Thailand

In this briefing:

1. Asian Credit Monitor: 2019 Portfolio Strategy, US Rate Trajectory, China Reform Pause
2. IPO Radar: AutoCorp, Honda’s Avatar in Thailand
3. Forecasting the Semiconductor Market
4. The New Year’s Week that Was in ASEAN@Smartkarma – Indo Pharma, Industrials, and Weaker Oil
5. Thai Macro Watch: Traditional ‘Weak Oil’ Plays in Thailand

1. Asian Credit Monitor: 2019 Portfolio Strategy, US Rate Trajectory, China Reform Pause

If we had to make a base observation for Asia credit markets over 2018, it was certainly caught “wrong-footed” like most of its other risky asset counterparts. The combination of a more hawkish Fed in 2018, global quantitative tightening, late-cycle economic conditions, volatility and a strong USD have all served to impact almost all the asset classes negatively. According to some asset allocators, the only asset class which returned positive in 2018 was cash, every other traditional asset class saw losses.

USD direction will further dictate the impact on overall Asian risk, in our view, with many undervalued Asian currencies following their sharp declines in 2018. One of our scenarios includes a range-bound USD in 1H19, followed by a possible reversal in 2H19 on any dovish Fed policy/US economic weakness. In this case, it has the potential to attract incremental portfolio inflows back into Asian risk. We expect a slightly tighter bias in monetary policy in most Asia ex-Japan nations which is supportive for their respective currencies.

In 2019, risk-reward dynamics have improved particularly for Asian investment grade (“IG”) where we see more limited MTM pressure. We expect a more defensive market at least in 1H19 which supports our heavier IG bias. We suspect larger investors would continue to reallocate depending on the outcomes of the China-US trade dispute and their view on US risk (arguably near its last late-cycle expansion legs). We continue to be extremely selective in Asian high yield (“HY”) which have been impacted by idiosyncratic situations including credit deterioration and rising defaults. Exogenous factors such as the potential for “fallen angel” risk (i.e. a migration from issuers on the cusp of IG, “BBB-”  into HY) as well as net portfolio outflows from HY, EM and leveraged loan funds are ongoing concerns. Despite cheaper valuations in Asian HY, we still see skewed risk-reward (with larger potential risks).

In the US, our base case expects the Fed to hike 1-2 times (quarter point each) for 2019, premised on still below-trend inflation and external factors. We think it is near the tail-end of its current tightening cycle, but we would continue to monitor the US supply-side (labour markets, employment gaps, prices) for further clues. A sustained upshot to the previous factors may have the potential to prolong the Fed’s tightening cycle.

On China’s side, we have seen a critical reversal in policy towards selective expansion/accommodation again as economic reforms instituted 3 years ago have been reprioritized. China’s difficult task to balance growth targets and restructure its economy is a perennial issue. We would also expect defaults to remain elevated domestically/internationally as a new paradigm of credit investing takes root in China.

Finally, we would like to wish our readers luck in investing and trading in the year ahead.

2. IPO Radar: AutoCorp, Honda’s Avatar in Thailand

In August 2017, Honda stole the top spot in Thai passenger cars from Toyota and held it for a few months. They are still formidable players, and ACG (AutoCorp) which runs Honda dealerships and service centers across Thailand, is expected to IPO some time in 2019. Here’s our quick look at the company.

• We value this IPO at Bt2/sh using DCF, since there’s really no good comparables. The company is expected to enjoy slower revenue growth and higher margins going forward as car sales slow down nationally and maintenance becomes a bigger chunk of the revenues.
• They only operate in four provinces and run 8 showrooms with over 6,000 sqm of display space. The service centers account for almost 17,200 sqm. The big chunk comes from lower margin car sales. Along with accessories, these account for 84% of revenues.
• The IPO is firmly underwritten by Singapore’s Phillips Securities and is good for more than a quarter of shares outstanding (26%). The founding Rangkanuwat family control all remaining shares and have committed to 6 month lock-up period.

3. Forecasting the Semiconductor Market

This is the time of year that Objective Analysis releases its semiconductor forecast.  This post is based upon a video posted on the WeSRCH website that explains the Objective Analysis 2019 semiconductor forecast.

Although accurate semiconductor forecasts are straightforward to produce, the consistently-accurate methodology spelled out in this Insight is rarely used.

The forecast predicts that the downturn that the industry is currently entering will be longer than most, with profits eluding chip companies until 2022.

4. The New Year’s Week that Was in ASEAN@Smartkarma – Indo Pharma, Industrials, and Weaker Oil

Macro Insights

In Strong Revenues / Benign CPI / Indrawati’s Award / Prabowo’s Arabic / Scandals Mount / Tsunami Toll, Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week.

Equity Bottom-up Insights

In Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics, CtossASEAN analyst, Jessica Irene zeros in on Indonesia’s largest pharma company as its consumer health division overtakes pharmaceuticals as a source of revenue and asks whether now is the time to revisit the stock. 

In Selamat Sempurna (SMSM IJ) – Truly Industrious, former Jakartan Angus Mackintosh circles back to Indonesia’s largest filter manufacturer, which he sees as one of the country’s best quality listed industrials. 

In Indonesia Banks – Exceptional ROA Still Unrecognized at PT BFI Finance, banking specialist Daniel Tabbush circles back to PT BFI Finance Indonesia (BFIN IJ), which he suggests is an attractive prospect. 

In Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover? , out Thai guru Athaporn Arayasantiparb, CFA takes a look at Thanachart Capital (TCAP TB) as TMB Bank PCL (TMB TB) comes close to concluding its takeover. 

In Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?, Johannes Salim, CFA takes another looks at US-listed South East Asian e-commerce player Sea Ltd (SE US) and sees the company gaining ground in Indonesia, which is its most important growth market. 

