Sector Updates. Singapore REITs Singapore Coal Sector Monthly Singapore Banking Sector Monthly. 2 April 2018, 8.15am/11.15am Morning Call/Webinar

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1 2 April 2018, 8.15am/11.15am Morning Call/Webinar Sector Updates Singapore REITs Singapore Coal Sector Monthly Singapore Banking Sector Monthly

2 Disclaimer The information contained in this presentation has been obtained from public sources which Phillip Securities Research Pte Ltd ( PSR ) has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the Research ) contained in this presentation are based on such information and are expressions of belief only. PSR has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in this presentation is subject to change, and PSR shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSR be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. This presentation is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should seek advice from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. 2

3 S-REITs First rate hike in 2018 and the implications for S-REITs Tan Dehong Phillip Securities Research Pte Ltd 2 April 2018

4 First Rate Hike in 2018 implications and outlook First Rate hike in Expectations were for three hikes this year before that, as previously guided by the Fed. FTSE S-REIT index pricing in macro headwinds, underperforming STI YTD Sector Performance Comparison YTD -2.0 Source: Bloomberg, PSR STI FTSE REIT Index FTSE Real Estate Developer 4

5 Dovish comments from Fed Chairman tapered rate hike expectations Market expectations of 4 rate hikes or more this year fell after last week s rate hike. Fed Chairman Powell s comments re-affirming gradual rate hikes. Concerns of Trump administration s trade policies a concern for businesses. Raised GDP outlook while keeping inflation forecast intact. Probability of FED rate hikes in 2018 (%) rate hikes rate hikes 0 Source: Bloomberg, PSR Median Variable (%) Longer run Change in real GDP December projection Unemployment rate December projection PCE inflation December projection Core PCE inflation December projection Federal funds rate December projection Source: Fed, PSR 5

6 What else is happening this year that could move interest rates? Macro/interest rate headwinds Existing pressure points: Fed rate hikes, Fed Balance sheet tapering What s new? (Sell off reasons in Jan/Feb 2018) Interest rate hike pressures Rising commodity prices, weak USD, strong wage growth in Jan 2018 (highest since 2009) stoked inflationary concerns. US inflation expectations now at 4y highs Political comments from Treasury Secretary supporting a weak USD Trump tax cuts to fuel further growth and possibly accelerate inflation Trump s US$1.5t unfunded infrastructure spending. Growing deficit could drive up US borrowing costs. 6

7 Impact on DPU from rising financing costs c.80% of S-REITs have at least 70% of debt hedged on fixed rates. For every 100bps increase in interest rates, negative impact on DPU: Based on current hedging status: -1% to -3%. Under zero hedging situation: -8% to -12%. 7

8 What is the outlook for each S-REIT sector? Other than retail, all other sectors office, industrial and hotels generally face a positive scenario of tapering supply Easing of supply in 2018 should build a base for rentals to start climbing with demand expected to improve as global economies recover 8

9 '000 sqm Retail (Neutral) Operating environment remains challenging E-commerce remains a challenge, Tenant sales at malls deteriorating over the years. Entrance of Amazon into Singapore in Malls need to restructure to improve experiential shopping Small improvements in retail sales expected with improved sentiment. We expect bottom in retail rents only in Source: URA, REALIS, PSR Retail Space Demand/Supply 12/ / / / / / F 2019F Net Annual Supply Net Annual Demand Historical Annual Supply ( ) Historical Annual Demand ( ) Retail Space Rental Index and Occupancy Source: CEIC, PSR Retail Rent Index Retail Occupancy (RHS) 92.6 We expect retail rents to bottom only in 2H2018, in view of the intense competition from e-commerce %

10 Notable upcoming mall openings Significant supply in Eastern region Notable upcoming retail space launches Project Location Estimated NLA (sq ft) Completion Paya Lebar Quarter Paya Lebar 340, Northpoint City Yishun 330, TripleOne Somerset Podium Somerset 70, Raffles Hotel A/A City Hall 219, Wisteria Mall Yishun 58, Jewel Changi Airport Changi Airport 576, Funan North Bridge Road 324, City Gate Beach Road 76, Source: URA, JLL, CBRE, PSR 10

11 Office (Neutral): Bottom in Grade A office rents in 3Q % -0.9% Grade A office rents and YoY % change % % -1.6% -2.1% -2.2% 3.30% 9.4 4% 3% 2% 1% 0% -1% -2% -3% Bottoming of office rents in 2017 after 9 consecutive quarters of drop (22% from peak in 1Q15) Negative rental reversions still expected for 2018, but rebounding rents could lessen impact 2-3.5% -4.6% -4.8% -4.0% -4% -5% 0 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Monthly Rent (S$/sqft) % Change Source: Company, PSR -6% 11

