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Regional Morning Notes Summary - 05 July 2018

Core Content Overview

This document provides a summary of regional market insights and stock recommendations for China, Indonesia, Malaysia, and Singapore. It includes sector updates, company-specific analysis, key financial metrics, and investment recommendations for various stocks.

Key Regions & Sectors

China - Aviation Sector

• Core Message: Valuations for Chinese airlines are swinging to an extreme due to the renminbi depreciation.
• Upgrade: China Southern Airlines (CSA) is upgraded to BUY with a target price of HK$6.40.
• Analysis:
  • The de-rating of Chinese airlines is excessive as the impact on equity is only 1.0–1.6%, and it has no effect on cash flow.
  • Rising fuel prices are the biggest risk to earnings. A 1.7% increase in ticket prices can offset a US$5/bbl increase in fuel prices.
  • Net profit estimates for Air China, CEA, and CSA are reduced by 19%, 11%, and 22% respectively due to higher fuel costs and a 2.5% depreciation of the renminbi.
  • The sector is maintained at MARKET WEIGHT.
• Stock Picks:
  • CSA (1055 HK): BUY, target price HK$6.70.
• Peer Comparison:
  • Air China (753 HK): HOLD, target price HK$7.90.
  • China Eastern (670 HK): HOLD, target price HK$5.20.
  • China Southern (1055 HK): BUY, target price HK$6.70.
• Valuation Metrics:
  • Fair value P/B is pegged at 1.1x for all three carriers.
  • The sector is trading at 1x 2018F book value.

Indonesia - Perusahaan Gas Negara (PGAS IJ/HOLD/Rp1,610/Target: Rp1,620)

• Core Message: PGAS is making a milestone acquisition of a 51% stake in Pertagas.
• Analysis:
  • The acquisition is expected to provide a potential EBITDA upside of US$65m p.a..
  • However, the impact on net earnings is limited due to higher interest expenses.
  • The deal is expected to be completed within 90 days of signing on 29 June.
  • PGAS is maintaining a HOLD recommendation with a target price of Rp1,620.
• Key Financials:
  • Revenue: 3,044 (2018F), 3,487 (2019F), 3,601 (2020F).
  • EBITDA: 851 (2018F), 945 (2019F), 1,005 (2020F).
  • Net profit: 164 (2018F), 168 (2019F), 170 (2020F).
  • P/B: 0.8 (2018F), 0.8 (2019F), 0.8 (2020F).
  • EV/EBITDA: 6.4 (2019F), 5.8 (2020F).
• Risks:
  • The key factors that could re-rate the stock include: higher-than-expected distribution and transmission volumes, improving margins, and disposal of Saka Energi.
• Entry Price: Rp1,460.
• Company Description:
  • PGAS is the largest and integrated natural gas transmission and distribution company in Indonesia with a pipeline network of nearly 7,500km.
  • It also has participating interests in PSC and operates oil and gas blocks across Indonesia.

Malaysia - Technology Sector

• Core Message: Companies with high earnings quality and clear growth strategies will maintain above-mean valuations.
• Recommendation: Maintain OVERWEIGHT.
• Top Pick: Inari.
• Key Assumptions:
  • Malaysia's GDP growth is expected at 5.0% for 2018F and 5.3% for 2019F.

Singapore - Venture Corporation (VMS SP/HOLD/S$17.50/Target: S$18.20)

• Core Message: The stock is downgraded to HOLD due to event horizon concerns.
• Key Financials:
  • Share Price: S$17.50.
  • Target Price: S$18.20.
  • Upside: +0.6%.

Thailand - The Erawan Group (ERW TB/BUY/Bt6.90/Target: Bt10.50)

• Core Message: 2Q18 results are expected to have a temporary hiccup.
• Recommendation: BUY.
• Target Price: Bt10.50.
• Key Financials:
  • Share Price: Bt6.90.
  • P/B: 1.1x.

Key Indices

Key Assumptions

Corporate Events

Summary of Recommendations

Key Catalysts & Risks

• Positive Catalysts:
  • Lower fuel prices.
  • Stable renminbi.
  • Increase in domestic fuel surcharges.
• Risks:
  • Higher fuel prices.
  • Unfavorable currency movements.
  • Weak demand leading to low margin growth.

Analyst

• Edward Lowis
• Contact: +6221 2993 3917
• Email: edwardlowis@uobkayhian.com