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Thailand – Market strategy

Thailand – Market strategy. Kasem Prunratanamala Head of Thailand Research December 2010. Maintain Overweight with SET index target of 1200 for 2011. Political uncertainty remains but we expect a happy ending Democrat is likely to come back after next election

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Thailand – Market strategy

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  1. Thailand – Market strategy Kasem Prunratanamala Head of Thailand Research December 2010

  2. Maintain Overweight with SET index target of 1200 for 2011 • Political uncertainty remains but we expect a happy ending • Democrat is likely to come back after next election • Opposition still lacks a credible leader • Strong military support • This will lead to a more stable political situation in 2011, which should lead to a market re-rating closer to regional peers • More foreign inflows are likely to over the next few months • Economy forecast to grow 8.0% this year and 5.0% next year with possible upside surprises in 2011 • SET index target of 1200 for 2011, based on 13x forward P/E • Top picks – KBANK, KTB, STEC, CPF, GLOBAL, PS, LPN, SPALI, AMATA, HEMRAJ, PTTAR and PTTCH

  3. Politics likely to remain calm in 1H11 • PM Abhisit likely to call snap polls in early 2011 following massive government spending in 2H10 to boost popularity • Early elections to placate rural population following crackdown on protestors in Rajprasong on 19 May 2010 • Puea Thai Party still lacks a credible leader to lead them in the next elections • Some Puea Thai MPs may cross over to Bhum Jai Thai • Strong military support

  4. Political risks • Red-shirt protestors may take to the streets again • We believe the movement is unlikely to gain much support this time around • The government would have learned how to handle similar situations by now • And the new army chief, Gen Prayuth Chan-ocha, is more decisive

  5. Coalition partners unlikely to switch camps

  6. House dissolution in early 2011 – not too bad an option • The Democrats still have a good chance of returning as the government since coalition partners are not likely to cross over to the Puea Thai Party • The current administration still has enough time to speed up spending under the current budget to boost its popularity upcountry • It is not too long a timeframe for red-shirt protestors to wait

  7. Global macro outlook Table 1 : Real GDP growth - scenario GDP baseline GDP if euro stalls scenario Interest rate 2009 2010F 2011F 2009 2010F 2011F 2010F 2011F US -2.4 2.5 2.0-3.0 -2.4 1.5 2.0 0.50 1.25 Euro-area -4.1 0.6 1.5 -4.1 0.0 0.5 1.00 1.50 Japan -5.2 1.5 1.8 -5.2 1.0 1.5 0.10 0.10 China 8.7 10.0 10.0 8.7 10.0 8.0 5.85 6.66 GDP baseline GDP if euro stalls scenario Interest rate 2009 2010F 2011F 2009 2010F 2011F 2010F 2011F Malaysia -1.7 7.0 5.5 -1.7 5.7 5.0 2.75 3.25 Indonesia 4.5 6.1 6.4 4.5 6.0 6.1 7.00 7.50 Singapore -2.0 9.4 6.0 -2.0 8.0 5.0 0.70 1.00-2.00 Thailand -2.3 8.0 5.0 -2.3 5.9 5.0 2.00 3.00 Source : CIMB

  8. Thailand’s key interest rates Source : BBL, BOT

  9. Solid macro outlook • Despite political turmoil in Apr-May 2010, Thai economy did surprisingly well with 9.1% growth in 2Q10 and 6.7% in 3Q10, following a strong growth of 12.0% in 1Q10. • We expect Thai economy to grow 8.0% this year and 5.0% next year. • Although global economy is likely to slow, we do not expect a double dip. • Inflation under control at 3.3% this year and 3.6% next year. • Policy rate to rise another 100bp to 3.00% in 2011.

  10. Domestic demand will be key growth driver in 2011-12

  11. Thailand’s quarterly GDP growth forecasts Thailand's quarterly GDP growth forecasts (%) 15 12.0 9.1 10 6.7 6.0 5.8 5.0 5.3 4.2 3.9 5 0 (2.8) -5 (4.3) (4.9) (7.1) -10 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10E 2011E Source : CIMB Research, NESDB

  12. Foreign inflows likely to come in a big way in 2011 Source : Stock Exchange of Thailand (SET)

  13. Hedge funds very active Source : Stock Exchange of Thailand (SET)

  14. Local institutions start buying again Source : Stock Exchange of Thailand (SET)

  15. Prop desks getting cautious as well Source : Stock Exchange of Thailand (SET)

  16. Retail investors dominate market activity Source : Stock Exchange of Thailand (SET)

  17. Thailand’s market P/E Source : CIMB estimates

  18. Thailand’s market P/BV Source : CIMB estimates

  19. SET’s financial summary Source : CIMB Research

  20. Regional market comparison Source : CIMB Research

  21. Regional market comparison Source : CIMB Research

  22. Top picks Source : CIMB Research

  23. Amata Corporation (THB27.8, Outperform) • Reiterate OUTPERFORM with an unchanged THB27.80 target price, still based on 20x CY12 P/E, which is two standard deviations above its historical average. • A calmer political situation and higher Board of Investment (BOI) approvals bode well for industrial estate demand in CY11. We expect AMATA to sell 1,500 rai (600 acres) of industrial land in 2010 and 1,600 rai (640 acres) in 2011. • Its gross margin is expected to remain high at above 50% as competition in the industry is tame.

  24. Charoen Pokphand Foods (THB36, Outperform) • Maintain OUTPERFORM and THB36 target price, pegged to 14x CY12 P/E, 20% above its 4-year historical average of 12x. Potential catalysts include higher chicken prices, robust shrimp exports and newsflow on the EU export ban. • We see a bright outlook for the shrimp export and overseas businesses. We also expect domestic livestock prices to remain firm, if not rise higher, in the coming quarters due to flood damage to supply and the unattractiveness of current prices for new raisers. • CPF’s share price deserves a further re-rating as the company’s plan to raise the sales contribution of processed foods should translate into a healthier and more stable margin, bringing about higher earnings visibility.