12 '000 sqm Led by improvements in take-up for office space and peak in supply 2016: 5 th consecutive year of falling net demand. Improvement in demand in 2017 led by improved global economies. Huge supply in 2017 gradually absorbed. Narrowing gap between CBD and suburban rents to support demand for prime CBD offices (50) (100) Source: REALIS, CEIC, PSR Office Space Demand/Supply Upcoming supply below 10y historical net demand of 110k sqm Net Annual Supply Net Annual Demand Historical Ann Demand ( ) Historical Ann Supply ( ) Office Space Rental Index and Occupancy Source: CEIC, PSR Office Rental Index Office rents are bottoming and likely to stablise/rebound from 4Q/2017 Occupancy Rate (RHS) %

13 Upcoming Supply Notable Office launches Office Project NLA (sq ft) Location Expected launch 18 Robinson 145,000 Robinson Road 2018 Frasers Tower 663,000 Shenton Way 2018 Redevelpoment of Funan DigitaLife Mall 204,000 City Hall 2019 Park Mall Redevelopment 352,000 Orchard Road Robinson Road 500,000 Robinson Road 2020 Hub Synergy Point Redevelopment 128,000 Anson Road 2020 Afra-Asia Building Redevelopment 154,000 Shenton Way 2020 Redevelopment of Golden Shoe Car Park 635,000 Raffles Place 2021 Source: JLL, CBRE, PSR 13

14 Industrials (Neutral): Tapering of supply post 2017 should build a base for rentals to start climbing '000 sq m Generally tapering supply after 2017 for all 3 industrial sectors Easing of supply in 2018 should build a base for rentals to start climbing with demand expected to improve as global economies recover Industrial Rental Index/Occupancy Oversupply situation abating, and we believe rents will bottom by end Industrial Rental Index Factory Occupancy Rate (RHS) Warehouse Occupancy Rate (RHS) Source: CEIC, PSR % 1, Warehouse Space Demand/Supply F 2019F Net Annual Supply Net Annual demand Historical Annual demand ( ) Historical Annual Supply ( ) Source: REALIS, CEIC, PSR 14

15 '000 sq m Industrials (Neutral): Tapering of supply post 2017 should build a base for rentals to start climbing '000 sqm 250 Business Park Demand/Supply F 2019F Source: CEIC, URA, PSR Net Supply Net Demand Historical Annual Supply ( ) Historical Annual demand ( ) 1,400 1,200 1, Factory Space Demand/Supply F 2019F Net Annual Supply Net Annual Demand Historical Annual Supply ( ) Historical Annual demand ( ) Source: REALIS, CEIC, PSR 15

16 Strategic top-down view Maintain exposure to Business and Science Park properties and Hi-Tech/Hi Specs buildings. SG evolving towards higher value-added manufacturing; Smart Nation initiative. Would like to see occupancy improve, in order to upgrade our sector view for industrial REITs 16

17 Hospitality (Overweight): Recovery in tourist arrivals and Hotel RevPARs Recovery in tourist arrivals in 2017, up 4%. RevPAR turned positive after 4 years in negative territory. Industry RevPar at 2 year high Return of biennial events in SG such as Singapore Air Show. 40 SG Tourist Arrivals/Hotel RevPAR YoY % Visitors Arrival Hotel RevPAR Hotel RevPAR (Luxury) Source: CEIC, PSR 17

18 Hotel Supply tapering off from 2018 SG New Hotel Supply 70, CAGR: 5.3% 3 year CAGR 1.4% 392 (0.6%) , (2.5%) 68, (1.2%) 67, (4.5%) 66,000 65,000 64, ,000 62,000 61,000 End End 2020 Existing Hotel Supply New Supply Source: JLL, STB, CDLHT, PSR 18

19 Most of supply in 2018 in midscale/upscale sector Notable Hotel openings Hotel Name No of Rooms Target Segment Location Expected launch Swissotel The Stamford 97 Upscale/Luxury City Centre 2018 The Patina Capitol Singapore 157 Upscale/Luxury City Centre 2018 Duxton Terrace 109 Upscale/Luxury City Centre 2018 Raffles Hotel 111 Upscale/Luxury City Centre 2018 Dusit Thani Hotel and Resort 208 Upscale/Luxury Outside City Centre 2018 Aqueen Hotel Little India 81 Economy Outside City Centre 2018 Aqueen Hotel Lavendar 69 Economy Outside City Centre 2018 THE EDITION by Marriott 190 Upscale/Luxury City Centre 2019 Swissotel The Stamford 329 Upscale/Luxury City Centre 2019 Capri by China Street 306 Mid-tier City Centre 2019 Yotel Changi Jewel 130 Economy Outside City Centre 2019 Village Hotel Sentosa 620 Economy Outside City Centre 2019 The Outpost@Sentosa 193 Upscale/Luxury Sentosa 2019 Artillery Avenue Palawan@Sentosa 40 Upscale/Luxury Sentosa 2019 The Clan 292 Mid-tier City Centre 2020 Aqueen Hotel Geylang 100 Economy Outside City Centre 2020 Source: CDLHT, JLL, PSR 19

