the year, it faced some challenges subsequently and YTD gains were eroded. At the company level, revenue growth for consumer-related firms was decent although margin pressures from rising costs had an effect on bottom-line figures. 

Top-line growth to face headwinds
For 2014, we expect revenue growth to be a tad more challenging. Data points both domestically and aboard have indicated that consumer spending will not be as forthcoming as before. Concerns over the ongoing global recovery process will continue to dominate consumer focus, as will be the impact of rising inflation on purchasing ability. In fact, we could expect to see companies spend a higher amount in order to attract a single dollar of consumer expenditure vis-a-vis previous years.

Margin pressures to remain
On the cost front, we expect consumer-related companies to face the greatest pressures domestically. Regulatory changes have been rather punitive on companies with higher reliance on foreign labour, and have forced companies to look towards more expensive local help. With this issue extending to other countries in the region via an increase in the minimum wage requirements, we can expect to see an overall increase in wage costs for companies in 2014. This increase in operating expenses may potentially outpace top-line growth - due to greater competitive pressures - and lead to an eventual, further compression of margins. 

Consumer sector to be less attractive in 2014
As the consumer sector is cyclical in nature, we expect the first half of 2014 to be an uneventful one for the sector. Investor attention is unlikely to be on consumer-related companies (particularly consumer discretionary counters) given the overall macro uncertainty and challenges ahead, and the sector could see itself trading sideways. That said, we maintain our  UNDERWEIGHT  rating on the sector. Our top picks are Sheng Siong Group [BUY   FV: S$0.78] as we like its defensive qualities in the face of weaker domestic sales, and Petra Foods [BUY   FV:S$3.95] for its dominant leadership position in chocolate confectionary products. 

Land Transport - Impending Fare Hike, Focus on DTL Impact

Stocks to ride Singapore's  2013 Master Plan

Mapletree Commercial Trust,  Keppel Land,  Frasers Centrepoint Trust,  Pan-United and  Centurion Corp.

By Kang Wan Chern

With the aim of building better homes for Singaporeans and improving their standard of living, the URA launched an exhibition of its Draft Master Plan 2013 on Nov 20. Reviewed every 5 years, the master plan shows the permissible land use and density for every parcel of land to optimise the country?s limited space. More interestingly, the plan reveals areas of opportunity for investors to buy stocks that could benefit from the transformation of the city-state.

The draft plan reveals that more housing choices will be made available in the development of new residential estates at Bidadari, Tampines North and Punggol Matilda. In addition, plans are also underway to roll out 15,000 new homes in Marina South, Bugis Village and Holland Village. Marina South, in particular, will be developed into a mixed-use residential district within walking or cycling distance from a string of shops, offices, hotels and restaurants. The new area will be connected by the Marina South and Gardens by the Bay train stations, located on the new Thomson MRT Line.

For that to happen, the current Pasir Panjang Port will be relocated to Tuas, while plans to relocate the Tanjong Pagar and Pulau Brani terminals will be drawn up later. Meanwhile, development of Marina South will begin at Marina Bay and move westward towards Labrador.

More new homes will also be built in established estates such as Sembawang, Yishun, Hougang and Choa Chu Kang. Developed estates will also be rejuvenated. Yishun, for instance, will have a mixed commercial and residential development integrated with a new air-conditioned bus interchange, and a community club at the town centre.

In addition, a range of housing types will be provided in both new and existing estates. For example, the new BTO units launched at Dawson will come with gardens, while the 3Gen flats in Yishun and Jurong West will provide an option for multi-generational families. In total, up to 500,000 new public homes will be rolled out to cater to future population growth, with eight in 10 households located within a 10-minute walk from a train station.

Job decentralisation
Another important aspect of the master plan is the development of new commercial and industrial hubs outside of the CBD to enable employees to work closer to home. In Woodlands, the government is developing the North Coast Innovation Corridor, which will have 700km of new commercial space, housing the Woodlands Central retail hub and the Woodlands North Coast business park cluster.

Jurong Lake District in the West will also undergo redevelopment. Spanning 360 ha, the area will open up more than 500,000 sq m of office space, 250,000 sq m of retail space, 1,000 home and 2,800 hotel rooms into the market place when it is completed. In fact, two shopping malls ? JCube and JEM ? have already opened for business, while the Westgate retail and office development is expected to be completed by the end of this year or early next year.

But that?s not all. The government is also looking to develop the 320 ha Seletar Aerospace Park and consolidate all aerospace-related activities such as maintenance, manufacturing and R& D, creating up to 10,000 new jobs. Meanwhile, the Defu Industrial Estate will be redeveloped to accommodate up 2.1 million sq m of total factory floor space, more than five times its current size.

