Wednesda y , 18 October 2017 1 Refer to last page for important disclosures. R e g i o n a l M o r n i n g N o t e s Draft – for internal use only PLEASE CLICK ON THE PAGE NUMBER TO MOVE TO THE RELEVANT PAGE. CHINA Sector Consumer Page 2 Better-than-expected 3Q17 F&B sales; positives largely priced in. Healthcare Page 4 Expect re-rating opportunities for small-cap pharmas. Asian Gems Corporate Highlights China Yongda Auto Services Holdings (3669 HK/ BUY/HK$10.38/Target: HK$17.00) Page 7 Auto finance emerging as new growth driver. China Zhongwang Holding (1333 HK/NOT RATED/HK$4.12/Target: n.a) Page 10 Venturing into high-end flat rolling aluminium business. INDONESIA Asian Gems Corporate Highlights Wijaya Karya Beton (WTON IJ/BUY/Rp585/Target: Rp1,000) Page 13 2017 revenue and new contract targets remain intact. THAILAND Asian Gems Corporate Highlights The Erawan Group (ERW TB/BUY/Bt6.65/Target: Bt8.00) Page 16 Earnings growth to continue to gain momentum. Results TMB Bank (TMB TB/HOLD/Bt2.62/Target: Bt2.70) Page 19 3Q17: Earnings up 9% yoy, driven by strong non-II. Results, however, missed forecasts by 14% on higher-than-expected provisions. KEY INDICES Prev Close 1D % 1W % 1M % YTD % DJIA 22997.4 0.2 0.7 3.0 16.4 S&P 500 2559.4 0.1 0.3 2.2 14.3 FTSE 100 7516.2 (0.1) (0.3) 3.6 5.2 AS30 5958.1 0.7 2.6 3.1 4.2 CSI 300 3913.1 (0.0) 0.6 1.8 18.2 FSSTI 3329.0 0.2 1.2 2.7 15.6 HSCEI 11568.3 (0.3) 1.3 3.3 23.1 HSI 28697.5 0.0 0.7 1.9 30.4 JCI 5947.3 (0.0) 0.7 1.1 12.3 KLCI 1749.0 (0.3) (0.7) (1.9) 6.5 KOSPI 2484.4 0.2 2.1 2.7 22.6 Nikkei 225 21336.1 0.4 2.5 7.2 11.6 SET 1724.5 (0.1) 1.9 3.2 11.8 TWSE 10723.2 (0.5) 1.8 0.9 15.9 BDI 1552 1.9 9.4 12.1 61.5 CPO (RM/mt) 2745 0.5 0.1 (4.2) (14.2) Brent Crude (US$/bbl) 58 0.1 2.2 4.1 1.9 Source: Bloomberg TOP PICKS Ticker CP (lcy) TP (lcy) Pot. +/- (%) BUY CSPC Pharmaceutical 1093 HK 12.98 15.24 17.4 Waskita Karya WSKT IJ 2,010.00 3,000.00 49.3 Ekovest EKO MK 1.14 1.45 27.2 Gabungan AQRS AQRS MK 1.78 2.22 24.7 OCBC OCBC SP 11.50 13.38 16.3 Siam Cement SCC TB 498.00 600.00 20.5 SELL Great Wall Motor 2333 HK 11.00 5.50 (50.0) UMW Holdings UMWH MK 5.56 4.80 (13.7) KEY ASSUMPTIONS GDP (% yoy) 2016 2017F 2018F US 1.6 2.5 2.5 Euro Zone 1.7 1.8 1.6 Japan 1.0 0.9 1.2 Singapore 2.0 2.4 2.5 Malaysia 4.2 5.0 4.9 Thailand 3.2 3.3 3.3 Indonesia 5.0 5.2 5.5 Hong Kong 1.9 2.0 2.0 China 6.7 6.6 6.3 Brent (Average) (US$/bbl) 45 52 55 CPO (RM/mt) 2,653 2,600 2,400 Source: Bloomberg, UOB ETR, UOB Kay Hian CORPORATE EVENTS Venue Begin Close Analyst Presentation on Indonesia Hong Kong 17 Oct 18 Oct Consumer Piece and Strategy Fintech Seminar 2017 Kuala Lumpur 19 Oct 19 Oct Roadshow with PT Bumi Serpong Damai Taipei 24 Oct 25 Oct Analyst Presentation on Taipei 25 Oct 27 Oct Indonesian Construction Sector Roadshow with Hong Leong Bank Hong Kong 26 Oct 27 Oct Roadshow with Gabungan AQRS Singapore 31 Oct 1 Nov Luncheon with Globetronics Technology Malaysia 1 Nov 1 Nov UOB Kay Hian Annual Regional Strategy Kuala Lumpur 13 Nov 13 Nov Conference
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Transcript
Wednesday , 18 Oc tober 2017
1 Refer to last page for important disclosures.
R e g i o n a l M o r n i n g N o t e s
Draft – for internal use only
PLEASE CLICK ON THE PAGE NUMBER TO MOVE TO THE RELEVANT PAGE.
CHINA Sector
Consumer Page 2Better-than-expected 3Q17 F&B sales; positives largely priced in.
Healthcare Page 4Expect re-rating opportunities for small-cap pharmas.
Asian Gems Corporate Highlights
China Yongda Auto Services Holdings (3669 HK/BUY/HK$10.38/Target: HK$17.00) Page 7Auto finance emerging as new growth driver.
China Zhongwang Holding (1333 HK/NOT RATED/HK$4.12/Target: n.a) Page 10Venturing into high-end flat rolling aluminium business.
INDONESIA Asian Gems Corporate Highlights
Wijaya Karya Beton (WTON IJ/BUY/Rp585/Target: Rp1,000) Page 132017 revenue and new contract targets remain intact.
