.Mean S KBank Multi Asset Strategies Strategies...1 .Mean S Strategic Thesis Once you are number 1, there is only one way to go. Of late, China and Russia made FX headlines as the

1

.Mean S

Strategic Thesis Once you are number 1, there is only one way to go. Of late, China and Russia made FX headlines as the two countries established the “Agreement on Cooperation” to bypass the US dollar for their bilateral trade. Dollar bears resurface to cast doubts of the greenbacks’ ability to hang on to the world’s reserve currency status since Bretton Woods, post World War II. We took a look at this risk and see that a one in three chance that the world could move away from the US dollar. World trade dynamics suggests that the US dollar could be disintermediated. However, there are serious doubt about the requirement for a deep and open financial markets. We find that the size of the US bond market facilitates its reserve currency status nicely. On preserving the purchasing power of parity, EM currencies stand a slim chance as by their very definition, they are still emerging and hence inflation dynamics will tend to be higher than DM.Two main factors driving global markets are Fed’s and ECB’s dovish stance, which imply ample global liquidity, low interest rate and low volatility environment i.e. a perfect combination for carry trade. We favour a selective group of Asian Fx under this backdrop. But will Thai assets benefits from the return of foreign inflows? Yes and No. Relatively low return in Thailand provides little reason to be bullish on Thai fixed income. Yet, Thai equities could benefit from inflows especially after offshore investors had largely reduced their holding. On the domestic front, BoT’s V-shaped recovery implies a maintenance of policy rate at 2.0% in 2014 and possibly rate normalization later in 2H2015. With our view of range bound yield movement, our medium duration still provides merit, particularly when 5-year bond is the steepest part of the curve and will benefit from rolling down strategy.

Kobsidthi Silpachai, CFA –Kasikornbank [email protected] KResearch

[email protected]

� Once you are number 1, there is only one way to go.

� China and Russia’s endeavor to topple USD maybe in vain

� As per the Fed’s Pianalto, “For any currency to serve as an

international reserve currency, three features seem especially

important: First, the currency must be widely used in

international transactions. Second, it has to be linked to deep

and open financial markets. Finally, people need to have

confidence that the purchasing power of that currency will

remain fairly stable.”

� Global liquidity flush give rise to carry trades which should bode

well for Asian Fx, especially TWD, INR, MYR, and PHP.

� BoT’s V-shaped recovery implies a maintenance of policy rate at

2.0% in 2014 and possibly rate normalization later in 2H2015

� Our view of range bound yield movement implies that medium

duration still has merit, particularly when 5-year bond is the

steepest part of the curve and will benefit from rolling down

strategy

KBank Multi Asset Strategies Dethroning the US dollar, is the threat real?

Strategies

Macro / Multi Asset

July 2014

Volume 85

“KBank Multi Asset

Strategies”

can now be accessed on

Bloomberg: KBCM <GO>

Disclaimer: This report

must be read with the

Disclaimer on page 33 that forms part of it

2

Key Parameters & Forecasts at Year-end

2007 2008 2009 2010 2011 2012 2013 2014E 2015E

GDP, % YoY 4.9 2.5 -2.3 7.8 0.1 6.4 2.9 2.3 4.0

Consumption, % YoY 1.6 2.7 -1.1 4.8 1.3 6.6 0.3 0.8 3.3

Investment Spending, % YoY 1.3 1.2 -9.2 9.4 3.3 13.3 -2.0 -1.2 6.0

Govt Budget / GDP % -1.5 -1.0 -5.6 -3.2 -2.7 -2.8 -2.6 n.a. n.a.

Export, % YoY 18.2 15.9 -13.9 28.4 16.4 3.2 -0.2 3.0 3.5

Import, % YoY 9.1 26.7 -25.1 37.0 24.7 7.8 -0.4 -2.5 4.8

Current Account (USD bn) 15.68 2.16 21.90 13.18 5.3 2.7 -2.8 9.5 7.0

CPI % YoY, average 2.3 5.5 -0.9 3.3 3.8 3.0 2.2 2.6 2.5

Fed Funds, % year-end 4.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.75

BOT repo, % year-end 3.25 2.75 1.25 2.00 3.25 2.75 2.25 2.00 2.50

Bond Yields

2yr, % year-end 3.91 1.98 2.17 2.35 3.10 2.88 2.62 2.30 3.00

5yr, % year-end 4.5 2.2 3.6 2.75 3.15 3.15 3.41 3.10 4.20

10yr, % year-end 4.9 2.7 4.3 3.25 3.30 3.52 3.98 3.90 4.70

USD/THB 33.7 34.8 33.3 31.4 31.54 30.60 32.68 33.50 34.00

USD/JPY 111.8 90.7 93.0 82.0 76.9 85.8 104.9 106.0 112.0

EUR/USD 1.46 1.40 1.43 1.40 1.29 1.32 1.38 1.31 1.28

SET Index 858.1 450.0 734.5 1,032.8 1,025.3 1,391.9 1,299.0 1,512.0 1,580.0

Source: Bloomberg, CEIC, KBank, KResearch (preliminary forecast as of July 8th, 2014), KSecurities

KBank Thai Government Bond Rich / Cheap model

-50

-40

-30

-20

-10

0

10

20

30

LB145B

LB14DA

LB155A

LB15DA

LB167A

LB16NA

LB176A

LB183B

LB193A

LB196A

LB198A

LB213A

LB21DA

LB233A

LB236A

LB24DA

LB267A

LB27DA

LB283A

LB296A

LB316A

LB326A

LB383A

LB396A

LB406A

LB416A

LB616A

3 mth avg Now

Bps (actual YTM vs. model)

Source: Bloomberg, KBank

3

KBank THB NEER Index KBank USD/THB – FX Reserves / USD Majors model

KBank THB Trade Weighted Index

75

80

85

90

95

100

105

110

115

01 02 03 04 05 06 07 08 09 10 11 12 13 14

Jan 1995 = 100

+ 1 std dev

-1 std dev

average

28.0

29.0

30.0

31.0

32.033.0

34.035.0

36.037.0

38.0

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

actual model -2SE +2SE

KBank USD/THB model

Source: Bloomberg, KBank Source: Bloomberg, KBank

FX reserves – USD/THB model DXY – USD/THB model

y = -6.877Ln(x) + 66.899

R2 = 0.8976

27

29

31

33

35

37

39

41

43

45

47

25 50 75 100 125 150 175 200 225

FX reserves to USD/THB mapping current 2014 est.

USD/THB

FX reserves, USD bn

y = 32.782Ln(x) - 110.02

R2 = 0.7393

25

30

35

40

45

50

70 80 90 100 110 120 130

DXY to USD/THB mapping current

USD/THB

DXY

since 2001


KBank BOT repo model SET forward dividend yield vs. 10yr bond yield

0.00.51.01.52.02.53.03.54.04.55.05.5

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

actual model

%

2

3

4

5

6

7

8

9

05 06 07 08 09 10 11 12 13 14

10yr yields SET forward dividend yields

%


Thai contribution to GDP growth KBank leading economic indicator

19.1%

0.6%2.7%2.9%

5.4%3.1%4.4%

0.4% -0.6%

3.2% 2.7% 3.7%

-8.9%

-10%

-5%

0%

5%

10%

15%

20%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

%YoY

Private consumption Government expenditureGross fixed capital formation Change in inventoriesNet exports GDP growth

90

100

110

120

130

140

150

160

170

02 03 04 05 06 07 08 09 10 11 12 13 14

650,000

750,000

850,000

950,000

1,050,000

1,150,000

1,250,000

1,350,000

lead indicator, Jan 95 = 100 GDP, SA

Source: NESDB, KBank Source: Bloomberg, CEIC, KBank

4

Thai inflation parameters Thai government bond, yield to duration ratio

-15

-10

-5

0

5

10

15

20

25

07 08 09 10 11 12 13 14

%

Headline Inflation Core inflation Producer price inflation

20

40

60

80

100

120

140

160

180

200

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

yield to duration, bps -1sd average +1sd

Source: Bloomberg, KBank Source: CEIC, KBank

Implied forward curve: swaps Implied forward curve: TGBs

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

0 1 2 3 4 5 6 7 8 9 10

Jul-14 Oct-14 Jan-15 Jul-15

%

tenor (yrs)

Implied forward rate shifts (IRS)

1.80

2.05

2.30

2.55

2.80

3.05

3.30

3.55

3.80

4.05

4.30

0 1 2 3 4 5 6 7 8 9 10

Jul-14 Oct-14 Jan-15 Jul-15

%

tenor (yrs)

Bond yields implied curve shifts


Foreign holding of Thai fixed income and stock Mapping BOT repo vs. 2-10 spreads

-100

-

100

200

300

400

500

600

700

07 08 09 10 11 12 13 14

TGB, exc. BOT bond BOT bond Thai stocks, est since 1999

THB bn

2, 138

y = -64.797x + 305.15

R2 = 0.5561

-50

0

50

100

150

200

250

300

350

400

1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.75 5.00

BOT repo - policy rate, %

2 - 10 spreads, bps

Source: Bloomberg,ThaiBMA, KBank Source: Bloomberg, KBank

5

KBank EUR/THB model KBank JPY/THB model

36

38

40

42

44

46

48

50

52

54

09 10 11 12 13 14 15

actual model

EUR/THB

25

27

29

31

33

35

37

39

41

43

09 10 11 12 13 14 15

actual model

JPY/THB


KBank GBP/THB model KBank CNY/THB model

4042

444648

50

52

545658

60

09 10 11 12 13 14 15

actual model

GBP/THB

4.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

5.8

09 10 11 12 13 14 15

actual model

CNY/THB


KBank SGD/THB model KBank AUD/THB model

20

21

22

23

24

25

26

27

28

09 10 11 12 13 14

actual model

SGD/THB

21.0

23.0

25.0

27.0

29.0

31.0

33.0

35.0

09 10 11 12 13 14 15

actual model

AUD/THB


6

Because once you make it to the top, the only place to go

is down

Dethroning the US dollar, is the threat real?

Once you are number 1, there is only one way to go. Of late, China and Russia made FX headlines as the two countries established the “Agreement on Cooperation” to bypass the US dollar for their bilateral trade. Dollar bears resurface to cast doubts of the greenbacks’ ability to hang on to the world’s reserve currency status since Bretton Woods, post World War II. Even when the US terminated the dollar’s convertibility to gold in the early 1970s, there was no other alternative to the greenback. But then, that was yesteryear when the Cold War was still boiling. It would be over another decade before the Berlin wall comes down and China was not to experiment with State - Capitalism for another 20 years or so. The present illustrates a different picture, one where China is now the second largest economy and may, in the not too distant future overtake the US as the largest economy. In 2007, Sandra Pianalto, President and CEO of the Federal Reserve Bank of Cleveland, gave a speech titled “The Internationalization of National Currencies” (https://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2007/Pianalto_20070327.cfm). A key point in this speech, in our humble opinion was the following part: For any currency to serve as an international reserve currency, three features seem especially important: First, the currency must be widely used in international transactions. Second, it has to be linked to deep and open financial markets. Finally, people need to have confidence that the purchasing power of that currency will remain fairly stable.

For the first point, China or rather the CNY has a very strong potential for a reserve currency status. Fig 2 shows trade values for the past 12 months of major economies and the value of trade for China is actually larger than that of the US. The past 12 months trade for China was some USD 4.1 trillion whilst the US was USD 3.9 trillion. Fig 1. In Mao, we trust? Fig 2. Trade by major economies

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

US EUROZONE CH JP UK

Total trade, USD bn, past 12mths

Source: cagle.com Source: Bloomberg, CEIC, Reuters Eikon, KBank

Kobsidthi Silpachai, CFA - Kasikornbank [email protected] Pareena Phuangsiri - Kasikornbank [email protected] Nattariya Wittayatanaseth –Kasikornbank [email protected] Pornwalee Pilavun – Kasikornbank [email protected]

7

The second point as stated by Pianalto, requires such a currency is linked to a deep and open financial markets. Fig 3 shows data from the International Monetary Fund, the IMF. According to the IMF as of 1Q14, total reserves at central banks around the world were USD 11.864 trillion of which USD6.175 trillion were allocated to key fiat currencies such as the USD. At the time, central banks reported that they have allocated USD 3.763 trillion of their reserves to the USD, followed by the EUR and JPY. Fig 4 highlights the point mentioned by Pianalto, whereby we proposed that the amount of reserves allocated to the USD was related to the size of its sovereign bond market. Data of the size of the sovereign bond market was available since 4Q09. The chart suggests that the variance of the size of the US sovereign bond market explains about 96% of the variance of the allocation of reserves to the USD.

Fig 3. Break down of allocated reserves by currency Fig 4. Size does matter: reserve allocation to USD as a

function of size of US sovereign bond market

3,763

239 24617

1,512

174

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

USD GBP JPY CHF EUR Others

reserves allocated to fiat currencies, USD bn

12,202 , 3,763

y = 0.2101x + 1346.3

R2 = 0.9627

2,700

2,900

3,100

3,300

3,500

3,700

3,900

4,100

7,000 8,000 9,000 10,000 11,000 12,000 13,000

size of US debt outstanding, USD bn

International FX reserves denominated in USD, bn

Source: Bloomberg, CEIC, Reuters Eikon, KBank Source: Bloomberg, CEIC, Reuters Eikon, KBank

Results for other currencies were not so significant. For example, the size of Japan’s sovereign bond market merely 12.6% of the allocation of reserve to the JPY. EUR was better than JPY results which had a coefficient of determination of 49%. JPY’s low results could be explained by extreme patriotism of Japanese citizens who are more than willing to finance their government’s budget deficits. For EUR, a reason we could think of as to why the coefficient of determination was lower than that of the USD was because of the ongoing sovereign debt crisis which we presumed had been giving Mario Draghi numerous sleepless nights.

8

Fig 5. Major economies’ size of sovereign debt markets

12,182

9,4879,084

2,356

1,548962

704 610 512 480 304 244 157 133 108 9-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

US

Japan

Eurozone

UK

China

Brazil

India

Canada

Korea

Mexico

Australia

Turkey

Russia

Indonesia

Switzerland

Saudi Arabia

debt market, USD bn

Source: Bloomberg, CEIC, Reuters Eikon, KBank

This can be a two-edged sword for Chinese Authorities since it would require the increased convertibility of the capital account which, would and will raise the CNY volatility. Currency volatility is great for speculators but not so great for exporters and importers since it raises uncertainty and operating margin variability.

Fig 6. FX vols and implied ranges

latest level

1M ATM, % est. lower level

est. upper level


est. upper level


est. upper level

USDJPY 101.78 4.77 100.38 103.18 5.37 99.05 104.51 6.12 97.38 106.18

AUDUSD 0.94 6.29 0.92 0.96 6.50 0.91 0.97 7.05 0.89 0.99

USDSGD 1.24 2.61 1.23 1.25 2.90 1.23 1.26 3.32 1.22 1.27

USDKRW 1,011.68 4.64 998.13 1,025.23 5.26 985.07 1,038.29 6.12 967.94 1,055.42

USDTWD 29.94 2.39 29.73 30.15 2.64 29.54 30.34 2.94 29.32 30.56

USDCNY 6.20 1.77 6.17 6.23 2.04 6.14 6.27 2.35 6.10 6.31

USDCNH 6.20 2.50 6.16 6.25 2.67 6.12 6.28 2.84 6.08 6.33

USDHKD 7.75 0.25 7.74 7.76 0.34 7.74 7.76 0.40 7.73 7.77

USDIDR 11,629 12.32 11,215 12,043 11.29 10,973 12,285 11.19 10,709 12,549

USDMYR 3.17 4.88 3.13 3.22 5.02 3.09 3.25 5.35 3.05 3.29

NZDUSD 0.88 6.98 0.86 0.90 7.19 0.85 0.91 7.73 0.83 0.93

USDPHP 43.35 4.23 42.82 43.88 4.76 42.32 44.38 5.28 41.73 44.97

USDTHB 32.39 4.48 31.97 32.81 4.99 31.59 33.20 5.49 31.14 33.65


9

Manufacturers with razor thin operating profit margins (EBIT / Sales) may easily find themselves losing money due FX volatility. For example, a Thai exporter with a normal EBIT margin less than 4% faces a 67% probability to lose money as the markets sees 1 month, 3 months and 6 months expected volatility are all greater than 4% as per fig. 6. The difference of expected FX volatility amongst USD/Asia also illustrates which central banks have more freedom in using interest rates as the main monetary tool. Hong Kong is an obvious example followed by China. This is why, in our opinion, the People’s Bank of China has to resort to using reserve requirement ratios (RRR) to control the money supply rather than interest rates. We also surmise that this is the root cause of the inefficient allocation of capital which has allowed China’s shadow banking woes to perpetuate. Ditching the dollar might not be in China’s near term interest either. It takes two to tango. For every seller, there has to be a buyer. If the US sells its US Treasuries, China seems to be more than willing to buy them. As of April 2014, China holds a staggering USD 1.263 trillion in US Treasuries (USTs). An aggressive push to dethrone the USD as a reserve currency equates to a dilemma as to how to reposition its savings in USTs without losing it in the process. Fig 7. Holdings in UST by Asian central banks Fig 8. China’s UST holding

1,2101,263

176

55155

93 69 47

0

200

400

600

800

1000

1200

1400

JP CH TW SK HK SG IN TH

USD bn

-

200

400

600

800

1,000

1,200

1,400

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

China's holdings in UST

USD bn


Other than USTs or other the bonds of other major fiat currencies, gold is another major choice. But since Ben Bernanke, the former Fed Chairman, uttered those words about QE tapering, gold took a dive south from over USD1,600 per ounce. Fig 9. Unallocated reserves and gold price Fig 10. Gold price as a function of unallocated reserves

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

200

400

600

800

1000

1200

1400

1600

1800

2000

Unallocated reserves,% of total reserves (left axis) Gold price, USD/ troy oz (right axis)

ρ = 96%

y = 0.2675x + 157.91

R2 = 0.9291

0

200

400

600

800

1000

1200

1400

1600

1800

2000

- 1,000 2,000 3,000 4,000 5,000 6,000

unallocated international reserves, USD bn

Gold prices, USD/ troy oz


10

The last factor highlights the management of inflation and deflation. This is rooted in the theory of purchasing power of parity (PPP). Many might be accustomed to this as the Big Mac Index suggesting that a Big Mac in one country should be about the same price as in another considering the exchange rates. If not, an arbitrage would ensue and therefore would adjust the exchange rate. In general, a country with higher inflation should lead to a weakening currency and vice versa. But considering that a large but still emerging China to have a low rate and sustainable rate of inflation is wishful thinking. Fig. 11 shows China’s consumer price index, rebased to January 2000 along with the calculated compound average growth rate (CAGR). Its peak CAGR is about 2.7% and has averaged about 2.4% post the outbreak of the US subprime crisis.

