4Q21: Fair Game
Source: Trinity Research
September 2021
Nuttachart Mekmasin, CFA, FRMTrinity Securities
- Pure valuation of global equity looks stretch. However, relative valuation when compared to bond yield is perfectly fair. As a result UST yield will be key to watch in 4Q21.
- QE tapering is in the rear view mirror. It will no longer matter whether when it will start (but likely in November). Market will now turn focus to policy rate path a.k.a. Fed Funds futures. As long as it stays low (a.k.a. behind the Fed curve), global equity will continue to be supported by ample liquidity.
- Due to market being behind the Fed curve, beware of global equity selloff if investors start to believe more in the Fed. However the good news for Thai equity market is that foreign holding is still near the lowest level on record.
Source: Trinity Research
Key view
2
Note: Data as of 28 September 2021
Source: Trinity Research
Global equity still looks fine on EYG measure
3
- A raising of debt ceiling to 70% of GDP will allow Thai government to do borrowings about 2.3 trillion baht in 2022F (funding deficit / refinancing / injecting new stimulus)
- Additional government stimulus would relieve some pressure on BoT from interest rate cut. As per the amount, a 1 trillion baht supplementary is possible in our view. If happens, domestic demand stands to benefit the most.
- Reopening theme is not something new for global equity. However in the case of Thailand who is among the last to recover, it seems this factor has not yet been fully priced in.
- For 4Q21, we prefer Large cap & Value over Small cap & Growth – all based on valuation and liquidity wise.
Source: Trinity Research
Key view (Con’t)
4
Source: Trinity Research
Preferred equity style box for 4Q21
Large
Medium
Small
Value GrowthBlend
5
- 3Q21 earnings are mostly in the price. Therefore focus on the firm that will have positive earnings trajectory from 4Q21 onwards. Most of them are domestic demand stocks.
- We believe the impact of some large caps with low free-float that has distorted the index for so long will be subside from now on. Investors are already aware of the new calculation measure from the SET and this should limit speculation in these stocks going forward. It’s a fair game now.
- For the rest of year we could see an adjustment from index/passive funds, offloading DELTA and loading more other large cap stocks. Top 10 largest stocks stand to benefit are PTT, AOT, ADVANC, CPALL, SCC, GULF, PTTEP, SCB, BDMS, OR
Source: Trinity Research
Key view (Con’t)
6
Key upside risk
- New massive stimulus measures and significant country reopening with an ability of the Govt to control new infections.
Key downside risk
- Market follows the Fed curve by pushing rate expectation up, causing a yield spike and bond shock phenomena.
Worth watching
- UST yield movement
- Slowdown of global PMI
- New calculation method for SET50/SET100
Source: Trinity Research
Positives & Negatives in 4Q21
7
Evergrande Liquidity crisis
8
- China Evergrande will likely face debt restructuring and it has some negative repercussion on China HY grade already. However the crisis has not yet spilled over to bank liquidity. Part of that was due to PBOC helping hand.
- We see no contagion risk to Thailand as most major developers and listed firms no longer used high leverage. Solvency ratio remains favorable and has actually been higher recently.
- Even for the firms that are using high leverage, it seems like investors are not quite worrisome on other similar stocks that have weak balance sheet. They are still the better performers in Asia recently.
Source: Trinity Research
Our view on Evergrande debt saga
9
Note: Data as of 22 September 2021
Source: Bloomberg
Yield of China HY spook to record
10
Note: Data as of 22 September 2021
Source: Bloomberg
But liquidity fear in banking system still not be seen
11
Note: Data as of 22 September 2021
Source: Bloomberg
Part of that was because of PBOC liquidity injection
12
Note: Data as of 22 September 2021
Source: Bloomberg
It seems like Evergrande crisis did not lessen investor appetite on weak-balance sheet stocks
13
Note: Data as of 2Q21
Source: BoT
Even there is a contagion, with healthy financial condition, Thai listed firms should easily survive.
14
Global and Thai economic checkup
15
- Thailand vaccine administration rate is pointing into a right direction. 100m doses target at the end of 2021 looks plausible right now. This could push the country to go ahead with further reopening plan and make a strong case for positive QoQ GDP growth in 4Q21.
