23 October 2023: DBS Group Holdings Ltd (DBS SP), Sunny Optical Technology Group (2382 HK), Lockheed Martin Corp (LMT US)
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Geo Energy Resources Limited (GERL SP): Profit off from seasonality
- BUY Entry 0.260 – Target – 0.305 Stop Loss – 0.240
- Geo Energy Resources Limited is an integrated coal mining specialist. The Company owns and operates coal mines, offers mine contracting services to third-party mine owners, and sells coal to coal traders and export companies.
- War chest secured. The company announced that it has secured US$200mn term loan facilities with an 8.5% p.a. Interest rate and tenor of up to 5 years from Bank Mandiri. The loan is used for potential acquisitions, working capital and other expenditures.
- Re-stocking season coming. China’s economic recovery has been lukewarm since its reopening in 4Q22. However, its coal demand remains resilient as higher electricity consumption is driven by the recovery in the service sectors. Meanwhile, the increasing penetration of electric vehicles also drives power demand higher. Seasonally, 4Q is the peak season of both electricity and coal demand, and hence, power companies start restocking their coal inventories for the coming winter. Accordingly, coal prices are expected to edge up higher.
Indonesia’s coal exports to China seasonality
(Source: Bloomberg)
China port coal stocks
(Source: Bloomberg)
Indonesia 4,200 GAR coal futures
(Source: Bloomberg)
- Attractive dividend yield. Geo Energy has been paying consistent quarterly dividends. The current trailing 12M dividend yield is 24%.
(Source: Bloomberg)
DBS Group Holdings Ltd (DBS SP): SGD strengthens again
- RE-ITERATE BUY Entry 33.10 – Target – 34.50 Stop Loss –32.35
- DBS Group Holdings Limited and its subsidiaries provide a variety of financial services. The Company offers services including mortgage financing, lease and hire purchase financing, nominee and trustee, funds management, corporate advisory and brokerage . DBS Group also acts as the primary dealer in Singapore government securities.
- New feature coming soon. OCBC, DBS, and UOB are introducing a new security feature to lock up customers savings in response to scams in Singapore. DBS recently announced the upcoming roll-out of a new banking account, “digiVault” that will adopt a “digitally in, only physically out” approach. DBS will launch its digiVault feature on their Digital app by the end of November, and will be made available after customers verify their identity physically. Customers will be able to make fund transfers digitally into this new account, but not out of the account.This feature aims to empower customers to secure their funds, reducing the risk of falling victim to scams while maintaining the convenience of digital banking.
- Jumping into the metaverse. DBS Bank is developing a metaverse game called DBS BetterWorld to raise awareness of sustainability issues, particularly global food waste. The game will be available later this year on The Sandbox platform and will allow players to interact with characters, take part in activities, and earn in-game rewards. DBS is partnering with sustainable companies to create the game and is using the metaverse to engage with its younger customers and promote its brand values.
- Largest foreign bank in Taiwan. DBS Bank recently acquired Citigroup’s consumer banking business in Taiwan, becoming the largest foreign bank by assets in the market. The deal effectively doubled DBS’ consumer banking customers in Taiwan and its credit card accounts climbed nearly fivefold. DBS paid a lower premium for the purchase than originally expected, and said the deal would accelerate its consumer business growth in Taiwan by at least 10 years. The acquisition is part of DBS’ strategy to build meaningful scale in its core Asian markets.
Share price and USD/SGD correlation
(Source: Bloomberg)
- 2Q23 results review. Profit rose 48% YoY to S$2.69bn from S$1.82bn in 2Q22, beating forecast. This jump in profit was due to higher interest rates and strong inflow of wealth into Singapore.
- Market consensus.
(Source: Bloomberg)
Sunny Optical Technology Group (2382 HK): A smart recovery
- BUY Entry – 63.0 Target – 69.0 Stop Loss – 60.0
- Sunny Optical Technology (Group) Company Limited is an investment holding company principally engaged in the design, research and development, manufacture and sale of optical and optical related products and scientific instruments. The Company operates its business through three segments: Optical Components, Optoelectronic Products and Optical Instruments. Through its subsidiaries, the Company is also engaged in the research and development of infrared technologies. The Company distributes its products in domestic market and to overseas market.
