Etron Sector

Etron Sector

THB depreciating due to political unrest

THB has been depreciating continuously due to fund outflow from Thailand, as
the stock market has been pressed by the unpredictable political unrest and
the slowing economy. Moreover, MPC might possibly cut policy interest from
2.25% by another 0.25% at the 22 January 2014 meeting, and FED is likely to
start QE cut as U.S. economy has been recovering well. Currently, THB is at
B32.9/US$, likely to reach B34/US$ in near future, weaker than our
expectation for 2014-2015 at B31.5/US$. Thus, we might revise up our profit
forecast.
- Sector's profit to leap 16% from forecast if THB weakens to B34/US$
Weak Baht benefits electronic part sector, so we will revise up net profit
forecast in near future. According to our study on effect of THB depreciation
on the sector, every B1 of depreciation increases profit from the forecast by
the average of 6%. If THB weakens to the average of B34/US$ in 2014,
sector's net profit would increase by 16%. HANA would be the most
advantageous. 100% of HANA's income is in US$, while 85% of its cost is in
foreign currencies. Moreover, it has a small proportion of debt in US$. Thus,
HANA's FY2014 net profit is projected to rise by 18%. Next advantageous
companies would be DELTA, KCE, SVI and SMT. 100% of their income is in
foreign currencies (mostly US$). However, 80-90% of its cost is in foreign
currencies, and they have some proportion of foreign debt. Thus, the benefit
from weak THB would be partially negated (see next page for the increase in
their FY2014 net profit). CCET would be the least advantageous. 100% of its
income is in US$. However, nearly 90% of its cost is in foreign currencies, and
it has a large proportion of foreign debt, greatly negating the benefit from
weak THB. Thus, CCET's net profit is projected to rise by only 8%, the lowest
plus in this sector. Overall, under the assumption that THB would weaken to
B34/US$, the sector's FY2014-2015 net profit (excluding extraordinary income
from post-flood insurance claim) is projected to grow by 44%yoy and
13%yoy, respectively. Aside from weak THB, overseas orders for electronic
parts are also likely to increase, especially thanks to auto and smartphone
businesses. This is correspondent to economic recovery in the US and Europe,
which are main clients for electronic products.
- "OVERWEIGHT". Top pick is DELTA.
We recommend "OVERWEIGHT". Share prices have undergone correction in
the previous week, along with the market, so they have attractive upside.
Political unrest and slowing economy have no effect on the sector's earnings,
as most clients are outside Thailand. Top pick is DELTA(FV@B67) for its strong
financial position and good growth potential in next two years along with
power supply business related to data center and telecom businesses.
Moreover, DELTA focuses on variety of products in auto sector, responding to
growth in hybrid car and electric car businesses. We also recommend buying
HANA(FV@B29) and KCE(FV@B27), as they benefit most from THB
depreciation. HANA's share price is still laggard in the sector, with FY2013 PER
at 10x and dividend yield expected at 6%p.a (paid twice a year).