Singapore Exchange - Back to the Bull

Liquidity support: SGX reported 4Q09 profit of S$91.2mn, up 65% QoQ and 1% YoY on higher trading and market activity. A slight beat on better cost control. Final dividend S$0.155ps, in line. SGX will increase the base dividend to S$0.15ps (S$0.0375ps per qtr) from FY10. FY09 profit was S$306mn, down 31% YoY.

Operating revenue: Up 42% QoQ; down 1% YoY. Securities market fees were up 80% QoQ and 10% YoY as average daily traded value jumped 82% QoQ, to S$1.7bn. Derivative fees increased 15% QoQ, down 14% YoY, with an 18% QoQ rise in traded contracts, a tad disappointing and due to lower structured warrants activity. Stable revenue was up 5% QoQ, down 14% YoY with higher corporate actions. Market-driven revenue was 79% of total mix (vs. 72% in 3Q09).

Operating expenses: Up 18% QoQ; down 4% YoY. Bonus accruals were up 152% QoQ (4Q seasonality), down 17% YoY. Good cost controls in staff costs, marketing and travel expenses offset increased system investments, with system maintenance and depreciation costs both increasing. Improved markets led to a 7ppt QoQ fall in operating efficiency, to 38%.

Back to Bull: SGX is rational with shareholder capital, in our view, and continues to seek to expand the proposition and diversify revenue streams. The announcement of the new CEO removed an uncertainty. With global monetary policy conditions likely to remain loose for some time, we expect liquidity to continue to expand and flow into risky assets and also increase corporate activity. SGX is a leveraged play on this thematic, and we see average daily traded value reaching and holding the S$2-2.5bn range. Trading on 22x FY10e EPS, SGX appears very reasonable compared with HKEx at 38x.

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Venture = Better momentum, solid cashflow

Venture continues to positively surprise with its strong performance. Excluding one-off gains, it reported net profit of S$40.2mn (+30% q-q), 25% ahead of our estimates of S$32.1mn (Exhibit 1). One-offs included a gain of S$25m as mark-to-market value of CDOs recovered, if hindered by a forex loss of S$4.3mm.

The surprise came from 2Q09 sales of S$846mn (+17% q-q), significantly ahead of our estimates of S$704mn. We believe the sales growth reflects Venture success in expanding into full configuration printers for its largest customer HP. (Note: sales to printer segment grew 37% q-q, ranking as the fastest-growing segment). Given that the complete assembly business has lower margins, Ventures’ gross margins fell 90bps q-q to 9.6%. That said, despite the lower gross margins, EBIT margins rose 27bps q-q to 4.4%, reflecting cost-cutting.

In this downturn, several smaller CMs, were faced with lengthening cash cycles, as OEMs asked for better terms. In contrast, Venture has made solid improvements. Cash cycle in days fell by 17 days q-q to 61 days in 2Q09, versus typical 70-75 day levels. This marks the lowest levels since FY05. This resulted in operating cashflow coming in at S$70mn, (versus profit of $40.2mn); this brings 1H09 operating cashflow (OCF) to S$169mn and free cashflow (FCF) to S$158mn for an OCF yield of 14% and FCF yield of 13% (annualised).

The main cut came from inventory — which fell by 20 days to 53 days. We believe the cut was owing to finished good inventory. Given the high-mix nature of products Venture makes, these levels strike us as too low. Indeed management said they are scrambling to get components as business momentum improves.

In our view, cashflow and margins will set Venture apart from its EMS peers during this downturn. Given Venture’s success in expanding into full configuration printers for its largest customer HP, we now forecast a 10% y-y drop in sales (earlier: -25.4% y-y). For FY10F, we now forecast sales growth of 11.8% y-y (earlier: 10.1% y-y) to reflect the new customers as discussed above. We have raised our profits by 19.9% for FY09F and 13.9% by for FY10F.

Given earnings uncertainty across the EMS segment, we use P/BV as a valuation metric. The US EMS players have been fairly aggressive in cleaning their books, writing off large goodwill balances. By contrast, goodwill at Venture stood at 34.6% of equity at end-2Q09. To make an apples-to-apples comparison between Venture and peers, we strip out goodwill from BV to derive adjusted BV. In addition, we add back net cash/share (S$1.31 at end-FY09F) in arriving at our price target (methodology unchanged). We believe that this compensates for Venture’s cash on balance sheet, versus debt for its peers. Our revised price target is S$10.06 (previously S$8.86).

Upside to our cash balance could come from recovery of CDO maturing on 20 December, 2009, will raise cash per share by an additional S$0.44. Management believes they can recover the full amount when the CDO matures, but to be conservative, we await the cash inflow. Downside risks to our price target could stem from delays in ramp with new customers in FY10F.

Straits Asia Resources - Boundary approval comes through

We reiterate our Outperform recommendation and increase our DCF-based price target to S$3.00 from S$2.25, on the back of the Sebuku boundary being approved.
Reserve upgrade leading to higher production. We believe that the boundary approval will lead to roughly 50mt upgrade to reserves (and further upside through additional exploration). We have therefore increased our 2010 production forecast from 12mt to 13.5mt and long-term production from 16mt to 20mt.

Higher ASP and lower costs. We have increased our estimated average selling price for the company by about 6–7% due to increasing production out of Sebuku, which is of a higher quality coal vs Jembayan. Further, given Sebuku’s lower strip ratio of around 4–5x, low transportation distances and excess capacity, we have also reduced our production cash cost estimate by 6% in 2010.

Short-term cautious, but medium-term upside risk to coal price forecasts in 2011+ towards US$85–90 due to a tightening supply/demand balance.

Valuation is attractive vs peers, as the stock trades at 2010E adjusted PER of 13x vs the sector’s 20x. We think it is appropriate to strip out amortisation for the company to be comparable with its peers.

Key risk – production delays beyond March 2010? Post the Cagar Alam boundary being approved, the company is required to get an environmental permit and borrow use permit. The company believes that this process is administrative and on-track. We highlight that should bureaucracy lead to further delays, there would be downside risk to our forecasts.

We downgrade our 2009 earnings estimate by 26% to reflect the one-off expenses, higher taxes and warrants dilution, but upgrade those for 2010-12 by 64%, 28% and 56% to factor in the impact of the boundary approval. We raise our target price to S$3.00 from S$2.25.

We reiterate our Outperform recommendation with a revised price target of S$3.00. We believe that the boundary approval is transformational, which should lead consensus to upgrade reserves, production, average selling price and lower costs.

Parkway Holdings Limited: Continues on a good growth trajectory

Brightening outlook. Parkway Holdings (Parkway) reported its 2Q09 results with topline of S$258.6m (+10% YoY, +8.7% QoQ) and PATMI of S$40.3m (+47.6% YoY, +89% QoQ). Excluding exceptional items, 2Q09 bottomline would have been S$30m (+7% YoY, +28% QoQ). The results were better than expected as its Singapore operations were not as bad as expected and its International Hospital and Healthcare segments delivered strong double digit growth. The taint in the results was the writeback of only S$17.2m (final settlement) out of S$34m bad debt provision.

Hospitals: International buffers Singapore performance. Singapore hospitals' showed encouraging QoQ improvements (but still down YoY) in both patient admissions and days stayed. The well-received 40 elective surgeries helped buffer revenue. Therefore FY09 might be able to show a flat performance. Parkway's international hospitals continued on its topline growth trajectory (+33% YoY, +11% QoQ), driven by its Pantai Hospitals, increased patient loads at its cardiac centre in Brunei and consolidated revenue of Gleneagles KL.

Healthcare: keeps up performance. The segment's good showing (+23% YoY, +9% QoQ) was driven by Parkway Shenton's clinic network as it secured new corporate contracts as well as a government contract for temperature screening at all border points. Fees were also accreted from its management project in the Abu Dhabi Hospital. Cost containment and government incentives helped accentuate Healthcare's EBITDAR growth by 66% YoY.

Crystal balling Novena. Parkway management has updated that changes in the construction schedules will push the Novena Hospital opening to 1H12 (prev. 2H11). The move is a double edged sword as Parkway expects to save S$100-150m in construction costs with lower construction costs but pushes Novena's breakeven far out to 2017. Parkway will only obtain the Building Permit and the right to sell its suites in 1Q10. Therefore, we have pushed the sale of medical suites back to 2010, albeit at the same prices (S$3500psf) and number of suites (80 units).

Upgrade to BUY. We have raised our estimates with its brightened outlook and re-peg Parkway to 20x (prev. 15x) FY10F as risk appetite returns. Our fair value is now S$2.22 (prev. S$1.28). Parkway did not declare any dividends in a bid to conserve cash. We have cut our dividend forecast to 1.25 S cents for both FY09 and FY10. H1N1 proliferation will pose significant risk to our estimates as people travel less and avoid elective procedures in hospitals.

Venture - Strong demand for consumer products

Outlook — VMS describes the current situation as “load and chase” – customers are over-loading EMS players and repeatedly chasing deliveries. It does not rule out some customers resorting to double bookings to fulfill enddemand and in view of industry supply chain congestion. 2Q09 revenue could have been higher if not for constraints on labor and components.

Strong demand for consumer products — Venture saw more orders for “capexlight” products as many firms are still not willing to commit high capex. Printing & Imaging (P&I) (being closest to the consumer electronics segment despite serving corporate customers) saw a substantial QoQ revenue increase, while Test & Measurement (which involves huge customer capex) saw QoQ revenue contraction. Visibility remains poor as customers are still “not prepared to commit to the pace and trajectory of recovery”. Inventory channels remain very lean.

Gaining new customers — Venture added 7 new customer accounts recently across various industries including Medical, Aerospace, Instrumentation, and Printing & Imaging. The strategy is to increase revenue contribution from ODM and compensate for any potential loss of a major customer in P&I.

Expanding margins — Mgmt says P&I revenue improved significantly QoQ due to the shift towards turnkey for a major customer which was difficult to turn away. However, going forward, much emphasis will be placed on shifting existing and new customer accounts’ product mix away from ESP (~15% gross margin) towards ODM (18-25% gross margin) and Enterprise Solutions (>40% gross margin) to capture wider margins. VIP Color printer developed with HP was cited as an example of an Enterprise Solution that was highly profitable.

Cash conversion cycle and dividends — Management says there is little room for further cash cycle reduction as working capital has been substantially lowered, including a 15% qoq reduction in inventory. Management has reiterated FY09E DPS of S$0.50 given strong +FCF of the Group. Management remains very cautious on possibility of full CDO write-back and says future write-backs are uncertain given the nature of the financial product.

DBS - 2Q09: Ahead, but issues simmer

Loan growth decelerated in 2Q, flat q-q post-currency adjustment (1Q: +1%) – disappointing considering DBS highlighted market share potential as a driver for the ROE-depressing S$4bn capitalraising in Dec 08. Net interest margin (NIM) saw a positive albeit shallow inflexion (+2bps, following steady decline since 2Q07) as low interbank rates weighed on a liquid, high CASA balance sheet.

Non-interest income (NII) was key positive surprise – fee income grew 13% q-q, primarily on capital market-related revenues, while both trading and investment income surprised with q-q resilience, supporting management’s contention that de-risking of the trading operations over 2H08 will yield more stable contributions going forward. On the other hand, NPLs surprised negatively, rising a hefty +80bps q-q, to 2.8% - while this caused related overshooting in provisioning, loan loss cover has been allowed to further shrivel, declining to 68% (1Q: 85%). Peers remain near the 100% level.