In Jardine C&C (JCNC SP): Close the Stub Trade, Curtis Lehnert revisits his recommendation on Jardine Cycle & Carriage (JCNC SP) and suggests now is the time to close the trade idea. 

In M1 Offer Coming – Market Odds Suggest a Bump But…  Travis Lundy investigates that the take over of Konnectivity Pte. Ltd. by leading Singapore telecoms firm M1 Ltd (M1 SP). 

In Tuan Sing: Beneficiary of Exuberant Demand for Prime Office Investment Properties, Property Specialist Insight Provider Anni Kum suggests that recent large office acquisition by Gaw Capital in Singapore should benefit office player Tuan Sing Holdings (TSH SP). 

In Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer, event-driven specialist David Blennerhassett zeros in on Hotel Properties (HPL SP) after a recent change in shareholding. 

Sector and Thematic Insights

In Thai Macro Watch: Traditional ‘Weak Oil’ Plays in Thailand, Thai guru Athaporn Arayasantiparb, CFA searches for beneficiaries of the weaker oil price in Thailand. 

In The Four Vulnerabilities in Thai Property, Athaporn Arayasantiparb, CFA looks takes a step back to look at the Thai Property Sector and explores a number of vulnerabilities. 

5. Thai Macro Watch: Traditional ‘Weak Oil’ Plays in Thailand

As the US turns into a net exporter and weaker Chinese economic outlook looms, oil prices have tanked quickly. While QE unwinding will continue to weigh down share price performance for Thai equities in 2019, we do believe a few areas could benefit from lower energy costs on the earnings side.

• Consumer goods. Lower energy cost leads to higher disposable income. BJC, which sells consumables like potato chips, comes to mind.
• Retailing. Retailers that sell bigger items and provide parking space like BJC’s Big C and Robinsons benefit on the revenue side, while CP All’s 7-Eleven can expect to see cost reduction.
• Airlines & other tourism stocks. The cost savings for airlines is arguably bigger than any other sector could expect to enjoy. If they cut down ticket prices to compete, it will spill over to other areas of tourism, such as airport and hotel operators.
• Media. Improving consumer sentiment prompts new purchases and encourages businesses to advertise more. If we had to pick one, we’d go with Major this time. We also hold this stock for good measure.

In this briefing:

1. Forecasting the Semiconductor Market
2. The New Year’s Week that Was in ASEAN@Smartkarma – Indo Pharma, Industrials, and Weaker Oil
3. Thai Macro Watch: Traditional ‘Weak Oil’ Plays in Thailand
4. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.
5. Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover?

1. Forecasting the Semiconductor Market

This is the time of year that Objective Analysis releases its semiconductor forecast.  This post is based upon a video posted on the WeSRCH website that explains the Objective Analysis 2019 semiconductor forecast.

Although accurate semiconductor forecasts are straightforward to produce, the consistently-accurate methodology spelled out in this Insight is rarely used.

The forecast predicts that the downturn that the industry is currently entering will be longer than most, with profits eluding chip companies until 2022.

2. The New Year’s Week that Was in ASEAN@Smartkarma – Indo Pharma, Industrials, and Weaker Oil

Macro Insights

In Strong Revenues / Benign CPI / Indrawati’s Award / Prabowo’s Arabic / Scandals Mount / Tsunami Toll, Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week.

Equity Bottom-up Insights

In Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics, CtossASEAN analyst, Jessica Irene zeros in on Indonesia’s largest pharma company as its consumer health division overtakes pharmaceuticals as a source of revenue and asks whether now is the time to revisit the stock. 

In Selamat Sempurna (SMSM IJ) – Truly Industrious, former Jakartan Angus Mackintosh circles back to Indonesia’s largest filter manufacturer, which he sees as one of the country’s best quality listed industrials. 

In Indonesia Banks – Exceptional ROA Still Unrecognized at PT BFI Finance, banking specialist Daniel Tabbush circles back to PT BFI Finance Indonesia (BFIN IJ), which he suggests is an attractive prospect. 

In Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover? , out Thai guru Athaporn Arayasantiparb, CFA takes a look at Thanachart Capital (TCAP TB) as TMB Bank PCL (TMB TB) comes close to concluding its takeover. 

In Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?, Johannes Salim, CFA takes another looks at US-listed South East Asian e-commerce player Sea Ltd (SE US) and sees the company gaining ground in Indonesia, which is its most important growth market. 

In Jardine C&C (JCNC SP): Close the Stub Trade, Curtis Lehnert revisits his recommendation on Jardine Cycle & Carriage (JCNC SP) and suggests now is the time to close the trade idea. 

In M1 Offer Coming – Market Odds Suggest a Bump But…  Travis Lundy investigates that the take over of Konnectivity Pte. Ltd. by leading Singapore telecoms firm M1 Ltd (M1 SP). 

In Tuan Sing: Beneficiary of Exuberant Demand for Prime Office Investment Properties, Property Specialist Insight Provider Anni Kum suggests that recent large office acquisition by Gaw Capital in Singapore should benefit office player Tuan Sing Holdings (TSH SP). 

In Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer, event-driven specialist David Blennerhassett zeros in on Hotel Properties (HPL SP) after a recent change in shareholding. 

Sector and Thematic Insights

In Thai Macro Watch: Traditional ‘Weak Oil’ Plays in Thailand, Thai guru Athaporn Arayasantiparb, CFA searches for beneficiaries of the weaker oil price in Thailand. 

In The Four Vulnerabilities in Thai Property, Athaporn Arayasantiparb, CFA looks takes a step back to look at the Thai Property Sector and explores a number of vulnerabilities. 

3. Thai Macro Watch: Traditional ‘Weak Oil’ Plays in Thailand

As the US turns into a net exporter and weaker Chinese economic outlook looms, oil prices have tanked quickly. While QE unwinding will continue to weigh down share price performance for Thai equities in 2019, we do believe a few areas could benefit from lower energy costs on the earnings side.

