the best of asean for 2015 small caps - i3investorvinamilk 103,000 120,000 sales to surprise...

February 9, 2015

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA

ASEAN STRATEGY

The best of ASEAN for 2015 The key positives in ASEAN for 2015 are sectors that have exposure to the US economy, earn in US$ and benefit from Chinese tourists and government spending. Weaker commodity prices will impact rural incomes in Thailand, Malaysia and Indonesia.

Figure 1: Top picks

Stock

Share

price

Target

price Re-rating catalysts

Large caps

Gamuda 5.15 5.99 Potential of clinching more jobs such as MRT2 and LRT3

First Gen Corp 29.00 31.00 Benefiting from supply shortage and commissioning new plant

Minor International 34.75 42.00 Beneficiary of surging inbound tourism

ST Engineering 3.43 3.93 Earnings recovery post restructuring and stronger USD

Vinamilk 103,000 120,000 Sales to surprise positively given anecdotal evidence

Small caps

8990 Holdings Inc. 9.41 10.60 Robust economy to drive demand for affordable houses

Central Plaza Hotel 32.75 38.50 Beneficiary of surging inbound tourism

KCE Electronics 50.25 55.00 Exporter with USD-denominated revenue

Nusa Raya Cipta 1,545 2,100 Beneficiary of government infrastructure spending

Mobile World 127,000 134,000 Revenue surprise from rising adoption of smartphones

Muhibbah Engineering 1.98 2.75 Oversold, beneficiary of government spending

Ha Tien 1 Cement JSC 19,700 27,917 Beneficiary of government infrastructure spending

Venture Corporation 8.22 8.91 Net cash, exporter with USD-denominated revenue

(Local currency)

SOURCES: CIMB, COMPANY REPORTS

We are bullish on Indonesia, the Philippines and Vietnam given the strength of their economies and resilience of corporate earnings but cautious on Singapore, Thailand and Malaysia given further anticipated earnings disappointment. Figure 1 summarises our top regional picks.

Exporters The strengthening US$ and robust US economy will benefit exporters, such as electronics manufacturing service providers and drug makers, namely Venture, MPI, Unisem, KCE, Hovid and Karex. First Gen in the Philippines will also benefit from a stronger US$.

Tourism Chinese tourists are returning to Thailand, Singapore and Malaysia after the MH370 disappearance, kidnappings in Malaysia and coup in Thailand. Malaysia is emulating Thailand by waiving visa fees of Rmb80 (US$13). Key beneficiaries are Airasia, MINT and CENTEL.

Infrastructure spending

Governments in the region will continue to spend on infrastructure. After slashing fuel subsidies, Indonesia has freed up Rp290tr or 2.7% of GDP to spend on infrastructure, education and healthcare. Our top picks are INTP, PTPP and WIKA. In Malaysia, we anticipate more progress for outstanding major infrastructure projects (total value RM117bn) in 2015, which will benefit Gamuda and Muhibbah. Infrastructure spending in Vietnam has jumped from 2-3% of GDP before 2013 to 5-6% presently, a shot in the arm for HT1, Vietnam’s leading cement company. We expect the Philippine government to step up spending as this is a pre-election year, boding well for Holcim Philippines and La Farge Republic.

Key risks An unexpected rise in US interest rates or a global economic or financial shock (e.g. Grexit) could pull capital from emerging markets to safe havens. A weaker-than-expected China economy could also dampen ASEAN economies.

Sources: CIMB. COMPANY REPORTS

Notes from the Field

—————————————————————————————————————————

Kelvin GOH, CFA T (60) 3 2261 9099 E [email protected]

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Contents

EXPECT WEAK EARNINGS MOMENTUM TO PERSIST .... 2 INFRASTRUCTURE SPENDING .......................................... 4 EXPORTERS......................................................................... 8 THE RETURN OF THE CHINESE TOURISTS .................... 10 RISKS .................................................................................. 12 VALUATION AND RECOMMENDATIONS .......................... 14

Highlighted Companies

Minor International

MINT will benefit from strong tourist arrivals from China, which we estimate contributes 15% of its revenue.

8990 Holdings

This under-researched, high-margin, high-ROE builder of affordable homes is well placed to address a deficit of 3.1m units of low-cost homes in the Philippines.

Nusa Raya Cipta

Nusa Raya Cipta is an under-researched, undervalued private construction company that stands to benefit from the ample job flows brought about by the new government’s commitment to infrastructure development.

Muhibbah Engineering

Concerns over capex cuts by Petronas are largely overblown as it has secured some work for Rapid. Muhibbah should benefit from the construction of MRT2 and LRT3. Cambodia airports and Favelle Favco, which it has stakes in, earn largely in US$.

http://www.efasoftware.com/

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The best of ASEAN for 2015 EXPECT WEAK EARNINGS MOMENTUM TO PERSIST

2015 consensus earnings expectations in ASEAN were weak in the last 12 months with the Philippines and Singapore being the most resilient. Earnings forecasts for Malaysia and Thailand are the most disappointing, having been revised down 11% and 18%, respectively, over the past 14 months. We expect the Philippines to be the most resilient, followed by Indonesia, but foresee further earnings downgrades in Malaysia, Thailand and, possibly, Singapore.

