Indonesia

In this briefing:

1. 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now
2. Are US Stocks Still Expensive?
3. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018
4. Micron’s Guidance Bombshell Signals Troubled Times Ahead For Beleaguered Semiconductor Segment

1. 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now

Our review of ten Asian gaming companies forward prospects for 2019 yielded our top five picks. Two of those comprise this insight. Three more will follow in Part Two. There is, in our opinion, some disconnect between continuing macro headwinds in both the VIP and mass sectors and a more bullish tone based on a recent upside trend in Macau, strong results in the Philippines and Cambodia. Given the battering of the market in general, the already 8 month old bearish tone to the sector and the current pricing of the two stocks noted here, we see significant upside opportunity as we near the beginning of 2019.

2. Are US Stocks Still Expensive?

There are striking parallels between 1929 and 2018.  

The 1929 crash put a halt to a nine-year bull run on the market.

Up until October 1929, same as this year, market consensus was that asset prices could only go up from their current level.

As we mentioned in When the Tide Goes Out, Dominoes Fall, a decade of building up excesses meant a painful burst, back 79 years ago: between October of 1929 and September of 1932, eighty-nine percent of the value of stocks was erased and the market didn’t recover to its former peak until 25 years later.

Are we in a similar situation right now? 

3. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018

Highlights of significant recent happenings include:

4. Micron’s Guidance Bombshell Signals Troubled Times Ahead For Beleaguered Semiconductor Segment

After months of skirting around inventory build-up and a weakening demand outlook, Micron used their latest earnings report to call closing time on a revenue and profitability party that began in Q4 2016 and just got better and better with each passing quarter. 

Micron reported Q1 FY2019 results on December 18’th and while revenues were largely in line with recently lowered guidance from the company, their outlook for both Q2 and 2019 as a whole was worse than even the most bearish of expectations. 

Citing high inventory levels at key customers, Micron guided Q2 FY2019 revenues for $6 billion at the midpoint, down a staggering $1.9 billion, 24% QoQ and 18% YoY. At the same time, Micron revised down their CY2019 bit demand growth forecast for both DRAM (from 20% to 16%) and NAND (35%, the bottom of the previously forecasted range). The company plans to adjust both CapEx and bit supply output downwards to match.

In the wake of their guidance bombshell, Micron’s share price closed down almost 8% the following day to end the session at $31.41, a level last seen in August 2017. Micron is unique in reporting out of sync with its industry peers, making it the proverbial canary in a coal mine. The company’s gloomy outlook and clarion call for further CapEx reductions in a bid to rebalance supply and demand spells troubled times ahead for an already beleaguered semiconductor segment ahead of the upcoming earnings season. 

In this briefing:

1. EM Relative Strength Is Bottoming: Overweight

1. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.

In this briefing:

1. EM Relative Strength Is Bottoming: Overweight
2. Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019
3. RRG Global Macro – US Fed Positive Outlook – Stocks Fall.  Politics Take Over from Fundamentals
4. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships

1. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.

2. Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019

In a follow up to my note from last year Overview of My Winners and Losers in 2017…and 5 High Conviction Ideas Going into 2018 I again look at my stock ideas that have worked out in 2018, those that have not and those where the verdict is still pending.

Last year I provided 5 high conviction ideas and here is their performance in a brutal year for Asian Stock Markets:

4 out of 5 had a positive performance.

Below I will make a new attempt to provide five high conviction ideas going into 2019.

3. RRG Global Macro – US Fed Positive Outlook – Stocks Fall.  Politics Take Over from Fundamentals

• US: Stocks fall on political turmoil despite positive noises from the Fed with a dovish rate hike, a reduction in expected 2019 hikes and positive trends on employment and inflation.
• Russia: Unexpected 25 bps rate hike in the face of higher inflation in Nov. Watch for impact of lower oil prices in coming quarters.
• Turkey: Economic developments remain negative. The outlook for retail sales is poor as the economy in general is faltering.
• Indonesia: Trade deficit in November. Exports down 3.3%; imports up 11.68%. This disappointing performance could be the beginning of a trend.

4. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships

• We’ve reviewed 10 companies in the sector. Of those, three are the consensus favorites of our Tokyo based panel of industry, financial and economics observers of the IR initiative over many years.
• Based on pachinko alone, the stocks of these companies are fully valued. Based on potential tailwind from a license award within 6 months, they could be vastly undervalued.
• Each of the three noted here brings strength to a bid less based on financials than corporate focus, outlook and experience in the field.

