singapore offshore and marine sector

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

24 November 2016 Asia Pacific/Singapore

Equity Research Capital Goods

Singapore Offshore and Marine Sector

Research Analysts

Gerald Wong, CFA

65 6212 3037

[email protected]

Shih Haur Hwang

65 6212 3024

[email protected]

SECTOR REVIEW

Government help could limit downside risks

Figure 1: Rising balance sheet risks in the O&M sector have led to

significant spillover effects to other sectors

Source: Company data, Bloomberg, Credit Suisse estimates

■ Help could be on its way. Singapore's Minister for Trade and Industry

indicated that the government is looking at potential measures to assist the offshore and marine sector. While we do not expect a bailout for the sector, we believe it is plausible that the government could work with local banks to provide funding for new projects and absorb the majority of risks associated with each project loan.

■ Government initiative could reduce balance sheet stress for selected companies. Sustained cash outflow has led to rising balance sheet stress

and default in the industry, as exemplified by companies such as Swiber and Swissco filing for judicial management. With an increase in credit facility under the Internationalisation Finance Scheme (IFS) from S$30 mn currently to US$30-50 mn, selected companies with near-term liquidity requirements of about S$100 mn or less could benefit. This could lower sector NPLs under a ‘deep-stress’ scenario.

■ Not a panacea, but initiatives could provide some support to the economy. The offshore and marine sector represented about 7% of the

manufacturing output and 1.4% of Singapore's GDP in 2015, and any government initiative would be a slight positive to the economy. In addition, it could provide some support to Singapore's labour market, as the sector represents 19% of the total manufacturing employment. However, we expect more limited impact on rigbuilders Keppel (UNDERPERFORM) and Sembcorp Marine (NEUTRAL), as the value of project loans under the IFS

would be small as compared to their total debt.

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

Net gearing (x)

24 November 2016

Singapore Offshore and Marine Sector 2

Focus charts

Figure 2: Breakdown of total bank borrowing by

segment Figure 3: Pacific Radiance—2018 bond YTM at 50%

Source: the BLOOMBERG PROFESSIONAL™ service, company data, Credit Suisse estimates

Source: the BLOOMBERG PROFESSIONAL™ service

Figure 4: Oil and gas represents 4-6% of total loans

for Singapore banks

Figure 5: NPL for Singapore banks has also

increased

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 6: Offshore and marine value added as a

percentage of GDP

Figure 7: Offshore and marine as a percentage of

total manufacturing employment

Source: Economic Development Board Source: Economic Development Board

Government Linked Companies , S$4.9 bn,

27%

Medium-sized manufacturing

companies , S$0.9 bn, 5%

Unlisted SME , S$3.8 bn, 21%

Medium-sized listed services companies,

S$8.6 bn, 47%

0

10

20

30

40

50

60

Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16

Pac Radiance 2018 bond YTM (%)

17.0

7.7

12.4

19.0

9.3

12.6

16.0

9.2

12.2

0

2

4

6

8

10

12

14

16

18

20

DBS UOB OCBC

4Q15 2Q16 3Q16

5.9%

6.6%

5.4%

3.7%

4.4% 4.2%

5.9% 6.1% 5.9%

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

DBS UOB OCBC

2 2 2 2 3 4 5 6 6 5 6 6 7 5

1.1%1.0%

1.1% 1.2%1.2%

1.4%

2.0% 2.0%

1.8%1.6% 1.6%

1.7%1.8%

1.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0

1

2

3

4

5

6

7

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

S$

bn

Marine and offshore engineering - LHS Marine and Offshore engineering as % of GDP

39 37 41 45 53 6494 94 85 83 86 89 86 76

318 314 317 324 329341

341 324 329 335 338 336 331324

357 351 358370

382404

435418 414 418 425 425 416

400

0.0

5.0

10.0

15.0

20.0

25.0

0

100

200

300

400

500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

S$

bn

Marine and offshore engineering - LHS Others - LHS Employment as % of Total manufacturing - RHS

24 November 2016


Government help could limit downside risks

Help could be on its way

According to Singapore's Minister for Trade and Industry (Industry), S Iswaran, the Singapore

government is studying, in consultation with the offshore and marine sector and financial

institutions, the need for measures to support the industry. However, we do not expect a

broad-based bail-out of the sector so as to prevent any potential moral hazard issues. We

expect the initiatives to be likely focused on ensuring that viable companies with sound

business models do not go under because of any potential liquidity crunch.

An initiative could be an expansion of the Internationalisation Finance Scheme (IFS),

which is offered to Singapore-based companies looking to secure financing from banks for

their overseas investments or projects. IE Singapore currently co-shares default risks with

participating financial institutions for credit facilities up to S$30 mn. The government could

also introduce a scheme similar to the Special Risk-Sharing Initiative (SRI) first introduced

in Budget 2009, aiming to stimulate bank lending to ensure that viable companies across

all industries continue to enjoy access to credit, with the government taking on 80% of the

risk sharing, with the remaining 20% by the participating financial institution.

In the scenario where an increase in the IFS leads to (1) lower balance sheet risks for

certain companies having short-term liquidity requirements of about S$100 mn or less and

(2) lower NPLs for unlisted SMEs, we estimate that only about S$4.4 bn out of S$18.3 bn

of bank borrowing could be at risk, representing peak NPL of 24%, compared to our

previous 'deep-stress' scenario, where we estimated total NPLs for the O&M sector could

reach as high as 33%.

Rising stress from lower oil

The sustained cash outflow in the industry has led to increasing balance sheet stress for

companies in the sector. On our estimates, aggregate net gearing in the offshore and

marine sector has risen to above 1x in September 2016 from 0.5x in March 2014. In the

global financial crisis of 2008-09, companies were in a net cash position on aggregate due

to the progressive payment terms provided by customers. As a reflection of greater

balance sheet stress and concerns about debt repayment, the yield-to-maturity (YTM) of

bond issuances by companies in the offshore and marine sector has risen sharply. The

YTM of Swiber's 2018 bond rose to 91% prior to its collapse, while the YTM of Ezra’s 2018

bond has risen to 79% from 16% as recent as in July 2016.

