Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: A Goldilocks scenario outcome whereby President Trump loses the election, but Joe Biden does not win a mandate led to material US High Yield (HY) index spread tightening, driven by Caa-rated entities.Markets were overpricing a Blue Democratic Party sweep prior to the US election, as we predicted. Now they are overpricing an inhibited tax and regulatory agenda under a Biden Presidency and Republican Senate. The run-off for two Senate seats in Georgia could see Republicans’ lose the Senate. As such, the amount of potential fiscal stimulus under the new administration remains difficult to handicap. Plus, regulatory changes are now largely driven by Executive Orders.In Asia, despite improving Purchasing Managers Index results and an unexpected acceleration in China’s October exports, Asia’s HY market underperformed the US on global economic growth concerns. Increasing Coronavirus cases in Europe and a pre-Christmas lock-down are a headwind for Asia’s export growth and tourism over the near term. Concurrently, Biden’s Coronavirus plan also adds to uncertainty. Furthermore, expectations that Joe Biden may be less confrontational than President Trump with China may prove wrong as the new President would focus on mid-term elections and the need to prove himself where he won narrowly. However, despite these potential negatives, Asia’s HY index looks oversold particularly relative to US Caa-rated index levels.The suspension of Ant Financial’s (<a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> )initial public offering (IPO) in China and Hong Kong also negatively affected Asia’s risk sentiment and raised serious questions on China’s regulatory due process. <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC's (HSBA LN)</a> shares sold-off following the Ant Financial announcement despite the firm not waiving interest charges on margin borrowing for the suspended IPO. With a China-centric growth strategy, HSBC’s business model is increasingly caught in the middle of a developing bi-polar world.Nonetheless, never missing an opportunity to test the market, HSBC Holdings was the only financial institution to issue debt in the global capital markets this week. We assess the attractiveness of these Euro-denominated bonds within. In Asia, primary US$-bond sales plunged to just US$0.9b from US$6.8 billion in the prior week as borrowers awaited the U.S presidential election outcome. With interest rates diving lower, we anticipate additional issuance over the next few weeks as issuers fill 2021 borrowing needs early.Against this background, Asia’s lower duration Senior Unsecured bonds outperformed Tier 2 and Additional Tier 1 securities, in concert with concerns surrounding global economic growth potential over the near term. The top performing and underperforming bonds were short- and long-duration in nature, respectively.  Market Outlook: A less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including Emerging Markets (EM) fixed income securities over time. In the near term, risk asset and bank valuations may remain volatile through the year-end as large levels of cash remain on the sidelines.

Executive Summary: A Goldilocks scenario outcome whereby President Trump loses the election, but Joe Biden does not win a mandate led to material US High Yield (HY) index spread tightening, driven by Caa-rated entities.Markets were overpricing a Blue Democratic Party sweep prior to the US election, as we predicted. Now they are overpricing an inhibited tax and regulatory agenda under a Biden Presidency and Republican Senate. The run-off for two Senate seats in Georgia could see Republicans’ lose the Senate. As such, the amount of potential fiscal stimulus under the new administration remains difficult to handicap. Plus, regulatory changes are now largely driven by Executive Orders.In Asia, despite improving Purchasing Managers Index results and an unexpected acceleration in China’s October exports, Asia’s HY market underperformed the US on global economic growth concerns. Increasing Coronavirus cases in Europe and a pre-Christmas lock-down are a headwind for Asia’s export growth and tourism over the near term. Concurrently, Biden’s Coronavirus plan also adds to uncertainty. Furthermore, expectations that Joe Biden may be less confrontational than President Trump with China may prove wrong as the new President would focus on mid-term elections and the need to prove himself where he won narrowly. However, despite these potential negatives, Asia’s HY index looks oversold particularly relative to US Caa-rated index levels.The suspension of Ant Financial’s (Ant Group (6688 HK) )initial public offering (IPO) in China and Hong Kong also negatively affected Asia’s risk sentiment and raised serious questions on China’s regulatory due process. HSBC's (HSBA LN) shares sold-off following the Ant Financial announcement despite the firm not waiving interest charges on margin borrowing for the suspended IPO. With a China-centric growth strategy, HSBC’s business model is increasingly caught in the middle of a developing bi-polar world.Nonetheless, never missing an opportunity to test the market, HSBC Holdings was the only financial institution to issue debt in the global capital markets this week. We assess the attractiveness of these Euro-denominated bonds within. In Asia, primary US$-bond sales plunged to just US$0.9b from US$6.8 billion in the prior week as borrowers awaited the U.S presidential election outcome. With interest rates diving lower, we anticipate additional issuance over the next few weeks as issuers fill 2021 borrowing needs early.Against this background, Asia’s lower duration Senior Unsecured bonds outperformed Tier 2 and Additional Tier 1 securities, in concert with concerns surrounding global economic growth potential over the near term. The top performing and underperforming bonds were short- and long-duration in nature, respectively.  Market Outlook: A less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including Emerging Markets (EM) fixed income securities over time. In the near term, risk asset and bank valuations may remain volatile through the year-end as large levels of cash remain on the sidelines.

