Regional Morning Notes Summary - 05 July 2017
Core Content Overview
This document outlines the investment strategy and stock recommendations for the Asia-Pacific region, focusing on China, Indonesia, Malaysia, Singapore, and Thailand. It provides updates on key companies, market indices, and financial metrics, with an emphasis on macroeconomic trends and valuation analysis.
China Strategy: The End Of Cheap Money
- Key Message: The tightening bias of the Fed and PBoC is creating headwinds for Chinese equities in the second half of 2017.
- Economic Drivers: The recent rebound in growth was driven by improved FAI (Financial Arrangement Instrument) and the promotion of PPP (Public-Private Partnership).
- Sector Outlook: China remains reliant on debt-fuelled investment spending, with low ROE making equity prices vulnerable to rising funding costs.
- Sector Adjustments:
- OVERWEIGHT: Only healthcare is recommended.
- BUY: CSPC and Chaowei Power are added to the BUY list, replacing Alibaba and Anta.
- Reasoning for Changes:
- Alibaba and Anta are dropped due to concerns about margin erosion and overvaluation.
- CSPC is expected to benefit from likely approval of its two key generic drugs.
- Chaowei Power is added due to its strong fundamentals and potential for growth.
- Market Performance:
- China and GEM outperformed in 1H17, with MSCI China rising 24.5%.
- Cyclical sectors like consumer discretionary, IT, and real estate led the growth.
- Risk Factors:
- Earnings growth forecasts may not be met due to slowing economic growth and tightening liquidity.
- The bulk of the 24.5% rally in MSCI China was driven by PE re-rating, not EPS improvement.
- Valuation:
- Target price for Agricultural Bank Of China (1288 HK) is HK$3.76, with an upside of +1.3% from the current price of HK$3.71.
- The bank is maintaining a HOLD rating, based on 0.94x 2017F P/B and the Gordon Growth Model.
Indonesia Update: Adhi Karya (ADHI IJ)
- Stock Recommendation: BUY
- Current Price: Rp2,170
- Target Price: Rp2,800
- Upside: +29.0%
- Key Update:
- Improved clarity on the LRT project development due to a new presidential decree.
- The government has provided legal backing, funding support, and a PSO incentive for the project.
- The LRT project's financial closing is expected in September 2017, which will act as a catalyst for the stock.
- Project Details:
- PT Kereta Api Indonesia (KAI) is appointed as the concession holder.
- Adhi Karya is the infrastructure and depo development contractor.
- Investment cost for the LRT project infrastructure was reduced by 7% to Rp22t.
- Financial Highlights:
- Net profit is expected to rise significantly, with 2017F forecast at Rp748b.
- The PE ratio is at 9.8x, below the historical mean, making the valuation attractive.
Malaysia: Rubber Gloves Sector
- Sector Outlook:
- With new production capacity coming online, most glove makers are expected to see high-single-digit to double-digit sales volume growth in 2H17.
- Market Conditions:
- Demand for rubber gloves is exceeding supply, supporting growth in the sector.
Singapore: Small/Mid Cap Highlights
- Hotung Investment Holdings (HIH SP):
- Stock recommendation: BUY
- Current Price: S$1.865
- Target Price: S$3.38
- Upside: +81.6%
- The company is considered undervalued.
Thailand Strategy: Alpha Picks for July
- Added to BUY List: BBL, GFPT, PSH
- Switched Out: DTAC, EGCO, MINT
- Market Context:
- The strategy reflects a shift in focus based on sector performance and growth potential.
