First Cut: Singapore Budget 2012: Building an inclusive society

Hi all,

As expected, the Singapore Budget 2012 included numerous measures that were aimed at building a more inclusive society. The key announcements/highlights are:

- Aim of achieving productivity growth of 2-3% per year
- Reduce the inflow of foreign workers, with assistance to SMEs
- Introduction of a calibrated reduction in Dependency Ratio Ceilings (DRCs) in the manufacturing and services sectors. DRC specify the maximum proportion of foreign workers that companies can hire
- All employers will receive a Special Employment Credit (SEC) for their Singaporean workers aged above 50 years old and earning up to $4,000 per month
- A 200% tax allowance on the transaction costs incurred for M&A, subject to an expenditure cap of $100,000
- An additional $905 million for the Tourism Development Fund (TDF).
- Funding for 550 buses while the public bus operators will add another 250 buses to reduce waiting times
- Higher CPF rates for employees aged 50 and higher
- Double yearly healthcare expenditure from $4 billion to about $8 billion over the next five years - including better infrastructure and hospital capacity
- GST vouchers for lower-income and older Singaporeans

Transport Sector: Boosting Bus Capacity (Lim Siyi)

- 800 buses to be added over five-years
- S$1.1b Bus Services Enhancement Fund by Government highlights strong commitment
- Positive for both public transport operators

The increase of bus capacity is to relieve the daily public transportation congestion, which accounts for about 60% of all passenger trips. The government - in partnership with the public transport operators (PTOs) - will add 800 buses over a five year period for a 20% increase in overall bus capacity. 550 buses will be provided by the government while the remainder will be added by the PTOs. A Bus Services Enhancement Fund with S$1.1b will be set up for the purchases of the buses and running costs for 10 years.

DPM stressed that this will be a one-time move and that the "viability of bus operations will have to rest on improvements in efficiency and a sustainable system of fare revenues".

We view this move as a positive for both PTOs - ComfortDelgro and SMRT - as recent performance of their bus segments have seen declining operating profits. Maintain BUY on SMRT at a fair value estimate of S$2.04.

Tourism Sector: Another boost to the local tourism industry (Sarah Ong)

- S$905m Tourism Development Fund (TDF)
- GST tourism refund for cruise tourists
- GST relief for goods brought in

To support growth in tourism, the government will inject an additional S$905m into the Tourism Development Fund (TDF). We think this is a substantial amount that will increase the attractiveness of Singapore as a tourist destination with quality offerings. For example, the Gardens by the Bay is estimated to cost S$1b. River Safari and the International Cruise Terminal, which are both scheduled to open this year, cost an estimated S$160m and S$500m, respectively.

Further, to capitalise on the vibrant growth of international cruise tourism, the GST Tourist Refund Scheme (TRS) will be extended to international cruise passengers departing from the Singapore Cruise Centre and the upcoming International Cruise Terminal, which will be opened in 2Q12.

The government will also simplify and enhance the GST relief for goods brought in by travelers and residents returning from abroad.

BUY rating on CDL Hospitality Trusts. We initiated coverage on CDL Hospitality Trusts (CDLHT) today with a BUY rating and fair value of S$2.00. CDLHT has ~80% of its revenue from high-end Singapore hotels, which have better supply-side dynamics than budget hotels. We project that demand growth for hotel rooms will comfortably outstrip overall supply growth for 2012-2015 (6.4% p.a. vs. 3.8% p.a.). Our report also briefly discusses the impact of the opening of the International Cruise Terminal and possible growth in visitor arrivals by sea. It may be worthwhile to look at possible beneficiaries of the growth of the cruise business, e.g. Genting HK [NOT RATED] which runs Star Cruises, and SATS [HOLD rating, S$2.43 fair value], will operate the new cruise terminal.

