Daily Equities Bottom-Up: Thai Telcos: Outstanding Liabilities to CAT/TOT Loom Post DTAC’s Partial Settlement and more

In this briefing:

1. Thai Telcos: Outstanding Liabilities to CAT/TOT Loom Post DTAC’s Partial Settlement
2. Sell General Electric (GE US): Lots of Liabilities, Limited Cashflow – Target $1
3. New Oriental (EDU): Do Not Fear Q2 Record Losses, 27% Upside
4. Meet, Beat or Miss Q4 Estimates, Both Las Vegas Sands and Sands China Are Solid Bets
5. AFFIN Bank: To Affinity and Beyond

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

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

2. Sell General Electric (GE US): Lots of Liabilities, Limited Cashflow – Target $1

GE’s business reality is far removed from management’s up-beat message. Creative accounting enabled management to line their pockets, while the underlying business deteriorated. A bloated board sanctioned poor disclosure, leasing, restructuring provisions and asset trading that obscured the decline. In FY 2018, we expect underlying Industrial profits of US$3.4bn and unlevered sustainable cashflow of US$5.1bn, down 50%. Change is coming, but it is too little, too late…

3. New Oriental (EDU): Do Not Fear Q2 Record Losses, 27% Upside

• The record net losses were mainly due to a seasonally weak quarter and recognition of the impairment in a subsidiary.
• Q2 revenues did not slow down and management does not believe Q3 revenues will slow down.
• EDU will not be negatively impacted by the new law from the Ministry of Education.
• The P/E band suggests an upside of 27% and a price target of USD90.

4. Meet, Beat or Miss Q4 Estimates, Both Las Vegas Sands and Sands China Are Solid Bets

• LVS shot at Japan license enhanced by his role in lobbying US Justice Department’s reverse opinion on online gambling published last week. Read why in this insight.
• Owning Sands China makes a strong case based on an ROCE analysis vs. the hospitality sector.
• Owning both at current trade is one of the screaming bargains in the entire sector

5. AFFIN Bank: To Affinity and Beyond

Based in Malaysia, AFFIN Bank Bhd (ABANK MK) is the product of two mergers over the last decade. Today AFFIN is a small-medium-sized financial services group, with 107 branches, combining corporate and SME banking; consumer banking (remittance services, vehicle loans, mortgages, personal loans, credit cards, unit trusts, and bancassurance products); Investment/Merchant Banking via AFFIN Hwang (AHAM), including corporate finance, capital market services and investment management; plus underwriting of general and life insurance (an underpenetrated market) through AAGI and AALI. AFFIN Islamic is a wholly owned subsidiary.

The core shareholders are LTAT (the superannuation fund for the Armed Forces), the Bank of East Asia, and Boustead Holdings which limits the float.

Malaysia has a tailwind of a new administration, vowing to overturn many aspects of its predecessor – including cancelling mega infra projects and reducing the “real” National debt.

The economy is pretty buoyant and is slated to generate an average of 4.75% GDP growth over 2018-2022. Inflation has mellowed, supported by the cut in GST, but will still, once these effects diminish, be modest, at around 2%, this year. The current and trade accounts are in surplus.

Malaysia, however, has a high level (by Asian standards) of household (excluding mortgages) indebtedness, dominated by credit cards, auto/vehicle finance, and personal loans. This had led to a moderately high risk in terms of the credit-to-GDP gap. The corporate sector is not excessively leveraged.