28 August 2023: UMS Holdings (UMSH SP), CNOOC Ltd. (883 HK), Eli Lilly and Co (LLY US)
Sector Performance | Hong Kong Trading Ideas |United States Trading Ideas | Singapore Trading Ideas| Trading Dashboard
United States
Hong Kong
UMS Holdings (UMSH SP): Better outlook moving forward
- RE-ITERATE BUY Entry 1.18 – Target – 1.30 Stop Loss –1.12
- UMS Holdings Limited provides equipment manufacturing and engineering services to Original Equipment Manufacturers (OEMs) of semiconductors and related products. The Company manufactures high precision components and complex electromechanical assembly and final testing services. UMS supports the electronic, machine tools and oil and gas industries.
- Semiconductor sector is bottoming out. The milestone development of artificial intelligence (AI) in 1H23 not only buffers the downcycle of the semiconductor sector but also kickstarts a new growth engine. The AI hype shadows the fall in demand for mobile/PC chips due to the normalisation of life and the drop in capex due to geopolitical factors. However, several market leaders projected that the sector will bottom out in 2H23 or 1H24 as both orders and capex will gradually recover. In the UMS’s 2Q23 press release, according to SEMI, global 300mm fab equipment spending for front-end facilities next year is expected to begin a growth streak to hit a US$119 billion record high in 2026 following a decline in 2023.
- Nvidia 2Q24 stellar results reinforce the AI revolution. Nvidia’s 2Q24 earnings smash market expectations again. Meanwhile, it also provides better-than-expected guidance for 3Q24. This marks the end of the technology and semiconductor sector correction since the end of July. The strong demand for AI chips and servers will uphold the bullish sentiment in the semiconductor sector.
- Applied Materials 3Q23 review. Applied Materials (AMAT US) is a key customer to UMS. Its 3Q23 revenue dropped 1.4% YoY to US$6.3bn, beating estimates by US$250mn. 3Q23 Non-GAAP EPS was US$1.9, beating estimates by US$0.15. It expects 4Q23 net sales to be approximately US$6.51bn, plus or minus US$400 mn, compared to a consensus of US$5.87bn. 4Q23 Non-GAAP adjusted diluted EPS is expected to be in the range of US$1.82 to US$2.18, compared to a consensus of US$1.60.
Weekly return correlation between UMS and AMAT
(Source: Bloomberg)
- 2Q23 results review. Revenue fell 14% YoY to S$74.4mn. Gross material margin decreased to 46.3% from 51.7%. PATMI plugged 42% YoY to S$11.6mn. Net margin fell to 15.4% from 23.2%. The new plant in Penang is expected to contribute at least US$30mn for FY24. The company declared an interim dividend of 1.2 SG cents.
- Market consensus.
(Source: Bloomberg)
Seatrium Limited (STM SP): Resilient creude oil performance
- RE-ITERATE BUY Entry 0.140 – Target – 0.150 Stop Loss – 0.135
- Seatrium Limited provides offshore and marine engineering solutions. It operates through two segments: Rigs & Floaters, Repairs & Upgrades, Offshore Platforms, and Specialised Shipbuilding; and Ship Chartering.
- Order book remains strong. It secured new contract wins of S$4.3bn ytd with solid orders pipeline. It’s net order book of S$19.7bn with projects lined up to 2030, comprising 40% renewables and cleaner/green solutions. Additionally it showed strong operational performance with track record of projects delivered.
- Share buyback. Seatrium bought back shares for the second time. The company bought back 20mn shares on August 4 for 13.4 SG cents each. This follows its first buyback on June 12, when it bought 1.2mn shares for 12.4 SG cents each.
- Offshore market expected to strengthen. Seatrium is expected to benefit from the strengthening offshore market. The industry estimates that offshore oil and gas capital expenditure will continue to grow in 2023 and 2024, supported by data showing that day rates for latest generation drillships are now over $500,000 per day, and the number of active offshore rigs has increased by 8% YoY. The company has a strong order book, access to new markets, and the capacity to accept more projects and is looking to fill its 2028/29 production schedule. Furthermore, the normalisation of economic activity should also result in a greater volume of shipping activities, which will positively impact Seatrium’s repair/upgrade segment. These factors will help to drive Seatrium’s growth and share price in the future.
- Expecting mild growth in the upstream oil and gas capex. Oil prices have been showing signs of resilience despite a weakening economy, contribution by deflation in China. Yet, these concerns are offset by a steep drawdown in U.S. fuel stockpiles and Saudi and Russian output cuts, sending oil prices to a high since January 2023. The oil and gas upstream spending also continues. Oil majors accelerated to explore and develop oil resources outside Russia after the sanction. Hence, there still be mild growth in the upstream capex during 2023/2024.
