Stocks the only game as Fed rates rise

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Stocks the only game
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T U E S DAY D ECE M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
2 COVE R S TO RY
Stocks the only game in
town as Fed rates rise, says
JP Morgan’s David Kelly
BY ASSI F SHA MEEN
SINGAPORE (Dec 14): Like almost everyone else, David Kelly,
the chief global strategist at JP Morgan Asset Management in
New York, is betting that the US Federal Open Market Committee will move to hike rates on Dec 17. “I think they will raise
rates — the overnight rate from 25 bps to 50 bps and the interest on reserves to 50 bps,” he says. Fed chair Janet Yellen
is likely to emphasise the gradual pace of the rate cycle and
reiterate that the US central bank will remain data-dependent. Kelly thinks the 25 bps hike will be followed up with four
similar increases next year, leaving the federal funds rate at
between 1.25% and 1.5% by the end of next year. “What is
going on with the US economy is that the supply side is really
hurting,” he tells The Edge Singapore in an interview on Dec
9. “The economy can’t grow that fast.”
The US unemployment rate has fallen from 10% in October
2009 to 5% currently. “Because there has been almost no productivity growth, all the 2.1% [annualised] GDP growth has
helped create jobs,” Kelly says. He expects the US economy to
grow 2% next year, which would take the US unemployment
rate to 4.4% by end-2016 and 3.8% by mid-2017. The US is essentially running out of available workers, he argues. “This
idea that somehow there is a lot of slack in the labour force
is wrong,” he says.
With the Fed hike baked into stock prices and corporate
earnings growth in the US actually contracting, should investors still buy US stocks? Kelly says equities are still the best
and possibly the only game in town. “The market is trading
at just over 16.5 times next year’s earnings, or fairly close to
the long-term historical average,” he notes. “Stocks are cheap
relative to the yield on bonds, relative to yield on cash and
relative to inflation.” Clearly, the US stock market may not
be terribly cheap right now but is not about to fall off a cliff.
Low oil prices and strong dollar
Kelly argues there is no corporate earnings recession in the US.
Two extraordinary factors — low oil and the strong US dollar
— have helped drag earnings down. The beleaguered energy
sector makes up 12% of the Standard & Poor’s 500’s operating earnings and the impact of the strong dollar dragged US
earnings down 6% this year. “Energy and the US dollar have
taken away a combined 18% of the S&P’s earnings this year,”
he notes. “If you believe we are near a bottom in energy [prices] and close to a high for the dollar, then next year’s earnings
are going to be positively affected by energy and the dollar.”
Even if the dollar and oil prices remain at current levels, US
corporate earnings could be up 10% next year. “If the dollar
weakens and energy prices nudge up a little, we could have
much stronger earnings growth,” he says.
Kelly thinks the impact of share buy-backs on earnings is
grossly overstated. “We estimate the effect of buy-backs on
earnings through a reduction of the share count has been less
than 1% a year over the last few years. Buy-backs clearly have
helped but the overall impact hasn’t been that big. Also, the
companies are sitting on a mountain of cash so they probably will do more buy-backs but also deploy that cash in other
ways [including more capex].”
While many have lamented that US consumers are not
spending the windfall from low oil prices, the veteran strategist argues that the impact of low oil is already being felt in
many sectors. “Auto sales are off the charts,” he says. “We have
had 18.1 million annualised auto sales for three consecutive
months now” — that is the strongest number since 2005. He
thinks consumer spending will grow at least 3% next year.
But he concedes that there is a problem in the US with
brick-and-mortar retailers because people are ordering online. “Traditional retailers are not doing well and there is
some constraint because banks are holding back on lending
to poor people,” he says.
US, eurozone, EMs, or the Far East?
So, how should global investors position themselves now?
While Kelly is bullish on US stocks, he likes European equities
even more. “The US is in the eighth inning of its economic expansion with almost full employment, Japan is at full employment and the eurozone has 10.7% unemployment,” he says.
So, from the medium-term perspective, he would rather be
overweight in Europe than anywhere else.
Doesn’t the eurozone have too many issues — political,
terrorism, refugees, little traction on structural reforms, the
problems in the European periphery as well as troubled economies such as Greece? “Everywhere I go, whether it is Latin
America or Europe, people often say politics is a big issue, but
I don’t think the success of right-wing parties in Europe or the
overreaction to terrorist attacks will have a big impact over
the long run,” he says. “I think Europe will continue to take
in the refugees and more immigrants, and the economies are
turning around.”
Indeed, he argues, investors need to look at all the positives
T UES DAY D EC E M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
3
T U ES DAY D ECE M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
BLOOMBERG
4 COVE R S TORY
JP Morgan’s Kelly
says Greece is no
longer a drag on
Europe nor seen
as one
in the eurozone. “Europe exports more of its GDP than the US,
Europe also imports more of its oil than the US, and cheap oil is
helping European consumers.” As is a cheap euro. “There is a
lot of pent-up demand in Europe, confidence is improving and
the days of austerity are over.” Kelly says Greece is no longer
a drag on Europe nor seen as one. “Back in 2012, everyone
freaked out about Greece because its problems were seen as
contagious... As soon as [European Central Bank president]
Mario Draghi made it clear that ECB would buy as many sovereign bonds as were necessary to protect the eurozone, the fear
went away. Moreover, the other vulnerable countries — Italy,
Spain, Portugal, Ireland — are all doing very well right now.”
