2Q09 results ahead of forecast; offshore sales momentum picking up 2Q09 results came in ahead of forecast on higher than expected profit recognition and better offshore sales. Demand has firmed in offshore markets, especially in China townships and increasingly in Vietnam. We revise up our EPS, RNAV and TP; Buy maintained. With gearing at a low 23% KepLand looks well positioned to us to capitalise on acquisition opportunities which may further enhance NAV.

Earnings were driven by development profits, which rose 69% YoY on higher recognition and better sales in Singapore and offshore. Additional units sold in Tresor and Park Infinia also contributed. KepLand has sold more than 1,440 units in 1H09 in China with brisk take-up for township projects in Chengdu and Wuxi. Sales have also picked up in Vietnam with 30 units sold in The Estella since May.

We have fine-tuned our earnings forecast and revised our FY09-11 PATMI upwards by 4-6% on the back of higher take-up and ASP. We forecast core 2009 PATMI of S$180.8m (-15% YoY) with 2H earnings underpinned by profit recognition from pre-sold projects and stable rental and fund mgmt income. KepLand plans to launch Promont, Madison and Riviera Cove (Vietnam) in 2H09.

We revise our RNAV from S$2.55 to S$2.90 on the back of the re-rating of K-REIT and Evergro, ASP increase in selected residential projects and surplus from Tianjin Eco-City. The stock is currently trading at a 12% disc to RNAV and 1.1x P/B vs larger peers at 13% premium to RNAV. Downside risks: reversal of recovery trends for the economy, weaker than expected housing and office leasing demand.

Rotary has clinched a S$48m EPC contract from PTT Tank Terminal Company Thailand, for the construction of an ammonia storage tank and facilities at the Map Phut petrochemical hub in Rayong Province, Thailand. The scope of work includes supply of equipment and materials, engineering, construction, commissioning and start-up of the PTT Tank Project. Work has commenced and would be completed months.

Rotary has also clinched two contracts worth S$36m from Neste Oil Singapore undertake work at Neste’s S$1.2bn NExBTL Renewable Diesel Plant in Tuas. The contracts are for electrical and instrumentation (E&I) work as well as mechanical, piping, painting and steel structures work. The mechanical and piping contract expected to be completed by Mar 2010 and the E&I installations, by mid-2010.

Industry awakens. These contracts fall within our contract-win assumptions for FY09- 10, in the range of S$50m-200m sizes expected for the South-East Asian region. With the worst of the recession behind us, it would be reasonable to expect more contracts that were earlier postponed. We believe the PTT and Neste projects mark the start of more regional contracts. The recent award of a US$10bn contract by the Merapoh Resources refinery project in Kedah, Malaysia to South Korea’s SK Group is another positive sign. Malaysia also has another US$4.6bn oil-refinery project in Perak state, in conjunction with a Qatar company. This project will comprise an oil refinery, a petrochemical plant and storage facilities, and is expected to come onstream in two years.

Order book. With these new orders, Rotary’s order book has been lifted to S$1.52bn. We believe there is scope for further growth in 2009 as there are still projects in the region, in particular, Malaysia and Indonesia.

Maintain Outperform and target price of S$0.90, still based on 11x CY10 P/E. More order wins and the successful execution of projects could be catalysts for its share price, we believe. Given a growing proportion of higher-margin overseas contracts in its order book, we will be reviewing our FY10-11 forecasts. Rotary is trading at 9.5x CY10 P/E, at a steep discount to its regional peers, Dialog in Malaysia and Sino-Thai Engineering (average 15.5x).

CapitaMall Trust (CMT) reported distributable income of S$67.9m (+20.7% yoy) and DPU of 2.13 cents (-39.5% yoy), in line with our expectations.

Sustaining full occupancy. Portfolio occupancy was 99.7% in 2Q09, a slight improvement from 99.5% in 1Q09. A total of 322 renewals and new leases involving net lettable area (NLA) of 392,961sf were signed in 1H09. Contracted rental rates were 1.5% higher than preceding rental levels, sustaining slight positive rental reversion. Gross revenue locked-in for 2009 exceeds 98% of full year 2008 gross revenue based on committed leases as at Jun 09.

Valuation of investment properties. CMT has recognised a S$276.2m or 3.9% decrease in valuation of its investment properties. Its assets in Singapore are currently valued at S$6.9b. Capitalisation rates have increased marginally by 5-10bp to 5.50-6.00%. NAV/share was thus reduced from S$1.65 to S$1.56.

Credit crunch has eased. CMT does not have any requirement for refinancing in 2009. It has borrowings of S$440m due in 2010, with the bulk of S$315m due in Apr 10. Current gearing of 33.4% will be further reduced to 30.3% when S$335m fixed rate term loan is repaid in Aug 09 with proceeds from the rights issue. Feedbacks from bankers indicate that cost of borrowings has dropped by 100bp. Moody's Investors Service has reaffirmed corporate rating of A2 for CMT, the highest among S-REITs.

2Q09 slightly ahead. 2Q09 net profit grew by 13.8% yoy to S$8.8m on the back of a 6.5% growth in revenue to S$53.9m. The better than expected earnings were a result of better operating efficiencies, particularly staff costs, which grew by only 3.4% vis-à-vis topline growth. Operating margins rose 1.5ppt from 18.8% in 2Q08 to 20.3% on the back of cost and operating efficiencies.

Resilient healthcare division. Topline growth from the Healthcare division was at 12.3%, higher than the 4.8% growth reported by the Hospital division. 3 new clinics were opened in 2Q, on track towards the Group's target of a total 5 clinics this year. Management shared that patient volumes were up 5%, helped by foreign patients (+13%) offset by dip in local patients (-7%).

Net cash of S$27.5m. Operating cashflow remained healthy at S$13.9m in 2Q09. This contributed to the Group's net cash position of S$27.5m. We expect net cash position to further strengthen to S$47m by Dec 09, based on our forecast. An interim dividend of 1cent per share was declared, similar to 1H08. Book closure would be on 20 Aug, while the dividend would be paid on 4 Sep 09.

Maintain Hold, TP: S$1.06. We raised our forecasts by 2% - 5% to factor in the lower than expected operating expenses. We maintain our Hold recommendation, but adjust our TP up to S$1.06 as we pegged it to 16x on FY09F earnings, in line with regional peers and ?1 standard deviation from its trading average.

Biosensors reported its 1Q10 (quarter-ended June) results after market close on 27 July œ the first profitable quarter in its history. Revenue was in line with the company‘s guidance.

Profit from its China JV (JWMS) remained strong with 100% growth YoY, 12% growth QoQ œ the JV contributed 74% of Biosensors‘s 1Q10 EPS. The company expects to receive Chinese SFDA approval for its BioMatrix in next 9-15 months.

With US$50 mn cash as of June and its positive free cash flow, the company believes it can pay the US$48 mn convertible bond, which is due in November 2009. We, however, believe near-term fund raising may be inevitable.

With encouraging 1Q10 results, we raise our FY10E EPS by 48%, but reduce FY11E EPS by 28% œ we expect competition to intensify due to the planned 2010 launch of NEVO and Boston Scientific‘s drug-eluting stent (DES) with biodegradable polymer but Biosensors‘ likelihood of being acquired has increased. Maintain OUTPERFORM with but reduce our target price from S$0.90 to S$0.80.

Achieved positive rental reversion with average monthly office rent increasing 5.3% qoq despite difficult operating environment. However, share price overshot potential improvement in outlook for office market. HOLD.

CapitaCommercial Trust (CCT) reported a distributable income of S$48.0m (+30.5% yoy) and DPU of 1.71 cents (-34.2% yoy) for 2Q09, in line with our expectations. Total DPU for 1H09 is 3.33 cents and will be paid on 28 Aug 09.

Generated positive reversion. CCT benefitted from positive rental reversion with average monthly office rent increasing 5.3% qoq to S$8.14psf in 2Q09. In May and Jun 09, renewals and new leases for 139,380sf net lettable area (NLA), or 4.1% of portfolio, were signed with tenants such as Cisco Systems, EIM (Asia) and the European Commission. Rental rates committed were at 45% above previous rental levels on a weighted average basis. Portfolio occupancy remained relatively unchanged at 96.2%.

Completed rights issue. The recent 1-for-1 rights issue was 135.4% subscribed, raising S$828.3m for CCT. Some S$664.0m of the proceeds raised have been utilised to repay borrowings, thus reducing CCT’s gearing from 43.1% to a more comfortable 31.0% as at Jul 09. All refinancing has been completed for 2009. The next major debt refinancing is S$520m commercial mortgage-backed securities (CMBS) under Raffles City Singapore due Sep 2011.

Revaluation results in lower NAV/share. CCT’s portfolio of investment properties was valued at S$6,029.6m based on the latest valuation as at 22 May 09. This is 10.1% lower compared with the valuation of S$6,710.6m as at 1 Dec 08. NAV/share was reduced to S$1.50 after taking into account the 1-for-1 rights issue and the latest valuation, lower than S$2.91 previously.

According to CB Richard Ellis, average prime and Grade A monthly rents declined 18.2% and 17.5% qoq to S$8.60psf and S$10.15psf respectively. Take-up is likely to remain in negative territory in 2H09 as there is usually a time lag between retrenchment exercises and the release of excess office space. However, the pace of rental decline has slowed due to improved sentiments and stabilisation in the economy.

More than half of leases expiring in 2009 have been renewed. About 92% of forecast gross rental income for 2009 is locked-in with committed leases. We continue to expect rents for Grade A office space to correct two-thirds from the peak to S$6psf due to supply coming on stream, especially in 2010. We have assumed portfolio occupancy tapering off from 94.9% currently to 88% by 3Q10. We keep our 2009 and 2010 DPU forecasts relativelyunchanged.

Maintain HOLD as our fair price is close to the current share price. Our fair price of S$0.90 (adjusted for the rights issue) is based on the dividend discount model (required rate of return: 7.7%, terminal growth: 2.5%).

Our recent discussion with management reinforces our view of still challenging times ahead for the luxury watch retailer as sales weakens and rentals creep up again. Maintain HOLD with a fair price of S$0.65.

Between softening sales and higher start-up expenses for new boutiques, The Hour Glass (THG) is caught in a near-term jam, in our view. We recently caught up with its management and received insights on the financial year ahead, a preview of rental expenses this year in view of the opening of two new boutiques in Singapore this July, and how they are looking to manage margin pressure against a challenging backdrop.

Downbeat on IR impact. Management is of the view that there is still uncertainty surrounding a full recovery and that consumers are still cautious on discretionary spending with no visible pick-up in the retail segment at present.

Rental expense is a bugbear. The leases for THG’s three new boutiques were all signed in 2007 when retail rentals were at their peak. Other leases that are up for renewal this year will be subject to rising rentals, offering no reprieve to the situation.

