Thailand

In this briefing:

1. Follow The Money
2. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price
3. Semiconductor Memory Business Shrinking Fast
4. The Dollar Is Already Dead
5. DTAC: Survived 2019 but Pressured on All Sides. Maintain Reduce.

1. Follow The Money

• January data on investor positioning show a big improvement in risk appetite for Emerging Markets
• Two-year ahead returns from risk assets likely to be sizeable and positive
• However, not clear that we are yet definitely at the ‘bottom’
• Strongest convictions are to favour EM over US and China over India

2. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.

3. Semiconductor Memory Business Shrinking Fast

Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings.  In this Insight I review each of the  companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.

4. The Dollar Is Already Dead

The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.

5. DTAC: Survived 2019 but Pressured on All Sides. Maintain Reduce.

Total Access Communication (DTAC TB) has emerged from a torrid 2018 and has survived. That was not always a certainty as the year progressed and their access to much of their spectrum expired. In the end DTAC managed to buy some 2x5MHZ of 900MHZ and 2x5MHZ of 1800MHZ spectrum and retain access temporarily to expired spectrum (the remedy). See DTAC 3Q Result: No Recovery Yet. Spectrum Issue Now Solved, but Leverage Is Rising.

However, survival has come at a cost. DTAC is paying a high price to TOT to rent its 2300MHZ spectrum (and is paying to build out the network), it has paid large sums to secure small amounts of 1800MHZ and 900MHZ spectrum to partially replaced expired concession spectrum and has agreed to pay to use equipment sitting on CAT’s infrastructure.  Finally it has moved to settle a number of disputes with CAT (discussed in Thai Telcos: Outstanding Liabilities to CAT/TOT Loom Post DTAC’s Partial Settlement) and pay them a net THB9bn. That clears the decks partially but there are some very large outstanding cases not covered (these relate to all three operators).

Latest results do little to suggest that good times are just around the corner. They were disappointing and suggest the Thai market will continue to struggle in 2019 as discussed in Emerging Asean Telcos 2019: Indonesia Looks Best Placed. Malaysia Improving. DTAC’s survival has led to increased competition in the market as it moves to win back customers and that suggests more earnings disappointment to come. We remain cautious and somewhat surprised by the strong move in recent days. We have a Reduce recommendation and THB32 target price.

In this briefing:

1. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price
2. Semiconductor Memory Business Shrinking Fast
3. The Dollar Is Already Dead
4. DTAC: Survived 2019 but Pressured on All Sides. Maintain Reduce.
5. 2019 Semiconductors: 5%+ Decline

1. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.

2. Semiconductor Memory Business Shrinking Fast

Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings.  In this Insight I review each of the  companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.

3. The Dollar Is Already Dead

The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.

4. DTAC: Survived 2019 but Pressured on All Sides. Maintain Reduce.

Total Access Communication (DTAC TB) has emerged from a torrid 2018 and has survived. That was not always a certainty as the year progressed and their access to much of their spectrum expired. In the end DTAC managed to buy some 2x5MHZ of 900MHZ and 2x5MHZ of 1800MHZ spectrum and retain access temporarily to expired spectrum (the remedy). See DTAC 3Q Result: No Recovery Yet. Spectrum Issue Now Solved, but Leverage Is Rising.

However, survival has come at a cost. DTAC is paying a high price to TOT to rent its 2300MHZ spectrum (and is paying to build out the network), it has paid large sums to secure small amounts of 1800MHZ and 900MHZ spectrum to partially replaced expired concession spectrum and has agreed to pay to use equipment sitting on CAT’s infrastructure.  Finally it has moved to settle a number of disputes with CAT (discussed in Thai Telcos: Outstanding Liabilities to CAT/TOT Loom Post DTAC’s Partial Settlement) and pay them a net THB9bn. That clears the decks partially but there are some very large outstanding cases not covered (these relate to all three operators).

Latest results do little to suggest that good times are just around the corner. They were disappointing and suggest the Thai market will continue to struggle in 2019 as discussed in Emerging Asean Telcos 2019: Indonesia Looks Best Placed. Malaysia Improving. DTAC’s survival has led to increased competition in the market as it moves to win back customers and that suggests more earnings disappointment to come. We remain cautious and somewhat surprised by the strong move in recent days. We have a Reduce recommendation and THB32 target price.

5. 2019 Semiconductors: 5%+ Decline

An earlier post outlined the general direction of the Objective Analysis 2019 forecast but didn’t provide any numbers.  In this post I explain the 5%+ decrease in revenues that the market will experience and how and why various elements play into that number.

In this briefing:

1. 2019 Semiconductors: 5%+ Decline
2. Indonesia Property – In Search of the End of the Rainbow?

1. 2019 Semiconductors: 5%+ Decline

An earlier post outlined the general direction of the Objective Analysis 2019 forecast but didn’t provide any numbers.  In this post I explain the 5%+ decrease in revenues that the market will experience and how and why various elements play into that number.