In the short term, Kelly likes Japanese stocks because the
economic data has surprised on the upside. “Japanese unemployment is at the lowest level it has been in 20 years,”
he notes. “Abenomics may not be producing results as fast as
some people had expected, but it is clearly the only way forward for Japan. Japan has more serious supply constraints
than even the US, and their capacity to grow is probably not
much more than 1% a year, but they are on the right track.
We have seen reforms in governance which will help the Japanese corporate sector.” Corporate earnings are improving,
the stock market has done well and he projects that, over
the next 12 months, Japanese stocks will continue to do well.
“Over the long run, Japan has some bigger issues such as the
huge debts that the government has accumulated,” he says.
“In some ways, Japan is why the US needs to raise rates now.
Having near-zero interest rates for 20 years, Japan is proof
that zero rates don’t work.”
He also likes beaten-down emerging markets, though he
thinks it might be a while — at least another six months to
a year — before developing markets start to turn. “There is
a glut in commodities and there are problems in China, but
valuations are now more attractive and, with productivity
growth and more workers, emerging economies will do well
over the long run.” Kelly argues that the so-called “commodities curse” is not the reason EMs are reeling.
“In countries like Russia, Venezuela or Brazil, there are
clear political problems like bad leadership, corruption, instability, bad economic policies. So, commodity prices only
make things worse,” he says. “If you look at other commodi-
ty-dependent countries like Australia, Canada or Chile, they
have managed far better because they have diversified economies and good governance, which allows them to deal with
low commodity prices and move on.” Kelly says it may be a
while before commodity producers such as Brazil, which is in
terrible shape, dig themselves out of the mess. “The trouble
with commodities is that we have a big glut that will take a
long while to work out.”
China’s real issue
He is less bearish on China but argues that the world’s second-largest economy is most difficult to model because the
economic data is just wrong. “China’s retail sales growth
of 11.2% or 11.3% is not a real number and neither is GDP
growth of 6.9%,” he says. “So, we need to look at other numbers like electricity generation to get a better idea of what’s
going on.” Electricity generation was up just 1% over the past
year. “How do you square 7% GDP growth with 1% growth in
electricity generation?”
The real issue, he argues, is whether China can slow more
steadily. “In August, when China devalued the renminbi by
3%, there was a moment when you could see they were losing control,” notes Kelly. “Eventually, they re-asserted control
and have since maintained a degree of financial stability.” In
the long run, China could have a bigger problem because of
the huge corporate debts it has amassed. “But, over the years,
Chinese policymakers have maintained great control over
the economy and proven that they can achieve the macroeconomic goals they have set for themselves. So, I would not
bet against China,” he says.
In an environment in which the Fed is gradually raising
rates, Kelly says what would work best for investors is cyclical stocks in the US rather than defensive ones. So, things
such as US utilities and REITs will not do as well as consumer
discretionary, technology stocks and financials, he says. “In
Europe, I think consumer stocks will do well but, because I
don’t expect rates to rise there, dividend-paying stocks will
remain fairly attractive in the eurozone.” He also thinks eurozone export-oriented stocks will benefit from a weaker
euro. Overall, 2016 will be a decent year for equities despite
all the Fed moves.
T UES DAY D EC E M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
5
T U ES DAY D ECE M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
6 H OM E
China shipping groups merger plan
erases US$900 mil in value
SINGAPORE (Dec 14): China’s biggest shipping reform failed to
enthuse investors as two major companies lost about US$900
million ($1.3 billion) in total market value after the government proposed combining its two key ocean liner groups.
China Shipping Container Lines Co and China Cosco
Holdings Co led the declines with drops of as much as 30%,
the most on an intraday basis in more than 10 years. The
shares had been halted from trading since August pending
an announcement by their parent companies.
The State-owned Assets Supervision and Administration
Commission announced approval Friday for the reorganisation of China Ocean Shipping Group and China Shipping
Group, extending efforts to shrink industries plagued by
overcapacity while creating globally competitive businesses.
The plan comes as other shipping companies explore M&As
amid a slump in global freight rates.
“China shipping stocks have been suspended for more than
four months, so part of today’s slide has to be the shares catching
up with the broader market” decline, says Castor Pang, head
of research at Core Pacific Yamaichi International Hong Kong.
“The entire reorganisation plan, while intended to help consolidate operations, is very complicated and unwieldy. It won’t
be a year or two before effects are fully seen and understood.”
Market declines
Hong Kong’s benchmark Hang Seng Index fell 13% during
the four months when shares of China Ocean Shipping Group
and China Shipping Group companies were halted in the city.
The Shanghai Composite index dropped 8.3% in the period.
China Shipping Container lost as much as 30%, the biggest intraday loss since June 2004, and traded at HK$2.19
as of 11.53am in Hong Kong. China Cosco declined as much
as 28%. The stock declines wiped out as much as HK$3.41
billion ($621 million) and HK$3.54 billion respectively.