Stock picks 
What does it all mean for investors? ?We see this plan as having a long term positive effect on developers, construction companies and other ancillary service providers,? says DBS Vickers in a Nov 20 report, ?In the shorter term, we see positive impact on stocks with existing landbanks in the [targeted] growth areas.? In this regard, the brokerage?s top picks areMapletree Commercial Trust,  Keppel Land  and  Frasers Centrepoint Trust.

DBS Vickers is also bullish on  Pan-United  owing to its exposure to the construction sector, where activities are likely to intensify over the next few years. It also recommends  Centurion Corp, the local operator of foreign worker dormitories. ?The stream of development projects announced will ensure that the demand for foreign workers will still be strong,? says DBS Vickers.

By Eli Koksiong Lee 
Wed, 13 Nov 2013, 16:36:05 SGT

While the Fed Fund rate is expected to stay at low levels until at least 2015, we expect increasing caution to set in as the overhang from government measures remains in play and the market grapple with an onerous pipeline of physical supply ahead. Over FY14, we forecast for mass-market residential prices to dip 5%-15% and for high-end residential prices to dip 0%-10%. In light of the subdued outlook for the domestic residential sector, we favor large-cap developers with strong balance sheets and diversified exposure across regional real estate markets. Our top picks in the space are CapitaLand, rated BUY with a fair value estimate of S$3.77 (30% RNAV disc.), and Keppel Land, rated BUY with a fair value estimate of S$4.09 (30% discount to RNAV).

Top picks: CapitaLand and Keppel Land
While the Fed Fund rate is expected to stay at low levels until at least 2015, we expect increasing caution to set in as the overhang from government measures remains in play and the market grapple with an onerous pipeline of physical supply coming ahead. Over FY14, we forecast for mass-market residential prices to dip 5%-15% and for high-end residential prices to dip 0%-10%. In light of the subdued outlook for the domestic residential sector, we favor large-cap developers with strong balance sheets and diversified exposure across regional real estate markets. Our top picks in the space are  CapitaLand, rated  BUY  with a fair value estimate of S$3.77 (30% RNAV disc.), and  Keppel Land, rated  BUY  with a fair value estimate of S$4.09 (30% discount to RNAV).

Physical oversupply situation lies ahead
One significant headwind for the residential sector lies in the large physical supply expected over FY14-16. Including HDB, DBSS and EC completions, we anticipate that 50.0k, 49.7k and 73.6k homes will come into the physical supply in FY14, FY15 and FY16, respectively. Assuming a 6.0m population target by 2020 from the latest Population White Paper, we forecast average population growth at ~86k individuals p.a. from 2014-20, which translates to an average incremental demand of ~29k physical homes per year. In our view, this mismatch points to a fairly clear physical oversupply situation ahead.

Three reasons why a crash is unlikely
That said, barring a macro crisis, we do not believe headline prices will correct excessively (> 20%) in 2014. This is due to three reasons: 1) The direct impact of a physical oversupply (of homes which are already sold) is first on vacancy rates and subsequently on rental prices. While falling rents will pressure home prices, we do not see many home-owners force-selling into a softening market given that a negative rental carry is the norm in Singapore historically and that the average individual balance sheet remains fairly benign. 2) The level of unsold pipeline held by developers (which forms the primary supply) is currently at 36k units. This is lower than the 10-year historical average of 43k units and is not overly onerous. While developers will likely ease prices ahead to move inventory, a fire-sale situation is unlikely to ensue given relatively strong balance sheets. 3) Finally, we believe the data currently point to a fairly high price elasticity of demand. That is, significant numbers of buyers will come into the market at every incremental price dip. This is illustrated when CapitaLand introduced discounts at its 1715-unit d?Leedon in 1Q13 and subsequently saw 543 more units sold by 3Q13. Similarly, developers which set lower prices at recent new launches (Sky Vue at Bishan and Thomson Three at Bright Hill Dr.) saw firm performances, despite the Jul-13 TDSR measures.

SIGNS OF A cooling property market in Singapore are coming thick and fast. Private-home resale prices fell 0.1% in October over the previous month, after dropping 1.6% in September. HDB resale prices may also be starting to decline, down 1.6% in October over September. The fall in HDB cash-over-valuations to their lowest level since the global crisis days of July 2009 is yet another warning sign. Falls in some of the overheated micro-markets have been quite pronounced ? a recent report showed prices of high-end residential units in Sentosa cove down hugely. One of Singapore?s largest property developers sounded a note of caution in its recent earnings release, noting that the government?s cooling measures were beginning to bite.

Given the importance of the property sector to the economy and to individual citizens, what is the outlook for this sector and how will the economy be affected? It is important that we first take a step back and look at what has been driving the sector and its impact on the economy as a whole.