THAILAND Asian Gems Corporate Highlights
The Erawan Group (ERW TB/BUY/Bt6.65/Target: Bt8.00) Page 16Earnings growth to continue to gain momentum.
Results
TMB Bank (TMB TB/HOLD/Bt2.62/Target: Bt2.70) Page 193Q17: Earnings up 9% yoy, driven by strong non-II. Results, however, missed forecasts by 14% on higher-than-expected provisions.
SELL Great Wall Motor 2333 HK 11.00 5.50 (50.0) UMW Holdings UMWH MK 5.56 4.80 (13.7)
KEY ASSUMPTIONS GDP (% yoy) 2016 2017F 2018F US 1.6 2.5 2.5 Euro Zone 1.7 1.8 1.6 Japan 1.0 0.9 1.2 Singapore 2.0 2.4 2.5 Malaysia 4.2 5.0 4.9 Thailand 3.2 3.3 3.3 Indonesia 5.0 5.2 5.5 Hong Kong 1.9 2.0 2.0 China 6.7 6.6 6.3 Brent (Average) (US$/bbl) 45 52 55 CPO (RM/mt) 2,653 2,600 2,400 Source: Bloomberg, UOB ETR, UOB Kay Hian
CORPORATE EVENTS
Venue Begin Close
Analyst Presentation on Indonesia Hong Kong 17 Oct 18 Oct Consumer Piece and Strategy
Fintech Seminar 2017 Kuala Lumpur 19 Oct 19 Oct
Roadshow with PT Bumi Serpong Damai Taipei 24 Oct 25 Oct Analyst Presentation on Taipei 25 Oct 27 Oct Indonesian Construction Sector
Roadshow with Hong Leong Bank Hong Kong 26 Oct 27 Oct
Roadshow with Gabungan AQRS Singapore 31 Oct 1 Nov
Luncheon with Globetronics Technology Malaysia 1 Nov 1 Nov
UOB Kay Hian Annual Regional Strategy Kuala Lumpur 13 Nov 13 Nov Conference
Wednesday , 18 Oc tober 2017
2 Refer to last page for important disclosures.
R e g i o n a l M o r n i n g N o t e s
Draft – for internal use only
SECTOR UPDATE
Consumer – China Better-than-expected 3Q17 F&B Sales; Positives Largely Priced In
Our recent channel checks suggest better-than-expected sales at F&B companies in 3Q17, thanks to strong beverage sales that are riding on the trend of favourable weather. After the recent sector rally, we see that positives have largely been priced in. We downgrade Tingyi to SELL on its stretched valuation and advise investors to take profit. We maintain our HOLD ratings on UPC and Want Want. Maintain UNDERWEIGHT on the sector.
WHAT’S NEW
Sales recovery continued in 3Q17. Our recent channel checks suggest sales recovery of F&B companies continued in 3Q17, particularly on better-than-expected beverage sales riding on favourable weather. For the instant noodles segment, the sales decline of old noodle products (which was a major drag in 1H17) appears to have stabilised due to a low base in 2H16. The increase in tourist traffic during the Golden Week holiday should also provide a short-term boost for F&B companies’ sales into 2H17.
Input cost pressure to sustain in 2H17. We notice raw material prices have stayed at relatively high levels in 2017, with sugar, PET and palm oil prices up over 20% on average. Cost pressure has not been easing into 2H17, which varies from our previous expectations. As a result, we are turning more cautious on companies’ gross profit margin assumptions and expect it to take a little longer to recover.
The trend of product premiumisation. Although we foresee the demand for F&B products remaining weak in China in the medium term, companies have accelerated product upgrades and are focused on the development of premium products to drive up sales growth and profitability. Uni-President China’s (UPC) “Soup Daren” continues to see double-digit revenue growth and now accounts for about 20% of its total noodle revenue. The company also strives for new product developments such as the carbonated Thai Lemon Tea drink. Albeit still at the early stage, we expect such a strategy to bear fruit in the long run.
We have revised up our 2017 full-year earnings estimates of UPC to Rmb908m, largely on better-than-expected sales in 3Q17. This implies 2H17 net profit of Rmb339m, against Rmb175m in 1Q17 and Rmb395m in 2Q17. We have trimmed our estimates for Tingyi modestly on tighter gross profit margin assumptions.
EARNINGS REVISION
2017F 2018F 2019F
(Rmbm) New Old % chg New Old % chg New Old % chg UPC 908 752 21% 1,019 825 24% 1,162 938 24% Tingyi 1,567 1,587 -1% 1,838 1,893 -3% 2,301 2,296 0%
Source: UOB Kay Hian
UPC: SALES AND GROWTH ESTIMATES 2015 2016 2017F 2018F 2019F
We maintain our medium-term cautious view on China’s F&B sector. We believe the recent share price rally is based on: a) a low base in 2016, and b) favourable weather to serve as short-term catalyst. We downgrade Tingyi to SELL with a new target price of HK$10.40 (27x 2018F PE), largely on stretched valuations. The stock has rallied over 35% in three months and now trades at a premium to historical average. We maintain our HOLD ratings for UPC and Want Want with revised target prices of HK$6.90 (25x 2018F PE) and HK$5.60 (19x 2018F PE) as we roll over to 2018 valuations.