- Recovery of China’s smartphone market. China’s smartphone market, which has been declining since the beginning of the year, is showing signs of recovery, thanks to strong demand for Huawei’s new 5G phones and Apple’s recently launched iPhone 15 series. The recent “golden week” holiday saw a 15% YoY growth in smartphone sales in China. The global smartphone market also underwent a slight drop of 1% in 3Q23, signalling a slowdown in its decline, and also recorded double-digit sequential growth in 3Q23, ahead of the sales seasons, supported by regional recoveries and new product upgrade demand. Sunny Optical would be able to tap on the recovery of the smartphone market to drive sales to its customers.
- Huawei’s Mate 60 Pro handsets surging sales. Huawei Technologies reportedly sold 1.6mn of its Mate 60 Pro handsets in 6 weeks, despite a slowdown in the global smartphone market. Huawei also saw strong demand for its high-end smartphone renaissance over the same period in which Apple launched the iPhone 15 in mainland China, with its stocks being swiftly bought up as soon as it became available. With Huawei being one of Sunny Optical’s biggest customer for camera modules, Sunny Optical is bound to benefit from the strong demand for high-end Huawei’s products.
- 1H23 earnings. Revenue fell by 15.9% YoY to RMB14.28bn, compared to RMB16.97bn in 1H22. Net profit fell by 66.7% YoY to RMB459.4mn, compared to RMB1.38bn in 1H22. Basic EPS fell by 67.8% YoY to RMB39.99, compared to RMB124.13 in 1H22.
- Market Consensus.
(Source: Bloomberg)
China Oilfield Services (2883 HK): Capturing Oil Demand
- RE-ITERATE BUY Entry – 9.00 Target – 9.70 Stop Loss – 8.60
- China Oilfield Services Limited is a comprehensive oilfield service provider. The Company mainly operates through four business segments. The Drilling Services segment is mainly engaged in the provision of oilfield drilling services. The Oil Field Technical Services segment is mainly engaged in the provision of oilfield technical services, including the logging, drilling fluids and directional drilling services. The Geophysical and Engineering Exploration Services segment is mainly engaged in the provision of seismic prospecting and engineering exploration services. The Marine Support Services segment is engaged in the transportation of supplies, including the delivery of crude oil, as well as refined oil and gas products. The Company mainly operates its businesses in domestic and overseas markets.
- New Contract. China Oilfield Services recently secured a contract to deliver comprehensive onshore oilfield services to an undisclosed major oil company in Mexico, with the contract bring valued at around US$123mn. This contract will be executed through its Mexican subsidiary, signifying a strategic shift for the Chinese company. This shift aims to facilitate a transition from primarily focusing on its drilling business to giving equal attention to equipment and technology in Mexico.
- New jack-up drilling rigs. China Oilfield Services recently announced that the company has agreed to buy 4 jack-up drilling rigs from Dalian Shipbuilding Offshore, at a total contract price of around US$445.3mn excluding tax. This purchase would allow the company to meet its operating needs, enhancing their market competitiveness, and further improve the quality of large-scale equipment.
- Demand for oil to outgrow supply. World oil demand is surging to record levels, with growth being driven by a number of factors, including a rebound in air travel, increased oil use in power generation, and strong demand from China’s petrochemical industry. Demand is expected to rise by 2.3 mb/d in 2023, reaching 101.9 mb/d, according to the latest IEA Oil Market Report. China is expected to account for more than 70% of this growth. Additionally, major oil-producing countries, including Saudi Arabia, also recently announced that they would be extending the voluntary oil cuts to year-end, putting more constraints on oil supply, and driving up oil prices in the near term. Saudi Arabia will be extending its voluntary oil cut of 1mn barrels per day to the end of 2023, and Moscos will be extending its voluntary oil cut of 300,000 barrels per day to end of 2023, with both countries to still review the cuts monthly. Consequently, the cost of oil is anticipated to increase within the market.
- 1H23 earnings. Revenue rose by 24.1% YoY to RMB18.9bn, compared to RMB15.2bn in 1H22. Net profit rose 31.0% YoY to RMB1.46bn, compared to RMB1.11bn in 1H22. Basic EPS rose by 21.1% YoY to RMB28.06, compared to RMB23.17 in 1H22.
- Market Consensus.
Share price and Brent crude oil price correlation
(Source: Bloomberg)
(Source: Bloomberg)
Lockheed Martin Corp (LMT US): Increasing safeguards due to worsening conflict
- BUY Entry – 446 Target – 480 Stop Loss – 429
- Lockheed Martin Corporation is a global security company that primarily researches, designs, develops, manufactures, and integrates advanced technology products and services. The Company’s operations span space, telecommunications, electronics, information and services, aeronautics, energy, and systems integration. Lockheed Martin operates worldwide.
