Alpha POWER Shares (Asian Lions) Portfolio - October 2008
Stock Performance:
Lion Comments on Major Out-performers
S-Oil (-5.83%)
Amid the current volatile market conditions, S-Oil has outperformed due to its stable financials and high dividend yield. S-Oil is the most complex refinery in Korea and its biggest shareholders are Aramco Overseas (35 %) and Hanjin Group (28 %). S-Oil paid W 1,750 per share for its 3Q08 dividend, better than market expectations of W 750 per share. S-Oil has been maintaining its high dividend policy partly due to its major shareholders’ preference for dividends. Refining margins are likely to fall due to demand deterioration for naphtha and gasoline. Among the Korean refiners, SOil has the least exposure to naphtha and gasoline (at 23 % of its sales as compared to GS Caltex at 35 % and SK Energy at 27 %). We expect S-Oil to be supported by its dividend yield although upside at this point will be capped by weak refining margin outlook.
Sime Darby– SIME (-6.06%)
The Malaysian government has decided to adopt bio-fuel comprising 5% methyl ester (palm oil) and diesel for government vehicles from February 2009. This would be followed by the industrial and transport sectors which will be implements in stages. In addition, the allocation for oil palm replanting will result in 4% less palm oil output than the 2008 projected output of 17.4 m tones for Malaysia. In addition, the government announced cuts in fertilizer prices by 15%. These measures are positive for the plantation sector. In addition, China’s stimulus package will likely help stem further steep drops in palm oil prices. SIME has sold forward 25-30% of its palm oil volumes this financial year at an average price of M$2,900/tonne as compared to current levels of M$1,500/tonne. SIME is expected to remain in net cash position with positive free cash flow even if palm oil prices drop to M$1,000/tonne in 2009. SIME has outperformed its peers in recent months due to its diversified earnings composition.
KT&G Corp – KT&G (-8.46%)
KT&G posted 3Q08 sales of W 658.1 bn (up 3.7% YoY) while net profit increased 15.3% YoY to W 228.8 bn. The domestic tobacco market grew 3.8% YoY. KT&G experienced a 1.4% QoQ drop in market share, though this was outweighed by a 4.8% increase in ASP through an mix shift to premium brands. Export sales were weak as KT&G is currently negotiating a new contract with a key overseas export buyer. Export volumes fell 26 % YoY, although the weak won and product mix helped to reduce the value decline to 7 %. Ginseng posted a strong quarter with sales growing 23.1 % due to strong department store sales and new franchise shop roll-outs. With its defensive product qualities and excellent capital management, KT&G is expected to continue its outperformance during this difficult time.
Lion Comments on Major Under-performers
During the month, major underperformers were predominantly companies in the financial sectors. This was on the back of heightened concerns over potential loan defaults as well as refinancing risks on the back of the global financial turmoil.
Suntec REIT – SUN (-40.09%)
Suntec REIT reported 21.4% YoY revenue increase for FY08, lifted by positive rental growth as well as high occupancies. The recent refinancing of its S$400m bridge loan due in Oct 08 has deferred refinancing risk. Nevertheless, Sun will need to refinance a S$700 m CMBS by Dec 09. Gearing remains healthy at 32%. Management has maintained a sanguine outlook for office rentals with a less rosy outlook for retail for 2009. Due to the uncertain environment, the company has deferred its acquisition plans for the remaining strata office in Suntec as well as redevelopment plans for Park Mall.
DBS Group Holdings – DBS (-34.33%)
DBS reported 3Q08 core earnings of S$402 m, below market expectations. This was due to large allowances as well as slowdown in fees and trading income. Net interest margins declined 5 bp to 1.99% due to weak margins from Hong Kong and higher deposit costs. Deterioration in stockbroking, investment banking, fund management and wealth management caused fee income to fall 22% YoY while losses related to the unwinding of Lehman-exposed products pulled down net trading gains. Expense ratio fell to 41.3% from 42.4% as the group emphasized cost cutting in order to ride out the economic storm. The group will be cutting 900 staff by end November to further streamline its operating costs.
Hang Seng Bank – HSB (-17.99%)
HSB is expected to face slowing earnings growth due to the challenging economic environment. The recent sell-down of HSB was in part a result of concerns about its exposure to HK$204 bn of debt securities of which an estimated HK$70-100 bn are US$ financial/corporate debt securities. With potential loss from debt securities, slower fee/treasury income and increasing provision risks, earnings have been downgraded for HSB. Nevertheless, HSB should be able to weather the global financial crisis due to its good track record, prudent asset allocation and sound capital base.
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