• Consumer goods. Lower energy cost leads to higher disposable income. BJC, which sells consumables like potato chips, comes to mind.
• Retailing. Retailers that sell bigger items and provide parking space like BJC’s Big C and Robinsons benefit on the revenue side, while CP All’s 7-Eleven can expect to see cost reduction.
• Airlines & other tourism stocks. The cost savings for airlines is arguably bigger than any other sector could expect to enjoy. If they cut down ticket prices to compete, it will spill over to other areas of tourism, such as airport and hotel operators.
• Media. Improving consumer sentiment prompts new purchases and encourages businesses to advertise more. If we had to pick one, we’d go with Major this time. We also hold this stock for good measure.

4. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.

The Semiconductor Industry Association (SIA) just announced that worldwide sales of semiconductors reached $41.4 billion for the month of November 2018, an increase of 9.8% YoY, but down 1.1% MoM, the first such decline since February 2018. While the decline is modest and total 2018 total semiconductor sales are on track to reach ~$470 billion for a YoY increase of 15.7%, any decline in what should be peak holiday season is not a good sign. 

Semiconductor sales historically track Wafer Fab Equipment (WFE) sales with a roughly six month time lag. North American WFE sales have been declining each month for the past six months meaning that this latest semiconductor MoM sales decline is right on schedule.  

Leveraging a decade’s worth of historical data, we analyse two key questions that are likely on every investors mind. Firstly,for how long should we expect semiconductor sales to continue their decline. Secondly, how steep should we expect that decline to be?    

5. Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover?

As the merger between TMB and Thanachart gets a nudge from the Ministry of Finance and could be finalized this month, we try to answer a few questions in this review:

• Takeover premium. Based on our estimates, the potential improvements in ROE from the merger and potential divestment of MBK, we think it justifies an Bt11.1/sh premium for Thanachart. The new best case price target for Thanachart stands at Bt64.25/sh, implying a 29% premium over current share price.
• Negotiations will play a key role in the actual takeover price. We provide a table of how much money is left on the table for TMB if they acquire TCAP at lower than what we expect.
• Benefits. Thanachart has a higher ROE than TMB and appears smaller but better managed. The merger would allow TMB to re-enter the securities business (more cross-selling), enlarge its asset management franchise, and scale up deposit base for both banks…more so on the Thanachart side.
• Size. Even after the merger, the combined bank would still have a much smaller headcount than BAY, smallest of the five largest Thai banks. However, it would have more branches than BAY and just 11% less branches than KBANK. 

In this briefing:

1. Last Week in Event SPACE: Harbin Electric, MYOB, TMB Bank, Halla Holdings
2. Are US Stocks A Buy Yet?
3. Monthly Geopolitical Comment: Redrafting of Global Map of Political Alliances to Continue in 2019
4. The Four Vulnerabilities in Thai Property
5. Autonomous Driving. Waymo Leading The Charge With Ten Million Miles Driven And Counting

1. Last Week in Event SPACE: Harbin Electric, MYOB, TMB Bank, Halla Holdings

Last Week in Event SPACE …

• Just how will Harbin Electric Co Ltd H (1133 HK)‘s independent directors justify recommending an Offer to shareholders at a price which gave cash less cavalier than cash?
• MYOB Group Ltd (MYO AU)‘s directors grudgingly yet understandably enter an agreed deal with KKR.
• A TMB Bank PCL (TMB TB) / Thanachart Capital (TCAP TB) courtship is a possibility after an earlier Krung Thai Bank Pub (KTB TB) /TMB alliance failed. 

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

As previously discussed in Harbin Electric Expected To Be Privatised, Harbin Electric (HE) has now announced a privatisation Offer from parent and 60.41%-shareholder Harbin Electric Corporation (“HEC”) by way of a merger by absorption. The Offer price of $4.56/share, an 82.4% premium to last close, is bang in line with that paid by HEC in January this year for new domestic shares. The Offer price has been declared final. 

• Of note, the Offer price is a 37% discount to HE’s net cash of $7.27/share as at 30 June 2018. Should the privatisation be successful, this Offer will cost HEC ~HK$3.08bn, following which it can pocket the remaining net cash of $9.3bn PLUS the power generation equipment manufacturer business thrown in for free.
• On pricing, “fair” to me would be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers. That is not happening. It will be difficult to see how independent directors (and the IFA) can justify recommending an Offer to shareholders at any price below the net cash/share, especially when the underlying business is profit-generating.
• Dissension rights are available, however, there is no administrative guidance on the substantive as well as procedural rules as to how the “fair price” will be determined under PRC and HK Law.
• Trading at a gross/annualised spread of 15%/28% assuming end-July completion, based on the average timeline for merger by absorption precedents. As HEC is only waiting for approval from independent H-shareholders suggests this transaction may complete earlier than precedents. 

(link to my insight: Harbin Electric: The Price Is Not Right)  

KKR and MYOB entered into Scheme Implementation Agreement (SIA) at $3.40/share, valuing MYOB, on a market cap basis, at A$2bn. MYOB’s board unanimously recommends shareholders to vote in favour of the Offer, in the absence of a superior proposal. The Offer price assumes no full-year dividend is paid.

• On balance, MYOB’s board has made the right decision to accept KKR’s reduced Offer. The argument that MYOB is a “known turnaround story” is challenged as cloud-based accounting software providers Xero Ltd (XRO AU)  and Intuit Inc (INTU US) grab market share. This is also reflected in MYOB’s forecast 7% revenue growth in FY18 and follows a 10% decline in first-half profit, despite a 61% jump in online subscribers.
• And there is justification for KKR’s lowering the Offer price: the ASX is down 10% since KKR’s initial tilt, the ASX technology index is off by ~14%, a basket of listed Aussie peers are down 17%, while Xero, the most comparable peer, is down ~20%. The Scheme Offer is at a ~27% premium to the estimated adjusted (for the ASX index) downside price of $2.68/share.