The companies’ shares remain suspended from trading
in Shanghai pending a review of the restructuring by the
stock exchange there.
Cosco Corp Singapore fell as much as 19% to $0.305, the
lowest intraday price since February 2004, after resuming
trading Monday. The company expects a significant loss in
4Q as some offshore contracts are deferred or potentially
canceled, Cosco Singapore said last week. Its shares too had
been halted since August.
The proposed combination of the two Chinese groups
comes days after CMA CGM SA, the world’s third-biggest
container shipping company, offered to buy Singapore’s
Neptune Orient Lines for $3.38 billion. The Chinese combination would have a 7.7% share of the container market,
overtaking Hapag-Lloyd AG for fourth place, behind CMA
CGM, according to Alphaliner.
The Chinese government’s plan would lead to four listed
entities, each focusing on one aspect of the shipping business: containers, financing, terminals, and oil and gas, the
official Xinhua News Agency said.
When the businesses are reshaped, China Cosco will operate container ships, while China Shipping Container will
be a leasing and financing company for vessels and boxes,
the companies said in exchange filings late Friday.
Not inspiring
For China Shipping Container, “letting go of the container
liner operation is a welcoming move but taking on container leasing, manufacturing and banking does not inspire,”
analysts including Johnson Leung at Jefferies Hong Kong
wrote in a note Monday. “We are not sure whether the deal
will go through.”
Cosco Pacific will acquire wharf assets held by China
Shipping Container to operate the combined company’s
terminals globally, the statements showed. China Shipping
Development Co will be the focal point for oil-and-gas transportation business.
State companies’ “reform is a good thing, broadly speaking. China’s state sector is inefficiently run and change is
needed”, says Jackson Wong, associate director at Huarong
International Financial Holdings in Hong Kong. However,
“the parent bodies are not taking back the parts of the businesses that are unprofitable in this reorganisation, as we
have seen in most other state-owned enterprises reform”,
he says.
Train merger
In May, CSR Corp and China CNR Corp combined to create
CRRC Corp, a train equipment maker that challenges Europe’s Siemens AG and Alstom SA. China Minmetals Corp,
the country’s biggest metals trader, last week agreed to buy
China Metallurgical Group Corp, a government-owned engineering and mining group.
Combining operations could help the shipping companies
enlarge their presence and improve bargaining power, but
the overcapacity plaguing the industry will remain. Ships
with a total capacity of about 2.9 million 20-foot containers
are expected to be delivered this year and next, according
to Drewry Shipping Consultants Ltd.
Shipping lines are attempting to charge more, lifting spot
rates for hauling a 20-foot container to Europe from Asia to
US$703 for the week ended Dec 11, from US$275 from a week
earlier, according to the Shanghai Shipping Exchange. Levies to the US West Coast dropped to US$816 per 40-foot box.
China Shipping Group had revenue of RMB82.8 billion
($18.4 billion) in 2014, according to data compiled by Bloomberg. Cosco Group had revenue of RMB169.3 billion last year,
according to its website. — Bloomberg LP
7
T UES DAY D EC E M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
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T U E S DAY D ECE M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
8 H OM E
Vard says orders for two LPG carriers
terminated by Petrobras Transportes
BY AMY TAN
SINGAPORE (Dec 14): Vard Holdings says it has been notified
that Petrobras Transportes (Transpetro), the transportation
logistics arm of Brazilian state-run energy group Petrobas,
has terminated the contracts for two Liquefied Petroleum Gas
(LPG) carriers on order from Vard Promar, a 50.5%-owned indirect subsidiary of the company.
The vessels are the last two of a series of eight LPG carriers
originally contracted in June 2010 for delivery from Vard Promar between 2014 and 2016. The combined contract value for
IPS Securex receives
$64.46 mil LOA for
Hyperspike products
SINGAPORE (Dec 14): An IPS Securex Holdings’ unit has received a $64.46 million Letter of Award (LOA) for the sale of
Hyperspike acoustic hailing devices and their supporting accessories for delivery to a certain customer in Southeast Asia.
The sale is envisaged over a period of five years by December 2020, subject to the issue of the relevant purchase orders.
This LOA is the largest deal the company has received to
date and is expected to contribute to the group’s earnings
for the financial year ending June 30, 2016.
The company’s Hyperspike products are one of its bestselling products in the region.
Shares in IPS Securex closed 3.28% higher at 31.5 cents
on Friday. — By Amy Tan
the series of eight vessels was US$536 million ($757 million).
Construction of the two vessels is at a very early stage.
Vard Holdings is now reviewing its overall exposure to the
Brazilian market.
The termination, if effective, is expected to reduce the company’s overall exposure.
At the same time, the company intends to claim compensation from Transpetro for damages in relation to the terminated contracts.
Vard Holdings shares closed 5.45% lower at 26 cents
on Friday.
Rickmers Maritime flags net
loss for 4Q2015 and FY2015
SINGAPORE (Dec 14): The trustee-manager of Rickmers
Maritime says the trust is expected to report a net loss
for 4Q2015 and FY2015 ending Dec 31.
In light of the depressed chartering markets, the
trustee-manager is of the view that it is appropriate
to recognise impairment charges on its vessels in its
4Q2015 financial results amounting to about US$129
million ($182 million).
