Brief Thailand: UK Trip – Wake up to Deflation Risk and more

In this briefing:

1. UK Trip – Wake up to Deflation Risk
2. EPG: Revising Down Earnings by 10-12% While Long-Term Outlook Still Intact
3. TWPC: Sign of Recovery from 4Q18 Earnings
4. PLAT: Already Priced in the Delay in Opening a New Project
5. Confluence of Politics – China Bans Australian Coal Imports (Flash Note)

1. UK Trip – Wake up to Deflation Risk

By Bo Zhuang, Chief China Economist

• London-based investors are turning cautiously optimistic on China’s growth outlook amid the latest easing measures in January
• There is still little awareness about the rising deflation risk
• Interest in the trade war has subsided

2. EPG: Revising Down Earnings by 10-12% While Long-Term Outlook Still Intact

We revise down EPG’s net profit forecast by 10-12% in 2019-21E. However, we still maintain our positive outlook toward its FY20-21E earnings driven by growth in every business units: 1) sales and margins recovery for EPP segment (22% of revenue in FY9M19) from changing its product mix toward more on food packaging; 2) consistent revenue growth for automotive and thermal insulators (50% and 28% sales contribution). The new target price at Bt9.90 derived from its 2-years average trading range of 23xPE’19E.

• A slash down in earnings to factor in lower-than-expected sales growth in Aeroflex and EPP. Meanwhile, raising up SG&A to sales ratio to reflects operation enhancement program in Australia.
• Turn bearish view toward on TJM which contributed 12% in total revenue in 9MFY19 (April-December 2018), due to difficulty in running businesses given high labor cost in Australia and production scale that still far behind the rival.
• EPP’s gross margin was already bottomed out and expect to normalize on the back of low material price sourced in 4Q18, and, higher contribution from high margin products on food segment.

3. TWPC: Sign of Recovery from 4Q18 Earnings

TWPC 4Q18 recurring profit was Bt86m (+135%YoY, +975%QoQ). The easing in cassava supply help supporting TWPC both selling volume and profitability.

• The strong revenue at Bt2.1bn (+12%YoY, +25%QoQ) and GPM at 17.2% (+0.7ppts YoY, +3.2ppts QoQ) should reflect the easing cassava supply and mark its earnings bottom out.
• TWPC FY2018 recurring profit was Bt197m (-48% YoY), largely eroded by starch industry downturn.
• TWPC announced a dividend payment of Bt0.32 (XD on 07-May-19), which is equivalent to 4.0% dividend yield.

We maintain our BUY rating with 2019E target price of Bt10.0, derived from 16.5x PE. We believe 2019 will be turnaround year for TWPC as the starch business down-cycle should have already ended. We like TWPC for its scalability with its strong brands in large markets both starch and food (Vermicelli and noodles).

4. PLAT: Already Priced in the Delay in Opening a New Project

PLAT reported 4Q18 net profit of Bt198m (-3%YoY, +6%QoQ) and in-line with our expectation.

• Slow sales growth (+3%YoY) due to the delay in opening The Market Bangkok project from Dec 18 to 14 Feb 2019 caused a YoY drop in 4Q18 performance. In summary, 2018 earnings grew 2%YoY driven by 5%YoY in sales growth. We also believe current share price already priced in this delay.
• Despite a drop in 4Q18 earnings YoY, we expect strong recovery in 1H19 earnings driven by opening The Market Bangkok (70% booked).
• We maintain our positive view toward its outlook back by the rise in average rental rate trend after long term contracts expiration in 2020-2021E.
• Announced an annual dividend payment of Bt0.2 (XD on 4 Mar), which is equivalent to 2.6% upcoming dividend yield.

We maintain BUY rating with a target price of Bt9.4 based on DCF (10.8%WACC, 0% TG)*.

5. Confluence of Politics – China Bans Australian Coal Imports (Flash Note)

• China implements coal import caps specifically targeting Australian producers
• Unclear as to how widespread these restrictions will eventually be
• Thermal and metallurgical coal exports affected
• Impacting ~A$8.4Bn of metallurgical coal exports; or 4.4% of national income
• Thermal coal exports affected worth ~A$3.8Bn; or an additional 2% of national income
• Collectively, thermal and metallurgical exports equate to ~0.9% of Australian annual GDP 
• Actions appear to be a response to blocking Huawei bidding for the 5G network
• Recent Chinese cyber-attacks harden Australian Government’s resolve
• Expect similar Chinese measures (in time) to be applied to other commodities and industries