Fig 11. China’s CPI index and CAGR Fig 12. BIG MAC index – CH, implied relative value vs.

USD

y = 0.2803x - 244.44

R2 = 0.9569

90

100

110

120

130

140

150

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

China CPI, rebased to Jan 2000, left CAGR, right

1.00

1.20

1.40

1.60

1.80

2.002.20

2.40

2.60

2.80

3.00

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

-60%

-58%

-56%

-54%

-52%-50%

-48%

-46%

-44%

-42%

-40%

price of Big Mac in China, USD, left CNY (under) / over valued vs. USD, right


Fig 13. Implied currency valuation, (under) / over-valued vs. USD based on the Big Mac Index

local currency (under) / overvalued vs. USD

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

IN SA MA UK ID HK EG PO RU TA SL CH MX TH SR JN PH PD AR PK UA LN CZ SK PE SI CL TU EE HU GR CR CO AU NZ AS US GB NE IR UR SP TE GE CA IS FR DE IT BZ BE FI SW SZ VZ NO


11

We preliminarily conclude that risk to dethroning the US dollar’s near monopoly as the world reserve currency is highly unlikely. If history is any guide, before the US dollar was able to topple the pound sterling as the world’s reserve currency required some monumental event like World War II. Because of World War II, the British Empire was severely weakened and could no longer hold onto many of its colonies which had substantiated the saying “The Sun never sets on the British Empire” e.g. Jordan (1946), India (1947), Pakistan which included today’s Bangladesh (1947), Israel (1948), Myanmar (1948) and Sri Lanka (1948).

12

The re-correlation with US Treasury

vs. The de-correlation across Asian Fx

� The ECB has joined major central banks in pumping in liquidity to

the global financial markets

� Despite the US and the UK contemplating on the timing of the first

rate hike, we expect such event to be delayed further

� Global liquidity flush, low volatility and low interest rate gives a

supportive backdrop to Fx carry trades

� We believe Asian currencies still offer a pocket of values

� We favour TWD, INR, MYR, and PHP for a medium-term play in

comparison to other South East Asian currencies

� But, we remain on the sideline for KRW

� Yet, one point to keep in mind is the re-correlation of UST which

means greater risk and sensitivity of Asian currencies to swift

shifts in the Fed’s stance

The ECB has finally tied the knot

The ECB has become the fourth major central bank to join the ‘liquidity creation club’ as it introduced a packaged deal to jumpstart bank lending to the real economy.

Table 14. ECB’s recent measures to jumpstart bank lending

Measures Detail Objective

Negative interest rate

- Main refinancing operations rate is decreased to 0.15% (-10 bps)

- Marginal lending facility rate is decreased to 0.4% (-35 bps)

- Deposit facility rate is decreased to -0.1% (-10 bps)

The reduction in deposit rates means that banks would have to pay penalty if they hold reserves in excess of the minimum reserve requirements.

Targeted longer-term refinancing operations (TLTROs)

Banks will be able to borrow cheaply from the ECB if they extend loans to non-financial private sector

Provide liquidity to banks and stimulate lending to non-financial private sector.

Preparatory work to purchases of asset-backed securities (ABS)

The Eurosystem will consider purchasing simple and transparent ABS with underlying assets consisting of claims against the euro area non-financial private sector, taking into account the desirable changes in the regulatory environment, and will work with other relevant institutions to that effect.

To enhance the functioning of the monetary policy transmission mechanism, given the role of this market in facilitating new credit flows to the economy.

Suspension of liquidity sterilization under SMP program

The ECB would suspend its nearly four-year-old policy of draining funds from euro-zone banks on a weekly basis, a process known as ‘sterilization’. It has been draining euros out of the financial system since May 2010 when it created a government bond purchase facility called the Securities Market Program (SMP). For every euro the ECB spent on government bonds of Greece, Ireland, Portugal, Spain and Italy, it tried to withdraw an equal amount from banks through interest-bearing deposits.

This will leave excess liquidity amounting to EUR156 bn in the euro area’s financial system.

Source: ECB, KBank

13

The centrepiece of these measures is the ‘targeted longer-term financing operations’ (TLTRO). The TLTROs is used to provide longer-term financing to banks in the euro area which will allow banks to borrow cheaply from the ECB if they expand lending to non-financial sector. The expected amount of liquidity to be injected into the financial system through this program could amount to as large as EUR1.4 trn through the conduct of 8 TLTROs over 2014-2016. During the initial phase (18 September and 11 December 2014), the ECB will grant EUR400 bn loans, calculated by 7% of banks’ net lending excluding loans for home purchases, in which banks can keep until 2016. Then, during the second phase between March 2015-June 2016, banks can borrow additional funds of 3 euros for every 1 euro of new lending to non-financial sector above the ECB’s benchmark. The benchmarks differ between healthy banks with positive net lending to non-financial sector and deleveraging banks with negative net lending. For healthy banks, the benchmark is their average lending level over the 12 month period to April 2014. While for deleveraging banks with negative net lending, the benchmark will decline linearly and transform into a constant benchmark by April 2015 so as to give banks a period of adjustment.

Despite the technical complications of the measures, the TLTRO has less condition that expected as banks can access the initial phase of TLTRO, totaling EUR400bn, with no strings attached, only the additional borrowings for the second phase (April 2015-September 2016) are subjected to the conditional incremental lending. We expect this to be well-received by banks in accordance to the past two LTRO programs in 2011-2012 in which banks took up loans more than the ECB’s initial projection. While banks will be able to raise funds at cheaper cost as a byproduct of the negative interest rate. On July 4, 2014, after the ECB announced its measures, German bund 1-year yield dropped below 0.0% for the first time since June 2013. The decline in benchmark rates and risk premium should bring down borrowing cost across the board for euro area members which should provide a supportive backdrop for banks; particularly when the ECB is due to release its Asset Quality Review Program in October 2014 which could leave some banks with capital shortfalls. While policymakers in the US and the UK are contemp lating on the timing of the first rate hike, we expect the significance of such watershed event to dissipate for the time being. There are three key reasons why we believe advanced economies’ monetary policy will remain loose. Firstly, inflation rate across advanced economies is likely to remain low given commodity price cycle has not picked up. Secondly, advanced economies are not operating at their full potentials yet. The IMF estimated that the G7 group will still operate at 1.7% below its potential level in 2015. Lastly, central bankers

Fig 15. Benchmark for banks with positive net lending

in the 12 months to 30 April 2014 Fig 16. Benchmark for banks with negative net lending

in the 12 months to 30 April 2014

Source: ECB, KBank Source: ECB, KBank

14

are now more reluctant to raise rates unless economic indicators show a broad-based recovery. Carry trades boost spillovers of TLTRO to EM

The firming US economy amidst the belief that the Fed will stay pat at least until H2/2015, together with reduced geopolitical risks and a flush of euros from the ECB, gives supportive backdrop for risky, higher-yielding assets. Large excess liquidity amidst low interest rates and low volatility environment suggests that Asian currencies are being caught in an Fx carry trade environment in which banks would borrow cheap funding denominated in low-yielding currencies, i.e. euro, to invest in higher yielding currencies. During the previous two LTROs, demand for peripheral European, i.e. Italian and Spanish, bonds heightened, pressing down peripheral countries’ borrowing cost to be closer to that of core European countries. But, given the current market condition in which spreads between core and peripheral government bond yields are already compressed to levels below the onset of the crisis, we believe the scope for carry trades within the euro area is now less attractive. Hence, we expect to see positive spillovers of TLTRO on EM assets to continue in the coming quarters. Fig 17. The VIX index shows volatility has crept down

towards a 7-year-low

0

10

20

30

40

50

60

70

80

90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

VIX


Emerging Asian assets still offer a pocket of values

During Q2/2014, Asian Fx has become more correlated to UST 10-year yield (10YUST) again which means that UST, or in other wo rds the Fed’s stance, is now the predominant factors driving Asian Fx movement . The short-term implication of this is the bearish outlook for USD-Asian Fx and EUR-Asian Fx, as long as the Fed remains dovish. Despite the re-correlation between the 10YUST and Asian Fx, we observed that Asian countries have become de-correlated in terms of external fundamentals and economic prospects. Looking both at the external fundamentals and economic prospects, we favour TWD, INR, MYR, and PHP for a medium-term play in comparison to other South East Asian currencies. But, we remain on the side-line for KRW.

15

TWD: Taiwan’s economy has been a bright spot for Asia. Exports recovery has been led by high demand for electronic products. While domestic economy is also supportive for the central bank to normalize rates in the coming months. Credit growth grew by 5%YoY in May. Yet, low inflation has permitted the central bank to keep rates steady at 1.875% for the past 12th consecutive quarters. But, this year El Nino poses risk to price stability, particularly for Taiwan as food price contributes to a near 26% of Taiwan’s CPI basket. On the other hand, we expect a gradual strengthening bias of the yuan to lend support to the Taiwan dollar. China’s economy is likely to gain momentum in the second half. Disposable income for both rural and urban population has bottomed out since 2013. Latest PMI for manufacturing sector also shows that export is poised for a rebound in H2/2014. Hence, we expect Chinese officials to become less active in trying to guide the yuan lower.

Fig 18. US assets remain the most dominant drivers of

Asian currencies Fig 19. Correlation between 10YUST and Asian

currencies has kept at high level since Q2/2014

-100

-80

-60

-40

-20

0

20

40

60

80

100

Dollar index S&P500 VIX index UST 10Y Yuan TWI

H1/2013 H2/2013 Q1/2014 Q2/2014

-100

-80

-60

-40

-20

0

20

40

60

80

100

Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14

Correlation of Asian Fx and UST10Y


Fig 20. High co-movement of 10YUST vs Asian Fx Fig 21. But, correlation of 10YUST is less strong on EM

stock markets

1.21.4

1.61.82.02.2

2.42.6

2.8

3.03.2

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

%

500520

540560580600

620640

660

680700

Index

10-year UST Asia Fx (right)

1.21.4

1.61.82.02.2

2.42.6

2.8

3.03.2

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

%

35

37

39

41

43

45

47$ bn

10-year UST FTSE Emerging Market ETF (right)


16

Fig 22. USDTWD moves in line with USDCNY Fig 23. PE ratios for Asian stock markets

6

6.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8

6.9

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

28.0

28.5

29.0

29.5

30.0

30.5

31.0

31.5

32.0

32.5

33.0

USDCNY Curncy (right) USDTWD Curncy

12

14

16

18

20

22

24

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14

Indonesia

Philippines

S&P500

Taiwan

India

Thailand

Singapore


INR: India’s economy is rebalancing in response to previous monetary policy and exchange rate adjustments. It has made much progress in accumulating foreign exchange reserves and re-balancing the economy to narrow its current account deficit which is positive for macroeconomic stability. Against stronger backdrop, core inflation has eased to three-month low in May, putting less pressure on the central bank to maintain rates at high levels. Since the prime minister election, the central bank has also tilted its hawkish tone towards a more dovish one to support higher demand for fiscal borrowing. Despite the surge in flows to India’s stock and bond markets, India’s stock market still remains attractive while PE ratio remains lower compared to most Asian markets. Nevertheless, Indian officials have been keen in intervening in the Fx markets to keep INR lower as observed by the large change in foreign exchange reserves. Fig 24. ‘FX reserves’, a proxy of Fx intervention Fig 25. IN quarterly inflows

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Indonesia Korea India Thailand Philippines Malay sia Singapore

USD,mn

-5,000

0

5,000

10,000

15,000

20,000

25,000

USD,mn

Current 3M ago Change (right)

-6000

-4000

-20000

2000

4000

6000

8000

10000

12000

14000

Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14

USD,mn

FDI inflows Equity inflows Bond inflows


MYR: Amidst rising inflation and accelerating loan growth, we expect the central bank to raise rates in the coming months. Although Bank Negara Malaysia (BNM) has not moved its overnight rate since its last hike in May 2011, we expect the BNM to join the rate-rise club soon. Malaysia’s bond and stock markets are relatively undervalued in comparison to other Asian markets. Its stock market has only rose by 10.9% since its trough this year in January 27, 2014. While accumulative inflows from non-residents to Malaysian bond market since the QE taper tantrum has been less than cumulative flows to South Korea, Indonesia, Philippines, and Thailand. Thus, the liquidity flush and attractive valuation makes MYR asset an attractive choice. PHP: The Bangko Sentral ng Pilipinas (BSP), on the other hand, has already begun its tightening cycle by raising bank’s reserve requirement ratio twice, and special deposit accounts (SDA) rate once so far this year. BSP Governor also said that the BSP is still

17

mindful of risks amidst slower Philippine June CPI and will adjust policy levers as appropriate to keep a lid on inflation and ensure financial stability are in check. The BSP might not be able to delay normalization cycle much longer given the acceleration in inflation and money supply growth. It next meets to review policy on July 31. Table 26. Stock market performance for major Asian markets

(Index Jan 2014=100) YTD Peak YTD Trough Current index Change from YTD trough

India 125.2 96.5 122.5 27.0%

Thailand 122.6 99.5 122.6 23.2%

Indonesia 116.3 96.5 116.1 20.3%

Philippines 117.0 97.6 115.4 18.2%

Taiwan 110.7 96.0 110.2 14.8%

S&P500 108.4 95.1 107.2 12.7%

Singapore 104.1 93.2 103.2 10.6%

Korea 102.5 95.9 101.7 6.0% Fig 27. BNM and BSP are likely to lead the

normalization cycle in South East Asia Fig 28. Philippines sees acceleration in both money

supply and inflationary pressure

0

1

2

3

4

5

6

7

8

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

%

Malaysia overnight rate Philippiens overnight rate

S.Korea overnight call rate Taiwan discount rate

0

5

10

15

20

25

30

35

40

45

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

%YoY

0

1

2

3

4

5

6

%YoY

Money supply (M3) growth CPI


Although South Korea is an all-time favourite for foreign investors, we believe Korean assets are now less appealing compared to other Asian Fx. Despite the solid export recovery, economic momentum is weakening since the ferry accident on April 16, 2014. Retail sales data has contracted to the lowest level in a year in April. Factory output contracted by 2.1%YoY in May and is likely to see slower growth as manufacturers have already built up large inventory. On the Fx front, the incoming Finance Minister Choi said that he will try to stabilize Fx market when being formally appointed, and that the government may have to cut 2014 GDP growth forecast from 3.9%. With the central bank being very active in trying to curb won appreciation over the past month, we have also not seen any evidence of inflows from euro area to KRW assets after the TLTRO. The spread between German bund and Korean government bond (KTB) yields has not compressed, suggesting there has not been a dramatic shift in demand for KTBs. Hence, we remain on the sideline for KRW given the weakening economic momentum and stretched valuations. Yet, one point to keep in mind is the re-correlation of UST also means greater risk and sensitivity of Asian currencies to swift shifts in the Fed’s stance and comments. Thus, given the short-term and speculative nature of the flows, these currencies will be prone to greater risk if volatility picks up, especially those with high correlation with 10YUST.