In this briefing:

1. Are US Stocks A Buy Yet?
2. Monthly Geopolitical Comment: Redrafting of Global Map of Political Alliances to Continue in 2019
3. Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics
4. Autonomous Driving. Waymo Leading The Charge With Ten Million Miles Driven And Counting
5. The Festive Week the Was in ASEAN@Smartkarma – Thailand Rising, Frail DBS, and Small Cap Picks

1. Are US Stocks A Buy Yet?

• 5%-like rallies on Wall Street are signs of a bear market not a bull market
• Bull markets require strong liquidity and low risk appetite, neither yet apply
• Risk appetite readings at minus 12.6 are still above the minus 40 criterion for an upturn
• Recent large fall in risk appetite consistent with upcoming economic recession

2. Monthly Geopolitical Comment: Redrafting of Global Map of Political Alliances to Continue in 2019

3. Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics

The healthcare industry in Indonesia has undergone a massive change since the introduction of the National Health Insurance (JKN) in 2014. Although the program allows for better healthcare access for over 200mn Indonesians, the industry dynamics have shifted and Kalbe Farma (KLBF IJ) is one of the companies that has been on the losing side during this adjustment period.

With the Health and Social Security (BPJS) deficit forecast to grow to IDR16t by end of 2018, and with a continuing roll out of coverage to 250mn people by end of 2019, all parties in the healthcare industry are expected to continue subsidizing the program.  Hospitals and drug manufacturers have had to cope with relatively flat pricing from the INA-CBG (reimbursement) tariff since 2014, despite cost pressures stemming from the currency depreciation and inflation. KLBF has reported declines in its overall pharmaceutical margin, as well as low growth rates for its licensed and OTC (over the counter) drugs over the past five years.

Our recent meeting with the company revealed that to mitigate the JKN impact, KLBF has launched several strategies, including expanding into niche specialty products such as oncology and biosimilar drugs, as well as preventive and herbal supplements. We are also at a tipping point where KLBF’s non-OTC consumer health and nutritionals revenues are finally larger than the pharmaceutical revenues for the first time. In this insight, we will discuss whether the worst is already behind us, and if it is now time to take another look at the stock. 

4. Autonomous Driving. Waymo Leading The Charge With Ten Million Miles Driven And Counting

Waymo CEO John Krafcik made some bold decisions after taking the helm at Alphabet‘s self-driving project in September 2015. Chief among them was the fact that the company abandon its plans for Level 3 automated driving and focus exclusively on levels 4 & 5. Furthermore, he decreed that Waymo would no longer manufacture its own vehicles but would instead integrate their technology into those of other automakers. Three years later, those decisions would appear to be finally paying off.

On October 10 2018, Waymo reached a significant milestone having completed 10 million self-driving miles across 25 cities in the US. While their first million self-driving miles took 18 months to complete, Waymo now clocks up over a million self-driving miles per month.  The company also recently announced the launch of its robo taxi service in Phoenix, Arizona and looks set to quickly follow suit in California. Plans to extend its self-driving technology beyond robotaxis, most notably for trucks and last-mile transportation solutions are also in the works. Furthermore, the company has begun laying down a framework of innovative B2B revenue models which should help accelerate the speed with which they can eventually monetize their technology.

It hasn’t been smooth sailing all the way for Waymo however. Earlier this year, the company was derided for the driving style of its autonomous vehicles and faced the criticism that its driverless cars continue to have safety drivers. There was also an embarrassing incident where one of those very safety drivers caused the self-driving car he was monitoring to hit a motorcyclist when he attempted to take control of the vehicle. According to Waymo’s own analysis of the vehicle log files, the accident would not have happened had he not intervened. 

With ten million self-driving miles under their belt and a thoughtful, strategic approach to monetizing their technology beginning to emerge, Waymo remains firmly ahead of their peers in leading the autonomous driving charge.  

5. The Festive Week the Was in ASEAN@Smartkarma – Thailand Rising, Frail DBS, and Small Cap Picks

Macro Insights

In Thailand: The Sandbox Economic Insight provider Dr Jim Walker circles back to the Thai economy, which he suggests is about to take off.

In The Philippines: Reform Impetus Gives Way to Politicking, Manu Bhaskaran explores the risks ahead for the Philippine Economy. 

In IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates, Kevin O’Rourke provides his value-added comment on economic and political developments in Indonesia over the last week. 

In Malaysia: Implosion of Former Ruling Party Could Create Tensions in Ruling Coalition, Manu Bhaskaran zeros in on rising political risks in Malaysia.

Equity Bottom-Up Insights

In Global Banks – DBS Frail Against Global PeersDaniel Tabbush looks at DBS Group Holdings (DBS SP) in light of falling oil prices and assesses the potential impact in credit quality. 

In AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO PriceDr. Andrew Stotz, CFA works his magic on Astra Agro Lestari (AALI IJ) and comes back with a positive view. 

In SPH REIT Nibbles at Blackstone’s PortfolioAnni Kum revisits SPH REIT (SPHREIT SP) in light of its recent acquisition in Australia. 

In CKP (CKP TB): Powerful Expansion to Drive Earnings GrowthDr. Andrew Stotz, CFA takes a close look at CK Power Pcl (CKP TB) which offers stronger growth relative to its peers. 

