4Q21: Fair Game

4Q21: Fair Game

Source: Trinity Research

September 2021

Nuttachart Mekmasin, CFA, FRMTrinity Securities

- Pure valuation of global equity looks stretch. However, relative valuation when compared to bond yield is perfectly fair. As a result UST yield will be key to watch in 4Q21.

- QE tapering is in the rear view mirror. It will no longer matter whether when it will start (but likely in November). Market will now turn focus to policy rate path a.k.a. Fed Funds futures. As long as it stays low (a.k.a. behind the Fed curve), global equity will continue to be supported by ample liquidity.

- Due to market being behind the Fed curve, beware of global equity selloff if investors start to believe more in the Fed. However the good news for Thai equity market is that foreign holding is still near the lowest level on record.


Key view

2

Note: Data as of 28 September 2021


Global equity still looks fine on EYG measure

3

- A raising of debt ceiling to 70% of GDP will allow Thai government to do borrowings about 2.3 trillion baht in 2022F (funding deficit / refinancing / injecting new stimulus)

- Additional government stimulus would relieve some pressure on BoT from interest rate cut. As per the amount, a 1 trillion baht supplementary is possible in our view. If happens, domestic demand stands to benefit the most.

- Reopening theme is not something new for global equity. However in the case of Thailand who is among the last to recover, it seems this factor has not yet been fully priced in.

- For 4Q21, we prefer Large cap & Value over Small cap & Growth – all based on valuation and liquidity wise.


Key view (Con’t)

4


Preferred equity style box for 4Q21

Large

Medium

Small

Value GrowthBlend

5

- 3Q21 earnings are mostly in the price. Therefore focus on the firm that will have positive earnings trajectory from 4Q21 onwards. Most of them are domestic demand stocks.

- We believe the impact of some large caps with low free-float that has distorted the index for so long will be subside from now on. Investors are already aware of the new calculation measure from the SET and this should limit speculation in these stocks going forward. It’s a fair game now.

- For the rest of year we could see an adjustment from index/passive funds, offloading DELTA and loading more other large cap stocks. Top 10 largest stocks stand to benefit are PTT, AOT, ADVANC, CPALL, SCC, GULF, PTTEP, SCB, BDMS, OR


Key view (Con’t)

6

Key upside risk

- New massive stimulus measures and significant country reopening with an ability of the Govt to control new infections.

Key downside risk

- Market follows the Fed curve by pushing rate expectation up, causing a yield spike and bond shock phenomena.

Worth watching

- UST yield movement

- Slowdown of global PMI

- New calculation method for SET50/SET100


Positives & Negatives in 4Q21

7

Evergrande Liquidity crisis

8

- China Evergrande will likely face debt restructuring and it has some negative repercussion on China HY grade already. However the crisis has not yet spilled over to bank liquidity. Part of that was due to PBOC helping hand.

- We see no contagion risk to Thailand as most major developers and listed firms no longer used high leverage. Solvency ratio remains favorable and has actually been higher recently.

- Even for the firms that are using high leverage, it seems like investors are not quite worrisome on other similar stocks that have weak balance sheet. They are still the better performers in Asia recently.


Our view on Evergrande debt saga

9


Source: Bloomberg

Yield of China HY spook to record

10


Source: Bloomberg

But liquidity fear in banking system still not be seen

11


Source: Bloomberg

Part of that was because of PBOC liquidity injection

12


Source: Bloomberg

It seems like Evergrande crisis did not lessen investor appetite on weak-balance sheet stocks

13

Note: Data as of 2Q21

Source: BoT

Even there is a contagion, with healthy financial condition, Thai listed firms should easily survive.

14

Global and Thai economic checkup

15

- Thailand vaccine administration rate is pointing into a right direction. 100m doses target at the end of 2021 looks plausible right now. This could push the country to go ahead with further reopening plan and make a strong case for positive QoQ GDP growth in 4Q21.

- Domestic demand especially consumption will recover first, and it will be the primary Government target for new economic stimulus. Investment and tourism will likely come into picture starting next years onwards.

- Global PMI manufacturing new orders suggests Thai exports might soften markedly from 4Q21 onwards, especially for industrial goods.


Our view

16


Sources: MOPH, Trinity Research

Thailand vaccination rate on the rise – paving the way for more reopening

0

200,000

400,000

600,000

800,000

6-J

un

-21

13-J

un-2

1

20-J

un-2

1

27-J

un-2

1

4-J

ul-

21

11-J

ul-2

1

18-J

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1

25-J

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1

1-A

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8-A

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-21

15-A

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22-A

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-21

29-A

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1

5-S

ep-2

1

12-S

ep

-21

19-S

ep

-21

Doses Daily vaccine administered 7-day m.a.