SUGAR PRICE
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
Jul-1
6
Jan-
17
Jul-1
7
(Rmb/t)
Source: Wind, UOB Kay Hian PALM OIL PRICE
3,0004,0005,0006,0007,0008,0009,000
10,00011,00012,000
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
Jul-1
6
Jan-
17
Jul-1
7
(Rmb/t)
Source: Wind, UOB Kay Hian PET PRICE
6,000.0
7,000.0
8,000.0
9,000.0
10,000.0
11,000.0
12,000.0D
ec-1
2
Apr-1
3
Aug-
13
Dec
-13
Apr-1
4
Aug-
14
Dec
-14
Apr-1
5
Aug-
15
Dec
-15
Apr-1
6
Aug-
16
Dec
-16
Apr-1
7
Aug-
17
(Rmb/mt)
Source: Bloomberg, UOB Kay Hian F&B 1H17 RESULTS COMPARISON
Healthcare – China Expect Re-rating Opportunities For Small-cap Pharmas
Triggered by policy benefits, the average PE of China’s major pharma companies ramped up 12% since 1 September. However, small-cap pharmas are significant laggards to large-cap names in terms of valuation. In the short-term, we expect re-rating opportunities for small-cap healthcare names with rapid and solid net profit growth potential in 2017/18. In the long run, the valuation premium of the China healthcare sector (over MSCI China) should further expand. Maintain OVERWEIGHT.
WHAT’S NEW
Positive policies trigger a re-rating for big pharmas…Since early-Sep 17, the average 12m-forward PE of China’s large-cap pharmas was up 12% to 18.1x (vs MSCI China: + 2.6%). The valuation premium of large-cap pharmas over MSCI China recovered to 33% in Oct 17 (vs 22% in Sep 17). We believe the re-rating was mainly due to: a) earlier-than-expected implementation of the 2017 National Reimbursement Drug List (NRDL), which will drive significant sales volume expansion for newly-included drugs; and b) new CFDA guidelines to accelerate innovative drug approvals. Leading domestic pharmas such as CSPC (1093 HK), Sino Biopharm (1177 HK) and 3Sbio (1530 HK) are key policy beneficiaries thanks to their young product portfolios and innovative drug pipelines.
…while small-cap names remain significantly undervalued. Due to tightened liquidity, the average PE of small-cap pharmas dropped to 13.7x, which is at a 25% discount to large-cap names. Their valuation premium over MSCI China shrunk to only 1% in Oct 17 (vs 40% in Oct 16). We believe China’s small-cap pharmas are largely undervalued, especially names with strong growth visibility such as Consun Pharma (1681 HK), Dawnrays (2348 HK) and BBI Life Sciences (1035 HK).
Consun Pharma (1681 HK/NR).The company is in a leading position in China’s chronic kidney disease drug market. Meanwhile, the acquisition of Yulin Pharma will further boost net profit growth. Growth drivers include: a) fast sales expansion at Yulin after a sales force restructuring. After being acquired by Consun in 2016, Yulin Pharma made changes to its management team and grew its sales force from 100 to 285 people. In addition, the price hike of Yulin’s drugs in the OTC channel will further improve margins. Management expects Yulin’s top-line to grow 30%/25% yoy in 2017/18; b) Uremic clearance granules (UCG) (尿毒清颗粒) have been included into the Class A category of the 2017 NRDL. UCG, which is used for the treatment of stage 3 and 4 chronic kidney disease, has been promoted to being covered under Class A medical insurance (100% reimbursement). UCG’s current sales (~Rmb700m) trails far behind its potential to achieve peak sales of ~Rmb2.0b.
Valuation. Based on Bloomberg consensus, Consun Pharma is currently trading at a 9.8x 2018F PE, and its net income is expected to rise 25.7% and 15.5% yoy in 2017/18 respectively. Catalysts include the roll-out of its X-ray medical contrast (Lopamidol).
BBI Life Sciences (1035 HK/BUY/Target: HK$3.65) ranks No.1 in DNA synthesis and No.6 in gene sequencing in China, with it positioned in the upstream of China’s DNA value chain. Growth drivers include: a) industrial-scale DNA synthesis: BBI’s customer base has shifted from scientific research laboratories to molecular diagnosis companies and biological drug developers; b) deeper geographical penetration for gene sequencing: The robust growth of its sequencing business mainly comes from its penetration into tier-2/3 cities and from acquiring shares from BGI (300676 SZ) and Berry Genomics (000710 SZ); and c) accelerating overseas expansion: BBI has been aggressively venturing into Korea, UK and Singapore, with its loss-making Korea business expected to turnaround in 1H18.
Valuation. The company is currently trading at a 13.6x 2018F PE and its net income is expected to rise to Rmb64m and Rmb86m in 2017 and 2018, up 6.1% and 33.8% yoy respectively. Catalysts include: a) being granted the Shanghai clinical diagnosis licence; b) positive clinical trial results for Tianjin Henjian’s cancer peptide vaccine.
Dawnrays Pharma (2348 HK/NR). After putting an end to the use of national agents in Jul 16, the company completed the establishment of its in-house sales team and is undergoing a sales recovery. Growth drivers include: a) resumption of sales of Entecavir (Leiyide) since May 17. Domestic sales of Entecavir resumed since May 17 and sales reached Rmb100m in 1H17. Management expects Rmb100m-150m in Entecavir sales in 2H17; b) EBIT turnaround for bulk medicine in 2H17. The bulk medicine business is expected to turnaround in 2H17 after production line revamps since 2016; and c) price increase for An-series (安系列). Management expects to continue to raise ASP of the An-series in the OTC channel from Rmb0.6/tablet to ~Rmb1.0/tablet.
Valuation. As per management’s guidance, the company is expected to record a net income of Rmb320m and Rmb370m in 2017/18 respectively (up 21% and 15% yoy respectively), reflecting 8.3x 2018F PE. Catalysts include the CFDA’s marketing approval for esomeprazole by end-17.
