Election 26thjuly

Singapore’s June Non-Oil Domestic Exports (NODX) posted a 10.5% year-on-year rise, much to the disappointment of the market which had expected a consensus of 13 –14% increase. Despite electronics sales improving by 7.6% year-on-year, the performance within the group was very uneven. Semiconductors continued to lead the rise in sales while disk-drive shipments and PCBAs persistently dragged down and partly offset the gains made in the electronics segment.

Semiconductor sales in June reached a new high of $1.75 billion in absolute terms. Semiconductor exports rose 61.5% to $1.74 billion. The significance of this industry is clearly highlighted as chips account for almost a fifth of Singapore’s total exports. This had been expected to bode well for semiconductor counters like Chartered Semi-Conductor Manufacturing (CSM) and ST Assembly Test Services Ltd (STATS) which had recently posted their second-quarter results.

CSM recently announced above-consensus second quarter profits of $58 million (up 53% year-on-year) for the 3 months ended 30 June, driven largely by increased revenue and greater utilisation. Market analysts generally like CSM, having upgraded the outlook of the company’s future earnings based on better-than-expected margin improvements, higher equity contribution from associate SMP and lower start-up losses. Some are upbeat about this stock, impressed by the increases in the average selling prices of wafers. Their views were also reaffirmed after CSM said it will spend $1.05 billion this year to boost production so as to meet rising demand for its wafers. CSM’s management expressed confidence of its prospects and has maintained its earlier target of US$200 million profit for FY2000.

Also riding on the recovery story of the semiconductor industry is STATS with its second quarter profit registering at $14.1 million, more than double the previous year’s. However, market investors are unfazed as the profit figures were only within market expectations. Analysts have been quite inhibited about buying this stock mainly over the issue of wafer supply. STATS’s second quarter profits were crimped after supply of wafer shipments slowed during the period and analysts are not ruling out disruptions to future supply. They add that the company’s strategy for the second half for this year is unclear. On a brighter note, STATS says it is expecting second half results to be better than the first and expects wafer shipments to rise 20% in the third quarter from the second.

Despite the healthy profit figures churned by these semiconductor companies, recent comments by an industry association that investment in chip production may slow has adversely hit share prices of CSM and STATS. STATS lost 8 cts on Tuesday to close at $4.00 after hitting a intraday low $3.90, despite its healthy profits. At $4.00, this is the lowest level since the stock made its debut on the mainboard at $7.85, having lost some 60% of its value after peaking in March. CSM did not fare any better, falling 20cts to $14.40. Profit warnings from US technology heavyweights last Friday only compounded the falling share prices.

Nasdaq took a tumble last Friday after Agilent and Ericsson issued profit warnings due to a shortage of component parts like capacitors and LCDs, spooking a 2.2% fall on the technology-laden index to 4,094.45. News of PC growth in the US slowing to 14.5% in the second quarter from 20% also brought on warning bells for the technology sector. The local market sentiment was hurt, dragging down prices of electronics and technology stocks, with Natsteel Electronics Ltd, the world’s fifth largest electronics components maker for specific customer down 50 cts to $5.90 on Monday while JIT Holdings dipped 10cts to $3.24. Omni Industries also fell 14 cts to $3.08. It only goes to show that the Singapore electronics sector bears a close correlation with similar electronics-makers in the US and that the electronics components problem is not completely over despite talk of an easing situation.

Meanwhile, semiconductor exports are still expected to rise despite the industry association’s warning. For a start, Hitachi Ltd, Japan’s third-largest chipmaker intends to move production of its random-access memory chips from Japan to Singapore in end-2001. The prudent analysts will caution against being too optimistic about semiconductor stocks as there are worries over a possible peaking of the semiconductor cycle soon. It is however, anyone’s guess as to which part of the cycle the industry is currently at.

