asean strategy

See important disclosures, including any required research certifications, beginning on page 94

Pan Asia Strategy

3 May 2019

ASEAN Strategy

Cyclical hideouts, diverse themes and disinflation!

Overweight Indonesia, the Philippines and Thailand; neutral on Singapore and Malaysia; we are constructive on Vietnam

Emerging ASEAN has outperformed in most DM bear markets, has scope for monetary easing, and offers lower trade-cycle correlation

Presenting 15 ASEAN themes; sector and strategy contributions from Daiwa and alliance partners; and a report on China’s production shift

Paul M. Kitney, PhD(852) 2848 4947

[email protected]

See important disclosures, including any required research certifications, beginning on page 94

Pan Asia Strategy

Roadmap unchanged: 1H19 rally but cyclical risks beyond summer.

Our roadmap is largely unchanged from our 2019 outlook report, published

almost 6 months ago: APAC Equity Strategy - 2019 Outlook: economic

cycle and trade war collide, 29 November 2018. We called for a year-end

2018 rally into the first half of 2019. Our view last November was that the

cyclical risks, particularly in 2020 in the US and other major developed

markets, would become clearer by mid-2019, so that the second half of

2019 might be more challenging for DM equities and, eventually, the whole

equity class may struggle during that time. In Asia, we care about the global

trade cycle, which has turned negative for the first time since the GFC.

If EM cannot decouple from DM bear markets, can ASEAN? Maybe…

Much of the emerging ASEAN economy has a low correlation with the trade

cycle. Also, several central banks — Indonesia, Malaysia, and possibly the

Philippines — now have an increasingly credible case for monetary easing,

to help mitigate cyclical risks. We study historical precedents to identify

episodes, if at all, where ASEAN has outperformed or decoupled from DM

bear markets. The result is startling: while global EM has underperformed

DM bear markets overall, ASEAN has outperformed. When DM bear

markets have coincided with a weak USD, some emerging ASEAN markets

have actually decoupled.

Chinese corporates production shift to ASEAN – a win-win-win policy!

We include a special report on the trend for Chinese corporates to shift

production to ASEAN, identifying 120 Chinese listed equities. This is a win-

win-win scenario. It helps Chinese firms manage trade-war risk; it helps

execute China’s structural supply-side reform; and it provides FDI and

growth opportunities in ASEAN countries.

Overweight parts of EM-ASEAN less correlated with the trade cycle.

We remain overweight Indonesia, the Philippines and Thailand. We are

constructive on Vietnam and neutral on Singapore and Malaysia.

Sector and strategy contributions from Daiwa’s ASEAN network.

We compile sector, economics, and strategy contributions from Daiwa’s

research team as well as our ASEAN alliance partners. These include

theme identification, equity ideas, and industry insights. Animal Spirits has

compiled 15 ASEAN investment themes from these contributions, with

related equities.

3 May 2019

ASEAN Strategy

Cyclical hideouts, diverse themes and disinflation!

Overweight Indonesia, the Philippines and Thailand; neutral on Singapore and Malaysia; we are constructive on Vietnam

Emerging ASEAN has outperformed in most DM bear markets, has scope for monetary easing, and offers lower trade-cycle correlation

Presenting 15 ASEAN themes; sector and strategy contributions from Daiwa and alliance partners; and a report on China’s production shift

No Capital Markets and Services Licence has been issued by the Malaysian Securities Commission to any member of Daiwa Capital Markets and accordingly this report and any part of its content may not be distributed or made available by any means within Malaysia.

Animal Spirits Top Picks

Company Ticker

AIA Group 1299 HK Shenzhou International 2313 HK China Telecom 728 HK Beijing Enterprise Water 371 HK China Mengniu Dairy 2319 HK Geely Automobile 175 HK China Railway Construction 1186 HK China Construction Bank 939 HK Wharf REIC 1997 HK Sands China 1928 HK Havells India HAVL IN Axis Bank AXSB IN HDFC Bank HDFCB IN Larsen & Toubro LT IN AEON Credit* ACSM MK Amata Corporation* AMATA TB Bangkok Bank* BBL TB Bank Rakyat Indonesia* BBRI IJ Ayala Land* ALI PM Vista Land* VLL PM

Source: Daiwa. Note: * names are our top picks for ASEAN

Paul M. Kitney, PhD(852) 2848 4947

[email protected]

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1a959a9739a17951bba819d8cd733170300e2cf65yJO98Lh5kpjjl1UEo8KxP8swm2XYPd0l6e2OtXOmUm8u8%2BXmgNbaa%2FYIIn5vzBAo7eQ97uzt9LSnWM%2Fk0aSqw4J0dF4RDkJkFjFiADyzRmbwi%2B5xRN%2Fv6l4DeNfK%2F%2Bar4j0nfRqTFnE64q2%2FlgCmZGvXE%2BbSKCFaqsdhm3MNjQDbjLzjs3H%2BX0O8DbzXgpZLDxwUn%2BB2Pjx%2BHDa0fwfNbQ%3D%3D


2

ASEAN Strategy: 3 May 2019

Table of contents

ASEAN strategy ........................................................................................................ 3

Roadmap is on track but cyclical risks loom .......................................................................3

Can ASEAN decouple from a prolonged DM bear market? ................................................5

Emerging theme — China production shift to ASEAN ........................................................8

Valuations are attractive in the Philippines and Indonesia ..................................................8

Earnings are resilient in the Philippines and Indonesia ......................................................9

ASEAN snapshot by market............................................................................................. 10

Selected ASEAN investment themes ............................................................................... 12

Sustainable yield focus in our ASEAN dividend strategy .................................................. 13

Special topic: China’s production shift to ASEAN ...............................................19

China manufacturing: from “bring-in” to “go-global” .......................................................... 19

Singapore strategy ..................................................................................................25

Singapore Telecoms ...............................................................................................29

Singapore Industrials and Capital Goods .............................................................33

Singapore Banks .....................................................................................................37

Singapore Property and REITs ...............................................................................41

Singapore Healthcare and Consumer ....................................................................45

Philippines strategy ................................................................................................49

Philippines Property ................................................................................................53

Philippines Utilities & Energy .................................................................................57

Philippines Consumer .............................................................................................61

Indonesia strategy ...................................................................................................65

Malaysia strategy .....................................................................................................71

Thailand strategy .....................................................................................................77

Vietnam strategy ......................................................................................................83

3


ASEAN strategy

Roadmap is on track but cyclical risks loom

Our roadmap is largely unchanged from our 2019 outlook report, published almost 6

months ago: APAC Equity Strategy - 2019 Outlook: economic cycle and trade war collide,

29 November 2018. We called for a year-end 2018 rally into the first half of 2019. Our view

last November was that the cyclical risks, particularly in 2020 in the US and other major

developed markets, would become clearer by mid-2019, so that the second half of 2019

might be more challenging for DM equities and eventually, the whole equity class may

struggle during that time.

We are staying “risk on” according to our roadmap, over the near term. We have

highlighted that the base effect from the first tariffs introduced April 2018 would lead

technically to uplift in some economic data, particularly in China once we clicked into April

2019, and that there were still some upside risks from a trade MOU or an extension of

Brexit. We also saw the prospect of easier Fed policy guidance needing to be priced-in

before the chill sets in during 2H19, once the cyclical reality in 2020 becomes more visible.

Yes, we also note the recent upward revision to US GDP growth, which in 1Q19 was 3.2%

YoY. So, all in all, our short-term bullish outlook remains intact, but we do not wish to

overstay our welcome.

Animal Spirits treats the 1Q19 US GDP data point with the same degree of contempt as

the US bond market did, which rallied on the announcement. We thought 4Q18 was a little

on the low side and given the notoriously volatile nature of this data series, particularly

late-cycle, when we “smooth” the growth pattern, it is clear that the cycle peaked in 3Q18,

is in gradual decline in 2019, and should drop sharply in 2020 into 2021, in our view. Equity

markets tend to look ahead about 12 months and our view on the cycle was that the

positive impact of the US tax cuts would decline after 2019, paving the way for a sharp

decline in activity in the US in 2020. That view is unchanged, but we believe the cyclical

risks are rising appreciably. Consequently, we remain focused on this summer as the target

area to look to take off our “risk on” view, positioning for harder times ahead.

Our asset allocation in APAC remains unchanged, with an underweight stance on Japan

and an overweight call on Asia ex-Japan. We see Japan, Korea, and Taiwan as particularly

exposed to a downturn in the global trade cycle and are underweight in each of these

markets. In contrast, we believe the growth profile in India and parts of ASEAN such as

Indonesia, the Philippines and Thailand should be less correlated with the global trade

cycle and are preferred, with overweight ratings. We maintain our slight overweight

position in China/Hong Kong. See pages 15 to 17 for our regional market and sector views.

The inversion of the yield curve on 22 March — where the US 10-year bond yield fell below

the 3-month yield — indicates that growth and inflation expectations have shifted down

sharply in the US. Yes, it is an indicator that recessionary risks are rising in the US. Yet this

is only the most recent data point heading in that direction. We have seen weak retail

sales, poor non-farm payrolls and delinquencies on auto loans in the US, while European

and Chinese PMIs have turned down, and the Bank of Japan has indicated that the risks to

tepid CPI inflation are to the downside. Animal Spirits has been vocal about our concern of

a US recession since our outlook report, APAC Equity Strategy – 2019 Outlook: economic

cycle and trade war collide, 29 November 2018, and we tightened up our view in Animal

Spirits – South-biased EM Asia strategy immune to DM woes?, 14 March 2019.

Without the fanfare of the US yield-curve inversion, world trade volumes (YoY%) have

dropped below zero (see chart below left). The latest data point (February 2019) by the

CPB Netherlands Bureau for Economic Policy Analysis now points to 3 consecutive

monthly declines. See the chart below (left).

Our roadmap is

unchanged since our

2019 outlook report last

November — remaining

“risk on” until mid-2019

before markets start to

discount larger cyclical

risks in 2020 from 2H19




https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=17dce1f6bee078648010cd25f76373fdee1bb93b9XQj00z7zKdJpV9fUZGm0yAoR5%2BzR1Qov5yGwTLJfaYQeqcxMezunmPc0NycoRldzMrybFxsZhSjt%2BoJ%2F6DbyLLyEwOYGH6GUr5BzKibAs5b20Bgx0GB2MGJZmw2mM%2F097zvGWQ6w8jQDN1RnJY6lR%2FjOzqh4DF9UUp%2BQmIRFC6l3R8EvmKAG1o1e1Ljjh2xbwfwFLjLxsds1E6ca%2F0JBXw%3D%3D


4


World trade volumes (YoY%) Exports YoY growth

Source: Daiwa, CPB Netherlands Bureau for Economic Policy Analysis. Note: Data as of February 2019

Source: CEIC, Daiwa Note: Data as of March 2019

This is big news, in our view. Since the collapse in the trade cycle following the GFC, there

has not been a period more than one month, when trade volumes have declined — until

now. It shows the global trade cycle expansion that began after the GFC may now be in

jeopardy. Animal Spirits can postulate confidently that this has something to do with the

ongoing China-US trade war, and the general slowdown in the global economy.

We can see the trade cycle slowdown in individual country export data in the chart above

right. In March (on a YoY basis), Korean exports fell by 8.2%, Taiwanese exports grew

marginally by 0.8% and Japanese exports fell by 2.4%. Chinese exports were up 14.1%

YoY in March; however, we view it as the low base effect from 2018 rather than an

improvement in fundamentals. In Singapore, former double-digit export growth in the July-

October 2018 period has dropped to -3.0% YoY in March. The latest US export data in

February showed a mild growth of 1.9% YoY, and European exports in February were up

6.1% YoY, slowing from 12.9% YoY in October 2018.

We summarise a variety of Asia ex-Japan economic data series in the tables below for

reference and context.

GDP growth summary CPI summary

Real GDP, % 2015 2016 2017 2018 2019E 2020E

China 6.9 6.7 6.8 6.6 6.3 6.0

Hong Kong 2.4 2.2 3.8 3.0 2.3 2.3

Taiwan 0.8 1.5 3.1 2.6 2.1 2.1

Korea 2.8 2.9 3.1 2.7 2.5 2.4

India 7.4 8.2 7.1 7.2 7.0 7.2

Singapore 2.0 2.4 3.6 3.3 2.5 2.5

Indonesia 4.9 5.0 5.1 5.2 5.1 5.1

Malaysia 5.1 4.2 5.9 4.7 4.5 4.5

Philippines 6.1 6.9 6.7 6.3 6.1 6.2

Thailand 3.1 3.4 4.0 4.1 3.8 3.7

Inflation, % 2015 2016 2017 2018 2019E 2020E

China 1.44 2.01 1.55 2.10 2.10 2.20

Hong Kong 3.00 2.42 1.48 2.40 2.30 2.20

Taiwan -0.30 1.39 0.62 1.40 1.00 1.10

Korea 0.70 1.00 1.90 1.30 1.40 1.60

India 4.91 4.96 3.33 4.00 3.40 3.80

Singapore -0.52 -0.53 0.59 0.50 1.00 1.45

Indonesia 6.38 3.53 3.81 3.20 3.37 3.60

Malaysia 2.10 2.09 3.88 1.00 1.40 2.40

Philippines 0.67 1.26 2.86 5.20 3.50 3.50

Thailand -0.90 0.19 0.67 1.10 1.00 1.40

Source: Bloomberg, Daiwa Note: Data as of 30 April, Bloomberg consensus for 2019E and 2020E


Policy rate summary Exchange rate summary

Policy rate, % 2015 2016 2017 2018 2019E 2020E

China 4.35 4.35 4.35 4.35 4.30 4.25

Taiwan 1.63 1.38 1.38 1.38 1.35 1.40

Korea 1.50 1.25 1.50 1.75 1.75 1.80

India 6.75 6.25 6.00 6.50 5.85 5.95

Indonesia 7.50 4.75 4.25 6.00 6.05 5.90

Malaysia 3.25 3.00 2.91 3.19 3.20 3.25

Philippines 4.00 3.00 3.00 4.75 4.60 4.50

Thailand 1.50 1.50 1.50 1.75 1.85 1.95

Currency 2015 2016 2017 2018 2019E 2020E

China 6.49 6.95 6.51 6.88 6.69 6.57

Hong Kong 7.75 7.76 7.81 7.83 7.84 7.80

Taiwan 32.86 32.33 29.73 30.55 30.85 30.15

Korea 1175.06 1205.83 1067.40 1110.95 1127.50 1105.00

India 66.15 67.92 63.87 69.77 70.38 69.25

Singapore 1.42 1.45 1.34 1.36 1.34 1.31

Indonesia 13788 13473 13555 14390 14325 14025

Malaysia 4.29 4.49 4.05 4.13 4.12 4.01

Philippines 46.91 49.60 49.85 52.56 53.10 52.75

Thailand 36.03 35.84 32.57 32.33 31.80 31.40

Source: Bloomberg, Daiwa Note: Data as of 30 April ; Bloomberg consensus for 2019E and 2020E


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Taiwan USA Europe

We are witnessing the

first real decline in the

trade cycle since the

GFC — this is big news!

5


Can ASEAN decouple from a prolonged DM bear market?

We view the trade cycle as a useful segue into a discussion about ASEAN market cyclical

risk in comparison with competing APAC markets.

Emerging-ASEAN economies are less correlated to the trade cycle

In a recent report, Animal Spirits – South-biased EM Asia strategy immune to DM woes?,

14 March 2019, Animal Spirits examined the correlation (see table below) between various

APAC economies and the global trade cycle. The results were unsurprising (see the table

below). Taiwan and Korean GDP growth has the highest correlation at almost 90%,

followed by Japan at 82%. In contrast, Indonesia has a low correlation at 11%, as does

Malaysia at 37%, China is at 43% and the Philippines has a 57% correlation. Singapore

has high growth sensitivity to trade but if we do see a prolonged period of weakness in the

global trade cycle, then emerging ASEAN growth — particularly from Indonesia, Malaysia,

and the Philippines — may be resilient in a downturn.

Correlation between global trade cycle and GDP growth in Asian markets

Japan China HK Taiwan Korea Thailand Philippines Singapore Indonesia Malaysia India

Correlation 0.816 0.425 0.667 0.898 0.897 0.661 0.570 0.879 0.110 0.372 0.488

Source: Bloomberg, Daiwa Note: Data as of June 2005 to September 2018, data for Malaysia as of March 2011 to September 2018; quarterly basis

Has ASEAN decoupled before? Examining historical precedents

In Animal Spirits – South-biased EM Asia strategy immune to DM woes?, 14 March 2019,

we posed the question whether there were historical episodes when EM decoupled from

DM markets, under various assumptions. We now extend this analysis to examine the

granular performance of individual emerging-ASEAN markets, using the same framework.

Emerging ASEAN and DM performance in bear markets

Source: MSCI, Bloomberg, Daiwa Note: Data period of January 2000 to April 2019

In the above chart we examine four periods of DM equity market weakness. In the aftermath

of the Dot Com bubble — March 2000 to October 2002 — developed markets fell by almost

50%. In this case EM fell by a similar degree. However, the 4 emerging-ASEAN markets

outperformed considerably, particularly Thailand, which was down only 15.6% over the

same period. During the GFC episode (October 2007-March 2009), DM fell by 58.4%. EM

underperformed, falling 61.7%. However, all of the ASEAN markets outperformed both

MSCI DM and EM indices. In the “China Capital Flight” (April 2015-January 2016) period,

EM underperformed again, down 31.8% versus DM, falling 17.7%, in this time frame.

However, again, the emerging-ASEAN markets all outperformed both DM and EM indices,

particularly Indonesia and Malaysia, falling 9.8% and 9.3%, respectively. Finally, in the

period we call “Trade War Phase I” (January 2018-December 2018), EM underperformed

DM but again, each of the ASEAN markets outperformed both global EM and DM markets.

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MXWO Index (LHS) SET Index (LHS) FBMKLCI Index (LHS) JCI Index (RHS) PCOMP Index (RHS)

ASEAN economies such

as Indonesia, Malaysia,

and the Philippines have

a low correlation with

global trade volumes;

Singapore is not so

fortunate

Dot-com (Mar-00 to Oct-02) DM: -49.8% EM: -47.6% TH: -15.6% ID: -29.8% PH: -34.5% ML: -33.6%

GFC (Oct-07 to Mar-09) DM: -58.4% EM: -61.7% TH: -52.7% ID: -51.2% PH: -49.8% ML: -37.6%

China Capital Flight (Apr-15 to Jan-16) DM: -17.7% EM: -31.8% TH: -15.6% ID: -9.8% PH: -15.6% ML: -9.3% Thailand:

Trade War Phase I (Jan-18 to Dec-18) DM: -18.4% EM: -24.8% TH: -12.8% ID: -7.5% PH: -17.3% ML: -9.9% Indonesia: Philippines: Malaysia:



6


The conclusions are threefold: 1) EM has underperformed overall when DM has been in

prolonged bear markets, when we do not control other variables, 2) Emerging ASEAN has

outperformed both global DM and global EM markets, during DM bear phases, and 3)

emerging-ASEAN has outperformed in each of these episodes that have not decoupled,

when we do not adjust the data for other factors, like currency movements. We will look at

that now.

Emerging ASEAN and DM performance in a weak USD

Source: MSCI, Bloomberg, Daiwa Notes: Data period of January 1988 to April 2019; red line refers to US dollar index

In the figure above, we examine the performance of the same set of markets during

extended periods of USD weakness. As you can read the numbers in the figures, I won’t

go over each episode but what is clear, is that with the exception of the January 1994-April

1995 period, during periods of weak USD, emerging ASEAN markets generally

outperformed global EM (sometimes by a lot) and global DM indices. Also, during these

phases, global EM generally outperformed. In Animal Spirits – South-biased EM Asia

strategy immune to DM woes?, 14 March 2019, we provide our fundamental explanation

as to why EM tends to outperform during weak USD periods.

We now examine DM bear markets, controlling for weak USD, to examine the record of EM

markets and the individual emerging-ASEAN indices. See the chart on the next page.

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While EM has

underperformed DM bear

markets, emerging-

ASEAN has

outperformed

Jun-89 to Feb-91 DM: 1.4% EM: 20.2% USD: -22.6% TH: 27.7% ID: 30.1% PH: -18.9% ML: 20.3%

Jul-91 to Sep-92 DM: 6.5% EM: 18.4% USD: -18.5% TH: 6.6% ID: -12.5% PH: 31.4% ML: -4.4%

Jan-94 to Apr-95 DM: 6.8% EM: -17.5% USD: -16.0 TH: -11.1% ID: -29.0% PH: -14.9% ML: -16.6%

Jul-01 to Mar-08 DM: 34.0% EM: +250.8% USD: -40.2% TH: 151.8% ID: 450.6% PH: 108.1% ML: 90.6%

Mar-09 to Nov-09 DM: 64.1% EM: 92.7% USD: -15.3% TH: 62.2% ID: 86.0% PH: 58.6% ML: 48.1%

Jun-10 to Aug-11 DM: 9.7% EM: 6.8% USD: -16.3% TH: 34.4% ID: 36.1% PH: 28.3% ML: 11.6%

Dec-16 to Feb-18 DM: 27.8% EM: 51.3% USD: -13.5% TH: 21.1% ID: 32.5% PH: 37.7% ML: 14.6%



7


Emerging ASEAN performance in weak USD and DM bear markets

Source: MSCI, Bloomberg, Daiwa Notes: Data period of January 1988 to April 2019; red line refers to US dollar index

It is not that common to have simultaneous DM bear markets and a weak USD but we

have found two periods, December 1989-September 1990 and May 2001-October 2002. In

both cases we see that global EM outperformed DM. However global EM has not

decoupled from a global DM bear market, even with a weak USD environment. End of

story? No, not exactly. We see evidence of decoupling by some of the emerging-ASEAN

markets in the figure above. In the first period (December 1989-September 1990), when

DM fell by 25.4%, Indonesian equities rose 17.2%. In the second period (May 2001-

October 2002), DM fell by 37.1% but Thailand rose 13.4% and Indonesian equities

appreciated 8.4%. The major takeaways from this work are: 1) emerging-ASEAN has

historically outperformed both global EM and global DM during DM bear markets,

irrespective of what happens to the USD, and 2) if the USD is weak during DM bear

markets, there have been occasions when selected emerging-ASEAN markets have

actually decoupled.

Scope for monetary easing — positive real rates and FX fundamentals

Going into a global downturn, there appears to be significant monetary policy flexibility in

some emerging-ASEAN economies. See the charts below.

Nominal and real policy rate (%) Real Effective Exchange Rate relative to past 20-year average

Source: Daiwa, Bloomberg Note: Data as of 30 April 2019

Source: Daiwa, Bloomberg Note: Data as of 30 April 2019; REER is indexed at 100 based on 1998 REER, representing

the post-Asia Crisis regime

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l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15Ju

l-15

Jan-

16Ju

l-16

Jan-

17Ju

l-17

Jan-

18Ju

l-18

Jan-

19


(1)

0

1

2

3

4

5

6

7

Malaysia Philippines Singapore Thailand Indonesia

Policy rate Inflation Real rate85 90 95 100 105 110

MYR

IDR

PHP

SGD

THB

Overall ASEAN has

outperformed DM during

DM bear markets but

when the USD has been

weak during these DM

bear phases, some

ASEAN markets have

actually decoupled; this

is not the case for EM in

general

Dec-89 to Sep-90 DM: -25.4% EM: -10.1% USD: -7.8% TH: -26.3% ID: 17.2% PH: -50.6% ML: -18.4%

May-01 to Oct-02 DM: -37.1% EM: -19.2% USD: -7.6% TH: 13.4% ID: 8.4% PH: -24.0% ML: 15.5%

8


Real policy rates (nominal monetary policy rate minus CPI inflation) in both Malaysia and

Indonesia are over 300bps. Even the Philippines, which had a negative real policy rate 6

months ago, is experiencing a sharp disinflationary phase, which has now led to over a

100bps real policy rate. At least in the case of Indonesia and Malaysia, there is scope for

monetary easing, particularly since in both cases (see bottom right chart on previous page)

their respective real effective exchange rates are below their 20-year average. In the case

of the Philippines, the real effective exchange rate is not overvalued, at about its 20-year

average. Hence the risk of significant currency depreciation following a rate cut is less

likely. In fact, when we examine the improvement in the current accounts of the Philippines

and Indonesia, this is less of a concern. In summary, we think that monetary policy

flexibility is present in some emerging-ASEAN economies, which may also act as a

defensive mechanism in a global downturn.

Emerging theme — China production shift to ASEAN

Before a discussion of our investment process for ASEAN markets, we want to highlight a

special topic which Animal Spirits has recently researched, which relates to the increasing

trend of Chinese corporates diversifying their production base into ASEAN countries. Now,

in the context of the US-China trade war, there has been plenty of talk regarding the future

direction of global companies’ decisions regarding managing risk, by considering

alternative locations for production diversification. However, there has not been much on

the shifts been made by Chinese corporates. So, my colleague, Patrick Pan (see pages

19-23), has identified 120 Chinese listed companies, who have either set up or plan to set

up production facilities in Vietnam, Malaysia, Cambodia, Malaysia, and Indonesia. This

outward-bound foreign direct investment (ODI) in ASEAN is a win-win-win, since it helps

China shed some of its excess capacity in certain industries as part of structural supply

side reform (SSSR), it diversifies Chinese corporations’ exposure in a trade war, and it

provides investment and growth opportunities within ASEAN countries.

Valuations are attractive in the Philippines and Indonesia

Animal Spirits likes using index valuations, as they are very convenient for cross-country

comparisons. However, there is a limitation, which is that large index components can

distort the impression of the average or median valuation in a given market. Consequently,

we like to use median valuations within the respective MSCI indices, together with the pro-

forma index valuations, as a robustness check.

MSCI Asia ex-Japan median valuation

Malaysia Philippines Singapore Thailand Indonesia Japan China China A Hong Kong Taiwan India Korea Asia ex JP

Median PER 18.86 13.26 15.31 16.63 15.32 14.93 13.58 17.81 17.12 13.77 18.55 11.79 14.59

Source: FactSet, Daiwa Note: Data as of 8 April

The table above depicts the median PER for APAC markets and on the next page we

present the pro-forma valuations. Starting with the latter we notice that PER (2019

estimated) for Indonesia, Thailand, Malaysia, Philippines and Vietnam are in a very tight

15-16x range. However, when we look at median valuations (above), we see a much

greater degree of divergence in valuation. The Philippines (13.26x) and Indonesia (15.32x)

are somewhat cheaper than Thailand (16.63x) and especially Malaysia (18.86x). In the

case of the Malaysia, a key part of our “neutral” view is due to expensive valuations

relative to peers. Our overweight ratings conversely in the Philippines and Indonesia, are

linked to better relative value within ASEAN, in our opinion.

High real policy rates

and improving currency

fundamentals, especially

in Malaysia and

Indonesia, provide

credible scope for

monetary easing

Chinese corporates are

diversifying production

into ASEAN, which is a

win-win-win. It helps

Chinese corporates risk

-manage trade wars;

helps with execution on

SSSR; and promotes FDI

and investment in

ASEAN

Philippines and

Indonesia median

valuations show value in

these markets; not so for

Malaysia…

9


ASEAN: peer valuation comparisons

Source: Bloomberg, Daiwa Note: Data as of 30 April, 2019

Asia ex-Japan 2019E PER

Source: Factset, Daiwa Note: Data as of 30 April 2019

Earnings are resilient in the Philippines and Indonesia

In the next two tables we show the market and sector earnings growth and earnings

revisions for Asia ex-Japan markets but we focus on the ASEAN components.

Asia ex-Japan EPS growth for 2019E

Source: Factset, Daiwa Note: Data as of 30 April 2019

10


Asia ex-Japan market earnings revision matrix

Source: Factset, Daiwa Note: Data as of 30 April; India and Japan data calendarised. Earnings revision = (number of upward revisions — number of downward revisions)/total number of estimates. Weekly data, 75 days

capture and smoothed with 3-month moving average

In the earnings growth table above we see that consensus 2019 earnings growth for Asia

ex-Japan is at 3.6%. Within ASEAN, the standout is the Philippines with 15% estimated

earnings growth and remarkably as the table immediately above shows, earnings revisions

are positive, currently +4.8%. This compares with -24.5% for Asia ex-Japan. The

Philippines earnings profile is now the most resilient in APAC, based on these metrics.

Also, we see solid earnings growth in Indonesia (+8.8%) with modestly negative earnings

revisions (-4.7%). This is also a comparatively resilient earnings performance. In contrast,

Malaysian earnings growth is negative (-0.6%) and earnings revisions are very weak (-

33.5%).

ASEAN snapshot by market

Indonesia (Overweight)

PER is fair within emerging ASEAN at 15.8x but somewhat above global EM (12.7x).

Earnings growth is outpacing ASEAN peers except the Philippines, at 8.8% and revisions

are also positive. The central bank has addressed inflation with positive real policy rates.

The significant decline in the oil price should improve both the fiscal and CA balance,

which is a positive for the Rupiah and asset prices. It also takes pressure off the central

bank to raise rates. Pro-consumption policies ahead of the 2019 election are also

supportive. According to Lucky Ariesandi and Satria Sambijantoro from our Indonesian

alliance partner Bahana Sekuritas, several measures are likely to lead to positive growth

spillovers into 2Q19 and possibly beyond. These include the 40% YoY social spending

budget increase, boosting rural incomes. Also, civil servant salaries and the minimum

wage have been boosted in 2019 by 5% and 8% respectively. The election is now over and

while an official result is not yet in, exit polls suggest that President Jokowi will be returned

to government, which should remove residual political uncertainties. Please see the

Indonesian strategy section on pages 65-70.

Philippines (Overweight)

Median PER at 13.26x is the cheapest in emerging ASEAN and in line with global EM.

Earnings growth is 15.0% in 2019E, outperforming peers in ASEAN and significantly above

Asia ex-Japan. Also, earnings revisions have turned positive at 4.8%. The big swing factor

is the fall in CPI inflation (3.3%) below the policy rate (4.75%), taking pressure off the BSP,

and providing a circuit breaker against the vicious cycle of inflation- currency depreciation.

In fact, the BSP may be in a position to cut rates later in 2019. The Peso has been

stronger in recent months and the announcement that S&P has upgraded Philippines

credit to BBB+ will help in this regard, in our view. Daiwa analyst, Micaela Abaquita, sees

particularly strong earnings growth coming from both the property and consumer sectors.

See our Philippines strategy outlook on pages 49-52.

This report uses credit ratings assigned by Standard & Poor’s, which is not registered with Japan’s Financial Services Agency pursuant to Article 66, Paragraph 27 of the Financial Instruments and Exchange Act.

Earnings growth and

revisions are particularly

resilient in Indonesia

and the Philippines; this

is not the case in

Malaysia

11


Thailand (Overweight)

Domestic consumption and investment are solid. March CPI inflation is 1.24% so there is

little scope for monetary tightening. Earnings growth at 5.9% is stronger than Asia ex-

Japan at 3.6%, while revisions are roughly in line. Valuation is cheap among peers, with

PER at 14.9x being lowest in emerging ASEAN pro-forma index valuations. However, this

valuation comparison is not as pronounced when we use median valuations. The Thai Baht

is becoming slightly overvalued now on a REER basis, around 8% above the 20-year

average. This is not extreme at all but may affect competitiveness of export-oriented

sectors, in our opinion. According to our alliance partner, Thanachart Securities’ strategist,

Pimpaka Nichgaroon, the current regime, led by Prime Minister Prayut Chan-o-cha, is

likely to remain intact, perhaps even for the next 5 years. She believes this will eliminate

political uncertainty and the market will focus on big-picture issues, such as the Eastern

Economic Corridor (EEC). In May, news flow regarding EEC should be meaningful,

including an announcement regarding zoning for the EEC high-tech investment hub and an

announcement of the winner for the high-speed train linking the 3 main airports, according

to Pimpaka. See her discussion of Thai strategy on pages 77-82.

Vietnam (Not Rated)

Valuations in Vietnam look very reasonable now to Animal Spirits, as shown from the

comparison table on page 9. The pro-forma Vietnam 2019 estimated PER at 16.1x is

below both the Philippines and Malaysia. Earnings growth in 2019 (consensus, source:

Bloomberg) is 8.3%, above the regional average and 24% in 2020, which if it comes to

fruition, would be very solid indeed, particularly given our less optimistic outlook for the

global economy at that time. Our alliance partner, SSI’s Vietnam strategist, Phuong Hoang,

points out several positive catalysts and trends. GDP growth in 1Q19 was 6.79%, which

keeps it on target to reach the full-year target of 6.8%. Inflation has become somewhat

subdued reaching 2.63% in 1Q19 versus a range of 2.82-4.96% in the 2017-18 period.

Phuong sees Vietnam as a US-China beneficiary as production shifts to ASEAN by global

and Chinese corporates become more apparent. Domestic consumption is strong and

Phuong believes Vietnam is getting closer towards an upgrade to emerging market status.

Animal Spirits is somewhat constructive on Vietnam and recommends reading Phuong’s

Vietnam strategy views on pages 83-87.

Singapore (Neutral)

Earnings growth and earnings revisions are on par with Asia ex-Japan. Valuations appear

cheap versus Asia ex-Japan, global DM, and Hong Kong. The trade cycle is the major

macro risk for Singapore as GDP growth correlates around 0.88 with global trade volumes.

The domestic economy is stagnant. Policy measures to cool the property market have hurt

domestic demand which was previously showing signs of recovery. The negative real

policy rate should help stimulate domestic demand but will it be enough? Daiwa analyst

Ramakrishna Maruvada sees the cyclical risks as being dominant. He believes there is no

reversal of the property cooling measures in sight. The upcoming elections are unlikely to

yield any significant change. The FY19 budget is likely to be neutral for the Singapore

economy and equity market. He believes that Singapore is devoid of domestic catalysts to

offset the cyclical risks. We agree. See his strategy section on pages 25-28.

Malaysia (Neutral)

Malaysia’s valuation is expensive relative to peers and its own history. 2019E PER at 15.8x

is second highest after the Philippines among ASEAN peers and is in the top 20% of its

own history. Median valuations are the highest in the region. Earnings growth at -0.6%

remains the weakest among peers and revisions are falling faster than peers. The

country’s fiscal position is improving. The central bank (BNM) is vigilant on inflation with the

highest real policy rate in ASEAN controlling inflation well. There is now scope to ease.

Focus on fiscal debt reduction is positive and the Ringgit is undervalued on a REER basis.

See Kevin Low’s (Affin Hwang) Malaysia strategy section on pages 71-76.

We are becoming more

positive on Vietnam due

to reasonable

valuations, solid growth,

moderate inflation;

Vietnam is a winner from

the US-China trade war,

consumption is strong

and emerging market

status is approaching, in

our view

12


Selected ASEAN investment themes

The Animal Spirits stock picking approach involves a process that involves thematic and

quantitative inputs. We have already had a discussion on factor analysis and dividend

strategy, which represents the quantitative approach. We now turn to the examination of

investment themes in ASEAN. For this, we work hand in hand with both Daiwa and

Daiwa’s alliance partners’ research department, to identify thematic drivers — micro,

macro, regulatory, or event — and selected equities that fit the thematic choices. These are

summarised in the table below.

ASEAN: selected themes and Daiwa and alliance partners’ stock picks

Theme Industry Description Stocks Analyst

Structural reform of Singapore yards Singapore Rig Builders Consolidation enables Singapore yards to solve the capacity glut issues and stay competitive against global heavyweight yards

Keppel Corp (KEP SP, SGD6.77, Outperform [2])

Royston Tan

Booming MRO demand for narrow-body aircrafts

Singapore Aviation Growing narrow-body aircrafts fleet size, aided by rapid inflows of A320neo and B737MAX into Asia will contribute higher market share to MRO services.