18

Fig 29. South Korean production is likely to be weighed

down by inventory built-up Fig 30. Spread between German bund and KTB yields

-10

0

10

20

30

40

50

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

%YoY

80

85

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95

100

105

110

115

120

125

Index

Industrial production Exports Inventory build up

0

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3

4

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6

7

2008 2009 2010 2011 2012 2013 2014

%

80

100

120

140

160

180

200

220

240

260

280

bps

German Bund 10Y Korean govt bond 10Y Spread


Fig 31. Comparison of correlation to 10YUST for each Asian currencies

-0.8

-0.7

-0.6 -0.5 -0.5 -0.5 -0.5 -0.5

-0.3-0.2

0.0

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1.0

COP AUD IDR VND NZD PHP MYR THB INR CNY HUF KRW MXN CZK BRL TKR

Correlation to UST10Y (current) Correlation to UST10Y (3M ago)


19

Bond market outlook for 2H2014 and a glimpse of 2015

� BoT’s V-shaped recovery implies a maintenance of policy rate at

2.0% in 2014 and possibly a start of normalization later in 2H2015

� Export performance remains one the key risks to Thai growth in the

long-term, especially when global trade is experiencing a structural

change

� Two main factors driving global markets are Fed’s and ECB’s dovish

stance, implying ample global liquidity, low interest rate and low

volatility environment i.e. a perfect combination for carry trades

� Will Thai assets benefit from the return of foreign inflows? Yes and

No. Relatively low return in Thailand provides little reason to be

bullish on Thai fixed income. Yet, Thai equities could benefit from

inflows especially after offshore investors had largely reduced their

holding

� June’s bond market conditions affirmed that interest rates will be

gradually rising. But with our view of range bound yield movement,

our medium duration still provides merit, particularly when 5-year

bond is the steepest part of the curve and will benefit from rolling

down strategy

� More exciting trading movement should come with the new

tentative supply plan in late September, almost the same time as

when QE program is ending

� A structural change in global bond market is expected in 2015; this

should lead to an adjustment towards further yield curve

steepening and higher required return by investors.

V-shaped recovery: Policy rate maintenance at 2.0% in 2014 and

possibly rate normalization later in 2H2015

After the takeover of the military government on May 22nd, Thailand’s political tensions eased; investors have expressed a more positive view on economic outlook; while BoT also sent the same message, in its Monetary Policy Report, June 2014. The forecast shows that in spite of a contraction in the first half of 2014, BoT expects to see a “V-shape” recovery in the second half, followed by a significant improvement in 2015. Functioning fiscal policy is seen as one of key positive factors adding supports to domestic demand. On the domestic instability side, inflationary pressure appears to resume an upward trend even though the National Council for Peace and Order (NCPO) helped peg gas price (LPG) and asked businesses not to adjust the prices of several consumer goods at least for the next 6 months.

20

On the external demand side, we expect to see clearer signs of G3’s economic recovery in the second half of this year and that usually means a more promising outlook for Thai exports as a growth driver. Anyhow, a structural shift in world trade structure poses key risk on Thai growth. As pointed out by the BoT, global trade volume has only expanded at a gradual pace over the past years; this goes to show that Thai exports would also be growing at a slow pace. At the same time, an increase FDI trend of putting both upstream and downstream industries within the same country has reduced interconnectivity and positive trade spillover within the region. Last but not least, a narrowing gap on unit labor costs between developed and emerging markets has also shifted production activities back to developed markets to be locally produced, reducing imports demand from Asia. Such structural shifts are in fact a key downside risks to GDP even for the long-term. In terms of policy implication, we think BoT’s projection of V-shaped recovery implies that there is no need for further monetary easing and that MPC would maintain policy rate at 2.0% at least until the year-end 2014. Based on BoT’s projection on growth and inflation outlook, we think that the timing of Thailand’s rate normalization would arrive in the second half of 2015. BoT’s communication of the growth story implies that we could be looking at two rate hikes to 2.50% at the end of 2015. It should be noted that this is based on the assumption that the Fed would keep rates low for an extended period of time and begin to normalize Fed fund rate after mid-2015. Fig 32. Global leading indicator and Thai exports Fig 33. KBank’s repo model

-6%

-4%

-2%

0%

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6%

8%

07 08 09 10 11 12 13 14

-30%

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-10%

0%

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30%

40%

50%

OECD global lead indicator Thailand's export growth

0.00.51.01.52.02.53.03.54.04.55.05.5

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

actual model

%


Fig 34. Probability distribution of GDP growth forecast

GDP ranges:% YoY 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

0.0 0.0 - - - - - - - -

0.0 0.0 - - - - - - - -

0.0 >12 - - - 4.0 3.0 1.0 - -

10.0 12.0 - - - 13.0 9.0 3.0 1.0 1.0

8.0 10.0 - - 4.0 25.0 21.0 9.0 5.0 4.0

6.0 8.0 - 2.0 18.0 29.0 28.0 19.0 12.0 11.0

4.0 6.0 - 16.0 33.0 19.0 23.0 26.0 21.0 19.0

2.0 4.0 3.0 39.0 29.0 7.0 12.0 23.0 25.0 24.0

0.0 2.0 36.0 33.0 12.0 2.0 4.0 13.0 20.0 20.0

-2.0 0.0 51.0 9.0 2.0 - 1.0 5.0 11.0 12.0

< -2.0 10.0 1.0 - - - 1.0 5.0 7.0

weighted average -0.3 2.3 4.2 7.4 6.7 4.6 3.2 2.9

Source: BoT -0.3 2.3 4.2 7.4 6.7 4.6 3.2 2.9

21

Fig 35. Probability distribution of core inflation forecast

Core CPI ranges: % YoY 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

0.0 0.0 - - - - - - - -

4.0 4.5 - - - - - - - -

3.5 4.0 - - 1.0 1.0 1.0 1.0 1.0 1.0

3.0 3.5 - 3.0 4.0 4.0 2.0 2.0 3.0 4.0

2.5 3.0 4.0 13.0 12.0 10.0 6.0 6.0 7.0 8.0

2.0 2.5 24.0 29.0 23.0 18.0 13.0 13.0 13.0 14.0

1.5 2.0 46.0 32.0 28.0 24.0 20.0 19.0 19.0 19.0

1.0 1.5 24.0 18.0 20.0 22.0 23.0 22.0 21.0 21.0

0.5 1.0 3.0 4.0 9.0 14.0 19.0 18.0 18.0 16.0

0.0 0.5 - 1.0 2.0 6.0 11.0 11.0 11.0 10.0

0.0 <0 - - - 2.0 6.0 7.0 7.0 6.0

weighted average 1.78 1.93 1.83 1.66 1.37 1.33 1.38 1.44

Source: BoT

June’s bond market conditions: Gradual rising yields

During June to the beginning of July, Thai bond yields with maturity between 2-10 years saw an increase of about 10-20bps, as investors priced out the possibility of further interest rate cut by the MPC. At the same time, some priced in a good economic rebound especially for next year, implied by BoT’s economic projection in June.

In line with our expectation, yields for the mid-curve and long-term bonds edged higher but at a gradual pace. The resume of functioning fiscal policy, prospects of higher spending needs and higher inflation provide little incentive for yield to stay subdued. Notably, yields on the front-end section unexpectedly picked up, mainly due to reallocation of funds into deposit programs which have recently offered attractive returns with low volatilities. Yields on 1-month up to 1-year bills, which had been tightly anchored with policy rate for quite some times, saw an increase of about 1-7bps during the period between June 6th and July 4th. Thai government yield curve shifted upward with bonds in the belly section seeing the largest losses, as reflected by falling 2-5 but higher 5-10 yield spread. We expect to see a continuation of range bound movement with some risk of further yield rising in 3Q2014 when there seems to be little new driving factor for Thai bond market. Anyhow, such

Fig 36. Thai yield curve saw an upward shift Fig 37. 2-5 and 5-10 spread

2.14

2.4

2.65

3.01

3.223.4

3.563.66

3.76 3.81

2.23

2.43

2.83

3.033.19

3.34 3.43.51

3.6

2.062.0

2.22.4

2.6

2.83.0

3.2

3.4

3.6

3.8

4.0

1y 2y 3y 4y 5y 6y 7y 8y 9y 10y

tenor

%

4-Jul 6-Jun 22-May

20

30

40

50

60

70

80

90

100

110

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

2-5 spread 5-10 spread

bps


22

upward pressure on yield should be rather limited, given no change in repo and only little room left for rates to climb higher based on our year-end targets. As for IRS market, the price-out of market’s perception on further monetary easing has been much more obvious than in government bond market. IRS rate has increased significantly over the past months. The 2- and 5-year IRS rate have picked up by about 25bps in June to early July, narrowing bond-swap spread to 20bps from 35bps during the recent peak in late-May. Even with the pickup in IRS rate, existing negative bond-swap spread indicates that there is still an opportunity to pay fixed rate on those tenors before spread narrows even more.

Perfect combination for risky-assets: Low interest rate and low

volatilities

From global markets’ perspective, there have been two main factors generating increased positivity towards Emerging Markets (EMs) again in the recent months. First is the Fed’s dovish stance to keep interest rate lower for longer period of time, even with U.S. economic data showing an impressive rebound from 1Q 2014. Second factor is ECB’s new easing measures to counter deflation risk. These factors are seen to help secure ample liquidity in the global markets, suppress interest rate and keep market volatilities subdued, i.e. a perfect combination for risky-asset investment. Fig 40. VIX index (volatility) is at its lowest since 2008 Fig 41. The performance of EM assets

0

10

20

30

40

50

60

70

80

90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

VIX

80

85

90

95

100

105

May-13 Aug-13 Nov-13 Feb-14 May-14

Emerging markets' stock index Emerging markets' total return on bonds

Index (May 2013 = 100)


In fact, we already observed such positive spillover towards EM in both stock and bond markets, as reflected by rising EM stock index as well as total return on bonds above the level observed in May 2013. Anyhow, we do not expect to see the rally being across the board and across all EM assets, foreign capital inflows should be moving more towards

Fig 38. Investors priced-out further rate cut Fig 39. Bond swap spread narrow

1.5

2.0

2.5

3.0

3.5

4.0

11 12 13 14

BOT repo 1yr IRS

%

2.5

2.7

2.9

3.1

3.3

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3.7

3.9

Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14

-40

-30

-20

-10

0

10

20

30

5Y bond-swap spread Government Bond 5Y IRS 5Y

% bps


23

equity assets. This is because stocks provide a more interesting return and choice for investment when investors are seeking for high yield products. The reason why we argue that fixed income market should benefit less than equity is because low interest rate environment has not only discouraged investment in developed markets’ fixed income, but also hurt the attractiveness of EM’s bonds. The figure shows that even though there is still some juice left in EM bonds, we doubt that it is sufficient to provide attractive returns to hoard substantial amount of money into such trade. The figure below showed that the return from carry trade (investing in 1-year sovereign EM bonds with the funding cost being 1-year Libor) for Thailand is not the most attractive, in comparison with other EM markets; Thailand’s carry returns offer about 1.6% vs. 3.6% average from other 19 EM countries. On the other hands, when accounting for FX volatilities for each EM markets (the idea similar to concept of Sharpe ratio or risk-adjusted returns), Thai assets climbs up the rank, yet again not the most attractive ones. Despite suitable market environment for carry trade, many also argue against such trading theme in the current period, citing reasons including geopolitical risks that may provoke unexpected volatilities and valuation that is already not so eye-catching given the level of potential systematic risk in fixed income assets. Fig 42. Environment for carry trade: Is there much juice

left in the selected EMs? Fig 43. Is there much juice left in the selected Ems

when accounting for FX volatility

10.49.5

7.8

6.3

4.4

3.1 3.0 2.9 2.6 2.5 2.0 1.9 1.6 1.6 1.50.5

-0.1 -0.4

4.5

7.9

-2

0

2

4

6

8

10

12

BZ PK IN TU ID VN CO PE NZ CH MA MX SK AU HU TH PH RU SO CZ

% Carry return for investing in 1-year soverign bond using 1-year libor as funding

13.0

6.3

3.2 2.9 2.3 2.2 2.2 2.1 1.5 1.4 1.3 1.2 1.1 0.9 0.80.2 -0.2

-0.4

4.02.5

-2

0

2

4

6

8

10

12

14

VN PE IN BZ PK ID CH TH MX MA NZ CO HU PH TU SK AU RU SO CZ

Sharpe ratio: Carry return deflated by FX volatility


In line with our reasoning above, we began to see some hints about asset reallocation towards Thai equities. The current investment pattern of offshore investors showed an unusual high interest in short-term bills with maturity less than a year. The figure below showed that foreign investors have been largely accumulating position in short-term bonds. This is suspected to represent foreign investors parking money before rotating into Thai equity market at a more favorable time or when stock valuation is less expensive. With regards to long-term bonds, foreign investors have consistently maintained their holding position but cautiously not adding more exposure to Thai markets. The figure below shows Thai fixed market is at par with foreign investors’ position compared May 2013, whereas some markets including South Korea and Indonesia have been the beneficiary of foreign capital flows return to the bond markets.

24

Bond market outlook for 2H2014 and a glimpse of 2015

We still expect to see bond yields moving within range bound over the next months; the return of foreign inflows will likely to benefit more for equity rather than fixed income assets. Anyhow, more exciting market conditions should come after the release new bond plan for FY2015. In fact, the tentative bond supply schedule at the end of September should come roughly at the same time as the finish of Fed’s asset purchase program (If the Fed continues with the current pattern of USD10bn at each meeting, there will be THB15bn left at October meeting). This should provide more catalyst for bond investors to trade and yield movement to see higher volatilities. Given our view of range bound yield movement, our m edium duration still provides merit for bond investors, particularly when 5-year bond yield is at the steepest part of the yield curve and there are benefits from roll ing down strategy. The 2-5 spread is currently 81bps, not so far from the steepest 2-5 point in several years of 100bps (seen in April 2014). The lack of new 5-year bond supply for July should increase the security’s premium. The current 5-year (interpolated) yield is at 3.21% (already standing above our year-end forecast); we do not expect to see a further increase from here over the next month. Against outlook of rising yields, we think that investors should try to offset negative effect from rising yield curve by entering a transaction of paying 5-year IRS. While we do not expect to see positive bond-swap spread but the gap should be narrower.

Fig 44. Foreign investors are parking money to invest

in risky assets Fig 45. Foreign inflows into Thai bond market

-50,000

-30,000

-10,000

10,000

30,000

50,000

70,000

90,000

110,000

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

<1 yr net buy / sell, 20-day moving sum, THB mn

>1yr net buy / sell, 20-day moving sum, THB mn

40

60

80

100

120

140

160


India IndonesiaMalaysia PhilippinesSouth Korea Thailand

Index (May 2013 = 100)

Source: CEIC, KBank Source: Bloomberg, KBank

Fig 46. Foreign inflows into Thai stock market Fig 47. Foreign holding in Thai stocks had edged below

long-term average

-40

-20

0

20

40

60

80

100

120

140

160

180


Thailand IndiaIndonesia PhilippinesSouth Korea Taiwan

Index (May 2013 = 100)

30

31

32

33

34

35

36

37

38

05 06 07 08 09 10 11 12 13 14

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Foreign ownership in Thai stock Average ownership since 2005 SET Index, right

% of market capitalization Index

Source: Bloomberg, KBank Source: KSecurities

25

The table below summarizes our view on each factor affecting Thai bond market outlook before drawing more conclusion about bond market scenario.

Fig 48. Key factors for bond market and their implication on yield curve

Factors 2H2014 2015 Our rationale

Economic growth Positive Negative

We expect to see only a gradual pick up in the Thai economy as there are still constraints for a rapid economic rebound. High household debt is seen to drag spending while the return of inflation would reduce spending power. At the same time, remaining uncertainties on Thai politics and the question on who is going to be the next government, including policy implementation risk could still weigh on new investment decision. We stay cautious on private activities especially when export (or the true driver of the economy) continues to see structural challenges. Investors are waiting to see more concrete FY2015 budget plan; markets are currently pricing in almost the same budget as FY2014. Large difference in terms of amount and channels of funding will lead to more movement on bond yields. The pickup of the economy in 2015 should play a less positive factor for bond market as the resume of risk-on sentiment would divert funds towards riskier assets rather than fixed income. This is especially when investors know that there is going to be a structural shift in global bond market, following global policy rate normalization.

