KBank
Multi Asset
Strategies
April 2020
Kobsidthi Silpachai, CFA [email protected]
KResearch [email protected]
KSecurities [email protected]
FX market monitor page 1
Fixed income monitor page 7
Economic monitor page 12
Equity market monitor page 16
“KBank Multi Asset
Strategies” can now be
accessed on
Bloomberg: KBCM
<GO>
Disclaimer: This report
must be read with the
Disclaimer on page 37
that forms part of it
1
Spike in demand for dollar was triggered by the global stock
market plunge and a sell-off from the fixed income markets on
the back of global fear of economic impact from the coronavirus.
This resulted in the recent US dollar liquidity shortages in the
global financial system.
The emergency measures were necessary to help contain the
shortage of US dollar liquidity. However, the tightness in the US
financial condition remains, reflected by widening spread
between the US Corporate bond and US Treasury yields.
KBank Capital Markets expect USD/THB to trade within 33.00-
33.50 by the end of the second quarter. The key factors to watch
going forward are additional monetary policy measures by the
BOT, impact of the coronavirus on corporate credit, and falling
Thai current account balance in the month of April and May given
dividend payment and disappearing tourist visitors.
Factor influencing the US dollar volatility and its strength
The wide spreading coronavirus outbreak, especially in China, Europe, and the US
has caused major disruption in global economic activity and prompted each
country to launch measures to limit the spread of the virus. As a result, the fear of
global economic crisis has triggered financial market turmoil, raising demand for
the US dollar. The dollar, hence, has been strengthening, replicating what
happened during the Global Financial Crisis in 2008, with increased volatility.
1. US dollar liquidity shortage in the global market
Spike in demand for dollar was triggered by the global stock market
plunge and a sell-off from the fixed income market on the back of
global fear of economic impact from the coronavirus, especially
when the number of cases rose dramatically in Italy and all over Europe.
Investors, therefore, scaled back their investment in risky assets. As the
value of almost all type of assets deteriorated across the world, the
demand for cash hoarding increased, especially the US dollar. This
resulted in the recent US dollar liquidity shortages in the global financial
system, reflected in the increase in cost of US dollar funding in currency
swap operation (Basis Swap) (Fig. 1).
FX market monitor: Global financial turmoil; US dollar and
Thai baht outlook
Peerapan Suwannarat [email protected] Warunthorn Puthong [email protected] San Attarangsan [email protected]
2
Fig 1: Currency Swap Basis Fig 2: dollar denominated debt (USD Billion)
-120
-100
-80
-60
-40
-20
0
20
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
JPY-USD Basis Swaps 1Y
EUR-USD Basis Swaps 1Y
GBP-USD Basis Swaps 1Y
Q3 2019
Amount
outstanding
(USD bn)
Borrowers outside the United States 12,075
Of which: EMEs 3,790
Africa and Middle East 952
Emerging Asia and Pacific 1,404
Emerging Europe 410
Latin America 1,024
By instrument
Bank loans 5,839
Debt securities issues 6,237
Of which: non-financial borrowers 3,184
Memo: Borrowers in the United States
Non-financial borrowers 53,172
Of which: government 21,923
Source: Bloomberg, KBank Source: BIS, KBank
The negative effect of dollar liquidity shortage in the global funding
market was significant, given the large scale of the US dollar
denominated debt. According to the Bank of International Settlement
(BIS), within the global debt outstanding outside the US at 82.7 trillion in
Q3 2019, the size of US dollar denominated debt was as large as USD
12 trillion or 15% of the total global debt outstanding, separating into debt
securities of USD 6.2 trillion and bank loans of USD 5.8 trillion.
The emergency measures, hence, become necessary in helping
contain the shortage of US dollar liquidity. The Federal Reserve and
other 5 major central banks (Japan, Europe, UK, Switzerland, and
Canada) agree to establish the standing US dollar liquidity swap line to
ensure the flows of dollars around the world. The measure has
effectively help lessened the financial market pressure. However, the
tightness in the US financial condition remains, reflected by widening
spread between the US Corporate bond and US Treasury yields, and the
spread between the interbank rate (Libor) and the Overnight Index Swap
(OIS) which typically indexed to Fed Funds rate widened as well. In
Asia, markets have also faced with the US dollar liquidity shortage.
The Bank of Korea has agreed with the Fed on the US dollar swap line
with the size of USD 60 billion, so as the Monetary Authority of
Singapore which also has the swap line agreement of USD 60 billion.
During the week of 28 March to 3 April, central banks across the world,
both in major economies and Emerging Markets have used the US dollar
swap totaled USD 1.53 trillion (Fig.3).
As for Indonesia, the central bank is looking to also have US dollar
liquidity swap line with the Fed after having heavily intervened in the
foreign exchange market to slow the falling value of the Indonesian
rupiah. The rupiah has reached record low, passing 17,000 on the dollar.
In Thailand, the Bank of Thailand has also intervened in the foreign
exchange market in an attempt to stabilize the market, causing the
foreign reserve to decline in recent weeks (Fig.4).
3
Fig 3: US dollar Swap Auction result (USD Billion)
Fig 4: Thailand International Reserve (weekly, USD Billion)
144.4
54.6
19.4
4.3
-
4.3
-
-
2.9
1.1
0.1
70.9
34.0
22.4
7.8
-
2.6
8.7
5.0
-
0.5
0.6
0 50 100 150 200
BOJ
ECB
BOE
SNB
BOC
MAS
BOK
Banxico
DNB
Norges Bank
RBA
US dollar Swap Auction result (USD Billion)
21-27 March 28 Mar -3 April
26-Oct-18236
27-Dec-19257
6-Mar-20268
27-Mar-20262
230
235
240
245
250
255
260
265
270
275
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20
Source: NewYork Fed, KBank Source: Bloomberg, KBank
2. Global economic recession triggering the flight to quality
In theory, a country whose economy encounters weak economic outlook,
its currency would depreciate, due to both (1) an unattractive investment
outlook from poor prospects for economic growth, triggering foreign
investment outflows. Also, (2) corresponding expansionary monetary and
fiscal policies would create more money in circulation, while demand
remains subdued, resulting in lower returns from investment in domestic
assets. The severe impact of the outbreak of the coronavirus in the
US on its economy allowed the Fed to take emergency Fed Funds
rate cuts to record low at 0.00-0.25% and the approval of the
government stimulus of USD 2 trillion in late-March had led the US
dollar to temporarily fall, before edging back up.
However, over the past 3 months, the US dollar kept trending upward
on the back of fear of global economic crisis. As the size of the US,
Europe, and China accounted for 50.4% of the global economy, the
pandemics centered within these economies have raised the fear that
global economy would fall into deep recession. Deep contraction in
global demand from the measure to curb the spread of the virus and
major layoffs, as well as the falling global oil price would have
detrimental effects on the Emerging Market Economies, those whose
economy relies on exports, and oil exporters. As a result, this triggered a
mass sell-off from these economies, causing their currencies to weaken
and raising the holding of the US dollar. The net dollar non-commercial
future position has remained on the net buy over the past weeks (Fig.5).
3. Important role of the US dollar in the global financial market will keep the
demand of the US dollar intact. Despite the large scale of liquidity injection into
the US financial market and the piling up of the US government debt, the US
dollar would remain the most important currency in global currency transaction.
This was due to the fact that (1) the role of the dollar as global reserve currency.
The central banks across the world have the lion‟s share of assets held in the US
4
dollar, accounting for 58% of overall reserve across the world. Also, (2) the US
dollar has possessed the largest share in global payment. Through the Swift
system, the payment using US dollar accounted for 47% of global payment,
compared to the euro, the second largest share, at only 20%. These factors
couple with the size of the US dollar denominated debt, the US dollar is likely to
remain strong, despite subdued economy.
Thai baht expected to keep depreciating during the wake of
economic recession
KBank Capital Markets business expects USD/THB to reach 33.00-33.50 by the end of the second quarter (Fig. 6). The major factors driving depreciation of Thai baht are the large portfolio outflows from risky asset, the strength of the US dollar on the global risk-off sentiment, and the expected sharp deterioration of Thai economy in 2020. We expect Thai economy to be hit by the prolonged coronavirus outbreaks and the measure to curb the spread, and the impact of major drought in Thailand. Also, the increased government spending is unlikely to offset slowing economic activity and its impact on the labor market, though it would help support business and workers
The key factors influencing Thai baht to watch going forward:
The additional BOT monetary policy measures: The BOT have cut policy rate down to 0.75%, released measures to inject massive liquidity into the financial market, as well as stepping up the measures to temporarily eased debt burden for personal loan, credit card loan, housing loans, and business loans. Regarding the escalating situation of the virus outbreak, we expect that the BOT would have to do more to counter the financial tightness in businesses and financial markets, especially the strain in fixed income market. The recent relaxation on the collection of the commercial bank payment to FIDF bailout funds from 0.46% to
Fig 5: Dollar net (non-commercial) future position and the US dollar.
75
80
85
90
95
100
105
-20000
0
20000
40000
60000
80000
100000
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Dollar net (non-Commercial) future position US dollar Index, right
Source: Bloomberg and KBank
5
0.23% for 2 years would allow more room for the BOT to further lower policy rate. Moreover, the Cabinet has recently approved laws to allow the central bank to provide soft loans and to purchase the corporate bonds in the secondary markets.
Impact of the coronavirus on corporate credit, given increased default risk as the Thai economy is faltering. Despite the BOT measure to correct the market functioning in the fixed income market and the consideration of the additional measure to purchase corporate bond, the yields spread between the corporate bond and government bond keep on widening. The market participants remained cautious about the risk that companies could default on their debt service, on the back of prolonged measure to curb the spread of coronavirus which will severely affect hotel, transportation industry, other travel related industry and the low quality debt.
Thai current account balance points to deteriorate in the month of April and May given the dividend payment and disappearing tourist visitors. Season for dividend payment of the listed companies in Q2 is another factor to weigh on Thai baht. The listed companies have announced the dividend payment during the month of April to June 2020. This year, the amount expected to be paid to the foreign holders is slightly higher than the previous year at THB 88,709 million (Fig. 7-8), most of which will be clustered in late-April and May. The payment would lead to temporary decline in current account balance and depreciation of Thai baht. Also, as we expect no foreign tourist visitors coming into Thailand in these months due to the government measures to delay any visits to Thailand from foreign countries.
