Time to trawl market for key stocks

 

  Thanawat Patchimkul

Head of Research, DBS Vickers Securities (Thailand)

 

The Thai market has been sluggish in the last two weeks. Overall sentiment was weak, as reflected in the declining trading activity. 

Average daily turnover slipped to Bt36 billion in May, compared with a Bt45-billion average in the first five months of this year. 

Foreign investors have been net sellers of Thai shares worth Bt6 billion year to date. They were also net sellers at Bt36 billion in 2014 and Bt195 billion in 2013. 

Key sectors that weighed down the market were banking and information and communications technology, as investors worried about asset quality deteriorating and delays in the auction of bandwidth for fourth-generation cellular phones. Tourism-related stocks performed well, in tandem with the positive outlook for tourist arrivals.

As far as external factors are concerned, market expectations are still fluid on the timing of an interest-rate increase by the US Federal Reserve, going by the economic indicators as well as Fed speeches. The euro zone has yet to resolve Greece’s problems. Japan’s economy has shown favourable progress so far with the support of a weaker yen. 

In China, the slowing economy has not discouraged local investors from pouring money into stock markets there as they anticipate more stimulus measures. The overheated stock markets led to a drop of 6.5 per cent in the Shanghai stock market and 2.2-per-cent drop in Hong Kong’s Hang Seng Index as investors panicked after brokers tightened margin rules, and fears mounted that China’s central bank might drain liquidity out of the system. We believe domestic liquidity in China remains high and stocks could regain their losses in the coming weeks. 

In terms of global fund flows, in the last three months, global investors were still pouring money into developed markets, particularly Hong Kong and Japan. But we saw significant outflows from the SPDR S&P 500 exchange-traded fund (SPY) worth US$17.5 billion (Bt590 billion) for the three months. There were smaller outflows from Chinese A-share ETFs and US Treasuries. 

Going forward, we recommend investors with a long-term investment horizon to start trawling the Thai market for key stocks, particularly banking shares such as Kasikornbank (KBANK), as their balance sheets are solid and would be able to absorb a mild increase in non-performing loans. 

Tourism stocks remain our favourites. Our top picks are Airports of Thailand (AOT) and Central Plaza Hotel (CENTEL). In the healthcare sector, we like Bangkok Dusit Medical (BDMS). For infrastructure plays, we like Ch Karnchang (CK). 

For regional infrastructure, we like major Chinese locomotive supplier CSR Corporation, which is merging with China CNR Corporation. The locomotive company has a strong chance of winning railway-extension projects in Thailand and elsewhere in Asia.

 

Tisco Securities

Encouraging first-quarter GDP data has eased our concerns on a possible technical recession. In general, EPS (earnings per share) growth bounced back into positive territory in 1Q15, rescued by net margin expansion. With more positive signs from the government budget, we anticipate an economic recovery in the second half of 2015 and believe potential political flare-ups coinciding with upcoming constitution debates should be manageable.

In our recent strategy update, we mentioned that we would be more positive if we saw three key developments: fiscal easing, sustained economic recovery and more attractive market valuations. The recent strong rebound in public investment and plans for a larger budget deficit in fiscal year 2016 imply that the first box is being “ticked”. The second box is around the corner, as the economy appears to have bottomed out, with material recovery coming in 2H15. We see evidence that the tide is turning in the recent improvement in non-durable retail sales and non-commodity-related exports.

We now await further progress towards our third key factor, more attractive valuations. Although further short-term correction is possible, this is likely to be somewhat mild in nature because of strong local-investor participation. While overall market valuations are still rich, the recent market pullback provides an opportunity to collect quality stocks at more attractive valuations.

We have removed HMPRO (Home Product Center) and QH (Quality Houses) from our top-picks list after their disappointing 1Q15 results and have added KBANK (Kasikornbank) and SCC (Siam Cement) as long-term picks. KBANK is now trading at 1.4 times P/B (price-to-book ratio), a key post-2009-crisis bounce-back level, and we believe bad news is already in the price. We like SCC for its exposure to a strong public-investment recovery and sustained high ethylene-chain margins.

We also like CPN (Central Pattana) because of its resilient rental income. The company could offer an earnings surprise when its third-biggest mall in Bangkok (Central Pinklao, partially owned by CPNRF, the CPN Retail Growth Leasehold Property Fund) returns to operations (expected by year’s end).

