The Singapore Blue Chips

The following sections are included:

• ACKNOWLEDGEMENTS
• CONTENTS

When we thought of writing a book about Singapore corporations, a journalist joked, “Are you writing about Singapore corporates?! You only have to cover MNCs, GLCs and PLCs — multinational companies, government linked companies and poor local companies.” The implication was that the corporate sector in Singapore comprised overseas companies that chose to make Singapore home because of its investor friendly climate, local companies that flourished because of government backing and a host of small and medium scale enterprises that barely survived.

Temasek Holdings (“Temasek”), Singapore’s investment company, is not a listed entity. But it has played a pivotal role as an investor in large Singapore-based corporates and a dividend paying corporation to its shareholder, Singapore’s Minister for Finance, a body corporate under the Singapore Minister for Finance (Incorporation) Act (Chapter 183). The company is designated a Fifth Schedule Company under the Singapore Constitution along with Singapore’s central bank, the Monetary Authority of Singapore (MAS) and the company responsible for managing Singapore’s foreign reserves — GIC Private Limited (GIC).

SGX has several agri-business companies listed on it such as Bumitama Agri, First Resources, Golden Agri Resources, Olam International and Wilmar International. One uniform characteristic of agri-business companies is that they are price takers as they are engaged in the commodities business. Hence, agri-business companies’ profits are driven by their cost effectiveness.

Two of the largest oil palm plantation companies in the world — Golden Agri Resources (GAR) and Wilmar International (Wilmar), are listed on the Singapore Exchange (SGX). Of these two companies, GAR’s business model is relatively simpler as its oil palm business is the largest contributor to its revenues and margins and its China-based soybean and deep sea port businesses are much smaller. GAR, Wilmar and Olam International (Olam) are three agri-business companies listed on the SGX. The three chapters covering GAR, Wilmar and Olam will enable readers to understand the different types of agri-business companies i.e., whether an agri-business company is engaged in upstream, downstream or integrated operations and/or supply chain management, and the impact of the business model on profitability, capital structure and stock returns.

Wilmar, one of the largest companies listed on the SGX, shares interesting similarities and differences with GAR. Both companies were founded by immigrant Chinese entrepreneurs in Indonesia and are dominant players in the global oil palm industry. Wilmar distinguishes itself from GAR on account of its more diversified business model that includes sugar, fertilizer and consumer food businesses. It would also be interesting to observe how these companies counter the current low commodity price environment and evolve in the future, which is discussed in the concluding sections of this chapter.

Of the three agri-business companies covered in this book, Olam International distinguishes itself from Golden Agri Resources (GAR) and Wilmar International (Wilmar) in that it is engaged in the ‘seed to shelf’ supply chain management of multiple agricultural and industrial raw materials, as opposed to GAR’s and Wilmar’s core business of cultivating, processing and marketing agricultural commodities. Hence, the risks Olam is exposed to, its earnings drivers and balance sheet structure are quite different from GAR’s and Wilmar’s.

Investors proposing to invest in agri-business companies need to be aware of the type of agri-business companies they propose to invest in, the risks each category of company is exposed to and if they have the appetite — both monetary and psychological, to withstand these risks.

Thus was born the then seemingly improbable idea to leverage on the recently independent and struggling city state of Singapore’s location and transform it into one of the leading global financial centres within a decade. By 2014, finance and insurance together accounted for 11.80% of Singapore’s SGD390 billion GDP. Financial inclusion achieved by Singapore is among the highest in the world with 98% of the population having a bank account with a formal financial institution.

The Singapore Exchange (SGX) is an interesting example of a city state starting its stock exchange from the scratch and transforming it into a leading regional player by developing its product and service capabilities and offering an efficient and transparent operating environment. But the SGX is currently at a crossroads. In the absence of a large domestic economy providing it with trading volumes, other regional exchanges like the Hong Kong Exchange, the Shanghai and Shenzhen Exchanges in China and the Bombay and National Stock Exchanges in India have grown into much larger entities than the SGX in terms of market capitalisation.

Keppel Corporation is a household name in Singapore with strong market positions in three core businesses — offshore and marine, infrastructure and property that employ about 30,000 people from close to 30 countries. But the genesis of Keppel Corporation occurred more than a century before the Port of Singapore Authority corporatised its Dockyard Department to form Keppel Shipyard (Pte) Ltd.

The venerable 133 year old Fraser & Neave (F&N), one of Singapore’s oldest companies, is no longer a Straits Times Index (STI) constituent; Hutchison Port Holdings Trust replaced F&N in April 2013. Nevertheless, the evolution of F&N from a single business company selling beverages to Singapore’s clubs, hotels and residences to a home grown conglomerate with interests in food & beverage, breweries, real estate and publishing and printing and finally to two distinct entities, that overseas companies own, highlights a few interesting issues.

The STI’s constituents include four engineering companies — Sembcorp Industries (“Sembcorp”), its 61% subsidiary Sembcorp Marine, SIA Engineering and ST Engineering. Sembcorp is involved in utilities, developing, owning and operating energy and water assets; and urban development. Sembcorp Marine is a leading global marine and offshore engineering group, focussed on four key capabilities: rigs & floaters; repairs & upgrades; offshore platforms and specialised shipbuilding.

Singapore Technologies Engineering Limited (“ST Engineering”) is an integrated engineering company specialising in solutions and services for the aerospace, electronics, land systems and marine sectors. The company has grown to become one of Asia’s largest defence and engineering groups. Asia continues to be ST Engineering’s largest market accounting for 58% of 2014 revenues, followed by USA (23%), Europe (5%) and other countries (14%). ST Engineering’s commercial customers contribute to 64% of its revenues while defence customers make up the balance 36%.