Fig 6: USD/THB outlook
29.0
30.0
31.0
32.0
33.0
34.0
35.0
36.0
37.0
Jan-14 Jan-16 Jan-18 Jan-20
USD/THB
USD/THB USD/THB: Mid point forecast
Q4 202031.50-32.00
Q2 202033.00-33.50
CNY Devaluation 2015
USD/THB: 3.0% (6 months)
EM Debt Crisis 2018
USD/THB: 7. % (7 months)
Source: CEIC and KBank
6
Fig 7: Weekly dividend payment to foreign investors (THB million)
1,185 1,117 369 44
763
5,284
171
20,649 21,300
4,693
9,750
19,260
4,084
-
5,000
10,000
15,000
20,000
25,000
2-6 Mar 9-13 Mar 16-20 Mar23-27 Mar 30 Mar to3 Apr
6-10 Apr 13-17 Apr 20-24 Apr 27 Apr-4 May
6-10 May 13-17May
20-24May
27-31May
2020 est. weekly dividend payments to foreign investors, THB mn
Source: Bloomberg and KBank
Fig 8: Weekly dividend payment to foreign investors (THB million)
company amount, THB mn payment date company amount, THB mn payment date
1 ADVANCED INFO SERVICE PCL 7,682 22-Apr-20 26 BANGKOK BANK PUBLIC CO LTD 954 07-May-20
2 PTT PCL 6,459 30-Apr-20 27 OSOTSPA PCL 922 28-May-20
3 KASIKORNBANK PCL 4,689 30-Apr-20 28 HANA MICROELECTRONICS PCL 860 15-May-20
4 INDORAMA VENTURES PCL 4,210 20-May-20 29 SRISAWAD CORP PCL 766 22-May-20
5 CP ALL PCL 3,880 22-May-20 30 SIAM CITY CEMENT PUB CO LTD 755 03-Apr-20
6 SIAM COMMERCIAL BANK PUB CO 3,457 29-Apr-20 31 THAI UNION GROUP PCL 656 22-Apr-20
7 INTOUCH HOLDINGS PCL 3,406 23-Apr-20 32 HOME PRODUCT CENTER PCL 610 08-May-20
8 TOTAL ACCESS COMMUNICATION 3,152 24-Apr-20 33 MINOR INTERNATIONAL PCL 600 21-May-20
9 SIAM CEMENT PCL/THE 3,097 27-Apr-20 34 THANACHART CAPITAL PCL 582 15-May-20
10 DELTA ELECTRONICS THAI PCL 2,613 09-Apr-20 35 SUPALAI PUBLIC COMPANY LTD 565 18-May-20
11 PTT EXPLOR & PROD PUBLIC CO 2,545 10-Apr-20 36 THAI CENTRAL CHEMICAL PUB CO 540 23-Apr-20
12 TISCO FINANCIAL GROUP PCL 2,477 15-May-20 37 BERLI JUCKER PUBLIC CO LTD 493 22-May-20
13 ELECTRICITY GENERATING PCL 1,773 23-Apr-20 38 KIATNAKIN BANK PCL 492 21-May-20
14 CHAROEN POKPHAND FOODS PUB 1,575 19-May-20 39 THAI OIL PCL 483 21-Apr-20
15 BANK OF AYUDHYA PCL 1,563 21-May-20 40 MAJOR CINEPLEX GROUP PCL 462 07-May-20
16 BANGKOK DUSIT MED SERVICE 1,560 24-Apr-20 41 FRASERS PROPERTY THAILAND IN 454 11-Mar-20
17 CENTRAL PATTANA PUB CO LTD 1,453 15-May-20 42 BANPU PUBLIC CO LTD 423 30-Apr-20
18 TRUE CORP PCL 1,336 29-May-20 43 BUMRUNGRAD HOSPITAL PCL 417 08-May-20
19 JASMINE INTL PUBLIC CO LTD 1,328 12-May-20 44 BTS RAIL MASS TRANSIT G FUND 413 13-Mar-20
20 PTT GLOBAL CHEMICAL PCL 1,299 28-Apr-20 45 WHA CORP PCL 410 25-May-20
21 KRUNG THAI BANK PUB CO LTD 1,163 08-May-20 46 TIPCO ASPHALT PUB CO LTD 407 24-Apr-20
22 JASMINE BROADBAND INTERNET I 1,091 04-Mar-20 47 LH FINANCIAL GROUP PCL 401 20-May-20
23 GULF ENERGY DEVELOPMENT PCL 1,076 28-Apr-20 48 STAR PETROLEUM REFINING PCL 382 07-May-20
24 LAND & HOUSES PUB CO LTD 1,073 22-May-20 49 SPCG PCL 377 15-May-20
25 VINYTHAI PUBLIC CO LIMITED 969 22-May-20 50 OTHERS 10,354
EST. TOTAL 88,709
Source: Bloomberg and KBank
7
The Thai bond market faced with a lack of liquidity amid market
fears of upcoming global recession
Markets are concerned about the risk of corporate bond default
given rising of a cost of funding, larger size of corporate bond
outstanding and retail investors as the major bond holders
BOT measures released in March could only relieve the issue in a
short period of time given a small size of BSF, limitation of bond
coverage to an investment grade, and a lack of market demand
Measure released on April 7 indicated that the BOT aims to
directly support corporate and households by (1) providing
domestic financing through BOT’s soft loans, (2) cutting the FIDF
fee for the depository institutions by a half, and (3) supporting
liquidity in the market
Persistent volatility and a lacks of liquidity in the
debt markets
The Thai bond market is highly volatile in March 2020 as investors continued to sell
off the Thai bonds. Specifically, the foreign investors recorded net sells of THB 92 billion
in a month, the highest level since beginning a record since 2009. This reduced the
foreign government bond holding to 15% from a peak of 18.9%. Also, asset management
companies bought only THB 75 billion, much less than an average purchase of THB 300
billion per month since 2009. (Fig. 1)
Fig 1. Net trading value of asset management companies and foreign investors
-20
80
180
280
380
480
580
680
09 10 11 12 13 14 15 16 17 18 19 20
THB bn Net trading value of Asset management
Asset Mgnt. Companies
-150
-100
-50
0
50
100
150
200
09 10 11 12 13 14 15 16 17 18 19 20
THB bn Net trading value of foreign companies
Foreign Companies
-20
80
180
280
380
480
580
680
09 10 11 12 13 14 15 16 17 18 19 20
THB bn Net trading value of Asset management
Asset Mgnt. Companies
-150
-100
-50
0
50
100
150
200
09 10 11 12 13 14 15 16 17 18 19 20
THB bn Net trading value of foreign companies
Foreign Companies
Source: CEIC and KBank
Retail investors sold the Thai money mutual funds since mid-March. As a result, the
funds needed to liquidate their bonds, cutting more than 13% of their assets within a half
month (Fig 2). Bond price declined and the yields rose. Eventually, there were 4 money
mutual funds that were closed as of late.
In a primary market, there were 2 auctions of Bank of Thailand (BOT) bonds that
cannot be issued at their target size, namely 3-month and 3-year BOT bonds. The
Fixed Income Monitor: facing a dearth of liquidity while
BOT measures offers only a pain relief
Kobsidthi Silpachai, CFA [email protected] Peerapan Suwannarat [email protected] Warunthorn Puthong [email protected] San Attarangsan [email protected]
8
actual issuance values are THB 14.5 and 9.9 billion, respectively, compared to a target
size of THB 45 billion each. Usually, the BOT bonds can be issued at a full size. This
indicated demand shortage in the market.
However, a sell-off in the Thai bond market seems to be relieved after the BOT
launched the measure to add the liquidity in the market since March 22 onward.
Fear of upcoming recession is a source of problem
Markets are worried that the public health crisis will eventually result to a global
economic recession. The coronavirus outbreak is widely spread and the world has yet
applied the vaccine to prevent the infections. The International Monetary Fund (IMF) also
confirmed that the world would enter a recession in this year at a more severe level than
the Subprime crisis during 2008-2009.
The deteriorating situation prompted investors to seeking safe-haven assets
especially the US dollar. All riskier assets were sold off. The US Treasuries, which are
among the safest financial assets, also faced this sell-off situation. That‟s why the
sovereign bond yields jumped globally with a high level of volatility in March (Fig 3).
Plenty of liquidity created by the major central banks since the latest crisis in 2008-
2009 is another condition of prevailing high global market volatility. The combined
asset size of the Federal Reserve, the European Central Bank, and the Bank of Japan
rose more than 3.5 times since the crisis to USD 14.7 trillion currently. The size is
expected to increase further to more than USD 17 trillion by the end of the year. Besides,
the foreign investors accumulated the Thai government bonds to a peak of 18.9% from
2% prior to the crisis. Once, markets are fears of recession. There are huge potential
capitals to flow out of the Thai bonds.
Corporate bonds at risk of default
Corporate are at risk of bond default as their revenue and free cash flows are impacted
by the spread of the Covid-19 outbreak and an existing tariff between the US and China.
The situation in the corporate bond market also added more risks as follows:
1. Cost of funding rose since mid-March (Fig 4) as investors cut their positions
from the riskier assets. The spread between the corporate bond yields and Thai
government bond yields thus widened.
2. During the past 5 years, Thai corporate have shifted their funding channel
to bond issuance. The outstanding value of the corporate bonds increased from
THB 2.1 trillion to THB 3.4 trillion nowadays (+62%) (Fig 5a) as cost of bond
issuance was much lower than borrowing from banks. Meanwhile, the size of
non-rated bonds widens for more than double to 14% of the total outstanding
value.
3. Corporates might fail to fully roll over their bonds due to demand shortage.
One reason is individual investors are major bond holders. However, recently,
they sold off their money mutual funds from their portfolio, causing the funds to
also liquidate the assets. This indicated that major source of funding disappeared
and has a consequence effect to other bond holders. Note that the combination
bond holding value by individual investors and money mutual funds accounted
9
for 39% of corporate bond outstanding values. Amid demand shock, corporate
might fail to fully roll over their expired bonds.
On the other hand, corporate bond defaults would potentially impact the bond
markets, particularly bond holders as individuals, insurance, pension funds,
mutual funds, and money mutual funds are the major bond holders.
Fig 4. Thai corporate bond spread by credit rating with maturity of 3-5 years
180
200
220
240
260
280
300
40
50
60
70
80
90
100
110
120
Average corporate bond spread, bps
AAA: 3 to 5 Y AA: 3 to 5 Y
A: 3 to 5 Y BBB: 3 to 5 Y, RBS
Source: CEIC and KBank
Fig 5 The outstanding value of Thai corporate bonds
(a) By credit rating
1655, 79%
201, 10%
223, 11%
Dec 2015, THB bn
A group B group Non-rated
Total outstanding = THB 2,079 bn
2541, 74%
415, 12%
482, 14%
Mar 2020, THB bn
A group B group Non-rated
Total outstanding = THB 3,438 bn
(b) by holders
Individual, 29
Insurances, 17
GPF, Provident fund, 13
Mutual fund excl MMF, 12
Coop, MMF, other deposit,
10
Corporate, 8
Financial institutions, 6
Govt, BOT, SSO, 4
Non-profit, 1 Non-resident, 0
in 2018
Source: ThaiBMA, KBank
10
BOT’s measures to relieve lack of liquidity
In March, the BOT released the measures in an effort to providing liquidity in the bond
market, which can be divided into 3 types.
1. Government and BOT bonds: The BOT bought the government bonds for more
than THB 100 billion during March 16-19 and reduced the auction sizes of the
BOT bonds. As for the BOT bond with the maturity of 3 month and 6 months, the
auction sizes in April are cut from THB 45 billion to THB 30 billion per week. The
auction sizes of the bonds with maturity of 14 days and 1 years fall from THB 50
billion to THB 20 billion each. And, since April 2, all the auction of 14 days bonds
are all cancelled.
2. Money mutual funds: The BOT will provide funding via repurchase agreement to
the financial institutions that buy or help the money mutual funds with having the
credit rating BBB- and above. Financial institutions could bring those mutual
funds, T-bills, government bonds, and investment-grade corporate bonds as
collaterals. The cost of funding will be as low as policy rate minus 50bps.
3. Commercial papers and corporate bonds: The BOT established the Corporate
Bond Liquidity Stabilization Fund (BSF) with a budget of THB 70-100 billion to
help corporate bonds rollover at full amount. However, the amount of purchase is
capped at 50% of each bond.
BOT’s attempts partly relieve the problems
We expected that these measures only partly increase the liquidity into the market.
The sell-off by the foreign investors reduced from THB 15 billion per day during March
12-13 to THB 6 billion per day a week later and eventually THB 1-3 billion per day by the
end of the month.
The BSF could partly help bond rollover due to the following reasons.
1. The budget is lower than the amount of potential needs: The amount of corporate
bonds that will mature in Q2 accounted for THB 280 billion, almost triple of the
BSF budget. However, on April 7, the cabinet approved a royal decree to give
permission to the BOT to be able to make a purchase of corporate bonds with a
budget of THB 400 billion. (more detail in the next section)
2. Still, the BSF coverage is only 50% of total outstanding corporate bonds, leaving
the other 50% at risk. Given low liquidity in the markets, there is a probability that
corporates could not find enough demand to fully rollover their bonds. Especially,
the major bond buyers are individuals.
3. The scope of the fund excludes the below BBB- bonds and non-rated bond.
BOT measure on April 7
The cabinet approved the fiscal and monetary measures worth THB 1.9 trillion (12% of
GDP). THB 900 billion of which is for the monetary measures, which include as follow.