Inflation Neutral Neutral

We expect inflation to pick up on cost-push factors, but NCPO’s measures to maintain consumer prices for 6 months should limit the pace of reflation in the short-term. Our 2014 headline inflation is expected to tick up to 2.6% and to 2.5% in 2015. Such figures continue to stay in line with Thailand’s long-term average inflation. Thus, we do not see much pressure from inflation on yield level.

Local investors Positive Positive

Local investors’ demand continued to support the market, especially for long-term local funds. Our chart below shows the annual growth rate of long-term investors’ NAV (including provident fund, retirement mutual fund, government pension fund, and social security fund) continues to grow roughly at the same pace as the size of government bond outstanding (excluding short-term bills). This implies that there is some level of cushion for Thai fixed income market from demand perspective.

Foreign investors Neutral Negative

We see less supporting role from offshore investors as positive demand-supply dynamics in Thai bonds decline. As elaborated above, low interest rate environment reduces the attractiveness of fixed income assets and equity investment should provide more interesting return in short-term horizon before policy rate normalization. The figure on unit holders’ redemption out of foreign bonds indicates that fixed income asset would have a difficult time especially next year; not only offshore funds would not show much interest in EM bonds, but it is the unit holders who would additional increase pressure on their fund managers through redemption, which has been the trend since QE tapering talk in 2013.

Bond supply Neutral Neutral

More exciting news from bond supply should come in late September. We expect to similar funding needed by the government, in comparison to FY2014, based on what NCPO reveals to the markets; FY2015 budget is expected to record THB75trn. Yet, the structure of bond issuance should give more idea for new investing strategies.

Valuation Negative Negative

Current valuation is rather tight especially for the long-term bonds. Our yield model indicates that 5- and 10-year bond yields decline in early 2014 were not been in line with the structural relationship. Based on the model, yield level should rise in the medium-term.

Note: Positive = positive for the bond market i.e. keep a downward pressure on bond yield, and vice versa Source: KBank’s view

26

As for the outlook in 2015, we view that a structural change in global bond market should lead to an adjustment towards further curve steepening bias. Our new 2-, 5- and 10-year yield targets are 3.0%, 4.2% and 4.7% respectively. The historical relationship between 2-10 yield spread and repo rate suggest that with policy rate edging higher to 2.50% by year-end 2015, the 2-10 yield spread, on average, should be about 150bps. Given that the change in bond market to be a structural shift, we add about 20bps to the 2-10 spread, representing higher required risk premium by investors. Anyhow, a word of caution is here that our scenario is based on the assumption that Fed fund rate hike would materialize in 2H2015.

Fig 49. Long-term local investors provides cushion for

Thai bond markets Fig 50. Fixed income fund managers are getting

pressure from large redemption

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 2013

-5%

0%

5%

10%

15%

20%

Gvernment bond outstanding to GDP Sum of long-term investors' NAV to GDP

Governmentbond outstading growth, right Long-term investors' NAV growth, right

% GDP YoY growth

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

08 09 10 11 12 13 14

PIMCO foreign bond fund, cumulative inflows / redemption, USD million

Source: AIMC, KBank Source: Bloomberg, KBank

Fig 51. 2-year yield forecast Fig 52. 5-year yield forecast

0.0

1.0

2.0

3.0

4.0

5.0

6.0

03 04 05 06 07 08 09 10 11 12 13 14 15

actual model

1

2

3

4

5

6

7

03 04 05 06 07 08 09 10 11 12 13 14 15

actual model


Fig 53. 10-year yield forecast Fig 54. Historical 2-10 spread vs. repo

1

2

3

4

5

6

7

03 04 05 06 07 08 09 10 11 12 13 14 15

actual model

2, 138

y = -64.797x + 305.15

R2 = 0.5561

-50

0

50

100

150

200

250

300

350

400

1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.75 5.00

BOT repo - policy rate, %

2 - 10 spreads, bps


27

Economic Update

� May economic indicators showed signs of improvement, MoM, for the second month in a row, signaling that the Thai economy could

bounce back from bottom in this quarter.

� Nevertheless, over-year indicators still contracted due to a high 2013 base. Therefore, domestic spending should begin to recover

in the upcoming month since political tension has eased.

� 2014 GDP growth has been revised upward to 2.3%, owing to improving domestic demand, while the Thai economy will likely

expand by 4.0% next year.

� A gradual global economic recovery remains in sight, though growth has been modest in most major economies.

2013 2014 2014

Units: YoY %, or indicated otherwise 3Q 4Q 1Q YTD. Mar Apr May Jun

Private Consumption Index (PCI) 0.3 -2.2 -0.9 -1.6 -1.2 -1.2 -0.8 -0.3 • Sales Volume of Benzine and Gasohol 6.6 11.1 9.8 -0.1 0.3 0.3 1.6 0.3 • Value-added Tax at 1995 prices -0.5 -7.2 -0.9 -0.3 0.0 -1.3 -1.3 2.1 • Imports of Consumer Goods at 1995 prices 2.3 -2.6 -0.9 -8.3 -7.0 0.3 -0.8 -8.5 • Passenger Car Sales -6.1 -24.8 -39.7 -55.3 -50.1 -55.8 -34.4 -44.4 • Motorcycle Sales -5.9 -8.6 -14.7 -21.4 -20.8 -18.3 -22.4 -17.8

Private Investment Index (PII) -2.6 -3.5 -7.9 -6.1 -4.5 -6.1 -4.8 -2.9

• Sales Volume of Domestic Cement 10.0 8.5 3.7 0.4 0.2 0.4 6.6 -6.0

• Sales Volume of Commercial Cars -8.4 -26.2 -24.0 -36.6 -34.9 -37.5 -32.3 -31.7 • Imports of Capital Goods at 1995 prices -9.6 -9.3 -15.3 -7.5 -4.9 -2.2 -0.7 -1.3 • Value of BOI Applications -6.2 -61.1 -13.9 -13.2 -42.6 48.4 -81.0 -19.8

Manufacturing Production Index -3.2 -3.5 -7.1 -7.1 -5.9 -10.5 -4.1 -4.1 • Capacity Utilization 64.4 63.9 62.1 61.8 60.7 64.5 56.4 61.4

Agriculture Production Index -1.3 -7.6 4.3 3.9 4.8 2.4 5.2 6.9 • Agriculture Price Index -0.3 2.0 1.6 -0.1 -3.0 -0.3 -5.8 -8.6

Exports (in $) -0.2 -1.8 -1.0 -0.8 -0.9 -2.7 -0.9 -1.2 • Unit Value -0.5 -0.6 -1.2 -1.6 -1.4 -1.4 -1.0 -1.1 • Volume 0.3 -1.2 0.2 0.9 0.5 -1.3 0.1 -0.1

Imports (in $) -0.4 -2.9 -7.6 -15.0 -13.3 -13.7 -13.8 -7.7 • Unit Value -2.1 -2.0 -1.4 -1.4 -1.1 -1.2 -0.9 -0.3 • Volume 1.7 -0.8 -6.3 -13.8 -12.3 -12.6 -13.0 -7.4

Trade Balance ($ millions) 6,355 5,033 3,849 6,519 8,708 3,480 559 1,629 Current Account ($ millions) -2,790 429 2,962 8,226 6,919 2,898 -643 -664 Broad Money 7.3 7.1 7.3 6.4 4.4 6.4 5.9 4.4

Headline CPI 2.2 1.7 1.7 2.0 2.2 2.1 2.4 2.6 2.4 USD/THB (Reference Rate) 30.732 31.486 31.737 32.663 32.559 32.394 32.320 32.530 32.514

Sources: BOT, MOC, OAE, and OIE

The Thai economy is expected to bottom out in 2Q14

May economic indicators showed signs of improvement overall MoM for the second consecutive month, signaling that the Thai e conomy could bounce back from bottom during this quarter. There was some recovery seen in the Manufacturing Production Index (MPI) at 1.1% MoM, s.a., as well as in the Private Consumption Index (PCI) to 0.5% MoM, s.a., and the Private Investment Index (PII) to 0.6% MoM, s.a.

Kanang Duangmanee, KResearch [email protected]

28

Nevertheless, given the high 2013 base, those indicators had still contracted. The May PCI fell -0.3% YoY, from -0.8% YoY last month, owing to a contraction in spending on durable goods such as passenger cars (-44.4% YoY) and motorcycles (-17.8% YoY), as well as some non-durable goods, e.g., fuel (-3.6% YoY) and imports of consumer goods (-8.5% YoY), while household electric power costs rose for a second consecutive month. In terms of investment, the May PII had dropped by -2.9% YoY, versus -4.8% in April, as investors awaited news on developments in the political turmoil at that time. Investments in machinery and equipment contracted along with falling commercial vehicle sales (-31.7% YoY) and imports of capital goods (-1.3% YoY), while a slowdown seen in construction sector investments was in line with falling new construction permits (-0.7% YoY) and lower domestic cement sales. It is expected that both the PCI and PII may pick up within the upcoming month, wherein consumer and investor confidence could improve given that political tension has eased following the coup on May 22, coupled with many economic stimuli that have been put into effect by the National Council for Peace and Order (NCPO). There is no doubt that the declaration of martial law, along with the nationwide curfew imposed by the NCPO in May had affected tourism, since many countries issued travel advisory warnings about Thailand. The number of foreign tourists thus plunged -10.7% YoY and -5.4% MoM; tourist arrivals from Asia and the Middle East also decreased.

Exports continued to deliver disappointing performance in May, dropping -1.2% YoY, as a result of falling agricultural prices, especially for rubber, cassava and rice, though the export volume of these products increased. Export demand for automobiles, chemical products, steel and other metals from Asian economies fell during the month, while exports of manufactured products to EU countries and the US expanded.

Relative to destinations, exports to ASEAN accounted for 27.5% of our total exports in May, followed by those to China, Europe and US at 10.5%, 11.1% and 10.7% of the total, respectively, while exports to Japan fell to 9.4% of the total. Year-on-year, the MPI contracted -4.1% YoY on a high 2013 base in automobile production last year, falling demand for electronic appliances, as well as a supply shortage affecting frozen shrimp production due to a disease outbreak. Meanwhile,

Fig1. Private Consumption and Investment edged

upward over -month, though still contracted YoY Fig 2. The number of tourist arrivals plunged in May

-0.3%

-2.9%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

May-13

Jun-13

Jul-13

Aug-13

Sep

-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

%YoYPCI (YoY)(LHS) PII (YoY)(LHS)

PCI (MoM)(RHS) PII (MoM)(RHS)

1,737

800

1,300

1,800

2,300

2,800

Jan Apr Jul Oct

No. of Foreign Tourist Arrivals

(Thousand)

2011 2012 2013 2014

Source: BOT, KResearch Sources: BOT, KResearch

29

petroleum production increased over a low 2013 base because of a temporary maintenance shutdowns at petroleum refineries in May of last year.

The Headline CPI eased in June after hitting a 14-month high in May, rising 2.35% YoY, and 0.1% MoM. Meanwhile, the Core CPI, excluding volatile energy and food prices, had eased to 1.71% YoY, compared to a 1.75% YoY increase last month, due largely to the NCPO's stimuli that included a freeze on diesel fuel and household cooking gas prices, a price reduction on petrol and gasohol plus price controls over hundreds of other goods. 2014 GDP forecast has been revised upward to 2.3% on recovering

domestic demand, while growth rate next year is projected at 4.0% An improving political situation, along with the NC PO economic roadmap, has had a significant effect on the vigor of the Thai econo mic recovery. Several economic stimuli have been introduced so far, e.g., assistance to farmers vis-à-vis payouts on the rice brokerage program, production cost-cutting measures; initiatives to boost private and public spending such as the approval of pending BOI investment promotions; accelerated FY2014 budgetary disbursements and preparation of the FY2015 budget. Exports are expected to improve in 2H14 along with expected economic recoveries within many trade partner economies. We expect these factors to help restore confidence and support the Thai economy during 2H14, resulting in GDP growth of 4.3%YoY for the period (forecast range of 3.3-4.7%), being much higher than the 0.2%YoY growth during 1H14. As for overall growth in 2014, even though we have revised our forecast for export growth this year downward to 3% due to disappointing export performance during 1H14, the Thai economy will likely get a boost of 1.0-1.5% from NCPO economic stimuli programs. As a consequence, we have revised our projection for Thai GDP growth this year to 2.3% (forecast range of 1.8-2.6%), up from our previous forecast of 1.8% (forecast range of 1.3-2.4%). Therefore, we will be keeping our eyes on several factors such as the pace of the global economic recovery that may affect the outlook for Thai export growth, as well as on the violent turmoil in Iraq that could affect global oil prices and put more pressure on domestic inflation during upcoming months.

Fig 3. Export performance was still weak in May, while

MPI contracted Fig 4. Exports to EU countries and US rose

-1.20%

-4.10%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct-1

3

Nov-

13

Dec-

13

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

%YoY

Export (YoY) MPI (YoY)

-15%

-10%

-5%

0%

5%

10%

15%

20%

ASEAN EU China Japan USA

Jan-14 Feb-14 Mar-14 Apr-14 May-14

Source: BOT, KResearch Sources: BOT, KResearch

30

Looking ahead to next year, we believe that the pac e of economic recovery should continue as all major components of GDP are expecte d to perform better. With political situation becoming more stable, rising in vestor confidence, along with improving exports demand, we expect Thai economy gr owth should reach 4.0% in 2015 (forecast range of 3.5-4.8%).

Indicators 2013(%YoY or otherw ise indicated) Base Case Forecast Range Base Case Forecast Range

Thai GDP Growth 2.9 2.3 1.8-2.6 4.0 3.5-4.8

Private Consumption 0.3 0.8 0.3-1.0 3.3 2.8-3.7

Investment -2.0 -1.2 -1.7 to -0.7 6.0 5.3-6.6

Exports -0.2 3.0 2.0-4.0 3.5 2.5-5.0

Imports -0.4 -2.5 -4.0 to -1.0 4.8 3.5-6.0

Current Account Balance (USD Bn) -2.8 9.5 7.5-9.8 7.0 5.7-8.0

Headline CPI 2.2 2.6 2.4-2.8 2.5 2.2-2.8

Avg. Dubai Crude Prices (USD/Barrel) 105.4 106.0 105.0 -107.0 105.0 104.0-107.0

2014 2015

Source: NESDB, BOT, MOC, and KResearch preliminary forecast as of July 8, 2014

Global Economy: Growth recovering at modest pace in major

economies

Recent economic data confirms the view that the US economic recovery is still on track. A surge in Non-Farm Payrolls indicates that the US labor market added 288,000 jobs in June and their unemployment rate had fallen to a new post-recession low of 6.1%, which was a relief after the first quarter GDP growth was revised to show a -2.9% contraction, annualized. Their Consumer Confidence Index had jumped to 6-1/2 year high, though. The significant improvement in their job market, along with other data, has turned attention to the Fed’s monetary policies. Even though it seems that the Fed will hold on to their view that the US labor market has abundant openings and is slack – meaning that the Fed could continue to keep interest rates low to boost economic growth – markets are speculating that the Fed may raise rates sooner than currently thought will occur in mid-2015. The European Central Bank (ECB) kept their main refinancing rate on hold at their July meeting after lowering their deposit rate to -0.1% and their main refinancing rate to 0.15% in June, along with other measures such as offering banks a targeted long-term refinancing operation (LTRO) incentive to persuade them to lend. The ECB’s statement stated that they believe this combination of further easing and other monetary operations to take place over coming months will support bank lending. With that view, it is likely that ECB interest rates will remain at present levels for an extended period. Should banks fail to boost lending and the longer-term outlook for inflation deteriorate further, they may need to take other action and quantitative easing (QE) could be brought back to the table again.

Fig 5. 2014 GDP forecast has been revised upward to 2.3%, while growth rate is projected at 4.0% in 2015

31

The Bank of Japan (BOJ)’s Tankan survey shows that their sentiment index for large manufacturers had fallen from 17 in the March quarter to 12 in the June quarter, as expected due to the April consumption tax hike. However, large manufacturers expect business conditions to improve over the next three months and intend to increase their fixed investments during the current fiscal year, which adds to signs that the Japanese economic recovery will get back on track after a slip during 2Q14. As for China, in an attempt to boost economic growth this year, the authorities there launched certain targeted measures, e.g., tax cuts, reducing the amount of cash that some banks have to hold as reserves and instructing regional governments to quicken their spending. Thus, it is possible that their 2Q14 GDP growth could perform better than the first quarter. Also, their Purchasing Manager Index (PMI) had increased for the fourth month in a row during June, suggesting that there was a recovery in some exports and production. Nevertheless, a cooling property sector and high local government debt levels remain key risks to their economy.

