Yuanta Research Center

YUANTA RESEARCH CENTER

Sep 12, 2001

SET expected to fall about 5% after one-day shutdown

The Thai market is expected to open with a fall of about 5% in line with declines in Taiwan and Malaysia, the only other regional stock markets that shut down yesterday.

Prime Minister Thaksin Shinawatra ordered the temporary closure of the Stock Exchange of Thailand following Tuesday night’s terrorist attack on the World Trade Center and Pentagon.

Although we initially disagreed with this decision, the one-day shutdown has given investors more time to think through their investment strategy and will probably limit selling by scared investors.

There are far-reaching economic implications of the unprecedented terrorism strikes on the US. At this point, we see a possibility of the following scenario:

The US will certainly retaliate. The problem for the White House is first identifying who was behind the attacks and then deciding what is the appropriate military response. According to US officials, preliminary evidence all points to the terrorist atrocities being the handiwork of Saudi dissident Osama bin Laden who is reportedly sheltered by the Taliban. A US attack on Afghanistan’s hard-line regime would arouse little indignation among Islamic countries but military reprisals against other “rogue” states such as Iraq risks inflaming public opinion in the Arab world.
Concerns that retaliation will lead to a wider conflict in the Middle East may keep oil prices high in the short-term.
Higher oil prices would put renewed pressure on the already weak US and Japanese economies, fanning fears of a global recession.
The temporary grounding of US air travel and freight shipments will have a short-term negative impact on the US economy.
There are also major concerns about the longer-term impact on global consumer confidence and consumption.
There is widespread speculation that the US Fed, together with other central banks, will announce a coordinated series of interest rate cuts in order to inject liquidity, put a floor under financial markets and boost investor confidence.

The effect of these uncertainties can be seen in the commodity, currency and equity markets throughout the region. Oil prices rose 6.3% yesterday, while the price of gold increased 5.3%. The currency market is relatively stable, but trading volumes are very thin. Stock markets throughout the region yesterday fell 4-12%. Some major European stock markets such as Germany ’s DAX and London’s FTSE index reversed early losses, however, and closed higher. US markets will be again be closed today and won’t reopen until tomorrow at the earliest.

	10/09/2001	% chng	11/09/2001	% chng	12/09/2001
Commodities
Brent 1Mth FOB Asia (US$)	27.74	6.31%	29.49	-2.20%	28.84
Gold (US$)	271.50	5.34%	286.00	-3.50%	276.00

Currencies
Baht/US$	44.61	0.70%	44.30	-0.18%	44.38
Singapore $/US$	1.7503	0.82%	1.736	-0.03%	1.7366
Philippine peso/US$	51.10	-0.20%	51.20	0.08%	51.16
Indonesia rupiah/US$	9,060	-0.28%	9,085	0.83%	9,010
Japanese yen/US$	121.00	1.54%	119.17	-0.13%	119.32

Equities
Japan Nikkei 225	10,195.69	0.95%	10,292.95	-6.63%	9,610.10
Hong Kong - Hang Seng	10,366.32	0.49%	10,417.36	-8.87%	9,493.62
Singapore - ST Times Ind	1,558.45	0.53%	1,566.76	-7.42%	1,450.45
Korea - Kospi	550.73	-1.84%	540.57	-12.02%	475.60
Indonesia - JSX Index	443.60	0.42%	445.48	-3.51%	429.85
Philippines - Composite	1,297.19	-0.24%	1,294.09	-4.07%	1,241.39

Stay with defensive stocks with quality, recurrent earnings

Once the Thai stock market reopens, we believe that the banking, finance and property shares will face the biggest selling pressure. Since the beginning of August, these three sectors have risen by 12.6%, 15.5% and 23.9% respectively.