The impairments will be reflected in the income
statement, thereby resulting in a net loss for 4Q2015
and FY2015.
But they are non-cash items and will not have an impact on the trust’s cash position and cash flows.
Shares in Rickmets Maritime closed 3.91% lower at
12.3 cents today. — By Amy Tan
Court rules North Korea-linked shipper guilty in illegal arms case
SINGAPORE (Dec 14): A district court today found Chinpo
Shipping, a company implicated in an illegal shipment of
arms on a North Korean container ship, guilty of two criminal charges.
Chinpo Shipping Co (Pte) Ltd had been charged for transferring financial assets or resources that could have been
used to contribute to North Korea’s weapon programmes,
which are subject to UN sanctions.
Chinpo Shipping was named by a UN report as helping
arrange the shipment of Cuban fighter jets and missile parts
that were bound for North Korea when they were seized in
Panama in 2013.
The firm was also charged with carrying out a remittance
business without a licence between 2009 and 2013.
The court is expected to hand down the sentence in late
January.
Edmond Pereira, a lawyer representing Chinpo Shipping,
says the verdict was “disappointing”. — Reuters
T UES DAY D EC E M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
9 HOME
SINGAPORE (Dec 14): The owners of five Airbus Group SE
A380s leased to Singapore Airlines have begun touting the superjumbos around potential future operators while the latter
evaluates whether to retain them.
Singapore Air must reach a decision by next September,
though a clause requiring it to refurbish the jets at a total
cost of as much as US$125 million ($176.3 million) provides
a strong incentive to extend 10-year leases that expire from
2017, according to Dr Peters Group, which owns four of the
double-deckers.
Dr Peters and Doric, which controls the other plane and
manages all five, has teamed with Airbus and former Doric
partner Mark Lapidus to drum up interest in the A380s while
Singapore Air mulls its options. Carriers in the US, Turkey and
China, as well as top European leisure operators, could be in
the running.
“No airline wants to pay US$125 million without having
an aircraft,” Dr Peters CEO Anselm Gehling says in an interview. If the planes do become free, Turkish Airlines is
a potential user, he says, though it hasn’t decided whether
it wants new or old aircraft, while US carriers will decide
whether they see a role for second-hand superjumbos “in
one or two years”.
Airlines from China and other parts of Asia may also look
at used A380s, with a fleet of four to five examples required
to make the model viable, according to Gehling. New operators may want denser seating arrangements than current
customers, which generally view the A380 as a fleet flagship,
so that capacity could grow to 700 or 800 people in a single
class, he says.
Turkish Air, or Turk Hava Yollari AO, has already been looking at second-hand double-deckers, though it said in June that
it had decided against leasing relatively young A380s deemed
surplus to requirements by Malaysian Airlines.
Efforts to secure customers for the Singapore A380s are in
full swing even as Airbus struggles to find buyers for new superjumbos. Among announced purchasers, Transaero Airlines
of Russia is now defunct and Skymark Airlines Inc of Japan is
in bankruptcy protection, while Hong Kong Airlines cancelled
orders and Virgin Atlantic Airways and Indian Ocean carrier
Air Austral seem unlikely to take planes.
Rental rate
The last new order was placed in 2014 by Lapidus, who has
yet to find users for the 20 double-deckers he’s due to take.
Second-hand A380s are valued at between US$90 million and
US$110 million by experts, Gehling said, though none have yet
been sold. That compares with a current list price of US$428
million.
Singapore Air ordered the A380s in 2000, when the model
sold for US$235 million, though as an early customer would
BLOOMBERG
A380 owners target US, China role
for surplus Singapore planes
most likely have received a significant discount. Dr Peters took
over its four planes from 2007, the year deliveries to Singapore
Air began, at a cost of about US$200 million apiece.
Singapore is paying Dr Peters $1.71 million per month per
aircraft, or about US$205 million over the life of the lease,
based on fees for the first plane, according to publicly available documents.
The airline is obliged to return the A380s in “full life” condition - meaning that their cabins, engines and other elements
must be like new — or make a payment of up to US$25 million for each plane handed back without being refurbished,
Gehling says.
Long-term deal
While that clause also holds if Singapore invokes a two-year
lease extension, Dr Peters might be prepared to cut the carrier
a deal if terms were lengthened somewhat further, encouraging it to keep the planes, the CEO says.
Airbus, which has said Asian low-cost airlines or carriers ferrying pilgrims to Mecca may also help establish a second-hand
A380 market, is probably not willing to shoulder the risk of
buying back superjumbos itself, but will provide marketing
assistance and customer contacts, Gehling says.
Singapore spokesperson Nicholas Ionides says the carrier
will decide whether to extend the leases next year. He declines
to comment on contract details.
Airbus reiterated that the emergence of new business models
for high-density, long-haul planes will favour the A380, with
used superjumbos more productive than other second-hand
options such as Boeing Co’s smaller 777-300ER. — Bloomberg LP
T U E S DAY D ECE M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
1 0 HOM E
SGX named Global Exchange of the Year
BY PC L EE
SINGAPORE (Dec 14): SGX was named “Global Exchange of the
Year” for the first time at the recent Futures & Options World
(FOW) International Awards ceremony, as well as “Exchange
of the Year — Asia, Australasia and MEA.”