• Bain was okay selling at $3.15/share to KKR and will be fine selling its remaining ~6.5% stake at $3.40. Presumably, MYOB sounded out the other major shareholders such as Fidelity, Yarra Funds Management, Vanguard etc as to their read on the revised $3.40 offer, before agreeing to the SIA with KKR.

• If the markets avoid further declines, this deal will probably get up. If the markets rebound, the outcome is less assured. This Tuesday marks the beginning of a new year and a renewed mandate for investors to take risk, especially an agreed deal; but the current 5.3% annualised spread is tight.

(link to my insight: MYOB Caves And Agrees To KKR’s Reduced Offer)

TMB Bank PCL (TMB TB) (Mkt Cap: $1.2bn; Liquidity: $7mn)

The Ministry of Finance, the major shareholder of TMB, confirmed that both Krung Thai Bank Pub (KTB TB) and Thanachart Capital (TCAP TB) had engaged in merger talks with TMB. Considering an earlier KTB/TMB courtship failed, it is more likely, but by no means guaranteed, that the deal with Thanachart will happen. Bloomberg is also reporting that Thanachart and TMB want to do a deal before the next elections, which is less than two months away.

• TMB is much bigger than Thanachart and therefore it may boil down to whether TMB wants to be the target or acquirer. In Athaporn Arayasantiparb, CFA‘s view, a deal with Thanachart would leave TMB as the acquirer rather than the target. But Thanachart’s management has a better track record than TMB.
• Both banks have undergone extensive deals before this one: 1) TMB acquired DBS Thai Danu and IFCT; and 2) Thanachart engineered an acquisition of the much bigger, but struggling, SCIB.
• A merger between the two would still leave them smaller than Bank Of Ayudhya (BAY TB) and would not change the bank rankings; but it would give TMB a bigger presence in asset management, hire-purchase finance and a re-entry into the securities business.

(link to Athaporn’s insight: Sathorn Series M: TMB-Thanachart Courtship)  

Halla Holdings (060980 KS) / Mando Corp (204320 KS)

Mando accounts for 45% of Halla’s NAV, which is currently trading at a 50% discount. Sanghyun Park believes the recent narrowing in the discount may be due to the hype attached to Mando-Hella Elec, which he believes is overdone; and recommends a short Holdco and long Mando. Using Sanghyun’s figures, I see the discount to NAV at 51%, 2STD above the 12-month average of ~47%.

(link to Sanghyun’s insight: Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando)  

• LG Chem Ltd (051910 KS)‘s 1P is now at a 44.20% discount to Common. The dividend will be the same as last year of ₩6,000 despite lower earnings. The dividend yield for Common will be 1.68%, and 3.03% for 1P or a dividend yield difference of 1.35%, a four-year high. (link to Sanghyun’s insight: LG Chem Share Class: Another Pref to Watch as Div Yield Gap at 4Y High)  

• Glow Energy Pcl (GLOW TB). In a strange twist to the tale, the ERC agrees to approve Global Power Synergy Company Ltd (GPSC TB)‘s takeover of Glow under a revised plan in which they have to: 1) sell Glow SPP1, a power plant with 124MW capacity and 90 tons/hr of steam; and 2) allow clients such as Pa Daeng to change providers. This will reduce Glow’s market share within the MapTaPhut area, but Athaporn Arayasantiparb, CFA thinks the purchase price (Bt139bn according to Bangkok Post) will have to be revised downwards too.  For more on the original deal, see Deal Alert! GPSC Goes For the Jugular! and Anti-Trust Should Be A Non-Issue In The GPSC/Glow Deal.

• Unisem (M) (UNI MK). The Offer is now unconditional and will remain open to acceptances until the 7 January 2019.
• Stanmore Coal (SMR AU). The offer has been extended until the 22 January 2019.

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

2. 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

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

4. The Four Vulnerabilities in Thai Property

As the year closes, developers from giant AP to SC Asset have been warning markets about a downturn in the property market in 2019, and the world is no stranger to the interlinks between economic crisis and property sector. There are four reasons why they might be right to be so bearish:

• Banks Rejection rates for mortgages have been on the rise. Yet, few credible developers get rejected, because banks have a preference for corporate loans. This means they are effectively supporting the supply side without demand.
• New financing methods. In recent years, REIT IPOs have become very popular, increasing the amount of financing available to developers. But what of the demand side? Slower wage growth, wealth concentration at the top, rising unemployment.
• Higher interest rates. While the BOT has resisted rate hikes, they have finally capitulated this month. High rates, lower affordability.
• Regulations. A cap on loans-to-value ratio at 80% further limits the mortgage availability, but who’s limiting supply?

5. 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.  

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. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth

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. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth

• Good payout ratio, good growth in core profit, and strong long-term sales growth relative to its sector
• Acquisition of 49% stake in a 30MW solar farm in Malaysia with a commercial operation date (COD) set for 1Q20 to support revenue growth
• High volume of solar rooftop installation projects planned for Charoen Pokphand Foods Pub (CPF TB) and other private firms to boost GUNKUL’s construction revenue
• Attractive at 19CE* PEG ratio of 0.5 relative to ASEAN Industry at 1.6
• Risk: Lower than expected electricity demand, unfavorable weather conditions

* Consensus Estimates

In this briefing:

1. Thai Macro Watch: Traditional ‘Weak Oil’ Plays in Thailand
2. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.
3. Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover?
4. Last Week in Event SPACE: Harbin Electric, MYOB, TMB Bank, Halla Holdings
5. Are US Stocks A Buy Yet?

1. Thai Macro Watch: Traditional ‘Weak Oil’ Plays in Thailand

As the US turns into a net exporter and weaker Chinese economic outlook looms, oil prices have tanked quickly. While QE unwinding will continue to weigh down share price performance for Thai equities in 2019, we do believe a few areas could benefit from lower energy costs on the earnings side.