Notwithstanding positive revision bias on NII out-performance, the latter’s underlying dependence on inherently volatile capital market activity sits uncomfortably with broadly weak commercial banking traction i.e. loan growth, margins, NPL formation / coverage. ROE is set to remain depressed and a discounting factor versus peers.

Our Gordon Growth-based price target (methodology unchanged, assuming 10% sustainable ROE, 10% cost of capital and 5% long-term growth) is S$10.80, implying 1.2x FY10F adjusted book value (1.0x stated book) and 14x FY10F earnings. Upside risk lies in faster-than-expected recovery in export demand; this would significantly reduce NPL stress on the balance sheet, particularly from exposure to HK/China SMEs. On the downside, while DBS’ corporate CDO exposure has been substantially provided for, the rapid pace of corporate-directed loan growth over the last two years, coupled with substantial exposure to the HK/China export-dependent SME segment and corporate debt securities, means earnings are highly vulnerable to potential spiking in corporate defaults. Further, any delay or uncertainty surrounding the replacement of DBS’ CEO Richard Stanley, who unexpectedly passed away in April, would be a discounting factor, in our view.

Genting - Best proxy to Singapore’s flourishing tourism industry

We are optimistic that Singapore's first IR start strong in less than six months. In our opinion, Genting Singapore offers exposure to Singapore's flourishing tourism sector and seems well placed to tap the underserved Southeast Asian gaming market. Already the most liquid Asian gaming stock, current premium valuation is sustainable near term given its unique offering, pre-opening premium and stable regulatory regime. Initiate with Buy, S$1.26 target price.

Genting Singapore’s Resorts World Sentosa (RWS) is on track for a soft opening by January 2010. We believe RWS is positioned to capture a 40-50% share of the US$3.0bn casino market, making Singapore’s market one-fifth the size of Macau’s and two times larger than Malaysia’s. Singapore’s excellent air connectivity and attractive gaming tax rate should appeal to VIP high rollers. Domestic population also has a high propensity to gamble, spending an estimated S$9.5bn/year. This should be further complemented by its growing tourist arrivals.

The opening of the two IRs in 2010 should further cement Singapore’s aspiration to become the premier tourist destination in Asia. We expect RWS, home to the first Universal Studios theme park in Southeast Asia, to welcome 11m visitors in 2010 and generate S$0.76bn and S$1.1bn of EBITDA in FY10-11E. Deutsche Bank’s EBITDA estimates are 21% and 50% above the street.

Our target price of S$1.26 values RWS at 14x 2012E time-weighted EV/EBITDA (see pp. 3, 6-7). We do not believe this is excessive considering the pre-opening premium of the Macau plays, tourism scarcity value in Singapore, stable regulatory regime/contained competition and its own historical 2010 EV/EBITDA band of 10- 20x. Key risks are opening delay of RWS; another downturn in the regional economy; intensifying regional competition; and stringent junket licensing process.

City Developments Ltd: Good results; upgrade to HOLD

Results were above expectations. City Developments' (CDL) 2Q09 results came in above our expectations due to better performance from its property development segment. Revenue increased by 0.8% YoY and 26.4% QoQ to S$787m and the strong performance was aided by the property development segment which saw maiden contribution from The Arte at Thomson and Livia. Hotel operations turned in weak results as expected, with revenue declining 25.2% YoY but grew 5.8% QoQ. PATMI fell by 15.3% YoY but jumped 68.3% QoQ to S$140m due to strong performance from the property development segment.

Impressive sales achieved for the year to date. For the year to date, CDL has sold 1,031 residential units that amount to ~S$1.34b. Sales momentum picked up strongly during the last 2 months as CDL sold 494 units amounting to S$675m since July. This is expected to increase in the coming months with new project launches.

New launches in the pipeline. CDL is expected to launch the former Hong Leong Garden site, a 396-unit mass market project in West Coast area next month. With nearby projects achieving average selling prices (ASP) of ~S$750 psf in the secondary market, we expect CDL to launch this site at ASP of S$800-S$850 psf. We have now raised our ASP assumption for this project from S$700 psf to S$850 psf. The former Albany and Thomson Mansion sites located next to The Arte is expected to be launched in 4Q09. The Quayside Isle Collection could also be launched depending on market conditions and this project could potentially bring about a positive surprise to our earnings estimate as construction has already been started and CDL could book in more profits from the sales, based on the advance stage of construction.

Fair value raised to S$9.26; Upgrade to HOLD. Our RNAV estimate for CDL has now been raised to S$9.26 per share (previously S$8.20), reflecting the lower cost of capital used (6.57%), increase in market value of Millennium and Copthorne and increase in our estimated surplus from the South Beach project. We expect the completion schedule of the South Beach project to coincide with the expected recovery in the office sector in 2013. We continue to peg our fair value of CDL at par to our RNAV estimate. As such, our fair value has now been raised to S$9.26 (previously S$8.20) and we are now upgrading CDL from SELL to HOLD.

Indofood Agri Resources - 1H09: sterling performance

IFAR reported a sterling performance in 1H09. Excluding biological asset revaluations, 1H09E net income came at Rp645 bn, 65% of our old FY09E forecasts and 59% of consensus forecasts, with 2Q09 net income going up by 68.5% QoQ.

IFAR offers an ideal mix of upside growth potential with some downside risks protection. As a majority owner of LSIP (with LSIP contributing around 40% of IFAR's 2Q09E operating income), we believe IFAR is well positioned to benefit from LSIP's stronger cost management and improving outlook, which provide upside growth potentials. Its exposure to the branded consumer products segment provides IFAR with some downside protections. This is evident from IFAR's ability to pass on highercost of CPO in 2008A and maintain its higher selling price throughout 1H09 without any meaningful impact on sales volume. IFAR's robust fundamentals are evident from its sterling performance in 1H09. We increase our FY09EFY11E earning estimates of IFAR by 20.5%-31.2%.

Despite a 6% MoM drop in Malaysian CPO inventory in July 2009, higher 3Q09E CPO output may lead to higher inventory by end 3Q09E. Investors looking to pick better entry points may consider waiting until the negative catalyst of higher inventories materialises in 3Q09E. However, the rapid re-rating of the Indonesian market may lead investors to overlook the short-term negative catalysts in favour of the longer-term outlook.

IFAR's valuations remain attractive, trading at the second lowest 2010E P/E of all CPO plays under our coverage. We maintain our OUTPERFORM rating on IFAR and increase our target price to SG$2.45 (from SG$1.15), given higher earning estimates and stronger IDR (as IFAR's earnings are quoted in IDR, while its share price is quoted in SGD). Our new target price is based on 16x 2010E P/E, comparable to AALI.

CapitaMall Trust - Retail resiliency

We increase our distributable income forecasts to S$273m in FY09 (+26%) and to S$291m in FY10 (+45%) to reflect: 1) higher occupancy rates of 99% (from 95%) in FY09; 2) a rise in our FY09 retail spot rent assumption from a 20% yoy decline to a 10% decline; and 3) lower interest cost assumptions, as debt is paid down by rights proceeds of S$1.2bn in 2H09. FY09 earnings are essentially a known variable, with only 2% of rents up for renewal. But negative rent reversion could kick in next year when 37% of its rents are due for renewal. Despite this, we expect distributable income to improve 6.6% yoy in FY10 due to interest savings.

Retail rents and occupancy were more resilient than we expected despite a supply pipeline of 2.1m sq ft in 2009 and 2.2m in 2010 vs average new demand of 0.24m sq ft pa in the past decade. CMT maintained its portfolio occupancy rate at a high 99.7% in 2Q09, a testament, in our view, to its superior retail property management skills. Prime Orchard spot rents fell 6% hoh to S$33.90 psf in 1H09, but suburban malls declined only 2.4% hoh to S$28.30 in the same period, boding well for CMT as 51% of its portfolio is suburban malls. Our higher spot rent assumptions are also supported by higher shopper traffic (+1.3% yoy) in 2Q09,14% higher than in 2Q07.

Our DCF-based target of S$1.64 (from S$1.60) reflects: 1) a higher share base arising from its rights issue in February and 2) higher valuation of S$5.2bn (+69%) due to our higher FY09-FY11 earning forecasts. Dividend yields are at a decent 5.9% in FY09F and 6.3% in FY10F.

Venture - In a recovery phase

In Venture’s recorded 2Q FY09 results we liked the recovery in revenue, increased traction with customers for ODM projects and strong free cash flow, while we disliked the slow recovery in recurring net profit margins.

Better-than-expected 2Q FY09 results. Venture’s net profit for 2Q09 was S$61m, above our and Bloomberg consensus forecasts due to a S$25m write-back of collateralised debt obligation (CDOs) and a higher revenue base. Revenue for 2Q09 was S$846m, up 17% QoQ (-13% YoY), above our forecast of S$818m due to strong sequential growth in the printing and imaging segment (+37% QoQ). In 2Q09, all other business segments recorded sequential revenue growth except for the test and measurement segment. Core net profit margins in 2Q09 rose to only 4.8%, up from 4.3% in 1Q09, due to pricing pressure and a change in product mix. Venture generated about S$70m in free cash flow in 2Q09 due to a reduction in working capital (down S$75m QoQ) and increased operating profits. As at the end of 2Q09, Venture holds S$20.7m CDOs in book (12.3% of host value).

Positive on outlook. Management is cautiously optimistic about its 2H09 business and expects core profit margins to recover moderately due to a weak product mix. Venture has observed an increased lead time of certain components (including connectors). Its workforce is also fully utilized now. In recent months Venture added many new projects and customers for its low-margin EMS and its high-margin ODM/Enterprise solution businesses. The company expects a contribution from these products beginning next year. Venture expects its mine tracing and RF surveillance systems to contribute revenue beginning in 2H09. The company also engaged one European aerospace customer in 2Q09.

We maintain our six-month target price of S$10.00, based on a fully diluted target PER of about 14.3x on our FY09 earnings forecast (about 12.0x on our FY10 forecasts).

We raise our 2009 revenue forecast by 1.5% on higher contributions from printing and imaging. We lower our net profit forecast by 3% on lower margin assumptions.

We maintain our 2 (Outperform) rating because: 1) we believe earnings from highmargin product segments should rise next year in line with a recovery in the IT investment cycle, 3) we like Venture’s strong free cash flow, and 4) we see upside potential to the FY09 cash dividend (subject to the recovery of CDO money).

Genting Singapore: Less muted 2Q09 results

Less muted 2Q09 results. Genting Singapore (Genting) posted a less muted set of 2Q09 results last Friday evening. While revenue fell 3.1% YoY to S$120.1m, it was up 14.0% QoQ, thanks to improved luck factor and increase in business volume at its UK casino operations. However, net loss widened from S$1.8m in 2Q08 to S$50.7m - it was also up 59.0% QoQ, mainly due to its share of associates loss of S$20.7m; this arising from a reduction in values of a property owned by a jointly controlled entity in London, as well as higher pre-operating expenses for RWS.

However if we strip out this item and also its fair value adjustments, its core loss would have widened 101.0% YoY but shrunk 13.5% QoQ to S$20.7m. For the first half, revenue fell 21.7% to S$225.5m, meeting about 38.4% of our FY09 estimate, while Genting swung from a net profit of S$4.2m in 1H08 to a net loss of S$82.5m; excluding fair value adjustments and associate loss, core loss came up to S$44.6m, meeting 44.8% of our FY09 forecast.

