S&P_Singapore 2011 Outlook

8/7/2019 S&P_Singapore 2011 Outlook

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This report is for information purposes and should not be considered a solicitation to buy or sell any security.Neither Standard & Poors nor any other party guarantees its accuracy or makes warranties regarding resultsfrom its usage. Redistribution is prohibited without written permission. Copyright 2010. All requireddisclosures and analyst certification appears on the last 3 pages of this report. Additional information isavailable on request.

2011 Outlook: Good but choppy If history is any gauge, the upcoming third year of the bull market could be a hitor a miss for the FSSTI but certainly if we are to refer to the prior liquidity bubble,chances are decent that the stock market could surprise on the upside. Risinginterest rates and the Eurozone debt crisis remain risks but we believe currentmarket valuations are discounting these issues. As such, we believe the FSSTIshould perform well in 2011, and we are looking at a potential 14% upside fromthe Dec. 17 close.

We believe that regional markets are increasingly discounting potential rate hikesof 50bps-100bps. With still limited retail participation and ample liquidity, weexpect that there is room for equities to gain favour with investors particularly onrotation out of fixed income into stocks.

Eurozone debt worries remain a drag but we expect the contagion to be containedwith the ECB able to provide support to Portugal, Ireland and Greece whileSpanish banks are in relatively healthier shape and are not expected to requireECB help. More importantly, northern European and the U.K. economies aregrowing.

Singapore issues had a mixed performance in 2010 with clear leaders Healthcare,Consumer Discretionary and the Industrial sectors outperforming while the restlargely lagged. This differs somewhat from the regional performance and thisprobably reflects the components of the sectors in Singapore.

For 2011, we are Overweight Energy and Industrials. We are neutral on theFinancials with a preference for banks over the property issues. While signs arepointing to some resilience in the property segment, we anticipate additionalmeasures to be introduced if transactions do not slow. Overall, our neutral viewon the Financials leads us to take a Marketweight stance on Singapore relative toour regional market recommendations.

o We maintain our preference for Energy issues over Materials onvaluation grounds and reduced transparency for steel prices.

o For banks, we note the lending environment is competitive butvaluations largely reflect the risks in our view while animproving global economic outlook should allow for morebalanced activity.

o The global recovery should continue to lift Industrials issues.Raw material costs may be rising but we see relativeappreciation of the SGD against the USD which should helpmitigate margin pressures while improving demand should leadto better asset utilization.

o After outperforming in 2010, we take a cautious view onHealthcare given relatively pricey valuations.

Asia Singapore

Standard & PoorsEquity Research Services17 th Floor, Prudential Tower30 Cecil Street, Singapore

Global Strategy

Equity Research

December 23, 2010

KEY 2011 GDP ESTIMATES:Singapore: 4.5%-5.0%China: 8.5%-9.0%U.S.A.: 2.6%Eurozone: 1.9%

2011 TARGET:

FSSTI: 3,600Hang Seng Index: 29,000S&P 500: 1,315

Lorraine TanDirector of Research


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Standard & Poor s Equity Research

December 23, 2010 Global Strategy

Choppy but positive

The S&P Equity Research Asia team believes that a combination of excessliquidity and relatively low valuations should lead to a positive performance forequities in 2011. Global interest rates remain low but are anticipated to rise as theyear progresses. This may dampen sentiment periodically in emerging Asiawhere interest rates are anticipated to rise ahead of developed markets.Nonetheless, as the global economy gains pace towards 2012, a positive demandoutlook should increase risk appetite. We see the S&P Asia 50 rising 16% fromthe Dec. 17 close to end 2011 at 4,000 points.

On valuation grounds, based on Bloomberg market consensus, Singapores FSSTIlooks to be comfortably valued at 14.0x 2011 PER. Based on 2010 average,

however, we should see the market support 2011 PER of 15x-16x as 2011 unfolds.Looking further back, this remains well below historical average of 17x-20xalthough we note that the make up of the index is more narrow than in the past.With the financials and real estate issues making up 43% of the FSSTI weighting,market consensus is estimating 2011 weighted EPS growth at 10.8%, while we arelooking at 17.6% annualized weighted EPS growth for a broader universe. Assuch, we peg our year-end 2011 FSSTI target at 3,600 on 16x 2011 PER. Our targetalso includes upside for a potential upward rerating on 2012 growth expectations.If confidence reverts to historical norms closer to 17x PER, upside would begreater, potentially to the 3,800 level. Conversely, if 2012 growth expectations donot materialize, we see reasonable fundamental justification for the index to stayflat at the 3,150 level.

FSSTI PERs and 2011 Target

9.2

11.3

15.917.317.4

15.114.913.613.1

13.914.514.315.315.415.315.6 16.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

D e c - 0 8

M a r - 0 9

J u n - 0 9

S e p - 0 9

D e c - 0 9

M a r - 1 0

A p r - 1 0

M a y - 1 0

M a y

2 5 l o w

J u n - 1 0

J u l - 1

0

A u g - 1 0

S e p - 1 0

O c t - 1

0

N o v - 1 0

2 0 1 0

e 2 0 1 1

e

P E R x

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

I n d e x

PERx FSSTI

Source: Bloomberg, S&P Equity Research estimates

Excess liquidity and relatively lowvaluations should lead to a positive

performance

We see a year-end target of 3,600 for theFSSTI. If confidence returns, a rise to the3,800 level could be supported while,conversely, we see risk contained to the3,150 level should 2012 growth fail tomaterialize


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U.S. Recovery Should Provide Buffer to Tightening RiskWe believe the markets have largely discounted expectations for a sluggishglobal recovery. The good news, nonetheless, is that a double dip appears more

remote which removes one recent concern. S&P Economists forecast U.S. realGDP to rise 2.3% from 2Q10 through 2Q11 and 3.2% from 2Q11 through 2Q12. Thelatest data, however, may indicate that the U.S. GDP may be growing on a fastertrajectory than originally assumed and if so, there is upside potential to GDPestimates. At this stage we expect China to post real GDP growth of around 10%in 2010 and narrowing to 9.0% in 2011. Singapores 2011 GDP growth shouldnormalize to the 4.5%-5.0% range given the higher base in 2010.

Singapore Real GDP Growth

-2.4

-9.0

-1.8

10.5

7.9

4.5 4.3 5.05.6

-0.2

1.6

7.8

2.6

19.5

3.8

17.4

-15

-10

-5

0

5

10

15

20

25

1 Q 0 8

2 Q 0 8

3 Q 0 8

4 Q 0 8

1 Q 0 9

2 Q 0 9

3 Q 0 9

4 Q 0 9

1 Q 1 0

2 Q 1 0

3 Q 1 0

4 Q 1 0

1 Q 1 1

2 Q 1 1

3 Q 1 1

4 Q 1 1

Y o

Y %

YoY Annualized

S&P Forecast

Source: CEIC, S&P Equity Research estimates

Another positive from the growth pick up from mid 2011 is that we expect theremay be upside potential for 2012 estimates with the possible boost to U.S.growth and stable China GDP growth of 9.0%. The key areas of likely EPS risesshould come to the transport segment on improved freight and shipping rates, rigfabrication contracts for the energy sector and property income.

Without a doubt, the signs are that inflation risk will be a significant issueparticularly for Asia. The PRC government has set Chinas inflation (CPI) target at4.0% in 2011, up from 3+% in 2010. We see the Renminbi (CNY) appreciating byaround 5% annually going forth and this should provide some offset to inflationfor China. Nonetheless, with the 1-year deposit rate trailing at 2.5%, we could seeabout 75-100 bps of rate hikes in 2011, just to narrow the gap. This should takeChinas benchmark lending rate to 6.25-6.50%, which remains below the pre-crisishigh of 7.47%.

U.S. GDP may be growing on a faster

trajectory than originally assumed and there is upside potential to GDP estimates

Upside potential for 2012 estimates

In Asia, particularly China, we could seeabout 50-100 bps of rate hikes in 2011although Singapore rates should stay low


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For Singapore, interest rates should trend higher along with the economicrecovery but we see a relatively muted rise with the MAS current preference towiden the SGD trading band. As such, SGD strength remains a probable tool tocombat inflation. With likely appreciation in the CNY, we should see the SGD postsimilar gains. In addition, competition among the banks remains significantparticularly given mortgage restrictions and this may keep the rise in borrowingcosts contained.

