20161213-大华继显-Regional_Morning_Notes_24页_1mb

Regional Morning Notes Summary - 13 December 2016

Core Content Overview

This document provides a comprehensive analysis of the financial and market conditions of several Asian markets, with a focus on China's aviation and property sectors, as well as updates from Indonesia, Malaysia, and Singapore. It includes market performance, sector updates, stock recommendations, and key assumptions related to economic growth and currency impacts.

Main Points and Key Information

China - Aviation Sector

• Sector Downgrade: The aviation sector is downgraded to MARKET WEIGHT due to the market awaiting stability and signs of reduced forex losses.
• Renminbi Depreciation Impact:
  • Expected depreciation of Rmb7.20/US$ by end-2017, leading to a Rmb1.5b-2.1b decline in PBT (or 13-16% of EBIT).
  • This would reduce 2017 ROEs by 2.5-3.0ppt.
• US$ Debt Reduction:
  • The three major airlines (Air China, CEA, CSA) have reduced their US$ debt by 13-41% in 1H16.
  • Further reductions of 12-19% are expected in 2017, with a progressively greater rate in subsequent years.
  • Air China remains the top pick due to its relatively resilient pax yields and lowest net gearing.
• Earnings Revisions:
  • 2017 net profit estimates for Air China, CEA, and CSA are reduced by 6-14%.
  • Target prices are adjusted accordingly: Air China (HK$6.50), CEA (HK$4.60), CSA (HK$6.00).
• ROE and Fair Value:
  • 2017 ROEs are expected to be 10.6-13.6%.
  • Fair value of Air China, CEA, and CSA is reduced by 6-7%.
  • Cathay Pacific is rated as SELL due to its high exposure to the weakening renminbi and lower ROE.

China - Property Sector

• Renminbi Depreciation Impact:
  • The weak renminbi affects developers with high offshore debt exposure and low core earnings base.
  • Evergrande, Joy City, and Sunac are most impacted, while Vanke, Longfor, and R&F are less affected.
• Offshore Debt Exposure:
  • Offshore debt exposure for developers is expected to fall from 34.5% in 1H16 to 25.1% in 2017.
  • Developers like Evergrande and Sunac have redeemed high-yield offshore bonds to mitigate losses.
• Funding and Currency Risk:
  • The booming domestic bond market has helped reduce funding costs and offshore debt exposure.
  • Developers are increasingly using forward contracts and currency swaps to hedge against forex risk.
• Stock Recommendations:
  • Sunac and Poly Property are rated as SELL.
  • Longfor and China Resources Land are rated as BUY.
  • China Vanke is rated as SELL due to its high forex impact.
  • Sino-Ocean Land is rated as HOLD with a significant forex exposure.

Indonesia

• Tiga Pilar Sejahtera Food (AISA IJ) is rated as BUY with a 24.1% EPS growth forecast for 2017.
• Target price is Rp2,550, and the current share price is Rp2,000.

Malaysia

• 3Q16 Rubber Gloves Sector:
  • Sector net profit grew 7% qoq due to firmer latex glove ASPs and marginally stronger exchange rates.
• Tenaga Nasional (TNB MK):
  • Rated as BUY with a RM13.98 share price and RM16.00 target.
  • Higher dividend payout and share price weakness are key factors.

Singapore

• Property/REITs Sector:
  • Limited domestic impact from liquidity curbs in China.
• Renminbi Depreciation Impact:
  • The market is pricing in a 20-23% depreciation of the renminbi, which could lead to significant book value destruction.

Thailand

• MCOT (MCOT TB) is rated as SELL with a Bt15.20 share price and Bt10.10 target.
• Net profit unlikely in the near term.

Key Indices

• The DJIA, S&P 500, FTSE 100, and others show mixed performance, with some indices showing positive growth and others negative.
• Brent Crude and CPO have shown positive price changes in 2016.

Top Picks (BUY)

• Air China (753 HK), China Eastern Airlines (670 HK), China Southern Airlines (1055 HK), Indosat (ISAT LJ), Genting Bhd (GENT MK), City Dev (CIT SP), Bangkok Dusit (BDMS TB), Siam Cement (SCC TB).

Key Assumptions

• GDP Growth for major economies is projected to be slightly lower in 2017 compared to 2016.
• Renminbi Depreciation is expected to reach Rmb7.20/US$ by end-2017.
• Brent Crude is forecasted to average US$56/bbl in 2017, up from US$42/bbl in 2016.
• CPO is projected to increase to RM2,600/mt in 2017 from RM2,500/mt in 2016.

Corporate Events

• China Healthcare Sector event in Singapore on 16 Jan.
• Analyst Marketing in Malaysia on 17-18 Jan.
• SGX-UOB Kay Hian Corporate Day in Taipei on 21 Feb.
• UOB Kay Hian ASEAN Conference in Taipei on 22 Feb.

Market Risk and Catalysts

• The market is overestimating the renminbi depreciation and forex losses.
• Catalysts include a sequential decline in forex losses and improved earnings.
• The sector is expected to see reduced forex risk as US$ debt is progressively lowered.

Conclusion

The document highlights the impact of renminbi depreciation on both the aviation and property sectors in China, with a focus on forex losses and debt management. It recommends BUY for several major airlines and property developers, while SELL for others with significant forex exposure. The market is overvalued on the renminbi depreciation risk, and the sector is downgraded to MARKET WEIGHT pending more stability. The domestic bond market has helped reduce funding costs and offshore debt exposure for developers, with some actively hedging and repaying offshore debt.