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Market Commentary

US stocks rise on signs of debt ceiling compromise

• US stocks rebounded from an early session sell-off on Wednesday as Mitch McConnell, Senate minority leader, said that his Republican party would support an emergency extension on the federal government debt ceiling into December, which would stave off the immediate threat of a US default.

• The benchmark S&P 500 reversed early losses of as much as 1.3%, to close up 0.4% following the comments. Worries about inflation and slower economic growth still linger, but lower bond yields helped push Big Tech higher. The Nasdaq Composite climbed 0.5%, while the Dow advanced 0.3%.

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• The 10-year Treasury yield ended the day at 1.52% after having climbed to 1.55%. The 10-year yield has spiked from 1.31% since the end of September, when the Federal Reserve confirmed it will soon begin tapering, or reducing its bond buying.

• A robust US nonfarm payrolls report tomorrow night could cement predictions of a reduction in Federal Reserve stimulus starting next month. US private payrolls rose by 568,000 last month, according to a report from the payroll processor ADP. That was the biggest rise since June and topped economists’ expectations for an increase of 428,000.

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• Investors are continuing to weigh the economic recovery against inflation risks from a jump in energy costs. Oil prices have hit their highest since November 2014 this month, which have stirred worries that spiralling energy costs could force central banks to raise rates more quickly to combat quickening inflation.

• Natural gas prices — up as much as 40% at one point — turned lower after Russia’s President Vladimir Putin said the country is ready to help.

• European stocks declined as investors worried that the surging energy prices will lead to long-lasting inflation and higher interest rates, hampering the economic rebound. The Stoxx Europe 600 index closed 1% lower as travel, retail and automakers fell the most.

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• Given all the uncertainties regarding growth, inflation and policy outlooks, Asian stocks headed lower as a selloff in the heavyweight tech sector deepened. A benchmark tracking Chinese technology stocks in Hong Kong closed at a record low.

• Japan’s Nikkei 225 was among the biggest losers among main indices in the region, sliding more than 1%. Japanese automakers dropped as JPMorgan cut ratings or price targets on multiple firms, while Credit Suisse warned of falling US sales of Japanese autos. In the UK, new car sales had the worst September in decades due to the impact of the chip shortage.

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• The Straits Times benefitted from the rotation out of tech-centric North Asian heavyweights, to close up 0.51%.

• Investors remain on edge as they grapple with an array of risks, including monetary-policy tightening to tackle price pressures and the impact on Chinese growth from Beijing’s curbs on a debt-laden property sector.

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CapitaLand Investment Ltd (CLI SP) – Transformation augurs well for the future

• More nimble and resilient business model post restructuring
• Continued focus on new economy sectors and capital recycling
• New senior hires to support strategic drive ahead

A more resilient business model with stronger recurring income streams

We believe CapitaLand Investment Limited (CLI) (formerly CapitaLand prior to its restructuring) has emerged as a nimbler entity with a more resilient business model after completing its strategic restructuring in late Sep 2021. Post-restructuring, CLI has become one of the world’s largest listed real estate investment managers (REIMs), with SGD119b of real estate assets under management (AUM), as at 30 Jun 2021. More than 80% of its AUM is located in Asia. CLI’s real estate funds under management (FUM) was SGD83b (as at 30 Jun 2021), and this is held via six listed REITs and business trusts, and over 20 private funds. Management reiterated its target of achieving SGD100b of FUM by 2024, which would help to grow its fee income and thus recurring income streams.

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Focus on new economy assets and capital recycling

Looking ahead, CLI would continue to target SGD3b of divestments per annum, and proceeds would be reinvested into new economy assets such as logistics, data centre and business park properties. While its lodging management business has been adversely affected by the Covid-19 pandemic, CLI has mitigated the impact by focusing on asset-light management and franchise contracts. It had 123k lodging units under management, as at 31 Dec 2020, of which more than 80% of the units are under management contracts and franchise deals. Management aims to grow its lodging units under management to 160k by 2023. Compared to its local peers, we believe CLI will be relatively less susceptible to the impact from potential government cooling measures within the residential market, given that its property development arm has been privatised under its parent following the restructuring.

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New fair value estimate of SGD3.83

In order to support its strategic drive, CLI announced two new senior hires recently, which we believe can help propel its funds management business further. The first is Mr Simon Treacy, who was formerly the Global CIO and Head of U.S. Equity for BlackRock Real Estate and is joining CLI as CEO of Private Equity Real Estate. The second is Mr Patrick Boocock, who was previously Managing Partner and Head of Asia at Brookfield Asset Management, and will be joining CLI as CEO of Private Equity Alternative Assets. We rework our assumptions to factor in CLI’s completed strategic restructuring, and adopt a sum-of-the-parts (SOTP) approach to derive a fair value estimate of SGD3.83.