In UTP (UTP TB): Continued Gain from Tight Global Paper Supply, Dr. Andrew Stotz, CFA zeros in on paper manufacturer United Paper (UTP TB) and sees an improving picture. 

In BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum, Dr. Andrew Stotz, CFA takes a close look at this Malaysian and Philippines auto player. BAUTO sells Mazda vehicles in Malaysia and via its subsidiary Bermaz Auto Philippines Inc (BAP) in the Philippines. 

In COM7 (COM7 TB): Acquisition to Support Aggressive Expansion, Dr. Andrew Stotz, CFA looks at this Thai retailer and finds it an attractive prospect.

Sector and Thematic Insights

In Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019, CrossASEAN Insight Provider Nicolas Van Broekhoven looks back over his stock ideas over the past year and lays out his picks for 2019.  

In Small Cap Diary: MEGA, Eastwater, Thai Guru Athaporn Arayasantiparb, CFA looks at a number of interesting better know small caps in Thailand, including Mega Lifesciences (MEGA TB) and Eastern Water Resources Dev (EASTW TB).

In Sathorn Series M: TMB-Thanachart Courtship, Athaporn Arayasantiparb, CFA investigates talks if a merger between Thanachart Capital (TCAP TB), Krung Thai Bank Pub (KTB TB), and TMB Bank PCL (TMB TB) and gives us his views.

In Singapore REIT – Preferred Picks 2019, Anni Kum provides us with her top picks for 2019 in the Singapore REIT space. 

In this briefing:

1. 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now
2. Are US Stocks Still Expensive?
3. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018
4. Micron’s Guidance Bombshell Signals Troubled Times Ahead For Beleaguered Semiconductor Segment
5. IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates

1. 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now

Our review of ten Asian gaming companies forward prospects for 2019 yielded our top five picks. Two of those comprise this insight. Three more will follow in Part Two. There is, in our opinion, some disconnect between continuing macro headwinds in both the VIP and mass sectors and a more bullish tone based on a recent upside trend in Macau, strong results in the Philippines and Cambodia. Given the battering of the market in general, the already 8 month old bearish tone to the sector and the current pricing of the two stocks noted here, we see significant upside opportunity as we near the beginning of 2019.

2. Are US Stocks Still Expensive?

There are striking parallels between 1929 and 2018.  

The 1929 crash put a halt to a nine-year bull run on the market.

Up until October 1929, same as this year, market consensus was that asset prices could only go up from their current level.

As we mentioned in When the Tide Goes Out, Dominoes Fall, a decade of building up excesses meant a painful burst, back 79 years ago: between October of 1929 and September of 1932, eighty-nine percent of the value of stocks was erased and the market didn’t recover to its former peak until 25 years later.

Are we in a similar situation right now? 

3. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018

Highlights of significant recent happenings include:

4. Micron’s Guidance Bombshell Signals Troubled Times Ahead For Beleaguered Semiconductor Segment

After months of skirting around inventory build-up and a weakening demand outlook, Micron used their latest earnings report to call closing time on a revenue and profitability party that began in Q4 2016 and just got better and better with each passing quarter. 

Micron reported Q1 FY2019 results on December 18’th and while revenues were largely in line with recently lowered guidance from the company, their outlook for both Q2 and 2019 as a whole was worse than even the most bearish of expectations. 

Citing high inventory levels at key customers, Micron guided Q2 FY2019 revenues for $6 billion at the midpoint, down a staggering $1.9 billion, 24% QoQ and 18% YoY. At the same time, Micron revised down their CY2019 bit demand growth forecast for both DRAM (from 20% to 16%) and NAND (35%, the bottom of the previously forecasted range). The company plans to adjust both CapEx and bit supply output downwards to match.

In the wake of their guidance bombshell, Micron’s share price closed down almost 8% the following day to end the session at $31.41, a level last seen in August 2017. Micron is unique in reporting out of sync with its industry peers, making it the proverbial canary in a coal mine. The company’s gloomy outlook and clarion call for further CapEx reductions in a bid to rebalance supply and demand spells troubled times ahead for an already beleaguered semiconductor segment ahead of the upcoming earnings season. 

5. IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates

Prabowo has yet to dent Widodo’s 20-point lead in polls and, meanwhile, certain key macro-economic figures are finally swinging in the incumbent’s favor.  Jakarta and Surabaya are linked by toll road — after decades of work.  The Freeport mine nationalization went through, benefiting Widodo (but possibly no one else).  The Efta Cepa bodes well for other trade agreements in the works.  The Lippo Group scandal is escalating, but not yet affecting James Riady.  PT Toba Sejahtera Tbk suffered damaging NGO scrutiny.  Electoral authorities set the presidential debate schedule. 

