Thailand

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

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
4. ASAP: Weak Profitability Priced In, While Growth Still Intact
5. Are US Stocks Still Expensive?

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

4. 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

5. Are US Stocks Still Expensive?

There are striking parallels between 1929 and 2018.  

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

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

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

Are we in a similar situation right now? 

In this briefing:

1. 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
4. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion
5. Micron’s Guidance Bombshell Signals Troubled Times Ahead For Beleaguered Semiconductor Segment

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:

4. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion

• Improving asset turnover, good risk adjusted price momentum, and relatively strong analyst recommendations relative to its sector
• Larger distribution channel through acquisition of DNA Retail Link to add 95 more stores to current 518 stores
• New mobile product launches in 4Q18 and COM7’s focus on high margin products, such as Android smartphones, should support high earnings growth which was up 56% YoY in 3Q18
• Attractive at a 19CE* PEG of 0.9 versus ASEAN sector at a PEG of 2.7
• Risks: Lower-than-expected demand for new IT products, slower-than-expected store expansions

* Consensus Estimates

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

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

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

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

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

In this briefing:

1. UTP (UTP TB): Continued Gain from Tight Global Paper Supply
2. The Week that Was in ASEAN@Smartkarma – Dithering Dangerously, Digital Transformation, and Breadtalk
3. TPCH (TPCH TB): Biomass Power Value Play

1. UTP (UTP TB): Continued Gain from Tight Global Paper Supply

• Strong long-term sales growth, share price is less volatile, and solid short-term earnings momentum relative to its sector
• Sales growth for UTP’s cardboard paper and packaging used for corrugated boxes should be supported by an ongoing 20% ramp-up in production to 20,000 tons/month on tight global supply conditions
• Strong demand and efficiency improvements on older cardboard paper-making equipment has expanded margins, operating margin expanded by 12 ppts in 9M18 YoY
• UTP has shown solid improvements in asset turnover while also improving its net margin
• Risk: Chinese moves to ramp up paper supply again

* Consensus Estimates

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

Macro Insights

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

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

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

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

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

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

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

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

Equity Bottom-Up Insights

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

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

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

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

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

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

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

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

Sector and Thematic Insights

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

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

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

3. TPCH (TPCH TB): Biomass Power Value Play

• Strong long-term earnings growth, good growth in core profit, and relatively strong analyst recommendation relative to its sector
• As Thailand’s largest independent biomass power producer, TPCH is well-positioned to take advantage of government moves to diversify the country’s energy mix
• Longer-term earnings to be supported by ongoing capacity expansions, including the waste-to-energy project in Nonthaburi planned for 2019
• Trades below Thai Utilities at 19CE* 9.7x PE and offers double-digit EPS growth while the sector is expected to contract
• Risks: Higher feedstock costs as well as project delays and/or issues

* Consensus Estimates

In this briefing:

1. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending December 22, 2018
2. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion
3. Micron’s Guidance Bombshell Signals Troubled Times Ahead For Beleaguered Semiconductor Segment
4. Sathorn Series M: TMB-Thanachart Courtship
5. CKP (CKP TB): Powerful Expansion to Drive Earnings Growth

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

Highlights of significant recent happenings include:

2. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion

• Improving asset turnover, good risk adjusted price momentum, and relatively strong analyst recommendations relative to its sector
• Larger distribution channel through acquisition of DNA Retail Link to add 95 more stores to current 518 stores
• New mobile product launches in 4Q18 and COM7’s focus on high margin products, such as Android smartphones, should support high earnings growth which was up 56% YoY in 3Q18
• Attractive at a 19CE* PEG of 0.9 versus ASEAN sector at a PEG of 2.7
• Risks: Lower-than-expected demand for new IT products, slower-than-expected store expansions

* Consensus Estimates

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

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

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

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

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

4. Sathorn Series M: TMB-Thanachart Courtship

Right before Christmas, the Ministry of Finance confirms that both Thanachart and KTB were in talks to merge with TMB. We note that:

• Considering that KTB’s earlier courtship failed once, it is more likely, but by no means guaranteed, for the deal with Thanachart to happen.
• A deal with Thanachart would leave TMB as the acquirer rather than the target. Thanachart’s management has 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 BAY and not really change the bank rankings, but it would give TMB a bigger presence in asset management and hire-purchase finance and an re-entry into the securities business.

