Left Brain Right B - the DBS Vickers Securities Equities Research

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Regional Equity Strategy 4Q 2009 Country Assessment Sector recommendation and stocks for Thailand SECTOR REMARKS STOCK SELECTION Banks & Finance Overweight (Upgrade from Neutral) Commerce Neutral Communication Neutral Under Thailand’s 1st and 2nd stimulus packages, the government plans to borrow from the domestic financial market from 2H09 onwards - this should benefit banks largely in terms of credit growth. In addition, large and blue chip corporates are switching from foreign to domestic banks for funding, which should create opportunities for domestic banks, and seasonally stronger demand from SMEs. Following this, we forecast FY09F loan growth at 2.2%, including inorganic growth at BAY and TISCO, and 4.8% growth for FY10F. In terms of asset quality, NPL ratio should improve to 6.6% by YE09F from 6.9% by YE08, with most banks still trying to reduce NPLs through write-offs and sale the rest of the year. KBANK and BBL are our top picks. We like KBANK for its good asset quality, lowest NPL ratio among peers, and attractive valuation, and BBL for its strong balance sheet, highest NPL coverage ratio, and strong capital base to cover rising NPL without the need to raise capital. The Consumer Confidence Index has improved for 3 consecutive months since June 2009, and our optimistic view of the Commerce sector is unchanged. We are maintaining our view that the three companies under our coverage (CPALL, BIGC, and HMPRO) are still strong in their respective markets, and their revenues are considered resilient to the weak economy relative to other sectors on the SET. We expect them to grow revenue and earnings continuously this year and next, led by continuous network expansion and effective cost control. Moreover, the government has extended several stimulus measures to boost consumption, e.g. cash handouts for low-income earners, which should be positive for the sector. These companies also have strong balance sheets. In our view, the convenience store format will grow the fastest in Thailand for the following reasons: (i) as the name implies, they offer convenient and quick services to clients, (ii) favorable locations, (iii) availability of value-added services such as bill payments, (iv) they are profitable because most work under a franchise model with good store management. Our top pick remains CPALL for its strong balance sheet, and earnings growth prospects led by (i) continued store expansion, (ii) increasing highmargin food products contribution, and (iii) positive impact from the full-year de-consolidation of loss-making Lotus Supercenter business in China this year. Thai Telecom sector underperformed the SET Index in Mar-Jun 2009 because cyclicals led the early phase of the market recovery. Nonetheless, the sector outperformed the market lately due to the progress of 3G license awarding. We believe the sector is attractive, and the next share price catalyst would be the award of 3G licenses. The National Telecommunication Commission approved the first draft of the 3G regulation on 9 Sep. The trial auction and final public consultation will be held in late September. The next few steps would be announcing the final 3G regulation in October and awarding the licenses awarded in early 2010. In our view, the replacement of four NTC commissioners is unlikely to take place before the 3G regulation is officially announced, and the NBTC is also unlikely to be set up before 2H 2010. All the major cellular operators will benefit from 3G licenses, but DTAC will benefit the most. DTAC is trading at only 12.8x FY10 PE and 5.0x EV/EBITDA, Its current valuations reflect only the value of its 2G operations. We also reiterate our Trading BUY call for TRUE. KBANK and BBL CPALL DTAC Page 119
Regional Equity Strategy 4Q 2009 Country Assessment Sector recommendation and stocks for Thailand SECTOR REMARKS STOCK SELECTION Construction Materials Overweight (Upgrade from Neutral) Contractor Neutral Electronics Components Neutral Domestic cement sales volume turned positive y-o-y for two consecutive months in June and July, up 5% and 3%, respectively. Steel sales volume is also improving, and positive economic growth expectations should support steel prices. Rebar price has inched up 15% in Aug from 2Q09 average. Meanwhile, although the Consumer Confidence Index remains near a 7-year low, August data has ticked up for 3 consecutive months since May. In addition, the 2nd stimulus package, worth Bt1.43 trillion and covers the government’s fiscal years October 2010-12, should accelerate domestic construction activities. 73% of the package is earmarked for infrastructurerelated projects. All the above factors point to signs of recovering demand for construction materials from 4Q09 onwards. Our top picks for the Sector are Siam Cement (SCC) and Tata Steel (Thailand) (TSTH). Contractors will be the prime beneficiary of government pump priming, especially its Stimulus Package 2 (SP 2), which will be focusing on infrastructure. The package will commence in Oct 2009 (fiscal 2009/2010), and spending should be seen in early 2010. Further, the sector will also benefit from falling construction material prices, which should result in margin expansion. Our top pick in the sector is Sino- Thai Engineering (STEC) for four reasons. First, the company has a large backlog (e.g. the second Purple line contract). Second, its net cash position will enable the company to bid for more projects. Third, its margins should improve considerably due to the end of its loss-making Airport link project. Lastly, the company has good connections with the government. We remain positive about a demand recovery in the Electronics sector from 2Q09 onwards, and that global demand had bottomed out in 1Q09. Following 12 months of manufacturers consuming their chip stockpiles due to slack demand in the face of the recession, inventories are now depleted to the point where new orders are needed. At the end of 2Q09, iSuppli estimates inventory value has fallen to US$24.9bn from US$32.6bn in 2Q08. Moreover, the economic stimulus programs in China, including incentives for purchasing consumer products and investments in 3G/TDSCDMA communications infrastructure, have helped to drive semiconductor sales in the world’s largest chip market. Hence, sales volume should start to improve q-o-q, and have a positive impact on Thailand’s Electronics sector. Further, Hana Microelectronics (HANA) has hired over 600 new employees since Apr09 following its 19% workforce reduction between Oct08 and Mar09 (from 9,120 to 7,364). It is likely to hire another 400-500 staff in 2H09. This is a positive development because it reflects expectations of a demand recovery since 2Q09 (compared to sharp drops in production orders in 4Q08 and 1Q09). The current outlook for electronics export orders remains strong, and 2H09 prospects remain positive h-o-h. This will be led by (i) continued replenishment of the supply chain (following reduced capacity of manufacturers in 4Q08), (ii) increasing orders as demand improves, (iii) peak season in 3Q, and (v) low base in 4Q08. SCC and TSTH STEC DELTA, HANA and CCET Page 120
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Left Brain Right B - the DBS Vickers Securities Equities Research

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