ST Engineering (STE SP, SGD3.96, Buy [1])

Royston Tan

S-REIT Mergers & Acquisition Singapore Property and REITS

S-REITS getting larger and more liquid after M&A can get recognised by more global investors

Ascott Residence Trust (ART SP, SGD1.2, Outperform [2])

David Lum

Robust domestic demand for private healthcare services

Singapore Pharma & Healthcare

Domestic demand is expected to offset weaker foreign patient volumes driven by favourable government policies

Raffles Medical Group (RFMD SP, SGD1.08, Buy [1])

Jame Osman

Competitive pressure from online and small players

Singapore Consumer Superior supply chain and cost management count in Singapore consumer retail

Sheng Siong (SSG SP, SGD1.03, Hold [3])

Jame Osman

Geographical diversification Philippines Property The demand from middle class households and government commitment to countryside development to benefit provincial residential developers

Ayala Land (ALI PM, PHP48.95, Outperform [2]), Vista Land (VLL PM, PHP7.31, Buy [1])

Micaela Abaquita

Lower power tariffs and industrial consolidation

Philippines Utilities & Energy

Smaller power firms are expected to be acquired by large firms in a difficult competitive environment

Aboitiz Power (AP PM, PHP37.7, Buy [1])

Gregg IIag

Philippine Senate Election Philippines Consumer Candidate spending is a major driver of domestic private consumption, benefiting retailers, manufacturers and food operators

Jollibee Foods Corporation (JFC PM, PHP304.6, Hold [3]), Puregold Price Club (PGOLD PM, PHP41.9, Buy [1])

Renzo Candano

Rising purchasing power of low income households

Indonesia Consumer The government increased its social spending budget and raised minimum wages to support low income households consumption, benefiting poultry, cigarette and FMCG

Ramayana Lestari (RALS IJ, IDR1,785, Buy), HM Sampoerna (HMSP IJ, IDR3,500, Buy)

Lucky Ariesandi/Satria Sambijantoro

Industrial margin recovery Indonesia Telecommunications

Telecom operators are expected to book healthy earnings growth after intense price war in 2018 and data price is being gradually adjusted upward

XL Axiata (EXCL IJ, IDR2,920, Buy) Lucky Ariesandi/Satria Sambijantoro

Earnings growth strategy Malaysia O&G Capacity expansion will boost O&G activities led by the national oil company Petronas, consistent with industry trend of global oil majors

Serba Dinamik (SDH MK, MYR4.18, Buy)

Kevin Low/Alan Tan

Earnings growth strategy Malaysia Rubber Demand is expected to outstrip supply, supported by robust demand for rubber gloves, while manufacturers are more cohesive avoiding overcapacity

Kossan (KRI MK,MYR3.64, Buy) Kevin Low/Alan Tan

EEC and booming infrastructure Thailand Infrastructure Infrastructure investment is estimated to accelerate at 7% GDP from 2019 to 2021, and EEC is pushed forward at a high speed

Sino-Thai Engineering (STEC TB, THB25.25, Buy), Amata Corporation (AMATA TB, THB22.40, Buy)

Pimpaka Nichgaroon

Thailand election Thailand Consumer Consumption is expected to benefit from government policies in 2019E, especially supporting demand from low-income consumers

Home Product Center (HMPRO TB, THB15.70, Buy)

Pimpaka Nichgaroon

Resilient domestic consumption power Vietnam aviation Rising middle class in Vietnam contributed to Vietnam air passenger traffic growth

Airports Corp of Vietnam (ACV VN, VND83,700, Neutral)

Phuong Hoang

Source: Daiwa, Thanachart, Affin Hwang, SSI. Note: Share prices data as of 30 April

Animal Spirits won’t rehash all of the contents of the above table, since there is more detail

in the analyst contribution sections to follow in the sector research sections of this report.

We will, however, highlight half dozen themes that grab our attention.

We start with Singapore and the troubles the shipyards face with overcapacity. The lack of

demand from mobile offshore drilling unit (MODU) assets has been the source of under-

utilised yards and Singapore is falling behind both China and Korea in terms of shipyard

consolidation efforts. Daiwa analyst Royston Tan sees this as an opportunity (and a

necessity) for both Keppel Corp and SembMarine to consolidate their yard businesses.

Royston prefers Keppel Corp (KEP SP, SGD6.77, Outperform [2]) as a play on this theme.

Our alliance partner SSI’s Vietnam strategist, Phuong Hoang identifies an important

consumer theme — the secular growth potential for airline passenger volumes, due to both

home-grown consumerisation and inbound tourism potential. She highlights Airports Corp of

Vietnam (ACV VN, VND83,700, Neutral) as a good play on this theme. ACV operates 21 of

the nation’s 22 airports and SSI expects a sustainable passenger growth CAGR of 8-9%.

Vietnam tourism, driven

by domestic

consumerisation and

inbound traffic to drive

airline passenger

growth; we like ACV

13


Next we feature Daiwa analyst Micaela Abaquita’s theme regarding regional diversification

in Philippines property. Growing middle-class incomes in both rural and urban areas,

together with rural revitalisation policies adopted by the Duterte government are

supportive. Animal Spirits would add that the decline in CPI inflation and the stabilisation of

the Peso improve the health of the asset reflation story in the Philippines. We agree with

Micaela on her property sector picks as a play on this theme — Ayala Land (ALI PM,

PHP48.95, Outperform [2]) and Vista Land (VLL PM, PHP7.31, Buy [1]). Both of these

have been Animal Spirits Top Picks since 14 February 2019.

Animal Spirits also likes the theme identified by Daiwa analyst, David Lum, related to

consolidation in the S-REITs sector in Singapore. As per our general focus on sustainable

dividend yield in our quantitative work, this thematic dovetails nicely. David prefers Ascott

Residence Trust (ART SP, SGD1.2, Outperform [2]) as a play on this theme. Animal Spirits

is positively disposed towards the Singapore REITs not only due to the higher yield profile,

but as they are also among the best managed in the APAC region. We continue to focus on

yield plays with strong defensive characteristics, especially strong balance sheets but we

also see consolidation in the sector as a move towards yield sustainability.

The Eastern Economic Corridor (EEC) project in Thailand is a major infrastructure

development that should support both domestic and inbound investment growth into the

future, according to the Thailand strategist at our alliance partner, Thanachart Securities,

Pimpaka Nichgaroon. She prefers Sino-Thai Engineering (STEC TB, THB25.25, Buy) and

Amata Corporation (AMATA TB, THB22.40, Buy) as plays on this theme. We should note

that Animal Spirits’ work on Chinese production shifts to ASEAN, demonstrates the role of

the EEC in that trend in China. See pages 21-22 for more detail on this important theme.

Finally, in Indonesia, we like the theme presented by Lucky Ariesandi and Satria

Sambijantoro from our alliance partner, Bahana Sekuritas, related to the policy-driven

recovery in low-income consumption. The Indonesian government recently increased its

social spending budget and raised minimum wages to support low-income households’

consumption, benefiting poultry, cigarette and FMCG companies. Lucky and Satria prefer

Ramayana Lestari (RALS IJ, IDR1,785, Buy) and HM Sampoerna (HMSP IJ, IDR3,500,

Buy) as plays on positive low-income consumer trends.

Sustainable yield focus in our ASEAN dividend strategy

In Animal Spirits - Sustainable yield preferred strategy during disinflation, 2 April 2019, we

outlined our case for sustainable dividend yield in both Asia ex-Japan and Japan. Our key

valuation measure is excess real yield spreads between equity income and fixed income or

dividend yield minus government bond yield minus inflation. During reflation periods such

as much of 2017 and 1H18, when inflation and bond yields were rising, in order to

generate excess real yield spreads, dividend growth is needed. As we see for both Asia ex-

Japan (left, below) and ASEAN (right, below), dividend growth excess factor returns

exceeded those of dividend yield, for much of reflationary period. However, in disinflation,

inflation and bond yields fall, so dividend growth is no longer necessary to generate high

real yield spreads. We argue that high dividend yield stocks, with sufficiently strong

balance sheets to minimise the risk of dividend cuts in a downturn (and management with

a strong corporate governance mind-set), are preferred in a disinflationary paradigm, which

we believe we have entered. We screen for sustainable yield stocks in ASEAN in the table

below.

Near-term

announcements on the

EEC plan in Thailand to

drive infrastructure and

investment growth; our

preferred plays are BTS

and WHA

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=145f92b0268a786debffd59f0772efa549acb37b8hPa7ZgWjvMza3FgRoyNInjLXZUWFOkONn5f7pp7G1jR0%2BH59Fg%2B4qY40J%2BGuvZgqlp0MVMQS1l5myaPHgW6XoEdj4JtFEIMOjqTcrD%2FuK7mYSEffdL0M2iXfnPS2jY71rshFq4EsHHjQ43v5zDXqmS1psfXPws2elp1VEclOgRdWSL%2B2nBGDeNb0dnPn6R76Xh%2F0fy6Cffur55WwINjHSg%3D%3Dhttps://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=145f92b0268a786debffd59f0772efa549acb37b8hPa7ZgWjvMza3FgRoyNInjLXZUWFOkONn5f7pp7G1jR0%2BH59Fg%2B4qY40J%2BGuvZgqlp0MVMQS1l5myaPHgW6XoEdj4JtFEIMOjqTcrD%2FuK7mYSEffdL0M2iXfnPS2jY71rshFq4EsHHjQ43v5zDXqmS1psfXPws2elp1VEclOgRdWSL%2B2nBGDeNb0dnPn6R76Xh%2F0fy6Cffur55WwINjHSg%3D%3D

14


Asia ex-Japan factor excess returns for dividend yield and dividend growth

ASEAN factor excess returns for dividend yield and dividend growth

Source: MSCI, Daiwa Custom Products, Fact Set. Note: Factor returns generated by top and bottom quartile returns for MSCI Japan. Data as of

25 March 2019

Source: MSCI, Daiwa Custom Products, Fact Set. Note: Factor returns generated by top and bottom quartile returns for MSCI Japan. Data as of 5

April 2019

MSCI ASEAN sustainable high-yield screen

Ticker Company Name Share price (LC) Market Covered Analyst Rating Target Price

(LC) Net Debt to Equity (x) Dividend Yield (%)

PTTGC TB PTT Global Chemical Plc 68.75 Thailand Chak Reungsinpinya Buy 80 0.18 6.01

PTBA IJ PT Bukit Asam Tbk 3,690 Indonesia Michael Benas Buy 4,880 -0.36 7.90

ST SP Singapore Telecommunications 3.17 Singapore Ramakrishna Maruvada Outperform (2) 3.37 0.35 5.63

AAGB MK AirAsia Group Bhd. 2.73 Malaysia Isaac Chow Hold 2.86 -0.32 25.30

ADRO IJ PT Adaro Energy Tbk 1,305 Indonesia Not covered Not rated Not covered 0.11 7.56

CT SP CapitaLand Mall Trust 2.42 Singapore David Lum Outperform (2) 2.53 0.44 4.77

SPH SP Singapore Press 2.51 Singapore Not covered Not rated Not covered 0.38 5.26

UNTR IJ PT United Tractors Tbk 27,175 Indonesia Adrianus Prasuryo Buy 36,200 -0.06 3.75

CCT SP CapitaLand Commercial Trust 1.94 Singapore David Lum Sell (5) 1.53 0.35 4.37

SGX SP Singapore Exchange Ltd. 7.38 Singapore Not covered Not rated Not covered -0.74 4.74

MISC MK MISC Bhd 6.90 Malaysia Jianyuan Tan Sell 5.95 0.21 4.50

TLKM IJ PT Telekomunikasi Indonesia 3,790 Indonesia Lucky Ariesandi Buy 3,800 0.35 4.24

DMC PM DMCI Holdings Inc. 11.16 Philippines Not covered Not rated Not covered 0.24 3.97

Source: Factset, Daiwa CPG Note: We screen for top 2 quintiles for net debt to equity and Top 1 quintile for dividend yield in MSCI ASEAN universe. Data as of 30 April 2019.

We now summarise our Asia ex-Japan market and sector views, including the key inputs

into our investment process. Following this, our Animal Spirits Top Picks are presented.

90

95

100

105

110

115

120

125

130

Oct

-16

Dec

-16

Feb

-17

Apr

-17

Jun-

17

Aug

-17

Oct

-17

Dec

-17

Feb

-18

Apr

-18

Jun-

18

Aug

-18

Oct

-18

Dec

-18

Feb

-19

Dividend Yield Dividend Growers

90

95

100

105

110

115

120

125

Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

Dividend Growers Dividend Yield

15


Animal Spirits: Japan market outlook

Valuation Earnings Policy Macro Comments

Animal Spirits View

APAC Global DM

JAPAN

Japan is trading at a 2019E PER of 12.8x, which is a discount to the US’s (17.9x), France’s (14.2x), the UK’s (13.0x), and Germany’s (13.5x). Earnings growth is estimated at 2.1% in 2019E after 4.2% in 2018, although underperforming global DM and Asia ex-Japan. Earnings revisions are in line with ex-US DM peers and resilient in comparison with Asia ex-Japan. The US is the standout, which is driven by tax cuts. The labour market is tightening, with a full-time employee job offers to applications ratio of 1.14, which shows the shortage. Growth is likely to be solid but sub trend in 2019 at 1.1%. Headwinds include weak trade cycle and weak USD fundamentals - a driver for EM outperformance but a negative for Japanese earnings - and global disinflation. The increase in the consumption tax in October 2019 looms as a negative event, with no scope for policy. We are underweight Japan in APAC portfolios but moderate this view to neutral within global DM, due to Brexit risks and the relatively weak EU economy.

Animal Spirits: Asia ex-Japan market outlook

Valuation Earnings Policy Macro Comments MSCI

Asia xJ

Animal Spirits Weight

Animal Spirits View

CHINA

China-H valuations are below the regional average and global EM at an 12.3x PER versus 13.9x PER and 12.7x PER, respectively. Consensus earnings growth forecast for 2019 (14.4%) remains above MSCI Asia ex-Japan (3.6%) and global EM (6.6%). Earnings revisions are in line with Asia ex-Japan. The 5 RRR reductions since 2018 and trade-related fears suggest the tight monetary policy adopted by the PBOC focusing on financial sector reform may be loosening slightly. Also, VAT tax cuts, fiscal deficit to GDP rate expansion and special purpose bond approvals for infrastructure show a willingness to ease fiscal policy marginally. The yield curve as a result has moved from an inverted position to a positive gradient. We view this positively. The macro environment has improved slightly with the manufacturing PMI returning above 50 since February, mainly due to policy stimulus. A trade deal still looms.

36.49% 37.00%

CHINA A

A-share valuations are below Asia ex-Japan but at a slight premium to China-H, at 12.8x PER vs. 13.9x and 12.3x, respectively. However, when comparing median PER, China A is 17.8x versus 13.6x for MSCI China. This is a 31% premium. Earnings growth for 2019 is above the region at 17.5% vs. 3.6%. Earnings revisions are roughly in line with China-H. Financial leverage however is a risk. Net debt to equity is 137% versus 68% for China H. Financial leverage is a concern during an economic slowdown, which we expect.

0.96% 0.96%

HONG KONG

Both earnings growth for 2019 and earnings revisions lead comp Singapore, its nearest comp. Its valuation is at a significant premium to Singapore at 17.0x PER vs. 13.3x PER but on par with global DM. Hong Kong will benefit from macro stabilisation policy in China. Via the fixed exchange rate mechanism Hong Kong credit conditions will likely benefit from easier monetary policy in the US. Trade cycle exposure to GDP growth is somewhat lower than Singapore at 0.67 versus 0.89x, respectively.

11.91% 12.50%

TAIWAN

Taiwan’s 2019E PER is 16.1x versus global EM at 12.7x and a large premium to nearest comp Korea at 11.7x, based on pro-forma MSCI data. However, using median PER, Taiwan is 13.8x, broadly in line with global EM and only a small premium to Korea at 11.8x, more than explained by governance differences. Earnings growth in 2019 is -2.6%, well below global EM at 6.6%, but above the double-digit declines in Korea. Earnings revisions are weak. Export growth has turned negative in the past 5 months, reflecting the high exposure of Taiwanese growth to the trade cycle. Minimum wages and the rise in public servant wages should be positive for consumption, against the backdrop of a tightening labour market. Not much monetary policy flexibility.

13.02% 9.50%

KOREA

Korea’s domestic economy is slowing and export growth declined to -2% in April 2019, fifth consecutive month of recording export negative growth. As discussed in Taiwan above, Korean valuations are not as cheap when examined on a median PER basis. Earnings growth for 2019E slumps significantly to -22.9%, the lowest in the region and earnings revisions (-34.2%) are weak. Minimum wage hike should boost consumption marginally. Trade cycle sensitivity to Korean growth is problematic.

14.65% 7.50%

INDIA

India’s valuation premium is more than deserved given that earnings growth in India is 21.7% in 2019E. Bank loan growth is recovering to pre-GST levels. High real policy rates in India open the prospect for rate cuts in 2019, especially with a new dovish RBI governor, Shaktikanta Das. As we expected, the RBI has cut rates twice already in 2019 due to the stronger Rupee and weaker global inflationary forces, particularly given the fall in oil prices since October. The latter also helps the current account balance — a key FX fundamental. Before the 2019 elections, price floors are being introduced for agricultural products to boost the rural economy. India’s economy and earnings structure is less correlated with global cyclical risks such as the global trade cycle, thus deserves a premium.

10.27% 13.82%

SINGAPORE

Earnings growth and earnings revisions are on par with Asia ex-Japan. Valuations appear cheap versus Asia ex-Japan, global DM, and Hong Kong. The trade cycle is the major macro risk for Singapore as GDP growth correlates around 0.88 with global trade volumes. The domestic economy is stagnant. Policy measures to cool the property market have hurt domestic demand which was previously showing signs of recovery. The negative real policy rate should help stimulate domestic demand.

4.03% 4.03%

MALAYSIA

Malaysia’s valuation is trading expensive relative to peers and its own history. PER at 15.8x is second highest after the Philippines among ASEAN peers and is in the top 20% of its own history. Median valuations are the highest in the region. Earnings growth at -0.6% remains the weakest among peers and revisions are falling faster than peers. The country’s fiscal position is improving. The central bank (BNM) is vigilant on inflation with the highest real policy rate in ASEAN controlling inflation well. There is now scope to ease. Focus on fiscal debt reduction is positive and the Ringgit is undervalued on a REER basis

2.39% 2.39%

THAILAND

Domestic consumption and investment are solid. March CPI inflation is 1.24% so there is little scope for monetary tightening. Earnings growth at 5.9% is stronger than Asia ex-Japan at 3.6%, while revisions are roughly in line. Valuation is cheap among peers, with PER at 14.9x being lowest in emerging ASEAN. Thai Baht is becoming overvalued now on a REER basis, which may affect competitiveness of the export sectors.

2.60% 4.00%

PHILIPPINES

Median PER at 13.26x is the cheapest in emerging ASEAN and in line with global EM. Earnings growth is 15.0% in 2019E, outperforming peers in ASEAN and significantly above Asia ex-Japan. Also, earnings revisions have turned positive at 4.8%. The big swing factor is the fall in CPI inflation (3.3%) below the policy rate (4.75%), taking pressure off the BSP, and providing a circuit breaker against the vicious cycle of inflation-currency depreciation. In fact the BSP may be in a position to cut rates later in 2019.

1.23% 3.30%

INDONESIA

PER is fair within emerging ASEAN at 15.8x but somewhat above global EM (12.7x). Earnings growth is outpacing ASEAN peers except the Philippines, at 8.8% and revisions are soft. The central bank has addressed inflation with positive real policy rates. The significant decline in the oil price should improve both the fiscal and CA balance, which is a positive for the Rupiah and asset prices. It also takes pressure off the central bank for raising rates. Pro-consumption policies ahead of the 2019 election supportive.

2.42% 5.00%

Source: MSCI, Daiwa; Note: valuation data as of 10 April, weightings data as of 30 April 2019

16


In the following tables, we outline our APAC sector views, including the inputs that feature

in this analysis.

Animal Spirits: Asia ex-Japan sector outlook

Valuation Earnings Growth

Earnings Revisions Macro Comments

MSCI Asia xJ


Animal Spirits View

Consumer discretionary

Yield is dropping towards 1SD below the past-10-year average at 1.6% while PBR is 1SD above the past-10-year average at 2.4%; PER is at 17.9x, which is relatively rich. Earnings growth is well above regional average at 23.8% but revisions are poor. Pro consumer policies and numerous elections are positive for consumer discretionary, with outstanding secular themes. However, the trade war and the related impact on consumer sentiment is a significant macro drag. Automobile sales are slowing in China, recording -2.8% YoY growth in 2018; however, we see policy shifts in China assisting the sector.

13.44% 13.44%

Consumer staples

PER of 24.9x is trading near 2SD above the past-10-year average but we believe a premium is deserved as this sector is less exposed to the global trade cycle than others. Earnings growth overall is in line with the region at 9.6% in 2019E, but is above the regional average in all markets except Korea and Singapore. Pro-consumption policies in the region are more positive for consumer staples than

discretionary as many focus on lower income earners.

4.77% 4.77%

Energy

EV/EBITDA of 5.3x is at 1SD below the past-10-year average. Earnings growth in 2019E is 8.9%, well above the region, while earnings revisions are weaker than broader indices. Rebound in oil prices should offset the previous negative impact of falling energy prices, particularly at E&P companies, since last October.

4.64% 4.64%

Financials

PER is above while PBR is trading at 1SD below the past-10-year average. 14.9% earnings growth is well above average, which is particularly strong in Hong Kong, India, Indonesia and the Philippines. Earnings revisions are in line with the region. Policy easing in China has reversed the inverted yield curve, matched by steepening yield curves in India and Korea, which is supportive of NIMs. The scope for central banks to cut rates in 2019, particularly in ASEAN and India could boost lending.

23.95% 27.00%

Healthcare

Asian healthcare stocks are trading currently at more than 1SD above the past-10-year average PER at 29.4x. Sector earnings growth is well above average for 2019E at 19.6% but revisions are in line with broader indices. Also policy moves in China (adverse towards the generic drug makers) are a headwind.

2.83% 0.60%

Industrials

EV/EBITDA is currently trading 1SD below the past-10-year average at 9.8x. Earnings growth is outpacing the region for 2019E at 13.1%. Earnings revisions are slightly more resilient than the region. As the Fed policy (and Asia central banks follow) normalisation is likely done, there should be another tailwind for Asia ex-Japan industrials.

6.58% 8.34%

Information technology

PER is surging beyond 2SD above the past-10-year average. Sector earnings outperformance peaked in 2018 and currently consensus (which is likely still behind the curve) is for -31.4% earnings growth in 2019E. Revisions are in line with the average. Trade war is an ongoing risk but strong demand drivers remain in memory and new technologies, such as AI and HMI.

16.81% 11.80%

Materials

Valuations are broadly in line with the region. Pricing power is under pressure with the gradual fadeout of supply-side reforms. Consensus earnings growth in 2019 is above regional rate at 5.0%, while earnings revisions have been weaker than average. Slowdown in China particularly a risk to material sector demand, given much of the inventory adjustment has now been done. However, Chinese stimulus should be supportive for this space during 2019.

4.47% 4.47%

Real estate

The sector PBR of 0.93x is currently above the past-10-year average. Rising bond yields will have raised cap rates but as the Fed relaxes the pace of normalisation, this will be a policy positive. Earnings growth and revisions are strong, and above the region. Given the slower growth profile globally and in the region, REITs will likely perform better as they are less likely to act like bond proxies, especially those with solid DPU growth. We see the potential for investment properties to be targeted with new taxes in China but are unlikely to be in effect in near term. Easier monetary policy in Asia should be a positive.

6.44% 7.00%

Communication services

EV/EBITDA is more than 1SD above the past-10-year average at 8.3x in Asia ex-Japan post September GICS reclassification. Earnings are growing above the regional average at 5.1% for 2019E, but revisions are roughly in line. High dividend yield may perform relatively well as the regional economy slows.

12.94% 12.94%

Utilities

Dividend yield is more than 1SD above the past-10-year average at 3.5%. Earnings growth in 2019 is tracking well above the region at 26.9% and earnings revisions are resilient. Prefer sustainable high yield utilities as disinflation progresses.

3.13% 5.00%

Source: MSCI, Daiwa; Note: valuation data as of 10 April, weightings data as of 30 April 2019 Note: the input (valuation, earnings, policy, macro) is supportive of market or sector evaluation; very supportive; unsupportive; very unsupportive; neutral. The arrows on the output

side or final column represent the strength and direction of market view or sector, based on the inputs: overweight; heavy overweight; underweight; heavy underweight; market weight

17


Animal Spirits: Japan sector outlook

Valuation Earnings Growth

Earnings Revisions Macro Comments

MSCI Japan


Animal Spirits View

Consumer discretionary

PER and PBR are both around 1SD below the past-10-year average, respectively, at 11.25x and 1.13x. Earnings growth is well below the regional average, at 0.3% , while earnings revisions are softer. The upcoming consumption tax hike from 8% to 10% in October 2019 is a policy headwind. Inbound tourism during the 2019 Rugby World Cup and ahead of the 2020 Olympics could help offset some of the weaker macro outlook

18.46% 15.00%

Consumer staples

PER is trading at 21.02x, well above the past-10-year average. Earnings growth overall is in line with the regional average, at 2.5% vs. 4.5% for 2019E. The October consumption tax hike is expected to have a limited impact on staples due to government measures such as keeping the tax rate on food unchanged to offset any potential negative impact on consumer spending. In addition, high-quality Japanese consumer staples, such as baby care products, still have strong China demand

8.35% 10.00%

Energy

EV/EBITDA trading below past-10-year average of 5.17x. Earnings growth in 2019E is poor, at -0.9%, and earnings revisions are weak. Oil price recovery should help stabilize margins at E&P companies

0.96% 0.00%

Financials

PBR is trading around 1SD below the past-10-year average, at 0.51x. Earnings growth of 10.8% for 2019E is above comps in developed markets and earnings revisions are slightly down but in line with global DM peers. Macro environment is poor for financials in Japan as BOJ QQE policy prevents bank margin improvement from shifts in the yield curve and falling bond yields are negative for insurance company embedded values.

10.85% 8.63%

Healthcare

Japan healthcare stocks are trading at less than 1SD above the past-10-year average PER at 25.3x. Sector earnings growth is the lowest in the region for 2019E at -8.6%, but revisions are easing faster than average. Although drug innovations are highly encouraged, healthcare spending cuts from drug repricing are a secular theme in Japan given an aging population

8.77% 8.77%

Industrials

EV/EBITDA is currently above the past-10-year average at 9.32x. Industrials earnings growth for 2019E is -5.2%, the lowest among major developed markets. Earnings revisions are broadly in line with the region. However, easier credit conditions globally and infrastructure projects abroad are supportive of capital goods demand

21.41% 23.00%

Information technology

PER is recovering above past-10-year average at 17.1x. Earnings growth for 2019E is strong at 11.0%, higher than DM peers, while earnings revisions are in line with the regional average. Trade war-related risk is an ongoing problem, but strong long-term demand drivers remain in memory and new technologies. Nevertheless, the weaker end-demand outlook remains a concern

11.13% 8.00%

Materials

Valuations are attractive in developed markets, with a PER for 2019E of 10.4x versus global DM at 14.0x. Pricing power was under pressure for most of 2018 and the trend looks set to continue in 2019E. Consensus earnings growth for 2019E is in line with the region, while earnings revisions are slightly more resilient than average.

Slowdown in China is the key macro risk

5.60% 5.60%

Real estate

The sector PBR of 1.29x is above1SD below the past-10-year average while the dividend yield of 2.64% is approaching 2SD above the past 10-year average. Earnings growth remains weak at 4.5% for 2019E but revisions are somewhat more resilient. REITs should remain strongly in demand due to rising real yields in a disinflationary environment, while falling cap rates are supportive of developer valuation

3.98% 6.00%

Telecom services

EV/EBITDA is at 1SD above the past-10-year average at 6.87x. Earnings growth is in line with regional average, at 3.3% versus 3.9% for 2019E. 5G commercialisation is the long-term industry catalyst. As disinflation starts to gather pace, the higher dividend yield in this sector should be supportive as the spread between real dividend yields and bond yields rises

8.66% 11.00%

Utilities

Dividend yield is above the past-10-year average at 2.51%. Earnings growth for 2019E is outperforming global DM at 26.9% and earnings revisions are resilient. In addition, we favour higher-dividend growth companies among the higher-yield utilities

1.83% 4.00%

Source: MSCI, Daiwa; Note: data as of 30 April 2019 Note: the input (valuation, earnings, policy, macro) is supportive of market or sector evaluation; very supportive; unsupportive; very unsupportive; neutral. The arrows on the output

side or final column represent the strength and direction of market view or sector, based on the inputs: overweight; heavy overweight; underweight; heavy underweight; market weight

In the next table, we outline the Animal Spirits top-20 picks in Asia ex-Japan.

18


Animal Spirits Top Picks

Company Ticker Share price Market Industry Analyst Target price Rating Theme Rec Date

AIA Group 1299 HK HKD79.95 China Insurance Leon Qi HKD95 Buy (1) Financial sector reform winner 10-Apr-18

Shenzhou International 2313 HK HKD105.3 China Textiles, Apparel & Luxury Goods

John Choi HKD112 Buy (1) Consumer premiumisation 6-Jul-18

China Telecom 728 HK HKD4.06 China Telecommunication Maruvada Ramakrishna HKD5.19 Buy (1) 5G capex 29-Nov-18

Beijing Enterprise Water 371 HK HKD4.87 China Utilities Dennis Ip HKD5.9 Buy (1) China environmental 5-Nov-18

China Mengniu Dairy 2319 HK HKD29 China Food and beverage Anson Chan HKD32.8 Buy (1) Relaxation of one-child policy 29-Nov-18

Geely Automobile 175 HK HKD15.74 China Automobile Kelvin Lau HKD22 Buy (1) Policy incentives in auto sector 31-Oct-18

China Railway Construction 1186 HK HKD9.26 China Industrial Fiona Liang HKD12.1 Buy (1) Infrastructure stimulus 28-Sep-18

China Construction Bank 939 HK HKD6.93 China Banks Leon Qi HKD8.4 Buy (1) Financial sector overweight 21-Jan-19

Wharf REIC 1997 HK HKD60.1 Hong Kong Real estate Jonas Kan HKD68.4 Buy (1) Greater Bay Area (GBA) 21-Jan-19

Sands China 1928 HK HKD43.1 Hong Kong Gaming Andrew Chung HKD45.6 Buy (1) GBA and gaming sector call 31-Jan-19

Havells India HAVL IN INR774.65 India Electrical products Saurabh Mehta INR778 Buy (1) Indian premiumisation 2-Feb-18

Axis Bank AXSB IN INR766.85 India Banks Punit Srivastava INR875 Buy (1) India domestic growth 31-Oct-17

HDFC Bank HDFCB IN INR2,317.45 India Banks Punit Srivastava INR2,710 Buy (1) India domestic growth 29-Nov-18

Larsen & Toubro LT IN INR1,348.55 India E&C Saurabh Mehta INR1,740 Buy (1) Infrastructure recovery 17-May-18

AEON Credit* ACSM MK MYR16.3 Malaysia Finance Eileen Tan MYR20.4 Buy Malaysian budget beneficiary 5-Nov-18

Amata Corporation* AMATA TB THB22.4 Thailand Industrial estate Rata Limsuthiwanpoom THB31 Buy Thai EEC infrastructure 29-Nov-18

Bangkok Bank* BBL TB THB203 Thailand Banks Sarachada Sornsong THB240 Buy Thai Inflation 29-Nov-18

Bank Rakyat Indonesia* BBRI IJ IDR4,370 Indonesia Banks Lucky Ariesandi IDR4,530 Buy Indonesia Inflation 29-Nov-18

Ayala Land* ALI PM PHP48.95 Philippines Real estate Micaela Abaquita PHP52 OP (2) Philippines asset reflation 14-Feb-19

Vista Land & Lifescapes* VLL PM PHP7.31 Philippines Real estate Micaela Abaquita PHP8.3 Buy (1) Philippines asset reflation 14-Feb-19

Source: Bloomberg, Daiwa Notes: prices as of close on 30 April 2019; * names are our top picks for ASEAN

When a report covers six or more subject companies please access important disclosures for Daiwa Capital Markets Hong Kong Limited at http://www.hk.daiwacm.com/research_disclaimer.html or

contact your investment representative or Daiwa Capital Markets Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, Hong Kong.

We now turn to a special topic — China’s production shift to ASEAN — and take a deep

dive into this major emerging theme.

http://www.hk.daiwacm.com/research_disclaimer.html

19


Special topic: China’s production shift to ASEAN

Patrick Pan (852) 2773 8805 ([email protected])

China manufacturing: from “bring-in” to “go-global”

China ODI in ASEAN

China production capacity shifting to ASEAN is a “win-win-win” proposition, in our opinion.

For emerging ASEAN, foreign direct investment (FDI) promotes regional economic growth

by helping to finance infrastructure development. For China, investing in ASEAN is an

effective way out to phase out production capacity in labour-intensive and resource-

intensive industries, such as textiles and metallurgy, to make room for industry

transformation. In other words, it helps facilitate structural supply side reform (SSSR). In

addition, US anti-subsidy and anti-dumping investigations against China exports are

encouraging manufacturers of a plethora of goods ranging from solar products to tyres, to

shift capacity abroad, to limit trade war-related exposure, as a risk management measure.

From 2011 to 2013, China outward direct investment (ODI) in ASEAN witnessed steady

increases under the ASEAN-China “10+1” Economic cooperation mechanism. However,

the upward trend reversed as the global economy slowed down and due to political turmoil

in Vietnam and Thailand. After the Belt & Road initiative (BRI) was proposed, China ODI in

ASEAN resurged and contributed more than 8% to China’s total ODI by 2017. At that time

in fact, 40% of total BRI projects were located in ASEAN. Since then, there has been some

push back, most notably following the 2018 elections in Malaysia, but key projects such as

the East Coast Rail Project are now back on track, so to speak.

ASEAN contribution to China ODI China ODI in ASEAN ex-Singapore (USDm)

Source: Daiwa, CEIC Source: Daiwa, CEIC

Industrial parks — vehicles for Chinese overseas investment

China did not invent the “Overseas Industrial Park”. Others have been there before,

including Singapore. In the early 1990s, the Singapore Government initiated overseas

industrial park developments in China, India, Vietnam and Indonesia under the

“Regionalism 2000” initiative. By establishing strategic alliances and collaborating with

private or semi-private enterprises on national projects, Singapore was able to remain

competitive in the global economy (Caroline Yeoh, Siang Yeung Wong, 2005) and to

participate in the dynamic growth of Asia emerging economies, in no small part due to this

initiative.

China is pursuing Singapore’s strategy. According to HKTDC, offshore industrial parks can

be put into 3 categories: 1) small-scale industrial parks built and occupied by enterprises

themselves, 2) medium-sized parks built by third parties for the use of other enterprises,

and 3) government-initiated, corporate-managed large-scale parks. Small-and-medium-

sized industrial parks used to be the mainstream for Chinese corporates’ investments

overseas. Yet now, China’s government is playing a more active role in initiating and

facilitating large-scale offshore industrial parks, in a similar way the Singapore government

0%

2%

4%

6%

8%

10%

12%

2011 2012 2013 2014 2015 2016 2017

ASEAN ASEAN ex-Singapore

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2011 2012 2013 2014 2015 2016 2017

Indonesia Laos Myanmar Philippines

Vietnam Cambodia Thailand Malaysia

China production

capacity shift to ASEAN

is a “win-win-win” deal

Chinese offshore

industrial parks serve as

significant investment

platforms for Chinese

corporates due to

“policy mobility”

http://www.baidu.com/link?url=A_MJ6qQb2gv3Itx9h-WvgzmB5dlooT4yzAfibpr_28IXlzYUYMX8eV_3Z_ovvVCHc-9E6vKbf7qDOE0eIQo8eXMmc9n0-JP5lVMXNvAH4uq

20


did when setting up Vietnam-Singapore Industrial Parks (VSIP) and China Suzhou-

Singapore Industrial Park (CS-SIP) in the 1990s. By negotiating and securing favourable

policy terms from host countries, the China government can draw on and extend its state

enterprise network to facilitate industrial parks development in a way called “policy

mobility”, which is characterised as the migration, combination, and evolution of policies,

valuations, and ideas from one region to another (Song Tao, 2018).