Politics: Recent economic trends, such as inflation, the exchange rate and the price of oil, are benefiting President Joko Widodo.  Employment is an area where the president remains vulnerable, but Prabowo Subianto’s new television ads on the topic may be backfiring.  Prabowo has focused on lamenting the lack of professional careers for college graduates – a remote concern for the bulk of voters (Page 2).  The General Election Commission (KPU) has secured agreements from the two presidential campaigns regarding topics and formats for televised debates in the coming months.  The challenge for Widodo will be to shield his running mate from questions on matters beyond his narrow field of Islamic jurisprudence (p. 2).  After prolonged wrangling with Gerindra, the Islamic Justice Welfare Party (PKS) finally named two nominees for vice governor of Jakarta; neither seem dynamic (p. 4). 

Surveys: President Joko Widodo’s 20 percentage-point lead remained intact through the second week of December, according to a credible poll (p. 5).  

Justice: Anti-Corruption Commission (KPK) officials are scrutinizing State Minister for Sports and Youth Imam Nahrawi, after having arrested a deputy state minister for alleged kickbacks on grants to the National Sports Committee (Koni).  The affair could become an embarrassment for Widodo (p. 5).  KPK officials indicated the likelihood of pursuing a former Lippo Cikarang president director, but they have not yet conveyed any such signals about investigating group owner James Riady (p. 6).  An NGO alliance highlights conflicts of interest on the part of Coordinating Maritime Affairs Minister Luhut Panjaitan (p. 7).

Policy News: Officials signed a comprehensive partnership (Cepa) with four European states (including Switzerland and Norway) (p. 9).  The transaction to nationalize the Freeport mine concluded on 21 December.  The deal will benefit Widodo (and perhaps him alone) (p. 10). 

Infrastructure: The linkage of the Trans Java Toll Road – first envisioned in 1978 – finally occurred on 20 December.  Opposition figures, noting that previous administrations had put the plans in place, dispute how much credit should accrue to Widodo; in fact, he was the first to expedite land acquisition and thereby overcome the chief obstacle (p. 12).  

In this briefing:

1. Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics
2. Autonomous Driving. Waymo Leading The Charge With Ten Million Miles Driven And Counting
3. The Festive Week the Was in ASEAN@Smartkarma – Thailand Rising, Frail DBS, and Small Cap Picks
4. 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now
5. Are US Stocks Still Expensive?

1. Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics

The healthcare industry in Indonesia has undergone a massive change since the introduction of the National Health Insurance (JKN) in 2014. Although the program allows for better healthcare access for over 200mn Indonesians, the industry dynamics have shifted and Kalbe Farma (KLBF IJ) is one of the companies that has been on the losing side during this adjustment period.

With the Health and Social Security (BPJS) deficit forecast to grow to IDR16t by end of 2018, and with a continuing roll out of coverage to 250mn people by end of 2019, all parties in the healthcare industry are expected to continue subsidizing the program.  Hospitals and drug manufacturers have had to cope with relatively flat pricing from the INA-CBG (reimbursement) tariff since 2014, despite cost pressures stemming from the currency depreciation and inflation. KLBF has reported declines in its overall pharmaceutical margin, as well as low growth rates for its licensed and OTC (over the counter) drugs over the past five years.

Our recent meeting with the company revealed that to mitigate the JKN impact, KLBF has launched several strategies, including expanding into niche specialty products such as oncology and biosimilar drugs, as well as preventive and herbal supplements. We are also at a tipping point where KLBF’s non-OTC consumer health and nutritionals revenues are finally larger than the pharmaceutical revenues for the first time. In this insight, we will discuss whether the worst is already behind us, and if it is now time to take another look at the stock. 

2. Autonomous Driving. Waymo Leading The Charge With Ten Million Miles Driven And Counting

Waymo CEO John Krafcik made some bold decisions after taking the helm at Alphabet‘s self-driving project in September 2015. Chief among them was the fact that the company abandon its plans for Level 3 automated driving and focus exclusively on levels 4 & 5. Furthermore, he decreed that Waymo would no longer manufacture its own vehicles but would instead integrate their technology into those of other automakers. Three years later, those decisions would appear to be finally paying off.

On October 10 2018, Waymo reached a significant milestone having completed 10 million self-driving miles across 25 cities in the US. While their first million self-driving miles took 18 months to complete, Waymo now clocks up over a million self-driving miles per month.  The company also recently announced the launch of its robo taxi service in Phoenix, Arizona and looks set to quickly follow suit in California. Plans to extend its self-driving technology beyond robotaxis, most notably for trucks and last-mile transportation solutions are also in the works. Furthermore, the company has begun laying down a framework of innovative B2B revenue models which should help accelerate the speed with which they can eventually monetize their technology.

It hasn’t been smooth sailing all the way for Waymo however. Earlier this year, the company was derided for the driving style of its autonomous vehicles and faced the criticism that its driverless cars continue to have safety drivers. There was also an embarrassing incident where one of those very safety drivers caused the self-driving car he was monitoring to hit a motorcyclist when he attempted to take control of the vehicle. According to Waymo’s own analysis of the vehicle log files, the accident would not have happened had he not intervened. 