SGD Gains Against Major Currencies Except for JPY, AUD

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

J a n - 0 7

M a r - 0 7

M a y

- 0 7

J u l - 0

7

S e p - 0 7

N o v - 0

7

J a n - 0 8

M a r - 0 8

M a y

- 0 8

J u l - 0

8

S e p - 0 8

N o v - 0 8

J a n - 0 9

M a r - 0 9

M a y - 0 9

J u l - 0

9

S e p - 0 9

N o v - 0 9

J a n - 1 0

M a r - 1 0

M a y

- 1 0

J u l - 1

0

S e p - 1 0

N o v - 1 0

SGD:USD SGD:AUD SGD:EUROSGD:GBP SGD:JPY100

Source: CEIC

We believe the market has discounted the rate hikes although the periodic talk ofa rise should still cause jitters. Fundamentally, impact to companies earningsdue to increased interest expense should be contained with our universe showingcomfortable average net gearing of 40%.


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Chinas Benchmark Deposit Rates Have to Narrow the Gap to Inflation (CPI)

-4

-2

0

2

4

6

8

10

J a n - 0 7

M a r - 0 7

M a y - 0 7

J u l - 0 7

S e p - 0 7

N o v - 0

7

J a n - 0 8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

N o v - 0 8

J a n - 0 9

M a r - 0 9

M a y - 0 9

J u l - 0 9

S e p - 0 9

N o v - 0 9

J a n - 1 0

M a r - 1 0

M a y - 1 0

J u l - 1 0

S e p - 1 0

N o v - 1

0

%

CPI3-Mths Time Deposit RateBase Lending Rate

Source: CEIC

At this stage, we dont see U.S interest rates rising until 4Q11 withunemployment rate likely to stay high. Regardless, interest rates are coming froma low level so impact is likely to be absorbed.

The global economic recovery, however, should enable companies to poststronger toplines and this should provide buffer to rising costs, including interestexpense. In addition, we expect consumer and investor confidence to rise as theglobal economy recovers. This, we expect, should lead to increased risk appetiteand a rotation into equities.

Property Bubble Risk Exists but Should be ContainedWe do not see a bubble developing in the Singapore property market given thegovernments recent measures. The risk to the sector, however, will probablycome from dampened sentiment as the government will likely impose additionalmeasures should speculative activity remain prevalent. Similarly, we se recentpolicy moves curtailing Hong Kong activity in the short term. We do see,however, a property bubble risk in China, although we believe this should becontained.

For China, an offshoot of the rising rate risk is the impact to the real estate marketand banks asset quality. We see greater impact to the property market from thedirect measures to curb lending rather than from the actual interest rate hike.Unlike the sub-prime mortgage situation in the U.S., the Chinese have funded themajority of housing purchases with 50% cash so we see moral hazard risk asbeing low. We would not rule out, however, that some developers loans may seegreater risk but this is anticipated to mainly impact the third tier and moreprovincial oriented banks.

Markets have discounted the rate hikesand rising confidence and risk appetiteshould lead to a rotation into equities

Limited bubble risk in Singapore but China risk is more significant, albeit manageable


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At the same time, however, the relative price levels indicate that the establishedcities such as Beijing, Shanghai and Guangzhou would be at greater risk to seeprices come down. At current price levels, affordability appears stretched.Demand in the second tier cities such as Chengdu should be stable beingrelatively more affordable.

If the China property market should crumble, the national banks should seecontained risks given more diversified loan books in terms of both industry andgeography. Mortgage loans and property development loans make up 20%-25%of total loans for the top four banks. In his sensitivity analysis, our banks analystDesmond Chng estimates that a 30% decline in property values would raise NPLratios by about 1 %-pt, representing a manageable 7%-9% of shareholders funds.Separately, a 50%-60% decline in property values would raise NPL ratios by 3%-4% pts, impacting shareholders funds by 27%-30%. The latter case wouldnevertheless represent a more extreme scenario which assumes a significantslowdown in economic growth.

We also note the property market in Hong Kong is also somewhat bubbly butinterest rates will remain low given the HKD peg to the USD. Nonetheless, therecent measures are likely to be severe enough to generate a 10% drop in HongKong property prices and a 25% decline in transactions, according to our HongKong property analyst Tam Ching Wah.

For the equity market, however, we believe a fair degree of risk is alreadyreflected in the share prices of the real estate developers. Nonetheless, theoutlook remains challenging in the near-mid term and real estate industry shareprices are likely to move in the line with the market at best.

Eurozone Risk Remains but Likely ContainedProblems with Eurozone debt are likely to continue in 2011 but we believe impactwill be contained. S&P Equity Strategist Robert Quinn is optimistic with thestronger global economic recovery likely to pull the Eurozone up. So far theGerman, French and Benelux economies are performing well and this will providea buffer to the olive belts recession. He notes that Spain, given its size, is thetipping point but Spanish banks, unlike Irelands, are unlikely to require theEuropean Central Bank (ECB) to provide liquidity. Nonetheless, Spain will havesignificant sovereign debt to refinance in 2011 so markets may get the jitters fromtime to time.

Near Term Technical Pullback Remains in PlayWhile we like the market over the mid-term, the short term picture worries MarkArbeter, our Technical Strategist. Mark writes on Dec. 17 that global markets arestruggling led by toppish signs on the Hang Seng Index. Mark notes that the S&P500, as well as other major indices, is hitting key resistance while bullishsentiment remains broad, which is seen as a contrarian indicator. He furtherindicates that the Hong Kong and China markets have lagged, which he takes tobe a weak sign since these markets have led the U.S. market in terms of tops andbottoms. In his view, technical indicators are pointing to a weak start for 2011 andnear term cautiousness warranted.

Chinas tier one cities at greater risk of property price slump while second tier

cities should be stable

A 10% drop in Hong Kong property prices is possible


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Sector Recommendations

Bearing in mind the generally favourable market conditions but with an eye onvalue and the potential for upward re-ratings, we like issues with positiveindustry developments with which we expect activity to pick up. With our viewthat growth plays are still likely to outperform on the global economic pick up, weare OW Energy and Industrials and UW Healthcare and Real Estate, with the latterlikely to lag on policy measures.

Overweight Energy and IndustrialsRising global consumption is likely to keep demand for commodities and relatedtransport services favourable. Given the growth story, we like Energy andIndustrials on an improving outlook as well as having relatively comfortablevaluations. We have a preference for the Energy sector as we see limited supplygrowth to keep oil prices on an upward trend and comfortable valuations.Furthermore, oil services suppliers and equipment providers should improvingdemand and with it, improved asset utilization that should support margins.

While excess capacity and higher raw material costs may limit the earningsupside for industrials, improving revenue and asset utilization rates are likelyprovide a buffer to margins. Hence we expect an improving operating margintrend through 2012 to underpin performance. After a stellar performance in 2010,airlines may lag other transport issues but Singapore Airlines, in our view,remains relatively attractive.

Neutral Banks, GamingBanks have lagged with worries over margins and loans growth as well as globalworries over issues ranging from Chinas loan quality risk to the Basel 3requirements. However, we see an improving environment for Singapores banksin 2011 with steady economic growth to provide support as well as a pick up intreasury activity. Our neutral stance, however, reflects our expectation formargins to continue to be challenged.

The Consumer Discretionary issues led gains in 2010 due largely to gaming stockGenting. With the Singapore integrated resorts more of a known issue going into2011, and already heightened valuations, we see more limited upside. Excludinggaming the sector was relatively lacklustre in 2010.

Underweight Healthcare and Real EstateHealthcare was a key outperformer among Singapore issues in 2010 due in largepart to mergers & acquisition activities, firstly, the takeover battle for Parkwayand, secondly, the sale of Thomson Medical Center. With the space fortransactions for limited and premium valuations, we see fewer positive drivers inthe sector.

While demand for newly launched properties remains strong and the share pricesof real estate companies may already reflect risks, we expect the potential foradditional measures remains high. As such, we see a losing news flow situation

for share prices. If the property market remains buoyant, measures may be addedbut if transactions and prices slip, the earnings outlook may be less certain.