Fundamental drivers of real estate price appreciation are weakening
Asset inflation in the real estate sector was driven by several factors, some of which are losing steam:

• Global liquidity reaching a peak:  Clearly, the ultra-low interest rates that have prevailed since the onset of the global crisis in August 2007 did help drive up demand and hence prices ? savers had to switch from bank deposits to assets such as real estate to secure a better yield. Some part of the massive liquidity unleashed by quantitative easing policies has also been deployed to real estate assets, further pushing up prices. Now, we have a situation in which the first hints of the ?tapering? of the Federal Reserve policy in the US sufficed to push long-term interest rates around the world up by more than 100 basis points, including in Singapore. It is also clear that quantitative easing policies will start to be scaled back by early 2014 in the US and that short term rates will probably rise by a year after that. We can quibble about the exact timing, but there is no gain saying that, within a reasonable time frame, this key driver of asset inflation will diminish. As the global economy recovers, capital will increasingly be re-allocated away from real estate assets to more productive assets whose return prospects are set to improve.
• Supply-demand imbalances are also easing.  When Singapore allowed a massive increase in its population over a short period of time but did not allow for enough extra homes to be built to accommodate the increased demand for property that ensued, it was no surprise that prices were driven up. Now, projections by analysts suggest that the tight supply-demand balance will start to ease in 2014 and that a major part of the pent-up demand for housing will have been met by then. Moreover, the most recent measures to restrain demand for property, especially the limitations placed by the total debt service ratio regulations, has significantly reduced demand and
• Shifting composition of population growth.  A strategy of enhancing Singapore as a destination for super high net worth individuals from all over the world has attracted massive funds into the real estate sector, adding a huge new source of demand without a corresponding increase in supply. The rethink of population policy means our population will grow at a much slower rate from now on. In addition, the new foreign manpower regime has led to a decline in the number of employment pass holders in the past year, reducing an important source of private sector rental demand.

By Lim Siyi 
Thu, 21 Nov 2013, 08:57:21 SGT

Despite general economic improvements, the counters within the transportation sector failed to perform well in 2013 due to industry-specific challenges and issues (e.g. sustained competitive pressures in the aviation sector, demand-supply imbalance for the shipping sector, lack of fare increases for the land transportation sector). With some of these issues unlikely to be resolved in 2014, we are downgrading the overall sector to UNDERWEIGHT and expect investor interest to remain tepid. Out of the counters in our coverage, our top pick is ComfortDelgro, rated BUY with a fair value estimate of S$2.20, as we favour its diversified and stable earnings stream, attractive overseas operations, and strong domestic leadership in the taxi and bus segments.

Sector performed poorly in 2013
Despite general improvements in overall investor sentiment, transportation-related counters took a hit in 2013. The aviation sector remained bogged down by intense competition across both premium and budget segments while the absence of a fare review for the local land transportation sector limited investor interest. Bucking the trend, aviation service providers fared decently well due to their stable earnings profile and regular dividend payouts, which helped to sustain investor interest in the low-yield environment. 

UNDERWEIGHT aviation
Entering CY2014, we downgrade the aviation sector to  UNDERWEIGHT. While the overall economy should improve, competitive pressures amongst the carriers ? both in the premium and LCC segments ? will results in overall lower passenger yields and reduced profitability. Within our coverage, we maintain no preference for either Singapore Airlines [SELL   FV: S$9.50] or Tiger Airways [HOLD   FV: S$0.55]. The former still relies on promotional fares to stimulate demand and capacity increases have placed pressure on load factors and yield while the latter face downside risk from continued losses by its associate airlines. 

NEUTRAL on aviation service providers 
We remain  NEUTRAL  on the sub-sector of aviation service providers for 2014. While we believe that the long term outlook for the topline of the sub-sector is positive, we believe that the positives have been largely priced in. We also note that labor costs pressures have been rising, most noticeably for SIAEC. Based on valuations, we have HOLDs on SATS [HOLD   FV: S$3.35], SIA Engineering [HOLD   FV: S$5.14], and ST Engineering [HOLD FV: S$4.32].

UNDERWEIGHT shipping
With significant operating challenges likely to linger in 2014 and the persistence of a demand-supply cap, we deem it too premature to call for an inflection point for the sector. Although the overall economic climate should improve, capacity overhang and lack of industry action should see liners suffer from lower freight rates. Therefore, we  UNDERWEIGHT  the shipping sector and keep our SELL rating on Neptune Orient Lines [SELL   FV: S$0.95]

NEUTRAL on land transportation
We are anticipating a decent fare increase of 3% for the land transport operators, which should help to relieve some pressure on operating margins. However, overall challenges still remain unless there are changes to the operating framework. As such, we maintain our  NEUTRAL  outlook on the land transportation sector. In terms of our coverage, we prefer ComfortDelgro [BUY   FV:S$2.20] over SMRT [HOLD   FV:S$1.30]. The former because of its better growth potential both locally and abroad, while the latter will see operating results remain under pressure due to the on-going rail rejuvenation programmes.