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ESG Updates

CLI leads its peers in the adoption of strong sustainability programmes, in particular to governance. It also has a majority independent board and an independent Chairman to support oversight of management. On the category of ‘Opportunities in Green Building’, CLI’s portfolio features a relatively high proportion of green-certified buildings relative to peers. According to CLI, it has concluded its augural Sustainability X Challenge to crowd-source the world for the best sustainability innovations as part of its 2030 Sustainability Master Plan, and has set up a SGD50m CapitaLand Innovation Fund. CLI has also retained its listing on the 2021 Global 100 Most Sustainable Corporations in the World index by Corporate Knights Inc. It remains a constituent of the 2021 FTSE4Good Index Series, along with CapitaLand Integrated Commercial Trust. CLI and all five of its Singapore-listed REITs are also ranked among the top 10 in their respective categories in the Singapore Governance and Transparency Index 2021. BUY. (Research Team)

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CNOOC Ltd (883 HK) – Fundamentals remain positive

• Surging gas prices; higher Brent crude forecasts
• A-share listing plans underway

Higher Brent crude forecasts

Near-term natural gas prices have surged and the increase in energy costs has broadened to other commodities such as oil and coal. Our bank has also recently increased the 3-month forecast for Brent crude to USD85/bbl, before drifting back to below USD80/bbl over a 12-month time frame. This compares to USD80/bbl (3-month) and USD76/bbl (12-month) previously.

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Strong earnings recovery along with higher oil prices and growth in production volumes in 1H21

Recall that CNOOC delivered a robust growth in earnings in 1H21, with net profit coming in at RMB33.3b, up more than 200% YoY and more than 120% HoH, mainly due to the strong recovery in oil prices and 7.9% growth in overall production to 278mmboe in 1H21. This was driven by a rise in domestic production (+11% YoY) rather than overseas production (+1.8% YoY), and is faster than expected, keeping in mind management’s production guidance of 545-555mmboe or 3.2-5.1% volume growth for the year. Measures were taken to lower the natural decline rate of matured oil fields and production ramp-up for new projects. We see a good chance of production for 2021 hitting 555mmboe or exceed the high end of the guidance with 13 new projects scheduled to come onstream in 2H21.

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A near term target on renewables

On energy transition, the company plans to invest 5-10% of the annual capex on renewable energy. By 2025E, CNOOC expects about 5-10% of its revenues to come from renewables. By 2050E, non-fossil fuel energy should account for about half of the group’s revenue. The Jiangsu wind farm is estimated to account for less than 0.3% of the group’s profit in 1H21.

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US sanctions

CNOOC is retained in the new “Non-SDN Chinese Military-Industrial Complex Companies List” announced by the Biden administration on 3 Jun 2021, which replaces the previous “Communist Chinese Military Companies” sanction list. US investors have been disallowed from purchasing CNOOC’s shares starting 2 Aug 2021, and existing US shareholders will have one year to divest until 3 Jun 2022. CNOOC has been on the US DoC’s “Entity List” since Jan 2021, and so far the sanctions have had minimal impact on fundamental operations.

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A share listing plans

Looking ahead, another development to look out for is the planned A-share listing of CNOOC, which would broaden the investor base of the company. Given CNOOC’s ample cash position, capital-raising is likely not the sole purpose of the A-share listing. We update our estimates and raise our fair value estimate to HKD10.70.

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ESG updates

Among the major oil companies in China, CNOOC is the lowest cost upstream producer. The stock is the closest proxy to oil prices given its upstream focus, and investors may wish to consider it as one to ride on an oil price recovery. Fundamentally, CNOOC’s operational outlook appears healthy but the group is not highly regarded on the ESG front. Its environmental management and mitigation practices remain generally weak compared to peers and there are concerns regarding its governance practices. We assign an ESG discount to CNOOC, given that the group fares poorly compared to the industry average in the aspects of E, S and G. BUY. (Research Team)

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PetroChina Co Ltd (857 HK / 601857 CH) – Buoyed by supportive macro

• Surging gas prices; higher Brent crude forecasts
• But also expecting higher import gas losses

Higher Brent crude forecasts

Near-term natural gas prices have surged and the increase in energy costs has broadened to other commodities such as oil and coal. Our bank has also recently increased the 3-month forecast for Brent crude to USD85/bbl, before drifting back to below USD80/bbl over a 12-month time frame. This compares to USD80/bbl (3-month) and USD76/bbl (12-month) previously.