Global upstream oil and gas capex
(Source: Bloomberg)
- 1H23 results review. Revenue rose 164% YoY to S$2.9bn from S$1.1bn the prior year. Net loss amounted to -S$264mn due to provision for contracts and merger expenses. The Group’s EBITDA of S$27mn in 1H2023 was higher than the negative S$19mn in the same period last year. EBITDA before provision for contracts and merger expenses amounted to a creditable S$258mn.
- Market consensus.
(Source: Bloomberg)
CNOOC Ltd. (883 HK): High dividend yield amidst market downturn
- BUY Entry – 12.8 Target – 14.0 Stop Loss – 12.2
- CNOOC Ltd is a China-based investment holding company principally engaged in the exploration, production and sales of crude oil and natural gas. The Company operates three segments. Exploration and Production segment is engaged in conventional oil and gas business, shale oil and gas business, oil sands business and other unconventional oil and gas businesses. Trading segment is engaged in entrepot trade of crude oil in overseas areas. Corporate segment is engaged in headquarter management, assets management, research & development, and other businesses. The Company mainly operates businesses in China, Canada, the United Kingdom, Nigeria, and Brazil, among others.
- Demand for oil to outgrow supply. According to the International Energy Agency (IEA), global oil demand reached record levels of 103mn barrels per day in June and is poised to peak again in August. The increase in the oil demand is attributed to stronger-than-expected economic growth in developed countries, robust summer air travel, and surging oil consumption in China, particularly for petrochemical production. Additionally, major oil-producing countries, including Saudi Arabia, have implemented significant oil production cuts, further driving up oil prices in the near future. Saudi Arabia will also be likely to roll over a voluntary oil cut of 1mn barrels per day for a third consecutive month into October, amid uncertainty about supplies and as the kingdom targets drawing down global inventories further. Consequently, the cost of oil is anticipated to increase within the market.
- Opening doors for bunkering operations. CNOOC and Pavillion Energy successfully completed their first ship-to-ship LNG bunkering operation in China recently. The operation was conducted at an anchorage in Chinese waters and involved the delivery of LNG to Maran Dione, a new-built dual-fuel VLCC. This is a significant milestone for CNOOC, as it is the company’s first delivery to an LNG-powered VLCC at an anchorage in Chinese waters. The success of this operation could pave the way for more bulk carriers and product tankers to conduct LNG bunkering operations at anchorages in Chinese ports, potentially bringing more sales volume for CNOOC.
- Uncovering more oil supply. CNOOC intends to initiate offshore exploration in Tanzania, as part of a recent plan. This plan arises from an agreement between CNOOC and the Tanzania Petroleum Development Corporation (TPDC). The collaboration between the two companies will involve conducting seismic studies in deep-sea blocks owned by TPDC. Tanzania is actively pursuing the development of its natural gas resources and has recently secured a partnership with major oil and gas firms to construct a large liquefied natural gas (LNG) export terminal. The purpose of establishing the LNG export terminal is to fulfil the growing demand for LNG in Europe, as the region aims to diversify its gas supplies away from Russian pipelines by 2027, which has been facing pressures from oil supply cuts recently.
- 1H23 earnings. Revenue FELL BY 14.1% YoY to RMB151.69bn. Net profit fell 11.3% YoY to RMB63.76bn. Diluted and Basic EPS is at RMB1.34, down 14.7% YoY.
- Market Consensus.
Share price and Brent crude oil price correlation
(Source: Bloomberg)
(Source: Bloomberg)
East Buy Holdings Ltd. (1797 HK): Going live streaming on Taobao
- RE-ITERATE BUY Entry – 42.0 Target – 50.0 Stop Loss – 38.0
- East Buy Holding Limited operates livestreaming platform businesses. The Company provides private label products including agricultural products, food, books, and household goods. East Buy Holding also conducts college education businesses.
- Live Streaming on Taobao. According to local reports, East Buy Holdings officially joined Taobao Live, with its first live-streaming session scheduled for next Tuesday, 29th August, hosted by the Founder and CEO of the company. This is bound to expand the company’s e-commerce exposure, driving the company brand name as well as sales.
- Increasing popularity of live-streaming. The online live-streaming shopping market in China is experiencing significant growth, reaching a total of $497 billion in 2022, as reported by Coresight Research. This upward trend can be attributed to consumers who are increasingly valuing their time and opting for the convenience of watching live stream shopping from anywhere, rather than simply browsing products online or visiting physical stores for purchases.
- Boosting domestic consumption. China recently pledged expansion in domestic consumption to boost growth within the China market. With poorer-than-expected economic indicators and signs that the China market is slowing down, the government has announced rate cuts to boost innovation, consumption as well as recovery, with the government lowering the loan prime rate by 10bps in June, as well as another 10bps in August, to a current loan prime rate of 3.45%. Going forward, more stimulus is expected to be released as well to boost the level of consumption.
- 1H23 results. 1H23 Revenue from continuing operations rose by 590.2% YoY to RMB2.08bn in 1H23 than compared to RMB301.4mn in 1H22. Net profit rose to RMB601mn in 1H23, compared to RMB27.0mn in 1H22. Basic EPS rose to RMB0.58, compared to -RMB0.11 in 1H22.