Managing margin pressure in tough times. THG will focus its efforts on controlling end-consumer discount, an area where sales staffs hold a high degree of discretion by implementing profit-sharing schemes rather than abiding by traditional commission structures.

Maintain HOLD, fair price unchanged at S$0.65. Notwithstanding THG’s strong balance sheet, the luxury retail business is vulnerable to weak consumer sentiment and discretionary spending cuts. Maintain HOLD with a fair price of S$0.65, based on 0.8x P/B.

Improving outlook; Upgrade to BUY. We expect Armstrong to be positively impacted by the sequential recovery for its Data Storage and Automotive businesses in 2Q09. We are also forecasting Group revenue and net profit to come in at S$36.5m and S$2.4m respectively in 2Q09, an 11% and 240% jump QoQ. Along with our upward adjustments to our earnings forecast for both FY09 (+26.3%) and FY10 (+25.9%), we upgrade Armstrong to a BUY with target price of S$0.29 (from S$0.18 previously). Our revised TP is based on 10x FY10 P/E, which is the average the stock traded at during recovery periods.

Automotive theme in China burning hot. Further boosted from the stimulus package implemented by the Chinese government in Mar 09 where it was announced that Rmb5b would be spent on rural vehicle sales subsidies, the United States was surpassed by China as the world’s biggest automotive market. In 1H09, total vehicle sales in China had increased 17.7% YoY to hit 6.1m vehicles. Market forecasts are now gunning for total sales to hit at least 12m for the whole of 2009, representing no less than a 28% increment over last year’s 9.38m vehicles. With the Automotive segment accounting for more than 25% of Armstrong’s total revenue, we believe that the company would be boosted by the growth that is expected for the automotive industry in China.

Real demand reviving after restocking in 2Q09. The restocking activity within the electronics industry that occurred in 2Q09 is an open secret with almost all of our industry contacts having experienced this phenomenon. With the hard disk drive (HDD) space expected to improve after having bottomed out in 1Q09, Armstrong’s Data Storage segment would therefore also be given a lift. Management believes that they are currently seeing genuine demand returning beyond the second quarter, with encouraging indicative orders coming through from its HDD clients. Just yesterday, Armstrong’s major customer Seagate released its 4QFY09 results that saw both top and bottomline exceed market forecasts. Seagate also noted of “signs of improved visibility” and upped its 1QFY10 sales forecast.

Raffles Medical (RMG) delivered good 2Q09 results, with 13.8% net profit growth, in line with our above-consensus forecasts. While its operations were affected slightly by the H1N1 virus — with increased operating costs and a 7% decline in local patient volumes at its hospital, we believe its primary care network continues to show resilience with 12% top-line growth. Foreign patient volumes also increased 13% y-y, across a diversified market. We reiterate our BUY rating.

RMG posted 2Q09 net profit growth of 13.8% (1H09: 20%), largely in line with our full-year forecast of 14.0% and above consensus forecast of 6.0%. Revenues grew 6.5% y-y, on the back of strong 12.3% growth in its healthcare services segment (which comprises its primary care network and insurance arm). Hospital services revenue growth remains muted at 4.8% y-y.

According to management, patient load at Raffles Hospital increased 5% y-y, driven by 13% growth in foreign patient volumes across a diversified market. On the other hand, local patient volumes declined 7% likely due to fears of the H1N1 pandemic. Management highlighted that the decline is probably not due to locals switching to subsidised care, as public hospitals too witnessed a similar decline in volumes. Management also guided that patient flows have since recovered this month.

Having opened three clinics this year, management believes the group will continue to expand its primary care network, with a target of five clinics per year on average. While management is aware of the intensifying competition in this space, it continues to be positive on increasing its patient base in this fragmented market through its integrated approach to healthcare.

Management also highlighted that its hospital has the potential to increase its capacity by adding two additional floors to its existing building. In the near term, it could relocate its corporate offices to increase bed capacity, if demand rises. We note that it is currently operating 200 beds of the 380 registered beds.

We reiterate our BUY rating on the stock, with a price target of S$1.30, which implies 23% potential upside. We peg our price target to 16.4x FY10E P/E, which is within the mean of RMG’s historical trading range.

2Q09 results ahead of expectations. Chartered Semiconductor reported its 2Q09 results last Friday. Revenue fell 23.7% YoY (+43.1% QoQ) to US$349.0m but was slightly ahead of our expectation of US$340.4m and its revised guidance of US$338-348m. Net loss attributable to Chartered, on the other hand, registered US$39.4m, reversing its profit of US$43.4m in 2Q08 (US$98.8m loss in 1Q09), but similarly exceeded our estimate of US$50.7m loss and its guidance of US$45-53m loss. Key variances between our quarterly forecasts and the results came mainly from higher revenue, a US$18m favorable impact from a change in depreciation policy (effective from 4Q08), stronger contribution from associates, and a US$8.8m tax benefit from recognition of deferred tax assets for Fab 3E's unabsorbed wear-and-tear allowances and tax losses. For 1H09, we note that revenue totaled US$593.0m (-29.9% YoY, -27.3% HoH), making up 46.9% of our FY09 sales projections, while net loss reached US$138.2m (2Q08: US$45.8m profit, 1Q09: US$138.4m loss), or 55.6% of our full-year loss figure.

Communications and computer sectors to drive 3Q09 growth. As Chartered progresses into 3Q09, it is seeing healthy sequential growth in its business, driven mainly by the communications sector and computer sector to a lesser extent. Based on the current outlook, the group is expecting its 3Q09 revenue to hit US$382-394m (up 9.5-12.9% QoQ) and its net loss to narrow to US$17-27m. Its utilization rate, likewise, is expected to improve to 67-73% from 60% in 2Q09. In order to capitalize on the momentum seen in its leading-edge technologies and customer engagements, Chartered is also increasing its FY09 capex to US$500m from US$375m as guided previously. We understand that this additional capex will be used to increase Fab 7's capacity to 31,000 12-inch wafers per month by 1Q10, although it is not expected to add significant capacity this year.

Reiterate SELL. We have revised our FY09 sales forecast upwards by 7.7% to take into account of the better outlook. While it is without doubt that Chartered has been making significant improvements in its business operations and financial position, we believe that the group may only reach its breakeven utilization of 75% in 2Q10, as opposed to 4Q09 as expected by management. At current price, the stock also seems to have run ahead of its fundamentals. As such, we keep our SELL rating for now, but revise our fair value upwards from S$1.40 to S$1.46 (0.6x FY09F NTA) on better earnings forecasts.

the company’s automotive business is seeing strong demand due to the the China government’s stimulative efforts in boosting domestic demand for cars by way of lowering purchase taxes and provision of subsidies. These efforts have resulted in a strong 20-25% growth in China’s automotive market in 1H2009, helping them surpass US as the world’s largest automotive market;

Armstrong is gaining traction via higher volumes from existing customers and products in the automotive market as well as a number of new projects and products such as a new back seat project using a new technology for Volkswagen which provides higher profit margins and a new air flow part that is lower cost but better performing, helping them to boost margins;

the political tension between China and France over Tibet which had negatively impacted Armstrong’s automotive business with Dongfeng Peugeot-Citroen Auto in China last year is water under the bridge as management said that volumes have started to ramp up to normal levels again in 2Q ‘09;

the hard disk drive component business which was negatively impacted late last year and early this year due to severe and sudden cut back in orders is expected to benefit from the strong recovery from Seagate and Western Digital as they rebuild inventories in the channels to meet the strong recovery in demand from the PC and notebook sectors, evident from Intel’s recent stronger than expected results and outlook. Besides, Armstrong’s 2 major customers are expected to continue to gain market share from their Japanese and Korean competitors;

at 6-9x forward and prospective PE, valuation is below its historical average of 10-11x, and its 5-6% div yield and 1x price to book should provide downside support.

Five of the S-REITs under our coverage reported results last week. Three of the five results were above our expectations. Some of the REITs are still enjoying positive rental reversions, albeit at a lower rate than previously achieved. There have been further slippages in occupancy but many managers have countered that they were still better than the market average.

Guidance ranged from cautiously optimistic to just cautious. Generally, the managers agree that the external environment seems to be showing signs of stabilizing. But there is still variance in terms of manager expectations of the impact on 2H CY09 earnings. We note that the tone seems to be differentiated by sector ? for instance, Ascott Residence Trust ? which tends to be feel the first impact of macro directional changes ? seems to be (relatively) the most optimistic about 2H09 performance. Mapletree Logistics Trust, on the other hand, was far more cautious saying that despite some stabilization in the economic environment, in 2H09 "the environment remains challenging and occupancy and rental rates may be under pressure".

We like CCT and ART. We upgraded Ascott Residence Trust to a BUY last week and we are maintaining our BUYcall on CapitaCommercial Trust as well. Generally, we are seeing signs that the macro picture is bottoming out while the credit markets also seem to be unclogging. For Frasers Centrepoint Trust and Mapletree Logistics Trust, we feel their future DPU growth path is still a question mark ? pricing and financing is the big unknown for acquisitions.

Earnings adjusted upwards. We increased our FY09F & FY10F distributable income estimates for four out of the five S-REITs (namely CapitaCommercial Trust, Ascott Residence Trust, Mapletree Logistics Trust, and Frasers Centrepoint Trust). We still expect negative rental reversions for most REITs. In terms of valuation, we have also made some adjustments to the discount applied to our RNAV or SOTP value for the REIT as well as the discount and cap rates used.

We believe Venture’s recent outperformance (up 16% in the last week versus the market’s expectation of up 8%) has been driven by data ratifying a strong rebound in Singapore’s electronics output in 2Q, coupled with improved optimism in tech demand.

We earlier highlighted that 1Q09 would have been the quarter with lowest profitability for Venture, with QoQ improvement for the rest of the year. Despite core profits declining 40% YoY, consensus EPS downgrades have abated, with upgrades observed in FY10E. Similarly, a marginal improvement in sales outlook for 18 of Venture’s clients provide more positive read-through from FY10E.

With Venture’s strong free cash flow-generating profile implying our dividend assumptions are intact, potential write-backs from S$157 mn in marked-to-market charges on its CDO portfolio, now at 6% of face value, raises probability of a higher dividend payout.

We will review our forecasts upon 2Q09 results, expected after market on 7 August. We roll-over our target price to S$9.25 (from S$7.90). Despite the recent climb, profitability is looking up, and Venture looks attractive on 11x P/E, at 1 std dev below its five-year mean.

Mr Kenny Yap, Chairman of Qian Hu Corporation Limited has a long held conviction of the resiliency of the ornamental fish business, even during an economic recession. This belief is now proven true as QH reports stable financial results for the 1HFY09. Revenue for 1HFY09 is $46.9 million (+0.6% yoy), net profit is $3.1 million (+10.4% yoy) and EPS for the half year is 0.73 cents. On a quarter basis, revenue is $23.7 million (+0.6% qoq), net profit is $2.6 million (+10.1% qoq) and EPS is 0.39 cents.