Growth story still in play - OW Energy,and Industrials and UW Healthcare and Real Estate


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S&P Singapore BMI Sector Performances, 2010 (year-to-Nov. 30) and 2009

72%

125%

98%

191%

131%

72%

23%

137%

59%

74%

138%

-19%

-11%

-5%

-4%

0%

1%

7%

19%

28%

35%

6%

-50% 0% 50% 100% 150% 200% 250%

Index

Materials

Utilities

Energy

Information Technology

Financials

Telecom S ervices

Consumer Staples

Industrials

Consumer Discretionary

Healthcare

2009 2010 YTD

Source: S&P Index Services

Sector Weighted Share Price Performances as of Dec. 17, 2010

GICS Sectors

1 month

perf

3 month

perf

YTD perf

'10 1 year perfConsumer Discretionary 0.5% 1.0% 61.8% 79.8%Median -0.8% 0.8% 2.3% 9.1%

Consumer Staples 2.1% 6.1% 13.1% 13.5%Median 2.0% 3.6% 50.0% 50.0%

Energy -3.3% 4 .9% 36.5% 42.3%Median -0.2% 2.5% 40.7% 45.2%

Financia ls -0.6% 3 .7% -0.1% 3.2%Median -0.9% 11.6% 4.4% 6.5%

Banks & Diversified Financials 0.7% 4.6% -1.9% 1.2%Insurance -4.3% -4.8% -1.8% -0.4%

Real Estate -3.5% 1.9% 4.0% 7.8%Healthcare 0.3% 43.5% 115.5% 133.0%Median -2.0% 12.6% 74.5% 84.6%

Indus tr ials -2.6% -3.1% 0 .2% 2.8%Median -4.4% -4.5% 0.9% 5.0%

Aviation -4.2% -5.2% 0.4% 4.6%Construction & Engineering -1.6% -1.0% -5.8% -6.3%Industrial Conglomerates, Machinery & Others -0.1% -0.1% 0.3% 0.3%Trading 1.8% 5.5% 10.5% 11.8%

Information Technology -16.7% -18.7% -18.7% -19.0%Median -12.5% -12.5% -22.2% -22.2%

Mater ia ls -3.8% -13.5% 17.6% 15.2%Median 4.2% -10.0% -5.7% -2.0%

Telecom Services -2.8% -0.6% 0.7% 2.9%Median -5.8% -0.1% 7.8% 11.0%

S&P Singapore Universe -1.3% 1.5% 7.0% 11.4%Median -2.0% -0.1% 4.4% 9.1%

Source: Factset


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S&P Recommended Sector Weightings and Key Annualized Weighted Average Sector Ratios (as of Dec. 17)

GICS Sectors 2009 PER 2010e PER 2011e PER 2010e EPS 2011e EPS 2010 Div Yld 2010 P/BV 2010 ROE Recommended X X X Growth % Growth % est. % est. X est. % S&P Sector EmphasisConsumer Discretionary n.m. 33.0 22.7 (0.5) 45.9 0 .0 5 .2 15.6 MarketweightMedian n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m.Consumer Staples 28.0 92.6 14.0 93.1 39.0 2.6 1.1 14.3 MarketweightMedian 17.2 14.6 11.6 46.0 16.8 4.4 2.0 10.4 Energy 15.7 13.9 13.2 11.6 6.9 2.6 1.3 18.4 OverweightMedian 16.7 15.0 11.9 11.5 5.5 1.6 2.6 0.0 Financials 15.3 16.5 12.9 4.7 30.1 3.6 1.4 10.4 MarketweightMedian 14.3 10.8 12.3 14.9 5.6 2.9 1.4 9.0

Banks 15.9 17.5 11.7 3.7 47.9 4.3 1.5 11.9 MarketweightReal Estate 14.2 14.6 15.9 6.9 (10.7) 2.0 1.2 6.9 Underweight

Healthcare 41.0 28.7 23.4 35.1 21.0 2.0 1.3 14.7 UnderweightMedian 16.7 15.0 11.9 11.5 5.5 1.6 2.6 17.2 Industrials 13.2 22.4 35.7 (24.0) (22.4) 3.9 1.7 16.9 OverweightMedian 9.3 8.3 7.1 6.5 8.1 4.3 2.7 11.1

Aviation 14.8 28.7 49.2 (30.6) (26.9) 3.7 1.3 15.2 OverweightConstruction & Engineering 9.4 5.9 5.3 60.0 9.8 2.9 0.3 11.4 OverweightIndustrial Conglomerates & Others 11.0 13.7 16.8 (19.5) (17.8) 4.4 2.5 20.0 MarketweightTrading Services 7.9 7.1 6.5 12.7 9.1 4.3 0.3 10.7 Overweight

Information Technology 8.4 10.4 12.3 (10.9) (15.1) 6.5 1.1 12.0 MarketweightMedian 8.6 8.0 8.7 (6.7) 0.0 5.7 1.4 6.7 Materials 4.2 5.1 5.5 (17.9) (6.9) 1.7 0.4 16.2 MarketweightMedian 4.5 5.1 5.5 (11.6) (6.6) 1.9 0.8 16.6 Telecom Services 12.9 14.2 13.1 (8.5) 8 .3 4 .8 3 .0 40.5 MarketweightMedian 13.1 15.9 14.6 (16.1) 8.3 6.3 1.7 n.m.S&P Singapore Universe 12 .9 19.0 17.9 (3.1) 17 .6 3.5 1.7 18 .2Median 13.7 12.7 11.7 (0.1) 6.8 3.6 2.3 10.8 Source: Company data, S&P Equity Research estimates


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Consumer DiscretionaryOverviewThe consumer discretionary sector outperformed in 2010 with the S&P Singapore BMIConsumer Discretionary rising by 28.4% YTD vs. the 6.1% gain in the broader market.Discretionary spending strengthened on the back of growing consumer confidence, animproving global economic outlook and the wealth effect from the equity and property markets.The sector has also seen an upward re-rating on the back of a resumption of global economicgrowth.

The opening of the two integrated resorts (IR) this year has provided a boost to the sector. TheIRs have generated strong revenues while tourism arrivals have hit record high levels aided bythe draw of the two IRs.

Sector Performance vs. S&P Singapore BMI (as of Nov. 30)

Consumer Discretionary vs. Index

-9%

7%3%

-1%

2%

74%

28% 28%

8%

-3%

6%

72%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2009 1Q10 2Q10 3Q10 QTD YTD

Consumer Discret ionary Index


We expect continued strength in the regional economies to support further growth indiscretionary spending in 2011. We are Marketweight the consumer discretionary sector withvaluations reflecting upside expectations.

2011 Outlook Positive DriversModest global economic growth and the robust regional economies are the main drivers for thesector. Higher purchasing power from rising income levels should lead to higher discretionaryspending and a reduced need for price discounting. The addition of new facilities andattractions at the IRs will ensure that the IRs remain a draw for visitors.


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NegativesThe absence of licensed casino junkets in Singapore may somewhat limit the ability of the IRsto fully realize the potential of the premium player segment of the casino market. Also, high

cotton prices are likely to put pressure on apparel retailers margins. With consumers beingmore price-sensitive than in the past, it may be difficult for apparel retailers to fully pass on thehigher cost. In addition, any sharp declines in the property and equity markets that results in anegative wealth effect may impact consumer sentiment.

Base Case ExpectationWe project a 20%-25% growth in casino revenue in 2011, which will be the first full-year ofoperations for the IRs. We expect exporters/suppliers that are dependent on the U.S. andEuropean markets to see a gradual improvement in demand. In addition, major suppliers thatare financially strong should continue to benefit from consolidation in the supply chain.

IRR Openings Have Boosted Tourist Arrivals, Hotel Rates and Occupancy Recover

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

J a n - 0

7

M a y - 0

7

S e p - 0

7

J a n - 0

8

M a y - 0 8

S e p - 0 8

J a n - 0

9

M a y - 0

9

S e p - 0

9

J a n - 1

0

M a y - 1 0

S e p - 1 0

V i s i t o r

A r r

i v a l s

Americas As ia Europe Oceania

0

10

20

30

40

50

60

70

80

90

100

J a n - 0

7

M a y -

0 7

S e p - 0

7

J a n - 0

8

M a y -

0 8

S e p - 0

8

J a n - 0

9

M a y -

0 9

S e p - 0

9

J a n -

1 0

M a y -

1 0

S e p - 1

0

O c c u p a n c y

R a t e

( % )

0

50

100

150

200

250

300

350

S G D / n i g h t

Hotel Occupancy Rate (lhs)Avg. Room Rate (rhs)

Source: CEIC


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Consumer StaplesOverviewThe Singapore consumer staples sector performed in line with the broader market in 2010. TheS&P Singapore BMI Consumer Staples rose 6.6% YTD vs. the 6.1% gain in the broad marketindex.

Palm oil prices have rallied over 50% since mid-2010 to about USD1,200/ton, presently on tightglobal supply of vegetable oils and continued high demand. Adverse weather conditions haveaffected palm oil production in Malaysia and Indonesia, and soybean plantings in SouthAmerica. China led the demand growth as domestic production lagged accelerating demand.


