20180620-大华继显-Regional_Morning_Notes_16页_733kb

Regional Morning Notes Summary - 20 June 2018

Core Content

This document provides a comprehensive overview of market updates and investment recommendations for the automotive sector in China, Indonesia, Malaysia, Singapore, and Thailand, as well as insights into the broader economic indicators and corporate events.

Main Points

China: Automotive Sector

• US-China Trade War Impact:
  • The US imposed a 25% tariff on $50 billion of Chinese goods, including automobiles, effective from 6 July 2018.
  • This has led to increased import tariffs on US-made cars, potentially affecting auto dealers exposed to US imports.
  • Chinese automakers like Brilliance and BAIC may benefit from the localisation of foreign models (e.g., BMW X5), while brands like Geely, GWM, and BYD may face market sentiment risks due to their US market expansion plans.
• Market Sentiment:
  • The trade war has negatively impacted market sentiment, especially for companies planning to enter the US market.
  • The impact on earnings is expected to be minimal in the short term due to low current US auto exports to China.
• Top Picks:
  • BUY: Geely (175 HK), BAIC (1958 HK), GAC (2238 HK), Zhengtong, Yongda.
  • SELL: GWM (2333 HK), BYD (1211 HK).
• Sector Recommendation:
  • Maintain Market Weight on the sector.
• Key Risks:
  • Macro risks such as a hard-landing scenario or severe credit tightening could hurt overall auto sales.
  • Market sentiment may remain weak for companies with US expansion plans.

Indonesia: Astra International (ASII IJ)

• Potential Upside:
  • ASII may benefit from growth in coal, financial services, and the automotive sector.
• Earnings Update:
  • 1Q18 net income grew by 68% yoy, surpassing the forecast of 31.4%.
• Recommendation:
  • Maintain BUY recommendation with a target price of Rp9,200.
• Key Financials:
  • 1Q18 net income: Rp21,292 million.
  • 1Q18 sales: Rp97,140 million.
  • 1Q18 gross profit: Rp10,088 million.
  • 1Q18 operating income: Rp657 million.
  • 1Q18 net income after minority: Rp8,188 million.
• Segmental Analysis:
  • Automotive segment: 6.3% sales growth, 7.6% gross profit growth, 15.5% operating income growth, and 12.8% net income growth.
  • Financial Services: 13.8% net income growth.
  • Heavy Equipment: 31.2% net income growth.
• Corporate Events:
  • Astra acquired 25% of Astra Sedaya Finance (ASF) for Rp2.8t, contributing to 0.7% yoy earnings growth.
• Key Risks:
  • Lower-than-expected profits in the automotive, financial services, and coal segments.

Malaysia: Top Glove (TOPG MK)

• Results:
  • 3QFY18: Core earnings grew by 21% qoq, beating expectations.
  • Forward orders remained soft.
• Recommendation:
  • SELL with a target price of RM8.40.
• Key Concerns:
  • High valuations and unattractive risk-reward profile.
• Valuation:
  • Current price: RM11.32.
  • Target price: RM8.40.
  • Potential downside: -31.9%.

Singapore: CITIC Envirotech (CEL SP)

• Recommendation:
  • BUY with a target price of S$1.06.
• Performance:
  • Minimal impact from the trade war due to a positive outlook.
• Current Price: S$0.56.
• Potential Upside: 85.9% from current to target price.

Thailand: Automotive Sector

• Market Sentiment:
  • Selective BUYs on earnings growth stocks.
• Sector Overview:
  • US auto imports account for about 1% of total auto sales, with BMW and Mercedes-Benz being the top import brands.
  • The increased tariff could lead to a price increase of over 20% for US-made cars in China, which might push buyers to European or Japanese cars.
• Key Indices:
  • CSI 300: 3621.1, with a 10.2% YTD growth.
  • FSSTI: 3301.4, with a 6.5% YTD growth.
  • HSCEI: 11492.8, with a 7.0% YTD growth.
  • KLCI: 1715.4, with a 7.5% YTD growth.

Key Information

Corporate Events

• Analyst Presentation on Indonesia Outlook & Strategy: 25–26 June, Bangkok.
• Analyst Presentation on Singapore and China Banks: 27–28 June, Kuala Lumpur.
• Roadshow with Jacobson Pharma Corp (2633 HK): 28 June, Hong Kong.
• Luncheon Talk with UOB Thailand (UOB SP): 29 June, Bangkok.
• Roadshow with United Overseas Bank (UOB SP): 2–3 July, Taipei.
• Luncheon with Luk Fook Holdings International (590 HK): 5 July, Hong Kong.
• Industry 4.0 Conference: 26 July, Kuala Lumpur.

Market Weight & Top Picks

Key Assumptions

• GDP Growth:

  • US: 2.3% (2017), 2.5% (2018F), 2.3% (2019F).
  • Euro Zone: 2.4% (2017), 2.3% (2018F), 1.9% (2019F).
  • Japan: 1.7% (2017), 1.8% (2018F), 1.9% (2019F).
  • Singapore: 3.6% (2017), 2.8% (2018F), 3.0% (2019F).
  • Malaysia: 5.9% (2017), 5.0% (2018F), 5.3% (2019F).
  • Thailand: 3.9% (2017), 4.2% (2018F), 4.2% (2019F).
  • Indonesia: 5.1% (2017), 5.3% (2018F), 5.4% (2019F).
  • Hong Kong: 3.8% (2017), 3.8% (2018F), 2.8% (2019F).
  • China: 6.9% (2017), 6.4% (2018F), 6.2% (2019F).

• CPO (RM/mt): 2307, with a 3.5% YTD growth.

• Brent Crude (US$/bbl): 75, with a 12.3% YTD growth.

Essentials

• Preference:
  • Prefer pure Chinese brands over joint ventures due to long-term concerns about the latter.
  • Prefer OEMs over dealers due to increased market risk aversion.
• Sector Impact:
  • The impact of tariff cuts on imported cars has been largely priced in, and it may not drive dealer stocks in the near term.

Risks

• Macro Risks:
  • Hard-landing scenario or severe credit tightening could hurt China's auto sales.
• Sector Risks:
  • Lower-than-expected profits in the automotive, financial services, and coal segments.

Valuation/Recommendation

• Astra International (ASII IJ):
  • Maintain BUY recommendation.
  • Target price: Rp9,200.
  • Upside: +33.3%.
  • Current price: Rp6,900.
  • PE: 15.0x.
  • Implied auto division net income decline: -22.4%.

Analysts

• Ken Lee: +852 2236 6760, ken.lee@uobkayhian.com.hk
• Johnny Yum: +852 2236 6706, johnny.yum@uobkayhian.com.hk
• Stevanus Juanda: +6221 2993 3845, stevanusjuanda@uobkayhian.com.hk

Summary of Key Insights

• The US-China trade war has had mixed impacts on the automotive sector.
• Brilliance and BAIC are likely to benefit from the increased import tariffs on US-made cars, encouraging localisation.
• Geely is highlighted as the top pick due to its strong market position and state support.
• GWM and BYD are recommended for SELL due to margin pressures and competitive challenges.
• Astra International (ASII IJ) is recommended for BUY due to potential upside from coal, financial services, and auto growth.
• Top Glove (TOPG MK) is recommended for SELL due to soft forward orders and unattractive valuations.
• CITIC Envirotech (CEL SP) is recommended for BUY due to minimal trade war impact and a positive outlook.
• Market sentiment remains a key factor, especially for Chinese automakers with US expansion plans.