By the end of March 2019, China had established 6 large industrial parks in ASEAN: Thai-

China Rayong Industrial zone (Thailand), China-Vietnam Economic Zone (Vietnam), Long

Giang Industrial Park (Vietnam), Sihanoukville Special Economic Zone (Cambodia), China-

Indonesia Economic Corporation Zone (Indonesia), and Malaysia-China Kuantan Industrial

Park (Malaysia), most of which are located in the capitals or major industrial cities of the

host countries. In the figure below, we list several industrial parks and some of the

participating Chinese firms in these developments.

Chinese industrial parks in ASEAN

Source: China Ministry of Commerce, compiled by Daiwa Note: Data as of 31 March 2019, Corporate facilities marked with * are still under construction

Chinese corporate investment in ASEAN

In this section, we screen MSCI China components and the full A-share universe with

production facilities operating or under construction in ASEAN (Vietnam, Thailand,

Indonesia, Malaysia, Philippines, and Cambodia), yielding 120 companies, which is our

universe (page 24). We believe these companies reflect the general landscape of China’s

manufacturing capacity shift to ASEAN. We exclude Singapore from our research because

most inbound FDI is service-oriented rather than our focus, which is manufacturing.

R&D expenditure (GERD) as % of GDP Monthly minimum wage in ASEAN emerging countries

Source: UNESCO UIC, World Bank, Index Mundi Note: Data for Thailand, South Korea, Japan, World as of 2016; data for Malaysia, Cambodia,

China, India as of 2015; data for Singapore as of 2014; data for Philippines, Indonesia and Vietnam as of 2013

Source: CEIC, Public reports, Daiwa

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Sin

gapo

re

Mal

aysi

a

Tha

iland

Phi

lippi

nes

Indo

nesi

a

Cam

bodi

a

Vie

tnam

Chi

na

Indi

a

Sou

th K

orea

Japa

n

Wor

ld

100

120

140

160

180

200

220

240

260

280

300

Philippines Thailand Malaysia Indonesia Vietnam Cambodia

Most Chinese industrial

parks in ASEAN are

located in the capital

cities or major industrial

cities of the host

countries

21


ASEAN (ex-Singapore) has a relatively low Science and Technology (S&T) exposure.

Malaysia and Thailand are at a relatively high level in the region after Singapore in terms of

R&D expenditure and number of researchers. They are consequently preferred locations

for high-tech investments in our universe. On the other hand, Vietnam, Indonesia and the

Philippines have cheap labour forces and relatively large populations, which are suitable

for taking on China’s labour-intensive manufacturing capacity and attracting consumer

investments.

Semiconductors and electrical equipment are investment highlights for Chinese corporates

in Malaysia. A well-established industrial system and prominent geographical location

make the country an ideal investment destination for export-oriented industries. Malaysia

also has a well-educated workforce and a long track record in IT-related supply chain

manufacturing. Some examples of Chinese corporations with IT-related production

capacity in Malaysia include Xinyi Solar (968 HK, HKD4.47, Sell [5]), LONGi Green Energy

(601012 CH, Not rated) and Konfoong Materials (300666 CH, Not rated).

In recent years, glass and paper are becoming emerging investment areas in Malaysia.

Leading Chinese players such as Lee & Man Paper (2314 HK, HKD6.36, Hold [3]), Nine

Dragons Paper (2689 HK, HKD7.25, Outperform [2]), Jingxing Paper (002067 CH, Not

rated), and Kibing Group (601636 CH, Not rated) have established or plan to build

overseas facilities in the country. On one hand, strict environmental regulations, high

manufacturing costs, and Structural Supply-Side Reform (SSSR) in China are driving out

these industries; on the other hand, government support and surging demand from rapid

urbanisation in Malaysia are paving the way for Chinese firms to enter this market. In the

figure below (left), we highlight several Chinese firm production facilities and their

respective geographies.

Malaysia: distribution of Chinese corporates Thailand: distribution of Chinese corporates

Source: Company reports, compiled by Daiwa Note: Data as of 10 April 2019, company facilities marked with * are still in construction


We now turn to Thailand. In Thailand, the Bangkok Metropolitan Region is the traditional

cluster district for China investments. Nearly 25% of the country’s total population in the

region provides a relatively cheap labour force and a sizeable consumer market for foreign

corporates. However, assisted by the Eastern Economic Corridor (EEC) project and the

BRI, Chinese investments are now shifting towards the East Thailand provinces such as

Chun Buri and Chachoengsao. Since the Thai-China Rayong Industrial Zone was

established in 2006, Rayong, renowned as Thailand’s chemical and automobile industry

hub, has become a popular location for Chinese investments. Of the 25 Chinese firms in

our universe investing in Thailand, 12 operate or construct their production facilities in the

region. Automobiles and auto components are the most preferred investment areas which

also consist with local industrial advantages. Such advantages include a long history of

supply chain manufacturing for the Japanese auto industry. Listed Chinese corporates

Semiconductors and

electrical equipment are

investment highlights for

Chinese firms in

Malaysia

Automobiles and auto

components are the

most common industries

for production facilities

of Chinese corporates in

Thailand

22


investing in this region include SAIC Motor (600104 CH, Not rated), Linglong Tyre (601966

CH, Not rated), Minth Group (425 HK, HKD24.75, Buy [1]), and Weichai Power (2338 HK,

Not rated). Please see the figure on the previous page (right) for the location of the

Chinese names investing in production capacity in Thailand.

We now consider Vietnam. In Vietnam, most Chinese companies are located around the

Red River Delta and the Mekong River Delta. The Vietnamese labour force is the second-

largest within ASEAN (behind Indonesia) with relatively low wage costs within emerging

ASEAN. We therefore believe Vietnam is a potential beneficiary of the ongoing trade war

between China and the US, by undertaking some of China’s export manufacturing

capacity, especially in labour-intensive industries such as textiles and general OEM. Within

the Chinese textiles industry, 11 out of 15 firms with overseas facilities are located in

Vietnam (3 in Cambodia). Examples include Bros Eastern (601339 CH, Not rated), Regina

Miracle (2199 HK, HKD6.32, Hold [3]), Shenzhou International (2313 HK, HKD105.3, Buy

[1]), and Texhong Textile (2678 HK, HKD10.62, Buy [1]). See the chart below (left) for a

more complete list of Chinese capacity investment in Vietnam.

Vietnam: distribution of Chinese corporates Indonesia: distribution of Chinese corporates



Finally, we look at Indonesia. Indonesia is ASEAN’s largest consumer market in terms of

population size. In Jawa Island, Chinese automobile & components manufacturers Geely

(175 HK, HKD15.74, Buy [1]), Nexteer Automotive (1316 HK, HKD12.28, Outperform [2]),

and SAIC Motor (600104 CH, Not rated) have established their automobile or KD plants.

Meanwhile, Chinese electronics players Lenovo (992 HK, HKD7.27, Outperform [2]),

Xiaomi Corp (1810 HK, HKD12.02, Outperform [2]), and ZTE (763 HK, Not rated) have

shifted parts of their manufacturing capacities to the country to serve local and other

ASEAN consumers. In Sulawesi and Kalimantan Islands, where natural resources are rich,

Chinese corporates invest in metals & mining industries including iron pipes and

aluminium. Listed investors include Nanshan Aluminium (600219 CH, Not rated), China

Hongqiao Group (1378 HK, Not rated), and Anhui Conch Cement (914 HK, Not rated).

See the figure above (right) for more detail.

Prospects for a China production capacity shift to ASEAN

Similar to Singapore practices, we expect China to push its production capacity shift in a

“top-down” approach (not driven by the firms alone), where the government will continue to

play an influential role. The China central government advocated the “International

Production Capacity Cooperation” (IPCC, 國際產能合作) initiative in 2015. As Premier Li

Keqiang remarked in The World in 2016, Economist, through combining cost-effective

China manufacturing practices with high-end technology from developed economies under

IPCC, “high-quality and low-cost” infrastructure and equipment from China can help

emerging countries accelerate industrialisation and urbanisation, and promote strong

A large and cheap labour

force in Vietnam attracts

labour-intensive industry

investments, such as

textiles

“Big consumer” sector

including automobile,

food products, and

consumer electronics

are Chinese corporates’

favourite investments in

Indonesia

The Chinese government

will continue to play a

dominant role in shifting

capacity overseas

23


economic growth from the supply side. By 2018, China had signed IPCC agreements with

more than 40 countries, according to China’s Ministry of Commerce. Local governments

have also issued policies to encourage the production capacity shift. For example, Hebei

Province set the target of transferring 20m tonnes of steel manufacturing capacity abroad

within the next 5 years. This is a textbook example of SSSR.

In the long run, we believe the success of China’s production capacity shift strategy will

depend on Chinese corporates’ competitiveness more than government policy. However,

Chinese firms will need to develop a greater capability to deal with unstable political

environments, unskilled labour forces and potential conflicts of interests with local

communities when investing abroad.

24


China production capacity shift research universe

English name Chinese name Ticker GICS Sector Country English name Chinese name Ticker GICS Sector Country

Facilities in operation

Victory City International 冠华国际 539 HK Consumer D ID/KH

Nexteer Automotive Group 耐世特 1316 HK Consumer D ID Morris Holdings Ltd 慕容控股 1575 HK Consumer D KH

Shandong Linglong Tyre 玲珑轮胎 601966 C1 Consumer D TH Jiangsu Hongdou Industrial 红豆集团 600400 CH Consumer D KH

Sailun Group Co Ltd 赛轮金宇 601058 CH Consumer D VN Shanghai Huayi Group Co Ltd 华谊集团 600623 CH Consumer D TH

Minth Group Ltd 敏实集团 425 HK Consumer D TH Henan Rebecca Hair Products 瑞贝卡 600439 CH Consumer S KH

Zhejiang Jingu Co Ltd 金固股份 002488 CH Consumer D TH Wolong Electric Group Co Ltd 卧龙电气 600580 CH Industrials VN

Brilliance China Automotive 华晨汽车 1114 HK Consumer D MY/VN/PH Nature Home Holding Co Ltd 大自然家居 2083 HK Industrials KH

Geely Automobile 吉利汽车 175 HK Consumer D ID Zhejiang Dun'An Artificial Environment 盾安环境 002011 CH Industrials TH

Dongfeng Motor Group 东风集团 489 HK Consumer D ID Guangdong Sunwill Precising Plastic 顺威股份 002676 CH Industrials TH

SAIC Motor Corporation 上汽集团 600104 C1 Consumer D TH/ID LONGi Green Energy Technology 隆基股份 601012 C1 IT MY

Lifan Industry Group Co Ltd 力帆实业 601777 CH Consumer D VN/PH GCL System Integration Tech 协鑫集成 002506 CH IT VN

Beiqi Foton Motor Co Ltd 福田汽车 600166 CH Consumer D TH Konfoong Materials International 江丰电子 300666 CH IT MY

Jiangsu High Hope International 汇鸿集团 600981 CH Consumer D KH Lenovo Group Limited 联想集团 992 HK IT ID

Qingdao Haier 青岛海尔 600690 C1 Consumer D TH/ID Xiaomi Corp. Class B 小米集团 1810 HK IT ID

Tcl Corporation TCL 集团 000100 C2 Consumer D VN Better Life Commercial Chain Share 步步高 002251 CH IT ID

Midea Group 美的集团 000333 C2 Consumer D VN Shenzhen Kaifa Technology 深科技 000021 CH IT MY/TH/PH

Zhejiang Supor Co Ltd 苏泊尔 002032 CH Consumer D VN Shanghai Xintonglian Packaging 新通联 603022 CH Materials MY

Sichuan Changhong Electric 四川长虹 600839 CH Consumer D ID China Hongqiao Group Ltd. 中国宏桥 1378 HK Materials ID

Xiamen Intretech Inc 盈趣科技 002925 CH Consumer D MY Shandong Nanshan Aluminium 南山铝业 600219 CH Materials ID

Comefly Outdoor Co Ltd 牧高笛 603908 CH Consumer D VN Zhejiang Hailiang Co Ltd 海亮股份 002203 CH Materials VN

Shenzhou International 申洲国际 2313 HK Consumer D VN Xinxing Ductile Iron Pipes Co Ltd 新兴铸管 000778 CH Materials ID

Youngor Group 雅戈尔 600177 C1 Consumer D VN Advanced Technology & Materials 安泰科技 000969 CH Materials TH

Regina Miracle International 维珍妮 2199 HK Consumer D VN Nine Dragons Paper Holdings Ltd. 玖龙纸业 2689 HK Materials VN

Bros Eastern Co Ltd 百隆东方 601339 CH Consumer D VN Lee & Man Paper Manufacturing 理文造纸 2314 HK Materials VN

Zhejiang Jasan Holding 健盛集团 603558 CH Consumer D VN Shandong Sun Paper Industry 太阳纸业 002078 CH Materials laos

Texhong Textile Group Ltd 天虹纺织 2678 HK Consumer D VN Hengyi Petrochemical Co Ltd 恒逸石化 000703 CH Materials BN

Luthai Textile Co Ltd 鲁泰 A 000726 CH Consumer D VN Zanyu Technology Group Co Ltd 赞宇科技 002637 CH Materials ID

Ningxia Zhongyin Cashmere 中银绒业 000982 CH Consumer D KH Cofco Biochemical Co Ltd 中粮生化 000930 CH Materials TH

Tsingtao Brewery 青岛啤酒 168 HK Consumer S TH Anhui Conch Cement 海螺水泥 914 HK Materials ID/MM

China Mengniu Dairy Co., Ltd. 蒙牛乳业 2319 HK Consumer S ID MYS Group Co Ltd 美盈森 002303 CH Materials VN

Tongwei Co. Ltd. Class A 通威股份 600438 C1 Consumer S VN Facilities in planning or construction

New Hope Liuhe 新希望 000876 C2 Consumer S VN/PH/ID Guizhou Tyre 黔轮胎 A 000589 CH Consumer D VN

Yankershop Food Co Ltd 盐津铺子 002847 CH Consumer S VN Prinx Chengshan 浦林成山 1809 HK Consumer D TH

Shanghai Xuerong Bio-Tech 雪榕生物 300511 CH Consumer S TH Jiangsu General Science Technology 通用股份 601500 CH Consumer D TH/KH

Hengan International Group 恒安国际 1044 HK Consumer S ID Ningbo Tuopu Group Co Ltd 拓普集团 601689 CH Consumer D MY

Zhuzhou Kibing Group Co Ltd 旗滨集团 601636 CH Industrials MY Jiangsu Xinquan Automotive Trim 新泉股份 603179 CH Consumer D MY

Zhejiang Chint Electrics 正泰电器 601877 C1 Industrials TH Guoguang Electric Co Ltd 国光电器 002045 CH Consumer D VN

Luxshare Precision Industry 立讯精密 002475 C2 Industrials VN/MY KingClean Electric Co Ltd 莱克电气 603355 CH Consumer D VN

Zhejiang Founder Motor 方正电机 002196 CH Industrials VN Hang Zhou Great Star Industrial 巨星科技 002444 CH Consumer D VN

Shenzhen Center Power Tech 雄韬股份 002733 CH Industrials VN Anhui Anli Material Technology 安利股份 300218 CH Consumer D VN

China XD Electric Co Ltd 中国西电 601179 CH Industrials ID Huafu Fashion Co Ltd 华孚时尚 002042 CH Consumer D VN

Qingdao Zhongzi Zhongcheng 青岛中程 300208 CH Industrials ID HMT Xiamen New Technical Materials 华懋科技 603306 CH Consumer D VN

Goldcup Electric Apparatus 金杯电工 002533 CH Industrials ID Huafu Fashion Co Ltd 华孚色纺 002042 CH Consumer D VN

Camel Group Co Ltd 骆驼股份 601311 CH Industrials MY Jiangsu High Hope International 汇鸿集团 600981 CH Consumer D MM

Jiangsu Zhongli Group Co Ltd 中利科技 002309 CH Industrials TH Want Want China 中国旺旺 151 HK Consumer S VN

Weichai Power 潍柴动力 2338 HK Industrials TH Petpal Pet Nutrition Technology 佩蒂股份 300673 CH Consumer S KH

Sinotruk Hong Kong Ltd. 中国重汽 3808 HK Industrials VN/MY/PH Shandong Intco Medical Products 英科医疗 300677 CH Health Care VN

CRRC Corporation 中国中车 1766 HK Industrials MY Zhejiang Henglin Chair Industry 恒林股份 603661 CH Industrials VN

CIMC 中集集团 000039 C2 Industrials TH UE Furniture Co Ltd 永艺股份 603600 CH Industrials VN

Shenzhen Changhong Tech 昌红科技 300151 CH Industrials VN Jiangsu Leili Motor Co Ltd 江苏雷利 300660 CH Industrials VN

Ningbo Cixing Co Ltd 慈星股份 300307 CH Industrials VN Zhejiang Sanhua Intelligent Controls 三花智控 002050 CH Industrials VN

Shanghai Yongli Belting 永利股份 300230 CH Industrials ID Shandong Weida Machinery 海利得 002026 CH Industrials VN

Suzhou Boamax Technologies 宝馨科技 002514 CH Industrials PH Yindu Kitchen Equipment 银都股份 603277 CH Industrials TH

Bosun Tools Co Ltd 博深工具 002282 CH Industrials TH Hanyu Group Joint-Stock 地尔汉宇 300403 CH Industrials TH

Shandong Himile Mechanical S&T 豪迈科技 002595 CH Industrials TH Sinoma Science & Technology 中材科技 002080 CH Materials VN

ZTE Corporation Class H 中兴通讯 763 HK IT ID Sichuan Dowell S&T 达威股份 300535 CH Materials KH

AAC Technologies Holdings 瑞声科技 2018 HK IT VN/PH China National Building Material 中国建材 3323 HK Materials VN

Kingboard Holdings Limited 建滔集团 148 HK IT TH Shandong Jinjing S&T 金晶科技 600586 CH Materials MY

GoerTek Inc. Class A 歌尔股份 002241 C2 IT VN Zhejiang Jingxing Paper JSC Ltd 景兴纸业 002067 CH Materials MY

Foxconn Industrial Internet 工业富联 601138 CH IT VN GEM Co Ltd 格林美 002340 CH Materials ID

Xinyi Solar Holdings Ltd. 信义光能 968 HK IT MY Lee & Man Paper Manufacturing 理文造纸 2314 HK Materials MY

Source: Bloomberg, Country reports, Daiwa Note: “Consumer D” refers to “Consumer discretionary”, “Consumer S” refers to “Consumer Staples”, “IT” refers to Information technology; We use ISO country codes for country abbreviations: Brunei

(BN), Cambodia (KH), Indonesia (ID), Malaysia (MY), Myanmar (MM), Philippines (PH), Thailand (TH) and Vietnam (VN)

25


Singapore strategy

Ramakrishna Maruvada (65) 6228 6742 ([email protected])

Global cues hold sway

Corporate earnings continue to weaken

The corporate earnings revision cycle remains on a downward trend. Our 2019-20 STI

earnings forecasts are down 1.8-2.0% over the past 2 months, largely driven by downward

revisions to our earnings forecasts for the banking (down by c.1-3%) and industrials (down

by c.2-4%) sectors.

Daiwa analysts’ forecasts revisions over the past 2 months

Source: Daiwa forecasts, Bloomberg

Our index target is 3,240

Our end-2019E STI target of 3,240 is based on an unchanged 5% discount to the past-15-

year average market PER of 13.1x. We believe a 5% discount is still warranted as the

earnings cycle remains on a downward trend and there appears to be little visibility on how

global macro factors (Brexit, US-China trade negotiations, China economy) will play out in

the coming months.

Our target suggests a 5% downside risk to the STI, implying the market is fully valued. This

reflects our assessment that the recent stock market rally (+11% YTD), which appears to

have been fuelled by a global increase in risk appetite, has brought valuations (PER) into

fully-valued territory.

FSSTI: 12-month forward PER bands FSSTI: 12-month forward PBR bands

Source: Bloomberg, Daiwa forecasts Note: FSSTI has been reconstituted from 2008

Source: Bloomberg, Daiwa forecasts

Overall, we forecast adjusted STI market earnings to increase by 7.2% YoY for 2019 and

6.1% YoY for 2020.

(5%)

(4%)

(3%)

(2%)

(1%)

0%

1%

2%

3%

Market Banks Real Estate Telecom Consumerservices

Industrial Oil & Gas Consumer goods

2019E 2020E

0

5

10

15

20

25

30

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Jan-

18

Jan-

19

+1 stdev

Mean

12M forward PER (x)

-1 stdev

+2 stdev

-2 stdev

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Jan-

18

Jan-

19

+1 stdev

Mean

12M forward P/BV (x)

-1 stdev

+2 stdev

-2 stdev

Our 2019-20E STI

earnings are down 1.8-

2% in the past 2 months

We believe a discount to

PER is warranted as the

earnings revision cycle

remains on a downward

trend

We forecast market

earnings growth of 6-7%

YoY for 2019-20

26


Singapore: adjusted earnings forecasts by sector

YoY 2018 2019E 2020E

Market (FSSTI Index) 7.7% 7.2% 6.1%

Banks 17.3% 8.0% 6.1%

Real Estate 5.3% 2.6% 6.7%

Telecom -13.2% -2.5% 0.5%

Consumer services 8.1% 6.4% 4.4%

Industrial 5.8% 4.7% 5.9%

Oil & Gas 21.7% 13.3% 7.4%

Consumer goods -26.7% 33.1% 11.8%

Source: Daiwa estimates and forecasts, Bloomberg, companies

Market devoid of domestic rerating catalysts

In our opinion, the Singapore stock market lacks short-term domestic catalysts.

First, we believe the initiatives in the government’s FY19 budget (announced in February

2019) will be largely neutral for the Singapore stock market. The budget was an

expansionary one, with the government targeting expenses of SGD80.3bn (+1.8% YoY).

The government projects the budget deficit to be SGD3.5bn or 0.7% of GDP (vs. FY18: a

surplus of SGD2.1bn or 0.4% of GDP). Around 30% of the budgeted expenses are

earmarked for traditional areas like defence and cyber security, while another SGD6.1bn is

to be set aside to fund healthcare schemes for the elderly (the Merdeka generation

package). The budget also contained some populist measures like one-off tax rebates and

cash vouchers (SGD1.1bn allocated for Bicentennial bonuses), which should support

domestic demand, in our view.

Second, political transition risks have receded as the ruling party has already identified its

next generation of leaders (to be led by Finance Minister Heng Swee Keat). Thus, the next

round of general elections, possibly towards end-2019E, is unlikely to throw up any major

surprises and we expect continuity in existing government policies. Third, we do not think

the government will reverse its property cooling measures anytime soon. In addition, the

effects of many of the fundamental changes taking place in the economy (hi-tech areas like

fintech, artificial intelligence [AI] and autonomous vehicles; and industry transformation via

digitalisation) will likely become evident only over a much longer time frame, in our view.

Economic indicators suggest a slowdown, with recent data mixed

The consensus 2019 GDP growth estimate, based on a survey by the Monetary Authority of

Singapore, has been revised down so far this year, and currently stands at 2.5% vs. 2.6% in

December 2018; our forecast remains at 2.6%. In February, the Ministry of Trade and

Industry (MTI) said GDP growth would likely come in slightly below the mid-point of its official

1.5-3.5% range. The Singapore economy is slowing, in our view.

However, the latest available domestic exports and Purchasing Managers’ Index (PMI)

data have surprised market expectations on the upside. Non-oil domestic exports rose by

4.9% YoY in February, reversing the YoY decline recorded in January, driven by a surge in

exports to China and Hong Kong. Meanwhile, the March PMI edged up to 50.8, up 0.4pp

MoM. This uptick in manufacturing activity, which is a reversal from 6 months of continuous

decline, was led by growth in new orders, new exports and factory output.

Singapore: Daiwa’s economic forecasts

% YoY 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E

Real GDP 15.2 6.2 3.7 4.7 3.3 2 2 3.6 3.2 2.6 2.4

CPI 2.8 5.2 4.6 2.4 1 -0.5 -0.5 0.6 0.4 1.3 1.3

Current account balance, (% of GDP) 16.8 22 17.2 18 17.4 19.7 19.1 18.8 19.3 19 19

Exchange rates (per USD) 1.29 1.3 1.22 1.27 1.33 1.42 1.45 1.34 1.37 1.39 1.34

Source: CEIC, Daiwa forecasts

Government’s FY19

budget neutral to the

Singapore stock market,

in our view

Upcoming elections

likely a non-event; we

also do not expect a

reversal in property

cooling measures

Consensus GDP

expectations are on the

way down

Singapore’s PMI edged

up 0.4pp MoM for March

27


External factors likely the key to stock market performance

The US interest rate expectations have shifted drastically over the past 5 months, with the

Federal Reserve essentially no longer projecting rate hikes in 2019 (vs. 2 rate hikes in

2020E). The recent inversion of the US yield curve has become the subject of much

debate as it raises the possibility of a US recession or interest-rate cuts. The US-China

trade war and Brexit are other relevant, but intractable global issues at the moment. These

factors are important within the context of a Singapore portfolio because: 1) there exists a

strong correlation between the Fed rate cycle and domestic interest rates, which in turn

drives the earnings and price performances of the heavyweight banking sector stocks, and

2) the resolution of the US-China trade war could increase risk appetites, which would

benefit higher-beta stocks, in our view.

Sector and stock strategy

Our strategy revolves around 3 pillars: 1) to position away from sectors that are leveraged

positively to a rising interest-rate cycle, 2) to maintain a preference for domestic-demand

plays that offer reasonable dividend yields, and 3) to look at pockets of opportunities in

other sectors (plantations, aviation).

Singapore: Daiwa’s recommended sector weightings

Sectors Weighting Relative preferences

Banks Neutral UOB

Real estate Neutral Developers (Neutral) (CIT); REITs (Neutral) (CT)

Telecoms Overweight Singtel

Consumer services Neutral Industrials Neutral STE, SATS

Oil and gas Underweight Consumer goods Overweight Wilmar, Thai Beverage

Source: Daiwa

Themes

Positioning away from sectors positively geared to interest rate cycle

We maintain our Neutral stance on Singapore banks, with a preference for UOB (UOB SP,

SGD27.83, Outperform [2]) as it is less sensitive to interest rates than heavyweight DBS

(DBS SP, SGD28.25, Hold [3]). The fund flow data released by the Singapore stock

exchange also suggests that institutional investors have accumulated sizeable positions in

the banks (investors have poured SGD2.7bn into the banks while withdrawing SGD2.7bn

from the telecoms sector since 2017), thus making the sector’s performance vulnerable to

any fund outflows.

SGX: cumulative institution fund flows

Source: SGX Notes: January 2016 is considered the base month

(4,000)

(3,000)

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000

5,000

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

Telecommunication Services Financials Market

(SGDm)

The Fed’s rate cycle has

implications for

Singapore banks; we

believe the US-China

trade war could

influence market risk

appetite

Fund flow data suggests

investors have piled into

the banks in recent

years, making the sector

vulnerable to outflows

28


Looking favourably on yield plays

We remain Overweight on the telecom stocks (key picks are Singtel [ST SP, SGD3.17,

Outperform (2)] and Netlink Trust [NETLINK SP, SGD0.83, Buy (1)]) and prefer them to S-

REITs as they offer superior dividend yields, on our forecasts. Index heavyweight Singtel is

facing significant competitive challenges in markets like Australia and India, but we believe

its FY19E yield is relatively secure, thus boosting its defensive appeal for us.

Within the S-REITs space, we prefer Ascott Residence Trust (ART SP, SGD1.2,

Outperform [2]) as we believe it offers an above-sector-average dividend yield and

possesses an underleveraged balance sheet, which could be used to drive future

acquisitions. Meanwhile, we retain our preference for CapitaLand Mall Trust (CT SP,

SGD2.42, Outperform [2]).

Playing the pockets of strength

We retain our Overweight stance on the consumer goods sector to reflect our positive

views on Thai Beverage (THBEV SP, SGD0.84, Outperform [2]) (Thai consumption) and

Wilmar (WIL SP, SGD3.64, Buy [1]) (asset restructuring play). We also retain our

preference for First Resources (FR SP, SGD1.83, Outperform [2]), which we believe has a

stronger production outlook and operational efficiency relative to its peers.

CPO prices bottomed out in 4Q18, following news of the removal of levies in Indonesia and

reduction in customs duties in India. Recently, 2 other positive data points have emerged

which we believe could be supportive of CPO prices in the near term: 1) a reduction in

inventory levels in Malaysia (down 5.9% MoM for March), and 2) an increase in demand

for bio-diesel in Indonesia. Meanwhile, our analyst Jame Osman believes the production

oversupply situation in the industry would limit the extent of recovery in CPO prices. Our

strategy of going long on downstream players like Wilmar and quality upstream CPO

players like First Resources reflects our desire to play the improving short-term sentiment

while being cognisant of the medium-term risks.

We remain Neutral on the property developers as the sector has rebounded from its lows.

We retain our preference for City Developments (CIT SP, SGD8.94, Buy [1]). Our ratings

for the rest of the sectors are unchanged — we are Underweight on oil & gas, and Neutral

on the rest.

We remain Overweight

on telecoms; we prefer

them to S-REITs on

superior yields

We are Overweight on

consumer goods and

Underweight on oil &

gas

Positive data points

have emerged in the

CPO space, and we still

like aviation plays

29


Singapore Telecoms

Ramakrishna Maruvada (65) 6228 6742 ([email protected])

Chen Wenjun (65) 6228 6746 ([email protected])

Sector outlook

Last legs of earnings down-cycle

New entrant TPG Telecom (not rated) launched its services in the Singapore market in

December 2018 on a limited-trial basis. We still think the company will focus on niche areas

of the market and thus believe threats of severe market disruption have now greatly

diminished. This assessment, taken together with the cost restructuring and diversification

efforts of the Singapore mobile operators, suggests to us that we are in the late stage of the

downward earnings cycle for the telecoms sector. Thus, we reiterate our Positive sector view.

Singapore Telecoms: revenue growth forecasts (% YoY)

Source: Companies, Daiwa forecasts

For 2019, we expect industry revenue to rebound by a modest 0.8% YoY after declining by

1.8% YoY in 2018, driven largely by companies’ diversification into emerging areas like

cyber-security and ICT services. Meanwhile, as ICT is a lower-margin business than

traditional carriage business, we expect overall EBITDA margins to continue to decline into

2019, notwithstanding the cost-restructuring efforts of the operators. Hence, we forecast a

1.9% YoY fall in EBITDA for the mobile operators (for the Singapore market) in 2019. Also,

with rising investments and spectrum-related costs, we expect balance sheets (net debt-to-

EBITDA ratio) to deteriorate further into 2019. As such, we forecast a 10% YoY fall in net

profit for the industry in 2019. Although this outlook appears weak, we believe the pressure

on industry net profit should decrease as we head further into 2020E.

Singapore Telecoms: EBITDA growth forecasts (% YoY) Singapore Telecoms: net debt/EBITDA profile

Source: Companies, Daiwa forecasts Source: Companies, Daiwa forecasts

(3%)

(2%)

(1%)

0%

1%

2%

3%

4%

5%

6%

FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

(5%)

(4%)

(3%)

(2%)

(1%)

0%

1%

2%

3%

4%

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19E

FY

20E

FY

21E

0.0

0.5

1.0

1.5

2.0

2.5

2017 2018E 2019E

Singtel StarHub M1

(x)

Singapore Telecoms are

likely in the late stage of

the downward earnings

cycle, in our view

We expect operators’

industry EBITDA and

profit to decline in 2019

30


Operations

Key trends

Key operating trends in the Singapore market which have been in place for 1-2 years are:

1) aggressive launch of SIM-only plans, which is impacting the average revenue per user

(ARPU) metric and mobile service revenue across operators, 2) a structural decline in the

pay-TV customer base due to the proliferation of alternative viewing mediums (eg, over-

the-air operators like Netflix and Yupp TV), and 3) slow customer additions in fixed

broadband as the market is saturated.

Mobile ARPUs are on a downtrend

The ARPU metric has been on a downtrend in both the postpaid and prepaid markets over

the past couple of years in Singapore. We believe the key factors driving the decline in the

postpaid market are: 1) a change in revenue recognition criteria following the adoption of

new accounting standards (IFRS15), 2) competition from mobile virtual network operators

(MVNOs), and 3) a structural change in consumer behaviour due to the rising popularity of

SIM-only plans (which have lower ARPU as they do not bundle handsets). Meanwhile, in

our view, the ARPU declines in the prepaid market are due to a rise in mobile data

consumption and broader availability of Wifi networks (eg, in foreign workers’ dormitories),

both of which resulted in a sharp decrease in international call revenue, a key component

of prepaid ARPUs in the industry.

Singapore Telecoms: prepaid ARPU Singapore Telecoms: postpaid ARPU

Source: Companies, Daiwa estimates Source: Companies, Daiwa estimates

Pay TV impacted by rise in alternative viewing mediums

Both the pay-TV revenue and customer base are on secular declining trends due to the

rising popularity of Netflix and other alternative viewing platforms. In 4Q18, the industry

customer base fell by 8.3% YoY and revenue declined by 13.1% YoY.

Singapore Telecoms: pay-TV industry revenue Singapore Telecoms: pay-TV industry subscribers


8

10

12

14

16

18

20

22

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

SingTel StarHub M1

(S$)

30

40

50

60

70

80

90

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

SingTel StarHub M1

(S$)

(15)

(10)

(5)

0

5

10

15

20

25

120

125

130

135

140

145

150

155

160

165

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Pay TV industry revenues % YoY (RHS)

(SGDm) (% YoY)

(10)

(5)

0

5

10

15

700

750

800

850

900

950

1,000

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Pay TV industry subscribers % YoY (RHS)

('000) (% YoY)

Operating trends in the

carriage business are

negative and have been

in place for a while now

Both prepaid and

postpaid ARPUs have

been on a downtrend

Pay TV impacted by

rising popularity of

alternative viewing

platforms

31


Broadband segment is saturated

The fixed-broadband customer base is largely saturated with migration to fibre networks

now largely complete. StarHub announced the closure of its cable broadband service from

end-1H19.

Singapore Telecoms: fibre broadband penetration Singapore Telecoms: industry broadband subscribers


ICT remains a bright spot

With core legacy services on a firm downtrend, operators have been diversifying into

emerging areas like ICT and cyber-security. In 4Q18, Singtel reported an 8% YoY increase

in ICT service revenue, while StarHub saw a 13% YoY rise.

Top sector picks

Netlink NBN Trust (NETLINK SP, SGD0.83, Buy [1])

Investment thesis

We reaffirm our Buy (1) rating on Netlink Trust as we believe in its ability to generate

resilient and predictable cash flow. Its earnings and DPU are relatively immune to the

prevailing uncertain economic conditions as we regard its customer base as very sticky.

We expect its share price to benefit from any decrease in bond yields.

NetLink NBN Trust: key forecasts summary

FY18A FY19E FY20E FY21E FY18-21E CAGR

Key forecasts SGDm

Revenue 229 341 356 362 16.6

EBITDA 168 244 263 273 17.7

Net profit 50 71 83 91 21.9

Capex 212 110 53 47 (39.5)

EPS (SGD share) 0.013 0.018 0.021 0.023

DPS (SGD/share) 0.032 0.046 0.047 0.047

Revenue breakdown SGD m

Residential 142 205 216 222 16.2

Non-residential 19 31 35 38 27.3

Subscribers '000

Residential 1192 1277 1327 1357 4.4

Non-residential 44 50 56 60 10.9

ARPU (SGD/month)

Residential 14.6 13.8 13.8 13.8 (1.8)

Non-residential 51.8 55.0 55.0 55.0 2.0

Source: Company, Daiwa forecasts

Valuation and risks

Our DCF-based 12-month TP is SGD0.92. Rising interest rates and delays in smart nation

initiatives and 5G technology developments pose key downside risks to our Buy (1) call.

