Brief Thailand: A Second Look at the Thai Airlines Industry and more

In this briefing:

1. A Second Look at the Thai Airlines Industry
2. CHG: Short-Term Cost Pressures Create an Opportunity to Invest
3. Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL
4. PLANB: Moving Forward with VGI, the Outdoor Media Tycoon
5. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success

1. A Second Look at the Thai Airlines Industry

In this two part series, we apply some of the thoughts of UK-based industry expert Morrel to the Thai airlines industry and try to figure if even the best-in-class ones like AAV is worth a shot. In the first part, some of the key points include:

• Heightened attention. The industry has regained spotlight with recent news flow of: 1) failed M&A between Air Asia and Nok Air; 2) demand and logistic shocks from India and the Phuket incident; and 3) the Boeing 737 recalls sparked in Ethiopia.
• Governance and foreign ownership. Certain issues that might have come up had the Air Asia-Nok deal gone forward include foreign ownership given Air Asia’s Malaysian roots. On the governance side, Thai Airways probably has more serious issues than other rivals in the industry.
• Leased vs. owned fleets. The typical Thai carrier owns most of its fleet compared to only half for most Asian airlines. These cost savings, though tying down capital, are possible for a number of reasons, from state support to strong financials and smaller size.
• Impact of a strong Baht. The Baht’s appreciation tends to affect the sector negatively, because it makes tourism more expensive. For Thai Airways, however, its large Japanese debts means it is a net beneficiary of the recent trend.

2. CHG: Short-Term Cost Pressures Create an Opportunity to Invest

We initiate coverage of CHG with a BUY rating and a 2019E target price of Bt2.53, derived from a discounted cash flow valuation (WACC of 6.2% and terminal growth of 2.0%). This is equivalent to 44.5 PE’19E, which is near its five-year trading average of 43.7x.

The story:

• Competitive player in a key strategic location
• Pressures from launch of new greenfield hospitals should be short term
• Recent share price retreat opens an investment opportunity
• Expected flat earnings in 2019E and growth at a 19% CAGR in 2020-21E

Risks:     Medical personnel shortage

                Litigation for medical services

                Change in social security policy

3. Asian Bank Asset Quality: “One Overdue, Two Bad” 一逾两呆 The Complex Journey of the NPL

• Asset Quality recognition is something of a black art with varied definitions for non-performing loans (“NPLs”).
• Firstly, we analyse what a NPL is.
• We then evaluate provisioning changes across Asia. We rank countries.
• We further analyse specific underlying NPL recognition issues in China.
• We then rank a sample of regional banks and countries by NPL recognition.
• Later, we take a look at how different systems come under NPL stress and how they cope often in a crisis environment.
• Finally, we wrap things up with some concluding insights about the cultural backdrop which defines systemic asset quality.

4. PLANB: Moving Forward with VGI, the Outdoor Media Tycoon

We maintain PLANB with a BUY rating with the target price of Bt8.30 derived from 1.5xPEG’2019E of Thai consumer discretionary sector, which implies to 36xPE’19E.

The story:

• Collaboration among the leaders in OOH industry
• Revising down EPS in 2019-21E by 9-11% due to dilution effect

Risks: Obstacles for renewing concession contracts with state-owned enterprises along with falling consumer spending and a share-price dilution effect on the back of then generally mandated raise in capital.

5. China’s New Semiconductor Thrust – Part 2: Commodities as a Quick Path to Success

China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities.  This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.

This second part of the series explains how China chose commodity semiconductors (DRAM and NAND flash memory chips) as the best technology to pursue.