ed: CK / sa: CT, PY SET : 1,571.05 Analyst Chanpen SIRITHANARATTANAKUL +662 657 7824 [email protected]Thailand Research Team +662 657 7831 [email protected]Key Indices Current % Chng SET Index 1571.05 0.48% SET 100 Index 2223.24 0.49% SET 50 Index 985.53 0.47% Bt/US$ Exchange Rate 35.65 -0.37% Daily Volume (m shrs) 12,644 Daily Turnover (US$m) 1,946 Source: SET, DBS Vickers Market Key Data (%) EPS Gth Div Yield 2015A (16.9) 3.1 2016F 35.8 3.0 2017F 7.1 3.1 (x) PER EV/EBITDA 2015A 20.9 8.8 2016F 15.5 8.4 2017F 14.5 7.9 Source: DBS Vickers STOCKS Source: DBS Vickers, Bloomberg Finance L.P. Closing price as of 30 Dec 2016 DBS Group Research . Equity 6 Jan 2017 Thailand Market Focus Strategy Refer to important disclosures at the end of this report Bottom-up selection still key Our 12-month SET Index target is at 1650, representing 15.6x 2017F earnings Expect market EPS growth of 7% for 2017 Five themes for investment in 2017 Top 10 picks: ANAN, AOT, CK, CPALL, GL, IVL, MTLS, SCC, TISCO, and TKN. 2016 recap. The Thai market was the best performing market in the region in 2016, with the SET Index rising 19.8% vs 3.5% gain for regional peers. The strong performance was due to the strong corporate EPS growth of c. 36% boosted by energy, petrochem and transportation sector and the return of foreign investors into the market. Mid/small-cap stocks (+64.8%) strongly outperformed large-cap ones (+18.9%), thanks to their superior earnings growth outlook. Expect 7% corporate EPS growth for 2017. Looking forward to 2017, we expect market earnings to grow 7%. Our current earnings growth forecast is 15% for 2017. We believe the key difference was mainly in the banking and energy sector, due to different in provisioning and oil price assumptions. Based on our conservative 7% EPS growth, our SET Index target is now 1650, based on 15.6x earnings in 2017. Five themes for 2017 investment. We have five themes for investment in 2017. They are (i) infrastructure upcycle – The rising infrastructure spending in 2017 should be a key catalyst for construction contractors like CK, SCC, STEC (ii) superior earnings growth outlook – Those fit the themes are ANAN, FN, IVL, WORK, MTLS, TKN, BEAUTY (iii) strong tourism – Beneficiaries are AOT, ERW (iv) strong US dollar – This should benefit exporters like IVL, HANA, TU (v) CLMV exposure – GL, BEAUTY, CBG Top ten picks. Our top ten picks are Ananda Development (ANAN), Airports of Thailand (AOT), Ch. Karnchang (CK), CP All (CPALL), Group Lease (GL), Indorama Ventures (IVL), Muangthai Leasing (MTLS), Siam Cement (SCC), Tisco Group (TISCO), and Taokaenoi Marketing (TKN). Price Mkt Cap Target Price Performance (%) Bt US$m Bt 3 mth 12 mth Rating Ananda Development 4.94 458 5.60 2.1 24.6 BUY Airports of Thailand 398.00 15,826 455.00 (1.5) 17.5 BUY Ch. Karnchang 31.00 1,462 40.00 5.1 13.8 BUY CP ALL 62.50 15,627 75.00 2.5 47.0 BUY Group Lease Public Co Ltd 57.25 2,431 88.00 81.6 339.5 BUY Indorama Ventures 33.50 4,489 42.00 9.2 57.5 BUY Muangthai Leasing Pcl 24.70 1,458 32.00 42.1 28.7 BUY Siam Cement 496.00 16,567 580.00 (8.4) 9.6 BUY TISCO Financial Group 60.25 1,343 65.00 4.7 37.3 BUY Taokaenoi Food & Marketing 28.00 1,076 32.00 17.8 na BUY
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ANAN specialises in developing condos near mass-transit
stations (<500m) with brands like Ideo and Ashton.
The JV with Mitsui Fudosan, 51% held by ANAN, is
expected to turn profitable in 4Q16F, thanks to the
completion of Ideo Q Chula-Samyan (Bt6.8bn).
Five more JV projects worth a combined Bt18.6bn are
scheduled to be completed next year.
