Not All Heading South - zenjournalist.org · [email protected] Raju R...

Thai Truths Market strategy

Commerce and Telco did well going through the past five elections

Source: CLSA, Blomberg

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Suchart Techaposai [email protected] +66 2 257 4632

Yupapan Polpornprasert

+66 2 257 4648

25 November 2013

Thailand Market Strategy

www.clsa.com

Not All Heading South We see SET moving side way with surrounding factors deteriorating. Analysts are downgrading estimates; foreign investors continue leaving Thailand; the government stability deteriorates further. An early election is a likely solution to the current political deadlock in our view. Historically Commerce, Telco, Media, and Property did well in election periods. Conviction Buy Lists are KTB, SCC, CPALL, INTUCH, CPN, and BLA. We replace BIGC with THAI on Sell List.

Consensus Continues Going South Consensus estimates on CLSA coverage have been revised downward by 7% and

5% for FY13E and FY14E over the past eleven months. Downgrades are in Consumers, Transportation, Petro/Chem, and Material, and

Healthcare. Upgrades are in Hotels & Leisure, Contractor, Property. Outlook – Consumer, Petro/Chem, Material reach bottom on downward revision.

Transportation, Property, Media may see further downgrades.

Foreign Investors Continue Walking Out Foreign ownership has been on decline over the past one year to 30% now. Sectors witnessing declining foreign ownership are Property and names that have

underperformed (BANPU, GSTEL, SSI) or associated with rising growth uncertainty (KTB, TISCO) and were richly valued (HMPRO, CPALL).

Sectors with rising foreign ownership are diversed with INTUCH leading the pack. The valuation premium still argues for the outflows to continue until the political

situation and growth visibility improves.

Insiders Remain Upbeat So Far; Will This Continue? Since SET peak in May, company insiders have been net-buyers totalling Bt4.7bn. Media is the active sector with most reducing position except NMG. Among big liquid names, BTS and ITD witnessed adding; THCOM on the contrary.

Politics – Will Pheu Thai Strike a Hat Trick? Two bills were down in weeks. Will the Bt2tn borrowing bill be the next? The odd for an early election continues rising as it is a peaceful option in our view. Historically an election on average was market neutral. But Consumer, Telco,

Media, and Property did relatively well going through election. Recent implementation of personal income tax cut will help household spending mood also.

Conviction Buys are KTB, SCC, CPALL, INTUCH, CPN, and BLA. Sells: TMB, THAI.

Prepared for: [email protected] Raju R Gopalakrishnan 11/27/13 08:31:01 AM Reuters - Internal Employee ID's - 96

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Not All Heading South Thai Truths

25 November 2013 [email protected] 2

Not All Heading South SET continues going side way with surrounding factors deteriorating. Analysts are downgrading earnings estimate; foreign investors continue leaving Thailand; the Yingluck government stability deteriorates further following the Constitutional Court ruling against the Constitutional Amendment on Senate section. An early election is a likely solution to the current political deadlock in our view.

Historically an election was market neutral, but Commerce, Telco, Media, and Property outperformed. This is consistent with our Conviction Buy List of CPALL, INTUCH, and CPN. We also replace BIGC with THAI on our Sell List. (Figure 1)

Figure 1 : Conviction List

Valuation summary Price Target Rec +/- Mkt Cap PE (x) EPS growth (%) 14CL Stock (Bt) (Bt) (%) (US$bn) 14CL 15CL 14CL 15CL Div Yld

(%) ROE (%)

PB (x)