2. Indonesia Property – In Search of the End of the Rainbow?

The Indonesian property sector has only had a few glittering moments in the sun over the past five years, since the boom times of 2012-2013. The sector continues to trade at near record discounts to NAV despite the back-drop of record-low mortgage rates, rising affordability and high levels of pent-up demand. In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

In this series of Insights we will discuss in depth:

• The drivers to the property sector, including the economic drivers, with a more benign outlook on interest rates, overall supply and demand, correlations to mortgage rates, the currency impact, construction costs, regulation and tax law change over the years and the influx of foreign developers and potential buyers. 
• The profiles of the biggest players in each segment of the property market. We will also map out the details of each company’s location, accessibility, and longevity of their land bank.
• How each development is interconnected and how it benefits from new infrastructure projects, such as the new toll roads or MRT, or LRT projects, and the rise of the T.O.D. (transport orientated development). 
• Each developer’s target segment, whether they are focused on landed township developments, high rise, mixed-use, or industrial developments, and how each segment fared during boom time (2012-2014) or bust (2015-2018).
• How much of each developer’s revenues are coming from recurrent investment property sources such as the office, hotel, or retail properties, and which have the biggest proportion of speculative buyers versus end-users?

Last year saw a pick-up in sales activity for most developers but the question is can this be sustained going forward? With a more benign outlook on interest rates and a less hawkish tack from Bank Indonesia for 2019, the potential for positive regulatory changes to support the property sector, and a potential post-election tailwind from May onwards, there are good reasons to revisit this beaten up sector. 

In this briefing:

1. U.S. Equity Strategy: Market in Wait-And-See Mode; Upgrading Tech

1. U.S. Equity Strategy: Market in Wait-And-See Mode; Upgrading Tech

The S&P 500 has paused just below logical resistance at the downtrend, and we believe the equity market is in wait-and-see mode for incremental information on a variety of issues including trade talks, Fed action and earnings.  Meanwhile, We are upgrading equal-weighted Technology to overweight. Our equal-weighted Tech Sector has surged to the top of our RSR ranks due to broad-based strength in semiconductors last week. Solar stocks are another Group that is emerging as leadership. In today’s report we highlight attractive small-cap Technology stocks, as well as selection of key stocks (MSFT, AMZN, GOOGL, V, NFLX, and ADBE) and subsectors (semis, biotech, and homebuilders) which are all up against logical price resistance.

In this briefing:

1. This Week in Blockchain & Cryptos: Bakkt, Li Ka-Shing, & Starbucks
2. RRG Global Macro Weekly – Political Turmoil in London, Caracas and DC Shakes Markets
3. Don’t Write off Further Aussie LNG Supply Growth: Positive for WPL AU; Negative for US LNG Players
4. The Week that Was in ASEAN@Smartkarma – Vietnam Rising, Indonesian M&A, and Data Pricing
5. 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables

1. This Week in Blockchain & Cryptos: Bakkt, Li Ka-Shing, & Starbucks

• If you are a follower of the Asian stock markets, one of the “rules of thumb” is to carefully follow the investments trails of the “superman” Li Ka-Shing, who has recently publicly declared that he supports Bakkt. On December 31st, 2018, Bakkt raised $182.5 million from high profile investors including Li Ka-Shing backed Horizon Ventures, M12 (Microsoft’s venture capital arm), Intercontinental Exchange (owner of the New York Stock Exchange), Alan Howard, and the Boston Consulting Group. 

• Starbucks and Bakkt have yet to mention exactly when Starbucks will allow consumers to use Bitcoin to purchase coffee at their stores. In terms of timing, we believe that the probable time frame is likely to be sometime in 4Q 2019 to 2020 when Starbucks will start allowing their consumers to start using Bitcoin at some of their stores. This will represent a crucial positive tipping point for Bitcoin in the next two years.
• Rakuten & Bitcoin – It has been reported that Rakuten may start to allow Bitcoin as a means of payment as early as April 2019. 

2. RRG Global Macro Weekly – Political Turmoil in London, Caracas and DC Shakes Markets

China: US-China trade negotiations are focusing on the easy parts to avoid truly difficult discussions on thornier structural issues.
Brazil: Early economic numbers have been positive for new president Bolsonaro. Data this week and next will show the way forward.
Thailand: Elections set for March 24th. Constitutional changes may avoid the repeat of the populist/protest /coup cycle that has dominated Thai politics since 2000.

3. Don’t Write off Further Aussie LNG Supply Growth: Positive for WPL AU; Negative for US LNG Players

We think the market is underestimating global LNG supply in the early to mid-2020s from current facilities: initially we look at Australia, which became the world’s largest LNG exporter on a monthly basis in November (~80mtpa or 25% of global supply). Our analysis of Australian LNG supply suggests that production in the early to mid-2020s will be much higher than market expectations of falling production, as fields move into decline. Overall we think this is negative longer-term for the LNG market as supply could supply to the upside but it is a relative positive for the Australian LNG companies. 

We think production could grow to around 95mtpa by the mid-2020s due to substantial upside to the nameplate capacity on existing facilities, tie-backs and new developments keeping existing facilities full and utilizing new brownfield LNG trains. Australia’s key advantages versus LNG projects elsewhere are the low offshore upstream operating costs, cheap shipping costs to Asia, an investor friendly environment and having a huge installed base of LNG infrastructure and associated cashflows.

Relative to its size Woodside Petroleum (WPL AU) should be the biggest beneficiary and it is also positive for Inpex Corp (1605 JP) and Santos Ltd (STO AU) . It is also good news for the larger integrated players such as Chevron Corp (CVX US), Total Sa Spon Adr (TOT US) and Royal Dutch Shell (RDSA LN). We think that the US LNG players are disadvantaged relative to Australian expansions so this is relatively negative for the likes of Cheniere Energy (LNG US) and NextDecade Corp (NEXT US).