Singapore’s June Non-Oil Domestic Exports (NODX) posted a 10.5% year-on-year rise, much to the disappointment of the market which had expected a consensus of 13 –14% increase. Despite electronics sales improving by 7.6% year-on-year, the performance within the group was very uneven. Semiconductors continued to lead the rise in sales while disk-drive shipments and PCBAs persistently dragged down and partly offset the gains made in the electronics segment.

Semiconductor sales in June reached a new high of $1.75 billion in absolute terms. Semiconductor exports rose 61.5% to $1.74 billion. The significance of this industry is clearly highlighted as chips account for almost a fifth of Singapore’s total exports. This had been expected to bode well for semiconductor counters like Chartered Semi-Conductor Manufacturing (CSM) and ST Assembly Test Services Ltd (STATS) which had recently posted their second-quarter results.

CSM recently announced above-consensus second quarter profits of $58 million (up 53% year-on-year) for the 3 months ended 30 June, driven largely by increased revenue and greater utilisation. Market analysts generally like CSM, having upgraded the outlook of the company’s future earnings based on better-than-expected margin improvements, higher equity contribution from associate SMP and lower start-up losses. Some are upbeat about this stock, impressed by the increases in the average selling prices of wafers. Their views were also reaffirmed after CSM said it will spend $1.05 billion this year to boost production so as to meet rising demand for its wafers. CSM’s management expressed confidence of its prospects and has maintained its earlier target of US$200 million profit for FY2000.

Also riding on the recovery story of the semiconductor industry is STATS with its second quarter profit registering at $14.1 million, more than double the previous year’s. However, market investors are unfazed as the profit figures were only within market expectations. Analysts have been quite inhibited about buying this stock mainly over the issue of wafer supply. STATS’s second quarter profits were crimped after supply of wafer shipments slowed during the period and analysts are not ruling out disruptions to future supply. They add that the company’s strategy for the second half for this year is unclear. On a brighter note, STATS says it is expecting second half results to be better than the first and expects wafer shipments to rise 20% in the third quarter from the second.

Despite the healthy profit figures churned by these semiconductor companies, recent comments by an industry association that investment in chip production may slow has adversely hit share prices of CSM and STATS. STATS lost 8 cts on Tuesday to close at $4.00 after hitting a intraday low $3.90, despite its healthy profits. At $4.00, this is the lowest level since the stock made its debut on the mainboard at $7.85, having lost some 60% of its value after peaking in March. CSM did not fare any better, falling 20cts to $14.40. Profit warnings from US technology heavyweights last Friday only compounded the falling share prices.

Nasdaq took a tumble last Friday after Agilent and Ericsson issued profit warnings due to a shortage of component parts like capacitors and LCDs, spooking a 2.2% fall on the technology-laden index to 4,094.45. News of PC growth in the US slowing to 14.5% in the second quarter from 20% also brought on warning bells for the technology sector. The local market sentiment was hurt, dragging down prices of electronics and technology stocks, with Natsteel Electronics Ltd, the world’s fifth largest electronics components maker for specific customer down 50 cts to $5.90 on Monday while JIT Holdings dipped 10cts to $3.24. Omni Industries also fell 14 cts to $3.08. It only goes to show that the Singapore electronics sector bears a close correlation with similar electronics-makers in the US and that the electronics components problem is not completely over despite talk of an easing situation.

Meanwhile, semiconductor exports are still expected to rise despite the industry association’s warning. For a start, Hitachi Ltd, Japan’s third-largest chipmaker intends to move production of its random-access memory chips from Japan to Singapore in end-2001. The prudent analysts will caution against being too optimistic about semiconductor stocks as there are worries over a possible peaking of the semiconductor cycle soon. It is however, anyone’s guess as to which part of the cycle the industry is currently at.

New Policies Of Help To The Hong Kong Property Market?

Since the economic crisis in 1997, Hongkong housing prices plunged some 50% from its pre-crisis levels. Many home owners are now concerned about the depressed property market as the value of their homes have gone below its purchase price. In a bid to stem the downward spiral of home prices, the Hongkong government recently announced measures to intervene in the property market. However, are these measures effective? Many analysts do not think so.

