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29 April 2022: Keppel Corp Ltd (KEP SP), BYD Company Limited (1211 HK)

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Keppel Corp Ltd (KEP SP): An O&M powerhouse following the merger with Sembcorp Marine

  • BUY Entry – 6.75 Target – 7.23 Stop Loss – 6.54
  • Keppel Corporation is a Singaporean conglomerate headquartered in Keppel Bay Tower, HarbourFront. The company consists of several affiliated businesses that specialises in offshore & marine, property, infrastructure and asset management businesses.
  • Big powerhouse. Yesterday, the proposed merger of Keppel Offshore & Marine (O&M) with Sembmarine was announced. The combination would result in one of the world’s largest offshore energy players worth $8.7 billion. The merger would help Keppel realise about $9.4 billion in value. This includes $500 million in cash from Keppel O&M to settle outstanding interest and partial redemption of certain perpetual securities previously issued to Keppel. It also includes $4.05 billion from the sale of Keppel O&M’s legacy rigs and associated receivables to a separate company that will be 90% owned by other investors, with Keppel holding a 10% stake. Keppel will also get a bigger share at 56% of the new entity arising from the merger, while Sembmarine shareholders will own 44%.
  • 1Q22 results. Revenue was 9% higher at S$2.1bn for 1Q22, underpinned mainly by Energy & Environment, while net profit in 1Q22 was higher YoY, with improved performance in Energy & Environment, Connectivity and Asset Management. All key business units apart from Keppel O&M were profitable, however, Keppel O&M significantly reduced net loss and was EBITDA positive.
  • Improving oil prices to bolster the O&M segment. With improving conditions in the offshore & marine sector, underpinned by the improving oil price and the increasing utilisation rates and day rates of offshore drilling rigs, Keppel O&M’s legacy rigs can be substantially monetized in the next 3-5 years. Energy markets worldwide are dealing with massive disruptions to supply following Russia’s invasion of Ukraine and subsequent sanctions slapped on Moscow by the United States and its allies. Despite the volatility in oil prices in the first quarter of 2022, WTI and Brent Crude oil prices are still trading above pre-invasion prices and have closed around the US$100/bbl mark yesterday.
  • Positive consensus estimates. Currently, Keppel Corp has a consensus estimate of 10 BUYS, 1 HOLD and 1 SELL, with a 12M target price of S$7.30.

Keppel Corp Ltd (KEP SP) (Source: Bloomberg)

Capitaland Integrated Commercial Trust (CICT SP): A reopening play

  • RE-ITERATE BUY Entry – 2.31 Target – 2.47 Stop Loss – 2.24
  • CapitaLand Integrated Commercial Trust (CICT) is the first and largest real estate investment trust (REIT) listed on Singapore Exchange Securities Trading Limited (SGX-ST). CICT owns and invests in quality income-producing assets primarily used for commercial (including retail and/ or office) purposes, located predominantly in Singapore.
  • A strong set of FY21 financials. CICT recorded gross revenue of S$1.3bn and distributable income of S$687.4mn in FY2021, an increase of 75.1% and 83% YoY respectively. DPU stood at 10.4 SG Cents in FY21, up 19.7% YoY from 8.69 SG Cents. As of 31 December 2021, CICT’s aggregate leverage was 37.2%, well below MAS’ regulatory limit of 45% to 50%. The average cost of debt was stable at 2.3% per annum.
  • Reopening play. The Singapore government announced on 25 March 2022 that all vaccinated travellers can enter Singapore without quarantine from the first of April. Travellers will no longer be required to take only designated flights to enter Singapore quarantine-free, and will not have to take the antigen rapid test (ART) within 24 hours of arrival. This latest round of easing will make travelling as seamless as it was before the pandemic. Out of CICT’s Retail REIT portfolio, Clarke Quay’s occupancy was the lowest at 73.5% as of 31 December 2021. The recent easing of regulations which includes alcohol after 1030pm and the upcoming reopening of all nightlife activities, such as clubs and discos starting 19 April is expected to boost the laggard retail mall. As for CICT’s Office REIT portfolio, the occupancy rate is currently at 91.5% and further upside is driven by the relaxation to 75% of workers being able to return to office, compared to 50% previously.
  • Inflationary hedge. Out of CICT’s total borrowings of S$8.6bn as of 31 December 2021, 83% are on fixed interest rates, which is able to shield the impact of upcoming interest rate hikes. In addition, because rents and property value tend to increase amidst the increase in overall prices, the REITs whose properties are able to capitalise on that can provide an inflation hedge.
  • Recent acquisitions. On Friday (Mar 25), CICT and CapitaLand Open End Real Estate Fund (Coref) announced that they had entered into an agreement to acquire 79 Robinson Road with a respective 70% and 30% ownership.
  • Positive consensus estimates. Currently, CICT has a consensus rating of 17 BUYS, 3 HOLDS and 0 SELL, and a 12M TP of S$2.45.