- Domestic demand especially consumption will recover first, and it will be the primary Government target for new economic stimulus. Investment and tourism will likely come into picture starting next years onwards.
- Global PMI manufacturing new orders suggests Thai exports might soften markedly from 4Q21 onwards, especially for industrial goods.
Source: Trinity Research
Our view
16
Note: Data as of 19 September 2021
Sources: MOPH, Trinity Research
Thailand vaccination rate on the rise – paving the way for more reopening
0
200,000
400,000
600,000
800,000
6-J
un
-21
13-J
un-2
1
20-J
un-2
1
27-J
un-2
1
4-J
ul-
21
11-J
ul-2
1
18-J
ul-2
1
25-J
ul-2
1
1-A
ug
-21
8-A
ug
-21
15-A
ug
-21
22-A
ug
-21
29-A
ug-2
1
5-S
ep-2
1
12-S
ep
-21
19-S
ep
-21
Doses Daily vaccine administered 7-day m.a.
17
Note: Data as of 17 September 2021
Sources: Bloomberg, Trinity Research
Thai GDP will see positive QoQ momentum in 4Q21
-3
-2
-1
0
1
2
4Q20 1Q21 2Q21 3Q21E 4Q21E
% QoQThai GDP
18
Global PMI losing momentum
Note: Data as of August 2021
Source: Bloomberg19
China PMI on the fall especially new orders
Note: Data as of August 2021
Source: Bloomberg20
Note: Data as of August 2021
Source: Bloomberg
As a result Thai exports started to came back to earth
21
Central bank Monitor
22
- A start of QE tapering in November and the implied reduction pace of $15bn per month is in line with market expectation, so the impact should be muted. However, a more hawkish Fed dot plots has pushed UST yield and the USD up.
- 3-4 steps hike a year for Fed being shown in dot plots is well in line with history. If there are 5, it’s another story.
- Based on upward trajectory of DM policy rate, we see little possibility that the BoT will cut rate from current 0.5% level.
- We see limited downside risk for THB from the current level and expect BoT to intervene more at the level beyond 33.5 baht/USD. BoT currently has all kind of arsenal to do so.
Source: Trinity Research
Our view
23
Note: Data as of 23 September 2021
Sources: Fed, Trinity Research
Fed plans for 3 steps hike a year …
24
Note: Data as of 23 September 2021
Source: Bloomberg
… which is very in line with the past
25
Note: Data as of 23 September 2021
Sources: Bloomberg, Trinity Research
Market believes the 1st hike will occur in March 2023 and still quite behind the Fed curve
26
Note: Data as of August 2021
Sources: ECB, Trinity Research
ECB bond buying started to fade away
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000M
ar-
20
Ap
r-20
Ma
y-2
0
Jun
-20
Jul-
20
Aug-2
0
Se
p-2
0
Oct-
20
Nov-2
0
Dec-2
0
Jan
-21
Fe
b-2
1
Ma
r-2
1
Apr-
21
Ma
y-2
1
Jun
-21
Jul-
21
Au
g-2
1
EUR, m ECB Monthly net purchases
27
Note: Data as of 27 September 2021
Source: Bloomberg
BoT forward position pointed to more ability to intervene
28
Rates & Liquidity
29
- For 2022, upside risk for THB will depend on tourism outlook. THB could strike back if service revenue and current account balance start to gain traction. On the other hand, downside risk for THB will be hinged on Fed Funds rate path. If there’s more significant upward shift, 33.5/$ may not be sustain.
- For 4Q21 a likelihood of U.S. infrastructure bill could have implication on UST yield.
- Expect THB curve to extend steepening mode. ST yield will be capped by ultra-low policy rate outlook, while LT yield will continue to rise from more Government bond supply. This situation bodes well for value stocks.
- Local liquidity growth fell off significantly in recent months.
