KBank
Multi Asset
Strategies
October 2019
Kobsidthi Silpachai, CFA [email protected]
KResearch [email protected]
KSecurities [email protected]
FX market monitor page 1
Fixed income monitor page 6
Economic monitor page 11
Equity market monitor page 15
―KBank Multi Asset
Strategies‖ can now be
accessed on
Bloomberg: KBCM
<GO>
Disclaimer: This report
must be read with the
Disclaimer on page 41
that forms part of it
1
Thai baht is likely to remain the outperformer of Asian currencies. We
keep our expectation that the Thai baht is to face an appreciation
pressure on the back of continuing high demand for safe-haven assets
in the global risk-off sentiment and still-strong current account surplus.
The key factor to watch over the coming months is the development of
trade talks between the US and China, risk of the US recession that
could prompt the Fed to lower policy rates further, as well as the
stance of the BOT’s monetary policy, amid the global easing interest
rate cycle. On the additional measures to be taken by the BOT, we
remain doubtful about their effectiveness in curbing Thai baht
strength. Our target for USD/THB by the end of 2019 is kept at
30.50.
Thai baht is to remain a safe haven of Asia, given the heightening of global risk. Prospect
about a global economic slowdown as well as the risk surrounding trade tension between
the US and China, Brexit, and risk of economic recession in the Eurozone are likely to
support the falling investors’ risk appetite and increased demand for safe assets (Fig. 1).
The strong pressure on Thai baht appreciation has raised a question on the possibility of
further action to be taken to limit the appreciation. We revisited measures that the BOT
has taken and has yet to be taken. We found that additional measures that BOT could
implement further seem to be limited and we expect the baht to remains strong, going
forward.
Revisiting measures that the BOT has taken
1. The Bank of Thailand has lessened the magnitude of foreign exchange
intervention that could have curbed strong appreciation pressure of Thai
baht. Foreign exchange intervention happens when the central bank has the
Fig 1 : USD/THB vs USD/JPY
102
107
112
117
122
30.0
31.0
32.0
33.0
34.0
35.0
36.0
Jan-17 Jan-18 Jan-19
USD/THB USDJPY, RHS
USD/THB USD/JPY
Source: Bloomberg, CEIC, KBank
FX market monitor: Revisiting measures to curb Thai baht
strength
Peerapan Suwannarat [email protected] Warunthorn Puthong [email protected] San Attarangsan [email protected]
2
intention to manage the fluctuation of their currency, such as when central banks
buy foreign currency and sell their own currency to lower the appreciation
pressure of their currency. The change in the foreign exchange reserve is a
result of such intervention. During 2016-2017 when Thai baht appreciated
significantly, the Bank of Thailand had increased its purchase of foreign
exchange to lessen the strength of the baht. (Fig. 2). However, in 2019, the Thai
baht appreciated significantly but foreign exchange reserves increased by lesser
magnitude compared to 2016-17. This suggested that the BOT has been much
less aggressive in involving in foreign exchange intervention.
Fear of being named as a currency manipulator by the US Treasury
department could be a major reason that the Bank of Thailand has been more
careful in involving in foreign exchange intervention activity. The three main
factors for a country to be considered as a currency manipulator are (1) the
“material” current account surplus that amounts to 2 percent of GDP or more, (2)
A bilateral trade surplus with the US that exceeds $20billion, and (3) "Persistent,"
one-sided intervention in which net purchases of foreign currency total at least 2
percent of a country's GDP over a 12-month period. Thailand's current account
surplus has been material. The market consensus expected Thai current account
to GDP to reach 5.9% this year, down from 6.4% in 2018. On trade surplus with
the US, Thailand has run a trade balance surplus with the US at the level just
below USD 20billion at USD 19.57 billion over the past 12 month-to-August.
However, the country is yet to be considered as persistently one-sided
intervened in the foreign exchange market. As a result, Thailand has been saved
from being named as a currency manipulator on the latest assessment.
2. Foreign currency deposit (FCD) has increased over the past years. Allowing
foreign exchange currency deposits within the country has helped slow the pace
of Thai baht appreciation. However, it could cause more downward pressure on
Thai baht in the future. Income from Thai exports has increasingly been
deposited at Thai commercial banks in foreign currency terms. Many exporters
used this channel to avoid being exposed to the loss from converting foreign
currency such US dollar into Thai baht when baht appreciated. The amount of
Fig 2: Change in foreign exchange reserve and Thai baht appreciation
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
Change in FX reserve and Net Forward Position(USD billion), 3MMA
Thai baht appreciation (% MoM), 3MMA, inverted axis (RHS)
USD bn, 3mma %MoM, 3mma
Thai baht appreciate from prior month
BoT add US dollar tointernational reserve
Source: Bloomberg, CEIC, KBank
3
foreign currency deposit outstanding recorded at USD 17 billion with the rate of
growth at 17.6% a year on average since 2009 (Fig. 3).
However, going forward, the accumulation of FCD accounts over the past
years can put depreciation pressure on Thai baht. When Thai baht start to
weaken, exporters would start to convert their US dollar income deposited at
such an account into Thai baht to gain or limit loss from foreign exchanges. This
would limit depreciation pressure on Thai baht. Also, the conversion could be
material in the future when their funding needs increase, especially during the
time of economic difficulties.
3. The measure to cut the amount of the BOT bond auctions has helped ward
off the short term inflows to the Thai bond market, hence lowering appreciation
pressure on Thai baht. In July, the BOT cut the amount of the central bank bond
auctions by THB 10 billion per week for the bond with a tenor of 3 months and 6
months. Consequently, the foreign flows to Thai short-term (less than 1 year)
bond market have recorded net outflows at THB 42 billion in July (Fig.4).
However, on the foreign exchange front, Thai baht failed to weaken from the fact
that foreign flows to the long-tern Thai bond market and stock market still
recorded net inflows of totaled THB 37 billion in July.
The Bank of Thailand could use this approach to further limit inflows since
it could effectively lower flows into the Thai bond market. However, it is
important to also note that foreign net short-term inflows (year-to-date) have
been more than reverted the inflows saw in 2018 already. Also, cutting short term
bond issuance would compress short term bond yields on the back of limited
supply. This could send a misguided monetary policy signal when investors
interpret such a lower interest rate in the short-term market as a signal for a rate
cut.
Fig 3: Foreign currency deposit (FCD) at Thai commercial banks
Dec-13, 7,744
Dec-14, 10,906
Dec-15, 12,312 Dec-16, 13,468
Dec-17, 14,734
Dec-18, 16,032 Jul-19, 16,972
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Thai bank FCD, USD mn
Source: Bloomberg, CEIC, KBank
4
4. An additional measure to prevent speculation on Thai baht was introduced
in July. The BOT lowered the ceiling amount to which foreign investors can hold
within the Non-Resident Baht Account (NRBA) and Non-Resident Baht Account
for Securities (NRBS) to THB 200 million from THB 300 million per account by
the end of the day to limit channel for speculation on Thai baht. We think that the
BOT is unlikely to lower the cap further from the same reason as above that the
short-term outflows had already been large. The need for the BOT to further limit
short-term speculative flows has lessened.
Other possible measures yet to be implemented and their
limitation
1. Restrictions on resident portfolio outflows have been constantly relaxed
over time. In 2015, ten types of institutional investors including derivatives
dealer are allowed to invest in overseas securities and the type of investor
expanded to includes Thai juristic persons or individuals having investments in
securities or derivatives or deposits of at least THB100 million in 2016 (up to 5mn
per year). In 2018, the restriction has been relaxed to allow Thai Juristic persons
or individuals having investments in securities or derivatives or deposits of at
least THB 50 million but less than THB 100 million to invest in overseas
securities (up to USD 1 million per year). Encouraging more portfolio outflows is
perceived as the measure to liberalize the Thai capital market. However, despite
the fact that portfolio liberalization could help lessen the surplus in the basic
balance of payment (current account balance-capital account balance), it would
take a long time for the measure to have an impact on Thai baht. The portfolio
outflows in 2018 failed to increase, even though further relaxation was taken into
effect (Fig. 5).
The Bank of Thailand (BOT) governor Veerathai has recently said in an interview
that the BOT would substantially increase the limit to allow residents to invest
overseas for both mutual funds and individual investors. We expect the BOT to
take further steps on capital market liberalization soon.
Fig 4: Thailand portfolio inflows and USD/THB
30.030.531.031.532.032.533.033.534.034.535.035.536.0
-100,000
-50,000
-
50,000
100,000
150,000
Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul 19
Thailand portfolio inflows and USD/THB
TH: Equity Foreign net buy
TH: Bond Foreign net buy: Short-Term (TTM<=1Y)
TH: Bond Foreign net buy: Long-Term (TTM>1Y)
THB millionUSD/THB
Source: Bloomberg, CEIC, KBank
5
2. Tobin tax that would increase the cost of foreign exchange transactions
and Unremunerated Reserve Requirement (URR) that would keep foreign
portfolio investment in Thailand longer could help limit speculative inflows.
However, the measures have major limitations because such measures could be
viewed as de-liberalization to the Thai capital market. In 2006, the BOT’s
implementation of the URR measure has damaged foreign investor confidence in
the Thai capital market, causing massive capital outflows at the time. Regarding
the tax on foreign exchange transaction, further study on process and implication
is required since the measure has never been implemented before. Also, since it
is a tax policy, it would require further discussion between the bank of Thailand
and the government.
Fig 5: Thailand portfolio investment position abroad
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0Q
1/12
Q3/
12
Q1/
13
Q3/
13
Q1/
14
Q3/
14
Q1/
15
Q3/
15
Q1/
16
Q3/
16
Q1/
17
Q3/
17
Q1/
18
Q3/
18
Q1/
19
Thai Portfolio Investment Position Abroad, USD bn %YoY, RHS
Note: In Jan 18, BOT allowed people with financial assets of ≥THB 50 mn directly invest abroad
Source: Bloomberg, CEIC, KBank
6
Fixed Income Monitor: Chinese bond inclusion possibly
puts upward pressure on the Thai bond yields in 2020
In the early of September, the long-term Thai government bond
yields were higher for almost 20 bps due to lower fears of the US
economic performance and improvement in trade talks. However, a
surge in global yields was discounted after the European Central
Bank (ECB) delivered a large stimulus package during the middle of
the month and several major central banks also adopt more
accommodative policy.
As for next year, Chinese bond inclusion possibly puts upward
pressure on the Thai bond yields in 2020 by 12-20 bps due to an
expected outflows during February – November 2020 approximately
USD 0.21 billion per month (or THB 6.4 billion).
Key bond yield movements in September
Early in the month, the August report of the non-farm payroll employment showed that
the US labor market remained solid, easing market worries that the US economy was
heading for recession ahead. In addition, trade tensions between the US and China
abated after the Chinese government announced to exempt some American products
from the additional tariffs. In return, president Trump said that he was considering an
interim trade deal with the Chinese counterparts. As a result, the risk-on sentiment
supported the rise of US Treasury yields across the curve, bringing the long-term Thai
government bond yields higher for almost 20 bps.
However, a surge in global yields was discounted after the European Central Bank (ECB)
delivered a large stimulus package during the middle of the month. This put downward
pressure on the German Bunds yields as well as the US Treasury yields as the ECB
decided to reduce its deposit rate deeper into negative territory. As for Thailand, a delay
in government’s budget act for the fiscal year 2020 continued to keep a lid on Thai long-
term yields as it means that a relatively-small amount of government bond auctions would
be in the pipeline during the last quarter of this year.
Particularly for the front-end curve, yields were kept behind the policy rate throughout the
month as some of the market participants priced in a chance that the Bank of Thailand
might surprisingly deliver the second rate cut anytime within this year even though the
foreign investors recorded a net sell-off in Thai bonds of THB 19.8 billion in the month.
The global monetary easing trend is more intense
In September, several major central banks decided to adopt more accommodative policy.
These included the US Federal Reserve (Fed) which went forward with its second rate
cut this year. However, the FOMC left markets with even more puzzling outlook about
where the policy rate could go, since the dot-plot estimates revealed some disagreement
among the policymakers where 7 committees supported the third rate cut while 5 voted to
hold rate and another 5 members were seen hawkish, expecting to raise rate by 25 bps
from current levels (Fig 1). In regard to the policy statement, the FOMC said that it would
Kobsidthi Silpachai, CFA [email protected] Peerapan Suwannarat [email protected] Warunthorn Puthong [email protected] San Attarangsan [email protected]
7
remain data-dependent. Meanwhile, the key economic indicators such as payroll
employment and production indicators are in the market focus. Given the Fed’s intension
of insurance cuts against the plausible downside risks to the economy, we expect the
Fed to deliver a third cut in October 2019 and then pause to see the impact of the series
of rate cuts on the economy.
Similarly, the ECB announced a deposit rate cut by 10 bps to -0.5% while keeping other
rates unchanged. However, the bank opened a room for further rate cut in the future as it
indicated that the current level of policy rates could be reduced further until inflation
returns to its target of 2%. Moreover, the well-known asset purchase program was
brought back but the size of EUR 20 billion per month was smaller than what we
expected. However, the term of the program is open-ended. We think that the ECB will
leave its ultra-easing monetary policy in place at least until the end of this year as the
stimulus package has been large given with limited room to ease further. Besides, the
ECB will be in a transition period as the President Mario Draghi will leave the post after
the October 24th meeting before handing over to Christine Lagarde in November.