4. The Week that Was in ASEAN@Smartkarma – Vietnam Rising, Indonesian M&A, and Data Pricing

Macro Insights

In Vietnam: Economic Prestidigitation, Dr. Jim Walker analyses the GDP growth numbers out of Vietnam and concludes that even if there is some artistic license in the number itself, underlying growth in that country remains strong. 

In Vietnam: Still China Plus One?, Dr. Jim Walker revisits the China Vietnam connection from an economic standpoint and asks whether the “Plus one” is still justified. 

In Vietnam’s Economy Trounces Other Frontier Markets: 2018 Pullback Provides Solid Entry Point, Frontiersman Dylan Waller comments on the prospects for the Vietnamese stock market following the recently recent GDP numbers and a pullback in the market. 

In Widodo Prevails in 1st Debate / Reform Discussed / BI Holds Rate / Poll Margins Steady / PSI Emerges, Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week. 

In Indo Politics: Key Takeaways from First Presidential Debate, Johannes Salim, CFA lays out his takeaways from the first Presidential debate in Indonesia.

In The Bull Case for 2019: If Household Spending Stands Out (And Funding Finally Flows In), Kevin O’Rourke analyses the prospects for the Indonesian economy and stock market in light of a potential tailwind from domestic household spending. 

Equity Bottom-Up Insights

In Ramayana Lestari Sentosa (RALS IJ) – The Changeling, former Jakartan Angus Mackintosh comments on this leading Indonesian low-end department store operator and remains convinced that this time, its transformation will yield positive results. 

In Golden Agri:  Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020, Commodities specialist Charles Spencer circles back to this leading Crude Palm Oil plantation company and remains positive in the longer term. 

In Thailand – KTC Defies the Sceptics, Daniel Tabbush circles back to this leading Thai Finance company, which continues to show strong growth prospects. 

In AFFIN Bank: To Affinity and Beyond, Paul Hollingworth zeros in on this Malaysia lender and comes away with a positive view. 

In BDMN/BBNP Merger Leads to BDMN Buyout Arb, Travis Lundy circles back to this ongoing Indonesian M&A situation.

In Keppel-KBS US REIT – Positioned for Defensive Growth. Still Attractively Priced., Royston Foo circles back to this REIT following some better than expected results. 

In REIT Discover: Frasers Commercial Trust (FCOT SP) At Inflection Point, Anni Kum zooms in on Frasers Commercial Trust (FCOT SP), which she suggests is at an inflection point, after seven consecutive quarters of falling net property income stemming from a downward trending occupancy rate. 

Sector and Thematic Insights

In Singapore Property – 4Q18 Residential Statistics Support View of Weakness in High-End Segment, Royston Foo circles back to the sector following the releases of residential numbers. 

In Indonesian Telcos: Mobile Pricing Should Continue to Recover. Telkom Remains Our Top Pick, our friends at New Street Research revisit the sector and update their views.  

In Thai Telcos: Outstanding Liabilities to CAT/TOT Loom Post DTAC’s Partial Settlement, our friends at New Street Research zero in on the Thai Telco sector following the settlement of numerous outstanding court cases but still see further liabilities along the line. 

In StubWorld: Intouch Gains On Possible Sale of Thaicom, David Blennerhassett takes a look at this potential M&A transaction in Thailand. A sale of Thaicom, Thailand’s only satellite operator, by Intouch Holdings (INTUCH TB) potentially to CAT (Communications Authority of Thailand) would make sense given political sensitivities. 

5. 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables

We examine some of the key drivers of the oil price and on the whole we are relatively bullish as although we see some risk to demand growth forecasts in 2019, in the absence of a recession we think that supply has more room to surprise to the downside. Geopolitics and financial markets will play a huge role in prices. We think that US oil supply growth will be lower y/y in 2019, OPEC+ compliance with cuts will be high and maybe helped by unplanned disruptions and base production will decline more rapidly than forecast. Companies will accelerate the sanctioning of new projects in 2019 and also will increase exploration spending, despite a number of years of poor success rates – overall the trend should be positive for the offshore oil service companies. We expect strong LNG supply growth in 2019 to hit spot pricing but still expect a large number of projects to be sanctioned helping the LNG engineering and construction companies. It will be a very interesting year for the refining industry as new regulations limiting shipping sulphur emissions should lead to a spike in diesel and to some extent gasoline margins towards the end of the year, helping complex refiners. Major oil companies will continue to embrace renewables as investors continue to push for companies to plan for the energy transition.

The main stocks that we come out positive on are Hess Corp (HES US), Valero Energy (VLO US), TechnipFMC PLC (FTI FP), Kosmos Energy (KOS US), Transocean Ltd (RIG US), Golar Lng Ltd (GLNG US) and Galp Energia Sgps Sa (GALP PL).

We are more negative on Cenovus Energy Inc (CVE CN) , Royal Dutch Shell (RDSA LN) , Cheniere Energy (LNG US); Eog Resources (EOG US) and Ecopetrol SA (ECOPETL CB) . 