Figure 2: 2015 consensus earnings in ASEAN have been revised down

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ID MY SG TH PH SOURCES: CIMB, DATASTREAM

Indonesia

We expect earnings expectations to trough as consumption should remain weak while mining companies write down their inventories in 4Q14. We also assume the government will start spending only in 2Q although the budget has already been approved. The risks to our view are delays in government spending and prolonged weakness in consumption due to lower commodity prices. Similarly, we think there is downside risk to consensus 2015 GDP growth forecast of 5.4%; we project 4.9%. This is on the back of possible disappointments in channelling subsidy savings to infrastructure spending.

Malaysia

We anticipate more earnings downgrades because of weak crude palm oil (CPO), oil and LNG prices as well as potential cuts in banks’ earnings. Our Malaysian banks analyst Winson Ng says that the sector is experiencing a squeeze on NIMs and expects mortgage loan growth to slow in 2015 due to the introduction of GST. Our economist Julia Goh thinks there is downside risk to CIMB and consensus GDP growth forecasts of 5% and 4.9%, respectively. Expectations are likely to be downgraded due to weak private spending (i.e. household consumption and private investments) as consumer sentiment is dampened by the introduction of GST.

Thailand

We believe consensus’s 2015 EPS growth forecast of 18% vs. an estimated 2% in 2014 in Thailand is likely to be revised down to single-digits due to weak economic prospects and poor consumer sentiment, the result of poor farm prices. Also, we think consensus GDP forecast of 4.2% is overly optimistic vs. CIMB’s 3.3% on the back of weak anticipated exports growth as Thailand’s electronics exports are mainly in the slower-growth non-mobile space, a

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lacklustre rural economy as a result of poor farm prices and disappointments in fiscal spending.

Singapore

We think there is some more downside risk to the earnings of SGX-listed companies given their exposure to regional economies, which are decelerating, and oil and CPO prices. Also, falling property prices are putting pressure on property sector earnings. Lastly, rising domestic labour costs are squeezing the margins of some corporates. The government projects 2-4% GDP growth. CIMB forecasts 3.4% and consensus 3.1% given that the economy is going through a rebalancing (moving up the value-added chain) and corporates are struggling to cope with rising labour costs.

The Philippines

We believe the Philippines will be the most robust, both in terms of earnings expectations and GDP growth. It is enjoying low inflation, accommodative interest rates, lower fuel prices, rising foreign reserves and healthy economic growth. In addition, we expect the government to spend on infrastructure this year, which it typically does the year before an election. The Philippine consumer sector will benefit from lower oil prices and strong remittances. Given the solid fundamentals, we see little downside risk to consensus EPS numbers. While the government has set a 7-8% GDP growth target for 2015, we forecast 6.7% while consensus projects 6.1%.

Vietnam

Vietnam is shaping up nicely, with the key weaknesses being addressed by the government. Inflation and interest rates are at multi-year lows, the fiscal deficit is narrowing, the property overhang is being cleared and non-performing loans are being resolved with the strengthening of the Vietnam Asset Management Company (VAMC). Consensus expects GDP growth to rise from an estimated 5.9% in 2014 to 6.2% in 2015, driven by an acceleration in loan growth from 13% in 2014 to 15% in 2015. Also, we note that new regulations implemented on 1 Feb will ensure that a higher proportion of Vietnam's newly-created credit actually reaches end-borrowers; in 2013 and 2014, a significant portion of credit growth went towards helping distressed debtors stay afloat.

Figure 3: Forward-looking economic indicators in ASEAN

Malaysia Indonesia Singapore Thailand Philippines Vietnam

2014E 6.0 5.2 3.2 0.6 6.2 5.6

2015F 5.0 4.9 3.6 3.3 6.7 5.8

2014E 3.2 5.3 1.1 2.0 4.3 4.5

2015F 4.0 4.9 0.2 2.0 3.8 5.8

2014 3.3 7.8 0.4 2.0 4.0 4.5

2015F 3.3 8.0 0.9 2.0 4.3 4.0

2014E 5.2 -2.9 17.6 3.8 3.1 4.4

2015F 5.0 -2.4 16.3 2.7 3.0 3.5

2014E -3.5 -2.6 0.5 -2.0 -2.0 -5.3

2015F -3.0 -2.5 0.4 -2.5 -2.0 -4.5

Current 3.50 12714 1.31 33.0 44.7 21388

2015F 3.70 13500 1.4 40.0 48.0 21700

GDP (%)

Inflation (%) *

Interest rate (%) ^

Current account balance

(% GDP)

Fiscal balance

(% GDP)

Exchange rate

(vs US$1)


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INFRASTRUCTURE SPENDING

We believe governments in the region will continue to spend on infrastructure, with Indonesia and the Philippines expected to step up spending.