Sector	31/07/2001	11/09/2001	% chng
SET	297.69	330.37	10.98%
Property	37.09	45.97	23.94%
Building Material	1596.3	1960.39	22.81%
Textile	302.21	364.86	20.73%
Finance	743.63	859.06	15.52%
Telecom	51.08	58.55	14.62%
Banking	145.24	163.53	12.59%
Transportation	45.96	50.5	9.88%
Energy	3220.19	3414.8	6.04%
Entertainment	44.42	47.08	5.99%
Hotel	137.34	144.09	4.91%
Electronics	589.88	611.72	3.70%

We believe the downside risk is much more limited for energy and entertainment sectors, which have both risen only about 6.0% since the Thai market rally began one and a half months ago. More importantly, these two sectors have high quality, recurrent earnings.

We feel compelled to make a few changes in our recommendations. We are downgrading THAI Airways International (THAI) from BUY to SELL, as the terrorist act has ramifications for the entire airline industry. We also want to reemphasize that PTT Exploration & Production is a BUY, given its cheap valuation and the fact that it is one of the few beneficiaries of higher oil prices in the Thai market.

Banking

Since the beginning of the August, the banking sector had risen 12.6%. This was not due to an improvement in fundamentals, but rather anticipation of the establishment of the TAMC and the weight of money flowing into the Thai market. The TAMC amendment bill is still bogged down in the Senate and the weight of money argument doesn’t look as impressive now. We have an UNDERWEIGHT rating on the banking sector. If the sector gives up its recent gains, we could see some bargain-hunting in the bigger local banks, like Bangkok Bank (BBL) and Siam Commercial Bank (SCB). We currently have both stocks rated as HOLD.

Building Materials

We recommend UNDERWEIGHT for the building materials sector. In the cement industry, we are expecting a gradual improvement in the high-margin domestic market due to rising housing demand. However, this will be partially offset by an even faster contraction in the low-margin export market, as the global economy slows. Cement manufacturers will probably get approval for a 2-5% increase in cement prices within the next two months, but this will be offset by higher energy expenses which account for about 40-50% of their cost structure. The net effect is limited earnings growth. This is especially true for Siam Cement (SCC) due to worsening performance of its other two major business groups – petrochemicals and pulp & paper. Even though Siam City Cement (SCCC) is recording very impressive earnings and cash flow, this is already fully reflected in its share price. We have TAKE PROFIT recommendations on the two largest cement companies.

TIPCO Asphalt (TASCO) is a potential recovery play whose shares recently began moving up after the company signed a syndicated loan agreement to refinance a US$46.7mn ECD put option, which falls due on September 19. We are expecting third quarter earnings performance to show an improvement as the government accelerates road construction and maintenance at the end of the fiscal year. Even though higher oil prices will temporarily narrow margins on its asphalt business, we are keeping our BUY recommendation and target price of Bt22.

Telecom

We are maintaining our OVERWEIGHT recommendation on the telecom sector, as most stocks in the sector are still trading at sizeable discounts to our fair value estimates. The exception, Advanced Info Service (ADVANC), could face some selling pressure if foreigners begin pulling out of the Thai stock market. However, we believe downside risk is limited to no more than 15%. Our favorite telecom stock is Shin Corp (SHIN), which offers a cheaper play on Thailand’s fast-growing mobile phone industry than ADVANC. It’s also more diversified due to its subsidiaries involved in satellite services, Internet and TV broadcasting. Other telecom stocks with solid growth prospects are TelecomAsia (TA) and United Communication (UCOM). Although both are currently undervalued, they will suffer short-term weakness if the SET index plunges in line with regional trends.

Energy Sector

The energy sector will again be a relatively safe haven for investors, as PTT Exploration & Production (PTTEP) benefits from higher oil prices, BANPU higher coal prices and the electricity companies generate quite predictable earnings and cash flow. PTTEP is our favorite with forecast sales and earnings growth of 28% and 68%, respectively this year. The stock is also undervalued at a 23.2% discount to fair value estimate of Bt164. Longer term prospect appear bright as PTTEP is stepping up exploration activity in advance of PTT’s third natural gas pipeline to be completed by 2006. PTTEP is also currently considering an equity stake in Indonesian developer, Medco Energi, to boost its crude production and reserves.

