7 TH ISSUE 3, SEPTEMBER 2015 Thai economic recovery towards the end of 2015 remains weak Investment opportunities in stocks with positive risk-adjusted returns Continued growth in the AEC economy Shingles...a lurking risk for the elderly Provision of "Green Loans" in line with sustainable development initiative KASIKORNTHAI THAI ECONOMIC Overview It is expected that Thai exports in 2015 will exhibit steeper-than-expected "THAI contraction. However, KResearch is keeping ECONOMIC abreast of the progress on public investment and spending (including budgetary disbursement RECOVERY and stimulus measures) and other economic IN 4Q15 developments. If public spending and tourism can help offset contractions in other sectors, REMAINS the 2015 Thai economic growth may lean WEAK" towards our projection at 2.8 percent. 1 Shareholder Newsletter 03/ 2015 Global economy remains fragile in 2H15 In 4Q15, the global economic performance will remain The slowing economy during the remainder of 2015 may weak, especially in China, other Asian countries and emerging force the People’s Bank of China (PBOC) to trim its interest rates markets. Key industrialized countries will exhibit laggard and reserve requirement ratio (RRR) of commercial banks, economic recoveries, as well, with the exception of the US as well as allowing the Yuan to soften in the coming months. that has been able to sustain steady and substantial economic It should be noted, however, that the fragile Chinese economy growth. Given this, the global economy and financial market will likely steepen volatility in global capital movements and during the remainder of 2015 will hinge on economic threaten its key trade partners. developments in China and the timing of the first post-recession With regard to the Fed Funds rate at the FOMC meetings Fed Funds rate increase. during the remainder of 2015, important factors prompting • The Chinese economic growth in 2H15 will likely soften to the Federal Reserve (Fed) to raise its policy rate may not be below the 7.0 percent YoY pace achieved in 1H15. Due to its only economic developments within the US, but also downside economic reform and restructuring policies, public investment risks stemming from the global economy and financial/capital - the only driver for domestic spending - may fail to counter- markets (especially the Chinese and emerging economies) that balance negative effects of the anemic global economy on should prevail until the yearend. its export and manufacturing sectors. However, KResearch holds the view that there is a likelihood that the Fed may raise its Fed Funds rate at least once at either one of the two FOMC meetings on October 27-28, 2015 or December 15-16, 2015 due to steady recoveries in the US economy and labor market. The fragile global economic recovery in 2H15 will not only heighten volatility in global capital movements and forex markets, but also undermine the recovery of Thailand’s export sector. 2 KASIKORNTHAI Thai Economic recovery will be limited in 4Q15 In 2H15, the state of Thai economy does not differ much from the global economy as domestic economic activities continue to rebound at a meager pace (although some sectors have been driven by accelerated public spending and stimulus measures implemented in late 3Q15). The export and manufacturing sectors may take more time to bounce back as does the agricultural sector that remains plagued by persistent drought. Thai Economic Indicators (Excluding Tourism) Continue to Contract 5 % YoY % YoY 0.1 45 0 39.4 40 37.6 35 -5 -3.3 -3.7 -3.6 -4.7-5.0 -5.3 -5.8-6.3 30 -7.2 -7.5 24.7 -10 25 23.1 -9.8-9.8 -9.9 -11.1 -11.8 -12.5 20 -15 1Q-15 2Q-15 Jul-15 Aug-15 15 -20 10 -20.8 5 -25 0 Agricultural Agricultural Exports Manufacturing Car Sales No. of Foreign Prices Production Production Tourists Souce : BOT, OAE, OIE, F.T.I., Department of Tourism KResearch has preliminarily assessed that the Thai economy GSP privileges, putting more pressure on overall Thai exports to will be able to sustain QoQ growth during the remainder of the EU that have already been hurt by dwindling purchasing 2015, supported by favorable growth in tourism and public power there. Tariff and non-tariff trade barriers, especially on spending, while adverse effects from the production suspension Thai agricultural product exports (e.g., China has increased of some car models will gradually ease. However, a high base import tariffs on compound rubber, based on the old formula, and external risks may put the Thai economic growth in 2H15 to support local producers of compound rubber, based on the at greater risk of slipping to 2.7 percent YoY, from 2.9 percent new formula) will likely make it more difficult for some export YoY