The Bank of Japan (BOJ) kept its monetary policy unchanged but signaled a possibility to
add more easing measures to bring its inflation back on track toward its 2% target.
However, we did not expect to see any sizeable amount of more asset purchase as
49.3% of Japanese government bonds have already been held by the BOJ.
As for Thailand, the Bank of Thailand (BOT) expressed more concerns on its economic
growth. Impacts of US-China trade tariff did not only hurt Thai exports, but domestic
investment and employment started to show signs of weakness. This highlighted the fact
that the domestic economy will expand more slowly at the same time where public
spending are capped by a delay of new budget act. Thai inflation tended to remain
subdued with an average of 0.8% in this year due to both weak demands and lower cost
of energy prices. Unfortunately, given BOT’s limited policy space and substantially large
household debts to GDP of as much 78.7%, we expect the BOT to delay its second rate
cut to December 2019. Given the fact that the bond yields with the maturity of 0-15 years
are currently behind the policy rate, signaling that the market have already priced in a
possible rate cut by the end of this year. That being said, the reduction of policy rate in
December might not have much impact on yields at the front-end of the curve if the BOT
won’t signal that it will enter the rate cut cycle.
8
Fig 1. Global monetary policies are on easing bias, lowering yields
Source: Compounded by KBank
Chinese bond inclusion possibly puts upward pressure on
the Thai bond yields in 2020
JP Morgan Chase & Co (JPM) announced to add Chinese government bonds in its
benchmark bond indices. The inclusion will begin on February 28, 2020 until November
2020. This reflected China’s success to encourage foreign bond inflows to the country.
Referring to the JPM GBI-EM global diversified index, the main benchmark index for
emerging markets bond mutual funds, China’s weight will be capped at 10% by smoothly
adding the Chinese bonds 1% each month. The process is expected to be completed in
November. According to JPM, the assets that are tracking the JPM GBI-EM global
diversified benchmark are USD 202 billion. This means, only this benchmark, the assets
of approximately USD 20.2 billion will flow into the Chinese bond market next year.
Fig 2. Timeline for an inclusion of Chinese government bonds in the GBI-EM global diversified index
Feb-20
1.0%
Timeline for inclusion of China Government bond in GBI-EM diversified
current
0%
Mar-20
2.0%
Apr-20
3.0%
May-20
4.0%
Jun-20
5.0%
Jul-20
6.0%
Aug-20
7.0%
Sep-20
8.0%
Oct-20
9.0%
Nov-20
10.0%
Source: Bloomberg, KBank
JPM’s announcement followed the Bloomberg Barclays global benchmark index and the
FTSE Russell index that had added Chinese bonds since April 2019 and 26 September
2019, respectively. This reflected that foreign investors will continually increase their
Chines bond holdings. Currently, the foreign holdings rose to 8.3% in August 2019,
quadruple from 2.0% in July 2014 (Fig 3).
Given the law of scarcity, an inclusion of Chinese bonds in the index will be compensated
by an exclusion of other emerging markets bonds from the index. The JPM reported that
9
the share of top-10 holdings for the GBI-EM Global Diversified index will be changed.
Brazil and China will be kept at the largest share at 10% each while others’ share will
decline. Colombia and Thailand appear to be the biggest losers as their shares will be
reduced the most by 1.02% and 1.05%, respectively (Fig 4).
Fig 3. Share of foreign holding in Chines bonds
Fig 4. A change in the weight of top-10 holdings of the
JPM GBI-EM global diversified index
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19
Top 10 holdings for GBI-EM Global Diversified Index
Country Old weighting New weighting Change
China 0% 10% 10%
Brazil 10% 10% 0%
Mexico 10% 9.95% -0.05%
Indonesia 10% 9.47% -0.53%
Thailand 9.37% 8.32% -1.05%
Poland 8.86% 7.86% -1.00%
South Africa 8.49% 7.51% -0.98%
Russia 7.99% 7.11% -0.88%
Colombia 6.56% 5.54% -1.02%
Malaysia 6.12% 5.17% -0.95% Source: CEIC, KBank Source: Bloomberg, KBank
As for Thailand, the Chinese bond inclusion will result in a lower weigh of Thai bonds in
the index from 9.32% to 8.32%. This implied capital outflows from 14 Thai benchmark
bonds during February – November 2020, of approximately USD 0.21 billion per month
(or THB 6.4 billion), accounting for 26% of total foreign inflows to Thai bonds with a
maturity of more than 1 years in 2018. The sensitivity analysis showed that the 5-yr Thai
government bond yield will rise in a range of 12-20 bps due to the impact. However, this
might not impact the USD/THB to rise next year as monthly capital outflows of USD 0.2
billion would be offset by a much larger current account surplus of average USD 2.7
billion per month in 2018.
Fig 5. Market capitalization of Thai bonds in the GBI-EM
Global Diversified index
LB21DA LB226A LB22DA LB236A LB23DA LB25DA LB26DA
USD mn 9,325 5,873 6,912 7,053 6,942 7,749 7,852
% 0.78 0.49 0.58 0.59 0.58 0.65 0.65
LB28DA LB296A LB316A LB326A LB366A LB386A LB466A
USD mn 6,194 9,639 7,878 10,206 7,939 4,809 7,315
% 0.52 0.80 0.66 0.85 0.66 0.40 0.61 Source: Bloomberg, KBank
10
Thai government bond yield curves Thai government bond yield movements
1.39 1.40 1.41 1.401.37 1.37 1.38 1.37
1.40 1.42 1.43 1.44 1.45 1.48
1.64
1.84
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
1m 3m 6m 1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 15y 20y 30y
%
tenor
4-Oct-19
30-Sep-19
31-Aug-19
0
20
40
60
80
100
120
1.3
1.7
2.1
2.5
2.9
3.3
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
bps%
2-10 spread policy rate 2y 5y 10y
Source: Bloomberg, KBank Source: Bloomberg, KBank
Thai bond market trading Non-resident position in Thai bond market
Unit: THB mn Jul-19 Aug-19 Sep-19 Oct-19 YTD
Average trading value 888,246 906,095 994,216 928,358 965,645
- Short-term (TTM<1) 253,472 209,605 359,130 31,915 267,279
- Long-term (TTM>1) 574,009 789,951 661,341 95,895 557,555
Asset Mgnt. Companies (TTM>1) 44,731 40,818 58,439 -1,066 288,492
- Total flows -25,459 -34,649 -19,826 -5,839 -76,923
- Long-term (TTM>1) 17,227 -11,297 -9,053 -7,332 42,007
- Short-term (TTM<1) -42,353 -20,853 -1,362 1,493 -57,203
- Expired bond -333 -2,499 -9,412 0 -61,727
-Foregin holding in GB (% share) 18.0 17.7 NA NA NA
Domestic investors
Foreign investors
21.8
31.5
12.5
23.9
14.6
21.5
12.3
12.8
9.2
28.9
27.0
37.4
13.1
14.1
19.3
Aug-19
Sep-19
Oct-19
Composition of NR trading by TTM (% share)
0-1Y 1-3Y 3-5Y 5-10Y >10Y
7.3
6.5
6.9
15.8
16.6
16.0
16.1
16.4
16.4
31.6
31.8
32.0
29.2
28.7
28.8
Aug-19
Sep-19
Oct-19
Net foreign bond holding by TTM (% share)
0-1Y 1-3Y 3-5Y 5-10Y >10Y
Source: CEIC, KBank Source: CEIC, KBank
Government bond yield projections
Thai government bond yields
Unit: % 4Q19F 1Q20F 2Q20F 3Q20F 4Q20F 1Q21F 2Q21F 3Q21F
Thai central bank rate 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25
2Y Thai government bond yield 1.40 1.53 1.51 1.53 1.53 1.55 1.56 1.66
5Y Thai government bond yield 1.44 1.39 1.41 1.43 1.48 1.44 1.45 1.53
10Y Thai government bond yield 1.62 1.72 1.71 1.72 1.74 1.79 1.79 1.80
US Treasury yields
Unit: % 4Q19F 1Q20F 2Q20F 3Q20F 4Q20F 1Q21F 2Q21F 3Q21F
Fed Funds rate (Upper bound) 1.75 1.50 1.25 1.25 1.25 1.50 1.50 1.50
2Y US Treasury yield 1.62 1.54 1.54 1.60 1.72 1.74 1.75 1.77
10Y US Treasury yield 1.74 1.86 1.97 2.01 2.11 2.06 2.05 2.05
Source: KBank as of 7 October 2019
11
Economic Update
August economic indicators showed a raft of dismal data
KResearch has revised downward our 2019 GDP growth forecast to
2.8% due to weak external sectors and subdue domestic investment
Global economy is heading towards a downhill but not a cliff edge
Units: %YoY, or indicated otherwise 2018 1Q-19 2Q-19 Jun-19 Jul-19 Aug-19 Sep-19 YTD- 2019
Private Consumption Index (PCI) 3.1 4.3 3.3 1.9 2.8 2.2
3.4
· Non-durables Index 1.4 2.4 3.3 2.4 2.5 1.5
2.6
· Durables Index 8.4 5.3 0.1 -3.7 0.5 -4.0
1.5
· Service Index 5.2 3.5 2.6 1.8 1.8 2.3
2.6
· Passenger Car Sales 19.2 12.9 1.9 -2.4 -4.0 -6.6
3.8
· Motorcycle Sales -1.3 0.4 -6.1 -10.9 6.4 -0.5
-1.0
Private Investment Index (PII) 3.5 -1.0 -2.8 -6.0 0.1 -5.0
-2.2
· Construction Material Sales Index 4.5 1.0 2.5 2.6 -1.4 -7.9
0.0
· Domestic Machinery Sales at constant prices 5.9 -2.4 -4.1 -6.4 -4.9 -2.6
-3.8
· Imports of Capital Goods at constant prices 3.7 2.6 -2.1 -12.2 8.1 -8.8
-0.1 · Newly Registered Motor Vehicles for
Investment 5.7 6.6 -1.8 -6.8 5.2 -8.2
1.3
Manufacturing Production Index 3.6 -1.2 -2.7 -5.4 -3.4 -5.0
-2.5
· Capacity Utilization 68.8 68.3 67.5 65.7 66.7 66.5
67.6
Agriculture Production Index 6.5 2.6 -2.4 0.3 0.5 0.8 -0.5
· Agriculture Price Index -5.7 -0.6 2.1 0.5 6.1 1.6 0.8
No. of Tourists 7.5 1.8 1.1 0.9 4.8 7.4
2.6
Exports (Custom basis) 6.9 -0.6 -0.6 -2.2 4.3 -4.0
-2.2
Price 3.4 0.4 0.2 0.2 0.6 0.3
0.3
Volume 3.9 -4.4 -4.4 -2.3 3.7 -4.3
-2.5
Imports (Custom basis) 12.1 -1.4 -1.4 -9.4 1.7 -14.6
-3.6
Price 5.6 0.2 -0.1 -0.6 0.4 -0.3
0.0
Volume 7.7 -3.0 -1.3 -8.9 1.2 -14.3
-3.6
Trade Balance ($ millions) (Custom basis) 3.25 2.01 1.76 3.21 0.11 2.05
6.1
Current Account ($ millions) 32.39 12.49 4.93 3.92 1.77 3.99 25.1
Broad Money 5.1 3.7 4.3 3.3 3.8 4.5
4.0
Headline CPI 0.66 0.74 1.08 0.87 0.98 0.52 0.32 0.81
USD/THB (Reference Rate) 32.3 33.0 31.6 31.8 31.1 30.8 30.6 31.3
Sources: BOT, MOC, OAE, and OIE
Warat Niamsa-ing, KResearch [email protected]
12
Thailand Economic Update
August economic indicators showed a raft of dismal data
After the dust settled following the low base effect in July, a string of disappointing
economic data appeared in August. Both exports and private investment contracted at
a faster pace. Meanwhile, government spending experienced a delay. However,
tourism was the only bright spot in this month.
Fig 1. Key economic indicators
Source: BOT, OIE, KResearch
The Private Consumption Index (PCI) decelerated in August. It grew merely 2.2%
YoY against 2.8% YoY in July 2019. A slowdown in non-farm income contributed a broad-
based decline in consumption. Consumption in durable goods contracted amid lukewarm
demand in automobile sales. However, consumption in non-durable items and service
remained level as some government stimulus started feeding into the economy.
The Private Investment Index (PII) plummeted 5.0% YoY, due to a sharp decline in
imports of capital goods and vehicle sales. Overall, the investment gauges reported a
board-base of contraction in sub-categories. The contractors shrugged off their new
projects amid the enforcement of LTV measure as well as deteriorating consumer
spending. Meanwhile, imports of capital goods took a toll on heightened trade war
between the US and China.
The number of foreign tourist arrivals to Thailand expanded 7.4% YoY, led by a rise
in Chinese tourists. Chinese visitors rose 18.9% YoY due to visa on arrival fee waiver
as well as the protest in Hong Kong. However, economic slowdown in these countries
caused a mild contraction in visitors from these region.
Government spending dropped 5.3% YoY in August due to a decline in general
budget disbursement. The general budget fell 6.6% YoY, while investment budget
remained unchanged from the previous year. Overall, the disbursements were rather
behind the schedule, especially SOEs because some SOEs were waiting for the new
board of directors to reconsider the plan.