We expect FY17F share of profit from JV of Bt546m (vs loss
of Bt171m in FY16F) and lofty earnings growth of 51% for
ANAN in FY17F. In addition to the strongest FY17F
earnings growth in the industry, ANAN’s FY17F transfers
(ANAN + JV) are also most secured (74% secured).
BUY Bt398.00
Forecasts and Valuation
Airports of Thailand (AOT TB, TP: Bt455.0)
Solid long-term fundamentals
FY Sep (Bt m) 2014A 2015A 2016A 2017F
Revenue 37,585 43,969 50,962 55,373
EBITDA 21,157 26,880 31,024 33,731
Pre-tax Profit 15,269 23,335 24,424 28,089
Net Profit 12,220 18,729 19,571 22,536
Net Pft (Pre Ex.) 12,029 15,755 19,482 22,536
Net Pft Gth (Pre-ex) (%) 21.1 31.0 23.7 15.7
EPS (Bt) 8.55 13.1 13.7 15.8
EPS Pre Ex. (Bt) 8.42 11.0 13.6 15.8
EPS Gth Pre Ex (%) 21 31 24 16
Diluted EPS (Bt) 8.55 13.1 13.7 15.8
Net DPS (Bt) 4.94 5.00 4.20 4.80
BV Per Share (Bt) 67.9 76.0 84.9 96.5
PE (X) 46.5 30.4 29.1 25.2
PE Pre Ex. (X) 47.3 36.1 29.2 25.2
P/Cash Flow (X) 30.0 22.8 18.7 21.4
EV/EBITDA (X) 26.5 20.6 17.4 16.1
Net Div Yield (%) 1.2 1.3 1.1 1.2
P/Book Value (X) 5.9 5.2 4.7 4.1
Net Debt/Equity (X) CASH CASH CASH CASH
ROAE (%) 13.0 18.2 17.0 17.4
Source: Company, DBS Vickers
Temporary impact from the crackdown of zero-dollar tours. Thailand still offers cost-competitive travelling and a variety of destinations. Also, the Thailand tourism industry has shown its resilience by rebounding rapidly in the wake of several unfavourable events in the past.
Government’s stimuli to boost international tourist arrivals
to Thailand. The cut in visa fees on arrival temporarily
from Bt2,000 to Bt1,000 and waiver of visa fees of
Bt1,000 for foreign tourists from 19 nations including
China, Bhutan, India, Taiwan, and Saudi Arabia, which will
be implemented from 1 Dec to 28 Feb 2017, will surely
boost international arrivals to Thailand.
Non-aeronautical business to be another earnings driver.
Besides passenger service charges, we expect concession
revenue to drive earnings growth further. The additional
concession revenue would come from additional
commercial space at i) Don Muang airport (from 6,144
sqm to 33,253 sqm), ii) Phuket airport (from 5,229 sqm to
10,289 sqm), and iii) increase of revenue sharing at
Suvarnbhumi Airport from 18% in FY16 to 19% in FY17.
Market Focus
Page 5
BUY Bt31.00 Forecasts and Valuation
Ch. Karnchang (CK TB, TP: 40.0)
King of infrastructure plays
FY Dec (Bt m) 2014A 2015A 2016F 2017F
Revenue 32,951 34,912 47,389 44,833
EBITDA 3,776 3,178 4,981 5,978
Pre-tax Profit 2,700 2,719 2,559 2,154
Net Profit 2,296 2,193 2,184 1,968
Net Pft (Pre Ex.) 992 182 2,184 1,968
Net Pft Gth (Pre-ex) (%) nm (81.7) 1,102.2 (9.9)
EPS (Bt) 1.36 1.29 1.29 1.16
EPS Pre Ex. (Bt) 0.59 0.11 1.29 1.16
EPS Gth Pre Ex (%) nm (82) 1,102 (10)
Diluted EPS (Bt) 1.39 1.33 1.32 1.19
Net DPS (Bt) 0.35 0.40 0.39 0.35
BV Per Share (Bt) 11.3 12.1 13.2 14.0
PE (X) 22.9 23.9 24.0 26.7
PE Pre Ex. (X) 52.9 289.1 24.0 26.7
P/Cash Flow (X) 48.4 nm nm 377.5
EV/EBITDA (X) 23.7 32.0 23.5 20.1
Net Div Yield (%) 1.1 1.3 1.2 1.1
P/Book Value (X) 2.7 2.6 2.3 2.2
Net Debt/Equity (X) 1.9 2.3 2.8 2.8
ROAE (%) 12.9 11.1 10.2 8.5
Source: Company, DBS Vickers
We see abundant opportunities for CK, thanks to the
rollout of infrastructure projects – especially the MRT
works which CK has a strong competitive edge. We expect
the infrastructure spending in FY17 to reach Bt500bn
CK has gained 32% market share of the bidding result of
the Bt77bn MRT orange line, which is the highest market
share among other major contractors
Additionally, we expect CK to secure the M&E system and
O&M service* contracts for the blue line extension project,
worth Bt25bn, from Bangkok Expressway and Metro PCL
(BEM TB), this year
* Operations Service and Maintenance (O&M); Mechanical and
Electrical (M&E)
Reiterate BUY; currently CK is the top pick in the
contractor sector. Our target price of Bt40.0 is based on
SOP valuation, comprising Bt15 for the construction
business and Bt25 for its investment.
