Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Country Assessment
Sector recommendation and stocks for Thailand
SECTOR REMARKS STOCK SELECTION
Energy
Overweight
Entertainment
Underweight
(Downgrade from Neutral)
Property Development
Overweight
We expect crude oil price to remain volatile at around US$70, but should
move upward towards year-end supported by seasonally stronger demand
for heating oil in winter. Although refining margin has bottomed out,
continued high inventory levels and new refining capacities should remain an
overhang and cap refining margin gains. Refining margin bottomed out at
US$2.4/bbl average in July, but has since recovered to US$3-4. We expect
margins to hover at US$3-5 going forward.
Refinery stocks strongly outperformed the SET and domestic and regional
peers in 3Q09. This was fuelled by speculations about upcoming merger
plans between PTT’s refinery and petrochemical affiliates. In our view,
refinery share prices have risen ahead of a fundamental recovery. Therefore,
we continue to favor upstream and integrated plays, like PTT Exploration &
Production (PTTEP) and PTT, which are direct beneficiaries of rising crude oil
price.
Overall ad spending for 7M09 fell 4.3%, while TV ad spending for the same
period softened only 1.0%. Despite minimal ad spending recovery currently,
the dispute between Ch7 and Unilever has resulted in ad migration from Ch7
to other channels, especially BEC’s Ch3 and MCOT’s Ch9. And with the
dispute expected to continue throughout the year, the ad migration will
continue into 2H09. This, coupled with the recent recovery of overall ad
spending, means BEC and MCOT will still enjoy strong loading even during
the low season (August). Generally, ad income in 3Q is lower than 2Q, but
now it seems 3Q09 ad income could buck the trend. We expect earnings to
be relatively strong in 4Q09 for three reasons: (i) 4Q is a high season for ad
spending in Thailand; (ii) the economy should have improved by then; and (iii)
positive impact of ad migration from Ch7 should continue into the quarter.
We reiterate our BUY rating for BEC and MCOT. BEC remains our top pick in
the sector.
Thai Property sector reported 3% y-o-y and 22% q-o-q earnings growth in
2Q09 led by (i) stronger sales, (ii) wider gross margins, and (iii) relatively flat
SG&A expenses. Most property companies still have healthy balance sheets
with average net gearing of 70% at end-2Q09. Prospects for the sector
remain positive in 2H09, supported by (i) the low interest rates environment,
(ii) rebounding consumer confidence, (iii) improving economy, and (iv) falling
supply particularly from small & non-listed developers. Several companies
have also secured large backlogs, which should ensure revenue streams this
year and next. Major companies are also planning to launch more projects in
2H09 and 2010, which should result in higher bookings and revenue.
Share prices in the sector have risen 87% YTD, out-performing the SET
Index’s 58% gain. But several stocks are still trading at below historical
valuations while offering very generous dividend yields. We recommend
investors focus on companies with strong balance sheets, large quality
backlogs (implying clearer earnings visibility), diversified portfolios, and
attractive valuations. Our top picks are Preuksa Real Estate (PS TB), Asian
Property Development (AP TB) and Supalai (SPALI TB) for their large backlogs,
attractive valuations and high dividend yields. Quality Houses (QH TB) is also
rated a Buy for its attractive valuation and strong earnings growth next year
due to condominium transfers.
PTTEP and PTT
BEC and MCOT
PS, AP, SPALI and QH
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