Indonesia

After slashing fuel subsidies, Indonesia has freed up Rp290tr or 2.7% of GDP to spend on infrastructure, education and healthcare, with the assumption that oil prices come in at US$70/bbl. It will be in a position to prop up spending, particularly for infrastructure, healthcare and education. The government’s spending theme, we believe, will be critical as consumption growth is expected to be dampened for the next 2-3 quarters following the fuel price hike. If the government can speed up spending and improve the ease of doing business, combined with the average anticipated 2015 wage hike of 13% yoy, we think investment growth should pick up following a sluggish 2014, the result of elections and messy politics.

With the prospects of a pick-up in government spending, it makes more sense for investors to continue playing the theme as infrastructure-related sectors should see more sustainable earnings growth. We consider construction a close proxy for this theme. Our top picks within the construction space are NCRA, PTPP and WIKA.

Figure 4: Indonesia’s infrastructure budget (in Rp tr and % of GDP)

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Source:


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Malaysia

Public and private sector projects remain the main themes for construction in 2015. We continue to anticipate more progress in the RM150bn (Figure 5) in total value of outstanding major infrastructure projects in 2015. This includes the RM25bn MRT 2, which should start its tender phase in 2H15, the RM9bn LRT 3, the RM27bn Penang Transport Master Plan (PTMP) and several more highway infra projects on top of the remaining works for the West Coast Expressway. Overall sector drivers include segments such as rail, highways, power plants and oil and gas infrastructure. We also anticipate greater clarity on the government's execution plans for the RM30bn-40bn KL-Singapore high-speed rail (HSR) in 2015. Gamuda is our top big-cap pick while Muhibbah Engineering is our preferred small-cap stock in the construction space.

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Figure 5: Value of construction jobs awarded in Malaysia

53 55 61

93

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120 118

0

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Value of jobs awarded (listed & non-listed contractors) - RM bn

RM bn


Figure 6: Outstanding construction jobs over the next 12-18 months in Malaysia

Value Next

Project owner RM m Category milestone Time line Funding

Klang Valley MRT 2 (KVMRT 2) MRT Corp 25,000 Rail Prequalification 2H15 Gov't/Bonds

West Coast Expressway (WCE) remaining packages WCE Sdn Bhd 2,800 Highway Tenders 1H15 Private sector

Penang transport infra master plan Unknown 27,000 Highway & rail PDP agreement Aug-15 Private sector

Pan-Borneo Highway Unknown 27,000 Highway Tenders Unknown Gov't

Kuantan Port expansion KPC 3,000 Port infra Award 2H15 Private sector

Infra/site preparation for Kwasa Damansara (RRI Land) Kwasa Land 1,000 Infra/TOD Tenders 2H15 Private sector

KL-Singapore high speed rail (HSR) Unknown 30,000 Rail Project structure 2H15 Unknown

Rapid - oil & gas marine related infra Petronas 3,000 Infra Awards 2015 Private sector

Rapid - water & sewerage Petronas 1,000 Water infra Awards 2015 Private sector

Kinrara -Damansara Expressway (Kidex) Kidex 3,000 Highway Awards end-2015 Private sector

Sg. Besi Ulu Kelang Expressway (Suke) Prolintas 2,000 Highway Tenders end 2015 Private sector

Damansara-Shah Alam Highway (Dash) Prolintas 2,000 Highway Tenders end 2015 Private sector

Warisan 118 Tower PNB 3,000 Commercial Awards 2015 Private sector

LRT 3 (Bandar Utama - Klang) Prasarana 9,000 Rail Tenders 1Q15 Gov't/Bonds

Gemas-JB double tracking Unknown 8,000 Rail Unknown Unknown Gov't

Monorail extension (KL Sentral - Bandar Sunway) Unknown 2,500 Rail Unknown Unknown Gov't

Total 149,300 SOURCES: CIMB, COMPANY REPORTS

Thailand

While we think government infrastructure spending is the country’s only hope for lifting its economy, progress so far has been quite disappointing. One of the reasons for the delays in spending are efforts to fight graft in the system. The military government has set up a committee, called the Budget Monitoring and Scrutinising Committee, to review all major government and state enterprise projects that are worth more than THB1bn (US$30m). And since all government infrastructure projects are worth a lot more than THB1bn, they have to be evaluated by the committee. The committee has already asked some government agencies to review a number of these projects, which have led to rollout delays.