Fig 6. US Non-Farm Payrolls surged in June Fig 7. US CCI index jumped to a 6-1/2 year high

0

50

100

150

200

250

300

350

400

4.55.05.56.06.57.07.58.08.59.0

Jan-

12

Apr

-12

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

'000

Per

cent

Change in Non-Farm Payroll, RHS Unemployment Rate

9,500

10,000

10,500

11,000

11,500

12,000

0

10

20

30

40

50

60

70

80

90

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

US

D B

illi

on

US CCI Personal Consumption Expenditures, RHS

Source: Bloomberg, KResearch Source: Bloomberg, KResearch

Fig 6. US Non-Farm Payrolls surged in June Fig 7. US CCI index jumped to a 6-1/2 year high

-15

-10

-5

0

5

10

15

20

Q1

201

2

Q2

201

2

Q3

201

2

Q4

201

2

Q1

201

3

Q2

201

3

Q3

201

3

Q4

201

3

Q1

201

4

Q2

201

4

Tankan Business Conditions Tankan Fixed Investments All Enterprises

4445464748495051525354

Jan-

12

Ap

r-12

Jul-1

2

Oct

-12

Jan-

13

Ap

r-13

Jul-1

3

Oct

-13

Jan-

14

Ap

r-14

HSBC PMI Of f icial PMI

Source: Bloomberg, KResearch Source: Bloomberg, KResearch

32

Outlook for Next Month

The June MPI will continue to contract YoY, but at a slower pace than previous month. Exports could return to positive territory on a low 2013 base, as well as on expectations toward rising demand from trading partners. July Headline Inflation will likely hover around the same level as during June, owing to the NCPO measure to maintain diesel fuel and LPG prices.

33

Disclaimer For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained from sources we believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained herein. Further information on the securities referred to herein may be obtained upon request. PLEASE NOTE: KS and Macquarie Securities (Thailand) Limited have entered into an exclusive strategic alliance agreement to broaden and deepen the scope of services provided to each parties respective clients. With effective from Wednesday 2nd, May 2012, research reports produced by KS may refer to information obtained from research reports prepared by Macquarie Securities (Thailand) Limited (“MSTL”), with the contribution of KS, and/or any entity within Macquarie Group (“Macquarie”). MSTL and Macquarie are not responsible for the content of KS research reports. KS strongly believes that the changes will enable us to provide our best research services and we apologize for any inconvenience caused from the change-over.

Please refer to page 13 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie may be an Issuer of Derivative Warrants on securities mentioned in this report. Kasikorn Securities Public Company Limited may be the issuer of structured notes on

securities mentioned in this report.

THAILAND

Insider transaction ratio

Shows the ratio of buy to sell transactions on a weekly basis, plotted against the SET Index

Source: SET, Macquarie Research, July 2014

MacqThai New Money Ideas

BBG code Rec

Mkt cap

(US$bn)

ADV

(US$m)

Price

(Bt)

TP

(Bt)

TSR

(%)

Domestic plays

KKP O 1.17 3.0 45.25 53.00 23

TISCO O 1.03 1.8 41.75 52.00 29

MAJOR O 0.52 1.4 19.00 22.00 20

SPALI O 1.18 4.6 22.20 26.00 22

External plays

PTTGC O 9.29 25.9 66.75 91.00 41

PTTEP O 19.73 24.4 161.00 198.00 27

TOP O 3.27 6.1 52.00 69.00 37

SCC O 17.33 20.2 468.00 495.00 9

Removing

PS O 2.04 3.1 29.75 29.00 0

STANLY O 0.54 0.1 227.00 243.00 10

SAT O 0.24 1.2 18.00 19.00 9

Adding

SCB O 18.33 38.7 175.00 208.00 22

AP O 0.56 3.0 6.35 7.00 14

PSL O 0.80 1.3 25.00 32.50 32

Share prices as of 3 July 2014.

Source: Bloomberg, Macquarie Research, July 2014

Analyst(s) David Gambrill +66 2 694 7753 [email protected] Nathapol Pongsukcharoenkul +66 2 694 7726 [email protected] Josh Holcroft +852 3922 1279 [email protected]

4 July 2014

Thailand Strategy Update Who is doing what? Event

Happier, but not yet happy. The steady progress the Junta is making in

stabilising the economy, along with evidence that the economy is bottoming, a

general uplift we are seeing in domestic sentiment and the increased talk of a

major reform agenda all combine to make us feel happier about investing in

Thailand. But not yet happy. Market valuations remain stretched, earnings

cuts continue, and as shown in the chart on the left, the insider transaction

ratio has turned decisively negative.

Impact

Three out, three in.... We remove three stocks from the MacqThai New

Money Ideas this month, all due to a lack of upside. After a good run, we take

PS off the list as well as remove the two auto parts plays SAT and STANLY.

We want to keep our domestic exposure focused on banks and property and

so add both SCB and AP to the list as our second picks in their respective

sectors. Finally we add PSL into our external plays. Valuation is the key

theme behind our stock selection as we continue to avoid sectors and stocks

on high multiples. We view Property and Banks as the relatively inexpensive

ways to gain exposure to the domestic market, and we feel both sectors have

underappreciated structural growth stories.

Earnings estimates again drifting lower. After a brief pause in the earnings

cuts in late May, June saw a further 1.5% trimmed from current year earnings.

Bloomberg Consensus EPS for the market pulled back to a new low of 101.45

as 1Q actual results were digested by the market. Implied growth for this year

is down to 6.5%, (we calculate 2013 SET EPS at 95.3). A smaller cut was fed

through to 2015, so there is actually a lift in implied consensus market

earnings growth for 2015 to 14.9% from 14.2% at end-May.

Simply not attractive. Based on Datastream consensus estimates, the

market is currently on a rolling 12-mth forward PER of 13.7x which is now

approaching two standard deviations above its post-2010 average of 11.9x.

We acknowledge the growing possibility that a sustained reform agenda could

lift confidence in longer term growth rates, justifying the current multiple. But

as we highlight, there are material risks to this view as well. So while the shift

is currently toward a more constructive market environment, we remain

cautious on potential for a rapid de-rating should the risks begin to

materialize.

Quant’s of interest. In the Quant Corner this month, Josh Holcroft highlights

a rebound in analyst sentiment and a switch away from value to high multiple

stocks offering high growth (details on pages 7 & 8).

Outlook

From a regional perspective, our strategist Viktor Shvets remains underweight

Thailand but in light of the positive start made by the Junta, he has reduced

the extent of his Thai underweight. From the country view, our central

concerns are the market’s stretched valuations and the earnings outlook

which we believe is still relatively subdued.

0.00

0.20

0.40

0.60

0.80

1.00

1200

1300

1400

1500

1600

1700

Ja

n-1

3

Ma

r-1

3

Ma

y-1

3

Ju

l-13

Se

p-1

3

No

v-1

3

Ja

n-1

4

Ma

r-1

4

Ma

y-1

4

SET (LHS) Weekly Ratio 0.5x

http://www.macquarie.com/research/disclosures

https://www.macquarieresearch.com/rp/d/r/publication.do?f=E&pub_id=7236480&file_name=WhatCaughtMyEye030714e184265.pdf&uid=MTI2Njgw

https://www.macquarieresearch.com/rp/d/r/publication.do?f=E&pub_id=7236480&file_name=WhatCaughtMyEye030714e184265.pdf&uid=MTI2Njgw

KSecurities | Macquarie Thailand Strategy Update

4 July 2014 2

Reform or relapse?

We are impressed. To date, the Junta have done a very good job in not just stabilising the

economy and lifting sentiment, but also in setting up what looks increasingly like a broad-based

reform agenda. And it is starting to gain momentum. While we had expected a pro-active reform

agenda, it is the scope that has surprised us. Rather than simply focusing on political and

governance reform – both of which are critical – there is clearly a deeper understanding that

Thailand faces other structural challenges that, if not addressed, will lower long term growth

potential. These challenges revolve around education, wealth distribution and demographic

structure.

Addressing demographic structure would likely be via a ‘work-around’ solution, with improving

infrastructure linkages with neighbouring countries to position Thailand as a service economy

for the broader region as a way to tap into the potential for a demographic dividend in these

countries. We believe the other key strategy for addressing demographic structure, allowing

permanent immigration, will likely remain off the table.

On a superficial level, education appears to be a lost opportunity given the existing age

structure of the population. But there are gains to be made in providing further education to

those already in the work force, and this is a key strategy that if pursued could help address

Thailand’s lack of productivity gains. Reform of the school based education system is also

likely to come into focus.

A critical step in addressing wealth distribution would be the introduction of a land tax. This

has been long promoted by finance ministry officials but could never get adequate support to

be put before parliament. Many political families happen to be large land owners, so it is

perhaps understandable why this never progressed. This issue has yet to be formerly put in

front of the Junta, but we would view it as a critical step in confirming the depth of the desire to

push for substantive reform.

A feel good factor for the market, but still early days... and it is a bumpy road. The Junta’s

moves to stabilize the economy appear to have proven effective. There is also greater recognition

that Bank of Thailand’s prudent management of both monetary policy and financial sector

supervision provides a strong underpinning for the economy – a point we have made repeatedly

since mid-2013 with our argument that it will be a ‘benign tail’ to the current economic cycle. There

is clearly an improvement in domestic confidence and increased talk of a reform program feeds

into the optimism. That said, we do not expect it to be a completely smooth road. Tough choices

still have to be made in areas such as energy prices, long term income support for the agricultural

sector and even in areas such as telecom regulation (not again!). There is also an ongoing purge

of the civil service to depoliticise key posts, and corruption investigations represent a clear and

present danger to some. It has to be expected that while popular support for the Junta is growing,

resentment toward them will also be gaining traction in certain areas. The Junta will be

transitioning into an interim government over the next three months. Any material policy missteps

or scandals may weaken the ability of this government to implement the Junta’s plans effectively.

Where does that leave us? We have previously outlined four growth scenarios for the economy

and the market:

Goldilocks – a robust recovery in the economy and earnings into 2014.

Baby bear – lower growth for longer, both for GDP and earnings

Mama bear – more severe impact on the economy threatens employment and asset quality

Papa bear – negative external factors combine with political impacts for a full blown financial

crisis.

Our base case is Baby bear – with risks to upside and Goldilocks, or downside to Mama bear.

Progress over the last month suggests risks of mama bear are receding, and goldilocks is

becoming a real potential outcome. What is convenient for us is that our suggested stock selection

follows the same positioning for both goldilocks and baby bear – remain long the domestic sectors

that are fundamentally attractive: Banks and Property. We acknowledge that both sectors are

precisely the wrong sectors to be positioned in for mama bear, so a decline in the risk of mama

bear provides a sense of relief. As discussed on page 6, we keep with banks and property as the

two key sectors for domestic plays within our MacqThai New Money Ideas.


4 July 2014 3

The market: Who is doing what?

Earnings estimates again drifting lower. After a brief pause in the earnings cuts in late May, a

further 1.5% was trimmed from current year earnings in June.

Bloomberg Consensus EPS for the market pulled back to a new low of 101.45 in late June as

1Q actual results were digested by the market.

Implied growth for this year is down to 6.5% (we calculate 2013 SET EPS at 95.3). While we

still see moderate risk to the downside, the post coup improvement in both consumer and

business sentiment is reducing that risk. A smaller cut was fed through to 2015, which lifts

implied consensus market earnings growth for 2015 to 14.9% from 14.2% at end-May.

On current Bloomberg consensus, the SET is trading on 2014E PER of 14.7x and 12.8x for

2015E. Based on Datastream consensus estimates, the market is currently on a rolling 12mth

forward PER of 13.8x and is now approaching two standard deviations above its post-2010

average of 11.9x.

We maintain our view that the market multiple is too demanding. We acknowledge the

growing possibility that a sustained reform agenda could lift confidence in longer term growth

rates, justifying the current multiple. But as we highlight, there are material risks to this view as

well. So while the shift is currently toward a market environment that is more constructive, we

remain cautious on potential for a rapid de-rating should the risks start to materialize.

Fig 1 SET Index Consensus EPS

Fig 2 SET Index Consensus EPS Growth

Source: Bloomberg, Macquarie Research, July 2014 Source: Bloomberg, Macquarie Research, July 2014

Fig 3 SET Index forward PER since 2010 based on current consensus

Source: DataStream, Macquarie Research, July 2014

40.00

60.00

80.00

100.00

120.00

140.00

160.00

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

2009 2010 2011 2012

2013 2014 2015 2016

SET Index EPS (Bt/sh)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-142010 2011

2012 2013

2014 2015

SET Index EPS Growth (%)

8

9

10

11

12

13

14

15

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Fwd P/ELT avg. Fwd PER =12.0 Current Fwd PER = 13.8


4 July 2014 4

What keeps us nervous... Insiders. What reinforces our caution is the deterioration in the insider

transaction ratio over the last few weeks. It has turned decisively negative as insiders choose to

take money off the table, despite the improvement in overall market sentiment. The second

investor group voting with their wallets has been the local retail investors who have now joined the

foreign selling. Taking up the slack has been the local institutions and local prop desks.

We continue to view the insiders as signally that the underlying fundamental performance of

listed companies may not be matching with the movements in their underlying equity prices –

motivating the insiders to sell into the strength as they did in early 2013 (Fig 6). This is why we

remain cautious on potential for further earnings disappointments.

The positive positioning by local prop desks in the market since the start of the year does not

help calm our nerves. There is potential for these positions to quickly reverse.

There are risks to the upside. Local institutions continue to point to ample domestic liquidity

that is driving the market higher, and given the weight of YTD foreign selling, there is potential

for a turn in the foreign tide should confidence in a real reform program build.

Fig 4 Net Buy Sell by Investor types

Local Institution Proprietary Trading Foreign Investor Local Investor Net Buy/(Sell) Net Buy/(Sell) Net Buy/(Sell) Net Buy/(Sell)

30-Jun-14 (35) (272) 2,398 (2,091) 27-Jun-14 668 751 1,915 (3,334) 26-Jun-14 3,074 (827) (49) (2,198) 25-Jun-14 152 89 (899) 658 24-Jun-14 (793) (221) (202) 1,217 23-Jun-14 681 803 (654) (831) 20-Jun-14 2,632 (946) (365) (1,321) 19-Jun-14 3,480 (259) (3,851) 630 June 6,823 2,917 (357) (9,383) May 18,012 1,643 (35,760) 16,105 April 3,130 (14) 15,872 (18,988) March (3,671) 2,635 14,254 (13,218) February 14,148 1,016 (21,377) 6,213 2014 January 3,475 (520) (13,665) 10,710 2013 December 16,931 (2,680) (40,584) 26,333 November 10,071 2,454 (48,075) 35,550 2014 YTD 41,917 7,677 (41,034) (8,561) 2013 108,163 (1,723) (193,911) 87,470 2012 (24,302) 7,256 76,388 (59,342) 2011 (29,149) 1,307 (5,119) 32,962 2010 (15,200) (449) 81,724 (66,075) 2008 45,177 924 (162,346) 116,246

Source: Exchange of Thailand, Macquarie Research, July 2014

Fig 5 Foreign ownership of SET 50

Fig 6 Insider trading: Buy vs Sell transactions

Source: SET, Macquarie Research, July 2014 Source: SET, Macquarie Research, July 2014

30.00

32.00

34.00

36.00

38.00

40.00

Jan-0

6

May-0

6

Sep

-06

Jan-0

7

May-0

7

Sep

-07

Jan-0

8

May-0

8

Sep

-08

Jan-0

9

May-0

9

Sep

-09

Jan-1

0

May-1

0

Sep

-10

Jan-1

1

May-1

1

Sep

-11

Ja

n-1

2

May-1

2

Sep

-12

Jan-1

3

May-1

3

Sep

-13

Ja

n-1

4

Ma

y-1

4

% foreign holding

SET 50

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1200

1250

1300

1350

1400

1450

1500

1550

1600

1650

1700

Jan

-13

Mar-

13

Ma

y-1

3

Jul-

13

Se

p-1

3

Nov-1

3

Jan

-14

Mar-

14

May-1

4

SET (LHS) Weekly Ratio 0.5x


4 July 2014 5

Fig 7 Daily domestic fund primary mkt flows - June Fig 8 Monthly domestic fund primary mkt flows

Source: KSEC, SET, AIMC, Macquarie Research, July 2014 Source: KSEC, SET, AIMC, Macquarie Research, July 2014

Fig 9 Foreign ownership - top five gainers and losers

Change 1 wk (%) Change 4 wks (%) Change 3 months (%) Change YTD (%)

Gainers Gainers Gainers Gainers MAJOR 0.5 ERW 2.2 SAT 3.1 DCC 9.8 BTS 0.4 TRUE 2.0 ERW 2.9 SAT 6.0 AMATA 0.3 AP 1.2 TRUE 2.6 ERW 4.0 BGH 0.3 HEMRAJ 1.1 IVL 2.5 SIRI 3.6 TRUE 0.2 AMATA 1.1 BECL 1.9 TRUE 2.6 Losers Losers Losers Losers LPN -0.8 LPN -3.0 TICON -5.7 SPALI -10.5 TICON -0.6 TICON -2.0 SPALI -4.7 TICON -7.7 ADVANC -0.5 HANA -1.4 LPN -3.9 LPN -4.7 HEMRAJ -0.5 MCOT -1.2 ROBINS -1.9 BTSGIF -4.5 QH -0.4 ADVANC -1.1 TUF -1.8 CPF -4.0

Source: SET, Macquarie Research, July 2014

Thailand Corporate Calendar – July 2014

MON TUE WED THU FRI

1-Jul 2-Jul 3-Jul 4-Jul

7-Jul 8-Jul 9-Jul 10-Jul 11-Jul

XD [email protected]



28-Jul 29-Jul 30-Jul 31-Jul

XR 2.5725:1 @6.45

XD = Ex-date for cash dividend XD (s) = Ex-date for stock dividend XW = Ex-date for new warrant subscription XR = Ex-right for common stocks PD = Dividend payment date NL = New listing MAI = Market of Alternative Investment

Source: Stock Exchange of Thailand, Bloomberg, Macquarie Research, July 2014

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1 4 7 10 13 16 19 22 25 28 31

2012 2013 2014

- - - - - -

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


4 July 2014 6

Stock and sector preferences

Three out, three in... We remove three stocks from the New Money Ideas this month, all due to a

lack of upside. PS has had a fantastic run, up nearly 80% since the start of the year, into which

Patti has downgraded to Neutral and we remove PS from the list. We want to maintain exposure

to property and keep SUPALI on the list and add AP, now Patti’s 2nd

pick in the sector. As we have

said consistently for many months now, we still like Property and Banks as the relatively

inexpensive ways to gain exposure to the domestic market, and we feel both sectors have

underappreciated structural growth stories. We are backing this up by adding Passakorn’s 2nd

pick

in the sector to the New Money Ideas - SCB.

