In this briefing:
- The Guerrilla War Against The PBOC
- The Week That Was in [email protected] – The Omnibus Law, Bank Risk, and Mobile World
- Semiconductor WFE Strong 2019 Finish And Double Digit 2020 Outlook, Albeit With A Coronavirus Caveat
- Market Monitor: A Corona Hangover
- Thinking About BBL’s Buy of Permata – Buy the Dips
In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.
However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.
While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.
This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.
If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.
This past week’s offering of Insights across [email protected] is filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up and credit insights. Please find a brief summary below, with a fuller write up in the detailed section. We also include in the detailed section the past week’s relevant Discussions in [email protected], this week including discussions on Ace Hardware Indonesia (ACES IJ),XL Axiata (EXCL IJ), and Indocement Tunggal Prakarsa (INTP IJ).
In Vast Omnibus Holds Promise but May Languish / Would Halve Severance / Health Minister Vs Harvard, CrossASEAN Insight Provider Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week.
In Mobile World Investment (MWG VN) – From Mobile Phones to Groceries, Cross ASEAN Insight Provider Angus Mackintosh finds value in one of Vietnam’s fastest-growing consumer companies.
In BAT Malaysia: Trading Lower than 1997 Asian Financial Crisis, Cheapest in 27 Years, Div Yield at 11%, Nicolas Van Broekhoven revisits Malaysia’s leading tobacco player and finds deep value.
In OCBC – Wing Hang Bank and Oil Price Risk, banking specialist Daniel Tabbush revisits Oversea Chinese Banking Corp. (OCBC SP) which has exposure in a number of areas which are likely to impact both growth and credit quality.
In Thinking About BBL’s Buy of Permata – Buy the Dips, events specialist Travis Lundy circles back to this ongoing M&A situation.
In Bangkok Bank: Deal or No Deal, Shares Are Too Depressed, Emerging Markets banks specialist Paul Hollingworth takes a closer look at Bangkok Bank Public (BBL TB) in light of the ongoing takeover of Bank Permata (BNLI IJ).
In Tesco to Offload Its Thai & Malaysia Business: Generous Valuation but Value Is in the UK BusinessOshadhi Kumarasiri takes a look at the potential sale of Tesco PLC (TSCO LN)’s Thai and Malaysian Assets.
In Central Retail Listing and SET50/MSCI Index Inclusion,Brian Freitas looks at the implications from Central Retail (CRC TB) being included in key indices after listing.
In ThaiBev Beer Brewery Pre-IPO/Spin-Off – Early Take – Aiming to Build an ASEAN Champion?,Zhen Zhou, Toh zeros in on the impending spin-off of Thai Beverage (THBEV SP)’s beer assets.
In a second insight ThaiBev Beer Brewery Pre-IPO/Spin-Off – Valuation Estimates and Implications,Zhen Zhou, Toh zeros in on the potential valuations for this impending spin-off.
In Noble Development Base Support with Volume Concerns, technical analysis specialist Thomas Schroeder looks at Thai property developer Noble Development (NOBLE TB) and works his magic.
In TASCO: Surfing the Spread Uptrend in 2020, our friends at Country Group initiate coverage of Tipco Asphalt (TASCO TB) with a BUY rating and a 2020E target price of Bt27, derived from 12.8xPE’20E, which is in line with valuations of the Asia-ex Japan materials sector.
In BCPG: Upside from Second Hydro Power Plant Acquisition in Laos,Country Group comment on the recent hydro acquisition by Bcpg Pcl (BCPG TB) and increase their target price as a result.
In PTTEP: Thai E&P Leader with Promising Growth Outlook, Country Group initiate coverage of PTTEP with a BUY rating, based on a 2020E target price of Bt142, derived from a discounted cash flow valuation (WACC of 10% and TG of 2%). Their valuation implies 11.3x PE’20, which is in line with the Thai Energy Sector.