In this briefing:

1. Catalyst Calendar for Thailand 2019
2. Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low

1. Catalyst Calendar for Thailand 2019

While it may not be possible to get 100% visibility on upcoming analysts, the team at MCorp Review figured that it would be useful to start a calendar for those we see in the pipeline for this year and cite no more than three stocks that could come into focus during those months because of these catalysts. Some examples include:

• The TMB-Thanachart deal (late January) possibly the biggest bank deal since Mitsubishi-UFJ bought BAY for US$4.4bn in 2013, we see the government’s fingerprints in this and the likelihood that the share swap ratio will favor TMB.
• Chinese New Year (Feb 5), an important test for Thai tourism and AOT following the death of mainland tourists in Phuket last year. An underwhelming show would also hit Indorama.
• General elections (late May?) If this goes through, Sino Thai Engr & Constr (STEC TB) , whose tycoon Anutin Charnvirakul leads the swing vote party Bhumjaithai, could benefit hugely.
• Blockbuster season (August) So far, X-Men sequel The New Mutants, which timeline is confirmed, looks like the big boost for cinema titan Major Cineplex Group (MAJOR TB) , though we suspect Avengers Endgame, the sequel to Infinity Wars, would be an even bigger deal.

2. Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low

Trawling through  >1500 global banks, based on the last quarter of reported Balance Sheets, we apply the discipline of the PH Score™ , a value-quality fundamental momentum screen, plus a low RSI screen, and a low Franchise Valuation (FV) screen to deliver our latest rankings for global banks.

While not all of top decile 1 scores are a buy – some are value traps while others maybe somewhat small and obscure and traded sparsely- the bottom decile names should awaken caution. We would be hard pressed to recommend some of the more popular and fashionable names from the bottom decile. Names such as ICICI Bank Ltd (ICICIBC IN) , Credicorp of Peru, Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB US) are EM favourites. Their share prices have performed well for an extended period and thus carry valuation risk. They represent pricey quality in some cases. They are not priced for disappointment but rather for hope. Are the constituents of the bottom decile not fertile grounds for short sellers?

Why pay top dollar for a bank franchise given risks related to domestic (let alone global) politics and the economy? Some investors and analysts have expressed “inspiration” for developments in Brazil and Argentina. But Brazilian bonds are now trading as if the country is Investment Grade again. (This is relevant for banks especially). Guedes and co. may deliver on pension/social security reform. If so, prices will become even more inflated. But what happens if they don’t deliver on reform? Why pay top dollar for hope given the ramp up in prices already? Argentina is an even more fragile “hope narrative”. More of a “Hope take 2”. Similar to Brazil, bank Franchise Valuations are elevated. While the current account adjustment and easing inflation are to be expected, the political and social scene will be a challenge. LATAM seems to be “hot” again with investment bankers talking of resilience. But resilience is different from valuation. Banks from Chile, Peru, and Colombia feature in the bottom decile too. If an investor wants to be in these markets and desires bank exposure, surely it makes sense to look for the best value on offer. Grupo Aval Acciones y Valores (AVAL CB) may represent one such opportunity.

Our bottom decile rankings feature a great deal of banks from Indonesia. In a promising market such as Indonesia, given bank valuations, one needs to tread extremely carefully to not end up paying over the odds, to not pay for extrapolation. In addition, India is a susceptible jurisdiction for any bank operating there – no bank is “superhuman” and especially not at the prices on offer for the popular private sector “winners”. Saudi Arabia is another market that suddenly became popular last year. We are mindful of valuations and FX.

Does it not make more sense to look at opportunity in the top decile? While some of the names here will be too small or illiquid (mea culpa), there are genuine portfolio candidates. South Korea stands out in the rankings. Woori Bank (WF US) is top of the rankings after a share price plunge related to a stock overhang but this will pass. Hana Financial (086790 KS) , Industrial Bank of Korea (IBK LX) and DGB Financial Group (139130 KS) are portfolio candidates. Elsewhere, Russia and Vietnam rightly feature while Sri Lanka and Pakistan contribute some names despite very real political and macro risks. We would caution on some of the relatively small Chinese names but recommend the big 4 versus EM peers – they are not expensive. In fact some of the big 4 feature in decile 2 of our rankings. There are many Japanese banks here too. And many, like some Chinese lenders, are cheap for a reason. While the technical picture for Japanese banks is bearish, at some stage selective weeding out of opportunity within Japan’s banking sector may be rewarding. The megabanks are certainly not dear. Europe is another matter. Despite valuations, we are cautious on French lenders and on German consolidation narratives – did a merger of 2 weak banks ever deliver shareholder value? The inclusion of two Romanian banks in the top decile is somewhat of a headscratcher. These are perfectly investable opportunities but share prices have been poor of late.

In this briefing:

1. Catalyst Calendar for Thailand 2019
2. Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low
3. Uzbekistan Initiation: Value Hidden in Plain Sight

1. Catalyst Calendar for Thailand 2019

While it may not be possible to get 100% visibility on upcoming analysts, the team at MCorp Review figured that it would be useful to start a calendar for those we see in the pipeline for this year and cite no more than three stocks that could come into focus during those months because of these catalysts. Some examples include:

• The TMB-Thanachart deal (late January) possibly the biggest bank deal since Mitsubishi-UFJ bought BAY for US$4.4bn in 2013, we see the government’s fingerprints in this and the likelihood that the share swap ratio will favor TMB.
• Chinese New Year (Feb 5), an important test for Thai tourism and AOT following the death of mainland tourists in Phuket last year. An underwhelming show would also hit Indorama.
• General elections (late May?) If this goes through, Sino Thai Engr & Constr (STEC TB) , whose tycoon Anutin Charnvirakul leads the swing vote party Bhumjaithai, could benefit hugely.
• Blockbuster season (August) So far, X-Men sequel The New Mutants, which timeline is confirmed, looks like the big boost for cinema titan Major Cineplex Group (MAJOR TB) , though we suspect Avengers Endgame, the sequel to Infinity Wars, would be an even bigger deal.

2. Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low

Trawling through  >1500 global banks, based on the last quarter of reported Balance Sheets, we apply the discipline of the PH Score™ , a value-quality fundamental momentum screen, plus a low RSI screen, and a low Franchise Valuation (FV) screen to deliver our latest rankings for global banks.

While not all of top decile 1 scores are a buy – some are value traps while others maybe somewhat small and obscure and traded sparsely- the bottom decile names should awaken caution. We would be hard pressed to recommend some of the more popular and fashionable names from the bottom decile. Names such as ICICI Bank Ltd (ICICIBC IN) , Credicorp of Peru, Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB US) are EM favourites. Their share prices have performed well for an extended period and thus carry valuation risk. They represent pricey quality in some cases. They are not priced for disappointment but rather for hope. Are the constituents of the bottom decile not fertile grounds for short sellers?

Why pay top dollar for a bank franchise given risks related to domestic (let alone global) politics and the economy? Some investors and analysts have expressed “inspiration” for developments in Brazil and Argentina. But Brazilian bonds are now trading as if the country is Investment Grade again. (This is relevant for banks especially). Guedes and co. may deliver on pension/social security reform. If so, prices will become even more inflated. But what happens if they don’t deliver on reform? Why pay top dollar for hope given the ramp up in prices already? Argentina is an even more fragile “hope narrative”. More of a “Hope take 2”. Similar to Brazil, bank Franchise Valuations are elevated. While the current account adjustment and easing inflation are to be expected, the political and social scene will be a challenge. LATAM seems to be “hot” again with investment bankers talking of resilience. But resilience is different from valuation. Banks from Chile, Peru, and Colombia feature in the bottom decile too. If an investor wants to be in these markets and desires bank exposure, surely it makes sense to look for the best value on offer. Grupo Aval Acciones y Valores (AVAL CB) may represent one such opportunity.

Our bottom decile rankings feature a great deal of banks from Indonesia. In a promising market such as Indonesia, given bank valuations, one needs to tread extremely carefully to not end up paying over the odds, to not pay for extrapolation. In addition, India is a susceptible jurisdiction for any bank operating there – no bank is “superhuman” and especially not at the prices on offer for the popular private sector “winners”. Saudi Arabia is another market that suddenly became popular last year. We are mindful of valuations and FX.

Does it not make more sense to look at opportunity in the top decile? While some of the names here will be too small or illiquid (mea culpa), there are genuine portfolio candidates. South Korea stands out in the rankings. Woori Bank (WF US) is top of the rankings after a share price plunge related to a stock overhang but this will pass. Hana Financial (086790 KS) , Industrial Bank of Korea (IBK LX) and DGB Financial Group (139130 KS) are portfolio candidates. Elsewhere, Russia and Vietnam rightly feature while Sri Lanka and Pakistan contribute some names despite very real political and macro risks. We would caution on some of the relatively small Chinese names but recommend the big 4 versus EM peers – they are not expensive. In fact some of the big 4 feature in decile 2 of our rankings. There are many Japanese banks here too. And many, like some Chinese lenders, are cheap for a reason. While the technical picture for Japanese banks is bearish, at some stage selective weeding out of opportunity within Japan’s banking sector may be rewarding. The megabanks are certainly not dear. Europe is another matter. Despite valuations, we are cautious on French lenders and on German consolidation narratives – did a merger of 2 weak banks ever deliver shareholder value? The inclusion of two Romanian banks in the top decile is somewhat of a headscratcher. These are perfectly investable opportunities but share prices have been poor of late.

3. Uzbekistan Initiation: Value Hidden in Plain Sight

Uzbekistan’s economy is a frontier market stand out and has a large number of attractive characteristics:

• Uzbekistan’s stock market trades at a substantial discount to other frontier markets, though the extremely illiquid nature of the market makes it hard to trade.  However, there still is foreign interest in the market.
• The IMF projects that the economy will grow by 5% during 2018 and 2019, and eventually reach 6% by 2022, though this is still below its historical high. 
• Market reforms were spearheaded in December 2016 when the newly elected president, Shavkat Mirziyoyev decided to transition towards a market- oriented economy led by private sector growth, as the public sector was unable to create enough jobs.  This represents a significant shift given that Uzbekistan had been a closed, centrally planned economy until 2016.
• Tourist arrivals grew by 91.6% during H1 2018, and this is poised to improve greater in the future due to the impact of the visa liberalization measures.
• Twin deficits have remained under control and Uzbekistan is one of few current account surplus frontier markets.
• Uzbekistan is also very attractive compared to other markets in the frontier space given that its minimum wage is only US$24/month, compared to around $70-75/month in Kyrgyzstan and Kazakhstan.