BUY Bt62.50 Forecasts and Valuation
CPALL (CPALL TB, TP: Bt75.00)
Persistent strength
FY Dec (Bt m) 2014A 2015A 2016F 2017F
Revenue 357,766 391,817 436,663 492,038
EBITDA 26,802 32,554 35,880 41,077
Pre-tax Profit 12,589 16,884 19,963 25,017
Net Profit 10,200 13,682 16,219 20,094
Net Pft (Pre Ex.) 9,823 13,687 16,219 20,094
Net Pft Gth (Pre-ex) (%) (10.7) 39.3 18.5 23.9
EPS (Bt) 1.13 1.52 1.80 2.24
EPS Pre Ex. (Bt) 1.09 1.52 1.80 2.24
EPS Gth Pre Ex (%) (11) 39 19 24
Diluted EPS (Bt) 1.13 1.52 1.80 2.24
Net DPS (Bt) 0.82 1.07 1.26 1.57
BV Per Share (Bt) 3.43 4.16 4.82 5.49
PE (X) 55.3 41.0 34.6 28.0
PE Pre Ex. (X) 57.2 41.0 34.6 28.0
P/Cash Flow (X) 21.3 17.9 18.3 16.5
EV/EBITDA (X) 27.3 22.5 20.3 17.7
Net Div Yield (%) 1.3 1.7 2.0 2.5
P/Book Value (X) 18.2 15.0 13.0 11.4
Net Debt/Equity (X) 4.7 4.0 3.4 3.0
ROAE (%) 34.3 40.2 40.2 43.4
Source: Company, DBS Vickers
Driven by aggressive expansion plan. CPALL continues to
aggressively expand the number of outlets. It plans to roll
out at least 700 stores p.a. and has a target to reach
12,000 stores in the next three years.
Expanding margins. CPALL’s gross margin should be
healthy, thanks to economies of scale from a larger
network and increasing contribution from higher-margin
products such as ready-to-eat meals and health and beauty
items.
Healthier balance sheet. CPALL issued perpetual
debentures worth c.Bt10bn in Nov to refinance its existing
debts. The perpetual debenture would be classified as
equity and will lower its debt to equity (we expect the end-
2016 ratio to fall from 4.5x in 3Q16 to 3.5x). Interest
expenses on the perpetual debenture will not be booked in
P&L statements, but instead flow from retained earnings in
the balance sheet. However, this should have only a
minimal impact on its ability to pay dividends.
Market Focus
Page 6
BUY Bt57.25
Forecasts and Valuation
Group Lease (GL TB, TP: Bt88.00)
The best has yet to come
FY Dec (Btm) 2014A 2015A 2016F 2017F
Pre-prov. Profit 630 1,083 1,593 2,849
Net Profit 116 583 1,097 2,209
Net Pft (Pre Ex.) 116 583 1,097 2,209
Net Pft Gth (Pre-ex) (%) (51.7) 402.0 88.1 101.5
EPS (Bt) 0.11 0.41 0.72 1.35
EPS Pre Ex. (Bt) 0.11 0.41 0.72 1.35
EPS Gth Pre Ex (%) (56) 269 77 87
Diluted EPS (Bt) 0.11 0.41 0.72 1.35
PE Pre Ex. (X) 519.2 140.7 79.6 42.5
Net DPS (Bt) 0.06 0.16 0.28 0.34
Div Yield (%) 0.1 0.3 0.5 0.6
ROAE Pre Ex. (%) 4.9 11.5 14.0 19.6
ROAE (%) 4.9 11.5 14.0 19.6
ROA (%) 1.8 6.5 7.8 12.2
BV Per Share (Bt) 2.39 5.29 5.30 8.79
P/Book Value (x) 24.0 10.8 10.8 6.5
Source: Company, DBS Vickers
At present, it has presence in five countries outside
Thailand. GL now has investments in Thailand and five
other countries, namely Cambodia, Laos, Indonesia,
Myanmar, and Sri Lanka. The company is now operating
three key businesses, i.e. hire purchase, asset-backed
loans, and microfinance. Its unique Digital Finance Platform
is very successful and has now been used in, and will also
be applied to GL’s operations in other countries.
