Market Commentary     

Growth hopes outweigh inflation worries

·        The month of “sell in May and go away” is just about to end with a happy tone for risk assets. The S&P 500 ended last week near a record, while the Russell 2000 of small caps posted its eighth consecutive month of gains, the longest run since 1995. Markets focused on the outlook for higher spending that could boost growth, even after the personal consumption expenditures core-price gauge rose the most in two decades. The perception that the latest figures won’t be enough to prompt any change in policy by Federal Reserve officials also helped sentiment.

·        With reflation strategies again playing second fiddle to the crypto volatility and meme stock mania, stable Treasury yields helped the tech-heavy Nasdaq 100 outperform the Dow Jones Industrial Average by the most in seven weeks. The Dow finished the week 321.61 points higher, at 34,529.45, up 0.94%. The S&P 500 index gained 1.16%, to 4204.11, while the Nasdaq Composite rose 2.06%, to 13,748.74. The reflation rally may yet power ahead if the business cycle booms anew and renews investor conviction.

·        In Asia, the Nikkei 225 index climbed 2.1%. China’s CSI 300 slipped 0.3%. Stocks were flat in Hong Kong, though shares of Chinese online retail giant JD.com’s logistics arm climbed 14% in a strong debut. The Stoxx Europe 600 index rose 0.6%, closing at a fresh high on Friday.

·        Singapore shares closed the week higher, on upbeat economic data from the US and President Joe Biden’s federal spending plans which support recovery momentum. Straits Times Index ended 0.6% or 17.41 points higher at 3,178.

·        Asian markets can take some comfort from the resilience the region’s markets showed in the face of a resurgence in the pandemic. The MSCI Asia-Pacific Index is poised to end May with a 0.9% advance, which has it on course to outperform the S&P 500 for the first time since January.

·        US markets will be closed on Monday for the Memorial Day holiday, which traditionally marks the start of summer vacations. The UK will also observe a holiday today, with markets closed.

Key Research Idea

SATS Ltd (SATS SP) – Aided by non-aviation revenue

SATS’s FY21 results came in within our expectations. Its revenue fell 50.0% YoY to SGD970m, pulled down by lower Food Solutions and Gateway Services revenue as a result of persistent headwinds from Covid-19. FY21 net loss attributable to shareholders was SGD78.9m, as compared to PATMI of SGD168.4m in FY20. No dividend was declared as compared to 6 S-cents last year to conserve cash and more jobs. Management guided that SATS needs to be profitable and generate positive cash flow without government relief before they would consider resuming dividend distribution. Looking ahead, SATS will continue to grow its non-aviation business (44% of FY21 revenue) across Asia and enhance its cargo capabilities to meet the increasing demand for temperature sensitive supplies and e-commerce. After adjustments, our fair value estimate decreases from SGD4.95 to SGD4.84. BUY(Chu Peng)

Research Ideas

Singapore Exchange Ltd (SGX SP) – Softening in April’s market activities 

Operating an integrated securities and derivatives exchange across different asset classes. SGX is the leading securities market in Southeast Asia, exchanging trade stocks and bonds, ETF, warrants, derivatives and infrastructure funds. The Equities segment contribute an estimated 70-80% to total revenues, while Fixed Income, Currencies and Commodities (FICC) and Data, Connectivity and Indices (DCI) contribute 10-20% each.  Looking ahead, the company expects FICC and DCI to be relatively faster growth areas. The company has committed to a progressive dividend policy, and guided for  annualized dividend of 32 cents/sh (raised from FY20’s payout of 30.5 cents/share). While we are positive on its initiatives to broaden its revenue streams, time will be needed while a key concern remains on  competition risks in the China A50 equity derivatives space (China A50 index futures accounted for 34% of SGX’s FY20 revenues and ~46% of its FY20 equity derivative volumes).  HOLD(Research Team)

Pinduoduo Inc (PDD US) – Charting the next chapter

Despite its relatively shorter operating history in comparison to its major peers, Pinduoduo (PDD) has made big strides in China’s e-commerce market, especially in lower-tier cities, and is the largest e-commerce platform by active buyers in China (as at 1Q21). PDD adopts a team-purchase model, which helps to aggregate consumer orders and increases bargaining power. This model’s success can also be attributed to its unique social features, which relies on Weixin and QQ, its own social network (Pin Xiao Quan) and gamification features. Within the Community Group Purchase (CGP) market, we believe that PDD’s Duo Duo Maicai (DDMC) has proven to be a nimble innovator. Despite these positives, we do highlight a number of factors that keep us on the sidelines. In CGP, we believe PDD’s relative weakness is in offline execution. Another source of near-term uncertainty also relates to founder Colin Huang’s departure from the board. In branded GMV, management notes that it has made steady progress with brands, but the challenge remains on educating brands on the incremental value that the PDD platform can bring. We also highlight that PDD and 3 other CGP companies were also fined RMB1.5m in March 2021 for breaching the country’s price law. HOLD(Research Team)