The SET Index inched up 0.7 per cent in the last two weeks to close at 1,304 on February 20, with the steel, media and finance sectors leading the gain. The Stock Exchange of Thailand underperformed regional peers, represented by the MSCI Asia ex-Japan In
Gross domestic product grew by only 0.6 per cent year on year in the fourth quarter of 2013, leading to full-year average growth of 2.9 per cent. The National Economic and Social Development Board now expects 2014 GDP growth to be within the 3 to 4 per cent range. The rhetoric from the NESDB was clearly bearish, though, and going by its current estimates, it is probably looking at GDP growth to be closer to 3 per cent than 4. The critical assumption in the 2014 outlook is that the government is fully functional again by the second half of the year, which would promote a recovery in business confidence.
We currently forecast GDP to grow by 3.5 per cent in 2014, but see downside risks to our forecast if the political deadlock is not resolved soon.
On the interest-rate front, while the pressure is on the Bank of Thailand to trim the policy rate at the policy meeting on March 12, we think the central bank will sit pat for now. An interest-rate cut carries with it longer-term risks, but offers little boost in the near term unless the political situation improves.
Fourth-quarter results announced so far were quite mixed. Those sectors and companies related to domestic consumption generally saw weaker-than-expected results, while earnings of exporters and those with overseas revenue beat market expectations.
Our current forecast indicates moderate earnings growth of 11 per cent for the Thai market this year, versus the 18.5-per-cent consensus estimate. We, therefore, expect to see consensus earnings downgraded, particularly on those companies relying on domestic consumption and investment.
Valuation-wise, the Thai market is now trading on 11.8x FY14F P/E (price to earnings), which is slightly below the historical average. Nonetheless, we see limited upside on the market near-term, amid lingering political uncertainty and potential for a further earnings downgrade.
We recommend investors overweight the electronics, telecom, food and transportation sectors, which should be relatively resilient to the current political uncertainty. Our stock picks include DELTA (Delta Electronics), KCE (KCE Electronics), TUF (Thai Union Frozen Products), JAS (Jasmine International), AOT (Airports of Thailand), AP, SPALI (Supalai), and STPI (STP&I).
We stand by the view that political risks will keep a lid on SET performance in the near to medium term, with our 2014 target range of 1,300-1,350 unchanged.
Two events in recent days underscore this view: First, TOT’s cancellation of an announcement that it would make an idle portion of its 2.1-gigahertz spectrum available to ADVANC (Advanced Info Service), apparently in response to the protesters’ boycott of firms linked to the Shinawatra family; and second, the Civil Court’s decision to leave the emergency decree in place but barring the government from using force to disperse demonstrators, in essence rendering the decree meaningless.
Daily international passenger arrivals continued to slump through mid-February, exacerbated by the timing of Chinese New Year. From AOT (Airports of Thailand) data, total international passenger arrivals at all airports dropped 5 per cent year on year for the February 1-16 period, decelerating from flat year-on-year growth for the January 1-31 period. For Suvarnabhumi Airport alone, international arrivals contracted 10 per cent for the February 1-16 period, worsening from the 5-per-cent contraction for the January 1-31 period.
Meanwhile, domestic car sales slumped to a 25-month low for January, down 46 per cent, with total production down 31 per cent and exports down 7 per cent. According to a Bank of Thailand survey, the model-year transition period now underway has exacerbated the contraction of late as automakers complete their retooling process.
Note that the economics team at TISCO (Tisco Financial Group) has cut its growth forecast for 2014 gross domestic product from 3.7 to 2.5 per cent after the release of fourth-quarter 2013 GDP data last week. According to the National Economic and Social Development Board, Thailand’s GDP in 4Q13 grew 0.6 per cent year on year (versus 2.7 per cent in 3Q13), beating our negative-1.2-per-cent forecast and positive-0.3-per-cent Bloomberg consensus. However, changes in inventories contributed a full 1.8 percentage points to growth for the quarter, while domestic demand posted a negative GDP contribution of 4.7 percentage points.
Our Thai market strategy centres mainly on selectivity for earnings growth and resilience, especially for FY15E, which will become analysts’ new base year in three to six months. Top big-cap buys are BBL (Bangkok Bank), ADVANC (Advanced Info Service), AOT, CPALL (CP All) and CPN (Central Pattana). Top smaller-cap buys are CENTEL (Central Plaza Hotel), JAS (Jasmine International), STEC (Sino-Thai Engineering and Construction) and BCP (Bangkok Petroleum).
Based on our recent study, foreign holdings stayed below the long-term average, reflecting a below-normal risk to sell off. This signal is in line with CDS (credit default swap) spread, which currently stays above the level during the protests in 2010, which were more violent than the current ones. This indicates that investors have priced in political protests.
The following sectors are held by foreign investors at low levels compared with each group’s averages.
Retail, particularly HMPRO (Home Product Center), BJC (Berli Jucker), GLOBAL (Siam Global House);
Hotel (CENTEL, or Central Plaza Hotel);
Hospital (BH, or Bumrungrad Hospital, BCH, or Bangkok Chain Hospital).
We see low downside risks for these sectors and stocks in the next periods compared with the market. These sectors and stocks should be foreign investors’ targets if the political situation finds a solution. (In the base case, we expect the political situation to have a conclusion within the first half of this year.)
Recently, the estimate for the SET’s 2014 EPS (earnings per share) was revised down to Bt107.3 per share, the lowest level since Bloomberg’s data collection. We have studied the correlation of estimated EPS and SET’s performance. Usually, the SET Index moves ahead of EPS by about two quarters. The SET Index recently fell as investors priced in likely unsatisfactory performance in the first and second quarters.
If the political situation finds a solution within the first half of this year, we expect listed companies’ performance to recover in the second half. That will prompt the SET Index to rebound in this period. On the contrary, if the political situation is prolonged into the latter half, listed companies’ estimated earnings will be revised down further.
Investment strategy: Market downside risk lowers after the market priced in the political factor and likely unsatisfactory performance in the first and second quarters. Wait to accumulate stocks when the SET Index moves in a range of 1,280-1,300 points. Stock picks: BBL (Bangkok Bank), BANPU, CPF (Charoen Pokphand Foods), HANA (Hana Microelectronics), SVI, PTTGC (PTT Global Chemical), SPALI (Supalai), JAS (Jasmine International), PSL (Precious Shipping), TTA (Thoresen Thai Agencies).