Importance of the O&M sector to the economy

We note that the offshore and marine sector remains an important component of Singapore’s

economy, increasing its share of manufacturing output from 3.2% in 2003 to close to 6.9% in

2015, while the relatively high value added nature of the offshore and marine industry has led

to a larger contribution of 7.8% in 2015 when measured in terms of value added. Overall, we

estimate that offshore and marine engineering contributed about 1.4% to Singapore's GDP in

2015, and any government initiative could provide some support to the economy. In addition,

it could provide some support to Singapore's labour market, as the sector represents 19% of

the total manufacturing employment, but has seen significant layoffs since 2015. However, we

expect a more limited impact on rigbuilders Keppel (UNDERPERFORM) and Sembcorp

Marine (NEUTRAL), as the value of project loans under the IFS would be small compared to

their total debt. In addition, we do not see any restructuring involving Keppel and Sembcorp

Marine happening in the near term.

The Singapore government is studying

the need for measures to support the offshore

and marine industry

Initiatives could include an expansion of the IFS

and introduction of a scheme similar to the

SRI

The sustained cash outflow in the industry

has led to increasing balance sheet stress for companies in the

sector

The offshore and marine sector remains

an important component of

Singapore’s economy, contributing about

1.4% to Singapore’s GDP in 2015

24 November 2016


Help could be on its way

Government likely to take on more risk on lending to

sector

Government could absorb risks associated with project loan

According to Singapore's Minister for Trade and Industry (Industry), S Iswaran, the

Singapore government is studying in consultation with the offshore and marine sector and

financial institutions, the need for measures to support the industry. The Business Times

further reported that IE is working with local banks to provide funding for new projects, and

a proposal has been put up for the government to absorb up to 80% of the risk associated

with each project loan.

In this regard, there could be an expansion of the Internationalisation Finance Scheme

(IFS), which is offered to companies looking to secure financing from banks for their

overseas investments or projects. IE Singapore currently co-shares default risks with

participating financial institutions for credit facilities up to S$30 mn. The scheme is

available to all Singapore-based companies with meaningful operations locally. According

to reports in The Business Times, the value of the credit facility could be increased to

US$30-50 mn.

Assistance cannot be a panacea

In our view, the government is unlikely to do a broad-based bail-out of the sector, so as to

prevent any potential moral hazard issue. At the same time, Singapore's GDP growth is

not yet as dire as during the global financial crisis period. While the government could

provide assistance where appropriate, this is mainly to ensure that the industry does not

lose key capabilities and competencies while in the transition process. Should the

government step in, the initiatives are likely to be focused on ensuring that viable

companies with sound business models do not go under because of any potential liquidity

crunch. In our view, any potential government assistance would have to meet the following

criteria: (1) no risk of moral hazard or setting a precedent preventing structural

adjustments from being made, and (2) investment decisions made on a commercial basis.

Initiative likely to be quite similar to Special Risk-Sharing Initiative during GFC

During the Global Financial Crisis in 2008-09, the Singapore Government dipped into past

reserves for the first time in Budget 2009, drawing S$4.9 bn to fund various schemes

including the Jobs Credit Scheme and Special Risk-Sharing Initiative (SRI). The S$5.8 bn SRI

scheme aims to stimulate bank lending to ensure that viable companies across all industries

continue to enjoy access to credit. The SRI comprises two components: (1) the New Bridging

Loan Programme (BLP), and (2) Trade Finance Schemes. The BLP aims to improve access

to working capital for all companies, especially mid-sized companies, with a maximum loan

quantum of S$5 mn per borrower group, with the government taking on 80% of the risk

sharing, with the remaining 20% by the participating financial institution. The trade finance

schemes aims to help mid-sized and large exporters to obtain loans and trade insurance in an

environment of reduced risk appetite and limited private insurance capacity. Similarly, the

government will take on a significant proportion of the risks.

Measures so far aimed at reducing costs; limited measures to help financing

Any expansion of the IFS would provide assistance to companies in need of financing, as

measures introduced by the government so far have been limited to lowering business costs.

In the 2016 budget, the Singapore government granted a one-year deferment of levy

increases for foreign workers in the marine and process sectors, in view of the challenging

business conditions and a reduction of work permit holders (WPH) in these sectors. Levy

24 November 2016


rates for the Marine sector will remain at S$300/WPH for R1 and S$400/WPH for R2 up to 1

July 2017, before increasing to S$350/WPH and S$500/WPH, respectively.

The SME Working Capital Loan was also introduced to help local companies access

unsecured working capital financing of up to S$300,000, with a repayment period of up to

five years. SPRING will share the risk of loan defaults with participating financial

institutions in the event of the company insolvency. However, we note the small value of

the SME Working Capital Loan is unlikely to have a significant impact for most of the listed

offshore and marine companies, given the size of their total borrowing.

Selected companies could benefit

In our view, an increase in the credit value under the IFS from S$30 mn to US$30-50 mn

(S$42-70 mn), is most likely to assist companies with liquidity requirements of about

S$100mn or less in the near term. The remaining financing needs can then be met

through asset disposal or other capital market activity. As shown in Figure 8, there are

selected listed companies which have short-term debt exceeding cash of S$100 mn or

less. The debt held by these listed companies would be about S$1.3 bn, representing

11.1% of total debt amongst the companies in the sample group.

Figure 8: Short term debt vs cash positions of selected listed O&M companies (In S$ mn)