Consumer Staples vs. Index

4%

-10%

3%

-1%

2% 7%10%

137%

72%

6%

-3%

8%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2009 1Q10 2Q10 3Q10 QTD YTD

Consumer Staples Index


We have a Marketweight view on the consumer staples sector. The sector is trading at a 2011PER of about 15x, which is close to current market valuations. We remain positive on the

outlook of palm oil prices in 2011 and project an average price of between USD900/ton andUSD1,000/ton (vs. USD860/ton estimated for 2010) due to supply-demand imbalance. Whilehigh commodity prices are positive for upstream producers such as plantation companies, F&Bcompanies are likely to face cost pressures in 2011. We expect leading F&B players with greaterpricing power to fare better in the high cost environment.

2011 Outlook Positive DriversThe negative effect of adverse weather conditions on palm oil yields and soybean plantings willkeep the global supply tight, in our opinion. 1Q is also a seasonally low production period forpalm oil and soybean oil. Palm yields are expected to recover in 2H2011 while a more favorableweather could potentially support larger soybean plantings in the US at record level. However,we expect expanding biodiesel production to limit the availability of soybean oil for export.

Similarly, we expect the planned implementation of the biodiesel mandate in Malaysia in mid-2011 to absorb the higher output and keep the countrys palm oil stock low.


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Meanwhile, we expect rising consumption and product mix enhancements to be the mainpositive drivers for F&B companies in 2011.

Malaysia CPO Prices, Production and Inventory

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

J a n - 0 7

M a r - 0 7

M a y - 0 7

J u l - 0 7

S e p - 0 7

N o v - 0 7

J a n - 0 8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

N o v - 0 8

J a n - 0 9

M a r - 0 9

M a y - 0 9

J u l - 0

9

S e p - 0 9

N o v - 0 9

J a n - 1 0

M a r - 1 0

M a y - 1 0

J u l - 1 0

S e p - 1 0

N o v - 1 0

M Y R / t o n

Spot Price 1-month Forward2-months Forward

0

500

1,000

1,500

2,000

2,500

J a n - 0 8

A p r - 0 8

J u l - 0

8

O c t - 0

8

J a n - 0 9

A p r - 0 9

J u l - 0

9

O c t - 0

9

J a n - 1 0

A p r - 1 0

J u l - 1

0

O c t - 1

0

" 0 0 0 t o n s

CPO Production CPO Stock

Source: CEIC

NegativesPalm oil import demand from China is likely to slow down given the increasing inventory level.The steep price increase could also curb consumption and halt biodiesel production in Asia.The projected recovery in palm oil production in 2H could put downward pressure on prices.

Commodity prices remain a key concern for F&B companies. While product mix enhancementsand selling price increases can help cushion the impact of higher raw material cost, companiesmay not be able to fully pass on higher costs if there are sharp increases in commodity prices.

Base Case ExpectationWhile palm oil prices could be pressured by the projected production recovery, we expect thedownside to be supported by the continued growing demand for vegetable oils from both foodand non-food sectors. Given the low stock levels of oilseeds, competition for acreage isexpected to continue in 2011. Accordingly, we do not factor in a big expansion of soybeanplantings in the U.S. to make up for the weather-induced production losses in South America.We thus expect the supply-demand situation for soybean oil to remain tight throughout 2011.This is expected to increase the dependence on palm oils to meet the demand for vegetableoils.

We expect to see continued cost headwinds for F&B companies in 1H11 due to high commodityprices, but believe that product mix enhancements, selling price increases and improving

production efficiency will help cushion the impact.


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Energy

OverviewThe Energy sector performance was a mixed bag so far in 2010, generally underperforming theS&P Asia-Pacific ex-Japan BMI, and the S&P Singapore BMI. The gains in the regional energysector have generally been led by upstream oil & gas companies. Margins at oilfield servicescompanies in general saw declines, as slower capital investments on worries over the globaleconomy and safety procedures post-Macondo resulted in lower asset utilization. Meanwhile,upstream players saw better profits as crude oil prices tracked higher.


Energy vs. Index

-5% -11%

5%

-1%

2%

191%

7%

-5%8%

-3%6%

72%

-50%

0%

50%

100%

150%

200%

250%

2009 1Q10 2Q10 3Q10 QTD YTD

Energy Index


Fundamentally, 2011 oil prices should increase at a more sedate pace as spikes in oil pricesshould be tempered as spare capacity remains, but USD movements will be the wildcard, andmay boost short-term crude price volatility. We are Overweight the sector given the relatively

attractive sector 2011 weighted PER of 13.2x and we see limited downside risk to oil prices inour base case scenario. As we move into 2012, upward pressure is likely on prices as demand isanticipated to grow at a quicker pace than supply. This should filter through to improve overallsector activity.

Positive DriversThe two key factors that may boost energy prices in 2011 are: (i) the prospect for USDweakness and (ii) a faster-than-expected growth in global demand. S&P economists expect theUSD to depreciate by 3.9% vs. its major trade partners in 2011. The current reprieve due to theweak EUR will be short-term in nature, as the combined effects of QEII and dampened USexports will continue to put downward pressure on the dollar.

This should sustain short-term market interest in oil futures and other commodity issues as ahedging tool.


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If the global economy grows at a quicker rate, the current spare capacity in oil output should bemore rapidly absorbed, boosting futures prices and benefiting the upstream oil & gas and coalindustries in particular. Further, OPECs inaction (or inability to act, especially as compliance totarget is already low at 54%) could delay an expected supply response, and provide morestrength to oil prices.

The potential strength to oil prices should also incite a pickup in exploration & production,leading to a rise in oil & gas equipment demand and rental rates. Increased investment awardsshould benefit fabricators, while a better lending environment in 2011 should also boostinvestments.

NegativesA slower-than-expected global economic recovery will negatively impact energy demand andprices. A drop back in oil will be negative for upstream producers. Refiners may not be assensitive, given the likely faster drop off in raw material prices, since gasoline prices have notkept pace with the recent rise in oil prices. The risks for the services companies is if investmentremains weak, but profit margins should have lower downside risk in 2011, as utilization ratesappear to have bottomed.

Base Case ExpectationOur fundamental outlook on oil places an average price for WTI of about USD85.41/bbl for2011, implying an 8.4% increase from an expected 2010 average of USD78.82/bbl. Oil pricesshould be supported by improving fundamentals but capped by excess supply.

The higher oil prices and improving lending environment should allow committed investmentto increase, and although 1H10 orderflow was slow, the pace began to pick up in 2H10. Weexpect this will translate into better times for the oil & gas services industry, which faced

shrinking orderbooks and more competitive equipment rental rates in 2010. Hence, we factorrig and other support vessel rental rates to grow by 5% YoY.


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Financials - Banks

OverviewAs a sector, financials lagged the S&P Singapore BMI and specifically, banks underperformedthe FSSTI in 2010. The domestic operating environment in 1H10 was largely cautious, with loangrowth trailing in the mid single digit range throughout much of the period. Competition,meanwhile, was stiff and net interest margins (NIM) continued to compress as a result. The 2Hnevertheless, has seen renewed confidence. Loan growth has gathered momentum and was up13.8% YoY in October, driven essentially by consumer lending, particularly to the propertysector. We expect aggregated operating profit for the three banks to rise 4.1% in 2010.Recurring net profit, on the other hand, is expected to jump 24% on the back of lowerimpairment charges.

We are Marketweight the Singapore banks primarily on valuation grounds as we believe

present valuations are fair, with the sector presently trading at an average P/BV of 1.4x for anaverage ROAE of 12%. Providing support to share price nevertheless, are average yields of4.3% for 2010.


Financials vs. Index

-4% -1%

0%

-1%

2%0%

5%

72%72%

6%

-3%

8%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2009 1Q10 2Q10 3Q10 QTD YTD

Financials Index


Positive DriversWe expect economic momentum to provide impetus to loan growth while NIM is likely to havebottomed, in our view. The strength of regional economies in which the banks are present,such as Malaysia, Indonesia and Hong Kong, should serve to enhance group earnings as well.What is also undoubtedly positive is that Singapore banks are more than adequatelycapitalized, with core capital ratios of 12%-14%, placing them in a strong position to pursuefuture growth strategies.


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NegativesOf risk would be of slower-than-expected economic growth in the region that would negativelyimpact earnings. Also of concern would be government efforts to further rein in the property

sector. Housing loans presently account for about 25%-29% of group loans on average.

