SINGAPORE (Jan 24): Singapore’s stock market is expected to be rattled on Friday, after the Asian financial hub on Thursday evening announced its first confirmed case of the deadly Wuhan virus that has claimed the lives of at least 17 people in China.
According to China’s National Health Commission, at least 571 people in China have been confirmed to be infected with the new coronavirus, which first appeared last month in Wuhan, the largest city in central China with a population of about 11 million.
Singapore is the latest country to be hit, following reports that the SARS-like virus had already spread to Hong Kong, Japan, Macau, South Korea, Taiwan, Thailand and the US.
Singapore’s Ministry of Health on Thursday evening confirmed a 66-year-old man from Wuhan, who had arrived in Singapore with his family on Jan 20, has been tested positive for the novel coronavirus and is currently warded in an isolation room at the Singapore General Hospital.
The authorities revealed that the man had stayed at Shangri-La’s Rasa Sentosa Resort & Spa in Sentosa. Shangri-La Group on Thursday said the hotel room occupied by the man has been "thoroughly disinfected and sanitised". Four of the hotel's employees have also been quarantined.
The Wuhan resident’s 37-year-old son, who was among nine of his travelling companions, has also been warded as a suspect case. MOH said in an update that the other eight travel companions have left Singapore, adding that authorities of their destination country have been informed.
Another patient – a 53-year-old female who is also from Wuhan, but is not related to the confirmed case – has also been isolated after she tested preliminarily positive for the novel coronavirus. The result of the confirmatory test is pending.
This brings the total number of suspect cases in Singapore so far to 28, out of which seven have been ruled out.
The announcement of the confirmed case comes just hours after Prime Minister Lee Hsien Loong, speaking at the sidelines of the World Economic Forum annual meeting in Davos, Switzerland, said there is “no need to panic” as the country is “much better prepared” to deal with another virus outbreak since the Severe Acute Respiratory Syndrome (SARS) epidemic in 2003.
Despite his confidence, the markets are likely to be spooked at the opening bell.
Already, the benchmark Straits Times Index has tumbled 1.4% this week, since closing at 3,280.09 on Monday. The index has shed 46.34 points to close at 3,234.56 on Thursday, before the announcement of the confirmed case.
See: Healthcare stocks get a shot in the arm as Wuhan virus fears rise
Markets might catch a cold
“The fall-out of SARS in 2003 remains at the top of Asian investors’ minds,” says Jeffrey Halley, senior market analyst for Asia Pacific at OANDA. “News that China has effectively quarantined the entire city of Wuhan – a city of 11 million people and the source of the outbreak – has rattled markets regionally.”
The way Halley sees it, the conditions are “perfect” for a viral spread – with “hundreds of millions of people moving around China and Asia as a whole, returning home for Chinese New Year”.
“Rising concerns of a new coronavirus from Wuhan in China has triggered profit-taking across [China’s] consumer sector,” analysts at OCBC Investment Research say in a sector report on Jan 22. “While less deadly compared to SARS, the low mortality rate of the Wuhan epidemic and its potential for human-to-human transmissions could result in a wider dispersion.”
Indeed, there is little doubt that the Wuhan virus outbreak will have a broad economic impact.
“Travel and tourism will be the hardest hit, along with labour-intensive industries like manufacturing,” says Imogen Page-Jarrett, a research analyst at The Economist Intelligence Unit’s Access China platform, which provides data, analysis and forecasts for China.
“However, some sectors could benefit,” she adds. “Pharmaceutical companies will see a stronger demand for vaccines and antibiotics. Automotive may sales may pick up, as consumers shift to cars to avoid the risk of infection on public transport. Spending on online entertainment and e‑commerce platforms may rise as people choose to stay at home more.”
Should the Wuhan virus outbreak develop into an epidemic comparable to SARS, Page-Jarrett believes that the virus could “reduce real GDP growth in 2020 by 0.5‑1 percentage points against our baseline forecast of 5.9%.”
Where the opportunities lie
Among the potential key beneficiaries in Singapore are glove maker Riverstone Holdings and healthcare provider Raffles Medical Group.
“The continued negative newsflow from the pandemic through Chinese New Year could be a catalyst for glove manufacturers such as Riverstone Holdings,” says CGS-CIMB Research analyst Lim Siew Khee in a Jan 22 strategy note.
Even without any major disease outbreak, the analyst forecasts a “mid-teen volume growth” for Riverstone’s healthcare gloves in FY2020 ending December.
In its latest results announcement on Nov 7, 2019, Riverstone reported a 10.2% rise in revenue to 731.5 million ringgit ($242.4 million) for the first nine months of 2019. The company derives close to 70% of its revenue from healthcare gloves.
CGS-CIMB has an “add” recommendation on Riverstone with a target price of $1.25. Shares in the counter closed at $1.02 on Thursday, marking a 9.7% surge since closing at 93 cents on Jan 17.
At the same time, Lim is also buoyant on the prospects for Raffles Medical, which was appointed by the immigration and checkpoint authorities during the SARS epidemic in 2003 to conduct screening for fever and other symptoms at the air, land and sea border checkpoints.
“During SARS, we observed a positive share price reaction for Raffles Medical Group,” Lim notes. “Raffles Medical could be a medium-term beneficiary in terms of higher patient footfall redirected from public hospitals and more vaccinations.”