Top Buy KTB TB 19.0 29.0 BUY 52.6 8.4 7.2 6.1 12.6 18.4 5.3 17 1.1 SCC TB 399.0 530.0 BUY 32.8 15.1 10.8 10.6 17.7 2.1 4.6 25 2.5 CPALL TB 41.0 48.0 BUY 17.1 11.6 24.0 17.8 36.6 35.0 3.0 45 9.7 INTUCH TB 75.5 116.0 BUY 53.6 7.6 11.8 10.2 29.1 16.3 8.5 72 7.8 CPN TB 43.0 53.2 O-PF 23.7 6.1 25.9 21.6 23.4 20.1 1.3 19 4.7 BLA TB 59.3 82.0 BUY 38.4 2.3 13.4 12.4 12.6 8.3 1.9 21 2.6 ROBINS TB 52.0 70.0 BUY 34.6 1.8 20.6 16.1 34.5 28.2 2.9 23 4.4 Top Sell TMB TB 2.7 2.4 SELL (10.4) 3.7 12.5 10.6 53.8 17.9 2.6 14 1.7 THAI TB 16.5 14.0 SELL (15.2) 1.1 10.5 11.9 0.0 (11.9) 2.4 5 0.5 Note: As of 22 Nov 2013 Source: CLSA

Consensus Continues Going South YTD consensus estimates on CLSA coverage have been revised downward by c.7% and c.5% for FY13E and FY14E over the past eleven months. Sectors witnessing downgrades are Consumers due to surprise spending slowdown and rising SG&A, Transportation on rising competition from excess capacity and price war, Petro/Chem and Material on weak demand and commodity deflation, and Healthcare on rising SG&A.

It is not all bad. Bank, Insurance, Telco, Power, and Media have generally deliver in-line results and therefore have not witnessed any significant revision. Hotel & Leisure witnesses upgrade from strong tourism activities, Contractor from solid backlog, and Property from solid past presales. (Figure 2)

SET goes side way with no positive catalyst

except an early election

Consensus estimates have been downgraded by

7% and 5% for FY13E and FY14E respectively




Figure 2

YTD changes in FY13E and FY14E earning consensus by sector

Source: CLSA, Bloomberg

Within our CLSA coverage, the Top Ten witnessing their earnings estimates being revised upward among analyst community based on Bloomberg database are shown in Figure 3, while those suffering from estimate downgrade are in Figure 4.

Looking out, we are confident that Consumer, Petro/Chem, Material have seen their earnings reaching bottom supported by improving regional demand for petrochemicals and material and bottoming household sentiment supported by personal income tax cut and imminent political resolution. However, transportation, property, and media may see further downgrades due to rising supply relative demand.

Figure 3 Figure 4

Top Ten names within CLSA coverage witnessing upward revision

Top Ten names within CLSA coverage witnessing downward revision

Source: CLSA, Bloomberg Source: CLSA, Bloomberg

Foreign Investors Continue Walking Out Over the past seventeen trading days, Thailand has seen sixteen days of equity outflows totalling Bt 32.6bn or over US$ 1bn. YTD cumulative net equity outflows have reached Bt 136bn.

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Upgrade

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If we add cumulatively all foreign net buy/sell since Jan 09, the period when SET hit bottom in the current cycle, it is interesting to see that the outstanding foreign investor position in terms of monetary value left in the Thai equity market is now ~Bt55bn, the level not seen since Sep 2010. (Figure 5)

Figure 5

Cumulative Foreign Net Buy/Sell in Thai Equities since Jan 2009

Source: CLSA

Having reached peak 33.34% in Nov 12, foreign ownership of SET100 universe since then has been on gradual decline toward just below 30% now. (as of 18 Nov) (Figure 6)

Figure 6

Foreign ownership has been on decline since latest high in Nov 12

Source: CLSA, SETSMART; Note: Excluding Siam Makro, Golden Land that were taken over.