Loans growth is recovering, interest rates are still low and margins should improve

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

J a n - 0 8

A p r - 0 8

J u l - 0

8

O c t - 0

8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0

9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1

0

M o

M

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Y o Y

Loans (MoM) Loans (YoY)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

J a n - 0 8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

N o v - 0 8

J a n - 0 9

M a r - 0 9

M a y - 0 9

J u l - 0 9

S e p - 0 9

N o v - 0 9

J a n - 1 0

M a r - 1 0

M a y - 1 0

J u l - 1 0

S e p - 1 0

N o v - 1 0

%

Overnight Rate SIBOR 3-Months

Interbank 3-Months

Source: Company data, S&P Equity Research estimates

Base Case ExpectationS&P Economists forecast GDP growth of 5% for Singapore in 2011, as the island state continuesto ride the global economic recovery. For the banks, we forecast aggregate loan growth of 8.9%and an improvement in net interest margins to contribute to a 9.1% expansion in operatingprofit, while recurring net profit is expected to grow at a faster clip of 12.7%.


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Financials - Real Estate

OverviewIn 2010, like most key regional property markets, the Singapore property market was not sparedAsian-centric property policy measures to pre-empt a bubble. Strong sales were tempered bytwo rounds of control measures, beginning in 2Q10.

Government intervention will remain a dominant threat in 2011 and any perceived priceexuberance will be swiftly contained by more policy measures. Active government measureshave thus far been effective, with transaction volumes slowing down post measures.Nevertheless, the sharp 79.2% MoM uptick in sales volume to 1,909 units in November 2010 hasre-ignited fears of further tightening measures. We believe that sales outperformance isdifficult in such an environment. In our view, stricter measures in the governments arsenalinclude a capital gains tax and further modification of credit availability to buyers.

Transactions anticipated to cool following government measures but prices should be stable

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0

8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0

9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1

0

S G D ' 0 0

0 / p s f

-50%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

C h a n g e

f r o

m P e a

k

Avg. Transacted Price Change f rom Dec. '07 Peak

Source: CEIC

Likewise we remain concerned about impending supply in the coming three years. Note that anaverage of 12,500 residential units per annum have been sold during 2007 to 2010, with thebulk completing in the coming three years. On the supply side, the 1H11 Government LandSales Programme (GLS) now includes 17 confirmed residential sites, which should yield 8,100units, just slightly lower than 2H10s record 8,135 units. Meanwhile, the reserve list of the GLSincludes another 12 residential sites that can yield 6,200 potential units, aggregating to a totalof 14,300 units for 2011. In addition, the government is expected to add another 22,000 HDBunits in 2011. Therefore we see the bulk of supply influx coming on stream in 2012-2014, whichmay lead to oversupply due to the governments current more stringent immigration policy toslow population growth.

We maintain an Underweight view on the sector. Sector gearing remains healthy at 35% to 50%and the average sector P/BV of 1.2x is fair versus a five-year historical sector average of 1.5x.


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We believe that the residential sub-segment will face near term headwinds, as any demandexuberance in 4Q10 will be plugged by more legislative measures. Nevertheless, all other sub-sectors will continue to perform well, especially the office sector, as rents are still well belowits previous peaks. In our view, this segment will benefit from continued GDP growth and apositive employment outlook, especially in the financial services segment.

Positive DriversTwo key factors will underpin demand for properties in 2011, namely the low-interest-rateenvironment and ample liquidity. We believe that this will drive transaction volumes, withprices remaining firm, that is if it is not curtailed by further cooling measures. In addition, thehigh end segment may see more foreign buyers returning to the market, especially Chinesebuyers, which accounted for 20% of foreign demand for private homes in Singapore in 3Q10(on par with the Indonesian buyers).

Negative DriversThe government will continue to employ policy measures to temper the property market toprevent asset bubbles. This will result in periodic volatility, curb demand exuberance anddampen investor sentiment.

Base Case ExpectationsGoing into 2011, most Singapore developers are still optimistic as they are buffered by strongpre-sales from previous years. We project recurring net profit for companies under ourcoverage to grow by 10% to 18% in 2011. Most developers are still selectively augmenting toexisting landbank, favoring choice sites near main transport nodes. Though the high residentialland supply coming on stream is likely to result in lower land prices, it may not translate tolower selling prices, which have thus far held firm. Nevertheless, we believe that furthercooling measures are imminent. We project that about 14,000 residential units will be sold in2011, about 15% lower than 2010 levels. On the price front, we believe that selling prices willremain fairly firm, with most developers seeing no urgency to discount.

On a relative basis, commercial space will perform better in 2011. We see commercial spaceoutperforming on the back of a cyclical recovery, liquidity inflows, and cap rate compression.The glut that many had feared has eased substantially with over 50% of the 2011 office spacealready pre-committed. Office supply is expected to fall meaningfully after 2012, especially inthe CBD. This will drive higher reversionary yields. With demand and net take-up rates positive,coupled with cap-rate compression, asset values will be supported.

The retail segment, similarly, will remain resilient, as the bulk of supply is held in the hands ofa few major landlords. In our opinion, the healthy GDP growth and influx of tourists will bode

well for the retail market in the near term, with rentals remaining firm, especially for suburbanspace.


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Healthcare

OverviewIn Singapore, the healthcare sector looks positive with the regional economic recovery andupturn in medical tourism. Private healthcare providers are expected to benefit from risingaffluence and the aging population, continued attraction of Singapore as a medical hub and itsgrowing resident population. The beneficial conditions coupled with a few high profiletakeovers led the sector to outperform, gaining 35% vs. the S&P Singapore BMI rise of 6% year-to-Nov. 30.

However, share price rises have led the sector to heightened valuations and we suspect, morelimited upside. With fewer exceptional triggers in 2011, we expect the sector to underperform.As such, we are Underweight the sector although we note that there are pockets of relativelyattractive smaller cap stocks that may still be fodder for potential acquisitions.


Healthcare vs. Index

11% 7% 2%

-1%

2%

138%

13%

35%

8%

-3%

6%

72%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2009 1Q10 2Q10 3Q10 QTD YTD

Healthcare Index


Positive DriversKey catalysts for the healthcare sector in Singapore include continued growth in the globaleconomy and the prospect for further mergers and acquisitions. This comes after KhazanahNasional took over Parkway Holdings and billionaire investor Peter Lim making a general offerfor Thomson Medical in 2010. There are limited healthcare players listed in Singapore andvaluations are likely to be supported by investors looking for exposure to this sector.

Negative DriversSlower-than-expected economic recovery could affect demand for healthcare services andcause patients to cut medical bills. Rising competition, a loss of key doctors, complaints ormedical negligence are all ongoing operating risks. Investment risks stemming from overseas


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21



ventures, higher-than-expected start-up costs, and longer-than-expected gestation period mayalso dampen margins and cash flow. Another severe flu outbreak could also reduce medicaltourists and discourage hospital usage.

Base Case ExpectationsThe fundamental outlook remains buoyant with earnings growth underpinned by a risingSingapore population, particularly consisting of a bigger expatriate community with decentspending power. In addition, regional economic growth and the ensuing wealth effectgenerated should help the increase of medical travelers to Singapore. The governments driveto increase medical tourism and boost Singapores attraction as a world class healthcaredestination with investments in skilled medical professional and technology should also helphealthcare providers sustain margins against rising costs. We also expect the private healthcareproviders to continue to capitalize on their established Singapore brand and expand overseaswhich will help bolster their net profits. Meanwhile, pre-tax margins are expected to remainfirm due to continued efforts to roll-out medical specialties services and continued emphasis oncost management. However, the positive story is largely reflected with the sector trading at 26x2011 PER with 2011 average weighted EPS growth of 21% (excludes Parkway, which is nottrading).


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22



Industrials

OverviewThe Industrial sector outperformed in 2010, increasing 21.0% vs. 8.6%% for the S&P Asia-Pacificex-Japan BMI through end-November. This outperformance was seen across markets in theregion, including a 19% rise vs. the S&P Singapore BMIs 6% return. Within the region, thegains were led primarily by transport issues. In Singapore, while aviation was flat, theconstruction & engineering segment, conglomerates and marine issues led the market.

For 2011, the outlook remains largely positive with the global recovery expected to help thetransport logistics sector through improving capacity utilization and stable rates. We alsoanticipate capital equipment sales to gain towards end 2012 as companies begin to refocus onexpansion activities. We remain Overweight the Industrials sector.