- Market Consensus.
(Source: Bloomberg)
Eli Lilly and Co (LLY US): R&D successes
- BUY Entry – 550 Target – 580 Stop Loss – 535
- Eli Lilly and Company discovers, develops, manufactures, and sells pharmaceutical products for humans and animals. The Company products are sold in countries around the world. Eli Lilly products include neuroscience, endocrine, anti-infectives, cardiovascular agents, oncology, and animal health products.
- Smooth progression for thyroid cancer drug. Eli Lilly’s cancer drug Retevmo has passed Phase 3 of the progression-free survival (PFS) test in a study for thyroid cancer. The trial, LIBRETTO-531, showed that patients taking Retevmo had better results in terms of cancer not getting worse compared to those taking other treatments. The trial focused on patients with advanced thyroid cancer. Retevmo’s safety was as expected. Eli Lilly plans to share the results with other experts and health authorities. Retevmo was approved by the FDA in 2022 for certain types of advanced cancers. With continued success and progression in their development of drugs, the company will likely to increase their toplines.
- Drug success. Eli Lilly’s diabetes drug Mounjaro achieved $979.7mn in 2Q23 sales, a substantial increase from the $16mn it made in the same period last year. Mounjaro, originally for diabetes, is also being explored for weight reduction. Supply challenges are expected due to high demand, despite efforts to increase manufacturing capacity. Revenue growth was also driven by breast cancer pill Verzenio’s 57% rise to $926.8mn and Jardiance’s 45% climb to $668.3mn in sales. However, cancer drug Alimta’s sales dropped by 73% to $60.9mn due to patent expiration. Sales of Covid-19 antibody treatments were absent due to FDA action. Eli Lilly expects strong growth ahead as challenges ease.
- 2Q23 earnings review. Revenue rose 28.0% year-over-year to US$8.31bn, beating estimates by US$700mn. Non-GAAP EPS of $2.11 beat expectations by $0.11. New Products contributed $1.0bn to revenue in 2Q23, led by Mounjaro. Growth Products revenue increased 16% to $4.93bn in 2Q23, led by Verzenio, Jardiance and Taltz.
- Market consensus.
(Source: Bloomberg)
Palantir Technologies Inc (PLTR US): AI in the spotlight again
- RE-ITERATE BUY Entry – 14.8 (Buy Stop) Target – 17.0 Stop Loss – 13.7
- Palantir Technologies Inc develops software to analyse information. The Company offers solutions support many kinds of data including structured, unstructured, relational, temporal, and geospatial. Palantir Technologies serves customers worldwide.
- AI trend is back. Nvidia, the world’s most valuable chipmaker, is benefiting from the growing demand for artificial intelligence (AI). The company’s GPUs are essential for building and running AI applications, and its data center business is growing rapidly as cloud service providers and large consumer internet companies snap up next-generation processors. Nvidia’s growth forecast in its AI chip and database segment is a positive sign for the overall AI market. This is because it suggests that more companies are investing in AI, which is good for Palantir as it provides an opportunity to sell its AI software and services to these companies.
- Raised outlook. Palantir Technologies has raised its annual revenue forecast due to strong demand for its AI platform. The platform, launched just four months ago, already has users in over 100 organisations and discussions underway with 300 more. The platform offers an AI assistant to aid business decision-making. However, demand in Europe has been subdued, and the company’s commercial revenue was affected by investments in special purpose acquisition companies. The upcoming quarter will see increased expenses as Palantir focuses on expanding its AI platform and recruiting new technical talent.
- Garnering interest in its AI platform. Palantir Technologies’ AI platform, AIP, helps governments and businesses make better decisions by providing access to machine learning capabilities, commercial and open-source large language models, and industry-leading risk controls. The platform has been used by the U.S. military and other government organisations, as well as by companies like Novartis and Azule Energy. Palantir is well-positioned to continue to grow in the years to come, as more and more organisations adopt AI to improve their decision-making. The company’s most recent partnership is with Azule Energy, a 50/50 independent joint venture owned by BP and Eni, to deploy cutting edge software to optimise Azule Energy’s upstream production.
- 2Q23 earnings review. Revenue rose 12.8% year-over-year to US$533.32mn, in line with estimate. Non-GAAP EPS of $0.05 in line with expectations. The number of U.S. commercial customers count increased 35% YoY, from 119 customers in 2Q22 to 161 customers in 2Q23.
- Market consensus.
(Source: Bloomberg)
Trading Dashboard Update: Add UMS (UMSH SP) at S$1.18, Seatrium (STM SP) at S$0.140, and Easy Buy (1797 HK) at HK$42.0. Take profit on Bumitama Agri (BAL SP) at S$0.575. Cut loss on China Aviation Oil (CAO SP) at S$0.895 and Boeing (BA US) at US$220.