SIA Engineering Company (“SIA Engineering”), the smallest of the three engineering companies that constitute the STI, provides aircraft maintenance, repair and overhaul (MRO), and is a good example of how the geographically central location of Singapore can be leveraged in the Asia Pacific region whose growth is set to accelerate and propel global growth in the coming years.

American literary personality, Ambrose Bierce, would have been a very happy man had he witnessed the Singapore Government herald organised and remunerative gaming on the island while simultaneously curbing its adverse socio-economic effects.

The real estate sector is one of the pillars of the Singapore economy. Construction and ownership of dwellings accounted for 4.1% and 4.9% of the 2015 GDP at current prices, aggregating 9.2%. The share of these two sectors has progressively increased to 9.2% in 2015 from 8.3% in 2011. Home ownership rate of resident households has progressively peaked to 92% in 2000 from 58.8% in 1980 and has slightly moderated to 90.3% in 2014. Nevertheless, Singapore has among the highest home ownership rates in the world.

CapitaLand Limited is Southeast Asia’s largest listed property company and one of Asia’s largest integrated and listed property companies and also one of the earliest foreign developers to tap China. The company is now leveraging its success in its core markets of China and Singapore and replicating the business model in Indonesia, Malaysia and Vietnam.

Real Estate Investment Trusts (REITs), though operating in the same industry as property developers and full service property companies, possess several distinguishing features. REITs are subject to closer regulatory oversight and in Singapore, are required to comply with Monetary Authority of Singapore’s (MAS) norms including at least 75% of the REIT’s property being income generating in nature, a maximum loan to value ratio of 45%, a minimum distribution payout of 90% and development activity restricted to 10% of property value.

Global Logistic Properties (GLP) provides warehousing, logistics and supply chain facilities in China, Japan, Brazil and the USA to manufacturers, retailers and third party logistics companies. It is the market leader in all these countries except United States. In United States it is the second largest warehouse operator after Prologis. GLP’s customers include Adidas, COFCO, H&M, Panasonic Logistics, Schenker, Amazon, Deppon, JD.com, Procter & Gamble, Unilever, Coca-Cola, DHL, FedEx, Rakuten, Walmart and Goodaymart (Haier).

Telephones were first introduced in Singapore in 1879 by Bennett Pell, manager of the Eastern Extension Telegraph Company, with a trial connection made between Raffles Square and Tanjong Pagar using a telegraph line. Pell also set up a 50-line exchange made up of manual switchboards in 1881, giving Singapore a head start. The city state, then a British colony, was the first in the East to have a telephone system, barely three years after Alexander Graham Bell patented his invention.

Singtel is Singapore’s largest info-communications company, both by revenues and market capitalization. Yet we chose to write about StarHub as the first chapter in the telecom section of this book as it is a pure play info-communications company. In other words, StarHub’s operations are focussed on mobile, pay TV, broadband and fixed services for both consumer and corporate markets in Singapore. Hence readers would be able to better understand the business, growth potential and risks associated with an integrated info–communications operator.

The evolution of Singtel from a government owned statutory board to Singapore’s largest info-communications operator and a multinational telecom investor is an interesting illustration of a Singapore company nimbly adapting to the giant strides taken by the infocommunication industry during the last few decades and consolidating its market leading position while simultaneously being a successful investor in overseas telecom companies.

Telecommunications in Singapore is an industry at a crossroads. The strengths of the three operators, Singtel, StarHub and M1 are strong controlling shareholders, a demonstrated track record in offering integrated info-telecom services, stable market share and strong financials. Singtel has established its market leadership in the mobile telecommunications business, StarHub in Pay TV and M1 is a stable third operator.

Singaporeans and tourists to the city state, by observing the ubiquitous blue Comfort cabs and yellow CityCabs, would have deduced that the company that plies these cabs is the market leader in Singapore. ComfortDelGro, in addition to operating the largest taxi fleet of 16,997 cabs in Singapore, also operates a fleet of 3,656 public buses through its listed subsidiary SBS Transit Ltd, 350 private buses including buses owned by subcontractors, the North East and Downtown Mass Rapid Transit (MRT) train lines, the Light Rail Transit (LRT) systems in Punggol and Sengkang, and offers automotive engineering services and inspection and testing services.

Singapore Airlines (SIA) has established itself as a leading global airline not only in terms of fleet and service quality, but also by registering a consistent financial performance in an industry in which bankruptcies and reorganisations have not been uncommon. Much larger airlines, like American Airlines, US Airways, Delta, United and Southwest who have had the advantages of catering to both domestic and international markets and larger fleets, have been through periods of financial distress and reorganisation.

A review of the twenty companies covered in this book highlights the diversity of their businesses, the differentiated strategies they have adopted to build their market position and how these home grown companies have spread their wings to prosper in the most opportune markets globally. Singapore’s business friendly policies, effective rule of law, robust intellectual property regime and low-corruption environment have combined to create a culture of corporate excellence and discipline. The city-state’s policies have enhanced economic freedom transforming its workforce into one of the most skilled globally, and helped boost prosperity across the corporate landscape.

The following sections are included:

• APPENDIX 1 MILESTONES
• APPENDIX 2 REGULATORY GUIDELINES FOR SINGAPORE BANKS
• BIBLIOGRAPHY
• GLOSSARY