With ten million self-driving miles under their belt and a thoughtful, strategic approach to monetizing their technology beginning to emerge, Waymo remains firmly ahead of their peers in leading the autonomous driving charge.  

3. The Festive Week the Was in ASEAN@Smartkarma – Thailand Rising, Frail DBS, and Small Cap Picks

Macro Insights

In Thailand: The Sandbox Economic Insight provider Dr Jim Walker circles back to the Thai economy, which he suggests is about to take off.

In The Philippines: Reform Impetus Gives Way to Politicking, Manu Bhaskaran explores the risks ahead for the Philippine Economy. 

In IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates, Kevin O’Rourke provides his value-added comment on economic and political developments in Indonesia over the last week. 

In Malaysia: Implosion of Former Ruling Party Could Create Tensions in Ruling Coalition, Manu Bhaskaran zeros in on rising political risks in Malaysia.

Equity Bottom-Up Insights

In Global Banks – DBS Frail Against Global PeersDaniel Tabbush looks at DBS Group Holdings (DBS SP) in light of falling oil prices and assesses the potential impact in credit quality. 

In AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO PriceDr. Andrew Stotz, CFA works his magic on Astra Agro Lestari (AALI IJ) and comes back with a positive view. 

In SPH REIT Nibbles at Blackstone’s PortfolioAnni Kum revisits SPH REIT (SPHREIT SP) in light of its recent acquisition in Australia. 

In CKP (CKP TB): Powerful Expansion to Drive Earnings GrowthDr. Andrew Stotz, CFA takes a close look at CK Power Pcl (CKP TB) which offers stronger growth relative to its peers. 

In UTP (UTP TB): Continued Gain from Tight Global Paper Supply, Dr. Andrew Stotz, CFA zeros in on paper manufacturer United Paper (UTP TB) and sees an improving picture. 

In BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum, Dr. Andrew Stotz, CFA takes a close look at this Malaysian and Philippines auto player. BAUTO sells Mazda vehicles in Malaysia and via its subsidiary Bermaz Auto Philippines Inc (BAP) in the Philippines. 

In COM7 (COM7 TB): Acquisition to Support Aggressive Expansion, Dr. Andrew Stotz, CFA looks at this Thai retailer and finds it an attractive prospect.

Sector and Thematic Insights

In Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019, CrossASEAN Insight Provider Nicolas Van Broekhoven looks back over his stock ideas over the past year and lays out his picks for 2019.  

In Small Cap Diary: MEGA, Eastwater, Thai Guru Athaporn Arayasantiparb, CFA looks at a number of interesting better know small caps in Thailand, including Mega Lifesciences (MEGA TB) and Eastern Water Resources Dev (EASTW TB).

In Sathorn Series M: TMB-Thanachart Courtship, Athaporn Arayasantiparb, CFA investigates talks if a merger between Thanachart Capital (TCAP TB), Krung Thai Bank Pub (KTB TB), and TMB Bank PCL (TMB TB) and gives us his views.

In Singapore REIT – Preferred Picks 2019, Anni Kum provides us with her top picks for 2019 in the Singapore REIT space. 

4. 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now

Our review of ten Asian gaming companies forward prospects for 2019 yielded our top five picks. Two of those comprise this insight. Three more will follow in Part Two. There is, in our opinion, some disconnect between continuing macro headwinds in both the VIP and mass sectors and a more bullish tone based on a recent upside trend in Macau, strong results in the Philippines and Cambodia. Given the battering of the market in general, the already 8 month old bearish tone to the sector and the current pricing of the two stocks noted here, we see significant upside opportunity as we near the beginning of 2019.

5. Are US Stocks Still Expensive?

There are striking parallels between 1929 and 2018.  

The 1929 crash put a halt to a nine-year bull run on the market.

Up until October 1929, same as this year, market consensus was that asset prices could only go up from their current level.

As we mentioned in When the Tide Goes Out, Dominoes Fall, a decade of building up excesses meant a painful burst, back 79 years ago: between October of 1929 and September of 1932, eighty-nine percent of the value of stocks was erased and the market didn’t recover to its former peak until 25 years later.

Are we in a similar situation right now? 

In this briefing:

1. The Festive Week the Was in ASEAN@Smartkarma – Thailand Rising, Frail DBS, and Small Cap Picks
2. 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now
3. Are US Stocks Still Expensive?
4. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018
5. Micron’s Guidance Bombshell Signals Troubled Times Ahead For Beleaguered Semiconductor Segment

1. The Festive Week the Was in ASEAN@Smartkarma – Thailand Rising, Frail DBS, and Small Cap Picks

Macro Insights

In Thailand: The Sandbox Economic Insight provider Dr Jim Walker circles back to the Thai economy, which he suggests is about to take off.

In The Philippines: Reform Impetus Gives Way to Politicking, Manu Bhaskaran explores the risks ahead for the Philippine Economy. 

In IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates, Kevin O’Rourke provides his value-added comment on economic and political developments in Indonesia over the last week. 

In Malaysia: Implosion of Former Ruling Party Could Create Tensions in Ruling Coalition, Manu Bhaskaran zeros in on rising political risks in Malaysia.

Equity Bottom-Up Insights

In Global Banks – DBS Frail Against Global PeersDaniel Tabbush looks at DBS Group Holdings (DBS SP) in light of falling oil prices and assesses the potential impact in credit quality. 

In AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO PriceDr. Andrew Stotz, CFA works his magic on Astra Agro Lestari (AALI IJ) and comes back with a positive view. 

In SPH REIT Nibbles at Blackstone’s PortfolioAnni Kum revisits SPH REIT (SPHREIT SP) in light of its recent acquisition in Australia. 

In CKP (CKP TB): Powerful Expansion to Drive Earnings GrowthDr. Andrew Stotz, CFA takes a close look at CK Power Pcl (CKP TB) which offers stronger growth relative to its peers. 

In UTP (UTP TB): Continued Gain from Tight Global Paper Supply, Dr. Andrew Stotz, CFA zeros in on paper manufacturer United Paper (UTP TB) and sees an improving picture. 

In BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum, Dr. Andrew Stotz, CFA takes a close look at this Malaysian and Philippines auto player. BAUTO sells Mazda vehicles in Malaysia and via its subsidiary Bermaz Auto Philippines Inc (BAP) in the Philippines. 

In COM7 (COM7 TB): Acquisition to Support Aggressive Expansion, Dr. Andrew Stotz, CFA looks at this Thai retailer and finds it an attractive prospect.

Sector and Thematic Insights

In Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019, CrossASEAN Insight Provider Nicolas Van Broekhoven looks back over his stock ideas over the past year and lays out his picks for 2019.  

In Small Cap Diary: MEGA, Eastwater, Thai Guru Athaporn Arayasantiparb, CFA looks at a number of interesting better know small caps in Thailand, including Mega Lifesciences (MEGA TB) and Eastern Water Resources Dev (EASTW TB).

In Sathorn Series M: TMB-Thanachart Courtship, Athaporn Arayasantiparb, CFA investigates talks if a merger between Thanachart Capital (TCAP TB), Krung Thai Bank Pub (KTB TB), and TMB Bank PCL (TMB TB) and gives us his views.

In Singapore REIT – Preferred Picks 2019, Anni Kum provides us with her top picks for 2019 in the Singapore REIT space. 

2. 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now

Our review of ten Asian gaming companies forward prospects for 2019 yielded our top five picks. Two of those comprise this insight. Three more will follow in Part Two. There is, in our opinion, some disconnect between continuing macro headwinds in both the VIP and mass sectors and a more bullish tone based on a recent upside trend in Macau, strong results in the Philippines and Cambodia. Given the battering of the market in general, the already 8 month old bearish tone to the sector and the current pricing of the two stocks noted here, we see significant upside opportunity as we near the beginning of 2019.

3. Are US Stocks Still Expensive?

There are striking parallels between 1929 and 2018.  

The 1929 crash put a halt to a nine-year bull run on the market.

Up until October 1929, same as this year, market consensus was that asset prices could only go up from their current level.

As we mentioned in When the Tide Goes Out, Dominoes Fall, a decade of building up excesses meant a painful burst, back 79 years ago: between October of 1929 and September of 1932, eighty-nine percent of the value of stocks was erased and the market didn’t recover to its former peak until 25 years later.

Are we in a similar situation right now? 

4. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018

Highlights of significant recent happenings include:

5. Micron’s Guidance Bombshell Signals Troubled Times Ahead For Beleaguered Semiconductor Segment

After months of skirting around inventory build-up and a weakening demand outlook, Micron used their latest earnings report to call closing time on a revenue and profitability party that began in Q4 2016 and just got better and better with each passing quarter. 

Micron reported Q1 FY2019 results on December 18’th and while revenues were largely in line with recently lowered guidance from the company, their outlook for both Q2 and 2019 as a whole was worse than even the most bearish of expectations. 

Citing high inventory levels at key customers, Micron guided Q2 FY2019 revenues for $6 billion at the midpoint, down a staggering $1.9 billion, 24% QoQ and 18% YoY. At the same time, Micron revised down their CY2019 bit demand growth forecast for both DRAM (from 20% to 16%) and NAND (35%, the bottom of the previously forecasted range). The company plans to adjust both CapEx and bit supply output downwards to match.

In the wake of their guidance bombshell, Micron’s share price closed down almost 8% the following day to end the session at $31.41, a level last seen in August 2017. Micron is unique in reporting out of sync with its industry peers, making it the proverbial canary in a coal mine. The company’s gloomy outlook and clarion call for further CapEx reductions in a bid to rebalance supply and demand spells troubled times ahead for an already beleaguered semiconductor segment ahead of the upcoming earnings season. 