Leveraging its large customer/supplier networks. Other
than HP loans, GL now also provides asset-backed loans to
retail customers and working capital loans to suppliers
(SMEs). GL also earns consulting services fees from
suppliers on services rendered to enable its products to
reach potential customers. Those non-HP businesses are
more profitable and will soon become a substantial part of
GL’s income.
Growth story does not end here. GL is always looking for
new investment opportunities across countries, banking on
the 2.5bn potential customers worldwide who have no
credit history and no access to traditional finance. GL
believes it can utilise its Digital Finance Platform and expand
into the rural areas of several countries. In three years, GL
expects overseas businesses to contribute 90% of its profit.
BUY Bt33.50 Forecasts and Valuation
Indorama Ventures (IVL TB, TP: Bt42.00)
Earnings optimism continues
FY Dec (Bt m) 2014A 2015A 2016F 2017F
Revenue 243,907 234,698 231,568 251,435
EBITDA 12,736 16,905 28,203 30,505
Pre-tax Profit 3,586 8,769 20,154 14,015
Net Profit 1,675 6,609 16,208 10,048
Net Pft (Pre Ex.) 234 2,935 9,581 10,048
Net Pft Gth (Pre-ex) (%) nm 1,153.7 226.4 4.9
EPS (Bt) 0.35 1.37 3.37 2.09
EPS Pre Ex. (Bt) 0.05 0.61 1.99 2.09
EPS Gth Pre Ex (%) nm 1,154 226 5
Diluted EPS (Bt) 0.35 1.37 3.37 2.09
Net DPS (Bt) 0.38 0.48 1.18 0.73
BV Per Share (Bt) 15.1 16.6 19.1 20.2
PE (X) 96.3 24.4 10.0 16.1
PE Pre Ex. (X) 688.9 54.9 16.8 16.1
P/Cash Flow (X) 7.2 6.5 4.2 8.1
EV/EBITDA (X) 17.8 14.3 9.0 8.7
Net Div Yield (%) 1.1 1.4 3.5 2.2
P/Book Value (X) 2.2 2.0 1.8 1.7
Net Debt/Equity (X) 0.8 0.9 0.9 1.0
ROAE (%) 2.5 8.7 18.9 10.6
Source: Company, DBS Vickers
Positive view is intact. IVL’s earnings outlook should be
driven by sales volume growth and more contribution from
high value-added products. Its share price performance
however has not fully reflected this positive development.
HVA capacity to boost earnings and margins. Several
acquisitions of high-value-added (HVA) products in 2016
would continue to lift IVL’s margin and its market
positioning in specialty chemical markets. These HVA
products would be the key factor in stabilising IVL’s core
EBITDA/ton in the longer term given its steady margins.
Core EBITDA/ton of HVA in 9M16 at US$225/ton was way
above that of commodity-grade products, which only
averaged US$54/ton.
Core EBITDA/ton is expected to gradually improve. We
estimate IVL’s core EBITDA/ton to gradually increase from
US$93/ton in 2015 to US$97-98 by 2018, given a higher
proportion of HVA products in its portfolio. This is
expected to rise to >US$100/ton by 2019 when the ethane
cracker in the US starts operations in late 2017 after the
completion of the refurbishment of the plant.
Beneficiary of strong USD. IVL is one of the beneficiaries of
strong USD as its product price is linked to USD while
operating cost is largely in local currencies. Its local
presence in each region also protects the company from
trade barrier.
