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Regional Morning Notes Summary - 13 June 2016

Core Content Overview

This document provides a summary of market updates and stock analysis for several Asian markets, including China, Indonesia, Malaysia, Singapore, and Thailand, as well as detailed analysis of two Chinese automotive companies: Baoxin Auto Group (1293 HK) and Brilliance Auto (1114 HK). It includes updates on corporate events, financial performance, valuation models, and analyst recommendations.

China

Baoxin Auto Group (1293 HK)

• Update: CGA's 75% partial offer for Baoxin has become unconditional. The deal is expected to be completed before the deadline of 16 August 2016.
• Target Price: Raised from HK$2.75 to HK$4.70.
• Current Share Price: HK$4.98.
• Upside: -5.6% (from target price).
• Reason for Target Price Adjustment: The success of the deal is now assumed to be 100% likely in the binomial valuation model, which previously had a 50% success probability. The fair value of the stock is recalculated accordingly.
• Deal Impact: After the deal, Mr. Yang Aihua and his related parties will exit, and the company will be taken over by CGA.
• Outlook: Despite the takeover, Baoxin faces challenges such as margin squeeze and increased competition in the after-sales service sector.
• Stock Impact: The deal has been fully priced in, and the share price is expected to drop to its fair value post-transaction.
• Key Financials:
  • Net profit (2016F): Rmb242m.
  • Net profit (2017F): Rmb263m.
  • Net profit (2018F): Rmb270m.
  • EPS (2016F): 9.5 fen.
  • PE (2016F): 45.8x.
  • P/B (2016F): 2.6x.
  • EV/EBITDA (2016F): 13.6x.
  • Net margin (2016F): 1.0%.
  • Debt to equity (2016F): 8.6x.
  • Interest cover (2016F): 2.2x.
• Company Description: Baoxin Auto Group is a luxury car dealership operator in China, focusing on luxury and ultra-luxury brands. It operates 4S stores, showrooms, and repair centers.
• Stock Data:
  • GICS sector: Automobile.
  • Bloomberg ticker: 1293 HK.
  • Shares issued (m): 2,557.
  • Market cap (HK$m): 12,735.
  • Market cap (US$m): 1,633.
  • 3-mth avg daily turnover (US$m): 4.4.
• Price Performance:
  • 52-week high/low: HK$7.30 / HK$2.10.
  • 1mth: 7.3%.
  • 3mth: 1.2%.
  • 6mth: 20.0%.
  • 1yr: -10.4%.
  • YTD: 2.7%.
• Major Shareholders:
  • Mr. Yang Chu Yu: 60.72%.
  • FY16 NAV/Share (Rmb): 2.24.
  • FY16 Net Debt/Share (Rmb): 1.27.

Brilliance Auto (1114 HK)

• Update: May 2016 sales rebounded due to deepened discounts, with a 15.5% yoy increase in wholesale shipment to 25,400 units.
• Target Price: Maintained at HK$7.70.
• Current Share Price: HK$7.71.
• Upside: -0.1%.
• Sales Performance:
  • 5-series: 27.1% yoy increase in May 16, but 0.6% yoy decline in 5M16.
  • X1: 16.0% yoy decline in May 16 due to short launch period.
  • 2-series: 29.0% mom decline in May 16.
• Outlook: Sales of new models are not expected to significantly boost performance in the short term. The 5-series is nearing the end of its life cycle, and the new E-class is expected to pose competition.
• Key Financials:
  • Net profit (2016F): Rmb3.23b.
  • Net profit (2017F): Rmb4.18b.
  • Net profit (2018F): Rmb5.08b.
  • EPS (2016F): 64.3 fen.
  • PE (2016F): 10.4x.
  • P/B (2016F): 1.5x.
  • Net margin (2016F): 7.7%.
  • Debt to equity (2016F): 3.9x.
  • Interest cover (2016F): 6.2x.
  • ROE (2016F): 15.2%.
• Company Description: Brilliance Auto, through its 50%-owned joint venture BMW Brilliance, produces and sells BMW cars, including the 5-series, 3-series, and X1, in China. It also operates under its proprietary brand Jinbei.
• Stock Data:
  • GICS sector: Automobile.
  • Bloomberg ticker: 1114 HK.
  • Shares issued (m): 5,026.
  • Market cap (HK$m): 38,749.
  • Market cap (US$m): 5,000.
  • 3-mth avg daily turnover (US$m): 19.3.
• Price Performance:
  • 52-week high/low: HK$12.70 / HK$6.10.
  • 1mth: 6.1%.
  • 3mth: 13.5%.
  • 6mth: -24.0%.
  • 1yr: -33.0%.
  • YTD: -20.9%.
• Major Shareholders:
  • Huachen: 55.38%.
  • FY16 NAV/Share (HK$): 5.29.
  • FY16 Net Debt/Share (HK$): 0.22.

Other Markets

Indonesia

• Sector: Banking.
• Risk: Low probability of a banking crisis, but higher risk due to capital flight.

Malaysia

• Update: SapuraKencana (SAKP MK) is expected to report disappointing 1QFY17 results due to low oil prices, lower revenue from reduced activity, and costs from right-sizing exercises.
• Recommendation: SELL.
• Target Price: RM1.43.
• Current Share Price: RM1.64.
• Upside: -5.6%.

Singapore

• Strategy: KSH Holdings (KSHH SP) is recommended as a BUY.
• Target Price: S$0.69.
• Current Share Price: S$0.55.
• Upside: +23.6%.

Thailand

• Update: Diamond Building Products (DRT TB) is downgraded to HOLD due to its attractive dividend yield of 7% annually.
• Target Price: Bt5.00.
• Current Share Price: Bt5.10.
• Upside: -1.9%.

Key Indices (as of 13 June 2016)

Top Picks

BUY

• Air China: TP HK$10.20, Potential +93.5%.
• Ping An Insurance: TP HK$45.00, Potential +28.8%.
• Bank BJB: TP HK$1,170.00, Potential +17.6%.
• Genting Bhd: TP HK$10.40, Potential +25.3%.
• City: TP HK$10.86, Potential +23.8%.
• DBS: TP HK$19.30, Potential +21.5%.
• Bangkok Dusit: TP HK$27.70, Potential +16.4%.
• Siam Cement: TP HK$630.00, Potential +31.8%.

SELL

• Hartalega: TP HK$3.10, Potential -24.4%.
• Sembcorp: TP HK$0.90, Potential -45.8%.

Corporate Events

Key Assumptions

Valuation & Earnings Outlook

• Baoxin Auto Group:

  • 2016F net profit: Rmb242m.
  • 2017F net profit: Rmb263m.
  • 2018F net profit: Rmb270m.
  • Earnings forecast is 60% below consensus due to lower margin assumptions.
  • Valuation based on 10x 2016F PE (1SD below historical mean).

• Brilliance Auto:

  • 2016F net profit: Rmb3.23b.
  • 2017F net profit: Rmb4.18b.
  • 2018F net profit: Rmb5.08b.
  • Earnings forecast is 10% below consensus for 2016.

Analysts

• Ken Lee: +852 2236 6760 | ken.lee@uobkayhian.com.hk
• Sophie Yu: +852 2826 1392 | sophie.yu@uobkayhian.com.hk