Healthcare Sector: Addressing growing healthcare needs (Andy Wong)

- Strong pledge for healthcare spending
- Middle class group to get aid too
- Private healthcare providers to benefit

The emphasis was on addressing Singapore's growing healthcare needs. The government pledged to double the yearly healthcare expenditure from S$4b to S$8b over the next 5 years. This includes enhancing healthcare infrastructure and increasing the pool of healthcare professionals, including doctors and nurses. We believe this is a strong boost to both the public and private sector as an improved infrastructure would undoubtedly raise Singapore's profile as a medical hub.

Besides reiterating its commitment to help the needy and elderly, the government has also highlighted its intention to support the middle class. This group has a stronger tendency to take up private healthcare services compared to the lower income group. Hence with reduced out-of-pocket medical expenses, we believe this will thus benefit private healthcare providers such as Raffles Medical Group [BUY; FV: S$2.61].

The government also stated its plans to expand hospital capacity. While this will provide competition for the private sector, investments on infrastructure take time and the growing need for quality healthcare services implies that demand for the private sector should remain robust, especially with rising income levels and growing foreign patient trends.

In light of these factors, we reiterate our OVERWEIGHT rating on the healthcare sector.

Oil and Gas Sector: Push for lower dependence on foreign workers continues (Pei Han)

- Marine sector spared for now
- M&A allowance and development of R&D are positives
- Neutral for bigger cap, but could benefit small-mid cap marine stocks

The marine sector seems to be spared for now. After announcing increases in foreign worker levies in both Budget 2010 and Budget 2011, the government is now introducing a calibrated reduction in Dependency Ratio Ceilings (DRCs) in the manufacturing (from 65% to 60%) and services sectors. There is no mention about the marine industry (comprises companies involved in ship building and repair) being affected by this move, and there are also no plans yet to increase foreign worker levies for all sectors. However, higher levies may come back into the picture depending on the growth of the foreign workforce in the next 12 months.

But manufacturing sector includes some O&G companies too
According to classification by the Ministry of Manpower, companies involved in 1) mechanical engineering works and 2) manufacturing and repair of oil/gas field machinery are under the "manufacturing" sector. Examples of such companies are Technics Oil & Gas, Mun Siong and Baker Technology.

This latest budget proposal means that companies which are near the maximum in terms of their DRCs (i.e. the maximum proportion of foreign workers they can hire) are likely to be more hard-pressed to find ways to reduce their dependence on foreigners. Those that are still well within their DRCs should experience less pressure to do so but will take the lower DRCs into account in their future hiring decisions.

Encouraging M&As: Expecting more consolidation ahead
The oil and gas industry has seen one of the highest levels of mergers and acquisitions (M&A) activity compared to other sectors in the past few years. Looking ahead, we see potential for further consolidation due to the current fragmented nature of the industry. The government is also keen to see more efficient and competitive players gain economies of scale, acquire new capabilities and raise overall industry productivity.

More tax allowances for those contemplating M&A
Hence on top of the M&A Allowance Scheme that was introduced in Budget 2010 (in which companies are able to enjoy tax allowances of 5% of up to S$100m of the acquisition value), this year's budget will include a 200% tax allowance on the transaction costs incurred, e.g. legal and tax advisory fees, subject to a cap of S$100k.

Spurring innovation: R&D for deepwater solutions
The push for drilling in deeper waters is set to continue, and the Budget also included goodies for offshore companies keen to capitalize on this trend. The government will allocate S$150m from the National Research Fund to A*STAR and EDB to help companies in the offshore & marine industry build R&D capabilities to develop solutions for deepwater oil production.

Impact on companies
We see Keppel Corporation [BUY, FV: S$12.27] and Sembcorp Marine [BUY, FV: S$5.63] among the beneficiaries for the R&D funding for deepwater solutions, and the smaller oil and gas companies as those that may be impacted by further industry consolidation. As mentioned earlier, O&G companies classified under the "manufacturing" sector would also be affected by the lower DRCs.



Company Registration No: 198301152E
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