Bank Credit Weekly: Election Goldilocks Priced-In as Growth Concerns Increase

Asean-focused. Ex-Head of Thai Research

Athaporn Arayasantiparb, CFA

Asean (Thailand) Focused Independent Research

M Corp Review

M Corp is led by Athaporn Arayasantiparb who served as Head of Research for UOB and ANZ in Thailand and was an award-winning telecoms analyst at UBS in 2010 (AsiaMoney Thailand category) and Regional Strategist for DMG in Singapore. Prior to that, he also served as Kasikornbank credit analyst and scholar. He has a total work experience of 17 years, of which 14 were in research and 4 in research management roles. He started his career as an engineer for PTT and currently manages family investments. He holds an MBA from Stern (NYU) and CFA Charter since 2006. Apart from IPO Radar, which focuses on future listings, MCorp Review also provides six on-going thematic series ranked by frequency in descending order, namely: 1) Silicon Stories (technology) 2) Sathorn Series (financial services) 3) Thai-Coons (billionaire origin stories) 4) Reality Check (data-driven, investigative) 5) Thai Media Spotlight; and 6) Thai Macro Watch (global market drivers).

Equity Bottom-Up

For the upcoming year, we have selected 10 stocks for our country portfolio, and they can be broken down into three groups: <ul>
<li>
Big cap picks. Big caps tend to outperform during times of strong QE flows. These include our top pick in large sectors except energy (BBL, AIS), the world's most valuable airport (AOT), and MINT (Thailand's only top 20 global hotel chain).</li>
<li>
Recent listings. CRC was listed in 2020 and is considered an important recovery play. In particular, we are excited about two new listings in 2021 as well, namely NForce and Kerry (Thailand).</li>
<li>
Small cap rebounds. Interestingly, a number of small cap stocks can also stand out and provide your portfolio with alpha. These include contractor SKY, massage operator SPA, and the country's incredibly fast-growing gaming company AS (AsiaSoft).</li>
</ul>

For the upcoming year, we have selected 10 stocks for our country portfolio, and they can be broken down into three groups: 

Big cap picks. Big caps tend to outperform during times of strong QE flows. These include our top pick in large sectors except energy (BBL, AIS), the world's most valuable airport (AOT), and MINT (Thailand's only top 20 global hotel chain).

Recent listings. CRC was listed in 2020 and is considered an important recovery play. In particular, we are excited about two new listings in 2021 as well, namely NForce and Kerry (Thailand).

Small cap rebounds. Interestingly, a number of small cap stocks can also stand out and provide your portfolio with alpha. These include contractor SKY, massage operator SPA, and the country's incredibly fast-growing gaming company AS (AsiaSoft).