During the past twelve months, foreign investors have lowered exposure in Media, Material, Property, Commerce, and Bank, while adding exporting sectors like Electronics, Petrochem, Food, as well as Healthcare, Transportation, and Telco. (Figure 7)

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Foreign ownership reached a fresh low over

the past one year

Foreign Cumulative Investment of Thai

Equities reached that of Sep 2010




Figure 7

Change in foreign ownership over the past twelve months by sector

Source: CLSA, SETSMART

Among liquid names, most added names are INTUCH, PS, THAI, PTTGC, and BTS. Names that foreign investors reducing holdings most are BANPU, SIRI, LPN, BECL, and TISCO. (Figure 8 and 9)

Figure 8 Figure 9

Names that foreign investors adding most Names that foreign investors reducing holdings most

Source: CLSA, SETSMART Source: CLSA, SETSMART

The current Thai equity valuation, measured by MSCI Thailand vs MSCI AxJ, relative to the Asian regional peers is not exciting for bargain-hunting either. MSCI Thailand, while flat on Forward PE at ~12x FY14E, is a premium on Forward PBV. Therefore it is not a rush to buy unless the current political situation resolves to some extent and growth outlook improves visibly. (Figure 10-11)

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Foreign investors add Export sectors, Food,

Healtcare, Transportation, and Telco




Figure 10 Figure 11

Forward PE of MSCI AxJ vs MSCI Thailand Forward PB of MSCI AxJ vs MSCI Thailand

Source: CLSA, Bloomberg Source: CLSA, Bloomberg

Insiders Remain Upbeat So Far; Will This Continue? Since SET index peak in May, company management have net bought their own shares totalling Bt4.7bn, according to the filings with SEC. Interestingly, management in most media companies net sold their own company shares except Nation Multimedia.

Among big liquid names, BTS and ITD management net bought their own shares. (Figure 12 and 13)

Figure 12 Figure 13

Top 10 net buy names by their management Top 10 net sell names by their management

Source: CLSA, SETSMART Source: CLSA, SETSMART

Politics – Will Pheu Thai Strike a Hat Trick? Two bills were shot down within weeks. The Amnesty Bill was voted down by Senate on 11 Nov and the ratification among coalition parties not to reconsider the bill after 180 days following the widespread protest against the Bill led by ex-Democrat MP Suthep. The approved Constitution Amendment Bill on Senate section was ruled unconstitutional by Constitutional Court on 20 Nov. Moreover, the Democrat has just filed a case with Constitutional Court against the Bt2tn borrowing bill for infrastructure spending, which has just been approved by Senate, arguing that the Bill lacks transparency and breaches the budgetary regulation stipulated by the Constitution.

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Politics continues moving against the government &

Pheu Thai party




In addition, the government is also facing two investigations by National Anti-Corruption Commission (NACC) on rice pledge scheme and water infrastructure project. With ongoing protests against the government and Pheu Thai party, the Yingluck government is facing rising difficulties to carry on its duty and function effectively.

In our view, the odd for PM Yingluck to dissolve Parliament and to call for an early election is rising. First, the option could peacefully defuse all mass protests. Second, the party can better consolidate public support for its policy framework and direction going forward with an election campaign. Last, it allows the party to introduce a new set of policies and to back off from the past policy mistakes.

We simply look into the market movement surrounding the past five elections: 3 Jul 11, 23 Dec 07, 6 Feb 05, 6 Jan 01, and 2 Jul 95. We exclude 17 Nov 96 and 2 Apr 06 out because the former was set at the beginning of currency attack and just ahead of the 1997 financial crisis and the latter was controversial leading to the 2006 September Coup. These two events are not good proxies as there are stronger overriding factors on market reaction, ie financial crisis risk for the former and excessive political risk in the latter.

We rebase all SET index and it key sub-indices to 100 on election dates and see how the market reacted 90 days approaching past election dates and 90 days afterwards.

On average of the past five elections, SET performed well approaching election dates, delivering c.5% on election dates if one had bought three months prior to election. That is understandable as an election in Thailand is always an early election except the 6 Feb 05, the first time that the government completed the full four-year term as stipulated under the Constitution. It was the Thaksin I government. Therefore an early election is an option regularly used by the government when they faced rising political difficulties to govern. Therefore the market reacted positively once the political difficulties were resolved with an early election.