... including a shift in our small cap externals. We also remove the two auto plays SAT and

STANLY. A combination of a recent rally in their respective share prices and yet weak near-term

earnings that have led to Itthikorn lowering his target valuations, has left insufficient upside.

Itthikorn still likes the long term structural story, but with upside limited, he downgraded SAT to

Neutral while maintaining an Outperform on STANLY. As a replacement we bring another small

cap external play, PSL, one of Andrew Lee’s preferred plays in the regional shipping space.

Still sounding like a broken record. We keep shy of sectors trading on high multiples. While the

growth outlook has improved, the risks to this remain and we are sticking with our baby-bear

scenario of lower growth for longer. Hence we see a double threat of weak EPS and a potential

de-rating when bottom line growth disappoints.

Fig 10 Macq Thailand's New Money Ideas

Source: Bloomberg, Macquarie Research, July 2014, Share prices as of close 3 July 2014.

Fig 11 Sector and stock views across our coverage

Sector Sector view Outperforms Neutral Underperforms

Materials/Petrochem OW PTTGC, SCC, SCCC IVL Banks OW SCB, TISCO, KKP, KTB, BBL, TCAP, TMB, CIMBT, LHBANK BAY Residential property OW QH, SPALI, LPN, AP LH, PS Exploration & Production OW PTTEP Food OW TUF, CPF OISHI M Commercial property OW CPN, CPNRF, TLGF Auto OW STANLY SAT Shipping OW PSL Refining N TOP, ESSO IRPC, BCP Tourism N AAV, CENTEL, ERW MINT, AOT THAI Consumer Discretionary N HMPRO, ROBINS Industrial property N TICON, HEMRAJ AMATA, ROJNA Healthcare N BGH BH, BCH Insurance N BLA Auto N STANLY SAT Electronics N HANA DELTA Soft Commodities N KSL ICT UW ADVANC, DTAC TRUE Media UW MAJOR BEC MCOT Consumer Staple UW CPALL, MAKRO, BIGC Integrated Energy UW PTT Utilities & Infrastructure UW BECL, EGCO, RATCH BTS, BTSGIF, GLOW, TTW Coal UW BANPU


BBG code Sector Rating Beta

Mkt cap

(US$ bn)

3m ADV

(US$ m)

Price

(Bt)

Target

(Bt)

Upside

(%)

2014E div

yield (%)

Expected

return (%) Value Growth

Momen-

tum Profit Analyst Risk

External plays

PTTGC Materials O 0.81 9.29 25.9 66.75 91.00 36 4.8 41 1.02 0.20 0.54 -0.40 0.25 0.54

PTTEP Energy O 0.64 19.73 24.4 161.00 198.00 23 4.1 27 1.63 0.00 -0.84 0.91 0.69 1.15

TOP Energy O 0.81 3.27 6.1 52.00 69.00 33 4.5 37 0.33 -1.05 -1.02 1.15 0.00 0.46

SCC Materials O 1.00 17.33 20.2 468.00 495.00 6 3.4 9 0.14 0.35 2.46 -0.11 -0.24 -1.36

PSL Transport O 1.25 0.80 1.3 25.00 32.50 30 1.6 32 -0.89 -1.21 -0.66 0.02 -1.73 -0.46

Domestic plays

SCB Banks O 1.20 18.33 38.7 175.00 208.00 19 3.1 22 0.31 -0.40 -1.35 3.00 -0.24 0.74

KKP Banks O 1.10 1.17 3.0 45.25 53.00 17 5.4 23 0.15 2.40 -0.11 0.37 0.00 0.09

TISCO Banks O 1.02 1.03 1.8 41.75 52.00 25 4.6 29 1.99 0.08 -0.45 -0.77 0.00 -0.35

MAJOR Media O 1.04 0.52 1.4 19.00 22.00 16 4.1 20 -0.30 -1.42 0.36 -0.73 0.00 -0.43

SPALI Property O 1.25 1.18 4.6 22.20 26.00 17 4.5 22 1.80 -0.73 -0.46 -1.20 0.00 -0.66

AP Property O 1.31 0.56 3.0 6.35 7.00 10 3.9 14 1.29 -0.83 -1.26 -0.73 0.00 -0.03

The Fundamental view The Quant view

https://www.macquarieresearch.com/rp/d/r/p/_OTA3NDQ0?u=MTI2Njgw

https://www.macquarieresearch.com/rp/d/r/p/_OTA4MDUz?u=MTI2Njgw

https://www.macquarieresearch.com/rp/d/r/p/_OTAzMTAz?u=MTI2Njgw

https://www.macquarieresearch.com/rp/d/r/p/_OTAzMTAz?u=MTI2Njgw

https://www.macquarieresearch.com/rp/d/r/p/_OTA5Mjkx?u=MTI2Njgw

https://www.macquarieresearch.com/rp/d/r/p/_OTA1MTE5?u=MTI2Njgw


4 July 2014 7

Fig 12 Performance of the present names in the MacqThai New Money Ideas

Stock Included Current Absolute Performance Performance since inclusion

Date Price (Bt) 1mth 3mth 6mth 1yr Absolute vs SET vs MSCI Thai

PTTGC 7-Oct-11 51.50 -3.6% -4.6% -10.7% -2.6% 29.6% -34.6% -14.1% PTTEP 6-Dec-12 155.50 2.9% 3.2% 5.2% 2.5% 3.5% -7.9% -1.8% TOP 6-Jan-14 50.50 1.5% 0.0% 3.5% 3.0% -18.3% -15.6% SCC 8-May-13 488.00 7.8% 9.3% 23.2% 6.4% -4.1% 3.4% 3.3% STANLY 25-Mar-13 245.00 4.1% 12.3% 11.8% -9.2% -6.9% -4.9% -5.7% SAT 8-Jul-13 17.80 1.7% 12.5% 33.3% -2.7% 1.1% -5.2% -3.5% KKP 8-Jul-13 50.00 0.0% -1.1% 28.4% -11.7% -9.5% -15.8% -14.1% TISCO 2-May-14 39.75 0.6% 5.0% 0.0% 1.3% MAJOR 8-Jul-13 21.90 5.0% 1.6% 18.8% -13.2% -13.2% -19.5% -17.9% PS 8-May-13 28.50 14.3% 33.3% 79.6% 38.9% 5.3% 12.8% 12.6% SPALI 8-Jul-13 16.30 7.2% 22.0% 58.6% 32.1% 36.2% 29.9% 31.6% SET 2.7% 7.3% 21.9% 3.4% MSCI Thailand 2.8% 6.4% 20.2% 1.7%

Share prices as of close 3 July 2014: # STANLY, SAT and PS removed as of July 3nd

2014.


Fig 13 Performance of past members in our MacqThai New Money Ideas

Added Removed % chg in % chg in Relative % chg in Relative

Stock Date Price (Bt) Date Price (Bt) price SET Perform. MSCI Thai Perform.

AMATA 7-Oct-11 9.10 23-Aug-12 17.00 86.8% 36.1% 50.7% 30.9% 55.9% BEC 7-Oct-11 38.75 22-Mar-12 53.00 36.8% 31.0% 5.8% 31.9% 4.8% CPN 7-Oct-11 33.25 1-Dec-11 39.50 18.8% 12.1% 6.7% 11.4% 7.4% DELTA 7-Oct-11 18.50 22-Mar-12 24.20 30.8% 31.0% -0.2% 31.9% -1.1% ESSO 7-Oct-11 8.75 1-Dec-11 9.05 3.4% 12.1% -8.7% 11.4% -8.0% HANA 7-Oct-11 16.80 22-Mar-12 22.30 32.7% 31.0% 1.7% 31.9% 0.8% HMPRO 7-Oct-11 8.80 8-Feb-12 11.30 28.4% 22.8% 5.7% 23.5% 4.9% KK 7-Oct-11 28.00 1-Dec-11 33.25 18.8% 12.1% 6.7% 11.4% 7.3% ROBINS 7-Oct-11 31.50 29-Feb-12 46.00 46.0% 27.7% 18.3% 30.5% 15.5% SCC 7-Oct-11 265.00 6-Dec-12 400.00 50.9% 47.4% 3.6% 36.5% 14.4% THAI 7-Oct-11 18.50 17-Jan-12 21.30 15.1% 16.2% -1.1% 15.5% -0.4% TOP 7-Oct-11 52.25 8-Feb-12 69.50 33.0% 22.8% 10.3% 23.5% 9.5% KTB 1-Dec-11 15.10 07-Nov-13 20.20 33.8% 39.8% -6.1% 27.2% 6.5% CENTEL 1-Dec-11 10.00 8-Feb-12 11.40 14.0% 9.5% 4.5% 10.8% 3.2% IRPC 1-Dec-11 4.00 6-Feb-13 4.44 11.0% 47.2% -36.2% 33.7% -22.7% PS 17-Jan-12 13.40 27-Feb-13 30.00 123.9% 43.7% 80.2% 27.0% 96.9% PTT 8-Feb-12 348.00 6-Dec-12 328.00 -5.7% 20.1% -25.8% 10.5% -16.3% SPALI 8-Feb-12 13.80 22-Mar-12 15.70 13.8% 6.7% 7.1% 6.8% 7.0% TISCO 8-Feb-12 35.75 23-Aug-12 40.50 13.3% 10.9% 2.4% 6.0% 7.3% AP 22-Mar-12 5.85 23-Aug-12 8.20 40.2% 3.9% 36.3% -0.8% 40.9% KK 22-Mar-12 36.50 8-Aug-12 42.25 15.8% 1.9% 13.8% -1.7% 17.5% MCOT 22-Mar-12 29.25 6-Dec-12 41.50 41.9% 12.5% 29.4% 3.5% 38.4% PTTEP 27-Apr-12 175.00 8-Aug-12 153.00 -12.6% 0.2% -12.8% -2.0% -10.6% HMPRO 8-Aug-12 11.60 7-Nov-12 11.60 0.0% 7.1% -7.1% 2.3% -2.3% ADVANC 7-Nov-12 188.00 8-May-13 280.00 48.9% 24.2% 24.7% 17.0% 31.9% BECL 7-Nov-12 29.00 6-Feb-13 45.25 56.0% 15.4% 40.6% 12.3% 43.7% EGCO 7-Nov-12 130.00 9-Jan-13 151.50 16.5% 9.5% 7.0% 8.5% 8.0% MAJOR 7-Nov-12 19.40 6-Dec-12 19.40 0.0% 3.1% -3.1% 2.9% -2.9% ROBINS 7-Nov-12 62.25 8-May-13 81.00 30.1% 24.2% 5.9% 17.0% 13.1% PSL 6-Dec-12 13.50 27-Feb-13 16.40 21.5% 13.3% 8.2% 7.5% 14.0% AMATA 6-Feb-13 20.10 25-Mar-13 26.75 33.1% 1.6% 31.5% -2.3% 35.4% MAJOR 6-Feb-13 20.80 8-May-13 24.40 17.3% 7.6% 9.7% 4.1% 13.2% AP 27-Feb-13 10.50 07-Nov-13 5.35 -49.0% -6.1% -42.9% -3.3% -45.7% OISHI 8-May-13 154.50 07-Nov-13 91.00 -41.1% -11.7% -29.4% -8.6% -32.5% LPN 8-Jul-13 23.40 07-Nov-13 21.1 -9.8% 1.5% -11.3% 3.2% -13.0% CPF 7-Nov-12 36.50 06-Jan-14 29.25 -19.9% -5.3% -14.6% -8.6% -11.3% TUF 21-Aug-13 53.75 06-Jan-14 65.00 20.9% -9.2% 30.1% -7.6% 28.5% HANA 21-Aug-13 19.90 06-Jan-14 25.00 25.6% -9.2% 34.8% -7.6% 33.2% SCB 7-Nov-13 166.50 23-Jan-14 156.50 -6.0% -8.2% 2.2% -8.3% 2.3% TISCO 8-Jul-13 40.00 23-Jan-14 38.00 -5.0% -6.9% 1.9% -5.4% 0.4% ROBINS 21-Aug-13 48.00 23-Jan-14 45.50 -5.2% -3.5% -1.8% -0.9% -4.3% QH 7-Nov-12 2.14 03-Mar-14 2.92 36.4% 3.0% 33.4% -1.6% 38.1% CENTEL 6-Jan-14 24.10 03-Mar-14 31.75 31.7% 8.8% 22.9% 7.6% 24.2% CPN 6-Jan-14 37.50 2-May-14 45.00 20.0% 15.5% 4.5% 14.3% 5.7% HMPRO * 8-May-13 11.10 2-May-14 8.95 -19.4% -11.9% -7.4% -10.7% -8.7% PS 8-May-13 28.50 3-Jul-14 30.00 5.3% -7.5% 12.8% -7.4% 12.6% SAT 8-Jul-13 17.80 3-Jul-14 18.00 1.1% 6.3% -5.2% 4.6% -3.5% STANLY 25-Mar-13 245.00 3-Jul-14 228.00 -6.9% -2.0% -4.9% -1.2% -5.7%

* HMPRO is adjusted for stock splits.

Source: Bloomberg, Macquarie Research, July 2014.


4 July 2014 8

The Quant Corner

MSCI Thailand had a strong month, gaining 5.5% in local terms driven entirely by multiple

expansion.

June saw a rebound in analyst sentiment, with consistent performance across all revisions

indicators.

Expensive stocks with high forecast growth were the standouts last month as value

underperformed, breaking its recent trend.

Momentum performed consistently poorly as the recent outperformers were sold off.

