Alpha POWER Shares (Asian Lions) Portfolio - November 2008
Stock Performance:
Lion Comments on Major Out-performers
Singapore Press Holding – SPH (+10.94%)
SPH outperformed on the back of its defensive earnings given that SPH controls more than 90% of newspaper advertising in Singapore. Nevertheless, SPH will face a challenging year ahead as advertisers take a cautious stance due to the worsening economic outlook. Classified for the property sector and recruitment have shown signs of weakness already. Although earnings growth will likely be muted, investors are attracted to SPH’s high and secure dividends of 8% and strong balance sheet.
Taiwan Mobile – TWM (+8.32%)
TWM reported good 3Q08 results with net profit rising 9.1% YoY. Revenue was flat due to a weak economy. TWM was the best performing Taiwanese telco in 3Q as it was the only operator to maintain a stable top line. Mobile revenue was soft due to increasing competition and mandatory price cuts. The soft mobile business was offset by the improving operations of its new fixed line and pay TV/broadband businesses. Management has indicated interest in acquisition opportunities amongst the cable operators although a deal is not expected to be done this year due to the volatile market.
CLP Holding – CLP (+5.77%)
CLP has outperformed the recent market sell-down on the back of its defensiveness. Most of CLP’s power generation businesses are in countries not exposed to fuel cost risks. These countries include Hong Kong, India, Thailand and Taiwan where there are fuel pass-through mechanisms. In the case of Taiwan, there is some time lag for fuel cost compensation in Taiwan. In the case of Australia, fuel cost risk is also low as its coal is supplied from its own mine and NG supply is secure through long-term contracts. It is only in China that CLP is exposed to fuel cost risk. This is through its 30% owned joint venture with Shenhua Coal, Guohua International, where through its relationship with Shenhua, coal supply contracts are limited to 10% price increment in 2008.
Lion Comments on Major Under-performers
Taiwan Semiconductor Manufacturing – TSMC (-15.0 %)
TSMC is the world’s largest dedicated semiconductor foundry. TSMC manufactures, markets and tests integrated circuits, serving more than 150 customers. TSMC operates two advanced 300mm wafer fabs, four 8-inch wafer fabs and one 6-inch wafer fab. TSMC guided for worse-than-expected outlook for 4Q08 on weak global economies as well as order cuts from customers. TSMC expects revenues to drop approximately 30% QoQ versus earlier 25% guidance with gross margins declining to 30-32% from 34-36% due to lower utilization rate. The lowered guidance is a sign of weak demand and inventory correction across the IT supply chain as customers pushed out orders and deliveries of wafers that were previously ordered. With customers focusing on bringing down inventories, we expect foundry orders to remain weak in the next few months. TSMC is expected to remain profitable despite lowered sales and margins with limited downside due to support from free cash flow, strong balance sheet and high dividend yield of 7.4%.
DBS Group Holdings - DBS (-12.89%)
DBS underperformed its local peers in Nov due to fears of capital raising exercise. This was on the back of Standard Chartered Bank’s announcement of a rights issue to bolster its capital ratios. Amongst the three local banks in Singapore, DBS has the lower Tier-1 ratio. Other concerns were potential impairment charge for its Hong Kong franchise and off-balance sheet risk. Nevertheless, the valuation gap between DBS and its local peers has widened with DBS currently trading at 0.75x book while UOB is trading at 1.28x book. We view the current discount of DBS relative to its local peers as too large given that the operating risks are essentially similar and expect the discount to narrow over time.
Hongkong Land – HKL (-9.77%)
HKL share price has underperformed due to worsening office market outlook arising from the global financial crisis. HKL’s Central office portfolio vacancy rate is currently at 2%. However, given sluggish demand from financial and banking institutions due to retrenchments, HKL office vacancy rates are expected to rise going forward. Fortunately, no new office building is expected to be completed in Central before 2011. Despite deteriorating outlook for its core business, net profits should benefit from the recognition of substantial development profits from two residential joint ventures in Macau and Singapore. Rental earnings should register slower growth momentum in 2009. HKL is trading at 59 % discount to NAV of US$5.45.
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