Wednesday , 18 Oc tober 2017
6 Refer to last page for important disclosures.
R e g i o n a l M o r n i n g N o t e s
Draft – for internal use only
CHINA HEALTHCARE PEERS TABLE Share Price 3M avg. daily
trading value Market cap ------ PE ------ EV/EBITDA EPS CAGR ---------- PEG -------- --------- P/B -------- ROE
Ticker Company name (HKD) (US$m) (US$m) 2017E 2018E 2017E 2018E (2017-19) 2017E 2018E 2017E 2018E 2016A 2196 HK Shanghai Fosun Pharmaceutical
Group Co Ltd 36.80 8.5 13,583 22.9x 19.5x 32.9x 27.1x 17.2% 1.3x 1.1x 3.0x 2.7x 13.9%
1093 HK CSPC Pharmaceutical Group Ltd 13.14 19.7 10,186 29.3x 23.4x 19.1x 15.6x 23.3% 1.3x 1.0x 6.6x 5.5x 22.3% 1177 HK Sino Biopharmaceutical Ltd 8.86 15.5 8,409 29.7x 26.1x 14.9x 13.0x 13.9% 2.1x 1.9x 5.6x 4.6x 23.0% 2269 HK Wuxi Biologics Cayman Inc 39.45 6.3 5,875 n.a. 69.4x 64.2x 39.2x 79.6% n.a. 0.9x 9.5x 8.4x 67.8% 874 HK Guangzhou Baiyunshan
COMPANY DESCRIPTION China Yongda Auto Services Holdings is an owner-operator of luxury automobile dealership stores in China. The company operates 4S dealership stores, showrooms and repair centres. It also provides car rental and finance leasing services.
Yongda attended our Asian Gems Conference in Singapore recently. During the meetings, management emphasised the expansion of its finance leasing business through cooperation with leading players in insurance, banking and internet sectors. Yongda targets to grow its interest-bearing assets to Rmb7b and Rmb12b by the end of 2017 and 2018 respectively. New-car sales margin remains on an uptrend. Store additions ytd beat management’s target. Maintain BUY. Target price: HK$17.00.
WHAT’S NEW
Strategic cooperation to boost the growth of proprietary auto finance business. Yongda’s proprietary auto finance business includes: a) finance leasing, and b) consumer loans for buying insurance. As of 30 Jun 17, Yongda had Rmb2.9b of interest-bearing assets. The company targets to have Rmb7b, Rmb12b and Rmb18b of interest-bearing assets by the end of 2017, 2018 and 2019 respectively. In order to attain the targets, Yongda plans to introduce potential strategic shareholders from the insurance, banking and e-commerce sectors to bring in synergies for the finance leasing business. The proprietary auto finance business boasts a ROA of 2.5-3.0% and will serve as a new growth driver in the coming three years.
New-car sales margin remains on uptrend Management is confident that new-car sales gross margin will improve from 3.8% in 1H17 to a higher level in 2H17. The strong new-car sales gross margin will sustain through to 2019, driven by strong new product cycles of BMW and Porsche. The market response to BMW 5-series is stronger than expected, and the model is still selling at zero discount. In 1H18, BMW will launch its flagship SUV model, the new X3 in China. By end-17, Porsche will launch the new Cayenne. Also boosting the new-car sales margin in 2H17 would be the rebate for 2016 sales received from Audi in Jul-Aug 17.
Rapid after-sales service revenue growth. Yongda’s management expressed optimism regarding its after-sales services revenue growth. The times of services provided grew 13% yoy to 750,000 units in 1H17. Management stated Yongda retains 90% of its luxury car customers owing to high quality of services. 70% of its existing customers are return customers, and can be attributed to the quality after-sales services. The repair and maintenance cost per vehicle remains stable at 1.2-1.5% of the car’s ASP. We anticipate the after-sales service revenue will continue to grow at 20% CAGR in 2017-19, given the strong new-car sales and high customer retention rate.
KEY FINANCIALS Year to 31 Dec (Rmbm) 2015 2016 2017F 2018F 2019F
Launching 3-year auto insurance plans to expand insurance agency business. In order to expand its insurance agency business, Yongda is starting to sell 3-year insurance policies (vs the conventional one-year insurance policies) for certain insurance companies. Management believes that the new product, coupled with the proprietary auto finance business, will boost the growth of insurance commission incomes.
Store additions ytd beat targets. Management expressed optimism about the expansion of dealership network. Yongda has acquired 30 dealership stores ytd via M&As and self-building, and this has already outpaced management’s target of adding 20 stores p.a.. Management guided that the new dealership stores mainly sell luxury and ultra-luxury brands eg Porsche, BMW and Jaguar. Management expects to continue growing the dealership network via M&As and self-building in 2017 and 2018.
STOCK IMPACT
We maintain our 2017-19 assumptions on Yongda’s operating figures unchanged as shown in the table on the right.
EARNINGS REVISION/RISK
Maintain net profit forecasts for 2017-19 unchanged at Rmb1,466m/Rmb1,969m/Rmb2,358m respectively, implying yoy growth of 69%/34%/20% in 2017/18/19.
VALUATION/RECOMMENDATION
Maintain BUY on Yongda due to its burgeoning earnings growth underpinned by the strategic cooperation with e-commerce, insurance and banking giants in the proprietary business and continuous expansion of dealership network. We maintain our target price of HK$17.00 based on the same target 2018F PE of 13x. Catalyst will be the release of the upbeat 3Q17 results by Oct-Nov 17.