Capitaland Integrated Commercial Trust (CICT SP) (Source: Bloomberg)

BYD Company Limited (1211 HK): China to promote EV sales in rural areas

  • BUY Entry 220 – Target – 240 Stop Loss – 210
  • BYD COMPANY LIMITED is a China-based company principally engaged in the manufacture and sales of transportation equipment. The Company is also engaged in the manufacture and sales of electronic parts and components and electronic devices for daily use. The Company’s products include rechargeable batteries and photovoltaic products, mobile phone parts and assembly, and automobiles and related products. The Company mainly conducts its businesses in China, the United States and Europe.
  • 1Q22 performance review. Revenue from operations jumped by 63.0% YoY to RMB66.8bn. Net profit attributable to shareholders jumped by 240.6% YoY to RMB808.4mn. The stellar performance was due mainly to the growth of the industry of new energy vehicles.
  • Policy to uphold EV consumption. On 25th April, China unveiled guidelines to further tap the country’s consumption potential. One of the guidelines will promote the sales of automobiles, especially EVs in the country’s rural areas.
  • First combustion engine car maker to go full EV production. The company announced that as of last month it stopped making combustion engine vehicles and only produced electric and hybrid vehicles. Moving forward, BYD will be the domestic largest pure EV company. The implication is that the valuation for the company will be elevated as the combustion engine car segment will no longer drag the company.
  • Updated market consensus of the EPS growth in FY22/23 is 116.3%/58.6% YoY respectively, which translates to 83.5×/52.6x forward PE. Current PER is 152.2x. Bloomberg consensus average 12-month target price is HK$328.34.

BYD Company Limited (1211 HK) (Source: Bloomberg)

Anhui Conch Cement Company Limited (914 HK): Expecting infrastructure expansion to revive the weak economy

  • RE-ITERATE BUY Entry – 41.2 Target – 45.0 Stop Loss – 39.3
  • Anhui Conch Cement Co Ltd is a China-based company principally engaged in production and sale of cement, commodity clinker and aggregate. The Company’s main cement products included 32.5-grade cement, 42.5-grade cement and 52.5-grade cement, which are widely used in construction projects of large-scale national infrastructures such as railways, expressways, airports and hydraulic power as well as urban property, cement products and the rural markets. The Company distributes its products within the domestic market and to overseas markets.
  • A new round of loosening monetary policy. On April 15th, PBOC lowered the requirement reserve ratio by 25bps but kept the one-year loan prime rate at 2.85%. There will be RMB530bn (US$83.25bn) in long term liquidities released in the banking system, buffering the slowdown in the economy due to lockdowns in main cities. Previously, China’s central government drew up lists of infrastructure projects totalled at US$2.3tn. It is evident that China will resort to government spending to boost the economy in the near term.
  • China cement price holding up well. As of 25th April, China cement price index (CEMPI) grew by 9.13% YoY to 169.76. The index has been consolidating at the current level YTD. The supply and demand dynamics are relatively balanced as the production and the consumption declined due to lcokdowns of cities.