Company As of ST debt LT debt Cash Net debt ST debt - cash Bonds due in

2017-18

EMAS Offshore FY4Q16 769 - 17 752 752 Nil

Swiber 1Q16 660 715 175 1,199 484 457

Ezra FY3Q16 524 687 44 1,167 481 150

Swissco 3Q16 349 - - 349 349 100

ASL 2Q16 363 229 25 567 338 150

Otto Marine 2Q16 322 493 14 801 308 Nil

KS Energy 3Q16 256 151 11 397 245 Nil

POSH 3Q16 254 602 19 837 235 Nil

Nam Cheong 3Q16 298 293 112 480 186 165

Marco Polo Marine 2Q16 189 67 18 238 170 Nil

Triyards FY4Q16 188 16 21 183 167 Nil

Vallianz 3Q16 197 302 51 449 146 60

Falcon 3Q16 151 119 42 229 109 50

Ausgroup 2Q16 126 54 22 158 104 110

Pacific Radiance 3Q16 140 550 40 650 100 100

KTL Global 3Q16 27 8 1 34 26 Nil

Beng Kuang Marine 3Q16 30 26 6 51 25 Nil

Viking Offshore 3Q16 32 12 10 33 22 Nil

Technics 1Q16 12 35 18 30 Net cash Nil

MTQ 3Q16 3 41 25 19 Net cash Nil

Kim Heng 3Q16 8 18 23 3 Net cash Nil

Heatec Jietong 2Q16 3 3 4 1 Net cash Nil

Dyna-Mac 3Q16 20 0 123 Net cash Net cash Nil

CSE Global 3Q16 18 0 71 Net cash Net cash Nil

Rotary Engineering 3Q16 6 16 98 Net cash Net cash Nil

Nordic 3Q16 26 8 35 Net cash Net cash Nil

Baker Tech 3Q16 - - 112 Net cash Net cash Nil

CH Offshore 3Q16 7 - 10 Net cash Net cash Nil

Jason Marine 3Q16 - - 19 Net cash Net cash Nil

Source: Company data, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

As one of the key concerns on the IFS is that it is limited only to new project loans, we

show in Figure 9 that selected offshore and marine companies have still been able to

secure new projects in 2016, mainly for providing offshore support vessels to customers.

24 November 2016


Figure 9: Contracts received by selected O&M companies in 2016

Date Amount

(US$ mn)

Vessel type Units Client Comments

POSH

1/11/2016 Large AHT 4 Shell Provide towage and position

16,000 BHP AHTS 1 services for Shell Prelude FLNG

2/24/2016 85 Utility vessels 4 Saudi Arabian

national O&G

major

Five-year charter, with options to

extend

2/24/2016 AHTS 1 Qatari client Five-year charter

3/31/2016 Semisubmersible

accommodation vessel

1 Brazil One-year charter extension

4/26/2016 167.5 Anchor-Handling,

Supply and Safety

Standby vessels

8 Middle Eastern

NOC

Five-year charter with two one-

year extension options

6/24/2016 Semisubmersible

accommodation vessel

1 Technip

Oceania

Pacific Radiance

11/2/2016 73 Maintenance work boat 1 Mexican client Multi-year contract to perform

maintenance, diving and subsea

maintenance

Source: Company data

Small and medium enterprises could also benefit We expect an increase in the size of the credit value under the IFS to also potentially

benefit some unlisted SMEs. This is based on our sample of 20 unlisted small and medium

enterprises in the oil and gas sector spanning different sub-sectors including the

distribution of parts and equipment, subcontractors, as well as mooring and rigging

services. Of these companies, 12 have little or no debt. The bulk of borrowing is from one

company, Pacific Richfield Marine, while generated S$26 mn of revenue and S$10 mn of

EBITDA in FY13, but had total debt of S$258 mn. The other 19 companies had combined

borrowing of S$68 mn.

24 November 2016


Figure 10: Borrowings from unlisted SMEs (S$ mn) and list of principal bankers

DBS UOB OCBC S$ mn Revenue EBITDA Total debt ST debt LT debt DCM Bank borrowings

Franklin Offshore 184 12 8 8 - 8

Jebsen & Jessen 112 -4 13 12 0 13

ROS 69 11 9 1 8 9

Beng Hui 57 9 11 11 - 11

Tellus Marine 39 4 - - - -

Atwin Marine 27 5 - - - -

1 1 1 Pacific Richfield Marine 26 10 258 39 219 258

T&T Salvage Asia 25 3 8 0 8 8

Seaquest Enterprise 21 2 14 11 3 14

Excel Marco 10 0 - - - -

Eng Soon 9 -1 1 0 0 1

KM Kinley 5 1 1 1 0 1

Tiong Woon 4 1 4 2 2 4

Aflex 4 0 - - - -

Amsbach Marine 4 -4 - - - -

Duvalco Valves 3 0 - - - -

Svitzer Marine Services 3 0 - - - -

Opus Offshore 2 1 - - - -

Promor 2 -2 - - - -

NAV Marine 1 0 0 0 - 0

1 1 1 Total 606 49 326 86 240 - 326

Note: All figures using FY14 data for all companies except for Tiong Woon using FY12 data, KM Kinley and Pacific Richfield Marine using FY13 data, and Aflex and ROS using FY15 data. Source: Company data, Credit Suisse estimates

Government assistance could reduce our estimates

of peak sector NPLs

We estimate total borrowing by Singapore's oil and gas sector to be about S$25 bn as of

December 2015, comprising S$6.6 bn of debt capital markets borrowing (26%) and

S$18.3 bn of bank borrowing (74%). Total DCM principal maturing in 2016-18 is S$3.1 bn,

with peak maturity in 2017 of S$1.3 bn.

Of S$18.3 bn in bank borrowing, the majority (S$8.6 bn or 47%) relates to medium-sized

listed services companies (vessel charterers), with S$4.9 bn (27%) related to government-

linked companies, S$3.8 bn (21%) related to unlisted small and medium enterprises, and

S$0.9 bn (5%) related to medium-sized listed manufacturing companies.

In our previous 'deep-stress' scenario, we had estimated that total NPLs for the O&M

sector could reach as high as 33%. This is based on a screen of listed companies with a

net gearing of more than 0.8x, interest coverage of less than 4x, net debt/EBITDA of more

than 5x and cash below short-term financial liabilities.

However, in the scenario where an increase in the International Finance Scheme leads to

(1) lower balance sheet risks for certain companies having short-term liquidity

requirements of about S$100 mn or less and (2) lower NPLs for unlisted SMEs, we

estimate that only about S$4.4 bn out of S$18.3 bn of bank borrowing could be at risk,

representing peak NPL of 24%.