95 99

82 88

100 100

0

20

40

60

80

100

120

Dec-17 Dec-18

SingTel StarHub M1

(%)

700

800

900

1,000

1,100

1,200

1,300

1,400

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

('000)

Migration to fibre

services is almost

complete

ICT segment remains a

bright spot

Resilient earnings and

DPU

32


SingTel (ST SP, SGD3.17, Outperform [2])

Investment thesis

We reiterate our Outperform (2) rating on Singtel as we believe its earnings will bottom in

FY19E and recover through FY20-21E, driven by operational improvements in Australia

and India and its longer-term picture remaining robust. In addition, we regard its FY19-20E

dividends (SGD0.175/share) as very attractive.

SingTel: key forecasts summary

FY18 FY19E FY20E FY21E FY18-21 CAGR (%)

SGDm

Group revenue 17,532 16,786 17,175 17,445 -0.2

Group Op EBITDA 5,089 4,804 4,874 5,006 -0.5

Reported net profit 5,451 3,045 3,086 3,436 -14.3

Singapore S$m

Revenue 8,396 8,201 8,289 8,357 -0.2

EBITDA 2,181 2,128 2,102 2,125 -0.9

EBITDA margin 26.0% 25.9% 25.4% 25.4% -0.5 p.p

Optus A$m

Revenue 8,710 8,761 9,021 9,226 1.9

EBITDA 2,773 2,731 2,814 2,926 1.8

EBITDA margin 31.8% 31.2% 31.2% 31.7% -0.1 p.p

A$/S$ rate 1.05 0.98 0.99 0.99

Associates S$m

Pre-tax contribution 2,461 1,645 1,958 2,411 -0.7

Source: Company, Daiwa forecasts

Valuation

We have an SOTP-based 12-month TP of SGD3.37. An escalation in competition in its key

markets — which is likely if TPG Telecom fails to secure regulatory approval for its merger

with Vodafone Hutchison Australia — is the key downside risk to our positive rating.

Singapore Telecoms: valuation summary

Company Stock code

Price (LC)

Mkt cap (USDm) Rating

Target price (LC)

PER (x) PBR (x) EV/EBITDA(x) Dividend Yield (%) ROE (%)

FY1E FYE2 FY1E FY2E FY1E FYE2 FY1E FY2E FY1E FY2E

Singapore Telecom ST SP 3.17 38,122 Outperform (2) 3.37 16.8 15.1 1.8 1.7 12.8 12.3 5.5% 5.0% 10.5 11.4 NetLink NBN Trust Netlink SP 0.83 2,380 Buy (1) 0.92 39.0 35.7 1.1 1.1 14.3 13.7 5.7% 5.7% 2.3 2.8

Source: Bloomberg, Daiwa forecasts Note: Closing prices as of 30 April 2019

FY19E likely to mark an

earnings bottom

33


Singapore Industrials and Capital Goods

Royston Tan (65) 6228 6745 ([email protected])

Sector outlook

Rigbuilders: not the time to celebrate

We maintain our Neutral rating on the Singapore Rigbuilders sector, which has seen a

reprieve of late due to the rebound in oil prices. However, we see volatility in oil prices as a

phenomenon that is here to stay, which could discourage oil companies from making hasty

decisions pertaining to field developments, in our view. Instead, we see oil majors

engaging in a newfound “capital discipline” approach, whereby shareholders’ returns and

free cash flow growth take precedence over any buffing-up of reserve backlogs. Any

weakness in oil prices would likely prompt even further cost-reduction efforts by the oil

companies, which would not augur well for new project sanctions, in our view.

Global active MODU existing fleet (year-end) vs. backlog Global active MODU utilisation rate

Source: Clarksons Research Source: Clarksons Research

The global mobile offshore drilling unit (MODU) market remains in oversupply, and we

estimate it to see a tepid demand recovery at best, with day rates still hovering near record

lows in 2019, based on our assessment. This does not bode well for Singapore’s yards,

Keppel (KEP SP, SGD6.77, Outperform [2]) and SembMarine (SMM SP, SGD1.71, Hold

[3]), both accounting for a major share of such drilling asset production globally over the

past 2 decades. Delays in project sanctions due to oil-price volatility would further deter the

ability and willingness of drilling contractors to order newbuild assets into an already

oversupplied market, in our view.

MODU day rates (USD’000s)

Weak day rates will

likely deter drilling

contractors from placing

significant newbuild

orders from yards, in

our view

Source: Clarksons Research

Note: Average across various geographical regions

240258 264 270

64

92 88 80 75

8

126 120 117 111

20

0

50

100

150

200

250

300

2015 2016 2017 43435 Backlog

Jack-up > 300' Semi-sub > 5,000' Drillship

0.86

0.74

0.64 0.660.7

0.92

0.75

0.57

0.68

0.62

0.880.82

0.710.65 0.68

0%

20%

40%

60%

80%

100%

2015 2016 2017 2018 43466

Jack-ups Semi-subs Drillships

86 80 74 71

235

165 170 165

0

50

100

150

200

250

2015 2016 2017 2018

Jack-ups Floaters

We view the sweet spot

for oil (Brent) as being in

the range of USD65-

70/bbl

Only a single MODU

order was placed

through Keppel in 2018

34


Therefore, while the worst of the oil & gas (O&G) down cycle may be behind us, we believe

the road to recovery for the Singapore offshore yards remains a long one, with a need to

offer diversified products to avoid a complete depletion of the yards’ order backlog. As

such, we maintain our Neutral assessment discussed in our Singapore rigbuilders report,

2019 outlook and 4Q18 preview: unlikely to inspire, but current valuations present

opportunities, published 9 January 2019, with our pecking order as follows: 1) Keppel, 2)

SCI and 3) SembMarine.

Aviation: long-term structural growth remains intact

We reiterate our Positive rating on the Singapore Aviation sector and preference for the

aviation service providers, among which our top picks are STE (STE SP, SGD3.96, Buy

[1]) and SATS (SATS SP, SGD5.23, Outperform [2]).

Confidence survey: recent and expected changes in traffic volumes

Confidence survey: recent and expected changes in yields

Source: IATA Airline Business Confidence Index — January 2019 Source: IATA Airline Business Confidence Index — January 2019

According to data from IATA, global passenger numbers are expected to reach 4.59bn in

2019, up from 4.34bn in 2018, with 2019 marking the 10th year of consecutive profit for the

global airline industry. A business confidence survey conducted by IATA in January 2019

also pointed to strong passenger demand growth over the next 12 months despite a risk of

slowing global economic growth and concerns over a possible trade war. However, the

survey results show that the yield environment remains challenging.

Amid strong long-term demand for air travel, we see aviation service providers (such as

MRO providers, ground handlers and inflight meal providers) as the key beneficiaries of

this macro trend. While airlines typically benefit from strong air travel demand as well, we

believe the positive flow-through impact from this demand tailwind is likely tapered in the

Asia-Pacific region, where intense competition exists among full-service carriers (FSCs)

and low-cost carriers (LCCs) alike, making it difficult for airlines to pass on higher operating

costs (such as fuel costs) to a highly price-sensitive population. Therefore, despite the

recent reprieve in the form of lower fuel costs, we expect the bottom line of SIA (SIA SP,

SGD9.68, Outperform [2]) to remain under pressure from the company’s inability to price

air tickets at a premium.

Themes

Consolidation likely to solve a long-term structural issue for Singapore yards

We have long advocated that the Singapore yards consolidate their yard facilities in a bid

to solve the capacity glut issues, with yards being under-utilised due to a demand shortfall

in MODU assets. Yards in China have been in a consolidation phase for the past 3-4 years

and according to China’s State-owned Assets Supervision and Administration Commission

(SASAC), the government will accelerate the consolidation in various industries — the

shipbuilding sector being one of them — through mergers and acquisitions, asset swaps

and strategic alliances.

15% 15%

70%

7% 7%

85%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Deterioration/Decrease No-change Improvement/Increase

Last three months Next twelve months

30%33%

37%

33% 33% 33%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Deterioration/Decrease No-change Improvement/Increase

Last three months Next twelve months

Demand growth for

passenger traffic

expected to slow (+6% in

2019 vs. +6.5% in 2018),

as per IATA

We expect SIA’s

substantial hedging

policy to result in lower

benefits from the low oil-

price environment vs.

airlines with low levels

of fuel hedging

Singapore yards will find

it increasingly difficult to

compete with state-

backed yards that have

undergone

consolidation, in our

view

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=171a0d581d87489ae0483554616a1e49e56263774buvXIcRbjJ7BU%2F37YeAcM9k5aVKQpKFuF%2FrA%2FRA%2BmG%2BuCczG3hlfiFvAXEcRhVsdZfx5BNO6Ps0dVZf%2BEg5aSEfqrw1nqwfPh%2Bk4A%2Bd96dE%2FkbJClIfmCpBAYSU%2BHFoKNxUt1aMSPFGP6fhsRz24bzJrIvqqFfdR%2F9nR%2FKWCkYDviB3K%2F4aiCx62TiPEvZ8mXWyYJAELKEm7bDH8JcBgvQ%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=171a0d581d87489ae0483554616a1e49e56263774buvXIcRbjJ7BU%2F37YeAcM9k5aVKQpKFuF%2FrA%2FRA%2BmG%2BuCczG3hlfiFvAXEcRhVsdZfx5BNO6Ps0dVZf%2BEg5aSEfqrw1nqwfPh%2Bk4A%2Bd96dE%2FkbJClIfmCpBAYSU%2BHFoKNxUt1aMSPFGP6fhsRz24bzJrIvqqFfdR%2F9nR%2FKWCkYDviB3K%2F4aiCx62TiPEvZ8mXWyYJAELKEm7bDH8JcBgvQ%3D%3D

35


The big-3 Korean yards are also undergoing a massive consolidation exercise, with

Hyundai Heavy Industries (HHI) (009540 KS, KRW124,500, Buy [1]) seeking to acquire

Daewoo Shipbuilding and Marine Engineering (DSME) (042660 KS, KRW329,050, Buy

[1]). The closure of this deal would result in the largest shipbuilder in the world, with a joint

order book of c.180 ships.

We believe it would be in the best interests of both Keppel and SembMarine to consolidate

their yard businesses to stay competitive against global heavyweight yards from China and

Korea, most of which tend to enjoy implicit government support.

MRO demand for narrow-body aircraft expected to take flight

The influx of new aircraft into Asia is occurring rapidly and will serve to increase demand

for MRO services, in our view. However, we believe it is critical that MRO operators

position themselves in the right market to capitalise on this aircraft growth trend. Currently,

narrow-body aircraft account for 57% of the global fleet size and 45% of the MRO market

share, while wide-body aircraft account for only 20% of global fleet size but c.44% of MRO

expenditure as these aircraft are more maintenance-intensive due to their complex nature.

According to data from Oliver Wyman, by 2028, narrow-body aircraft will account for 66%

of the global fleet size and 55% of the MRO market share vs. 19% of the global fleet size

and 38% of the MRO market share for wide-body aircraft. More importantly, we expect the

MRO market to become increasingly concentrated within a handful of aircraft platforms,

with the top-2 platforms — the narrow-body A320ceo/neo family and B737NG/MAX —

together accounting for c.50% of total MRO spending by 2028.

Hence, we believe MRO operators will need to ensure they have the facilities and

capabilities to service these critical aircraft platforms that will take centre-stage over the

coming decade.

Top sector picks

Keppel Corp (KEP SP, SGD6.77, Outperform [2])

Investment thesis

We see tailwinds supporting Keppel’s two key divisions, O&M and Property, in 2019 —

the former being new order acceleration amid an improving oil-price environment, and the

latter benefiting from the recent relaxation of property cooling measures in China. As such,

we have an Outperform (2) rating. We expect Keppel’s O&M division, a key laggard over

the past 2-3 years due to the O&G downturn, to finally turn profitable in 2019 on the back

of years of cost streamlining, as well as heightened visibility on new orders (the company

won its maiden contract in early 2019 when Awilco Drilling, an existing client, exercised the

option to construct a second deepwater semi-submersible).

We expect the contribution from property to be relatively robust in 2019, aided by the

relaxation of some property cooling measures in China, which we see as a welcome relief

for developers.

Valuation

We have a SOTP-based 12-month TP of SGD7.15 for Keppel. While we believe the stock

lacks imminent short-term catalysts, we view it as attractively valued post the 23% decline

in its share price from its peak in February 2018, with its diversified business model

ensuring that the group as a whole remains profitable. The key downside risk to our call is

a significant decline in oil prices, which could impact the recovering new orders momentum

in the O&G space.

The A320neo and B737

MAX are expected to see

more than 8,000 new

deliveries in the coming

decade

36


ST Engineering (STE SP, SGD3.96, Buy [1])

Investment thesis

We believe STE is well positioned to ride on various macro themes with clear structural

growth trends, such as rising air travel demand, which would bode well for aircraft demand

and consequently requirements for MRO services, in our view. STE is the largest global

MRO player in terms of airframe MRO and focused on servicing the CFM56 engines that

powers the popular narrow-body A320neo aircraft. The company is also focusing on other

structural themes such as smart cities development and IoT applications, as well as the

proliferation of autonomous vehicles. We are positive on its acquisition of MRAS, which we

see as highly earnings-accretive, with the take-over deal fully completed in mid-April 2019.

STE looks on track to meet the double-digit YoY earnings growth we expect for 2019,

through a combination of organic and inorganic growth. The company can still afford to

further leverage on its balance-sheet strength, even after announcing 2 major acquisitions

over the past 6 months, with strong operating cash flow generation supporting a stable

dividend payment of c.4%. We have a Buy (1) rating for the stock.

Valuation

We have a DCF-based 12-month TP of SGD4.01 for the counter. The key risk is larger-

than-expected provisions made pertaining to its current portfolio restructuring activities.

Singapore Industrials and Capital Goods: valuation summary

Company Stock code

Price (LC)


Target price (LC)



Keppel Corp KEP SP 6.77 8.99 Outperform (2) 7.10 14.3 11.9 1.0 1.0 10.6 8.7 3.2 3.8 7.5 8.6

Sembcorp Industries SCI SP 2.66 3.50 Outperform (2) 3.01 11.6 10.3 0.7 0.6 9.2 8.4 1.9 2.3 6.0 6.4

ST Engineering STE SP 3.96 9.06 Buy (1) 4.01 21.9 19.6 5.3 5.1 15.3 13.9 4.0 4.3 24.8 26.7

SATS Ltd SATS SP 5.23 4.29 Outperform (2) 5.26 23.5 22.2 3.5 3.4 14.9 13.7 3.6 3.8 15.1 15.6


STE’s marine division

recently won its largest

order to date, worth

c.SGD2.9bn

37


Singapore Banks

David Lum (65) 6228 6740 ([email protected])

Sector outlook

Store of value

In the current period of economic growth uncertainty (slowing global economic growth,

trade tensions, and lingering political/economic uncertainties such as Brexit and general

election results in ASEAN), we still see Singapore banks as a good “store of value” for

2019E, for their respectable underlying EPS growth, undemanding PER and PBR

valuations, and attractive dividend yields. We reiterate our Positive rating on the sector.

Our outlook for earnings growth has not changed much since the end of 2018. We expect

sector core EPS growth of 8% YoY for 2019, 6% YoY for 2020, and 9% YoY for 2021. The

3-year (2018-21E) CAGRs for sector-average core EPS and pre-provision operating profit

(PPOP), based on our forecasts, are 8% and 7.5%, respectively. Our core EPS forecasts

are roughly in line with those of the Bloomberg consensus, so we do not believe our core

assumptions are overly optimistic (or pessimistic for that matter).

Slower loan and asset growth assumptions have led to cuts to our 2019-20E EPS (that we

made following the 3Q18 and 4Q18 results announcements), but we believe a slower

growth environment would also ease regulatory capital requirements and bolster the

common-equity Tier 1 (CET1) ratios of the banks, which at 13.9-14% as at end-2018 were

already at the high-end of their optimal ranges. We believe this implies that the ability to

raise dividends remains strong for the sector as long at EPS growth is not negative.

Singapore banks are cyclical stocks, but their dividend yields (of just below 5% and on par

with those of the large-cap commercial S-REITs) are attractive and well above the

Singapore market’s average. Their sustainable payout ratios of 40-50% are structurally

higher than ever before as their capital ratios are likely to be comfortably above regulatory

requirements for the foreseeable future, based on our forecasts.

We believe a potential positive share-price catalyst would be the successful conclusion of

the ongoing trade negotiations between the US and China, or any event that would

improve global economic growth expectations in the long term. As many investors have

been positioned in yield plays in Singapore since December 2018, prompted by an

increasingly dovish Fed and falling 10-year bond yields, we see some upside risk to banks’

share prices and a rotation back into cyclicals and high-beta stocks, triggered by a positive

macro development.

Singapore Banks: core EPS growth forecasts (YoY) Singapore Banks: Daiwa vs. Bloomberg EPS forecasts

Source: Daiwa forecasts Source: Bloomberg, Daiwa forecasts

11%

7%

9%

6% 6%

8%

7%

5%

9%

8%

6%

9%

0%

2%

4%

6%

8%

10%

12%

2019E 2020E 2021E

DBS OCBC UOB Sector average

0.4% 0.2%

2.3%

-0.4% -0.6%

2.4%

-0.3%

-1.3%

0.3%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2019E 2020E 2021E

DBS OCBC UOB

A “store of value” for

2019E

High single-digit EPS

and PPOP CAGR over

2018-21E

Still able to pay

dividends and maintain

high payouts

Singapore banks are

also yield plays

We see some upside risk

from a successful trade

deal between the US and

China

38


Our core assumptions

We assume gradual bottoming out in 2H19, followed by a gradual recovery

Our core macro assumption for the sector is that Singapore (and Asian) economic growth

will continue to decelerate modestly from 2018 to 1H19 and bottom out sometime in 2H19,

after which we expect an extremely modest recovery in 2020 and 2021.

For all 3 banks, we assume loan growth of 5% YoY for 2019, 6% YoY for 2020, and 7%

YoY for 2021. Our 1pp annual increase in loan growth for 2020-21E is consistent with our

core macro scenario.

No change to our SIBOR forecasts

We maintain our annual average 3-month SIBOR assumptions of 1.7% for 2019 and 2020,

and 2.0% for 2021. We believe a higher rate for 2021E is also consistent with a gradual

loan growth and Asian economic recovery in 2020-21E (our base scenario). We see some

upside risk to both our loan growth and 3-month SIBOR assumptions for 2021 if Asian and

global GDP growth gathers pace by then.

We still see upward pressure in net interest margin (NIM) for 2019E due to the upward

loan re-pricing throughout 2018. We expect a slower pace of NIM expansion (maximum of

1-3bps each year) for 2020-21E, with some upside risk for 2021E.

Domestic interest rates remain firm

For 2019 YTD, domestic rates — the 3-month SIBOR and 3-month SOR — have remained

firm despite the dovish comments by the US Fed officials since December 2018, with both

rates near their 12-month highs. If these rate conditions persist further, we believe

stronger-than-expected net interest income and NIM could result in positive earnings

surprises for 2019E.

Singapore: 3-month SIBOR and SOR (% pa) US: Fed funds rate (midpoint) and 3-month LIBOR (% pa)

Source: Bloomberg Source: Bloomberg

We expect credit costs to remain near their mid-cycle average for each bank over 2019-21.

We believe slowing Singapore and Asian economic growth would lead to upward pressure

on NPL ratios and credit costs, though this negative factor should be offset by slower and

more prudent (ie, credit-cost friendly) loan growth. Moreover, the recent credit growth cycle

(with total annual loan growth expanding in the high single digits and low teens YoY in

2015-18) was not excessive; thus, we still expect a normalised level of credit costs even as

loan growth slows in the coming quarters.

In a slower-paced growth environment with more restrained cost pressures, we also

believe that all banks will have the capacity to maintain positive JAWs (with YoY income

growth exceeding YoY operating expense growth) over 2019-21E and this will help to

underpin fairly reliable YoY growth in PPOP, in our view.

0.0

0.5

1.0

1.5

2.0

2.5

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep

-17

Nov

-17

Jan-

18

Mar

-18

May

-18

Jul-1

8

Sep

-18

Nov

-18

Jan-

19

Mar

-19

3-month SIBOR 3-month SOR

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep

-17

Nov

-17

Jan-

18

Mar

-18

May

-18

Jul-1

8

Sep

-18

Nov

-18

Jan-

19

Mar

-19

Fed funds rate (midpoint) 3-month LIBOR

Our base scenario: a

gradual slowdown

followed by a gradual

recovery

We lowered our interest-

rate assumptions at end-

2018

More modest increases

in NIMs for 2019-21E

Local rates still near 12-

month highs

We expect normalised,

mid-cycle credit costs in

2019-21

Positive JAWs ratios and

continued YoY growth in

PPOP likely over 2019-

21E

39


Risks

Rapidly decelerating loan growth

Although we see upside risk to net interest income in 1H19E if the SIBOR and SOR rates

remain resilient, the biggest downside risk to net interest income, in our opinion, would be

a rapid deceleration in loan growth. The monetary policies in nearly all key Asian

economies remain accommodating due to central banks’ wariness of slowing economic

growth in the large economies, trade-war related concerns, and the prospect of general

elections in some markets. In this macro environment, we still see selective lending

opportunities and mid-single-digit, quality loan growth as a highly achievable target.

Accordingly, any unforeseen disruption to this core assumption due to external shocks or

severe and coordinated slowdowns in major economies could lead to painful loan growth

and EPS downgrades.

Collapsing local interest rates

We see downside risk to our NIM and net interest income forecasts if the SIBOR and SOR

rates fall sharply below 1.7% (our annual average 3-month SIBOR assumption is 1.7% for

2019 and 2020) from 1.94% as at 10 April 2019. This possibility could come from

aggressive rate cuts by the Fed and other central banks, prompted by a sharp deceleration

in global economic growth or a severely negative external shock.

Top sector picks

United Overseas Bank (UOB SP, SGD27.83, Outperform [2])

Investment thesis

UOB is our top pick and we reiterate our Outperform (2) rating. We believe UOB is

attractive on valuations (PER and PBR), dividend yield, and its appeal as a defensive play

in the Singapore bank sector (for its purer commercial bank exposure vs. its peers and

mass affluent exposure [vs. ultra-high net worth] in the wealth management segment).

UOB also has significantly lower Greater China exposure (9% of 2018 pre-tax profit vs.19-

25% of 2018 pre-tax profit for its peers). Consequently, we expect UOB’s earnings to be

more resilient to any downside risks in the Chinese economy.

We are also aware of the strong tendency for the sector to revert to the mean over several

quarters. From this perspective, the knee-jerk switching that we observed from OCBC and

UOB to DBS after their 4Q18 results announcements could reverse in subsequent quarters

if the negative factors in the 4Q18 results actually prove to be one-time occurrences.

Valuation

UOB shares are trading near their post-GFC average 12-month forward PER of 11x and

slightly higher than the post-GFC average 12-month forward PBR of 1.1x. The key risks to

our positive call on UOB are DPS disappointment in the 2Q19 or 4Q19 results, sub-optimal

reported ROE vs. its peers, and a negative region-specific shock to ASEAN relative to the

rest of Asia.

DBS Group (DBS SP, SGD28.25, Hold [3])

Investment thesis

ROE is the bright spot

We reaffirm our Hold (3) rating on DBS. Its appeal as the bank with clearer dividends and

better ROEs vs. its peers has not diminished, in our opinion. With a resilient 4Q18 ROE of

11.3% despite market weakness and 2018 ROE of 12.1% (its highest since 2007) and

upbeat guidance on further ROE improvement, we expect DBS to continue to deliver

industry-leading EPS growth and ROE improvement for 2019-21.

Key downside risk is an

unforeseen slowdown or

collapse in group loan

growth

Faster- and sharper-

than-expected rate cuts

would likely hit earnings

hard

We prefer a more

defensive exposure

Well exposed to ASEAN

Looking for mean

reversion after DBS’ YTD

outperformance

Downside risks are a

stingy DPS and ASEAN-

specific negative shock

DBS’ ROE appeal has

not diminished

40


However, with a more diminished outlook for interest-rate hikes and possibly loan growth,

we believe DBS’ EPS growth rates are likely be more subdued, and any sudden collapse in

local interest rates (SIBOR and SOR) would have a more negative impact on DBS’ NIMs

than its peers’ due to its considerable current and savings account (CASA) in Singapore, in

our view.

Valuation

DBS shares are trading slightly higher their post-GFC average 12-month forward PER of

10x and considerably higher than their post-GFC average 12-month forward PBR of 1.1x,

due to an improved ROE outlook since 2H17, in our view. The key risks to our positive call

on DBS are further cuts to loan growth or SIBOR forecasts (given DBS’ higher EPS

sensitivity to these parameters), and a surprise departure of CEO Piyush Gupta.

Singapore Banks: valuation summary

Company Stock code

Price (LC)




UOB UOB SP 27.83 34,033 Outperform (2) 10.9 10.4 1.2 1.1 n.a n.a 4.5 4.7 11.6 11.4

DBS Group DBS SP 28.25 53,059 Hold (3) 11.5 11.0 1.5 1.4 n.a n.a 4.4 4.7 13.2 13.1

OCBC OCBC SP 12.1 37,755 Outperform (2) 10.8 10.2 1.2 1.1 n.a n.a 4.5 4.9 10.9 11.0


Vulnerable to further

macro-related

weaknesses

More earnings sensitive

to cuts in rates and loan

growth

41


Singapore Property and REITs

David Lum, CFA (65) 6228 6740 ([email protected])

Sector outlook

S-REITs: time for a breather

We maintain our Neutral rating on the S-REIT sector, which has been the major

outperformer in the Singapore market since December 2018 when the Fed first turned

dovish and global long-bond yields fell sharply afterwards. By any measure, we believe the

entire S-REIT sector is clearly in overvalued territory, with yields trading near all-time lows

and PBRs for many stocks at all-time highs. At these premium valuations, we believe it is

not a good time to buy S-REIT stocks now.

Nonetheless, we believe S-REIT prices are likely to trade positively on further declines in

the 10-year Singapore government securities (SGS) yield; the 10-year SGS yield can go

down further from the recent low of 2%, in our view. Thus, from a trading perspective, we

think any weak datapoints from the US economy or trade-related uncertainty could drive

down long-bond yields further and boost the unit prices of S-REITs. The 10-year SGS yield

has fallen by40bps since its recent peak in October 2018, but is still 90bps above its lowest

level ever (of 1.3% in 2012 during the robust quantitative easing period).

Although we accept that a further 10-20bps decline in the 10-year SGS yield could drive S-

REIT prices up further and “prolong the party”, any steeper decline in global long-bond

yields is likely to signal the growing risk of a severe and damaging global recession, in our

view. This event, if realised, would have dire implications for real estate fundamentals

(such as falling rents, rising vacancies and a collapse in tenant demand across nearly all

real estate segments). Moreover, using yield spread analysis as the basis to justify REIT

price levels implicitly assumes that the DPUs will be stable and sustainable; thus, a

collapse in projected DPUs due to rapidly deteriorating industry fundamentals would make

this approach almost useless, in our opinion.

Singapore: key total return indices Singapore: 10-year SGS yield (% pa)

Source: Bloomberg Source: Bloomberg

Among the major S-REIT sub-segments, we are most positive on the hospitality and hotel

sector as we expect the supply of new hotel rooms to be extremely tight (a 3-year CAGR of

1.5%), and therefore conducive for YoY revenue-per-available-room (RevPAR) growth in

high single digits for 2019-20E.

We are also positive on the retail property segment, which has shown signs that rents are

nearing their bottom with median rentals, according to the URA data, inching up 1.3% QoQ

and YoY for the fringe (suburban) area, and 0.3% QoQ and -1.7% YoY for the central area

in 4Q18. However, we still expect subdued or flat rental growth in 1H19 upon the opening

of large malls in decentralised areas. With likely limited new supply from 2H19E, we expect

modest rental growth after the new supply has been absorbed by the market.

(25%)

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18

Sep

-18

Oct

-18

Nov

-18

Dec

-18

Jan-

19

Feb

-19

Mar

-19

Apr

-19

FSSTI FTSE/EPRA REITs FTST/EPRA Non-REITs

2.0

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18

Sep

-18

Oct

-18

Nov

-18

Dec

-18

Jan-

19

Feb

-19

Mar

-19

Apr

-19

Yields at record lows,

PBRs near all-time highs

Possibly more downside

for long-bond yields,

upside for S-REIT prices

But watch out for tail

risk

We expect strong

RevPAR growth in the

hospitality sector

Some large malls to

open in 1H19

42


As for industrial property rents (0% QoQ and -0.4% YoY for JTC’s all-industrial index in

4Q18), which have shown signs of gradually bottoming out in 2019 after several years of

oversupply, we see lingering uncertainty in tenant demand and possible downside risk to

rents if the US and global economies show further signs of weaknesses.

We expect the office sector to report another year of rental growth after rising by 10% YoY

(for the URA category-1 office buildings) in both 2018 and 4Q18. However, as many office

landlords have adopted a prudent leasing strategy of having a relatively long portfolio

weighted-average lease to expiry (WALE) vs. a typical 3-year office lease to minimise and

manage the amount of office space up for renewal each year, the benefit of a rising rental

market would only be partially passed through to the DPU level, in our view. Consequently,

we expect modest YoY DPU growth for office REITs despite the rising office rental market.

Developers: almost back to normal

We reaffirm our Positive rating on the developers, which have significantly underperformed

the market since 5 July 2018, when the government surprisingly announced another round

of cooling measures. Although the sector has recovered from its recent lows since the start

of 2019, share prices are still trading near or below the levels immediately after the 5 July

2018 sell-off, and we believe the share prices are still too cheap in view of what has

transpired in the residential physical market since the latest round of cooling measures.

Singapore: private residential price index since 2010 Singapore: new home sales by developers (units)

Source: Singapore URA Source: Singapore URA

We believe the data on property prices and new home sales transactions suggests that the

market is “back to normal”. Overall, home prices have been largely flat (with a slight

negative bias) for 3 consecutive quarters (3Q18-1Q19) since the cooling measures were

announced. Private new home sales were slower for a few months after July 2018, but

judging by their performance in recent months, new home sales volume, which never

appeared excessive even before the July cooling measures, appear to be back to normal.

From the Singapore government’s perspective, we regard the outcome as “mission

accomplished”. The excessive market euphoria was removed overnight and the incipient

home price bubble was punctured before it did any real damage, in our opinion. We

believe the outcome so far has been remarkable given that effective home prices have

increased by 5% (corresponding to the incremental increase in the additional buyer’s

stamp duty for most buyers) after the cooling measures.

Now that it has become clear that the market is back to normal even after the imposition of

the cooling measures, we believe the share prices of property developers, many of which

are still near the levels immediately following the 5 July 2018 sell-off, are excessively low

and represent deep value. The major tail risk (that the cooling measures would create a

downward spiral in property prices and freeze home buying) never materialised; thus, in

retrospect, we believe the selling in response to the cooling measure announcement was

overdone.

100

110

120

130

140

150

160

2010

Q1

2010

Q3

2011

Q1

2011

Q3

2012

Q1

2012

Q3

2013

Q1

2013

Q3

2014

Q1

2014

Q3

2015

Q1

2015

Q3

2016

Q1

2016

Q3

2017

Q1

2017

Q3

2018

Q1

2018

Q3

2019

Q1 0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-

17F

eb-1

7M

ar-1

7A

pr-1

7M

ay-1

7Ju

n-17

Jul-1

7A

ug-1

7S

ep-1

7

Oct

-17

Nov

-17

Dec

-17

Jan-

18F

eb-1

8M

ar-1

8A

pr-1

8M

ay-1

8Ju

n-18

Jul-1

8A

ug-1

8S

ep-1

8O

ct-1

8N

ov-1

8D

ec-1

8Ja

n-19

Feb

-19

Mar

-19

Industrial segment

vulnerable to external

demand and sentiment

Office rents rising, but

long WALEs likely to

limit YoY DPU growth

Prices still near the post-

cooling measures sell-

off levels

Data so far points to a

normal and stable

market

The cooling measures

fulfilled their policy

objectives immediately

Shares now look

oversold; negative tail

risk did not materialise

43


Themes

S-REIT M&A and premiums for large cap S-REITs

According to S-REITs that merged last year, ESR-REIT (EREIT SP, SGD0.53, Outperform

[2]) and Viva Industrial Trust, and those proposing a merger so far this year, OUE

Commercial REIT (not rated) and OUE Hospitality Trust (not rated), one major motivation

for a merger is the benefit of size and market capitalisation. In Singapore, the top-8 S-

REITs by market capitalisation also enjoy the highest trading liquidity, with 3-month

average daily trading values of over SGD10m. After the top 8, we note that daily trading

volume falls off considerably to SGD1-3m.

Our view on M&A is that being larger and more liquid would certainly help to get on the

radar of global investors and allow them to trade units easier, but it is not evident to us

whether a larger size alone allows REITs to trade at higher valuations, which we believe is

the real (and rightful, in our opinion) objective of the REIT managers.

Even among the top-8 S-REITs in terms of market cap, we can cite several names that

trade at discernible discounts (by DPU yield or PBR) to their peers. We believe these

valuation discrepancies can be explained by the perceived quality of assets in the

portfolios or the perceived quality and track record of the REIT manager (and sponsor).

Moreover, among the smaller market-cap S-REITs (those not among the top-8), we also

see a few names trading at premium valuations (even higher than most, if not all, of the

top-8), such as Parkway Life REIT (not rated) and Keppel DC REIT (not rated), as they are

highly focused and exposed to favourable (according to investor perceptions) property

segments like Singapore healthcare and datacentres. We believe their management teams

and REIT managers are also highly regarded by investors.

From these observations, our view on M&A to gain size (market cap) alone is that it

probably creates negligible value for minority unitholders, though if it leads to quantifiable

savings (such as lower borrowing costs or other scale-related savings), it may be worth

considering. We believe the real driver of higher valuations is the quality of assets and

quality of the REIT manager (ie, a track record of delivering sustainable DPU growth

through leasing related, asset-enhancement-related or investment-related activities above

the rate of inflation). These factors that create value are independent of size. Higher REIT

management fees are the only certainty, in our view, of a REIT that gets bigger.

Top sector picks

S-REIT pick: Ascott Residence Trust (ART SP, SGD1.20, Outperform [2])

Investment thesis

ART is our top pick in the S-REIT sector as it offers relative value (a considerably higher

2019-20E DPU yield than the S-REIT sector average) in an increasingly overvalued S-

REIT sector. In addition to its yield attraction, we see upside risk to our 2019-20E DPU as

after the divestment of Ascott Raffles Place Singapore (scheduled for May 2019) that will

leave the REIT underleveraged at a gearing ratio of c.32%, we believe its debt-funded

acquisition headroom potential of c.SGD750m (to reach a target gearing ratio of 40%)

could trigger DPU-accretive acquisition announcements (not in our forecasts).

In our view, ART’s other potential unit-price catalyst would be a potential merger with

Ascendas Hospitality Trust (not rated) as both REITs would eventually come under 1

sponsor. By market capitalisation, ART is roughly twice as large as Ascendas Hospitality

Trust; thus, we expect ART to be the acquirer in any M&A transaction, and a larger market

cap and free float would be unit-price positive, in our view. Being the acquirer may be a

concern for some investors, but we see limited DPU dilution risk for ART as it would be a

related-party merger (the sponsor and REIT manager of both REITs would be CapitaLand

[CAPL SP, SGD3.53, Buy (1)], following CapitaLand’s acquisition of Ascendas-Singbridge

scheduled for completion by 3Q19). Therefore, we expect the merger terms to be

favourable (non-DPU dilutive) for ART’s unitholders. Finally, we recognise that absorbing

Market cap and trading

liquidity help to get

recognition by more

investors

But will size alone lead

to higher valuations?

Valuations depend on

quality of assets and

REIT manager

Quality matters more

than size, in our view

Attractive yield with

upside DPU potential

from acquisitions

A related-party M&A may

not be DPU dilutive

44


Ascendas Hospitality Trust alone may not add much value to ART, but we see the longer-

term potential to unlock some of Ascendas Hospitality Trust’s hotel properties such as

rebranding them or converting them to properties that fit into the ART portfolio, or disposing

them altogether, as value-added catalysts post a potential merger.