In addition, the bidding process for future mass transit systems could be delayed if the government’s plan to create a new government agency, the Rail Transport Authority of Thailand, materialises. This new agency will be tasked with the bidding process for all mass transit rail networks and maintaining them while the State Railway Authority of Thailand (SRT) and the Mass Rapid Transit Authority of Thailand (MRTA) will focus on providing services to the public.

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Lastly, the 19% yoy decline in the value of projects submitted for BOI incentives in 10M14 does not bode well for 2015’s investment outlook.

Should the military government get the wheels of construction turning, we think CH Karnchang will be the key beneficiary as it has the closest connection with the current military government given its long history of constructing military buildings. Other contractors should also benefit: Italian-Thai Development (ITD), Sino-Thai Engineering (STEC) and Unique Engineering (UNIQ).

Figure 7: THB2.4tr of public investment committed to improving the rail system in Thailand

Transportation Projects Number of projects

1 Rail (70.13%) 32 1,683,210

Dual Track Train 17 469,544

Dual Track Train (standard gauge) 2 741,460

Metropolitan Rail System 13 472,206

2 Roads (20.26%) 18 486,342

Construction of express ways connecting to major cities 3 163,050

Upgrading rural road network 4 33,164

Upgrading transportation system 8 147,992

BUS NGV and bus park 1 13,383

Others 2 128,753

3 Deep Sea Port (1.12%) 6 26,878

4 Airport (4.74%) 7 113,623

5Others such as repairing rail route, installing fences

and traffic signals (3.75%)11 89,947

Total 74 2,400,000

THBm


The Philippines

Construction spending by the government should rise in 2015, which is a pre-election year. Government expenditure and infrastructure spending have on average risen 12% and 28% yoy (Figure 8), respectively, in a pre-election year since 1990. Key beneficiaries of construction spending are cement producers Holcim Philippines and La Farge Republic.

Figure 8: Average growth in government spending yoy in the Philippines (%) from 1990 to 2014

0

5

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election year off-year pre-election year all years

Total Expenditures Capital Outlays (Infrastructure)


\

Vietnam

We estimate that infrastructure spending in Vietnam has jumped from 2-3% of GDP in the years preceding 2013 to 5-6% of GDP at present. This jump in spending is evidenced by a plethora of large construction projects, including roads, bridges, a new subway in HCMC and new power stations as well as a

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pick-up in the sale of steel and cement (cement demand grew 11% in volume terms in 2014 after falling by about 2% a year for the past few years while steel demand rose 12% after growing about 2% a year in recent years). In addition to the projects currently under construction, a slate of new projects that are mainly focused on the periphery of Vietnam’s major cities is in the works as well as new ports and a new airport for HCMC (the existing airport is located in an increasingly-congested area inside the HCMC city limits). Also, some large projects are being completed; as this report is being published, a new bridge and highway connecting Hanoi’s airport to its CBD will cut the driving distance in half to 15km while a new US$900m terminal, funded by Japanese ODA, will dramatically expand that airport’s capacity. HT1, the country’s largest and most efficient cement producer, and HPG, the largest and most efficient construction steel producer in Vietnam, are key beneficiaries here.

Figure 9: Major infrastructure projects in Vietnam

Project name

Investment

(US bn) Time frame Description

Long Thanh Airport 18.7 2015-2020 help to ease pressure on Tan Son Nhat, which is expected to become overloaded by 2017

HCMC-Long Thanh-Dau Giay Expressway 0.9 2012-2014 12km section with a 4km bridge and 8km approach roads

Ben Luc – Long Thanh Expressway 1.5 2014-2018 57km long, four-lane highway linking Long An Province, in the Mekong Delta, with southern Dong

Nai Province

Metro Line 1 2.49 2014-2019 connecting Ben Thanh Market and Suoi Tien Park

Metro Line 2 1.25 2016-2019 connecting Ben Thanh Market to An Suong in District 12

Noi Bai - Lao Cai expressway 1.45 2009 -2014 Vietnam’s longest expressway (245km), cutting Hanoi - Lao Cai travel time in half

Dau Giay-Lien Khuong Highway 3 2015-2018 200km expressway connecting Dau Giay in Dong Nai province to Lien Khuong airport in Lam

Dong province

Hanoi - Hai Phong highway 2.2 2008-2015 105km highway

Da Nang-Quang Ngai Expressway 1.4 2011-2018 140km highway

Nhat Tan Bridge 0.647 2011 -2015 Vietnam's longest cable-stayed bridge , with a length of 8.9 km and six lanes, connecting Hanoi

to Noi Bai Airport

Dong Tru Bridge 0.33 2006-2014 Viet Nam's first concrete-filled steel tubular arch bridge, with a length of 1.1km and eight lanes

linking Dong Anh District with Long Bien District

Trung Luong - My Thuan Expressway 0.7 2014-2019 54km long, four-lane highway connecting HCMC with Can Tho province