1. Royal decree to allow the BOT to provide soft loans to SMEs at 2% interest rate
with the budget of THB 500 billion and postponed the principal and interest
repayment for 6 months.
11
2. Royal decree to allow the BOT to buy corporate bonds via BSF and increase the
BSF size to THB 400 billion.
3. Extend the period of deposit protections of THB 5 million for 1 more year
4. Cut the FIDF fee by half to 23bps for 2 years.
We viewed that these measures indicate the BOT‟s effort to directly support corporate
and households by (1) provide channels for domestic financing through BOT‟s soft loans,
(2) reducing the depository institutions from cutting the FIDF fee by a half, and (3)
boosting more demand in the market.
1. Increasing chance of borrowing through BOT‟s soft loans. The BOT had
implemented the program for 6 times. The latest program is in 2012 after
Thailand faced severe floods. And an actual loan provision is at 70-95% of the
budget.
2. Reducing the depository institutions from cutting the FIDF fee by a half. This also
increases a probability that the BOT to deliver another rate cut this year. We
expected that the BOT will cut its policy rate by 25 bps to 0.50% in May.
3. Boosting more demand in the market as the BOT will become another bond
buyer in the market. However, the fund still does not support risky and junk
bonds.
12
Economic Update
February indicators suggested that the impact of the COVID-19
outbreak on Thai economy was brutal
Thai economy will likely enter into recession in 2020, with GDP
growth rate could fall close to the Bank of Thailand’s latest forecast
of -5.3%
The outbreak could cause a global recession in 2020 despite massive
emergency stimulus measures
Units: %YoY, or indicated otherwise 2018 2019 4Q-19 1Q-20 Dec-19 Jan-20 Feb-0 Mar-20 YTD- 2020
Private Consumption Index (PCI) 4.6 2.4 1.8 1.0 2.5 3.4 3.0
· Non-durables Index 1.5 2.2 0.9 -2.1 1.0 2.4 1.7
· Durables Index 8.1 -2.0 -8.8 -12.0 -3.1 -8.7 -5.9
· Service Index 5.3 2.8 3.0 2.5 2.4 -12.2 -4.6
· Passenger Car Sales 19.1 -2.5 -15.9 -20.2 -4.8 -20.8 -12.9
· Motorcycle Sales -3.1 -3.3 -7.8 -20.7 -2.0 -4.5 -3.2
Private Investment Index (PII) 3.5 -2.7 -5.2 -3.6 -6.2 -10.1 -8.1
· Construction Material Sales Index 4.4 -0.7 -1.9 1.7 -3.2 -0.4 -1.8
· Domestic Machinery Sales at constant prices 6.1 -5.5 -8.9 -7.2 0.5 -2.1 -0.8
· Imports of Capital Goods at constant prices 3.6 -1.0 -3.0 3.7 -2.8 -15.3 -8.4
· Newly Registered Motor Vehicles for Investment
5.7 -3.0 -15.4 -26.4 -17.6 -8.4 -13.5
Manufacturing Production Index 3.7 -3.6 -6.8 -4.4 -4.0 -5.2 -4.6
· Capacity Utilization 69.2 66.0 63.3 64.9 65.2 63.8 64.5
Agriculture Production Index 8.5 0.4 -3.7 -4.4 -3.9 -4.5 -4.2
· Agriculture Price Index -5.4 1.9 3.5 5.5 9.2 8.7 8.9
No. of Tourists 7.3 4.2 6.4 2.5 2.5 -42.8 -19.8
Exports (Custom basis) 6.9 -2.7 -4.5 -1.3 3.3 -4.5 -0.8
Price 3.4 0.3 0.4 1.1 0.7 -0.2 0.2
Volume 3.9 -3.5 -5.3 -2.8 2.8 3.8 3.3
Imports (Custom basis) 12.0 -4.7 -6.8 2.5 -7.9 -4.3 -6.3
Price 5.6 0.2 0.8 2.5 2.1 -0.6 0.7
Volume 7.7 -5.6 -8.3 -0.7 -2.1 -7.2 -4.4
Trade Balance ($ millions) (Custom basis) 4.76 9.60 1.65 0.60 -1.56 3.90 2.34
Current Account ($ millions) 28.46 37.91 10.35 4.21 3.44 5.38 8.83
Broad Money 5.1 4.1 4.1 3.6 3.7 3.2 3.5
Headline CPI 1.06 0.71 0.39 0.41 0.87 1.05 0.74 -0.54 0.41
USD/THB (Reference Rate) 32.3 31.0 30.3 31.3 30.2 30.4 31.3 32.1 31.3
Sources: BOT, MOC, OAE, and OIE
Macro Department, KResearch [email protected]
13
Thailand Economic Update
The Thai economy in February 2020 was hit hard by the COVID-19 outbreak. Weakened sentiment triggered by the outbreak severely dampened private investment and consumer spending on services and durable goods while panic buying led to a surge in purchases of necessary consumer goods. On the external front, exports dropped to some extent given declining oil prices and sluggish global demand. However, gold exports continued to skyrocket as investors seek for safe haven. Looking forward, Thai economy may enter into recession in 2020, as the outbreak is expected to prolong and cause immeasurable damage to the economy.
Fig 1. Key economic indicators
2.5
-6.2
-4.0
3.4
-10.1
-5.2
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Private Consumption
Private Investment Manufacturing Production
% YoY
Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20
2.5
-3.9
-42.8
-4.5
-50.0-45.0-40.0-35.0-30.0-25.0-20.0-15.0-10.0
-5.00.05.0
10.015.020.0
No. of Tourists Agricultural Production
% YoY
Sep-19 Oct-19 Nov-19
Dec-19 Jan-20 Feb-20
Source: BOT, OAE, KResearch
The Private Consumption Index (PCI) expanded at a faster pace of 3.4% YoY in February 2020, given a spike in purchases of necessary consumer goods as a result of concerns over the COVID-19 outbreak. Nevertheless, the spending on other categories contracted considerably, especially services expenditure on hotels and restaurants as well as transportation, partly because people avoided going outside. In addition, spending on durable goods further contracted in consistent with weakening consumer confidence and household income.
The Private Investment Index (PII) contracted deeply at 10.1% YoY in February 2020. Imports of capital goods, especially from China, declined significantly as the COVID-19 outbreak forced Chinese factory to shut down. At the same time, other private investment indicators also declined due to softening domestic and external demand as well as deteriorated investor sentiment amid the COVID-19 outbreak.
The number of foreign tourist arrivals to Thailand plunged 42.8% YoY in February 2020 due to the coronavirus outbreak. In particular, visitors from China, Thailand‟s largest source of tourists, tumbled 84.9% YoY due to China‟s outbound travel ban. Meanwhile, the number of tourists from other countries also cooled down as coronavirus fears led to a dramatic drop in travel demand. Government spending contracted 6.9% YoY in February 2020. Disbursement of investment budget continued to drop sharply at 77.8% YoY, mainly due to the delayed enactment of the FY2020 budget. Meanwhile, disbursement of regular budget slightly increased. On the external front, merchandise exports declined 4.5% YoY in February 2020 amid mixed effects from various factors. The precipitous crash in oil prices as well as high base effect from a one-time shipment of arms and military drills in February 2019 were the major dragging factors of Thai exports in February 2020 while a huge surge in gold demand continued to foster Thai exports. Meanwhile, the impact of the coronavirus outbreak on Thai exports in February 2020 remained subtle, as the outbreak was mainly concentrated in China and China was the only country that imposed lock
14
down measure during that time. However, as worldwide spread of the virus accelerates, the global economy could experience a synchronized slowdown as well as supply chain disruptions, given production stoppages around the globe. Hence, Thai export prospects will look gloomier in the near future. Headline inflation fell to negative territory the first time since 2016 in March 2020, with the inflation standing at -0.54% YoY. Headline inflation in March 2020 declined remarkably due to the slump in oil prices. At the same time, core CPI rose at a slower pace of 0.54% YoY, compared to 0.58% YoY in the previous month, as the coronavirus outbreak as well as lockdown measure hit demand of some products. Meanwhile, the prices of some agricultural products such as rice, chickens and eggs increased as a result of panic buying.
Thai economic growth may fall close to the Bank of Thailand’s latest
forecast of -5.3% as the COVID-19 outbreak exacerbates.
The coronavirus outbreak in Thailand will likely intensify and prolong, as the number of COVID-19 infected cases in Thailand has soared dramatically, similar to those of the European countries that were unable to control the disease. In the case that the outbreak persists for several months, consumption and investment in Thailand could deteriorate drastically. Moreover, protracted outbreak could leave Thailand‟s tourism sector virtually comatose and the number of tourist arrivals may not recover until the end of this year. Given perennial weak domestic spending and heavy dependence on tourism, the Thai economy is heading for a deep slump this year. Furthermore, impending global economic slowdown is set to have pronounced impact on Thai exports and tourism sector. Besides that, Thai exports will be further hammered by a fall in oil and other commodity prices. Therefore, risks to the Thai economy are now increasingly tilted to the downside. Nonetheless, the Thai government has taken a series of stimulus measures, which include cash handouts, soft loans, emergency loans, and tax break, in a bid to mitigate the impact of the coronavirus outbreak. At the same time, the Bank of Thailand has eased monetary policy and increasingly injected liquidity into the market in order to help businesses stay afloat. Supportive fiscal measures and looser monetary conditions may boost domestic activities to some extent. However, as the economic damage of the coronavirus outbreak is expected to be tremendous, the Thai economy may enter into recession in 2020 and GDP growth could plummet close to the Bank of Thailand‟s latest forecast of -5.3%, which is the steepest downturn since the 1998 Tom Yum Kung financial crisis. Nonetheless, the severity of economic downturn will mainly depend on the outbreak situation that is still subject to high uncertainty
Global Economic Update
The odds of global recession rise as the coronavirus outbreak lingers.
The coronavirus outbreak continues to spiral out of control as infected cases globally keep proliferating. As a result, many countries such as China, New Zealand, Italy, France, the U.S. and India have imposed rigid lockdown measures aimed at slowing the transmission of the virus. Due to the lockdown, normal economic activity has been disrupted. Consumption, particularly for discretionary spending such as at restaurants and clothing stores, has been severely dampened. Tourism has been knocked comatose by travel bans and anxiety around the coronavirus outbreak. Besides that, global trade has been upended amid sluggish global demand and supply chain disruptions.
15
The impact of the outbreak has been felt across the globe. Early economic data for March 2020 started to paint the bleak picture of the global economy amidst the COVID-19 pandemic. According to the preliminary estimates, the 1Q2020 GDP growth of Singapore registered the worst year-on-year decline since the 2009 financial crisis with the economy contracting by 2.2% YoY and 10.6% QoQ. As the first Asian country to publish quarterly GDP data, Singapore presages the pain the rest of the region can expect from the COVID-19 outbreak. Meanwhile, the U.S. and Europe saw record declines in business activities in March, as the coronavirus outbreak weighed on economic growth and oppressed business operations to halt. The IHS Markit‟s preliminary Composite PMI for the U.S. in March 2020 fell to 40.5, the lowest reading since 2009 while the Composite PMI for the Eurozone declined to a historical low of 31.4 in March 2020. Similarly, the au Jibun Bank Flash Japan PMI in March 2020 dropped remarkably to 35.8, the lowest level since the Tsunami in 2011. In the case of China, with significant reduction in new infections, the economy in March rebounded from the slump seen in February. China‟s manufacturing purchasing managers index bounced to 52.0 in March 2020, up from 35.7 in the previous month. Nevertheless, the economic recovery is not expected to be a „V‟ shape as global economic fallout will continue to derail the Chinese economy. The China‟s GDP growth in 2020 could possibly sink into a new low of around 2.5%. Given unprecedented damage to the global economy, the spread of coronavirus has sent global economy into a tailspin and may trigger global recession in 2020, which could even be worse than the 2009 global financial crisis, as emerging markets like China and India are seriously affected by the current outbreak, unlike during the 2009 financial crisis that these countries were still growing at a rapid rate. Meanwhile, the U.S., Europe and Japan could all experience recession in 2020, given devastating impact of the outbreak. Nonetheless, the length and the depth of the global contraction depend mostly on the outbreak situation. If the outbreak can be contained in the near future, the global recession may probably be „sharp but short‟ recession. However, the outlook could darken even further if the virus lasts longer than anticipated.