UK operations remain wild card. Although its UK operations have picked up somewhat QoQ, aided by improvement in business volume, as well as significant cost control on its end, management noted that the outlook for its UK operations remain uncertain. Besides the still uncertain economic environment, there are also several new measures by the UK government to raise gaming taxes; Genting expects the higher taxes to have an impact of less than £0.5m in 2009 but will continue to mitigate the impact of revenue reduction via vigilant cost reduction measures.

RWS on track for 1Q10 launch. As for Singapore, RWS is still targeting for a soft launch in 1Q10, but some talks have emerged that its casino may open before the end of 2009. RWS has increased its investment from S$6.0b to S$6.59b, but it expects the additional investment to be funded by operating cash flows once the IR opens. It has awarded over S$4.7b in project costs but it expects capex to remain under S$6.0b by the time of opening; we understand some attractions will only be opened by end 2011.

Maintain HOLD with improved S$0.85 fair value. In view of the improving economic outlook for Singapore and Asia, we have raised our FY10 revenue forecast by 10.1% and reduced our loss estimate by 48.9%; this will in turn improve our fair value from S$0.76 to S$0.85. Maintain HOLD.

NOL - Jun/Jul Container Monitor: Volume decline shrinks markedly but rates still dismal

Volumes recover markedly in period 7 (Jun 27 – Jul 24): Container shipping volumes fell 11% y/y to 187,400 FEUs in period 7 (July), a marked improvement from period 6 (June) and period 5 (May), where volumes fell 14% and 21% y/y respectively. The average volumes shipped per day in period 7 increased by 9% m/m and 18% over May. In the past 3 months, we saw the y/y decline in container volumes shrink by 5ppts per month on average which is positive for the sector.

However, rates are still down substantially and below breakeven: Average revenue per FEU (in US$) fell 28% y/y to $2,219 in period 7, slightly better (+1ppt) than period 6 but still dismal. Freight rates are still at a low compared to the previous year’s levels, despite a concerted industry effort to raise rates. Although the market tends to react positively to every rate hike announcement and we believe the operating outlook is getting better, it is uncertain how much can be effectively passed through and when the liners can return to profitability as exporters and freight forwarders remain resistant. Moreover, once freight rates move up to more sustainable levels, the ships laying idle (which constitute c.10% of global container capacity) will be back online plus newbuild deliveries will also exacerbate the oversupply.

Top line recovering slowly: We estimate container revenues fell 36% y/y in period 7, a 3ppts improvement from the previous 3 months, where revenues fell 39% y/y. Year to date, container revenues fell 38% y/y.

Maintain neutral stance towards SPH

According to latest data from The Nielsen Company ("Nielsen"), Singapore advertising expenditures (adex) in July 09 fell 6.8% YoY to S$168.2m, representing the highest monthly adex year-to-date. Radio, Cinema and Internet adex showed YoY improvements and in particular, the July Internet adex grew a record 54.9% YoY (albeit from a low base). But performance across all other adex platforms continued to be weak, with Bus & Taxi adex registering the largest YoY decline (-24% YoY). Newspaper adex (excluding Today) decline decelerated to 8.7% YoY, but newspaper's (excluding Today) 32.9% share of total adex was only marginally above June 09's three-year low. Total print (newspaper and magazine) adex in July reached S$74.5m, 7% lower than a year ago.

Although adex decline appears to be decelerating, it is difficult to get too excited about the July 09 adex data. Our channel checks reveal that advertisers remain generally cautious. And although sentiment is strengthening, this has not translated into an increase in advertising orders and marketing budgets remain restrained. As we have previously highlighted, there is a typical lead-time for planning of and adjustments to marketing budgets and as such, we continue to expect any substantial adex recovery to happen towards mid-2010.

We estimate SPH booked approximately S$109m advertising revenues in the first two months of 4Q09, in-line with our estimates for the quarter (S $166m). Given lack of evidence of any strong recovery in the adex market, we maintain our forecasts and Hold recommendation.

SGX - Lower earnings due to securities turnover plunge

Raised FY10 ADT assumption and SGX target price, but SELL maintained. SGX reported FY09 net profit of S$305.7m, down 36% YoY, in line with our forecast S$296m. The decline was mainly due to the 23% fall in operating revenue to S$595m. Given the strong S$1.58b ADT for Jul 09, we raised our FY10 ADT assumption from S$1.36b to S$1.47b. Correspondingly, we raise our FY10 net profit forecast by 3% to S$341.1m. Applying a 22x P/E multiple (similar to the 22x average over the past 4 years), we derive a target price of S$7.00 (versus previous S$6.20). Based on the current SGX share price of S$8.59, the market is imputing a FY10 ADT of S$2.0b, which we believe is unlikely.

Securities market revenue plunged 34% to S$299m. Securities market trading value (excluding derivative warrants) fell 42% to S$309m, with average daily turnover (ADT) falling a similar percentage to S$1.23b.

Derivatives trading was more resilient. Net derivatives clearing revenue was flat versus FY08 at S$156m. Whilst futures clearing revenue was up 8% to S$147m, structured warrants clearing revenue plunged 55% to S$9m. Futures trading volume rose 8% to 58.3m contracts, whilst structured warrants trading volume collapsed 60% to 46b units.

Final dividend of 15.5S¢/share declared. SGX is committed to an annual base dividend of 14S¢ from FY09 onwards. We are forecasting FY10 dividend of 28.9S¢/share, based on a 90% payout ratio (FY09 payout ratio was 90%). We see 22x P/E as fair. SGX hit a high of 37x P/E in Oct 07, when ADT was as high as S$3.0b and economic growth was robust. But we are now only emerging from economic contraction. Liquidity could drive equity market volumes in the short term, but we believe SGX could only hit those high P/Es when fundamental growth can be sustained. We believe a fairer P/E rating is the historical average of 22x.

ComfortDelGro: Lower energy costs boosted margins

2Q09 results in-line with expectations. ComfortDelGro registered 2Q09 PATMI of SGD57.3m, up 0.9% YoY (+9.1% QoQ). 1H09 PATMI of S$109.8m was 49.3% of our full year forecast of S$222.8m (consensus S$219.4m). Revenue fell by 4.0% YoY to S$758.3m due to the negative translation effect of the weaker £ and A$. Excluding the translation effect, revenue would have risen by 0.3% to S$792.5m. Operating profit surged 81.7% YoY to S$94.5m due largely to a sharp fall in operating expenses led chiefly by a drop in fuel and electricity costs. Maintain BUY with a DCF-derived target price of S$1.78, based on a 6.9% WACC and 3% terminal growth rate.

Lower energy costs boosted bus earnings. Revenue from the group's bus operations fell by 3.9% as growth from operations in Australia and China was offset by declines in Singapore and the UK. The temporary fare reduction, increase in transfer rebate and decline in bus ridership (-2.1%) led to a 7.3% decline in Singapore bus revenue. This was, however, offset by lower fuel prices which led to the surge in EBIT from S$3.1m in 2Q08 to S$10.7m.

Weak rail ridership seen in Jan-Jun. In 1H09, ComfortDelGro daily Singapore rail ridership rose 6.6% YoY to 0.36m, slower than 2008's growth of 15.4%. We are, however, upbeat that ridership figures could be stronger next year on the back of stronger economic and tourism growth. We expect NEL to see stronger ridership when RWS opens its doors in 1Q10.

Underperformed broader market despite healthy earnings. Since March, ComfortDelGro's stock price rose 22% vis-à-vis the STI's 76%. We believe the underperformance is unjustifiable given its stable earnings growth. An interim dividend of 2.63¢ was declared, representing a payout ratio of 50%. ComfortDelGro currently trades at 14.6x FY10 P/E multiple which is at the mid range of its 13-17x trading band. At our target price of S$1.78, ComfortDelGro will trade at an FY10 P/E multiple of 16.5x. We, however, prefer SMRT as it remains a key beneficiary to Singapore's land transport structural growth story.

STX : Results in line in 2Q09; Maintain Sell

STX reported a loss of US$35.9m in 2Q09 with US$0.18 loss per share in-line with the market expectation. Total revenues US$805, down 70.1% yoy and up 4.7% qoq, of which revenues from bulk business up 24.5% qoq and that from non-bulk business (including container, tanker and pure car/truck carrier) down 2.7% qoq. Loss in gross profit expanded qoq, from US$4.1m in 1Q09 to US$52.3m in 2Q09.

Rebound in freight rate improves bulk business: BDI rebounded from 1562 in 1Q09 and 2714 in 2Q09 help STX's bulk business. STX's bulk revenue improved that much as BDI because, in our view, 1) STX reduced chartered-in activities 2) STX did not put all capacity in the spot market.

Weak non-bulk business contributed more to the loss: We saw a sharp decline in container freight rate as well as Tanker rate hit a historical low level in 2Q09. We think the non-bulk business contributed more loss when compared with 1Q09.

Outlook in supply-side needs to be verified: Management gave positive outlooks on both demand-side and supply-side. We do believe there is a strong demand for dry bulk shipping form China steel production, but we need to see the actual cancellation/delay from greenfield shipyards in China, which is the key factor impacting the fleet growth in 2H09 and 2010.

Maintain Sell but raise price target to SG$11.0. We raise the price target to SG$11.0 based on 1x 2010F P/B, on expectation of 1) strong commodity demand from China 2) recovery of global economy. The stock is current trading at 1.3X 2010F P/B. Maintain Sell.

SIA - Business rebound expected, maintain Buy

Singapore Airlines posted tangible improvements to its July load factors. Its passenger load factor, at 79.7, was just 1.3 points off July 2008’s figure, and was a continuing trend of improvement from June 2009’s 75.7. The pick-up came from two fronts; firstly, from SIA’s ongoing efforts to reduce capacity, where passenger seat-kms was cut by 11.8%, and from a month-on-month improvement in passenger loads by a significant 12%.

On the cargo side, there was also cause for optimism, with cargo load factors up by 3.3 points year-on-year to 63.6. However, this improvement came primarily from a sharp 18.9% reduction in capacity, while loads declined by a comparatively lower 14.6%. On a sequential basis, cargo loads did improve by 10.5%.

We warn that the resulting overall improved load factor numbers by 1.1% points to 69.7, while positive, does not give an indication of yields. Premium travel is still in the doldrums, and the improved loads may be a function of SIA’s ticket discounting in order to fill seats. However, the willingness of passengers to get on planes in view of improved economic conditions is encouraging. We also anticipate costs to come down further as SIA adjusts capacity to match loads.

Our FY10 forecast stands at S$451.5m, for a decline of 61%. However, we reiterate that FY10’s weak earnings are already expected and priced in by the market. We expect a strong rebound from FY11 onwards, and hence maintain our BUY call with target of S$14.70 based on 1.2x PBR.

DBS - Loan loss provision higher than expected

Overall, DBS delivered a strong 2Q09 underlying result partly offset by higher than expected provisions. Profit $552m vs. DB $445m and consensus $434m while DPS of 14cps was unchanged and in line. With upside surprise driven by both revenues and expenses it appears the underlying business is perfoming better than we anticipated and given the stock is trading well below our $16.50/share target price we maintain our Buy rating.