The Hongkong Housing Authority (HA) made changes to its public housing policy, announcing that it would rent rather than sell 16,000 planned government-built flats for a span of 4 years and delay the next sale of government housing until the year 2001. The government’s decade-old Home Ownership Scheme (HOS),  which was put in place to build and sell flats to lower-income families, will be increased to more first-time buyers and the waiting list for public housing has been cut to 3 years. Also, home purchase subsidies are to be increased, according to market conditions and demand.

Many property developers and analysts  believe that these measures, though positive in boosting sentiment in the housing market, are not sufficient to shore up falling prices. They say the new policies do not solve the root problem of the slumped property market, citing several fundamental reasons  namely: an oversupply of unsold flats, high unemployment, low consumer demand and rising interest rates. Of these, the main reason is the lack-of-demand factor for private property in Hongkong.

In their opinion, there are more effective ways the government can help prop up the property market. One is to restrict land sales and place large sites on the reserve list. Another way is to cut or suspend sales of subsidised housing. This measure would be, in part, able to counter the government’s annual supply of 85,000 subsidized housing units being placed out to the residential market. They add that the government could also raise the 70% mortgage ceiling, or scrap it altogether so as to encourage more home-buying.

However, there are downsides to these suggestions. For instance, restricting land sales and sales of government units would affect government revenue. This could potentially create confusion in the long-run when residential prices recover. Also, curtailing land supply has a lag effect of at least 3 months. Thus, it may be effective in driving up prices in the short-term but not in the long-run.

Suspending the sale of subsidized housing units is also not likely to address the underlying problem of poor demand for private housing in Hongkong. The raising of mortgage ceilings from 70% would also seem unnecessary as banks are already very eager to lend.

It is unclear at this juncture, whether the territory’s government will implement more changes in its Housing policies to help the ailing property market. However, it seems that there is mounting pressure on the government to do so. The Hongkong-Macau Regional Office Quarterly Report from the Bank of China (which looks to the Communist Party of China for leadership) seems to suggest so. This report said the territory needs to take up short-term measures to avoid a long-term depression. It specifically mentioned that the Hongkong government should cut land supply and suspend the sale of subsidised housing.

Disgruntled homeowners have also been taking to the streets in protest against the government for not taking sufficient action against falling property prices. Last Sunday saw some 1,200 people rallying for this cause in the streets.

Over the past week, the hefty gains notched up by property shares over the preceding 2 weeks have been eroded by selling pressure on the sector due to US interest rate hike jitters. The sell-down was also compounded by selling from wary investors who felt that the index gained “too much, too soon” as well as a scandal-plagued HA over construction issues.

For now, analysts are advising investors to take a wait-and-see stance. Investors should watch out for the following factors, the first being the direction of interest rates as it would be a major factor in determining the affordability of private housing  in Hongkong, given the already slack consumer demand.

Analysts also suggest keeping an eyeful on strategies which property developers will undertake, especially their sales strategy for unsold units. If developers become too aggressive in selling new units now, this will only dampen the sector’s longer-term prospects.

The property sector’s turning point will be strongly dependent on the strength of Hongkong’s economic growth since potential property buyers look to GDP figures for confidence in property capital appreciation. So far, the territory has recorded a GDP growth of 14.3% in the 1Q of the year. If growth continues to generate at this level or more, property stocks should expect to see a rally in the 2H of the year.

It is anyone’s guess now, on whether the Housing Authority will interfere in the residential market again. But analysts are quite sure that should the property market sink back into the doldrums, the HA will have no other choice but to do so in order to salvage the value of the people’s assets.

NATSTEEL ELECTRONICS – ACQUISITION TRACK A DOUBLE-EDGED SWORD?