Governments around the world are imposing massive stimulus
packages in order to curb economic fallout due to the outbreak.
Governments around the world are employing a wide range of policy tools, which include interest rate cuts, liquidity injections, targeted relief packages, and tax postponements, in order to support their economies as the coronavirus outbreak hits both demand and supply. The Federal Reserve has cut the benchmark rate to near zero and massively injected liquidity into the banking system. In addition, the U.S. Congress has passed a historic USD 2 tn stimulus bills to shore up a reeling U.S. economy. The relief packages include USD 250 bn set aside for direct payments to individuals and families, USD 350 bn in small business loans, USD 200 bn in unemployment insurance benefits and USD 500 bn in loans for distressed companies. Similarly, the European Central Bank, the Bank of England, and the Bank of Japan, among others, have also pumped additional liquidity into their financial systems through repo operations and asset purchases to avoid liquidity problem. At the same time, the governments of the U.K., Canada, and Singapore, among others, have enacted record high stimulus packages to provide relief for ailing sectors. All of these measures are expected to mitigate the damage of the coronavirus outbreak to some extent. Even though the effectiveness of these measures remains ambiguous, at least these stimuli would rather prevent a credit crunch that could make recession worse.
16
The market outlook remains highly “path-dependent” on the
development of the COVID-19 outbreak. We believe that the
decisive measures announced to control the epidemic, though
economically very painful in the short term, should result in a
better-off outcome in the long term. We lower our 12-month forward
SET Index target to 1,370, which is in line with our Scenario #2
(successful development of effective antiviral drugs) and we expect
the SET Index to recover to 1,230 (Scenario #3) once the spread is
brought under control by full-scale lockdowns in the US and EU. We
see the current SET Index level having limited downside as it
already reflects the rising outbreaks in the EU and US and the
economic impacts from full-scale lockdowns in key economies, i.e.
Scenario #4.
COVID-19: Stress test
As the COVID-19 crisis represents a shock to global demand, we see it necessary
to perform a stress test. Compared with our base-case GDP growth of 0.4% for 2020E,
we ran three stress tests assuming 2020 GDP growth of -2%, -5.8% and -10%. Based on
this analysis we sorted stocks into three groups depending on the severity of the impact.
The results of the analysis are as follows:
Minimally impacted sectors include: ICT, with 2020 earnings to drop by 8%/10%/13%
from the base case. ADVANC is the least affected thanks to its solid financial position.
Rubber gloves. STA‟s earnings drop by only 1%/3%/5% from our base case on weak
natural rubber demand mostly offset by strong rubber glove demand. Utilities sector.
The conventional power sector‟s 2020 earnings fall by 7%/15%/23% while for the
renewables segment the declines are much more moderate at 0%/1%/2% due to their
committed power purchase agreements with EGAT and PEA. We see minimal
deterioration in D/E. Commerce sector. Aggregate earnings of the six retailers under our
coverage drop by 5%/8%/13 amid lower consumption. Most of the companies show
sound financials in our tests.
Moderately impacted sectors include: Asset management companies, whose 2020
earnings drop by 2%/8%/12% from our base case. While benefiting from rising NPLs, a
key concern is the impact from ongoing credit market disruption. Soft commodities, for
which we expect aggregate earnings (CPF, GFPT, and TU) will drop by 6%/16%/19% on
weaker global consumption partly offset by a weak Thai baht. Civil contractor sector,
where 2020 earnings drop by 8%/14%/21% with the piling sector to be affected more.
Ground transport, for which we expect aggregate earnings drop by 12%/17%/21% on
lower ridership. F&B, whose 2020 earnings drop by 10%/22%/37%. We see no credit
issues for stocks in this group.
Heavily impacted sectors include: Electronics, whose 2020 earnings drop by
6%/31%/63% on weaker global demand; Energy and Petrochemicals, where earnings
drop by 7%/18%/35% on lower oil prices, GRM and petrochemical spreads; Non-banks,
Equity market monitor: COVID-19: Stress test
Equity Research Team
17
whose 2020 earnings drop by 20%/39%/73% but D/E would remain below debt
covenants; Healthcare sector, where earnings drop by 0%/24%/45% on lower cash
patients; Infrastructure funds/Office REITs, where earnings drop by 19%/33%/35%.
The impact will be greatest on the IFF/office REIT segment but we see no particularly
deterioration in financial positions; Residential property, for which we expect 2020
earnings drop by 13%/23%/42% although net IBDE ratios would remain manageable; and
Commercial property (CPN) where earnings drop by 20%/28%/36%. Despite being one
of the hardest hit, CPN‟s financials remain sound.
The most affected sectors include: Banks, whose earnings drop by 49%/134%/243%
due to our very stringent increases in NPL ratio (from 5ppt to 15ppt) and a sharp drop in
loan growth (from -2ppt to -15ppt). That said, the CET1 ratios of all banks remain
comfortable. Aviation & Tourism sectors where 2020 earnings drop by
26%/142%/234% due to the collapse in tourist arrivals. We are most concerned about
THAI‟s financial position but believe that AAV, BA and all hotels under our coverage will
survive and to be able to meet their financial obligations in 2020.
12-mth forward SET Index target of 1,370
We lower our 12-month forward SET Index target to 1,370 (from 1,450 previously), this
time, to reflect credit market disruptions caused by rising concern over credit quality and
the subsequent escalation of liquidity hoarding in the global and Thai money markets.
This has resulted in a spike in both government bond yields and credit spreads.
Nevertheless the key central banks, along with the Bank of Thailand, have implemented
major liquidity backstop measures that so far have been able to tame the disruptions.
We still see the market outlook remaining highly “path-dependent” on how the COVID-19
epidemic develops. We believe that the decisive measures, i.e. full-scale lockdown, to
control the epidemic, though very economically painful in the short term, should result in a
better off outcome in the long term. Indecisive measures or, in the worst case, allowing
the spread to run its course, in our opinion, will result in much larger economic damage
and a higher number of deaths.
Our SET Index target of 1,370 is in line with our Scenario #2 for the COVID-19 outbreak,
which sees the successful development of effective antiviral drugs, which by itself is a
bullish investment case. We also expect the SET Index to recover to 1,230 (Scenario #3)
once the spread is brought under control by the full-scale lockdowns in the US and EU,
measures which are unavoidable in our opinion. We see the current SET Index level of
1024 (as of Mar. 23) to have limited downside as it already reflects the outbreaks in the
EU and US as well as the economic impacts from the upcoming full-scale lockdown, i.e.
Scenario #4.
As the COVID-19 crisis, in our opinion, is a shock to global demand, we see it being
necessary to perform a stress test, a standard treatment to a fat-tail risk event like
COVID-19. Compared with our base-case GDP growth of 0.4% for 2020E, we ran three
stress tests that assume 2020 GDP growth of -2%, -5.8% and -10%. The higher impact
on 2020 GDP in our stress test reflects a longer impact from the COVID-19 outbreak on
the Thai economy.
► Minimally impacted sectors:
ICT sector. 2020 earnings drop by 8%/10%/13% from our base case with
ADVANC‟s earnings the least affected at -9.8 to -16.6% YoY among three
telcos. Financial positions remain solid. While TRUE‟s earnings and financials
18
are affected the most, we see no major credit event due to its position within
the CP Group.
Rubber glove sector (STA). STA‟s earnings drop by only 1%/3%/5% from
our base case due to weak natural rubber demand, but this will be mostly
offset by the strong current demand for rubber gloves.
Utilities sector. The conventional power sector‟s earnings drop by
7%/15%/23% while for the renewables segment the declines are much less
severe at 0%/1%/2% due to committed power purchase agreements with
EGAT and PEA.
Commerce sector. The aggregate earnings of the six retailers under our
coverage drop by 5%/8%/13 on lower consumption. We see no major credit
issues for the companies in this sector.
► Moderately impacted sectors:
Asset management companies (AMCs). 2020 earnings drop by 2%/8%/12%
from our base case. Despite benefiting from rising NPLs, we put AMCs in the
moderately impacted category due to ongoing concerns about debt
refinancing.
Soft commodities. Aggregate earnings (CPF, GFPT, and TU) drop by
6%/16%/19% from our base case in 2020 due to weaker global consumption,
partly offset by a weak Thai baht. We see no concerns on overall financial
status.
Civil contractor sector. Aggregate earnings drop by 8%/14%/21% from our
base case in 2020 with companies in the piling sector affected more due to
their higher contributions from the private sector.
Ground transport. Aggregate earnings drop by 12%/17%/21% from our base
case on lower ridership. We see no credit issues in this sector.
F&B. Aggregate 2020 earnings drop by 10%/22%/37% from our base case in
2020 but we see no credit issues for the sector due to low D/E ratios.
► Heavily impacted sectors.
Electronics sector. Aggregate earnings drop by 6%/31%/63% from our base
case in 2020 due to the weaker global demand, partly offset by weak Thai
baht.
Energy and Petrochemical sectors. Aggregate earnings drop by
7%/18%/35% from our base case on lower oil prices, GRM and petrochemical
spreads. Most companies‟ financial positions remain sound with low D/Es.
Non-banks. Aggregate earnings drop by 20%/39%/73% from our base case
in 2020 with lower coverage ratios from 139% to 95%, 76%, and 68%
respectively. All companies‟ D/Es will remain lower than their debt covenants.
Healthcare sector (Hospitals). Aggregate earnings drop by 0%/24%/45%
from our base case in 2020 due to lower cash patient volumes but we see no
credit issue for the sector due to low D/E ratios.
Infrastructure funds/Office REITs. Aggregate earnings drop by
19%/33%/35% from our base case in 2020 with the highest impact on the
IFF/office REIT segment. That said, we see no particular deterioration in
financial positions, except for potentially lower DPU.
19
Residential sector. Aggregate earnings drop by 13%/23%/42% from our
base case in 2020 but net IBDE ratios for most companies remains at
manageable levels. SIRI and ORI run a higher risk due to the higher
investment exposure (SIRI) and low equity base (ORI).
Industrial Estate sector. Aggregate earnings drop by 14%/29%/53% from
our base case in 2020 but overall financial positions remain sound.
Commercial property (CPN). Aggregate earnings drop by 20%/28%/36%
from our base case. While the sector should be one of the hardest hit from
COVID-19, CPN runs a very strong B/S and thus its financial position remains
sound in all tests.
► Most-affected sectors.
Banks. Aggregate earnings drop by 49%/134%/243% from our base case in
2020 as we assume a very stringent increase in NPL ratio (from 5ppt to 15ppt)
and a sharp drop in loan growth (from -2ppt to -15ppt). That said, the CET1
ratios of all banks remain comfortable and higher than BOT requirements.
Aviation & Tourism sectors. Sector 2020 earnings drop by 26%/142%/234%
from our base case due to the collapse in tourist arrivals under the stress
scenario. We are most concerned about THAI‟s financial position due to its
potentially negative equity. Despite the potentially severe pressure, we think
AAV, BA and all hotels under our coverage will survive and be able to meet
their financial obligations in 2020.
For this update we present four investment themes as follows:
► Key beneficiaries of the COVID-19 outbreak (STA and ADVANC). A surge in
demand for gloves amid fears over COVID-19 should benefit STA. The ICT sector
should be less vulnerable to the COVID-19 outbreak and data consumption may
increase during the outbreak as people cut back on out-of-home activities.