Lach Huyen deep water port 1.2 2013-2017 This new port in Hai Phong will be capable of handling 100,000DWT ships (Hai Phong’s river-

based port can only accommodate 40,000DWT ships, which must transfer their cargo on to larger

container ships at Hong Kong or Singapore)

National highway 1A 4.5 2008-2015 Upgrade 1500km-highway, which connects the North and South of Vietnam

Total 40.3 SOURCES: CIMB, COMPANY REPORTS

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EXPORTERS

The strengthening US$ and robust US economy will benefit exporters, such as electronics manufacturing service providers and drug makers. The Php and VND are the most resilient currencies, tracking the US$ closely and even strengthening against the US$ in recent weeks (Figure 10). The RM, S$ and Rp have weakened the most against the US$, depreciating by 15%, 8% and 7%, respectively, since September.

We think the ASEAN currencies should continue to weaken relative to the US$ as central banks are likely to lower interest rates to support their economies and given the US economy’s robustness. Exporters will benefit from a weakening domestic currency.

In this space, we like Venture, MPI, Unisem, KCE, Hovid and Karex (Figure 11) for their net US$ exposure as well as their exposure to the US economy.

Figure 10: ASEAN currencies have been weakening against the US$

Title:

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Figure 11: Beneficiaries of strong US$/growing US economy

Stock Bberg

Ticker

Market

cap

(US$m)

USD

revenue as

% of total

revenue

Sales to

US

USD opex

as % of

revenue

Net

debt/

EBITDA

(x)

USD debt Comments

Venture VMS SP 1,637 80-90% 0% 60-70% Net Cash

KCE KCE TB 774 100% 18% 60% 1.88 44% debt in USD, 80%

Hedged

DELTA DELTA TB 2,801 72% 26% 47% Net Cash

HANA HANA TB 1,024 100% 12% 53% Net Cash

SVI SVI TB 294 85% 6% 69% Net Cash Still recovering from the fire incident. We expect

earnings to contract 42% yoy

MPI MPI MK 318 100% 30% 45% Net cash

Uchi UCHI MK 157 100% 1% 55% NA NA Exports are largely to Europe

Unisem UNI MK 371 100% 65% 45% 1.3 72% (about 50% hedged) Traditionally hedges payments due in 12 months

Karex KAREX MK 443 90% 20% 20% Net cash

Hovid HOV MK 80 50% 0% 30% Net cash

Timber exporters

Jaya Tiasa JT MK 508 75% 0% 0% 2.63

13% of debt is denominated

in USD

Ta Ann TAH MK 387 65% 0% 0% 0.70

2% of debt is denominated in

USD

Other

ST

Engineering

STE SP 7,944 0.24 0.24 0.24 (1.1) 33% of total debt is variable

~50% of debt is in US$

STE has on-the-ground US operations. Every

US$0.01 movement could have impact of S$20m

on revenue and S$2m on profit (translation effect as

books are recorded in S$)

Condom and drug makers

Electronic manufacturing services/semiconductor packaging and test


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February 9, 2015

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THE RETURN OF THE CHINESE TOURISTS

The number of Chinese tourists to Singapore, Malaysia and Thailand plunged (Figure 12) following the disappearance of Flight MH370, the abduction of Chinese visitors in Malaysia’s Sabah state and the political unrest in Thailand. Most Chinese tourists visit these three countries together as part of a package in large tour groups. To stimulate tourist arrivals, Thailand launched a visa fee waiver scheme for China and Taiwan passport holders from 9 Aug to 8 Nov 2014. Malaysia followed suit, waiving the Rmb80 (USD13) visa fee. Having said that, the processing fee of Rmb120 yuan still applies.

Despite the end of Thailand’s fee-waiver period, Chinese tourist arrivals in Thailand rose to a record 513,441 in November and 494,034 in December from the trough of 216,934 in June.

We expect Chinese tourist arrivals in the region to rebound as political stability returns to Thailand and the Rmb appreciates against ASEAN currencies (Figures 12 and 13) amid China’s relatively robust economy. We expect tourist arrivals to Thailand to rise 10% yoy to 27m in 2015 from 24.8m in 2014, after declining 7% yoy in 2013. Meanwhile, the Tourism Council of Thailand expects tourist arrivals to grow 15% to 28.4m in 2015.

Figure 12: Chinese tourist arrivals Figure 13: The Rmb is appreciating against the ASEAN currencies

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Singapore Thailand Malaysia

MH370 incident

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SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

The key beneficiaries, which are summarised in Figure 14, are transport (AOT and AAV in Thailand, AAX and Airasia in Malaysia), retail (BEAUTY in Thailand) and hospitality (ERW, MINT and CENTEL in Thailand, CDL-HT in Singapore). These companies have a minimum 10% revenue exposure to Chinese travellers, based on our estimates.