Natsteel Electronics (NEL) has come a long way from being a Printed-Circuit Board Assembly (PCBA) to becoming a Full Systems Provider. Details of the company’s latest expansion move are bound to get investors hopeful as NEL continues its buying spree in a bid to enlarge its asset base. The question lies in whether the news will be able to win back disappointed investors who saw its share price dip in tandem with the Nasdaq’s fall since March.

NEL, the world’s fifth largest electronics contract manufacturer announced  in June its incorporation of a joint venture firm with 2 partners, Taiwan’s Accton Technology and US-based 3Com. The joint venture company US Robotics, will design, market and sell internet access products. It will also be charged with designing and marketing 3Com’s modems and networking equipment for large corporate vehicles. NEL and Accton Technology will each hold a 40.6% stake in US Robotics while 3Com will be holding the remaining stake of 18.7%.

US Robotics is expected to bring in $127 million in sales in the 3 months ending August 31. Full operations are expected to start by September 2, 2000.

JOINT VENTURE’S PLUS POINTS

Edward Lim from DBS Securities (DBSS) believes that with the incorporation of US Robotics, NEL’s business model will still be favourable given its full range of supply chain management capabilities. He said NEL’s alliance with 3Com and Accton could possibly develop into manufacturing for 3Com’s higher-end DSL and cable modems.

He has projected a 6% addition to NEL’s FY00 revenue, pending verification with NEL’s management. Meanwhile, he is forecasting Price-earning (P/E) ratios at 25x for FY2000 and 20x for FY2001 on the back of forecast 7% EPS growth for FY2000, maintaining DBSS’s call of a Market Perform for NEL.

Other research houses have also responded to NEL’s latest venture with some analysts expressing optimism. Analyst Patrick Yau from ABN-AMRO feels that NEL has shown foresight in its acquisition plans. He explained, ”NEL has been busy working on improvements to its design, manufacturing and logistics fulfilment capabilities. With this joint venture, contributions from the 2 other partners will be very innovative and useful”.  He adds, “ NEL remains a strong contender in the fast growing EMS market. Essentially, this will result in revenue growing into the US$5billion mark”.

He is recommending a Buy on account of restructuring benefits which will arise from NEL’s acquisitions. His Buy recommendation also took into account the increase in factory floor space due to the acquisitions.  Mr. Yau believes that NEL’s capacity is likely to see an increase due to additions to the existing number of SMT lines. He is predicting a PEG ratio of 0.7-1.0x for FY2001 earnings.

Jardine Fleming Electronics analyst Russell Tan points out:” NEL currently has 156 SMT lines. NEL’s management is expecting a total of 180 SMT lines at the year-end. That’s a 37%  year-on-year increase.” He reiterated that the market has over-reacted to NEL’s profit warning in mid-May and that the stock is oversold. On concerns of profitability, he said, “Higher margin activities from US Robotics will definitely improve NEL’s profitability.”

Mr. Tan is forecasting a 21.9% growth in earnings for FY2000, with a 3-year EPS CAGR of 27.5%, giving the stock a Trading Buy recommendation. “I believe that consumers in the market could also potentially benefit from the conception of new products which partners like Accton could bring to this joint venture. Credit Lyonnais analyst Lim Keng Hock supports this view, saying that investors should watch out for potential new products which the partners can bring into the joint venture.

WOES TO BE FACED

However, the market consensus is one of concern rather than delight.  Just last month, Natsteel Electronics issued a profit warning to investors, sending the counter and its rivals under selling pressure over the past month. Company management warned that its net profit for FY2000 could be crimped by the following factors namely:

(i) Higher interest expense arising from the US$250 million convertible bonds issued by the Company last July,

(ii) Lower gross profit margins due to the shortages of certain critical components, and

(iii) Higher overhead expenses arising from a major revamp of the Group's infrastructure.