- Israeli-Hamas conflict impact. The Israel-Hamas conflict, which has recently escalated and extended for more than a week, is causing significant regional uncertainty in the Middle East. This heightened conflict raises concerns about the defence industry. It can impact this industry by driving an increased demand for military equipment, potentially leading to higher weapon sales, fostering innovation and technological development in defense, creating export opportunities for nations supporting Israel, and influencing broader geopolitical dynamics that can affect global defense strategies and investments. Conflict situations often stimulate growth and innovation in the defence sector, with potential ripple effects across the industry. Israel’s close relationship with the U.S. may lead to additional support from American defence companies, potentially boosting defence contracts and sales. This regional instability could also create export opportunities for defence companies in supporting nations, further influencing global defence industry dynamics.
- US supplying arms to Israel. The Pentagon plans to send tens of thousands of 155mm artillery shells to Israel. Originally, these shells were intended for Ukraine but will now be diverted to Israel. The Israel Defense Forces and the Israeli Ministry of Defense expressed the urgent need for these artillery shells to prepare for potential conflicts in Gaza and along the Israel-Lebanon border. US officials believe that redirecting the shells to Israel will not immediately impact Ukraine’s capabilities in its conflict with Russia. While there’s concern about potential regional conflicts, the Pentagon is confident it can support both Ukraine and Israel in meeting their defence needs. This decision follows Israel’s increased use of artillery in response to recent hostilities. The ammunition was part of a US weapons stockpile in Israel, and the US agreed to send it back to Israel in response to the urgent request.
- Better expectations ahead. Lockheed Martin saw strong demand for its military equipment amid geopolitical tensions in Q3. The company reported weak sales in the F-35 fighter jet unit but the ongoing conflict in Ukraine has led to increased demand for weapons like shoulder-fired missiles and artillery, benefiting defense companies. Lockheed’s weapons, including the multiple launch rocket system and Javelin anti-tank missiles, have been crucial in Ukraine’s defense. However, pandemic-related labour and supply chain disruptions, particularly in the aeronautics business, have impacted the company’s performance. Sales in the aeronautics unit declined by 5.2% in the third quarter, while revenue from the Missiles and Fire Control unit increased by 3.8%. With the recent Israeli-Hamas conflict, it is anticipated that there will be an increase in sales demand.
- 3Q23 results. Revenue rose 1.8% year-over-year to US$16.88bn, beating estimates by US$160mn. Non-GAAP EPS of $6.77 beat expectations by $0.15. FY2023 outlook: Net sales of $66.25bn – $66.75bn vs. consensus of $66.64bn; Diluted EPS of $27 to $27.2 vs. consensus of $27.11. Increased share repurchase authority by $6.0bn to a total authorisation of $13.0bn.
- Market consensus.
(Source: Bloomberg)
Teekay Tankers Ltd (TNK US): Escalating conflict and its impact on Middle East oil shipments
- RE-ITERATE BUY Entry – 42 Target – 48 Stop Loss – 39
- Teekay Tankers Ltd. provides oil transportation services through a fleet of mid-size tankers, including Suezmax and Aframax crude oil tankers and Long Range 2 product tankers. The Company’s vessels are typically employed through a mix of short- or medium-term fixed-rate time charter contracts and spot tanker market trading.
- Oil impacted. The Israeli-Hamas conflict has recently escalated, prolonging for more than a week and creating an atmosphere of uncertainty throughout the Middle East. This heightened conflict has led to growing concerns about the regional situation. In response, the shipping volume of crude oil and refined oil products in the area is expected to surge in the short term, subsequently driving up freight rates.
- Oil supply and demand dynamics. Anticipated growth in crude oil demand is on the horizon for 2024. According to OPEC’s most recent monthly report, released last week, global crude demand is expected to rise by 2.25 million barrels per day in the upcoming year, slightly down from the 2.44 million barrels per day witnessed in the current year.
- 2Q23 results. Revenue rose 52.9% year-over-year to US$370.6mn, beating estimates by US$113.37mn. Non-GAAP EPS of $4.38 missed expectations by $0.07.
- Market consensus.
Baltic Dry Tanker Index
(Source: Bloomberg)
(Source: Bloomberg)
Trading Dashboard Update: Cut loss on Palantir Technologies (PLTR US) at US$16.0.
