20170419-大华继显-Regional_Morning_Notes_20页_995kb

Regional Morning Notes Summary - 19 April 2017

Core Content Overview

This document provides a comprehensive analysis of the regional financial and plantation sectors, with a particular focus on palm oil demand, market dynamics, and key regulatory developments in China and other Asian countries. It also outlines corporate events, key indices, and investment recommendations.

Main Points

Palm Oil Market Outlook

• Demand Trends:
  • Demand from China and the EU is expected to remain relatively flat in 2017 due to slowing GDP growth and population increase in China, and reduced food sector demand in the EU.
  • Long-term demand is driven by developing countries with higher consumer spending power.
• Supply and Price Dynamics:
  • CPO (Crude Palm Oil) prices have dropped by 15% year-to-date due to concerns over production recovery and soybean supply.
  • The drop in prices was considered premature as palm oil inventory is expected to remain tight until July 2017.
  • Production is expected to normalise in 4Q17, leading to a potential rebound in CPO prices.
• Market Share Shifts:
  • In the EU, palm oil is gaining market share from rapeseed oil and used cooking oil due to declining rapeseed production and increasing biodiesel demand.
  • In China, the basic demand is expected to be at least 5.0 million tonnes, with increased imports anticipated to meet this demand.
• Investment Recommendations:
  • Maintain OVERWEIGHT on palm oil producers.
  • Top picks include Bumitama Agri (BAL SP), First Resources (FR SP), Kim Loong Resources (KIML MK), Astra Agro (AALI IJ), and Sampoerna Agro (SGRO IJ).
  • CPO price forecast for 2017 is RM2,600/tonne, with a target of RM2,500/tonne for 2018.

China Financial Sector Crackdown

• Focus Shift: The anti-corruption crackdown has shifted focus to the financial sector, particularly banks and brokers.
• Regulatory Measures:
  • Banks are expected to improve loan classification, reduce reliance on interbank borrowings, and ensure sufficient provisions and capital.
  • Brokers are under scrutiny for market manipulation, with no significant impact on trading turnover expected.
• Key Impacts:
  • Banks with high NPLs (Non-Performing Loans) and 90-day overdue loans are under pressure.
  • The CBRC (China Banking Regulatory Commission) has introduced stricter regulations on WMPs (Wealth Management Products), including transparency, separate management, and control of leverage.
  • Brokers are encouraged to maintain market stability and are expected to see continued demand for their services.
• Top Picks:
  • Banks: CCB (China Construction Bank), ICBC (Industrial and Commercial Bank of China), and CMB (China Minsheng Bank) are recommended as BUY.
  • Securities: CITICS (China International Trust and Investment Corporation) and CGS (China Great Wall Securities) are recommended as BUY.

Key Information

Market Indices

Corporate Events

• Group Luncheon with U-Mobile – Kuala Lumpur, 19 Apr
• Roadshow with Meidong Auto Holdings – Beijing, Shanghai, UK (19 Apr – 5 May)
• Group Luncheon with Singamas Container Holdings – Hong Kong, 20 Apr
• Analyst Presentation on Malaysia Outlook and Strategy – Singapore, 20 Apr – 21 Apr
• Analyst Presentation on Indonesia Strategy – Thailand, Singapore, Kuala Lumpur (24 Apr – 28 Apr)
• Roadshow with Singtel – Canada, 26 May
• Roadshow with PT Siloam Int'l Hospital – Canada, 5 Jun – 16 Jun
• Luncheon with United Overseas Bank – Singapore, 3 Jul
• Roadshow with Top Glove Corporation – US/Canada, 5 Sep – 12 Sep

Key Assumptions

Positive Developments

• China:
  • Minimum palm oil demand is expected to reach at least 5.0 million tonnes in 2017, with increased imports needed to meet base demand.
  • Rapeseed oil auctions are unlikely to significantly impact palm oil demand due to higher auctioned prices.
• EU:
  • Biodiesel demand is increasing, with palm oil gaining market share from rapeseed oil.
• Asia Pacific:
  • F&B franchises expanding into developing countries like Myanmar, South Korea, the Philippines, and Vietnam will support long-term palm oil demand.

Negative Developments

• China:
  • Increased soybean imports from the US may reduce palm oil demand.
• EU:
  • Declining demand from the food sector due to preference for sunflower oil.
  • EU lawmakers may vote for a ban on palm oil-based biofuels by 2020, which could affect demand.
• Production:
  • The drop in CPO prices was considered premature due to tight inventory and delayed production recovery.

Sector Catalysts

• Weather Disruption: Could positively impact palm oil prices due to reduced supply.
• Demand from Key Importing Countries: Expected to increase significantly, especially in the Asia Pacific region.

Risks

• Backtracking of Biodiesel Mandates: In Indonesia and Malaysia, due to falling crude oil prices.
• Regulatory Uncertainty: Could impact financial sector stability and profitability.

Investment Recommendations

• Plantation Sector: Maintain OVERWEIGHT on palm oil producers.
• Top Picks:
  • Bumitama Agri (BAL SP) – BUY, Target: S$1.25
  • First Resources (FR SP) – BUY, Target: S$2.15
  • Kim Loong Resources (KIML MK) – BUY, Target: RM4.20
  • Astra Agro (AALI IJ) – BUY, Target: Rp19,045
  • Sampoerna Agri (SGRO IJ) – BUY, Target: Rp2,300

Analysts

• Regional Research Team
  • Contact: +65 6535 6868, research@uobkayhian.com
• Jonathan Koh, CFA
  • Contact: +65 6590 6620, jonathankoh@uobkayhian.com
• Jasmine Duan
  • Contact: +852 2826 1351, jasmine.duan@uobkayhian.com.hk

Conclusion

The report highlights the challenges and opportunities in the palm oil market, with a focus on the need for producers to diversify into new markets as traditional demand from China and the EU remains stagnant. It also discusses the ongoing regulatory scrutiny in the Chinese financial sector, particularly on banks and brokers, and outlines key investment recommendations. The document serves as a guide for investors and analysts to navigate the evolving market landscape.