17 March 2023: Oversea-Chinese Banking Corp Ltd (OCBC SP), China Traditional Chinese Medicine Holdings Co. Ltd (570 HK), Microsoft Corporation (MSFT US)

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Oversea-Chinese Banking Corp Ltd (OCBC SP): Bank run leads to capital runs away

BUY Entry 12.05 – Target – 12.45 Stop Loss – 11.85
Oversea-Chinese Banking Corporation Limited offers a comprehensive range of financial services. The Company’s services include deposit-taking, corporate, enterprise and personal lending, international trade financing, investment banking, private banking, treasury, stockbroking, insurance, credit cards, cash management, asset management and other financial and related services.
Capital inflow. The recent crisis at Credit Suisse, Switzerland’s second-biggest bank, and the failures of Silicon Valley Bank (SVB) and Signature Bank in the United States have increased concerns of financial contagion on a global scale. Despite measures in place to bail these banks out of trouble by Swiss National bank and the US government, there are still strong bank solvency fears. Some depositors in the Asia region may choose to shift their funds to perceived safer banks in Singapore, which are heavily regulated by the Monetary Authority of Singapore (MAS). The MAS has assured that the local banking system will remain sound and resilient as the banks are well-capitalised and conduct regular stress tests against interest rate and other risks, allowing them to weather potential stresses from global financial developments. Furthermore, MAS has also stated its readiness to provide liquidity to ensure that Singapore’s financial system remains stable and markets continue to function in an orderly manner.
Rate cut expectation leading to refinancing. Due to the recent bank collapses in the US leading to heightened volatility in global financial markets, the Federal Reserve is expected to be more cautious when raising rates. The overall market believes that the Feds will also attempt to decrease systemic risk in the financial sector by reducing interest-rate hikes and start to cut rates by 3Q23, with interest rates expected to peak at 4.75% to 5.00%. With the expected decrease in interest rates, borrowers could refinance their loans which were granted at higher rates.
FY22 results. Group net profit increased 18% YoY to S$5.75 bn, from S$4.86 bn in FY21. Net interest income grew 31% from S$5.86 bn to a record S$7.69 bn in FY22.
Updated market consensus of the EPS growth in FY23/24 is 21.0%/2.9% respectively, which translates to 7.9x/7.8x forward PE. Current PER is 9.5x. Bloomberg consensus average 12-month target price is S$14.44.

OCBC’s P/B is below the 10-year average
(Source: Bloomberg)

(Source: Bloomberg)

TheHourGlass (HG SP): The clock is ticking

RE-ITERATE BUY Entry 2.20 – Target – 2.40 Stop Loss – 2.10
The Hour Glass Limited retails and wholesales watches, jewelry and related products through its subsidiaries. The Company also manufactures watches and invests in properties. Having established itself in Singapore as a premier watch boutique, the Group expanded worldwide. The Group holds exclusive agency and distribution rights to Gerald Genta, Breguet, Daniel Roth, Bertolucci, Burberrys, Christian Dior, Revue Thommen, Hublot and Montega.
Revival of Daniel Roth. Daniel Roth, a Swiss watch brand owned by LVMH, is set to make a comeback as an independent company, with its first new model scheduled to be released in 2023. However, those interested in purchasing the brand’s watches will have to go through The Hour Glass, as they hold exclusive distribution rights.
Post-Covid boom. Last year, there were about 6.3 million visitors arriving in Singapore, a YoY increase of 1,810.5%. China lifted its overseas travelling restrictions in early January 2023, and Singapore is expected to see a spike in Chinese tourist influx this year. In January 2023, there were 931,500 visitors (up 1,529.3% YoY) in Singapore. According to a recent market survey from travel agents in China, Southeast Asian countries are among the top cross-border travelling preferences after a three-year lockdown.
Luxury spending. Despite the challenging economic climate characterized by surging inflation, rising interest rates, and the looming possibility of recession, the demand for luxury goods has remained steady. This demand is largely driven by affluent individuals who have benefited from the recent wealth accumulation and the savings accrued during the Covid lockdown periods. Additionally, the return of Chinese shoppers – the primary source of profits for luxury companies before the pandemic – is expected to bolster the industry, with Chinese consumers saving one-third of their income and depositing 17.8 trillion yuan (US$2.6 trillion) into banks last year.
Retail sales. Singapore’s retail industry, and other service sectors, are expected to reap the rewards of the ongoing revival of leisure and business air travel, as well as China’s decision to reopen its borders. Data from Singapore Tourism Board shows approximately 49% of tourists receipts from Mainland China in 2019 (pre-pandemic) were from shopping. According to the department of statistics Singapore, retail sales on watches and jewellery increased by 13.1% YoY in December 2022 and 10.8% MoM. In 1H23, it expects retail trade to improve by 8% and operating revenue to increase by 2% in the first quarter.
1H23 results review. Revenue rose 18% YoY for the six months ended Sept 30 to S$555.5mn from S$472.4mn. Net profit jumped 35% YoY from S$62.6mn to S$84.6mn, despite higher operating costs.
Updated market consensus of the EPS in FY24/25 is 4.35%/4.17% respectively, which translates to 9.4x/9.0x forward PE. Current PER is 8.7x and the 5 year historical PER is 8.8x.