KEY ASSUMPTIONS
(Rmbm) 2016 2017F 2018F 2019F
No. of stores Dealership + service outlets 162 192 212 232
KEY METRICS Year to 31 Dec (%) 2016 2017F 2018F 2019F
Profitability
EBITDA margin 4.8 6.1 6.3 6.3
Pretax margin 2.7 4.0 4.4 4.6
Net margin 2.0 2.8 3.1 3.2
ROA 4.6 6.7 7.9 8.5
ROE 18.9 24.7 25.6 24.0
Growth
Turnover 20.7 21.2 20.9 15.1
EBITDA 26.0 55.3 24.5 14.4
Pre-tax profit 48.4 80.5 34.3 19.8
Net profit 62.3 72.2 34.3 19.8
Net profit (adj.) 48.2 68.5 34.3 19.8
EPS 48.2 59.5 29.3 14.2
Leverage
Debt to total capital 45.4 38.0 34.3 28.6
Debt to equity 186.3 129.4 106.0 75.7
Net debt to equity 123.3 85.4 69.5 35.1
Interest cover (x) 3.5 4.4 5.6 6.8
Wednesday , 18 Oc tober 2017
10 Refer to last page for important disclosures.
R e g i o n a l M o r n i n g N o t e s
Draft – for internal use only
ASIAN GEMS CORPORATE HIGHLIGHTS NOT RATED
Share Price HK$4.12
Target Price n.a
Upside n.a
COMPANY DESCRIPTION China Zhongwang is the second largest industrial aluminium extrusion product developer in the world and largest in Asia. Besides, Zhongwang also engaged in deep-processing and aluminium flat rolled business.
Venturing Into High-End Flat Rolling Aluminium Business
Post our Asian Gems Conference, China Zhongwang’s management shared some insight into its expansion plans. It has shifted its existing production facilities to produce aluminium alloy formworks (AAF), which accounted for 66% of its gross profit in 1H17. Going forward, Zhongwang will expand its second aluminium rolling production line in its Tianjin plant, adding 1.2m tonnes of production capacity. Management has guided for 2018 earnings to be flat as profit growth from the AAF segment will be offset by the start-up costs of new aluminium rolling plant.
WHAT’S NEW
Since the beginning of 2017, the company has shifted its focus to producing aluminium alloy formworks as it yields better ASP and margins. This segment now accounts for 40% of the company’s sales volume, 50% of revenue and 66% of gross profit for 1H17. Zhongwang stated that it operates on a cost plus model, and is thus able to pass through the strong aluminium cost to end-users. Management stated that they currently charge their customers processing fees as high as Rmb20,000/tonne for the final product (assuming ingot price of Rmb11,000/tonne). Based on the ASP for the AAF segment in 1H17 of Rmb32,480/tonne, spread margin was high at 61.6%. Going forward, management expects top-line growth to be driven by this segment.
Venturing into high-end flat rolling aluminium products. Zhongwang has commenced operation of its first Flat Rolling production line in its Tianjin plant (capacity of 0.6m tonnes) in Jul 17, and plans to gradually ramp up its second production line in the following two years (capacity of 1.2m tonnes). This new plant produces aluminium plates and sheets that are targeted at high-end customers. In addition, Zhongwang also acquired its first overseas company, Alunna, in Germany, which provides technical know-how and access to its high-end customer base such as Boeing and BMW.
Receivable days continued to trend up to 76 days in 1H17 (from 37 in 1H16), while inventory days trended up to 148 days (126 days in 1H16), as the company shifted its clientele to construction contractors (which require longer payback period). Management does not foresee any bad debts as it expects China to see strong economic growth.
Management expect profits to be flat next year as profit growth from the alloy formwork segment will be offset by the start-up costs of its new aluminium rolling plant. Dividend payout ratio has been on a rising trend from 35% in 2015 to 55% in 1H17, resulting in a decent annualised dividend yield of 4.8% for 2017.
KEY FINANCIALS Year to 31 Dec (Rmbm) 2013 2014 2015 2016
2017 Revenue And New Contract Targets Remain Intact
WTON highlighted that its 2017 revenue and new contract targets remain intact and guided for a milder gross margin amid a higher portion of revenue from the ready-mix business, in-line with our expectations. WTON also reiterated that they will not be impacted by the potential new regulation of a 50% internal pre-cast supply limitation among SOE contractors. Maintain BUY with a target price of Rp1,000, pegged to -1SD to the historical average PE of 19.2x on 2018F EPS.
WHAT’S NEW
New contracts in 9M17 reached Rp4.1t; full-year target remains intact. Wijaya Karya Beton (WTON) is on track to achieve its new contract target of Rp7t in 2017 as it has secured new orders of Rp3t in 1H17 and Rp1.1t in 3Q17. Management expects new contracts worth Rp3t to be signed in 4Q19, comprising an elevated highway (its first engineering, production & installation contract worth Rp1.5t), toll road projects (Rp0.6t) and many smaller projects (Rp0.9t). Infrastructure projects accounted for 59.9% of new contracts in 3Q17, followed by energy projects at 29.9%. With these projects in the pipeline, management is optimistic and believes it is on track to achieve full-year revenue of Rp5.1t for 2017 (1H17: Rp2.0t).
No impact from the potential regulations limiting internal precast supply. Management does not expect WTON to be affected by the potential new regulation limiting parent companies from awarding more than 50% of a government contract to its subsidiary. It is unclear if the limits are placed on all government contracts secured by parent WIKA or imposed on a project by project basis. Its biggest customer WIKA accounted for 22.9% of WTON’s revenue in 2Q17 (less than 50%). WTON is less reliant on SOEs as the private sector accounts for 53.1% of its total revenue.
Rising receivables day and milder gross margin as consequences of business expansion. Management also revealed that receivables are at around 3-4 months while payables are at 2-3 months. Thus, WTON has to finance a gap of one month in working capital. However, payments from WIKA’s (parent) turnkey projects had recently been stretched to once every six months. Management intends to resolve the mismatch on its working capital by securing supply chain financing and chasing for prompt payments by WIKA. Management also expects margins to be slightly lower due to the shift in revenue mix towards ready-mix concrete for toll road projects since 2Q17. The latter is in-line with our expectations and already reflected in our current earnings estimate.