On the external front, August exports fell 4.0% YoY as trade tension between the
US and China has intensified. Overall exports, excluding gold, contracted at a faster
pace of 7.3% YoY. Exports of electronics, machineary, ICs and petroleum products were
among the worst performance. In terms of export destinations, exports to major
destinations excluding the US reported a sharp decline. Given the scenario that the trade
dispute between the US and China may not dissipate by the end of 2019 or materially
escalate from the current status quo, KResearch has revised our 2019 export forecast
from 0.0% to -1.0%.
13
Headline inflation slipped to 0.32% YoY in September. A decline of 6.4% YoY in
energy items caused a slowdown in inflation overall. Meanwile, the core CPI rose 0.44%
YoY. All in all, the inflation still fell short of the lower band of inflation target but an
increase in excise tax may reignite growth in inflation in the late 2019. KResearch
expects that headline inflation may rise around an average of 0.8% in 2019.
KResearch has revised downward our 2019 GDP growth forecast to
2.8% due to weak external sectors and subdue domestic investment
Amidst the prolonged trade dispute between the US and China, KResearch was
revised downward our 2019 GDP growth forecast to 2.8%. We expect that the impact
from the trade war towards Thai exports would be USD2.1-3.0bn in 2019. The damage
would be primarily seen in electronics part and chemical sectors as they were linked to
the US-China supply chain. Due to the impact of the trade war, we also downgraded
investment outlook as private sector shrugged off investment amid rising uncertainties
over economic prospects. Regarding consumption, we maintain that domestic
consumption may grow ahead. The government stimulus could provide cushion against
risks but may fail to boost the economic growth overall.
% YoY
2019F*
(Previous)
Base Case Range Base Case
GDP 4.1 3.1 2.5-3.0 2.8
Private Consumption 4.6 4.2 3.9-4.5 4.2
Government Consumption 1.8 2.5 2.0-2.5 2.3
Total Investment 3.8 3.1 2.5-3.4 2.8
- Private investment 3.9 4.2 3.0-3.5 3.2
- Public investment 3.3 1.5 0.5-3.0 1.5
Gov't Budget Deficit (% of GDP) -3.0 -3.1 -2.8 to -2.3 -2.5
Exports (Customs Basis) 6.9 0.0 -2.0 to 0.0 -1.0
Imports (Customs Basis) 12.1 0.8 -5.0 to 1.0 -3.0
Current Account (USD bn) 37.7 30.0 35.1 28.0-36.0
Headline Inflation 1.1 0.8 0.6-1.0 0.8
2019F*
2018
Global Economic Update
Global economy is heading towards a downhill but not a cliff edge.
Although the global economy has faced many pieces of bad news, the environment is still
far from the crisis. Apart from the trade-inflicted sectors, consumption overall remained
intact. Non-Manufacturing PMIs in many regions stayed above 50 demarcation line,
suggesting a further expansion in the activities. Low gasoline prices, subdued inflationary
pressure and monetary supports from central banks could help support the continuity of
consumer spending. As a result, consumer spending continues to support pace the
economy, even as business investment has pulled back.
However, there are several risk factors that could alternate recovery path. The political
situation in the US will determine the global growth in the coming months. Trade
uncertainties as well as Brexit issues become the turning point in economic development
toward 2020.
The trade conflicts between the US and China are likely remains
unresolved before the presidential election. KResearch views that the
trade breakthrough between the US and China will unlikely happen
14
anytime soon or significant escalation from the current status quo. Given
the wide gap between Washington and Beijing, the trade negotiation in
mid-October would not produce a material progress to reach a temporary
deal. China may wait until 2020 presidential election to seek for a better
deal. Despite a slowdown in the US economy, US policy direction,
including trade policy could be quite popular. However, weak economic
data in both the US and China may prevent both parties to escalate
tariffs materially in the future.
WTO airbus ruling could pave a way to a new USD 7.5bn tariffs but
the negotiation remains open. The EU is not allowed to retaliate per
the WTO decision, while a similar WTO ruling on Boeing subsidies would
not expect to happen before mid-2020. This could limit the retaliatory
measures from the EU. Also, weak manufacturing data in the US could
deter it from imposing draconian measures that could damaging to both
economies, which are closely integrated.
Uncertainty over no-deal Brexit remains high. KResearch believes
that the likelihood of no-deal Brexit is higher today than it was in the past;
however, it is not yet an inevitability. Currently, PM Johnson has tried to
secure his final Brexit agreement during EU council summit on October
17-18. However, there are uncertainties whether the EU agree with the
plan or the UK parliament gives a vote for the deal. Hence, chance of no-
deal Brexit remains high as PM Johnson insists that he will not delay
Brexit deadline beyond October 31, 2019.
15
We reiterate our positive market view with our 12-month forward
SET Index target maintained at 1,750. Key supporting factors for
our positive view remain the government measures to boost the
economy, potential sovereign credit rating upgrades, dovish key
central banks and an EM rate cut cycle.
We maintain our near-term trading range for the SET Index at 1,586-
1,681, which is pegged between mean and +0.25SD of the earnings
yield gap. This is unchanged from our review in our August strategy
paper. Key underlying changes this time are: 1) a slight drop in the
10-year bond yield to 1.5% vs 1.54% previously; 2) slightly lower 12-
month forward EPS at 107 vs 108 previously.
We see some possibility for the BOT to ease towards yearend,
subject to three conditions: dovish G3 central banks, another round
of rate cuts by regional central banks and expectations Thailand’s
2019 GDP growth will fall far below 3%. We see the BOT being
reluctant to relax its monetary policy and we believe it might
choose to ease its macro-prudential measures instead, both of
which, if happened, will benefit the property sector.
There have been some positive signs that the trade war tension is
easing, suggesting that a deal may be agreed between the US and
China at the upcoming October talks although any agreement is
likely to be only a partial one. If US President Donald Trump is
feeling pressure from domestic issues, we believe that he is likely
to lower the tension with China.
As we see a strong relationship between the current account and
loan growth, we believe that the room for the Thai baht to
appreciate further is limited as Thai banks’ loan growth appears to
have troughed. Meanwhile, while it might still be too early to buy,
there is no harm in putting the Thai electronics sector on the radar
screen as the weaker Thai baht will help sector profitability.
Statistically October looks to be a volatile month for global and
Thai market where SET Index showed the biggest high-low gap of
6.2% vs 4.1% for other months of the year. We see a good
opportunity to accumulate if the SET Index tests our lower band of
1,586.
Strategist’s preferred sectors and top picks
We remove AMATA, CPALL, ERW, INTUCH, MINT, and TKN from our top picks in the
October strategy though we still have positive views on these stocks. With the new
thematic approaches, we replace these stocks with TOP, PRM, TASCO, AP, SPALI, and
GFPT. We now have five themes for our monthly top picks:
Equity market monitor: ―The Art of the Deal‖
Equity Research Team
16
ICT sector (DTAC and TRUE) on robust revenue and core profit growth in
2H19E following benign competition as implied by rising ARPUs, lower handset
subsidies and well contained marketing costs for the entire mobile industry.
Key beneficiaries from IMO 2020 (TOP, PRM, BGC, and TASCO) on the
change in global shipping fuel usage.
Property sector (AP, SPALI) on potential relaxation of the BOT’s LTV
measures.
Key beneficiaries from the African swine flu (CPF and GFPT) on higher
chicken exports to China and higher swine prices in Vietnam.
Infrastructure funds (JASIF and TFFIF) on the current low interest rate
environment and opportunities for new asset injections.
12-mth forward SET Index target of 1,750
We maintain our positive market view with a 12-month forward SET Index target of 1,750.
Since our August update, the market has drifted in a relatively sideways pattern, mostly
reacting to the ups and downs of news about the US-China trade spat.
Key supporting factors for our positive market view remain the government measures to
boost the economy, potential sovereign credit rating upgrades following positive
adjustments of the country’s credit outlook by Fitch and Moody’s, a continued low interest
rate environment and Thailand’s strong external stability. Tourist arrivals have become a
positive factor again, partly due to the low base in 2018. For external factors, dovish key
central banks, low interest rates, a benign inflation outlook and an EM rate cut cycle
should help mitigate the impacts of the global economic slowdown.
Fig 1 Positive and negative factors that are in play
Domestic Overseas Domestic Overseas
Upcoming government policies to boost economy Dovish ECB and FED Lackluster GDP growth Weak global export
Potential sovereign credit rating upgrades Declining world interest rate Negative export growth US-China tension
Lower yield curve Benign world inflation outlook Market concerns on earnings outlook Weak China economic momentum
Strong external stability EM rate cut cycle Hard BREXIT
Positive tourist arrival growth due to low-base* HK situation
Key positive factors Key negative factors
Source: Bloomberg, KS Research, * previously one of the key negative domestic factors (August strategy)
While our house view is that the BOT will hold its policy rate at 1.5%, we see some
possibility of a rate cut towards year-end, subject to three conditions (see next
paragraph). We see the BOT being reluctant to relax its monetary policy and instead
choosing to loosen the macro-prudential measures instead, both of which will benefit the
property sector.
Three rate cut conditions:
Dovish G3 central banks.
Another round of rate cuts by regional central banks.
Expectations Thailand’s 2019 GDP growth will fall far short of 3%.
We see some positive signs that the trade war tension is easing. This potentially
suggests that a deal may be agreed between the US and China at the upcoming October
talks although any agreement is likely to only yield only minor concessions rather than
result in a comprehensive agreement. If US President Donald Trump is feeling pressure
from domestic issues (lower approval rating, potential impeachment, rising US recession
probability), we believe that he is likely to seek to ratchet down the tension with China.
17
As we see a strong relationship between the current account and loan growth, we believe
that the room for the Thai baht to appreciate further is limited as Thai banks’ loan growth
looks likely to hit a trough soon. Meanwhile, while it might still be too early to buy, there is
no harm in putting the Thai electronics sector on the radar screen as a weaker Thai baht
will definitely help sector profitability.
Fig. 2 Thai and regional credit ratings/outlooks by key rating agencies
Standard&Poor's Fitch Moody's
Thailand BBB+ (stable) BBB+ (positive) Baa1 (positive)
Indonesia BBB (stable) BBB (stable) Baa2 (stable)
Philippines BBB+ (stable) BBB (stable) Baa2 (stable)
Malaysia A- (stable) A- (stable) A3 (stable)
South Korea AA (stable) AA- (stable) Aa2 (stable)
Taiwan AA-u (stable) AA- (stable) Aa3 (stable)
Credit rating (outlook)Country
Source: Bloomberg, KS Research
Fig. 3 Strong external stability
2015 2017 2018 2015 2017 2018 2015 2017 2018 2015 2017 2018
Thailand 8.0% 11.0% 7.0% -2.6% -3.5% -2.5% 32.0% 36.7% 35.2% 1.2 1.2 1.2
Indonesia -2.1% -1.6% -3.0% -2.6% -2.9% -1.9% 36.1% 34.8% 34.0% 0.3 0.4 0.3
Philippines 2.5% -0.8% -2.4% -0.9% -2.2% -3.2% 26.5% 23.3% 25.0% 0.9 1.0 1.0
Malaysia 2.9% 3.1% 2.3% -3.2% -3.0% -3.7% 72.2% 65.0% 75.0% 0.4 0.5 0.4
South Korea 7.7% 4.9% 4.7% 1.3% 2.8% 2.5% 28.6% 27.3% 27.0% 0.9 0.9 0.9
Taiwan 14.3% 14.3% 12.2% 0.2% -0.1% 0.1% 30.2% 31.8% 33.0% 2.7 2.5 2.4
CountryReserve / external debt (x time)Current account (% of GDP) External debt (% of GDP)Fiscal balance (% of GDP)
Source: Bloomberg, CEIC, KS Research
We remove AMATA, CPALL, ERW, INTUCH, MINT, and TKN from our top picks in our
October strategy paper even though we still have positive views on these stocks. With
our new thematic approaches, we replace them with TOP, PRM, TASCO, AP, SPALI,
and GFPT. We now have five themes for our monthly top picks as follows:
• ICT sector (DTAC and TRUE) on robust revenue and core profit growth in 2H19
following benign competition as implied by rising ARPUs, lower handset
subsidies and well contained marketing costs for the entire mobile industry;
• Key beneficiaries from IMO 2020 (TOP, PRM, BGC, and TASCO) on the
change in global shipping fuel usage;
• Property sector (AP and SPALI) on potential relaxation of the BOT’s LTV
measures and a potential policy rate cut;
• Key beneficiaries from the African swine flu outbreak (CPF and GFPT) on
higher chicken exports to China and higher swine prices in Vietnam;
• and Infrastructure funds (JASIF and TFFIF) on the current low interest rate
environment and outlook for new asset injections.