5. CKP (CKP TB): Powerful Expansion to Drive Earnings Growth

• Strong net profit momentum and more attractive to analysts relative to its sector
• Higher power demand trend from new industrial consumers should continue supporting electricity sales, revenue rose 31% YoY in 3Q18
• Large capacity expansion from Xayaburi hydroelectric power plant in Laos with expected commercial operation date (COD) in 4Q19 to more than double CKP’s current effective capacity
• Trades above ASEAN Utilities at 19CE* 45.1x PE but offers great EPS growth in a sector that is expected to remain flattish
• Risk: Delays for new plants, change in government regulation

* Consensus Estimates

In this briefing:

1. TPCH (TPCH TB): Biomass Power Value Play
2. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis

1. TPCH (TPCH TB): Biomass Power Value Play

• Strong long-term earnings growth, good growth in core profit, and relatively strong analyst recommendation relative to its sector
• As Thailand’s largest independent biomass power producer, TPCH is well-positioned to take advantage of government moves to diversify the country’s energy mix
• Longer-term earnings to be supported by ongoing capacity expansions, including the waste-to-energy project in Nonthaburi planned for 2019
• Trades below Thai Utilities at 19CE* 9.7x PE and offers double-digit EPS growth while the sector is expected to contract
• Risks: Higher feedstock costs as well as project delays and/or issues

* Consensus Estimates

2. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis

December turned out to be more eventful than expected. Guess not everyone is waiting peacefully at home for Santa to hop by. Here’s a quick run-down on stories that have impact (at least indirectly) on Thai equities.

• Winning bids, losing confidence. PTTEP crushes Chevron in a mighty bid to secure the Bongkot and Erawan fields, but investors responded by driving their shares down 6%. Energy guru Manoon Siriwan pushes back on the bears saying that while costs are high, getting Erawan field on a greenfield basis should more than outweigh the negatives.
• Huawei and trade wars. Trump’s trade wars take a strange turn following the arrests of Huawei CFO and Canadian citizens in China. As commerce and politics gets mixed up, talks abound about Apple moving production to Vietnam or…Thailand?
• ERC puts the final nail to Glow’s coffin. This is lamest ruling ever! ERC rejects GPSC’s appeal saying that other industrial estates are already monopolies, and they don’t wanna turn MapTaPhut into another one. Their reasoning defies logic and forced us to capitulate on our Glow position.
• End of the LTF era. As the tax exemptions from LTFs are phased out, critics point that equities-based programs favor the rich over the poor, while the Puay Ungpakorn Institute points out that insurance companies could benefit from this unfortunate event.
• CP Group Routs the Mighty BTS in its bid for the high speed railway project, though their victory still predicates on the terms of government subsidy. Though this CP Group entity isn’t listed and many consortium members are foreign, two listed Thai consortium members include BEM and ITD, the country’s biggest construction company.

In this briefing:

1. Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019
2. Company Visits: The Best of November/December 2018
3. RRG Global Macro – US Fed Positive Outlook – Stocks Fall.  Politics Take Over from Fundamentals
4. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships
5. Time-Out Not Time up for Trade War

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

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

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

4 out of 5 had a positive performance.

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

2. Company Visits: The Best of November/December 2018

During this quarter, we visited 13 companies and have to admit the average quality has improved. Amongst these, there were four stocks that impressed us the most, and the Oscars go to…

• SSP acheiving profit growth in excess of 20% in the backdrop of Thai economic headwinds and Trumpian trade wars by expanding into countries unaffected by both issues.
• Amata VN capitalizing on the shift from locations with rising labor costs (eg Thailand, China) to Vietnam, which has more than a few geographic and demographic advantages.
• Gunkul, arguably Thailand’s hottest renewable play at the moment delivering outsized long-term growth in solar/wind space as well as a promising solar roof game plan.
• TIGER, an aggressive and small construction company that has only IPO’d for less than a quarter and is already highlighting aggressive growth plans.

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

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

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

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

5. Time-Out Not Time up for Trade War

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

In this briefing:

1. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion
2. Micron’s Guidance Bombshell Signals Troubled Times Ahead For Beleaguered Semiconductor Segment
3. Sathorn Series M: TMB-Thanachart Courtship
4. CKP (CKP TB): Powerful Expansion to Drive Earnings Growth
5. Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019

1. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion

• Improving asset turnover, good risk adjusted price momentum, and relatively strong analyst recommendations relative to its sector
• Larger distribution channel through acquisition of DNA Retail Link to add 95 more stores to current 518 stores
• New mobile product launches in 4Q18 and COM7’s focus on high margin products, such as Android smartphones, should support high earnings growth which was up 56% YoY in 3Q18
• Attractive at a 19CE* PEG of 0.9 versus ASEAN sector at a PEG of 2.7
• Risks: Lower-than-expected demand for new IT products, slower-than-expected store expansions

* Consensus Estimates

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

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

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

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

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

3. Sathorn Series M: TMB-Thanachart Courtship

Right before Christmas, the Ministry of Finance confirms that both Thanachart and KTB were in talks to merge with TMB. We note that:

• Considering that KTB’s earlier courtship failed once, it is more likely, but by no means guaranteed, for the deal with Thanachart to happen.
• A deal with Thanachart would leave TMB as the acquirer rather than the target. Thanachart’s management has 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 BAY and not really change the bank rankings, but it would give TMB a bigger presence in asset management and hire-purchase finance and an re-entry into the securities business.