 

Kitpon Pripisankit

Equity Analyst and Strategist

Kasikorn Securities

 

Likely fluctuations during the first half of June, opportunity to buy

The Stock Exchange of Thailand (SET) continued to move downward for most of last week, reflecting the US Federal Reserve’s move towards interest-rate rises this year and prompting consistent appreciation of the US dollar. This pressured crude-oil prices and energy stocks across the world. Besides this, with concerns over Greece’s debt repayments, foreign investors became net sellers of Thai stocks. 

In the past two weeks, foreign investors opened their net-selling position for SET50 Index Futures consistently. The number of short sales on May 28 peaked at 23,368 contracts, the highest since the first trade of the index futures, leading to psychological impact on local investors’ investment. 

The SET Index rose instantly on the day foreign investors had net sales of more than 10,000 contracts. The stock market remained steady for up to 10 days before moving up. However, such short sales may signal the SET Index’ downward risk in the short term. We believe the market is close to a change of trend.

Emerging markets have underperformed developed markets since the beginning of 2013. The MSCI World and MSCI EM at 1.70-1.80 times is the point where we expect stocks in emerging markets will have a chance for strong recovery. They have been more attractive for short-term investment than those in developed markets during two past years. 

Returns on stocks since the beginning of this year in China were 38 per cent, South Korea was 10 per cent and Taiwan was 4.96 per cent. Returns in Thailand was 1 per cent, Indonesia was zero per cent and the Philippines (TIP) was 3 per cent. This is because listed companies have seen profits bottom out and have started recovering. We expect North Asia’s economy to have closer linkage with the US and Europe than TIP has and that could prompt a faster recovery. TIP’s listed-company profits will be close to the bottom, and this could be a support factor for these markets to recover in the next periods.

Greece is due to repay the International Monetary Fund 1.6 billion euros between June 5 and 19 and the euro-zone creditors a big sum in the next few months. It’s essential for the country to receive financial assistance of 7.2 billion euros from its euro-zone creditors. We expect the negotiations for this round may be prolonged to the last minute, which will pressure stocks and risky assets early this month before clear solutions are reached.

Impact factors that need monitoring: the European Central Bank meeting tomorrow and an agreement to help Greece before the next payment is due on June 5.

The market is expected to swing in a range of 1,480-1,510 points. Greece’s prolonged debt problem may pressure the SET Index to test 1,450 points in the first half of June. This is a key point to buy in this round before the Thai economic recovery. 

Investors are projected to accumulate stocks gradually, at about 25 per cent, during the first half of the month and overweight late in the month. If the SET Index drops below 1,450 points, banking stocks may fall too if the central bank’s Monetary Policy Committee cuts the policy rate again. This will be the best buy for banking stocks this year.

 

Stock picks: CENTEL (Central Plaza Hotel), SPCG, CPF (Charoen Pokphand Foods), SIRI (Sansiri), SC (SC Asset), SPALI (Supalai), SCC (Siam Cement), AOT (Airports of Thailand), ITD (Italian-Thai Development), HMPRO (Home Product Center), MEGA (Mega Lifesciences).

Technical picks: SGP (Siamgas and Petrochemicals), SUPER (Superblock), TGCI (Thai-German Ceramic Industry) MBK, TTCL, TTA 

 (Thoresen Thai Agencies), ARROW (Arrow Syndicate). 

Investors should set stop loss if stocks move down 3-5 per cent.

 

Research Department

Trinity Securities

Foreign investors are going ahead with net short sales in the futures market. From early May, accumulated short sales totalled more than 70,000 contracts, the highest ever. Most of them were new position openings. This situation reflected the lack of confidence foreign investors have in the Thai bourse. 

Based on our study, whenever foreign investors have net short sales of more than 15,000 contracts per day, the SET Index goes down 1.6 per cent on average in one to two weeks after that. If, in the next periods, foreign investors have not done short sales of more than 15,000 contracts, we expect the SET Index to fall to 1,460-1,470 points in the next two weeks before making a rebound.

Deputy Prime Minister MR Pridiyathorn Devakula’s remark that the baht’s recent depreciation was not too fast might increase weight on market expectations for a policy-rate cut next month even if there is small opportunity for this. We still expect Thai exports to improve clearly from May after the depreciating baht has a more positive impact. Overweight export-oriented stocks like HANA (Hana Microelectronics), CCET (Cal-Comp Electronics (Thailand)) and VNG (Vanachai Group).

The SET Index is expected to have limited upside during this period. It will continue its downtrend for two more weeks. When the SET Index weakens, focus on investment in three groups: export-oriented, hire-purchase, and energy and petrochemical products.