Thai Strategy 2021 (Part 2): Top 10 Stock Picks

ASEAN Insight Provider, CrossASEAN Research

Angus Mackintosh

ASEAN Insight Provider

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

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A call with <a href="https://www.smartkarma.com/entities/astra-international-tbk-pt" target="_blank" data-smartkarma-citation="entities:46:1" rel="noopener">Astra International (ASII IJ)</a> management revealed that it has seen the worst of it for its core auto division, with a gradual recovery underway for both its autos and motorbikes, where its market share is back to pre-COVID-19 levels at 52% and 75% respectively.  Most of the company's businesses have already started to see significant recoveries from COVID-19 and this momentum will continue into the end of the year and into 2021. Watch out for the increasing impact of digitalization and potential acquisitions utilizing the proceeds of the <a href="https://www.smartkarma.com/entities/bank-permata-tbk-pt" target="_blank" data-smartkarma-citation="entities:728:1" rel="noopener">Bank Permata (BNLI IJ)</a> sale.
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October may see slightly less positive car sales given a 2nd round of PSBB measures were in place for half the month and consumers delayed purchases in the hope that luxury tax would be removed, which did not happen. 
<a href="https://www.smartkarma.com/entities/astra-international-tbk-pt" target="_blank" data-smartkarma-citation="entities:46:1" rel="noopener">Astra International (ASII IJ)</a> financial services arm is seeing some recovery and has already made adequate provisioning.
The company has a rock-solid balance sheet post the <a href="https://www.smartkarma.com/entities/bank-permata-tbk-pt" target="_blank" data-smartkarma-citation="entities:728:1" rel="noopener">Bank Permata (BNLI IJ)</a> sale but is considering a number of investment opportunities, potentially in the digital space where it has already invested in <a href="https://www.smartkarma.com/entities/gojek" target="_blank" data-smartkarma-citation="entities:25976:1" rel="noopener">Gojek (1379371D IJ)</a>.
<a href="https://www.smartkarma.com/entities/astra-international-tbk-pt" target="_blank" data-smartkarma-citation="entities:46:1" rel="noopener">Astra International (ASII IJ)</a> is very focused on digitalizing its overall business with an "Astra Digital" department at head office focused on creating synergies across its businesses, as well as utilizing data analytics.
<a href="https://www.smartkarma.com/entities/united-tractors-tbk-pt" target="_blank" data-smartkarma-citation="entities:698:1" rel="noopener">United Tractors (UNTR IJ)</a> is supported by its gold exposure, where this business is worth more than the rest of its businesses combined. 
<a href="https://www.smartkarma.com/entities/astra-international-tbk-pt" target="_blank" data-smartkarma-citation="entities:46:1" rel="noopener">Astra International (ASII IJ)</a> remains one of our top picks for the recovery in the Indonesian economy going into 2021. It trades on 12.7x FY21E PER, with EPS growth forecast at +9.5% and +20.6% for FY21E and FY22E respectively.


A call with Astra International (ASII IJ) management revealed that it has seen the worst of it for its core auto division, with a gradual recovery underway for both its autos and motorbikes, where its market share is back to pre-COVID-19 levels at 52% and 75% respectively.  Most of the company's businesses have already started to see significant recoveries from COVID-19 and this momentum will continue into the end of the year and into 2021. Watch out for the increasing impact of digitalization and potential acquisitions utilizing the proceeds of the Bank Permata (BNLI IJ) sale.

October may see slightly less positive car sales given a 2nd round of PSBB measures were in place for half the month and consumers delayed purchases in the hope that luxury tax would be removed, which did not happen. 
Astra International (ASII IJ) financial services arm is seeing some recovery and has already made adequate provisioning.
The company has a rock-solid balance sheet post the Bank Permata (BNLI IJ) sale but is considering a number of investment opportunities, potentially in the digital space where it has already invested in Gojek (1379371D IJ).
Astra International (ASII IJ) is very focused on digitalizing its overall business with an "Astra Digital" department at head office focused on creating synergies across its businesses, as well as utilizing data analytics.
United Tractors (UNTR IJ) is supported by its gold exposure, where this business is worth more than the rest of its businesses combined. 
Astra International (ASII IJ) remains one of our top picks for the recovery in the Indonesian economy going into 2021. It trades on 12.7x FY21E PER, with EPS growth forecast at +9.5% and +20.6% for FY21E and FY22E respectively.