Product segments analysis. Revenue make-up remains fairly consistent. Sales of ornamental fish continues to be the biggest contributor at 51% to total revenue, Accessories sales contribute 39% while the plastics segment account for the remaining 11%.

Profit margins. QH has placed conscious emphasis on containing cost in the previous quarter and the result is evident in the improvement of net profit margin from 7.25% in 1QFY09 to 8.58% in 2QFY09. As can be seen from exhibit 4, the accessories and plastic segments have shown general improvement in operating efficiency. The plastics segment has shown significant improvement through cost-saving measures implemented. We expect the accessories segment profitability margin to stay within a range of 5-10%. The new Chennai JV may put some pressure on the margin during the start-up phase. Ornament fish‘s profitability margin has decreased generally compared to FY08. The reason for variability lies in sales of QH self-bred Dragon fish vs externally-sourced Dragon fish. We expect the margin to improve as the breeding facilities in Malaysia becomes productive in 2HFY09 and also the schedule completion of the new ponds in Singapore in another 2-3 months should also add to the profitability. However we expect the Singapore facility to start contributing only in FY10.

Future plans. The focus for QH is to achieve equal revenue contribution from the fish segment and the accessories segment. QH believes there is still huge potential for the accessories segment as it currently exports to only approximately 30 countries compared to more than 80 countries for the fish segment. The execution QH is adopting is through strategic overseas investments. QH has demonstrated its intention through the investment in Arcadia and also the Chennai JV.

Valuation and recommendation. We revised our growth assumptions and forecast a 5-year CAGR of 3%. In our opinion, we classify QH as a stable growth company. We raise our DCF derived fair value from $0.15 to $0.17 which translate to 12x FY09F earnings and 1x FY09F book value. Maintain our Buy recommendation.

2Q09 to see strong sequential rebound. We expect Singapore tech companies to report positive, if not stronger than expected, numbers this upcoming result season. Excluding Chartered, which is expected to narrow losses to US$48m in 2Q09 from US$101m in 1Q09, we expect earnings growth of 13% q-o-q although still a contraction of 47% y-o-y. Operating margins should also get a q-o-q boost, even if minor, as the cyclical rebound coincides with benefits of extensive cost reductions since last year end.

Further growth expected in 3Q09 albeit slower; 2H09 >1H09. Taking cue from Intel, we expect companies to guide positively for 3Q09 and with higher conviction into the second half, as customers¨ build up plans reflect ramping ahead of the buying season and continued strength in China. As the economic recovery continues, tech companies are likely to see, by 4Q09, the first quarter of y-o-y growth, considering the low base in 4Q08.

Risk is weaker than expected sellthrough in 3Q09, which would then result in a drop in orders for 4Q09. However, as long as device makers remain cautious in their seasonal buildup considering fragility of economic recovery, the chance of a massive inventory glut is low.

Scope for catalysts and cheap valuations. Besides reasonably good upsides to our fair value target of S$3.50 (67% upside) and S$9.40 (17%), Chartered has an M&A catalyst from market talk that Abu Dhabi is eyeing Temasek¨s 62% stake in Chartered whereas Venture has an added bonus from a probable CDO writeback at year end, which enhances the likelihood of a special dividend on top of the usual 50ct DPS. For small caps, we like Meiban (6 P/E, 0.6x P/B, 8% yield) and Broadway (>4x P/E, 0.4xP/B, 5% yield) for their compelling valuations.

Chartered (Buy, TP: S$3.50) is a good proxy for early tech recovery. We are positive on Chartered Semiconductor in anticipation of positive quarterly results and it is also the cheapest among top three foundries globally. There is also an added M&A bonus for Chartered; it is rumoured that Temasek is considering a takeover bid for its 62% stake from Abu Dhabi.

Venture (Buy, TP: S$9.40) remains a champion for solid quality long term growth. Unlike its typical EMS peers, Venture’s focus on the ODM business, which accounts for 35% of FY08 sales from 25% in FY07, enables it to post above-industry margins. Although near term profitability has taken a hit as Venture undertakes full configuration for its key customer, it is not a sign that the company’s focus on margin has gone astray. Rather, full turnkey is the “last mile” solution necessary to complete the total value chain management, which would then enable Venture to strengthen customer alliances and stickiness in the long haul. Meanwhile, Venture persists to expand its ODM offerings and has embarked on new ODM platforms with strategic customers. We are confident Venture’s relentless pursuit of high value business will eventually drive core net margins to long term target of 6-8%, compared to industry average of 1-3%.

Hi-P (Buy, S$0.79) still riding high on smartphone but 2Q09 would be subdued. We expect Hi-P’s operating performance in Q2 to be lower q-o-q because some wireless products have reached end-of-line, but new platform is not ramping until 3Q09. Beyond Q2, new orders from RIM, Apple and HTC in the coming months would boost 2H09 results. We are positive on Hi-P’s medium term prospects, considering a rationalized cost structure and its smartphone exposure. We have revised TP to S$0.79 as we roll over our valuation peg to 9x PER ( vs previous peg of –1SD valuation of 7x PER) on blended FY09/10 earnings. Our new target price translates to 22% upside. Maintain Buy.

Meiban (Buy, S$0.35) is an undervalued gem @ 0.6x book with 8% yield. Current valuation of 6x FY09 P/E will be lowered to only 3x if ex-cash per share of S$0.12. Operationally, Meiban expects strong restocking bounce in 2Q and further margin expansion. Thanks to very early streamlining and careful cost management since mid 08, the company’s bottomline is less affected during this downturn. This is evident in 1Q09 results where net profit shrank 18% even though revenue collapsed 40% from a year ago. Our TP of S$0.35 is pegged to mid cycle valuation of 8x FY09/10 earnings.

Creative (Fully Valued, S$3.40) faces a double whammy of losing market share in a downward market. Notwithstanding several new chipsets and video conferencing products, Creative lacks a killer application to differentiate itself in a challenging market. Furthermore, the company continues to lose market share to Apple and Microsoft in the personal digital entertainment market. We do not believe that Creative will return to profitability in FY10, since revenues are unlikely to reach breakeven point. However, with improved working capital management in FY09 and restructuring costs mostly out of the way, we are more positive about Creative’s balance sheet position, going forward. Based on our net cash/ share projection at the end of FY10, we revise our target price to S$3.40 and upgrade the counter to FULLY VALUED.

2Q09 boosted by restocking bounce and margin expansion. We expect Q2 sales to rebound 10% sequentially to S$80m after two quarters of deep and broad-based de-stocking. Notwithstanding improved business, management has not lifted cost control measures, which coupled with operating leverage, would drive margin higher in Q2. Hence, we believe net profit could grow stronger 15% q-o-q to S$3.3m.

3Q09 would be the strongest quarter, based on continued seasonal ramp for key customers. Meiban is a key printer enclosure supplier for HP and contract manufacturer for Dyson vacuum cleaner. Our checks indicated that capacity utilization is running as high as 90%, compared to 70-75% in Q1.

Solid cashflow boost cash. Meiban generated S$11m of free cashflow in Q1 and ended the quarter with S$28.6m (9cts/sh) net cash. Considering a tightened capex of S$7m in FY09, Meiban could potentially grow its kitty to S$38m (12cts/sh) by year-end, giving more scope for special dividend.

Raised forecast, Upgrade to Buy. We have revised FY09 profit forecast to S$13m for improved orderflows and better than expected margin seen in Q1 results. Our new target price is S$0.35, based on 8x FY09/10 blended earnings. Stock is compelling at 6x P/E and only 0.6x book with an attractive yield of 8%. Upgrade to Buy.

New target S$13.35 (from S$8.50) — A tug-of–war between a turnaround in the Singapore economy and weak SIA fundamentals favours a well-supported SIA share price, helped by a "SATS dividend" worth S$1.65/SIA share. While we expect a June quarter operating loss to provide a reality check, we concede that SIA will remain above book value; and we re-benchmark our target to S$13.30 (1.1x FY10E P/B), raising FY10E EPS 60% to S$0.54, ROE 4.6%, on lower costs/higher traffic forecasts. We maintain our Sell ahead of June results but concede that SIA could be pulled up if the market recovery continues.

Market sentiment — SIA's 10-yr P/B discount relative to STI ranges from -6% to -34% with a mean of -20%. The discount is at its narrowest at both STI bottoms and peaks, and its widest just ahead of STI mean P/B levels. At a current STI of 2400 (= P/B of 1.47x), SIA at 1.14x P/B (Mar 09 BV/S S$11.78) trades at a 22% discount. History suggests that SIA shares tend to recover at inflexion points for passenger traffic growth, loads, and passenger spread vs break even, but rising oil/fuel prices as in 2004-06 delayed SIA price recovery.

Fundamental reality — June passenger traffic fell 18% YoY, up from a 23% YoY fall in May, marking a possible inflexion point. Load factor rose to 76% from 67%, reflecting a typical June seasonal traffic pick-up, plus efforts to cut capacity. However, overcapacity, higher QoQ jet fuel (June qtr US$67/bbl vs. March qtr US$55/bbl) and yield pressures may have lifted passenger/cargo breakeven loads above the 77%/75% in March 2009. Actual loads of 71.6% and 60.6% respectively suggest SIA may again report quarterly operating losses in June.

Move comes despite gross cash of S$1.4b in hand as at 1Q09. STE announced the issue of US$500m (S$725m) 10-year 4.80% bonds - part of the US$1.2b multicurrency medium term notes programme announced previously. The yield to maturity of 4.876% is about 150 bps above current 10-year US Govt bond yields and is about at par with STE＊s effective interest rate of 4.90% for FY08. This note issuance can largely be interpreted as a pre-emptive move by STE to diversify its funding sources since STE already had about S$472m in net cash and cash equivalents as at the end of 1Q09.

Strategic acquisitions likely to follow. The increase in interest costs will impact bottomline by about 2% in FY09 and 4% in FY10, in the absence of any income accretive acquisitions. However, that assumption may not hold. While we do not have clear visibility, we believe this move is geared towards enabling new M&A opportunities to propel growth in the near future. In the process, management has also locked in fixed interest rates instead of rolling over existing debt at potentially higher rates, going forward.

Re-rating to come on the back of renewed growth. While the stock is currently trading at 5.6% FY09 dividend yield, we expect that share price performance may be limited in the short term by concerns related to i) the usage of funds, and ii) dividend sustainability. But re-rating should be on the cards if management delivers on accretive acquisitions. With no significant acquisitions over the last 3 years, and with earnings starting to flatten out, STE needs to deliver on its growth trajectory before re-rating can occur. As such, we are neutral to slightly positive on the developments, pending further clarity. Maintain HOLD, TP S$2.50 (18x FY09 EPS).

