0521 th strategy-1q13

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Strategy, 21 May 2013

1Q13 Results Review Overweight

Overweight On Banks, Telcos & Transportation

Macro ��

Risks ��

Growth ��

Value ��

The Thai stocks within our coverage reported total net earnings of THB189.2bn for 1Q13, up 6.9% y-o-y, accounting for 27.7% of our FY13 earnings forecast. We maintain our FY13 earnings growth projection of 17.19% on improving earnings from the residential property sector and industrial estate operators as well as from the expected recovery in the Agro & Food sector in 2H13. Net earnings of Transportation (+62.1% y-o-y), Tourism & Leisure (+30.2% y-o-y) and Infrastructure (+47.8% y-o-y) sectors significantly outperformed expectations during the quarter.

♦ Total revenue grew 5.2% y-o-y in 1Q13, dragged down by a flat 0.2% revenue growth in the energy sector. Without factoring in the Energy and Petrochemicals sectors, total revenue expanded by 14.3% y-o-y. Sectors that enjoyed strong top-line growth were Banks (+19.3%), Residential Property (+21.6%) and Construction (+46.5%).

♦ Both revenue and net profit growth softened in 1Q13, as there were signs of weakening in some parts of the economy pertaining to exports and domestic consumption, due to the strong baht and lower farm income. However, civil and ICT contractors saw substantial increases in revenue, at 25%-60%, due to robust growth in Construction for both the private and public sectors. Mobile operators saw a 8.6% y-o-y revenue growth due to the strong demand for data.

♦ Ex-Financial Services sector, big cap stocks performed better due to controlled operating costs and economies of scale, which had led to sustainable earnings growth. Many of the small- to mid-cap stocks saw subdued and lumpy revenue growth due to weakening domestic consumption and higher costs as the new minimum wage ruling is now applicable to the whole country. Central Pattana (CPN) performed better than Big C Supercenter (BIGC), while Land and Houses (LH), Quality Houses (QH), Pruksa Real Estate (PS) and LPN Development (LPN) showed better growth than the smaller property companies. In the meantime, CH Karnchang (CK), Sino Thai Engineering (STEC) and Italian-Thai Development (ITD) performed well ahead of smaller contractors such as TRC Construction (TRC) and Sriracha Construction (SRICHA). ICT was the only sector where all big-cap counters eg Advance Info Service (ADVANC) and Total Access Communication (DTAC) as well as small cap ones like Samart Corp (SAMART), Advanced Information Technology (AIT) and LOXLEY showed decent growth.

♦ We expect the market to be volatile over the next few months with an upside bias as political risks and regulatory risks relating to the Thai baht, higher banking provisions and lower loan-to-value ratios for the residential property industry remain. The passing of the Infrastructure Bill will also help speed up public investments.

♦ We expect the SET to trend higher to 1,700 in the near term due to the possible cut in policy rate. The SET Index is currently trading at 14.34x P/E, 0.84x PEG and 2.49x P/BV. We are upgrading the Energy sector to Neutral with state-owned PTT as our top pick as we expect relatively stable earnings this year, with small volatility in crude oil/commodity prices. The PTT as a group is about to make a firm foothold into the ASEAN region with potential huge investments to be made in both Vietnam and Indonesia

Veena Naidu 66 2862 9752 [email protected]

21 May 2013

See important disclosures at the end of this report 2

We have an Overweight rating for Banks, Telcos and Transportation, while retaining the Selective Buys call on the Property, Energy and Construction sectors. Our top picks are Siam Commercial Bank (SCB), Krung Thai Bank (KTB), Thanachart Capital (TCAP), ADVANC, Shin Corp (INTUCH), DTAC, Airports of Thailand (AOT), Thai Airways International (THAI), CPN, PTT, PS, QH, LH, Amata Corp (AMATA) and CK.

1Q13: Sector Results Summary Figure 1: 1Q13 revenue and net profit

Source: Company Data, RHB Estimates

Net earnings for Transportation (+62.1% y-o-y) and Infrastructure (+47.8% y-o-y) significantly outperformed estimates. Collectively, the Transportation sector saw revenue increase by 8% y-o-y, with growth heavily skewed towards the aviation sector due to a 22% y-o-y surge in passenger demand as airlines enjoyed better economies of scale. The Shipping sector was weaker on a y-o-y basis as freight rates remain depressed. The 1Q13 key earnings highlight was the sharp unrealized forex gain recorded by companies holding foreign debt, notably AOT and THAI. The outperformer for the quarter was AOT, for which we have maintained our BUY call and raised our FV to THB188, as we upped its earnings estimates by 8%-12% for FY13-FY14.