Global Market Indices Performance (YTD)
| Index |
Prev Close |
1D % |
1W % |
1M % |
YTD % |
| DJIA |
21479.3 |
0.6 |
0.3 |
1.3 |
8.7 |
| S&P 500 |
2429.0 |
0.2 |
-0.4 |
-0.4 |
8.5 |
| FTSE 100 |
7357.2 |
-0.3 |
-1.0 |
-2.2 |
3.0 |
| AS30 |
5819.6 |
1.6 |
1.2 |
0.5 |
1.8 |
| CSI 300 |
3620.0 |
-0.8 |
-1.5 |
4.4 |
9.4 |
| FSSTI |
3211.2 |
-0.4 |
-0.3 |
-0.8 |
11.5 |
| HSCEI |
10306.0 |
-1.0 |
-1.8 |
-2.7 |
9.7 |
| HSI |
25389.0 |
-1.5 |
-1.7 |
-1.8 |
15.4 |
| JCI |
5865.4 |
-0.8 |
2.2 |
2.0 |
10.7 |
| KLCI |
1762.1 |
-0.4 |
-1.0 |
-1.4 |
7.3 |
| KOSPI |
2380.5 |
-0.6 |
-0.5 |
0.5 |
17.5 |
| Nikkei 225 |
20032.4 |
-0.1 |
-1.0 |
-0.7 |
4.8 |
| SET |
1574.1 |
-0.3 |
-0.8 |
0.5 |
2.0 |
| TWSE |
10347.8 |
-0.6 |
-1.6 |
1.2 |
11.8 |
| BDI |
882 |
-2.1 |
-2.3 |
6.3 |
-8.2 |
| CPO (RM/ml) |
2628 |
1.0 |
0.3 |
-5.6 |
-17.9 |
| Brent Crude |
50 |
-0.1 |
6.3 |
-0.7 |
-12.7 |
Key Assumptions
| Country/Region |
GDP (yoy) 2016 |
GDP (yoy) 2017F |
GDP (yoy) 2018F |
| US |
1.6 |
2.5 |
2.5 |
| Euro Zone |
1.7 |
1.8 |
1.6 |
| Japan |
1.0 |
0.9 |
1.2 |
| Singapore |
2.0 |
2.4 |
2.5 |
| Malaysia |
4.2 |
5.0 |
4.9 |
| Thailand |
3.2 |
3.3 |
3.3 |
| Indonesia |
5.0 |
5.2 |
5.5 |
| Hong Kong |
1.9 |
2.0 |
2.0 |
| China |
6.7 |
6.3 |
6.3 |
| Brent (Avg) |
45 |
55 |
58 |
| CPO (Avg) |
2,653 |
2,600 |
2,500 |
Top Picks (BUY)
| Ticker |
Company |
Current Price |
Target Price |
Upside (%) |
PE 2017F |
PE 2018F |
Dividend Yield (%) |
| 371 HK |
Beijing Ent. Water |
HK$5.93 |
HK$7.60 |
28.2 |
12.3 |
9.5 |
2.6 |
| 951 HK |
Chaowei Power |
HK$4.65 |
HK$5.80 |
24.7 |
6.4 |
6.0 |
2.4 |
| 1093 HK |
CSPC |
HK$11.10 |
HK$13.66 |
23.1 |
24.4 |
20.0 |
1.2 |
| CTRP US |
Ctrip* |
US$53.87 |
US$66.00 |
22.5 |
46.3 |
28.6 |
0.0 |
| 2319 HK |
Mengniu |
HK$14.72 |
HK$17.40 |
18.2 |
19.3 |
16.4 |
1.1 |
| 3933 HK |
The United Labs |
HK$5.11 |
HK$6.32 |
23.7 |
21.8 |
19.5 |
0.0 |
Top Picks (SELL)
| Ticker |
Company |
Current Price |
Target Price |
Upside (%) |
| 293 HK |
Cathay Pacific |
HK$9.77 |
HK$6.00 |
-38.6 |
| 2282 HK |
MGM China |
HK$16.08 |
HK$15.00 |
-6.7 |
| HART MK |
Hartalega |
MK$7.30 |
MK$4.07 |
-44.2 |
Corporate Events
| Event |
Venue |
Begin |
Close |
| Roadshow with Hopefluent Group |
Singapore, Kuala Lumpur |
4 Jul, 6 Jul |
5 Jul, 6 Jul |
| Analyst Marketing on Thai Strategy & Telco |
Singapore, Malaysia |
5 Jul, 6 Jul |
5 Jul, 7 Jul |
| Luncheon with Wisdom Education |
Hong Kong |
7 Jul |
7 Jul |
| Roadshow with Jacobson Pharma |
Shanghai |
7 Jul |
7 Jul |
| New Economy Conference 2017 |
Kuala Lumpur |
11 Jul |
11 Jul |
| Roadshow with Citic Envirotech |
Taipei |
18 Jul |
19 Jul |
| Analyst Marketing on Singapore Strategy |
Taipei |
20 Jul |
21 Jul |
| Visit to Sarawak Corridor of Renewable Energy |
Sarawak |
1 Aug |
3 Aug |
| Roadshow with Top Glove Corporation |