Valuation

Our 12-month TP of SGD1.27 for ART is pegged to parity with our DDM valuation. The

core assumption for the portfolio is a discount rate of 8% and an effective cap rate of 6%.

The key downside risk for ART is overpaying for acquisitions with no strategic value.

Developer pick: City Developments (CIT SP, SGD8.94, Buy [1])

Investment thesis

Under our core assumption for the sector that the residential physical market is back to

normal and that home prices will remain stable and appreciate by 4-6% pa over the next

several years, City Developments is our top pick for its proven ability to acquire landbank,

and launch and sell units before and after the property cooling measures in July 2018. The

company’s new-launch pipeline for 2019 of 2,434 units is one of the largest in the sector,

and we believe further positive traction in monthly home sales would be a positive share-

price catalyst and help to narrow the discount to NAV of almost 40%. As such, we reiterate

our Buy (1) rating for City Developments.

Valuation

Our 12-month TP of SGD12.25 is pegged to a 20% discount to our estimated NAV. The

company’s past-15-year average discount to Daiwa’s NAV is 7%. Key risks to our rating

would be overpaying for development sites and investment properties, or an inability to

replenish its Singapore landbank due to persistently intense competition for quality

developable land.

Singapore Property and REITs: valuation summary

Company Stock code

Price (LC)


Target price (LC)



Ascott Residence ART SP 1.2 1,920 Outperform (2) 1.27 9.8 19.7 0.9 1.0 n.a n.a 6.2 6.3 9.8 4.8

CDL Hospitality CDREIT SP 1.6 1,425 Outperform (2) 1.71 19.1 17.4 1.0 1.0 n.a n.a 6.2 6.6 5.5 6.0

CapitaLand Mall CT SP 2.42 6,556 Outperform (2) 2.53 19.2 18.2 1.2 1.1 n.a n.a 4.9 5.2 6.2 6.4

ESR-REIT EREIT SP 0.53 1,240 Outperform (2) 0.57 13.9 13.5 1.1 1.1 n.a n.a 7.7 8.0 8.2 8.5

City Dev CIT SP 8.94 5,929 Buy (1) 12.25 11.9 13.1 0.8 0.8 9.0 10.5 2.2 2.2 7.1 6.4

CapitaLand CAPL SP 3.53 11,007 Buy (1) 4.2 17.5 16.5 0.7 0.7 11.2 12.9 3.7 3.7 4.7 4.0


Proven development

ability before and after

cooling measures

45


Singapore Healthcare and Consumer

Jame Osman (65) 6228 6744 ([email protected])

Sector outlook

Consumer: trends set to remain sluggish this year

We expect consumption trends to remain sluggish in 2019, largely due to a continuation of

the slowdown observed in 2H18, even as price competition is expected to remain keen but

rational, in our view. Furthermore, management of Sheng Siong (SSG SP, SGD1.03, Hold

[3]) said it sees a more rational bidding environment for new store space in 2019, following

the aggressive bidding conditions experienced by smaller chain stores (eg, U Stars, Hao

Mart and Yes Supermarket) in 2018, which resulted in some eventual store closures.

Despite this, the January 2019 retail sales index was a positive surprise, recording a 7.6%

YoY increase (+5.3% YoY ex-motor vehicle sales), led by higher demand during the pre-

Lunar New Year festive season, which could bode well for the rest of 2019E, in our view.

Meanwhile, government restrictions on foreign labour announced during the recent budget

(ie, the dependency ratio ceiling [DRC]) are likely to have a negative impact on the

operating margins of the consumer companies in the near term, according to management

of these companies. However, given that management expected an eventual tightening in

operating margins, most companies have already set into motion initiatives to increase

automation and reduce reliance on labour to manage cost escalations in the long term.

Nevertheless, we expect some near-term negative impact on margins resulting from an

escalation in operating expenses.

Singapore: monthly retail sales index (excluding motor vehicles)

Singapore: monthly retail sales index (supermarkets and hypermarkets)

Source: Singapore Department of Statistics Source: Singapore Department of Statistics

Healthcare: domestic demand should be robust

In the healthcare space, the hospital operators have been negatively impacted by the

slowdown in foreign patient admissions for the past 1-2 years, as the combination of a

stronger SGD vs. regional currencies and greater competition from neighbouring ASEAN

countries (Thailand and Malaysia) have eroded Singapore’s competitiveness as a

healthcare tourist destination. While the market expects these trends to turn a corner in

2019, visibility remains a challenge as data that could affirm such a recovery remains

scarce. Nevertheless, we expect domestic demand for private healthcare services to

remain robust, driven by favourable government policies and lingering constraints in the

public system. In 2018, overall hospital admissions rose by 2.9% YoY, primarily driven by

the public sector (+4.2% YoY) following the opening of the public 1,400-bed-capacity

Sengkang Hospital in August 2018, which also accounted for the majority of the overall

increase in hospital beds (see charts below).

(10)

(5)

0

5

10

15

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18

Sep

-18

Oct

-18

Nov

-18

Dec

-18

Jan-

19

(% YoY change)

(20)

(15)

(10)

(5)

0

5

10

15

20

25

30

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18

Sep

-18

Oct

-18

Nov

-18

Dec

-18

Jan-

19

(% YoY change)

The January retail sales

index was a positive

surprise

Potential margin

pressure from higher

labour costs in 2019

Foreign patient volumes

remain a lingering

concern

46


Singapore Healthcare: private patient admissions trend Singapore Healthcare: total number of hospital beds

Source: Ministry of Health Source: Ministry of Health

Themes

Consumer: competitive pressures remain a relevant near-term risk

Against the backdrop of sluggish consumer trends, competition in the consumer space has

remained keen from online and traditional operators alike. In the grocery retailing space,

online players have largely struggled to gain a sizeable chunk of the market despite

investor concerns over the past few years. We attribute this to various factors, ranging from

the preference of grocery shoppers to “touch and feel” fresh produce to the high cost of

providing “last-mile” delivery services to individual shoppers. We believe the decision of

Lazada (not listed), owned by Alibaba, to fold RedMart into its platform in January could

reflect its desire to bundle its grocery delivery service with other product offerings, similar

to that of Amazon Prime. In our view, such a move could offer online retailers a more viable

solution to reduce overall last-mile delivery costs and ultimately drive profitability.

Meanwhile, we believe that an oversaturation of stores in certain areas of Singapore,

particularly in newer, less mature residential estates, has negatively impacted top-line

performance of supermarket operators. Furthermore, Dairy Farm (DFI SP, USD7.83, Hold

[3]) has been consolidating its store base in the Singapore market by closing its

underperforming stores, especially those of its languishing hypermarket business. Looking

ahead, this could prove to be a lingering theme as the pipeline for new HDB store leasing

appears to be healthy. While lease bidding may be more rational, we expect competition to

remain keen as smaller chain operators may look to capture some market share from the

incumbents. Nevertheless, we believe operators like Sheng Siong, with superior supply

chain and cost management, will outperform peers in the medium term.

Singapore supermarket operators: store base trend

Source: Companies, Daiwa compiled Note: NTUC store count includes NTUC Xtra, Finest and Fairprice Shops (excludes Cheers and Xpress); Dairy Farm includes Giant, Cold Storage,

Marketplace and Jasons stores

(6)

(4)

(2)

0

2

4

6

8

10

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Private sector hospital admissions % YoY

(%)

0

2,000

4,000

6,000

8,000

10,000

12,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Public Hospital Beds Private Hospital Beds

8,187

10,826

121

140

124

108

33

54

0

20

40

60

80

100

120

140

160

2013 2014 2015 2016 2017 2018 2019

NTUC Dairy Farm Sheng Siong

Online retailers appear

to be bundling services

to manage costs

47


Healthcare: can domestic demand offset weaker foreign patient volumes?

Given there is little visibility over whether an improvement in macro factors (strengthening

of regional currencies or an economic recovery) could drive a recovery in foreign patient

admissions in private hospitals in Singapore in the near term, we look for demand from the

domestic patient market to support operational performance of private healthcare players

in the near term. Healthcare remains a central focus of government policy, given concerns

that an ageing populace (1 in 4 Singaporeans will be 65 years or older by 2030, according

to the Ministry of Health) could put a strain on healthcare infrastructure in the medium to

long term.

Singapore Healthcare: government expenditure on healthcare

Source: Singapore Department of Statistics

Consequently, the government has been allocating a higher proportion of its budget

towards the healthcare sector, and making subsidies “portable” to allow patients to obtain

treatment at private healthcare facilities at government-subsidised rates in order to reduce

the burden on the public sector. In 2019, Singapore’s budget included a SGD6.1bn fund

that will subsidise healthcare for Singaporeans born in the 1950s, called the Merdeka

Generation package. Overall, we believe policies should remain favourable for the private

sector, even as public tertiary hospitals would continue to account for the majority (c.80%)

of healthcare delivery in the foreseeable future.

Top Healthcare and Consumer picks

Raffles Medical Group (RFMD SP, SGD1.08, Buy [1])

Investment thesis

Following a disappointing 4Q18, we downgraded our rating on Dairy Farm to Hold (3) from

Buy (1). As a result, our only remaining conviction call in the Healthcare/Consumer space

is Raffles Medical (RMG), for which we reaffirm our Buy (1) rating. We remain positive on

RMG’s significant expansion efforts in China, and believe concerns over the negative

impact of start-up costs have been adequately discounted at current share-price levels.

Moreover, we expect the progressive ramp-up of its Specialist Centre as well as greater

traction of its Raffles Shield insurance product to drive its top line in Singapore in the near

term. We would view clearer indications of higher-than-expected revenue growth and

lower-than-expected start-up losses as key share-price catalysts in the near term.

Valuation

We have a Buy (1) rating and DCF-based 12-month TP of SGD1.20. RMG shares are

currently trading at a 2019E PER of 28.7x, c.1.5SD above the past-10-year mean of 19.7x.

We believe this premium to the stock’s past-10-year mean is justified considering the

business growth potential from the company’s medium- and long-term capacity expansion

initiatives (Bugis Hospital’s expansion and China hospitals). Significant project delays and

poor execution are the key downside risks to our positive view on the stock.

0.9 0.81.0

1.31.2 1.2

1.3

1.6

1.8

2.12.2

0.0

0.5

1.0

1.5

2.0

2.5

0

2,000

4,000

6,000

8,000

10,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Government Health Expenditure (LHS) as % of GDP (RHS)

(SGDm) (%)

Government policies

remain favourable for

the private healthcare

sector

Significant opportunities

for organic growth in

China

48


Raffles Medical: 12-month forward PER (x) Raffles Medical: 12-month forward PBR (x)

Source: Bloomberg. Daiwa forecasts Source: Bloomberg. Daiwa forecasts

Singapore Healthcare and Consumer: valuation summary

Company Stock code

Price (LC)


Target price (LC)



Raffles Medical RFMD SP 1.08 1415.8 Buy (1) 1.2 28.7 24.7 2.3 2.2 18.7 15.4 1.9 2.0 8.2 9.2


6.0

11.0

16.0

21.0

26.0

31.0

36.0

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

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0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

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13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Jul-1

7

Jan-

18

Jul-1

8

Jan-

19

+2 stdev

+1 stdev

Mean

12M forward PER (x)

-1 stdev

-2 stdev

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

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

Jan-

18

Jul-1

8

Jan-

19

+2 stdev

+1 stdev

Mean

12M forward PBR (x)

-1 stdev

-2 stdev

49


Philippines strategy

Micaela Abaquita (63) 2 737 3021 ([email protected])

2019 outlook — equity strategy

Robust corporate earnings growth amid lower inflation to support rerating

The PCOMP Index has risen by 16.2% since November 2018, when inflation started

slowing after reaching 6.7% in September and October 2018, a 9-year high. The slowdown

in inflation was a result of the decline in global oil prices, the 175bps rate hike made by the

Bangko Sentral ng Pilipinas (BSP) throughout 9M18, and increased rice imports, which

lowered the cost of the country’s staple food. Inflation came in at 3.3% in March 2019,

which brought the 2019 YTD figure to 3.8%, within the BSP’s 2-4% target.

In our view, the improved inflationary environment alleviates pressure on the BSP to further

raise rates and strengthens the likelihood that it will cut reserve requirement ratios amid

lower excess liquidity in the market. The new BSP Chief, Benjamin Diokno, recently

announced possible reserve requirement cuts this year amid a more manageable inflation.

We think this is positive for earnings growth, especially for consumer and property stocks.

The Bloomberg consensus expects market EPS to rise by 14.8% YoY in 2019, the fastest

EPS growth since 2010. We see market earnings growth in 2019 being driven by the

property (we forecast sector earnings growth of 16.6% YoY in 2019) and consumer (15.1%

YoY in 2019) sectors. As such, these are the 2 sectors we favour this year. Also, we think

the 2019 Senate election is likely to boost SSSG among retailers and food operators under

our coverage. Besides, we think slowing inflation will likely lead to gross-margin expansion

due to decreasing input cost pressures. Meanwhile, developers under our coverage posted

strong pre-sales growth in 4Q18, despite a rise in mortgage rates observed during that

quarter. Stability in mortgage rates and record-high launches in 2018-19E amid lower YoY

inventory levels are likely to support residential demand this year, in our view. We also

believe strong consumption and industry trends would bode well for the malls and office

space. We are Neutral on Power (we forecast 7% YoY sector earnings growth in 2019)

given incremental supply continues to outpace demand, leading to a challenging

environment for the gencos.

The PCOMP is trading currently at 17.1x 2019E PER (Bloomberg forecasts), still below its

past-3-year average of 18.9x, despite likely faster EPS growth in 2019E vs. 2015-18.

Given the robust 2019E EPS growth outlook, we remain Overweight on the Philippines.

Our top picks are Ayala Land (ALI PM, PHP48.95, Outperform [2]), Vista Land (VLL PM,

PHP7.31, Buy [1]), Puregold (PGOLD PM, PHP41.9, Buy [1]), Jollibee (JFC PM,

PHP304.6, Hold [3]), and Aboitiz Power (AP PM, PHP37.7, Buy [1]).

PCOMP: past-10-year PER band PCOMP: market EPS growth (YoY %)

Source: Bloomberg, Daiwa Source: Bloomberg

8.35

12.38

16.41

20.44

24.47

5

10

15

20

25

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Forward PER -2SD -1SD

Average +1SD +2SD

39.7%

-6.7%

9.0%7.3%

3.3%

-4.6%

2.9%

10.7%

5.5%

14.9%

(10%)

0%

10%

20%

30%

40%

50%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

We expect robust GDP

growth amid an

improved inflationary

environment to boost

earnings growth in 2019

We continue to favour

the property and

consumer sectors given

robust growth forecasts

for 2019

50


Economy

The Philippines’ GDP growth accelerated to 6.4% 4Q18 from 6.1% in 3Q18. As shown in

the chart below (left) the improvement in trade deficit was the biggest contributor to the

improved activity figure. We believe this is due in part to the fall in global energy prices in

4Q18. Falling energy prices and global disinflation, together with a stronger Philippine

Peso, has resulted in a significant reduction in core and headline inflation (see below,

right). Having peaked at 6.7% in October 2018, headline inflation in the Philippines has

fallen to 3.3% for March 2019.

The Philippines GDP contribution Core and headline inflation (%)

Source: CEIC, Daiwa Source: CEIC, Daiwa

The Bangko Sentral ng Pilipinas (BSP) was substantially behind the curve for most of 2018

with inflation well above the policy rate. In other words, the real policy rate was negative,

which was behind the vicious cycle of domestic inflation and currency depreciation.

However, in the past few months this has changed significantly, to the point that the

reverse repo rate (BSP’s policy rate) is now at 4.75% versus inflation at 3.3%. This

represents a positive real policy rate of 1.35%. What is notable is the strong performance

of the Philippines Peso, particularly against the backdrop of a strong USD against most

currencies. Since October 2018, the Philippines Peso has appreciated 4.4%. Falling

inflation and the improvement in the trade account were the main drivers for this

performance — and the currency appreciation is keeping inflation in check. If inflation

continues to drop then the next move by the BSP will be to cut rates. This could happen in

late 2019, in our view.

In the chart below (left) we see that the spread of nominal policy rates between the US and

the Philippines has not moved much, but the effect of CPI inflation halving in the

Philippines has raised the real policy yield spread in favour of the Peso, which is behind

the appreciation in that currencies. Below right we see that there has been no change in

either the policy rate or the reserve requirements. This is a consequence of a prudent

central bank waiting for further evidence that the Philippines is behind its vicious cycle of

symbiotic inflation and depreciation of the currency.

Policy rate (%) Reserve requirement ratio (%)

Source: Bloomberg, CEIC, Daiwa Source: Daiwa, CEIC

(10%)

(5%)

0%

5%

10%

15%

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Jun-

17

Sep

-17

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Household consumption Government consumptionGCF Net exportsOverall

(1)

0

1

2

3

4

5

6

7

8

Nov

-13

Feb

-14

May

-14

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

Nov

-15

Feb

-16

May

-16

Aug

-16

Nov

-16

Feb

-17

May

-17

Aug

-17

Nov

-17

Feb

-18

May

-18

Aug

-18

Nov

-18

Feb

-19

Core inflation (%) Headline inflation (%)

0

1

2

3

4

5

6

7

United States (%) Philippines (%)

Philippines Headline Inflation (%)

17

18

18

19

19

20

20

21

Improvements in the

trade balance have

driven GDP growth

higher, while inflation

has abated significantly

BSP is now in a neutral

position on rates, but if

inflation drops further, it

may have flexibility to

cut rates

The real policy rate

spread has shifted in

favour of the Philippines

Peso

51


Themes

Infrastructure development progresses

In 2018, the government focused on securing funding for the projects under its ambitious

“Build Build Build” programme, which aims to increase infrastructure outlay to 7% of GDP

by 2022, from the 3% average in the previous administration. The government estimates

infrastructure outlay reached 6.2% of GDP in 2018.

The 2018 implementation of the first package of the tax reform programme is among the

government’s efforts to generate more revenue and support its massive infrastructure

spending. We note that the initiative has so far been promising, with 2018 revenue

collections up 10.15% to PHP1.96tn, albeit 4% lower than the target. For 2019, the

government targets a 19% YoY increase in revenue collection.

Apart from increased revenue collection, the government has entered into debt

agreements with other countries, including the PHP51.4bn loan for the Metro Manila

Subway project, the PHP18.8bn loan for the MRT 3 Rehabilitation project, and PHP7.3bn

for the expansion of the New Bohol Airport; all in partnership with the Japan International

Cooperation Agency (JICA).

For 2019, the government has allocated PHP910bn for infrastructure spending. In addition

to the Binondo-Intramuros Bridge and the Manila-Clark rail project, upon which

construction started in 2018, the first phase of the Metro Manila Subway project broke

ground in February 2019. Other projects that are targeted to commence construction

during the year are the Subic-Clark railway project (July 2019) and the PNR South Long

Haul (Manila-Bicol) project (August 2019). Although execution challenges may delay

construction and therefore the disbursement of funds for infrastructure spending, we

believe the government’s strong political will and commitment augur well for an

unprecedented pace of progress.

Philippines: infrastructure spending as % of GDP

Infrastructure spending

continues to rise under

the Duterte

administration

Source: CEIC, Daiwa

Note: LHS is infra spending in PHPbn; RHS is % of GDP

Pro-foreign investment measures being pursued

As the government pushes for its ambitious “Build Build Build” programme, it is also

pursuing improved ties with other nations, especially in Asia. Its efforts continue to bear

fruit, as evidenced not only by the funding it has been able to secure from other Asian

countries but also by the increased interest in domestic participation and exposure from

foreign corporate entrants. In 2018, the Philippines saw an increasing number of foreign-

local partnerships in the real estate, banking and construction sectors.

In the real estate sector, Rockwell (ROCK PM, Not rated) teamed up with Mitsui Fudosan

(8801 JP, JPY2567, Buy [1]) for a PHP9bn project in Quezon City; Robinsons Land (RLC

PM, PHP24.5, Outperform [2]) formed a joint venture with Hongkong Land (HKL SP,

USD6.97, Buy [1]) for a residential development; and Nomura Real Estate Development

Co. Ltd. (not listed) and Isetan Mitsukoshi Holdings Ltd. (3099 JP, JPY1,059, Hold [3])

0%

1%

2%

3%

4%

5%

6%

0

50

100

150

200

250

Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

Infrastructure spending (PHP bn) % of GDP

In 2018, the government

focused efforts on

securing funding for its

infrastructure projects

We expect more

infrastructure projects to

break ground in 2019

The Philippines has seen

increased foreign-local

partnerships in the real

estate, banking and

construction sectors

52


partnered with Federal Land (not listed) for a PHP20bn mixed-use project in Bonifacio

Global City. In the banking sector, several foreign banks signed cooperation agreements

with local banks for the provision of banking services and financial assistance to each

other’s corporate customers, with the most recent being the tie-up between RCBC (RCB

PM, Not rated) and KB Kookmin Bank Korea (not listed). Also, the administration’s

increased collaboration with other countries for large-scale projects, such as the Clark

Green City (masterplanned with the Japan Overseas Infrastructure Investment Corporation

for Transport & Urban Development [JOIN]) and the Mega Manila Subway, should attract

more corollary foreign participation from firms in the home countries of these partners, in

our view.

We see this trend continuing in 2019 as accelerated infrastructure development, fiscal

reform and rising incomes pave the way for increased business opportunities. In addition,

implementation of legislative reforms to improve the business environment (ie, Ease of

Doing Business Act) and liberalise more industries (ie, removal of select restrictions under

the Foreign Investment Negative List and amendments to the Retail Trade Liberalization

Act) are likely to support more foreign investment and entrants into the country, in our view.

Philippines: foreign direct investments

Net foreign direct

investments have been

growing strongly since

2016

Source: BSP, Department of Trade and Industry

Note: LHS is FDI in USDbn; RHS is YoY growth; 2014 YoY growth was computed in PHP

Philippines Strategy: valuation summary

Company Stock code

Price (LC)


Target price (LC)

PER (x) EV/EBITDA (x) Dividend yield (%) ROE (%)

FY0 FY1 FY0 FY1 FY0 FY1 FY0 FY1

Ayala Land ALI PM 48.95 13,831 Outperform (2) 52 24.1 20.4 13.8 12.1 1.2 1.4 17.0 17.7

Vista Land & Lifescapes VLL PM 7.31 1,801 Buy (1) 8.3 9.4 8.2 10.1 9.1 1.9 2.2 11.6 12.1

Source: Bloomberg, Daiwa forecasts Note: Closing prices as of 30 April

5.7 5.6

8.3

10.39.8

-31.8%

-1.8%

48.2%

24.1%

-4.9%

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

30%

40%

50%

60%

0

2

4

6

8

10

12

2014 2015 2016 2017 2018

FDI (USD bn) YoY growth

We expect the

implementation of

legislative reforms to

attract more foreign

investment to the

country

53


Philippines Property

Micaela Abaquita (63) 2 737 3021 ([email protected])

Still positive on property in 2019

We continue to be positive on the Philippines property sector in 2019. We forecast

aggregate earnings of companies under our coverage to rise by 16.6% YoY, driven by

14.5% YoY growth in residential revenue and an 18.1% YoY increase in rental revenue. We

also expect the higher margins posted by the faster-growing rental segment relative to the

residential business to boost earnings in 2019.

Philippines Property: core net income and YoY growth Philippines Property: core net profit growth (%)

Source: Companies, Daiwa forecasts Note: Net income attributable to equityholders of the parent company of property companies

under coverage

Source: Companies, Daiwa forecasts Note: Net income attributable to equityholders of the parent company of property companies

under coverage

Drivers intact; mortgage rates expected to stabilise in 2019E

Aggregate pre-sales of property companies under our coverage registered a CAGR of 19%

over 2016-18, double the 8.6% CAGR recorded over 2013-16. In our sector report (see

Sustained momentum in the residential segment boosting strong rental expansion,

published 25 June 2018), we discussed what we believed are the drivers of strong

residential demand: 1) overall optimism among wealthy local investors, 2) increased

options for more affordable housing in newly developed residential areas made accessible

by new infrastructure, and 3) increased appetite among foreign buyers, notably Chinese

nationals.

In our view, these drivers have so far overcome the impact of the increase in mortgage

rates (seen in 4Q18) on affordability and demand, even for middle-income-oriented

companies, whose sales rely heavily on bank financing. Aggregate pre-sales growth

remained strong in 4Q18, rising by 22% YoY to PHP112.3bn and resulting in full-year pre-

sales of PHP465.7bn, up 23% YoY.

Apart from these drivers, we think that the increase in monthly amortisation remains

moderate. For example, for a PHP3m 15-year loan, a 150bps hike in mortgage rate (ie,

from 6.5% to 8%) results in an additional PHP2,536 in monthly payout (from PHP26,133 to

PHP28,669). With inflation steadily easing to 3.3% in March, there is less pressure on the

Bangko Sentral ng Pilipinas (BSP) to raise rates further and we see mortgage rates

stabilising this year. Also, we note that average property prices have risen modestly.

According to BSP data, the Philippines residential real estate price index (RREPI) rose by

2.9% YoY in 2018, which looks manageable and supportive of affordability. Average

condominium prices in Metro Manila increased by 4.4% YoY in 2018 (see our Memo,

Housing prices rose by 2.9% in 2018, published 1 April 2019).

For 2019, we expect the aforementioned drivers to persist and mitigate the impact of

higher interest rates. Led by strong demand and easing inventory levels, our covered

companies launched projects worth PHP394bn in 2018, up 63% YoY and a record high.

50,425 57,570 75,372 76,188 87,887 99,593 116,962

26.5

14.2

30.9

1.1

15.413.3

17.4

0

5

10

15

20

25

30

35

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2013 2014 2015 2016 2017 2018 2019E

Aggregate YoY growth

21.2

28.9

13.2

23.9

14.312.2

17.417.919.4

13.1

16.9

12.4 11.6

14.8

0

5

10

15

20

25

30

35

Ayala Land FilinvestLand

Megaworld RobinsonsLand

SM Prime Vista Land Aggregate

2019 2018-20E

We see the drivers for

2018 persisting in 2019

and potentially

tempering the impact of

higher interest rates

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=14254f87dc8d612aaaae7652baf826cd769b9213aHu8x1PTd1luDkmY29JZBgYjf8sYcMmGu5zAbOGqwqQKRtZ5GnMigxi0TXYiLHyYw4HkMLkyN7zC5foD%2FmRNNQ%2BnemuuxmjhDL0fh1%2Breo1h%2BtjfCc0SnxGdQrOw2CAqu3JUxqyPp3hSc3rsbw%2FU2Zrm8VZfzxloXK3s%2Bl8yXzWt9WrjjrOBhcn2jKMfI%2BXJksgkd7cLra5McbIAEbQgBaw%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=10818f6d6e308b33463f38f2ccbdd766721ea8714%2BQ77FkO45aWBH2BG0hB666mDDhxzlkx%2BbrIctCi2l9SWbsalbFxs%2FS%2F7aDIBbyIHHl3wtemDQwIxsly5Vm0%2BojDBP51QXozpIex2d%2Bp1rAggYEVhVkcMpzZ6msN%2FYF%2B8R3h7W%2B%2FgEFlCqbP%2BFNmc4%2FtUVbIUUy7pnjdUKMyGQJXzOUvJdvyahQVKeJz7tzSDQ1Js2LCCLrQt7jBrwrMsdA%3D%3D

54


We believe these record-high launches, amid stabilising mortgage rates and persistent

demand drivers, will result in healthy pre-sales growth in 2019, albeit at a rate slower than

in 2018. Meanwhile, strong pre-sales achieved over the past 2 years would be able to

secure a healthy stream of residential revenue in the next 2 years, in our view.

Metro Manila: launches and take-up of condominium units Philippines Property: residential launches

Source: Colliers Source: Companies; Note: Limited to companies under coverage

Tenant diversification continues

We remain positive on the office sector as we expect the business process outsourcing

(BPO) sector to continue to post healthy growth, offshore gaming to maintain its

momentum, and entrepreneurial activity to strengthen along with the Philippines’ economic

expansion in 2019. We note that traditional office space demand has been strong since

2017, and the liberalisation of select industries will likely provide further support for office

space demand in 2019, in our view.

Overall, we forecast Metro Manila’s office vacancy rate to reach a healthy 6% in 2019 (from

5% in 2018), driven by steady growth in BPO, Philippine offshore gaming operators

(POGOs), and traditional office space demand. Despite our forecast for an uptick in the

vacancy rate in 2019, we are not overly concerned as we do not believe such an uptick

would result in a decline in rents. Historically, we have observed such rental reversions either

when the vacancy rate spikes by 4% YoY, such as in 1998 and 2009, or when the vacancy

rate is sustained at >9% YoY, as in 1999 to 2003, during which the vacancy rate reached a

high of 17% in 2001. We note that these periods were accompanied by sluggish economic

growth — something we do not expect for the Philippines in the medium term given the

sound macroeconomic backdrop. Therefore, we find the increase in vacancy more of a

timing issue, as the completions take some time to be absorbed, rather than a fundamental

imbalance.

Philippines: additional office take-up by segment (%) Metro Manila: office supply and demand

Source: Colliers; Note: KPO = Knowledge processing and outsourcing Source: Colliers, Daiwa forecasts

33.4

52.4

59.0 60.7

53.5

36.9 34.4

30.2 34.0

31

22.4

38.1

48.2

42.6 39.6 39.6

32.6

40.9

52.6

42

0

10

20

30

40

50

60

70

2009 2010 2011 2012 2013 2014 2015 2016 2017 9M18

Launches ('000 units) Pre-sales ('000 units)

205 219 204 161 243 394

6.8

-6.9

-21.3

51.362.3

(30)

(20)

(10)

0

10

20

30

40

50

60

70

(100)

0

100

200

300

400

500

2013 2014 2015 2016 2017 2018

Aggregate (PHP bn) YoY growth (%)

219

19

38

16

27

32

40

33

9

3521

0

20

40

60

80

100

120

2016 2017 2018

BPO (Voice) BPO (KPO) Non-BPO POGO

9,191 10,440 10,975 11,818 13,199 9,705 10,989 11,713 12,586 13,864

5.3%5.0%

6.3% 6.1%

4.8%

0%

1%

2%

3%

4%

5%

6%

7%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2017 2018 2019E 2020E 2021E

Total office space demand ('000 sqm)

Total office space supply ('000 sqm)

Vacancy

We remain positive on

office space demand in

2019 on the BPO

sector’s healthy growth,

POGO’s sustained

momentum and

increased

entrepreneurial activity

55


Themes

Geographical diversification continues

While most major developers long ago began their expansion outside of Metro Manila,

many picked up pace in the past 2 years amid the government’s thrust for infrastructure

and countryside development.

The completion of new roads and transport systems has improved the accessibility of new

areas, now rendering them viable locations for housing. The relative affordability (vs. CBDs)

of houses in these new-growth areas makes them especially attractive to middle-income

households looking for end use, in our view. As such, provincial areas in close proximity to

Metro Manila, such as Calabarzon, continue to see strong housing demand. We believe

Clark (north of Metro Manila) is an area that may see the same development trajectory and

property demand as Calabarzon, given the large-ticket infrastructure projects under way in

the area, such as the Clark airport expansion and a major railway connecting the area to

Metro Manila.

We expect companies to see more geographically diversified residential revenue sales

amid efforts to develop projects nationwide.

POGOs likely to continue to support office and residential demand

The legalisation of online gambling in the Philippines in 2016 has drawn a number of

POGOs to the country. This thriving industry has created a new source of demand for

office space. Moreover, employees of POGOs — a lot of whom are Chinese nationals —

have also boosted the demand for residential property. The recently improved ties between

the Philippines and Chinese governments have further increased investor interest in the

country’s property market. While pre-sales remain locally-driven, sales from Chinese

companies have provided a significant boost in the past 2 years and will likely continue to

lend support in 2019 to select property companies with exposure to projects preferred by

Chinese nationals in terms of price points and locations, in our view.

Dormitory format likely to gain ground

We note that more developers, such as Ayala Land and Robinsons Land, and private

equity firms have launched dormitories in the past 3 years. In our view, dormitories will

continue to be well-received as they offer an affordable housing alternative for BPO

employees and young professionals amid the worsening Metro Manila traffic. We believe

this dormitory segment poses a threat to affordable/middle-income segment condominium

projects, especially studios and 1-bedroom apartments, as they compete for the same

tenant base (ie, young professionals, fresh grads, BPO employees). Improving tourist

arrivals, in our view, may help mitigate this risk as these units are made available for short-

term rentals, such as through AirBnB.

Top sector picks

Ayala Land (ALI PM, PHP48.95, Outperform [2])

Investment thesis

Ayala Land remains our top pick in the sector as we believe its diversified landbank, strong

brand equity and established track record in estate development allow the company to

perform better than its peers in varying property market situations. In this favourable

property market, its residential sales has been recording accelerating growth and recurring

revenue has posted rapid expansion as its aggressive leasing expansion has started to pay

off with record completion of malls and offices, especially in 2017. Moreover, Ayala Land

has started aggressive development of provincial townships ahead of peers, allowing the

company to benefit from the government’s commitment to accelerate countryside

development more readily than its peers. We forecast its earnings to rise at a CAGR of 17%

over 2018-19, the highest rate among our coverage. We reaffirm our Outperform (2) rating.

We expect property

developers to see

increased contributions

from new-growth areas

POGOs expected to

support office and

residential demand in

2019

Dormitory format should

continue gaining ground

We have an Outperform

(2) rating on Ayala Land

and a 12-month TP of

PHP52

56


Ayala Land: net profit and YoY growth Ayala Land: historical PER (x)

Source: Company, Daiwa forecasts Note: Net income attributable to equityholder of the parent


Valuation

We arrive at our 12-month TP of PHP52 using the discounted NAV approach. We value ALI’s

efficient attributable raw landbank using estimated 1-year forward market prices and its

investment properties using 8-10% cap rates. We apply a 20% discount, in line with its past-5-

year average, on the back of its prime landbank, robust earnings growth prospects and strong

corporate governance. Key risks: a sharp rise in interest rates; significant economic slowdown.

Vista Land (VLL PM, PHP7.31, Buy [1])

Investment thesis

Vista Land is an end-user-oriented property developer with strong brand recognition in the

low-cost and affordable horizontal space, via its Camella brand. Consistent with its end-

user thrust, it also has the largest provincial residential revenue exposure among the

property names under our coverage, making it well-positioned to benefit from the

government’s commitment to countryside development. Also, we see its mall business

contributing more to its net profit and improving earnings visibility in the coming years,

which, in our view, will support a narrowing of its discount to NAV.

Valuation

Our NAV-based 12-month TP of PHP8.3 is based on: 1) market prices of its raw, efficient

landbank, 2) the NPV of our estimated market value of its residential inventory, and 3) an

11% cap rate on EBITDA. We apply a 50% discount to NAV, in line with its past-5-year

average discount. Key risks: a sharp rise in interest rates and weakness in remittances.