Strong net earnings for Tourism & Leisure (+30.2% y-o-y). 1Q13 was the strongest quarter, due to the peak tourist season. Revenue growth was driven by higher occupancy and average room rates from the luxury to economy segments. As expected, economy and mid-scale hotels recorded stronger growth compared to the luxury segment although hotel operators’ margins improved y-o-y due to the high fixed costs nature of the business. 2Q and 3Q are expected to be weaker, due to the low season for tourist arrivals.

21 May 2013


Earnings for the Agro & Food (-66.6% y-o-y), Electronic (-47.5% y-o-y) and Automobile (+1.00% y-o-y) took a hit. Weakening farm incomes and the strengthening baht hurt domestic-related counters and exporters. Discount stores such as BIGC were negatively impacted by the softer domestic consumption, while food producers Thai Vegetable Oil (TVO) and Thai Union Frozen Products (TUF) felt the pain of lower product prices. The sturdy baht also hurt exporters like TUF, as well as automotive players. Meanwhile, Charoen Pokphand Foods (CPF) was hit by the outbreak of the Early Mortality Syndrome (EMS), which badly affected its high-margin shrimp business. EFABodyText Chart Text

A boost for Banks (+24.4% y-o-y). Thai banks’ 1Q13 earnings provided an upside surprise on several fronts, with: i) better efficiency in revenue generation, ii) better operating cost management, and iii) well-managed asset quality. Overall earnings, which grew at an average 24%, beat estimates by 4% and boosted ROEs to 18%. Earnings in line for Healthcare (+24.3% y-o-y). Bumrungrad Hospital (BH)’s and BCH’s results were within our expectations, while Bangkok Chain Hospital (BGH)’s results were above our estimates due to stronger than expected volume growth. As expected, BCH’s profit was down y-o-y due gestational losses from its World Medical Centre. BGH recorded the strongest revenue and net profit y-o-y growth due to expansion across its hospital network and advantages of its greater economies of scale. Meanwhile, revenue growth from BH was relatively modest compared to the high base in the 1Q12, due to pent-up demand from medical tourism after the flood crisis was over. Revenue growth for the sector is expected to be around 12%-15% in FY13, while margins are expected to remain relatively stable. We expect 2Q to be relatively weaker due to the holiday and festive seasons while 3Q would be a strong quarter due to the higher domestic demand post-rainy season. Construction earnings declined 18.7% y-o-y but revenue rose 46.5%. Earnings for smaller-scale construction players were negatively impacted due to lumpy revenue recognition. However all the three big contractors – STEC, CK and Italian-Thai Development (ITD) – showed improving core operations as their gross construction margins were relatively solid at 9%-10% due to the stable raw material prices. Their higher labor costs arising from the minimum wage policy were also partly offset by economies of scale. We expect the major contractors to continue to recording robust y-o-y revenue and earnings growth, due to higher billings from their outstanding backlogs.

Dismal earnings profit growth for Residential Property (+7.7% y-o-y). The sector’s revenue climbed 22% to THB33bn. Leading the pack was Ananda Development (ANAN) (+190% y-o-y), followed by QH (+39% y-o-y), PS (+36% y-o-y) and Supalai (SPALI) (+33% y-o-y). Nevertheless, massive marketing expenses and cost overruns put pressure on the sector’s bottom-line, which was at THB4bn (+5% y-o-y) and accounted for 15% of our full year estimate. However, the sub-sector’s results are generally back loaded, thus the majority of its earnings will be seen in 2H2013. In 1Q13, QH was the best performer in the quarter, with earnings surging by 94%, followed by SPALI (+78% y-o-y). Sansiri (SIRI) fared the worst, incurring a loss of THB86m. Looking forward, we expect PS, QH and LPN to record positive results in 2Q-3Q while earnings for ANAN, LH and SIRI are expected to peak in 4Q. The earnings of residential developers will depend on the completion of their condominium projects. Unexciting profit for Industrial Estates (+11.2% y-o-y). The Industrial Estate sector saw a 16% y-o-y revenue recovery from 1Q12, as it was impacted by end-2011 floods. Net profit grew modestly by 11% to THB1.64bn, accounting for 22% of our full-year forecast. Rojana Industrial Park (ROJNA) was the best performer for the quarter, with items such as a THB1bn insurance claim and THB140m of gains from the sale of its hotel in China factored into its net profit. AMATA had a soft start in both presales and results, but this is normal as the majority of its earnings will kick in during 2H. Ticon Industrial Connection (TICON) also had a soft start but will show better results once it starts to monetize rental assets via a property fund or real estate investment trust (REIT). In the meantime, Hemaraj Land and Development (HEMRAJ)’s earnings were modest in 1Q13 but is expected to plunge in 2Q13 amidst problems at its 35%-owned Gheco-One power plant.