Source: Trinity Research
Our view
30
Note: Data as of 28 September 2021
Source: Bloomberg
Thailand FX reserve still looks strong
31
Note: Data as of 28 September 2021
Source: Bloomberg
Game changer for the THB is stronger C/A balance
32
We expect THB curve to lean towards more steepener
Note: Data as of 23 September 2021
Source: Bloomberg33
A time for value to shine
Note: Data as of 29 September 2021
Source: Trinity Research
0.0
0.5
1.0
1.5
2.0
2.5
3.0
-3M
-1M
Fir
st h
int
(Ma
y '1
3)
+1M
+3M
+6M
Kic
k off
(+
7.5
M)
+1M
aft
er
kic
k off
+3M
+6M
QE
en
de
d (
+10
M)
%UST 10y - 2y THB 10y - 2y
UST 2021 episode THB 2021 episode
34
Note: Data as of August 2021
Source: Bloomberg
Local liquidity seemed off the pace recently
35
Commodity Power
36
- Restocking and supply-chain disruption are likely phasing out. Commodity price (Non-energy) are expected to soften along with inflation expectation in overall.
- Oil price expected to peak out in 3Q-4Q21 while market condition is still a supply deficit. After that, midstream players will start to benefit from stronger petroleum demand and lower crude price. GRM started to climb up recently.
- In the last report, OPEC were very bullish on Asian demand, which was driven by transportation fuels.
- If our assumption is right on softening inflation expectation, It’s hard for real bond yield to decline much further. No significant upside for gold as a result.
Source: Trinity Research
Our view on commodity
37
Note: Data as of 22 September 2021
Source: Bloomberg
Commodity complex performance in 2H21 – AGRI is sliding down
38
Tightening oil market will end in 4Q21
Note: Data as of 17 September 2021
Sources: OPEC, Trinity Research
-3
-2
-1
0
1
2
3
4
85
90
95
100
105
110
1Q
21
2Q
21
3Q
21E
4Q
21E
1Q
22E
2Q
22E
3Q
22E
4Q
22E
mb/d Balance World oil demand World oil supply
39
Oil demand by key regions – Asia being standout
Note: Data as of 17 September 2021
Sources: OPEC, Trinity Research
8.0
8.5
9.0
9.5
10.0
40
45
50
55
60
1Q
21
2Q
21
3Q
21E
4Q
21E
1Q
22E
2Q
22E
3Q
22E
4Q
22E
mb/dmb/dOECD Non-OECD Asia ex.China, India (rhs)
40
Moving average of Singapore GRM
Note: Data as of 22 September 2021
Source: Bloomberg41
Thai equity snapshot
42
- Current situation bode well to value stocks. Rising vaccination rate, gradual reopening, more domestic stimulus, steepening yield curve, relative undemanding valuation.
- After a cost cutting trend has recently ended, It’s time for companies to boost their revenue now. Firms with high operating leverage could see significant jump in bottom line. For this regard, we like Power sector most.
- We expect large caps to outperform small caps in 4Q21. A record low of foreign holding should limit selling pressure on blue chip stocks. Moreover, a slowdown in local liquidity will continue to dampen retail participation. These are the people who pushed up small caps price since 2Q20.
Source: Trinity Research
Our view on Thai equity market
43
Relative forward PE between Thai value & growth stocks – Value is a safe bet at this level
Note: Data as of 17 September 2021
Source: Bloomberg44
Note: Data as of 2Q21
Source: BoT
It’s time to boost top line now
45
Note: Data as of 16 September 2021
Sources: SET, Trinity Research
Foreign holding still near record low
26.8
32.2
24
26
28
30
32
34
36
38
40
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
Ja
n-0
7
Ja
n-0
8
Ja
n-0
9
Ja
n-1
0
Ja
n-1
1
Ja
n-1
2
Ja
n-1
3
Ja
n-1
4
Ja
n-1
5
Ja
n-1
6
Ja
n-1
7
Ja
n-1
8
Ja
n-1
9
Ja
n-2
0
Ja
n-2
1
Foreign holding of Thai stocks Avg
+1SD -1SD
+2SD -2SD
46
Note: Data as of 20 September 2021
Sources: SET, Trinity Research
Retail participation on the fall
38
40
42
44
46
48
50
52
Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21
% (5D avg) Retail investor participation
47
Note: Data as of August 2021
Sources: SET, Trinity Research
Retail investor appetite starts to dissipate
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21
accounts Newly opened account
48
Index strategy & Investment Theme
49
- The good news is that SET EPS revision continues to look strong and 10y UST yield is still under 1.50%. This bode well to SET under earning yield gap (EYG) measure.