The Singapore-listed real-estate investment trusts (S-REITs) in the industrial space are due to be among the first to announce their 2Q09 results, from 17 July.

We expect minor (0.6-2.6%) quarter-on-quarter declines in net-property income (NPI) arising from a slight uptrend in overall vacancy rates and a more challenging leasing environment (for renewals).

We expect year-on-year declines in their distribution-per-unit (DPU) due to equity fundraising for Ascendas REIT (AREIT) and Mapletree Logistics Trust (MLT), and higher borrowing costs for Cambridge Industrial Trust (Cambridge).

We believe the implied trading yields (implied cap rates) of 8.1% for MLT and 10.9% for Cambridge (based on our estimates) are attractive relative to the cap rate of 7% for Singapore industrial properties. From this perspective, AREIT is unattractive, at an implied trading yield (based on our estimates) of about 6.6%.

We maintain our Negative rating for the industrial segment, and our 4 (Underperform) rating for AREIT, which we believe continues to trade at an excessive premium (at a price to NAV of 0.94x) to the sector and its industrial peers.

We believe the biggest risk to this segment is the relentless decline in asset values, down 7-11.3% QoQ for 2Q09 and in line with similar quarter-on-quarter falls for industrial rents, according to Jones Lang LaSalle.

We maintain our 3 (Hold) rating for MLT as we believe it offers reasonable value, but little else now that its acquisition-growth model has stalled.

Our top pick in this segment is Cambridge, 1 (Buy) rating, for its attractive valuations and, in our opinion, highly defensive lease-renewal profile. We believe a positive price trigger for Cambridge would be a well-timed asset disposal that would help reduce gearing.

2Q FY2009 results. For 2Q FY2009, M1 reported operating revenue of S$190.5m (-7.2% yoy), profit before tax of S$45.0m (-11.4% yoy) and net profit of S$37.1m (-9.7% yoy).

There are four main revenue segments: telecommunication services, international call services, fixed network services and handset sales. Telecommunication services registered 7.7% decrease in revenue to S$141.6m. Postpaid revenue fell by 8.5% to S$124.0m while prepaid revenue decreased by 2.2% to S$17.5m. Moreover, international call services posted 13.7% drop to S$32.8m while handset sales rose by 12.2% to S$15.6m. Fixed network services was a new segment that contributed revenue of S$0.5m.

Operating expenses also decreased to S$144.1m (-5.6% yoy) due to lower staff costs, facilities expenses amd provisions for doubtful debts. M1 benefitted from the Jobs Credit Scheme, paid lower bonus and hired fewer staff.

Therefore, net profit decreased due mainly to lower revenue despite lower operating expenses.

Profit margin. Net profit margin decreased from 22.5% in 1Q FY2009 to 19.5% in 2Q FY2009 due mainly to higher operating expenses. Based on a year-on-year comparison, it fell from 20.0% in 2Q FY2008 due to lower revenue.
Increase in number of customers. M1 saw an increase in the number of prepaid and postpaid customers from 740,000 and 879,000 in 1Q FY2009 to 783,000 and 886,000 in 2Q FY2009 respectively. Its market share for the prepaid and postpaid segments has changed from 23.9% and 26.8% in 1Q FY2009 to 24.5% and 26.5% in 2Q FY2009 respectively. We are concerned as M1 continues to lose market share for the postpaid segment. This is because M1 does not have Pay TV and is unable to offer bundled services to customers.

Outlook for FY2009. M1 expects 2009 to be a challenging year due to the global financial crisis. However, it expects the net profit for 2009 to be comparable to 2008. Moreover, its dividend policy for 2009 is to pay 80% of net profit after tax as dividend.

Maintain Hold with fair value at S$1.67. We keep our hold recommendation on the stock because M1 has a limited focus on the domestic market and does not have Pay TV services. As M1’s net profit of S$37.1m only came in 3.6% below our expectation of S$38.5m, we maintain the target price at S$1.67 based on our valuation using the free cash flow to firm model.

All in one. FCOT is proposing a recapitalization package involving a S$213.9m 3-for-1 rights issue to largely pare debt, refinancing up to S$675m loans and acquisition of Alexandra Technopark to be funded using convertible perpetual preferred units and backed by a 5-year master lease agreement. The end result of a much lower gearing of 38.5% and an improved interest cover of 2.7x, both which are well within covenant limits, would put the reit on a much stronger financial footing.

Purchase of ATP a stabilizing factor. Furthermore, the acquisition of Alexandra Technopark is earnings accretive and will result in greater income stability and lower forex exposure for FCOT. The reit¨s portfolio will be more Singapore-centric with 59% of assets situated locally while strong underlying master leases will mean that 74% and 65% of gross rental income at the start of FY11 and FY12 are secured, leading to better income visibility.

Near term DPU dilution but stock valuations already pricing in implied distressed prices. We estimate FCOT¨s FY09-10F DPU to be diluted by 35-64% to 2.2cts and 1.2cts and book NAV lowered 60% to $0.26. We believe investors should look beyond the near term DPU dilution to the underlying value of the reit. The TERP of $0.131, calculated based on the last closing price on the date of announcement, is at 0.50x P/adjusted book NAV and implies distressed valuation pricing to the underlying asset value. Our TP of $0.12 is based on discounting income from existing properties, which are supported by inbuilt organic rental growth structures and adjusted for the rights issue but before CPPU conversion. In the longer run, potential rationalization of the Japanese properties and value enhancement possibilities of the Singapore assets due to their proximity to new MRT stations of the upcoming Circle Line would create further value within the portfolio.

Recapitalisation and refinancing woes peaking; signs of operating stability. We believe that capital raising for the SREIT sector has now peaked. Refinancing risk is abating on improving credit markets and as the bulk of debt maturing this year has committed funding. We expect steady 2Q results later month, with signs emerging that the sharpest declines may now be past. The sector is now yielding 8.4% for FY09E, implying an above average 570bps spread over the risk-free rate. Buy AREIT and Suntec REIT.

Balance sheets strengthened; initial signs of credit market recovery. The REITs have raised S$3bn YTD, which will lower avg sector gearing to 28%. Cash calls are likely to slow. Smaller REITs with above-average gearing (MIREIT, Saizen) or those positioning for acquisitions (CRCT, ART) remain candidates to raise capital. We estimate that ~S$0.8bn of debt maturing in 2H09 requires refinancing, and this increases to S$2.3bn in 2010. The availability of credit from banks has improved, as seen by recent refinancing deals. Lending spreads (while still elevated) have stabilized or even tightened. Issuance of notes under MTN programmes has picked up again, but still in relatively small tranches (S$20-70m).

2Q results likely to be steady with signs of improvement at the margin. We expect generally steady 2Q operating results later this month with flat to positive lease reversions. Some revaluation deficits are likely to be reflected. Our channel checks suggest some modest improvement over the past 2 months. The pace of deterioration in office rents has moderated (JLL estimates 11% fall in 2Q Grade A rents to S$9.50psf vs. a 28% decline in 1Q) with a pick-up in leasing deals and tenant enquiries. Retail sales and visitor traffic for CMT's malls have picked up in April/May as consumer confidence improved. Industrial landlords have also seen enquires recovering slightly and the rental deterioration slowing. We expect the sharpest declines for office rents, and retail/industrial to be more resilient.

Acquisition and asset enhancement growth relatively muted. We do not expect acquisitions to return until next year, and most asset enhancements are likely to remain deferred. Comments from REIT managers suggest there are few distressed assets available in Singapore. Asset yields are likely to edge up as competition for assets diminishes and funding costs still remain elevated (3-year SOR is 2.1% and spreads are 250-300bp).

Top picks AREIT, Suntec; risks. S-REIT yields have compressed sharply after the re-rating and dilutive cash calls, but still offer an above average spread. We expect shareholder returns to be underpinned by relatively stable dividends and a normalizing yield spreads. The SREIT sector is currently yielding 8.4% CY09E and 8% CY10E, and trading at avg 0.6x P/B. Despite the recent spike in long bond yields, implied FY09E spread of 570bps is still significant and above historical avg. We continue to like AREIT for its defensive, well diversified portfolio and development capability which we view as a key competitive advantage as well as Suntec for its undemanding valuations. We value the REITs using a DDM methodology. Risks: refinancing and recapitalization, prolonged economic slowdown affecting leasing demand, competition from new supply.

A buzz is being generated by the opening of Marina Bay Sands (MBS) and Resorts World at Sentosa (RWS). In this report, we explore the potential economic implications and, in the process, identify the gainers and losers. We expect this theme to play out in 2H09.

Our recent meetings with the management of Genting and Las Vegas Sands have reinforced our optimism on the potential spin-offs from the two integrated resorts. We believe these two behemoth developments will bring good fortune to Singapore. To start with, the resorts complement one another: MBS targets business travelers while RWS targets families. Second, Singapore’s excellent connectivity and close proximity to a growing regional gaming market is one big plus. Third, China’s travel restrictions to Macau and Singapore’s much lower gaming tax regime could make Singapore the ‘destination’.

Property markets in Macau, Sydney and Melbourne enjoyed a multiyear boom following the liberalization of gaming. History could repeat itself in Singapore, albeit in a moderate manner. We think the benefits will be contained at the high-end segment, with inflows of high-net-worth money. Hawkish measures will limit any price run-up in mass-market homes. The government needs to ensure mass-market homes remain affordable. As such, high-end property developers like SC Global and Wheelock stand to gain more than mass-market property developers.

Tourists are expected to come in droves, filling up hotel rooms as more attractions are added to the skyline. Hoteliers – CDL Hospitality Trusts, Hotel Properties, Pan Pacific and Fragrance – and SIA stand to gain. Budget hotel operator Fragrance could see more bookings from cost-conscious travelers. Interior designer Kingsmen, which specializes in the design and production of exhibits for conventions, could participate in some of the international conventions that could come to Singapore. Consumer names like Breadtalk and FJ Benjamin could see brisk sales.

The remaking of Singapore is set to attract more tourism revenues, auguring well for the retailers. However, this will be offset by an influx of retail space (+20% by end-2010) that could exert downward pressure on retail rental.

Much hope is pinned on Petrobras contracts, as rig contract flow from drilling contractors will likely remain weak. No respite in the slide in global jack-up utilisation. Our contract win assumptions for Keppel Corp (Keppel) have already factored in potential contracts from Petrobras, which historically were low margin and carried higher cost over-run risk.

Jack-up utilisation weakens further in July. In the US Gulf of Mexico (GoM), competitive jack-up utilisation weakened to 28% in July from 38% in June. A year ago, utilisation was 77%. West Africa and North-West Europe also saw weaker jack-up utilisation in July. SE Asia & Australia region’s utilisation appears to be stabilising.