Vista Land: net profit and YoY growth Vista Land: historical PER (x)

Source: Company, Daiwa forecasts Note: Net income attributable to equityholders of the parent


Philippines Property: valuation summary

Company Stock code

Price (LC)


Target price (LC)



Ayala Land ALI PM 48.95 13,831 Outperform (2) 52 24.1 20.4 3.9 3.4 13.8 12.1 1.2 1.4 17.0 17.7

Vista Land & Lifescapes VLL PM 7.31 1,801 Buy (1) 8.3 9.4 8.2 0.5 0.4 10.1 9.1 1.9 2.2 11.6 12.1


11.7 14.8 17.6 20.9 25.3 29.2 35.4 40.7

30

26

19 1921

16

21

15

0

5

10

15

20

25

30

35

40

45

2013 2014 2015 2016 2017 2018 2019E 2020E

Net income (PHP bn) YoY growth (%)

0

5

10

15

20

25

30

35

40

Feb

-14

May

-14

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

Nov

-15

Feb

-16

May

-16

Aug

-16

Nov

-16

Feb

-17

May

-17

Aug

-17

Nov

-17

Feb

-18

May

-18

Aug

-18

Nov

-18

Feb

-19

-2SD -1SD AVERAGE

+2SD +1SD PE

6.2 7.0 7.9 8.8 10.2 11.5 12.7

19

14

1211

16

1211

0

2

4

6

8

10

12

14

16

18

20

0

2

4

6

8

10

12

14

2014 2015 2016 2017 2018 2019E 2020E

Net income (PHP bn) YoY growth

0

2

4

6

8

10

12

14

16

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Jun-

17

Sep

-17

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

-2SD -1SD AVERAGE

+2SD +1SD PE

We have a Buy (1) rating

on Vista Land and a 12-

month TP of PHP8.3

57


Philippines Utilities & Energy

Gregg Ilag (63) 2 737 3023 ([email protected])

Sector outlook for 2019

Supply surge in 2019-20

Additional power supply still seen outpacing demand in 2019-20E

Even with recent red and yellow alerts on the grid due to power plant shutdowns, additional

capacity still looks set to outpace demand growth for 2019-20, with no additional capacity

afterwards. Supply (3,207MW) continues to outpace demand (618MW). A bulk of the

supply remains in coal plants such as Limay unit 2 (150MW), Masinloc (300MW), San

Buenaventura (500MW) and Dinginin unit 1 (667MW), which will be built in Luzon. We

maintain our view that uncontracted plants will face difficulty securing power contracts

given the oversupply. Coal will likely remain the preferred base load plant, given its low

cost and high availability. Among coal plants, SCC has the lowest cost, based on our

estimates. Meanwhile, dynamics are changing for the peaking market given the

emergence of solar due to its low cost and the ease of building capacity.

Philippines: additional demand/supply in the grid (MW) Philippines: power situation (MW)

Source: DOE, Daiwa Source: DOE, Daiwa

We think the power market in Luzon remains the least challenging for generating

companies (gencos), since it has the lowest power reserves (c.56% for 2019E) compared

with the Visayas and Mindanao. We expect Luzon’s peak demand to grow by 4.3% per

annum over 2018-20, which marks a c.600-650MW annual increase. Conversely, we

estimate supply will surge by 1,744MW in 2019. The supply addition in Luzon is mostly

coal. In the Visayas, we estimate an additional supply of 733MW in 2019, which would

cause the reserve margin to jump from 46% in 2018 to 74% in 2019. We expect demand to

grow steadily by 85-90MW in 2019-20. The additional supply is mainly coal and biomass.

For Mindanao, we forecast an additional supply of 729MW in 2019 as reserve margins will

jump above 100% in that region; this capacity addition will exacerbate the supply-demand

imbalance, in our view. We think Mindanao is the worst power market in terms of

oversupply among the 3 island groups, given its significantly high reserve margin

compared with the other regions.

759

3,105

978 1,051

3,207

716

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2015 2016 2017 2018 2019F 2020F

Philippine Demand Philippine Supply

0%

10%

20%

30%

40%

50%

60%

70%

0

5,000

10,000

15,000

20,000

25,000

30,000

2014 2015 2016 2017 2018 2019F 2020F 2021F

Peak demand Dependable Capacity Reserve margin

Incremental power

supply likely to outpace

demand in 2019-20; coal

is likely to continue to

dominate the base load

and solar will change the

dynamics of the peak

demand market

We think the power

market in Luzon remains

the least challenging for

gencos, given the lower

reserve margin

compared with Visayas

and Mindanao

58


Luzon Grid: demand and supply projection (MW) Mindanao Grid: demand and supply projection (MW)

Source: Daiwa forecasts Source: Daiwa forecasts

Themes

Lower power tariffs and consolidation

The faster growth in supply compared with power demand will lead to increased

competition in securing power supply contracts from both retail customers and distribution

utilities, in our view. Prices in the wholesale electricity spot market (WESM) went up during

1Q19 and we do not expect this to continue over the medium term, given our view that the

incoming additional supply will outpace demand in the grid. As such, we see lower prices in

the medium term. We believe the difficult competitive environment will be tougher for

smaller power firms. We think several firms will continue to look to exit the industry and the

bigger firms will likely be in a position to acquire them. As we see it, AP, Manila Electric Co

(MER PM, PHP385, Underperform [4]) and SMC Global Power (unlisted) are buyers by

virtue of their size. These companies have high cash levels, which we think can fund

acquisitions. Conversely, we consider First Gen Corp (FGEN PM, PHP22.1, Hold [3])

unlikely to acquire new power plants, given its plans to possibly build an LNG terminal in

2020 depending on the cost and partnership agreements.

Coal dominates baseload, solar disrupts peak demand

We think coal will remain the dominant base load in the Philippines. We forecast coal

revenues will expand by 22% cumulatively for 2017-20E due to capacity expansion at

Aboitiz Power and potentially higher utilisation from coal plants. Similarly, we think GWh

sales will continue to rise as more coal plants come online. There is 3.4GW of incoming

coal plant capacity planned for 2019-21E; we expect this to put pressure on uncontracted

coal plants, which would lead to lower utilisation and tariffs. The expected decline in coal

prices by ~10% in 2019 (from consensus) will lead to lower tariffs for contracted coal

plants, but rising inflation expectations in the country should offset this decline, in our view.

Philippines: coal power plant revenues

Source: Daiwa forecasts

Coal is the cheapest source of base load among the incoming capacity in the Philippines

given its generation cost and dispatch prices. The average dispatch price of coal is at

0%

10%

20%

30%

40%

50%

60%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2014 2015 2016 2017 2018 2019F 2020F 2021F


0%

20%

40%

60%

80%

100%

120%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2014 2015 2016 2017 2018 2019F 2020F 2021F


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2015 2016 2017 2018 2019F 2020F

(PHPm)

Supply growth continues

to outpace demand

which will lead to lower

tariffs, spot prices in

2019-20E

59


PHP4.22/KWh vs. other base load capacities of PHP5.16/KWh and geothermal at

3.68/KWh. Although geothermal is cheap, fixed costs related to digging new wells are high.

The cost of a new well is estimated at USD400m, with a capacity potential of 5MW. There

is also a maintenance expense of PHP500m per well to maintain the capacity. Looking at

contract prices and operating cost among base load plants, coal remains very competitive,

with an operating cost of PHP2.40/KWh, while natural gas is at PHP2.97/KWh.

Philippines: baseload operating cost and contract prices (PHP/KWh)

Philippines: operating cost of peaking technology (PHP/KWh)

Source: Daiwa Source: Daiwa

We also note that the peaking demand requirements will likely be serviced by solar. We

believe falling solar prices (PHP3-4/KWh) will likely enable solar power to compete head-

on with other peaking providers, such as oil (c.PHP5/KWh) and wind (c.PHP4.56/KWh).

We also note that the load profile of solar is that it peaks in the afternoon, which also

accounts for the bulk of peak demand. We estimate an operating cost of PHP3.4/KWh for

solar, which is the second cheapest to hydro. We note that hydro cost additions will likely

be small over the next 3 years, while it is easier to make solar panels, which is why we

expect solar technology to grow faster and increasingly service peaking requirements.

Temporary spikes in WESM

Despite high reserve margins, the Philippine grid still experiences yellow and red alerts (a

condition that could put the grid into brownouts) several times in a year. This is due to the

age of the power plants, according to the Department of Energy. About 70% of the

operating power plants have been in operation for more than 15 years, which makes their

operations prone to unplanned shutdowns. These periodic shutdowns have led to

temporary spikes in the wholesale electricity spot market (WESM). Plants that have

significant uncontracted capacity or are only in short-term contracts (less than 1 year) will

benefit from the temporary spikes in the WESM prices, in our view. Semirara Mining and

Power Corp (SCC PM, PHP23.85, Buy [1]) has c.240MW of capacity contracted only in

short-term contracts.

WESM prices Philippines: age of power plants

Source: Daiwa Source: Daiwa

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Nat gas Coal Geothermal

Operating cost Latest Contract price/ASP0

1

2

3

4

5

6

7

Wind Solar Oil Hydro

0

5

10

15

20

25

30

35

01/07/19 01/14/19 01/21/19 01/28/19 02/04/19 02/11/19 02/18/19 02/25/19

Peak price Off peak price

< 5 years20.00%

5 to < 10 years0.10%

10 to < 15 years7.20%

15 to < 20 years33.60%

20 to < 25 years17.90%

25 to < 30 years0.60%

> 30 years20.60%

Periodic shutdowns

have led to temporary

spikes in the wholesale

electricity spot market,

which we expect to

benefit SCC

60


Top sector pick

Aboitiz Power (AP PM, PHP37.7, Buy [1])

Investment thesis

We have a Buy (1) rating for AP, one of the largest power generation companies in the

Philippines. We expect AP to grow earnings by 10% YoY in 2019 and 19% YoY in 2020,

supported by higher power capacity from the operations of the Therma Visayas, Dinginin

Plant and Subic Coal. In our view, AP should be able to withstand increased competition in

the power market due to its competitive generation pipeline, long track record, and

integrated generation/distribution business model.

AP: core net profit and growth

Source: Daiwa forecasts

Valuation

We have a TP of PHP45.77 based on SOTP/DCF methodology. AP shares are currently

trading at a 11x 2019E PER, on our forecasts, the lowest such multiple in 7 years due to

concerns over the power oversupply, which we think are unwarranted. The biggest risk to

our call is price risk, given that prices of new retail electricity contracts might be low and

negatively affect our estimates for AP.

AP: 10-year PER bands

Source: Daiwa

Philippines Utilities & Energy: valuation summary

Company Stock code

Price (LC)


Target price (LC)



Aboitiz Power AP 37.70 5.32 Buy (1) 45.76 11.1 9.3 2.0 1.8 8.1 6.8 4.9 5.4 19.0 20.6


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2014 2015 2016 2017 2018 2019F 2020F 2021F

Net income Profit growth

0

5

10

15

20

25

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

PE -2SD -1SD Average +1SD +2SD

We have a Buy (1) rating

on AP, with EPS growth

forecasts of 10/19% for

2019/20E as new

capacity ramps up

AP shares are trading at

11x 2019E PER, its

lowest such multiple in 7

years

61


Philippines Consumer

Renzo Candano (63) 2 737 3022 ([email protected])

Sector outlook for 2019

Positive outlook

Double-digit revenue and net profit growth seen in 2019

We are positive on the Philippines Consumer sector as we see consolidated revenue and

net income attributable to parent growing by 12.5% YoY and 15.1% YoY, respectively,

among our covered names (FB, JFC, RRHI, and PGOLD) in 2019. This year, we expect

our covered consumer names to cumulatively post a high single-digit store expansion

growth of 7.1%, and for retailers and restaurant operators to continue experiencing strong

same-store sales growth (SSSG) of >3% due to the positive spill-over effects of the 33rd

Philippine Senate election on private consumption.

Philippines Consumer: consolidated revenue growth Philippines Consumer: consolidated net profit growth

Source: Company; Daiwa estimates Note: Considers audited and unaudited financials of JFC, RRHI, FB, and PGOLD

Source: Company; Daiwa estimates Note: Considers audited and unaudited financials of JFC, RRHI, FB, and PGOLD

We expect the major drivers for earnings growth for the sector in 2019 to be: 1) candidate

spending being a positive catalyst for private consumption, and 2) gross-margin expansion

coming from decreased input cost pressures, given the slowing rate of inflation this year

compared with 2018.

Philippines: household final consumption expenditure Philippines: real GDP per quarter

Source: Philippine Statistics Authority Note: In PHPm; 2000 constant prices

Source: Philippine Statistics Authority Note: In PHPm; 2000 constant prices

9.2%

13.1%

11.4%

15.8%

12.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2015 2016 2017 2018 2019E

Consolidated revenue growth (YoY)

7.7%

23.7%

12.7%

10.6%

15.1%

0%

5%

10%

15%

20%

25%

2015 2016 2017 2018 2019E

Consolidated net profit growth (YoY)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Jun-

17

Sep

-17

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

(PhP m)

Household final consumption expenditure (PhP m)

0

5,000

10,000

15,000

20,000

25,000

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Jun-

17

Sep

-17

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

(Php)

GDP per capita (Php)

We forecast double-digit

top-line growth of 12.5%

YoY for our covered

consumer names in 2019

62


Themes

Election spending: a catalyst for private consumption

The 33rd

Philippine Senate election, which will be held on 13 May 2019, is likely to be a

major driver for domestic private consumption for 2019. Heightened candidate spending on

advertising and campaigns during election seasons often spills over to the wallets of

middle-class consumers, to the benefit of retailers, manufacturers, and food operators, in

our view. We saw this during the 2016 National Elections when various consumer

companies posted their strongest same-store sales growth (SSSG) figures in a 3-year

period (2015-17).

In line with the 2019 Senate elections, we see strong 2019 SSSG for our covered

consumer names (PGOLD PM, RRHI PM, and JFC PM). However, we expect our 2019

forecasts to be lower than their reported SSSG for 2018 because of the effects of the Tax

Reform for Acceleration and Inclusion (TRAIN) Law, enacted on 1 January 2018.

Philippines Consumer: same-store sales growth

Consumer companies

posted their strongest

SSSG in 2016, the year of

the national elections, for

the 3-year period

Source: Company; Daiwa calculations Note: Jollibee Foods’ SSSG is for local restaurants only

Gross-margin expansion due to slowing inflation

A highlight for 2018 was heightened inflation, which averaged 5.2% for the year, from 3.2%

in 2017. This phenomenon was brought about by increasing global fuel prices, the

depreciation of the PHP against the USD, and the dwindling supply of crops and

vegetables due to typhoons. Year-on-year, most consumer companies posted lower gross

margins in 2018 compared with the previous year, indicating that the heightened inflation

had a material effect on the consumer firms’ profitability, especially those for which low-

income consumers are the target market. With the slowdown in inflation in 2019, we expect

consumer names to post improvements in their gross margins.

Philippines: CPI inflation Philippines Consumer: gross margins of consumer companies

Source: Philippine Statistics Authority Note: CPI inflation rate is considers 2012 prices as the base

Source: Company; Daiwa calculations Note: Data for FB and URC are unaudited

2.9%

5.8%

4.9%

4.1%

7.0%

2.8%

5.5%

8.0%

6.0%

3.1% 3.3%

2.4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2015 2016 2017

Puregold Price Club Robinsons Retail Jollibee Foods SM Retail

3.8%4.3% 4.5% 4.6%

5.2%5.7%

6.4%6.7% 6.7%

5.1%4.4%

3.8%3.3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18

Sep

-18

Oct

-18

Nov

-18

Dec

-18

Jan-

19

Feb

-19

Mar

-19

Inflation rate

18.2%

33.0% 31.4%

17.3%

22.4%

17.2%

33.0%30.3%

16.9%

22.4%

0%

5%

10%

15%

20%

25%

30%

35%

JFC FB URC PGOLD RRHI

2017 2018

We expect the 2019

Senate election to spur

private consumption

The slowdown in

inflation will likely

improve gross margins

of consumer companies

63


Top sector picks

Jollibee Foods Corporation (JFC PM, PHP304.6, Hold [3])

Investment thesis

We like JFC because we see it achieving strong recurring EPS growth of 12.3% CAGR

over 2018-20E, on the back of robust same-store sales and store network growth, as well

as an expected EBITDA margin expansion from the increased franchising of restaurants.

We are also positive on JFC’s strategy of acquiring foreign restaurant chains as a means

to quickly increase its restaurant count and to expand to new geographic markets.

Furthermore, we view the stock as among the most liquid options for any investor seeking

exposure to restaurant companies in the ASEAN region, given its USD6.5bn market

capitalisation. Despite being a Hold (3), JFC is our long-term top pick because it has the

strongest earnings growth among our covered names, on Daiwa’s forecasts.

JFC: recurring net income and growth JFC: revenue and growth

Source: Company; Daiwa forecasts Note: LHS is recurring net income in PHPbn; RHS is YoY growth

Source: Company; Daiwa forecasts Note: LHS is revenues in PHPbn; RHS is YoY growth

Valuation

We have a Hold (3) rating on JFC with a 12-month TP of PHP330. We value the stock at a

39.3x 1-year-forward PER, which is 0.5SD above its past-5-year average of 36.8x. We

believe that the premium is warranted, given our strong recurring EPS growth forecast of a

12.3% CAGR over 2018-20, similar to the 12.2% CAGR recorded over 2012-17. Key

upside risk: spillover effect of the 2019 Philippine Senate election spending that will likely

benefit JFC’s top line. Key downside risk: heightened inflation potentially compressing

gross margins.

JFC: historical forward PER bands

JFC is currently trading

at a 36.8x 2019E PER

Source: Bloomberg; Daiwa forecasts

Note: Considers recurring EPS forecasts of Daiwa

4,928

6,165

7,109

8,330 9,072

10,500

-8.1%

25.1%

15.3%17.2%

8.9%

15.7%

(10%)

(5%)

0%

5%

10%

15%

20%

25%

30%

0

2,000

4,000

6,000

8,000

10,000

12,000

2015 2016 2017 2018 2019E 2020E

Net profit (Php m) YoY growth

100,780 113,811

131,577

161,199 178,209

193,819

11.1%12.9%

15.6%

22.5%

10.6%8.8%

0%

5%

10%

15%

20%

25%

0

50,000

100,000

150,000

200,000

250,000

2015 2016 2017 2018 2019E 2020E

Revenues (Php m) YoY growth

20

25

30

35

40

45

50

55

Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19

PER Average SDEV+1 SDEV-1 SDEV+2 SDEV-2

64


Puregold Price Club (PGOLD PM, PHP41.9, Buy [1])

Investment thesis

PGOLD is a major player in the Philippine grocery retailing segment with a store network of

409 as of end-2018. We like PGOLD because of its strong brand equity in its low-income

(Puregold) and high-income (S&R) grocery segments, as well as its solid foothold on mom-

and-pop store retailers which comprised c.70% of the country’s grocery retailing industry

(based on revenue) in 2018. We see PGOLD’s revenue and recurring EPS expanding at

12% and 14.6% CAGR, respectively, over 2018-20E, driven by strong SSSG and store

expansion at an 8% CAGR during the period.

PGOLD: revenue and growth PGOLD: recurring net income and growth

Source: Company; Daiwa forecasts Note: LHS is revenues in PHPm; RHS is YoY growth

Source: Company; Daiwa forecasts Note: LHS is recurring net income in PHPm; RHS is YoY growth

Valuation

We have a Buy (1) rating on PGOLD with a TP of PHP56.80. We value the company at a

target PER of 20.5x, which is in line with its past-5-year average, applied to our average

2019-20E EPS. Currently trading at a 18.6x 2019E PER, we believe the stock is

undervalued with potential upside of 36%. Key downside risk: heightened inflation

potentially compressing gross margins, especially of the Puregold segment.

PGOLD: historical forward PE bands

PGOLD is currently

trading at an 18.6x 2019E

PER

Source: Bloomberg; Daiwa forecasts

Note: Considers recurring EPS forecasts of Daiwa

Philippines Consumer: valuation summary

Company Stock code

Price (LC)


Target price (LC)



Jollibee Foods Corp. JFC PM 304.6 6,351 Hold (3) 330.00 36.8 31.8 6.2 5.4 33.6 28.5 0.8 1.0 18.3 18.6

Puregold Price Club PGOLD PM 41.9 2,223 Buy (1) 56.80 18.6 16.3 2.1 1.9 9.6 8.3 0.9 0.9 12.2 12.0

Source: Bloomberg; Daiwa forecasts Note: Closing prices as of 30 April 2019

97,172 112,589

124,491

140,918

157,950

176,706

14.7%15.9%

10.6%

13.2%12.1% 11.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2015 2016 2017 2018 2019E 2020E

Revenues (Php m) YoY growth

5,002 5,526

5,840 6,520

7,354

8,566

10.6% 10.5%

5.7%

11.6%12.8%

16.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2015 2016 2017 2018 2019E 2020E

Net profit (Php m) YoY growth

10

15

20

25

30

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

PER Average SDEV+1 SDEV-1 SDEV+2 SDEV-2

65


Indonesia strategy

Lucky Ariesandi (62) 21 250 5081 ([email protected])

Satria Sambijantoro (62) 21 250 5081 ([email protected])

Sector outlook

Spillover from global slowdown to weigh on growth

Household consumption to save the day

Heading into 2H19, we believe that Indonesia’s macroeconomic situation continues to be

challenging. Indonesian exports are under pressure from a global slowdown while rising oil

prices on the back of geopolitical tension in Libya and a possible OPEC supply cut are

threatening to derail an improvement in Indonesia’s current account deficit (CAD). On the

flip side, there is less pressure on interest rates given an increasingly dovish Fed, with

scope for a rate cut by Bank Indonesia (BI) in 2019 to stimulate growth.

A global slowdown, especially in China, will have repercussions for Indonesia, especially

via the commodity channel. Commodities contributed 52% of Indonesia’s non-oil and gas

exports in 2018, with a large portion of this exported to China, Indonesia’s biggest buyer of

coal and nickel ore and the third-largest buyer of crude palm oil (CPO) and rubber in 2018.

Commodity prices in 1Q19 generally reflected the impact of slower demand growth, with

the coal price falling by 13% and the CPO price declining slightly as of the end of March.

Indonesia main non-oil and gas exports Newcastle coal price

Source: Bloomberg Source: Bahana, Bloomberg

Meanwhile, investment sentiment may not be overly rosy despite a track record showing a

pick-up in investment activity post-election. We base our view on: 1) rising resource

nationalism in the past few years which may inhibit foreign direct investment (FDI) in the

resource extraction sectors, 2) tight liquidity in the banking sector, with the LDR at 93% as

of January 2019, which coupled with high interest rates should reduce domestic direct

investment (DDI), and 3) constantly increasing labour costs without an accompanying

relaxation of Indonesia’s rigid labour laws.

While the government expenditure target is set to increase by 10% YoY in 2019, we

believe that overall budget is not overly expansive (ie, the government is not spending an

unusually high sum of money) as the budget deficit is expected to remain flat at 1.8% of

GDP. The only difference is that the 2019 budget is reoriented towards supporting

consumption, in our view.

The government initiatives should help household consumption to remain resilient amidst

downward pressure on commodity prices, and grow by above 5% YoY in 2019. In fact, we

believe the consumer sector will be the sole engine for GDP growth in 2019. Given this, we

are upbeat on the prospects of the consumer sector, especially companies with a high

exposure to low-income households. On the flip side, we have a negative view on pro-

cyclical sectors given the likely modest GDP growth overall in 2019.

Agriculture3%

Palm oils10%

Base metals8% Processed

rubber4%

Paper and paper 3%

Processed wood2%

Paper materials2%Coal

15%Other mining products

3%

Non-monetary gold1%

Other non commodities

49%

60

70

80

90

100

110

120

Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19

USD/tonne

External pressure from

the global slowdown and

rising oil prices to weigh

on growth

GDP growth is reliant on

household consumption

growth

66


We set our JCI target at 6,800 pegged at 15.5x 2019E PER based on expected earnings

growth of 12.9%. This is based on an expected rerating of the index to -0.5SD given

superior growth compared with its average in the past 9 years of 6.6%, but also informed

by a lower global appetite for risk assets overall, especially for countries that are running a

large CAD.

Sector earnings growth forecast

We expect the metal &

mining sector to book

the highest earnings

growth

Source: Bloomberg, Bahana

Indonesian economics

Resilient economy amid external shocks

Indonesia’s economy is primarily domestic-driven, with household consumption

contributing around 56% of GDP in 2018 and government expenditure comprising another

12%. However, Indonesia’s link to the global economy remains high, with exports making

up 21% of GDP and FDI representing 56% of total direct investment.

Indonesia: GDP structure, 2018 Indonesia: FDI by sector, 2018

Source: BPS Source: Investment Coordinating Board

Given the challenges posed by external factors, and with the election in mind, the

government has increased its social spending budget in 2019 to support the purchasing

power of low income households. These are done primarily through the family hope

programme (PKH) and village funds, where the combined budget is 40% YoY higher at

IDR111tn for 2019.

The government has also raised civil servant salaries by 5% in 2019, with the adjustment

made in April. Meanwhile, the minimum wage has been increased by 8% overall in 2019,

which helps support purchasing power of blue-collar households.

Besides, we believe that election-related spending will stimulate the economy in 1Q19,

with some spillover into 2Q19. The election budget to be disbursed in 2019 amounts to

IDR15tn, or 0.1% of annual Indonesian GDP, and could easily add 0.2pp to 1Q19 and

2Q19 GDP growth, all else being equal. This does not include campaign spending by the

8,000 legislative candidates, which we estimate could add another 0.1-0.2pp to GDP in

1H19.

(20) (10) 0 10 20 30 40 50 60 70

Fuel distributor

Auto

Cons. Staples

Poultry

Coal

Banks

Infrastructure

Healthcare

Media

Cons. Discretionary

Property

Plantations

Cement

Metals

56.01

33.84

21.13

-23.7

12.09

-30 -20 -10 0 10 20 30 40 50 60 70

Household Consumption

Investment

Export

Import

Government Spending

0

5,000

10,000

15,000

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(USDm)

FDI DDI

Social spending budget

is set 40% YoY higher in

2019

Election may boost GDP

in 1H19

67


Altogether, these initiatives should more than offset the impact of lower incomes for 10m

farming households in the CPO and rubber sectors. Given this, we expect household

consumption growth to accelerate to 5.1% YoY in 2019 from 5.0% YoY in 2018.

Indonesia: Family Hope programme Indonesia: village fund budget

Source: MoF, MoSA Source: CEIC, Bahana

CAD improvement scenario in jeopardy

One of our main positive theses on Indonesia is the improvement in the CAD to 2.8% of

GDP in 2019 from 3.0% in 2018 given: 1) the lagged impact of interest-rate hikes on

imports, and 2) an improvement in the oil & gas trade balance driven by falling oil prices as

Indonesia had a net import balance of crude oil and refinery products of 217m barrels in

2018.

Indonesia: O&G trade balance

The O&G trade deficit is

the main culprit behind

the worsening CAD

Source: Bloomberg, Bahana

While imports have been declining in the past 4 months, consistent with our thesis, the oil

price has been rising due to the OPEC supply cut and geopolitical tensions in Libya.

Exacerbating the problem, Indonesia’s gas production is expected to miss its target due to

falling production at Mahakam Block after the transition of operatorship to NOC Pertamina.

All in, we believe there is a downside risk to our CAD estimate as we see imports declining

at a flatter trajectory compared with exports given stable GDP growth. We see scope for a

reduction of imports of electrical and mechanical appliances as infrastructure spending

shifts towards smaller projects which are more labour-intensive in nature.

Meanwhile, Indonesia’s exports are also likely to be under threat from a China slowdown,

especially coal, which contributed USD24bn to export revenue in 2018 (31% of Indonesia’s

coal exports were to China). Indonesia coal producers will be hard-pressed to find

alternative markets for its production as GDP growth in ASEAN countries is expected to

slow as well (by 10bps), according to IMF projections.

0

2000

4000

6000

8000

10000

12000

0

5000

10000

15000

20000

25000

30000

35000

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

F

(th)(IDRbn)

PKH Budget and Realization (LHS) Number of Receiver (RHS)

129,

723

150,

464

226,

180

253,

263

292,

433

308,

585

344,

728

411,

325

480,

645

513,

260

573,

703

602,

373

663,

578

682,

226

697,

900

826,

773

20,7

66

46,6

79

59,7

67

59,9

00

70,0

00

-

200,000

400,000

600,000

800,000

1,000,000

2004

2005

2006

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

2019

F

Regional Transfer Village Funds

-2000

-1500

-1000

-500

0

500

1000

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

Jan-

14

May

-14

Sep

-14

Jan-

15

May

-15

Sep

-15

Jan-

16

May

-16

Sep

-16

Jan-

17

May

-17

Sep

-17

Jan-

18

May

-18

Sep

-18

Jan-

19

O&G Trade Balance (RHS) O&G Exports (LHS) O&G Imports (LHS)

Trade wars and rising

protectionism globally

could also have a

negative spillover to the

economy

68


Interest rate cut made possible by dovish Fed We initially expected BI to hike interest rates by 25bps in 2019 following the expectation of

3 Fed rate hikes. We argued that given the expected poor 2019 CAD number, BI must

maintain a high interest rate to stabilise the currency and prevent a worsening balance of

payments.

The Fed, however, has turned increasingly dovish in 2019 with the Fed dot plot suggesting

a 50bps lower Fed Fund Rate expectation, with a distant possibility of a rate cut.

Therefore, we believe that BI now has ample room to cut interest rates to stimulate

faltering growth. We now expect a 25bps cut to 5.75%, which is likely to be done in 2H19

when the pressure on IDR is lower. We note that even after such a rate cut, Indonesia

would still have one of the highest real interest rates given the low expected inflation rate

of 3.3%.

However, we believe that the impact on the real-estate sector of a modest rate cut will also

be limited, with potentially no reduction in banking sector lending rate, given: 1) impact of rate

increase last year was not fully passed through, and 2) a high LDR in the banking sector of

93% as of January 2019. Nevertheless, the rate cut and relative scarcity of new government

bond offerings given a low deficit target may provide a catalyst for the Indonesia bond

market, which we believe is among the most attractive due to high real yields.

Comparison of real bond yields Indonesia: banking sector LDR

Country 10y yield Inflation Real yield

India 7.41 2.05 5.36

Indonesia 7.83 2.82 5.01

Malaysia 3.89 -0.7 4.59

Colombia 6.86 3.1 3.76

Russia 8.4 5 3.4

Thailand 2.47 0.27 2.2

Philippines 6.24 4.4 1.84

Italy 2.41 0.9 1.51

China 3.19 1.7 1.49

Romania 4.72 3.32 1.4

Portugal 1.44 0.48 0.96

Hungary 2.63 2.7 -0.07

Bulgaria 0.73 3 -2.28

US 2.65 1.6 1.05

Japan -0.03 0.2 -0.23

EU 0.1 1.5 -1.4

Source: Bloomberg, Bahana Source: Financial Service Authority

Themes

Rising purchasing power of low-income households

We believe spending from low-income households and rural households will increase and

drive household consumption growth, given the higher dependence on cash assistance

from the government and high marginal propensity to consume. Hence, we like sectors

with high exposure to these households such as poultry, cigarettes and FMCG. Retail

names such as Ramayana Lestari (RALS IJ, IDR1,785, Buy) and banks with an

entrenched rural area presence such as Bank Rakyat Indonesia (BBRI IJ, IDR4,370, Buy)

may also benefit, in our view.

Margin recovery given easing competition and/or input cost deflation We expect telecom operators to book healthy earnings growth in 2019 after a poor 2018

due to an intense price war. Data prices are gradually being adjusted upward and we

foresee better profitability for the industry, with mid-to-high single digit revenue growth and

100-200bps EBITDA margin escalation overall.

We also expect to see input cost deflation for the poultry industry given a potential decline

in the price of soybean meal on the back of a rising harvest in Argentina. Also, the corn

purchase price for 2019 may be lower overall due to a bumper corn crop harvest in

February in Indonesia, in our view.

75

80

85

90

95

100

105

Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

May Ju

l

Sep

Nov Jan

Mar

May Ju

l

Sep

Nov Jan

2016 2017 2018 2019

Com Bank BUKU IV BUKU III BUKU II

A dovish Fed opens up

possibility of BI rate cut

given high real interest

rate

Sectors with exposure to

low-income households

should benefit

69


Indonesia telecom industry EBITDA margin Argentina soybean production

Source: Companies, Bahana Source: Fitch Solutions

Secular nickel demand growth Based on company forecasts, the global nickel market is expected to remain in deficit in

2019, the fourth consecutive year of deficit, with an expected deficit of 33-50k tonnes in

2019. Global nickel stocks as of March 2019 shrunk to c.188k tonnes, translating into a

stock-to-usage ratio of 4 weeks, only slightly above the normal level of 15-25 days. Given

the deficit, we believe global nickel stocks may hit normal levels in 3Q19 and may result in

a strong rally for nickel prices.

Global nickel market forecasts Nicke stocks to usage

Source: INSG, SMM, Norilsk Source: Norilsk

Top picks

HM Sampoerna (HMSP IJ, IDR3,500, Buy)

Investment thesis

We believe that Sampoerna’s market share in Indonesia’s tobacco industry has stabilised,

with market share flat YoY at 33% in 2018. We expect its ASP hikes to normalise to the

industry norm (of c.4%) going forward, with its strong positioning in the LTLN machine-

rolled segment to help it claw back market share. The absence of an excise tax hike this

year should boost margins, as we expect the cigarette industry sales volume to resume

growth, albeit modestly, in 2019, driven by rising disposable income levels of lower-income

households.

Valuation

HMSP is currently trading at 2019E PER of 27.0x, below its past-3-year average (post

refloating) of 32.0x, with earnings growth of 12% YoY. We have a Buy call on the stock

with a TP of IDR4,150 based on a target PER of 32.0x. Key downside risks: 1) shift in

market trends towards full-flavoured machine-rolled cigarettes, and 2) weaker-than-

expected purchasing power.

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

E

Average, RHS Telkom Indosat XL Axiata20,000

30,000

40,000

50,000

60,000

70,000

2015 2016 2017 2018 2019E 2020E

(k tonnes)

-500

0

500

1000

1500

2000

2500

3000

Prod Cons Deficit Prod Cons Deficit Prod Cons Deficit

INSG Sumitomo Metal Norilsk Nickel

(k tonnes)

2017 2018 2019

15-25

3137

92

0

10

20

30

40

50

60

70

80

90

100

Ni Normal Ni Spot Ni historical average Ni high

(days)

The nickel sector is

experiencing the fourth

consecutive year of

deficit

Our top picks are big-

cap laggards with a

strong consumer

presence

70


XL Axiata (EXCL IJ, IDR2,920, Buy)

Investment thesis

We believe that there will be industry-wide margin recovery in the Indonesia telecom

industry following collective gradual data repricing by Indonesia carriers. XL looks poised

to be the main beneficiary, given: 1) its capex cycle has nearly peaked (unlike Indosat),

and 2) XL subscribers’ shift to data plans has almost been completed, translating into less

pressure on ARPU going forward from the inevitable shift.

Valuation

XL is currently trading at 2019E EV/EBITDA of 4.4x, -2SD of its past-10-year mean, with

EBITDA growth of 11% YoY vis-à-vis an historical EBITDA CAGR of 5.4%. We have a Buy

call on XL with an IDR3,025 TP, based on DCF and target EV/EBITDA of 5.9x. Key

downside risks to our forecasts: 1) re-emergence of a price war, and 2) higher-than-

expected capex growth.

Bank Mandiri (BMRI IJ, IDR7,725, Buy)

Investment thesis

Bank Mandiri’s share price has lagged its peers’ given investors’ concerns about the bank

overpaying for its acquisition of Bank Permata (BNLI IJ, Not rated). We believe the concern

is unfounded as the bank has several acquisition targets and we expect management to

pursue only the most value-accretive target. The bank may also benefit from the increase

in civil servant salaries, as many civil servants are the bank’s customers for payroll

accounts.

Valuation

Bank Mandiri is trading at 2019E PBV of 1.8x, 1.5SD below its past-10-year mean, with

expected improvement in ROE to 15.5% in 2019E from 15.1% last year. We have a Buy

call on the stock with a TP of IDR9,500 pegged at 2019E PBV of 2.2x. Key downside risks

to our forecasts are: 1) a sharp interest rate cut which may result in slight net interest

margin contraction, given sticky funding costs, and 2) higher-than-expected valuation paid

for its future acquisitions.