18
Fig. 4 Performance of KS’s top picks in our July strategy paper
28-Aug-19 26-Sep-19 % change
AMATA 26.50 25.00 -5.66%
BGC 15.10 15.30 1.32%
CPALL 83.25 79.75 -4.20%
CPF 29.75 26.50 -10.92%
DTAC 62.00 57.75 -6.85%
ERW 5.60 5.85 4.46%
INTUCH 64.25 65.00 1.17%
JASIF 11.50 11.00 -4.35%
MINT 37.75 37.50 -0.66%
TFFIF 13.20 13.10 -0.76%
TKN 10.30 10.70 3.88%
TRUE 6.15 5.35 -13.01%
Simple avg -2.96%
SET Index 1616.93 1636.75 1.23% Source: Bloomberg, KS Research
Fig. 5 SET Index and major sectors: Bloomberg consensus forecasts & valuations
Index ROE (%) Div yld (%)
(27 Sep) % YTD 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2019E
SET 1,644 5.1 99.1 109.8 118.9 16.6 15.0 13.8 3.1 10.9 8.3 -14.2 -11.9 -8.3 10.5 3.1
Energy 25,454 10.6 1,713.3 1,921.4 1,966.0 14.9 13.2 12.9 -1.3 12.1 2.3 -19.5 -12.2 -11.4 11.3 3.3
Petrochem 930 -27.6 83.6 105.0 113.6 11.1 8.9 8.2 -36.9 25.6 8.2 -43.5 -32.8 -27.6 8.9 3.9
Banks 462 -9.9 50.4 53.0 58.1 9.2 8.7 7.9 4.8 5.2 9.6 -5.7 -11.3 -6.2 9.2 4.2
Telcos 175 23.8 8.5 9.0 9.5 20.6 19.5 18.4 16.5 5.5 5.8 -7.4 -3.7 4.2 6.2 3.8
Commerce 42,754 9.3 1,454.9 1,645.4 1,849.1 29.4 26.0 23.1 4.6 13.1 12.4 -4.3 -4.6 0.9 20.2 1.9
Property 275 -1.5 21.5 23.4 24.4 12.8 11.8 11.3 18.7 8.7 4.5 -6.8 -9.0 -8.4 13.1 4.0
ConMat 10,552 -1.2 740.6 804.3 861.6 14.2 13.1 12.2 2.3 8.6 7.1 -11.8 -10.2 -16.6 7.4 3.6
Transport 417 14.6 9.7 12.2 16.3 42.8 34.1 25.6 51.7 25.6 33.1 -22.2 -12.1 4.8 13.1 1.7
Food 12,482 16.0 594.6 675.3 745.0 21.0 18.5 16.8 3.7 13.6 10.3 0.6 3.4 7.2 9.2 2.4
Healthcare 5,279 -6.4 165.0 174.0 189.8 32.0 30.3 27.8 5.8 5.4 9.1 -1.7 -9.7 -7.1 16.8 1.8
Hotel 554 -11.4 23.3 27.7 29.7 23.8 20.0 18.6 -6.4 19.1 7.4 -12.0 -5.7 -11.5 11.8 N/A
EPS growth (%) YTD EPS revision (%)EPS PER (x)
Source: Bloomberg, KS Research
Fig. 6 SET Index 12-month forward consensus PER
Fig. 7 SET Index 12-month forward consensus PBV
Source: Bloomberg, KS Research Source: Bloomberg, KS Research
Key risks to our positive call
The key risk to our call remains the US-China trade war. We expect a somewhat
positive outcome from the upcoming meeting due to recent positive gestures by
both sides. That said, we do not expect any comprehensive deal to be agreed this
year. While the global economy has been slowing down, the ongoing dispute and
increasingly harsh actions on each side might drag the world economy into a global
recession that would likely hurt the Thai stock market.
Another related key risk is an escalation into non-tariff measures, especially for the tech
industry, which, in our opinion, would have a much more serious impact on the global
economy. That said, we still see the current trade war as part of the overall geopolitical
19
competition between the US and China for world supremacy and thus we do not expect
either country will achieve its objectives from the dispute.
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 -10% (bearish) to +10% (bullish), depending on several key
factors, i.e., the economic outlook, broad market valuation, corporate earnings
momentum, etc. We still apply a “modestly bearish” adjustment (0 to -5%) but lower the
discount adjustment (-4.4%) with the key negative factors being ongoing weak global
exports and the recent escalation of the US-China row, offset by the positive impact of a
lower bond yield.
Fig. 8 SET Index target setting
Unit: Btmn Base-line Bearish (-5% to -
10%)
Modestly bearish (0 to -
5%)
Neutral (0%) Modestly bullish (0% to
+5%)
Bullish (+5% to
+10%)
KS Coverage: Total market cap based on current share price 13,350,202
KS Coverage: Total market cap based on target price 14,862,187
- Upside/(downside) 11.3%
SET Index (27 September) 1,644
SET Index target (-4.4% adjustment = Modestly bearish) 1,830 1,750
Implied 12-months forward PER based on 2020 BB EPS consensus 15.9
Total return (based on 3% dividend yield) 9.5%
Strategist adjustment vs base-line SET Index target
Source: Bloomberg, KS Research
Lower near-term trading range to 1,586-1,681
We have more or less maintained our near-term trading range for the SET Index, now at
1,586-1,681 which is pegged between mean and +0.25SD of the earnings yield gap. This
is unchanged from our review in our August paper. Key underlying changes this time are:
1) a slight drop in the 10-year bond yield to 1.5% vs 1.54% previously; and 2) slightly
lower 12-month forward EPS of 107 vs 108 previously.
We also maintain our view that a potentially partial US-China trade deal from the
upcoming October meeting could quickly bring the SET Index back to the upper end of
our near-term trading range, i.e. 1,681 (historical mean of the earnings yield gap). Since
2014, the SET Index’s earnings yield gap has mostly traded below the historical mean,
except for one time in 2016 (rising US yield curve) and again in August 2019 (re-
escalation of the US-China trade war, renewed concerns of a US recession, HK protests
and Brexit). Other than that, the SET Index’s earnings yield gap since 2014 has moved
between mean (bearish direction) and -1SD (bullish direction).
Fig 9 Near-term trading range of SET Index
As at 27 Sep 2019 As at 27 Sep 2019
Earnings yield gap 10-yr bond yield Earnings yield 12mth forward market EPS Implied SET Index
-SD1 3.34% 1.50% 4.84% 107 2,210
-SD0.875 3.53% 1.50% 5.03% 107 2,126
-SD0.75 3.72% 1.50% 5.22% 107 2,048
-SD0.625 3.91% 1.50% 5.41% 107 1,976
-SD0.5 4.10% 1.50% 5.60% 107 1,909
-SD0.375 4.29% 1.50% 5.79% 107 1,846
-SD0.25 4.48% 1.50% 5.98% 107 1,788
-SD0.125 4.67% 1.50% 6.17% 107 1,732
mean 4.86% 1.50% 6.36% 107 1,681
+SD0.125 5.05% 1.50% 6.55% 107 1,632
+SD0.25 5.24% 1.50% 6.74% 107 1,586
+SD0.375 5.43% 1.50% 6.93% 107 1,542
+SD0.5 5.62% 1.50% 7.12% 107 1,501
+SD0.625 5.81% 1.50% 7.32% 107 1,462
+SD0.75 6.01% 1.50% 7.51% 107 1,425
+SD0.875 6.20% 1.50% 7.70% 107 1,389
+SD1 6.39% 1.50% 7.89% 107 1,356 Source: Bloomberg, KS Research
20
Fig. 10 Previous near-term trading range of SET Index
As at 23 Aug 2019 As at 23 Aug 2019
Earnings yield gap 10-yr bond yield Earnings yield 12mth forward market EPS Implied SET Index
-SD1 3.34% 1.54% 4.88% 108 2,208
-SD0.875 3.53% 1.54% 5.07% 108 2,125
-SD0.75 3.72% 1.54% 5.26% 108 2,048
-SD0.625 3.91% 1.54% 5.45% 108 1,976
-SD0.5 4.10% 1.54% 5.64% 108 1,910
-SD0.375 4.29% 1.54% 5.83% 108 1,847
-SD0.25 4.48% 1.54% 6.02% 108 1,789
-SD0.125 4.67% 1.54% 6.21% 108 1,734
mean 4.86% 1.54% 6.40% 108 1,683
+SD0.125 5.05% 1.54% 6.60% 108 1,634
+SD0.25 5.24% 1.54% 6.79% 108 1,588
+SD0.375 5.43% 1.54% 6.98% 108 1,545
+SD0.5 5.62% 1.54% 7.17% 108 1,504
+SD0.625 5.81% 1.54% 7.36% 108 1,465
+SD0.75 6.01% 1.54% 7.55% 108 1,428
+SD0.875 6.20% 1.54% 7.74% 108 1,393
+SD1 6.39% 1.54% 7.93% 108 1,359 Source: Bloomberg, KS Research
Fig. 11 Market yield gap (net of 10yr GBY)
Fig. 12 Market yield gap (net of 10yr 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
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
STD-2 STD-1 Mean= 4.9% STD+1 STD+2
Source: Bloomberg, KS Research Source: Bloomberg, KS Research
Will the Bank of Thailand turn more dovish? Not now but more probable towards
yearend
We have observed increasingly aggressive policy support from regional countries. On the
monetary front, Indonesia and Philippines have entered another policy rate cut cycle, with
the two countries lowering their policy rates to 5% and 4% respectively. In non-monetary
policy areas, Indonesia and India have been the most aggressive with corporate tax cuts,
massive government projects and the relaxation of macro-prudential policies. All of these
measures have been aimed at supporting growth and mitigating the impacts of the global
economic slowdown and the US-China trade war.
Fig. 13 Policy actions by regional central banks in 2019
Country Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19
India 6.50% 6.50% 6.25% 6.25% 6.00% 6.00% 5.75% 5.75% 5.40% 5.40%
Russia 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7.50% 7.25% 7.25% 7.00%
Chile 2.75% 3.00% 3.00% 3.00% 3.00% 3.00% 2.50% 2.50% 2.50% 2.00%
Australia 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.25% 1.00% 1.00% 1.00%
Indonesia 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 5.75% 5.50% 5.25%
Philippines 4.75% 4.75% 4.75% 4.75% 4.75% 4.50% 4.50% 4.50% 4.25% 4.00%
Malyasia 3.19% 3.25% 3.25% 3.17% 3.25% 3.00% 3.00% 3.00% 3.00% 3.00%
South Korea 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.50% 1.50% 1.50%
New Zealand 1.75% 1.75% 1.75% 1.75% 1.75% 1.50% 1.50% 1.50% 1.00% 1.00%
Thailand 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.50% 1.50% Source: Bloomberg, KS Research
21
Fig. 14 Non-monetary policy supports by Indonesia and India
Country Non-monetary policy relaxation Announcement Details
Indonesia Capital relocation Aug-19 US$33bn budget; relocation to Borneo starting from 2024
Corporate tax cut Sep-19 From 25% to 20%
Relaxation of LTV and autocar down payment Sep-19 5ppt higher for home LTV and 5-10ppt lower for auto down payment
Relaxation of macroprudential intermediation ratio (MIR) Sep-19 Broadening of MIR band (84-94%) to allow more room to lend
India Corporate tax cut Sep-19 Effective tax from 35% to 25% Source: KS Research
Will BOT turn more dovish in both monetary and non-monetary policies? Not now
but we see some possibility and it is conditional on three factors:
• Dovish G3 central banks. This condition has already been met with recent rate
cuts by both the ECB and Fed while the BoJ has maintained its super
accommodative monetary policy with ongoing QE.
• Another round of rate cuts by regional central banks. This condition has
been partially met with the recent cuts by Indonesia and Philippines. The non-
monetary policy support by Indonesia and India, especially relaxation of macro-
prudential measures by the BI, should weigh a lot on BOT’s overall decision-
making processes.
• Expectations Thailand’s 2019 GDP growth will fall far below 3%. Currently
we expect 2019 GDP growth at 2.8%, in line with the BOT’s updated forecast.
Given the ongoing export weakness, private consumption, the key engine so far,
might fail to sustain the overall growth rate. The ongoing floods in the
Northeastern region, declining loan growth, strong baht and the BOT’s so-far firm
stance on high household debt might further slow the economy.
More reluctant to relax monetary policy. We see the BOT being averse to relaxing its
monetary policy. The BOT is likely to wait for all necessary confirmation of economic
readings before making another cut. We do understand the importance of maintaining
some policy space, which looks to be limited given the absolute policy rate of 1.5%, real
interest rate of approximately 0.5% and Thailand’s EM status. Note that the BOT decided
to keep the policy rate unchanged at its most recent meeting. There are two more MPC
meetings this year, one on Nov. 6 and another on Dec. 18. If the BOT decides to cut the
rate, the big banks will be asked to cut their commercial interest rates, which will hit their
earnings by 5-7%. Small banks, non-banks, property, yield plays and interest-rate-
sensitive sectors will be the key beneficiaries.
Relaxation of macro-prudential measures might come first. Rather than make a rate
cut, the BOT might decide to relax its macro-prudential policies, which we see having a
stronger pass-through effect via retail lending and thus are a more probable option. This
path will compromise the BOT’s firm stance on household debt and is a tough trade-off
because the BOT has a very cautious view on high indebtedness among low-income
earners as well as ongoing concerns about the property market bubble/oversupply
situation. The relaxation of macro-prudential measures will be positive for Thai property
due to the easier lending rules.
Some positive signs help ease trade war tension
We see some positive signs that in our opinion should help ease the trade war tension.