In this briefing:

1. Time-Out Not Time up for Trade War
2. Semiconductor WFE Outlook. Things Just Got Really Ugly
3. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price
4. The Week that Was in ASEAN@Smartkarma – Dithering Dangerously, Digital Transformation, and Breadtalk

1. Time-Out Not Time up for Trade War

• Xi and Trump walk away from Buenos Aires with something to sell at home
• But trade negotiations will be dominated by fraught disagreements
• After 90-day negotiations, further delays to tariff escalation are likely 

2. Semiconductor WFE Outlook. Things Just Got Really Ugly

SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, published three different forecasts for wafer fab equipment (WFE) sales in the past week. While the forecasts differ in approach and detail, they all agree on one thing, WFE revenues are continuing to fall and the outlook for 2019 is sharply down on previous estimates.

Specifically, Q4 2018 WFE revenues are set to decline 20.8% or $3.3 billion QoQ and the forecast which had just six months ago predicted 7% growth in 2019 is now calling for an 8% decline next year. 

These latest forecasts cast a dark shadow over the predictions of the leading WFE manufacturers that H1 2019 would be stronger than H2 2018 and we anticipate a strong downward revision of forward guidance in the upcoming earnings season. 

There may be a glimmer of hope on the horizon however as SEMI forecasts a strong rebound in the second half of 2019 leading to a return to growth of ~20% in 2020. Let’s see.  

3. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

4. The Week that Was in ASEAN@Smartkarma – Dithering Dangerously, Digital Transformation, and Breadtalk

Macro Insights

In his appropriately named insight, The Year of Dithering Dangerously, Kevin O’Rourke suggests that President Joko Widodo, cabinet-level policymakers and the broader political elite are neglecting the imperative for economic reform at a particularly critical juncture. 

In Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI, Kevin O’Rourke comments on the most important political developments over the past week. 

In his Insight Indonesia: All Together NowNicholas Chia provides up with an interesting update on the Indonesian Economy. 

In Thailand: Wobbles En Route to Slower but Still-Sustained Growth Momentum, Jason Tan writes on Thailand following some faltering GDP numbers. 

In Political Pit Stop (December): First Month of Campaigning, our Thai guru Athaporn Arayasantiparb, CFA comments on the state of political activity over the last month in Thailand as campaigning begins for the upcoming election. 

In The Philippines: Reforms Under a Political Cloud; BSP May Turn DovishManu Bhaskaran comments on recent economic developments in the Philippines. 

In Philippine Monetary Policy: Relief from No Rate Hike, Jun Trinidad comments on the economic outlook in the Philippines following a lack of action at BSP’s last policy meeting. 

In Singapore-Malaysia Tensions Rise Anew in Airspace and Maritime Disputes, Jason Tan comments on the resurgence of political tension between Singapore and Malaysia. 

Equity Bottom-Up Insights

In SCMA (SCMA IJ) – Biting the Digital Bullet, former Jakartan and CrossASEAN Insight Provider Angus Mackintosh circles back to leading Surya Citra Media Pt Tbk (SCMA IJ) following a conversation with management focusing on its digital aspirations. 

In BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap, Nicolas Van Broekhoven revisits Breadtalk (BREAD SP) following the opening of Din Tai Fung in London. 

In MER (MER PM): Solid Fundamentals at No. 1 Philippine Power Producer, Dr. Andrew Stotz, CFA  works his magic on this leading Philippines utility company. 

In PTT (PTT TB): Planned Listing of Retail Business in 2019, Dr Andrew Stotz, CFA circles back to PTT PCL (PTT TB) following the announcement of its intention to list its retail business.  

In SCC (SCC TB): Potential Beneficiary from US-China Trade War, Dr. Andrew Stotz, CFA revisits Siam Cement (SCC TB) as a potential beneficiary souring US-China relations. 

In PLANB: Solid Outlook for Music Marketing Business Under BNK48 Office, our friends at Country Group revisit media player Plan B Media (PLANB TB) in Thailand. 

In SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability, Dr. Andrew Stotz, CFA takes a close look at this leading construction player. 

In SVI (SVI TB): Production Capacity Expansion Should Continue to Pay Off, Dr. Andrew Stotz, CFA comments on electronics manufacturing company and takes a positive view. 

Sector and Thematic Insights

In a fascinating Insight, How the Mighty Fall…Or Should That Be A “Who Will”? Thai Guru Athaporn Arayasantiparb, CFA refers to Jim Collins’ book ‘How the Mighty Fall’ and highlights some interesting pitfalls that see some great companies decline or even collapse and follows them in stages. He applied the approach to companies in Thailand. 

In Revisiting the Renewable Energy Space, Athaporn Arayasantiparb, CFA checks out two stocks in the Thai renewable energy space. 

In Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis, Athaporn Arayasantiparb, CFA picks out the most interesting pieces of breaking news over the past week or so in Thailand. 