Pre-provision profit of $1,161m was 18% above DB forecast with revenue 8% ahead of expectations and expenses down 1% QoQ. Although net interest income grew 3% QoQ (peers -4%) with NIM +2bps, non interest income was the key revenue driver (+16% QoQ). This growth was broad based but pleasingly fees and commissions were up 13% QoQ on higher broking and investment banking fees. Given fee income is still 11% below previous highs we believe this emerging trend has further to go.

The provision expense of $466m (+13% QoQ) was above our $423m while NPLs increased to 2.8% from 2.0% 1Q09, an increase more pronounced than for peers. Although we think this was well anticipated by the market the composition is notable with HK credit quality benign (provision charge -19% QoQ to $71, NPA rate fell to 2.4% from 2.6%) and the Singapore provision charge +65% QoQ to $372m. However the Singapore NPA rate barely moved (1.3% vs 1.2% 1Q09) and given DB economists are forecasting an economic rebound for Singapore in '10e we believe this increase in loan losses is unlikely to be sustained.

Genting Singapore - Even odds

RWS could beat consensus forecasts in its maiden year of operation in 2010, and boost GENS' earnings by 210.0% and 50.3% in 2010-11. Recommend HOLD due to limited upside to fair price of S$0.95.

We initiate coverage on Genting Singapore (GENS) with a HOLD call and a DCF-based fair price of S$0.95/share, which implies a target 2011 EV/EBITDA of 12.7x. While we believe Resorts World@Singapore (RWS) could trounce consensus forecasts in its maiden year as a casino operator in Singapore in 2010, a peakish market outlook could prompt investors to cash in following GENS' 98.9% ytd price appreciation. We expect GENS to trade in the S$0.90-0.95 range, with the top end having already factored in continuity of the Singapore casino licence and scarcity premium for comparable Asian gaming-consumer plays. As our fair price has limited upside potential, we recommend HOLD with an entry price of S$0.80.

Earnings on a roll. We project GENS' earnings to surge 210.0% and 50.3% to S$295.2m and S$443.8m in 2010-11 as RWS' casino operations go into full swing by 1Q10, ahead of rival Singapore casino operator Marina Bay Sands. GEN could beat consensus forecasts of S$105.3m given its first-mover advantage, and with the partial deferment of expansion of the less profitable non-gaming operations.

Leveraging on Asia's sizeable VIP and Singapore's domestic gaming markets. RWS should be able to capture 5.0% of Asia's VIP market (estimated at US$9b-10b p.a.) and 12.5% of Singapore's gaming market (estimated at S$9b-10b p.a.). This excludes the full grind market potential which RWS could tap from neighbouring countries such as Malaysia, Indonesia, and possibly even China. This is based on the premise of RWS' strong global network, favourable tax structure and strategic location in Asia.

Quick wins and high margins at RWS. The S$5.6b RWS project promises a good payback period of 8-9 years, riding on Singapore's favourable gaming tax structure which gives RWS an advantage over its competitors in Australia and Macau in the high roller segment. Meanwhile, the non-gaming division (principally Universal Studios) should eventually attain decent returns, judging from Universal Studios Japan's achievements in recent years.

UK business' run of bad luck should turn by 2011. GENS' UK business is projected to recover only in 2011 due to the UK's prolonged economic slowdown and adverse regulatory environment. Still, earnings could post apositive surprise as 2008's streamlining and restructuring exercises could save up to £10m annually, but the upside is not significant to group earnings.

Impacts on Genting. We expect Genting's earnings growth to gain momentum in 2010 and 2011, boosted by RWS' contributions. We forecast Genting's 2010 and 2011 EBIT growth at 80% and 17% yoy, mainly as RWS' contribution to group EBIT rises to 32.9% and 37.5% respectively (reversing losses in 2009). We recommend buying into share price weakness (with target price of RM7.60) as Genting will be the cheaper entry point to RWS' future earning growth potential.

SingTel - reported better than expected results

Profit margin. Net profit margin decreased from 25.3% in 4Q FY2008 to 24.6% in 1Q FY2009. This was due to the increase in operating expenses mainly from the inclusion of Singapore Computer Systems (SCS) in its financial statements.

Merger between Bharti and MTN. Currently, Bharti and South Africa’s largest telecommunications company, MTN, are in discussions and the agreement extends up to 31 August 2009. During the briefing, SingTel has declined to disclose details about the transaction. Currently, SingTel has a 30.4% equity interest in Bharti. We believe that SingTel will try to increase its stake in Bharti to avoid any dilution in interests if the merger is successful.

Listing of NCS. SingTel has acquired SCS and include it as part of NCS. We believe that there is a possibility that SingTel may list NCS after it has reorganised the operations of NCS. This will enable SingTel to raise funds that may be used to increase its stakes in the regional mobile associates, for future acquisitions or distribution as dividends to shareholders.

FY2010F Outlook. The company expects the operating revenue for the Singapore and Australian businesses to grow at single-digit level and low single-digit level respectively. Moreover, among its regional mobile associates, Bharti and Telkomsel are likely to see growth in earnings. Nevertheless, the contributions from the regional mobile associates are likely to be affected by the depreciation in the regional currencies.

Maintain BUY recommendation and target price at S$3.80. We rate SingTel as buy and maintain the target price at S$3.80 because of its good financial performance. Furthermore, SingTel has highlighted that the worst is over and it is monitoring the recovery of its operations. In fact, we continue to like SingTel as it has established operations in Singapore and Australia as well as strong profit contributions from its regional mobile associates.

CitySpring Infrastructure Trust – Rights issue to raise S$235.2m in gross proceeds

CitySpring announced a fully underwritten, renounceable 1-for-1 rights issue at S$0.48 per rights unit, priced at a 38.5% discount to Thursday’s closing price of S$0.78. Temasek is committed to sub-underwrite up to 32.0% of the rights units, including its pro-rata entitlements of 27.8% of the rights units.

Net proceeds of S$227.5m will be used to repay early part of the S$370m-DBS term loan at the trust-level. With that, the Basslink acquisition is no longer 100% debt-financed. An in-principle approval for a-S$370m revolving credit facility (RCF) from DBS has been received. The RCF is intended to replace the TLF, with only S$142.5m drawn. While the terms are still being negotiated, the manager does not expect the costs to be more onerous than under the term loan.

The manager estimates net savings of S$4.7m p.a., taking into account interest savings, base management fee, and commitment fee for the RCF (but before any upfront fee). Assuming the rights issue had been completed on 1 Apr 09, the pro forma 1Q10 DPU would have been 1 cts per unit compared to the current 1.75 cts.

With a reduced debt-level and a committed RCF, CitySpring will enjoy greater funding flexibility. The manager said that the RCF could be utilized to fund acquisitions, investments in its Basslink telecoms network, or partially fund the S$200m gas network conversion initiative at City Gas, which could begin in 2H10 and take 5 years to complete (announced at IPO).

Assuming that the distribution guidance is unchanged, we estimate post-rights DPU p.a. at 4.0 cts, offering a yield of 6.3% based on the TERP of $0.63. Our ex-rights target price would be $0.70, implying a total return of 17.3%. The frequency of DPU payment remains (quarterly). We maintain our Buy recommendation with a target price of $0.86.

Venture - optimism into 2H, uncertain growth trajectory

Venture reported June-quarter revenue of S$846.0 mn (-13% YoY, +17% QoQ), and net profit of S$60.9 mn (-7% YoY, +120% QoQ). Excluding gains on its CDO portfolio (S$25 mn) and forex losses then, core earnings at S$37.1 mn were in line with our estimates.

All business segments saw sequential improvement in sales (up 7-37%), with the exception of test/measurement/others (-3% QoQ), which continued to reflect industry over-capacity, and anaemic capex spend.

Gross margins fell from 20.5% to 15.5% YoY, on less favourable mix (HP’s full product configuration model contribution), coupled with pricing pressure. Working capital management stayed tight, which drove S$72 mn in operating cash flow, and helped Venture end the quarter on a S$219 mn net cash balance sheet.

Despite optimism from Venture’s clients on 2H09 prospects, the growth trajectory remains uncertain, and hence we have kept our forecasts largely intact. With the stock’s outperformance so far, and limited upside to our 13x P/E S$9.25 target price, we downgrade our rating to NEUTRAL (from Outperform).

SGX - boosted by market rebound; expect stock to move sideways

SGX reported FY6/4Q09 net profit of S$91.1 mn (65% QoQ, 1% YoY) driven by a bounce in securities market activity. Performance of other drivers (derivatives and stable fee) was lacklustre.

After bottoming at S$0.8 bn in February, average daily equity turnover has recovered and stabilised at S$1.6 bn in June-July at 75-80% turnover velocity. Derivatives turnover is down 6% YoY as market volatility has reduced considerably.

4Q09 saw just one IPO, the worst in recent times. We do not expect new listings or new product launches to be significant drivers near term. After last quarter’s market rebound, upside to equity turnover near term seems limited as well.

We increase our FY10-FY11 estimates by 13-24%, mainly driven by higher turnover assumption (S$1.7-1.8 bn from S$1.1-1.2 bn).

We assume coverage with a NEUTRAL rating and target price of S$8.50 (from S$5.80) at 24x 12M forward P/E (five-year average 40% premium to Singapore market). With stock price and equity turnover more than doubling from March lows, drivers have peaked near term.

DBS - Q 2 beats consensus but provisioning high

DBS’s Q2 net profit beat our estimate by 10% and consensus estimate by 20%. The highlight of its results, in our view, was the higher-than-expected provisioning. The increase came mainly from its shipping and Middle East exposure. However, the credit quality in Singapore was stable while that in Hong Kong and China improved.

DBS’s earnings were ahead of estimates because of stronger trading income that benefited from the improved market conditions, and an increase in its risk appetite as measured by value-at-risk (VAR). In its core business of lending, its loan growth of 8% YoY was ahead of its competitors while its net interest margin remained relatively intact despite inter-bank rate pressure.

While we are positive about the bank growing its business when many of its competitors have taken a more defensive posture, we believe the market will be concerned about the sudden increase in provisioning outside its core markets. We plan to discuss this with management and will want to know whether this is a oneoff and whether there are any other lumpy exposures outside the main markets that could surprise.

Our price target of S$14 is derived using the Gordon Growth model with the main assumptions being ROE of 9.3%, COE of 7.7%, and terminal growth of 3%.

City Development - Still The Best Proxy

Net profit fell 15% y-o-y in Q2 to $140 mln, consistent with the performance of other property companies.

Like other developers, City Dev has done well in recent months - after selling 537 new homes in the first half for $665 mln (or $1.24 mln average), the group sold 494 units in the last 7 weeks for $675 mln ($1.37 mln), bringing the total sold in the year to date, to 1,031, valued at $1.34 bln ($1.3 mln). This would include the 329-unit joint-venture project The Gale, which is >90% sold, and the 85-unit Volari @ Balmoral, which is almost sold out.

In the remaining months of the year, City Dev plans to launch the 396-unit Hong Leong Garden in the west coast, and the 162-unit Albany, which is next to the almost sold-out Arte at Thomson, but on a superior site.

On the holiday Sentosa island, City Dev is expected to launch The Quayside Isle Collection to coincide the opening of the Sentosa IR early next year. Construction has already started, suggesting meaningful recognition of profit soon after the launch, much as what City Dev had done with Arte (ie construction began before the launch), which made its maiden contribution to the bottom-linein Q2.

