Quoteworthy: "In the short term, the market will amplify all the negatives concerning China as usual. That is the easy part. The hard part is identifying the next sector that Beijing will target and why." — DBS Economist Chris Leung, on China's crackdown on private tuition
MAS lifts dividend cap on banks to positive reactions
Analysts from CGS-CIMB Research and RHB Group Research have maintained their “overweight” calls on the Singapore banking sector after the Monetary Authority of Singapore (MAS) announced, on July 28, that it has lifted the restrictions on dividends on Singapore banks and finance companies.
The move comes as the banks have maintained strong capitalisation ratios. It also comes after the US Federal Reserve and European Central Bank ended their dividend restrictions in their respective territories in June and July.
To CGS-CIMB analysts Andrea Choong and Lim Siew Khee, the asset quality across Singapore banks have remained “well-contained” through the Covid-19 pandemic.
That said, any potential deterioration in asset quality may surface in the 2QFY2022 after the target loan reliefs for SMEs and needy individuals have expired after end-2021, they note.
“We understand that the regional movement restriction orders recently introduced could result in an uptick in loan relief applications, but significant credit quality concerns are unlikely at this juncture,” write Choong and Lim in a flash note dated July 29.
On this, the analysts see all three banks — DBS Group Holdings, United Overseas Bank (UOB) and Oversea-Chinese Banking Corp (OCBC) — being on a “firm trajectory” to returning to their pre-Covid-19 net profit levels amid a rebound in business transactions and loan growth. “At this stage, the banks are on track to meet our FY2021 return on equity (ROE) forecasts of 10% to 12%,” they say.
As such, Choong and Lim expect the banks to reinstate their dividends for the FY2021 to be similar to that of the dividends distributed in the FY2019. They have also estimated a dividend of 30 cents per share from DBS, 25 cents apiece from OCBC and 55 cents per share from UOB in the 2QFY2021.
“A scenario analysis of banks’ fair values using [the] dividend discount model (DDM) valuation (risk-free rate: 1.2%, terminal growth: 2.5%, beta: 1, market risk premium: 6%) yields $27.72 for DBS, $11.22 for OCBC, and $27.43 for UOB,” estimate Choong and Lim.
Among the banks, Choong and Lim have indicated their preference for UOB as a “laggard and economic reopening play”. The bank has previously stated that it would resume its 50% dividend payout policy previously once the dividend cap has been lifted.
The RHB Singapore research team says it deems the removal of the dividend cap as positive as it “signals confidence and strength in Singapore’s banking system, notwithstanding any potential adverse economic development”.
While the team sees an “upside risk” to its FY2021 dividend forecasts for Singapore banks, they will review their dividend forecast on the banks only after their 2QFY2021 results are posted.
OCBC and UOB will release their results on Aug 4 while DBS will release its results on Aug 5.
The RHB team has identified OCBC as their top pick among the three banks, followed by UOB, then DBS. The team currently assumes dividend estimates of 93 cents for the FY2021 and $1.20 for the FY2022 for DBS. They have assumed a total dividend estimate of 96 cents for the FY2021 for UOB and an estimate of 43 cents for the FY2021 for OCBC. — Felicia Tan
Under siege, China’s EdTech giants take steps to curb fallout
China’s largest private education firms are moving swiftly to overhaul their businesses to adjust to a harsh new reality after Beijing launched a sweeping crackdown on the US$100 billion ($135.43 billion) sector.
Two of the sector’s biggest names have in past days reached out to reassure investors and managers their businesses remain viable and will not abruptly collapse, according to people familiar with the matter. Yuanfudao, the US$15.5 billion start-up backed by Tencent Holdings and DST Global, plans to yank all advertising after already curtailing part of its marketing earlier this year, one of its largest expenses, the people said, asking not to be identified talking about a sensitive matter. But the start-up also said it has ample cash on hand to sustain its business, one of the people said.