There are some analysts who have their doubts that the tripartite venture will benefit NEL. Electronics analyst Jonathan Quek from UBS Warburg warned that NEL is relatively more vulnerable to component shortages than its rivals like Venture Manufacturing. He said,” I expect the component shortage problem to worsen until the end of this year, thus increasing supply
and cost burden on NEL. Also, there is a high chance that there will be irregular and delayed component deliveries, which are expected to result in higher costs and eroded margins”.

Data from the May Non-Oil Domestic Export (NODX) trade figures have shown that electronics exports are a still drag on overall NODX growth, with growth from the Jan-May period at 5.8%. The current global shortage of key components, especially those of PCBAs is still of great concern.

Mr. Lim from DBSS remains cautious on NEL in the short-term on the issue of profitability. “There is a big question mark hanging over the profitability of the company due to these acquisitions. Other areas which could adversely affect NEL include the large goodwill amortisation arising from its recent acquisitions, its stretched balance sheets and rising interest costs. I would advise investors to wait until NEL makes clear its take on goodwill and measures to further improve its capital structure”.

A major concern raised by most analysts the Financial-Planner spoke to, was how highly-leveraged NEL was. They noted that NEL’s balance sheet will be quite stretched following the 2 major acquisitions. Just 2 months back, the company had already drawn some US$200 million worth of banking facilities to complete the acquisition of NEC America's manufacturing operations located in Oregon. Cashflow is bound to be affected.

Furthermore, the completion of an earlier acquisition (3Com), possibly in September, could compound NEL’s cash debt position. Earlier in March, 3Com had announced the sale of its manufacturing assets in the US to NEL. NEL and 3Com are widely expected to unveil a manufacturing agreement over the next week or so. Many analysts say this acquisition, if completed, may result in the Company drawing down additional banking facilities during the second half of 2000, which will further increase its interest expenses. It is likely that NEL will have to find various financing alternatives, of which includes talk of a listing on Nasdaq.

“Caution is the key to not getting burnt at this moment”, said Mr. Quek from UBS Warburg. Most analysts the Financial-Planner spoke to seem quite wary of NEL at this juncture.

WHERE DO INVESTORS TAKE THEIR CUE?

In the short-term, investors should keep an eyeful on the direction of interest rates as they will take its toll on the company’s interest charges. More critically, they should watch how soon the problem of component shortages will alleviate in future. If the prices of these short-in-supply components were to rise, it would only exacerbate NEL’s woes. Going forward, NEL and other electronics manufacturers will also be taking their cue from the volatile Nasdaq. Why? Half of the constituents of the technology-laden Nasdaq are computer-related stocks and the US market consumes some 30% of Singapore-made exports, of which the majority are electronics goods.

Time to bank in on banks?

Credit Expansion in May

Singapore bank loans saw an expansion for the first time in almost 2 years, implying renewed demand for credit. Bank lending grew by an unexpected 0.6% year-on-year in May to SGD149.2 billion from SGD148.3 billion in 1999. On a month-on-month basis, May loans grew by 1.2%. The latest figures released by the Monetary Authority of Singapore (MAS) have caught most bank analysts offguard, as they had predicted a loans contraction for May. With economic data moving into positive territory, is it safe to buy into Singapore banking stocks? Analysts seem to think so despite the price volatility experienced by these counters over the past months.

The improvement in May ‘s bank credit was spearheaded by loans to retail segments. The Building/Construction sector including housing loans expanded 3.5% year-on-year to SGD59.2 billion. This accounts for some 40% of overall loans. Loans to private individuals were up 6.0% year-on-year to SGD22.7 billion, comprising 15% of bank lending.

Analysts say a good set of growth numbers in bank lending, and general economic data like the 2nd Quarter economic growth estimates, will rekindle strong buying interest in banking and property stocks which had earlier languished under interest rate worries. Just Monday, the Ministry of Trade and Industry announced advance estimates for 2nd Quarter GDP which had registered a 7.7% growth year-on-year. This is a good sign for the resilient Singapore economy and will bode well for the property and banking sector. Local banking stocks like Oversea-Chinese Banking Corporation (OCBC),  United Overseas Bank (UOB) and Overseas Union Bank (OUB)  notched up gains over the past week or so on optimism that credit lending will continue to improve and thus boost company earnings. Paradoxically, the same group of investors who pushed up bank prices are also worried that our banks may not be able to compete well against foreign ones as more liberalisation measures for Singapore’s banking industry are being announced by the MAS.