24 November 2016


Figure 11: Breakdown of total borrowing by

segment

Figure 12: Breakdown of total bank borrowing by

segment

Source: Economic Development Board, the BLOOMBERG PROFESSIONAL™ service, company data, Credit Suisse estimates


Extent of assistance unlikely to be similar to other

countries

Amid a decline in demand, the South Korean government has stepped forward to provide

financial assistance to its shipbuilding and shipping industries, providing W11 tn (US$9.6

bn) to order more than 250 naval and civilian vessels and W6.5 tn in financing to help

shipping companies secure new vessels. Of the W11 tn for the shipbuilding industry, the

government will order 63 vessels worth W7.5 tn by 2018, while the remaining W3.7 tn will

be used for the financing of new ship orders.

The top three shipbuilders in South Korea, Hyundai Heavy Industries, Samsung Heavy

Industries and Daewoo Shipbuilding & Marine Engineering, are concurrently undergoing

restructuring, and are expected to reduce their combined workforce from 62,000 in 2015 to

42,000 in 2018. According to South Korea’s Finance Minister Yoo Il-ho, the government is

pushing for an aggressive form of restructuring to ensure the financial soundness of the

companies post-restructuring and ability to survive a prolonged downturn.

For the shipping industry, the government plans to (1) increase the size of an existing fund

from W1.2 tn to W2.4 tn to help shipping companies order more vessels, including bulk

carriers, containerships and tankers, (2) form a new company with W1.0 tn in capital to buy

vessels for shipping companies, (3) increase the target purchase of shipping companies’

existing fleet from W1.0 tn to W1.9 tn, and (4) increase incentives to shipping companies to

make calls at South Korean ports, including in Busan and other local terminals.

Government Linked Companies , S$7.4 bn ,

31%


companies , S$1.1 bn , 5%



S$11.3 bn , 48%

Government Linked Companies , S$4.9 bn,

27%


companies , S$0.9 bn, 5%



S$8.6 bn, 47%

24 November 2016


Rising stress from lower oil

Net gearing has gone up sharply across sector

The sustained cash outflow in the industry has led to increasing balance sheet stress for

companies in the sector. On our estimates, aggregate net gearing in the offshore and

marine sector has risen to above 1x in September 2016 from 0.5x in March 2014. In the

global financial crisis of 2008-09, companies were in a net cash position on aggregate due

to the progressive payment terms provided by customers.

Figure 13: Gearing levels have gone up significantly since 3Q14


Net gearing has increased across the entire sector, although to a varying extent. Keppel's

net gearing has increased from 0.11x in 4Q14 to 0.57x in 3Q16, while Sembcorp Marine's

net gearing has increased from 0.21x in 4Q14 to 1.03x in 3Q16. Smaller companies in the

sector generally have higher net gearing. Swiber's net gearing has increased from 0.93x in

4Q13 to 1.57x in 1Q16, while Ezra's net gearing has increased to 1.46x in FY 3Q16 from

0.81x in FY 4Q15 after a rights issue.

Figure 14: Keppel—net gearing of 0.6x at 3Q16 Figure 15: SMM—net gearing of 1.0x at 3Q16

Source: the BLOOMBERG PROFESSIONAL™ service, company data Source: the BLOOMBERG PROFESSIONAL™ service, company data

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20


Net gearing (x)

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70


Keppel - Net gearing (x)

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50


SMM - Net gearing (x)

24 November 2016


Figure 16: Swiber—net gearing of 1.6x at 1Q16 Figure 17: Ezra—net gearing has increased sharply

to 1.5x despite rights issue

Source: the BLOOMBERG PROFESSIONAL™ service, company data Source: the BLOOMBERG PROFESSIONAL™ service, company data

Rising defaults in O&M sector

Bond yields in the offshore and marine sector have risen sharply

As a reflection of greater balance sheet stress and concerns about debt repayment, the

yield-to-maturity (YTM) of bond issuances by companies in the offshore and marine sector

has risen sharply. The YTM of Swiber's 2018 bond rose to 91% prior to its collapse, while

the YTM of Ezra’s 2018 bond has risen to 79% from 16% as recent as in July 2016.

Figure 18: Swiber—2017 bonds YTM above 1,400% Figure 19: Ezra—2018 bonds YTM close to 80%

Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service

Figure 20: Pacific Radiance—2018 bond YTM at 50% Figure 21: Nam Cheong—2017 bond YTM above

120%

Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

Swiber - Net gearing (x)

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

Ezra - Net gearing (x)

0

200

400

600

800

1000

1200

1400

1600


Swiber 2017 7.125% bond YTM (%)

0

10

20

30

40

50

60

70

80

90


Ezra 2018 bond YTM (%)

0

10

20

30

40

50

60


Pac Radiance 2018 bond YTM (%)

0

20

40

60

80

100

120

140


Nam Cheong 2017 bond YTM (%)

24 November 2016


Defaults and insolvencies in the offshore and marine sector

Companies in the O&M sector have seen a spate of insolvencies and defaults in 2016.

Companies which are in insolvency/filing or filed for judicial management

■ Linc Energy: On 15 April, Linc Energy announced that it is entering into voluntary

administration, paving the way for a potential financial restructure of the business.

■ Technics Oil & Gas: Technics Oil & Gas filed an application under the High Court of

Singapore in May 2016 to be placed under judicial management after receiving writ of

summons from creditors.

■ Swiber: Swiber made an application to wind up the company on 27 July after receiving

letters of demand amounting to approximately S$25.9 mn as of 26 July 2016 and a

proposed subscription of US$200 mn preference shares by AMTC Ltd was postponed

(application was subsequently changed to judiciary management). Swiber is currently

under investigation by the Commercial Affairs Department for an offence under the

Securities and Futures Act.

■ Swissco: Swissco filed for judicial management on 21 November as its main lenders

have rejected its financial restructuring plan. Swissco has been suspended from

trading since 10 October pending an informal meeting with noteholders and faced

increasing creditor action.

Companies undergoing financial restructuring

■ KrisEnergy: In August 2016, KrisEnergy had highlighted risks that certain covenants

under its existing MTN programme may come under stress. KrisEnergy launched its

consent solicitation exercise on 17 November, with improved terms for noteholders

with coupon payments up to 7% p.a. after noteholders threatened to vote down the

debt restructuring proposed by the company unless the terms are improved.

