Daily Thailand: Catalyst Calendar for Thailand 2019 and more

In this briefing:

1. Catalyst Calendar for Thailand 2019
2. Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low
3. Uzbekistan Initiation: Value Hidden in Plain Sight

1. Catalyst Calendar for Thailand 2019

While it may not be possible to get 100% visibility on upcoming analysts, the team at MCorp Review figured that it would be useful to start a calendar for those we see in the pipeline for this year and cite no more than three stocks that could come into focus during those months because of these catalysts. Some examples include:

• The TMB-Thanachart deal (late January) possibly the biggest bank deal since Mitsubishi-UFJ bought BAY for US$4.4bn in 2013, we see the government’s fingerprints in this and the likelihood that the share swap ratio will favor TMB.
• Chinese New Year (Feb 5), an important test for Thai tourism and AOT following the death of mainland tourists in Phuket last year. An underwhelming show would also hit Indorama.
• General elections (late May?) If this goes through, Sino Thai Engr & Constr (STEC TB) , whose tycoon Anutin Charnvirakul leads the swing vote party Bhumjaithai, could benefit hugely.
• Blockbuster season (August) So far, X-Men sequel The New Mutants, which timeline is confirmed, looks like the big boost for cinema titan Major Cineplex Group (MAJOR TB) , though we suspect Avengers Endgame, the sequel to Infinity Wars, would be an even bigger deal.

2. Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low

Trawling through  >1500 global banks, based on the last quarter of reported Balance Sheets, we apply the discipline of the PH Score™ , a value-quality fundamental momentum screen, plus a low RSI screen, and a low Franchise Valuation (FV) screen to deliver our latest rankings for global banks.

While not all of top decile 1 scores are a buy – some are value traps while others maybe somewhat small and obscure and traded sparsely- the bottom decile names should awaken caution. We would be hard pressed to recommend some of the more popular and fashionable names from the bottom decile. Names such as ICICI Bank Ltd (ICICIBC IN) , Credicorp of Peru, Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB US) are EM favourites. Their share prices have performed well for an extended period and thus carry valuation risk. They represent pricey quality in some cases. They are not priced for disappointment but rather for hope. Are the constituents of the bottom decile not fertile grounds for short sellers?

Why pay top dollar for a bank franchise given risks related to domestic (let alone global) politics and the economy? Some investors and analysts have expressed “inspiration” for developments in Brazil and Argentina. But Brazilian bonds are now trading as if the country is Investment Grade again. (This is relevant for banks especially). Guedes and co. may deliver on pension/social security reform. If so, prices will become even more inflated. But what happens if they don’t deliver on reform? Why pay top dollar for hope given the ramp up in prices already? Argentina is an even more fragile “hope narrative”. More of a “Hope take 2”. Similar to Brazil, bank Franchise Valuations are elevated. While the current account adjustment and easing inflation are to be expected, the political and social scene will be a challenge. LATAM seems to be “hot” again with investment bankers talking of resilience. But resilience is different from valuation. Banks from Chile, Peru, and Colombia feature in the bottom decile too. If an investor wants to be in these markets and desires bank exposure, surely it makes sense to look for the best value on offer. Grupo Aval Acciones y Valores (AVAL CB) may represent one such opportunity.

Our bottom decile rankings feature a great deal of banks from Indonesia. In a promising market such as Indonesia, given bank valuations, one needs to tread extremely carefully to not end up paying over the odds, to not pay for extrapolation. In addition, India is a susceptible jurisdiction for any bank operating there – no bank is “superhuman” and especially not at the prices on offer for the popular private sector “winners”. Saudi Arabia is another market that suddenly became popular last year. We are mindful of valuations and FX.

Does it not make more sense to look at opportunity in the top decile? While some of the names here will be too small or illiquid (mea culpa), there are genuine portfolio candidates. South Korea stands out in the rankings. Woori Bank (WF US) is top of the rankings after a share price plunge related to a stock overhang but this will pass. Hana Financial (086790 KS) , Industrial Bank of Korea (IBK LX) and DGB Financial Group (139130 KS) are portfolio candidates. Elsewhere, Russia and Vietnam rightly feature while Sri Lanka and Pakistan contribute some names despite very real political and macro risks. We would caution on some of the relatively small Chinese names but recommend the big 4 versus EM peers – they are not expensive. In fact some of the big 4 feature in decile 2 of our rankings. There are many Japanese banks here too. And many, like some Chinese lenders, are cheap for a reason. While the technical picture for Japanese banks is bearish, at some stage selective weeding out of opportunity within Japan’s banking sector may be rewarding. The megabanks are certainly not dear. Europe is another matter. Despite valuations, we are cautious on French lenders and on German consolidation narratives – did a merger of 2 weak banks ever deliver shareholder value? The inclusion of two Romanian banks in the top decile is somewhat of a headscratcher. These are perfectly investable opportunities but share prices have been poor of late.

3. Uzbekistan Initiation: Value Hidden in Plain Sight

Uzbekistan’s economy is a frontier market stand out and has a large number of attractive characteristics:

• Uzbekistan’s stock market trades at a substantial discount to other frontier markets, though the extremely illiquid nature of the market makes it hard to trade.  However, there still is foreign interest in the market.
• The IMF projects that the economy will grow by 5% during 2018 and 2019, and eventually reach 6% by 2022, though this is still below its historical high. 
• Market reforms were spearheaded in December 2016 when the newly elected president, Shavkat Mirziyoyev decided to transition towards a market- oriented economy led by private sector growth, as the public sector was unable to create enough jobs.  This represents a significant shift given that Uzbekistan had been a closed, centrally planned economy until 2016.
• Tourist arrivals grew by 91.6% during H1 2018, and this is poised to improve greater in the future due to the impact of the visa liberalization measures.
• Twin deficits have remained under control and Uzbekistan is one of few current account surplus frontier markets.
• Uzbekistan is also very attractive compared to other markets in the frontier space given that its minimum wage is only US$24/month, compared to around $70-75/month in Kyrgyzstan and Kazakhstan.

The market reforms that the country recently implemented will be a major catalyst for future economic growth and makes investment in this market appealing.  Apart from strong growth, the market is also appealing due to its high foreign exchange reserves ( nearly 2 years of import cover), consistent CA surplus, and stable currency.  My latest frontier and emerging market recap highlights the appeals of markets such as Bangladesh, Vietnam, and Egypt, while expressing concerns for markets such as Sri Lanka and Pakistan.  Uzbekistan is a suitable addition given its stable macro/political picture, and the main negative factor of this market is the highly inaccessible nature of the equity market.  The ADTV is less than $100,000, which is a far cry from other frontier markets like Romania, Sri Lanka and Kenya.