Market Focus
Page 7
BUY Bt24.70
Forecasts and Valuation
Muangthai Leasing (MTLS TB, TP: Bt32.00)
Stellar growth
FY Dec (Btm) 2014A 2015A 2016F 2017F
Pre-prov. Profit 694 1,056 2,065 3,140
Net Profit 544 825 1,392 2,098
Net Pft (Pre Ex.) 544 825 1,392 2,098
Net Pft Gth (Pre-ex) (%) 54.8 51.6 68.7 50.8
EPS (Bt) 0.32 0.39 0.66 0.99
EPS Pre Ex. (Bt) 0.32 0.39 0.66 0.99
EPS Gth Pre Ex (%) 39 21 69 51
Diluted EPS (Bt) 0.32 0.39 0.66 0.99
PE Pre Ex. (X) 76.8 63.5 37.6 25.0
Net DPS (Bt) 0.13 0.20 0.25 0.30
Div Yield (%) 0.5 0.8 1.0 1.2
ROAE Pre Ex. (%) 15.5 15.3 22.7 28.3
ROAE (%) 15.5 15.3 22.7 28.3
ROA (%) 7.4 7.5 7.3 6.8
BV Per Share (Bt) 3.02 2.67 3.12 3.86
P/Book Value (x) 8.2 9.3 7.9 6.4
Source: Company, DBS Vickers
Aggressive branch expansion. MTLS targets to have 1,600
branches by end-2016 and 2,200 by end-2017. In 3Q16,
279 branches were added, making the total number at
1,515.
Robust balance sheet. Its strong balance sheet is the key
factor to support the company’s aggressive business
expansion (NPL=0.95%; coverage ratio >280%; and D/E
ratio=2.4x at end-3Q16).
Strong growth in portfolio and earnings. We expect
MTLS's loan portfolio and EPS to expand 87%/46% and
69%/51% respectively in FY16/17F
BUY, with Bt32.00 TP. Our TP is based on GGM (21%
ROE, 10% growth, and 11% cost of equity).
BUY Bt496.00 Forecasts and Valuation
Siam Cement (SCC TB, TP: Bt580.00)
Lift from regional presence
FY Dec (Bt m) 2014A 2015A 2016F 2017F
Revenue 487,545 439,614 424,972 448,236
EBITDA 67,256 89,639 95,657 99,105
Pre-tax Profit 41,928 59,793 67,112 66,367
Net Profit 33,615 45,400 53,212 51,264
Net Pft (Pre Ex.) 33,615 45,400 53,212 51,264
Net Pft Gth (Pre-ex) (%) (8.0) 35.1 17.2 (3.7)
EPS (Bt) 28.0 37.8 44.3 42.7
EPS Pre Ex. (Bt) 28.0 37.8 44.3 42.7
EPS Gth Pre Ex (%) (8) 35 17 (4)
Diluted EPS (Bt) 28.0 37.8 44.3 42.7
Net DPS (Bt) 12.5 16.0 17.8 17.2
BV Per Share (Bt) 148 172 199 225
PE (X) 17.7 13.1 11.2 11.6
PE Pre Ex. (X) 17.7 13.1 11.2 11.6
P/Cash Flow (X) 12.5 8.8 7.7 8.2
EV/EBITDA (X) 11.8 8.9 8.3 8.0
Net Div Yield (%) 2.5 3.2 3.6 3.5
P/Book Value (X) 3.4 2.9 2.5 2.2
Net Debt/Equity (X) 0.8 0.7 0.5 0.5
ROAE (%) 19.8 23.7 23.9 20.1
Source: Company, DBS Vickers
Chemical segment still the key earnings driver. The
chemical segment including its associate in Indonesia could
still be the key driver for earnings, the cement and building
materials segment is expected to provide upside potential
to profit in 2017-18F given more cement demand for
infrastructure projects in Thailand and ASEAN.
Focusing on adding high value-added products. SCC has
continued to emphasise its strategic move to increase the
proportion of HVA products in its portfolio since 2004 in
order to reduce volatility from commodity-grade products,
and improve margins. Revenue from HVA products already
accounted for 38% of total revenue.
Strong presence in CLMV market. SCC has been proactive
in expanding its business into Cambodia, Laos, Myanmar
and Vietnam (CLMV) with revenue contribution from this
market accounting for 12.8% of total sales revenue in
9M16. This was mainly from cement business; capacity in
this market accounts for 20% of total cement capacity. Its
first cement plant in the CLMV market started operations
in 2007 in Cambodia. A new plant in Laos will commence
operations in 1H17.
