Excerpts from CGS-CIMB report

Gradually rotating into a beaten-down (-25% YTD) Tech sector. The fear of order deferment among major customers and a weakening economic outlook de-rated the Tech sector’s forward P/E from c.14x in Jan 22 to the current c.9.5x.

Among the large caps, we have largely kept our 2-year EPS forecasts intact through the year as demand outlook and guidance remained firm, suggesting that the sector could be ready for a re-rating if there are no major earnings cuts in 1H23F.

We are also OW (overweight) on Gaming, Telco, Consumer and Healthcare as proxies to further China reopening.

CIMB toppicks2023 note: * includes dividend yield

• Other than gaming, telco and consumer, all sectors have seen earnings surpass their respective pre-Covid levels amidst strong commodity and power prices, hikes in the US Fed Fund Rate (FFR) and pent-up demand. YTD, overall earnings of all Singapore companies under our coverage turned out stronger than the pre-Covid-19 level and we project CY22F aggregate net profit growth of c.30% since 2019.

"Although we like the consumer sector as a whole on the back of the economic reopening theme, margins are likely the biggest risk as brands/retailers balance between passing on cost pressures vs. market share strategies."

• Going into CY23F, we expect most catalysts that spurred the recovery in corporate earnings over the past two years to wane off, including banks’ NIMs (net interest margin) peaking, strong commodity prices and general demand recovery. Amidst a slower economic growth environment, unabated high cost pressures as well as potential belt tightening by corporates should lower the likelihood of positive earnings surprises in the quarters ahead.

This is especially true after two years of EPS upgrades since 4Q20. In short, we think Singapore’s corporate profit growth likely peaked in CY22 – we currently forecast net profit growth of 14% yoy for CY23F.

In terms of FSSTI constituents, we forecast core EPS growth of 19% for CY23F and 3% for CY24F. However, as investors could price out doomsday scenarios and search for growth, Singapore stocks could still be in demand vs. regional peers that are showing earnings growth of 5-11%.

• We highlight gaming as a sector that could surprise on the upside although we already ranked it no.1 for earnings growth in CY23F.

Note that gaming revenue in 3Q22 already reached 90% of the quarterly run rate over the pre-pandemic periods in FY17-19, thanks to the trend of longer stay among the affluence and premium customers. We believe the ongoing travel recovery could sustain this trend.

Tech is also another sector that could surprise positively as we currently forecast only 4% growth for CY23F.

As the tech industry works through its current downcycle, the planned production ramp-up the Singapore tech companies could boost their economies of scale and margin expansion potential.

Although we like the consumer sector as a whole on the back of the economic reopening theme, margins are likely the biggest risk as brands/retailers balance between passing on cost pressures vs. market share strategies.

Full report here.

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