In this briefing:
- Japanese Banks: These Lifeless Things (The Ozymandias Syndrome)
- Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer
- Tuan Sing: Beneficiary of Exuberant Demand for Prime Office Investment Properties
- TRACKING TRAFFIC/Containers & Air Cargo: Container Rates Up
1. Japanese Banks: These Lifeless Things (The Ozymandias Syndrome)
Japanese bank stocks performed so poorly in 2018, with the Topix Bank Index falling 25.7% while the overall market declined by a lesser 16.4%, that some may be tempted to speculate that Japanese banks might be a key sector in leading a market recovery in 2019. We don’t think so. The fundamental outlook for banks’ profits remains clouded by a strengthening Yen against the US$, declining revenue growth, anaemic manufacturing sector loan demand, relentless downward pressure on net interest margins, weak fee business, rising valuation losses on both stocks and bonds, and ‘normalising’ credit costs. Simply put, there are no growth catalysts to drive the Japanese banking sector forward on a sustainable basis in terms of stock price appreciation. This all adds up to uninspiring valuations, even at current levels. ‘Caveat emptor! (May the buyer beware!)’ remains our key recommendation to would-be investors in Japanese bank stocks for 2019.
2. Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer
Hotel Properties (HPL SP) (“HPL”) announced on Friday evening a significant change in its shareholdings relating to the HPL shares owned by 68 Holdings Pte Ltd.
The restructuring of shareholding did not come as a surprise and was within expectations.
Now, Wheelock holds only a significant minority interest of 22.53% and without a board seat in HPL. Wheelock’s influence in HPL has been reduced significantly. Without control, Wheelock’s investment in HPL is as good as any other non-strategic investment in quoted securities.
In the event that Wheelock Properties decides to sell its HPL shares, Mr Ong will be a likely buyer of the HPL shares. This will present a very good opportunity for Mr Ong to successfully privatise and delist HPL.
3. Tuan Sing: Beneficiary of Exuberant Demand for Prime Office Investment Properties
Gaw Capital is said to be paying a CLSA-managed fund S$710 mn for 77 Robinson, which is just 3 minutes’ walk away from Tuan Sing-owned prime freehold office building, Robinson Point. This works out to around S$2,300 psf based on NLA. 77 Robinson has a balance lease of 74 years.
Evidently, institutional buying interest in Singapore’s prime commercial buildings remains strong as the Singapore office market is now still a “landlords’ market”. Grade A CBD office rents are expected to continue their upward growth trajectory into 2019. Tuan Sing is a beneficiary of the strong office rental upturn as its prime freehold commercial assets in Singapore – 18 Robinson, Robinson Point, and 896 Dunearn – make up more than two-third of its total property portfolio value. Tuan Sing’s share price is down 17% in the last six months and lately, the company has been busy buying back its own shares at around S$0.33-0.345/share.
4. TRACKING TRAFFIC/Containers & Air Cargo: Container Rates Up
Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces.
Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.
In this issue readers will find:
- An analysis of November container shipping rates, which our index suggests increased by over 20% Y/Y. We concede that our index skews toward volatile spot rates rather than contract rates, but we suspect higher average container rates in Q418, combined with moderating fuel prices, will result in surprisingly strong earnings for the quarter.
- A look at November air cargo activity and air cargo pricing, which diverged. The volume of air cargo handled by the five airlines we track declined slightly (-0.1% Y/Y) but some of those carriers reported sharply higher yields (circa +10% Y/Y), due to limited capacity expansion in the region.
- Some good news: fuel prices have continued to moderate. Bunker climbed by just 5.1% Y/Y as of mid-December, and jet fuel prices have fallen about 11% Y/Y. Given firm container rates and air cargo pricing, the drop in fuel prices bodes well for Q418 margins, though it’s unclear whether such gains are sustainable.
Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers and air cargo operations in the near-term. We believe many investors remain too pessimistic regarding near-term earnings for container carriers and airlines.
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