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Figure 14: Companies benefiting from inbound Chinese tourists

Company Comments Est % of revenue from Chinese travellers

Malaysia

AirAsia AirAsia has direct flights to Southern China from its bases in Malaysia and Thailand, so an

increase in Chinese tourists should help improve load factor/yield.

No breakdown

AirAsia X AirAsia has direct flights to Northern China from its bases in Malaysia and Thailand, so an

increase in Chinese tourists should help improve load factor/yield.

No breakdown, but revenue for flights to North Asia accounted

for 48% of AirAsia X's revenue in 9M14.

MAHB Being Malaysia's airport operator, an increase in Chinese tourists to Malaysia will increase

MAHB's passenger traffic.

No breakdown by nationality, but passengers on flights to

mainland China accounted for 8.5% of KLIA's international

traffic and 6% of KLIA's total traffic in 2013.

Singapore

CDL-HT Chinese visitors staying in the hotel c.10%

OUE-HT Chinese visitors staying in the hotel c.8%

FEHT Chinese visitors staying in the hotel c.10%

SPH REIT Higher Chinese visitors could potentially boost both footfalls and spendings in prime malls

SGREIT Higher Chinese visitors could potentially boost both footfalls and spendings in prime malls

Thailand

AOT Chinese tourists formed 18% of total customers in 9M14. 20%

ERW Chinese tourists formed 15% of total customers in 9M14. Likely to see more Chinese tourists in

4Q14 for its IBIS and Hip Hop hotels, which are low end segments

15%

MINT MINT saw 40% yoy jump in Chinese tourists in its hotels in Thailand and overseas, especially in

Maldives. It is likely to see further rise in high-end Chinese tourists

15%

CENTEL It saw big increase in Chinese tourist following waiver of Chinese tourists. With political stability,

more Chinese are expected to come to Thailand next year.

15%

ROBINS More Chinese in tourist destinations such as Phuket, Chiangmai 10%

AAV It is the prioneer in opening new routes to and from China, and it should benefit most from strong

rebound in Chinese tourists as Chinese are price sensitive.

10%

THAI Has increased more flights to China 5%

BEAUTY BEAUTY’s Beauty Buffet is incredibly popular with Chinese tourists to Thailand. This supported

SSSG during the weak periods of local consumption in FY14-15. BEAUTY reported strong

SSSG of 39.6% in 3Q14 (vs. retail sector average of -1.9%)

Sales revenue from Chinese customers has risen from only 10-

12% of total revenue in FY13 to 15% in 1H14, before

increasing to 30% in Sep 2014. SOURCES: CIMB, COMPANY REPORTS

Strategy │ ASEAN

February 9, 2015

12

RISKS

Capital flight

Quantitative easing has kept interest rates low in the US and allowed the US government to borrow cheap. This has forced capital to seek out better returns in US equities and emerging markets. Expectations of rising interest rates or a negative economic surprise, such as Greece exiting the Eurozone, could send financial markets into turmoil. This will pull capital out of emerging markets around the world to the US, which is considered a safe haven. Over the past 5 years, there were two sharp exits from emerging markets: in August 2011 on fears of contagion from Europe’s debt crisis and June 2013 when the Federal Reserve announced its intention to ease asset purchases (Figure 15). Fed chairwoman Janet Yellen has said that the central bank is unlikely to move interest rates before the end of April 2015 and that borrowing costs will remain low for a “long time”.

Figure 15: Portfolio equity flows to emerging markets

-30

-20

-10

0

10

20

30

40

1/1

/201

0

1/3

/201

0

1/5

/201

0

1/7

/201

0

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/201

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1/1

1/2

010

1/1

/201

1

1/3

/201

1

1/5

/201

1

1/7

/201

1

1/9

/201

1

1/1

1/2

011

1/1

/201

2

1/3

/201

2

1/5

/201

2

1/7

/201

2

1/9

/201

2

1/1

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012

1/1

/201

3

1/3

/201

3

1/5

/201

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1/7

/201

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1/9

/201

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1/1

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013

1/1

/201

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/201

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1/5

/201

4

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/201

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1/9

/201

4

1/1

1/2

014

1/1

/201

5

Fed announces QE tapering

Fears of the contagion of Europe's sovereign debt crisis to Spain and Italy

US$ bn

SOURCES: CIMB, INSTITUTE OF INTERNATIONAL FINANCE

Weak China economy

Our economist Zhang Fan thinks rising debt is one of the major overhangs for China’s economy in 2015. China’s total leverage further grew to 230% of the country’s GDP in 1H14 from 170% in 2008 (Figure 16). In 2015, we expect to see leverage grow further given the prevailing easy monetary measures but the expansion is unlikely to trigger systemic problems as the authorities have already implemented strict policies on informal lending and LGFV loans.