17


Sources: Bloomberg, Trinity Research

Thai GDP will see positive QoQ momentum in 4Q21

-3

-2

-1

0

1

2

4Q20 1Q21 2Q21 3Q21E 4Q21E

% QoQThai GDP

18

Global PMI losing momentum

Note: Data as of August 2021

Source: Bloomberg19

China PMI on the fall especially new orders


Source: Bloomberg20


Source: Bloomberg

As a result Thai exports started to came back to earth

21

Central bank Monitor

22

- A start of QE tapering in November and the implied reduction pace of $15bn per month is in line with market expectation, so the impact should be muted. However, a more hawkish Fed dot plots has pushed UST yield and the USD up.

- 3-4 steps hike a year for Fed being shown in dot plots is well in line with history. If there are 5, it’s another story.

- Based on upward trajectory of DM policy rate, we see little possibility that the BoT will cut rate from current 0.5% level.

- We see limited downside risk for THB from the current level and expect BoT to intervene more at the level beyond 33.5 baht/USD. BoT currently has all kind of arsenal to do so.


Our view

23


Sources: Fed, Trinity Research

Fed plans for 3 steps hike a year …

24


Source: Bloomberg

… which is very in line with the past

25



Market believes the 1st hike will occur in March 2023 and still quite behind the Fed curve

26


Sources: ECB, Trinity Research

ECB bond buying started to fade away

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000M

ar-

20

Ap

r-20

Ma

y-2

0

Jun

-20

Jul-

20

Aug-2

0

Se

p-2

0

Oct-

20

Nov-2

0

Dec-2

0

Jan

-21

Fe

b-2

1

Ma

r-2

1

Apr-

21

Ma

y-2

1

Jun

-21

Jul-

21

Au

g-2

1

EUR, m ECB Monthly net purchases

27


Source: Bloomberg

BoT forward position pointed to more ability to intervene

28

Rates & Liquidity

29

- For 2022, upside risk for THB will depend on tourism outlook. THB could strike back if service revenue and current account balance start to gain traction. On the other hand, downside risk for THB will be hinged on Fed Funds rate path. If there’s more significant upward shift, 33.5/$ may not be sustain.

- For 4Q21 a likelihood of U.S. infrastructure bill could have implication on UST yield.

- Expect THB curve to extend steepening mode. ST yield will be capped by ultra-low policy rate outlook, while LT yield will continue to rise from more Government bond supply. This situation bodes well for value stocks.

- Local liquidity growth fell off significantly in recent months.


Our view

30


Source: Bloomberg

Thailand FX reserve still looks strong

31


Source: Bloomberg

Game changer for the THB is stronger C/A balance

32

We expect THB curve to lean towards more steepener


Source: Bloomberg33

A time for value to shine



0.0

0.5

1.0

1.5

2.0

2.5

3.0

-3M

-1M

Fir

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int

(Ma

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3)

+1M

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Kic

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(+

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+6M

QE

en

de

d (

+10

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%UST 10y - 2y THB 10y - 2y

UST 2021 episode THB 2021 episode

34


Source: Bloomberg

Local liquidity seemed off the pace recently

35

Commodity Power

36

- Restocking and supply-chain disruption are likely phasing out. Commodity price (Non-energy) are expected to soften along with inflation expectation in overall.

- Oil price expected to peak out in 3Q-4Q21 while market condition is still a supply deficit. After that, midstream players will start to benefit from stronger petroleum demand and lower crude price. GRM started to climb up recently.

- In the last report, OPEC were very bullish on Asian demand, which was driven by transportation fuels.

- If our assumption is right on softening inflation expectation, It’s hard for real bond yield to decline much further. No significant upside for gold as a result.


Our view on commodity

37


Source: Bloomberg

Commodity complex performance in 2H21 – AGRI is sliding down

38

Tightening oil market will end in 4Q21


Sources: OPEC, Trinity Research

-3

-2

-1

0

1

2

3

4

85

90

95

100

105

110

1Q

21

2Q

21

3Q

21E

4Q

21E

1Q

22E

2Q

22E

3Q

22E

4Q

22E

mb/d Balance World oil demand World oil supply

39

Oil demand by key regions – Asia being standout


Sources: OPEC, Trinity Research

8.0

8.5

9.0

9.5

10.0

40

45

50

55

60

1Q

21

2Q

21

3Q

21E

4Q

21E

1Q

22E

2Q

22E

3Q

22E

4Q

22E

mb/dmb/dOECD Non-OECD Asia ex.China, India (rhs)

40

Moving average of Singapore GRM


Source: Bloomberg41

Thai equity snapshot

42

- Current situation bode well to value stocks. Rising vaccination rate, gradual reopening, more domestic stimulus, steepening yield curve, relative undemanding valuation.