As coal prices tend to follow oil in the longer run, our second favorite in the energy sector is Banpu Plc. (BANPU). After BANPU acquires its Indonesian partner, Indocoal, by the middle of next year, BANPU’s coal reserves will increase from 82mn tons to 264mn tons. Even with only a partial contribution from Indocoal, BANPU’s sales are projected to increase 19% next year. BANPU shares look attractive at a 36.0% discount to our fair value estimate of Bt43.

Among the electricity companies, we like Electricity Generating Plc. (EGCOMP), as the stock is also attractively priced at 39.4% below DCF valuation of Bt59. EGCOMP is also in the hunt for new projects. EGCOMP intends to expand its total generating capacity from the current 2,425MW to 5,000MW by 2003 through the acquisition of existing projects and planned projects with signed PPAs.

Entertainment Sector

Entertainment stocks are widely seen as defensive given their cash rich positions and ability to generate relatively steady earnings through an oligopoly business structure. BEC World is certainly benefiting from its oligopoly position in the TV industry, as its Channel 3 and the rival Channel 7 will both raise ad rates in October despite sluggish ad spending. With a cash hoard of Bt3.77bn and little to spend it on, BEC is the odds-on favorite to announce a share buyback scheme, as well as a par split, which would make the stock more affordable to smaller investors. We expect the company’s revenues and net profit to grow 24% and 32% to Bt6,232mn and Bt2,041mn, respectively. Our target price is Bt284 per share.

Electronics

Thai electronic stocks are expected to experience further uncertainty on inventory clearing and demand recovery. Weakness in US consumption and corporate spending are major concerns as US companies buy roughly one-third of Thai electronics components. In addition, increased volatility in currency markets raises forex risks. We tend to be more bearish on consumer and PC-related stocks such as Calcomp Electronic (CCET), Circuit Electronics (CIRKIT) and KR Precision (KRP). CCET’s dependence on HP (with HP injet printers accounting for 70% of sales) may incur risks from delayed orders and margin cuts. CIRKIT is a low-end IC producer and is exposed to both declining margins and falling demand. Slower PC shipments are likely to further delay any earnings recovery by KRP. We rate CCET and CIRKIT as SELLs and KRP as a HOLD.

Hana Microelectronics (HANA) may benefit from a beef-up in security by airlines and multinationals as about 30% of its sales are derived from security and smart cards. Improved security systems may also increase demand for switch power supplies (SPS) equipment, thereby benefiting Delta Electronics (DELTA). About 70% of DELTA’s operating margins are dependent on the company’s SPS sales while the Taiwanese-based Delta Group controls a 33% share of the global SPS market. KCE Electronics (KCE) faces weaker PCB orders from telecom and computer companies but is somewhat protected by demand from European carmakers, which account for 35% of its sales. Moreover, the stock is already trading on very low 2-3X EV/EBITDA for 2001-2.

Hotels

Hotel stocks are likely to feel the impact of a global contraction in tourism as fears grow of a wider conflict in the Mideast. The tragedies in New York and Washington will have a negative impact on Thailand’s tourism market, with US and European travelers canceling or postponing vacations due to heightened fears over security. Asian tourists may also put off traveling during a period of global tensions but Asians tend not to stay as long or spend as much as their western counterparts. Even if we factor lower tourism arrivals into our earnings forecasts, Thai hotel stocks are still cheap. We currently have a BUY recommendation on Royal Garden Resort (RGR), but a TAKE PROFIT recommendation on Central Plaza Hotel after the stock’s 19% surge over the last week.

Property

When trading resumes, we expect property developers’ shares to be among the hardest hit. Investors still have very sizeable profits to take after the sector’s 23.9% gain since the beginning of August. We don’t think the terrorist attack in the US will slow buying of single detached homes in Bangkok, especially given the continuing low interest rate environment and the fact that land is still seen as form of security to Thais. We expect to see continuing strong sales of SDH units but much of this has already been factored into share prices. Shares of Noble Development (NOBLE), Golden Land (GOLD), Sammakorn (SAMCO) and Sansiri (SIRI) are currently trading at discounts to fair value of 20% or less, while Land & Houses (LH) and Quality Houses (QH) are trading at premiums to our fair value estimates. We currently have TAKE PROFIT recommendations for all of these companies. However, we would be buyers of LH, QH, GOLD and NOBLE, as well as the two shopping mall operators, CPN and MBK-PD, if share prices fall by 10% or more.