US/Canada |
5 Sep |
12 Sep |
Company Update: Agricultural Bank Of China (1288 HK)
- Stock Recommendation: HOLD
- Current Price: HK$3.71
- Target Price: HK$3.76
- Upside: +1.3%
- Loan Mix Strategy:
- Shifted towards corporate loans and residential mortgages, reducing discounted bills.
- This shift is expected to support NIM (Net Interest Margin).
- Asset Quality:
- NPL (Non-Performing Loan) ratio improved to 2.86% in Q4 2016.
- County Area, particularly in coastal regions, showed significant improvement in asset quality.
- Credit Cost:
- Expected to remain at about 90bp in 2017 despite moderation in NPL formation.
- Provisions:
- Management maintains provisions at about 90bp to ensure adequate coverage.
- ABC has the highest loan loss coverage among the Big-4 SOE banks at 173.6%.
- WMPs (Wealth Management Products):
- Outstanding balance fell 5% qoq to Rmb1.54t in 1Q17.
- Regulatory scrutiny has affected WMP issuance.
- Earnings Forecast:
- Net profit forecast for 2017F is HK$198.491b, with a 5.2% increase from previous estimates.
- Valuation:
- Based on 0.94x 2017F P/B and the Gordon Growth Model (ROE: 14.3%, COE: 15.0%, Growth: 3%).
Company Update: Adhi Karya (ADHI IJ)
- Stock Recommendation: BUY
- Current Price: Rp2,170
- Target Price: Rp2,800
- Upside: +29.0%
- Project Development:
- Better clarity on the greater Jakarta LRT project due to a new presidential decree.
- Legal and financial support for the project includes a Rp5.6t capital injection and government guarantees.
- Project Funding:
- Investment cost reduced by 7% to Rp22t.
- Financial closing is expected in October 2017.
- Financial Performance:
- Net profit is forecast to rise to Rp748b in 2017F.
- EBITDA is expected to reach Rp2,288b.
- The PE ratio is at 9.8x, which is attractive compared to historical levels.
Summary of Key Points
- China:
- Tightening monetary policy is a key headwind.
- Healthcare is the only OVERWEIGHT sector, with CSPC and Chaowei Power added to the BUY list.
- Agricultural Bank Of China (1288 HK) is maintained as HOLD with a target price of HK$3.76.
- Indonesia:
- Adhi Karya (ADHI IJ) is recommended as BUY due to improved LRT project clarity and financial support.
- Malaysia:
- Rubber gloves sector is expected to see growth due to new production capacity.
- Singapore:
- Hotung Investment Holdings is recommended as BUY due to undervaluation.
- Thailand:
- Alpha Picks include BBL, GFPT, and PSH, with DTAC, EGCO, and MINT being switched out.
- Market Indices:
- The global market has shown mixed performance, with some indices showing positive growth while others are in decline.
- Corporate Events:
- Several roadshows and analyst meetings are scheduled for the month of July and August 2017, focusing on key companies and strategies.