However, such absolute outperformance was reversed afterwards depending on election results, coalition governments formed, and policies adopted. (Figure 14)




Figure 14

SET movement 90-day before and after election dates (Rebased to 100 on election dates)


Interestingly, there are sectors that consistently performing well going through elections on average. They are Commerce, Telco, Media, and Property, ie domestic demand as the political events involve activities leading to more upbeat household spending going through and after elections. (Figure 15 and 16)

Figure 15

Average movement of SET sub-indices before and after election dates (Rebased to 100 on election dates)


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Commerce, Telco, and Property outperform SET

going through election dates




Figure 16

Average performance of SET and key sub-indices over the past five elections

Source: CLSA, SETSMART; Note: Excluding Nov 96 Election

While it is not yet clear whether the Yingluck government would consider an early election to resolve the current political situation and, if so, when the government would call an early election.

Still, a consumption play can be an outperforming theme in the current market volatility and rising political uncertainty hurting public investment. This is because recent household spending momentum is better than what the recent 3Q13 real private consumption of -1.2% YoY suggests. There are two bright spots within the contracting figure. First, ex durables, private consumption still grows 0.7% YoY dragged by beverages (excise tax hike) and highly-disputed accounting for gasoline use (under-recording). Second, Thais spending aboard in 3Q13 still grows 5.3% YoY above its 3.4% trend growth. (Figure 17)

Figure 17

3Q13 Private Consumption (ex Durables) is better than its headline growth

Source: CLSA, NESDB

Second, the recent implementation of personal income tax cut. While the government has announced the 2013 tax cut plan since last year, the government has just implemented the scheme last week dating back since

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its headline growth suggests.

Commerce, Telco, and Media did well

surrounding elections.




Jan 2013. Under the new scheme, they add more tax brackets from five to eight brackets with income levels falling into the first half of each old brackets paying 5% lower tax rates and the top brackets (taxable income over Bt 4mn) seeing a 2% lower tax from 37% to 35%. Overall we expect tax burden lower by c20-50% for those earning taxable income less than Bt1mn/yr, c15% for those earning taxable income between Bt 1-2.5mn/yr2-3.5%, and around 5% for much higher-taxable income earners.

Given that personal income taxes for the year have been withheld from monthly salaries at old rates since the beginning of the year until now, the implementation of the new lower tax scheme will see individuals getting income tax refund in 1H14 depending on how fast Revenue Department processes tax filings and refunds. This will undoubtedly improve spending sentiment in this festive season to some extent. (Figure 18)

Figure 18

Personal Income Tax Bracket Change (Old vs New to be effective Jan 2013)

Taxable Income Bracket Old Rate New Rate

1 - 150,000 0% 0% 150,001 - 300,000 10% 5% 300,001 - 500,000 10% 10% 500,001 - 750,000 20% 15% 750,001 - 1,000,000 20% 20%

1,000,001 - 2,000,000 30% 25% 2,000,001 - 4,000,000 30% 30%

> 4,000,000 37% 35% Source: CLSA, MOF

Within our conviction buy list, we have CP All, Intouch, and CPN to reflect the consumption play. We replace BigC with THAI on the Sell list because our aviation analyst, Narongphand Lisahapanya, has raised his concern on the effect of rising price war on passenger yield and therefore earning outlook. (Please see Thai Aviation (Safer on the ground) on 25 November 2013).

Companies mentioned Airports of Thailand (AOT TB - BT192.0 - BUY) Asia Aviation (AAV TB - BT4.7 - UNDERPERFORM) Asian Property (AP TB - BT5.0 - UNDERPERFORM) Bangkok Dusit (N-R) Bangkok Exprway (N-R) Bangkok Life (BLA TB - BT59.3 - BUY) Banpu (BANPU TB - BT28.0 - SELL) Big C Supercenter (BIGC TB - BT188.0 - SELL) BTS (N-R) Central Plaza (CENTEL TB - BT36.3 - OUTPERFORM) CP All (CPALL TB - BT41.0 - BUY) CP Foods (CPF TB - BT25.8 - UNDERPERFORM) CPN (CPN TB - BT43.0 - OUTPERFORM) Dynasty Ceramic (N-R) G Steel (N-R) Grammy (N-R) Hemaraj (HEMRAJ TB - BT3.1 - BUY) HomePro (HMPRO TB - BT10.7 - UNDERPERFORM)