FOW cited SGX’s strong volume growth through 2015 with
trading levels up more than 60% yo-y, as well as continued innovation across the risk management portfolio.
SGX was credited for expanding its offshore Asian equity
derivatives suite, the growth of its commodities clearing and
OTC business, and for continuing to grow the currency futures
portfolio and turnover.
Earlier this year at the FOW Awards for Asia 2015, SGX was
STI dips 0.69% to 2,815.04
SINGAPORE (Dec 14): Singapore stocks ended lower at the close
today, amid mixed trading in other Asian markets ahead of
the US Federal Reserve’s decision on interest rates this week.
The STI ended the day 0.69% lower at 2,815.04, after trading
between 2,793.39 and 2,821.67. Market breadth was negative.
Excluding warrants, decliners outnumbered gainers 310 to 110.
A total of 978.8 million shares worth about $916.3 million
changed hands, giving an average of 94 cents per share for
the entire market.
Spackman Entertainment Group, Ezra Holdings, Jiutian
Chemical Group, Golden Agri-Resources, and New Silkroutes
Group were among the most actively traded counters.
Among STI components, ST Engineering added 1% to $2.92,
while ComfortDelGro Corp rose 1% to $3.00. Meanwhile, Sembcorp Marine sank 3.7% to $1.67, while Yangzijiang Shipbuilding slipped 3.2% to $1.075.
USP Group soared 35.9% to 5.3 cents. It has signed an agreement to buy Supratechnic, a trader of marine equipment and
industrial machinery, in a bid to diversify its business. The
consideration for the acquisition will be $12.34 million in cash
and 64 million new shares in USP Group.
COSCO Corp (Singapore) plunged 18.7% to 30.5 cents after
the company expects a significant loss in 4Q as some offshore
contracts are deferred or may potentially be cancelled.
Spackman Entertainment Group surged 12.5% to 15.3 cents.
Last week, it said that Delmedia Co, a subsidiary of its associated company Spackman Media Group, has entered into a
programme agreement with Fengcan (Beijing) Culture Media
to produce a Chinese reality show series.
IPS Securex Holdings climbed 4.8% to 33 cents. It has received
a US$64.46 million Letter of Award for the sale of Hyperspike
acoustic hailing devices and their supporting accessories for delivery to a certain customer in Southeast Asia. — By Benny Tan
also named “Exchange of the Year” and awarded with the “Most
Innovative New Currency Contract” accolade, given the success
of the USD/CNH futures contract. SGX says it now offers the most
liquid offshore USD/CNH futures market and has cleared a total
of US$25 billion ($35.3 billion) since launching in October 2014.
SGX CEO Loh Boon Chye says, “We are pleased that SGX continues to receive industry recognition for our innovation and
risk management products and we look forward to enhancing this further through the year ahead. The success cited by
these awards has only been possible with the support of our
partners and customers and we take this opportunity to thank
them for this again.”
SGX closed 0.8% higher at $7.53.
DBS’ ‘PE Access’ introduces
direct private equity deals
to private banking clients
SINGAPORE (Dec 14): DBS Private Bank has announced
the launch of “PE Access” — a programme introducing
direct investment deals to its ultra high-net-worth clients.
Available to clients with a net worth of $50 million
and above and with a minimum deal size of $5 million,
“PE Access” is tailored for investors who seek alternative forms of investment, prefer to have direct access to
the businesses they are investing in, and have a higher
risk appetite.
With “PE Access”, DBS acts as an introducer by informing interested clients of relevant investment deals that
the bank comes across. Clients then perform their own
due-diligence and, if convinced of the merits of the deal,
can proceed to invest directly in the business.
The programme is the first to be introduced here by
a Singapore bank, claims DBS.
With the introduction of “PE Access”, DBS hopes to
help spur the growth of private equity and venture capital deals in Asia.
In 2014, 32% of the world’s GDP was generated in Asia,
up from 26% in 2000, yet Asia still accounts for a substantially smaller portion of private equity and venture
capital investment globally.
In 2014, Asia only accounted for 13% of the global private equity and venture capital industry’s total assets under management. Last year, US$55 billion ($77.6 billion)
in private equity capital was raised in Asia, as compared
to US$290 billion in North America and USD131 billion
in Europe. — By PC Lee
T UES DAY D EC E M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
11 H OM E
IN B RI E F
Interra Resources enters MOU
with Sany South East Asia
SINGAPORE (Dec 14): Interra Resources has entered into an MOU with Sany
South East Asia, a local unit of Sany
Heavy Industry.
Sany Heavy Industry is a manufacturer and distributor of engineering
machinery products and accessories
and is listed on the stock exchanges of
Shanghai and Hong Kong.
The agreement is in line with the
business plans and policies of Sany
Heavy Industry under China’s “One
Belt, One Road” initiative.
This is one of the largest and most
comprehensive development projects in
Asia’s history and will directly affect and
link a population of 4.4 billion people.