20 S-REITs trading at -1s.d. historical (post GFC) valuations Current: 2.9% (REIT yield 5.3% - Risk free 2.4%) vs 7 year average 3.7% Only 2 periods of time when the yield spreads compressed below current levels: in 2010 (for a 2-month period) and 2013 (for an 8-month period) FTSE Straits Times REIT Index Yield Spread Source: Bloomberg, PSR Yield Spread Mean (From 2010) +/-1SD +/-1SD 20

21 A-REITs trading at close to +1 S.D historical yield spreads S&P/ASX 200 A-REIT Index Yield Spread Source: Bloomberg, PSR Yield Spread Mean (From 2010) +/-1SD +/-1SD

22 US-REITs trading close to average historical yield spreads 3.5 MSCI US REIT Index Yield Spread Source: Bloomberg, PSR Yield Spread Mean (From 2010) +/-1SD +/-1SD 22

23 HK-REITs trading at close to -1 S.D historical yield spreads 5.5 Hang Seng REIT Index Yield Spread Source: Bloomberg, PSR Yield Spread Mean (From 2012) +/-1SD +/-1SD 23

24 J-REITs trading at close to average historical yield spreads 7 6 Tokyo Stock Exchange REIT Index Yield Spread Yield Spread Mean (From 2010) +/-1SD +/-1SD Source: Bloomberg, PSR 24

25 Regional REIT markets Snapshot S-REITs trade at one of the highest absolute yields vs major REIT markets % S-REITs ASX REITs US REITs HK REITs Japan REITs Source: Bloomberg, PSR Absolute Yield Yield Spread 25

26 S-REIT Comparison Table Mkt. Cap. (S$mn) Price (S$) PSR RATING PSR TARGET PRICE (S$) P/NAV Trailing Total Returns Gearing (%) yield (%) YTD (%) Approximate % of debt on fixed rate ROE (%) Average borrowing cost (%) % debt expiring in 2018/current FY % debt expiring in 2019/next FY Healthcare PARKWAYLIFE REAL ESTATE 1, December FIRST REAL ESTATE INVT TRUST 1, NEUTRAL December Average Hospitality ASCOTT RESIDENCE TRUST 2, December CDL HOSPITALITY TRUSTS 2, December FAR EAST HOSPITALITY TRUST 1, December OUE HOSPITALITY TRUST 1, December FRASERS HOSPITALITY TRUST 1, September ASCENDAS HOSPITALITY TRUST March Average Retail CAPITALAND MALL TRUST 7, NETURAL December MAPLETREE GREATER CHINA COMM 3, March SPH REIT 2, September FRASERS CENTREPOINT TRUST 2, NEUTRAL September STARHILL GLOBAL REIT 1, June CAPITALAND RETAIL CHINA TRUST 1, NEUTRAL December LIPPO MALLS INDONESIA RETAIL 1, N.A December BHG REIT December DASIN RETAIL TRUST BUY NA NA 4.8 NA NA December Average Year End 26

27 S-REIT Comparison Table Mkt. Cap. (S$mn) Price (S$) PSR RATING PSR TARGET PRICE (S$) P/NAV Trailing yield (%) Total Returns YTD (%) Gearing (%) Approximate % of debt on fixed rate ROE (%) Average borrowing cost (%) % debt expiring in 2018/current FY % debt expiring in 2019/next FY Commercial CAPITALAND COMMERCIAL TR 6, NEUTRAL December SUNTEC REIT 5, December KEPPEL REIT 4, December MAPLETREE COMMERCIAL TR 4, March FRASERS COMMERCIAL TRUST 1, September OUE COMMERCIAL REIT 1, December MANULIFE US REIT December KEPPEL-KBS US REIT NA December Average Industrial ASCENDAS REAL ESTATE INV TR 7, ACCUMULATE March MAPLETREE INDUSTRIAL TRUST 3, NEUTRAL March MAPLETREE LOGISTICS TRUST 3, March KEPPEL DC REIT 1, NEUTRAL December AIMS AMP CAPITAL INDUSTRIAL March CACHE LOGISTICS TRUST ACCUMULATE December SOILBUILD BUSINESS SPACE REIT December SABANA SHARIAH COMP IND REIT December VIVA INDUSTRIAL TRUST December ESR REIT December EC WORLD REIT N.A. N.A. December FRASERS LOGISTICS & INDUSTRIAL 1, September Average Source: Bloomberg (Updated 22 March 2018), Debt data from latest Company Results as of 31 Dec 2017, PSR 1 Covered by PSR on the SGX Stockfacts Scheme Year End 27

