Yahoo Finance HPH Trust, DFI Retail Group, SIA, REITs and other counters are DBS's top picks on China reopening and balanced Fed
Beyond April, the team is watchful of the seasonal ‘sell’ trend in May following post-ex-dividends.
DBS Group Research’s team of analysts have identified several Singapore Exchange (SGX)-listed counters which include REITs and semiconductor (semicon) stocks as their top picks in April. The team’s selections are based on the refocus on the reopening and recovery of China and Hong Kong as well as renewed interest with the current US Federal Reserve (US Fed) rate hike cycle ending by May.
The picks are Hutchison Port Holdings Trust (HPH Trust) NS8U, DFI Retail Group Holdings (formerly Dairy Farm) D01, Singapore Airlines (SIA) C6L, REITs such as CapitaLand China Trust (CLCT) AU8U, CapitaLand Ascott Trust (CLAS) HMN, CapitaLand Ascendas REIT (CLAR) A17U, LendLease Global Commercial REIT (LREIT) JYEU, UMS Holdings 558, and Venture Corporation (Venture Corp) V03.
China’s reopening and recovery
DBS’s analysts, Yeo Kee Yan, Foo Fang Boon, and Janice Chua, see three reasons to relook at Singapore stocks that may benefit from the reopening and recovery in China.
First, the reopening and recovery play is still in its early stages, with the team adding that the group’s strategist in Hong Kong sees the Chinese recovery story continuing to buttress market performance.
“Other than industrial production and profits, February data releases have mostly been stronger than expected (e.g., both manufacturing and non-manufacturing purchasing managers index or PMI, fixed asset investments, retail and residential property sales).” they say. “Inflation figures stay tame.”
Second, China’s reopening and continued upside to regional travel and tourism offsets slowing growth and financial instability shocks in the Western world.
The recent required reserve ratio (RRR) cut of 25 basis points signals the new administration’s strong commitment to sustaining growth. With the newly appointed Premier Li Qiang pledging to restore business confidence and achieve “around 5%” annual growth this year, the team predicts a gross domestic product (GDP) growth rate of 5.5%.
Third, the team highlights Hong Kong’s equity indices, which have corrected 50% from November 2022 leading up to the rally in January.
“The high-to-low correction magnitude was 17% before Hong Kong equity indices showed signs of recovery from March 20. The upside to our Hong Kong strategist’s year-end target of 24,500 for the HSI widened to 22.5% of the current level,” the team writes.
In addition, Prime Minister Lee Hsien Loong’s recent visit to China, which they believe is set to deepen cooperation between the two countries, may rekindle investor interest in Singaporean companies with exposure to China.
They explain their rationale for each stock pick in the following few paragraphs.
For HPH Trust, the analysts observe a strong PMI recovery. This contributes to their projection of steady earnings growth, high dividend yields, lower gearing ratios by FY2023 ending in December 2023, and earnings looking to recover on a sustained basis above FY2017 levels.
Riding on the retail sales recovery, the analysts say that CLCT reversions continue to be stable at [around] 3%, which is positive for the top line and net property income (NPI). A further upside is expected in 2023, upon completion of enhancement initiatives at selected malls which will garner more than 20% in reversionary rents.
The distribution per unit (DPU) growth for CLAS will be 5% for FY2023, and 11% for FY2024, which are the result of steady daily room rates coupled with longer lengths of stay with the return of Chinese and Japanese travellers.
The analysts say that DFI is well positioned to benefit from Chinese tourist inflow, given its dominant physical health and beauty or H&B (Mannings) store network. They see a substantial profitability upside, given the segment generated just US$94 million ($125.12 million) in operating profit in FY2022 versus its peak of US$330 million in FY2018.
Lastly, the analysts expect SIA’s passenger volumes to climb back to 2019 levels in the second quarter of FY2024, as Chinese travellers contributed to 10%-15% of passenger traffic in 2019. However, they hold the view that passenger yields should remain at elevated levels for some time on the back of revenge travel and measured capacity growth by competitors.
Beneficiaries of a more balanced Fed
For REITs and semicon stock picks which are affected by the movements in the tech sector, the analysts explain that these rate-sensitive sectors may see renewed interest with the current Fed rate hike cycle ending by May.
“Technology and REITs outperformed the benchmark Straits Times Index (STI) when the 2018 Fed rate hike cycle finally paused from December 2018 to June 2019,” they say. “REITs’ yield spreads will also revert to more attractive levels when US/Singapore 10-year yields continue its descent from its recent peaks.”
The analysts caution that prolonged financing costs may still persist and or bite in the absence of rate cuts, but say that they believe that sub-segments of hospitality/retail/industrial should still feature well in today’s environment, with a preference for REITs with forward yields of more than 5.5% and low refinancing risks.
The analysts highlight CLAS and LREIT as their preferred picks, as their estimated cost debt of 2.6% and 2.8% respectively are among the lowest within their sub-segments.
With Nasdaq-listed Micron’s latest better-than-expected guidance, the analysts see an improving outlook for semiconductor stocks. They anticipate that UMS Holdings could see a further upside as the industry gradually recovers in 2H2023, while contributions from new customers help cushion near-term weakness.
Finally, the analysts identify CLAR and Venture Corp given their year to date (ytd) net outflows based on the latest SGX fund flow data, where they’ve demonstrated more resilient operations in a tougher economic environment.
Outlook on STI in May
The analysts have also provided their outlook on the STI moving into May.
According to their April 3 note, the STI correction has ended at 3,094 points , barring the worsening of banking sector instability in Europe and the US.
While the upcoming ex-dividends (XD) dates for banks and and other index component stocks underpin the STI this month, uncertainties over inflation, a global economic slowdown and an end to net interest margin (NIM) expansion for banks keep the rebound in check.
“Beyond April, we are watchful of the seasonal trend (sell in May) in play post XD,” they say.
Meanwhile, the analysts say that Singapore banks should continue their broad sideways trend in the coming months, as they have robust asset-liability management and well-diversified funding and deposit sources.
However the upside is capped by concerns about a peak in sequential NIM improvement in the first half of 2023, uncertain recovery in wealth management income, and asset quality risks.
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