27 March 2023: Frencken Group Ltd (FRKN SP), China Literature Limited (772 HK), Meta Platforms Inc (META US)

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Frencken Group Ltd (FRKN SP): Ride on the AI bandwagon

BUY Entry 1.04 – Target – 1.12 Stop Loss – 1.00
Frencken Group Limited (“Frencken”) is a Global Integrated Technology Solutions Company that is listed on the Main Board of the Singapore Exchange. They provide comprehensive Original Design, Original Equipment and Diversified Integrated Manufacturing solutions for world-class multinational companies in the analytical & life sciences, automotive, healthcare, industrial and semiconductor industries.
Interest rates forecasted to decline. The US Federal Reserve
recently raised interest rates by another 25 basis points in the March FOME meeting, which aligns with market expectations of a lower rate hike or no increment of interest rates. Market foresees the rate hike cycle to end in May, and there will be a 100bps cut in 2H23. Falling rates favour higher valuations of the semiconductor sector.

US Fed fund rate projection

(Source: Bloomberg)

AI bandwagon. Artificial intelligence is gaining more attention with the release of new innovative AI technologies and more investors hopping onto the AI bandwagon. With the development of more AI systems, the production of newer and more powerful chips will be in demand. Frencken will need to be more innovative and increase existing production in order to meet the rise in demand for chips.
FY22 results review. Revenue moderately rose 2.5% YoY to S$786.1mn from S$767.1mn. Gross profit declined by 7.7% YoY to S$119.0mn. Net profit attributable to shareholders of the company dropped by 11.7% to S$51.9mn.
Updated market consensus of the EPS in FY24/25 is 8.7%/4.0% respectively, which translates to 8.5x/8.2x forward PE. Current PER is 8.7x. Bloomberg consensus average 12-month target price is S$1.09.

(Source: Bloomberg)

Raffles Medical Group Ltd (RFMD SP): A defensive stock amidst a market downturn

RE-ITERATE BUY Entry 1.40 – Target – 1.50 Stop Loss – 1.35
Raffles Medical Group is a leading integrated private healthcare provider in the region, operating medical facilities in thirteen cities in Singapore, China, Japan, Vietnam and Cambodia. The Group is the first Asian member of the Mayo Clinic Care Network. RafflesMedical clinics form one of the largest networks of private family medicine centres in Singapore. RafflesHospital, the flagship of Raffles Medical Group, is a private tertiary hospital located in the heart of Singapore offering a wide range of specialist medical and diagnostic services for both inpatients and outpatients.
Post-COIVD era tailwinds. Singapore continues to see an increase in foreign demand in the healthcare sector, with many foreigners opting for treatment in Singapore. As Singapore opens up its borders, foreign patients return to seek treatment at Raffles Hospital. Singapore residents who postponed their elective surgeries also returned for treatment. Meanwhile, inflation is expected to taper this year, and hence decreasing operating costs will continue to improve its profitability.
Defensive counter amidst market turmoil. The recent banking crisis in the US and Europe markets resulted in rising bearish sentiments which more or less spread to the Asia market. The sell-down in the healthcare services sector creates a buying opportunity as the fundamental remains sound.
FY22 results review. Revenue moderately rose 5.9% YoY to S$766.5mn. Operating profit jumped by 61.4% YoY to S$195.8mn. PATMI jumped by 70.5% YoY to S$143.5mn.
Updated market consensus of the EPS in FY24/25 is 1.9%/3.7% respectively, which translates to 20.0x/20.6x forward PE. Current PER is 17.9x. Bloomberg consensus average 12-month target price is S$1.72.

(Source: Bloomberg)

China Literature Limited (772 HK): Exploring AIGC-theme

BUY Entry – 41.0 Target – 50.0 Stop Loss – 37.0
CHINA LITERATURE LIMITED is a company principally engaged in the operation of online literature platform. The Company’s platform provides online readers with easy access to Company’s vast and diverse content library and enables a greater number of writers to create and publish original literary content online. Additionally, the Company able to extend the monetization lifecycle of Company’s content for our writers through Company’s intellectual property operation by managing and licensing Company’s content for adaptation into other entertainment formats.
A new model to monetise digital content. The most disruptive technological product, ChatGPT created a new direction of artificial development. The AI generative content (AIGC) requires abundant content input for the AI engine to train. The intellectual properties (IPs) owned by the company is a gold mine for AI companies which are developing large language model engine. AIGC technology + IPs could be a new business model for the company to commercialize and monetize its assets.
FY22 business review. The company’s online reading platform added approximately 540,000 writers, 950,000 literacy works and over 39bn Chinese characters. The number of online literary works that newly reached 3,000 average subscribers per chapter in 2022 increased by more than 50% YoY.
FY22 earnings review. Revenue declined by 12% YoY to RMB7.6bn. Gross profit declined by 12.4% YoY to RMB4.0bn. Profit attributable to equity holders of the company dropped by 67.1% YoY to RMB608mn. Non-IFRS profit attributable to equity holders of the company grew by 9.6% YoY to RMB1.3bn.
The updated market consensus of the EPS growth in FY23/24 is 152.9%/15.1% YoY respectively, which translates to 24.2x/21.0x forward PE. Current PER is 60.5x. Bloomberg consensus average 12-month target price is HK$45.01.