One of its goals is securing the energy needs for China and Asia; it will
meet the rising demand for energy
by investing in energy projects. This
ranges from upstream projects, oil and
gas pipelines and liquefied natural gas
terminals to power plants, energy connectivity as well as renewable energy.
Under the MOU, Interra and Sany
will cooperate to jointly invest in and/
or develop companies and assets related to the oil and gas industry in Southeast Asia.
Both parties will, among others, set
up a joint-venture company or otherwise cooperate together to market, distribute, sell and/or lease Sany’s equipment in the oil and gas industry in
Southeast Asia.
Shares in Interra Resources closed
8.24% higher at 9.2 cents today. — By
Amy Tan
Ezion Holdings enters into
cooperation agreement with
China state-owned enterprise
SINGAPORE (Dec 14): Liftboats and
service rigs provider Ezion Holdings
has entered into a strategic cooperation agreement with a Chinese stateowned enterprise (SOE) to support offshore wind power installation projects
in China.
These projects are mainly along the
coastal regions of China. As part of the
environmental goals in China’s Twelfth
Five-Year Plan, targets have been set for
non-fossil energy to account for 11.4%
of the total energy consumption and
for CO2 discharge per unit of GDP to
be reduced by 17%.
Offshore wind power development
can help to reduce air pollution in certain Chinese coastal cities that are burning coal to generate electricity. Wind
turbines installed along the coast can
help provide more clean energy into
the power grid of coastal cities.
The SOE is part of a central enterprise
power generation corporation under
supervision of the State-owned Assets
Supervision and Administration Commission of the State Council of China.
Ezion will be supporting the SOE
using its service rigs for the loading,
construction, transportation and installation aspects of the wind turbine
development projects.
In addition, the group will be providing the relevant technical expertise
required for the construction and installation of the wind turbine foundation
and components.
Shares in Ezion Holdings closed
1.77% lower at 55.5 cents today. — By
Amy Tan
Cacola gets $1 mil convertible
loan to Chinese investor
SINGAPORE (Dec 14): Cacola Furniture
International has obtained a $1 million
five-year, 6% convertible loan from investor Ge Jian Ming to fund acquisitions.
If fully converted into Cacola shares
at the initial conversion price of 0.684
cents per share, the conversion shares
will represent 17.1% of Cacola’s enlarged share capital.
The initial conversion price is a 2.3%
discount to Cacola’s closing price of 0.7
cents on Friday.
China businessman Ge is investing in
the company for investment purposes
only, the furniture maker announced
today before the market opened.
The investor will not hold 15% or
more of the company’s shares without
shareholder approval.
Cacola is on the SGX’s watch-list for
failing to meet profitability and market
capitalisation thresholds.
The company must raise either or
both of its earnings and market capitalisation by March 2016 or face potential
delisting. — By PC Lee
Rex’s stake in Lime Petroleum
Norway rises to 98.8%
SINGAPORE (Dec 14): Rex International’s
shareholding in Lime Petroleum Norway has risen to 98.77% from 74.16%,
after a restructuring of the subsidiary’s
capital.
Lime Petroleum underwent a capital restructuring that cut its share capital to 80.32 million Norwegian krone
($13.1 million) from 382 million krone
by accounting for 30.9 million krone of
uncovered losses and transferring 270.8
million krone to other equity.
As part of the restructuring, 900,000
Lime Petroleum shares that were held
by Rex were cancelled, and 77.4 million
krone was repaid to Rex then subsequently fully reinvested back into Lime
Petroleum for new shares.
Rex says the restructuring gives the
company an even larger stake in Lime
Petroleum’s Norwegian assets. Lime
Petroleum has interests in 19 licences
in the Norwegian continental shelf and
has plans to drill at least three more
wells in 2015 and 2016, Rex says.
Rex shares last traded at 8.7 cents
on Friday. — By PC Lee
Oceanus Group on SGX
watch-list from Monday
SINGAPORE (Dec 14): Oceanus Group
is on the SGX’s watch-list from today.
In light of this inclusion, the company will immediately cease and discontinue all arrangements to undertake a
transfer of the listing of the company
from the Mainboard of the SGX to the
Catalist Board, as previously contemplated by the company on Sept 3.
Oceanus has 24 months from today to
fulfill the requirements for its removal
from the watch-list.
Failing this, SGX may either delist
the company or suspend trading of the
company’s shares with a view to delisting the company.
Shares in Oceanus Group last traded
at 0.4 cents. — By Amy Tan
T U E S DAY D ECE M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
1 2 S TOCKS WITH MO MENTUM
VERSALINK HOLDINGS
Versalink Holdings is a Malaysia-based
manufacturer of mid- to high-end system
furniture with more than 90 overseas
dealers located in 40-plus countries in
Africa, Asia, Australasia, the Middle
East and North America. Apart from its
“Versalink” brand products, the company represents various international
brands. On top of this, it also provides
workspace planning and consulting
services.
For 1HFY2016 ended August, Versalink registered a 6.1% y-o-y decline in
its revenue to RM30.4 million, mainly
dragged down by lower revenue contribution from its export segment. This
was, however, mitigated by improved
contribution from its domestic segment.
