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Regional Morning Notes Summary - 04 November 2015

Core Content Overview

This document provides an analysis of the financial and market performance of key sectors and companies in China, Hong Kong, Malaysia, and Thailand, as well as updates on key indices and corporate events. The focus is on the automobile and coal sectors in China, with insights on stock valuations, earnings, and future growth expectations.

Main Points by Region

China

Automobile Sector

• Market Overview: The automobile sector faces overcapacity, competition, and margin pressure due to economic slowdown and price cuts by major brands.
• Investor Concerns: Focus on whether the slowdown is structural or cyclical, and the impact of government stimulus and tax exemptions.
• Earnings Outlook:
  • 3Q15 saw a slowdown in automobile sales, with a weak seasonal rebound expected in 4Q15.
  • Long-term growth is expected to average 4–5% from 2015–2020.
  • 2016 growth is anticipated to be 7% due to stimulus, but may be distorted.
• Top Picks:
  • Geely (175 HK) and Brilliance (1114 HK) are recommended as they are expected to benefit from new product launches and improved performance.
  • Great Wall Motor (2333 HK) is under review due to its lack of core competitiveness and competition from new players.
• Key Players:
  • Brilliance: New product cycle is expected to revive sales momentum.
  • Geely: Launching new models with Volvo technology, showing potential for growth.
  • Zhongsheng (881 HK) and Dah Chong Hong (1828 HK) are flagged as cautious due to vulnerability in after-sales service.

Coal Sector

• Earnings Performance:
  • 3Q15 earnings for coal companies deteriorated due to weak coal prices and increased competition.
  • Coal prices are expected to hit a new low of Rmb360/tonne in 4Q15.
• Price Forecasts:
  • 2015 QHD benchmark coal price: Rmb420/tonne
  • 2016 QHD benchmark coal price: Rmb380/tonne
  • 2017 QHD benchmark coal price: Rmb400/tonne
• Company Highlights:
  • China Shenhua: Net profit dropped by 38.5% yoy and 19.6% qoq. It is expected to focus on the power segment and benefit from "ultra-low-emission" technology.
  • China Coal: Net loss of Rmb701m in 3Q15 due to high production costs. Earnings are expected to improve in 2016 with lower finance costs.
  • Yanzhou Coal: Net profit increased 80.8% qoq due to higher investment income and cost control. Still underperforming compared to peers.
• Sector Recommendation: Maintain UNDERWEIGHT due to ongoing oversupply and economic transition.

Key Indices Performance

Top Picks

BUY

• Beijing Capital (694 HK): Target price HK$11.40, potential upside +34.0%
• ICBC (1398 HK): Target price HK$7.60, potential upside +56.7%
• Bank BJB (BJBR LJ): Target price LK$980.00, potential upside +28.1%
• DiGi.Com (DIGI MK): Target price MK$5.95, potential upside +12.3%
• Maybank (MAY MK): Target price MK$10.00, potential upside +20.3%
• CapitaLand (CAPL SP): Target price SP$4.08, potential upside +30.8%
• DBS (DBS SP): Target price SP$22.34, potential upside +26.9%
• Kasikornbank (KBANK TB): Target price TB$210.00, potential upside +18.6%
• PTT (PTT TB): Target price TB$340.00, potential upside +18.5%

SELL

• SIA Engineering (SIE SP): Target price SP$3.30, potential downside -24.6%
• UMWH Holdings (UMWH MK): Target price MK$7.00, potential downside -14.6%

Corporate Events

• Malaysia & Indonesia Strategy, Indonesia Consumer and Regional Gaming: London, 04–06 Nov
• China City Railway Transportation Technology Roadshow: Shanghai, 09–10 Nov
• Venture Corporation Corporate Roadshow: Singapore, 11 Nov
• Bumilama Agri Luncheon: Singapore, 12 Nov
• Valutronics Tea Session: Singapore, 17 Dec
• Regional 1H16 Strategy Forum: Kuala Lumpur, 2 Dec

Key Financial Insights

SJM Holdings (880 HK)

• 3Q15 Performance: Results below expectations due to weak VIP performance, but mass market contributed nearly half of revenues.
• Key Metrics:
  • Net revenue: HK$11,381m (down 6.5% qoq)
  • EBITDA margin: 7.8% (down 0.6 ppt qoq)
  • VIP GGR: HK$5.4b (down 13.7% qoq)
  • Mass GGR: HK$5.5b (up 1.3% qoq)
• Valuation: Trading at 12.5x 2015F PE, with a target price of HK$8.40 (upside +27.1%).
• Recommendation: Maintain BUY due to its strong long-term fundamentals and cheap valuation.

Analysts

• Ken Lee (China): +852 2236 6760, ken.lee@uobkayhian.com.hk
• Yingying Tang & Yan Shi (China Coal): +8621 5404 7225 ext. 819 & 804
• Vincent Khoo, CFA (SJM Holdings): +6032147 1998, vincentkhoo@uobkayhian.com
• Cindy Lam (SJM Holdings): +852 2826 4867, cindy.lam@uobkayhian.com.hk

Peer Comparison (Automobile Sector)

Summary

The report highlights the challenges faced by China's automobile and coal sectors, with continued margin pressure and weak sales performance in 3Q15. Despite this, there is optimism about the recovery potential in 2016, particularly for Geely and Brilliance, driven by new product launches and government stimulus. In the coal sector, prices are expected to remain low, with a revised 2016 forecast of Rmb380/tonne.

In Hong Kong, SJM Holdings is recommended as a BUY due to its strong fundamentals and underpriced valuation. In Malaysia, Samart Corp is a BUY, while British American Tobacco is downgraded to SELL due to price hikes and consumer spending slowdown.

Overall, the report maintains a cautious stance on many companies, with a focus on long-term fundamentals and structural changes in the economy.