On the South Beach development, having secured refinancing in June, including additional $195 mln from City Dev and $205 mln from a new partner (privately-owned Nam Fung of Hong Kong), the consortium is presently moving towards “refining the design plans and value engineering” before construction commences, and targeting to complete by the deadline in 2016.

City Dev’s balance sheet remains one of the strongest in the sector (excluding the cash-rich Wheelock), with gross gearing of 72%. Interest cover is a strong 10.1x, albeit lower than 11.7x a year ago.

Being the largest local developer (with land bank yielding 7.5 mln sf of gross floor area), City Dev remains one of the best proxies to the sector. While it has done well since March ’09, and appears to be encountering technical resistance at the $10 level, we remain comfortable with City Dev, taking a medium-term view.

Maintain BUY.

Parkway - Raise price target to S$2.35

We raise our earning estimates and price target as we expect a strong rebound in patients in view of the economic recovery. We maintain our Buy rating on the company, which is a prime beneficiary of the ageing population in the region. We raise our 2009/10/11 EPS estimates from S$0.07/0.07/0.07 to S$0.09/0.10/0.11.

We expect foreign patient numbers, which make up about 35% of its Singapore volume, to record a rebound in H209 after witnessing a decline for several months. There are cheaper alternatives in the region but we believe Parkway’s established reputation, connectivity by air, and areas of expertise give it competitive advantages.

We have assumed that it will sell its Novena medical suites at a break-even price of S$2,500 psf in 2012 but management has indicated that given the rebound in the property market, it may try to price a third of these suites at S$3,500 psf in 2010. If it succeeds, it would add a further S$0.15 to our valuation, and 47% and 92% to 2010 and 2012 earnings estimates, respectively.

The stock is trading at 18.4x 2010E PE, a 30% premium to the market but 22% below its 10-year mean. Our price target is based on DCF with key assumptions being a WACC of 6.5% (previously 7.1%) and terminal growth of 3%. The change in our WACC assumption is due to our lower risk-free rate assumption (-0.5%) and higher (by S$300m) debt assumption.

Sembcorp Marine: Tenders galore will surprise orders on the upside in 2H09

Limelight on Petrobras. We continue to like Sembcorp Marine (SMM) and believe that order momentum in 2H09 may surprise on the upside. While the market seems excited about the plentiful orders from Petrobras, we believe investors have yet to factor in other potential non-Petrobras contracts in the offing. We tweak our earnings model and raise our operating margin assumptions following 2Q09 results. Our new earnings estimates show that, unlike what the Street thinks, FY09 may not be the peak earnings year. We raise our target price to S$3.74 (from S$3.04 previously) as we remove the discount factor in our sum-of-the-parts valuation methodology, given less occurrence of customers defaulting in an improved credit environment. Maintain BUY.

We are equally excited on other non-Petrobras contracts. Petrobras was the focus in SMM’s recent briefing as the management stressed on its multi-prong strategy to undertake Petrobras’ projects. While the market seems excited about the plentiful orders from Petrobras, we opine investors have yet to factor in other potential non-Petrobras contracts in the offing. Our industry checks indicated that SMM is currently bidding for jack-up newbuilds from NOCs such as Saudi Arabia, Vietnam and even China.Other piecemeal contracts include FPSO conversions (potentially in Indonesia and Vietnam).

A recap: strong 2Q09 results. SMM’s 2Q09 revenue rose 8% YoY, 10% QoQ, to S$1.5b, while operating profit was S$167m, an improvement of 50% YoY, 24% QoQ. SMM’s outperformance for the fourth consecutive quarter was due to its strong operating margin of 11.1%, +210bp YoY. We have raised our FY09F-10F operating margins by 20bp.

Slight earnings revision. We push further revenue recognition on PetroRig II and PetroRig III, and cut back earnings from PetroProd’s CJ Jack-up on the back of prudency measures. Our FY09/10 recurring net profits are changed marginally by -2%/+5% respectively. We think there could be a possible upward revision to consensus’ estimates on the back of stronger margins and more-than-expected orders newsflow. Hence, FY09 may not be the peak earnings year, in our view. Given that the credit markets are improving and the risk of customers’ default is minimised, we remove the discount factor in our sumof- the-parts valuation methodology.

Genting - Playing it forward

We initiate with OW and a Jun-10 PT of S$1.20, implying 47% potential upside: We believe Genting Singapore (GS) is in a dominant position as it is one of the only two companies with the right to develop and operate an integrated resort (IR) in Singapore (and will maintain this duopoly at least for the next 10 years).

Building bullish expectations on IRs: (1) We believe IRs help the objectives of the Singapore government, which aims to double visitor arrivals by 2015; (2) with annual tourist arrivals of 10MM (+35MM transiting), Singapore already has the numbers to support two IRs (RWS expects 60% foreign visitors); and (3) a wide catchment area of 700MM people living within a 5-hour flight. Based on the Macau and Las Vegas experience, new casino openings should grow the casino industry pie.

Run-up to the RWS opening could prompt a share price re-rating: LVS, Galaxy, and Wynn’s share prices rose 14-85% before and after their casino openings (see page 12). We believe Genting Singapore’s share price could see a similar trend. RWS can leverage Genting Group’s established customer network and management expertise while RWS’s Universal Studios is also the only branded theme park in Southeast Asia. For FY12, we estimate RWS to have casino revenue of US$1.7B (when the IR is fully completed). Assuming a market share of 40%, this translates into a Singapore casino market size of US$4.3B, which is 4x the size of Malaysia’s and a quarter of the size of Macau’s. We also assume 7.5MM visitors to Universal Studios in FY12 (compared to 8-9MM visitors to Universal Studios, Osaka).

Valuation, PT, and risks: Our June-10 PT of S$1.20 is based on our SOTP valuation, in which we value its Singapore business at 14x FY12E EV/EBITDA. This is a concept stock which we think could trade over S$2 using bullish assumptions (see Table 5). Key risks to our PT include intense competition between RWS and Sands, a slower-than-expected recovery in the global economy, and unexpected health scares such as swine flu.

Singapore Exchange - Securities momentum

SGX reported FY6/09 net profits of S$305.7m, 3% ahead of consensus and 6% ahead of our estimate. The key variance with our forecast lies in stronger securities clearing fees. Given the recent improvement in market volume, we have raised our target price by 17% to S$10.28. We maintain our Outperform rating.

Securities clearing revenue doubled in 4Q FY6/09, as a result of a doubling in trading value. However, securities revenues were 38% lower YoY, due to a 42% decrease in securities trading value. We note the recent surge in securities trading value, which reached an average of S$1.58bn in July but exceeded S$2bn a day in the first two days of August. We believe that there is momentum in securities trading volumes.

Derivatives revenue for 4Q FY6/09 rose 15% QoQ, as the number of contracts rose 19%. Total derivatives contracts traded rose 8.3% YoY for FY6/09, although clearing revenue remained flat. We estimate that derivatives volume will rise by 7% YoY in FY6/10.

Stable revenue fell by 14% YoY but increased its contribution to total revenue to 24% from 21%. Stable revenues were 62% of operating expenses in FY6/09, compared with 68% a year ago. We remain comfortable with the sustainability of this revenue.

Post-results, we have raised our net profit estimate for FY6/10 by 17% on higher securities turnover assumptions. We raised our target price to S$10.28.

12-month price target: S$10.28 based on a DDM methodology. SGX’s FY6/10E PER remains below its historical mean of 25.4x. A comparison with regional exchanges indicates that Singapore Exchange remains at a discount to both Hong Kong Exchange and Bursa Malaysia. SGX is trading at a 17% discount to HKEx and at a larger 23% discount to Bursa Malaysia. We are maintaining our Outperform rating.

Hyflux: Resurgent 2Q09 results

Resurgent 2Q09 results. Hyflux Ltd posted its 2Q09 results last night, where revenue jumped 24.4% YoY to S$134.5m, while net profit climbed 14.7% to S$25.9m. The better performance was due to the progressive completion of higher-valued projects, especially from the MENA region, with continued active project execution driving improved gross profit margins. More importantly on a sequential basis, revenue shot up 52.4%, while earnings surged >400%, but this comes as no surprise as we had already noted the seasonality factor in our 1Q09 report (also see Exhibit 1). And for 1H09, revenue climbed 12.7% to S$222.7m, meeting 36.4% of our FY09 forecast, while net profit rose 9.6% to S$31.0m, or 50.4% of full-year estimate.

Municipal business continues to drive growth. On a segmental basis, we note that growth continues to be driven by its municipal business, which jumped 34.5% YoY and 54.6% QoQ to S$116.6m in 2Q09, aided by progressive EPC recognition of the Tlemcen and Magtaa projects in Algeria. While industrial business fell 17.4% YoY to S$17.6m, it was up 41.9% QoQ, where there have been signs of a business recovery in China. Going forward, management notes that municipal sector's fundamentals remained strong and expects the MENA and China markets to remain key contributors to its revenue.

Key MENA and China markets. Its current order book stands at S$1646m as at end-Jun, up further from the S$1480m at end-Dec (see Exhibit 2);more importantly, Hyflux pointed out the increase came mainly from its Operations & Maintenance segment, which surged 1.1% to S$694m following the completion of several China plants - this would translate into stable income over the next 20-25 years. While its S$952m EPC orders will progressively be recognized over the next two years, we expect this "shortfall" will be replenished by its two potential contracts in Libya - we had earlier estimated that the project value of the two projects should easily exceed S$1b (to as much as S$1.5b) but the actual deals may take up to 1.5 years to conclude. Hyflux is also looking at new markets like India but for the moment, it prefers to remain more of a technology provider.

Raising fair value to S$2.96. Due to the better-than-expected recovery in gross margins, we have bumped up our FY09 net profit estimates by 17.9% (FY10 by 17.5%), while keeping our revenue estimates unchanged. This in turn raises our fair value from S$2.52 to S$2.96, still based on 20x blended FY09/FY10 EPS. Maintain BUY

Venture Corporation: No surprises

Core results in line. Bottomline of S$60m included S$4m of forex losses and S$25m of CDO marked-to-market gains, without which, core profit would be S$37m. Sales contracted 13% yoy but grew 17% q-o-q to S$846m, ahead of our S$766m forecast. All businesses grew except Test & Measurement. Printing & Imaging was the outperformer with a 33%y-o-y and 37% q-o-q rise but the increased portion of turnkey projects did not result in margin improvement. Core net margin was firm on the quarter at 4.4% but fell 2.7% pts y-o-y.

S$25m CDO marked-to-market gains has raised Venture’s CDO to 12.3% of host value (S$168m) from 6.5% in Q1.

Rock solid balance sheet with S$219m net cash. Venture tightened working capital further as cash conversion shrank to 60days (1Q09: 75, 2Q08: 70), generating over S$60m of positive FCF.

M-o-m growth in 2H is expected but with little margin improvement as turnkey model continues to dominate. In fact, our industry checks indicated that the withdrawal of low value HP printers was deferred. More positively, Venture has won more new customers in Q2 than the whole of last year. Most of these new engagements (digitized receivers, Minetracer, aerospace, industrial etc) entail higher value added services and would start contributing in FY10.

Keeping forecast and S$9.40 TP. Excluding CDOs, Venture has achieved 45% of our FY forecast at half time. We are confident the company remains on track to meet our expectations with a seasonally stronger 2H. Maintain buy with unchanged TP of S$9.40 (15x blended FY09/10 PE).