This potentially suggests some sort of trade deal between the US and China at the
upcoming October trade talks. That said, in our opinion it is more probable that a partial
trade deal will be reached rather than a comprehensive one. We see a more positive
22
environment for trade talks next year when President Trump needs to focus on his re-
election campaign. The positive signs we have observed are:
• Good gestures from both sides ahead of the 14th US-China trade talks in
October. The US-China trade talks scheduled for Oct. 10 will be the 14th round!
Prior to this meeting, we have started to see some positive gestures that have
helped lower the tension. This began with China’s Tariff Commission of the State
Council announcing a delay of additional tariffs placed on US products. On the
US side, Trump agreed to delay placing an additional 5% tariff on USD250bn of
Chinese imports from Oct. 1 to 15 together with the exemption of 437 Chinese
goods from the higher tariffs.
• Trump’s falling approval rating. Recently a number of polls have shown a
decline in President Trump’s approval rating, including surveys by CNN (43% to
40%) and an ABC News-Washington Post Poll (51% to 46%). The main reasons
given by voters were a concern over a trade war-led recession and potential
impeachment of Trump. We believe Trump understands the concerns and will
address them ahead of his 2020-election bid. These reasons make us hopeful
about progress in the trade talks.
Fig. 15 Trump’s approval rating
Source: FiveThirtyEight.com, KS Research
• A potential impeachment, another battle at home. Another positive factor for
the US-China trade war is the start of impeachment proceedings against
President Trump. On top of his declining popularity, potential impeachment adds
to the list of his home-ground battles. From what we learnt from his “The Art of
the Deal” book (see Monthly strategy-“The Art of the Deal”, 28 August 2019) in
terms of managing business risk and downside, we believe that Trump will likely
relax his tough stance on China as there are too many balls in the air, which
might work against him at the same time.
Note that on Sep. 24, House Speaker Nancy Pelosi announced a formal
impeachment inquiry into President Trump. This was a consequence of a report
that he sought to cajole Ukrainian President Volodymyr Zelensky into investigate
a Trump political opponent, Joe Biden, who is also a potential US presidential
candidate. While we expect an impeachment process in the lower house to
happen in October, it would still be difficult to successfully impeach Trump as it
would require a two-thirds majority vote in the Senate, which is controlled by the
Republican Party.
23
Moreover, no president has ever been removed from office, although two
presidents were impeached, not convicted: Andrew Johnson and Bill Clinton.
Richard Nixon opted to resign before he could be impeached. In terms of stock
market performance, the S&P Index struggled and the VIX rose during the
investigation periods.
Fig. 16 VIX jumped during the 1998 investigation of
Clinton.
Fig. 17 Volatility in the S&P during the investigation of
Clinton.
Source: Bloomberg, KS Research Source: Bloomberg, KS Research
Fig. 18 The S&P fell sharply before the resignation of
Nixon in 1974.
Source: Bloomberg, KS Research
• Creeping-up US recession probability. While a US recession definitely does
not bode well for the global stock market, the NY Fed’s US recession probability
gauge, which crept up to 38% in August, in our opinion will force President
Trump to tone down the intensity of his fight against China. We believe the he
definitely does not want the probability of a recession to reach a higher level
when he has to focus on his election campaign next year.
Interestingly despite the rising US recession, the US credit spread has actually
declined YTD. BBB/Baa credit spreads with is now 148bp over 10-years treasury,
vs 186bp in December 2018. The lower credit spread usually suggests a better
risk appetite, which normally happens when recession concerns are low.
24
Fig. 19 U.S. Recession probability
Fig. 20 US Corp Credit Spread
0
5
10
15
20
25
30
35
40
45
50
Sep-0
0
Jun-0
1
Mar-
02
Dec-0
2
Sep-0
3
Jun-0
4
Mar-
05
Dec-0
5
Sep-0
6
Jun-0
7
Mar-
08
Dec-0
8
Sep-0
9
Jun-1
0
Mar-
11
Dec-1
1
Sep-1
2
Jun-1
3
Mar-
14
Dec-1
4
Sep-1
5
Jun-1
6
Mar-
17
Dec-1
7
Sep-1
8
Jun-1
9
Mar-
20
12-month ahead U.S. recession probability %
46.32 41.71
37.93
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Fe
b-0
3
No
v-0
3
Au
g-0
4
Ma
y-0
5
Fe
b-0
6
No
v-0
6
Au
g-0
7
Ma
y-0
8
Fe
b-0
9
No
v-0
9
Au
g-1
0
Ma
y-1
1
Fe
b-1
2
No
v-1
2
Aug-1
3
Ma
y-1
4
Fe
b-1
5
No
v-1
5
Au
g-1
6
Ma
y-1
7
Fe
b-1
8
No
v-1
8
Au
g-1
9
US Corp BBB/Baa - Treasury 10 Year Spread%
Source: NY Fed, KS Research Source: Bloomberg and KS Research
Another 25bp rate cut by the Fed might be too much to ask for at the Oct FOMC
meeting. While current Fed fund futures still suggest consensus expects another 25 bps
rate cut at the Oct. 27-28 FOMC meeting, we see the market being disappointed as the
Fed has repeatedly referred to the last two cuts as “insurance cuts”, which should be
followed by a pause for a market reassessment. The “insurance cut” also means that the
Fed has been “market” dependent rather than data dependent. The recently rise in the 2-
year bond yield and latest dot-plot of 1.875% are two indicators that do not support
another cut.
Fig. 21 2-yr U.S. bond yield is a good leading indicator
of the Fed rate.
Fig. 22 Median 2019 dot-plot remains at 1.875%
Source: Bloomberg and KS Research Source: Bloomberg and KS Research
Statistically volatile in October; potentially wider gap in the SET Index. Statistically,
October tends to be associated with a volatile stock market. The US VIX Index in the last
three years moved the most in October, by 36.8% on average vs 3% for other months of
the year. The strong volatility in October can be observed in the SET Index as well, which
showed the biggest high-low gap of 6.2% (based on the last three year compilations) vs
4.1% for other months of the year. With lots of noise from the ongoing geopolitical issues,
October this year looks to be volatile as well.
25
Fig. 23 VIX Index showed very high volatility in
October
Fig. 24 Very high volatility in October
Source: Bloomberg and KS Research Source: Bloomberg and KS Research
Thai baht looks set to reverse; electronics, though still too early, should be on
investors’ radar screens
The Thai baht has soared against the US dollar this year, significantly more than its Asian
peers. Since the beginning of this year, Thailand’s currency has jumped more than 6.2%
YTD against the dollar to Bt30.50/USD. We believe the strength of the baht this year has
been mostly supported by the ongoing high current account surplus and Thailand’s
strong external stability.
Fig. 25 Thai baht has been the best performing
currency in emerging Asia on YTD basis
Fig. 26 Thailand’s current account as % of GDP
6.2
1.8 1.5 1.4
-0.1-1.0 -1.1 -1.2 -1.4
-3.4 -3.4
-7.0-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
THB JPY IDR PHP HKD TWD INR MYR SGD CNY CNH KRW
% YTD
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
-10,000
-5,000
0
5,000
10,000
15,000
20,000
1Q
10
3Q
10
1Q
11
3Q
11
1Q
12
3Q
12
1Q
13
3Q
13
1Q
14
3Q
14
1Q
15
3Q
15
1Q
16
3Q
16
1Q
17
3Q
17
1Q
18
3Q
18
1Q
19
(% of GDP)(USD, bn.) Current account % of GDP (RHS)
Source: Bank of Thailand, KS Research Source: Bloomberg and KS Research
Fig 27 Thailand external stability remains resilient
Thailand external stability 2013 2014 2015 2016 2017 2018
Current account (% of GDP) -1.2% 3.7% 8.0% 11.7% 11.0% 7.0%
External debt (% of GDP) 35.8% 34.7% 32.0% 32.5% 36.7% 35.2%
Reserve / short-term external debt (x time) 2.7 2.8 3.0 3.2 2.9 3.3
Reserve / external debt (x time) 1.1 1.1 1.1 1.2 1.3 1.2
Source: Bank of Thailand, Bloomberg, KS Research
Strong Thai baht due to lack of growth. The latest policy rate cut in August was able to
weaken the Thai baht for only a few days before it strengthened again. In our opinion, the
ongoing strength of the Thai currency has less to do with the level of the policy rate and
more to do with the country’s growth outlook. We have studied the correlation between
Thailand’s current account position and the loan growth of Thai banks and found a
negative correlation of -0.52. Though the correlation level is not very high, the negative
26
sign confirms our belief that strong loan growth can potentially lower the current account
surplus, a key factor behind the Thai baht’s strength. In 2012 and 2013 when loan growth
reached a double-digit level due to the aggressive government stimulus programs, we
observed the current account turning negative in 2013.
Currently the loan growth outlook of Thai banks remains weak with 3.5% YoY growth in
July 2019 vs our bank analyst Jantana Taveeratanasilp’s forecast of 4.1% for 2019E. The
weak loan growth could be attributed to the ongoing economic slowdown and the BOT’s
macro-prudential measures on retail lending. Our analyst believes that Thai bank loan
growth should not dip below 3% for 2019 and thus is potentially close to a trough.
Fig. 28 Current account and loan growth
Fig. 29 Thai banks: loan growth
-5
0
5
10
15
20
-10,000
-5,000
0
5,000
10,000
15,000
20,000
1Q05
4Q05
3Q06
2Q07
1Q08
4Q08
3Q09
2Q10
1Q11
4Q11
3Q12
2Q13
1Q14
4Q14
3Q15
2Q16
1Q17
4Q17
(%)(US$m) Current account (US$m, LH)Loan growth (%, RH)
6.1%
4.7%
3.5%3.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Jan-1
7
Feb-1
7
Mar-
17
Apr-
17
May-1
7
Jun-1
7
Jul-17
Aug-1
7
Sep-1
7
Oct
-17
Nov-1
7
Dec-
17
Jan-1
8
Feb-1
8
Mar-
18
Apr-
18
May-1
8
Jun-1
8
Jul-18
Dec-
18
Jan-1
9
Feb-1
9
Mar-
19
Apr-
19
May-1
9
Jun-1
9
Jul-19
Covered banks' YoY loan growth
Source: Bank of Thailand, KS Research Source: Bloomberg and KS Research
Thai baht looks to trough. Given that Thai banks’ loan growth looks to bottom out in the
near term, we believe that the room for the Thai baht to appreciate further is limited.
Other factors that might help weaken the baht are:
• A positive outcome from the upcoming US-China trade talks in October, which
will likely lower the baht’s appeal as a safe haven currency; and
• A more comprehensive economic stimulus plan, which supports investment and
loan growth, rather than just sustaining consumption and will likely weaken the
baht due to the potentially lower current account surplus.
On the other hand, a negative trade talk outcome from the October meeting will likely
result in a continued strong Thai baht due to potential flight to a currency safe haven
again. Gold exports are also likely to accelerate due to lower local consumption, which by
itself will further boost Thailand’s current account surplus.
Still too early for the electronics sector but it should be on radar screens. As we
believe that the Thai baht looks set to dip, there should be no harm in our
recommendation to put the Thai electronics sector on the radar screen again. The
weaker Thai baht will definitely help the sector’s profitability. Also a weak baht might be
associated with positive US-China trade talks, which should be positive for the Thai
electronics on a better demand outlook. Note that the sector has a high correlation with
GDP growth.
27
Fig 30 global GDP growth vs IC market growth Fig 31 Correlation coefficient of global GDP growth and
IC market growth
-40
-30
-20
-10
0
10
20
30
40
50
-1
0
1
2
3
4
5
6
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
%% Global GDP growth [LHS] IC market growth [RHS]
Source: SIA, KS Research Source: IC Insights
Sustainable Equity Fund, a new version of LTF
The Federation of Thai Capital Market Organizations (FETCO) proposed that the Ministry
of Finance replace the Long-Term Equity Fund (LTF) that is to expire this year with a
Sustainable Equity Fund (SEF), which is currently awaiting final government approval.
Fig 32 NAV of Thai equities funds and net flows –
excluding LTFs/RMFs (Bt mn)
Fig 33 NAV of LTFs and RMFs (Bt mn)
Source: Morningstar and KS Research Source: Morningstar and KS Research
Key differences between LTF and SEF are:
• Required investment policy: LTF is required to invest not less than 65% in Thai
equities, while SEF’s investment policy requires not less than a 65% investment
in the SET Thailand Sustainability Investment (SETTHSI) index and
infrastructure funds.
• Maximum tax-deductible amount: LTF allows up to 15% of taxable income but
not more than Bt500k, while SEF allows up to 30% of taxable income but not
more than Bt250k.
To qualify for a tax deductible, the minimum holding period for SEF is seven calendar
years, the same as for the current LTF.
Fig 34 Key conditions of LTF vs. SEF
Source: FETCO, SETTHSI index = SET Thailand Sustainability Investment index, IFF=Infrastructure Fund
28
Lower inflows from SEF but gap to close gradually. Based on our taxpayer
distribution profile assumptions (total 10.3m persons), we expect total inflows from SEF
of Bt29.5bn vs Bt34.0bn from the current LTF, due mainly to a lower maximum amount
(Bt500k for LTF vs Bt250k for SEF), which will reduce inflows from taxpayers in the
highest tax bracket of 30-35%. That said, we expect this gap to close gradually as
normally the number of taxpayers in the middle tax bracket is likely to grow faster going
forward.