(Source: Bloomberg)

China Traditional Chinese Medicine Holdings Co. Ltd (570 HK): Health is Wealth

BUY Entry – 4.15 Target – 4.55 Stop Loss – 3.95
China Traditional Chinese Medicine Holdings Co. Limited is principally engaged in the manufacture and sales of traditional Chinese medicine (TCM) through its 12 subsidiaries.
Reformed Healthcare insurance systems. Local governments recently announced reforming China’s healthcare system to improve the use of medical funds and help vulnerable populations like the elderly and those with chronic diseases, which is managed by the China authorities. The demand for and expenses associated with outpatient services are increasing as society develops. More individuals paying out of their pocket for common illnesses would be able to make use to these funds for treatment, hence increasing the demand for healthcare in China.
Better medical and health systems. Chinese authorities has recently issued a set of guidelines to promote the sound development of the medical and health system in the country’s rural areas. The guideline highlighted the application of smart and digitalized technologies and the use of traditional Chinese medicine to allow residents to enjoy access to fairer and more systematical medical services in their vicinity.
A defensive stock amidst a market downturn. The Hong Kong market has been hammered by both a slowdown in China’s economic recovery and banking crisis. Growth, value, and cyclical sectors, as well as other thematic stocks, have been sold off indiscriminately. However, this stock is relatively outperforming the rest as its business is largely immune to inflation and systemic risks. The business driver is the sales volume rather than profit margins.
1H22 earnings. Revenue rose by 41.9% YoY to RMB431.18mn. Gross profit increased by 108.2% YoY to RMB27.41mn. GPM was at 6.4% for 1H22 compared to 4.3% for 1H21.
The updated market consensus of the EPS growth in FY23/24 is 67.7%/24.6% YoY respectively, which translates to 10.7x/8.6x forward PE. Current PER is 13.2x. Bloomberg consensus average 12-month target price is HK$5.07.

(Source: Bloomberg)

Weilong Delicious Global Holdings Ltd (9985 HK): Snacking good time

RE-ITERATE BUY Entry – 11.0 Target – 12.5 Stop Loss – 10.2
Weilong Delicious Global Holdings Ltd is a China-based holding company principally engaged in the production and sales of spicy snack foods. The Company operates in three segments: Seasoned Flour Products segment, Vegetable Products segment and Bean-based and Other Products segment. The Seasoned Flour Products segment mainly includes Big Latiao, Mini Latiao, Spicy Hot Stick, Mini Hot Stick and Kiss Burn. The Vegetable Products segment mainly includes Konjac Shuang and Fengchi Kelp. The Bean-based and Other Products segment mainly includes Soft Tofu Skin, 78° Braised egg and meat products.
Snacking culture. According to David Walsh, SNAC International’s Vice President of Communications, snacking culture has evolved post-pandemic and is expected to continue to grow due to factors like high value, affordable, and fun products. The pandemic has shifted snacking trends towards snacking from home, resulting in an increase in e-commerce and snack shopping. Snacking frequency has also increased, with millennials and Gen Z consumers snacking throughout the day, grazing, and even replacing meals with snacks.
Chinese snacks gaining appeal. The popularity of Chinese snacks is on the rise, fueled by the globalization of cuisine and the ease of online shopping. Chinese snacks are known for their unique flavors, textures, and ingredients, and snack producers are meeting the increasing demand for spicy options with a variety of spice and pepper types. In China, the demand for snacks is also growing due to changing lifestyles and preferences, and online shopping makes it easier for consumers to access a wide range of regional snacks. Chinese snacks are expected to continue growing in popularity globally due to their unique flavor profiles.
Vegetarian options. A wide array of the company’s snacks are of the vegetarian variety appealing to a wider range of consumers such as vegetarians and environmentally conscious consumers. These snacks are often perceived as healthier options to traditional snacks and are also often seen as more environmentally sustainable than meat-based snacks, as the production of meat requires a significant amount of resources such as water, land, and energy. Additionally, one of the company’s most popular products the konjac products which can replicate the texture of meat are cheaper to produce than meat products and can help them to generate higher margins due to their low costs.
Post-IPO prospects. Since their recent IPO, Weilong has been able to gather a lump sum of money that will help to boost their business through more investments in R&D and manufacturing capabilities. Furthermore, with the company being in a defensive sector, they will not be as affected by changes in macroeconomic conditions.
1H22 earnings. Revenue slightly dropped by 1.8% YoY to RMB2.3bn. Gross profit increased by 1.4% YoY to RMB861.5mn. Net loss was RMB260.8mn compared to a net profit of RMB357.6mn in 1H21.
The updated market consensus of the EPS growth in FY23/24 is 538.9%/20.9% YoY respectively, which translates to 20.2x/16.7x forward PE. Bloomberg consensus average 12-month target price is HK$12.85.