Sector and Thematic
In Thai Media Spotlight: An Early Quarter of Blockbusters, our Thai guru Athaporn Arayasantiparb, CFA highlights four interesting trends/developments in the Thai media sector.
3. Semiconductor WFE Strong 2019 Finish And Double Digit 2020 Outlook, Albeit With A Coronavirus Caveat
On the back of robust billings in the fourth quarter, the semiconductor Wafer Fab Equipment (WFE) segment closed out 2019 on a comparatively high note with annual billings for the North American players down 12% YoY, far less than had been originally anticipated. Now, with Applied Materials bringing to a close the latest reporting season earlier this week, the consensus is for strong double digit growth in 2020. However, that growth number comes with health warning as AMAT lowers its first quarter guidance by $300 million, some 7% of revenues, as a result of the disruption to their business in China caused by the spread of the so-called Novel Coronavirus in Hubei province.
The year of rats brought us the elephant in the room, a new strain of Coronavirus (COVID-19) which is an ironic germ cousin of the black death (from rats in the 14th century). The virus has already infected and killed more people than SARS in 2003. All the leading indicators that we track (EXHIBIT 4) pointed to a decline in global trade activities. We expect Asian central banks to cut rates and offer fiscal stimulus (i.e. tax cuts and cash giveaways) to boost the economy.
COVID-19 has somehow made the main news as the Middle East tension between the US and Iran, BREXIT, and the US President impeachment disappear into the background. On the flip side, we still believe this Corona phobia will turn into a buying opportunity in the end.
We are no medical experts, but we believe the economic impact will first be deeply-felt in countries/territories which have more infections relative to its population such as China, Macau, Singapore, and Hong Kong. The negative impact will be on countries with more trade and tourist links to China such as Thailand, South Korea, Taiwan, Australia, and Japan. We identify India and Indonesia as two Asian economics with less correlation to China’s economic slowdown (of which we lowered our GDP forecast to 5.0% from 5.8% in 2020).
We continue to favor EM equities and bonds (rated from “BB-“ to “BBB-”). As we believe bond valuations remain stretched, securities selection is key, and a buying opportunity on the sell-off event, especially stemming from the event risk (i.e. COVID-19), will reward value investors.
Our preference toward EM equites and bonds reflects improving credit fundamentals and a continued fund flow into an EM world for diversification away from developed markets (DM). In a year of rising geopolitical risk, we still favour defensive industries such as healthcare, infrastructure, utilities, and other non-cyclical businesses over hospitality, real estate, transport, retails, mining, oil & gas, and discretionary consumer goods industries.
On 12 February 2020, Bangkok Bank Public (BBL TB) (Bangkok Bank PCL (BBL/F TB)) put out a release on the Stock Exchange of Thailand website that they had set the date for the EGM for BBL shareholders to approve the purchase of Bank Permata (BNLI IJ) to be 5 March. All of the relevant information is linked here (https://www.bangkokbank.com/en/Investor-Relations/Shareholder-Information).
Bangkok Bank also released the The Opinion of an Independent Financial Advisor with regard to the Permata Transaction. It’s a long read so the TLDR is basically, “IFA is of the opinion that the Transaction is appropriate and will provide long-term benefits to BBL because of growth, business mix diversification, synergies, so entering into the Transaction is reasonable, and because the various ways to analyse the fair value by PBR, Precedent Transactions, and DDM approaches get to a transaction fair value of IDR 35.8-116.5trln, the Proposed Transaction of IDR 42trln is appropriate.”
The current price can be assumed to incorporate a group of inputs, including a “fair per annum return on an approved deal”, an FX transaction friction spread, a likelihood of passage at the BBL shareholder meeting, the probability of regulatory approval, some timing risk, and a gap risk (to what price does the stock fall if the whole thing falls apart).
Based on tweaking these parameters to see what the possibilities are, it’s still trading cheap, unless you have real fears of BBL shareholder approval. Much more below the fold…
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