Mounting deflationary pressure will be another risk for China’s economy in 2015, which will force the monetary authority to be aggressive on easing activities. For CPI, we see downside risks from reduced fuel prices and the lag effect of weak property sales in 2014. Meanwhile, the anti-corruption drive is unlikely to end in the medium term, which translates into limited pressure on the demand side for food prices. Zhang believes that weak demand, overcapacity and high borrowing costs for enterprises are likely to keep PPI depressed in 2015 at -1.5% yoy vs. -1.9% yoy in 2014 (Figure 17).

Strategy │ ASEAN

February 9, 2015

13

Figure 16: Public and private debt in China Figure 17: China’s CPI and PPI

0

50

100

150

200

250

Government Household Non-financials Financials

Debt as of % of GDP

-10.0

-5.0

0.0

5.0

10.0

15.0

Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14

CPI PPI

(yoy %)

SOURCES: CIMB, Wind SOURCES: CIMB, CEIC

A slowdown in China will dampen activity in ASEAN because of the size of the Chinese market and the close trade and investment links. Since this is likely to be associated with commodity price declines, financial market volatility or abruptly-tightening financial conditions, capital inflows could see sharp reductions or reversals.

Strategy │ ASEAN

February 9, 2015

14

VALUATION AND RECOMMENDATIONS

Our top picks

Our top picks are listed in Figure 18 and generally fall into the following themes: construction, tourism, export/US$ exposure and consumer.

Figure 18: Top picks in ASEAN

PriceTarget

Price

(local

curr)(local curr) CY2015 CY2016 CY2015 CY2016 CY2015 CY2016 CY2015 CY2016

Large caps

Gamuda GAM MK ADD 5.15 5.99 3,410 13.7 12.6 7% 13% 14% 14.1 13.2 2.2% 2.2%

First Gen Corp FGEN PM ADD 29.00 31.00 2,403 7.4 7.0 21% 19% 18% 6.4 6.1 1.7% 1.7%

Minor International MINT TB ADD 34.75 42.00 4,275 24.2 19.8 25% 19% 20% 18.3 15.2 1.4% 1.7%

ST Engineering STE SP ADD 3.43 3.93 7,937 18.3 17.0 10% 25% 26% 10.0 9.5 5.6% 5.8%

Vietnam Dairy Products JSC VNM VN ADD 103,000 120,000 4,830 16.1 15.6 10% 31% 28% 9.9 9.6 3.7% 3.8%

Small caps

Central Plaza Hotel CENTEL TB ADD 32.75 38.50 1,359 24.9 20.6 37% 16% 17% 12.9 11.6 1.3% 2.0%

Ha Tien 1 Cement JSC HT1 VN ADD 19,700 27,917 294 13.8 9.9 99% 12% 15% 6.9 5.8 0.0% 0.0%

KCE Electronics KCE TB ADD 50.25 55.00 874 12.4 10.0 23% 33% 32% 10.2 8.2 2.0% 2.2%

Mobile World Investment Corp MWG VN ADD 127,000 134,000 667 14.8 9.9 44% 50% 53% 11.4 7.8 0.0% 3.9%

Muhibbah Engineering MUHI MK ADD 1.98 2.75 241 8.5 8.1 6% 13% 13% 10.1 9.6 2.8% 3.0%

Nusa Raya Cipta NRCA IJ ADD 1,545.00 2,100.00 304 13.7 11.3 13% 26% 25% 19.0 15.4 1.6% 1.8%

Venture Corporation VMS SP ADD 8.22 8.91 1,683 14.2 12.9 7% 9% 9% 9.2 8.4 6.1% 6.1%

8990 Holdings Inc. HOUSE PM ADD 9.41 10.60 1,175 12.5 10.2 24% 25% 28% 11.0 8.4 3.2% 4.0%

Weighted average 15.3 13.7 15% 19% 20% 10.2 9.4 3.4% 3.7%

CompanyBloomberg

TickerRecom.

Market

Cap (US$

m)

EV/EBITDA (x)Dividend Yield

(%)Core P/E (x)

3-year

EPS

CAGR

(%)

Recurring ROE

(%)


Strategy │ Indonesia

February 9, 2015

15

DISCLAIMER #03

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(i) As of February 8, 2015, CIMB has a proprietary position in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:

(a) Gamuda, Karex Berhad, Minor International, Muhibbah Engineering, Prestariang, ST Engineering, Venture Corporation

(ii) As of February 9, 2015, the analyst(s) who prepared this report, and the associate(s), has / have an interest in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:

(a) -


February 9, 2015

16

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February 9, 2015

17

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CIMB Securities (Thailand) Co., Ltd. may act or acts as Market Maker and issuer including offering of Derivative Warrants Underlying securities of the following securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making investment decisions.