The market reforms that the country recently implemented will be a major catalyst for future economic growth and makes investment in this market appealing.  Apart from strong growth, the market is also appealing due to its high foreign exchange reserves ( nearly 2 years of import cover), consistent CA surplus, and stable currency.  My latest frontier and emerging market recap highlights the appeals of markets such as Bangladesh, Vietnam, and Egypt, while expressing concerns for markets such as Sri Lanka and Pakistan.  Uzbekistan is a suitable addition given its stable macro/political picture, and the main negative factor of this market is the highly inaccessible nature of the equity market.  The ADTV is less than $100,000, which is a far cry from other frontier markets like Romania, Sri Lanka and Kenya.

In this briefing:

1. ATP30: 100% Secured Client Base Prompt 2019 Growth
2. Inventory Clearance and the Semiconductor Cycle
3. RRG Global Macro Weekly – Dramatic Brexit Defeat A Positive for Markets? We Are Not So Sanguine
4. Wanted: A 21st Century Monetary Theory
5. The Week that Was in ASEAN@Smartkarma – Asia’s Time, Indo Mini-Marts, and Singapore Property Woes

1. ATP30: 100% Secured Client Base Prompt 2019 Growth

We maintain a BUY rating for ATP30, based on a target price of Bt2.46 (previous TP: 2.48) and derived from a 30xPE’18E, which is its average trading range in the past one year and 10% discount to Thailand’s transportation sector

The story:

• Active fleet expansion still go on in 2019-20E
• Lower interest expense burden support margin expansion

Risks: Higher than expected in volatility in fuel price and probability that clients will terminate service contracts

2. Inventory Clearance and the Semiconductor Cycle

A very normal part of the semiconductor cycle is inventory clearance.  DRAM makers are starting to discuss this in their earnings calls.  What they are NOT telling their investors is how significant this is to the onset of a price collapse, perhaps because they don’t understand it themselves.  This Insight will help readers to learn how and why an inventory clearance helps ratchet a budding oversupply into a full-blown glut.

3. RRG Global Macro Weekly – Dramatic Brexit Defeat A Positive for Markets? We Are Not So Sanguine

The dramatic defeat of PM May’s Brexit arrangement with the EU was seen by the markets as a positive development. Apparently the markets believe that this could result in Britain remaining in the EU.

While we agree this would be good news we consider it unlikely without many more months or years of uncertainty as another referendum is organized and implemented.

Romania: GDP in Q3 grew 4.4% y/y, up from 4.1% in Q2. The country’s economy is doing better than most EU countries.
Brazil: The CPI in Dec rose 3.7%, down from 4.05% in Nov. Lowest rate since May, as prices slowed for food and fuel.
India: The trade deficit in Dec narrowed to $13.1 bn. Exports rose a meager 0.3% and imports fell 2.44%. GDP growth of 7% is expected for this year and next..

4. Wanted: A 21st Century Monetary Theory

The globe is facing more than an ordinary business cycle.

Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.

5. The Week that Was in ASEAN@Smartkarma – Asia’s Time, Indo Mini-Marts, and Singapore Property Woes

Macro Insights

In Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat, Sharmila Whelan suggests that the time has come for Asia to outperform developed markets.

In The Black Elephant Has Trumpeted, Dr. Jim Walker argues that we are on the cusp of a period of pronounced outperformance for Asian economies. 

In Catalyst Calendar for Thailand 2019, our Thai Guru attempts upcoming catalysts for selective stocks in Thailand including TMB Bank PCL (TMB TB), Airports Of Thailand (AOT TB), Indorama Ventures (IVL TB), Sino Thai Engr & Constr (STEC TB), and Major Cineplex Group (MAJOR TB).

Equity Bottom-Up Insights

In his on the ground insight, Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves, former Jakartan Angus Mackintosh revisits this leading Indonesian mini-market operator. After a meeting with management, he finds the company on an altogether more favourable tack.

In Ayala Corp Placement – Selldown by Mitsubishi Likely to Reignite Overhang Worries, Zhen Zhou, Toh takes a look at this significant transaction in the Philippines. 

in Capitaland (CAPL SP): Transformational Acquisition at a Premium, Arun George comments on Capitaland Ltd (CAPL SP)‘s latest acquisition and though he sees it as significant would take a wait and see stance on the stock. 

Sector and Thematic Insights

In Singapore Real Deals (Jan 2019 Issue 1, Anni Kum launches a new regular product commenting on significant developments in the Singapore property sector. Singapore Real Deals is a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In the first issue of Singapore Real Deals, she will dive into the first property launch in Prime District 9 in 2019, RV Altitude, to get a sense of the product mix and pricing strategies that developers are adopting in a price-sensitive market. 

In Singapore Property – A Perfect Storm for the High-End Residential Market in 2019?, Royston Foo investigates some worrying developments on the supply side in Singapore property, which he suggests could negatively affect the market, especially the high-end.

In this briefing:

1. The Week that Was in ASEAN@Smartkarma – Vietnam Rising, Indonesian M&A, and Data Pricing
2. 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables
3. Snippets #18: Naughty CEOs, Southern Crusades
4. Monthly Geopolitical Comment: Too Early to Expect Lasting Improvements in US-China Relationship
5. Semiconductor WFE Billings Decline Reverses Course in December, First Bullish Signal in Six Months

1. The Week that Was in ASEAN@Smartkarma – Vietnam Rising, Indonesian M&A, and Data Pricing

Macro Insights

In Vietnam: Economic Prestidigitation, Dr. Jim Walker analyses the GDP growth numbers out of Vietnam and concludes that even if there is some artistic license in the number itself, underlying growth in that country remains strong. 