► Key beneficiaries from household staples hoarding (CPALL, BJC, and
RBF). Consumer staples should benefit as people stock up on staples to prepare for
lengthy home quarantines. We see stronger demand for RBF‟s sweeteners and other
ingredients. We expect RBF should survive in the current economic downturn as food
remains a basic need.
► Key beneficiary of China’s restocking after COVID-19 is contained (SCC).
We expect production and consumption will return to normal in China after the
epidemic is contained, and this will lead to demand for restocking, especially of
petrochemical products.
► Key beneficiary of rising NPLs in Thailand (BAM) as the company should
benefit from rising NPLs that will become available for its debt-acquisition businesses.
BAM has long-term experience in managing NPLs since the 1997 financial crisis in
Thailand.
20
Fig 1 SET Index and major sectors: Bloomberg consensus forecasts & valuations
Index ROE (%) Div yld (%)
(20 Mar) % YTD 2020E 2021E 2021E 2020E 2021E 2021E 2020E 2021E 2021E 2020E 2021E 2021E 2020E 2020E
SET 1,127 -28.6 88.0 99.1 106.3 12.8 11.4 10.6 2.3 12.5 7.3 -12.9 -9.6 -4.5 8.4 4.1
Energy 17,067 -31.9 1,394.1 1,606.5 1,793.7 12.2 10.6 9.5 0.1 15.2 11.7 -22.4 -14.2 -11.3 8.7 4.1
Petrochem 534 -44.5 66.9 83.1 78.4 8.0 6.4 6.8 63.6 24.2 -5.6 -23.5 -16.0 -4.9 6.7 5.7
Banks 263 -39.8 46.4 49.7 53.7 5.7 5.3 4.9 -1.1 7.0 8.0 -10.7 -9.5 -1.2 8.0 7.1
Telcos 135 -16.3 8.5 8.6 9.0 15.9 15.7 15.0 -20.9 1.5 4.3 -9.4 -11.4 -0.6 5.0 6.0
Commerce 29,400 -24.9 1,433.0 1,602.5 1,739.7 20.5 18.3 16.9 -2.1 11.8 8.6 -10.1 -10.8 0.9 19.5 2.6
Property 162 -35.4 17.0 17.6 18.3 9.6 9.2 8.9 1.2 3.5 3.9 -6.8 -6.3 0.4 7.4 4.6
ConMat 7,717 -21.9 625.3 698.0 690.6 12.3 11.1 11.2 5.2 11.6 -1.1 -8.1 -7.3 -3.1 6.1 4.4
Transport 291 -28.6 7.7 12.1 13.9 37.6 24.1 21.0 -7.0 55.7 15.1 -27.0 -22.6 -9.6 10.1 2.4
Food 9,655 -21.6 646.7 728.4 785.5 14.9 13.3 12.3 -1.8 12.6 7.8 -2.8 0.8 4.6 9.8 3.5
Healthcare 4,463 -20.3 152.3 169.8 181.8 29.3 26.3 24.5 -23.0 11.5 7.1 -9.3 -6.8 -1.9 12.2 2.0
Hotel 311 -34.5 17.8 25.8 25.7 17.4 12.0 12.1 41.3 44.6 -0.5 -31.0 -0.2 0.0 3.4 #N/A
EPS PER (x) EPS growth (%) YTD EPS revision (%)
Source: Bloomberg, KS Research
Fig. 2 SET Index 12-month forward consensus PER
Fig. 3 SET Index 12-month forward consensus PBV
-2SD = 10.17
-1SD = 11.81
MEAN = 13.45
+1SD = 15.09
+2SD = 16.73
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
Dec-
09
Aug-1
0
Apr-
11
Dec-
11
Aug-1
2
Apr-
13
Dec-
13
Aug-1
4
Apr-
15
Dec-
15
Aug-1
6
Apr-
17
Dec-
17
Aug-1
8
Apr-
19
Dec-
19
(x)
-2SD = 1.47
-1SD = 1.66
MEAN = 1.85
+1SD = 2.05
+2SD = 2.24
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
Dec-
09
Sep-1
0
Jun-1
1
Mar-
12
Dec-
12
Sep-1
3
Jun-1
4
Mar-
15
Dec-
15
Sep-1
6
Jun-1
7
Mar-
18
Dec-
18
Sep-1
9
(x)
Source: Bloomberg, KS Research Source: Bloomberg, KS Research
Key risks to our positive call
The key risks to our call in 2020 are 1) that the COVID-19 global infection rate escalates
and requires a full-scale quarantine/lockdown, which will have a large economic impact;
and 2) a major and “standalone” COVID-19 outbreak in Thailand due to insufficient
control measures.
SET Index target setting
We base our SET Index target on the target prices of the stocks in the KS Universe and
adjust the base-line target by -20% (bearish) to +20% (bullish), depending on several key
factors, i.e., the economic outlook, broad market valuation, corporate earnings
momentum, etc. With the ongoing escalation of the COVID-19 outbreak, we still apply a
“bearish” adjustment (-5% to -20% to our bottom-up SET Index target) of -14%, which
translates into a new 12-month forward SET Index target of 1,370 (vs a bottom-up index
target of 1601). Our SET Index target still reflects Scenario #2, under which we assume
the successful development of an antiviral drug cocktail.
21
Fig. 4 SET Index target setting
Unit: Btmn Base-line Bearish (-5% to -
20%)
Modestly bearish (0 to -
5%)
Neutral (0%) Modestly bullish (0% to
+5%)
Bullish (+5% to
+20%)
KS Coverage: Total market cap based on current share price 8,847,977
KS Coverage: Total market cap based on target price 13,832,158
- Upside/(downside) 56.3%
SET Index (23 March) 1,024
SET Index target (-5% adjustment = Modestly bearish) 1,601 1,370
Implied 12-months forward PER based on 2020 BB EPS consensus 15.6
Total return (based on 3% dividend yield) 36.7%
Strategist adjustment vs base-line SET Index target
Source: Bloomberg, KS Research
Fig. 5 Market yield gap (net of 10-year GBY)
Fig. 6 Market yield gap (net of 10-year GBY) — cont.
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
STD-2 STD-1 Mean= 4.9% STD+1 STD+2
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
STD-2 STD-1 Mean= 4.9% STD+1 STD+2
Source: Bloomberg, KS Research Source: Bloomberg, KS Research
Revisiting the five scenarios
Scenario #1 (Successful vaccine against COVID-19). This is a bullish scenario as a
successful vaccine against COVID-19 will lead to a potential reversal of the sell-down we
have observed so far. There are ongoing efforts to fast track vaccine development and
some key testing steps, such as animal testing have been skipped. Moderna, one of the
key developers of COVID-19 vaccines, has moved to 1st phase clinical test on a limited
number of volunteers. Moderna‟s vaccine is based on messenger RNA (mRNA) rather
than an inactive virus, which theoretically poses a smaller risk. Note that there are a total
of four phases for clinical tests where Phase 2 will be done on 100-300 volunteers; Phase
3 on 1,000-3,000 volunteers; and Phase 4, which refers to the safety studies during
commercial trials.
Nevertheless, the current view is that it will take at least another 12 months to come up
with a safe and effective vaccine and thus we see this case as a low probability.
The SET Index under this case should recover to 1,544 (pegged at the historical mean of
the earnings yield gap/EYG). While we expect the performances of all sectors to be
strong, we believe that the Tourism (airport, aviation, hotel) and Commercial Property
sectors will recover the most. A successful vaccine will make the maintenance of
restrictive measures unnecessary.
Scenario #2 (Antiviral drug (s) that work well with COVID-19). This is also a bullish
scenario and we believe that it is most likely given the current availability of various
antiviral drugs (both approved and being developed). As of this update, Avigan (or
Favipiravir developed by Fujifilm) has been showing some level of viral inhabitation,
especially for early administration of the drug, which should help accelerate the recovery
and/or reduce the death rate. We see this scenario to be more likely than Scenario #1.
22
The SET Index under this case would recover to 1,369 (pegged to +0.5SD EYG). We
expect a broad-based recovery for all sectors from current levels but not back to pre-
breakout levels. That said, we do not expect the tourism and commercial property sectors
to recover strongly as this scenario will continue to require various control measures
(social distance, alternate work-from-home policies, bans on events with massive
participation, online shopping), which should limit the magnitude of the recovery. We like
global cyclicals the most under this scenario.
Scenario #3 (Outbreaks in new EU/US to be brought under control). The SET Index
under this case, in our opinion, will carry a fair value of 1,230 (pegged at +1.0SD EYG),
which reflects the scenario that the outbreaks in the EU and US are brought under control
after lockdowns are implemented. We believe that a drastic lockdown will help control the
spread very effectively as we have observed in China. Similar to Scenario #2, the market
should see a broad-based recovery but with a lesser degree for tourism, commercial
properties and financials due to the residual impacts of COVID-19 such as the continued
restrictive measures and NPL issues.
Scenario #4 (Key DM countries trigger full-scale 14-day quarantines/lockdowns).
This, in our opinion, is the current situation and practically the worst scenario as a full-
scale lockdown by key DM countries and regions, in particular the US, the EU and Japan,
would ensure that the spread is brought under control, similar to what we have observed
in China. The economic impacts would be large and thus the equity market would take
another hit, in our opinion. After the full-scale lockdown, we would still see a need to
maintain restrictive measures so that any second wave of infection would be mild and
kept under control.
The SET Index under this case would collapse to 1,021 (pegged at +2.0SD EYG). We
see this level as the “worst” for the SET Index as the full-scale lockdown by major DMs
(and probably other EMs as well) would prevent a “super worst” case of prolonged and
severe pandemic.
Scenario #5 (Prolonged and severe pandemic). This scenario is unlikely, in our
opinion. Given the current knowledge base and quality of decision-making, key DMs are
likely to decide for a full-scale lockdown that would prevent this scenario from happening.
We peg the SET Index under this case at +3.0 SD EYG, which translates into the SET
Index at 873. We have to acknowledge that this scenario would be very bad for the entire
global financial market. We suggest no exposure in any equity investment.