■ Perisai: Perisai defaulted on its S$125 mn 6.875% notes due October 2016 and

subsequently announced that it has, together with its JV partner EMAS Offshore,

received an indicative offer of financing from a financial institution. Under the Corporate

Debt Restructuring Committee (CDRC) in Malaysia, Perisai has 60 days from 10

November to submit a proposal for its proposed debt restructuring scheme and CDRC

will then call for a meeting with lenders.

Companies which have concluded financial restructuring

■ Marco Polo Marine: In September 2016, Marco Polo Marine launched a Consent

Solicitation Exercise relating to its S$50 mn 5.75% fixed rate notes due October 2016

which was approved at a notesholder meeting held on 14 October.

■ Ausgroup: Successfully concluded the consent solicitation exercise (CSE) in October

2016 for its S$110 mn 7.45% notes due 2016, with 98.47% of votes casted in favour of

the resolutions proposed. AusGroup first launched the CSE in September 2016.

Singapore banks NPL has also gone up

Recent newsflow on stress in the oil and gas sector has sparked concerns over the

exposure of banks to the segment. Banks have also acknowledged that there are signs of

stress within their oil & gas loan books but mostly in the support services segment.

■ DBS – Among the three banks, DBS has the largest loan exposure to the oil & gas

sector amounting to S$16 bn as at 3Q16 (5.4% of total loans)

■ OCBC – Total latest oil & gas exposure amounts to S$12.2 bn (down QoQ, 5.9% of

total loans)

■ UOB – Smallest exposure to the oil & gas sector (total = S$9.2 bn or 4.2% of loans.

24 November 2016


Figure 22: Oil and gas represents 4-6% of total loans for Singapore banks

Source: Company data, Credit Suisse estimates

The NPL ratios rose QoQ at all three banks in 3Q16, driven by a further deterioration in

O&G exposures. Both UOB and OCBC indicated that their watchlist of weak oil & gas

creditors has not broadened year-to-date, while some new names that are linked to Swiber

showed signs of weakness within DBS' portfolio. However, all three banks expect their

NPL ratios to peak within the next 1-2 quarters and their guidance suggests that the pace

of deterioration in asset quality should moderate in coming quarters. We believe that the

comments by the Minister of Trade and Industry that the government is looking into the

need for measures to help the oil & gas industry could have provided some comfort to the

banks over asset quality outlook.

Figure 23: NPL for Singapore banks has also increased

Source: Company data, Credit Suisse estimates

17.0

7.7

12.4

19.0

9.3

12.6

16.0

9.2

12.2

0

2

4

6

8

10

12

14

16

18

20

DBS UOB OCBC

4Q15 2Q16 3Q16

5.9%

6.6%

5.4%

3.7%

4.4% 4.2%

5.9% 6.1% 5.9%

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

DBS UOB OCBC

24 November 2016


Importance of the O&M sector to the economy

Offshore and marine manufacturing represents about

1.4% of Singapore's GDP in 2015

The offshore and marine sector has contributed strongly to the manufacturing output in

Singapore, increasing its share of manufacturing output from 3.2% in 2003 to close to

6.9% in 2015, down from 8.1% in 2014. The relatively high value added nature of the

offshore and marine industry has led to a larger contribution of 7.8% in 2015 when

measured in terms of value added. This would make it the fourth-largest manufacturing

sector in Singapore after semiconductors (19.2%), pharmaceuticals (14.9%) and

machinery & systems (8.3%). Overall, we estimate that offshore and marine Engineering

contributed about 1.4% to Singapore's GDP in 2015.

Looking solely at the manufacturing data understates the importance of the offshore and

marine industry to Singapore’s economy as it creates demand for a cluster of marine-

related services, including those providing classification, maritime law and insurance, and

offshore support services.

Figure 24: Offshore and marine value added as a percentage of GDP

Source: Economic Development Board

1.8 1.6 2.1 2.5 2.9 3.8 5.4 5.7 5.7 5.5 5.7 6.3 7.1 5.5

1.1%1.0%

1.1% 1.2%1.2%

1.4%

2.0% 2.0%

1.8%1.6% 1.6%

1.7%1.8%

1.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

S$

bn

Marine and offshore engineering - LHS Marine and Offshore engineering as % of GDP

24 November 2016



total manufacturing value-added


total manufacturing output

Source: Economic Development Board Source: Economic Development Board

Weakness in offshore and marine engineering a drag

on industrial production

Based on advance estimates, 3Q16 GDP fell 4.1% quarter-on-quarter annualised, down

from a 0.2% QoQ saar rise previously. Final GDP numbers indicate that 3Q16 GDP fell

2% QoQ saar. This was far below the consensus expectation of 0% QoQ saar, but closer

to our -2% QoQ saar expectation. Final year-on-year GDP came in at 1.1% in 3Q16, the

weakest YoY growth rate since the Global Financial Crisis. Details based on advance

estimates showed that the services sector was essentially in recession, contracting for

three quarters in a row, with weakness seen in the retail and wholesale trade sector.

Figure 27: Percentage contribution to YoY GDP growth

Note: 9/2016 data based on advance estimates. Source: CEIC, Credit Suisse

Manufacturing contracted a sizeable 17.4% quarter-on-quarter annualised, weighed down

by the offshore and marine sector. On level terms, the transport sector continues to

contract since 2015.

2 2 2 2 3 4 5 6 6 5 6 6 7 5

35 35

44 4752 53

43 44

55 56 56 5457

6536 37

4649

5557

49 50

60 61 6260

64

70

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

S$

bn

Marine and offshore engineering - LHS Others - LHS Value Added as % of Total manufacturing - RHS

6 5 6 9 12 17 20 20 17 16 20 22 25 20

142 154186

209227

238 245208

258279 281 278 282

263148

159

193

218

239255

265

228

274

296 302 300 307

283

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0

50

100

150

200

250

300

350

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

S$

bn

Marine and offshore engineering - LHS Others - LHS Output as % of Total manufacturing - RHS

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

GDP %yoy Manufacturing Construction Services

9/2015 12/2015 3/2016 6/2016 9/2016

24 November 2016


Figure 28: Percentage contribution to YoY

manufacturing growth

Figure 29: Singapore Industrial Production (Index

2014 = 100 sa)