• Consumer goods. Lower energy cost leads to higher disposable income. BJC, which sells consumables like potato chips, comes to mind.
• Retailing. Retailers that sell bigger items and provide parking space like BJC’s Big C and Robinsons benefit on the revenue side, while CP All’s 7-Eleven can expect to see cost reduction.
• Airlines & other tourism stocks. The cost savings for airlines is arguably bigger than any other sector could expect to enjoy. If they cut down ticket prices to compete, it will spill over to other areas of tourism, such as airport and hotel operators.
• Media. Improving consumer sentiment prompts new purchases and encourages businesses to advertise more. If we had to pick one, we’d go with Major this time. We also hold this stock for good measure.

2. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.

The Semiconductor Industry Association (SIA) just announced that worldwide sales of semiconductors reached $41.4 billion for the month of November 2018, an increase of 9.8% YoY, but down 1.1% MoM, the first such decline since February 2018. While the decline is modest and total 2018 total semiconductor sales are on track to reach ~$470 billion for a YoY increase of 15.7%, any decline in what should be peak holiday season is not a good sign. 

Semiconductor sales historically track Wafer Fab Equipment (WFE) sales with a roughly six month time lag. North American WFE sales have been declining each month for the past six months meaning that this latest semiconductor MoM sales decline is right on schedule.  

Leveraging a decade’s worth of historical data, we analyse two key questions that are likely on every investors mind. Firstly,for how long should we expect semiconductor sales to continue their decline. Secondly, how steep should we expect that decline to be?    

3. Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover?

As the merger between TMB and Thanachart gets a nudge from the Ministry of Finance and could be finalized this month, we try to answer a few questions in this review:

• Takeover premium. Based on our estimates, the potential improvements in ROE from the merger and potential divestment of MBK, we think it justifies an Bt11.1/sh premium for Thanachart. The new best case price target for Thanachart stands at Bt64.25/sh, implying a 29% premium over current share price.
• Negotiations will play a key role in the actual takeover price. We provide a table of how much money is left on the table for TMB if they acquire TCAP at lower than what we expect.
• Benefits. Thanachart has a higher ROE than TMB and appears smaller but better managed. The merger would allow TMB to re-enter the securities business (more cross-selling), enlarge its asset management franchise, and scale up deposit base for both banks…more so on the Thanachart side.
• Size. Even after the merger, the combined bank would still have a much smaller headcount than BAY, smallest of the five largest Thai banks. However, it would have more branches than BAY and just 11% less branches than KBANK. 

4. Last Week in Event SPACE: Harbin Electric, MYOB, TMB Bank, Halla Holdings

Last Week in Event SPACE …

• Just how will Harbin Electric Co Ltd H (1133 HK)‘s independent directors justify recommending an Offer to shareholders at a price which gave cash less cavalier than cash?
• MYOB Group Ltd (MYO AU)‘s directors grudgingly yet understandably enter an agreed deal with KKR.
• A TMB Bank PCL (TMB TB) / Thanachart Capital (TCAP TB) courtship is a possibility after an earlier Krung Thai Bank Pub (KTB TB) /TMB alliance failed. 

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

As previously discussed in Harbin Electric Expected To Be Privatised, Harbin Electric (HE) has now announced a privatisation Offer from parent and 60.41%-shareholder Harbin Electric Corporation (“HEC”) by way of a merger by absorption. The Offer price of $4.56/share, an 82.4% premium to last close, is bang in line with that paid by HEC in January this year for new domestic shares. The Offer price has been declared final. 

• Of note, the Offer price is a 37% discount to HE’s net cash of $7.27/share as at 30 June 2018. Should the privatisation be successful, this Offer will cost HEC ~HK$3.08bn, following which it can pocket the remaining net cash of $9.3bn PLUS the power generation equipment manufacturer business thrown in for free.
• On pricing, “fair” to me would be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers. That is not happening. It will be difficult to see how independent directors (and the IFA) can justify recommending an Offer to shareholders at any price below the net cash/share, especially when the underlying business is profit-generating.
• Dissension rights are available, however, there is no administrative guidance on the substantive as well as procedural rules as to how the “fair price” will be determined under PRC and HK Law.
• Trading at a gross/annualised spread of 15%/28% assuming end-July completion, based on the average timeline for merger by absorption precedents. As HEC is only waiting for approval from independent H-shareholders suggests this transaction may complete earlier than precedents. 

(link to my insight: Harbin Electric: The Price Is Not Right)  

KKR and MYOB entered into Scheme Implementation Agreement (SIA) at $3.40/share, valuing MYOB, on a market cap basis, at A$2bn. MYOB’s board unanimously recommends shareholders to vote in favour of the Offer, in the absence of a superior proposal. The Offer price assumes no full-year dividend is paid.

• On balance, MYOB’s board has made the right decision to accept KKR’s reduced Offer. The argument that MYOB is a “known turnaround story” is challenged as cloud-based accounting software providers Xero Ltd (XRO AU)  and Intuit Inc (INTU US) grab market share. This is also reflected in MYOB’s forecast 7% revenue growth in FY18 and follows a 10% decline in first-half profit, despite a 61% jump in online subscribers.
• And there is justification for KKR’s lowering the Offer price: the ASX is down 10% since KKR’s initial tilt, the ASX technology index is off by ~14%, a basket of listed Aussie peers are down 17%, while Xero, the most comparable peer, is down ~20%. The Scheme Offer is at a ~27% premium to the estimated adjusted (for the ASX index) downside price of $2.68/share.

• Bain was okay selling at $3.15/share to KKR and will be fine selling its remaining ~6.5% stake at $3.40. Presumably, MYOB sounded out the other major shareholders such as Fidelity, Yarra Funds Management, Vanguard etc as to their read on the revised $3.40 offer, before agreeing to the SIA with KKR.