Transport

The stock most affected by the terrorist blitz on the US is Thai Airways International (THAI). We are now changing our recommendation from BUY to SELL as THAI, already in turmoil after the dramatic sacking of its board last week, now has to cope with the spike in oil prices (THAI does not hedge its fuel costs). More bad news for THAI is flight cancellations in the US and Canada and an expected drop in bookings as would-be tourists from North America and Europe cancel or postpone their travel plans. Longer-term, the airline faces increased costs due to higher insurance premiums and tightened security measures. All this negative news means that THAI has virtually no chance of keeping to its SPO timetable to sell 400mn shares to the public in November in order to reduce debts and improve the stock’s liquidity. Further delays to THAI’s SPO will damage investors’ confidence in PM Thaksin’s promises to accelerate privatization and undermine the airline’s attempts to reduce its sky-high debt/equity ratio of 17x.

By contrast, Bangkok Expressway (BECL) offers a safe haven in times of market volatility. The stock is cheap, at a 66% discount to our fair value estimate of Bt30, while earnings growth is beginning to come through on the back of rising traffic volume and debt reduction. Traffic volumes rose 4.2% yoy last month to 601,000 vehicles a day. Meanwhile BECL repaid Bt202mn of its debt last month, bringing its debt retirement in the first eight months to Bt1,193mn.

Others

Charoen Pokphand Foods (CPF) is unlikely to be affected much by the disaster in US. Firstly, the company’s shrimp exports to the US account for only 4% of total sales. Secondly, CPF’s subsidiary, CP-USA, generates 3% of sales, but it is located in the southern US state of Alabama. Earlier we were anticipating that chicken prices would begin falling later this year; however, the reported discovery of mad cow disease in Japan may push regional chicken prices up again. Overall, CPF’s fundamentals remain very strong, while its share rating is attractive. We are forecasting earnings growth of 10.9% this year to Bt3,757mn, which puts the stock on a prospective P/E ratio of 5.85x.

The share price of BigC Supercenter (BIGC) has gained 32.8% since the beginning of August, peaking just recently at our fair value estimate of Bt23. If the stock falls after trading resumes, investors should look to buy into this stock. BIGC plans to open two more BigC Supercenter stores this year and five stores in both 2002 and 2003. Early next year, the company also plans to launch a new brand of stand-alone supermarket outlets called “Leader Price.” This expansion is translating into earnings growth of 21% this year to Bt932m and 15% next year to Bt1,070mn.