23
Fig. 7 Earnings yield gap and the five COVID-19 scenarios*
As at 20 March 2020 As at 20 March 2020 Note; scenarios
Earnings yield gap 10-yr bond yield Earnings yield 12mth forward market EPS Implied SET Index
-SD1 3.38% 0.97% 4.35% 90 2,076
-SD0.875 3.57% 0.97% 4.54% 90 1,990
-SD0.75 3.75% 0.97% 4.73% 90 1,912
-SD0.625 3.94% 0.97% 4.91% 90 1,839
-SD0.5 4.13% 0.97% 5.10% 90 1,771
-SD0.375 4.31% 0.97% 5.29% 90 1,709
-SD0.25 4.50% 0.97% 5.48% 90 1,650
-SD0.125 4.69% 0.97% 5.66% 90 1,596
mean 4.88% 0.97% 5.85% 90 1,544 COVID-19 vaccine successfully developed
+SD0.125 5.06% 0.97% 6.04% 90 1,497
+SD0.25 5.25% 0.97% 6.23% 90 1,452
+SD0.375 5.44% 0.97% 6.41% 90 1,409
+SD0.5 5.63% 0.97% 6.60% 90 1,369 Antiviral drug (s) that works with COVID-19
+SD0.625 5.81% 0.97% 6.79% 90 1,331
+SD0.75 6.00% 0.97% 6.97% 90 1,296
+SD0.875 6.19% 0.97% 7.16% 90 1,262
+SD1 6.38% 0.97% 7.35% 90 1,230 Multiple countries trigger city lockdown/travel ban
+SD1.125 6.56% 0.97% 7.54% 90 1,199
+SD1.25 6.75% 0.97% 7.72% 90 1,170
+SD1.375 6.94% 0.97% 7.91% 90 1,142
+SD1.5 7.12% 0.97% 8.10% 90 1,116
+SD1.625 7.31% 0.97% 8.29% 90 1,091
+SD1.75 7.50% 0.97% 8.47% 90 1,066
+SD1.875 7.69% 0.97% 8.66% 90 1,043
+SD2 7.87% 0.97% 8.85% 90 1,021 Key DM countries trigger full-scale 14-days quarantine
+SD2.125 8.06% 0.97% 9.04% 90 1,000
+SD2.25 8.25% 0.97% 9.22% 90 980
+SD2.375 8.44% 0.97% 9.41% 90 960
+SD2.5 8.62% 0.97% 9.60% 90 942
+SD2.625 8.81% 0.97% 9.78% 90 924
+SD2.75 9.00% 0.97% 9.97% 90 906
+SD2.875 9.18% 0.97% 10.16% 90 890
+SD3 9.37% 0.97% 10.35% 90 873 Prolonged and severe pandemic
Source: Bloomberg, KS Research, *due to unusual movement in Thai 10-yr bond yield, we arbitrarily use 0.97% (vs actual of 1.69%), the same as previous note
24
Fig. 8 Earnings yield gap and the five COVID-19 scenarios (in the previous strategy note dated Mar. 6)
As at 6 March 2020 As at 6 March 2020 Note; scenarios
Earnings yield gap 10-yr bond yield Earnings yield 12mth forward market EPS Implied SET Index
-SD1 3.38% 0.97% 4.35% 95 2,184
-SD0.875 3.57% 0.97% 4.54% 95 2,094
-SD0.75 3.75% 0.97% 4.73% 95 2,011
-SD0.625 3.94% 0.97% 4.91% 95 1,934
-SD0.5 4.13% 0.97% 5.10% 95 1,863
-SD0.375 4.31% 0.97% 5.29% 95 1,797
-SD0.25 4.50% 0.97% 5.47% 95 1,736
-SD0.125 4.69% 0.97% 5.66% 95 1,678
mean 4.88% 0.97% 5.85% 95 1,624 COVID-19 vaccine successfully developed
+SD0.125 5.06% 0.97% 6.04% 95 1,574
+SD0.25 5.25% 0.97% 6.22% 95 1,527
+SD0.375 5.44% 0.97% 6.41% 95 1,482
+SD0.5 5.63% 0.97% 6.60% 95 1,440 Antiviral drug (s) that works with COVID-19
+SD0.625 5.81% 0.97% 6.79% 95 1,400
+SD0.75 6.00% 0.97% 6.97% 95 1,363
+SD0.875 6.19% 0.97% 7.16% 95 1,327
+SD1 6.38% 0.97% 7.35% 95 1,293 Multiple countries trigger city lockdown/travel ban
+SD1.125 6.56% 0.97% 7.54% 95 1,261
+SD1.25 6.75% 0.97% 7.72% 95 1,230
+SD1.375 6.94% 0.97% 7.91% 95 1,201
+SD1.5 7.12% 0.97% 8.10% 95 1,173 Key DM countries trigger full-scale 14-days quarantine
+SD1.625 7.31% 0.97% 8.28% 95 1,147
+SD1.75 7.50% 0.97% 8.47% 95 1,122
+SD1.875 7.69% 0.97% 8.66% 95 1,097
+SD2 7.87% 0.97% 8.85% 95 1,074
+SD2.125 8.06% 0.97% 9.03% 95 1,052
+SD2.25 8.25% 0.97% 9.22% 95 1,030
+SD2.375 8.44% 0.97% 9.41% 95 1,010
+SD2.5 8.62% 0.97% 9.60% 95 990
+SD2.625 8.81% 0.97% 9.78% 95 971
+SD2.75 9.00% 0.97% 9.97% 95 953
+SD2.875 9.18% 0.97% 10.16% 95 935
+SD3 9.37% 0.97% 10.34% 95 919 Prolonged and severe pandemic
Source: Bloomberg, KS Research
25
Fig. 9 Stress test - Change in net profit vs. base case forecasts
Sector Change in net profit (%) - 2020E Change in net profit (%) - 2021E
Scenario1 Scenario2 Scenario3 Scenario1 Scenario2 Scenario3
Chemical -12% -46% -81% 0% -8% -21%
Commerce - Commerce -5% -8% -13% -4% -7% -12%
Commerce - Cosmetics -15% -32% -51% -14% -27% -43%
Commerce - E-commerce -16% -31% -52% -11% -33% -55%
Commerce - Gadgets -17% -42% -65% -13% -33% -71%
Commodity - Agrobusiness -6% -16% -19% -1% -6% -10%
Contractor - Civil -8% -14% -21% 0% -1% -13%
Contractor - EPC -31% -355% -896% -90% -99% -145%
Energy - Oil & Gas -9% -22% -41% 3% -8% -12%
Energy - Other Oil & Gas -1% -15% -27% -9% -9% -19%
Energy - Petrochemical -3% -8% -20% 1% -3% -3%
F&B - F&B -10% -22% -37% -9% -24% -40%
F&B - Packaging -27% -36% -100% -12% -15% -58%
Healthcare - Healthcare Products -7% -11% -30% -7% -10% -40%
Healthcare - Hospital 0% -24% -45% 0% -18% -32%
ICT & Media - ICT -8% -10% -13% -13% -22% -50%
Industrial Products - Construction Materials -1% -3% -4% -1% -3% -5%
Industrial Products - Electronics -6% -31% -63% -6% -21% -39%
Property - Commercial -20% -28% -36% -10% -13% -16%
Property - Industrial -14% -29% -53% -10% -23% -45%
Property - Residential -13% -23% -42% -7% -12% -22%
Mid-Small Cap -5% -12% -20% -5% -12% -23%
Mid-Small Cap - Asset Management -2% -8% -12% -3% -8% -13%
Tourism - Airport -12% -22% -29% -7% -10% -12%
Tourism - Aviation -16% -39% -75% -46% -50% -138%
Tourism - Hotel -28% -137% -208% -9% -29% -48%
Transportation - Ground Transport -12% -17% -21% -8% -17% -26%
Transportation - Logistics -10% -26% -34% -5% -13% -22%
Utilities - Conventional Power -7% -15% -23% 2% 2% 1%
Utilities - Renewable Power 0% -1% -2% -2% -3% -5%
REITs - Other -29% -91% -121% 23% -32% -46%
IFF & REITs -19% -33% -35% -3% -7% -20%
Bank -49% -134% -243% -24% -61% -113%
Finance -20% -39% -73% -17% -33% -63%
Insurance -23% -54% -62% -28% -66% -76%
KS coverage (total or average) -19% -47% -81% -7% -23% -42%
Source: Research
26
Fig. 10 Stress test - Changes in net D/E vs. base case forecasts
Sector Net D/E (x) - 2020E
Base case Scenario1 Scenario2 Scenario3
Chemical -0.09 -0.09 -0.10 -0.11
Commerce - Commerce 0.81 0.82 0.82 0.83
Commerce - Cosmetics -0.40 -0.40 -0.40 -0.40
Commerce - E-commerce -0.23 -0.22 -0.21 -0.20
Commerce - Gadgets 0.36 0.33 0.32 0.27
Commodity - Agrobusiness 0.82 0.82 0.82 0.82
Contractor - Civil 0.85 0.67 0.69 0.73
Contractor - EPC 0.32 0.32 0.32 0.33
Energy - Oil & Gas 0.48 0.50 0.51 0.52
Energy - Other Oil & Gas 0.58 0.58 0.59 0.59
Energy - Petrochemical 0.71 0.70 0.70 0.71
F&B - F&B -0.25 -0.24 -0.24 -0.24
F&B - Packaging 1.44 1.44 1.41 1.41
Healthcare - Healthcare Products -0.10 -0.11 -0.11 -0.65
Healthcare - Hospital 0.18 0.18 0.20 0.21
ICT & Media - ICT 0.56 0.52 0.56 0.61
Industrial Products - Construction Materials -0.19 -0.17 -0.17 -0.17
Industrial Products - Electronics -0.09 -0.08 -0.07 -0.05
Property - Commercial 0.45 0.47 0.49 0.51
Property - Industrial 1.33 1.37 1.41 1.48
Property - Residential 0.94 0.98 1.01 1.07
Mid-Small Cap 0.81 0.82 0.85 0.87
Mid-Small Cap - Asset Management 1.15 1.15 1.15 1.14
Tourism - Airport -0.19 -0.18 -0.17 -0.16
Tourism - Aviation 0.47 0.50 0.54 0.63
Tourism - Hotel 0.84 0.85 0.92 0.97
Transportation - Ground Transport 1.35 1.20 1.24 1.29
Transportation - Logistics 0.87 0.87 0.89 0.89
Utilities - Conventional Power 0.92 0.93 0.95 0.96
Utilities - Renewable Power 1.05 1.05 1.05 1.05
REITs - Other 0.20 0.20 0.20 0.20
IFF & REITs 0.28 0.28 0.28 0.28
KS coverage (average) 0.51 0.50 0.51 0.51
Source: Research
27
Fig. 11 Stress test - Changes in net debt to EBITDA vs. base case forecasts
Sector Net debt to EBITDA (x) -2020E
Base case Scenario1 Scenario2 Scenario3
Chemical -0.79 -0.83 -1.09 -1.48
Commerce - Commerce 3.19 3.28 3.33 3.45
Commerce - Cosmetics -12.44 -13.05 -17.52 -63.45
Commerce - E-commerce -1.29 -1.38 -1.49 -1.71
Commerce - Gadgets 1.45 1.10 -0.32 6.14
Commodity - Agrobusiness 4.45 4.61 4.79 4.85
Contractor - Civil 9.08 9.04 8.99 8.74
Contractor - EPC 1.67 0.75 0.74 0.73
Energy - Oil & Gas 5.18 -13.01 -0.21 1.08
Energy - Other Oil & Gas 2.88 2.95 3.29 3.71
Energy - Petrochemical 4.67 4.56 4.51 5.15
F&B - F&B -1.12 -1.15 -1.32 -1.46
F&B - Packaging 3.20 3.44 3.44 4.23
Healthcare - Healthcare Products -0.40 -0.44 -0.47 -0.90
Healthcare - Hospital 1.29 1.29 1.42 1.55
ICT & Media - ICT 1.53 1.19 1.58 2.20
Industrial Products - Construction Materials -0.64 -0.62 -0.65 -0.66
Industrial Products - Electronics -1.36 -0.70 -0.73 -0.80
Property - Commercial 1.87 2.11 2.34 2.62
Property - Industrial 10.27 11.27 12.30 14.03
Property - Residential 8.93 10.47 11.85 14.29
Mid-Small Cap 1.53 1.59 1.68 1.79
Mid-Small Cap - Asset Management 4.64 4.69 4.84 4.95
Tourism - Airport -0.85 -0.89 -0.92 -0.95
Tourism - Aviation 16.01 42.52 119.34 n.m. *
Tourism - Hotel 7.63 8.23 9.29 14.42
Transportation - Ground Transport 8.31 6.91 7.44 8.30
Transportation - Logistics 3.40 3.58 3.93 4.06
Utilities - Conventional Power 5.81 5.85 5.80 5.80
Utilities - Renewable Power 4.02 4.02 4.03 4.05
KS coverage (average) 3.07 3.38 6.34 1.54*
Source: Research
Sectors and top picks
We remove BTS and CHAYO from our top picks although we maintain a positive view of the stocks in the long term. We remove BTS due to a drop in ridership following the COVID-19 outbreak and as a recovery may take longer than expected until a vaccine is discovered. We remove CHAYO on concern over higher financing costs amid tight liquidity in the bond market. Using a new thematic approach, we replace these stocks with BJC. We now have six themes for our monthly top picks:
► Key beneficiaries of the COVID-19 outbreak (STA and ADVANC). A surge in
demand for gloves amid fears over COVID-19 should benefit STA. The ICT sector should be less vulnerable to the COVID-19 outbreak as data consumption may increase during the outbreak as people cut back on out-of-home activities.