In this briefing:

1. Are US Stocks Still Expensive?
2. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018
3. Micron’s Guidance Bombshell Signals Troubled Times Ahead For Beleaguered Semiconductor Segment
4. IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates
5. EM Relative Strength Is Bottoming: Overweight

1. Are US Stocks Still Expensive?

There are striking parallels between 1929 and 2018.  

The 1929 crash put a halt to a nine-year bull run on the market.

Up until October 1929, same as this year, market consensus was that asset prices could only go up from their current level.

As we mentioned in When the Tide Goes Out, Dominoes Fall, a decade of building up excesses meant a painful burst, back 79 years ago: between October of 1929 and September of 1932, eighty-nine percent of the value of stocks was erased and the market didn’t recover to its former peak until 25 years later.

Are we in a similar situation right now? 

2. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018

Highlights of significant recent happenings include:

3. Micron’s Guidance Bombshell Signals Troubled Times Ahead For Beleaguered Semiconductor Segment

After months of skirting around inventory build-up and a weakening demand outlook, Micron used their latest earnings report to call closing time on a revenue and profitability party that began in Q4 2016 and just got better and better with each passing quarter. 

Micron reported Q1 FY2019 results on December 18’th and while revenues were largely in line with recently lowered guidance from the company, their outlook for both Q2 and 2019 as a whole was worse than even the most bearish of expectations. 

Citing high inventory levels at key customers, Micron guided Q2 FY2019 revenues for $6 billion at the midpoint, down a staggering $1.9 billion, 24% QoQ and 18% YoY. At the same time, Micron revised down their CY2019 bit demand growth forecast for both DRAM (from 20% to 16%) and NAND (35%, the bottom of the previously forecasted range). The company plans to adjust both CapEx and bit supply output downwards to match.

In the wake of their guidance bombshell, Micron’s share price closed down almost 8% the following day to end the session at $31.41, a level last seen in August 2017. Micron is unique in reporting out of sync with its industry peers, making it the proverbial canary in a coal mine. The company’s gloomy outlook and clarion call for further CapEx reductions in a bid to rebalance supply and demand spells troubled times ahead for an already beleaguered semiconductor segment ahead of the upcoming earnings season. 

4. IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates

Prabowo has yet to dent Widodo’s 20-point lead in polls and, meanwhile, certain key macro-economic figures are finally swinging in the incumbent’s favor.  Jakarta and Surabaya are linked by toll road — after decades of work.  The Freeport mine nationalization went through, benefiting Widodo (but possibly no one else).  The Efta Cepa bodes well for other trade agreements in the works.  The Lippo Group scandal is escalating, but not yet affecting James Riady.  PT Toba Sejahtera Tbk suffered damaging NGO scrutiny.  Electoral authorities set the presidential debate schedule. 

Politics: Recent economic trends, such as inflation, the exchange rate and the price of oil, are benefiting President Joko Widodo.  Employment is an area where the president remains vulnerable, but Prabowo Subianto’s new television ads on the topic may be backfiring.  Prabowo has focused on lamenting the lack of professional careers for college graduates – a remote concern for the bulk of voters (Page 2).  The General Election Commission (KPU) has secured agreements from the two presidential campaigns regarding topics and formats for televised debates in the coming months.  The challenge for Widodo will be to shield his running mate from questions on matters beyond his narrow field of Islamic jurisprudence (p. 2).  After prolonged wrangling with Gerindra, the Islamic Justice Welfare Party (PKS) finally named two nominees for vice governor of Jakarta; neither seem dynamic (p. 4). 

Surveys: President Joko Widodo’s 20 percentage-point lead remained intact through the second week of December, according to a credible poll (p. 5).  

Justice: Anti-Corruption Commission (KPK) officials are scrutinizing State Minister for Sports and Youth Imam Nahrawi, after having arrested a deputy state minister for alleged kickbacks on grants to the National Sports Committee (Koni).  The affair could become an embarrassment for Widodo (p. 5).  KPK officials indicated the likelihood of pursuing a former Lippo Cikarang president director, but they have not yet conveyed any such signals about investigating group owner James Riady (p. 6).  An NGO alliance highlights conflicts of interest on the part of Coordinating Maritime Affairs Minister Luhut Panjaitan (p. 7).

Policy News: Officials signed a comprehensive partnership (Cepa) with four European states (including Switzerland and Norway) (p. 9).  The transaction to nationalize the Freeport mine concluded on 21 December.  The deal will benefit Widodo (and perhaps him alone) (p. 10). 

Infrastructure: The linkage of the Trans Java Toll Road – first envisioned in 1978 – finally occurred on 20 December.  Opposition figures, noting that previous administrations had put the plans in place, dispute how much credit should accrue to Widodo; in fact, he was the first to expedite land acquisition and thereby overcome the chief obstacle (p. 12).  

5. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.