Fig 14 Thailand Top and Bottom Quant picks

Source: Macquarie Research, July 2014

Ticker Name Industry Group Alp

ha

Anal

yst

Cap

ital

Gro

wth

Mom

entu

m

Pro

fit

Qual

ity

Technic

al

Val

ue

Liquid

ity

Ris

k

PTT TB PTT PCL. Energy 4.0% 0.1 0.6 -0.3 -0.7 -0.4 0.9 -1.6 1.7 0.7 1.9

INTUCH TB SHIN CORPORATION PCL. Telecommunication Services 3.8% 0.3 0.9 0.3 -0.8 3.0 0.3 -0.6 0.9 1.0 0.8

TCAP TB THANACHART CAPITAL PCL. Banks 3.7% -0.6 1.7 -0.4 -0.6 0.6 -0.7 1.0 2.3 0.0 0.4

BCP TB THE BANGCHAK PTL.PCL. Energy 3.4% 0.5 0.7 -0.4 -1.3 -0.8 0.7 -0.2 2.2 -0.4 0.9

PTTEP TB PTT EXP.& PRDN.PCL. Energy 3.3% 0.4 0.3 -0.1 -0.3 1.0 -0.1 0.1 0.4 1.7 1.5

PS TB PRUKSA REAL ESTATE PCL. Real Estate 3.0% 0.7 0.0 0.8 2.2 -0.4 -0.3 -0.3 0.0 0.1 -0.5

DELTA TB DELTA ELTN.(THAI.) PCL. Technology Hardware & Equipment 2.8% 0.6 0.5 -0.1 1.1 0.7 0.8 -0.8 0.1 -1.0 0.8

DTAC TB TOTAL ACCESS COMM.PCL. Telecommunication Services 2.5% 0.2 0.6 0.0 -0.2 1.9 0.5 -0.4 0.1 2.0 0.3

KTB TB KRUNG THAI BANK PCL. Banks 2.5% -0.3 0.1 -0.1 0.3 0.2 -0.5 0.3 0.6 1.9 0.4

BLA TB BANGKOK LIFE ASR.PCL. Insurance 2.3% 0.1 -0.1 0.2 1.2 1.9 -0.1 -1.6 -0.1 -0.7 0.5


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CPF TB CHAROEN PKPH.FOODS PCL. Food Beverage & Tobacco -1.2% 0.3 0.2 -0.6 -0.9 -1.3 -0.3 0.1 0.1 0.1 -1.1

TMB TB TMB BANK PCL. Banks -1.3% -0.6 0.0 0.8 -0.6 0.0 -0.6 -0.3 -0.3 -0.2 0.0

True TB TRUE CORPORATION PCL. Telecommunication Services -1.3% -0.4 -0.2 3.0 1.1 1.0 0.5 -0.4 -1.8 0.2 -0.8

CENTEL TB CENTRAL PLAZA HOTEL PCL. Consumer Services -1.6% -0.5 0.0 0.4 0.5 0.2 0.3 -0.5 -0.9 -0.2 -1.0

HMPRO TB HOME PRODUCT CENTER PCL. Retailing -1.9% -0.1 -0.5 0.2 -0.1 0.5 -0.2 -0.1 -1.1 -0.1 -0.1

VGI TB VGI GLOBAL MEDIA PLC. Media -2.0% -2.3 -0.3 0.9 0.4 3.0 0.7 0.3 -1.3 -0.7 0.8

BTS TB BTS GROUP HOLDINGS PCL. Transportation -2.2% -0.8 0.5 0.3 0.1 -0.1 0.4 0.1 -1.0 0.0 -0.8

THAI TB THAI AIRWAYS INTL.PCL. Transportation -2.7% -1.2 0.3 -0.8 -2.0 -1.0 -1.1 1.6 1.2 0.4 -2.3

BJC TB BERLI JUCKER PCL. Capital Goods -4.9% -2.1 0.0 -0.3 -0.4 -0.1 0.5 -1.0 -1.0 -1.6 -0.7

GLOBAL TB SIAM GLOBAL HOUSE PCL. Retailing -5.7% -0.6 -0.6 0.7 -1.9 -1.3 -0.7 -0.5 -1.2 -0.4 -1.3


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TCCC TB THAI CENTRAL CHM.PCL. Materials 6.0% 0.7 1.1 0.4 1.9 1.0 2.5 1.7 0.2 2.0

KTC TB KRUNGTHAI CARD PCL. Diversified Financials 5.8% 2.2 0.0 1.5 1.1 1.3 -1.2 0.1 1.6 -1.5 -0.5

DCON TB DCON PRODUCTS PCL. Materials 4.9% 0.4 0.2 2.2 1.8 0.5 -0.5 -1.0 1.1 -0.2 0.1

UTP TB UNITED PAPER PCL. Materials 4.7% 0.3 0.0 2.8 -0.3 -0.5 -0.2 0.2 2.5 0.4

CSP TB CSP STEEL CENTER PCL. Materials 4.7% 0.2 0.1 0.8 0.5 1.3 0.8 2.0 -0.5 0.1

HANA TB HANA MICROELS.PCL. Technology Hardware & Equipment 4.6% 1.5 0.6 -0.2 1.3 0.0 2.1 0.1 0.6 -0.1 -0.2

KYE TB KANG YONG ELECTRIC PCL. Consumer Durables & Apparel 4.5% 0.8 1.3 -0.5 0.1 3.0 1.9 1.7 -0.2 1.7

QH TB QUALITY HOUSES PUB.CTD. Real Estate 4.4% 0.4 0.7 0.2 0.5 1.1 -0.6 0.1 1.9 -0.4 -0.7

LANNA TB LANNA RES.PCL.(THE) Energy 4.3% 1.8 0.9 -0.7 0.6 -0.5 -0.4 0.3 0.8 -1.3 1.6

SCBLIF TB SCB LIFE ASSURANCE PCL. Insurance 4.3% 0.4 0.2 0.0 2.1 -0.2 1.9 1.1 1.0 1.2


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THRE TB THAI REINSURANCE PCL. Insurance -5.9% 0.8 -0.2 2.1 -1.8 -2.2 -1.4 -0.6 -2.0 -1.3 -0.9

LIVE TB LIVE INCORPORATION PCL. Media -6.3% -2.5 -1.8 -2.4 0.1 -2.5 0.0 -0.9 -0.3 -2.0

SSI TB SAHAVIRIYA STL.INDS.PCL. Materials -6.7% -1.0 -2.9 0.3 0.6 -2.5 -1.1 1.4 -2.5 0.0 -1.2

AEC TB AEC SECURITIES PCL. Diversified Financials -6.9% -0.2 -2.1 -2.3 -2.9 -2.4 -0.7 -1.6 -0.3 -0.8

NIPPON TB NIPPON PACK (THAI.)PCL. Materials -7.1% -2.9 -1.5 -1.6 -1.9 -3.0 0.6 -1.6 -0.7 -1.3

WAT TB WATTANA CAPITAL PCL. Real Estate -7.1% -2.9 -1.0 -1.6 -2.3 -1.0 1.6 -2.0 1.5 -2.2

WORK TB WORKPOINT ENTM.PCL. Media -7.8% -3.0 -0.1 -1.9 -0.4 0.1 -0.4 -1.0 -1.5 -1.6 -2.2

IEC TB INTERNATIONAL ENGR.PCL. Technology Hardware & Equipment -7.8% -3.0 -2.1 -1.9 -1.5 -3.0 1.6 -1.5 -0.2 -2.8

ACD TB ASIA CORPORATE DEV.PCL. Consumer Services -9.1% -0.2 -1.3 -3.0 -2.5 -3.0 0.3 -2.3 -0.4 -1.4

GRAMMY TB GMM GRAMMY PUBLIC CTD. Media -9.7% -2.9 -0.3 -0.7 -1.8 -1.6 -0.2 0.7 -2.6 -1.8 0.7

SET 50 : Bottom Quant Picks

SET 50 : Top Quant Picks

SET (ex 50) : Top Quant Picks

SET (ex 50): Bottom Quant Picks


4 July 2014 9

Fig 15 Thailand Factor Performance


Fig 16 MSCI Thailand – Return Attribution since January 2013 (USD)


Factor 1M 1Y 5Y 10Y Factor 1M 1Y 5Y 10Y

Macquarie Alpha Model -4% -2% 2% 2% Profitability/Return on Capital 1% -1% 1% 0%CFROI 0% -3% 2% 1%

Valuation -7% -1% -1% 1% ROA - NTM -10% -1% 0% 0%Book Yield - NTM -5% 1% -1% 1% ROE - NTM -7% -2% 1% 1%Cash Yield - NTM 1% 1% -1% 0% ROIC - NTM -6% -3% 1% 0%Dividend Yield - NTM -9% -1% 1% 1%Earnings Yield - FY0 -4% 0% -1% 1% Quality 6% -1% 1% 0%Earnings Yield - NTM -4% 0% -1% 1% Earnings Stability -5% -2% 0% -1%Sales Yield - NTM 1% 1% -1% 1% Macquarie Quality Indicator 4% -2% 0% 0%EBITDA / EV - NTM 0% 1% -1% 0% Operating Accruals * -6% 1% -2% 0%

Profit Margin - NTM 2% -1% 0% 0%Momentum -4% -3% 0% 1%

Momentum - 12 Month -1% -2% 1% 0% Low Risk -3% -3% 1% 0%Momentum - (12 Month - 1 Month) -4% -3% 1% 1% Altman Z-score -12% -4% -1% 1%Momentum - 3 Month -5% -5% 0% 1% Earnings Certainty 1% -1% 1% 1%Momentum - 6 Month -4% -3% 0% 1% Merton Model -8% -3% 1% 0%Macquarie Periodic Momentum 3% 0% 0% 0% Relative Volatility * -3% 0% 1% 1%

Volatility 250 Day * 8% 2% 0% -1%Analyst Sentiment 2% 0% 1% 1% BETA * 1% 1% -1% 0%

Consensus Recommendation -5% -1% -1% 0%DPS Revisions - 3 Month 2% -3% 0% 0% Capital & Funding -3% -1% 1% 0%Earnings Revisions - 3 Month 7% -2% 1% 1% Buybacks to Shares -12% -1% 1% 1%Up-down Earnings Revision Ratio 4% -2% 1% 1% Captial Expenditure Growth 1% 1% 0% 0%Maquarie Sentiment Indicator 0% -3% 2% 1% Increase in the Number of Shares 7% 1% -1% 0%Recomm. Revisions - 3 Month 6% 0% 0% 1% External Financing -7% 0% -1% 0%Price Upside -5% 2% -2% 0%

Liquidity -5% -1% 1% 1%Growth 2% 0% 1% 0% Relative Turnover -4% -1% 1% 1%

5 Year EPS Trend 9% 0% -1% 0% Size 4% -3% -1% 0%EPS Growth - FY-1 to FY0 3% 0% 1% 1% Turnover (USD) 20 Day 3% 0% -1% 0%EPS Growth - FY0 to FY1 4% 1% 1% -1% Broker Coverage -9% -1% -1% -1%Margin Growth - FY0 to FY1 -2% -2% -1% 0% Change in Number of Estimates 0% 0% -1% -1%ROA Growth - FY0 to FY1 -5% -2% 0% 0%ROE Growth - FY0 to FY1 -10% 0% 1% 0% Technical Indicators -2% 2% 0% 2%Sales Growth Last Actual & FY1 -1% 1% -2% -1% Momentum - 1 Month * 9% -1% 0% -1%

RSI 14 Day * -6% -2% 0% -1%Stochastic Oscillator * 1% 0% 0% -1%Williams %R * 10% -2% 1% -2%

* These signals are used in the contrarian sense and performance numbers have been negated in table

-25%

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Jan 13 Feb 13 Mar 13 May 13 Jun 13 Jul 13 Sep 13 Oct 13 Dec 13 Jan 14 Feb 14 Apr 14 May 14 Jul 14

MSCI Thailand - Return Attribution (USD)

Currency Dividend Change in Earnings Expectations Multiple Change Total Return (USD)


4 July 2014 10

The Economy: Hopes building.

A growing belief the economy has bottomed. While private investment and consumption have

remained negative YoY, the data points for May continued to show an improvement MoM which

adds weight to a view that the economy has passed its bottom. While actual growth in 2Q14 will

remain very subdued, there are growing hopes of a gradual improvement in growth rates for 2H14

and a more substantial pick-up in growth in 2015.

Employment picture looks stable. Since mid-2013 we have maintained a constructive view on

Thailand’s seemingly high level of household debt, arguing that it is well supported by robust

household income. The potential weakness in this view would be any deterioration in the

employment picture, threatening household incomes so weakening asset quality in the financial

sector. We are somewhat more relaxed about this as employment is holding steady and, while it is

a relatively minor indicator, we have seen a pick-up in non-agricultural overtime employment. We

also note that the pickup seen in unemployment since December 2013 has been driven by worker

resignations, with rates of employment termination remaining stable. Hence, we see justification in

our preference to maintain domestic exposure via property and banks.

Still keeping an eye on the risks. As we highlighted on page 2, we feel it is too early in the

process of forming a new government to be complacent on the risks. Running the country and the

economy will get increasingly difficult as more definitive choices have to be made. There is

implementation risk as any material policy mistakes or internal scandals could force an interim

government into a caretaker role. There also remains a risk that parties that believe they are

disadvantaged by the military takeover may try and discredit or destabilise the NCPO’s efforts.

Fig 17 Core CPI stabilizing Fig 18 Unemployment edging up off a low base


Fig 19 Consumption and Investment have bottomed Fig 20 Confidence starting to rebound


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Rebased consumer confidence (LHS) Rebased business sentiment index (RHS)

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Fig 21 Our Thai Coverage: Key stock data (as of 3 July 2014)

Mkt cap 3m ADV Price TP Up/ PER PBV Div yield

Company Ticker Beta US$bn (US$m) (Bt) (Bt) down% Rec 13A 14E 15E 13A 14E 15E 13A 14E 15E

Bangkok Bank BBL 1.06 11.84 41.6 201.00 214.00 6 O 10.7 10.9 9.6 1.3 1.2 1.1 3.2 3.5 4.0 Siam Commercial Bank SCB 1.20 18.33 38.7 175.00 208.00 19 O 11.8 11.4 9.8 2.4 2.2 1.9 3.0 3.1 3.6 Krung Thai Bank KTB 1.22 9.40 34.4 21.80 24.00 10 O 9.0 9.5 8.4 1.5 1.4 1.2 4.0 3.7 4.2 Bank of Ayudhya BAY 0.79 8.53 0.6 45.50 31.00 -32 U 19.7 19.3 14.0 2.2 2.1 1.9 1.7 1.9 2.6 Thanachart Capital TCAP 1.05 1.32 2.9 35.50 42.00 18 O 4.9 9.5 7.9 1.0 0.9 0.8 4.5 3.1 3.8 TMB Bank TMB 1.00 3.34 7.9 2.48 2.40 -3 N 18.8 17.5 13.3 1.8 1.7 1.5 1.6 2.0 2.6 Tisco Financial Group TISCO 1.02 1.03 1.8 41.75 52.00 25 O 7.7 8.7 6.3 1.5 1.4 1.2 4.7 4.6 6.4 Kiatnakin Bank KKP 1.10 1.17 3.0 45.25 53.00 17 O 8.7 9.8 7.2 1.1 1.1 1.0 5.9 5.4 7.2 CIMB Thai Bank CIMBT 1.08 1.43 0.3 2.20 1.98 -10 N 31.1 34.5 29.4 2.1 2.1 2.0 0.5 0.7 0.8 LH Financial Group LHBANK 0.73 0.65 4.7 1.59 1.60 1 N 22.5 24.1 20.3 1.4 1.3 1.3 2.1 1.6 2.0 Banks 1.09 72.72 178.1 6 12.9 12.7 10.6 2.0 1.8 1.6 2.7 2.8 3.4 PTT PTT 0.67 28.12 34.0 319.00 319.00 0 N 9.7 8.5 7.7 1.3 1.2 1.1 4.1 4.1 4.4 PTT Exploration PTTEP 0.64 19.73 24.4 161.00 198.00 23 O 11.3 9.4 8.0 1.7 1.5 1.4 3.7 4.1 4.2 Thai Oil TOP 0.81 3.27 6.1 52.00 69.00 33 O 11.7 11.8 8.9 1.2 1.1 1.0 4.4 4.5 5.1 IRPC IRPC 1.09 2.11 3.6 3.34 3.00 -10 U nmf 88.1 16.3 0.9 0.9 0.9 1.3 3.0 2.7 Esso Thailand ESSO 1.02 0.64 0.6 6.00 6.90 15 O 10.2 6.5 8.2 0.9 0.8 0.8 3.9 7.7 6.1 Bangchak Petroleum BCP 0.94 1.22 3.1 28.75 28.00 -3 N 8.4 8.4 8.3 1.1 1.1 1.0 9.7 4.7 4.8 Banpu BANPU 0.83 2.33 13.4 29.25 24.00 -18 U 24.4 16.7 24.4 1.0 1.0 1.0 2.6 3.4 2.2 Energy 0.70 57.42 85.2 6 10.6 12.2 8.9 1.4 1.3 1.2 3.9 4.1 4.3 Siam Cement SCC 1.00 17.33 20.2 468.00 495.00 6 O 15.3 14.8 11.8 3.5 3.2 2.8 3.3 3.4 4.3 Siam City Cement SCCC 1.06 3.22 1.9 454.00 405.00 -11 N 21.8 17.9 18.0 5.4 4.9 4.7 3.3 4.4 4.4 PTT Global Chemical PTTGC 0.81 9.29 25.9 66.75 91.00 36 O 10.7 9.0 7.5 1.3 1.1 1.0 5.1 4.8 5.4 Indorama Ventures IVL 1.32 4.20 20.0 28.25 21.60 -24 U nmf 38.6 18.5 2.3 2.2 2.0 1.0 1.1 2.1 Materials 0.99 34.04 68.1 2 12.8 16.4 12.0 2.9 2.7 2.4 3.5 3.6 4.3 Advanced Info Service ADVANC 1.09 19.82 53.5 216.00 180.00 -17 N 17.8 16.8 16.6 14.1 13.5 13.4 5.6 6.0 6.1 Total Access DTAC 1.02 8.08 13.8 110.50 100.00 -10 N 23.3 17.9 15.6 7.6 7.0 6.6 6.6 5.6 6.5 True Corporation TRUE 1.59 4.39 41.4 9.80 4.00 -59 U 227.3 1,046.9 123.3 5.0 5.0 0.0 0.0 0.0 0.0 Telecom 1.14 32.29 108.7 -28 47.7 157.3 30.9 11.2 10.7 9.9 5.1 5.1 5.4 Bumrungrad Hospital BH 0.91 2.56 4.8 114.00 102.00 -11 N 39.2 34.5 28.6 10.4 9.4 8.8 1.7 1.6 2.7 Bangkok Dusit Medical BGH 1.13 7.75 19.0 16.20 18.00 11 O 41.0 35.3 31.6 6.2 5.6 5.1 1.2 1.3 1.3 Bangkok Chain Hospital BCH 0.86 0.63 1.6 8.25 7.00 -15 N 35.2 31.3 27.3 5.2 4.5 4.1 1.0 1.1 1.2 Healthcare 1.06 10.94 25.4 -5 40.2 34.9 30.6 7.1 6.5 5.9 1.3 1.3 1.6 CP All PCL CPALL 0.94 12.96 22.6 46.75 38.00 -19 U 40.1 36.6 27.4 14.6 13.1 10.1 1.9 1.4 1.8 Home Product Center HMPRO 1.29 3.26 4.8 9.65 12.50 30 O 29.5 29.4 23.3 7.2 6.2 5.0 0.3 0.4 0.4 Big C Supercenter BIGC 0.84 5.25 2.0 206.00 165.00 -20 U 23.5 26.3 23.2 4.6 3.9 3.5 1.2 1.1 1.3 Siam Makro MAKRO 0.86 6.07 0.3 41.00 25.00 -39 U 45.8 38.3 32.1 17.7 17.9 16.1 2.0 2.4 2.8 Robinsons ROBINS 1.11 1.95 1.7 57.00 60.00 5 N 32.5 30.7 25.2 5.6 4.7 4.2 1.6 1.3 1.6 Retail 0.96 29.50 31.6 -9 36.7 34.0 27.0 12.0 11.1 9.2 1.6 1.4 1.8 Somboon Advance Tech. SAT 1.28 0.24 1.2 18.00 19.00 6 N 9.6 10.1 9.2 1.6 1.4 1.3 4.2 3.3 3.9 Thai Stanley Electric STANLY 0.71 0.54 0.1 228.00 243.00 7 O 12.6 11.9 10.4 1.6 1.5 1.3 2.6 3.1 3.5 Auto 0.88 0.78 1.2 6 11.7 11.4 10.1 1.6 1.5 1.3 3.1 3.2 3.6 Hana Microelectronics HANA 0.54 0.86 1.5 34.50 37.00 7 O 19.9 13.5 11.6 1.7 1.5 1.4 4.4 5.8 4.7 Delta Electronics DELTA 0.61 2.49 2.8 64.75 49.00 -24 N 15.7 15.1 14.4 3.2 2.9 2.7 4.2 4.2 4.2 Electronics 0.59 3.35 4.3 -9 16.8 14.7 13.7 2.8 2.6 2.4 4.3 4.6 4.3