Fig 35 Our estimated annual LTF flow model
Fig 36 Our estimated annual SEF flow model
0-150,000 exempt 6.3 - - -
150,001-300,000 5% 2 22,500 - -
300,001-500,000 10% 0.98 45,000 - -
500,001-750,000 15% 0.5 75,000 10,000 5,000
750,001-1,000,000 20% 0.2 112,500 15,000 3,000
1,000,001-2,000,000 25% 0.2 150,000 20,000 4,000
2,000,001-4,000,000 30% 0.05 300,000 200,000 10,000
more than 4,000,001 30-35% 0.03 500,000 400,000 12,000
10.26 34,000
Maximum LTF bought
per taxpayer (Bt)
Assumed LTF bought
per taxpayer (Bt)
Taxpayer
(mn)
Tax rate
(%)
Taxable income LTF flows
(Bt m)
0-150,000 exempt 6.3 - - -
150,001-300,000 5% 2 45,000 - -
300,001-500,000 10% 0.98 90,000 - -
500,001-750,000 15% 0.5 150,000 10,000 5,000
750,001-1,000,000 20% 0.2 225,000 15,000 3,000
1,000,001-2,000,000 25% 0.2 250,000 20,000 4,000
2,000,001-4,000,000 30% 0.05 250,000 200,000 10,000
more than 4,000,001 30-35% 0.03 250,000 250,000 7,500
10.26 29,500
Assumed SEF bought
per taxpayer (Bt)
SEF flows
(Bt m)
Taxable income Tax rate
(%)
Taxpayer
(mn)
Maximum SEF bought
per taxpayer (Bt)
Source: The Revenue Department and KS Research Source: The Revenue Department and KS Research
Fig 37 Annual LTF flows from 2014-1H19
Fig 38 Quarterly LTF flows from 2014-1H19
34,595 34,360
22,389
13,057
35,000
-14,000-20,000
-10,000
0
10,000
20,000
30,000
40,000
2014 2015 2016 2017 2018 1H19
Bt m
-20,000
-10,000
0
10,000
20,000
30,000
40,000
50,000
Q1 Q2 Q3 Q4
Bt m
2014 2015 2016 2017 2018 2019
Source: Morningstar and KS Research Source: Morningstar and KS Research
Stocks in the THSI index and Infrastructure funds to be key beneficiaries. Due to
the new investment policy requirements for SEF, stocks in the THSI index (Thailand
Sustainable Index) and Infrastructure funds will be the key beneficiaries of the shift from
LTF to SEF. Key criteria to be included in the THSI index are:
• stocks that pass the Stock Exchange’s ESG criteria (marked as “THSI List”). The
list is published annually in October.
• a minimum market capitalization of Bt5bn.
• a free float of not less than 20%.
There are currently eight infrastructure funds, i.e., JASIF, TFFIF, SUPEREIF, BTSGIF,
BRRGIF, ABPIF, DIF and EGATIF. We currently cover all of these funds.
Under SEF, losers would be stocks that are not included in the THSI list, but we believe
the list will be expanded significantly from here, as well as members of the TSHI index.
29
Fig 39 Stocks that pass the SET’s ESG criteria, i.e., THSI list
ADVANC MINT ADVANC KKP ADVANC IVL AAV KTC
AGE NSI AH LPN AMATA KBANK AEONTS LH
AH NYT AMATA MINT AOT KKP ANAN MAJOR
AKP PCSGH AOT NYT BANPU MINT AP MBK
AMATA PM BANPU PM BBL PSH BCH MEGA
AOT PPP BBL PSH BCP PTG BCPG MTC
BAFS PPS BCP PTG BEM PTT BDMS ORI
BANPU PSH BEM PTT BGRIM PTTEP BEAUTY OSP
BAY PT BGRIM PTTEP BPP PTTGC BEC PLANB
BBL PTG BPP PTTGC CENTEL RATCH BH PRM
BCP PTT CENTEL RATCH CK SCB BJC PSL
BEM PTTEP CK SAT CPALL SCC BLAND QH
BGRIM PTTGC CPALL SC CPF SPALI BTS ROBINS
BPP RATCH CPF SCB CPN STA CBG RS
BWG S&J CPN SCC DELTA TASCO CHG SAWAD
CENTEL SAT DELTA SPALI DTAC TISCO CKP SGP
CFRESH SC DTAC STA EA TMB COM7 SIRI
CHO SCB EA SYNEX EGCO TOP EPG SPRC
CK SCC EASTW TASCO GFPT TRUE ERW STEC
CPALL SCG EGCO THCOM HMPRO TTW ESSO SUPER
CPF SNC GFPT TISCO INTUCH TVO GLOBAL TCAP
CPN SPALI HMPRO TMB IRPC GPSC THAI
DELTA SSSC INTUCH TOP GULF THANI
DRT STA IRPC TRUE GUNKUL TKN
DTAC SYNEX IVL TTW HANA TOA
EA SYNTEC JWD TVO JAS TPIPP
EASTW TASCO KBANK JMT TU
EGCO TBSP KCE WHA
FPI THCOM KTB
GFPT TISCO
HMPRO TMB
HTC TOP
INTUCH TRUE
IRC TSC
IRPC TSTH
IVL TTCL
JWD TTW
KBANK TVO
KKP UAC
LPN
THSI List THSI index Both SET100 & THSI index SET 100 but not THSI list
Source: KS Research
Fig 40 Key investment summary of eight leasehold infrastructure funds
Ticker JASIF TFFIF SUPEREIF BTSGIF BRRGIF ABPIF DIF EGATIF
Market capital 63,800 59,410 6,489 63,668 3,290 3,750 183,928 28,363
Avg. trading volume 176.06 112.02 91.38 64.38 1.49 2.60 242.14 39.10
Rating Outperform Outperform Outperform Neutral Neutral Underperform Underperform Underperform
Target price 12.82 14.14 10.60 11.20 9.40 5.31 15.70 9.82
- Existing asset 12.82 10.29 10.60 9.43 9.40 5.31 15.70 8.89
- New asset injection - 3.85 - 1.77 - - - 0.93
Capital gain 11.5% 7.9% -15.9% 0.5% 1.8% -13.0% -6.6% -27.8%
Dividend yield 8.5% 2.7% 3.6% 5.8% 3.6% 9.5% 6.1% 5.9%
Market IRR 4.7% 4.3% 4.0% 4.9% 3.3% 10.4% 3.7% 0.9%
IPO IRR 7.2% 6.4% 6.2% 5.7% 6.3% 8.5% 9.4% 5.9%
Ownership Freehold Leasehold Leasehold Leasehold Leasehold Leasehold Freehold Leasehold
Remaining years n.a. 29 22 10 17 3 n.a. 17
Underlying asset Broadband Expressway Solar plant Rail mass transit Power plant Power plant Telecom Power plant
Major shareholder JAS Ministry of finance SUPER BTS group holding PCL Burirum sugar PCL Amata B.grimm power TRUE EGATF
Sponsor JAS EXAT SUPER BTS group holding PCL Burirum sugar PCL BGRIM TRUE EGAT
Prefered by order 1 2 3 4 5 6 7 8
Reason 1. Attractive IRR 1. Attractive IRR 1. Attractive IRR 1. Decent IRR 1. Attractive IRR 1. Attractive IRR 1. Decent IRR 1. Low IRR
2. Attractive dividend
yield2. DPU growth 2. Decent yield 2. New asset 2. Low liquidity 2. Low liquidity 2. DPU growth 2. No DPU growth
3. New asset 3. New asset 3. Long contract 3. No new asset 3. Short remaining life 3. Benefit from 5G
4. Freehold 4. Long contract 4. No new asset 4. Freehold Source: Company, KS Research
Expect 2H19E earnings to decline 1% HoH but grow 14% YoY
We expect aggregate 2H19 earnings of the stocks under our coverage to come in at
Bt381bn, down 1% HoH but up 14% YoY. Excluding DIF’s Bt4bn and BDMS’s Bt6bn
extra profits in 1Q19, aggregate earnings could have been up 2% HoH. Sectors that are
likely to report better HoH and YoY earnings are: commerce; finance (non-banks);
30
industrial estates; residential property and tourism. Stocks with a better 2H19E earnings
outlook vs. 1H19 (HoH) or 2H18 (YoY) are ADVANC, AOT, BGC, CBG, CHG, CKP,
COM7, DTAC, GUNKUL, GPSC, INTUCH, MEGA, PRM, TOP, TKN and TRUE.
Below are our short comments for major sectors.
• Energy & Petrochemical. Sector earnings remain volatile due to high product
spread volatility, fluctuations in oil prices and active maintenance shutdowns at
several domestic refineries in 2H19. We expect the energy sector’s earnings to
contract 15% HoH but grow 9% YoY, and the petrochemical sector earnings to
grow 61% HoH but drop 19% YoY.
• Residential property. We expect 2H19 earnings to grow 52% HoH and 10%YoY
after earnings should have troughed in 2Q19. Key positive factors are planned
transfers, which should peak in 4Q19. We believe the ongoing economic
slowdown will affect the launches more than planned transfers of units. The
sector will be one of the key beneficiaries if the Bank of Thailand cuts its policy
rate and/or relax the macro-prudential measures.
• Banks. We expect the sector’s 2H19 earnings to drop 8% HoH but increase 2%
YoY. This excludes a potential one-time extra profit at SCB from selling a stake
of SCB Life. 2H earnings, especially of big banks, should remain under pressure
from the latest rate cuts. If the BOT decides to lower another its policy rate by 25
bps, we expect earnings of big banks to decline by 5-7%.
• Commerce. The sector is likely to report positive earnings both HoH and YoY, as
3Q is normally the low season for consumer spending and 4Q the strongest
season of the year. The sector remains one of the key beneficiaries of the
government stimulus programs where CPALL and BJC will benefit the most.
Overall SSSG should remain positive in 3Q19 but soften QoQ.
• ICT. While we expect the sector’s earnings to drop HoH by 30% (partly due to
extra profit of DIF in 1Q19), the sector’s 2H19 earnings should remain positive
with growth of 81% YoY due to potential mobile service revenue growth, easing
competition in the fixed broadband market, and control over OPEX and CAPEX.
• Soft commodities. We forecast earnings to decline 15% HoH and 8% YoY,
which looks conservative given that we expect all key companies to report strong
3Q19 earnings that might continue into 4Q19, mainly due to the high season for
food exporters, good product prices and favorable raw material costs despite the
strengthening of the THB.
• Tourism. We expect the sector’s 2H19 earnings to grow 72% HoH and 75% YoY
due to a low base in 2018. 3Q19 earnings should grow YoY supported by
improving arrivals on the back of higher Chinese tourist numbers from a low base
last year. Hong Kong protests have helped drive Chinese tourists to Thailand.
Domestic passengers should recover in 3Q19 led by higher Chinese inbound
tourist growth and visits to key provincial cities.
• Healthcare. We expect the sector’s earnings to drop 37% HoH but increase 12%
YoY. Excluding BDMS’s gain of Bt6bn from an asset sale in 1Q19, earnings will
likely be flat HoH. While the sector remains under regulatory pressure in terms of
potential drug price control, its 2H19 earnings should be supported by higher
capacity and margin expansion. Smaller hospitals, particularly CHG, should
report higher earnings growth than that of their large peers in 2H19.
31
• Electronics. We expect sector earnings to expand 9% HoH but decline 33%
YoY. The sector has long been underperforming due to the weak baht, weak
exports and headwind from the US-China trade spat since 3Q18. Although we
have turned positive on the sector, it is well worth putting this sector under the
radar for a potential turnaround.
