DBS Vickers Singapore Strategy-Budget Response

Last week, all eyes were on the Budget that was to be delivered on Friday, 17 Feb.
We said the Budget would be more socially focused as the general election is
around the corner, and we were not expecting any new significant business
stimulus. As it turned out, it was what we had predicted. The Budget was
generous to the people but unfortunately, not to corporate Singapore. Prime
Minister, Mr. Lee Hsien Long, announced an astonishing S$2.6bn in special
transfers, which includes growth dividends; bonuses for Workfare, for national
servicemen and ex-servicemen; and various top-ups for individuals. The total of
special transfers will send the overall budget into a budget deficit of S$2.9bn.
On the corporate front, there were no corporate tax cuts, no tax transparencies for business
trusts, and no removal of withholding tax for institutions investing in REITs. There are,
however, some fine-tuning to certain sectors such as the foreign REITs, Islamic banking,
Maritime and logistics sector, and fund management. Relevant to the equity market will be the
announcement of tax exemption on remittances of foreign-sourced interest and trust
distributions received by S-REITS and the allowance of GST recovery by S-REITS for the
setting up of special purpose companies (SPCs) and the acquisition and holding of overseas
non-residential properties by SPCs. Fortune REIT and Mapletree Logistics Trust should
benefit from this. The other direct beneficiary from the Budget announcement would be
Hyflux as we flagged out last week. The government announced a S$5bn R&D Trust Fund
focusing on three sectors of the Biomedical Sciences sector, the Interactive and Digital Media
sector, and the Environmental and Water Technologies sector.
Given the generous ‘People’s Budget’, vicarious beneficiaries should be the mass retail market
and services. Robinsons, Eu Yan Sang, and the three telcos could benefit from the extra pocket
money that the government is granting to the citizens. Among the telcos, we favour Starhub at
current price levels as the market unfairly punished it last Friday on the announcement of a
competitor to its cable TV. We believe that the new competitor, M2B World, serves a niche
market in Singapore, especially the Chinese heartlanders, with 60-80s Chinese drama serials
and B-rated movies. Moreover, the mode of transmission is through the Internet protocol. As
such, the threat is limited in the medium-term as we believe content is king in cable wars. M2B
World does not have any sports or news channels. We believe M2B World’s competitor is a
Free-to-Air TV content provider.
Looking at the week ahead, there should be a neutral reaction in the equity market to the
Budget. The market appears to be running out of ideas and a directionless market favours
defensive plays such as yield stocks and fundamentally sound companies. We are still positive
on the oil and gas sector and we advise clients to accumulate on weakness. Sembcorp Marine
continues to be our top pick in the sector. We are also still positive on the banks, despite the
announcement of a fourth quarter loss by one of the three banks. We continue to believe that
the net interest margins will continue to expand and loans growth continues to edge up. Our
top pick for banks is UOB. Note that we cannot comment on DBS, as it will be a conflict of
interest if we do so. In our large cap top 5 picks, we maintain our tactically defensive selection
of MIIF, and CapitaMall Trust. We have added StarHub in place of SingTel as the latter had
done well in the past three weeks. In the small caps, we maintain our top 5 picks of Pacific
Andes, Inter-Roller, Darco, Electrotech and China Fishery.
Now that the budget is out of the way, we await the election announcement. Hope you have a
profitable week ahead.