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► Key beneficiaries of household staple hoarding (CPALL, BJC, and RBF). Consumer staple stocks should benefit as people stock up to prepare for lengthy home quarantines. We see stronger demand for RBF‟s sweetener and other ingredients. We expect RBF to survive amid the current economic downturn as food is a basic necessity.
► Key beneficiary of China‟s restocking after COVID-19 is contained (SCC). We expect production and consumption will return to normal in China after the epidemic is contained, and this should lead to demand for restocking, especially of petrochemical products.
► Key beneficiary of rising NPLs in Thailand (BAM) as it should benefit from rising NPLs that will become available for its debt-acquisition businesses. BAM has long-term experience in managing NPLs since the 1997 financial crisis in Thailand.
Fig. 12 Performance of KS’s previous top picks
11-Mar-20 24-Mar-20 % change
ADVANC 185.00 194.00 4.86%
BAM 23.50 17.50 -25.53%
BTS 10.90 8.25 -24.31%
CHAYO 5.55 3.30 -40.54%
CPALL 66.00 59.00 -10.61%
RBF 4.18 2.88 -31.10%
SCC 312.00 289.00 -7.37%
STA 12.70 9.60 -24.41%
TASCO 20.00 16.60 -17.00%
Simple avg -19.56%
SET Index 1249.89 1033.84 -17.29%
Source: Bloomberg, KS Research
Key beneficiary of the COVID-19 outbreak (STA and ADVANC) Rubber gloves are selling strongly globally as they provide essential protection in the healthcare industry. There is also demand for restocking in Europe and the US to ensure ample supply in case of widespread outbreaks there. The utilization rate of STA's glove production facilities exceeds 100% so far in 1Q20 vs. 92% in 2019 due to a surge in demand for gloves. Fig. 13 Global demand for gloves
Fig. 14 STGT’s production capacity at the end of year
103127 135
173
230253
278
306
2005 2008 2011 2014 2018 2019E 2020E 2021E
0
50
100
150
200
250
300
350
Billion pcs.
14,000 14,000
17,000
27,000
33,000
36,500
2016 2017 2018 2019E 2020E 2021E
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Million pcs.
Source: Bloomberg, KS Research Source: Bloomberg, KS Research
29
STA plans to double its glove capacity to 50bn pcs/year by 2025 from 27bn pcs at
present to serve a surge in demand especially in emerging markets where gross
consumption is just 10 pcs per capita vs. 147 pcs in the US. Demand would come from
healthier lifestyle trends, disease outbreak controls, and implementation of the
USP<800> standard (effective since Dec 2019), which recommends health workers wear
two pairs of gloves while handling hazardous drugs. STA plans an IPO for its subsidiary,
STGT, in 3Q20. There will be a 31% dilution from the offering of new shares, which will
result in STA‟s stake in STGT decreasing to 56% from the current 81%. The dilution
effect would be offset by STGT‟s expansion that could cause earnings to double by 2025.
Our small caps analyst, Minling Wang, likes STA as she expects a strong earnings turnaround from 1Q20 onward given the weak Thai baht (-5% YTD), lower rubber price (-7% YTD), lower nitrile price (butadiene -5% YTD and acrylonitrile -4% YTD), and higher glove sales volume and selling prices. We expect STA to post a 2020 net profit of Bt2bn, a turn from a loss in 2019.
Fig. 15 Population vs. glove consumption per capita in 2017
Source: TOPG’s investor presentation, KS Research
ICT sector (ADVANC) should be less vulnerable to the COVID-19 outbreak, and data consumption will likely increase during the outbreak as people cut back on out-of-home activities. Our ICT analyst, Pisut Ngamvijitvong, is positive on the telco sector on 1) expected further robust results in 1Q20; 2) relative resilience from the economic downturn; 3) a limited impact on demand from COVID-19; and 4) a decent dividend yield. He sees demand for mobile, fixed broadband and satellite communication services unaffected in case of a 6-9 month impact. Consumer demand for telco services may rise as people spend more time at home and online. He expects industry mobile service revenue to grow 5% YoY in 2020E and for telcos to scale down outdoor marketing.
30
Fig. 16 Revenue breakdown (ADVANC, DTAC and TRUE) pre COVID-19 adjustment
Btmn 2,018 2019 2020E 2021E 2022E
Mobile
-Voice and data revenue 231,944 243,588 258,217 269,488 279,952
-IR, IDD and others 13,492 12,549 11,000 10,129 9,577
Total mobile service revenue 245,436 256,137 269,217 279,617 289,529
Fixed broadband revenue 33,439 35,911 41,776 45,310 47,997
Pay TV, EDS and others 13,697 12,982 11,608 12,094 12,612
Service revenue ex IC 292,572 305,030 322,601 337,020 350,138
IC revenue and others 36,481 44,251 37,567 36,285 35,480
Sales 50,490 54,739 52,737 53,456 53,465
Total revenue 379,542 404,019 412,905 426,761 439,083
% YoY
Mobile
-Voice and data revenue 5.0% 6.0% 4.4% 3.9%
-IR, IDD and others -7.0% -12.3% -7.9% -5.5%
Total mobile service revenue 4.4% 5.1% 3.9% 3.5%
Fixed broadband revenue 7.4% 16.3% 8.5% 5.9%
Pay TV, EDS and others -5.2% -10.6% 4.2% 4.3%
Service revenue ex IC 4.3% 5.8% 4.5% 3.9%
IC revenue and others 21.3% -15.1% -3.4% -2.2%
Sales 8.4% -3.7% 1.4% 0.0%
Total revenue 6.4% 2.2% 3.4% 2.9%
Proportion
Mobile
-Voice and data revenue 61.1% 60.3% 62.5% 63.1% 63.8%
-IR, IDD and others 3.6% 3.1% 2.7% 2.4% 2.2%
Total mobile service revenue 64.7% 63.4% 65.2% 65.5% 65.9%
Fixed broadband revenue 8.8% 8.9% 10.1% 10.6% 10.9%
Pay TV, EDS and others 3.6% 3.2% 2.8% 2.8% 2.9%
Service revenue ex IC 77.1% 75.5% 78.1% 79.0% 79.7%
IC revenue and others 9.6% 11.0% 9.1% 8.5% 8.1%
Sales 13.3% 13.5% 12.8% 12.5% 12.2%
Total revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company, KS Research
In the abyss of a tightening credit market, three mobile operators under our coverage will have cash deficit positions. However, he sees a low probability that the telcos will face a liquidity crunch and seek an equity injection at any price as they are likely to fund cash deficits through deferral of license payment, new debentures, payout reductions or asset disposals. The NBTC‟s proposed measures to relieve the fiscal burden on consumers during the pandemic by allowing mobile operators to deduct network costs from their upfront license fee and network costs from their universal service obligation fee would benefit cash flow amid the tightening credit market.
31
Fig. 17 Scenario analysis of the NBTC’s mobile broadband subsidy proposal
Ceiling price 0.16 Bt/MB 1,600 Bt/10GB
Effective market rate 0.02 Bt/MB 200 Bt/10GB
Subscriber (m) SIM Unique
ADVANC 42.01 25.52
DTAC 20.64 12.54
TRUE 30.64 18.62
Total sub (m) 93.30 56.68
Total pop > 15 age (m) 56.68
Scenario 1 2 3 4
ARPU (Bt) 232 232 232 232
Subsidy period (month) 3 3 3 3
% sub applying for this program 25.0% 50.0% 75.0% 100.0%
% sub downtrading packages 75.0% 50.0% 25.0% 0.0%
Deductible net of downtrade (Btmn)
ADVANC 1,111 4,443 9,998 17,774
DTAC 546 2,183 4,912 8,732
TRUE 810 3,241 7,292 12,963
Total 2,467 9,867 22,201 39,469
% of payable license fee
ADVANC 3.6% 14.4% 32.4% 57.5%
DTAC 6.0% 23.8% 53.6% 95.4%
TRUE 3.0% 12.0% 26.9% 47.9%
Total 3.7% 14.7% 33.1% 58.8%
Value upside (Bt/share)
ADVANC 0.37 1.49 3.36 5.98
DTAC 0.23 0.92 2.07 3.69
TRUE 0.02 0.10 0.22 0.39
Source: NBTC, Company, KS Research
Key beneficiaries from household staple hoarding (CPALL, BJC, and RBF) Companies that deal with consumer staples should benefit from COVID-19 as people stock up on to prepare for lengthy home quarantines. Our Commerce analyst, Tareetip Wongsaengpaiboon, expects SSSG for staple retailers to remain strong and expects CPALL and MAKRO to report SSSG of 0% and +6%, while BJC should show less negative SSSG in 1Q20 vs. -6.3% in 4Q19. Stores operated by BJC (BigC Supercenter), CPALL, and MAKRO can operate as normal while shopping malls close for 22 days to control the COVID-19 outbreak as they sell household staples, which are basic necessities. CPALL and BJC are the top beneficiaries of this as they are able to survive amid the current economic downturn. Fig. 18 QTD SSSG for staple retailers
Fig. 19 QTD SSSG for discretionary retailers
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
QTD
BJC (Big C) CPALL MAKRO Avg - Staple
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
QTD
GLOBAL HMPRO DOHOME Avg - Discretionary
Source: Companies data and KS Research Source: Companies data and KS Research
Demand for RBF‟s food sweeteners and other ingredients has been increasing due to food hoarding to prepare for lengthy home quarantines worldwide. Our analyst, Korakot Sawetkruttamat, expects RBF to report earnings growth of 22% in 2020 driven by strong
32
revenue growth from new plants in Indonesia and Vietnam scheduled for commercial startup in 1Q20, and better operating margins from interest savings and lower SG&A expense to sales. Valuation looks undemanding trading at a 2020 PER of 13x, vs. its global peer average of 17x, but EPS growth should exceed that of its peers in 2020. RBF should survive amid the current economic downturn as food is a basic necessity and as it is debt free.
Fig. 20 Revenue mix by product
35%
6%36%
4%
2%
14%
0%
4%
2018 revenue mix
Flour & Sauce
Dry
Flavour & Fragrance
Frozen
Plastic packaging
Trading goods
Others
Revenue from hotel business
Source: RBF, KS Research
Fig. 21 To turn to a net cash position post-IPO
Fig. 22 Operating cash flow sufficient to fund capex
-59
-673
819 810957
-800
-600
-400
-200
0
200
400
600
800
1000
1200
2017 2018 2019E 2020E 2021E
Btmn
322 337
492 480
617
262
324
439
321281
0
100
200
300
400
500
600
700
2017 2018 2019E 2020E 2021E
Btmn Operating cash flow Capex
Source: Companies data and KS Research Source: Companies data and KS Research
Key beneficiary of China’s restocking after COVID-19 is contained (SCC) We expect production and consumption will return to normal in China after the epidemic is contained and that this will lead to demand for restocking. Based on experience from the SARS crisis, we foresee a quick rebound for the Chinese economy in terms of restocking demand and higher consumption of goods and services after the freeze. Our analyst, Jakapong Chawengsri, believes SCC will be one of the biggest beneficiaries of lower oil prices. SCC‟s naphtha crackers will benefit from lower cost pressure from lower feedstock and fuel use costs, as well. The recent slump in share price has widened upside to our new YE2020 target price to 16%. Key risk is weak 1Q20 earnings from
33
huge oil inventory losses, but we believe any share price weakness offers an opportunity to accumulate the stock for long-term investors.