Industrials vs. Index

7%

-2%

4%

-1%

2%

19%

8%

59%

72%

6%

-3%

8%

-10%

0%

10%

20%

30%40%

50%

60%

70%

80%

2009 1Q10 2Q10 3Q10 QTD YTD

Industrials Index


Construction & Engineering: The construction sector GDP in Singapore continues to grow,albeit at a slower rate of 7.1% YoY in 3Q10 compared with 11.5% in 2Q10 and 9.7% in 1Q10(Source: MTI). The performance of the sector in 2010 was primarily driven by sustained publicworks and recovery in the residential property segment in tandem with improved marketsentiment. Public sector projects include the MRT contracts for the Downtown Line, road works,industrial facilities at Seletar Aerospace Park, service tunnel at Marina Bay and new healthcarefacilities. Nonetheless, the industrys growth has moderated this year due to the completion ofsignificant portions of the two integrated resorts.

In 2011, we expect the sector to continue to benefit from increased spending in public worksparticularly transport infrastructure and continued economic growth in Singapore. Robusteconomic growth in Singapore will create spill-over benefits to the construction sector,providing more tendering opportunities in building projects. In addition, expectations for asustained take-up rate in the private residential market should continue to buoy the sector.


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Meanwhile, local companies with overseas activities particularly in niche infrastructure areasshould benefit from the economic growth in the region.

Airlines : We expect Singapores aviation market to continue growing in 2011 on the back ofrising demand for air travel and airfreight. Business travel should also improve in line withgrowing regional trade and increasing activity in the financial sector. Visitor arrivals toSingapore are increasing, drawn by the new integrated resorts and the countrys establishedposition as a venue for conferences, seminars and exhibitions. The aviation support servicessector, e.g. maintenance, repair and overhaul, is expected to see more work as parked aircraftare recalled into service and new aircraft are commissioned. Singapore aviation stocks arecurrently trading at forward PERs of 13.9x, compared with historical averages of 12x-20x.

Marine : Going into 2011, we still prefer the container shippers over the dry bulk shippers andports. Container ship deliveries are decelerating versus dry bulk new built completions that willremain high following record orders in 2007 and 2008. Total dry bulk orderbook makes upapproximately 31% 2011 global fleet. Although oversupply could exist in both sub-sectors, we

estimate the extent will be much milder among the container liner operators, with an estimated1.0% excess supply growth versus dry bulk operators about 4.9% excess supply growth in2011.

Global trade growth will normalize to 7% to 9% in 2011, in our opinion, and the recovery shouldcontinue to underpin freight rates on most trade routes. Despite an increase in global containertonnage in 2011, we believe much of the new container vessel supply can be absorbed via slowsteaming. With the container liner operators less fragmented than bulk shippers, mutualcooperation via Grand Alliance pacts in terms of new routes and new builds has ensured amore stable operating environment.

Positive DriversConstruction & Engineering : In Singapore, public sector demand for construction services isexpected to remain strong in 2011, supported by extensive works in transportationinfrastructure. With the Singapore government spending over SGD60 bln over the next tenyears to double the existing rail transit system (RTS), the order books of local constructioncompanies are set to grow. The new lines are the Downtown Line (DTL), the Thomson Line(TSL) and the Eastern Region Line (ERL). In addition, other mega infrastructure include theSGD1.33 bln Sports Hub that will be rolled-out after a two-year delay due to the financial crisisand high building material costs.

HDBs plans to boost and expedite development of new flats to appease rising demand alsobode well for the construction industry. HDB is doubling this years supply from 8,000 to 16,000units and plans to launch a record of 22,000 flats in 2011. Besides the continued

implementation of government contracts, private building projects should be sustained byactivities in both the residential property and commercial segments in tandem with theimprovement in the economy.


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Private projects picked up with the recovery but government will step in should jobs dip

0

5,000

10,000

15,000

20,000

25,000

J a n -

9 5

J a n -

9 6

J a n -

9 7

J a n -

9 8

J a n -

9 9

J a n -

0 0

J a n -

0 1

J a n -

0 2

J a n -

0 3

J a n -

0 4

J a n -

0 5

J a n -

0 6

J a n -

0 7

J a n -

0 8

J a n -

0 9

J a n -

1 0

S G D m

l n

Public P roject Awards (YTD) P rivate P roject Awards (YTD)

Source: CEIC

Airlines : Sustainable economic growth will be the primary positive driver for airlines, as

business travel grows on increasing international trade and financial market activities, andleisure travel rises on higher disposable income and discretionary spending. We see increasingdemand and disciplined capacity management leading to stronger yields and higher revenues.At the same time, costs remain relatively stable, due to the restructuring measures that airlineswere forced to implement during the recession. Prospects for a weaker USD would be good forairlines in Asia in general, as this would reduce their USD debt burdens, acquired whenpurchasing aircraft, leading to foreign exchange gains.

Marine : A continued improvement in trade volume will be the key positive for both shippersand ports. In particular, signs of a pickup in manufacturing should improve confidence, whichwill be positive for container shippers. Chinas domestic requirements, especially ininfrastructure development, will continue to drive dry bulk deliveries.


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(Lef) Revenue/Passenger-km vs. Available Seat-km (Right) Freight Tonne-km vs. Available Freight Tonne-km

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Jan2006

Jul Jan2007

Jul Jan2008

Jul Jan2009

Jul Jan2010

Jul

RPK ASK

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Jan2006

Jul Jan2007

Jul Jan2008

Jul Jan2009

Jul Jan2010

Jul

FTK AFTK

Source: Association of Asia-Pacific Airlines

NegativesConstruction & Engineering : Higher prices of basic building materials such as steel bars andconcrete, and transportation costs could pressure margins. The gradual increase in foreignworkers levy to encourage contractors to invest in productivity enhancing equipment andtraining will further dampen margins. Fuel cost is also rising and this could further pressurizeconstruction margins. Undoubtedly, with construction of the integrated resorts completing,there may be added competition for new jobs and this may also constrict margins.

Airlines : Looking ahead to 2011, the overall outlook for Asian airlines remains positive, but thedouble-digit passenger traffic growth rates of the first nine months of 2010 are expected toease back toward normalized growth trends. Slower economic growth in Europe and the USalso needs to be factored in. There are signs that the airline industry is entering a slower phaseof growth after the strong post-recession rebound that began in 2H09 and gained momentum in1H10.

Now that the restocking cycle has ended, consumer spending and business investment will bemore important drivers of air freight demand, but they represent more uncertain factors as

joblessness remains high and consumer confidence falls in Europe and North America. At thesame time, airlines have been adding air freight capacity at a rate that has outpaced demandgrowth.

The rise in jet fuel prices remains a worry for airlines. Since its early 2009 low, the price of jetfuel has nearly doubled, in line with the rise in the price of crude oil. We are concerned thathigher fuel prices may hamper airlines profitability if fuel surcharges applied by airlines cannotfully offset the fuel cost increase. Airlines may also see a narrowing in fuel hedging gains or

losses, as fuel hedging contracts entered into in 2007/2008 are gradually settled.


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Marine : Shippers will have to manage fuel costs more actively in 2011 given our view for oilprices to see greater upside pressure as the global economy recovers. Since there remainsexcess capacity of vessels, the ability to pass through higher fuel costs may be limited. Risinginterest rates may lift interest expense but the shippers in our coverage have comfortablegearing levels and should see contained impact. As mentioned earlier there remains significantsupply of bulk ships coming on stream and this could pressure dry bulk freight rates.

Base Case ExpectationConstruction & Engineering: We anticipate local construction demand to grow at a slowerpace as it tapers from the peak of the recent building boom, particularly with the completion ofthe integrated resorts. However, we expect construction companies to continue to benefit fromthe governments sustained high level of public projects in the next few years comprisingmainly infrastructure works, new public housing and institutional projects. According to theBCA, the average annual construction demand for 2011 and 2012 is forecasted to reach betweenSGD18 bln and SGD25 bln. This is higher than the historical average annual constructiondemand of SGD15.6 bln between 1996 and 2006.

Airlines: We expect traffic demand to remain robust, although the pace of growth will likelymoderate, due to the higher base effect and as traffic patterns ease toward long term trends.For the Asia Pacific region, we see international passenger and cargo traffic growth slowingfrom 10% and 25% in 2010 to 4% and 10% in 2011, respectively. Of course the actual pace ofexpansion will be dependent on the strength of the global economic recovery ahead. A goodnumber of Asia-Pacific airlines have announced new aircraft orders in 2010, a sign thatconfidence has returned to the sector. We expect airline capacity to expand over the next fewyears to cater to growing demand, and that will also benefit airport operators. We expectairport operations to normalize and profitability to grow, in line with higher traffic and airlinescapacity growth.