4. CKP (CKP TB): Powerful Expansion to Drive Earnings Growth

• Strong net profit momentum and more attractive to analysts relative to its sector
• Higher power demand trend from new industrial consumers should continue supporting electricity sales, revenue rose 31% YoY in 3Q18
• Large capacity expansion from Xayaburi hydroelectric power plant in Laos with expected commercial operation date (COD) in 4Q19 to more than double CKP’s current effective capacity
• Trades above ASEAN Utilities at 19CE* 45.1x PE but offers great EPS growth in a sector that is expected to remain flattish
• Risk: Delays for new plants, change in government regulation

* Consensus Estimates

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

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

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

4 out of 5 had a positive performance.

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

In this briefing:

1. Company Visits: The Best of November/December 2018
2. RRG Global Macro – US Fed Positive Outlook – Stocks Fall.  Politics Take Over from Fundamentals
3. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships
4. Time-Out Not Time up for Trade War
5. Semiconductor WFE Outlook. Things Just Got Really Ugly

1. Company Visits: The Best of November/December 2018

During this quarter, we visited 13 companies and have to admit the average quality has improved. Amongst these, there were four stocks that impressed us the most, and the Oscars go to…

• SSP acheiving profit growth in excess of 20% in the backdrop of Thai economic headwinds and Trumpian trade wars by expanding into countries unaffected by both issues.
• Amata VN capitalizing on the shift from locations with rising labor costs (eg Thailand, China) to Vietnam, which has more than a few geographic and demographic advantages.
• Gunkul, arguably Thailand’s hottest renewable play at the moment delivering outsized long-term growth in solar/wind space as well as a promising solar roof game plan.
• TIGER, an aggressive and small construction company that has only IPO’d for less than a quarter and is already highlighting aggressive growth plans.

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

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

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

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

4. Time-Out Not Time up for Trade War

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

5. Semiconductor WFE Outlook. Things Just Got Really Ugly

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

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

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

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

In this briefing:

1. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis
2. Rental Rates for Last Mile Industrial Real Estate Poised to Move Higher in Most Key Global Markets

1. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis

December turned out to be more eventful than expected. Guess not everyone is waiting peacefully at home for Santa to hop by. Here’s a quick run-down on stories that have impact (at least indirectly) on Thai equities.

• Winning bids, losing confidence. PTTEP crushes Chevron in a mighty bid to secure the Bongkot and Erawan fields, but investors responded by driving their shares down 6%. Energy guru Manoon Siriwan pushes back on the bears saying that while costs are high, getting Erawan field on a greenfield basis should more than outweigh the negatives.
• Huawei and trade wars. Trump’s trade wars take a strange turn following the arrests of Huawei CFO and Canadian citizens in China. As commerce and politics gets mixed up, talks abound about Apple moving production to Vietnam or…Thailand?
• ERC puts the final nail to Glow’s coffin. This is lamest ruling ever! ERC rejects GPSC’s appeal saying that other industrial estates are already monopolies, and they don’t wanna turn MapTaPhut into another one. Their reasoning defies logic and forced us to capitulate on our Glow position.
• End of the LTF era. As the tax exemptions from LTFs are phased out, critics point that equities-based programs favor the rich over the poor, while the Puay Ungpakorn Institute points out that insurance companies could benefit from this unfortunate event.
• CP Group Routs the Mighty BTS in its bid for the high speed railway project, though their victory still predicates on the terms of government subsidy. Though this CP Group entity isn’t listed and many consortium members are foreign, two listed Thai consortium members include BEM and ITD, the country’s biggest construction company.

2. Rental Rates for Last Mile Industrial Real Estate Poised to Move Higher in Most Key Global Markets

• New industry data this week, plus take-aways from  our latest discussions with company managements, all confirm that the likely trend in the industrial segment of the global real estate industry is for rental rates to rise.
• The growth in e-commerce is continuing to accelerate globally. In some key market, this is “triggering a land grab for distribution space that experts say is accelerating”.
• Therefore, the increasing scarcity value of well situated industrial real estate in high demand markets is likely to continue to push up rental rates to higher and higher levels.
• Given our expectation that fundamentals driving the growing demand for Last Mile Industrial real estate are likely to persist, we continue to expect this segment to outperform the broader Real Estate sector for the foreseeable future.