Lower floater utilisation in SE Asia & Australia, but utilisation in other regions is holding up. In contrast to the jack-up market, the floater (semi-submersible rigs and drillships) market is healthy with a competitive fleet utilisation of 90% or above in most regions (the lowest is 85% in South-East Asia & Australia region and the highest is North-West Europe’s 95%). With a strong wave of 26 and 35 newbuilds to hit the market in 2009 and 2010 respectively, it remains to be seen whether fleet utilisation can remain at the current high levels.

85% utilisation the trigger point for rig newbuild orders. Ytd, Keppel has only managed to secure S$330m worth of new contracts (2008: S$5.2b; 2007: S$7.4b). This level of contract wins is below our S$2b forecast for 2009. If contract wins remain at current low run-rate, orderbook and hence, earnings will deteriorate rapidly. SMM has faired better with contract wins of S$945m ytd (2008: S$5.6b; 2007: S$5.4b). Jack-up orders are unlikely to return any time soon, while a lot of hope is pinned on Petrobras’ spending on deepwater rigs.

Awaiting Petrobras’ capex. Bloomberg reported on 8 July that Petrobras is set to receive bids from five groups competing US$4b (circa S$6b) in contracts to build the eight hulls of FPSO vessels to be used in Brazil’s pre-salt oil fields. Keppel FELs, a subsidiary of Keppel is leading one of the groups which will likely submit their proposals between 17 and 31 July and Petrobras will open the offers on 31 July. Petrobras aims to start operating the vessels in 2015 and 2016.

Intense competition. Separately, Petrobras will need 28 more drilling rigs (semi-submersible rigs and drillships) over the next five years (5-6 per year) as part of its expansion. Competition will be intense. Of the 12 rig contracts awarded by Petrobras in 2008, only one was secured by Singapore. South Korean shipyards benefitted the most as most of the contracts were for drillship newbuilds.

Lower margins. Petrobras is now preparing to issue tenders in 3Q09 requesting the provision of as many as 7-8 newbuild floaters for contract start-up from 2013, according to ODS-Petrodata. We estimate shipyard contracts could total US$5b-6b (circa S$7b-9b). However, history has shown that for shipyards, Petrobras projects typically have a lower profit margin than projects for other customers. This is evident in the EBITDA margin trend of Keppel Offshore & Marine (Keppel O&M), the shipyard arm of Keppel. Petrobras contracts also carry a higher cost over-run risk.

However, our earnings forecasts for Keppel have already factored in S$2b and S$3b contract wins in 2009 and 2010 respectively. Ytd contract wins of S$330m are below our 2009 S$2b estimate. Our forecasts have already factored in some of the potential contract wins from Petrobras. If these contracts do not materialise, there would be earnings downgrading.

Global jack-up utilisation weakens further in July, with US Gulf of Mexico faring the worst as utilisation collapses to 28%. Maintain SELL on Keppel (Fair: S$5.90) but HOLD on SMM (Fair: S$2.60) and SCI (Fair: S$3.20).

Healthway currently has one of the largest network of over 80 clinics in Singapore catering to both Primary Healthcare and Specialist & Wellness Healthcare. The Primary Healthcare segment includes 48 General Practice clinics (Healthway and Silver Cross) and 9 Dentistry clinics (Universal Aaron and Popular), while the Specialist & Wellness segment includes 11 Paediatric clinics, 6 Orthopaedic clinics (Island Orthopaedic) and 3 Aesthetics clinics (Neuglow).

In comparison to some of its healthcare peers in Singapore, Healthway has taken an asset-light approach to growth. We believe this is also a function of its smaller balance sheet at the moment. Most of its specialist clinics under its umbrella are located within other hospitals such Gleneagles Hospital and Thomson Hospital. Management is unlikely to veer away from this approach at the moment unless there are compelling opportunities to invest in physical assets.

Management has plans to increase the number of primary healthcare clinics from 66 currently to 120 over the next few years, while it targets to expand its corporate customer base. A milestone development was its recent 3 year $5.7m contract with the Singapore Police Force. It will also look to extend its specialist medical services beyond the current focus on Paediatrics/ Orthopaedics. On this front, Healthway will launch its first Eye Nose Throat (ENT) Specialist Centre and Nobel Eye & Vision Centre in July, with both located within Mt Alvernia Hospital.

In the longer-term, the Group’s central philosophy is to provide more accessible and affordable healthcare without necessarily being detrimental to corporate profitability. This will be done through a gradual introduction of more standardized procedures and taking the load away from doctors whenever possible. A good example of such a global trend would be the popular lasik surgery where technology and standard procedures have alleviated the work load of specialists.

With the healthy prospects of the Singapore private healthcare sector, driven by factors such as an aging population, increasing population and continued influx of foreign immigrants, Healthway represents possibly another way to play this theme. 1Q2009 revenue was up 46% from $16.2m to $23.7m due to new clinics and better general performance, while net profit was up 154% from $1.5m to $3.8m. Healthway is trading at 11X historical PER.

Mr Terry Clontz has announced his retirement as StarHub's CEO, effective January 2010, but he will continue as Director. He will be replaced by Mr Neil Montefiore, ex-CEO of M1. (Neil left M1 in January this year.) We think StarHub shares could react negatively to the news of Terry's departure. We believe Terry is a very highly regarded and respected CEO and has built a successful integrated business, and the second largest mobile carrier in Singapore. However, we see some operational risks on the horizon: a) national broadband network (NBN) impact on consumer prices and the ability to win enterprise customers; and b) uncertainty surrounding English Premier League (EPL) rights. As witnessed recently in the UAE, EPL ownership rights cannot be guaranteed and pricing is a key factor – Abu Dhabi TV won the rights recently, which were previously held by Showtime Arabia, and before that by Arab Radio and Television Network (ART). We maintain our NEUTRAL rating on StarHub.

Undoubtedly Mr Montefiore brings along with him deep knowledge of the local market and M1’s business, which could see StarHub target its segment more aggressively, in our view. Despite this, we still believe that M1 has an opportunity to expand its product offering in NBN world which could see incremental revenue upside. Execution will not be easy. We maintain our BUY rating – with a dividend yield of 8.3% in FY09F.

We do not expect any significant change in the competitive landscape in the near term. In fact, SingTel remains relatively more competitive. The company has been expanding its new media revenues and IT exposure, and this is likely to remain a focus. While we maintain BUY, our price target is under review.

SingTel: Our 12-month price target is based on our DCF sum-of-the-parts model. We use an average discount rate (WACC) of 9.08% for Singapore and the Optus businesses, with a terminal growth rate of 2.0%. Our discount rates for associates are 10-12%, with terminal growth rates ranging from 2% to 4%.

StarHub: Our DCF-based 12-month price target assumes a WACC of 8% with a terminal growth rate of 1.5%.

Mobile1: Our DCF-based 12-month price target uses a WACC of 8.7%, calculated using an 11% cost of equity, a 4% cost of debt and a terminal growth rate of 1.0%.

Singapore banks report 2Q09 results in the first week of August. Bottom line is likely to be down by about a fifth YoY, although up by 10-15% QoQ, with OCBC and UOB being the best performers YoY and QoQ, respectively.

Expect flat loan books, with DBS growing in Singapore and gaining market share. Margins should be generally flat-to-slightly-down QoQ, as falling deposit spreads (and fewer gapping opportunities) offset gains from better corporate/SME loan spreads.

Fee income should continue to improve, helped by capital market activity. Trading income should hold up to robust 1Q09 levels.

Loan loss provisions are likely to come off towards the 100 bp mark, as asset quality has not deteriorated as much as feared. However, NPLs are rising and banks are indicating a peak in 1H10.

Book values should expand for UOB and OCBC, from the reversal of some mark-to-market losses in 2008.

UOB remains our top pick – it has the best combination of ROEs, valuation and a conservative management.

SIA reported June operating numbers after market close. The numbers are encouraging, with passenger traffic rising +9% MoM (and falling less YoY) and load factors picking up for both passenger and cargo. We think this indicates that the global recession and concerns on H1N1 flu could be receding. The June MoM passenger traffic improvement is also better than that of Cathay Pacific, which still reported 6% MoM decline.

On the negative side, MoM cargo traffic fell again slightly. In terms of yield development, Taiwanese airlines, the only in the region reporting monthly yields, showed signs of rate stabilisation in April and May.

We have raised our target price on higher share prices for SATS share to be distributed. Our new target price of S$15.64 (S$15.07 previously) is a sum of S$14.0 (1.17x forward P/B) and S$1.64 (0.73 SATS at current share price per SIA share). Our target P/B (unchanged) is the mid-point between the historical average and one standard deviation below.

Fabrication contracts now amount to Rmb121.8m. Midas Holdings announced that its subsidiary Jilin Midas Aluminium Industries secured its third downstream fabrication contract (worth Rmb48m) for the provision of fabrication and welding services for large component panels used in metro train trains. The contract is being awarded by repeat customer Changchun Railway Vehicles and is expected to be earnings accretive in 2H09 and 2010.

No changes to earnings forecasts. This new contract is relatively small and amounts to around 3.4% of Midas’ total order book at c. Rmb1.4b. Given that we have already factored in additional contract wins for Midas’ downstream business up till 2010 in our previous report, there will be no changes to our top and bottomline forecasts.

Recommendation. Maintain BUY with price target of S$1.04 assuming it trades up to 18.8x FY09/10 blended P/E. Our target P/E is being derived from applying a 35% discount to its Shanghai listed peers on the basis that the P/E of the Singapore market is presently trading at a similar discount to the Shanghai Composite Index.

CWT, the largest Singapore-based logistics company, is a key beneficiary of the Singapore recovery story. Given its size and financial clout, it is able to set the tone for warehouse rental rates, which is likely to increase in the next 12 months as demand returns. With the economy improving, CWT, which has successfully monetised its assets by selling them to REITs, will also have ready buyers for its facilities. Moreover, valuations are attractive from numerous angles – historical and peers’ P/E (11.9x and 8x respectively), as well as earnings growth (36% CAGR).Initiate with BUY recommendation.

Largest in Singapore and still growing. CWT manages 7.1m sqf of warehouse space in Singapore and abroad. In particular, it has 5m sqf of space in Singapore, making it the largest logistics player. With the sprawling warehouse space it manages, CWT can offer convenience to its clients by having all the goods stored at one location. The dominance of CWT can be seen by the leading position in the various niche areas it is involved in, such as chemical and commodity logistics.

Facilities are fully utilised; potential upward rent revisions. Save for its new mega warehouse, all other facilities are fully utilised and will continue to be in the foreseeable future. We expect rentals to appreciate ~10% over the next 12 months, which augurs well for CWT.

Potential of sale to REITS. When the property market recovers, CWT may sell off some of its warehousing assets to the REITS, thereby monetising its assets for new investments and possibly recognising gains from such transactions.