Source: CEIC, Credit Suisse Source: CEIC, Credit Suisse

Labour market weakening with stress from the O&M

sector

Offshore and marine represents 19% of the total manufacturing employment

The offshore and marine industry employed over 76,000 workers in 2015, representing

19% of Singapore’s manufacturing labour force and reflecting the labour-intensive nature

of the business. This is down from close to 89,000 workers in 2013, representing 21% of

Singapore’s manufacturing labour force.


total manufacturing employment

Figure 31: Marine and offshore engineering

represents 19% of total manufacturing employment

in Singapore

Source: Economic Development Board, Credit Suisse estimates Source: Economic Development Board

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2013 2014 2015 2016

Manufacturing ex Offshore and Marine

Offshore and Marine

Manufacturing

60

70

80

90

100

110

120

2013 2014 2015 2016

Electronics sa Biomedical saChemicals sa Precision saTransport sa General sa

39 37 41 45 53 6494 94 85 83 86 89 86 76

318 314 317 324 329341

341 324 329 335 338 336 331324

357 351 358370

382404

435418 414 418 425 425 416

400

0.0

5.0

10.0

15.0

20.0

25.0

0

100

200

300

400

500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

S$

bn

Marine and offshore engineering - LHS Others - LHS Employment as % of Total manufacturing - RHS

Electronics17%

Chemicals6%

Biomedical Manufacturing

5%

Precision Engineering23%Marine & Offshore

Engineering19%

Other transport engineering

6%

General Manufacturing Industries

24%

24 November 2016


Foreign workers represent more than half of the employees in manufacturing

Due to the shortage of local workers who are willing to take up manufacturing jobs, foreign

workers have been used to fill the gap. Within manufacturing, foreign workers employed

as a proportion of total workforce increased from 39% in 2000 to the peak of 55% in 2015.

This would put manufacturing's use of foreign workers below construction (79%), but

above the services sector (31%) and Singapore average (41%).

Figure 32: Foreign workers as a percentage of total

manufacturing workforce

Figure 33: Foreign workers as a percentage of total

workforce

Source: Ministry of Manpower Source: Ministry of Manpower

Rising retrenchment in the sector

Based on data from the Ministry of Manpower, employment in the manufacturing sector fell

by 32,200 in 1Q15 to 3Q16. This was offset by modest gains in the construction sector

(+6,300) and more significant gains in the services industry (+81,300). We believe the

weakness in manufacturing employment is driven mainly by the transport engineering

sector (including the offshore and marine sector), where net employment fell by 13,600 in

1Q15 to 2Q16. Retrenchment levels have also picked up to 120 on average in 1Q15-

3Q16, which still remain below average of 340 in 4Q08-2Q09.

Figure 34: Singapore manufacturing employment

has been weak

Figure 35: Unemployment in transport engineering

sector has been increasing

Source: Ministry of Manpower Source: Ministry of Manpower

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Local Foreign Foreign as % of Total

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Overall Manufacturing Construction Services

-20

-10

0

10

20

30

40

50

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

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12

20

13

20

14

20

15

20

16

thousandManufacturing sa Construction sa Services sa

0

50

100

150

200

250

300

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0Change in net employment Retrenched (RHS)

24 November 2016


Singapore's headline unemployment rate remained low at 2.1% in September 2016.

However, the resident unemployment rate has increased to 2.9% from the low of 2.5% in

March 2015. This still remains significantly below the highs in previous crises, where

unemployment was at 4.7% (Asian Financial Crisis 97-98), 6.2% (Dotcom bust and SARS

in 2003), and 4.9% (Global Financial Crisis).

Figure 36: Resident unemployment rate at 2.9%

Source: CEIC

While the unemployment rate has remained relatively well behaved at 2.1%, broader

labour market details continue to point to weak underlying labour demand. Among others,

job vacancy rates have fallen, hours worked have moderated, retrenchments have picked

up, and labour turnover ratios have remained weak. The forward-looking surveys, such as

the Manpower Group outlook, also point to a further deterioration in employment propsects

in 2016. Some of these are sector specific, for instance in the offshore and marine and

also finance sectors. Nonetheless, this likely reflects reduced labour demand from rising

cost of hiring due to low productivity and higher wages. We expect the labour market to

deteriorate gradually in 2016, and expect the unemployment rate to rise to 2.2% by end-

2016, from 1.9% in end-2015:

1.0

2.0

3.0

4.0

5.0

6.0

7.0

95 97 99 01 03 05 07 09 11 13 15

Unemployment Rate sa Resident Unemployment Rate sa

Citizen Unemployment Rate sa

24 November 2016


Figure 37: Singapore's unemployment outlook weaker in 2Q16

Source: Ministry of Manpower

Anecdotal evidence suggests more layoffs to come

Based on these recent news reports, we believe the employment situation in the offshore

and marine industry in Singapore has worsened, with an acceleration in staff reduction:

■ In 2015, Keppel Corp reduced its direct staff strength in its Singapore and overseas

yards by about 6,000 (17% YoY) and Singapore's subcontract workforce by 7,900

(24% YoY) since December 2014. There were further cuts of close to 8,000 to its direct

staff strength in 9M16, bringing direct staff down a further 22% in September 2016 from

December 2014. (Source: Company Data)

■ Sembcorp Marine reduced its workforce by about 22% globally in September 2016

since the peak headcount pre-2014. Including subcontractors, total workforce has been

reduced by about 8,000 employees. (Source: Company data)

■ Liquidation of Dolphin Geophysical in March 2016 led to 160-170 job losses (Source:

The Business Times).

■ BW Offshore was reported to be reducing its workforce in Singapore by about 100 (out

of 300) in March 2016. MODEC is also planning to lay off workers in Singapore

contracted for the execution of floating production projects out of Singapore (Source:

The Business Times).

■ In January 2016, Subsea 7 decided to shift its regional headquarters to Kuala Lumpur

from Singapore, with the move expected to be completed by 3Q16. Around two-thirds

of its 90-strong staff in Singapore will be made redundant, with only a handful offered

relocation options to KL. (Source: Channel NewsAsia).

■ Saipem also shifted its regional HQ to KL in early 2016 after forming a joint venture

with local partner SapuraKencana (Source: Channel NewsAsia).