20% increase in production capacity by 2018. WIKA’s current installed capacity is at 2.7m tonnes per year. It will add one production line at its new Subang plant and another one production line at its South Lampung plant in 4Q17, which increases installed capacity to 3.0m tonnes per year. Installed capacity will increase by another 10% to 3.3m tonnes per year in 2018 from new plants in Kalimantan and Subang, West Java.
No exposure yet to Jakarta-Bandung High Speed Rail (HSR) project. Given the lingering uncertainty over the HSR project, management stated that WTON still has no exposure to the project as it has not secured any contracts yet. Currently, its parent company, WIKA has commenced land preparation for the HSR project and WTON targets to secure Rp1.5t in contracts from WIKA and around Rp2.5t from Chinese contractors involved in the HSR projects next year.
Additional capital raising option from treasury share sale. WTON currently holds 337m in treasury shares, representing 4.3% of its total outstanding shares. The treasury shares were bought in Nov 13. The company has to sell the treasury shares within six years; otherwise, the shares would be cancelled by Nov 19. It has no plans to sell any treasury shares in 2017 but may reconsider its options should share price move higher in 2018. At current prices, the potential value of those treasury shares is around Rp200b.
EARNINGS REVISION/RISK
We maintain our earnings forecast as we foresee WTON is still on track to meet its 2017 target which is in-line with our expectation. The company’s new contract and revenue growth targets of 15-20% for 2018 are also in-line with our expectations.
VALUATION/RECOMMENDATION
Maintain BUY with a target price of Rp1,000, based on -1SD of the historical average PE of 19.2x on 2018F EPS. The stock is trading at 11.2x 2018F PE, or -1.6SD of its historical mean. We understand the scarcity premium over WTON’s valuation is no longer justifiable, but we deem the current valuation attractive considering the 29% earnings growth potential in the next two years.
CUSTOMER PROFILE AS OF 1H17
Source: WTON
PRE-CAST PRODUCTION CAPACITY (MTONNE)
Source: WTON
PRODUCTION FACILITIES No Section Area (ha) No. of
production line
1 North Sumatra 5.0 6
2 Lampung 6.1 5
3 South Lampung 27.3 3
4 Bogor 13.2 8
5 Karawang 13.8 4
6 Subang 50.0 2
7 Majalengka 6.5 3
8 Boyolali 4.1 6
9 Pasuruan 12.9 7
10 South Sulawesi 10.8 5
11 North Sumatera Mobile Plant - 1
12 PT Citra Lautan Teduh 27.5 2
13 Wika Kobe 3.5 2
14 Wika Krakatau Beton 3.0 0
15 Quarry Cigudeg 43.1 0
16 Quarry Donggala 23.7 0
17 Quarry South Lampung 42.7 0
18 Others 0.4 0
Total 293.6 54
Source: WTON
Wednesday , 18 Oc tober 2017
15 Refer to last page for important disclosures.
R e g i o n a l M o r n i n g N o t e s
Draft – for internal use only
PROFIT & LOSS
BALANCE SHEET Year to 31 Dec (Rpb) 2016 2017F 2018F 2019F Year to 31 Dec (Rpb) 2016 2017F 2018F 2019F
COMPANY DESCRIPTION The Erawan Group (ERW) is a leading hotel investment company in Thailand. Its hotel portfolio ranges from luxury to mid-scale and economy across Thailand’s major tourist destinations.
We remain upbeat on ERW’s prospects on the back of its expansion plan in both Thailand and the Philippines. In addition, the heavy hotel investment during the past few years has started to pay off amid the rising number of tourist arrivals. We revise up our earnings projections for 2017-20 by 2-8%. Share price remains attractive, trading at 12.7x 2018F EV/EBITDA or -0.5SD to its 5-year mean. Maintain BUY with a target price of Bt8.00.
WHAT’S NEW
Expansion plan on track. The Erawan Group (ERW) plans to open seven new hotels in 2H17. This bodes well in supporting its long-term growth and should bring the number of ERW’s owned hotels from 41 (6,385 rooms) in 2016 to 52 hotels (7,315 rooms) by end-17. For its 5-year plan, ERW has set a 5-year capex of Bt10b for 2016-20 (Bt7b for Thailand, Bt3b for the Philippines), and this amount will be used to open more than 50 hotels in both countries. Management guidance suggests that the expansion plan remains on track. Meanwhile, we expect D/E ratio to rise to 1.9x in 2020, which is still manageable as the company’s debt covenant is 2.5x.
Expect 3Q17 earnings to have grown 43% yoy. We expect ERW to report a Bt80m core profit in 3Q17 (+43% yoy, ad +39% qoq). Key drivers would be: a) RevPar (excluding the budget segment) growth of 3% yoy, and b) EBITDA margin rising 40bp yoy to 27.8%. Overall, both Bangkok and upcountry hotels should see good performance, given the continued growth in tourist arrivals. This should bring 9M17 core profit to account for 69% of our full-year forecast.
Tourist arrivals gained momentum in 9M17. The number of tourist arrivals has continued to gain momentum, rising 5% yoy to 26.1m in 9M17. We believe tourist arrivals would be able to meet the Tourism Authority of Thailand’s (TAT) growth forecast of 6% yoy to 34.4m for 2017. Key supporting factors are continued growth in Chinese and Russian tourist numbers. ERW’s management also believes in the long-term growth prospects of the domestic tourism industry in Thailand. As economies grow, the advent of the low-cost carrier, and income levels rise, people will have a high propensity to travel more. Hence, the number of domestic travelers has continued to rise as well. Since the major markets for hotel revenue comes from Thai (16%) and Chinese (17%) travelers, ERW is a key beneficiary of growth prospects in tourism.