AAV, ADVANC, AMATA, ANAN, AOT, AP, ASP, BANPU, BAY, BBL, BCH, BCP, BEC, BECL, BGH, BH, BIGC, BJC, BJCHI, BLA, BLAND, BMCL, BTS, CENTEL, CK, CPALL, CPF, CPN, DCC, DELTA, DEMCO, DTAC, EARTH, EGCO, ERW, ESSO, GFPT, GLOBAL, GLOW, GUNKUL, HEMRAJ, HMPRO, INTUCH, IRPC, ITD, IVL, JAS, KBANK, KCE, KKP, KTB, KTC, LH, LOXLEY, LPN, M, MAJOR, MC, MCOT, MEGA, MINT, NOK, NYT, PS, PSL, PTT, PTTEP, PTTGC, QH, RATCH, ROBINS, RS, SAMART, SCB, SCC, SCCC, SIRI, SPALI, SPCG, SRICHA, STA, STEC, STPI, SVI, TASCO, TCAP, TFD, THAI, THCOM, THRE, THREL, TICON, TISCO, TMB, TOP, TPIPL, TTA, TTCL, TTW, TUF, UMI, UV, VGI, TRUE, WHA.

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.

The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result

Description: Excellent Very Good Good N/A


February 9, 2015

18

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Rating Distribution (%) Investment Banking clients (%)

Add 58.4% 6.0%

Hold 29.4% 4.3%

Reduce 12.2% 1.0%

Distribution of stock ratings and investment banking clients for quarter ended on 31 December 2014

1586 companies under coverage for quarter ended on 31 December 2014

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2014.

AAV – Very Good, ADVANC – Very Good, AEONTS – not available, AMATA - Good, ANAN – Very Good, AOT – Very Good, AP - Good, ASK – Very Good, ASP – Very Good, BANPU – Very Good , BAY – Very Good , BBL – Very Good, BCH – not available, BCP - Excellent, BEAUTY – Good, BEC - Good, BECL – Very Good, BGH - not available, BH - Good, BIGC - Very Good, BJC – Good, BLA – Very Good, BMCL - Very Good, BTS - Excellent, CCET – Good, CENTEL – Very Good, CHG – not available, CK – Very Good, CPALL – not available, CPF – Very Good, CPN - Excellent, DELTA - Very Good, DEMCO – Good, DTAC – Very Good, EA - Good, ECL – not available, EGCO - Excellent, GFPT - Very Good, GLOBAL - Good, GLOW - Good, GRAMMY - Excellent, HANA - Excellent, HEMRAJ – Very Good, HMPRO - Very Good, ICHI - not available, INTUCH - Excellent, ITD – Good, IVL - Excellent, JAS – not available, JUBILE – not available, KAMART – not available, KBANK - Excellent, KCE - Very Good, KGI – Good, KKP – Excellent, KTB - Excellent, KTC – Good, LH - Very Good, LPN – Very Good, M - not available, MAJOR - Good, MAKRO – Good, MBKET – Good, MC – Very Good, MCOT – Very Good, MEGA – Good, MINT - Excellent, OFM – Very Good, OISHI – Good, PS – Very Good, PSL - Excellent, PTT - Excellent, PTTEP - Excellent, PTTGC - Excellent, QH – Very Good, RATCH – Very Good, ROBINS – Very Good, RS – Very Good, SAMART - Excellent, SAPPE - not available, SAT – Excellent, SAWAD – not available, SC – Excellent, SCB - Excellent, SCBLIF – Good, SCC – Very Good, SCCC - Good, SIM - Excellent, SIRI - Good, SPALI - Excellent, STA – Very Good, STEC - Good, SVI – Very Good, TASCO – Good, TCAP – Very Good, THAI – Very Good, THANI – Very Good, THCOM – Very Good, THRE – not available, THREL – Good, TICON – Good, TISCO - Excellent, TK – Very Good, TMB - Excellent, TOP - Excellent, TRUE – Very Good, TTW – Very Good, TUF - Good, VGI – Very Good, WORK – not available.


February 9, 2015

19

CIMB Recommendation Framework

Stock Ratings Definition:

Add The stock’s total return is expected to exceed 10% over the next 12 months.

Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

*Prior to December 2013 CIMB recommendation framework for stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange were based on a stock’s total return relative to the relevant benchmarks total return. Outperform: expected to exceed by 5% or more over the next 12 months. Neutral: expected to be within +/-5% over the next 12 months. Underperform: expected to be below by 5% or more over the next 12 months. Trading Buy: expected to exceed by 3% or more over the next 3 months. Trading Sell: expected to be below by 3% or more over the next 3 months. For stocks listed on Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Outperform: Expected positive total returns of 10% or more over the next 12 months. Neutral: Expected total returns of between -10% and +10% over the next 12 months. Underperform: Expected negative total returns of 10% or more over the next 12 months. Trading Buy: Expected positive total returns of 10% or more over the next 3 months. Trading Sell: Expected negative total returns of 10% or more over the next 3 months.

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