Marine: While shipping rates are not expected to move much due to increased capacity, we feelvaluations are undemanding and this should provide support to share prices. We estimate theBDI will stay range bound at around the 2700 to 2800 range in 2011. We expect container freightrates to remain relatively flat on most routes. We have factored in an overall volume growth of8% on the back of increased global trade demand.


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Choppy recovery in Singapore container throughput

-3.2%-1.3%

-9.3%-5.8%

-8.4%-6.3%

18.5%

-4.9%

0.7%

5.9%2.5%

-5.8%

7.9%

0.5%

-1.9%

2.1%

-6.4%

10.4%

-3.7%

4.4%

-1.1%

5.3%

-3.7%-7.9%

7.1%

1.0%-0.1%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

S e p - 0 8

N o v - 0 8

J a n - 0 9

M a r - 0 9

M a y - 0 9

J u l - 0 9

S e p - 0 9

N o v - 0 9

J a n - 1 0

M a r - 1 0

M a y - 1 0

J u l - 1 0

S e p - 1 0

N o v - 1 0

Container Throughput (MoM)

Container Throughput (YoY)

Source: CEIC


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Information Technology

OverviewFollowing the stellar performance in 2009, the broad Information Technology sectorunderperformed in 2010. In Asia, the sector gained 4.4% vs. 8.6% YTD for the Asia-Pacific ex-Japan BMI and -4.0% vs. 6% for the S&P Singapore BMI. The overall weakness was mainly dueto more subdued growth expectations going into 2H10 in the absence of any inventoryrestocking. However, underlying performances were mixed. Internet issues fared far better andthis helped propel to the China technology sector to outperform, but this seems to be one ofthe fewer bright spots for the overall sector and an absent driver for the Singapore issues.


Information Techno logy vs. Index

2%

-19%

9%

-1%

2%

131%

7%

-4%

8%

-3%

6%

72%

-40%

-20%

0%20%

40%

60%

80%

100%

120%

140%

2009 1Q10 2Q10 3Q10 QTD YTD

Information Technology Index


For 2011, despite the uncertain outlook for the Europe, we expect demand for most applicationsto remain stable as global economy gradually recovers. Nevertheless, earnings growth will

decelerate due to: (i) a higher base in 2010; (ii) mounting raw material prices; and (iii) pricecompetition for certain applications. Overall, we estimate the stocks under our coverage to facechallenges but as the bad news is largely reflected in current valuations, we keep aMarketweight stance.

Positive DriversRecovery of the global economy remains the key factor for the demand of IT products. Globaldemand in 2009 and 2010 were mainly driven by stronger consumer spending as a result ofvarious government stimulus packages. Going forward, we expect the commercial sector tosupport demand for IT products as corporate profitability gradually recovers.

In addition, the continual launch of attractively priced products (e.g. tablet PCs and smartphones) and demand for high-speed data transmission will help support consumer spending.Further, stronger demand for end-user applications also suggests more outsourcing needs for


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manufacturing service providers (i.e. foundries and EMS) and supports prices for ITcommodities (e.g. TFT LCD and DRAM), in our opinion.

NegativesA slower-than-expected recovery in the global economy will negatively affect corporate ITspending due to poorer earnings prospects. Stronger price competition for the end-userapplications will also affect profitability for IT brand names and margin pressure for EMSproviders. For IT TFT LCD and DRAM industries, faster-than-expected expansion of theproduction capacities and weaker-than-expected demand for PCs and LCD TVs will lead togreater-than-expected demand-supply imbalance and a drop back in panel and chip prices, inour opinion.

Base Case ExpectationFollowing an 18% YoY growth in 2010, we expect PC demand to remain solid and project 15%YoY unit shipment growth based on further economic expansion particularly in the emergingmarkets. In addition, IDC also forecasts global handset shipments to grow by 8% YoY in 2011that will be supported by higher smart phone penetration (+22% YoY unit shipment growth).Stable demand for end-user applications also support our view about the 7% YoY and 8% YoYrevenue growth for the global semiconductor and EMS industries, respectively.

Nevertheless, we expect earnings for leading foundry suppliers to decline by single-digitpercentage, as we expect their aggressive capex plans will lead to excess capacities and pricingpressure for its services. For the TFT LCD industry, we expect cautious capacity expansionamong panel suppliers will result in an anticipated earnings recovery in 2H11.


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Materials

OverviewThe Materials sector outperformed in 2010, rising 12% YTD vs. 9% for the S&P Asia-Pacific ex-Japan BMI, as most materials prices remained strong, benefiting from excess liquidity andweakness in the USD. However, Materials underperformed the S&P Singapore BMI sharply. Therelative underperformance reflects mixed constituent performances with weakness in steelproduct companies and an absence of the larger cap raw material producers to boostperformances in the Singapore market. However, select small cap issues, such as BroadwayIndustrial Group, did well primarily due to specialized products and unique outlooks.


Materials vs. Index

3%

-20%-7%-1%

2%

-19%

6%

125%

72%

6%

-3%

8%

-40%

-20%

0%20%

40%

60%

80%

100%

120%

140%

2009 1Q10 2Q10 3Q10 QTD YTD

Materials Index


Overall, it was a volatile year, with metal prices falling in the beginning of the year butreversing the trend in 2H10, on the back of better economic outlook, further quantitative easing

in U.S. and power restriction measures in China. Steel companies under our coverage haveunderperformed the sector this year given slower China production growth of 11% YoY (vsglobal growth of 27% YoY YTD) and increased volatility of raw material prices after thereplacement of the annual raw material pricing system with a quarterly cycle. For 2010,prices of key raw materials (iron ore and coking coal) was pushed up by 110% YoY and 62%YoY, respectively and in turn has raised 2010 ASP for steel products over 20% YoY.


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(Left) Global Aluminum Inventory (Right) Global Copper Inventory

0

1,000

2,000

3,000

4,000

5,000

6,000

N o v - 0 3

N o v - 0 4

N o v - 0 5

N o v - 0

6

N o v - 0 7

N o v - 0 8

N o v - 0 9

N o v - 1 0

' 0 0 0 m

t

0

200

400

600

800

1,000

N o v -

0 3

N o v -

0 4

N o v -

0 5

N o v -

0 6

N o v -

0 7

N o v -

0 8

N o v -

0 9

N o v -

1 0

' 0 0 0 m

t

Source: ME, COMEX, SHFE

For 2011, we anticipate the Materials sector will continue to track global growth, particularlyChinas. Expectations of a weaker USD will have a positive impact on prices of industrial metalsand gold. While physical demand should be healthy, the biggest risk for the sector would be

further tightening measures in China due to higher inflation, or slower-than-expected growth inglobal economy. We remain Marketweight on the sector.

Positive DriversA weakening greenback (which lowers the price of commodities quoted in USD), stronger-than-expected global growth, reduction in excess capacity as well as industry consolidation in Chinawould continue to support material prices. Energy conservation moves by the Chineseauthorities should also help control excess production and this would assist in propping upmaterial prices as well. In addition, the potential launch of physically-backed metal ETFs mayreduce inventories and provide support to metal prices.

Mounting fears for a high inflation environment coupled with increased demand for gold bycentral banks as a hedge against currency volatility and a weakening USD would be catalystsfor a higher gold price.

Negative DriversA slower-than-expected global economic growth and strengthening USD could negativelyimpact material prices. Meanwhile, excess steel and aluminum capacity in China remains anissue to be resolved and could place a cap on prices should idle capacity restart production.Furthermore, aluminums high inventory levels may exert pressure on prices. Additionally, asharp rise in operating costs (such as energy costs) would be negative for the materials sectorshould global growth not pick up.


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Base Case ExpectationsWe expect the Materials sector to continue performing decently supported by expectations of aweaker USD and continued rise in Chinas fixed asset investment, especially in the rural areas.

Meanwhile, risk of excess capacity should be mitigated by Chinas environment controls andcapacity closures. Nonetheless, performance will be mixed among various materials, due todifferent fundamentals.

For steel in 2011, we estimate a 5%-10% YoY increase in production in tandem with ourexpectations for a decent GDP growth and improving construction activities, together withinventory accumulation by distributors. Nevertheless, given the risk for a lackluster globalgrowth, we would anticipate that segments where inventory has fallen faster may do better.Within the Chinese steel industry, long steel inventory has fallen 39% from its 2010 average,against a +7% in flat steel. Our models assume major steel prices ranging between USD650/mtto USD750/mt for the next year.