Meanwhile, earnings surged 76.8%
y-o-y to RM3.2 million for 1HFY2016,
spurred by lower expenses. In particular, administrative expenses decreased
13.6% to RM4.7 million, as one-off expenses related to its IPO were recognised
in 1HFY2015. The company’s bottom
line was also propped by an increase
in other income, thanks to a net gain
on forex and higher interest income.
Versalink’s balance sheet has remained healthy, with its cash position improving to RM20.5 million in
1HFY2016, up from RM12.4 million in
1HFY2015. The company says this gives it
the flexibility to adapt and grow amidst
challenging market conditions.
In relation to the business outlook,
Versalink says it is of the view that its
operating performance, in particular
the export segment, will be negatively
affected by the slowing global economy.
However, it remains positive about the
long-term prospects of the industry. Also,
it aspires to become a prominent player in the global market and continues
to seek growth and expansion in new
and existing markets. And, barring unforeseen circumstances, it expects to
remain profitable in FY2016 despite
tough global economic factors.
YTD, shares in Versalink are down
about 25%.
VERSALINK HOLDINGS
Valuation score*
Fundamental score**
TTM P/E (x)
TTM PEG (x)
0.99
P/NAV (x)
2.94
TTM Dividend yield (%)
20.93
Market capitalisation ($mil)
135.00
Shares outstanding (ex-treasury) mil
0.60
Beta
0.14-0.23
12-month price range ($)
This column is an analysis done
by The Edge Singapore on the
fundamentals of stocks with
momentum that were picked up
using proprietary algorithm by
Anticipatory Analytics Sdn Bhd
and that first appeared at www.
theedgemarkets.com. Please
exercise your own judgment
or seek professional advice
for your specific investment
needs. We are not responsible
for your investment decisions.
Our shareholders, directors and
employees may have positions
in any of the stocks mentioned.
*Valuation factor — Composite measure of historical return & valuation
**Fundamental factor — Composite
measure of balance sheet strength
& profitability
Note: A score of 3.0 is the best to
have and 0.0 is the worst
to have
VERSALINK HOLDINGS
(ALL FIGURES IN MYR MIL)
Financials
Turnover
EBITDA
Interest expense
Pre-tax profit
Net profit - owners of company
Fixed assets - PPE
Total assets
Shareholders' fund
Gross borrowings
Net debt/(cash)
-
-
VERSALINK HOLDINGS
FY2016Q2
31/8/2015
59.8
4.7
0.4
2.7
0.6
26.2
65.0
63.1
2.9
(24.0)
30.4
4.8
0.2
3.8
3.2
27.6
66.2
64.4
2.7
(19.6)
FY15 ROLLING 12-MTH
RATIOS
DPS ($)
Net asset per share ($)
ROE (%)
Turnover growth (%)
Net profit growth (%)
Net margin (%)
ROA (%)
Current ratio (x)
Gearing (%)
Interest cover (x)
FY15
28/2/2015
28/2/2015
-
-
0.01
0.47
1.01
4.51
12.42
0.01
0.48
4.33
-
T U E S DAY D ECE M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
1 3 MAL AYS IA
Ringgit in spotlight ahead
of US rate decision
BY SA N G EET HA A MA RTHALINGAM
KUALA LUMPUR (Dec 14): At current levels, the ringgit could
have priced in the possibility of a US rate hike this week, as the
currency contends with weaker renminbi and crude oil prices.
Economists say the US’ potential rate hike is expected to have
marginal impact on the ringgit, which depreciated to 4.3195
against the US dollar at 1.56pm.
US policy makers will meet on Dec 15 and Dec 16 to decide on
the country’s monetary policy. A US rate hike does not bode well
for emerging Asian markets like Malaysia, as investors will turn
their attention to US dollar-denominated assets.
A US rate hike will be the country’s first increase in about seven years from near-zero levels.
In Malaysia today, an economist from MIDF Amanah Investment Bank Bhd told theedgemarkets.com via email that in the
long term, it was important to note how the US economy and
financial markets would fare post-lift-off.
“That will eventually affect the pace of the subsequent rate
hikes. In the event that there are signs of overheating in the US
economy, the US Federal [Reserve policymakers] may decide to
conduct a faster pace of monetary policy tightening, leading to
further capital outflow from the emerging markets and vice versa.
“For now, we are not expecting that there will be much change
in the market post-lift-off, and the market should start to stabilise
by the middle of next year,” says the economist.
The ringgit’s strength also tracks prices of crude oil, a major
component of the Malaysian economy and government revenue.
Crude oil prices at below US$40 a barrel due to oversupply
have raised concerns on the ringgit. The economist says the ringgit possesses a higher correlation with the commodity’s price.
“In the short term, we may be seeing further downward pressure on the commodity index, particularly as it is expected that
the current winter is likely to become a warm winter, due to the
El Nino this year,” he says.
Today, the spotlight is on also the renminbi. Bloomberg reported that the ringgit declined to a three-week low following
China’s introduction of an index tracking the renminbi against
a basket of currencies.
It was reported that the move might put pressure on Asian
currencies to depreciate, as policymakers bid to keep exports
competitive with the world’s second-biggest economy by allowing
their exchange rates to weaken and as a looming US interest-rate
increase strengthens the greenback.