KEY FINANCIALS Year to 31 Dec (Btm) 2015 2016 2017F 2018F 2019F
JW Marriot Bangkok’s renovation plan will take place during 2017-19. Normally, ERW does a soft renovation for its hotels in their 10th year, and a hard renovation in the 20th year. ERW plans to renovate its JW Marriot Bangkok during the low season, which will take three years to complete (2017-19), with one-third of its inventory down for a few months in each phase. We believe downside risk is limited since: a) the renovation plan will take place during the low season, and resume operation during the high season, and b) there will be an approximate 10% increase in room rates charged after the completion of each phase of renovation.
Opportunities outside Thailand; continued focus on the Philippines. ERW’s management has viewed the Philippines as the next best hotel market apart from Thailand, based on demand and supply dynamics. Management believes that supply is still lagging in the Philippines, at a time when the domestic demand is growing, led by its growing economy. Although ERW has other countries in mind, such as Indonesia and Myanmar, they are not as economical as the Philippines to penetrate. In addition, its Hop Inn hotel in the Philippines (which opened in Dec 16) has seen an impressive performance with occupancy of around 80% in 1H17 vs its internal target of 70%.
EARNINGS REVISION/RISK
We revise up our 2017-20 earnings forecasts by 2-8% to factor in various assumptions including: a) up-to-date hotel expansion plans. We raise our forecast on the number of total hotels to 85 by end-20 (vs previous forecast of 80 hotels), and b) higher-than-expected EBITDA margin given more economies of scale.
EARNINGS REVISION Year to 31 Dec (Btm) 2017F Old 2017F New Chg (%) 2018F Old 2018F New Chg (%) Net turnover 6,158 6,170 0.2 6,568 6,597 0.4 Core profit 493 501 1.7 553 583 5.4 SG&A to sales (%) 25.7 25.7 0bp 25.0 24.8 -20bp Gross Margin (%) 41.7 41.9 +20bp 41.7 42.0 +30bp Source: UOB Kay Hian
VALUATION/RECOMMENDATION
Maintain BUY. ERW’s share price has increased by 49% ytd compared with the average 16% of the hotel sector under our coverage. Its impressive return is in line with our optimistic view. Looking forward, we believe its share price may continue to be supported by a promising industry outlook and strong earnings growth prospect. Meanwhile, the stock is still trading at an attractive 12.7x 2018F EV/EBITDA, or -0.4SD to its 5-year mean. Maintain BUY with a target price of Bt8.00, based on DCF (WACC: 6.7%, terminal growth: 3.0%). ERW remains our top pick for the sector.
Our target price also implies 14.4x 2018F EV/EBITDA, or pegged at +0.3SD to its 5-year mean.
SHARE PRICE CATALYST
Rising number of tourist arrivals.
TOTAL REVENUE BY SEGMENT (2016)
Source: ERW, UOB Kay Hian
HOTEL STATS (EXCL. BUDGET SEGMENT)
Source: UOB Kay Hian
EV/EBITDA BAND
Source: UOB Kay Hian
DCF VALUATION
Long-term D/E 67%
Beta 0.8
WACC 6.7%
Terminal growth 3.0%
Valuation (Btm)
Enterprise value 29,193.1
Less: Net debt 8,945.6
Less: MI 210.8
Equity value 20,036.7
No. of shares 2,500
Target price (Bt) 8.0 Source: UOB Kay Hian
Wednesday , 18 Oc tober 2017
18 Refer to last page for important disclosures.
R e g i o n a l M o r n i n g N o t e s
Draft – for internal use only
PROFIT & LOSS Year to 31 Dec (Btm) 2016 2017F 2018F 2019F
Net turnover 5,571 6,170 6,597 7,091
EBITDA 1,586 1,859 2,028 2,217
Deprec. & amort. 730 820 849 925
EBIT 856 1,039 1,179 1,292
Total other non-operating income 21 0 0 0
Associate contributions 15 20 20 20
Net interest income/(expense) (362) (372) (398) (431)
Pre-tax profit 529 687 801 881
Tax (122) (160) (187) (207)
Minorities (41) (26) (30) (33)
Net profit 367 501 583 641
Net profit (adj.) 346 501 583 641
BALANCE SHEET Year to 31 Dec (Btm) 2016 2017F 2018F 2019F
Fixed assets 11,707 12,887 14,038 15,113
Other LT assets 1,925 1,782 1,783 1,784
Cash/ST investment 795 634 689 841
Other current assets 483 438 469 503
Total assets 14,911 15,742 16,979 18,240
ST debt 2,557 2,166 2,301 2,436
Other current liabilities 1,049 1,198 1,286 1,360
LT debt 5,867 6,700 7,334 7,967
Other LT liabilities 365 282 282 282
Shareholders' equity 4,918 5,216 5,566 5,951
Minority interest 155 180 211 244
Total liabilities & equity 14,911 15,742 16,979 18,240
CASH FLOW Year to 31 Dec (Btm) 2016 2017F 2018F 2019F
3Q17: Earnings Below Forecast On Higher Provisions
Top-line growth was still sluggish on weak loan growth, but bottom-line growth was supported by strong non-II. Moderate NPL formation and further write-offs have forced the bank to keep credit costs at a high level to prevent coverage ratio from dropping below 140%. Maintain HOLD. Target price: Bt2.70. Entry price: Bt2.40.
RESULTS
Earnings below expectations. TMB reported a net profit of Bt2.0b, up 9% yoy. However, results were 14% below our forecast with key variance coming from higher-than-expected provisions.