Market Focus
Page 8
BUY Bt60.25 Forecasts and Valuation
TISCO Financial Group (TISCO TB; TP Bt65.00) The tide has turned
FY Dec (Btm) 2014A 2015A 2016F 2017F
Pre-prov. Profit 9,692 10,468 10,133 10,489
Net Profit 4,250 4,250 5,035 5,870
Net Pft (Pre Ex.) 4,250 4,250 5,035 5,870
Net Pft Gth (Pre-ex) (%) 1.7 0.0 18.5 16.6
EPS (Bt) 5.31 5.31 6.29 7.33
EPS Pre Ex. (Bt) 5.31 5.31 6.29 7.33
EPS Gth Pre Ex (%) (1) 0 18 17
Diluted EPS (Bt) 5.31 5.31 6.29 7.33
PE Pre Ex. (X) 11.4 11.3 9.6 8.2
Net DPS (Bt) 2.00 2.40 2.40 2.50
Div Yield (%) 3.3 4.0 4.0 4.1
ROAE Pre Ex. (%) 17.4 15.8 17.0 17.7
ROAE (%) 17.4 15.8 17.0 17.7
ROA (%) 1.3 1.4 1.8 2.1
BV Per Share (Bt) 32.1 35.1 39.0 43.9
P/Book Value (x) 1.9 1.7 1.5 1.4
Source: Company, DBS Vickers
Loan growth to resume in 2017. After three consecutive
years of portfolio contraction, TISCO expects its auto hire
purchase (HP) portfolio to continue to contract for some
time in 2017 but with flattish or marginal growth by the
end of the year. With that and the strong growth in
consumer loans as well as SME loans, the total portfolio is
likely to see growth in 2017. TISCO’s loan portfolio now
comprises 63% auto HP, 19% corporate, 8% SME, and
9% consumer loans
NPL ratio passed its peak; credit cost on downtrend.
Unlike big banks, TISCO had faced asset-quality problems
first and from auto HP loans. Now, we believe the asset-
quality cycle has already passed its bottom, and we expect
credit cost to go down further in 2017. Recall that over
the course of 2016, as TISCO’s asset quality continued to
improve along with its strong earnings performance (albeit
from the cost side), TISCO has set up general provisions to
counter cycles and cushion against future economic
uncertainties – resulting in a stronger coverage ratio. With
that, we believe TISCO does not need to provide excess
reserve to boost its coverage ratio.
Improvement expected from top- to bottom-line. We
expect to see improvements in TISCO’s top- to bottom-line
in 2017. Its top-line growth should be driven by both NII
(loan and NIM expansion) and non-NII (improving economy
and capital market). Credit cost should be lower than
2016’s, in line with improving asset quality and coverage
Stay put in ethylene chain Product price could improve on the back of higher
oil prices
US-China trade relation could pose the downside
risk for the sector
Maintain NEUTRAL stance with IVL as top pick
Overview
Share price performance in 2016. The Petrochemical
sector outperformed the overall market in 2016, up 36%
YTD, compared with +18% for the market. This was led by
IVL (+55%) given the market’s optimism on its new
acquisitions. The company has completed three acquisitions
in 2016, which boosted its capacity by 24% from end-2015.
The company also booked extra gains of >Bt6.3bn during
9M16.
Upstream producers benefit from wider spread in
2016. Most of petrochemical product prices declined 3% to
10% in 2016 but still at a slower pace than key feedstock
prices, i.e. naphtha whose price slid 20% y-o-y, in line with
oil prices. This implied better margins for petrochemical
producers, especially for upstream ethylene and propylene.
Ethylene spread over naphtha improved 11% y-o-y. The
average product spread of high-density polyethylene (HDPE)
over naphtha narrowed by 2% y-o-y but remained high at
US$720/t, compared with cash cost of US$500-550/t for this
region. Product spread for Para-xylene (PX) improved 13% y-
o-y to US$375/t but still below the 2012-15 average of
US$450/t. PET/Polyester spread softened 7-8% y-o-y on
higher feedstock cost, especially PX.