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Fig 21 Our Thai Coverage: Key stock data (as of 3 July 2014)

Mkt cap 3m ADV Price TP Up/ PER PBV Div yield

Company Ticker Beta US$bn (US$m) (Bt) (Bt) down% Rec 13A 14E 15E 13A 14E 15E 13A 14E 15E

Land & Houses LH 1.36 3.09 7.2 10.00 10.00 0 N 15.5 18.2 16.6 3.0 2.8 2.6 4.0 3.8 4.2 Quality Houses QH 1.57 1.04 4.6 3.68 3.70 1 O 10.5 11.3 9.8 1.9 1.8 1.6 4.9 4.5 5.2 Asian Property AP 1.31 0.56 3.0 6.35 7.00 10 O 9.0 8.9 7.7 1.3 1.2 1.1 4.0 3.9 4.5 Pruksa Real Estate PS 1.59 2.06 3.2 30.00 29.00 -3 N 11.5 11.3 10.4 2.7 2.3 2.0 2.8 2.7 2.9 LPN Development LPN 1.24 0.96 4.7 21.00 20.00 -5 O 13.3 13.6 9.7 3.2 2.9 2.4 4.0 3.7 5.2 Supalai PCL SPALI 1.25 1.18 4.6 22.20 26.00 17 O 13.2 9.1 7.9 2.7 2.2 1.9 3.1 4.5 5.1 Central Pattana CPN 1.24 6.68 5.8 48.25 54.00 12 O 33.9 27.5 24.1 5.9 5.1 4.4 0.7 0.9 1.1 CPN Retail Growth Fund CPNRF 0.67 1.15 0.6 16.80 22.00 31 O 13.0 9.5 9.0 1.5 1.5 1.5 8.9 7.6 7.6 Tesco Lotus Growth Fund TLGF 0.71 0.96 0.2 13.30 16.00 20 O - 16.1 15.3 1.2 1.2 1.2 5.6 5.9 6.2 Amata Corporation AMATA 1.26 0.57 3.3 17.40 14.00 -20 N 13.1 10.5 11.4 2.2 2.0 1.8 3.3 3.8 3.5 Hemaraj Land and Dev. HEMRAJ 1.29 1.13 4.9 3.78 3.90 3 O 14.3 8.5 7.5 2.7 2.4 2.0 5.9 5.9 6.6 Rojana Industrial Park ROJNA 1.04 0.37 0.3 8.25 6.50 -21 U nmf 11.6 16.2 1.8 1.8 1.7 3.6 3.9 2.8 Ticon Industrial Connection TICON 1.51 0.60 3.7 17.70 20.00 13 O 8.6 6.7 5.7 1.9 1.7 1.5 5.5 7.5 8.9 Property 1.27 21.01 49.5 1 18.7 17.3 15.3 3.5 3.1 2.7 3.3 3.4 3.8 Precious Shipping PSL 1.25 0.80 1.3 25.00 32.50 30 O nmf 45.7 34.1 1.7 1.7 1.6 1.6 1.6 1.6 BTS Group Holdings BTS 0.90 3.22 13.5 8.75 6.80 -22 U 37.4 35.7 34.3 1.8 2.0 2.2 6.3 6.7 7.8 BTS Growth Infra. Fund BTSGIF n.a. 1.79 n.a. 10.00 7.80 -22 U 16.3 14.9 14.4 0.9 0.9 0.9 6.1 6.7 7.0 Airports of Thailand AOT 1.17 8.69 22.5 197.00 185.00 -6 N 28.3 22.6 19.7 3.1 2.9 2.6 2.3 1.4 1.8 Asia Aviation AAV 1.20 0.64 2.9 4.26 4.80 13 O 19.8 23.3 17.0 1.1 1.0 1.0 0.0 0.0 0.0 Thai Airways THAI 1.30 0.96 3.6 14.30 11.00 -23 U nmf nmf 25.0 0.5 0.7 0.6 0.0 0.0 5.2 Bangkok Expressway BECL 0.93 0.88 1.2 37.00 44.00 19 O 16.6 12.9 12.7 1.3 1.2 1.2 4.4 4.6 4.9 Transport 0.99 16.97 45.0 -2 24.9 23.6 22.4 2.2 2.2 2.1 3.3 3.0 3.7 Major Cineplex MAJOR 1.04 0.52 1.4 19.00 22.00 16 O 16.0 17.2 16.7 2.7 2.6 2.5 5.3 4.1 4.8 BEC World BEC 1.03 3.10 2.9 50.25 47.00 -6 N 18.0 17.3 16.1 11.4 11.1 10.8 5.4 5.8 6.2 MCOT MCOT 1.00 0.55 0.5 26.00 30.00 15 U 9.9 9.9 9.9 2.2 2.2 2.2 9.2 10.0 10.8 Media 1.03 4.17 4.8 8 16.7 16.3 15.3 9.1 8.9 8.6 5.9 6.1 6.6 Ratchaburi Electricity RATCH 0.70 2.42 1.1 54.00 60.00 11 O 11.3 11.2 12.6 1.4 1.3 1.3 4.3 4.4 4.5 Electricity Generating EGCO 0.45 2.28 1.4 140.50 172.00 22 O 10.2 10.3 11.9 1.1 1.0 1.0 4.3 4.3 4.3 Glow Energy GLOW 0.71 3.76 1.7 83.25 60.00 -28 U 13.9 12.4 12.5 3.0 2.7 2.4 3.7 4.0 4.4 Thai Tap Water Supply TTW 0.59 1.35 0.9 11.00 7.00 -36 U 17.5 16.3 15.6 4.0 3.8 3.7 4.8 4.8 5.0 Utilities 0.63 9.81 5.1 -8 12.9 12.1 12.8 2.3 2.1 2.0 4.1 4.3 4.5 Thai Union Frozen TUF 0.80 2.31 4.8 65.25 80.00 23 O 26.0 13.4 10.2 1.9 1.7 1.6 2.3 3.7 4.9 Oishi Group OISHI 0.79 0.53 0.1 91.75 90.00 -2 N 31.0 33.3 28.2 5.5 4.8 4.4 1.8 1.8 2.1 MK Restaurant M n.a. 1.82 2.3 65.00 49.00 -25 U 25.2 27.5 22.5 4.7 4.5 4.1 2.5 2.4 2.9 Khon Kaen Sugar Industry KSL 0.69 0.73 0.3 14.20 16.30 15 O 13.7 10.2 8.2 1.9 1.7 1.5 2.5 3.2 4.0 Charoen Pokphand CPF 1.05 6.39 23.1 26.75 36.00 35 O nmf 15.9 10.3 1.6 1.5 1.4 1.9 3.3 4.9 Food 0.80 11.78 30.7 9 11.2 17.6 12.8 2.3 2.1 2.0 2.1 3.2 4.4 Minor International MINT 1.10 3.77 6.6 30.50 30.00 -2 N 28.9 25.9 21.3 4.8 4.2 3.7 1.2 1.3 1.5 Central Plaza Hotel CENTEL 1.38 1.53 2.6 36.75 42.00 14 O 37.2 34.8 24.6 4.9 4.4 3.8 1.1 0.7 1.0 The Erawan Group ERW 1.42 0.34 0.9 4.40 5.10 16 O 75.2 179.8 36.0 2.2 2.3 2.2 3.4 2.3 1.6 Hotel 1.19 5.63 10.1 10 33.9 37.5 23.1 4.7 4.2 3.6 1.3 1.2 1.4 Bangkok Life Assurance BLA 1.08 3.26 1.7 87.00 77.00 -11 N 24.0 23.3 19.1 4.7 4.0 3.5 1.1 1.2 1.8 Other financials 1.08 3.26 1.7 -11 24.0 23.3 19.1 4.7 4.0 3.5 1.1 1.2 1.8

Cov total/avg 313.68 649.6 -2 16.0 14.3 12.1 2.1 2.0 1.8 3.2 3.3 3.7



4 July 2014 13

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 30 June 2014

AU/NZ Asia RSA USA CA EUR Outperform 51.67% 60.69% 34.67% 42.33% 55.41% 44.84% (for US coverage by MCUSA, 6.76% of stocks followed are investment banking clients)

Neutral 33.00% 23.93% 38.67% 50.92% 38.51% 35.87% (for US coverage by MCUSA, 7.25% of stocks followed are investment banking clients)

Underperform 15.33% 15.38% 26.67% 6.75% 6.08% 19.28% (for US coverage by MCUSA, 0.48% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

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General disclaimers: Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Securities Ltd and its Taiwan branch; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities (NZ) Ltd; Macquarie First South Securities (Pty) Limited; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities (Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above mentioned entities. 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Asia Research Head of Equity Research

John O’Connell (Global – Head) (612) 8232 7544

Peter Redhead (Asia – Head) (852) 3922 4836

Automobiles/Auto Parts

Janet Lewis (China) (852) 3922 5417

Zhixuan Lin (China) (8621) 2412 9006

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Banks and Non-Bank Financials

Ismael Pili (Asia, Hong Kong, China) (852) 3922 4774

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Conglomerates

Gilbert Lopez (Philippines) (632) 857 0892

Consumer and Gaming

Gary Pinge (Asia) (852) 3922 3557

Linda Huang (China, Hong Kong) (852) 3922 4068

Jamie Zhou (China, Hong Kong) (852) 3922 1147

Elaine Lai (Hong Kong) (852) 3922 4749

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Emerging Leaders

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Industrials

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Scott Russell (Asia, Japan) (852) 3922 3567

Jian Li (China, Hong Kong) (852) 3922 3579


Software and Internet

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Property

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RJ Aguirre (Philippines) (632) 857 0890

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Utilities & Renewables

Gary Chiu (Asia) (852) 3922 1435

Alan Hon (Hong Kong) (852) 3922 3589

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Colin Hamilton (Global) (4420) 3037 4061

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Economics

Peter Eadon-Clarke (Asia, Japan) (813) 3512 7850

Richard Gibbs (Australia) (612) 8232 3935

Larry Hu (China, Hong Kong) (852) 3922 3778

Tanvee Gupta Jain (India) (9122) 6720 4355

Quantitative / CPG

Gurvinder Brar (Global) (4420) 3037 4036

Josh Holcroft (Asia). (852) 3922 1279

Burke Lau (Asia) (852) 3922 5494

Suni Kim (Japan) (813) 3512 7569

Tim Sharp (Hong Kong) (852) 3922 1318

Strategy/Country

Viktor Shvets (Asia) (852) 3922 3883

Chetan Seth (Asia) (852) 3922 4769

Joshua van Lin (Asia Micro) (852) 3922 1425

Peter Eadon-Clarke (Japan) (813) 3512 7850

David Ng (China, Hong Kong) (852) 3922 1291

Jiong Shao (China) (852) 3922 3566

Rakesh Arora (India) (9122) 6720 4093

Nicolaos Oentung (Indonesia) (6121) 2598 8366


Yeonzon Yeow (Malaysia) (603) 2059 8982

Alex Pomento (Philippines) (632) 857 0899

Conrad Werner (Singapore) (65) 6601 0182

David Gambrill (Thailand) (662) 694 7753 Find our research at Macquarie: www.macquarie.com.au/research Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales

Robin Black (Asia) (852) 3922 2074

Chris Gray (ASEAN) (65) 6601 0288 Peter Slater (Boston) (1 617) 598 2502

Jeffrey Shiu (China & Hong Kong) (852) 3922 2061 Thomas Renz (Geneva) (41) 22 818 7712 Bharat Rawla (India) (9122) 6720 4100

Jurgan Usman (Indonesia) (6221) 515 1555 Miki Edelman (Japan) (813) 3512 7857 John Jay Lee (Korea) (822) 3705 9988

Ruben Boopalan (Malaysia) (603) 2059 8888 Gino C Rojas (Philippines) (632) 857 0861 Eric Roles (New York) (1 212) 231 2559

Regional Heads of Sales cont’d

Paul Colaco (San Francisco) (1 415) 762 5003

Erica Wang (Taiwan) (8862) 2734 7586 Angus Kent (Thailand) (662) 694 7601 Julien Roux (UK/Europe) (44) 20 3037 4867

Sean Alexander (Generalist) (852) 3922 2101

Regional Head of Distribution

Justin Crawford (Asia) (852) 3922 2065

Sales Trading

Adam Zaki (Asia) (852) 3922 2002

Phil Sellaroli (Japan) (813) 3512 7837 Kenneth Cheung (Singapore) (65) 6601 0288

Sales Trading cont’d

Mike Keen (UK/Europe) (44) 20 3037 4905

Chris Reale (New York) (1 212) 231 2555 Marc Rosa (New York) (1 212) 231 2555 Stanley Dunda (Indonesia) (6221) 515 1555

Suhaida Samsudin (Malaysia) (603) 2059 8888 Michael Santos (Philippines) (632) 857 0813 Isaac Huang (Taiwan) (8862) 2734 7582

Dominic Shore (Thailand) (662) 694 7707

.Mean S KBank Multi Asset Strategies Strategies...1 .Mean S Strategic Thesis Once you are number 1, there is only one way to go. Of late, China and Russia made FX headlines as the

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