Indonesia strategy: valuation summary

Company Stock code

Price (LC)


Target price (LC)

PER (x) PBR (x) EV/EBITDA (x) Dividend yield (%) ROE (%)


HM Sampoerna HMSP IJ IDR3,500 28,591 Buy IDR4,150 27.0 24.7 11.4 11.4 20.7 18.5 3.7 4.0 42.6 46.5

XL Axiata EXCL IJ IDR2,920 2,192 Buy IDR3,025 36.2 19.9 1.4 1.3 4.4 3.8 0.0 0.0 3.9 6.8

Bank Mandiri BMRI IJ IDR7,725 25,318 Buy IDR9,500 13.5 11.7 1.8 1.6 NA NA 2.9 3.3 14.1 14.9

Source: Bloomberg, Bahana forecasts Note: Closing prices as of 30 April 2019

71


Malaysia strategy

Kevin Low (60) 3 2146 7479 ([email protected])

Overall strategy

Lofty valuations limiting fund inflows

Corporate earnings continue to disappoint

Corporate Malaysia reported some of its worst results in recent times in 4Q18, with

earnings contracting a sharp 23% YoY. Earnings revisions have typically been on a

downtrend (after the usual bullish start) and disappointments have pretty much prevailed,

setting the lacklustre tone on the KLCI over the past 5 years. We are looking for EPS

growth of 6.0% YoY for 2019E for now, though earnings growth forecasts are fast losing

credibility after successive years of disappointment. As the adverse impact from a global

economic slowdown trickles in, as a result of the trade tensions and as frail domestic

conditions manifest (declining PMI and weak consumer sentiments), we see the possibility

of a positive earnings surprise as less likely while downside risk is heightened.

Malaysia: quarterly core earnings growth (YoY % change)

Weak corporate

earnings and lofty

valuations have

restrained fund inflows

Source: Bloomberg, Affin Hwang

While regional markets have rallied YTD, the Kuala Lumpur Composite Index (KLCI) has

missed this party largely attributed to the disappointing corporate earnings and its relatively

lofty valuations. Despite the rally in neighbouring markets, the KLCI PE valuation gap

(against regional peer markets) has remained at a premium and close to 3-year highs.

With the poor earnings delivery and unattractive valuations, equity inflows could remain

subdued, partly explaining the KLCI’s underperformance. Regulatory concerns remain a

risk, especially as the government continues to unwind its fiscal imbalance and to meet its

country reform agenda. On a more positive note, CPO and oil prices remain on an upward

trajectory since end-December 2018, providing some semblance of stability to the overall

economy.

KLCI PER multiples still above mean KLCI valuations against Thailand/Indon/Phil

Source: Bloomberg, Affin Hwang Source: Bloomberg, Affin Hwang

11.4 13.6

16.3 20.2

14.1

1.7

(4.6)(1.6) (2.2)

(8.9)

4.9 3.7

(9.6)

9.3

(0.2)

7.5

20.1

7.0 8.2

(1.7)

1.1

(1.5)

(7.5)

(22.9)(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

25

1QC

Y13

2QC

Y13

3QC

Y13

4QC

Y13

1QC

Y14

2QC

Y14

3QC

Y14

4QC

Y14

1QC

Y15

2QC

Y15

3QC

Y15

4QC

Y15

1QC

Y16

2QC

Y16

3QC

Y16

4QC

Y16

1QC

Y17

2QC

Y17

3QC

Y17

4QC

Y17

1QC

Y18

2QC

Y18

3QC

Y18

4QC

Y18

16.0

16.5

17.0

17.5

18.0

18.5

19.0

19.5

20.0

Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

12-month rolling forward core PE 5 Year Average

Avg: 17.9X

-1SD: 17.2X

+1SD: 18.7X

29/3/2019: 17.5X

-2SD: 16.4X

+2SD: 19.4X

(x)

-10%

-6%

-2%

2%

6%

10%

14%

18%

22%

11

12

13

14

15

16

17

18

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep

-16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep

-17

Nov

-17

Jan-

18

Mar

-18

May

-18

Jul-1

8

Sep

-18

Nov

-18

Jan-

19

Mar

-19

(x)

PE Premium FBMKLCI PE Average TIP PE

Current premium: 7.9%Avg premium since 2016: 3.6%

4Q18 results were some

of the worst in recent

times

72


We remain Neutral on the KLCI, although there is an increasing downside bias as the

negatives from a global synchronised slowdown start to kick in. We, nevertheless, remain

confident that domestic demand will hold up, aided by the government initiatives to boost

household disposable income. Focus should also remain on sectors that will continue to

exhibit real earnings growth in 2019, which can be found amongst the O&G and rubber

glove sectors. We would also increase positions in defensives such as healthcare, while

the REITs also make a good play with a potential for rate cuts ahead.

Economy

Alan Tan (60) 3 2146 7540 ([email protected])

Growth to remain steady at 4.7% in 2019

Private consumption to drive domestic demand and economic growth

Malaysia’s real GDP growth is expected to remain favourable, expanding by 4.7% YoY

projected for 2019, the same rate of increase as in 2018, which will be at the higher end of

the official forecast range of 4.3-4.8%. Growth in domestic demand will remain supportive

of GDP growth, where private consumption growth will continue to be an anchor on GDP

growth, supported by continued employment and income growth. In addition, the

implementation of recent government measures and incentives to alleviate the cost of

living will also support consumption spending. With the implementation of the ongoing

multi-year projects, especially in the manufacturing and services sectors, growth in private

investment is also projected to expand favourably in 2019. However, downside risk on

investment activity remains, with current softer global economic conditions and cautious

business sentiment, but we believe this could be partially mitigated by the recent

announcement on the tax cut for small and medium enterprises (SMEs), to reduce the tax

burden of businesses as well as the repayment of tax refunds (amounting to about

MYR37bn) which will possibly encourage domestic spending. Going forward, we believe

that with the expansion in the global economy, if sustained, Malaysia’s export growth will

remain healthy given its open economy, which is dependent on the external environment.

The International Monetary Fund (IMF) also expects global GDP growth to expand by 3.5%

in 2019, lower than the 3.7% in 2018, but still within the long-term average range of 3.5%.

Malaysia: GDP growth forecast by BNM Malaysia: domestic demand

Source: DOS Malaysia, Bank Negara Malaysia Source: DOS Malaysia, Bank Negara Malaysia

Headline inflation will be low and manageable in 2019

On the inflation front, despite the deflation registered in January and February 2019, we

believe this will be temporary, as the country’s domestic retail petrol prices have started to

move gradually higher, followed by the likely implementation of a targeted fuel subsidy

sometime in 2H19. These factors will add to some upward inflationary pressure, whereby

we maintain our full-year projection of around 1.5%, which is within the official target range

of 0.7-1.7%.

0

1

2

3

4

5

6

7

2011 2012 2013 2014 2015 2016 2017 2018 2019F

(% yoy)

4.3-4.8

-8

-6

-4

-2

0

2

4

6

8

10

Privateexpenditure

Privateconsumption

Privateinvestment

Publicexpenditure

Publicconsumption

Publicinvestment

Domesticdemand

(% yoy)

2017 2018 2019F

Projected GDP growth of

4.7% YoY for 2019

73


Malaysia: base effects to mitigate in the near term Malaysia: recent rise in retail petrol prices

Source: DOS Malaysia Source: DOS Malaysia, Bank Negara Malaysia

As for monetary policy, we maintain our view that BNM will likely keep its monetary policy

accommodative, where OPR is anticipated to remain unchanged at 3.25% in 2019, as this

would be in line with its efforts to support the domestic economy, while inflation risks are

likely to be contained. Nevertheless, BNM’s future decisions on the direction of OPR will

continue to be data-dependent. However, BNM has guided that other measures, especially

that of structural reforms, would be needed to further support domestic growth in the

medium term. As for the Ringgit, which has depreciated around 0.07% YTD, we anticipate

a strengthening against the USD in 2019 to MYR3.90/USD by end-2019 (MYR4.13/USD

as at end-2018), supported by buoyant foreign reserves and a healthy current account

surplus.

Malaysia: OPR to remain unchanged at 3.25% Malaysia: ringgit to appreciate against the USD

Source: DOS Malaysia Source: DOS Malaysia, Bank Negara Malaysia

Themes

Theme 1 (Focus on growth — O&G and gloves)

Sectors that are experiencing revenue growth appear to be lacking. We would focus on the

gloves and O&G space, which are expected to deliver “real earnings growth” over 2019E

where capacity expansion will drive the former and higher O&G activities led by the

national oil company, Petronas [not listed] will drive the latter. The overall sector is at an

inflexion point, whereby global oil majors are also expected to raise capex spending by an

average 6% in 2019E. While the market remains concerned over an overcapacity issue in

the glove space, data-points suggest otherwise. We maintain our view that demand will

outstrip supply in 2019, while manufacturers are more cohesive in ensuring that an

overcapacity is avoided. We expect the rubber product sector to achieve earnings growth

of low-mid teens, supported by robust demand for rubber gloves. Although earning growth

is not as strong as the 23% in 2018, we still expect this to outperform the overall market

earnings growth of 6.0% for 2019. There could be an upside risk to the earnings forecast, if

China decides to set a higher goal for its environmental policy which could once again

disrupt vinyl goal production, increasing the likely substitution to rubber gloves.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-4%

-2%

0%

2%

4%

6%

8%

10%

Jun

-08

Feb

-09

Oct

-09

Jun

-10

Feb

-11

Oct

-11

Jun

-12

Feb

-13

Oct

-13

Jun

-14

Feb

-15

Oct

-15

Jun

-16

Feb

-17

Oct

-17

Jun

-18

Feb

-19

(% yoy)(% yoy)

RON95 - RHS Core Inflation Headline Inflation

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

(RM/litre)

RON95 RON97 Diesel

1.01.5

1.5

2.0

2.5

3.0

3.5

4.0

0.5

1.5

2.5

3.5

4.5

5.5

6.5

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

2019

F

(% p.a)(% yoy)

CPI OPR

82

87

92

97

102

1072.8

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

Jun

-06

Feb

-07

Oct

-07

Jun

-08

Feb

-09

Oct

-09

Jun

-10

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-11

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-11

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-14

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-15

Oct

-15

Jun

-16

Feb

-17

Oct

-17

Jun

-18

Feb

-19

(Index)(USD/MYR)

USD/MYR REER

O&G and gloves are

sectors that are

projected to see

convincing growth

74


Malaysia: quarterly oil and gas contract awards Malaysia: rubber sector earnings and growth

Source: Affin Hwang, Bursa Malaysia Source: Affin Hwang Estimates, Bloomberg

Theme 2 (Infrastructure projects — water plays)

Budget 2019 allocated MYR690m for the implementation of new water-supply projects and

reducing non-revenue water (NRW). The government allocated MYR590m for full-year

2019 to build more municipal sewage treatment plants and network systems in 2019 to

connect households that are still using septic tanks and traditional systems. With low water

reserve margins in several states currently, there is an urgent need for water treatment

plants and upgrades in water infrastructure. Besides, we understand that that Pengurusan

Asset Air Bhd (PAAB — the government’s special-purpose vehicle to own water assets) is

budgeting about MYR1.2bn pa in 2019-21E for capital expenditure to develop the water supply

and distribution systems in the 8 states in Malaysia that are under its purview. This is potentially

positive for contractors involved in water and sewerage projects, such as Taliworks (TWK MK,

MYR1.01, Buy), Salcon (SALC MK, NR), Gamuda (GAM MK, MYR3.50, Hold) and HSS (HSS

MK, MYR1.11, Buy). Also, we expect water pipe suppliers such as Engtex (ENGT MK, NR),

YLI Holdings (YLI MK, NR) and Fitters Diversified (FIT MK, NR) to benefit from the

government’s plan to roll out pipe replacement projects to reduce NRW.

Malaysia: water reserve margin in 2016

Water reserve margin is

at critical levels for

Selangor, Kedah, Perlis

and Kelantan

Source: Malaysia Water Industry Guide 2017

Theme 3 (Potential rate cut — interest rate-sensitive sectors)

With the rising probabilities of an interest rate cut, the MREITs could potentially be a

beneficiary and similar to sectors that have higher gearing including the media, telco and

transport sectors. Nevertheless, we believe some of this good news is already priced in

and likewise for the banks, which should see some negative impact from loan re-pricings.

We estimate that for every 25bps cut in the benchmark interest rate, the banking sector

may see an average 1.4% decline in net profit. Banks such as CIMB, RHB Bank, Public

Bank and Maybank are the more asset-sensitive to a rate cut due to a higher proportion of

variable rate loans.

3,48

825

560

35,

759

540

1,02

098

13,

539

1,13

14,

230

460

7,18

91,

601 3,

833

1,71

62,

239

8,52

614

,512

4,48

416

,242

1,57

016

,082

5,53

82,

317

9,74

34,

237

2,47

78,

005

3,18

81,

510

6,11

21,

713

2,81

87,

633

2,30

6 4,37

34,

782

5,21

82,

243

5,28

33,

155

0

2000

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1Q09

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1Q19

(RMm)

-10.0

-5.0

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40.0

0

200

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1,000

1,200

1,400

1,600

1,800

2014 2015 2016 2017 2018 2019E 2020E

(%)(RMm)

Core Net Profit (LHS) Growth (RHS)

34.1%

29.2% 28.7%27.2%

22.1% 21.4% 20.7% 20.1%

16.4%13.2%

6.4% 5.8%

1.0% 0.0% 0.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Pul

at P

inan

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F.T

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Per

lis

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ah

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ango

r

MYR1.28bn allocated in

Budget 2019 for water

and sewerage projects

REITS and highly geared

companies to be

beneficiaries from a rate

cut, but overall looks

already in the price

75


Malaysia: gearing ratio for key sectors in 2018

Source: Companies

Top picks

Kossan (KRI MK, MYR3.64, Buy)

Investment thesis

The successful commissioning of both Plant 16 (3.0bn glove pieces production capacity) and

Plant 17 (1.5bn glove pieces production capacity) will reignite Kossan’s growth trajectory as it

will be able to reap the benefits of the new productive strength as highlighted in its stronger

QoQ earnings in 4Q18 (vs. 4Q17). Besides, Kossan will be commissioning 2 new plants,

Plant 18 and Plant 19, likely by end-2019, which would have a combined capacity of 5.5bn

glove pieces per annum. Kossan is also trading at a discount relative to its peers despite

having the strongest earnings growth at 20% for 2019-20E against its peers.

Malaysia: growing capacity fuelling and maintaining growth Malaysia: trading attractively below average

Source: Afifn Hwang Estimates, Company Source: Affin Hwang Estimates, Bloomberg Note: Prices as of 10 April 2019

Valuation

We reiterate our Buy call with a 12-month target price of MYR5.15, based on 27x 2019E

EPS, as we maintain our belief in Kossan’s continued growth prospects. Kossan also

remains our top Buy pick for the sector and the country. Key downside risks to our view

include: 1) sudden movements in the USD against the MYR, 2) sharp changes in raw-

material prices, and 3) greater-than-expected pricing competition among glove players.

Serba Dinamik (SDH MK, MYR4.18, Buy)

Investment thesis

A favourable landscape will help Serba grow its current order book of MYR8.3bn to

MYR10bn by end-2019, and act as a near-term catalyst. The group continues to showcase

its good track record in penetrating into new regions, mainly Central Asia. In addition, with

its Bintulu Integrated Energy Hub (located in Sarawak) targeted to be completed by end-

2019, we believe contract replenishment in Malaysia should grow exponentially on the

back of doubling in maintenance and fabrication capacity. In the near term, earnings

growth of this company will be driven by the jump in EPCC revenue, supported by robust

maintenance activities in the Middle East.

-0.6-0.4-0.20.00.20.40.60.81.01.2

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& a

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0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

5

10

15

20

25

30

35

40

2015 2016 2017 2018E 2019E 2020E

Capacity (LHS) Growth (RHS)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Apr

-13

Oct

-13

Apr

-14

Oct

-14

Apr

-15

Oct

-15

Apr

-16

Oct

-16

Apr

-17

Oct

-17

Apr

-18

Oct

-18

Apr

-19

(x)

+1SD: 25.8x

Avg: 20.3x

-1SD: 14.7x

+2SD: 31.4x

-2SD: 9.2x

Undemanding valuation

backed by strong

earnings growth

76


Valuation

We reiterate Serba Dinamik as our O&G sector top pick with target price of MYR4.50,

pegged to 14x 2019E EPS. The valuation of this stock is still looking compelling at 11x

2019E PER, backed by a strong earnings growth with 2018-20E CAGR of 22%. Key risks

include any deferment in clients’ maintenance schedules; poor EPCC execution would

result in potential earnings downgrades.

Aeon Credit (ACSM MK, MYR16.30, Buy)

Investment thesis

Aeon Credit remains an alternative stock to the banking sector due to its high ROE, circa

20% (projected for FY19-21E). The company is expected to continue seeing robust

receivables growth of 17% p.a. subsequent to management’s strategic move to tap further

on the M40 market segment (promoting its motorcycle, auto and personal financing

solutions) while benefitting from the government’s reformative actions to improve the

overall mass market well-being. Aeon Credit has seen positive results from a ‘value-chain

transformation’ project (improved turnaround time in financing approvals, collections and

staff productivity) undertaken by the company about 2 years ago.

Aeon Credit: receivables growth and forecasts Aeon Credit: receivables breakdown (as at 4Q FY19)

Source: Company, Affin Hwang estimates Source: Company, Affin Hwang estimates

Valuation

We have a Buy rating on Aeon Credit with a target price of MYR20.4, based on a target

PER multiple of 13x on 2019E EPS. Dividends (payout ratio at 38%) for FY19-21E are

currently yielding 3-4%. Downside risks: deterioration in asset quality arising from weak

consumer sentiment; spike in unemployment rate; increased competition.

Malaysia strategy: valuation summary

Country Sector Company Stock code

Price (LC)


Target price (LC)

PER (x) PBR (x) EV/EBITDA (x) Dividend Yield (%) ROE (%)

FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E

Malaysia Rubber Products Kossan KRI MK 3.64 4,655.3 Buy 5.15 19.3 16.3 3.2 4.0 12.3 10.5 2.1 2.5 16.5 17.5

Malaysia Oil and Gas Serba Dinamik SDH M MK 4.18 6,138.3 Buy 4.50 13.0 10.6 2.8 2.5 9.5 8.1 2.3 2.8 21.4 22.1

Malaysia Exchanges & non-financials

Aeon Credit ACSM MK 16.30 4,089.0 Buy 20.40 11.8 10.4 2.2 2.0 14.0 13.6 3.2 3.6 19.0 19.0

Source: Company, Affin Hwang, Bloomberg Note: closing prices as of 30 April, 2019

4,616 5,497 6,535 7,261 8,496 9,953 11,687

27.0%

19.1% 18.9%

11.1%

17.0% 17.1% 17.4%

0%

5%

10%

15%

20%

25%

30%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY15 FY16 FY17E FY18E FY19E FY20E FY21E

(%)(RMm)

Trade Receivables (RMm) (LHS) Growth p.a. (RHS)

Card Purchase / Cash advance, RM702m, 9%

Objective Financing,

RM361m, 4%

Motorcyle Easy Payment,

RM2,420m, 29%

Automobile Finanicng, RM2,436m,

29%

Personal Financing, RM2,329m,

28%

SME Business, RM65m, 1%Outstanding

Receivables RM8.3bn (3QFY19)

A high ROE consumer-

financing company;

alternative to pure

banking exposure

77


Thailand strategy

Pimpaka Nichgaroon, CFA (662) 617 4977 ([email protected])

Overall strategy

Resilient, but more catalysts needed

We believe Thailand’s political landscape was determined when the new constitution was

passed in the public referendum in 2016. We expect the current regime to stay in power for

at least the next 4 years and likely longer — either openly or behind the scenes. We see

virtually zero chance of PM Prayut Chan-o-cha not returning to power as premier via the

majority vote mechanism (376 votes) of lawmakers in the 2 Houses (750), as stipulated in

the constitution. Of the 376 majority votes required, we expect as many as 250 to come

from senators, which implies the backing of only 126 lawmakers would be required from

the Lower House. With this new law, attempts by the anti-regime camp to form a coalition

government in case they can gather more than 250 seats (out of a total of 500 Lower

House seats) look irrelevant and are just noise, in our view.

Thailand: unofficial vote counts and estimated MP seats

Votes (in m) Total Seats Constituencies Party List

Pheu Thai 7.9 137 137 -

Palang Pracharath 8.4 116 97 19

Future Forward 6.3 80 30 50

Democrat 3.9 52 33 19

Bhumjaithai 3.7 51 39 12

Seree Ruam Thai 0.8 10 - 10

Chartthaipattana 0.8 10 6 4

Prachachat 0.5 7 6 1

New Economics 0.5 6 - 6

Pheu Chart 0.4 5 - 5

Action Coalition for Thailand 0.4 5 1 4

Chart Pattana 0.3 3 1 2

Palang Thongtin Thai 0.2 3 - 3

Rak Puen Pa 0.1 2 - 2

Palang Puangchon Thai 0.1 1 - 1

Palang Chart Thai 0.1 1 - 1

Parties with 1 seat each <0.1 each 11 - 11

500 350 150

Source: Election Commission, Workpoint News

Thailand: anti-regime camp not names of the game Thailand: names of the game

Seats

Pheu Thai 137

Future Forward 80

Seree Ruam Thai 10

Prachachat 7

New Economics 6

Pheu Chart 5

Palang Puangchon Thai 1

Total 246

Required combined House votes 376

Seats

Palang Pracharath 116

Democrat 52

Bhumjaithai 51

Chartthaipattana 10

Action Coalition for Thailand 5

Chart Pattana 3

Palang Thongtin Thai 3

Rak Puen Pa 2

Palang Chart Thai 1

Parties with 1 seat each 11

Total 254

Senate 250

Total votes for Prayut as PM 504

Required combined House votes 376

Source: The Constitution, Thanachart estimates Source: Thanachart estimates

We expect May to be a very good month for the Thai equity market. First, the political dust

will likely settle this month, when both Houses are scheduled to vote for the next PM. And

when the uncertainty ends, market fears should ease. Second, zoning for the

government’s flagship Eastern Economic Corridor (EEC) high-tech investment hub is

scheduled to be announced in May, helping sentiment toward the EEC project. Third, the

bid-winning consortium for the high-speed train linking three airports is also in final

negotiations with the government and we expect the project contract to be signed in May.

We expect the current

regime to stay in power

for at least the next 4

years and likely longer

— either openly or

behind the scenes

May is a promising

month for the equity

market because of the

settlement of political

dust and investment on

EEC infrastructure

78


Fourth, the bidding process for three other EEC mega-projects has begun, with bid winners

also likely to be named within May.

Thailand: potential positives in the pipeline for May

Source: Thanachart estimates

After the PM is voted in, we expect the market’s focus to return to key government policies,

which are infrastructure, the EEC, around a 30% increase in minimum wages and salary

hikes within 3 years, and more populist policies via welfare cards, among others. And after

weak export growth (-3% YoY) for 2M19, the Finance Ministry recently commented about

the possibility of some stimulus packages to help offset weak exports to a degree. This will

be a further plus to consumption and consumer sector, in our view.

Sectors that we foresee benefiting from the government’s policies are infrastructure,

industrial estate and consumption. Among the stocks included in our top-10 country picks,

and with exposure to these three areas, we highlight Sino-Thai Engineering (STEC TB,

THB25.25, Buy), BTS Group Holdings (BTS TB, THB11.80, Buy), WHA Corporation (WHA

TB, THB4.38, Buy), Amata Corporation (AMATA TB, THB22.40, Buy), CP All (CPALL TB,

THB77.50, Buy) and Home Product Center (HMPRO TB, THB15.70, Buy). Although not in

our country top picks, we also flag Krungthai Card (KTC TB, THB40.50, Buy) for its

exposure to the minimum-salary-hike story. We also reaffirm our Buy rating on Muangthai

Capital (MTC TB, THB51.50), a country top pick, as a play on the low US and Thai bond

yield theme.

Economy

We forecast 3.6% YoY growth in 2019

Thailand 4Q18 GDP growth came in line with our target at 3.7% YoY, taking the 2018 figure

to 4.1% YoY. Weaker-than-expected exports were offset by stronger-than-expected

consumption and private investment. The key drivers of 2018 GDP growth were exports

(up 7.7% YoY in USD terms), consumption (up 4.6% YoY) and tourism (a 9.6% YoY rise in

tourist income from 7.5% YoY tourist arrival growth). Private investment (up 3.9% YoY)

remained weak but was still stronger than we had expected, with growth accelerating

during each quarter. Public investment turned positive (up 3.1% YoY) but was still a

disappointment to us. We believe consumption was strong due to the government’s

populist policies and decent support continuing from tourism.

We forecast GDP growth of 3.6% YoY for 2019. The drop from the 4.1% YoY growth

recorded in 2018 reflects our concern over exports, which have shown signs of weakness

since 2H18 because of the impact of the global slowdown. We forecast export growth of

only 1.4% YoY. Export growth to China started to turn negative from 3Q18 and exports to

more countries, including those in Europe, declined in 4Q18. However, exports to ASEAN,

the US and Japan continued to experience positive growth, and these 3 markets

accounted for half of total Thai exports.

2019 is a transition year, in our view

The military government has spent the 5 years since the 2014 coup making changes to

various laws and regulations, which have not contributed much economic value, in our

view. We believe the improving GDP growth in 2017-18 actually received more of a boost

from exports and tourism, which in turn supported consumption. We expect 2019 to be a

transition year when: 1) the election will offer short-term benefits from populist policies and

election campaign spending, 2) the global slowdown accelerates, and 3) it should be the

Infrastructure, industrial

estate and consumption

are expected to benefit

from the government’s

policies

Weaker-than-expected

exports in 4Q18 were

offset by stronger-than-

expected consumption

and private investment

79


first full year of Thailand’s capex spending. With its ongoing current-account surplus,

Thailand can and should run a budget deficit for years to come to spur growth.

Thailand: budget balance Thailand: budget and public debt target

Source: Bank of Thailand; Ministry of Finance, Thanachart forecasts Note: Forecast years’ figures are from the approved 2019-21 budget and we add THB100bn pa

mid-year budget for 2020-21E.

Source: Thai government, Thanachart forecasts Note: In forecast years, the numbers are calculated from the government’s forecast of absolute

debt figures and Thanachart’s GDP forecasts.

Reflected in our GDP forecasts are consumption staying strong, more organic tourism

growth, accelerating public and private investment, and weak exports into a structural

growth cycle. We maintain our GDP growth forecasts for 2020-22 of 4.0-4.4% YoY. While

the export growth outlook remains mild, we forecast the economy to be driven more by

capex spending or investments. The THB745bn worth of bid-out projects and THB470bn to

be bid out this year should be experiencing full-steam spending in those years. We also

expect private investment in the government’s flagship Eastern Economic Corridor (EEC)

hi-tech investment hub to bear fruit. Given an already high base, we forecast slower

consumption growth in those years, with mid-single digit tourism growth.

Thailand: GDP growth forecasts

% growth 2015 2016 2017 2018 2019E 2020E 2021E

(%) (%) (%) (%) (%) (%) (%)

Real GDP growth 3.1 3.4 4.0 4.1 3.6 4.0 4.3

Private consumption 2.3 2.9 3.0 4.6 5.0 4.0 3.7

Private investment -2.2 0.5 2.9 3.9 7.0 9.3 10.5

Government investment 29.0 9.5 -1.4 3.1 11.9 13.0 15.0

Export (nominal USD growth) -5.6 0.1 9.8 7.7 1.4 3.6 3.5

Import (nominal USD growth) -10.6 -5.1 13.2 14.3 4.1 4.6 6.0

Current account (% to GDP) 8.0 11.7 11.0 7.5 6.1 5.5 4.3

Headline CPI -0.9 0.2 0.7 0.7 0.7 1.0 1.5

THB/USD - average 34.3 35.4 33.9 32.3 31.7 32.1 32.9

Policy rate 1.50 1.50 1.50 1.75 1.75 2.00 n.a.

Source: NESDB, Bank of Thailand, Ministry of Commerce, Thanachart forecasts

Themes

A new infrastructure cycle and the Eastern Economic Corridor (EEC)

The infrastructure sector in Thailand is getting more busy after over 20 years of limited

investment. Of the total THB745bn worth of bid-out projects over the past 3 years, we

estimate approximately half of these are under construction, including the Orange, Pink

and Yellow lines worth a combined THB220bn.

We visited EEC Office chief Dr. Kanit Sangsubhan recently and remain confident in the

scheme. Indeed, we were surprised at the speed of the EEC’s first-phase investment in

government infrastructure projects. While EEC zoning should be announced in May, the

bidding process for all 4 mega-projects with a combined value of THB640bn has begun.

And the current regime has voiced a strong intent to push for the bid winners of all the

projects to be known before the next government takes office.

(5)

(4)

(3)

(2)

(1)

0

1

(700)

(600)

(500)

(400)

(300)

(200)

(100)

0

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

E

2020

E

2021

E

(%)(THBbn)

Budget balance (LHS) % to GDP (RHS)

0

10

20

30

40

50

60

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

E

2020

E

2021

E

(%)

Thailand infrastructure

investments accelerate

after over 20 years of

limited investment

80


Thailand: THB745bn worth of projects have been bid out

Source: Thanachart estimates and forecasts

The EEC Office wants to see key infrastructure projects kicking off as there are many

potential EEC investors wanting to see meaningful process being made. The targets for

new investment in the EEC in the next 5 years are 70% existing industries (but higher-end

or smart industries) and 30% new industries. Existing industries are automotive,

petrochemical, food and agriculture, etc. New industries that the EEC foresees strong

potential demand for in the future are automation (robotics) and aviation.

There are 4 grand phases for the EEC: laws, infrastructure, private investments and city

building. Laws are difficult but they are pretty much done, as the EEC Act was enacted last

year and the EEC zoning law should come out in May. The Public Private Partnership

(PPP) framework with an 8-month process that is being implemented under the current

government is a blueprint for a permanent law. As for infrastructure projects, we consider

these pretty much done too, as all the core projects are about to announce bid winners.

Two years after this we should see more clarity as to whether the EEC will be a real

success via private investment flows into targeted industries. Then the final phase of city

building as a “livable industrial city” will likely see more progress 5 years from now. Key

foundations of this final community and city phase are U-Tapao Airport, its airport city

metropolis project, high-speed train stations and property development, and expanding

industrial development.

Thailand: EEC’s targeted industries Thailand: BOI applications and BOI’s granted promotions

Existing Industries But Smarter

1 New generation automobiles

2 Smart electronics

3 Agri and biotechnology

4 Food

5 Biofuel and biochemical

6 Medical

7 Affluent, medical and wellness tourism

New Industries

1 Digital

2 Logistics and aviation

3 Robotics for industry

Source: EEC Office Source: Board of Investment

We believe top names are imperative to make the EEC a success and that they have to be

in the right target industries. Thailand isn’t setting out to compete in the same

manufacturing sectors as Vietnam as the former is no longer competitive given its higher

production and labour costs. Also, Thailand isn’t in need of money or investment financing

— it has plenty of excess liquidity in the system. What Thailand needs and what the EEC

intends to achieve is new technologies, which is why the EEC has targeted smart

industries. Some industries are existing ones that need technology upgrades, such as

automotive, electronics, goods and agriculture; others are quite new, such as automation

or robotics and aviation.

0

200

400

600

800

1,000

1,200

1,400

2015-18 2019-21E 2022-25E

(THBbn)

In EEC Mega-project value

745 (4.5% GDP)

1,223 (7% GDP)All projects have been bid out

TORs have been issued

In the pipeline

(5.5% GDP)

0

500

1,000

1,500

2,000

2,500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

(THBbn)

BOI applications BOI's granted promotions

A jump in 2014 was ahead of BOI's promotion

change from zoning to sector basis.

Law and infrastructure

phases for the EEC are

pretty much done

81


Top picks

Sino-Thai Eng. & Cons. (STEC TB, THB25.25, Buy)

Investment thesis

We expect the infrastructure sector to outperform the market as it is the key policy focus of

the current regime, which we expect to rule the country beyond the upcoming election. We

therefore want to add more infrastructure exposure to our portfolio. Referring to Saksid

Phadthananarak’s report STEC — The time has come, 8 March 2019, we expect the

company to further benefit from government supporting policies on infrastructure,

especially on railway projects. Having been bid out for a year or so, the Orange, Pink and

Yellow lines are being built now and STEC is the direct beneficiary.

We forecast STEC’s new work value at THB30bn a year in 2019-21E, but see potential

upside from THB678bn worth of projects that are under the bidding process and

THB753bn worth of projects that are scheduled to open for bidding from 2H19 onward.

Those potential projects include U-Tapao Airport’s phase 2 (THB270bn), the Rama III-Dao

Kanong Expressway (THB31bn), the MRT Purple Line extension (THB101bn), the Orange

Line extension (THB109bn), the Red Line extensions (THB74bn), and nine double-track

railway lines (THB398bn).

Valuation

STEC’s earnings have entered their new multi-year growth cycle since last year and 4Q18

results showed an accelerating trend. Saksid recently lifted his 2019-21E earnings by 2-8%

on the back of: 1) 3-6% sales upgrades from accelerating revenue recognition from its

THB104bn backlog; 2) a lift of gross margin assumption to 8.3% in 2019F (from 8.0%

previously) on a higher proportion of high-margin projects; and 3) higher new work value

assumption to THB30bn a year in 2020-21E (from THB27-29bn) given more infrastructure

projects in the pipeline by the government. Our SOTP-derived, DCF-based 12-month TP

stands at THB30/share and we reaffirm our Buy rating.

We estimate STEC’s earnings to grow by 30% this year to a record high and rise further by

20% in 2020E and 7% in 2021E. We don’t believe this is too aggressive as STEC has a

high backlog value of THB104bn at the end of 2018, which include the three mass transit

lines that are already under construction and will be completed in 2021-22E. Despite a full-

year recognition of zero-margin parliament work in 2018, STEC’s gross margin in 2018

was still decent at 7.8%. We expect gross margin to rise in 2019-20E when there is a full

steam construction of mega projects and that the no-margin parliament project value falls

in proportion. Note that 90% of STEC’s backlog value comprises high-margin power plant

and infrastructure projects.

With a higher earnings base of the new earnings growth cycle, STEC’s valuation is now

inexpensive, in our view. It trades at PE multiples of 23x vs. 30% EPS growth in 2019E and

19x vs. 20% EPS growth in 2020E. These PE levels are similar to its average PE during

the trough of the cycle in 2008-13 when Thailand faced political turmoil and STEC had a

new work value of THB21bn a year on average. STEC’s average PE was 29x during 2014-

18 when new policies and a bidding cycle of infrastructure projects started and STEC had

new work value of THB32bn a year on average.

Amata Corp (AMATA TB, THB22.4, Buy)

Investment thesis

AMATA and WHA are the most direct plays on the EEC theme, in our view. Although the EEC

is a decade-long development scheme, we believe there also are near-term catalysts to play

these stocks this year: 1) the EEC zoning law is scheduled to come out in May, 2) the bid

winners of 4 EEC projects are due to be announced in May, 3) whether Alibaba will rent or

buy warehouses should be known this year, and 4) more Chinese companies are buying land

in the area and land prices are on the rise. Over the longer term, land sales should grow and

land price appreciation is quite normal during a period of industrial development.

Infrastructure sector is

expected to outperform

the market as it is the

key policy focus of the

current regime

STEC has a compelling

valuation, in our view

AMATA is one of the

most direct plays on the

EEC theme

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1c3a5ef1d0a28f5cb4c66274b2faec55b789f3578N3cgnF9rE25A8EzlzTaxBVPgLkDzvPB445yfJqybHg%2Buzd%2FrZk5%2FOA3rRJ%2Bh14pkV88qMWijPBMqRylSVZ17INuprd%2BfxAjBSPuwJAzSKsiNEs1amoQn3aQ8Qy4wDrnt4Mfooe2n2QQdMsmsqOHIzCaiswF%2F66cg0MzYgOTFjoIJ0rcphaCua%2FrgCQa%2FwetATC%2BKBgn1P8stggtKk89iGA%3D%3D

82


Valuation

AMATA posted disappointing 4Q18 earnings, mainly on one-time expenses, and we

recently fine-tuned down our 2019-21E projections by only 3-4%. We reaffirm our Buy

rating on AMATA, with an NAV-based 12-month TP of THB31, for the following reasons.

