Top Down Strategy and Large Cap Stock Picks - the DBS Vickers ...

Regional Equity Strategy Q4 2007
Country Assessment
GROWTH
We are upbeat on Singapore’s economic growth, as seen by the recent upgrades this year on
GDP growth in 2007 by DBS Economists, up from 6.3% to 7.7% this year. We have kept our
GDP growth forecast intact at 6.5% in 2008. Growth was broad-based, with all key engines –
manufacturing, construction and services – recording robust growth. Growth in pharmaceutical
output and value add from marine and aerospace engineering more than offset the slack in the
electronics sector.
The macro outlook for Singapore remains bright, barring any slowdown from the U.S. which
may derail growth. Growth will be broad-based. In addition to the twin engines of growth -
construction and services sectors, manufacturing sector is the added pillar. The strong order
book of Singapore’s shipyards will drive growth for the transport engineering sector over next
few quarters and into 2008. Together with output growth from the pharmaceutrical industry,
these will offset weaker exports for Electronics. The wild card lies in financial services sector
which could present downside risk if fee-based and stock broking activities slacken.
Net earnings in 2Q07 grew 28% yoy. Net earnings in 2Q for the basket of stocks under
DBSV’s coverage grew by 28%, vs 20% in 1Q, boosted by strong growth from all major sectors
including property, financial services, consumer services, property and oil and gas sectors.
Growth momentum will slow in 2H, partly due to a high base in 2H06 and margin pressures
kicking in.
No change in earnings growth, downside pending the dust settling in the US. At this
stage, other than potential downside to the financial sector, it is premature to determine if the
impact of a US slowdown could affect earnings growth in other sectors in Singapore. Our
current estimates are for earnings growth to accelerate into FY08 at 19%. Our two-year eps
cagr has been adjusted up from 17% to 18%. This is backed by strong earnings visibility from
pre-booked property sales, delivery of the record order book of shipyards and growth of China
consumption and infrastructure stocks covered in our universe. Even excluding growth from
property and Reits, growth for Singapore equities is fairly decent at 11% in 07 rising to 13% in
FY08.
Potential earnings downside could come from a) Companies with exposure to the US
economy, specifically the Technology and shipping sector in the event of a slowdown in the US
economy b) Financial Services sector due to write-offs and provisions for its CDO exposure and a
slowdown in fee-based income, from investment banking and c) margins pressure due to cost
push inflation in Singapore(wages and rental) and China.
Earnings Estimates by Sector
EPS Growth % CAGR PATMI S$m PE (x)
2006 2007 2008 06-08 2006 2007 2008 2006 2007 2008
Basic Materials 30.5 30.4 62.0 45 150 196 318 18.5 14.2 8.8
Consumer Goods 38.4 76.8 4.5 36 649 1,148 1,199 24.1 13.6 13.0
Consumer Services 14.1 5.7 11.1 8 2,588 2,734 3,038 16.6 15.8 14.2
Financials 37.6 8.5 8.6 9 6,699 7,272 7,897 15.1 13.9 12.8
Health Care 8.6 14.1 7.6 11 146 167 180 32.6 28.6 26.6
Industrials 0.3 14.0 23.7 19 3,804 4,336 5,366 25.5 22.4 18.1
Oil & Gas -24.0 48.7 13.0 30 335 498 563 14.0 9.4 8.3
Real Estate 31.0 54.4 55.1 55 2,381 3,677 5,701 32.0 20.7 13.4
REITS 16.1 58.5 24.8 41 573 908 1,134 40.2 25.4 20.3
Technology 130.9 23.6 20.3 22 1,030 1,272 1,531 19.3 15.6 13.0
Telecommunications 10.5 1.7 8.2 5 4,119 4,189 4,532 16.1 15.9 14.7
Utilities 30.7 -26.7 40.1 1 210 154 216 19.9 27.2 19.4
Grand Total 20.8 17.0 19.3 18 22,685 26,551 31,673 20.2 17.3 14.5
Total Ex Property & Reits 19.8 11.3 13.1 12 19,731 21,966 24,839 18.2 16.4 14.5
Source: DBS Vickers
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