(Source: Bloomberg)

SenseTime Group Inc. (20 HK): An alternative AI-themed choice

RE-ITERATE BUY Entry – 2.70 Target – 2.94 Stop Loss – 2.58
SenseTime Group Inc is a China-based company mainly engaged in the research and development and application of artificial intelligence (AI) software. The Company has self-developed AI infrastructure SenseCore, which can reduce the price of AI production factors and realize large-scale AI innovation and implementation. The Company’s businesses cover four major sectors, including smart business, smart city, smart life, and smart auto. It focuses on AI original technology research and has full-stack AI capabilities, including perception intelligence, decision intelligence, smart content generation, smart content enhancement, and key capabilities such as AI chips, AI sensors, and AI computing infrastructure.
Focus on technological self-reliance. China recently announced at the two sessions that China will be deepening its control over the technology sector, pushing China towards, technological self-reliance. China’s Communist Party unveiled a broad overhaul strengthening its role in managing finance, social affairs and technological development, as part of leader Xi Jinping’s efforts to entrench his brand of top-down rule. China will continue to expand its 5G network while further promoting the research and development of 6G as well as other cutting-edge technology. This includes humanoid robots, metaverse, quantum technology and more, so as to better support the implementation of a modern industrial system.
Rise of Artificial Intelligence in China. China’s 14th Five-Year Plan and Vision 2030 both place a strong focus on the development of the digital economy, seeing this sector as a source of tremendous untapped innovative power and space for growth. In the next few years, the construction of this new AI infrastructure is set to become one of the important pillars of the development of the digital economy and a focus of investment by local governments in China, significantly contributing to regional economic development.
Catching up with ChatGPT. Recently, the company unveiled an open-source AI model, Intern 2.5. Boasting 3 billion parameters, Intern 2.5 is the largest and most accurate on ImageNet among the world’s open-source models, and it is the only model in the object detection benchmark dataset COCO that exceeds 65.0 mAP. The ImageNet project is a large visual database designed for use in visual object recognition software research. The model’s cross-modal open-task processing ability can provide efficient and accurate perception and understanding support for general scenarios such as autonomous driving and robots.
1H22 earnings. Revenue fell by 14.3% YoY to RMB1,4bn, compared to RMB1.7bn in 1H21. Gross profit fell by 22.5% YoY to RMB934.0mn, compared to RMB1.3bn in 1H21. Net loss attributable to shareholders of the company was RMB3.2bn, compared to RMB3.7bn in 1H21.
The updated market consensus of the EPS growth in FY23/24 is 26.67%/25.79% YoY respectively. Bloomberg consensus average 12-month target price is HK$3.13.

(Source: Bloomberg)

Meta Platforms Inc (META US): Benefit from indirect policy tailwinds

BUY Entry – 200 Target – 225 Stop Loss – 190
Meta Platforms, Inc. engages in the development of products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and wearables worldwide. It operates in two segments, Family of Apps and Reality Labs.
Benefiting from the potential TikTok ban. The TikTok CEO’s congressional testimony last Thursday did not convince the US lawmakers that the short video platform has no threat to US national security. With the backdrop of deteriorating US-China relations, TikTok’s overseas operation will face more headwinds. However, other social media peers will take a big breath. Meta’s Reels as one of the benefactors is favoured indirectly by the policy tailwinds as Americans could be forced to switch from TikTok to Reels. In fact, Reels plays more than doubled in 2022.
Back to the right direction. Meta has toned down the development of Metaverse which the market sees too ahead of the current trend. The company announced another round of layoff of 10,000 employees, following the previous round of 11,000 job cuts. The right-sizing accounts for 25% of the total employment. Meanwhile, Meta is one of a strong rivals to ChatGPT. It announced its latest AI language model, LLAMA, which is an open-source package that anyone in the AI community can request access to.
4Q22 earnings review. Revenue dropped by 4.5% YoY to US$32.2bn. GAAP EPS was US$1.76. 1Q23 revenue guidance ranges between US$26.0bn and US$28.5bn.
The updated market consensus of the EPS growth in FY23/24 is 40.8%/23.1%, respectively, which translates to 20.7x/16.7x forward PE. Current PER is 18.7x. Bloomberg consensus average 12-month target price is US$225.63.

(Source: Bloomberg)

Barrick Gold Corporation (GOLD US): Safe haven

RE-ITERATE BUY Entry – 17.80 Target – 20.0 Stop Loss – 16.7
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. On 10 March 2023, 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 huge amounts of unrealised losses from 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 nutshell, 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 Fed recently hiked rates by 25 basis points. The market expects the Fed to stop raising interest rates and begin to cut rates in the second half of 2023.

(Source: Bloomberg)

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 prices were higher than expected, both showed overall prices were declining. The US job market started 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 3.7%/24.7%, respectively, which translates to 23.1x/18.6x forward PE. Current PER is 21.2x. Bloomberg consensus average 12-month target price is US$21.13.

Barrick Gold VS Gold price

(Source: Bloomberg)