(Source: Bloomberg)

Microsoft Corporation (MSFT US): Revolutionary singularity

BUY Entry – 275 Target – 295 Stop Loss – 265
Microsoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates in three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
GPT-4 is the game changer. Recently, the current most popular artificial intelligence application ChatGPT had another significant upgrade from previous 3.5 to 4.0. GPT-4 is “multimodal”, meaning that it can generate content from both image and text prompts. GPT-3.5 is limited to about 3,000-word responses, while GPT-4 can generate responses of more than 25,000 words. GPT-4 can also understand and talke about pictures. According the GPT-4 Technical Report, GPT-4 is even able to score a 5 on several AP exams and ace a “simulated” bar exam, scoring among the top 10% of test takers on the exam. Microsoft had integrated ChatGPT to Bing chat and Azure previously. From text to images, ChatGPT’s evolution is exponential, and soon it probably can process video prompts.
Banks’ losses could be good for the technology sector’s gains. The recent sell-off in the equity market, especially the finance sector, not only eased previous bigger rate hike expectations in the next week’s FOMC meeting but also bring forward the beginning of the rate cut cycle to 3Q23. Rate cut expectations are good for the technology sector.

Fed fund rate expectations

(Source: Bloomberg)

2Q23 earnings review. Revenue slight grew by 1.9% YoY to US$52.7bn, missing estimates by US$450mn. Non-GAAP EPS arrived at US$2.32, beating estimates by US$0.01. The company expected double-digit growth in revenue this year.
The updated market consensus of the EPS growth in FY23/24 is 1.6%/15.0%, respectively, which translates to 28.4x/24.7x forward PE. Current PER is 29.0x. Bloomberg consensus average 12-month target price is US$290.4.

(Source: Bloomberg)

Barrick Gold Corporation (GOLD US): Safe haven

RE-ITERATE BUY Entry – 16.4 Target – 18.0 Stop Loss – 15.6
Barrick Gold Corporation engages in the exploration, mine development, production, and sale of gold and copper properties. It has ownership interests in producing gold mines that are located in Argentina, Canada, Côte d’Ivoire, the Democratic Republic of Congo, the Dominican Republic, Mali, Tanzania, and the United States.
Financial crisis 2.0. Last week, a black swan event occurred in the US banking sector. The failure of Silicon Valley Bank (SVB) marked the second-largest bank failure in US history. The US Federal Deposit Insurance Corporation (FDIC) seized the assets of Silicon Valley Bank on Friday. The bank had $209bn in assets and $175.4bn in deposits at the time of failure, the FDIC said in a statement. The bank run is likely to spread to other regional banks in the US. Fears are crowded now, and investors rush to safe-haven assets such as gold and US Treasuries.
Rate hike pace could slow down or even pause. The SVB failure is attributable to the aggressive rate hikes throughout 2022, which results in the plunge in US Treasuries (UST) and other government-backed fixed-income securities like mortgage-back securities. US banks have hugh amounts of unrealised losses from the these holdings as they purchased when interest rates were near zero (fixed-income prices at high). If the Fed fund terminal rate continues to rise, the floating losses will widen further for banks. Banks either raise more capital or sell UST and MBS at losses. In a nut shell, regional banks are facing a liquidity crunch once withdrawals of deposits accelerate. The crisis could force the Fed to slower and smaller rate hikes or even pause. The probability of 50bps rate hike in the upcoming FOMC meeting this month drops from previous 80% to current 30% after the SVB fails. The dollar index fell from near 105.9 to 104.6 as of Friday.
Better outlook for gold price in 2023. There are several factors impact gold prices, and the key ones are the trend of the US dollars and global geopolitical risk. The broad market has expected that US dollars peaked last year as inflation has been on a downswing. Even though recent macro data such as January CPI and core PCE price were higher than expected, both showed overall prices were declining. The US job market starts showing some weaknesses as unemployment rate rose to 3.6% in February. The market expects Fed to cut rates by the end of after the peak in 3Q23. On the other hand, geopolitical tensions remain high and probably escalate anytime as China-US confrontations are more frequent. Gold is the good old safe haven.

Gold Price and Dollar Index Trend

(Source: Bloomberg)

Mixed 4Q23 results. Revenue dropped by 16.3% YoY to US$2.77bn, missing estimates by US$20mn. Non-GAAP net loss per share was US$0.13. 4Q22 gold and copper production was 1.12mn oz and 96mn pounds, respectively. Gold and copper prices averaged at US$1,728/oz and US$3.81/pound respectively.
US$750mn share buyback. The company authorized a share buyback program of up to US$750mn in 2023, compared to US$1.6bn of dividends and buybacks in 2022.
The updated market consensus of the EPS growth in FY23/24 is 8.8%/24.2%, respectively, which translates to 20.3x/16.3x forward PE. Current PER is 19.5x. Bloomberg consensus average 12-month target price is US$21.6.

Barrick Gold VS Gold price

(Source: Bloomberg)