■ In August 2015, McDermott International confirmed it will close its office in Singapore

and relocate its regional headquarters to Kuala Lumpur. McDermott employs more

than 300 engineering, marine, and support personnel in its Singapore office. (Source:

Upstream).

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0Singapore Net Employment Outlook (Manpower Group)

24 November 2016


Companies Mentioned (Price as of 23-Nov-2016) AGC (AUSG.SI, S$0.044) ASL Marine (ASLM.SI, S$0.125) Baker Technology (BATE.SI, S$0.635) Beng Kuang (BENK.SI, S$0.096) CHO (CHOF.SI, S$0.26) CSE Global (CSES.SI, S$0.41) DBS Group Holdings Ltd (DBSM.SI, S$16.76, UNDERPERFORM, TP S$14.8) Dyna-Mac (DMHL.SI, S$0.16) EMAS Offshore (EMASL.OL, Nkr0.38) Ezra Holdings Ltd (EZRA.SI, S$0.05) Falcon Energy Gr (FEGL.SI, S$0.155) Heatec Jietong (HTJT.SI, S$0.044) Jason Marine (JMGL.SI, S$0.112) KS Energy (KSTL.SI, S$0.082) KTL Global (KTLG.SI, S$0.05) Keppel Corporation (KPLM.SI, S$5.41, UNDERPERFORM, TP S$5.0) Kim Heng (KIMH.SI, S$0.07) MTQ (MTLS.SI, S$0.41) Marco Polo (MAPM.SI, S$0.06) McDermott International (MDR.N, $6.49) Nam Cheong (NMCG.SI, S$0.061) Nordic Group (NRGL.SI, S$0.23) Otto Marine (OTTO.SI^J16, S$0.315) Oversea-Chinese Banking Corp Ltd (OCBC.SI, S$8.77, NEUTRAL, TP S$8.8) POSH (PACC.SI, S$0.31) Pacific Radiance (PACI.SI, S$0.155) Rotary Engr (ROTE.SI, S$0.38) SWISSCO (SWCO.SI, S$0.052) Saipem (SPMI.MI, €0.41) SapuraKencana Petroleum Bhd (SKPE.KL, RM1.46) Sembcorp Marine Ltd. (SCMN.SI, S$1.45, NEUTRAL, TP S$1.2) Subsea 7 S.A. (SUBC.OL, Nkr101.2) Swiber Holdings (SWBR.SI, S$0.109) Technics Oil (TECH.SI, S$0.071) Triyards (TRIY.SI, S$0.28) United Overseas Bank Ltd (UOBH.SI, S$19.95, OUTPERFORM, TP S$21.2) Vallianz Holding (VHLD.SI, S$0.018) Viking Offshore (VIKO.SI, S$0.033)

Disclosure Appendix

Analyst Certification I, Gerald Wong, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for DBS Group Holdings Ltd (DBSM.SI)

DBSM.SI Closing Price Target Price

Date (S$) (S$) Rating

17-Feb-14 16.59 19.00 O

01-May-14 16.94 19.30

06-Aug-14 18.37 20.00

31-Oct-14 18.48 21.00

27-Nov-14 19.70 23.00

13-Feb-15 19.28 22.50

04-May-15 20.82 24.00

03-Nov-15 17.60 22.00

24-Feb-16 13.40 17.00

27-Apr-16 15.60 *

05-May-16 15.01 17.00 O

27-Jul-16 16.26 *

08-Aug-16 15.04 15.80 N

09-Sep-16 15.44 14.80 U

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

U N D ERPERFO RM

24 November 2016


3-Year Price and Rating History for Keppel Corporation (KPLM.SI)

KPLM.SI Closing Price Target Price


23-Jan-14 10.88 12.70 O

25-Jul-14 11.03 13.10

21-Oct-14 9.70 12.50

26-Jan-15 8.16 R

17-Apr-15 9.25 10.00 N

24-Jul-15 8.12 9.10

22-Oct-15 7.29 8.20

01-Dec-15 6.61 7.50

22-Jan-16 5.02 5.10

14-Mar-16 6.04 5.00 U


O U T PERFO RM

REST RICT ED

N EU T RA L

U N D ERPERFO RM

3-Year Price and Rating History for Oversea-Chinese Banking Corp Ltd (OCBC.SI)

OCBC.SI Closing Price Target Price


17-Feb-14 9.18 9.90 U

01-Apr-14 9.28 9.03

01-May-14 9.37 9.22

29-Jul-14 9.47 9.22 N

05-Aug-14 9.67 9.90

31-Oct-14 9.89 10.00

27-Nov-14 10.49 11.00

13-Feb-15 10.39 10.70

04-May-15 10.61 11.20

03-Nov-15 9.14 9.90

24-Feb-16 8.02 9.00

27-Apr-16 8.99 *

29-Apr-16 8.77 9.00 N

27-Jul-16 8.85 *

11-Aug-16 8.46 9.00 N

09-Sep-16 8.81 8.80


U N D ERPERFO RM

N EU T RA L

3-Year Price and Rating History for Sembcorp Marine Ltd. (SCMN.SI)

SCMN.SI Closing Price Target Price


24-Feb-14 4.07 4.00 N

02-May-14 4.06 3.90

06-Nov-14 3.59 3.60

12-Feb-15 2.99 3.30

27-Apr-15 3.01 3.00

29-Jul-15 2.71 2.60

22-Oct-15 2.54 2.40

02-Dec-15 1.97 2.20

16-Feb-16 1.57 1.20


N EU T RA L

24 November 2016


3-Year Price and Rating History for United Overseas Bank Ltd (UOBH.SI)

UOBH.SI Closing Price Target Price


17-Feb-14 20.32 21.96 N

01-May-14 21.72 22.75

31-Oct-14 22.95 23.45

27-Nov-14 23.78 25.45

13-Feb-15 23.52 25.30

04-May-15 24.60 28.00 O

03-Aug-15 21.96 24.50 N

03-Nov-15 20.33 22.80

24-Feb-16 17.01 19.00

27-Apr-16 18.88 *

05-May-16 18.10 19.00 N

27-Jul-16 18.94 *

11-Aug-16 17.87 19.26 N

09-Sep-16 18.73 21.20 O


N EU T RA L

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the anal yst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S . and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of assoc iated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

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Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (63% banking clients) Neutral/Hold* 38% (60% banking clients) Underperform/Sell* 15% (55% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on inves tment objectives, current holdings, and other individual factors.