Yuanta Earnings Summary
		11/09/2001	Fair Value	Net Profit			EPS			PER
Stock	Rec	Price	Fair Value	2000	2001F	2002F	2000	2001F	2002F	2000	2001F	2002F
Agribusiness
CPF	BUY	57.50	67.00	3,388	3,757	4,152	8.82	9.83	10.87	6.52	5.85	5.29
GFPT	BUY	25.50	29.00	105	536	332	1.78	7.73	10.50	14.36	3.30	2.43
Bank
BAY	SELL	6.00	4.52	(8,530)	(1,547)	(1,092)	(4.61)	(0.84)	(0.59)	Na	Na	Na
BBL	HOLD	38.00	48.75	(18,687)	5,767	12,981	(12.74)	3.93	8.85	Na	9.67	4.29
BOA	SELL	6.20	1.21	(4,118)	(4,680)	195	(0.88)	(1.00)	0.04	Na	Na	148.31
BT	HOLD	19.50	15.52	535	777	979	0.11	0.52	0.66	180.06	37.47	29.66
DTDB	SELL	6.50	4.16	(12,626)	140	653	(7.47)	0.08	0.39	Na	78.70	16.81
KTB	HOLD	11.00	11.00	76,259	(4,045)	9,985	6.82	(0.36)	0.89	1.61	Na	12.32
SCB	HOLD	19.50	21.93	3,560	2,058	6,432	1.14	0.66	2.06	17.09	29.57	9.46
TFB	SELL	19.00	19.37	1,265	(268)	5,844	0.54	(0.11)	2.48	35.34	Na	7.65
TMB	SPECULATIVE BUY	6.20	2.36	(25,064)	477	2,068	(6.26)	0.12	0.52	Na	51.67	11.92
Building Material
SCC	TAKE PROFIT	468.00	650.00	41	7,051	5,714	0.30	58.80	47.60	1,560.00	7.96	9.83
SCCC	TAKE PROFIT	154.00	156.00	952	2,161	2,279	3.80	8.60	9.10	40.53	17.91	16.92
TASCO	BUY	14.75	22.00	(318)	47	57	(2.40)	0.40	0.40	Na	36.88	36.88
Chemical
ATC	SELL	3.00	2.00	(4,760)	(3,049)	(2,154)	(11.90)	(7.62)	(5.39)	Na	Na	Na
NPC	TAKE PROFIT	32.75	43.00	2,160	1,286	1,894	6.97	4.15	6.11	4.70	7.89	5.36
VNT	BUY	4.80	9.60	(135)	664	1,339	(0.15)	0.74	1.48	Na	6.49	3.24
Commerce
BIGC	BUY	21.25	23.00	774	932	1,070	0.99	1.20	1.37	21.46	17.71	15.51
BJC	BUY	25.25	44.00	535	588	766	3.37	3.70	4.82	7.49	6.82	5.24
ICC	HOLD	172.00	180.00	471	533	606	16.19	18.35	20.84	10.62	9.37	8.25
LOXLEY	TRADING BUY	8.50	16.30	(1,686)	1,968	83	(27.34)	17.75	0.72	Na	0.48	11.81
MAKRO	HOLD	46.00	57.00	1,027	1,060	1,097	4.28	4.42	4.57	10.75	10.41	10.07
Commun
ADVANC	BUY	482.00	505.00	38,588	54,590	59,433	24.44	27.35	27.56	19.72	17.62	17.49
JASMIN	SELL	5.00	11.50	(783)	(429)	(187)	(2.10)	(1.15)	(0.50)	Na	Na	Na
SATTEL	BUY	32.75	36.00	711	1,493	2,207	1.62	3.41	5.05	20.22	9.60	6.49
SHIN	BUY	18.50	23.75	2,384	3,339	4,673	8.10	11.30	15.80	2.28	1.64	1.17
TA	BUY	15.00	26.00	(3,308)	(2,831)	(741)	(1.13)	(0.97)	(0.25)	Na	Na	Na
TT&T	SELL	4.30	4.00	(4,420)	229	(1,038)	(3.93)	0.08	(0.04)	Na	53.75	Na
UCOM	BUY	24.50	52.00	460	1,287	1,830	1.10	3.00	4.27	22.27	8.17	5.74
Electric
CEI	Buy	206.00	280.00	564	810	708	29.97	43.03	37.61	6.87	4.79	5.48
METCO	Buy	83.50	100.00	346	527	581	15.73	23.92	26.38	5.31	3.49	3.17
Energy
BANPU	BUY	27.50	43.00	(814)	2,314	3,423	(3.88)	11.04	16.34	Na	2.49	1.68
BCP	SELL	7.90	5.00	(1,557)	(2,099)	(1,041)	(2.98)	(4.02)	(1.99)	Na	Na	Na