Initiate with a BUY. Stripping away the exceptional items, FY09 earnings would have increased by 49% over the previous year, attributable to revenue contribution from Commodity Hub and savings from the job credit scheme. We are ascribing a target P/E of 9x to our FY10F EPS, a discount to its 3-year historical average of 11.9x. This works out to a fair value of S$0.66, representing an upside of 33.3%.

Where do we fly from here? We do not expect a broad-based cyclical recovery in 2009 but expect to see a muted recovery from a lower base in 2010. A more protracted downturn is likely as the market continues to adjust to excess capacity, falling premium traffic, threats posed by low-cost carriers (LCC) and the risk of lower traffic resulting from the Influenza A epidemic.

We do not expect operating margins to recover to pre-crisis levels of 10-13% any time soon and that 5-6% margins will be the norm for the next 2-3 years for full service carriers (FSC) such as Singapore Airlines (SIA) and Cathay Pacific Airways (CX). We remain UNDERWEIGHT on the sector and are sellers of all airline stocks featured in the report, except for Air China.

Air China is a BUY and the top pick in the sector. Among FSCs featured in this report, it will be the only one to show top-line growth, given its strong domestic passenger traffic growth (+18.6% ytd). It also has the largest potential for cost savings as domestic fuel prices have declined 50-60% from 2008 levels. The impact on its bottom line will thus be amplified by two factors: higher traffic growth and a simultaneous estimated 10% fall in unit cost for 2009. We also like Air China for its exposure to Beijing Capital International Airport, which is ranked second in the world in terms of passenger traffic throughput.

We are sellers of SIA and CX and now AirAsia. SIA's continued weak traffic numbers in the face of a slight uplift for international peers is our primary reason for maintaining our SELL call. For CX, we are sellers due to its lack of a consistent pattern in traffic growth, high EV/EBITDA valuation and high gearing. Air Asia is a SELL due to its relatively high valuation premium vis-a-vis LCC peers and weak 1Q09 load factors. PE valuations appear low, but this is due to deferred tax write-backs.

Yields could surprise on the downside. In April, American carriers reported a 21.9% decline in yields for the Atlantic region and an 18.0% decline in the Pacific region even as traffic declined just 1.4%. The real story for 2009 is the extent to which yields fall and we sense that deflationary pressure from weak ticket prices remains high in Asia. AirAsia, for example, has stated that ticket prices are likely to fall in 2H09. We believe the market is thus far focusing primarily on actual traffic numbers partly because Asian carriers do not report monthly yields.The impact will be greatest on FSCs that operate out of financial hubs, ie SIA and CX.

Fuel not a major concern at the moment. Both CX and Air China had hedged 40-60% of FY09 fuel requirements as at end-Dec 08, while SIA had hedged 25% as at end-Mar 09. Additional hedges since then would have lowered their effective averages for 2009 and 2010. Ongoing fuel surcharge revisions will defray costs so long as fuel prices do not rise sharply. AirAsia, however, remains exposed to spot prices.

Capacity to expand in 2H09. According to aviation data provider Ascend, fleet strength is expected to remain constant in 2009. What this means is that the previous capacity cuts and retirement ytd will be negated by forward deliveries. Thus, unless traffic growth picks up sharply, further capacity cuts will be required.

We are UNDERWEIGHT on MROs. A leading indicator of a turnaround in the MRO business is when airlines utilise grounded aircraft or increase flight frequencies. That has not happened in either the Asia Pacific or North America. The rate of aircraft parked in the desert has simply slowed down. Even if traffic patterns improve, newer-generation aircraft require less frequent checks and these can be performed progressively, thus cutting manhour billing for airlines and conversely lowering revenue for MRO players. Overhaul and Maintenance magazine has projected industry-wide growth of just 1.4% in 2009.

Following our upgrade of the sector to Overweight in April, the physical market and property shares have gone from strength to strength. Sales not only held up on a m-o-m basis, but prices have moved up from Mar/Apr lows. Since our upgrade, property stocks (FSTREH +29%) have outperformed the STI’s 20% gain. Despite this, we believe the sector still offers upside, as RNAV reflation arising from upward ASP adjustments goes underway. We adjust ASPs up by 20% from 1H09 lows, in line with our economist’s view of a V-shaped recovery. Further improvement in the physical market in line with the economy could provide a catalyst for higher valuations.

Tackling Two Thorny Issues. On the concern of impending residential supply, such numbers were known way in advance and such fear did not put the brakes on the recovery we have seen in the past six months. We believe that yield compression could still result in continued price appreciation even as rents continue to soften. On whether we are heading to a ‘false dawn’, we believe we should not see a short-lived spike unless prices rise beyond economic fundamentals.

Switch from Big-Caps to Mid/Small-Caps. We advocate switching from big-caps to mid/small-caps, which have a higher RNAV exposure to the residential sector, as we continue to remain bearish on the office sector. Our top picks are Allgreen and Ho Bee, though we continue to like CDL for big-cap exposure. Investors with higher risk appetite could accumulate high-end players like Wing Tai and SC Global, on expectation that the physical market recovery will soon filter through.

Direct beneficiaries of infrastructure spending. Governments worldwide have pump-primed their economies to buffer impact of the global economic slowdown. However, the multi-billion dollar capital injections have yet to present substantial direct benefits to companies, save for a small handful like Midas Holdings (Midas) and Rotary Engineering (Rotary), which have both recently won infrastructure-related projects worth about RMB1b and US$700m respectively. The contracts will underpin earnings and serve to tide these companies through a potentially long drawn recessionary period.

Midas: Getting the first tranche. We recently spoke with management and are particularly positive on the recent contract win flurry due to the following: 1) In winning such a large chunk of China's first tranche of railway investments, Midas has filled up its order books for the next two years. This eliminates the uncertainty of "hoping" for a similar quantum of investment in 2010; 2) Its downstream processing efforts have borne fruit with its first RMB73.8m contract. This will further distance itself from any upcoming competition; 3) Focus on high speed trains by the PRC government will act as higher barrier to entry for new players; 4) We have not heard its substantially larger peer, China Zhongwang, winning any contracts to date.

Rotary: Riding on 287bn barrels of Saudi oil. Rotary's estimated US$700m contract win with its JV partner, Rafid Group, puts the Company on a new playing field. The SATORP project in Jubail, Saudi Arabia is touted as a showcase refinery for the nation with its processing capability of 400,000bbl/day. The full-conversion refinery will maximize production of diesel and jet fuels, and will also produce 700,000 tons per year (t/y) of paraxylene, 140,000 t/y of benzene and 200,000 t/y of polymer-grade propylene. With the completion in 2013, Rotary will get stable earnings from this project for the next four years.

Rock solid in unstable times. Contrasted with the uncertain operating environment, along with the still unthawed credit freeze, Midas' and Rotary's net cash positions, good operating cash flows and better earnings visibility in next 2-4 years provide investors a relative safe haven. We have maintained our estimates and BUY ratings for both companies as these infrastructural projects will bring earnings stability. We have upped our fair value for Midas to S$0.90 (prev: S$0.85) based on 16x FY10F EPS (prev: 15x). Our fair value for Rotary remains at S$0.81.

RMG posted strong 1Q09 results, with net profit up 28% y-y on improved cost efficiencies. The healthcare services segment (including its primary care network and insurance arm) grew by 10.8% y-y, confirming its defensiveness amid the downturn. Despite the downturn, RMG is still in growth mode, particularly in expanding its primary healthcare network. The group is taking the opportunity to lock in low rental rates and expand its clinic network, while at the same time focusing on organic growth. It has opened four new clinics in the year-to-date, including an integrated outpatient centre at Tampines One offering specialty services such as O&G and paediatric medicine. In terms of hospital capacity, management highlighted that the group is only utilising 200 beds currently, and could expand up to 320 beds if demand arose.

Management reiterated its conservative stance on pursuing M&A opportunities in the region. The group highlighted China and Southeast Asia (particularly Malaysia) as the key regions of potential opportunity. Management continues to be wary of the regulatory environment in China. It is currently evaluating potential projects in cities like Beijing, with the aim of doing a greenfield project. One challenge is the selection of a local partner, since Chinese regulations cap foreign ownership of hospitals at 70%.

Our price target of S$1.30 (unchanged) is based on a target P/E of 16.4x applied to FY10F earnings, pegged within the mean of RMG’s historical trading range (method unchanged).

We retain our Overweight rating on StarHub after the company announced today (after market close) that its founding President and CEO, Terry Clontz, will retire as the company’s CEO in January 2010. After he steps down as CEO, Mr. Clontz will remain a Director on the Board. StarHub will appointM1’s ex-CEO, Neil Montefiore, as the succeeding CEO, subject to regulatory approval.

We believe this could raise concerns among investors as Mr. Clontz has been instrumental in StarHub’s success in the past 10 years. Having said that, we do not expect any material change in the company’s strategies or daily operations. StarHub could also benefit from Mr. Montefiore’s experience in the Singapore telecom industry, as he has been M1’s CEO since 1996. We also expect smooth management transition in January, especially given that Mr. Clontz will remain on the Board of Directors after he steps down as CEO.

Our Overweight rating on StarHub is based on our view that despite the weak macro environment, the company should be able to maintain its minimum dividend commitment of S$0.18 per share, which translates to an attractive dividend yield of 8-9%.

Singapore’s retail scene is undergoing a major rejuvenation, including the Orchard shopping belt that is worth some $4.4bn. Always the first choice in handling the most stringent retail fit out works for high-end retail boutiques, Kingsmen has garnered contracts for 20 shops out of an estimated 50 high-end boutiques at the ION Orchard.

Kingsmen is also in sweet spot to benefit from the two upcoming IRs. Filled with contracts worth $80m from the Universal Studios, we believe more contract wins are likely, possibly exceeding $100m by year-end. This is in view of a potential retail fit out space of up to 1.26m sqf at the Resorts World, non-mechanical works on the Universal Studios of up to $300m and an expected influx of MICE activities.

Armed with powerful and precious experience of delivering contracts for the Formula One Grand Prix, Orchard Shopping malls and the Integrated Resorts, Kingsmen’s impressive work will gain visibility worldwide. The group’s track record and experience in these high-profile projects will be increasingly sought after in the global arena. This opens doors to boundless opportunities for world-class attractions, particularly in the areas of theme parks, Formula One and the Olympics.

Superior quality of its products and services has enabled the group to derive up to 70% of its interiors revenue from repeated customers, which include world-class brands like Apple, Burberry and Chanel etc. Moreover, its interior division will grow along with the ongoing expansion plans of its blue-chip clients globally. We estimate 30% of Kingsmen’s earnings are recurring, which bodes well for its earnings stability ahead.