24 November 2016


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Target Price and Rating Valuation Methodology and Risks: (12 months) for DBS Group Holdings Ltd (DBSM.SI)

Method: Our 12-month target price of S$14.8 for DBS Group is based on the Gordon growth model. We use the average 2017-18E ROE (return on equity) as a proxy for medium-term sustainable ROE, cost of equity (COE) of 10.5% and terminal growth (g) of 2%. We have an UNDERPERFORM rating on DBS driven by concerns on deterioration in its oil & gas portfolio.

Risk: Apart from the performance of the overall economy in two of DBS's key markets, Hong Kong and Singapore, the risks to our target price of S$14.8 and UNDERPERFORM rating for DBS are: (1) SIBOR’s impact on margins in Singapore; (2) loan growth in Hong Kong/Singapore as well as the emerging markets of China, India and Indonesia; (3) potential acquisitions

Target Price and Rating Valuation Methodology and Risks: (12 months) for Keppel Corporation (KPLM.SI)

Method: Our S$5.00 target price for Keppel Corporation is based on an SOTP (sum-of-the-parts) methodology, valuing: (1) 1x net assets for the O&M business, (2) Credit Suisse's RNAV for Keppel Land and target price for Mobile One (S$2.15), (3) the marked-to-market value of other listed entities. We rate Keppel Corp UNDERPERFORM, as valuation already factors in new order recovery and we expect further decline in DPS for FY16.

Risk: Risks to our target price of S$5.00 for Keppel Corp include the following: (1) slower-than-expected recovery in the offshore & marine or property cycles; (2) limited earnings visibility on infrastructure business; and (3) limited disclosure on individual businesses. Key risks to our UNDERPERFORM rating include: (1) a sharp recovery in oil price and (2) larger-than-expected revaluation and divestment gains.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Oversea-Chinese Banking Corp Ltd (OCBC.SI)

Method: Our 12-month target price of S$8.80 for Oversea-Chinese Banking Corporation (OCBC) is based on a 1.0x 2016E prof-forma P/B (price-to-book). We use medium term sustainable ROE (return on equity) of 9.7%, cost of equity (COE) of 9.5% and terminal growth (g) of 2%. We have a NEUTRAL rating on OCBC as asset quality remains the key concern over the next few quarters. With new NPA formation gaining pace and the lowest balance sheet buffer among peers, upside risks to credit costs have increased.

Risk: Apart from the general economic performance in OCBC's key markets of Singapore, Malaysia and Indonesia, the risks to our S$8.80 target price and NEUTRAL rating include: (1) a slowdown in loan growth or credit quality deterioration in Malaysia; (2) steepness of the yield curve, which affects profits in insurance subsidiary, Great Eastern Holdings; (3) the continuation of capital management (i.e. share buy-backs); (4) the movement of Singapore Interbank Offered Rate (SIBOR); and (5) normalisation of loan loss provisions.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Sembcorp Marine Ltd. (SCMN.SI)

Method: Our target price for Sembcorp Marine of S$1.20 is based on 1x P/B (price-to-book). We maintain our NEUTRAL rating as we believe Sembcorp Marine's current share price incorporates the weak outlook of the offshore and marine industry.

Risk: The risks to SembCorp Marine achieving our target price of S$1.20 are: (1) changes in the oil and rig day rate prices, (2) a rebound in world economic growth, (3) a shift in capital expenditure of drillers to drill ships, and (4) changes in value or operating risk pertaining to COSCO Corp. Key downside risk to our NEUTRAL rating would be a further deterioration in Sembcorp Marine's balance sheet, while key upside risk would be a sustained oil price increase which leads to more than expected new orders.

Target Price and Rating Valuation Methodology and Risks: (12 months) for United Overseas Bank Ltd (UOBH.SI)

Method: Our 12-month target price of S$21.20 for United Overseas Bank is based on a Gordon growth model. We use the average 2017E ROE (return on equity) as a proxy for medium-term sustainable ROE, cost of equity (COE) of 9.5% and terminal growth (g) of 2%. We have an

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24 November 2016


OUTPERFORM rating on UOB as it is the most exposed to ASEAN among peers, a key risk to earnings in the near future. While valuations are not stretched, no clear catalysts near term.

Risk: United Overseas Bank (UOB) is the most geographically diversified Singapore bank, with reasonable presence in Thailand, Malaysia and Indonesia. Apart from the general economic performance and monetary policy in these markets, the risks to our target price of S$21.20 for UOB and OUTPERFORM rating are: (1) the potential impact by market dynamics in Malaysia, especially if loan growth softens or credit quality suffers; (2) the Thailand operation can potentially double its profits and stop being a drag on ROEs; (3) Indonesia interest rates and economic growth are key variables; and (4) potential for capital management by distributing special dividends and share buy-backs.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (KPLM.SI, SCMN.SI, DBSM.SI, OCBC.SI, UOBH.SI, EZRA.SI, SPMI.MI, SKPE.KL, SUBC.OL) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (KPLM.SI, SCMN.SI, OCBC.SI, UOBH.SI, EZRA.SI, SPMI.MI) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (UOBH.SI) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (KPLM.SI, SCMN.SI, OCBC.SI, UOBH.SI, EZRA.SI, SPMI.MI) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (KPLM.SI, SCMN.SI, DBSM.SI, OCBC.SI, UOBH.SI, EZRA.SI, SPMI.MI, SKPE.KL, MDR.N) within the next 3 months. Credit Suisse may have interest in (SKPE.KL) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (SUBC.OL). Credit Suisse beneficially holds >0.5% short position of the total issued share capital of the subject company (EZRA.SI, MDR.N).

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Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (SPMI.MI). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (SCMN.SI, UOBH.SI, EZRA.SI) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse AG, Singapore Branch .......................................................................................................... Gerald Wong, CFA ; Shih Haur Hwang To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Singapore Branch .......................................................................................................... Gerald Wong, CFA ; Shih Haur Hwang

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