Extra items boosted earnings performance in 9M16. The
aggregate net profit of the petrochemical sector rose 33%
y-o-y, led by IVL due to extraordinary gains from acquiring
assets at lower cost than book value and a huge inventory
loss for PTTGC in 3Q15. Carving these two items out, the
sector’s profit in 9M16 should have expanded by only 7% y-
o-y due to lower profit from PTTGC – caused by planned
maintenance shutdown and several unplanned outages.
Outlook
Higher oil price to drive petrochemical prices in 2017F,
in our view. We expect the product spread of HDPE over
naphtha to remain strong at >US$700/t on more balanced
demand/supply in the market. The key risk for the sector is
on Propylene whose price performance was better than
expected in 2016, as output from on-purpose production
facilities in China was lower than previously estimated due
to technical problems in ramping up utilisation rates.
Another product at risk is PX which could be affected by
huge capacity addition from India’s Reliance. The plant has
commenced operation in 4Q16 and we expect to see more
adverse impact in 2017. Nonetheless, this could
Market Focus
Page 26
Product spread: HDPE-Naphtha
Source: Datastream, DBS Vickers
Paraxylene Price and Spread over Naphtha
Source: Datastream, DBS Vickers
be positive for PET/Polyester producers on lower feedstock
cost.
Chinese demand could soften from US trade policy. On
the demand side, the key concern is Chinese demand which
could be affected by the trade relationship between the US
and China under the new US President.
Near-term lower product spread is expected. In the near
term, we believe that the product spread could soften again
in Dec 16-Jan 17 given potentially higher naphtha prices –
which could move up in tandem with oil prices. Also we
expect stock building ahead of the year-end period to be
slow on the back of seasonal impact which could affect
HDPE price during the low season. The restocking is
expected to take place ahead of Chinese New Year at the
end of Jan 17.
Net profit could weaken y-o-y in 2017F. We expect 2017
profit of the petrochemical stocks in DBSV’s universe to
decline slightly y-o-y due to the high base in 2016 given the
aforementioned extraordinary gains. The core profit would
continue to rise by 15% y-o-y. This would be driven by
healthier performance of PTTGC after several plant
shutdowns in 2016. We also expect IVL’s core EBITDA
margin to gradually improve as a result of more contribution
from high value-added and specialty products.
Stay NEUTRAL. In view of the share price outperformance in
2016, we are NEUTRAL on the sector. We have BUY ratings
on all petrochemical stocks in DBSV’s universe but prefer IVL
for its improving outlook for core earnings, driven by high
value-added products and its leading position in the global
market for PET/Polyester and automotive-related specialty
products. We believe the market remains too pessimistic on
its core EBITDA margin and its re-rating in 2017F is likely to
take place. We also like SCC for its solid earnings
performance and financial position, and healthy ROE and
EPG on the back of its improving earnings outlook, driven by
the automotive plastic segment. The key catalyst for the
stock is new orders from European automakers which will
launch SUV cars in 2017-18.
Market Focus
Page 27
Revisions to recommendations
Company Revision to Rec. Revision Reason
Current Previous Date
Upgrade
HANA HOLD Fully Valued 2 Dec 16 We see signs of a market recovery from 4Q16 onwards and a better outlook in 2017. The market should bottom out and the margin should improve from a weak baht and better economies of scale. Thus, we revised up our forecast and upgraded our rating from FULLY VALUED to HOLD.
COM7 BUY Hold 6 Dec 16 As the progress of operating True shop is faster than expected, we revised our assumption of operating True shop to 120 shops – up from 80 shops in our earlier
forecast. Also, COM7 has recently acquired 44 shops from BKK Telecom 999 and these shops will boost COM7’s revenue from 2017. We took into account the factors mentioned above and came up with a higher TP of Bt17.5 (from Bt13.3 previously). Hence, with the potential upside and strong growth outlook, we upgrade our rating from HOLD to BUY.
LPN FULLY VALUED Sell 16 Dec 16 We revised FY17F earnings upward by 4% as the company has just clinched two new land plots for launches and completions for 2017. Presales are expected to rise substantially this year thanks to high-end launches.
Downgrade None
Initiating Coverage and Equity Explorer
Company Rec. TP Price Date Reason
Initiating Coverage FN Factory Outlet BUY 10.40 28 Dec 16 Bright earnings outlook
Source: Company, DBS Vickers
Market Focus
Page 28
DBS Vickers recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 29 Dec 2016 15:51:07 Dissemination Date: 6 Jan 2017 07:14:56
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Market Focus
Page 29
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Market Focus
Page 30
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