Astra International (ASII IJ) - An Auto-Recovery Story with a Golden Digital Twist

Executive Summary: We noted last weekend that Treasury yields could gap down as True-Blue election sweep expectations declined and that bank valuations would follow. Both outcomes took place during the first part of the week. President Trump has gained enough in polls for traders with bearish positions in long-dated Treasuries to start unwinding them.  If Republicans’ retain the Senate, then fiscal stimulus may be lower than currently expected.  The December VIX future may also underprice the risk of a contested election result while thin markets keep volatility elevated.On Wednesday, most US stock indices posted their biggest single-day drop since June while European shares met five-month lows. As such, implied equity volatility jumped to its highest readings in 6 weeks. The US dollar and commodities also exhibited risk-off behaviour. Soaring Coronavirus cases in the US and Europe added to market jitters on the eventual time to a US federal stimulus package. The lack of a strong bullish reaction in Treasuries while equities sold-off reinforced concerns that low yields significantly reduce hedging protection. Within this background, Asia’s Additional Tier 1 (AT1) bonds underperformed Tier 2 and Senior Unsecured securities, in concert with developed market risk-off sentiment. The top performing bonds were overwhelmingly short maturity Senior Unsecured in nature. Asia’s HY markets slightly outperformed the US’ as both indexes widened during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.Financial institutions only issued US$4.5 billion in USD and Euros. Amongst Asia-headquartered banks, the <a href="https://www.smartkarma.com/entities/industrial-bank-co-ltd" target="_blank" data-smartkarma-citation="entities:19515:1" rel="noopener">Industrial Bank Co Ltd A (601166 CH)</a> and Kookmin Bank (<a href="https://www.smartkarma.com/entities/kb-financial-group-inc" target="_blank" data-smartkarma-citation="entities:718:1" rel="noopener">KB Financial Group (105560 KS))</a> were the only financial institutions to access global capital market during the week. The primary market issuance window may be closing very early this year.In terms of potential mergers and acquisitions, Bloomberg reported that <a href="https://www.smartkarma.com/entities/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a> is considering an offer for IndusInd Bank, which IndusInd subsequently denied. Please see <a href="https://www.smartkarma.com/insights/kotak-indusind-happy-indusind-bondholders-move-to-overweight" target="_blank" data-smartkarma-citation="insights:44542" rel="noopener">Kotak + IndusInd = Happy IndusInd Bondholders; Move to Overweight</a> for more details. On Friday, <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" data-smartkarma-citation="entities:1558:1" rel="noopener">Indusind Bank (IIB IN)</a> reported a 53% year-on-year decline in second quarter net profit that missed average analyst estimates. Despite the earnings miss and acquisition dismissal, IndusInd’s 3 7/8% coupon bond rose in price during the week.Market Outlook: Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market illiquidity and impact bank valuation over the near term.

Executive Summary: We noted last weekend that Treasury yields could gap down as True-Blue election sweep expectations declined and that bank valuations would follow. Both outcomes took place during the first part of the week. President Trump has gained enough in polls for traders with bearish positions in long-dated Treasuries to start unwinding them.  If Republicans’ retain the Senate, then fiscal stimulus may be lower than currently expected.  The December VIX future may also underprice the risk of a contested election result while thin markets keep volatility elevated.On Wednesday, most US stock indices posted their biggest single-day drop since June while European shares met five-month lows. As such, implied equity volatility jumped to its highest readings in 6 weeks. The US dollar and commodities also exhibited risk-off behaviour. Soaring Coronavirus cases in the US and Europe added to market jitters on the eventual time to a US federal stimulus package. The lack of a strong bullish reaction in Treasuries while equities sold-off reinforced concerns that low yields significantly reduce hedging protection. Within this background, Asia’s Additional Tier 1 (AT1) bonds underperformed Tier 2 and Senior Unsecured securities, in concert with developed market risk-off sentiment. The top performing bonds were overwhelmingly short maturity Senior Unsecured in nature. Asia’s HY markets slightly outperformed the US’ as both indexes widened during the week. The relative outperformance of Asia versus the US resulted in slight spread compression between the two indexes, although the remain wide of last year’s average and this years’ tights.Financial institutions only issued US$4.5 billion in USD and Euros. Amongst Asia-headquartered banks, the Industrial Bank Co Ltd A (601166 CH) and Kookmin Bank (KB Financial Group (105560 KS)) were the only financial institutions to access global capital market during the week. The primary market issuance window may be closing very early this year.In terms of potential mergers and acquisitions, Bloomberg reported that Kotak Mahindra Bank (KMB IN) is considering an offer for IndusInd Bank, which IndusInd subsequently denied. Please see Kotak + IndusInd = Happy IndusInd Bondholders; Move to Overweight for more details. On Friday, Indusind Bank (IIB IN) reported a 53% year-on-year decline in second quarter net profit that missed average analyst estimates. Despite the earnings miss and acquisition dismissal, IndusInd’s 3 7/8% coupon bond rose in price during the week.Market Outlook: Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market illiquidity and impact bank valuation over the near term.