Jardine Strategic - Hold: Expensive Dairy, Empty Rooms and Full Garages

2H Outlook: Grim — Jardine Strategic reported a set of in-line results, with 1H09 core profit at US$418m, down 10% YoY. Management slightly raised its interim DPS by US$0.001 to US$0.060. With management expecting the 2H on most businesses to remain difficult, we maintain our Hold (2M) rating. We raise our TP 19% to US$19.50 to reflect latest market value of group’s subsidiaries.

Initiate Coverage on Dairy Farm at Sell (3L) — Our negative view on Dairy Farm is predicated on the basis that from a macro (low regional CPI and retail sales) as well as a micro perspective (lower asset turnover and more competition), the company is now facing a period of subdued growth, and yet the stock is trading close to its all-time high (at 27 x PER).

Mandarin Oriental Hit Hard by Economic Downturn — In light of the dismal level of both business and leisure travel, Mandarin Oriental barely broke even with US$1m core profit, and it experienced a 34% fall in RevPAR during the period. Management believes that it is “too early to declare any green shoots” as July/August so far remain to be a weak period.

Hongkong Land — We recently raised our TP on HKL, which was consolidated into JM’s B/S for the first time, to US$4.70 to account for yield compression.

Other Businesses — HACTL saw its throughput drop 21%, accounting for most of the decline in Jardine Pacific’s contribution. New car markets for Jardine Motors in HK and UK remained weak and the division does not see the end of the tunnel at the current stage.

Jardine Matheson - Sell: Expensive Dairy, Empty Rooms and Full Garages

2H Outlook: Grim — Jardine Matheson reported a set of in-line results, with 1H09 core profit at US$389m, down 13% YoY. Mgmt slightly raised its interim DPS by 1 US cent to US$0.25. With mgmt expecting the 2H for most businesses to remain difficult, we maintain our Sell (3H) rating.

We raise our TP 20% to US$24.40 reflecting latest market value of the group’s subsidiaries.
Initiate Coverage on Dairy Farm at Sell (3L) — Our negative view on Dairy Farm is predicated on the basis that from a macro (low regional CPI and retail sales) as well as a micro perspective (lower asset turnover and more competition), the company is now facing a period of subdued growth, and yet the stock is trading close to its all-time high (at 27 x PER).

Mandarin Oriental Hit Hard by Economic Downturn — In light of the dismal level of both business and leisure travel, Mandarin Oriental barely broke even with US$1m core profit, and it experienced a 34% fall in RevPAR during the period. Management believes that it is “too early to declare any green shoots” as July/August so far remain to be a weak period.
Hongkong Land — We recently raised our TP on HKL, which was consolidated into JM’s B/S for the first time, to US$4.70 to account for yield compression.

Other Businesses — HACTL saw its throughput drop 21%, accounting for most of the decline in Jardine Pacific’s contribution. New car markets for Jardine Motors in HK and UK remained weak and the division does not see the end of the tunnel at the current stage.

UOB - 2Q09: within, yet uninspiring

Net interest income was sluggish – the loanbook contracted by 1.7% in 2Q09, for a YTD contraction of -1.7% (sector: -0.5%), with only ex-mortgage consumer finance showing growth. Net interest margin fell 6bps q-q to 2.35%, as narrowing interbank spreads reduced gapping opportunities, overcoming rising CASA share of deposits (+300bps q-q, to 41.3%) and resilient loan pricing.

Key areas of P&L outperformance: 1) for non-interest income, a S$141mn fair value investment gain (1Q: S$29mn) which mitigated 6% q-q fee income contraction; and 2) an effective tax rate of just 5% in 2Q (1Q: 21%) due to recognition of deferred tax assets. Asset loss provisioning rose 23% q-q due to a near doubling in collective impairment charge – while underlying NPLs rose (gross NPL ratio +30bps, to 2.4%), specific provisioning still declined q-q, with UOB now boasting the higher collective impairment buffer as percentage of gross loans at 1.5% (1.2% for OCBC, 0.9% for DBS).

While weak ex-investments operating income momentum and the desire to maintain large provisioning buffer weighs against positive earnings revision, the large AFS securities book revaluation gain (which is reflected directly in equity) over 1H09 (S$1.2bn) means we will be revisiting our book value forecast with a positive bias.

Our existing Gordon Growth-based price target (methodology unchanged, assuming 13% sustainable ROE, 9.5% cost of capital and 5% long-term growth) is S$18.00, implying 1.8x FY10F adjusted book value (1.5x stated book) and 12.5x FY10F earnings. With a large, export-biased SME exposure (25% of group loan book), sustained negative trade data trends would accelerate delinquencies in this portfolio. In a similar vein, UOB’s offshore operations (collectively around 35% of group operating income), being centred on the export-dependent Southeast Asian region, would be vulnerable to related macro events, in our view, adversely affecting sovereign creditworthiness and raising the potential for economic dislocation and sentiment-damaging measures, such as capital controls. This would negatively impact earnings expectations and UOB’s premium P/BV multiple over its less geographically diverse domestic peers.

Genting Singapore - UK business on the mend, brighter prospects at RWS

Genting Singapore (GENS) reported a 2Q09 net loss of S$50.7m (-59% qoq; -2,925% yoy). The higher loss is mainly attributed to a write-off of bad debt (S$3.1m) and a reduction in property value of a property owned by a jointly controlled entity (808 Holding Pte Ltd) in London. Its share of the property value loss is valued at S$20.7m. Excluding these two items, the net loss would be S$26.9m, an improvement of S$5m as compared with previous quarter.

The revenue was up 14% qoq (but down 3% yoy) contributed by higher drop (7% qoq) and better win percentage of 14.5% (vs 13.4% in 1Q09) at casinos in UK. Management has indicated that casino attendance has stabilized, particularly at provincial casinos.

UK casino operations on the mend. UK casino operations registered an operating income of S$5.3m (before net foreign exchange gain/loss and interest expense) for 1H09, as compared a loss of S$7.4m in previous corresponding period. The improvement is largely attributed to measures put in place by management in streamlining and restructuring the business, which includes a reduction of 600 staff and stringent cost controls.

Another S$675m drawndown. GENS has drawndown another S$675m from its S$4.b credit facility and bring the total drawndown amount of S$1.7b as at 30 Jun 09 to finance the construction of Resorts World Sentosa (RWS).

Increase in pre-opening expenses. S$14.5m pre-opening expenses for RWS were incurred in 1H09, mainly associated with the acceleration of recruitment, training, sales and marketing programmes prior to RWS' opening. As at 30 Jun 09, about 400 personnel had been recruited for RWS' operations.

Universal Studios Singapore (USS). Management guided that testing and commissioning of USS will commence in few weeks time, and that due diligence testing and safety of the rides is management's priority. Management will not rush these issues to achieve an earlier opening date. RWS' soft opening target remains unchanged at 1Q10, as indicated previously.

The 2Q09 results suggest that the adverse operating conditions in UK have stabilized, given the higher drop and stabilised attendance registered at UK casinos. For RWS, we expect pre-opening expenses to accelerate in 2H09. Going forward, GENS' prospects will be driven by continuous positive news flow from RWS, such as a possible earlier-than-expected opening of RWS (before the targeted 1Q10), further delay of Marina Bay Sands' opening, and a better regional economic outlook, which will drive Singapore's tourist arrivals. We are going to initiate coverage on this stock with a preliminarily target of S$0.95 per share based DCF valuation, which implies 2011 EV/EBITDA of 12.7x.

Impacts on Genting. GENS' 1HFY09 loss is within our expectations. Our forecasts for Genting Berhad already imputes higher 2H09 pre-opening expenses incurred at RWS. Maintain BUY on Genting Berhad. Our target price of RM6.15 per share is under review.

DBS 3Q09 Results Flash

Net profit of S$552m in 2Q09 (+27% qoq) was above our forecast of S$355m. Net interest income of S$1,112m (+5% yoy) was in line with our expectations. Net interest margin was marginally higher at 2.01% compared to 1.99% in 1Q09. Loans contracted by 1.8% qoq to S$130.4b in line with industry trend.

Fees & commissions were S$358m, up 13% qoq, with strong contributions from stockbroking (+79% qoq), investment banking (+59% qoq) and wealth management (+31% qoq).

Net trading income was a whopping S$234m due to foreign exchange and interest rate activities. DBS also recognised investment gains of S$138m from sale of equity holdings.

Staff cost and other expenses was well under control. Cost/income ratio improved from 38.4% in 1Q09 to 35.2% in 2Q09.

NPL ratio increased from 2.0% in 1Q09 to 2.8%% in 2Q09. The bulk of NPLs came from the "others" category, likely to be a financial institution and currently labeled under the substandard category. Management explained that the increase was from shipping and Middle East corporates and institutions.

Specific provision was S$272m and general provision was S$183m, totalling 138bp on an annualised basis. NPL coverage is 81%. Tier-1 CAR maintain at 12.6%.

DBS declared dividend of 14 cents, unchanged compared to the last quarter.

F&N - Property development paled in comparison to F&B

3Q09 revenue grew 12% YoY while core earnings (before property-related fair value adjustments and exceptional items) grew 2% to $118m. F&N took a $2.6m charge for the lower fair value of investment properties as well as a $7.6m exceptional gain (eg settlement fee, negative goodwill, etc). For the nine months, revenue was flattish (+1%) while core earnings fell 10% to $276m. No dividend was declared in 3Q following an interim dividend cut to $0.03/sh.

Group topline growth was driven mainly by progressive recognition of fully sold property projects in Singapore - One Jervois, One St Michael, Clementi Woods, St Thomas, Soleil@Sinaran, Martin Place Residences and Waterfront Waves – and Songjiang Four Seasons in China. However, it appears that earnings quality was not high. Although property development revenue jumped 44% YoY, PBIT grew only 6%.

In contrast, the F&B businesses performed strongly with both topline and margin improvement. Segment revenue grew 3% YoY but PBIT jumped 27% to account for 42% of group profits, as margin improved 2.5%-points. Soft drink sales grew 15% followed by breweries at 4%. While dairy sales fell 4% (due mainly to lower exports), it chalked up the best margin improvement overall on lower input and packaging costs.

While F&N is almost out of landbank, recent sales success should help it tide over the next 12 months. Moving forward, it will need to start landbanking in Singapore soon. On the F&B side, the extension of the bottling agreement with Coke will gain F&N extra time to build up its own branded soft drinks volume. The removal of geographical and category selling restrictions could be exciting in the long term but F&N does not have the home ground advantage in other SEA countries and Coke will also be able to compete with F&N.

At the current share price, F&N is trading close to our RNAV of $4.17 (previously $4.14). We have raised our forecasts to account for the bottling agreement extension as well as higher F&B margins but impact on RNAV is minimal. We reckon the stock has priced in recent positive developments and maintain our Hold call.

SembCorp Industries : Earnings growth propelled by marine contribution

1H09 net profit up 5% yoy on higher marine earnings which accounted for 58% of group earnings. Environment Engineering (EE) and Industrial Parks posted better-than-expected performance.

Marine’s net profit up 18% on higher rig building turnover. Utilities’ net profit in 2Q09 rose 11% yoy. Operations in the UK, Vietnam and the UAE performed well. However, 1H09 net profit declined 5% yoy mainly due to lower contribution from the UK as the UK business was affected by the expiry of certain favourable supply contracts as well as the depreciation of the pound sterling.