- Expected trading range of SET in 4Q21 is 1560-1660. Our fair level is still 1600 based on PE model. However, index could be stretched out to 1660 based on EYG model.
- Entry level is 1600 or below. On the other hand, anything beyond 1660 is demanding and fragile.
- Worst case scenario is 1500. If happens, recommend fully-invested on SET.
Source: Trinity Research
Index strategy
50
Roadmap for the rest of 2021
Source: Trinity Research
1450
1500
1550
1600
1650
1700
Jan
-21
Fe
b-2
1
Ma
r-2
1
Ap
r-21
Ma
y-2
1
Jun
-21
Jul-
21
Au
g-2
1
Se
p-2
1
Oct-
21
No
v-2
1
De
c-2
1
SET Index
51
SET 2022E EPS revision still looks strong
Note: Data as of 21 September 2021
Source: Bloomberg52
Note: Projected EPS based on Bloomberg consensus; Upside and downside calculations are based on level of 1600
Source: Trinity Research
SET seems at fair level now
Case Multiple Based on SET TargetUpside /
Downside
Bull16.8x Fwd PE
(Stretch)2022E EPS (95.5 baht)
1604 +0.3%
Base15.7x Fwd PE
(Magic number)2022E EPS 1499 -6.3%
53
Note: Data as of 29 September 2021
Source: Trinity Research
But earning yield gap tell us that 1660 is possible, given 10y UST yield could stay at 1.50%
0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90 2.00
93.5 1812 1778 1744 1712 1682 1652 1623 1596 1569 1543 1518 1494
94.0 1822 1787 1754 1722 1691 1661 1632 1604 1577 1551 1526 1502
94.5 1831 1797 1763 1731 1700 1670 1641 1613 1586 1559 1534 1510
95.0 1841 1806 1772 1740 1709 1678 1649 1621 1594 1568 1542 1518
95.5 1851 1816 1782 1749 1718 1687 1658 1630 1602 1576 1550 1526
96.0 1860 1825 1791 1758 1727 1696 1667 1638 1611 1584 1558 1534
96.5 1870 1835 1800 1767 1736 1705 1675 1647 1619 1592 1567 1542
97.0 1880 1844 1810 1777 1745 1714 1684 1655 1628 1601 1575 1550
97.5 1890 1854 1819 1786 1754 1723 1693 1664 1636 1609 1583 1557
= Stretch level
10Y UST Yield
Projected SET EPS for
2022E
54
Note: Data as of 28 September 2021
Sources: Bloomberg, Trinity Research
SET earning yield gap update
4.43
4.3
2.9
3.6
4.9
5.6
2
3
4
5
6
7
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Jan
-18
Jul-
18
Jan
-19
Jul-
19
Jan
-20
Jul-
20
Jan
-21
Jul-
21
SET E/P gap vs 10Y UST Avg -2SD -1SD +1SD +2SD
55
Top Picks
56
- We like value stocks and domestic demand sectors. Those that are still trading below long-term average PBV are Banking, Commerce, Construction services/material, ICT, Media, Healthcare, and Property.
- We also like selected firms in Energy space specifically Power and Refinery. Though the sector is trading along the mean, there are some firms trading cheaper.