Bank Credit Weekly: Risk Reduction on Election and Virus Uncertainty

Thematic (Sector/Industry)

Brett King's bestseller Bank 4.0 highlights many important trends that could overturn conventional banking. In this review, we look at how some of them threaten Thai banks and how the banks adapt to these emerging changes. Here are some of the most important highlights:<ul>
<li>
Models that start from scratch. The First Principle highlights fintech business models that eliminate the need of certain facets such as physical branches, while conventional banks here have a tougher time downsizing to cope up with the trend.</li>
<li>
Rising regulatory costs and investments could end up crippling the Thai banks and putting them at a disadvantage to fintechs, but part of this burden will be up to the regulators themselves. Banking is labor-intensive, and there's a lot of good-paying jobs at risk if they make the wrong move.</li>
<li>
Encroachment by telcos. With banking expected to resemble technology platforms in the future, telecom operators who control such infrastructure could end up eating a big part of the banking business. Some very profitable services today such as wealth management will be more vulnerable than others.</li>
</ul>

Brett King's bestseller Bank 4.0 highlights many important trends that could overturn conventional banking. In this review, we look at how some of them threaten Thai banks and how the banks adapt to these emerging changes. Here are some of the most important highlights:

Models that start from scratch. The First Principle highlights fintech business models that eliminate the need of certain facets such as physical branches, while conventional banks here have a tougher time downsizing to cope up with the trend.

Rising regulatory costs and investments could end up crippling the Thai banks and putting them at a disadvantage to fintechs, but part of this burden will be up to the regulators themselves. Banking is labor-intensive, and there's a lot of good-paying jobs at risk if they make the wrong move.

Encroachment by telcos. With banking expected to resemble technology platforms in the future, telecom operators who control such infrastructure could end up eating a big part of the banking business. Some very profitable services today such as wealth management will be more vulnerable than others.


Nine Reasons Why Thai Banks Should Be Worry About in the Future

Thailand

Bangkok Bank Public Company Limited provides various banking and financial services including commercial, consumer, credit card, and mortgage lending, international trade financing, investment banking, and securities services.

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Bangkok Bank Public (BBL TB)

Bank Credit Weekly: Election Goldilocks Priced-In as Growth Concerns Increase

A Goldilocks outcome resulted in excessive Caa-spread tightening. Markets are now overpricing an inhibited regulatory and China agenda. Asia’s...

Hank Calenti, CFA

Thai Strategy 2021 (Part 2): Top 10 Stock Picks

Go with big caps (BBL, MINT) to catch the QE wave. Give the new listings (CRC, KEX) a shot, and don't miss out on AsiaSoft, our ultimate top pick.

Athaporn Arayasantiparb, CFA

Astra International (ASII IJ) - An Auto-Recovery Story with a Golden Digital Twist

Astra remains one of our top picks for post-COVID-19 recovery in Indonesia, with its core auto and other businesses gaining ground. It has a rock...

Angus Mackintosh

Bank Credit Weekly: Risk Reduction on Election and Virus Uncertainty

Market reactions to soaring Coronavirus contagion, underpriced election outcome risks and sidelined treasury investors may augment market...

Hank Calenti, CFA

Nine Reasons Why Thai Banks Should Be Worry About in the Future

Brett King's bestseller sheds spotlight on one of the world's largest sector anywhere. Is the business model dead? Do regulators get it? Are you...

Athaporn Arayasantiparb, CFA

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