EGCOMP	BUY	35.75	59.00	1,216	2,348	3,948	2.32	4.47	7.53	15.41	8.00	4.75
LANNA	HOLD	39.00	53.00	(6)	59	65	(0.18)	1.70	1.86	Na	22.94	20.97
PTTEP	BUY	126.00	164.00	5,433	9,132	10,571	8.33	14.01	16.21	15.13	8.99	7.77
RATCH	HOLD	16.00	16.75	145	2,579	5,713	0.27	1.78	3.94	59.26	8.99	4.06
Entertainment
BEC	BUY	258.00	284.00	1,545	2,041	2,644	7.73	10.20	13.22	33.38	25.29	19.52
CVD	SELL	7.70	6.30	3	5	8	0.11	0.10	0.14	70.00	77.00	55.00
GRAMMY	HOLD	87.50	98.00	317	226	265	6.34	4.51	5.31	13.80	19.40	16.48
UBC	SELL	9.50	12.00	(2,081)	(1,931)	(1,663)	(2.75)	(2.55)	(2.20)	Na	Na	Na
Electronics
CCET	SELL	27.25	22.00	1,175	1,233	1,166	3.89	4.08	3.86	7.00	6.68	7.06
CIRKIT	SELL	14.25	10.00	562	276	209	11.40	5.60	4.24	1.25	2.54	3.36
DELTA	BUY	226.00	280.00	4,042	4,263	4,255	34.65	36.55	36.37	6.52	6.18	6.21
HANA	BUY	66.50	80.00	2,002	1,192	1,619	12.99	7.73	10.50	5.12	8.60	6.33
KCE	BUY	53.50	60.00	520	449	603	18.33	15.82	21.25	2.92	3.38	2.52
KRP	SWITCH/ HANA, DELTA	4.50	4.50	(374)	148	201	(1.53)	0.42	0.57	Na	10.78	7.95
Food
MFG	SELL at Bt52	47.00	48.50	107	29	156	3.32	0.91	4.82	14.16	51.65	9.75
SSC	BUY	182.00	155.00	490	606	765	18.85	23.30	29.43	9.66	7.81	6.18
TUF	HOLD	67.50	60.00	1,510	1,888	2,354	10.42	13.03	16.25	6.48	5.18	4.15
Hotel
CENTEL	TAKE PROFIT	23.75	26.00	154	312	336	1.71	3.47	3.73	13.91	6.84	6.36
RGR	BUY	14.25	28.00	218	318	353	1.60	2.30	2.60	8.91	6.20	5.48
Mining
PDI	BUY	14.00	26.00	218	690	774	1.31	3.05	3.42	10.69	4.59	4.09
Property
CPN	TAKE PROFIT	48.00	53.00	308	567	620	3.08	5.66	6.19	15.58	8.48	7.75
GOLD	TAKE PROFIT	7.40	9.30	(174)	81	86	(0.52)	0.13	0.14	Na	56.92	52.86
LH	TAKE PROFIT	34.25	34.00	216	1,401	1,489	0.30	2.20	2.40	114.17	15.57	14.27
MBK-PD	TAKE PROFIT	24.75	36.00	320	430	434	1.60	2.20	2.20	15.47	11.25	11.25
NOBLE	TAKE PROFIT	3.50	4.20	15	30	234	0.16	0.11	0.86	21.88	31.82	4.07
QH	TAKE PROFIT	5.30	4.70	(1,283)	98	105	(2.38)	0.12	0.13	Na	44.17	40.77
SAMCO	TAKE PROFIT	24.75	31.00	75	78	83	1.70	1.70	1.80	14.56	14.56	13.75
SIRI	TAKE PROFIT	4.70	4.60	750	43	58	2.84	0.15	0.21	1.65	31.33	22.38
Pulp & Paper
AA	SELL	14.50	12.00	629	(460)	222	1.18	(0.86)	0.42	12.29	Na	34.52
PPPC	BUY	38.50	64.00	2,090	1,469	1,869	18.87	13.33	16.88	2.04	2.89	2.28
Textile
BRC	BUY	10.75	22.00	48	592	722	0.49	6.07	7.41	21.94	1.77	1.45
Trans
BECL	BUY	10.25	15.00	172	755	473	0.22	0.98	0.61	45.88	10.45	16.69
Vehicle
SMC	SELL	3.70	3.00	(75)	46	77	(0.32)	0.20	0.33	Na	18.50	11.21
SPSU	BUY	12.25	20.00	97	107	136	1.23	1.35	1.72	9.96	9.07	7.12
Other
EASTW	BUY	28.75	42.00	230	314	428	2.30	3.14	4.28	12.51	9.15	6.72

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