TAL Education Group President Bai Yunfeng told his lieutenants during an internal meeting it is in no danger of failing but will have to adjust course. It is considering providing certain after-class courses for free while creating more self-study online resources, a person familiar with the proceedings said. Fresh layoffs are possible, the person added. And Rise Education Cayman, controlled by Bain Capital, is expanding its non-academic curriculum — such as science or drama courses — to offset declines in its specialty of English-language teaching, a person with knowledge said.
Those represent just the opening moves in an industry-wide restructuring as its biggest players from leader TAL to New Oriental Education & Technology Group and Gaotu Techedu come to grips with new regulations that threaten to annihilate much of the private tutoring arena. A Yuanfudao representative declined to comment, while TAL’s Bai reiterated in a text message that the company will comply with regulations. Representatives for Rise did not respond to calls and messages seeking comment.
The regulations unveiled last week target after-school tutoring for kindergarten through ninth grade and marked the culmination of a months-long campaign to rein in the ad spending wars and cut-throat competition that has come to define a sector critical to China’s future workforce. But the growing cost of tuition, along with a relentless stream of ads that play on parents’ paranoia, has triggered widespread outrage over how the industry is enriching entrepreneurs and their financiers while fomenting social inequality. — Bloomberg
Chip-shortage recovery will be rocky, says Apple
The great computer-chip shortage of 2021, a cloud hanging over companies ranging from Tesla to McDonald’s, is showing signs of easing. But not for everyone.
While chipmakers such as Qualcomm and Advanced Micro Devices (AMD) struck an optimistic tone recently, certain products will remain scarce for some time to come. That has left companies like Apple in a bind: Even with some supplies of semiconductors getting closer to normal, they still lack the components needed to complete their complex tech devices.
On July 27, Apple said that shortages will contribute to a lower rate of growth this quarter and get worse. And there is an ironic wrinkle: The iPhone maker expects to get enough of the more advanced chips that the company needs. It is the simpler ones — made with so-called legacy-node manufacturing — that will be tougher to come by.
It has been “difficult to get the entire set of parts,” CEO Tim Cook says. “The legacy nodes are where those supply constraints have been.”
The problem boils down to this: Even the most advanced Apple M1 processor can’t work alone. Modern devices are dependent on myriad different parts, some costing just cents. Shortages of components as mundane as a power regulator can bring production of thousand-dollar items to a halt.
A lack of parts also is hurting the availability of Microsoft’s Surface computers and slowing PC market growth in general, that company said. Tesla CEO Elon Musk said that computer-chip shortages will cap the automaker’s growth rate for the rest of the year.
Against that backdrop, there was still plenty of good news this week.
Though it has been rocked by the chip shortage, Ford Motor said on July 28 that higher car prices have helped offset the sales lost because of the shortfalls.
Qualcomm, the biggest maker of smartphone chips, predicted a “material improvement in supply by the end of the year”.
AMD also gave an upbeat forecast, suggesting that it is going to win market share from Intel Corp in server chips. But CEO Lisa Su warned that there would be “pockets of component shortages” afflicting personal computers.
Apple is facing the situation from multiple angles. It is one of the largest consumers of semiconductors in general, and its in-house design efforts have made it one of the biggest chip designers in the world. Shortages have affected the company’s Mac computers and the iPad, Apple has said.
The company’s advanced processors — the ones it’s having an easier time getting — are made by Taiwan Semiconductor Manufacturing. AMD also uses that company to produce chips, and its 99% gain in revenue last quarter underscored that it has a reliable source of supplies.
“We do see some level of constraints, but we are making progress each quarter,” AMD’s Su said.
A lingering problem is chipmakers have much less incentive to invest in the production of simpler types of semiconductors. Such products fetch low prices, and they are made using ageing equipment. And even if the companies decide to spend more on production, building and equipping a plant can take years.
For customers, this frustrating scenario is not going away soon. Tesla’s Musk says that a variety of chips have bedevilled the company by becoming the “slowest part in our supply chain”.
“The chip supply is fundamentally the governing factor on our output,” he adds. — Bloomberg
Photo: Bloomberg