Fig. 41 2H19E earnings estimates of sectors under our coverage
Btm 2H18 1H19 2H19E HoH YoY 1H19, % of FY
Agribusiness & Food 13,597 14,803 12,517 -15.4% -7.9% 54%
Banks 78,748 87,362 80,358 -8% 2% 52%
Commerce 25,910 24,102 29,243 21% 13% 45%
Commercial property 5,458 5,317 6,246 17% 14% 46%
Construction Materials 20,779 19,817 21,046 6% 1% 48%
Contractor -929 4,101 3,189 -22% from Loss to Profit 56%
Electronics 5,624 3,458 3,757 9% -33% 48%
Energy 71,252 90,814 77,358 -15% 9% 54%
Finance & Securities 7,952 8,459 10,228 21% 29% 45%
Healthcare 7,608 13,566 8,508 -37% 12% 61%
ICT 16,284 41,924 29,536 -30% 81% 59%
Industrial Estate 1,433 1,043 1,873 80% 31% 36%
Infrastructure Fund 3,420 -1,627 4,007 -346% 17% -68%
Insurance 1,984 2,302 -1,631 -171% from Profit to Loss 343%
Media 157 73 157 117% 0% 32%
Packaging 239 245 349 43% 46% 41%
Personal Products & Pharma 225 15 142 869% -37% 9%
Petrochemical 30,196 15,280 24,580 61% -19% 38%
Property Fund 785 499 995 99% 27% 33%
Residential 20,669 14,891 22,693 52% 10% 40%
Transportation 5,369 13,088 21,346 63% 298% 38%
Tourism 3,664 3,723 6,399 72% 75% 37%
Utilities 21,669 30,037 27,763 -8% 28% 52%
MAI Industry 182 180 191 6% 5% 49%
Total 342,275 393,471 390,848 -1% 14% 50% Source: SET, Bloomberg, KS Research
Fig. 42 Stocks under our coverage that show a potential strong earnings improvement HoH or YoY
Btm 2H18 1H19 2H19E HoH YoY 1H19, % of FY
ADVANC ICT 13,640 15,324 15,421 0.6% 13.1% 50%
AOT Transportation 11,623 13,530 13,011 -3.8% 11.9% 51%
BGC Packaging 239 245 349 42.7% 46.2% 41%
CBG Agribusiness & Food 768 972 1,256 29.3% 63.5% 44%
CHG Healthcare 262 302 330 9.3% 25.9% 48%
CKP Utilities 520 223 481 115.4% -7.6% 32%
COM7 Commerce 500 544 622 14.3% 24.4% 47%
DTAC ICT -5,863 3,103 4,465 43.9% from Loss to Profit 41%
GPSC Utilities 1,385 2,023 2,871 41.9% 107.2% 41%
GUNKUL Utilities 1,071 662 1,320 99.4% 23.3% 33%
INTUCH ICT 4,553 5,845 6,291 7.6% 38.2% 48%
MEGA Commerce 662 474 779 64.4% 17.8% 38%
PRM Transportation 372 505 613 21.6% 64.8% 45%
TKN Agribusiness & Food 153 180 295 64.3% 92.3% 38%
TOP Energy -254 4,975 6,910 38.9% from Loss to Profit 42%
TRUE ICT -2,044 2,569 281 -89.1% from Loss to Profit 90% Source: SET, Bloomberg, KS Research
32
Potential general reserve reversal to support Thai banks’ P&Ls in 2020-2024
The BOT recently held a hearing on TFRS9 with one of the key clarifications being the
reversal of excess provisions (as of the first date of TFRS9 adoption) through P&L
statements over a five-year period (straight line) starting from January 2020. Based on
our estimates of additional reserve required for special mention loans (SMLs), performing
restructured loans, and management overlay provisions, we believe that BBL stands to
have the highest excess reserve that it can reverse.
The key change under TFRS9 regarding NPLs and provisions compared to the current
method is that under the new regime loans will be divided into three stages: performing
(Stage 1), under-performing (Stage 2), and non-performing (Stage 3) versus the current
six classes of classification. Under TFRS9, Stage 2 and Stage 3 loans require provisions
for the lifetime of the expected loss. The key change will be to Stage 2 loans, for which
banks are currently required to set provisions of only 2%.
Fig 43 Banks’ current excess reserves compared to required reserve
Bt Mn
Allowance for
doubtful
accounts Excess reserve Required Reserve
LLR/Require
d reserve NPLs SMLs
Restrucutred
loans NP 2020E Equity 2Q19 RWA 2Q19
BBL 152,623 93,818 58,804 259.5% 82,148 48,012 95,534 37,288 423,161 2,378,053
SCB 105,358 41,341 60,049 168.8% 68,885 73,873 39,380 42,705 394,717 2,187,434
KTB 142,708 61,842 80,866 176.5% 107,438 74,430 161,023 30,648 318,631 1,974,956
BAY 63,983 20,562 43,421 146.9% 38,221 54,605 24,550 31,268 259,041 1,594,729
TCAP 23,121 7,149 15,972 144.8% 20,299 33,366 9,076 7,769 69,592 786,429
TMB 30,071 11,570 17,456 166.3% 21,423 26,163 15,160 7,449 100,438 637,627
TISCO 11,283 3,283 5,679 209.3% 7,691 17,362 2,631 7,987 35,662 172,030
KKP 11,085 4,500 6,585 182.4% 9,798 12,453 187 6,046 42,042 258,312 Source: Company data, KS research
Based on our sensitivity analysis and assumption of probability of defaults (PD) and loss
given defaults (LGD) assuming an LGD of 55% and PD of 50% for Stage 2 loans, we
conclude that large banks are in a better position to have excess reserves to be released
under TFRS9 with BBL having the highest excess reserve to be amortized over 5 years,
followed by KTB and SCB respectively.
Note that the actual amount of reserve that can be reversed may deviate from our
projections and is likely be lower than our estimates, in our view, given that banks may
decide to qualitatively classify restructured/SMLs loans to NPLs or they may set higher
management overlay provisions than our estimates given the high uncertainty clouding
the economic outlook.
Fig 44 Sensitivity analysis of potential excess reserves that could be released per year
Bt Mn
Estimated
required reserve
for stage1 loans
under TFRS9
Estimated
required reserve
for stage2 loans
under TFRS9
Estimated
required reserve
for stage3 loans
under TFRS9
Estimated
additional
provisions for
restructured
loans
Estimated
required TFRS9
Estimated
management
overlay
Estimated
excess
reserve
under TFRS9
Estimated
excess
reserve that
can be
released per
annum % of NP % of equity % of RWA
BBL 18,922 13,203 45,181 9,195 86,501 18,923 47,198 7,552 20% 1.8% 0.3%
SCB 18,175 20,315 37,887 3,790 80,167 18,177 7,015 1,122 3% 0.3% 0.1%
KTB 18,882 20,468 59,091 15,498 113,940 18,884 9,884 1,581 5% 0.5% 0.1%
BAY 16,678 15,016 21,022 2,363 55,079 16,680 na na na na na
TCAP 6,635 9,176 11,164 874 27,848 6,635 na na na na na
TMB 6,334 7,195 11,783 1,459 26,771 6,335 na na na na na
TISCO 2,129 4,775 4,230 253 11,387 2,129 na na na na na
KKP 2,105 3,424 5,389 18 10,937 2,105 na na na na na Source: Company data, KS research
33
Preferred sectors and top picks
We removed AMATA, CPALL, ERW, INTUCH, MINT, and TKN from our top picks in our
August strategy report while we still have a positive view of these stocks. With a new
thematic approach, we replace these with TOP, PRM, TASCO, AP, SPALI, and GFPT.
We now have five themes for our monthly top picks, as follows:
• ICT sector (DTAC and TRUE) on robust revenue and core profit growth in 2H19
following positive competition so far through rising ARPUs, lower handset
subsidies and well contained marketing costs for the entire mobile industry.
• key beneficiaries of IMO 2020 (TOP, PRM, BGC, and TASCO) on a change in
global shipping fuel usage.
• property sector (AP and SPALI) on possible relaxation of the BOT’s LTV
measure and potential policy rate cut.
• key beneficiaries of African Swine Flu (CPF and GFPT) on higher chicken
exports to China and higher swine prices in Vietnam.
• infrastructure funds (JASIF and TFFIF) on the current low interest rate
environment and opportunity for new asset injections.
ICT (DTAC and TRUE).
Recent share price corrections of ADVANC, DTAC, TRUE and INTUCH offer a good
buying opportunity as we believe the market misinterpreted the short-lived and limited
price competition, and it has overlooked positive competition so far through rising
ARPUs, lower handset subsidies and well contained marketing costs for the entire mobile
industry. Share prices of ADVANC, DTAC, TRUE and INTUCH now offer upside potential
of 15%, 21%, 50% and 19% to our 2020E-based target prices. We expect these telcos to
generate robust revenue and core profit growth in 2H19, which should be good enough
for share price re-ratings.
Fig. 45 Top tier – Quarterly service revenue growth
rate (%YoY) scenarios
Fig. 46 Stronger service revenue growth from better
data monetization
Source: Companies and KS Research Source: Companies and KS Research
34
Fig. 47 Share price performance (YTD)
Fig 48 5G scenario analysis
25-Sep
Bt 2019 2018/17 YTD 2018/17 YTD
ADVANC 215.00 -9.7% 24.6% 1.3% 19.7%
DTAC 57.25 -11.7% 32.4% -1.0% 27.1%
TRUE 5.15 -16.1% -1.0% -5.9% -4.9%
JAS 6.25 -37.2% 40.1% -29.6% 34.6%
DIF 17.50 -0.7% 21.5% 11.4% 16.7%
JASIF 11.00 -18.0% 10.0% -8.1% 5.6%
THCOM 4.74 -51.6% -21.7% -45.7% -24.8%
INTUCH 64.75 -15.1% 35.6% -4.8% 30.2%
SET 1,628.38 -10.8% 4.1% 0.0% 0.0%
Absolute return Relative return
Scenario Definition
ADVANC DTAC TRUE
Best case IRR > WACC +++ +++ +++
Base case IRR = WACC +/- +/- +/-
Worst case IRR < WACC --- --- ---
Super worst
case
Change in
market structureNew low? New low? New low?
Share price reaction
Source: Companies and KS Research Source: Company data, KS Research
Key beneficiaries of IMO 2020 (TOP, BGC, PRM, and TASCO)
We believe the International Maritime Organization’s IMO 2020, the upcoming regulation
on global shipping fuel usage, will have a material impact on some Thai listed companies.
Key beneficiaries should be: 1) TOP due to its highest leverage in middle distillates; 2)
PRM due to higher demand for its FSU vessels; 3) BGC as 30% of COGS is natural gas,
the price of which is linked with HSFO; and 4) TASCO as IMO 2020 should lead to
improving bitumen spreads, as demand for high sulfur fuel oil and supply of bitumen are
expected to decline substantially. Beneficiaries of IMO 2020 are as follows:
• Refinery sector (TOP is our top pick). Refineries would be the major
beneficiary of IMO 2020 due to a likely better refinery margin in 2020. Refiners
can choose to upgrade their refineries to reduce exposure to HSFO or change
their crude slate from sour to sweet crude processing. We conservatively
estimate market GRM to increase by USD1-2/bbl in 2020 to US$5.4-6.4/bbl,
which would result in TOP’s earnings increasing by 23%-46%. In the short term,
low refined oil product stockpiles in Singapore, peak demand season for heating
oil in 4Q19, as well as additional gas oil demand as a result of the IMO’s new
sulfur cap, will help support overall GRM in 4Q19-1Q20.
TOP would be the biggest beneficiary in the sector given its highest leverage of
middle distillates followed by SPRC as a pure refiner. TOP produces 60% middle
distillates, and this proportion will increase to 75% after completion of its CFP
project in 2023. IMO 2020 would be less positive to PTTGC, IRPC, and BCP as
their refinery business accounts for only 10%, 20%, and 50% of net profit,
respectively.
Fig. 49 Singapore GRM (hydrocracker)
Fig. 50 Singapore GRM (topping)
0
2
4
6
8
10
12
J F M A M J J A S O N D
USD/bbl 2018 2019
1Q19
= USD4.0
1Q18 = USD6.0
4Q18 = USD5.3
3Q18 = USD6.0
2Q19
= USD2.9
2Q18 = USD5.43Q19 = USD6.1
-2
0
2
4
6
8
10
J F M A M J J A S O N D
USD/bbl 2018 2019
1Q19
= USD2.3
1Q18 = USD1.9
4Q18 = USD3.3
3Q18 = USD2.4
2Q19 = USD1.1
2Q18 = USD1.23Q19 = USD3.9
Source: Bloomberg, KS research Source: Bloomberg, KS research
35
• A major beneficiary of a lower HSFO price (BGC). As shippers switch from
High Sulfur Fuel Oil (HSFO) to marine gasoil (MGO), MGO-HSFO spreads are
set to increase due to higher MGO cracking margins and lower HSFO cracking
margins. Lower HSFO prices in 2020 will result in a lower natural gas price, as
the latter is derived from the HSFO price with a time lag of 1-3 months. We see a
net positive impact for glass bottle producers as natural gas accounts for 30% of
their COGS. BGC stands to benefit the most as it is a pure glass bottle producer
with the highest market share by capacity in the glass packaging market (39% in
2019).
Fig. 51 MGO-HSFO spread (US$/ton)
Fig. 52 MGO vs. HSFO prices (US$/ton)
0
200
400
600
800
1000
1200
Jan-
11
Jun-
11
Nov
-11
Apr
-12
Sep
-12
Feb
-13
Jul-1
3
Dec
-13
May
-14
Oct
-14
Mar
-15
Aug
-15
Jan-
16
Jun-
16
Nov
-16
Apr
-17
Sep
-17
Feb
-18
Jul-1
8
Dec
-18
May
-19
US$/ton
July 2012 sulfur cap decreased from 4.5% to 3.5%
MGO
HSFO
Source: Bloomberg, KS Research Source: Bloomberg, KS Research
• Floating Storage Unit sector (PRM). IMO 2020 will push up demand for FSU
vessels for oil storage and blending to produce VLSFO. PRM is the only listed
company on the Thai stock market that operates in the FSU segment, which is
expected to account for 50% of PRM’s earnings in 2019. PRM has expanded its
FSU fleet to seven vessels from five since 2Q19 with a utilization rate of 100%.
We see upside to PRM’s FSU fleet expansion as the IMO regulation will result in
increased demand for FSU vessels.
• Asphalt producer (TASCO). TASCO’s major raw material cost to produce
asphalt is Venezuela crude oil, the price of which is derived mainly from the price
of Dubai crude oil and high sulfur fuel oil, with a degree of discount. We expect
the price of high sulfur fuel oil to decrease significantly after demand drops due to
IMO 2020. On the other hand, major oil refineries have decided to upgrade their
distillation process to eliminate the presence of heavy products. We also expect
the asphalt price to increase as refinery upgrades would cut asphalt supply (at
least 2.8mn tons per year in 2018 compared to 2017 production of 13-14mn tons
per year in the Asia Pacific excluding China) while demand is still expected to
grow. As a result, TASCO should benefit from IMO 2020 as its product spreads
(bitumen-HSFO and bitumen-Dubai spreads) improve. Moreover, a delay of the
Thai government budget should lead to three high seasons for the domestic
market in 2020, while the near-term outlook should also be strong on robust
regional demand for asphalt.
