CHOICE CUTS IN SINGAPORE

JUST TWO WEEKS AGO, Lim Jit Soon expected Singapore's Straits Times Index (STI) to hit 1,300 points by mid-1999. But Asian stock markets have been rallying so strongly that the STI pierced that target Nov. 4, closing at 1,301 points. Many analysts say regional bourses are riding a bear-market rebound - the real economies are still in dire straits. But Lim, head of research in Singapore for Salomon Smith Barney, believes the island republic's recent performance is well supported. "Earnings recovery will be driven by lower interest rates and the cost-reduction measures that are to be introduced by the government," he says. Lim forecasts a 17% increase in Singapore's corporate earnings next year, after a 15% contraction in 1998.

The prime beneficiaries will be rate-sensitive companies like banks and property developers, exporters that can use savings from lower overheads to price their products competitively, and labor-intensive companies. Businesses contribute the equivalent of 20% of an employee's salary to the state-mandated pension fund. The government would like to see contributions slashed to 10%, as part of its program to lower business costs by 15% to 20%. That's on top of savings on interest payments. Prime lending rates have fallen one percentage point since June, including a half-point cut Nov. 2.

The current rally has driven up prices, but for the long term, Ang Lay Peng of Goldman Sachs still likes OCBC, one of the country's Big Four banks. Its non-performing loans (NPL) account for just 7.3% of all lending. "OCBC can absorb an NPL rate of 19.6% without impairing its book value," says Salomon banking analyst John Doyle, who also favors UOB, which boasts the lowest NPL rate - 5.1% - among the Big Four. Of the property stocks, Ang likes City Developments, which has a strong balance sheet and a land bank acquired at cheap prices. Salomon's Lim says the developer's stable rental and hotel income (it owns the King's Hotel in Singapore and the Marriott in Hong Kong) is helping cushion it from Singapore's residential property downturn. He also favors almost debt-free Marco Polo Developments.

Salomon technology analyst Chang Chiew Yee likes exporters NatSteel Electronics and Venture Manufacturing. NatSteel, a contract maker of motherboards, disk drives and PC peripherals, has low-cost plants in Asia, Mexico and Hungary. The company supplies components for Apple Computer's iMac, a hot seller in the U.S. But Bernard Tan of Merrill Lynch has downgraded NatSteel's short-term rating to neutral, although he still has a long-term buy on it. He thinks the iMac factor is now fully reflected in the share price. The market has also been awash in NatSteel shares after the company issued new scrips. As for Venture, Chang forecasts 23% earnings growth in 1999, matching this year's expected performance. The world's tenth-largest contract electronics manufacturer has seen increased orders for printers and fiber-optics products.

Take note, though: the two electronics companies can be seriously hurt if there is a marked economic slowdown worldwide, especially in the U.S. That is a risk as well for sound-cards maker Creative Technology. But the company is riding high on computer giant Compaq's decision to use Creative's second-generation digital video disk upgrade kit in its new PC lines. Creative also has $417 million in cash, some of which it will use to buy back one-tenth of its issued shares. Singapore Telecom plans share buybacks too, the reason why Ang has a buy on it. She is also betting on ST Engineering and SembCorp Industries, which should benefit from restructuring efforts along with pension-fund cuts and lower interest rates.

Sources: Asiaweek Research, Bridge Information Systems and The Estimate Directory