https://www.clsa.com/member/company/index.asp?clsa_id=162505845




https://www.clsa.com/member/reports/542681069.pdf



Intl.Engineering (N-R) Intouch (INTUCH TB - BT75.5 - BUY) IRPC (IRPC TB - BT3.4 - UNDERPERFORM) Italian-Thai Dev (N-R) KCE Electronics (N-R) Krisda Mahanakorn (N-R) Krung Thai Bank (KTB TB - BT19.5 - BUY) Land & Houses (LH TB - BT9.7 - BUY) LPN (LPN TB - BT17.7 - BUY) Major Cineplex (MAJOR TB - BT18.4 - OUTPERFORM) Malee Sampran Fac. (N-R) MBK (N-R) Nation Multimedia (N-R) Pruksa (PS TB - BT20.0 - OUTPERFORM) PTT (PTT TB - BT297.0 - BUY) PTTGC (PTTGC TB - BT73.5 - OUTPERFORM) Quality Houses (QH TB - BT2.7 - UNDERPERFORM) Robinson (ROBINS TB - BT52.0 - BUY) Sahaviriya Steel (N-R) Sansiri (N-R) Siam Cement (SCC TB - BT399.0 - BUY) Stecon (STEC TB - BT19.5 - BUY) Sub Srithai (N-R) Thai Airways (THAI TB - BT16.5 - SELL) Thai Factory Dev. (N-R) Thaicom (THCOM TB - BT36.0 - OUTPERFORM) Tisco (TISCO TB - BT39.8 - UNDERPERFORM) TMB Bank (TMB TB - BT2.7 - SELL)




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Key to CLSA/CA Taiwan investment rankings: BUY: Total return expected to exceed market return AND provide 20% or greater absolute return; O-PF: Total return expected to be greater than market return but less than 20% absolute return; U-PF: Total return expected to be less than market return but expected to provide a positive absolute return; SELL: Total return expected to be less than market return AND to provide a negative absolute return. For relative performance, we benchmark the 12-month total return (including dividends) for the stock against the 12-month forecast return (including dividends) for the local market where the stock is traded. We define stocks we expect to provide returns of 100% or higher including dividends within three years as “Double Baggers”. ©2013 CLSA Limited (for research compiled by non-Taiwan analyst(s)) and/or Credit Agricole Securities Taiwan Co., Ltd (for research compiled by Taiwan analyst(s)). Note: In the interests of timeliness, this document has not been edited. The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views and opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or pressure by any person/s in compiling such publication/communication. CLSA group of companies (excluding CLSA Americas, LLC) (“CLSA”), Credit Agricole Securities Taiwan Co., Ltd. (“CA Taiwan”), CLSA/CA Taiwan's analysts and/or their associates do and from time to time seek to establish business or financial relationships with companies covered in their research reports. As a result, investors should be aware that CLSA and/or such individuals may have one or more conflicts of interests that could affect the objectivity of this report. Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual, potential or perceived conflicts of interests relating to research reports and such details are available at www.clsa.com/member/research_disclosures/. Disclosures therein include the position of CLSA, CLSA Americas, LLC and CA Taiwan only and do not reflect those of CITIC Securities International Company Limited, Credit Agricole Corporate & Investment Bank and/or their respective affiliates. If investors have any difficulty accessing this website, please contact [email protected] or +852 2600 8111. If you require disclosure information on previous dates, please contact [email protected] IMPORTANT: The content of this report is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group (18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone +852 2600 8888) and/or CA Taiwan Compliance (27/F, 95, Section 2 Dun Hua South Road, Taipei 10682, Taiwan, telephone +886 2 2326 8188). 05/08/2013


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