In Vietnam: Still China Plus One?, Dr. Jim Walker revisits the China Vietnam connection from an economic standpoint and asks whether the “Plus one” is still justified. 

In Vietnam’s Economy Trounces Other Frontier Markets: 2018 Pullback Provides Solid Entry Point, Frontiersman Dylan Waller comments on the prospects for the Vietnamese stock market following the recently recent GDP numbers and a pullback in the market. 

In Widodo Prevails in 1st Debate / Reform Discussed / BI Holds Rate / Poll Margins Steady / PSI Emerges, Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week. 

In Indo Politics: Key Takeaways from First Presidential Debate, Johannes Salim, CFA lays out his takeaways from the first Presidential debate in Indonesia.

In The Bull Case for 2019: If Household Spending Stands Out (And Funding Finally Flows In), Kevin O’Rourke analyses the prospects for the Indonesian economy and stock market in light of a potential tailwind from domestic household spending. 

Equity Bottom-Up Insights

In Ramayana Lestari Sentosa (RALS IJ) – The Changeling, former Jakartan Angus Mackintosh comments on this leading Indonesian low-end department store operator and remains convinced that this time, its transformation will yield positive results. 

In Golden Agri:  Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020, Commodities specialist Charles Spencer circles back to this leading Crude Palm Oil plantation company and remains positive in the longer term. 

In Thailand – KTC Defies the Sceptics, Daniel Tabbush circles back to this leading Thai Finance company, which continues to show strong growth prospects. 

In AFFIN Bank: To Affinity and Beyond, Paul Hollingworth zeros in on this Malaysia lender and comes away with a positive view. 

In BDMN/BBNP Merger Leads to BDMN Buyout Arb, Travis Lundy circles back to this ongoing Indonesian M&A situation.

In Keppel-KBS US REIT – Positioned for Defensive Growth. Still Attractively Priced., Royston Foo circles back to this REIT following some better than expected results. 

In REIT Discover: Frasers Commercial Trust (FCOT SP) At Inflection Point, Anni Kum zooms in on Frasers Commercial Trust (FCOT SP), which she suggests is at an inflection point, after seven consecutive quarters of falling net property income stemming from a downward trending occupancy rate. 

Sector and Thematic Insights

In Singapore Property – 4Q18 Residential Statistics Support View of Weakness in High-End Segment, Royston Foo circles back to the sector following the releases of residential numbers. 

In Indonesian Telcos: Mobile Pricing Should Continue to Recover. Telkom Remains Our Top Pick, our friends at New Street Research revisit the sector and update their views.  

In Thai Telcos: Outstanding Liabilities to CAT/TOT Loom Post DTAC’s Partial Settlement, our friends at New Street Research zero in on the Thai Telco sector following the settlement of numerous outstanding court cases but still see further liabilities along the line. 

In StubWorld: Intouch Gains On Possible Sale of Thaicom, David Blennerhassett takes a look at this potential M&A transaction in Thailand. A sale of Thaicom, Thailand’s only satellite operator, by Intouch Holdings (INTUCH TB) potentially to CAT (Communications Authority of Thailand) would make sense given political sensitivities. 

2. 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables

We examine some of the key drivers of the oil price and on the whole we are relatively bullish as although we see some risk to demand growth forecasts in 2019, in the absence of a recession we think that supply has more room to surprise to the downside. Geopolitics and financial markets will play a huge role in prices. We think that US oil supply growth will be lower y/y in 2019, OPEC+ compliance with cuts will be high and maybe helped by unplanned disruptions and base production will decline more rapidly than forecast. Companies will accelerate the sanctioning of new projects in 2019 and also will increase exploration spending, despite a number of years of poor success rates – overall the trend should be positive for the offshore oil service companies. We expect strong LNG supply growth in 2019 to hit spot pricing but still expect a large number of projects to be sanctioned helping the LNG engineering and construction companies. It will be a very interesting year for the refining industry as new regulations limiting shipping sulphur emissions should lead to a spike in diesel and to some extent gasoline margins towards the end of the year, helping complex refiners. Major oil companies will continue to embrace renewables as investors continue to push for companies to plan for the energy transition.

The main stocks that we come out positive on are Hess Corp (HES US), Valero Energy (VLO US), TechnipFMC PLC (FTI FP), Kosmos Energy (KOS US), Transocean Ltd (RIG US), Golar Lng Ltd (GLNG US) and Galp Energia Sgps Sa (GALP PL).

We are more negative on Cenovus Energy Inc (CVE CN) , Royal Dutch Shell (RDSA LN) , Cheniere Energy (LNG US); Eog Resources (EOG US) and Ecopetrol SA (ECOPETL CB) . 

3. Snippets #18: Naughty CEOs, Southern Crusades

In this review, we highlight five new unrelated developments that might impact the Thai stock market if you happen to hold the affected stocks.