- Underweight: Non-oil commodity – restocking and inflation expectation likely peaked out; Export-oriented manufacturing e.g., ETRON and AUTO - Peak earnings in 3Q21 and slowdown in global manufacturing PMI
Source: Trinity Research
Focus on Value
57
Note: Data as of 23 September 2021
Sources: Bloomberg, Trinity Research
PBV band since 2006
0
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
8
AG
RI
AU
TO
BA
NK
CO
M
CO
NS
CO
MU
N
CO
NM
T
EN
ER
G
EN
TE
R
ET
RO
N
FIN
FO
OD
HE
LT
H
INS
PE
TR
O
PR
OP
SE
T
TR
AN
S
xx Current Median
Sources: Bloomberg, Trinity Research
58
Note: Data as of 23 September 2021
Source: Bloomberg
Top pick in Banking: KBANK, BBL
59
Note: Data as of 23 September 2021
Source: Bloomberg
Top pick in Commerce: CPALL, GLOBAL
60
Note: Data as of 23 September 2021
Source: Bloomberg
Top pick in Construction: STEC, TOA
61
Note: Data as of 23 September 2021
Source: Bloomberg
Top pick in ICT: ADVANC
62
Note: Data as of 23 September 2021
Source: Bloomberg
Top pick in Energy: SPRC, ESSO
63
Note: Data as of 23 September 2021
Source: Bloomberg
Top pick in Utility: GULF, GPSC
64
Note: Data as of 23 September 2021
Source: Bloomberg
Top pick in Healthcare: BCH, CHG
65
Note: Data as of 23 September 2021
Source: Bloomberg
Top pick in Property: CPN, AP
66
MSCI Predictions
67
MSCI Thailand Standard Index
Source: Trinity Research
Market Cap (M)Foreign free float
(%)
Current status in
Standard IndexRemark
PTT 1,128,240 in
AOT 889,285 in
DELTA 621,196 in
CPALL 577,164 in
ADVANC 573,968 in
SCC 492,000 in
GULF 478,126 in
PTTEP 446,623 in
SCB 365,031 in
BDMS 363,927 in
OR 339,000 in
KBANK 286,689 Not enough NVDR room
SCGP 271,527 in
PTTGC 267,747 in
INTUCH 264,544 in
MAKRO 248,400 Not enough free float
IVL 241,426 in
CPN 239,190 in
EA 238,720 in
BAY 229,868 Not enough foreign free float
CPF 220,856 in
GPSC 219,234 in
BBL 217,608 Not enough NVDR room
CRC 202,038 in
HMPRO 182,802 in
68
MSCI Thailand Standard Index (Con’t)
Source: Trinity Research
Market Cap (M)Foreign free float
(%)
Current status in
Standard IndexRemark
MINT 167,669 in
KTC 162,435 in
KTB 156,532 in
AWC 138,240 in
BEM 136,036 in
BJC 135,263 in
DIF 133,959 Infrastructure fund
MTC 133,030 in
CBG 127,000 in
BTS 123,734 in
TRUE 112,703 in
BH 110,845 in
BGRIM 108,838 in
OSP 104,380 in
TU 103,344 in
TTB 103,256 22.9 Possible inclusion for Nov 2021
TOP 100,471 in
LH 96,793 in
KCE 96,581 58.0 Possible inclusion for Nov 2021
GLOBAL 96,175 32.1 Possible inclusion for Nov 2021
SAWAD 94,061 in
STGT 93,056 in
EGCO 91,342 in
RATCH 65,975 in
BAM 59,793 in
69
SET50/SET100 New rules & Predictions
70
- In the end, a free-float adjusted market cap index is inevitable. In the short-term, however, the SET has strong desire to impose stricter rules for SET50 and SET100 members as early as in the next round (1H22).
- Pilot adjustment will focus on liquidity measure. Qualitative screening will be used to exclude trading volume of stocks in the month that they were selected into Market Surveillance Measure List. This will easily delete DELTA from the list.
- Even without the new rule, our model did suggest a removal of DELTA in the next review date due to low turnover ratio.
- The impact on DELTA from index/passive fund selling off is vital as it’s a total removal, not free-float adjusted.
Source: Trinity Research
Our analysis
71
SET new liquidity criteria suggestion
Source: SET 72
Even with the same rule, DELTA is already subjected to exclusion in the next round
Note: Data as of 20 September 2021
Source: Trinity Research73
Potential additions: AWC, TIDLOR, KEX Potential deletions: DELTA, BJC, STA
Note: Data as of 20 September 2021
Source: Trinity Research74