• If the markets avoid further declines, this deal will probably get up. If the markets rebound, the outcome is less assured. This Tuesday marks the beginning of a new year and a renewed mandate for investors to take risk, especially an agreed deal; but the current 5.3% annualised spread is tight.

(link to my insight: MYOB Caves And Agrees To KKR’s Reduced Offer)

TMB Bank PCL (TMB TB) (Mkt Cap: $1.2bn; Liquidity: $7mn)

The Ministry of Finance, the major shareholder of TMB, confirmed that both Krung Thai Bank Pub (KTB TB) and Thanachart Capital (TCAP TB) had engaged in merger talks with TMB. Considering an earlier KTB/TMB courtship failed, it is more likely, but by no means guaranteed, that the deal with Thanachart will happen. Bloomberg is also reporting that Thanachart and TMB want to do a deal before the next elections, which is less than two months away.

• TMB is much bigger than Thanachart and therefore it may boil down to whether TMB wants to be the target or acquirer. In Athaporn Arayasantiparb, CFA‘s view, a deal with Thanachart would leave TMB as the acquirer rather than the target. But Thanachart’s management has a better track record than TMB.
• Both banks have undergone extensive deals before this one: 1) TMB acquired DBS Thai Danu and IFCT; and 2) Thanachart engineered an acquisition of the much bigger, but struggling, SCIB.
• A merger between the two would still leave them smaller than Bank Of Ayudhya (BAY TB) and would not change the bank rankings; but it would give TMB a bigger presence in asset management, hire-purchase finance and a re-entry into the securities business.

(link to Athaporn’s insight: Sathorn Series M: TMB-Thanachart Courtship)  

Halla Holdings (060980 KS) / Mando Corp (204320 KS)

Mando accounts for 45% of Halla’s NAV, which is currently trading at a 50% discount. Sanghyun Park believes the recent narrowing in the discount may be due to the hype attached to Mando-Hella Elec, which he believes is overdone; and recommends a short Holdco and long Mando. Using Sanghyun’s figures, I see the discount to NAV at 51%, 2STD above the 12-month average of ~47%.

(link to Sanghyun’s insight: Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando)  

• LG Chem Ltd (051910 KS)‘s 1P is now at a 44.20% discount to Common. The dividend will be the same as last year of ₩6,000 despite lower earnings. The dividend yield for Common will be 1.68%, and 3.03% for 1P or a dividend yield difference of 1.35%, a four-year high. (link to Sanghyun’s insight: LG Chem Share Class: Another Pref to Watch as Div Yield Gap at 4Y High)  

• Glow Energy Pcl (GLOW TB). In a strange twist to the tale, the ERC agrees to approve Global Power Synergy Company Ltd (GPSC TB)‘s takeover of Glow under a revised plan in which they have to: 1) sell Glow SPP1, a power plant with 124MW capacity and 90 tons/hr of steam; and 2) allow clients such as Pa Daeng to change providers. This will reduce Glow’s market share within the MapTaPhut area, but Athaporn Arayasantiparb, CFA thinks the purchase price (Bt139bn according to Bangkok Post) will have to be revised downwards too.  For more on the original deal, see Deal Alert! GPSC Goes For the Jugular! and Anti-Trust Should Be A Non-Issue In The GPSC/Glow Deal.

• Unisem (M) (UNI MK). The Offer is now unconditional and will remain open to acceptances until the 7 January 2019.
• Stanmore Coal (SMR AU). The offer has been extended until the 22 January 2019.

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

5. 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

In this briefing:

1. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth
2. ASAP: Weak Profitability Priced In, While Growth Still Intact
3. Are US Stocks Still Expensive?

1. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth

• Good payout ratio, good growth in core profit, and strong long-term sales growth relative to its sector
• Acquisition of 49% stake in a 30MW solar farm in Malaysia with a commercial operation date (COD) set for 1Q20 to support revenue growth
• High volume of solar rooftop installation projects planned for Charoen Pokphand Foods Pub (CPF TB) and other private firms to boost GUNKUL’s construction revenue
• Attractive at 19CE* PEG ratio of 0.5 relative to ASEAN Industry at 1.6
• Risk: Lower than expected electricity demand, unfavorable weather conditions

* Consensus Estimates

2. ASAP: Weak Profitability Priced In, While Growth Still Intact

We maintain a BUY rating on ASAP with new 2019E target price of Bt3.80 (from Bt6.50), derived from 19.6xPE, which is 1.0x PEG of earnings growth in 2019-20E.

The story:

• Trimmed 2018-20F earnings forecast by 35%
• Not a falling knife, but fallen angel
• Potential disruptor in car rental industry
• Expect a 20% CAGR for earnings in 2019-20E

Risks:

• Contract termination of airport space leases
• Participating in a highly competitive industry
• Cash-flow management will be a challenge in a growth phase

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? 

In this briefing:

1. Monthly Geopolitical Comment: Redrafting of Global Map of Political Alliances to Continue in 2019
2. The Four Vulnerabilities in Thai Property
3. Autonomous Driving. Waymo Leading The Charge With Ten Million Miles Driven And Counting
4. The Festive Week the Was in ASEAN@Smartkarma – Thailand Rising, Frail DBS, and Small Cap Picks
5. 2019 Asia Selected Gaming Stock Outlook: Headwinds, Tailwinds and Our Top Picks for Entry Levels Now

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

2. The Four Vulnerabilities in Thai Property

As the year closes, developers from giant AP to SC Asset have been warning markets about a downturn in the property market in 2019, and the world is no stranger to the interlinks between economic crisis and property sector. There are four reasons why they might be right to be so bearish:

• Banks Rejection rates for mortgages have been on the rise. Yet, few credible developers get rejected, because banks have a preference for corporate loans. This means they are effectively supporting the supply side without demand.
• New financing methods. In recent years, REIT IPOs have become very popular, increasing the amount of financing available to developers. But what of the demand side? Slower wage growth, wealth concentration at the top, rising unemployment.
• Higher interest rates. While the BOT has resisted rate hikes, they have finally capitulated this month. High rates, lower affordability.
• Regulations. A cap on loans-to-value ratio at 80% further limits the mortgage availability, but who’s limiting supply?