First, AMATA looks inexpensive to us, trading at 72% of our NAV estimate. Its 2019E PBR

of 1.6x is also below its past-20-year average of 1.7x. Second, after a 17% YoY drop in

earnings last year because of one-time expenses, we expect strong EPS growth to

resume, at 39% YoY in 2019E, driven by substantial carried-overland backlog. Third, the

government’s flagship EEC hi-tech investment hub has seen good traction, with a 104%

YoY jump in Board of Investment (BoI) applications in 4Q18. The BoI approved THB549bn

worth of projects last year and THB40bn more in2M19. Fourth, AMATA owns the best

location in the EEC area, in our view, with very strong pricing power. Fifth, AMATA’s

leasehold model plan looks accretive to us, with 15% prospective upside.

Our 39% YoY EPS growth forecast for 2019E is backed by the large backlog of THB3.6bn,

our land presales forecast of 880 rai and the full-year effect of 95MW of power plants

(SPPs). We project another 19% pa growth in 2020-21E, driven by continued land sales

growth in Thailand and the launch of Amata City Long Thanh, Vietnam. AMATA’s industrial

land revenue accounts for 49% of our forecast gross profit, utility income (19%), power

(19%), and factory rental and other services income (13%). For more on AMATA, see Rata

Limsuthiwanpoom’s recent report, Earnings growth resuming, 5 March 2019.

Thailand strategy: valuation summary

Company Stock code

Price (LC)


Target price (LC)



AMATA Corporation Pcl AMATA TB 22.4 750.4 Buy 31 13.7 11.6 1.7 1.5 15.8 12.5 2.9 3.5 12.9 13.9

Sino-Thai Eng & Cons. Pcl STEC TB 25.25 1,212.5 Buy 30 22.9 19.1 3.0 2.7 12.7 11.5 1.3 1.6 14.3 15.1

Source: Bloomberg, Thanachart forecasts Note: closing prices as of 30 April, 2019

We expect 39% EPS

growth in 2019E on the

back of high backlog

carried over from last

year

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=16a2b9a2b4ae295c4375bd01358ab0c38e0a0fb6fFZ0yJpArclxFk8FgtourLQTNHkxHDe%2FYguIBDE1lF%2FQ%2FbuQOhXpmnKS40RMqkWD6ldsrvC2heV5gk8TB1E9UxvWsi7wNq7o%2F%2B1JnexsqM2gFAXfyBiDCY6Lo8G1Mp38f0Cwa%2FRjy4gqt%2BnN9Z3uwk9vjc8XHKeniL4T%2Bpj7%2FYr9W6ccE8%2Fm6ouYhPnyMwGi5cdSAfOH6w%2Bo5XCPo3zktdA%3D%3D

83


Vietnam strategy

Phuong Hoang (84) 24 3936 6321 ([email protected])

Overall strategy

Resilient, but more catalysts needed

The VN Index posted a positive gain in 1Q19, increasing by 10% YTD, and with continually

strong fund inflows from foreign investors. For example, inflows totalled USD27m in March

and USD138m YTD. Vietnam stock market index ETFs attracted USD92m in April, for a

YTD figure of c.USD209m. During the quarter, companies started to release their 2019

plans, and listed companies’ earnings outlook vs. their original projections will likely

become more divergent as 2019 unfolds.

We believe that current developments in the economy and outlook for the stock market

remain positive, with prospects for an emerging-market-status upgrade in the longer term.

That said, more catalysts, especially those associated with foreign ownership limit or

privatisation process, are likely needed to ensure a comfortable rally to trace back to the

recent peak.

Economy

GDP growth at 6.79% YoY in 1Q19, beating estimates

Vietnam’s 1Q19 GDP growth clocked in at 6.79% YoY, lower than the 1Q18 performance of

7.45% but on track to achieve our 2019 full-year target of 6.8%. The manufacturing sector

continued along a double-digit growth streak with its contribution (in real GDP) growing

12.35% YoY while inflation dipped 0.21% MoM in March, just enough to bring the 1Q19

CPI to 2.63% YoY on average (lower than the 2017-18 range of 2.82-4.96%). Other factors

like foreign investment, consumption, a relatively healthy fiscal balance, and measured

credit growth are still similar to the picture last year.

Downside risks might be seen in trade, with slower export growth (+5.3% YoY), a delay in

SOE IPO and divestment as the country prioritises its anti-corruption campaign, or a

slowdown in the property market.

Vietnam: real GDP growth and CPI Vietnam: manufacturing & construction sector

Source: GSO Source: GSO

Overall, we believe that the first quarter data is on track, and is likely to outperform most of

its regional peers’. However, some challenges are still ahead in 2Q19. For example,

inflation pressure is likely to mount during April-May when the full impact from the

electricity price hike is realised, and the rebound in the pork price (and rice price) may kick

in. A lag in construction activities (infrastructure, property market, etc) in 2Q19 is also a

distinct possibility.

6.12

5.485.15

7.456.79

0.74

1.25

4.96

2.82 2.63

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

1Q 2015 1Q 2016 1Q 2017 1Q 2018 1Q 2019

Real GDP growth CPI (average)

0

2

4

6

8

10

12

14

16

1Q 2014 1Q 2015 1Q 2016 1Q 2017 1Q 2018 1Q 2019

Manufacturing Construction

Resilient GDP growth

84


Themes

Emerging market upgrade underway

Given the improvement in fundamentals, featuring good growth with macroeconomic

stability intact, Vietnam is poised for not only an upgrade from a frontier market to an

emerging market (the FTSE Russell added Vietnam onto its watch list in September 2018),

but its sovereign credit ratings might also be considered investment grade by 2020-21

(now at BB, as confirmed by Fitch in May 2018 and S&P in April 2019). More stock-market

reforms are progressing, with the Securities Laws to be revised this year and the continued

development of the derivatives market (with equity futures, bond indexes, or covered

warrants, etc), affirming that the country is on a positive track. Any extension to the foreign

ownership limit or acceleration in terms of SOE IPO and divestment (or more large-cap

listings) will augur well for the Vietnam stock market.

A trade war beneficiary

Vietnamese export growth was still at a positive level, at 5.3% YoY, despite Samsung

encountering difficulties in the first quarter of the year. This time around, domestic

enterprises took the lead in terms of export growth. It is now clear that Vietnam has been a

clear beneficiary of the US-China trade war as: 1) 1Q19 exports to the US increased by

28.8% YoY, and 2) foreign investment into Vietnam has increased quite quickly (31% YoY

for registered FDI, and 6.2% YoY on disbursed FDI). These key figures further affirm the

trend of the relocation of manufacturing bases to Vietnam, resulting in many medium-sized

projects and enterprises coming to the country to set up shop.

Vietnam: foreign Investment

Source: MPI

Resilient domestic consumption

Domestic consumption in 2019 is still resilient in the face of slower overall export growth

compared with last year and lower international tourist arrivals. Vietnam’s real retail sales

growth was 9% YoY (vs. 8.9% in 1Q18), and auto sales (volume) jumped by 25% YoY in

the first quarter, both of which are signs of solid consumption. We see Vietnam on a solid

trajectory path towards having a large middle-income class over the longer term, with

resilient economic growth and burgeoning private-sector development as the key variables

ensuring sustainable growth for the coming years.

24.4

35.9 35.5

10.8

21.0

29.7

25.6

5.13.4

6.2

9.9

5.7

15.817.5

19.1

4.1

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2016 2017 2018 1Q 2019

Total registered foreign investment Registered FDI FII FDI disbursement

On FTSE Russell watch

list, and soon to be in

MSCI

85


Vietnam: first quarter retail sales and final consumption growth

Source: MPI

Top picks

PVS (PVS VN, VND23,300, Outperform)

Investment thesis

PVS is a 51% subsidiary of PetroVietnam (PVN), with a proven capability in oil & gas

technical services. In our view, PVS is optimally positioned among the top beneficiaries

from upcoming offshore and onshore mega projects, such as Sao Vang-Dai Nguyet, Su Tu

Trang phase 2, Bao Vang, Block B, Dung Quat refinery expansion, GPPs, LNG Thi Vai

storage, and Blue Whale, with a total potential backlog exceeding USD3bn over 2018-23E.

The company has a strong balance sheet, with a small amount of long-term debt and a

high net cash position. As PVS has a diversified business model, with an array of industry

activities including EPC/EPCI, port, specialised ship services, FSO/FPSO, seismic

acquisition, and operation & maintenance, its revenue and profit were not severely

impacted by volatile oil prices in recent years compared with other oil & gas companies.

We are of the view that PVS is the best choice for long-term investors who want exposure

to the oil-price uptrend and upcoming E&P activities in Vietnam.

PVS: revenue and net earnings

Source: PVS, SSI estimates

Valuation

PVS is currently trading at a 2019E PER of 13.2x and PBR of 0.76x. However, we expect

strong net earnings growth of 18% YoY in 2020, leading to a more attractive valuation of

only 9.7x in terms of 2020E PER. Valuation also looks compelling in terms of 2019E

EV/EBTIDA, at only 2.3x. We forecast a 2019-23 net earnings CAGR of 11.3%. We note

that PVS has been paying out a stable cash dividend of 10-12% on par, equivalent to a

dividend yield of 5.2% at the current market price.

Downside risks: decline in oil prices, delay in implementing the above-mentioned projects,

or unpredictable one-off expenses.

0

1

2

3

4

5

6

7

8

9

10

1Q 2015 1Q 2016 1Q 2017 1Q 2018 1Q 2019

(%)

Retail sale growth Final consumption growth

-

500

1,000

1,500

2,000

2,500

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2013 2014 2015 2016 2017 2018 2019F 2020F

Revenue (VND bn) NPAT post MI (VND bn)

PVS is our top pick for

long-term investors who

want exposure to the oil

price uptrend and busy

E&P activities in Vietnam

86


HPG (HPG VN, VND33,600, Buy)

Investment thesis

HPG is the largest domestic steel manufacturer in Vietnam, with a market share of 26% in

construction steel and 32% in steel pipes for the first 2 months of 2019. We expect

industry-wide steel demand to grow by 8-10% each year over 2019-23.

HPG possesses a substantial advantage in terms of production costs for construction steel

— it uses BOF to produce long steel at a cost that is 10-15% lower than that of its

competitors that use electric arc furnaces (EAFs). The commencement of the Dung Quat

Integrated Steel Complex in 2019-20E would triple HPG’s BOF-type production capacity,

thereby strengthening its leading position in the domestic market.

We forecast net profits for 2019 and 2020 of VND8.7tn (+1% YoY) and VND10.9tn (+26%

YoY), respectively.

HPG: construction steel sale volume and market share

Source: HPG

Valuation

HPG is currently trading at a 2019E PER of 8.2x and 2020E PER of 6.6x, based on our

forecasts. Although the impact from higher iron ore prices may be felt for the next couple of

quarters, we believe the impact will gradually fade by late 2019, while the commencement

of the Dung Quat Steel furnaces from mid-2019 would substantially enhance its leading

position in the steel industry, as well as boost its long-term growth outlook. As a result, we

use the 2019-20E averages of EPS and EBITDA for our 1-year forward valuation.

Accordingly, we have a Buy rating on the stock, with a 12-month target price of VND43,500

based on PER and EV/EBITDA targets of 9x and 7.5x, respectively.

Downside risks: Lower ASPs and higher input costs than we assume, delay in the Dung

Quat Integrated Steel complex, and lower-than-expected profitability in the initial years of

operation.

ACV (ACV VN, VND83,700, Neutral)

Investment thesis

ACV is the largest airport operator in Vietnam, and operates 21 of the nation’s 22 airports.

In 2018, ACV’s passenger traffic increased by 7% YoY. We expect its passenger volume in

the next 3 years to expand at a CAGR of 8-9%. Furthermore, non-aeronautical revenue

per passenger was c.USD2.50 in 2018, lower than regional peers’ and likely to drive future

non-aeronautical revenue. In 2018, ACV non-aeronautical revenue accounted for only 20%

of its total revenue, also significantly lower than that of regional peers.

0%

5%

10%

15%

20%

25%

30%

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2012 2013 2014 2015 2016 2017 2018 2M19

Sale volume market share

Leading steel

manufacturer with

strong competitive

advantage and bright

long-term growth

outlook

Largest airport operator

in Vietnam, with a

passenger volume of

over 92m in 2018.

Passenger volume in the

next 3 years is forecast

to see a CAGR of 8-9%

87


ACV: passenger volume

Source: Company, SSI Research

Valuation

At the current price of VND83,700/share, ACV is trading at EV/EBITDA (ex-landing charges)

multiples of 14x for 2019E and 12.7x for 2020E, in line with the average of global airports.

However, we believe ACV deserves a higher-than-average multiple, given its growth

trajectory as follows: 1) 2018 Vietnam passenger traffic growth of 10% YoY, higher than the

6.3% average of global airports, 2) 2018 non-aeronautical revenue accounted for less than

30% (lower if including landing charges towards aeronautical revenue), which is

significantly lower than the 38% average for global airports, and 3) the non-aeronautical

revenue/passenger metric of c.USD2.50, which is lower than at regional peers, such as

USD3.20 for Malaysia Airports Holdings Berhad and USD5.10 for Airports of Thailand.

We have a 12-month target price of VND95,200/share, based on a target EV/EBITDA of

16x for 2019E (15% premium compared with global average), which offers 13.7% upside

potential. Our 12-month target price does not yet include additional potential revenue such

as landing charges, or any potential concession fees from the DAD and CXR airports. We

will wait for further updates from management regarding the potential upside on these

untapped revenue streams.

Downside risk: higher-than-expected depreciation of the VND against the JPY.

Vietnam strategy: valuation summary

Company Stock code

Price (LC)


Target price (LC)



Airports Corporation of Vietnam ACV VN 83,700 7,903 Neutral 95,200 27.9 24.8 5.2 4.5 14 12.7 1.2 1.2 20.9 20.5

HPG HPG VN 33,600 3,072 Buy 43,500 8.2 6.6 1.3 1.1 6.2 4.6 0 0 19.3 19.9

PetroVietnam Technical Services JSC*

PVS VN 23,300 491

Outperform 24,000 13.2 9.7 0.8 0.7 2.3 1.6 5.2 5.2 8.5 9.6

Source: Bloomberg, Daiwa forecasts Note: Closing prices as of 30 April 2019; *covered solely by Daiwa’s alliance partner, Saigon Securities

50.8

63.1

80.986.1

92.5101

109

24%

28%

6%7%

9%8%

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

2014 2015 2016 2017 2018 2019F 2020F

(Growth)(mn pax)

88


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Source: Daiwa

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Daiwa’s Asia Pacific Research Directory

HONG KONG

Takashi FUJIKURA (852) 2848 4051 [email protected]

Regional Research Head

Jiro IOKIBE (852) 2773 8702 [email protected]

Co-head of Asia Pacific Research

John HETHERINGTON (852) 2773 8787 [email protected]

Co-head of Asia Pacific Research

Craig CORK (852) 2848 4463 [email protected]

Regional Head of Asia Pacific Product Management

Paul M. KITNEY (852) 2848 4947 [email protected]

Chief Strategist for Asia Pacific; Strategy (Regional)

Kevin LAI (852) 2848 4926 [email protected]

Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Kelvin LAU (852) 2848 4467 [email protected]

Head of Automobiles; Transportation and Industrials (Hong Kong/China)

Fiona LIANG (852) 2532 4341 [email protected]

Industrials (Hong Kong/China)

Jay LU (852) 2848 4970 [email protected]

Automobiles and Components (Hong Kong/China)

Janice ZHANG (852) 2773 8842 [email protected]

Transportation (Hong Kong/China)

Leon QI (852) 2532 4381 [email protected]

Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China)

Kevin JIANG (852) 2532 4383 [email protected]

Banking (China)

Anson CHAN (852) 2532 4350 [email protected]

Consumer (Hong Kong/China)

Adrian CHAN (852) 2848 4427 [email protected]

Consumer (Hong Kong/China)

Andrew CHUNG (852) 2773 8529 [email protected]

Head of Gaming (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Carlton LAI (852) 2532 4349 [email protected]

Small/Mid Cap (Hong Kong/China)

Dennis IP (852) 2848 4068 [email protected]

Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China)

Anna LU (852) 2848 4465 [email protected]

Power, Utilities, Renewable and Environment (PURE) – IPP, Wind & Nuclear (China)

Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong and China Property

Cynthia CHAN (852) 2773 8243 [email protected]

Property (China)

Bryan CHIK (852) 2773 8741 [email protected]

Custom Products Group

Selwyn CHENG (852) 2773 8716 [email protected]


Jack CHAN (852) 2773 8731 [email protected]


PHILIPPINES

Renzo CANDANO (63) 2 737 3022 [email protected]

Consumer

Micaela ABAQUITA (63) 2 737 3021 [email protected]

Property

Gregg ILAG (63) 2 737 3023 [email protected]

Utilities; Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected]

Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Machinery

Mike OH (82) 2 787 9179 [email protected]

Banking; Capital Goods (Construction and Defence); Utilities; Steel

Josh RHEE (82) 2 787 9124 [email protected]

Chemicals

Iris PARK (82) 2 787 9165 [email protected]

Consumer/Retail

SK KIM (82) 2 787 9173 [email protected]

IT/Electronics – Semiconductor/Display and Tech Hardware

Henny JUNG (82) 2 787 9182 [email protected]

IT/Electronics – Semiconductor/Display and Tech Hardware (Small/Mid Cap)

Thomas Y KWON (82) 2 787 9181 [email protected]

Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected]

Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Nora HOU (886) 2 8758 6249 [email protected]

Banking; Diversified financials; Insurance; Strategy

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (Automation & PC Hardware)

Kylie HUANG (886) 2 8758 6248 [email protected]

IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected]

Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected]

Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected]

Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6228 6742 [email protected]

Head of Singapore Research; Telecommunications (China/ASEAN/India)

David LUM (65) 6228 6740 [email protected]

Banking; Property and REITs

Royston TAN (65) 6228 6745 [email protected]

Oil and Gas; Capital Goods

Jame OSMAN (65) 6228 6744 [email protected]

Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer

JAPAN

Yukino YAMADA (81) 3 5555 7295 [email protected]

Strategy (Regional)

92


Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100

Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935

Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600

Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340

Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808

Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441

Daiwa Capital Markets Europe Limited, Moscow Representative Office

Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain

(973) 17 534 452 (973) 17 535 113

Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621

Daiwa Capital Markets SG Limited 6 Shenton Way #26-08, OUE Downtown 2, SG 068809, Republic of SG

(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, Seoul, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District，

Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai China 200120 , People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road,

Lumpini, Pathumwan, Bangkok 10330, Thailand (66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417

London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

93


Explanatory Document of Unregistered Credit Ratings

In order to ensure the fairness and transparency in the markets, Credit Rating Agencies became subject to the Credit Rating Agencies’ registration system based on the Financial Instruments and Exchange Act. In accordance with this Act, in soliciting customers, Financial Instruments Business Operators, etc. shall not use the credit ratings provided by unregistered Credit Rating Agencies without informing customers of the fact that those Credit Rating Agencies are not registered, and shall also inform customers of the significance and limitations of credit ratings, etc.

■ The Significance of Registration Registered Credit Rating Agencies are subject to the following regulations: 1) Duty of good faith. 2) Establishment of control systems (fairness of the rating process, and prevention of conflicts of interest, etc.). 3) Prohibition of the ratings in cases where Credit Rating Agencies have a close relationship with the issuers of the financial instruments to be rated, etc. 4) Duty to disclose information (preparation and publication of rating policies, etc. and public disclosure of explanatory documents).

In addition to the above, Registered Credit Rating Agencies are subject to the supervision of the Financial Services Agency (“FSA”), and as such may be ordered to produce reports, be subject to on-site inspection, and be ordered to improve business operations, whereas unregistered Credit Rating Agencies are free from such regulations and supervision.

■ Credit Rating Agencies

[Standard & Poor’s]

The Name of the Credit Rating Agencies group, etc

The name of the Credit Rating Agencies group: S&P Global Ratings (“Standard & Poor’s”) The name and registration number of the Registered Credit Rating Agency in the group: S&P Global Ratings Japan Inc. (FSA commissioner (Rating) No.5)

How to acquire information related to an outline of the rating policies and methods adopted by the person who determines Credit Ratings

The information is posted under “Unregistered Rating Information” (http://www.standardandpoors.co.jp/unregistered) in the “Library and Regulations” section on the website of S&P Global Ratings Japan Inc. (http://www.standardandpoors.co.jp)

Assumptions, Significance and Limitations of Credit Ratings

Credit ratings assigned by Standard & Poor’s are statements of opinion on the future credit quality of specific issuers or issues as of the date they are expressed and they are not indexes which show the probability of the occurrence of the failure to pay by the issuer or a specific debt and do not guarantee creditworthiness. Credit ratings are not a recommendation to purchase, sell or hold any securities, or a statement of market liquidity or prices in the secondary market of any issues.

Credit ratings may change depending on various factors, including issuers’ performance, changes in external environment, performance of underlying assets, creditworthiness of counterparties and others. Standard & Poor’s conducts rating analysis based on information it believes to be provided by the reliable source and assigns credit ratings only when it believes there is enough information in terms of quality and quantity to make a conclusion. However, Standard & Poor’s does not perform an audit, due diligence or independent verification of any information it receives from the issuer or a third party, or guarantee its accuracy, completeness or timeliness of the results by using the information. Moreover, it needs to be noted that it may incur a potential risk due to the limitation of the historical data that are available for use depending on the rating.

This information is based on information Daiwa Securities Co. Ltd. has received from sources it believes to be reliable as of March 7th, 2017, but it does not guarantee accuracy or completeness of this information. For details, please refer to the website of S&P Global Ratings Japan Inc. (http://www.standardandpoors.co.jp)

[Moody’s]

The Name of the Credit Rating Agencies Group, etc

The name of the Credit Rating Agencies group: Moody’s Investors Service (“MIS”) The name and registration number of the Registered Credit Rating Agency in the group: Moody’s Japan K.K. (FSA commissioner (Rating) No.2)


The information is posted under “Unregistered Rating explanation” in the section on “The use of Ratings of Unregistered Agencies” on the website of Moody’s Japan K.K. (The website can be viewed after clicking on “Credit Rating Business” on the Japanese version of Moody’s website (https://www.moodys.com/pages/default_ja.aspx)


Credit ratings are Moody’s Investors Service’s (“MIS”) current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. MIS defines credit risk as the risk that an entity may not meet its contractual, financial obligations as they come due and any estimated financial loss in the event of default. Credit ratings do not address any other risk, including but not limited to: liquidity risk, market value risk, or price volatility. Credit ratings do not constitute investment or financial advice, and credit ratings are not recommendations to purchase, sell, or hold particular securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information, is given or made by MIS in any form or manner whatsoever.

Based on the information received from issuers or from public sources, the credit risks of the issuers or obligations are assessed. MIS adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MIS considers to be reliable. However, MIS is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

This information is based on information Daiwa Securities Co. Ltd. has received from sources it believes to be reliable as of April 16th

, 2018, but it does not guarantee accuracy or completeness of this information. For details, please refer to the website of Moody’s Japan K.K. (https://www.moodys.com/pages/default_ja.aspx)

[Fitch]

The Name of the Credit Rating Agencies group, etc

The name of the Credit Rating Agencies group: Fitch Ratings (“Fitch”) The name and registration number of the Registered Credit Rating Agency in the group: Fitch Ratings Japan Limited (FSA commissioner (Rating) No.7)


The information is posted under “Outline of Rating Policies” in the section of “Regulatory Affairs” on the website of Fitch Ratings Japan Limited (https://www.fitchratings.co.jp/web/)


Ratings assigned by Fitch are opinions based on established criteria and methodologies. Ratings are not facts, and therefore cannot be described as being “accurate” or “inaccurate”. Credit ratings do not directly address any risk other than credit risk. Credit ratings do not comment on the adequacy of market price or market liquidity for rated instruments. Ratings are relative measures of risk; as a result, the assignment of ratings in the same category to entities and obligations may not fully reflect small differences in the degrees of risk. Credit ratings, as opinions on relative ranking of vulnerability to default, do not imply or convey a specific statistical probability of default.

In issuing and maintaining its ratings, Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The assignment of a rating to any issuer or any security should not be viewed as a guarantee of the accuracy, completeness, or timeliness of the information relied on in connection with the rating or the results obtained from the use of such information. If any such information should turn out to contain misrepresentations or to be otherwise misleading, the rating associated with that information may not be appropriate. Despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed.

For the details of assumption, purpose and restriction of credit ratings, please refer to “Definitions of ratings and other forms of opinion” on the website of Fitch Rating Japan Limited.

This information is based on information Daiwa Securities Co. Ltd. has received from sources it believes to be reliable as of May 13th

, 2016, but it does not guarantee accuracy or completeness of this information. For details, please refer to the website of Fitch Rating Japan Limited (https://www.fitchratings.co.jp/web/)

May 2018

94


Important Disclosures and Disclaimer This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., Thanachart Securities, Affin Hwang Investment Bank Berhad, PT.Bahana Sekuritas, Saigon Securities, their respective subsidiaries or affiliates, or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Daiwa Securities Group Inc.,Thanachart Securities, Affin Hwang Investment Bank Berhad, PT.Bahana Sekuritas, Saigon Securities, their respective subsidiaries or affiliates do and seek to do business with the company(s) covered in this publication. Therefore, investors should be aware that a conflict of interest may exist. The following are additional disclosures. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Portions of this publication are prepared by Affin Hwang Investment Bank Berhad (“Affin Hwang”) and reviewed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates (collectively, “Daiwa”), and is distributed and/or originated from outside Malaysia by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. The role of

Daiwa Securities Group Inc. and/or its non-U.S. affiliates in connection with this publication is solely limited to the review and distribution of this publication ; and Daiwa Securities Group Inc. and/or its non-U.S. affiliates are not involved in the preparation of this publication in any other way. This research is for Daiwa clients only and the publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Other than disclosures relating to Daiwa, this research is based on current public information that Affin Hwang and Daiwa consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The analysts named in this report may have from time to time discussed with clients, including Daiwa’s salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction where such an offer or solicitation would be illegal nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents in relation to such investments. Portions of this publication are prepared by PT. Bahana Sekuritas and reviewed by Daiwa Securities Group Inc. and/or its affiliates, and distributed outside Indonesia by Daiwa Securities Group Inc. and/or its affiliates, except to the extent expressly provided herein. Certain copies of this publication may be distributed inside and outside of Indonesia by PT. Bahana Sekuritas in accordance with relevant laws and regulations. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Any review does not constitute a full verification of the publication and merely provides a minimum check. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Neither Daiwa Securities Group Inc. nor any of its affiliates is licensed to undertake any business within the Republic of Indonesia. Any display of any trade name or logo of the Daiwa Securities Group Inc. on this publication shall not be deemed to be an undertaking of any business within the Republic of Indonesia. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time may have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Portions of this publication are prepared by Thanachart Securities Public Company Limited and distributed outside Thailand by Daiwa Securities Group Inc. and/or its non-U.S. affiliates except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Thanachart Securities Public Company Limited (“Thanachart Securities”), Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Thanachart Securities, Daiwa Securities Group Inc. and/or their respective affiliates nor any of their respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. All research reports are disseminated and available to our clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Daiwa responsible for the redistribution of our research by third party aggregators. Portions of this publication are prepared by Saigon Securities Inc. and distributed outside Vietnam by Daiwa Securities Group Inc. and/or its non-U.S. affiliates except to the extent

expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Saigon Securities Inc. (“Saigon Securities”), Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Saigon Securities, Daiwa Securities Group Inc. and/or their respective affiliates nor any of their respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

https://daiwa3.bluematrix.com/sellside/Disclosures.action


95


Saigon Securities, Daiwa Securities Group Inc., their respective subsidiaries or affiliates, or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Saigon Securities, Daiwa Securities Group Inc., their respective subsidiaries or affiliates do and seek to do business with the company(s) covered in this research report. Therefore, investors should be aware that a conflict of interest may exist. IMPORTANT

This report is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Content herein is based on information available at the time the report was prepared and may be amended or otherwise changed in the future without notice. We make no representations as to the accuracy or completeness. Daiwa Securities Co. Ltd. retains all rights related to the content of this report, which may not be redistributed or otherwise transmitted without prior consent.

Ratings

Issues are rated 1, 2, 3, 4, or 5 as follows: 1: Outperform TOPIX/benchmark index by more than 15% over the next 12 months. 2: Outperform TOPIX/benchmark index by 5-15% over the next 12 months. 3: Out/underperform TOPIX/benchmark index by less than 5% over the next 12 months. 4: Underperform TOPIX/benchmark index by 5-15% over the next 12 months. 5: Underperform TOPIX/benchmark index by more than 15% over the next 12 months. Benchmark index: TOPIX for Japan, S&P 500 for US, STOXX Europe 600 for Europe, HSI for Hong Kong, STI for SG, KOSPI for Korea, TWII for Taiwan, and S&P/ASX 200 for Australia. Japan

Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Cromwell European REIT (CERT SP).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa

Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Disclosure of Interest of Thanachart Securities Investment Banking Relationship Within the preceding 12 months, Thanachart Securities has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: TOA Paint Thailand PCL (TOA TB), Gulf Energy Development PCL (GULF TB), TQM Corporation Pcl. (TQM TB). Disclosure of Interest of Affin Hwang Investment Bank Investment Banking Relationship Within the preceding 12 months, Affin Hwang Investment Bank has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: MI Technovation Berhad (fka Mi Equipment Holdings Bhd) (MI_MK), Malakoff Corporation Berhad (MLK MK). Disclosure of Interest of Bahana Sekuritas Investment Banking Relationship Within the preceding 12 months, Bahana Securities has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: PT Bank BRIsyariah Tbk (BRIS IJ), PT Indonesia Kendaraan Terminal Tbk (IPCC IJ). Disclosure of Interest of Saigon Securities Inc. Investment Banking Relationship Within the preceding 12 months, Saigon Securities Inc. has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Vietnam National Petroleum Group (Petrolimex)(PLX_VN), Dong Hai Ben Tre JSC (DHC_VN), Pan Group JSC (PAN_VN); Vinhomes JSC (VHM_VN); DHG Pharmaceutical JSC (DHG_VN); Tien Phong Bank JSC (TPB_VN).

Hong Kong

This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures

Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Singapore This research is distributed in SG by Daiwa Capital Markets SG Limited and it may only be distributed in SG to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets SG Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets SG Limited’s interest and/or its representative’s interest in securities). Recipients of this research in SG may contact Daiwa Capital Markets SG Limited in respect of any matter arising from or in connection with the research. Australia

This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. India

This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report. Associates of Daiwa India, registered with Indian regulators, include Daiwa Capital Markets Singapore Limited and Daiwa Portfolio Advisory (India) Private Limited and Associates of Daiwa India having office in India but not registered with any Indian regulators include Daiwa Corporate Advisory India Private Limited. Taiwan This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research including non-customer recipients of this research shall not provide it to others or engage in any activities in connection with this research which may involve conflicts of interests. Neither Daiwa-Cathay Capital Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not operate brokerage trading business in foreign markets, this research is prepared on a “without recommendation” to any foreign securities basis and Daiwa-Cathay Capital Markets Co.,

Ltd. does not accept orders from customers to trade in such foreign securities. Recipients of this research shall carefully judge their own investment risk and take full responsibility for the results of any resulting investments in the companies and/or sectors featured in this research. Without the prior written permission of Daiwa-Cathay Capital Markets Co., Ltd., recipients of this research are prohibited from disclosing the research to the media, reprinting the research, or quoting from the research to other parties. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd. in respect of any matter arising from or in connection with the research. Philippines

This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory,

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tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. United Kingdom

This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex . This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory. Germany

This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain

This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113 United States This research is distributed into the United States directly by Daiwa Capital Markets Hong Kong Limited and indirectly by Daiwa Capital Markets America Inc. (DCMA), a U.S. Securities and Exchange Commission registered broker-dealer and FINRA member firm, exclusively to “major U.S. institutional investors”, as defined under Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). This report is not an offer to sell or the solicitation of any offer to buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S. customers wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products discussed in this report may not be eligible for sale in some jurisdictions. Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of DCMA, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT: https://daiwa3.bluematrix.com/sellside/Disclosures.action

Ownership of Securities: For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships: For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making: For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts: For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification: For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings

Rating Percentage of total

Buy* 67.79%

Hold** 22.37%

Sell*** 9.84%

Source: Daiwa

Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2019. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. For stocks and sectors in Malaysia covered by Affin Hwang, the following rating system is in effect: Stocks:

BUY: Total return is expected to exceed +10% over a 12-month period

HOLD: Total return is expected to be between -5% and +10% over a 12-month period

SELL: Total return is expected to be below -5% over a 12-month period

NOT RATED: Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation

Sectors: OVERWEIGHT: Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL: Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT: Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months Conflict of Interest Disclosure: Affin Hwang

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationships Affin Hwang may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf

http://www.pse.com.ph/

http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory









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Affin Hwang market making Affin Hwang may from time to time make a market in securities covered by this research. For stocks and sectors in Indonesia covered by Bahana Sekuritas, the following rating system is in effect: Stock ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. Unless otherwise specified, these ratings are set with a 12-month horizon. It is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating.

"Buy": the price of the security is expected to increase by 10% or more.

"Hold": the price of the security is expected to range from an increase of less than 10% to a decline of less than 5%.

"Reduce": the price of the security is expected to decline by 5% or more.

Sector ratings are based on fundamentals for the sector as a whole. Hence, a sector may be rated “Overweight” even though its constituent stocks are all rated “Reduce”; and a sector may be rated “Underweight” even though its constituent stocks are all rated “Buy”.

“Overweight”: positive fundamentals for the sector.

“Neutral”: neither positive nor negative fundamentals for the sector.

“Underweight”: negative fundamentals for the sector.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationships (Bahana Sekuritas) Bahana Sekuritas may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Bahana Sekuritas market making Bahana Sekuritas may from time to time make a market in securities covered by this research. For stocks in Thailand covered by Thanachart Securities, the following rating system is in effect:

Ratings are based on absolute upside or downside, which is the difference between the target price and the current market price.

If the upside is 10% or more, the rating is BUY.

If the downside is 10% or more, the rating is SELL.

For stocks where the upside or downside is less than 10%, the rating is HOLD.

Unless otherwise specified, these ratings are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating.

For the sector, Thanachart looks at two areas, ie, the sector outlook and the sector weighting.

For the sector outlook, an arrow pointing up, or the word “Positive”, is used when Thanachart sees the industry trend improv ing.

An arrow pointing down, or the word “Negative”, is used when Thanachart sees the industry trend deteriorating.

A double-tipped horizontal arrow, or the word “Unchanged”, is used when the industry trend does not look as if it will alter. The industry trend view is Thanachart’s top-down perspective on the industry rather than a bottom-up interpretation from the stocks that Thanachart covers.

An “Overweight” sector weighting is used when Thanachart has BUYs on majority of the stocks under its coverage by market cap.

“Underweight” is used when Thanachart has SELLs on majority of the stocks it covers by market cap.

“Neutral” is used when there are relatively equal weightings of BUYs and SELLs.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action . Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action . Relevant Relationships (Thanachart Securities) Thanachart Securities may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Thanachart Securities market making Thanachart Securities may from time to time make a market in securities covered by this research. For stocks in Vietnam covered by Saigon Securities, the following rating system is in effect:

For stocks in Vietnam covered by Saigon Securities, the following rating system is in effect:

Buy: Expected to provide a price gain at least 10 percentage points greater than the market over the next 12 months.

Outperform: Expected to provide a price gain up to 10 percentage points greater than the market over the next 12 months.

Neutral: Expected to provide a price gain similar to the market over the next 12 months.

Underperform: Expected to provide a price gain up to 10 percentage points less than the market over the next 12 months.

Sell: Expected to provide a price gain at least 10 percentage points less than the market over the next 12 months.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action . Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action . Relevant Relationships (Saigon Securities) Saigon Securities may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Saigon Securities market making Saigon Securities may from time to time make a market in securities covered by this research. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law

(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.

Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.







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*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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