While having superior earnings quality and ROE, Kingsmen is trading at a mere 5.9x forward PER and at a sharp discount to peers. Besides offering a timely exposure to the Singapore IRs, Orchard rejuvenation and boundless regional growth, kingsmen has been generous in paying dividends. We estimate a FY09 DPS of 3 cents ~ a yield of 6%. Our conservative forecasts have yet to factor in possible contracts overseas in the area of theme parks, F1 and major events such as the Shanghai Expo. Reiterate BUY.

Key catalyst to share prices is contract flow. Share prices of shipyard stocks - Keppel Corp (Keppel), SembCorp Marine (SMM) and SembCorp Industries (SCI) - may rally on rising oil prices, but the rally is unsustainable if there is no follow through with contract flow. Ytd, there have been only four jack-up rig orders and one tender rig order. There are no semi-submersible rig (semi) and drillship orders. All in all, there have been only five rig orders. This is a sharp contrast to 2008’s 60 rig orders.

Jack-up utilisation is well below 85%, the trigger point for newbuild orders. As evident in the 2003-05 period, rig fleet utilisation needs to cross 85% before shipyards can expect rig newbuild orders, provided funding is available. Jack-up utilisation in most regions collapsed further in 1H09 to very low levels of 40-60% despite rising oil prices. While floater (semis and drillships) fleet utilisation in most regions remains robust at about 90%, there are signs of some easing in recent months.

Utilisation will remain soft as rig fleet expands with newbuild deliveries. The jackup market will see a strong influx of newbuilds – 36 units in 2009 compared with 28 units in 2008 – while the semi market will take delivery of 17 newbuilds this year compared with 10 last year. Jack-up dayrates in most regions have halved since the beginning of the year. Semi dayrates have fared better, but nonetheless have declined 20-40% in some regions.

Hope is pinned on Petrobras contracts. Singapore shipyards stand a winning chance in Petrobras contracts (possibly 7-8 newbuild semis and drillships with US$5b-8b shipyard contract value in 2H09), although not without competition. Contract wins will boost short-term share prices, but a) the low margins of these contracts, b) a long construction period before shipyard profit recognition, and c) upfront cost recognition in variation orders could shift operating margins to a lower level as existing more lucrative orderbooks are progressively completed in 2009 and 2010.

Our sector rating and stock calls remain unchanged. Maintain SELL on Keppel and HOLD on SMM and SCI.

The Tang brothers: Wee Sung and Wee Kit have responded to yesterday’s press articles on the petition to the MAS signed by 10 dissenting minority shareholders of CK Tang, with the tacit support of the SIAS, as follows:

Comparisons with The ION (owned by CapitaLand and Sun Hung Kai and land cost alone of $1.38 bln) and Wheelock Place (owned by Wheelock Properties and valued at $740 mln) are inappropriate as the former 2 have significantly larger built up areas. And more importantly, under Rule 26.2 (a) of the Singapore Takeover Code, a property which is occupied for purposes of the business must be valued at open market value for existing use. In other words, valuing the space at $340 mln based on the “existing use ” method meets with the statutory requirement.

They have no plans currently to discontinue the retail operations of CK Tang in its Orchard Road premises, nor do they intend to dispose of or redevelop these premises, which cover 17,769 sq meters strata floor area, representing 28.3% of Tang Plaza, which is owned by the Tang brothers.

Our stance remains that minority shareholders who believe CK Tang is undervalued at 83 cents per share vs last book NAV of 93 cents, can always choose to remain as shareholders of the company, even if the brothers succeed in pushing the delisting proposal through the EGM on Friday July 17th, given they own just over 87% of CK Tang’s issued capital, (ie the stock gets delisted from SGX) and continue to bet that the “true value” of CK Tang will eventually be realized, like when the Tang brothers decide to discontinue the retail operations / dispose of or redevelop the property.

2Q09 earnings revision — Chartered revised its 2Q09 guidance marginally upwards and now expects US$49mn loss (vs. US$59mn loss earlier) on stronger demand for mature technologies. With evidence of a seasonal demand pick up in 3Q09 and partly driven by new product introduction, guidance for 3Q09 will likely surprise on the upside.

...mid cycle correction likely – Our regional foundry analyst Andrew Lu believe mid cycle correction will begin in 4Q09-1Q10 and degree of correction could be ~10%, higher than consensus expectation of 5-10% qoq sales decline. In such a scenario, CHRT losses would deepen and price appreciation would be further capped. To mitigate risks of a prolonged downturn, CHRT would need to demonstrate its ability to achieve its break-even utilization target of 70%.

M&A catalyst – Chartered has denied receiving a bid from ATIC, the Abu Dhabi investment arm, to buy Temasek’s ~60% stake for ~US$1.7bn (or S$2.40-2.60 per share) but we do not rule out this possibility. ATIC had been perceived as a potential buyer as Chartered’s footprint and technology and customer base fits in well with Global Foundries, which is ~66% owned by ATIC. A potential bid for CHRT will be a strong catalyst for the stock.

Maintain Sell – We raise our estimates by 6-8% and revise our target price to S$1.20 (from S$1.10) based on 0.3-0.5x 2010E P/BV, as we incorporate management’s revised 2Q09 guidance. Chartered reports 2Q09 earnings and 3Q09 guidance on 24-Jul-09 (Fri) morning, Singapore time.

As part of the Temasek stable, Keppel has stated that the group is currently going through a comprehensive review to create and extract more value from its businesses, and that there were no sacred cows, with the possible divestment of operations that are non-strategic to Keppel.

While this is the first time that the group has refocused its businesses, we believe that the divestment of SPC was made under the helm of Keppel’s newly appointed CEO Choo Chiau Beng (previously deputy CEO), is significant given that SPC was part of Keppel Energy, which Mr Choo had earlier headed.

We believe the group will remain in its three core businesses of offshore & marine, property, and infrastructure & environmental engineering, but would look to divest of other non-core businesses, such as its investment in mobile telephone operator Mobile One Asia held through Keppel T&T, and other peripheral investment holdings.

Keppel disposed of its investments in Keppel Tat Lee Bank in 2000, for example, on the back of the banking mergers in Singapore. The sale of its financial services business helped the group to reduce debt and helped fund the privatisation of its marine and shipyard holdings, then held under a separately listed Keppel FELS.

As part of the strategic review, Keppel recently sold its entire 45.5% stake in SPC to PetroChina for S$1.47bn or S$6.25/share, which is at a 24% premium to the last close. As Temasek-linked companies have been often encouraged to retain and nurture key business where they can establish a regional dominance, we believe the synergistic benefits of Keppel’s continuing to hold a majority stake in SPC have diminished because the task of building a regionally dominant oil and gas group through SPC has proved to be an uphill task, particularly given the tough competition and high capital expenditure involved.

SPC’s main asset comprises a 290,000 b/d (14.5 m tpa) refinery (50:50 JV with Chevron) with an average complexity of 5.4. In 2008, it processed 266 kb/d of crude oil at an average of 92% utilisation rate. Apart from the refinery, SPC operates the third-largest retail network in Singapore with a total of 38 retail stations. It also has some trading and commercial marketing operations.

Keppel had highlighted in its press release on the SPC divestment that the group and PetroChina also plan “to explore opportunities in the offshore oil industry and in other areas of mutual benefit as such opportunities become available”. To sharpen focus on its O&M business, we believe there are opportunities for the group to move into existing or new offshore newbuilding investments (ie, offshore E&P-focused shipyards) in China, investments in offshore E&P operations (ie, offshore rig operators) or jointly expanding offshore operations in Singapore and other significant growth areas, particularly in Brazil.

Keppel’s often stated “near market, near customer” strategy has served the group well with its network of 20 shipyards and offices across 17 countries, allowing it to provide timely services to its global customer base. Its S$9.5bn net orderbook for offshore and marine (as at 1Q09), eg, comprises drilling rigs and production vessel contracts, which are being built at its yards in Singapore, in the US, in China and at its key shipyards in Europe. As oil prices recover to capex positive levels, and as national oil companies begin to lead, if not dominate, in developing their offshore oil and gas fields, we believe these strategic facilities will stand the group in good stead to continue to win a leading share of offshore exploration and production contracts.

Keppel’s presence in Brazil, for example, and strong relationship with Petrobras go back to the early 1980s when Keppel Shipyard first performed ship repairs and ship conversions for the Brazilian NOC. The group has a wholly owned shipyard BrasFELS yard, where it achieved 60-70% of local content requirements for major Petrobras projects, P-51 and P-52.

Keppel posted a 9% y-y rise in 1Q09 net profit to S$285.3mn, with its offshore & marine division earnings rising 60% y-y to S$220.2mn, contributing to 70% of group EBIT earnings. Property EBIT earnings fell 40% to S$62mn, while infrastructure earnings grew 177% to S$37mn. We believe the group’s infrastructure business will be a key segment to watch, given the increased contracts and projects undertaken by the group.

In April, Keppel Seghers won an S$518mn engineering, procurement and construction (EPC) contract to build an energy-from-waste combined heat and power plant in the UK. The plant will be completed in 2012, and is the largest privatisation project of this nature in the UK. The new contract, combined with infrastructure division’s two other EPC contracts in Qatar and smaller contracts will likely provide earnings and track record for the group’s environmental engineering business. Keppel Merlimau co-generation power plant, the NEWater plant, Keppel Gas and the group’s soon-to-be completed Tuas incineration plant is expected to provide a base-load of recurring income for the division.

Not a V-Shape Recovery ? A V-shape recovery will require the US, Japan and German production to grow at a very fast rate in the next few months. Even the recovery phase of the US Factory Orders during the early 2000 recession was not really a V-shape recovery. Thus, while we believe that global economy has bottomed out, it is not likely to experience a V-shape recovery. Recovery is likely to be slow and gradual with many pitfalls along the way.

Coal mining ? Coal can be used to generate power and manufacture steel, referred to as steaming/thermal coal or coking/metallurgical coal respectively. Coal is mined commercially in over 50 countries with China being the largest producer of coal in the world, producing over 2.8 billion tons of coal in 2007, or approximately 39.8 per cent of all coal produced in the world in 2007. The second largest producer, the United States, produced a bit more than 1.1 billion tons in the same year. Regional coal companies within our review are currently trading at an average current P/E and historical P/B of 17.9 and 3.5 respectively.

Iron ore mining ? Iron ore is the raw material used to make pig iron, which is one of the main raw materials to make steel. 98% of the mined iron ore is used to make steel. Iron is the world's most commonly used metal. It is used primarily in structural engineering applications and in maritime purposes, automobiles, and general industrial applications (machinery). China produces approximately 770 million tones of iron ore in 2008, accounting 35 per cent of the world's production in that year. Regional iron ore companies within our review are currently trading at an average current P/E and historical P/B of 8.6 and 2.2 respectively.