China Market Price of Commodities Ordinary Portland Cement P.C 42.5 in Bulk

  • FY21 performance review. Revenue mildly dropped by 4.7% YoY to RMB168bn. Gross profit mildly dropped by 3.3% YoY to RMB48.6bn. GPM increased by 0.4ppt. Net profit dropped by 5.3% YoY to RMB32.2bn. NPM was flat at 19.2%. The company will announce the 1Q22 results on 28th April Thursday.
  • The updated market consensus of the EPS growth in FY22/23 is -3.3%/2.9% YoY respectively, which translates to 5.4x/5.2x forward PE. The current PER is 5.2x. FY22F/23F dividend yield is 7.0%/7.2% respectively. Bloomberg consensus average 12-month target price is HK$55.02.

Anhui Conch Cement Company Limited (914 HK) (Source: Bloomberg)

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Singapore

  • Jardine Cycle & Carriage Ltd (JCNC SP) shares rose 8.5% yesterday, after it reported “improved performance” in the first quarter of 2022. The improvement was largely driven by higher contribution from its 50.1% owned Astra International. Astra, the Indonesia-based automotive group, saw its earnings jump 84% in the first quarter, on the back of domestic economic recovery and higher commodity prices. “While the group is encouraged by the good performance achieved in the first quarter, it remains cautious about the uncertainties arising from the pandemic and geopolitical tensions for the rest of the year,” it said in the bourse filing.
  • Keppel Corp Ltd (KEP SP) shares rose 6.4% yesterday. Sembcorp Marine Ltd. and Keppel Corp.’s offshore-and-marine business have agreed to merge, creating one of the world’s largest rig-building companies. Under the planned merger, Keppel Offshore & Marine and Sembcorp Marine will be combined, allowing a value realisation of S$9.42 billion, Keppel said Wednesday. Keppel will receive equity shares representing a 56% equity interest in the combined business, which will be listed as a separate entity. It will also get S$500 million cash. Meanwhile, Sembcorp Marine (SMM SP) shares fell 17.6% yesterday.
  • Sembcorp Industries Ltd (SCI SP) shares rose 2.8% yesterday. UOB Kayhian has raised Sembcorp Industries’ target price to S$3.59 from the previous target of S$2.95, on the back of higher expected earnings and aggressive plans to build up its renewable energy business.
  • ST Engineering Ltd (STE SP) shares rose 2.0% yesterday. DBS, UOB, CDG, ST Engineering and Genting among RHB’s top picks amid inflation theme. As the Singapore government has taken steps to drastically reduce its Covid-19 related restrictions, Jaiswal is recommending investors accumulate counters in sectors that have been the hardest hit by the pandemic. Within the brokerage’s coverage, Singapore Technologies Engineering (ST Engineering) is one of Jaiswal’s recommendations as an aviation play that could benefit from the reopening.

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  • Inner Mongolia Yitai Coal Company Ltd (3848 HK) Shares rose 14.93% yesterday. Yancoal Australia Ltd (3668 HK) Shares rose 10.56% yesterday. China Coal Energy Company Limited (1898 HK) Shares rose 10.24% yesterday. Coal sector jumped as China will cut import tariffs for coal to zero from May 1 to March 31, 2023, to help guarantee energy supplies, the Ministry of Finance said in a statement. Meanwhile, China locked donw part of its Northern hub for coal shipping.
  • Standard Chartered PLC (2888 HK) Shares rose 11.4% yesterday. The company announced its 1Q22 results. Operating income rose 9% YoY to US$4.29bn, extending an upturn since the bank in late 2021 resumed top-line growth for the first time since 2019.Net interest income rose 8% YoY to US$1.79bn. The net interest margin increased by 0.07ppt to 1.29%.
  • Shanghai Junshi Biosciences Co Ltd (1877 HK) Share rose 8.50% yesterday. There was no company specific news. The piece of news saying that Covid symptoms may return for some after taking Paxlovid antiviral pills could benefit the approval of the company’s covid pills.

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Trading Dashboard Update: Enter Capitaland Integrated Commercial Trust REIT (CICT SP) at S$2.31.