Daily Thailand: Political Pit Stop (January): Election Delay! and more

In this briefing:

1. Political Pit Stop (January): Election Delay!
2. Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat
3. The Week that Was in ASEAN@Smartkarma – Twin Deficits, Bank Mandiri, and the M1 Bid
4. Leong Hup IPO Preview: A Game of Chicken
5. Screening the Silk Road: Q1-2019 Small-Mid Cap GARP (Zulu Warrior Screening)

1. Political Pit Stop (January): Election Delay!

The regime announced that elections will be delayed from the seemingly ‘rock solid’ date of Feb 24, 2019 as there are concerns it would interfere with the coronation ceremony in early May. While the other political parties (Dems, Thaksinites) are generally understanding, there is a group of pro-democracy group that has marched out to protest and demand that the regime stick to the old timeline. Apart from this, there are some observations regarding:

• Short tenure. The Dems pointed out that given a possible Parliamentary minority (despite Senate majority), the Army faction’s new government could find itself unstable, something which the Army faction itself has not denied. Perhaps, the next government won’t last four years like this one.
• Differences and similarities in policies. From our standpoint, almost all the three major factions adhere to populist policies, such as straightforward money handouts. However, the Army faction has some advantages such as hotlines, which assume they stick to power for a while.
• Greater potential for violence. The protest against election delays has dragged on for two weeks, increasing the risk of armed conflict and instability.

2. Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat

We noted in   Ten Years On – Asia Outperforms Advanced Economies Asia’s economies and companies have outperformed advanced country peers in the ten years to 2017.  Growing by 6.8%, real, through the crisis the region is 188% larger in US dollar terms while US dollar per capita incomes 170% higher compared with 2007. In this note we argue even though Asian stock markets have underperformed since 2010 and the bulk of global capital flows have gone to advanced countries, Asia’s time is coming. Valuations are cheap. Growth fundamentals strong. There are few external or internal imbalances. Macroeconomic management has been better than in advanced economies and the scope to ease policy to ward off headwinds in 2019 is greater. China has already started.

3. The Week that Was in ASEAN@Smartkarma – Twin Deficits, Bank Mandiri, and the M1 Bid

Macro Insights

In Widodo, PDI-P Lead / Siregar to DC / Tobin Tax Unlikely / KPK Bomb Scare / Industry Minister Eyed, Kevin O’Rourke comments on the most significant economic and political developments over the last week. 

In his economic insight, Philippines: Time to Mull over the Risks of the ‘twin Deficit’ Syndrome, Jun Trinidad comments on the selling macro imbalances in the Philippines and the risks posed for the economy. 

In Philippines: Another CPI Downside Surprise in December, Jun Trinidad comments on the lower than expected inflation figures coming out of the Philippines. 

Equity Bottom-up Insights

In Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages, circles back to Bank Mandiri Persero (BMRI IJ) following a meeting with management in Jakarta. He sees Bank Mandiri Persero (BMRI IJ) as a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans.

In Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield, Nicolas Van Broekhoven circles back to this golfing play and suggests now it a good time to revisit. 

In IPS Securex (IPSS SP): Micro-Cap Could Benefit from SG Gov’t HDB Upgrade Program, Nicolas Van Broekhoven revisits this small cap which is a play on Housing Development Board upgrades in Singapore.  

In M1 Offer Despatched – Dynamics Still Iffy, Travis Lundy comments on the ongoing offer by Konnectivity for M1 Ltd (M1 SP) and whether we should expect a “bump” in the shares or to sell into the market.  

In M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War, Arun George comments on Konnectivity’s bid for M1 Ltd (M1 SP) and suggests taking up the offer.

In PCI Ltd – All Over Before It Starts, Ballingall event-driven specialist David Blennerhassett comments on the ongoing bid for Pci Ltd (PCI SP) and sees it as a done deal. 

4. Leong Hup IPO Preview: A Game of Chicken

Leong Hup International (LEHUP MK) is one of the largest producers of poultry, eggs and livestock feeds in Southeast Asia. After an unusually quite 2018, Malaysia’s equity capital market is set for rebound with at least three issuers looking to raise up to $500 million from IPOs. Leong Hup is set to the be the first as it has started the search for cornerstone investors.

5. Screening the Silk Road: Q1-2019 Small-Mid Cap GARP (Zulu Warrior Screening)

• Value made a comeback, but growth remains core: In May 2018, we examined the divide between value and growth stocks, ( Notes from the Silk Road: Small-Mid Cap Screening for Zulu Warriors). As Q3 unfolded, this eventuated with a +7.5% reversal in favour of value stocks, only to see growth resume dominance in October and November.
• The optimal value/growth style dynamic: We feel exposure to growth at a reasonable price (GARP) coupled with a healthy FCF yield (via our amended Zulu Screen) should provide some healthy medium to long term returns for investors.
• The Screen’s Risk: The Zulu Screen relies on analyst estimates. When market sentiment is weak and forecasts are not amended in a timely manner, the screen is susceptible to mis-selection.
• Q2 2018 screening list succumbed to volatile markets: This was seen in our May screen with our list posting on average a 30% decline in share price, relative to the broader Asia-Pacific Ex-Japan declining 13.6% and the Asia Pacific index by 11.8%.
• Are there reasons for the underperformance? 10 of the 19 stocks in the May screen were from Hong Kong, which saw the Hang Seng Index (HIS) decline 16% over the same period. The decrease seems due to concern over trade wars and doubts about the China economy. Our key approach to stock selection is to take a medium-to-long-term view as well as focus on quality ranked stocks relative to their peers. This is highlighted via the average stock rank of the group declining only 15.8% from 89.6 to 75.5 points.
• Our Q1 2019 screen selected only 9 stocks. Of the 9 stocks identified, the average PEG Ratio was 0.4x, the price to FCF yield was 11% and ROCE was 25%. Stocks were selected from Australia, New Zealand, India, Korea, Japan, Hong Kong, Taiwan and Singapore. Cowell Fashion Company from Korea was the only remaining stock from our May screening.