STOCK IMPACT
Flattish NII. Net interest income edged slightly lower by 1% yoy (flat qoq) while loan growth was relatively weak at 0.4% qoq. Net interest margin (NIM) softened slightly by 8bp qoq to 3.11% (-13bp yoy) as a result of loan growth tilting towards low-yield lending (money market and mortgage).
Non-II was healthy. Non-interest income (non-II) growth was healthy, up 18% yoy. This was supported by net fee income which grew 37%, underpinned by a strong growth in bancassurance fees, mutual fund and other commercial fees.
Opex slightly ahead of expectations. Opex was up 8% yoy, driven by higher marketing expenses. Overall, cost/income ratio rose to 47% vs 46% forecast.
Credit costs still high. The bank’s NPL formation (by our calculation) has improved slightly to 0.36% in 3Q17 (2Q17: 0.45%). However, reported NPL balance fell slightly by 1% qoq to Bt18b or 2.44% of total loans (2Q17: 2.56%) as the bank continued to write off its NPLs (Bt2.3b). To facilitate these write-offs, credit costs were kept high at 154bp (vs our forecast of 142bp) to maintain coverage ratio at around 140% level.
KEY FINANCIALS Year to 31 Dec (Btm) 2015 2016 2017F 2018F 2019F
Earnings revisions. Factoring in the weaker-than-expected 3Q17 numbers, we have cut our 2017 earnings forecast by 6%. Accordingly our 2018 earnings forecast has also been trimmed by 4%.
EARNINGS REVISIONS (Btm) 2017F 2018F 2019F Old 9,129 11,345 12,720 New 8,605 10,846 12,233 % chg -6% -4% -4%
Source: UOB Kay Hian
VALUATION/RECOMMENDATION
Re-iterate HOLD. We re-iterate our neutral view on TMB. As we roll over valuation to next year, we have raised our target price to Bt2.70 (pegged at 1.2x 2018F P/B against 11.5% ROE. Maintain HOLD with entry price at Bt2.40.
SHARE PRICE CATALYST
No near-term catalyst.
3Q17 RESULTS
Profit & Loss (Btm) 3Q17 3Q16 yoy % chg UOBHK Est. Deviation (%) Comments Net interest income 6,192 6,268 (1) 6,238 (1) Loan up 0.4% qoq Net fee & Commissions 2,791 2,034 37 2,493 12 Driven by mutual fund and bancassurance fees. Other income 392 662 (41) 550 (29) Lower forex Operating expenses (4,446) (4,123) 8 (4,231) 5 Driven by higher marketing expenses PPOP 4,929 4,841 2 5,050 (2) Credit Cost (2,391) (2,541) (6) (2,200) 9 Credit costs @ nearly 154bp to facilitate NPLs write-off PBT 2,538 2,300 10 2,850 (11) Net Profit 2,003 1,845 9 2,333 (14) EPS (Bt) 0.0 0.0 9 0.05 (14) DPS (Bt) BVS (Bt) 1.97 1.84 7 2.0 (0) Financial Ratio (%) 3Q17 3Q16 yoy chg (ppt) qoq chg (ppt) Comments NIM 3.1 3.2 (0.13) 3.2 (0.05) Loans growth skewed towards loan yield Loan Growth 4.7 4.2 0.43 6.4 (1.69) Deposit Growth 0.1 (0.6) 0.70 1.1 (1.01) Loan/Deposit Ratio 101.9 97.5 4.48 102.5 (0.61) Cost/Income Ratio (47.4) (46.0) (1.42) (45.6) (1.84) ROE 9.2 9.1 0.10 10.9 (1.65) NPLs Ratio 2.4 2.5 (0.06) 2.6 (0.12) NPLs slightly down on Bt2.3b write-off Credit Cost (bp) (154.5) (171.8) 17.35 (139.9) (14.60) Higher credit costs to facilitate write-off and to maintain
coverage ratio at 140% Loan Loss Coverage 140.8 142.3 (1.56) 146.9 (6.18) CET-1 CAR 13.6 12.9 0.70 12.3 1.30
Source: TMBl, UOB Kay Hian
Wednesday , 18 Oc tober 2017
21 Refer to last page for important disclosures.
R e g i o n a l M o r n i n g N o t e s
Draft – for internal use only
PROFIT & LOSS Year to 31 Dec (Btm) 2016 2017F 2018F 2019F
KEY METRICS Year to 31 Dec (%) 2016 2017F 2018F 2019F
Growth Net interest income, yoy chg 6.6 0.0 9.2 4.4
Fees & commissions, yoy chg 2.2 30.6 8.0 10.0
Pre-provision profit, yoy chg 9.7 6.6 12.9 7.3
Net profit, yoy chg (11.9) 4.6 26.0 12.8
Net profit (adj.), yoy chg (11.9) 4.6 26.0 12.8
Customer loans, yoy chg 3.0 7.3 7.1 7.1
Customer deposits, yoy chg (7.1) 7.1 7.0 7.0
Profitability Net interest margin 3.2 3.1 3.2 3.2
Cost/income ratio 47.1 47.0 45.1 44.5
Adjusted ROA 1.0 1.0 1.2 1.3
Reported ROE 10.3 9.9 11.5 11.9
Adjusted ROE 10.3 9.9 11.5 11.9
Valuation P/BV (x) 1.4 1.3 1.2 1.1
P/NTA (x) 1.4 1.3 1.2 1.1
Adjusted P/E (x) 13.9 13.3 10.5 9.3
Dividend Yield 2.2 2.3 2.9 3.2
Payout ratio 30.0 30.0 30.0 30.0
Wednesday , 18 Oc tober 2017
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R e g i o n a l M o r n i n g N o t e s
Draft – for internal use only
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Wednesday , 18 Oc tober 2017
23 Refer to last page for important disclosures.
R e g i o n a l M o r n i n g N o t e s
Draft – for internal use only
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