EE posted higher 1H09 net profit on lower operational costs. Industrial Park’s reduced net profit for both 2Q09 and 1H09 was due to lower land sales from its Vietnam industrial parks and reduced earnings from Gallant Venture. This was mitigated by better performance from the China industrial park. Lower earnings for Others/Corporate was due to write-back of tax provisions made in 2Q08 and 1H08.

With close to 60% of its earnings and valuation derived from SembCorp Marine (SMM), SembCorp Industries’ (SCI) share price performance is significantly dependent on SMM. We are neutral on SMM. While its new contract wins of S$1.1b ytd is on track to meet our S$2b estimate for 2009, our valuation of the stock factors in a longer-term higher annual contract win level of S$3b. As a result of the downturn in the petrochemical and chemical sectors, three UK customers, who contributed to about 30% of UK operations’ 2008 turnover, have announced closures of their on-site facilities. SCI said it will continue to focus on reconfiguring its assets to improve revenue and on reducing costs.

Earnings forecasts and target price raised marginally. We raise our net profit forecasts marginally by 2-3% and our fair price from S$3.20 to S$3.30, premised on our revised sum-of-the parts (SOTP) valuation of S$3.29/share. Maintain HOLD.

SMRT - HOLD with an adjusted fair value estimate of $1.89

Flat year-on-year revenue. The Group announced 1QFY10 revenue of $215.8 million, a decrease of $0.1 million compared to the same period last year showing signs that the fare reduction package has affected revenue streams from its train and bus segments. The Group also attributes the flat revenue to a smaller average hiredout fleet for taxis. Net profit showed a rise of 19.6% from $40.6 million in 1QFY09 to $48.2 million 1QFY10. There was an approximately $7.5 million rise in other operating income to $13.1 million, which seems like a one-off and when stripped, bottomline figures are flattish as well.

The MRT segment saw revenue at $115.6 million, a decrease of $0.03 million from 1QFY09. The growth in average daily ridership did partially offset the lower average fare for 1QFY10. Operating profit for MRT did increase by 8.0% to $36.7 million due mainly to higher operating income that was partially offset by higher repairs and maintenance as well as electricity costs. LRT revenue fell marginally to $2.2 million with an operating profit of $0.04 million.

Bus operations revenue for 1QFY10 fell 3.7% to $49.9 million due to lower average fares coupled with lower average daily ridership. It did however post an operating profit of $1.2 million due mainly to lower diesel cost, which is offset against lower revenue and higher repairs and maintenance expenses.

Taxi operations, due to a smaller average hired-out fleet, saw a decline in revenue by $1.2 million or 6.6% to $17.7 million in 1QFY10 compared to $18.9 million in the same period last year. A smaller average holding fleet allowed them to book an operating profit of $1.1 million due to lower other operating expenses.

Rental segment saw a rise in revenue by $1.6 million or 11.9% to $15.5 million compared to $13.8 million in 1QFY09. Operating profit increased by $1.4 million or 12.9% to $12.5 million. Increase in revenue and operating profit for the rental segment is mainly due to a better yield as well as increased rental space following the redevelopment of commercial spaces at various MRT stations.

Advertising revenue fell by $0.3 milion or 4.5% to $5.4 million attributable to the weak economic backdrop. Operating profit thus fell by $0.4 million to $3.5 million. Engineering and Other Services saw higher revenues of $10.6 million, which is $1.7 million above 1QFY09’s revenue. The increase was attributable to increased consultancy revenue and higher fees from overseas projects. Operating profit was however $0.6 million lower due mainly to lower taxi accident repairs.

Downgrade to HOLD with an adjusted fair value estimate of $1.89. It is evident that the fare reduction package introduced in April this year, which will last for the next 15 months from the 1st of April, has shown signs that it has taken its toll on SMRT’s train and bus revenues despite rising average daily ridership for the train segment. SMRT is expected to be facing headwinds in the coming periods due to the fare reduction package affecting train and bus revenue segments as well as the uncertain economic backdrop already affecting taxi operations and advertising revenues. We have adjusted some of our operating expenses as well as revenue segments to arrive at a slightly lower fair value estimate of S$1.89 (previously S$1.92). As this represents only an upside potential of 9.88% from the last traded price of $1.72, we are downgrading SMRT to a HOLD call with a fair value estimate of S$1.89.

Sembcorp Industries: Price upside remains attractive

Upgrade target price for SCI to S$4.09. The higher target price for SCI is due to the higher values of its listed associates in our SOTP valuation metrics. This includes the increase in target price for Sembcorp Marine (SMM) to S$3.70, and the 43% jump in Gallant Venture's share price to S$0.315. Maintain BUY on SCI.

Cheaper and indirect investment into Sembcorp Marine. At SCI's last closing share price, the implied value of SMM in our SOTP valuation metrics for SCI is S$2.59, vs. SMM's last closing share price of S$3.30.

2Q09 results were above-expectation. SCI's net profit increased 2.7% y-o-y to S$142m in 2Q09, vs. our forecast of S$132m. This was due to its Marine business' stronger-than-expected EBIT margin, at 11.1%, vs. the 9.9% in 1Q09 and our forecast of 9.8%.

Utilities business' performance is in line. SCI's Utilities business delivered S$47.9m (+11% y-o-y) net profit in 2Q09, and S$99.0m (-5%) in 1H09. This was due to higher contributions from its less established markets in Vietnam, China and Middle East, which mitigated the absence of strategic fuel sale in Singapore and the expiry of certain favorable contract in the UK.

Raises profit estimates in FY09-11. We have raised recurring net profit forecast to S$549m (+5.1%) in FY09 and S$574m (+5.6%) in FY10, mainly due to stronger-than-expected profit margins from the Marine business.

Neptune Orient Lines Ltd: Losses in 2Q09 carried a silver lining

2Q09 losses not a surprise. Neptune Orient Lines Ltd (NOL) posted a 37.9% YoY decline in 2Q09 revenue to US$1.4b. Operating income swung into the red at US$122.3m vs. a profit of US$92.3m a year ago, while net losses came in at US$146.2m as compared to a US$75.8m profit a year ago. On a sequential basis, revenue contracted by 10.0%, while net losses narrowed from US$244.6m in 1Q09. NOL's performance was consistent with its guidance for a bleak outlook. Management reiterated that FY09 will be a loss-making year. No dividends were declared.

Deterioration across the board. All three business segments posted weaker YoY results. NOL's main revenue contributor, the Container Shipping segment, turned in operating losses of US$142m (vs. a US$59m profit a year ago), while the Logistics and Terminals segments remained mildly in the black. Container shipping revenues fell by 38.5% YoY to US$1.2b as slower global trade flow crimped freight rates and volumes. NOL, along with its industry peers, has been trying to implement rate hikes, but overcapacity, especially along the Asia / Middle East route, has posed a challenge to these efforts.

The silver lining. We are mildly sanguine about the outlook for 3Q09, a seasonally strong quarter. NOL highlighted that the operating environment showed signs of stabilisation in the later stages of 1H09; volumes have bottomed out and demand has somewhat improved, possibly due to inventory restocking. While it appears that the worst could be over, management cautioned that visibility remains low. It remains premature to determine if the improvement seen so far can be sustained. Meantime, management remains committed to cost containment in the face of stilldeclining revenue.

Well positioned to endure turbulence. We reiterate our view it remains too early to call for a recovery in the containerships industry. Muted global trade, persistent unemployment and industry oversupply continue to dampen hopes of a recovery. Nevertheless, NOL is poised to weather the downturn given its strong financial position. With the US$1b proceeds raised from its recent rights issue, the group is ready to capitalize on investment opportunities that may arise. We believe that NOL could be on the lookout for distressed acquisition targets that can boost its market share upon economic recovery. We roll over our valuations to blended FY09/10 NTA and remove our 20% discount in light of improving outlook, bringing our fair value estimate to S$1.68 (previously S$1.39). Maintain HOLD.

StarHub: Price reflects challenges ahead

StarHub has achieved over 50% of our FY09F forecast. As expected, 2Q09 profit was significanlty better than 2Q08 profit, which was hit by competition due to mobile number portability. Overall, we see no risk to FY09F earnings and 18 Scents DPS estimate for FY09F. Management expressed confidence in securing the English Premier League (EPL) rights, providing there is rational competition from SingTel, in line with our view. The outcome of the bid is in 2-3 months time. Management conceded that EPL right could come at a higher price than the last time, but believed that pay TV margins could be kept stable.

Mobile business showing signs of recovery ahead of other segments. (i) Mobile ARPU showed sequential recovery with higher roaming and data contribution. (ii) Broadband ARPU showed sequential decline due to higher discounts and lower speed plans, in line with our view. (iii) Pay TV ARPU showed sequential decline due to lower take up of premium channels, which could be temporary. (iv) Fixed line business was stable sequentially.

Target price revised to s$2.40 in line with higher valuation for peers. Our SOTP target price of S$3.50 for SingTel, with earnings FY10F-FY12F CAGR of 8%, translates into 14.5x FY10F (Mar year end) PER. Given that StarHub is ex-growth due to challenges ahead in the broadband and pay TV segments, we assign StarHub a PER of 13x at 10% discount to SingTel¨s and regional peers average of 14.5x PER.

Hyflux Water Trust Results Highlights

Earnings highlights. 2Q revenue fell 60% YoY to S$6.6m, due to the lack of construction revenue. This has no impact on the bottom line or distributable income. Moving forward, the manager says construction revenue will become an insignificant part of HWT's revenue as HWT only intends to acquire completed projects. If construction revenue is stripped out, 2Q adjusted revenue rose 76% to S$6m (O&M and finance income only). Net operating income rose 27% to S$2.7m.

Unitholders will receive 2.56 S cents for 1H09, versus 2.17 S cents a year ago (+18% YoY). This is after the subordination to the sponsor, who will receive 1.77 S cents per unit (no distributions received a year ago).

Outlook. Utilization was flat QoQ at 44% as HWT's capacity grew but investments in industrial parks slowed. The manager said that the unused capacity will stand HWT in good stead when the Chinese economy "powers back to life again". HWT said it has seen signs of recovery in the PRC market but the manager does not expect this to translate into a "sudden surge" in the next two quarters. HWT is positive on the fundamentals for the PRC water sector in the mid-to-long term.

Growth depends on credit availability. HWT says that, from a Singapore perspective, the credit market seems to be easing but not on a broad basis. HWT's bankers are telling the trust that debt is available to sovereign institutions and "super-blue-chips". But the bankers say credit availability should improve in 2H09. From a PRC basis: there is still a lot of liquidity both generally and for the water sector. Currently, HWT's acquisition plans are on a two-year framework, but this could be accelerated if the market improves.

HWT has guided for a 2H09 DPU of 2.86 cents per unit. This is equivalent to an annualized trailing yield of 8.4%.

DBS Group Holdings - Core markets resilient

DBS reported a net profit of S$552m for 2Q09 (+27.5% qoq), above our forecast of S$355m. Fees & commissions and trading income were better than our expectations.