• Skeletons in the closet. CIMB’s Thai CEO went on voluntary leave to clear his name regarding a legacy case back in his KTB days, while one of Thailand’s highest profile tycoon Dr. Prasert has been implicated in a stock manipulation case of Bangkok Airways from way back in 2015.
• Religious wars? As the southern insurgency spreads to economically vibrant province of Songkhla, insurgents attack a Buddhist temple and kill two monks, possibly in an effort to turn the crisis into a religious war. Doesn’t sound great for overall stability.
• A rare bump in the Baht. Despite QE unwinding, the Baht has risen almost 3% against the greenback. Bad news for exporters (eg. TUF, DELTA) good news for serial acquirers (think Thai Beverage, Banpu).
• Government-inspired deals. Is the government driving M&A in Thailand these days? They certainly had a hand in the TMB-Thanachart deal and now are rumored to be buying Thaicom, the country’s only satellite operator.
• Air quality takes a dive thanks to diesel and aggressive skytrain construction programs. Stores selling face mask and companies that substitute ethanol to diesel are set to benefit, while BTS might hit headwinds as government forces them to slow down construction.

4. Monthly Geopolitical Comment: Too Early to Expect Lasting Improvements in US-China Relationship

5. Semiconductor WFE Billings Decline Reverses Course in December, First Bullish Signal in Six Months

On January 24’th 2019, SEMI announced that Wafer Fab Equipment (WFE) billings for North America-based manufacturers of semiconductor equipment amounted to $2.11 billion worldwide in December 2018. This represents an 8.5% MoM increase, although still lower YoY by 12.1%. December’s data marks the reversal of a six month long downtrend in monthly billings, a bullish signal that the WFE segment has bottomed and better times lie ahead. 

This latest billings data coincides with WFE bellwether Lam Research (LRCX US)‘s latest earnings report which slightly exceeded guidance with revenues of $2.5 billion, up 8.7% sequentially. On the call, company executives stated that first quarter CY 2019 would mark the trough from a gross margin perspective, strongly implying that it would be the same for revenues. 

LRCX shares surged 15.7% in overnight trading triggering a rising tide that lifted large swathes of semiconductor stocks, particularly those within the WFE sector. Two swallows don’t necessarily mean it’s Spring, but for now, the markets are betting that it does. 

In this briefing:

1. LNG Producers Outperform as More LNG from the US Is Coming into the Market
2. Thailand – KTC Defies the Sceptics
3. StubWorld: Intouch Gains On Possible Sale of Thaicom
4. Thai Telcos: Outstanding Liabilities to CAT/TOT Loom Post DTAC’s Partial Settlement
5. EM Active Fund Performance:  Difficult 2018, but Long-Term Outperformance Remains

1. LNG Producers Outperform as More LNG from the US Is Coming into the Market

On the back of a growing LNG global trade volume, LNG producers have outperformed the US market and their E&P peers including the oil majors over the last two years. As global LNG production reaches a record 316m tonnes in 2018, a 9.6% increase year on year, new capacity additions set to come online in the next three years will be dominated by the US. This insight will examine how the recent entry of US LNG in the market is transforming the LNG industry and which emerging players are driving the change.

Exhibit 1: LNG Producers Outperform the US Market

2. Thailand – KTC Defies the Sceptics

Krungthai Card (KTC TB) shows all too clearly how to keep profit growth high, rising from 20%, to 33% and to 56%, from 2016 through 2018. There are few financial companies that can compare to the persistent and high and improving rate of profit growth. We must remember that late in 2017, regulations changed lowering the maximum rate on credit card loans and limiting facilities based on a more stringent policy relating to income. Ironically, we believe this supports performance. Customers may have become more careful on defaulting, running the risk of getting cut off and having to re-apply for a personal loan or a credit card. And under new regulations, customers can not receive as high a credit limit as in the past, if their income is less than Bt30,000 or Bt50,000 per month.

3. StubWorld: Intouch Gains On Possible Sale of Thaicom

This week in StubWorld …

• Both Intouch Holdings (INTUCH TB) and Thaicom Pcl (THCOM TB) gain ~10% in response to rumours of a government takeout of Thaicom.

Preceding my comments on Intouch and Yoosung T&S (024800 KS) are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed as a % – of at least 20%.

4. Thai Telcos: Outstanding Liabilities to CAT/TOT Loom Post DTAC’s Partial Settlement

Total Access Communication (DTAC TB) recently settled a number of outstanding cases with CAT, one of the two Thai Telecom authorities (the other being TOT). DTAC agreed to pay THB9.5bn ($300m) to CAT to settle a number of outstanding disputes. They did NOT clear all their disputes and there are substantial remaining potential liabilities. In the past, The Thai telcos have tended to ignore these cases given the glacial moves through the system (some are 20+ years), but DTAC’s moves suggest it is time to take a closer look. The total numbers for the industry are substantial at around $20bn and, following DTAC’s settlement, Chris Hoare thinks the risk of crystallizing losses has increased. We have cut our target prices as a result. The industry was already facing headwinds from the business revival at DTAC now that it has secured access to spectrum.

5. EM Active Fund Performance:  Difficult 2018, but Long-Term Outperformance Remains

2018 was a year to forget for many active GEM managers. Absolute returns were the worst since 2011 and, relative to the I-Shares MSCI Emerging Markets ETF, active funds registered their first average underperformance since 2008.  Here we share some of the key data points on active fund performance for 2018 and over the longer term.