36
Fig. 53 Major refinery upgrades in Asia Pacific
Fig. 54 Dubai-HSFO-bitumen spreads
Refiner Country
Reduction in
bitumen supply
(mn ton/year)
Completion
Period
S-OIL South Korea 1.0 3Q18
SK South Korea 0.8 2Q20
TOP Thailand 0.4 1Q23
Exxon Singapore 0.6 2023
Shell Singapore N/A N/A
Pertamina Indonesia N/A N/A
-25.00
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
1Q
14
3Q
14
1Q
15
3Q
15
1Q
16
3Q
16
1Q
17
3Q
17
1Q
18
3Q
18
1Q
19
3Q
19E
1Q
20E
3Q
20E
1Q
21E
3Q
21E
USD/barrel Bitumen-Dubai Bitumen-HSFO HFSO-Dubai
Source: Bloomberg, KS research Source: Bloomberg, KS research
Agro-business sector (CPF, GFPT). We maintain our positive view of the Soft
Commodities sector. For 3Q19, we believe CPF, GFPT, and TU will report better
earnings from 2Q19 as the period is the high season for food exporters, good product
prices and favorable raw material costs despite the strengthening of the THB. Domestic
livestock businesses should continue to enjoy a profitability cycle supported by higher
average selling prices of domestic broilers and swine (YoY) and lower feed costs. Corn
and soybean export prices remain undemanding thanks to high stocks in the US, larger
supplies in Brazil and lower imports from China. However, earnings may contract QoQ in
4Q19 due to low seasonal impact.
Our top picks are CPF and GFPT. We like CPF as the swine price fell to Bt58/kg on hefty
sales amid concern over the ASF outbreak. The current price is close to the production
cost of listed producers and is already below cost of retail producers. We believe the
price is near bottom and should recover going forward. CPF operates a closed system,
which makes it immune to the ASF outbreak.
Fig. 55 Lower feed prices continue to boost
profitability
Fig. 56 CPF, GFPT: Farm price recovery
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0
Jun-1
6
Aug-1
6
Oct
-16
Dec
-16
Feb-1
7
Apr-
17
Jun-1
7
Aug-1
7
Oct
-17
Dec
-17
Feb-1
8
Apr-
18
Jun-1
8
Aug-1
8
Oct
-18
Dec
-18
Feb-1
9
Apr-
19
Jun-1
9
Aug-1
9
Bt/Kg Thai soybean meal Thai maize (RHS)
27
29
31
33
35
37
39
20
30
40
50
60
70
80
Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19
Bt/kg Thai swine Vietnam swine Thai Broiler (RHS) Bt/kg
Note: Vietnam price is converted using VND700/Bt
Source: OIE, KS Research Source: OIE, KS Research
For GFPT, we expect chicken exports to China will accelerate after a decline in supply of
swine in the country that led to increased demand for substitute meat products.
Meanwhile, the price of chicken price in China surged 15% YTD.
Infrastructure funds (TFFIF, JASIF). We maintain our positive view of the IFF sector as
1) we foresee the low interest environment continuing for quite some time; and 2) the IFF
dividend yield spread of 5.42% is higher than its historical mean. TFFIF and JASIF
remain our top picks as we expect a potential new asset injection soon.
In this low bond yield situation due to concern over a recession, we believe cash flow of
IFF’s would be less affected if a recession occurs compared to other sectors due to their
infrastructure assets such as rail mass transit, expressway and power generation, as they
37
are daily necessities. As such, we test the fair value of IFFs in the low bond yield
environment with a risk-free rate sensitivity. On this basis, TFFIF would benefit the most
in the leasehold IFF sector with a gain of 6.6% on a 100 bps decline in risk-free rate due
to its long duration followed by BTSGIF with a gain of 5.4% on a 100 bps decline in risk-
free rate due to its cash flow growth profile.
Fig. 57 Thai 10-year bond yield
Fig. 58 Spot yield spread vs. average yield spread
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
Jan-1
8
Feb-1
8
Mar-
18
Apr-
18
May-1
8
Jun-1
8
Jul-18
Aug-1
8
Sep-1
8
Oct
-18
Nov-1
8
Dec-
18
Jan-1
9
Feb-1
9
Mar-
19
Apr-
19
May-1
9
Jun-1
9
Jul-19
Aug-1
9
Sep-1
9
(%) Thai 10Y Bond Yield (RS)
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Dec-
15
Mar-
16
Jun-1
6
Sep-1
6
Dec-
16
Mar-
17
Jun-1
7
Sep-1
7
Dec-
17
Mar-
18
Jun-1
8
Sep-1
8
Dec-
18
Mar-
19
Jun-1
9
(%) Spread IFF Bond 10Y Average yield spread
Source: Bloomberg, KS Research Source: Bloomberg, KS Research
Fig. 59 SET vs IFF sector comparison
Fig. 60 Risk-free sensitivity
90
100
110
120
130
140
150
160
170
Jan-1
4
May-…
Sep-1
4
Jan-1
5
May-…
Sep-1
5
Jan-1
6
May-…
Sep-1
6
Jan-1
7
May-…
Sep-1
7
Jan-1
8
May-…
Sep-1
8
Jan-1
9
May-…
Sep-1
9
SET (Rebase 2014) IFF (Rebase 2014)
3.0% 2.5% 2.0%
ABPIF 5.31 5.33 5.34
BRRGIF 9.40 9.55 9.70
BTSGIF 11.20 11.49 11.80
EGATIF 9.82 10.01 10.19
SUPEREIF 10.60 10.83 11.08
TFFIF 14.14 14.60 15.07
Risk free rateFair price (Bt)
Source: Bloomberg, KS Research Source: Bloomberg, KS Research
Property sector (AP, SPALI). We expect 3Q19 presales and earnings to pick up QoQ. A
higher new-launch value and abnormally low 2Q19 presales caused by implementation of
the new LTV measure in April will result in 3Q19 presales showing growth QoQ.
However, we still see presales falling from a high base in 2Q18. This pattern will be seen
with 3Q19 earnings, as well. Low-rise backlog, which surged in 2Q19 following many new
project launches in June and increased completion of condominium projects should boost
3Q19 earnings from 2Q19, although not to a level comparable with what we saw in 2Q18.
Bank mortgage rejection rates soared to 40% on tighter lending rules, and the housing
market contracted by 5% after the new LTV limit took effect in April. We believe the BOT
may reconsider its LTV measure, such as by keeping it only on condominium projects but
waiving controls on other housing projects to support growth. In addition, the government
will consider property stimulus packages in the next few months, according to Mr. Kobsak
Pootrakool, deputy secretary-general to the prime minister for political affairs.
38
Fig. 61 KS top picks
PER (x) PBV (x) ROE (%) Div yield (%)
2019E 2020E 2019E 2020E 2019E 2020E 2019E 2020E
AP Outperform 6.65 9.30 39.85 45.50 6.13 5.40 0.78 0.71 13.35 13.82 5.65 6.51
BGC Outperform 15.30 16.70 9.15 12.32 18.90 12.58 2.12 1.98 11.45 16.28 3.17 4.77
CPF Outperform 26.50 35.00 32.08 34.31 17.94 12.41 1.26 1.18 7.16 9.84 2.23 3.22
DTAC Outperform 57.75 68.73 19.01 23.16 18.07 14.87 5.74 5.24 33.08 36.82 4.15 5.04
GFPT Outperform 17.80 19.80 11.24 12.95 14.62 13.15 1.62 1.47 11.56 11.73 1.71 1.90
JASIF Outperform 11.00 12.82 16.55 24.93 11.02 10.47 1.02 1.02 9.29 11.98 8.39 8.93
PRM Outperform 8.05 10.60 31.68 34.45 18.00 14.00 2.63 2.41 15.71 17.97 2.78 3.57
SPALI Outperform 18.50 23.00 24.32 29.95 6.70 6.37 1.05 0.95 16.52 15.70 5.63 5.74
TASCO Outperform 21.00 24.50 16.67 21.29 10.81 10.24 2.33 2.08 23.03 21.47 4.62 4.88
TFFIF Outperform 13.10 14.14 7.96 10.68 22.56 22.41 1.29 1.28 11.18 5.72 2.73 3.25
TOP Outperform 69.25 74.25 7.22 11.05 11.89 11.98 1.13 1.09 9.64 9.28 3.83 3.83
TRUE Outperform 5.35 7.89 47.52 49.20 62.64 30.42 1.32 1.29 2.10 4.29 1.68 1.61
Total
return (%)Stock Rec Price (Bt) TP (Bt) Upside (%)
Source: Bloomberg, KS Research, share prices as of September 26, 2019
39
KBank THB NEER Index
USD/THB vs DXY Index
129.03
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
95
100
105
110
115
120
125
130
135
KBank NEER,base = Jan 1995, left
est.
Latest data point, left
BOT NEER, base = 2012, right
29
30
31
32
33
34
35
36
37
Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19 Jul-19
88
90
92
94
96
98
100
102
104
USD/THB DXY Index, RHS
Source: Bloomberg, KBank Source: Bloomberg, KBank
Thailand’s GDP
Thai inflation parameters
3.5
4.24.5
4.0
5.04.7
3.23.6
2.82.3
1.01.4 1.2
0.4
1.9
1.1
-0.2
0.9 1.00.6
-1
0
1
2
3
4
5
6
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19
GDP (%YoY) GDP (%QoQ sa)
-2
0
2
4
6
11 12 13 14 15 16 17 18 19
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
1.37 1.37 1.38 1.371.40 1.42 1.43 1.44 1.451.331.33 1.35 1.37 1.35
1.40 1.41
1.47 1.45 1.45 1.46
1.401.41 1.40
1.33
0.75
1.00
1.25
1.50
1.75
0 1 2 3 4 5 6 7 8 9 10
07/10/2019
next 3 months
next 6 months
next 12 months
tenor, yrs
1.67
1.58
1.391.34 1.33
1.43
1.52
1.23 1.25
1.36
1.46
1.601.62
1.241.24
1.23
0.75
1.00
1.25
1.50
1.75
0 1 2 3 4 5 6 7 8 9 10
07/10/2019
next 3 months
next 6 months
next 12 months
tenor, yrs Source: Bloomberg, KBank Source: Bloomberg, KBank
Foreign holding of Thai fixed income and stock
Foreign net buy/sell in Thai markets
603 629
831
83
-389
-600
-400
-200
0
200
400
600
800
1,000
10 11 12 13 14 15 16 17 18 19
Thai government bonds, THB bn BOT bonds Thai stocks, est since 1999
-2.9 -5.1
-32.1
-10.4
-0.3
-16.4
3.4 3.7
46.7
20.1
-11.7-7.4
-2.7
-17.8
18.9
72.5
-25.1
6.7
-3.4
-54.3-60
-40
-20
0
20
40
60
80
Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19
Net buy bond Net buy equity
Source: Bloomberg, ThaiBMA, KBank Source: Bloomberg, KBank
40
Key Parameters & Forecasts at Year-end
2011 2012 2013 2014 2015 2016 2017 2018 2019E
GDP, %YoY 0.8 7.2 2.7 1.0 3.1 3.4 4.0 4.1 2.8
Consumption, %YoY 1.8 6.7 0.9 0.8 2.3 2.9 3.0 4.6 4.2
Government Spending, %YoY 3.7 7.2 1.5 2.8 2.5 2.2 0.1 1.8 2.3
Investment Spending, %YoY 4.9 10.7 -1.0 -2.2 4.4 2.9 1.8 3.8 2.8
Export (USD term), %YoY 15.1 2.9 -0.3 -0.5 -5.8 0.5 9.9 6.9 -1.0
Import (USD term), %YoY 25.1 8.9 0.5 -9.1 -11.0 -4.2 14.1 12.0 -3.0
Current Account (USD bn) 9.4 -4.9 -8.8 11.6 27.8 43.4 44.1 32.4 35.0
CPI, %YoY, average 3.81 3.02 2.19 1.9 -0.9 0.19 0.67 1.06 0.8
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
BOT Repo, %year-end 3.25 2.75 2.25 2.00 1.50 1.50 1.50 1.75 1.25
Bond Yields
2yr, % year-end 3.09 2.89 2.56 2.10 1.49 1.60 1.46 1.75 1.40
5yr, % year-end 3.16 3.15 3.41 2.48 1.95 2.26 1.85 2.14 1.44
10yr, % year-end 3.29 3.51 3.90 2.72 2.50 2.65 2.32 2.48 1.62
USD/THB 31.56 30.61 32.87 32.90 36.08 35.80 32.58 32.55 30.50
USD/JPY 76.91 85.96 105.17 119.48 120.22 116.96 112.69 110.27 103.00
EUR/USD 1.30 1.32 1.37 1.22 1.09 1.05 1.20 1.14 1.11
SET Index 1025 1392 1299 1498 1288 1543 1754 1564 1750*
* denotes 12-month forward
Source: Bloomberg, KSecurities, KResearch, KBank
41
Disclaimer
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