Fig. 23 Implied valuations under our bad and worst-case scenarios
BV Lowest PBV Basis under bad-case scenario
YE2019 Worst Bad Worst Bad Worst Bad
Upstream & Comglomerate
PTT 30.8 0.73 0.91 22.5 28.0 -40% -25% -1.5x S.D. PBV or SOTP of the potentia l trading of subs idiaries
PTTEP 89.9 0.46 1.05 41.4 94 -61% -11% -1.0x S.D. PBV or a lmost average of lowest PBV in FY2008/16
BANPU 14.0 0.52 0.52 7.3 7.3 2% 2% Lowest PBV of 0.52x in FY2016 when coal price was USD50/ton
RefineryTOP 58.8 0.46 0.86 27.1 50.6 -35% 21%
BCP 30.3 0.27 0.86 8.2 26.0 -65% 11% Lowest PBV of 0.86x in FY2014 when avg. GRM was USD2.8/bblSPRC 7.5 0.46 0.86 3.4 6.4 -48% -2%ESSO 6.4 0.43 0.86 2.7 5.5 -54% -8%
Petrochemical
PTTGC 62.6 0.46 0.77 28.8 48.2 -32% 14% Lowest PBV in FY2012 was 0.77x
IRPC 4.1 0.35 0.75 1.4 3.1 -38% 33% Lowest PBV in FY2012 was 0.75x
IVL 20.6 1.00 1.16 20.6 23.9 -24% -12% Lowest PBV in FY2015 was 1.16x
Others
SCC 233.5 1.00 1.45 233.5 339 -26% 7% -2x S.D. PBV in FY2018, but the lowest in FY2011-12 was 1.74x
PTG 4.0 1.49 2.95 5.9 11.7 -61% -23% Lowest in FY2018 was 1.49x
Note: Worst = Global recess ion/ lowest trading point
Bad = Sharp s lowdown, but not a global recess ion
SCC's YE2019 BV is adjusted BV (prior to IFRS 9/16)
IVL and BCP are adjusted BV (excl . perpetual bond)
Downside toImplied share price
Source: KS Research
Fig. 24 HDPE and PP spreads
Fig. 25 SCC’s polyolefin sales volumes
250
350
450
550
650
750
850
950
750
850
950
1050
1150
1250
1350
1450
Mar-
17
May-1
7
Jul-17
Sep-1
7
Nov-1
7
Jan-1
8
Mar-
18
May-1
8
Jul-18
Sep-1
8
Nov-1
8
Jan-1
9
Mar-
19
May-1
9
Jul-19
Sep-1
9
Nov-1
9
Jan-2
0
Mar-
20
HDPE - Naphtha (USD/MT)HDPE (USD/MT)
HDPE
HDPE -Naphtha
255,000 276,000 250,000 280,000 265,000 266,000 271,000 249,000
196,000215,000
210,000197,000 206,000 208,000 204,000
208,000
0
100,000
200,000
300,000
400,000
500,000
600,000
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19
PE PPtons
Source: Bloomberg, KS Research Source: KS Research
Key beneficiary of rising NPLs in Thailand (BAM)
Based on the three 2020 GDP scenarios (-2.2%, -5.8% and -10%), our 2020 earnings forecast for the sector falls from +20% in our base case scenario (existing forecast) to -4%, -27% and -67% due to higher credit costs following rising NPLs. The coverage ratio in 2020E will drop sharply from an average of 139% to 95%, 76%, and 68%, respectively, while the sector‟s D/E ratio in 2020E will increase from 2.72x to 2.77x, 2.91x, and 3.06x, respectively. Under all three scenarios, finance companies‟ D/E ratios are still under their debt covenant levels. In terms of liquidity, we believe these finance companies will be able to roll over their debentures given that their ratings are all investment grade in which in the worst case scenario, the recent BOT measure to set up a Bt70-100bn Corporate Bond Stabilization Fund (CBFS), should be able to support maturing corporate bonds that cannot be rolled over.
34
We believe BAM can survive the economic downturn. BAM has a secure balance sheet as its book value is 2.3x covered by the appraised value of collateral, its countercyclical business, and its high dividend of 5-6%. BAM also has an earnings buffer from DTAs that we have not yet included in our earnings forecasts. BAM maintained its NPL purchase target of Bt10-12bn in 2020 (vs. Bt12.8bn in 2019) to manage cash flow and liquidity, although it noted a higher inflow of NPL sales from banks. In the next few years, it will continue with this strategy of buying the same amount as it can recover in the previous year plus growth of 5-10%.
Fig. 26 Comparison of NPL book value to appraised value
and claims against debtors
Fig. 27 BAM acquired NPLs at a discount of 82%-83% of
the claim value against debtors
78.0 79.8 81.7 85.5
188.1 192.0 192.2 195.6
439.5 442.1 455.0 471.1
-
100.0
200.0
300.0
400.0
500.0
2016 2017 2018 3Q19
Bt Bn NPLs (gross), appraised value, and claims against debtors
Remaining acquisition cost Appraised valueOustanding claim againts debtors
78.0 79.8 81.7 85.5
188.1 192.0 192.2 195.6
439.5 442.1 455.0 471.1
-
100.0
200.0
300.0
400.0
500.0
2016 2017 2018 3Q19
Bt Bn NPLs (gross), appraised value, and claims against debtors
Remaining acquisition cost Appraised valueOustanding claim againts debtors
Source: Company data, KS research Source: Company data, KS research
Fig. 28 Appraised value of collateral is 2.3x NPL cost as
of 3Q19
Fig. 29 Appraised value of collateral is 2.3x NPA cost as
of 3Q19
2.41 2.40 2.35
2.29
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
2.30
2.40
2.50
2016 2017 2018 3Q19
NPLs aprraised value to BV (x)
2.42 2.41
2.30 2.29
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
2.30
2.40
2.50
2016 2017 2018 3Q19
NPAs aprraised value to BV (x)
Source: Company data, KS research Source: Company data, KS research
Fig. 30 KS top picks
PER (x) PBV (x) ROE (%) Div yield (%)
2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E
ADVANC Telco - Telco Outperform 194.00 225.92 16.45 20.83 19.44 18.45 7.85 7.36 41.61 41.16 4.37 4.61
BAM Financials - NPL management Outperform 17.50 26.50 51.43 57.07 12.40 12.12 1.42 1.20 11.87 11.52 5.64 5.36
BJC Commerce - Staples Outperform 37.75 48.00 27.15 29.37 20.54 19.37 1.27 1.23 6.19 6.33 2.22 2.24
CPALL Commerce - Staples Outperform 59.00 80.00 35.59 37.82 23.57 21.11 5.05 4.48 22.37 22.07 2.23 2.48
RBF F&B - F&B Outperform 2.88 5.00 73.61 76.60 13.36 12.13 1.36 1.28 10.65 10.88 2.99 3.30
SCC Oil & gas - Midstream Outperform 289.00 365.00 26.30 31.14 12.51 12.32 1.19 1.15 9.71 9.48 4.84 4.84
STA Industrial products - Agriculture Outperform 9.60 16.30 69.79 75.05 7.60 7.51 0.57 0.54 7.73 7.36 5.26 5.32
Total return
(%)Upside (%)Stock Sector Rec Price (Bt) TP (Bt)
Source: Bloomberg, KS Research, share prices as of 24 March 2020
35
KBank THB NEER Index
USD/THB vs DXY Index
122.19
95
100
105
110
115
120
125
130
135
95
100
105
110
115
120
125
130
135
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
KBank NEER,base = Jan 1995, left
est.
Latest data point, left
BOT NEER, base = 2012, right
88
90
92
94
96
98
100
102
104
30
31
32
33
34
35
36
37
Aug-16 Mar-17 Oct-17 May-18 Dec-18 Jul-19 Feb-20
USD/THB DXY Index, RHS
Source: Bloomberg, KBank Source: Bloomberg, KBank
Thailand’s GDP
Thai inflation parameters
4.44.0
5.04.6
3.2
3.8
2.92.4 2.6
1.61.2
0.7
1.7
0.8
-0.1
1.30.8
0.4 0.2 0.2
-1
0
1
2
3
4
5
6
3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19
GDP (%YoY) GDP (%QoQ sa)
-0.54
-2
-1
0
1
2
3
4
5
11 12 13 14 15 16 17 18 19 20 21
Headline Inflation Core Inflation
Upper Bound Policy Target Lower Bound Policy Target
Source: NESDB, KBank Source: Bloomberg, KBank
Implied forward curve: TGBs
Implied forward curve: USTs
0.730.730.740.790.89
1.021.13
1.291.40
1.481.53 1.56
0.670.670.72
0.84
0.99
1.13
1.29
1.46
1.581.63
1.501.61
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0 1 2 3 4 5 6 7 8 9 10
06/04/2020
next 3 months
next 6 months
tenor, yrs
0.28
0.37
0.49
0.64
0.74
0.410.46
0.67
0.77
0.92
0.00
0.20
0.40
0.60
0.80
1.00
0 1 2 3 4 5 6 7 8 9 10
7-Apr-20
next 3 months
next 6 months
tenor, yrs Source: Bloomberg, KBank Source: Bloomberg, KBank
Foreign holding of Thai fixed income and stock
Foreign net buy/sell in Thai markets (USD bn)
603 629 779
38
-434
-600
-400
-200
0
200
400
600
800
1,000
10 11 12 13 14 15 16 17 18 19 20
Thai government bonds, THB bn BOT bonds Thai stocks, est since 1999
-5.1
-17.8
18.9
72.5
-25.1-32.1
-10.4
-3.7 -5.8
3.911.4
-21.3-16.4
3.4 3.7
46.7
20.1
-54.3
-11.7-7.8 -7.7
-24.5-17.3 -19.6
-60
-40
-20
0
20
40
60
80
Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20
Net buy bond Net buy equity
Source: Bloomberg, ThaiBMA, KBank Source: Bloomberg, KBank
36
Key Parameters & Forecasts at Year-end
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E*
GDP, %YoY 0.8 7.2 2.7 1.0 3.1 3.4 4.1 4.2 2.4 0.5
Private Consumption, %YoY 1.8 7.3 1.0 0.5 2.6 2.9 3.1 4.6 4.5 1.8
Government Consumption, %YoY 3.7 7.2 1.5 2.8 2.5 2.2 0.1 2.6 1.4 2.3
Private Investment, %YoY 3.7 7.2 1.5 2.8 2.5 2.2 0.1 2.6 1.4 1.0
Public Investment, %YoY 14.7 11.6 6.0 -2.0 -2.7 -1.0 0.5 6.6 2.1 3.3
Export (USD term), %YoY 15.1 2.9 -0.3 -0.5 -5.8 0.5 9.9 6.9 -2.7 -5.6
Import (USD term), %YoY 25.1 8.9 0.5 -9.1 -11.0 -4.2 14.1 12.0 -4.7 -7.8
Current Account (USD bn) 9.4 -4.9 -8.8 11.6 27.8 43.4 44.0 28.5 37.3 27.0
CPI, %YoY, average 3.81 3.02 2.19 1.9 -0.9 0.19 0.67 1.06 0.7 0.4
Fed Funds, %year-end 0.0-0.25 0.0-0.25 0.0-0.25 0.0-0.25 0.25-0.50 0.50-0.75 1.25-1.50 2.25-2.50 1.50-1.75 0.00-0.25
BOT Repo, %year-end 3.25 2.75 2.25 2.00 1.50 1.50 1.50 1.75 1.25 0.50
Bond Yields
2yr, % year-end 3.09 2.89 2.56 2.10 1.49 1.60 1.46 1.75 1.16 0.98
5yr, % year-end 3.16 3.15 3.41 2.48 1.95 2.26 1.85 2.14 1.24 1.14
10yr, % year-end 3.29 3.51 3.90 2.72 2.50 2.65 2.32 2.48 1.47 1.27
USD/THB 31.56 30.61 32.87 32.90 36.08 35.80 32.58 32.55 30.15 31.50-32.00
USD/JPY 76.91 85.96 105.17 119.48 120.22 116.96 112.69 110.27 109.44 107.00
EUR/USD 1.30 1.32 1.37 1.22 1.09 1.05 1.20 1.14 1.12 1.09
SET Index 1,025 1,392 1,299 1,498 1,288 1,543 1,754 1,564 1,578 1,360
* KBank's Forecast
** denotes 12-month forward, to be rev ised soon
Source: Bloomberg, KSecurities, KResearch, KBank
37
Disclaimer
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