Further Liberalisation of Singapore’s Banking Industry

Just 2 weeks back, Singapore’s de facto Central Bank, the MAS announced further banking regulatory changes requiring local banks to divest their non-core operations within 3 years. The regulations are expected to come into effect by year-end. MAS Chairman and Deputy Prime Minister Brigadier-General Lee Hsien Loong reiterated his warning that local banks will be forced to merge as the financial sector will be liberalised further. He added that rationalisation is increasingly necessary.  To date, all 5 local banks have verbalised their support for the latest restructuring announcement.

This latest measure comes at a momentous time when skeptical market watchers, in their opinion, believe that the government was less-than- successful in its attempts to get the remaining local banks to consolidate. But thats not how the U.S. Federal Reserve Bank sees it. A top Federal official gave kudos to the MAS for the way it handled the Asian economic crisis. Speaking at the 50th anniversary of the Bank of Korea, Mr. William McDonough, president of the Federal Reserve Bank of New York said MAS has maintained a strong banking system during the 1997 crisis.

In his comments, BG Lee also repeated that it is not possible to have more than 2 big Singapore banks as the local market is too small. To date, all but the Development Bank of Singapore (DBS) and Keppel-TatLee Bank (KTL) have actually carried out some form of alliance or merger. The remaining 3 Singapore banks, OCBC, UOB and OUB have yet to merge, fuelled by rumours that possible dissent could arise over leadership of the newly-merged entity.

So far, only DBS Bank has responded fairly well to the issue of divestment, reducing its stake in DBS Land from 30% to 5.4% this year. It’s anyone’s guess as to when the other 4 local banks will follow suit.

Analysts’s Views

Credit Suisse First Boston said MAS’s new regulations means good news for investors. This is in line with analysts consensus that the non-core assets divestment are expected to boost banks’ return of equity.

CLSA Global Emerging Markets is quite optimistic about banking counters. Banks are attractive at current valuations and it expects the latest announcements on non-core divestments to see some insider action accelerate. The house forecasts a positive domestic credit recovery of 4% by end-2000, led by manufacturing, financials and personal loans.

Standard & Poor’s MMS International quipped that Singapore is putting the crisis behind and with the banking earnings outlook now improved, bank share prices should see a bolster.

W.I. Carr Securities is predicting a 2.7% loans growth in year 2000, based on its GDP forecasts. The house favours banks with a high portion of consumer lending, with the likes of DBS, UOB and Keppel-Tatlee Bank (all holding 37-38% consumer loans at year-end 99).

In Daiwa’s Asia Pacific Equity Research June Banking Monthly, it maintains an overweight call on the banking sector..It believes the attractive valuations coupled with high earnings quality and further confirmation of the regional recovery will still draw investors. But it warned that competition is expected to become tougher between banks operating in Singapore as their foreign counterparts will be given more space to wrestle their way into the local retail segment. The positive factors anticipated by the market such as non-core asset divestments, major writebacks of non-performing loans (NPLs), and double-digit loan growth may not come through either.

Positive factors notwithstanding, bankers advise caution, saying that bank lending in Singapore has yet to return to pre-crisis levels. They add that credit expansion is still slower than before the crisis.

It looks like investment spending in Asia (including Singapore) will increase, albeit the timing is uncertain. Already, there is strained productive capacity in countries like South Korea and Taiwan, largely in the colossal electronics industry. Analysts are optimistic of a shift in demand from consumer-driven lending to an investment-driven one. And when that takes place, bank investors will literally laugh their way to the bank.