- After a cost cutting trend has recently ended, It’s time for companies to boost their revenue now. Firms with high operating leverage could see significant jump in bottom line. For this regard, we like Power sector most.

- We expect large caps to outperform small caps in 4Q21. A record low of foreign holding should limit selling pressure on blue chip stocks. Moreover, a slowdown in local liquidity will continue to dampen retail participation. These are the people who pushed up small caps price since 2Q20.


Our view on Thai equity market

43

Relative forward PE between Thai value & growth stocks – Value is a safe bet at this level


Source: Bloomberg44

Note: Data as of 2Q21

Source: BoT

It’s time to boost top line now

45


Sources: SET, Trinity Research

Foreign holding still near record low

26.8

32.2

24

26

28

30

32

34

36

38

40

Ja

n-0

4

Ja

n-0

5

Ja

n-0

6

Ja

n-0

7

Ja

n-0

8

Ja

n-0

9

Ja

n-1

0

Ja

n-1

1

Ja

n-1

2

Ja

n-1

3

Ja

n-1

4

Ja

n-1

5

Ja

n-1

6

Ja

n-1

7

Ja

n-1

8

Ja

n-1

9

Ja

n-2

0

Ja

n-2

1

Foreign holding of Thai stocks Avg

+1SD -1SD

+2SD -2SD

46



Retail participation on the fall

38

40

42

44

46

48

50

52

Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21

% (5D avg) Retail investor participation

47



Retail investor appetite starts to dissipate

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21

accounts Newly opened account

48

Index strategy & Investment Theme

49

- The good news is that SET EPS revision continues to look strong and 10y UST yield is still under 1.50%. This bode well to SET under earning yield gap (EYG) measure.

- Expected trading range of SET in 4Q21 is 1560-1660. Our fair level is still 1600 based on PE model. However, index could be stretched out to 1660 based on EYG model.

- Entry level is 1600 or below. On the other hand, anything beyond 1660 is demanding and fragile.

- Worst case scenario is 1500. If happens, recommend fully-invested on SET.


Index strategy

50

Roadmap for the rest of 2021


1450

1500

1550

1600

1650

1700

Jan

-21

Fe

b-2

1

Ma

r-2

1

Ap

r-21

Ma

y-2

1

Jun

-21

Jul-

21

Au

g-2

1

Se

p-2

1

Oct-

21

No

v-2

1

De

c-2

1

SET Index

51

SET 2022E EPS revision still looks strong


Source: Bloomberg52

Note: Projected EPS based on Bloomberg consensus; Upside and downside calculations are based on level of 1600


SET seems at fair level now

Case Multiple Based on SET TargetUpside /

Downside

Bull16.8x Fwd PE

(Stretch)2022E EPS (95.5 baht)

1604 +0.3%

Base15.7x Fwd PE

(Magic number)2022E EPS 1499 -6.3%

53



But earning yield gap tell us that 1660 is possible, given 10y UST yield could stay at 1.50%

0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90 2.00

93.5 1812 1778 1744 1712 1682 1652 1623 1596 1569 1543 1518 1494

94.0 1822 1787 1754 1722 1691 1661 1632 1604 1577 1551 1526 1502

94.5 1831 1797 1763 1731 1700 1670 1641 1613 1586 1559 1534 1510

95.0 1841 1806 1772 1740 1709 1678 1649 1621 1594 1568 1542 1518

95.5 1851 1816 1782 1749 1718 1687 1658 1630 1602 1576 1550 1526

96.0 1860 1825 1791 1758 1727 1696 1667 1638 1611 1584 1558 1534

96.5 1870 1835 1800 1767 1736 1705 1675 1647 1619 1592 1567 1542

97.0 1880 1844 1810 1777 1745 1714 1684 1655 1628 1601 1575 1550

97.5 1890 1854 1819 1786 1754 1723 1693 1664 1636 1609 1583 1557

= Stretch level

10Y UST Yield

Projected SET EPS for

2022E

54



SET earning yield gap update

4.43

4.3

2.9

3.6

4.9

5.6

2

3

4

5

6

7

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Jan

-20

Jul-

20

Jan

-21

Jul-

21

SET E/P gap vs 10Y UST Avg -2SD -1SD +1SD +2SD

55

Top Picks

56

- We like value stocks and domestic demand sectors. Those that are still trading below long-term average PBV are Banking, Commerce, Construction services/material, ICT, Media, Healthcare, and Property.