  25. Hemaraj Land and Development (THB3.21, Outperform) • Reiterate OUTPERFORM with an unchanged THB3.21 target price, still based on 14.1x CY12 P/E, which is one standard deviation above its historical average. • Construction of Gheco-One is 80% complete and the plant is expected to be up and running in early 2012. We expect HEMRAJ to book about THB1.4bn per annum in share of profit from affiliates from the power plant. • HEMRAJ owns five out of six industrial estates in the eastern part of Thailand, the country’s auto hub, and houses 137 auto companies with 203 auto factories, making it a proxy for autos.

  26. Kasikornbank (THB155, Outperform) • Reiterate OUTPERFORM with an unchanged THB155 target price, still based on 2.3x CY11 P/BV, which is two standard deviations above its 5-year historical average. • The SME segment, which is KBANK’s bread and butter, is expected to perform well on the back of continued economic recovery. This will drive KBANK’s loan growth, net interest margin and fee income growth. • We expect KBANK to post double-digit earnings growth with mid-teen ROEs over the next few years, one of the highest in the sector.

  27. Krung Thai Bank (THB25, Outperform) • Reiterate OUTPERFORM with an unchanged THB25 target price, still based on 2.1x CY11 P/BV, which is based on the average P/BV of recent M&A transactions as the Financial Institution Development Fund (FIDF) may want to sell its stake to new investors, one of whom is the Ministry of Finance. • The sale of this stake may spark speculative interest in the stock. • KTB is still expected to benefit from lending to the government, even though the government’s pump-priming programmes are expected to play a lesser role in 2011.

  28. LPN Development (THB14.6, Outperform) • Reiterate OUTPERFORM, target price of THB14.60, based on 9.5x CY12 P/E, which is the peer average. Potential near-term catalysts are continued gross margin improvement and favourable 4Q10 results. • LPN’s pricing power has improved amid a competitive market environment on the back of its strong brand equity. This is reflected in its improving gross margins. • LPN boasts solid revenue visibility backed by a strong backlog of THB18bn. Its backlog to be booked in CY11 is already 92% of our CY11 revenue forecast.

  29. Pruksa Real Estate (THB36.9, Outperform) • Maintain OUTPERFORM and target price of THB36.90, based on 14x CY12 P/E. Potential near-term catalysts are positive newsflow about presales and backlog as well as gross margin improvements and expense control despite its aggressive expansion. • We expect PS to show a 3-year EPS CAGR of 21%, higher than the sector average of about 17%. Its robust earnings growth will come from strong backlog orders, sustainable high margins due to a flexible product mix and slower SG&A growth. • Despite PS’s aggressive expansion, the company remains impressively well-disciplined in its gearing with its net gearing expected to drop from 44% to 37% in CY11. We also expect its ROE to be sustained at above 27% for CY10-12.

  30. PTT Aromatic and Refining (THB46, Outperform) • Reiterate OUTPERFORM with an unchanged THB46 target price, based on 7x CY12 EV/EBITDA, a discount to the regional peer average of 9x. • We expect its refining margin and aromatics spreads, particularly for PX-naphtha, to improve significantly in 2011. • Share price catalysts will come from an improved industry outlook and strong earnings growth.

  31. PTT Chemical (THB235, Outperform) • Reiterate OUTPERFORM with an unchanged THB235 target price, still based on 9x CY12 EV/EBITDA, the average of its regional peers. • Increased utilisation at its new 1mtpa ethane cracker will boost PTTCH’s volume by 40% in 2011. • Starting 1 Jan 2011, PTTCH is expected to begin commercial operations at its all-new polymer production facilities, which has a capacity of 800ktpa of HDPE, 400ktpa of LLDPE and 300ktpa of LDPE. We expect LDPE, in particular, to contribute significant earnings in 2011 given its high margin of US$700/tonne currently.

  32. Siam Global House (THB14, Outperform) • Maintain OUTPERFORM and target price of THB14, based on DCF with 8.2% WACC and 2.5% long-term growth. Potential catalysts are the rollout of new stores and further details of its Jaengwattana development plan. • We forecast net profit to record a 33% CAGR over CY10-13, supported by the planned opening of four new stores p.a. and robust same-store-sales growth. • We believe high farm incomes, government populist policies and the multiplier effect as a result of accelerating investment in the area should support higher spending in the upcountry. This should support GLOBAL’s growth over the next few years.

  33. Sino-Thai Engineering and Construction (THB19, Outperform) • Reiterate OUTPERFORM with an unchanged THB19 target price, still based on 38x CY12 P/E, three standard deviations above its 3-year historical average. • STEC management is bullish on the sector, saying that the mega infrastructure cycle has just begun and it expects the cycle to last ten years. With only a handful of large contractors capable of handling such large-scale projects, STEC will be busy over the next few years. • A tame outlook for building material prices in CY11 bodes well for contractors’ margins.

  34. Supalai Plc (THB18.5, Outperform) • Maintain OUTPERFORM and target price of THB18.5, based on 9x CY12 P/E, a 8% discount to the peer average. Potential near-term catalysts are favourable reports of presales backlog and an expected record high quarterly performance in 4Q10. • SPALI has the highest gross margin and net margin among its peers, on the back of its hands-on project management and rising bargaining power on the back of expanding economies of scale. • We like SPALI for its well-diversified products in all mid- to upper-low-end market segments and locations, cheap valuation (5.5x CY12 P/E vs. peer average of 9.8x while offering an impressive 3-year EPS CAGR of 41%) and attractive yields (7-10%).

  35. Thank you

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