21 May 2013


Better margins for ICT (+10.6% y-o-y). Revenues of mobile operators rose 8.6% y-o-y, underpinned by strong demand for data. Core earnings, however, grew at a more robust clip at 11% y-o-y due to lower: i) SG&A expense, ii) network maintenance costs, and iii) corporate tax rates. During the quarter, ADVANC’s core earnings of THB9.9bn (+11% y-o-y) were in line with expectations. Meanwhile, DTAC’s THB3.5bn (+11% y-o-y) earnings came in above estimates, chiefly due to its minimal capex in 1QFY13 and the amortization of the 3G-2.1GHz licensing fee, the service of which has yet to commence. For the next three quarters, we expect data revenue to continue growing strongly on the back of more aggressive 3G subscriber acquisitions. Core earnings growth, on the other hand, may not be as rapid in 1QFY13 given the inclusion of higher: i) depreciation & amortization expenses, ii) network-related costs, and iii) advertising & promotional activities.

Weak 1Q13 earnings for Energy (-5.0% y-o-y). 1Q13 earnings for the Energy sector fell 5% y-o-y to THB82.2bn, mostly attributable to the decline in crude oil prices. Utilities earnings dipped 3% y-o-y to THB5.6bn, mainly due to weak performance by Banpu, which saw its earnings plunge 67% y-o-y to THB925m. In exploration and production, PTT Exploration and Production (PTTEP)’s earnings improved 11% y-o-y to THB20.2bn on the back of higher sales volume and selling price. The refineries and petrochemicals saw a 17% y-o-y decline in earnings to THB20.2bn as a result of lower stock gains this quarter compared to previous year. PTT posted net profits of THB36.1bn, down slightly by 4% y-o-y, due to softer crude oil prices and slightly lower associates income, although its forex gain was much higher. The crude oil price ended the quarter with flat q-o-q growth, averaging USD107.93/bbl vs USD107.23/bbl in 4Q12. However, over the past year, the price of crude oil had fallen 7% from an average of USD116.37/bbl in 1Q12.

Energy: the PTT Group making a firm foothold into the ASEAN region

For PTT, we believe in its strong core-business – namely the natural gas business and the oil marketing and trading business. We think that news of the Government’s expected re-pricing of the liquefied petroleum gas (LPG) and possibly natural gas vehicle (NGV) will provide positive boost to PTT’s earnings. At the moment the Government plans to increase the prices at the retail level, but has not made any promises to PTT about the re-pricing of its products (LPG and NGV).

The PTT as a group is about to make a firm foothold into the ASEAN region with potential huge investments to be made in both Vietnam and Indonesia. Although PTTEP has invested in the region over the past decade, and PTT has already made small investments within the region, we will see the PTT Group announce large investments in both refinery and petrochemicals in the region over the next couple of years. We think this is a positive long term strategy that will enhance and ensure its future growth in one of the worlds’ fastest growing regions.

We are upgrading our target price and recommendation of Thai Oil (TOP) and PTT Global Chemical (PTTGC) to be on a 12-month target price, similar to how we value PTT. Although we expect 2Q13 earnings to be softer for the refineries/petrochemical companies, we also believe that the positive news flow will support their share prices.

We review up our target price of TOP to THB69/share (based on 1.5x PBV) and PTTGC TP to THB82/share (based on 1.5x PBV) and upgrade them both from SELL to NEUTRAL. We maintain our BUY recommendation on PTT with our TP at THB388/share (based on sum-of-parts valuation).

Sluggish Media & Publishing sector (-0.3% y-o-y) The sector’s revenue was unexciting at +5% y-o-y while net profit was flat at THB2.2bn (20% of our full-year estimate). BEC World (BEC) was the best performer, with core profit surging 25% y-o-y. Major Cineplex Group (MAJOR)’s net profit of THB301m (+29% y-o-y) was boosted by divestment gains of THB156m. Meanwhile, content providers such as Workpoint Entertainment (WORK) and GMM Grammy (GRAMMY) saw their earnings plunge due to high operating costs. Although RS is a content provider, its satellite TV business was profitable, which helped to boost its profit growth to 21%. VGI Global Media (VGI)’s profit of THB224m (+18.5% y-o-y) was significantly below expectations.

21 May 2013


Earnings forecasts for stocks in our universe Figure 2: Earnings forecasts

Source: Company data, RHB Estimates

Figure 3: Valuation table

Source: Company data,RHB Estimates

21 May 2013


Figure 4: 1Q13 results summary


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Source: Company Data,RHB Estimates

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Figure 5: Quarterly Revenue


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Quarterly Revenue (Continued)


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Figure 6: Top picks for May 2013


21 May 2013


Top picks for May 2013 (continued)


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RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. 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0521 th strategy-1q13

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