China Steel Product Inventory Levels are Declining

-

100

200

300

400

500

600

700

800

900

1,000

J a n - 1

0

F e b - 1

0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1

0

J u l - 1 0

A u g - 1

0

S e p - 1

0

O c t - 1 0

N o v - 1 0

D e c - 1

0

' 0 0 0 0 t o n s

Long Steel Inventory Flat Steel Inventory

Source: Bloomberg

Aluminum however, continues to suffer from high inventories and oversupply issues. Althoughprices are rising due to production cuts and the weaker USD, it may not be sustainable with theremoval of power restrictions in China. We expect aluminum to trade around CNY16,000/mt toCNY17,000/mt in 2011, mainly due to higher production costs (energy prices).

In Singapore, building material products should see a gradually improving price trend. Pricesmay stay subdued, however, with overall building activity off peak levels. Nonetheless, sincethe majority of products are imported and priced primarily in USD, there should be some bufferto margins if rising prices can only be passed through on a lag. Those supplying to HDBprojects should see a relatively better sales outlook.


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Singapore material product prices recover gradually

-100%

-50%

0%

50%

100%

150%

J a n - 0 8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

N o v - 0 8

J a n - 0 9

M a r - 0 9

M a y - 0 9

J u l - 0 9

S e p - 0 9

N o v - 0 9

J a n - 1 0

M a r - 1 0

M a y - 1 0

J u l - 1 0

S e p - 1 0

N o v - 1 0

Y o Y

Cement Steel Bars Granite Concreting Sand

Source: Company data, S&P Equity Research estimates


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Telecommunications

OverviewRegionally, the telecommunications sector underperformed in 2010, rising by 4% YTD vs. theS&P Asia-Pacific ex-Japan BMI of 9% as investors sought higher beta issues and strongergrowth prospects. In Singapore, earnings stayed soft in 2010 due to high content cost,aggressive handset subsidies and continual price pressure, which led to further margincompression. As we expect revenue growth to be in the low single-digit percentage for 2011,we think the median 2011 PER valuation of 13.2x is justified. We maintain our Marketweightview on the sector with dividend play stocks providing a safe haven amid the macroeconomicuncertainties. We see positive catalysts emanating from ARPU uplifts and growth opportunitiesarising from the rollout of national broadband network (NBN).


Telecom Services vs. Index

2%

-4% -1%-1%

2%

23%

4%1%

8%

-3%

6%

72%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2009 1Q10 2Q10 3Q10 QTD YTD

Telecom Services Index


Positive DriversKey ARPU lifts include prospective payoffs from handset subsidies and smartphone revolution,aggressive rollout of mobile broadband services, and expansion into new growth areas (SMEmarkets, quadruple play) with the NBN rollout. We continue to see data services (i.e.broadband) taking centre stage in 2011, with greater emphasis on content strategy amid theconvergence of quadruple play (mobility, voice, data and video services).

NegativesNegatives for the sector include margin compression from aggressive handset subsidies, price

competition from new market entrants and pricing risk of broadband access. NBN rollout inSingapore could yield lower margins on broadband access.


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Base Case ExpectationWe expect stable mobile ARPU for 2011, as payoffs from handset subsidy strategy should helpoffset ARPU attrition rates. Nevertheless, amid a NBN environment, competition is expected to

remain intense, with the rising adoption of IPTV and pricing pressure on broadband services.Overall, we expect revenue to grow at a marginal rate of 2%-3% YoY in 2011.


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December 23, 2010

GlossaryS &P STARS - Since January 1, 1987, Standard & Poors Equity

Research Services has ranked a universe of common stocks basedon a given stocks potential for future performance. Underproprietary STARS (STock Appreciation Ranking System), S&P

equity analysts rank stocks according to their individual forecast of astocks future total return potential versus the expected total returnof a relevant benchmark (e.g., a regional index (S&P Asia 50 Index,S&P Europe 350 Index or S&P 500 Index)), based on a 12-monthtime horizon. STARS was designed to meet the needs of investorslooking to put their investment decisions in perspective.

S&P Quality Rankings (also known as S&P Earnings & DividendRankings )- Growth and stability of earnings and dividends aredeemed key elements in establishing S&Ps earnings and dividendrankings for common stocks, which are designed to capsulize thenature of this record in a single symbol. It should be noted,however, that the process also takes into consideration certainadjustments and modifications deemed desirable in establishingsuch rankings. The final score for each stock is measured against ascoring matrix determined by analysis of the scores of a large andrepresentative sample of stocks. The range of scores in the array ofthis sample has been aligned with the following ladder of rankings:A+ Highest B- LowerA High C LowestA- Above Average D In ReorganizationB+ Average NR Not RankedB Below Average

S&P Issuer Credit Rating - A Standard & Poors Issuer Credit Ratingis a current opinion of an obligors overall financial capacity (itscreditworthiness) to pay its financial obligations. This opinionfocuses on the obligors capacity and willingness to meet itsfinancial commitments as they come due. It does not apply to anyspecific financial obligation, as it does not take into account thenature of and provisions of the obligation, its standing inbankruptcy or liquidation, statutory preferences, or the legality andenforceability of the obligation. In addition, it does not take intoaccount the creditworthiness of the guarantors, insurers, or otherforms of credit enhancement on the obligation.

S&P Core Earnings - Standard & Poor's Core Earnings is a uniformmethodology for adjusting operating earnings by focusing on acompany's after-tax earnings generated from its principalbusinesses. Included in the Standard & Poor's definition areemployee stock option grant expenses, pension costs, restructuringcharges from ongoing operations, write-downs of depreciable oramortizable operating assets, purchased research and development,M&A related expenses and unrealized gains/losses from hedgingactivities. Excluded from the definition are pension gains,impairment of goodwill charges, gains or losses from asset sales,reversal of prior-year charges and provision from litigation orinsurance settlements.

S&P 12 Month Target Price The S&P equity analysts projection

of the market price a given security will command 12 months hence,based on a combination of intrinsic, relative, and private marketvaluation metrics.

Standard & Poors Equity Research Services Standard & PoorsEquity Research Services U.S. includes Standard & PoorsInvestment Advisory Services LLC; Standard & Poors EquityResearch Services Europe includes Standard & Poors LLC-

London; Standard & Poors Equity Research Services Asia includesStandard & Poors LLCs offices in Singapore, Standard & PoorsInvestment Advisory Services (HK) Limited in Hong Kong,Standard & Poors Malaysia Sdn Bhd, and Standard & PoorsInformation Services (Australia) Pty Ltd.

Abbreviations Used in S&P Equity Research Reports

CAGR- Compound Annual Growth RateCAPEX- Capital ExpendituresCY- Calendar YearDCF- Discounted Cash FlowEBIT- Earnings Before Interest and TaxesEBITDA- Earnings Before Interest, Taxes, Depreciation andAmortizationEPS- Earnings Per ShareEV- Enterprise ValueFCF- Free Cash FlowFFO- Funds From OperationsFY- Fiscal YearP/E- Price/EarningsPEG Ratio- P/E-to-Growth RatioPV- Present ValueR&D- Research & DevelopmentROE- Return on EquityROI- Return on InvestmentROIC- Return on Invested CapitalROA- Return on AssetsSG&A- Selling, General & Administrative ExpensesWACC- Weighted Average Cost of Capital

Dividends on American Depository Receipts (ADRs) and AmericanDepository Shares (ADSs) are net of taxes (paid in the country oforigin).


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December 23, 2010

Required DisclosuresIn contrast to the qualitative STARS recommendations covered in

this report, which are determined and assigned by S&P equityanalysts, S&Ps quantitative evaluations are derived from S&Psproprietary Fair Value quantitative model. In particular, the FairValue Ranking methodology is a relative ranking methodology,whereas the STARS methodology is not. Because the Fair Valuemodel and the STARS methodology reflect different criteria,assumptions and analytical methods, quantitative evaluations mayat times differ from (or even contradict) an equity analysts STARSrecommendations. As a quantitative model, Fair Value relies onhistory and consensus estimates and does not introduce an elementof subjectivity as can be the case with equity analysts in assigningSTARS recommendations.

S&P Global STARS DistributionIn North AmericaAs of September 30, 2010, research analysts at Standard &Poors Equity Research Services North America recommended39.2% of issuers with buy recommendations, 52.5% with holdrecommendations and 8.3% with sell recommendations.

In Eu

Documents

S&P_Singapore 2011 Outlook