reported in 1H15 categories to bounce back. The Thai export sector will exhibit slow recovery because However, the weakening Baht during the remainder of 2015 the rebound seen in key export categories, e.g., cars, may not will help alleviate pressure on exporters somewhat. Although be able to offset contractions in other export categories much. Thai exports may not be as competitive as our rivals in term of This is because the economies of our key trade partners in Asia, price (because their currencies, including the Chinese Yuan, including China, Japan and ASEAN remain weak and/or grow Vietnamese Dong, Malaysian Ringgit and Indonesian Rupiah quite slowly. In addition, export categories that are dictated by will likely weaken against the US Dollar and other key global oil and agricultural product prices, will remain stagnant currencies, as well), the softening Baht will allow exporters longer-than-expected, while shipments to the European Union to earn more income in Baht . (EU) will likely be undermined by the cancellation of the EU 3 Shareholder Newsletter 03/ 2015 In addition, there is likelihood that domestic spending will be revived in 4Q15 if budgetary disbursement, infrastructure investment and fund distribution to the grassroots economy (as part of an assistance measure for low-income earners, fiscal measure to support SMEs and assistance measure for drought-affected farmers) progress on track in 4Q15. These factors, coupled with thriving tourism, should help compensate contractions in the export, agricultural and industrial sectors, thus aiding in the 2015 economic growth to lean towards 2.8 percent as projected earlier. Thailand’s Growth Forecast for 2015 % YoY % YoY 8 7.3 3 6 2 4 2.8 2.8 1 2 0.9 0 0 4Q-14 1Q-15 2Q-15 3Q-15f 4Q-15f 2012 2013 2014 2015 f Source: NESDB, KResearch Forecast as of 9 July 2015 Source : NESDB, KResearch Forecast as of 9 July 2015 With regard to investment in the financial market, although pressure on global financial markets, the Baht and yields of the Thai government bonds have eased somewhat after the Fed decided to keep the Fed Funds rate steady at its September 2015 meeting, KResearch is of the view that corrections of the Baht forex rate and domestic bond yields will be only temporary for we expect that the Baht will trend weaker, while yields of medium-and long-term debt instruments will rise, though such movements depend on the timing of the Fed Funds rate hike and the need for the government to mobilize more funds in FY2016 than in FY2015. Disclaimer This research paper is arranged for public information, which has been obtained from sources believed to be reliable. KResearch does not warrant its completeness, reliability or accuracy for commerce or fitness for a particular purpose. The information contained herein may be subject to change at any time without notice. Reliance upon any information contained herein shall be undertaken at a user’s own risk. KResearch shall not be liable to any user, or anyone else for any damage occurring from the use of any content herein. Nothing in this research paper shall be counted as containing any advice, recommendation or opinion for decision making in business. 4 KASIKORNTHAI STOCK MARKET Condition Buy on the correction Seeking stocks with good risk-reward return 5 Shareholder Newsletter 03/ 2015 What’s going on? Limited downside at 1,200 pts. Based on 6 years of The SET Index has declined 10.7% YTD and 18.1% from its statistics (since the U.S.sub-prime crisis in 2008), we have peak in February amid weak exports, poor consumption and seen the SET Index experience 3 major corrections triggered a slump in the oil price. Moreover, trading sentiment has been by: 1) European debt crisis and Thai flooding in 2011 (PER fell 5 times); 2) the U.S. Federal announcement it would fragile due to fears about China’s economic problems, reduce quantitative easing (QE), which happened at the including slowing growth, a stock market bubble and currency same time as Thailand was be set with political turmoil in devaluation. At the current level, the SET is trading at a 2015 2013 (PER fell 3 times); and 3) the Greek debt crisis in early PER of 14.0, still above its average (2006-15) of 12.0x, but it 2015 (PER fell 3 times). In a major correction we can expect nevertheless looks attractive at a PBV of 1.80x, the same level PER to de-rate by 3-5 times. We thus see further downside this time limited given the SET Index’s PER has already fallen as its 15-year average for PBV with an earnings yield gap of by 4 times (from 18x to 14x). If the index falls to the full 5 5.0%. Therefore, we see the SET as currently at an attractive level times PER, it would imply a downside at 13x PER, or 1,200 pts.