- We also like selected firms in Energy space specifically Power and Refinery. Though the sector is trading along the mean, there are some firms trading cheaper.

- Underweight: Non-oil commodity – restocking and inflation expectation likely peaked out; Export-oriented manufacturing e.g., ETRON and AUTO - Peak earnings in 3Q21 and slowdown in global manufacturing PMI


Focus on Value

57



PBV band since 2006

0

1

2

3

4

5

6

7

8

0

1

2

3

4

5

6

7

8

AG

RI

AU

TO

BA

NK

CO

M

CO

NS

CO

MU

N

CO

NM

T

EN

ER

G

EN

TE

R

ET

RO

N

FIN

FO

OD

HE

LT

H

INS

PE

TR

O

PR

OP

SE

T

TR

AN

S

xx Current Median


58


Source: Bloomberg

Top pick in Banking: KBANK, BBL

59


Source: Bloomberg

Top pick in Commerce: CPALL, GLOBAL

60


Source: Bloomberg

Top pick in Construction: STEC, TOA

61


Source: Bloomberg

Top pick in ICT: ADVANC

62


Source: Bloomberg

Top pick in Energy: SPRC, ESSO

63


Source: Bloomberg

Top pick in Utility: GULF, GPSC

64


Source: Bloomberg

Top pick in Healthcare: BCH, CHG

65


Source: Bloomberg

Top pick in Property: CPN, AP

66

MSCI Predictions

67

MSCI Thailand Standard Index


Market Cap (M)Foreign free float

(%)

Current status in

Standard IndexRemark

PTT 1,128,240 in

AOT 889,285 in

DELTA 621,196 in

CPALL 577,164 in

ADVANC 573,968 in

SCC 492,000 in

GULF 478,126 in

PTTEP 446,623 in

SCB 365,031 in

BDMS 363,927 in

OR 339,000 in

KBANK 286,689 Not enough NVDR room

SCGP 271,527 in

PTTGC 267,747 in

INTUCH 264,544 in

MAKRO 248,400 Not enough free float

IVL 241,426 in

CPN 239,190 in

EA 238,720 in

BAY 229,868 Not enough foreign free float

CPF 220,856 in

GPSC 219,234 in

BBL 217,608 Not enough NVDR room

CRC 202,038 in

HMPRO 182,802 in

68

MSCI Thailand Standard Index (Con’t)


Market Cap (M)Foreign free float

(%)

Current status in

Standard IndexRemark

MINT 167,669 in

KTC 162,435 in

KTB 156,532 in

AWC 138,240 in

BEM 136,036 in

BJC 135,263 in

DIF 133,959 Infrastructure fund

MTC 133,030 in

CBG 127,000 in

BTS 123,734 in

TRUE 112,703 in

BH 110,845 in

BGRIM 108,838 in

OSP 104,380 in

TU 103,344 in

TTB 103,256 22.9 Possible inclusion for Nov 2021

TOP 100,471 in

LH 96,793 in

KCE 96,581 58.0 Possible inclusion for Nov 2021

GLOBAL 96,175 32.1 Possible inclusion for Nov 2021

SAWAD 94,061 in

STGT 93,056 in

EGCO 91,342 in

RATCH 65,975 in

BAM 59,793 in

69

SET50/SET100 New rules & Predictions

70

- In the end, a free-float adjusted market cap index is inevitable. In the short-term, however, the SET has strong desire to impose stricter rules for SET50 and SET100 members as early as in the next round (1H22).

- Pilot adjustment will focus on liquidity measure. Qualitative screening will be used to exclude trading volume of stocks in the month that they were selected into Market Surveillance Measure List. This will easily delete DELTA from the list.

- Even without the new rule, our model did suggest a removal of DELTA in the next review date due to low turnover ratio.

- The impact on DELTA from index/passive fund selling off is vital as it’s a total removal, not free-float adjusted.


Our analysis

71

SET new liquidity criteria suggestion

Source: SET 72

Even with the same rule, DELTA is already subjected to exclusion in the next round


Source: Trinity Research73

Potential additions: AWC, TIDLOR, KEX Potential deletions: DELTA, BJC, STA


Source: Trinity Research74

4Q21: Fair Game

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