20160928-大华银行-Regional_Morning_Notes_18页_1mb

Regional Morning Notes Summary - 28 September 2016

Core Content

This summary outlines the financial and market performance of various regions and sectors, focusing on aviation, economics, and small/mid-cap highlights in Indonesia, Malaysia, and Thailand. It also includes key indices, stock picks, corporate events, and financial data for selected companies.

Main Sectors and Key Information

Aviation - Regional

• China's Travel Market: Expected to become the largest travel market by 2025, with significant traffic growth potential for Chinese airlines.
• ROIC Performance: Asia-Pacific carriers have lower ROIC compared to North American carriers, mainly due to air cargo losses and low-cost carrier (LCC) competition.
• Top Picks:
  • Air China (BUY): Attractive valuation and relatively low competition from LCCs.
  • China Southern Airlines (BUY): Low cargo exposure and strong performance.
  • China Eastern Airlines (BUY): Core net profit growth and strong ROIC.
• Sell Recommendations:
  • Thai Airways (SELL): Poor performance and lack of growth.
  • Cathay Pacific (SELL): Structural challenges at hubs and depressed valuations.
• Market Trends:
  • Southeast Asian full-service carriers face declining yields due to heightened LCC competition.
  • Fuel prices and ancillary services are key drivers of airline profitability.
  • IATA forecasts China to surpass the US and India to rise to third place by 2025.
  • Industrial profit growth in China hit a three-year high in August 2016, driven by low base and rebounding raw material prices.

Economics - China

• Industrial Profit:
  • Improved by 19.5% in August 2016, the highest since August 2013.
  • Strong performance in upstream sectors (coal, steel, cement) due to rising prices and increased infrastructure investment.
  • Deleveraging and destocking continue, indicating weak long-term growth confidence.
• Key Sectors' Profit Growth (yoy % change):
  • Oil and Gas: -145.80%
  • Coal Mining: 15.0%
  • Ferrous Metal Mining: -18.0%
  • Ferrous Metal Smelting and Rolling: 209.6%
  • Railway and Aerospace Equipment: 1.9%
  • Automobile: 11.0%
  • Pharmaceutics: 13.9%
  • Chemicals: 14.0%
  • Electrical and Machinery: 15.1%
  • Computer and Electronics: 19.8%
• Government Policies:
  • Policy easing is expected to continue supporting industrial performance in 4Q16.
  • Coal prices remain strong, and output targets have been raised.
  • The government's "One Million Houses" programme is a major driver for BBTN's performance.

Small/Mid Cap Highlights - Indonesia

• Bank Tabungan Negara (BBTN IJ):
  • Leader in the housing loan market with 28% market share in 1H16.
  • Dominates in the subsidised mortgage market with over 95% market share.
  • Key factors:
    • Strong credit growth potential due to underserved low-end housing demand.
    • Improved asset quality with NPL ratio falling to 3.41% in 1H16.
    • Attractive valuation at 1.1x 2017F consensus P/B.
    • Funding from the FLPP programme (subsidised housing liquidity), with government support and insurance.
• FLPP Details:
  • Plafond: Up to Rp190 million.
  • Effective Interest Rate: 5% fixed, including insurance premiums.
  • Tenor: Up to 20 years.
  • Scheme: 90% government-funded, 10% bank-funded, with 0.03% interest charge to the bank.
  • Loan Growth: 18.4% in 1H16.
  • NPL Ratio: Reduced due to the simplified FLPP scheme and better risk management.

Key Indices

Stock Picks

Corporate Events

• Regional Financial and Telco Sector Analyst Presentation: UK/Europe (26–30 Sep)
• Xingda In'l Group Meeting: Hong Kong (29 Sep)
• Citytheon Corporate Roadshow: Taipei (29 Sep)
• LVGEM (China) Real Estate Investment Shenzhen Company Limited Roadshow: Kuala Lumpur (30 Sep)
• Ricoh Site Visit: Kuala Lumpur (5 Oct)
• SIN Bank, SIN Teleco and ASEAN Banks Analyst Presentation: Kuala Lumpur (6–7 Oct)
• Xtep International Holdings Roadshow: Taipei (7 Oct), Kuala Lumpur (15 Nov)
• Asian Gems Conference 2016: Singapore (11–12 Oct)
• Harmony China Auto Luncheon: Hong Kong (12 Oct)
• Joy City Roadshow: Shanghai (13 Oct)
• Metro Pacific Investments Roadshow: Canada (24–25 Nov)
• KL Kepong Site Visit: Malaysia (25 Oct)

Analysts

• K Ajith: +65 6590 6627 | ajith@uobkayhian.com
• Chaoping Zhu: +8621 5404 7225 ext. 822 | chaoping@uobkayhian.com
• Ye Xu: +8621 5404 7225 ext. 820 | xuye@uobkayhian.com
• Alexander Margaronis: +6221 2993 3876 | alexandermargaronis@uobkayhian.com

Summary of Key Views

• Aviation: China is poised to become the largest travel market by 2025, offering growth opportunities for Chinese airlines. Air China is the top pick due to its attractive valuation and low LCC competition.
• Industrial Profit: China's industrial sector saw a significant profit growth in August 2016, with upstream sectors like coal, steel, and cement benefiting from strong prices and policy support.
• Indonesia Housing Market: BBTN is a leading player in the housing loan market, with strong credit growth and improved asset quality due to the FLPP programme.
• Market Valuation: Chinese airlines are considered more attractive than SIA and CX due to better valuations and growth prospects.
• Fuel Prices and Yields: The relationship between fuel prices and ticket prices is positive, but yields for full-service carriers in Southeast Asia have declined due to LCC competition. Yields may stabilize or improve if fuel prices rise.

Additional Insights

• ROIC vs Cost of Capital: Asia-Pacific carriers still lag behind North American peers, but this is expected to change with China's dominance in the travel market.
• LCC Share: Low-cost carriers account for over 50% of intra-Asia seat capacity, significantly impacting full-service carriers.
• NPL Reduction: BBTN's NPL ratio improved due to the simplified FLPP scheme and better risk management.
• Corporate Travel Impact: IATA notes that corporate travel is likely to decline due to layoffs and cost-cutting, affecting SIA and CX.