3. 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.  

4. 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. 

5. 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.

In this briefing:

1. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.
2. Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover?
3. Last Week in Event SPACE: Harbin Electric, MYOB, TMB Bank, Halla Holdings
4. Are US Stocks A Buy Yet?
5. Monthly Geopolitical Comment: Redrafting of Global Map of Political Alliances to Continue in 2019

1. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.

The Semiconductor Industry Association (SIA) just announced that worldwide sales of semiconductors reached $41.4 billion for the month of November 2018, an increase of 9.8% YoY, but down 1.1% MoM, the first such decline since February 2018. While the decline is modest and total 2018 total semiconductor sales are on track to reach ~$470 billion for a YoY increase of 15.7%, any decline in what should be peak holiday season is not a good sign. 

Semiconductor sales historically track Wafer Fab Equipment (WFE) sales with a roughly six month time lag. North American WFE sales have been declining each month for the past six months meaning that this latest semiconductor MoM sales decline is right on schedule.  

Leveraging a decade’s worth of historical data, we analyse two key questions that are likely on every investors mind. Firstly,for how long should we expect semiconductor sales to continue their decline. Secondly, how steep should we expect that decline to be?    

2. Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover?

As the merger between TMB and Thanachart gets a nudge from the Ministry of Finance and could be finalized this month, we try to answer a few questions in this review:

• Takeover premium. Based on our estimates, the potential improvements in ROE from the merger and potential divestment of MBK, we think it justifies an Bt11.1/sh premium for Thanachart. The new best case price target for Thanachart stands at Bt64.25/sh, implying a 29% premium over current share price.
• Negotiations will play a key role in the actual takeover price. We provide a table of how much money is left on the table for TMB if they acquire TCAP at lower than what we expect.
• Benefits. Thanachart has a higher ROE than TMB and appears smaller but better managed. The merger would allow TMB to re-enter the securities business (more cross-selling), enlarge its asset management franchise, and scale up deposit base for both banks…more so on the Thanachart side.
• Size. Even after the merger, the combined bank would still have a much smaller headcount than BAY, smallest of the five largest Thai banks. However, it would have more branches than BAY and just 11% less branches than KBANK. 

3. Last Week in Event SPACE: Harbin Electric, MYOB, TMB Bank, Halla Holdings

Last Week in Event SPACE …

• Just how will Harbin Electric Co Ltd H (1133 HK)‘s independent directors justify recommending an Offer to shareholders at a price which gave cash less cavalier than cash?
• MYOB Group Ltd (MYO AU)‘s directors grudgingly yet understandably enter an agreed deal with KKR.
• A TMB Bank PCL (TMB TB) / Thanachart Capital (TCAP TB) courtship is a possibility after an earlier Krung Thai Bank Pub (KTB TB) /TMB alliance failed. 

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

As previously discussed in Harbin Electric Expected To Be Privatised, Harbin Electric (HE) has now announced a privatisation Offer from parent and 60.41%-shareholder Harbin Electric Corporation (“HEC”) by way of a merger by absorption. The Offer price of $4.56/share, an 82.4% premium to last close, is bang in line with that paid by HEC in January this year for new domestic shares. The Offer price has been declared final. 

• Of note, the Offer price is a 37% discount to HE’s net cash of $7.27/share as at 30 June 2018. Should the privatisation be successful, this Offer will cost HEC ~HK$3.08bn, following which it can pocket the remaining net cash of $9.3bn PLUS the power generation equipment manufacturer business thrown in for free.
• On pricing, “fair” to me would be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers. That is not happening. It will be difficult to see how independent directors (and the IFA) can justify recommending an Offer to shareholders at any price below the net cash/share, especially when the underlying business is profit-generating.
• Dissension rights are available, however, there is no administrative guidance on the substantive as well as procedural rules as to how the “fair price” will be determined under PRC and HK Law.
• Trading at a gross/annualised spread of 15%/28% assuming end-July completion, based on the average timeline for merger by absorption precedents. As HEC is only waiting for approval from independent H-shareholders suggests this transaction may complete earlier than precedents. 

(link to my insight: Harbin Electric: The Price Is Not Right)  

KKR and MYOB entered into Scheme Implementation Agreement (SIA) at $3.40/share, valuing MYOB, on a market cap basis, at A$2bn. MYOB’s board unanimously recommends shareholders to vote in favour of the Offer, in the absence of a superior proposal. The Offer price assumes no full-year dividend is paid.

• On balance, MYOB’s board has made the right decision to accept KKR’s reduced Offer. The argument that MYOB is a “known turnaround story” is challenged as cloud-based accounting software providers Xero Ltd (XRO AU)  and Intuit Inc (INTU US) grab market share. This is also reflected in MYOB’s forecast 7% revenue growth in FY18 and follows a 10% decline in first-half profit, despite a 61% jump in online subscribers.
• And there is justification for KKR’s lowering the Offer price: the ASX is down 10% since KKR’s initial tilt, the ASX technology index is off by ~14%, a basket of listed Aussie peers are down 17%, while Xero, the most comparable peer, is down ~20%. The Scheme Offer is at a ~27% premium to the estimated adjusted (for the ASX index) downside price of $2.68/share.

• Bain was okay selling at $3.15/share to KKR and will be fine selling its remaining ~6.5% stake at $3.40. Presumably, MYOB sounded out the other major shareholders such as Fidelity, Yarra Funds Management, Vanguard etc as to their read on the revised $3.40 offer, before agreeing to the SIA with KKR.