Molybdenum ? Molybdenum is used to manufacture of aircraft parts, electrical contacts, industrial motors, and filaments, mainly due to its ability to withstand extreme temperatures without significantly expanding or softening. Molybdenum is also used in alloys for its high corrosion resistance and weldability. China produced approximately 59.8 million tonnes or 28 per cent of the world's production, of molybdenum in 2008, ranks 2nd after United States which produced approximately 61.4 million tones of in the same year. Regional Molybdenum companies within our review are currently trading at an average current P/E and historical P/B of 15.2 and 2.3 respectively.

Our review of companies listed in Australia, China, Hong Kong, Indonesia and Singapore commands an average current P/E and historical P/B of 15.8 and 2.9 respectively.

The Government’s clarification on tax on property trading, while clearing the “air” for many according to views picked up by the press this morning, will likely hurt property stocks, which have enjoyed strong gains in recent months on the back of robust new home sales, which can be partly attributed speculative buying.

Of bigger short-term concern however is the likely impact of changes taking effect in January 2010 if implemented: will this lead to “dumping” in the coming months by buyers who are likely to be deemed “traders”.

The new Section 10G states that an individual who disposes of only 1 real property on any date on or after 1/1/2010, and has not disposed of any other real property within 4 years prior to the disposal of the first property, shall not be taxed for any gain arising from such a disposal. There is however no provision for tax loss.

The new rule will also cover (a) options for new property launches; and (b) part disposal of any real property, eg strata units.

The sector has already started to correct before the above development, with the worst hit being Keppel Land, even though it tends to be seen more as an office play than residential, even though it has a one third stake in the massive Reflections @ Keppel Bay. Not surprisingly UIC has been the least affected (down 1%), partly because its 49% rebound was among the weakest. As is Lee Kim Tah, which is 3% off high, which in turn was the weakest 31% above the March low.

Singapore banks have prepared themselves to weather the financial crisis by beefing up their balance sheets. Having survived the financial crisis, their strong capital base is a blessing as it positions them for expansion in Singapore and the region. Gaining market share as foreign banks retreat. Singapore banks did not compete aggressively for market share in the heady days of easy credit in 2007 and 1H08.

However, they expanded market share for S$-denominated loans by 3.2ppt to 58.7% in 4Q08 and 1Q09 after the collapse of Lehman Brothers as foreign banks retreat. There was a noticeable 2.9ppt increase in market share to 20.9% for DBS Group Holdings (DBS) in 2H08 and 1Q09. Oversea-Chinese Banking Corporation (OCBC) lost market share in 2008 but the magnitude is minuscule. United Overseas Bank (UOB) has kept its market share steady at 20.9%.

Credit freeze has started to thaw. Trade flows have started to normalise as availability of trade finance facilities, such as letters of credit and bank guarantees, has improved. Sales of private residential properties by developers have surged with buyers taking advantage of the current low interest rates and availability of the interest absorption scheme. We expect these positive trends to boost lending for general commerce, building & construction and housing loans.

Systemic risk much reduced. Spread for credit default swaps (CDS) of Singapore banks have normalised to about 100bp, a two-third correction compared with elevated levels of above 300bp when Lehman Brothers collapsed in Sep 08. They are at similar levels compared with CDS for sovereign wealth fund Temasek Holdings, which currently trades at 90bp.

Singapore banks are trading at the lower end of historical P/B bands at about one standard deviation below long-term averages. DBS is the most attractive with a P/B ratio at 1.13x, followed by OCBC at 1.42x. We have changed our sector call for Singapore banks from MARKET WEIGHT to OVERWEIGHT after upgrading OCBC to BUY last week. Systemic risk has been reduced, paving the way for valuations to recover to pre-crisis levels.

Singapore banks have prepared themselves to weather the financial crisis by beefing up their balance sheets. DBS, OCBC and UOB have raised a total of S$5.3b through issue of preference shares in 2008. In addition, DBS completed a 1-for-2 rights issue in 1Q09, raising S$4b. Having survived the financial crisis, Singapore banks’ strong capital base is a blessing as it positions them for expansion in Singapore and the region.

Set to benefit from any turnaround in the semiconductor space. Any recovery in the electronics sector should be first felt in the semiconductor space, given that semiconductors are regarded as the frontrunner of the whole technology cycle. Recently, some of the IT market research firms (Gartner, SIA, iSuppli, etc) have upped their forecasts for semiconductor sales in 2009 – this is expected to be beneficial to Chartered. Currently trading at 0.95x FY09 P/B and assuming that it trades up to the industry average of 1.2x FY09 P/B, we have a BUY recommendation on Chartered with target price of S$2.66.
Customers experiencing an improving trend. Several of Chartered’s major customers have upgraded their forecasts recently due to better-than-expected demand. Qualcomm, which contributes more than 10% to Chartered’s net revenue, raised its revenue estimate for 3Q09 by around 9% while Texas Instruments also boosted its top and bottomline forecasts for 2Q09.

Industry peers seeing recovery. TSMC recently revealed plans to increase its capex by 26% and added that the worst is already over for the semiconductor industry while predicting that the decline in global chip sales for 2009 would be 20%, rather than its previous projection of 30%. Similarly, Chartered itself had upgraded its earnings forecast for 2Q09 due to an improvement in its business operations.

Share price may not be reflective of fundamentals. Just only recently, it was rumoured that Temasek had received a takeover offer for Chartered at a price range of S$2.40 – 2.60 per share from a technology investment firm which is in turn fully owned by the Government of Abu Dhabi. While this event ultimately did not materialise, there were further rumours that Temasek had found the bidding price to be too low. Should this piece of news be true, this would indicate that Temasek regards Chartered’s share price as undervalued.

Paragon was revalued on 3rd July 2009 at S$1.98b, 1% below its value in 2008 and 24% higher than our previous assumption in our SOTP valuation. Stronger-than-expected take-up of space at new shopping malls along the prime Orchard shopping belt and impending opening of the Integrated Resorts could be key reasons for minimal value diminution.

Newspaper ads volume, particularly for Display property and mobile phone, had been firm in June. Print ad revenue had only declined 12.7% to-date; with only two months left to fiscal year-end, we maintain our view that that print ad revenue should decline less than previously expected (-25%). As such, we have raised FY09F and FY10F revenues by 6.3% and 6.5%.

According to data from URA, resale units have recently been transacted at between $1140psf and $1355psf in June, compared to the average launch price of $960psf, hence minimizing concerns about potential defaults upon Sky@Eleven’s completion next year. At Paragon, pressure on rental rates upon renewal may be softer based on better-than-expected committed occupancy at high-end retail malls, with rental rates higher than that at Paragon ($30-40psf); ION Orchard (94%; at $20-$80psf) and Mandarin Gallery (85%; at $50-70psf).

SPH’s 3QFY09 result is due on 13th Jul. We are estimating yoy decline in operating profit of around 17%. However, on revised assumptions of a 15% decline in print ad revenue for FY09F and average newsprint cost US$550/ton, our FY09F and FY10F net profit estimates have been raised by 9.5% and 10.5%, respectively.

Our SOTP target price has been raised to $3.90 from $3.46 as we peg the Paragon to market value and raise the value of its core media business due to revised assumptions. Our new target price implies potential upside of 25% from the current price. The stock still offers a prospective dividend yield of 7.8% and normal yield of 6.3% in FY11, excluding development profits. Maintain Buy.

Top small/mid-cap picks are Ezra Holdings (43% price upside) and Mermaid Maritime (60%). 43-60% price upside to our top picks' fair values. While we do not expect a quick recovery in the sector fundamentals in 2H09 given the bottlenecks, there are 43-60% upsides to the undemanding fair values (using normalized early cycle valuation) of our top small/mid-cap picks; namely Ezra Holdings and Mermaid Maritime.

Search for Alpha drives interest in new coverages. There was strong investor interest in our new coverages in June, namely Ezion Holdings [BUY; S$0.76] and Mermaid Maritime [BUY; S$0.85]. We see this as a reflection of an increasingly alpha investment bias.

Cautiously optimistic mood at our Pulse of Asia seminar. The participating offshore and marine companies and institutional investors were more optimistic at our July seminar, vs. the one in January.

Clients' enquiries have returned. The corporates have seen a return of clients' enquiries since April, and believe that some contracts may be awarded from these project pipelines in 2H09. The higher oil price is commonly cited as the reason for this revival of talks with clients.

But, the awards of new orders are still pedestrian. There are only 6 construction/charter contracts awarded to the 7 companies that attended our July seminar since mid April. We are not optimistic on a quick return to huge orders flow in 2H09 despite the project backlog, unless prevailing bottlenecks are removed.

There exist bottlenecks to business expansion. We see wide credit spreads and high supply chain costs as contract award bottlenecks. The credit spreads are restraining offshore and marine companies from pumping money into asset/business expansion, while high supply chain costs are still discouraging clients from converting pipelines into actual orders.

Seven rigs to be tendered out by early third quarter: The news article reported that Petrobras is finalizing a tender of seven rigs by early 3rd quarter. This is on the high end of the 5-8 rigs which was anticipated in Asia.
Ownership of the rigs by Petrobras? The news article indicates that Petrobras is likely to be the owner of the rigs (of at least the initial seven rigs). Given that in the recent past news articles (source: Upstream) have reported that all 28 "new-build" rigs for Petrobras were likely to be leased, this new “ownership structure” could bring in the ‘hesitant' yard owners to come in and set up Brazil-based yards to construct the rigs in the country itself and meet local content needs. Bulk packaged contracts or long term charters could act as an additional incentive. Moreover, Petrobras is likely considering the option of ownership to utilize PBR’s bargaining strengths to achieve overall reduction in equipment costs.

Petrobras to test market for parallel tender for up to four charter rigs which are also to be built in Brazil: It remains unclear from the news report whether the additional four rigs (for chartering) are over and above the 28 “new-build” deepwater rigs. While in recent weeks we have seen news flow (source: Upstream) of PBR needing to charter additional 4 rigs those were not to be new-builds. If these four rigs are over and above the 28 rigs, that would be upside surprise to PBR’s rig requirements.

28 rigs probably to be divided equally between semi-submersibles and drillships: This would be a clear positive for the Singaporean yards especially given the previous tender of 12 rigs wherein only four rigs were semi-submersibles. We see this as major news especially given thatour recent discussions with our Petrobras analyst, Sergio Torres, indicated that no mix was detailed by the company.

Keppel Corp relatively better positioned than Sembcorp Marine: Keppel Corp is relatively better positioned than Sembcorp Marine to win the Petrobras rig tenders given its ownership of BrasFELS as well as potential 70% stake in RioGrande yard (it has been identified to construct the eight hulls of PBR's FPSO program). On the other hand, SMM has no physical ownership of any Brazilian yard yet although it has a partnership with MacLaren Yard and is considering an investment in a yard in the state of Espirito Santo.