28 Singapore Coal Monthly A deeply undervalued sector Chen Guangzhi Phillip Securities Research Pte Ltd 2 April 2018

29 What is the news? China In Mar-18, the authority announced the Government Work Report for 2018: (part of it) Cut down steel and coal capacity by 30mn tonnes and 150mn tonnes respectively in 2018 Shut coal-fired plants with a capacity of less than 300k KW that fail to meet emission standards in Expect the demand for imported coal will continue to grow given the ongoing curtailment of domestic production will result in a supply short Indonesia In Mar-18, the Minister of Energy and Mineral Resources (MEMR) announced a price cap of coal sales to electricity sector for public interest: The price is fixed at US$70/tonne (on FOB basis), with standard specification of 6,322kcal/kg GAR, total moisture 8%, total Sulphur 0.8% and ash 15% The lower of prevailing price or US$70/tonne Drive higher volume of exported coal moving forward. Furthermore, it could cool down the sentiment of investment in the coal sector

30 Phillip Coal Tracker: Our snapshot of coal markets Figure 1: Monthly coal production in PRC slowing down Figure 2: Coal import from Indonesia by surged recently Source: National Bureau Statistics of PRC, PSR Source: General Administration of Customers of PRC, PSR

31 Phillip Coal Tracker: Our snapshot of coal markets Figure 3: China power demand continues to grow YoY Figure 4: Indonesia coal price reference (HBA) climbing up Source: National Bureau Statistics of PRC, PSR Source: Coalspot.com, PSR

32 Phillip Coal Tracker: Our snapshot of coal markets Figure 5: Qinghuangdao 5,500 GAR weekly FOB spot price Figure 6: Total port coal inventory declining Source: Bloomberg, PSR, NDRC price zones (red/blue/green) *Source: Bloomberg, PSR *The total port coal inventory includes coal stockpile at Qinghuangdao Port, Tianjin Port, Caofeidian Port, Guangzhou Port, Jingzhou Port, Lianyungang Port, Dandong Port, Jingtang Port, Yinkou Port, Qingdao Port, and Huanghuagang Port.

33 Coal counters monthly updates Golden Energy and Resources (Target px: S$0.48 / BUY) FY17 production arrived at 15.6mn tonnes (+64.2% YoY) Secured 13 offtake agreements for 15mn tonnes of coal sales in FY18 Sales target in FY18 will be 20mn tonnes Cash position reached US$189mn as of Mar-18 Geo Energy Resources (Target px: S$0.47/ BUY) FY17 production arrived at 7.7mn tonnes (+40% YoY) Secured an offtake agreement with ECTP for 7.5mn tonnes coal supply in FY18. Sales target in FY18 will be 11 to 12mn tonnes Cash position reached US$262mn as of Dec-17

34 Singapore Bank Monthly Upside in NIMs Phillip Securities Research Pte Ltd 2 April 2018

35 Singapore: Volumes softer but margins robust Figure 1: YTD loans growth 4.2% vs % Figure 2: Huge upside in YoY NIMs Source: CEIC, PSR

36 Hong Kong: Volume and margins healthy Figure 3: Loans growth remain robust Figure 4: Upside in YoY NIMs Source: CEIC, PSR

37 Disclaimer The information contained in this presentation has been obtained from public sources which Phillip Securities Research Pte Ltd ( PSR ) has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the Research ) contained in this presentation are based on such information and are expressions of belief only. PSR has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in this presentation is subject to change, and PSR shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSR be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. This presentation is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should seek advice from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. 37

38 Ask Questions! Archived Webinar videos can be accessed at: Have an opinion or questions on our reports? Post them in the comment section of the report! Analysts Paul Chew, Head of Research Pei Sai Teng, Macro Jeremy Ng, Technical Analysis Soh Lin Sin, Consumer Healthcare Richard Leow, Transport REITs (Industrial) Dehong Tan, REITs (Commercial, Retail, Healthcare) Property Tara Wong, REITs (Commercial, Retail, Healthcare) Property Ho Kang Wei, US Equity Chen Guangzhi, Oil and Gas Energy Alvin Chia, Research Associate By Phillip Securities Research Mohamed Amiruddin, Operations Exec 38