Maintain stable net interest margin. Net interest income of S$1,112m (+5.1% yoy) was in line with our expectations. Loans contracted by 1.9% qoq but grew 8.3% yoy to S$130.4b. Professional & Private Individuals was the only sector that registered positive qoq growth of 3.0%. HK$- denominated loans contracted 3.7% qoq to S$29.1b due to the strength of the S$. Net interest margin was marginally higher at 2.01% on a group-wide basis, compared to 1.99% in 1Q09. Improved credit spreads and lower funding cost were offset by lower SIBOR. Net interest margin for Hong Kong improved from 1.91% in 1Q09 to 1.94% in 2Q09.

Recovery from market-sensitive businesses. Fees & commissions of S$358m were up 13% qoq and above our expectations. DBS benefited from the recovery in market-sensitive businesses with strong contributions from stockbroking (+78.6% qoq), investment banking (+58.8% qoq) and wealth management (+31.3% qoq). Sales of unit trusts started to recover in 2Q09. Net trading income was a whopping S$234m due to foreign exchange and interest rate activities. DBS also recognised investment gains of S$138m from the sale of equity holdings.

Focus on improving productivity. Staff cost and other expenses were well under control. Cost/income ratio improved from 38.4% in 1Q09 to 35.2% in 2Q09, as a result of management’s focus on improving productivity. DBS has started to exploit its advantages in having economies of scale.

Core markets resilient. NPL ratio increased from 2.0% in 1Q09 to 2.8% in 2Q09. The bulk of new NPLs came from the "others" category, likely to be a financial institution and currently labelled under the substandard category. Management explained that the increase was from Middle East corporations and institutions (partly from 50%-owned Islamic Bank of Asia). NPLs from core Hong Kong and Greater China markets declined 10.6% and 10.7% qoq respectively. The proportion of NPLs not overdue is 38.2% (1Q09: 34.2%), indicating that asset quality remains sound.

Specific provisions of S$272m and general provisions of S$183m were significant, totalling 138bp on an annualised basis. However, NPL coverage has dropped from 97% in 1Q09 to 81% in 2Q09.

Loan growth picking up in 2H09. DBS has built a strong pipeline in residential mortgages and corporate loans. It has aggressively expanded in housing loans in Singapore, participating mainly in the owner-occupied and upgraders’ market. It offered 90% financing in the early part of 2Q09 but has since “clamp down”. It currently offers 90% financing only on a case-by-case basis. Disbursement for housing loans will be more pronounced in 2H09. Tier 1 CAR was maintained at 12.6%. DBS has declared a dividend of 14 cents/share, unchanged compared to the last quarter.

We have raised our assumptions for loan growth to 5.7% for 2009 (previously 7.8%) and 11.7% for 2010 (previously 8.2%) to factor in increased demand from property developers and housing loans. We have revised our assumptions based on trends in NPL ratios over the last three quarters. We assumed NPL ratio will hit 4.0% by end-10. Our earnings model has imputed allowance for credit losses of 120bp in 2H09 (previously 120bp) and 60bp in 2010 (previously 80bp). We have raised our 2009 and 2010 net profit forecasts by 14.0% and 11.5% respectively.

OCBC - NPL Formation Has Slowed Across Key Markets

Oversea-Chinese Banking Corp (OCBC) reported a net profit of S$466m for 2Q09, above our forecast of S$398m due mainly to lower provisions for nonperforming loans (NPLs) and higher non-interest income.

NPL formation has slowed. NPLs increased 14.3% qoq to S$1,628m due to the manufacturing, general commerce and transport & communications sectors. By geographical region, new NPLs came from the core Singapore and Malaysia markets. The increases in NPLs came from loans that were not overdue. We take this as a sign of conservative management in recognising NPLs early. In fact, NPLs in the doubtful and loss categories have declined. Management commented that the inflow of NPLs has slowed across key markets.

Benefitting from surge in home sales. OCBC is the prime beneficiary of buoyant sales for private residential properties. Approvals for housing loans doubled qoq in 2Q09. OCBC has so far approved S$600m of SME loans under the Special Risk-Sharing Initiative (SRI) administered by Spring Singapore. We have raised our assumptions for loans growth to 1.6% for 2009 (previous: 2.6%) and 11.7% for 2010 (previous: 8.2%) to factor in increased demand from property developers and housing loans.

We have revised our assumptions based on trends in NPL ratios over the last three quarters. We have assumed NPL ratio will hit 3.8% by end-10 (previous: 4.2%). Our earnings model has imputed allowance for credit losses of 80bp in 2H09 (previous: 95bp) and 60bp in 2010 (previous: 70bp). We have raised our 2009 and 2010 net profit forecasts by 0.9% and 4.1% respectively. Maintain BUY. Our target price of S$9.15 is based on a P/B of 1.72x derived from the Gordon Growth Model (ROE: 12%, payout ratio: 48%, required return: 8% and constant growth: 4.5%).

SIA - Traffic could improve from here, but yields less so

The general feel was that there was a lack of visibility in terms of traffic trends although the rate of decline in passenger traffic appeared to have bottomed out following the initial fears of being quarantined as a result of the H1N1 flu. However, yields are unlikely to improve significantly. We have already factored in an improvement in passenger yield with full-year projection at 11.0 cents vs 10.2 cents in 1Q09, and cargo yield at 30.0 cents vs 27.2 cents in 1Q09.

Yields. Two-thirds of the fall in passenger yield was a result of lower local currency yields due to aggressive ticket price cuts for both economy and premium traffic. The balance of a third was due to lower surcharges, lower premium traffic and forex losses. Cargo yield was affected by lower rates and we sense this is unlikely to get better unless traffic improves.

Passenger traffic. Promotional ticket prices had resulted in positive response and management indicated that the fears of being quarantined appeared to have subsided as authorities have stopped contact tracing and reporting infections. We expect passenger traffic to improve in 2H09 but have revised our full-year passenger traffic growth assumption to -14% from - 12%.

Fuel hedged. SIA indicated it had not materially changed its hedging requirements and still guided for a 25% hedge for FY10 at US$125/bbl. We can infer that management expects fuel prices to remain subdued for the period or that it envisions further capacity cuts.

Fleet and capactity management. In 1Q09, SIA took delivery of two A380s and four A330-300s. SIA will take delivery of three more A380s and three more A330-300s in 2H09, boosting capacity. Management said it will consider cutting capacity if passenger traffic continues to remain weak. We expect 2Q09 to see the full impact on capacity from the six aircraft deliveries in 1Q09. Load factor as such could fall, even if traffic improves.

Cost cutting. Further cuts in staff costs will net about S$60m in savings. Is the worst over? Management was non-committal about this, but we sense SIA is now more mindful of the need to maintain competitive ticket pricing to draw in discretionary travel. No indication was provided on the outlook on cargo traffic but the improvement in June’s cargo load factor should lead to at least reduced losses for 2Q09. Overall, we do not expect a significant improvement in yields in 2H09 but breakeven load factors should improve due to lower fuel and staff costs. We estimate SIA will deliver S$360m in operating profit on margin of 3% (previously 5%).

No cash call. SIA emphasised it has no plans for cash calls and that capex can be adequately funded by internal cash flow, cash balance and, if required, by debt. The company however did not give any guidance on dividends, but we have cut our dividend assumptions for FY11 and FY12 to 30 cents/share from 40 cents and 50 cents respectively.

We cut our FY10 and FY11 net profit numbers by 33% and 11% respectively following cuts in our yield assumptions. Passenger yield for FY10 is cut from 11.4 cents to 11.0 cents.

SIA has reported two consecutive quarters of operating losses and management has even highlighted the possibility of a full-year loss. Even so, stock price remains firm, suggesting an unwillingness to sell the stock given the SATS share dividend. Still, we see no immediate catalyst for an upgrade given our take that capacity will rise further. We continue to maintain SELL and our ex-all fair price of S$9.80, implying a 16% discount to book value and an EV/2-year average EBITDA of 4.7x.

United Overseas Bank - 2Q09: A stronger balance sheet

Stable net interest margin. Loans contracted 1.7% qoq to S$100.3b. Growth from housing loans (+2.6% qoq) was negated by contraction for building & construction (-2.7% qoq), general commerce (-4.1% qoq) and financial institutions (-5.8% qoq). By geographical region, the contraction came from Thailand (-4.5% qoq) and Greater China (-12.2% qoq). Net interest margin was slightly lower at 2.35% compared with 2.41 in 1Q09 due to lower gapping income. Customer deposits contracted 2.0% qoq to S$117.0b.

Boost from investment income. Fees & commissions were 6.3% lower qoq at S$225m. Contributions from loans-related activities declined 34.2% qoq to S$50m as the 1Q09 number was boosted by lots of capital restructuring activities. 2Q09 performance was significantly boosted by a net gain of S$34m from trading activities and investment income of S$141m from financial instruments and S$63m from available-for-sale assets.

Huge general provision. Non-performing loan (NPL) ratio increased from 2.1% in 1Q09 to 2.4% in 2Q09 due to large corporations in Singapore and OECD countries. The general provision of S$151m was similar to last quarter’s but United Overseas Bank (UOB) made a large general provision of S$321m (about S$100m for loans, S$150m for investment securities and S$100m for foreclosed assets in Thailand).

Stronger balance sheet. Available-for-sale reserves recovered by another S$1.2b due to the recovery in the equity and bond markets. Thus, NAV/share increased from S$9.37 to S$10.14. Tier-1 capital adequacy ratio (CAR) improved marginally from 12.3% to 12.6% due to a 1.7% qoq decline in risk-weighted assets.

Pick-up in demand. Demand for loans has increased due to improved sentiment and a pick-up in the housing market. Applications for loans increased 50% qoq in 2Q09. However, management mentioned that margins look “toppish” and there is intense competition for housing loans. NPL ratio is expected to increase in 2H09 but likely to be at a slower pace.

Venture - Uncertainty In 2010

Excluding the $25mln gain on derivative financial instrument, $2mln gain on disposal of fixed assets and $1.18mln tax writeback, operating profit of $32.7mln (which includes a forex loss of $4mln due to weakening of the US$), down 55% yoy and down 18% qoq was 34.6% below consensus expectations of about $50mln, reflecting weaker than expected contributions from higher margined products such as test & measurement and retail store solutions.

While the weaker yoy comparison is as to be expected, the weaker qoq bottom-line performance in 2Q09 is in stark contrast to the general technology industry which has seen a sharp rebound after the very depressed 4Q08 and 1Q09 performance.

Looking ahead, while their customers are generally more optimistic about 2H09 prospects, they are not able to commit to the pace of recovery in orders, reflecting the uncertainty of the global economic environment.

Further, we understand that Venture’s non-ODM business with HP which had contributed about $600-700mln in sales or 18% of sales would be negatively impacted starting 2010 due to Hon Hai’s new entry into this business segment. Similar to Venture, other HP suppliers such as Jabil and Calcomp will similarly be negatively impacted. Mass production has started recently for Hon Hai and is expected to pick up in 2H2009 and even more strongly going into 2010 with their market share expected to rise from zero currently to a significant 50% by 2011.

As a result, Venture’s 2010 earnings would likely be negatively impacted notwithstanding the fact that they expect new contributions from new customers as well as new products.

While the stock has corrected from its $10.26 intra-day high hit at the end of July’09, it has climbed a robust 120% from its $3.90 low hit at end Nov’08 to $8.57 currently. With its PE of 13-14x already in line with the world’s largest contract manufacturer, coupled with uncertain prospects in 2010 due to the loss of HP’s non-ODM business, we are maintaining our SELL recommendation.