CGS-CIMB has an “add” call on Raffles Medical with a target price of $1.16. Shares in the counter closed at $1.00 on Thursday, down 2.9% this week.
Defending against an outbreak
Meanwhile, Lim is also keeping an eye on defensive stocks that could withstand the coronavirus outbreak.
These include telcos such as Singapore Telecommunications (Singtel) and StarHub, whose earnings are “resilient irrespective of the outbreak”.
“We would bargain hunt on names that have done well recently and have diversified business models and customers such as ST Engineering, Venture Corp, City Developments and UOL Group,” Lim adds.
Out in the cold
On the other hand, Lim warns that the aviation, gaming, hospitality, consumer discretionary sectors, as well as those with China exposure, are most vulnerable.
Singapore Airlines (SIA) is expected to be among those hit the hardest by the Wuhan virus outbreak, alongside airline gateway services and food solutions provider SATS, as well as Dairy Farm International (DFI), A member of the Jardine Matheson Group, DFI is a major pan-Asian retailer involved in the processing and wholesaling of food and personal hygiene products in the Pacific region and in China.
“For SIA, we expect a SARS-like impact on its passenger traffic and financial performance if the epidemic sweeps across Asia. SIA would not only see passenger load factors decline considerably, it would also have to slash airfares in order to incentivise passengers to fly again, while much of its operating costs are fixed in the short term,” says Lim.
She notes that in 2003, the cancellation and suspension of many flights during the first quarter after the SARS outbreak saw SATS’s inflight catering and ground handling operations fall 14% and 10% respectively.
Lim believes that DFI, which has significant exposure to China and Hong Kong, is also at risk. In 2003, DFI saw reduced sales at Maxim’s, its restaurant associate, which reported a 30% drop in earnings as a result of the SARS outbreak.
“Given the heightened risks of further declines in retail sales and tourist arrivals amidst protests (in Hong Kong), DFI's North Asia revenues and EBIT as well as restaurant earnings could suffer a double whammy effect,” Lim says.
North Asia accounted for 65% of DFI’s 1HFY2019 revenue and around 90% of its 1HFY2019 EBIT, while restaurant earnings made up around 20% of its 1HFY2019 net profit.
Meanwhile, CapitaLand Retail China Trust (CRCT), the China shopping mall real estate investment trust with 100% of its portfolio based in China, including CapitaMall Minzhongleyuan in Wuhan, is expected to see some direct impact from the quarantine of the city where the virus originated.
Property developer Perennial Real Estate Holdings is another company with notable presence in China and Wuhan, in particular.
Shanghai RST Chinese Medicine Co (Renshoutang), the group’s eldercare business arm in China, runs the Wuhan Renshoutang Xiehe Eldercare and Retirement Home in Wuhan.
According to the company’s website, the eldercare facility, which caters for the more affluent, has an operating capacity of around 1,200 beds – just over 20% of Renshoutang’s existing portfolio of 5,927 beds.
Perennial owns an effective interest of 49.9% in Renshoutang and is its largest single shareholder.
Following news of Singapore’s first confirmed case of the Wuhan virus, Shangri-La Asia – the listed vehicle of the Shangri-La Group which owns the Shangri-La's Rasa Sentosa Resort & Spa where the patient that is the first confirmed case of the Wuhan virus in Singapore was staying at – is likely to fall even further.
The Kuok-family-controlled hotel chain, founded by Malaysia’s richest man Robert Kuok, had already suffered from a selldown last year because of the protests in Hong Kong.
This week, Shangri-La Asia, which has a primary listing on the Hong Kong Stock Exchange and a secondary listing on the Singapore Exchange, has dropped 7.6% to HK$7.80 on the back of fears of the spread of the virus outbreak.
The group owns 55 hotels in mainland China and another four in Hong Kong. China accounts for around 40% of its assets and revenue, followed by Singapore and Hong Kong at around 10% each.
Interestingly, Shangri-La Asia was among the 10 global stocks that The Edge Singapore picked to deliver handsome returns over the coming year in the latest edition of our newspaper (Issue 917, week of Jan 27).
See: 10 global picks: Shangri-La Asia [subscribers only]
The Edge Singapore’s analyst, Thiveyen Kathirrasan, notes that, based on its share price and fundamentals over the past 15 years, Shangri-La appears to be “significantly undervalued” given its negative price growth and positive value growth.
“We think the intrinsic value of the company is HK$9.90,” he says. This is some 26.9% above the current trading price.
Thiveyen adds that analysts have a target price of HK$10.90 for Shangri-La over the next 12 months – representing an attractive 39.7% upside.
Looking forward to the rebound
“The economic impact of disease outbreaks is historically short-lived,” says CGS-CIMB Research’s lead analyst Bertram Lai in a strategy note on Jan 22.
“The tourism sector bears the immediate brunt of a widespread outbreak as tourists delay trips and governments limit travel from the worst-affected areas to prevent the spread of the disease. The silver lining is that tourist arrivals and economic activity tend to recover swiftly,” he adds.
Lim, his colleague at CGS-CIMB, agrees. “The SARS outbreak hit Singapore in Feb 2003 and claimed 33 lives. There was a knee-jerk sell-off across regional markets in the first week,” she says. “However, one month after the SARS outbreak, most markets recovered – with the exception of Singapore and Hong Kong as the two countries took a while longer to recover due to high incidence of SARS cases.”