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Impact of higher commodity prices on the company

PetroChina would benefit from its production of natural gas (as well as oil), but do note that the import gas business is likely to see wider losses going forward too. This is because PetroChina may have to import higher-cost LNG during the winter peak demand period, which would worsen its import gas losses. Recall that the import gas business fell back to losses in 2Q21 from a profit in 1Q21, as 1) import gas cost in 2Q21 was benchmarked to higher crude oil prices in 3Q20 where it is estimated that average import gas cost in 2Q21 may be about 40% higher than that in 1Q21, and 2) city gate gas price in 2Q21 was 9% QoQ lower due to off-season gas prices. As mentioned in our earlier report, import gas losses may widen in 2H21 as import gas cost will continue to rise given the 9-month time lag in crude prices benchmarking.

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Energy transition plans underway

As one of the top few energy companies in China, the market is keen to glean more details of the group’s energy transition plans. Management has mentioned that it expects crude oil, gas and new energy to account for one-third each in the group’s output by 2035. For this year, the plan is to build up new energy capacity to replace 3.45mt of

standard coal. On geothermal, it has contracted 10m sqm of GFA for heat supply. Aggregate capacity under construction for geothermal, distributed wind, solar and other new energy are about 350kt per annum. As for hydrogen filling stations, the group has built two stations in Beijing, and six more stations are under construction. We update our estimates and along with the higher Brent crude forecasts, and our fair value rises to HKD4.50 (857 HK) and CNY6.40 (601857 CH).

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ESG updates

Unlike CNOOC which scores significantly below industry average for most key aspects under E, S and G, PetroChina scores above industry average on Carbon Emissions. There are strong management practices to address carbon emissions relative to peers. The two areas which the group scores the furthest below industry average are Biodiversity & Land Use, as well as Governance. BUY (857 HK) / HOLD (601857 CH). (Research Team)

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SPH REIT (SPHREIT SP) Still soft retail leasing sentiment

• FY21 DPU was 5.40 S cents
• Negative rental reversion of 8.4% due to weak retail leasing sentiment
• Tenant sales rose 2% YoY while footfall fell 20% YoY

In line set of results

SPH REIT’s FY21 gross revenue grew 14.8% YoY to SGD277.2m while NPI increased 11.4% YoY to SGD202.6m. This growth was largely driven by full year contribution from Westfield Marion, lower rental assistance granted to eligible tenants and improving operating environment. As such, 4QFY21 DPU came in at 1.58 S cents as compared to 0.54 S cents in 4QFY20. For the full-year, FY21 DPU jumped 98.5% YoY to 5.40 S cents (including 0.52 S cents deferred from FY20), which formed 103% of our forecast, broadly in-line with our expectation.

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Portfolio occupancy remained healthy at 98.8% but rental reversion was 8.4%

As at 31 Aug 2021, SPH REIT’s portfolio occupancy rate rose 1.1 ppt YoY to 98.8% but recorded negative rental reversions of 8.4%, due to weaker retail leasing sentiment. Despite its high occupancy rate at 98.9%, SPH REIT’s Singapore assets reported negative rental reversions of 8.2%, weighed by Paragon (-8.3%), and The Clementi Mall (-8.7%), but helped by The Rail Mall (+5.4%). Separately, SPH REIT’s Australia assets recorded negative rental reversions of 10.8% (Westfield Marion: -10.5%; Figtree Grove: -12%). We expect rental reversions to remain under pressure in FY22 as business sentiment remains weak and tenant retention is prioritised.

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Gradual improvement in traffic and sales

Overall portfolio tenant sales rose 2% YoY despite a 20% decline in footfall. Performances of The Clementi Mall, Westfield Marion and Figtree Grove were relatively more resilient given their strategic locations, and retail tenancy mix. Tenant sales for the three malls have recovered to over 90% of their pre-Covid-19 levels. Conversely, Paragon’s recovery was slower due to its reliance on tourist consumption. Paragon’s traffic and tenant sales fell 17% and 1% YoY for FY21, or at 60% and 71% of its pre-Covid-19 levels. After adjustments, our fair value estimate increases from SGD0.89 to SGD0.92.

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Portfolio occupancy remained healthy at 98.8% but rental reversion was 8.4%

SPH REIT’s human capital development and management practices continue to trail its peers, notably in offering comprehensive benefits, staff engagement, and development opportunities. In addition, its corporate governance structure falls into the average scoring range which is weaker than its global peers, most notably on executive compensation practices. However, the REIT ranks higher than industry average in terms of Environment score with higher proportion of green-certified buildings in its portfolio relative to peers. HOLD. (Chu Peng)