• If the markets avoid further declines, this deal will probably get up. If the markets rebound, the outcome is less assured. This Tuesday marks the beginning of a new year and a renewed mandate for investors to take risk, especially an agreed deal; but the current 5.3% annualised spread is tight.

(link to my insight: MYOB Caves And Agrees To KKR’s Reduced Offer)

TMB Bank PCL (TMB TB) (Mkt Cap: $1.2bn; Liquidity: $7mn)

The Ministry of Finance, the major shareholder of TMB, confirmed that both Krung Thai Bank Pub (KTB TB) and Thanachart Capital (TCAP TB) had engaged in merger talks with TMB. Considering an earlier KTB/TMB courtship failed, it is more likely, but by no means guaranteed, that the deal with Thanachart will happen. Bloomberg is also reporting that Thanachart and TMB want to do a deal before the next elections, which is less than two months away.

• TMB is much bigger than Thanachart and therefore it may boil down to whether TMB wants to be the target or acquirer. In Athaporn Arayasantiparb, CFA‘s view, a deal with Thanachart would leave TMB as the acquirer rather than the target. But Thanachart’s management has a better track record than TMB.
• Both banks have undergone extensive deals before this one: 1) TMB acquired DBS Thai Danu and IFCT; and 2) Thanachart engineered an acquisition of the much bigger, but struggling, SCIB.
• A merger between the two would still leave them smaller than Bank Of Ayudhya (BAY TB) and would not change the bank rankings; but it would give TMB a bigger presence in asset management, hire-purchase finance and a re-entry into the securities business.

(link to Athaporn’s insight: Sathorn Series M: TMB-Thanachart Courtship)  

Halla Holdings (060980 KS) / Mando Corp (204320 KS)

Mando accounts for 45% of Halla’s NAV, which is currently trading at a 50% discount. Sanghyun Park believes the recent narrowing in the discount may be due to the hype attached to Mando-Hella Elec, which he believes is overdone; and recommends a short Holdco and long Mando. Using Sanghyun’s figures, I see the discount to NAV at 51%, 2STD above the 12-month average of ~47%.

(link to Sanghyun’s insight: Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando)  

• LG Chem Ltd (051910 KS)‘s 1P is now at a 44.20% discount to Common. The dividend will be the same as last year of ₩6,000 despite lower earnings. The dividend yield for Common will be 1.68%, and 3.03% for 1P or a dividend yield difference of 1.35%, a four-year high. (link to Sanghyun’s insight: LG Chem Share Class: Another Pref to Watch as Div Yield Gap at 4Y High)  

• Glow Energy Pcl (GLOW TB). In a strange twist to the tale, the ERC agrees to approve Global Power Synergy Company Ltd (GPSC TB)‘s takeover of Glow under a revised plan in which they have to: 1) sell Glow SPP1, a power plant with 124MW capacity and 90 tons/hr of steam; and 2) allow clients such as Pa Daeng to change providers. This will reduce Glow’s market share within the MapTaPhut area, but Athaporn Arayasantiparb, CFA thinks the purchase price (Bt139bn according to Bangkok Post) will have to be revised downwards too.  For more on the original deal, see Deal Alert! GPSC Goes For the Jugular! and Anti-Trust Should Be A Non-Issue In The GPSC/Glow Deal.

• Unisem (M) (UNI MK). The Offer is now unconditional and will remain open to acceptances until the 7 January 2019.
• Stanmore Coal (SMR AU). The offer has been extended until the 22 January 2019.

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

4. 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

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

In this briefing:

1. ASAP: Weak Profitability Priced In, While Growth Still Intact
2. Are US Stocks Still Expensive?
3. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018

1. ASAP: Weak Profitability Priced In, While Growth Still Intact

We maintain a BUY rating on ASAP with new 2019E target price of Bt3.80 (from Bt6.50), derived from 19.6xPE, which is 1.0x PEG of earnings growth in 2019-20E.

The story:

• Trimmed 2018-20F earnings forecast by 35%
• Not a falling knife, but fallen angel
• Potential disruptor in car rental industry
• Expect a 20% CAGR for earnings in 2019-20E

Risks:

• Contract termination of airport space leases
• Participating in a highly competitive industry
• Cash-flow management will be a challenge in a growth phase

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:

In this briefing:

1. The Four Vulnerabilities in Thai Property
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. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth

1. The Four Vulnerabilities in Thai Property

As the year closes, developers from giant AP to SC Asset have been warning markets about a downturn in the property market in 2019, and the world is no stranger to the interlinks between economic crisis and property sector. There are four reasons why they might be right to be so bearish:

• Banks Rejection rates for mortgages have been on the rise. Yet, few credible developers get rejected, because banks have a preference for corporate loans. This means they are effectively supporting the supply side without demand.
• New financing methods. In recent years, REIT IPOs have become very popular, increasing the amount of financing available to developers. But what of the demand side? Slower wage growth, wealth concentration at the top, rising unemployment.
• Higher interest rates. While the BOT has resisted rate hikes, they have finally capitulated this month. High rates, lower affordability.
• Regulations. A cap on loans-to-value ratio at 80% further limits the mortgage availability, but who’s limiting supply?

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. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth

• Good payout ratio, good growth in core profit, and strong long-term sales growth relative to its sector
• Acquisition of 49% stake in a 30MW solar farm in Malaysia with a commercial operation date (COD) set for 1Q20 to support revenue growth
• High volume of solar rooftop installation projects planned for Charoen Pokphand Foods Pub (CPF TB) and other private firms to boost GUNKUL’s construction revenue
• Attractive at 19CE* PEG ratio of 0.5 relative to ASEAN Industry at 1.6
• Risk: Lower than expected electricity demand, unfavorable weather conditions

* Consensus Estimates