The economist who spoke to theedgemarkets.com says that
China’s move is not unexpected since the renminbi joined the
IMF’s Special Drawing Rights (SDR) basket.
“However, if anything, a weaker [renminbi] should be beneficial for Malaysia, as it will benefit China’s economy and eventually lead to a stronger global trade activity,” he says.
Moody’s: Malaysian
banks’ outlook stable
Foreign investors offloaded
RM663 mil last week
KUALA LUMPUR (Dec 14): Moody’s Investors Service says
most Asia-Pacific banks, including those in Malaysia, has
a stable outlook because of their loss-absorbing buffers.
In a report today, Moody’s Financial Institutions Group
managing director for Asia-Pacific Stephen Long says regional banks have a stable outlook despite asset quality
concerns.
“Profitability will likely weaken but remain sufficiently
strong so that rising impairment expenses can be absorbed
without resulting in weaker capitalisation.
“A moderation in loan growth will also be supportive of
relatively stable capital ratios. Another important buffer
for Asian banks, beyond their profitability and capitalisation, is relatively strong loan loss reserves,” Long says.
High household debt is a concern for banks in Malaysia, he adds.
But he also notes that household debt growth has slowed
because of regulatory measures. — By Tan Siew Mung
KUALA LUMPUR (Dec 14): Foreign money continued to exit the
Malaysian equity market on a net basis for the third week in
a row, according to MIDF Amanah Investment Bank Research.
In a note today, the research house says last week, investors
classified as “foreign” offloaded nearly RM663 million ($216
million) of local equity in the open market and were net sellers
in all of the five trading days.
It says foreign participation rate nonetheless dwindled to
RM861 million from a YTD high of RM1.68 billion recorded in
the previous week.
MIDF Research says local institutions continued to help support the market last week, mopping up almost RM631 million net.
It says the participation rate remained relatively high at
RM2.14 billion.
As well, local retailers were marginal net buyers at RM32
million. “Likewise, its participation rate continued to decline
to RM631 million last week,” it adds. — By Surin Murugiah
T UES DAY D EC E M B E R 15, 20 15 • THEEDGE SINGAPORE MARKET REPORT
14 PROPE RT Y
(Dec 14): Property foreclosures in Hong
Kong will double from current levels by
the end of next year as a slowing economy
hurts borrowers’ ability to service their
mortgages, according to an auctioneer
with 23 years of industry experience.
The average number of foreclosures
has risen to 80 a month from about 50
to 60 in 1H2015, Tsang Kit-chun, managing director of AA Property Auctioneers Ltd, said in a phone interview on
Friday. That’s still way slower than the
6,000-a-month pace in 2003, following a
six-year property bear market, he says.
Hong Kong developers including Cheung Kong Property Holdings Ltd and Henderson Land Development Co are offering
enticements such as stamp-tax rebates
as well as first and second mortgages in
an attempt to lure buyers, as some analysts predict prices are on the verge of
plunging. Colliers International Group
Inc sees prices dropping 15% in 2016.
Increased foreclosures reflect the eagerness of banks and other financial
institutions to call loans when owners
can’t afford mortgage payments, Jefferies Group LLC analysts wrote in a Nov
17 note. China’s economic slowdown is
exerting pressure on businesses, add-
BLOOMBERG
Hong Kong property foreclosures
seen doubling in 2016 on economy
ing risks to Hong Kong’s housing market indirectly, analyst Venant Chiang
says by email.
Residential properties make up 60%
of foreclosed properties, Tsang says. —
Bloomberg LP
Freehold condo in District 9 going for below $1,900 psf
BY TA N C H EE Y U EN
SINGAPORE (Dec 12): A five-bedroom unit at The Trillium is being
put up for sale on TheEdgeProperty.com for $4.5 million. The asking price works out to $1,883 psf over its strata area of 2,390 sq ft.
The Edge Fair Value, a valuation tool on TheEdgeProperty.
com, puts the indicative value of the property at slightly above
$1,900 psf. In October, another 2,390 sq ft unit on the eighth floor
fetched $4.6 million, or $1,925 psf.
Based on historical transactions, the subject property’s asking
price of $1,883 psf falls below 2010 prices. In July 2011, a 2,390 sq
ft unit on the second floor was sold for $4.77 million, or $1,996 psf.
In April 2010, another 2,390 sq ft unit on the seventh floor was
sold for $4.9 million, or $2,050 psf. Notably, prices of similar-sized
units have never dipped below the $1,900 psf mark since 2008.
The Trillium is a freehold condominium project on Kim Seng
Road developed by Lippo Land Corp and completed in 2010. It is
located within 500m of the upcoming Great World MRT station of
the Thomson East Coast Line. Schools within 1km include River
Valley Primary School.
According to URA, prices of high-end, non-landed homes
have fallen 9% since the peak in 1Q2013 and have returned to
2010 levels.
There were six rental contracts involving five-bedroom units
measuring 2,300 to 2,400 sq ft at The Trillium in 2015. Rents for
these units averaged $10,000 a month. Based on the listing price
of $4.5 million, the average rent translates into a potential gross
rental yield of 2.7%.