ECON: Thailand continues to post robust growth of 9.1% in 2Q10

Once again, Thailand has proved its resiliency against the downside risks i.e. political turmoil as it posted robust growth of 9.1% YoY in 2Q10. As a result, the economy expanded by a rapid rate of 10.6% in 1H10. Despite the strong year-on-year growth, the economy appears to cool off somewhat in 2Q10 as the seasonally adjusted growth slowed to 0.2% from 3.3% marked in 1Q10. As the slowdown pattern in the US and Eurozone has become more prominent, with more restrictive economic policies among the regional economies, we expect Thailand ’s growth to soften to around 4.5% in 2H10. This implies that the full-year growth will be 7.5% YoY (against our previous forecast of 6.7%).


Growth was broader based …

In terms of economic components, we are satisfied with growth in most of economic drivers. While private consumption accelerated to 6.5% YoY, overall investments remained relatively stable at 12.2% in the period. It was quite encouraging to see that investments by the private sector jumped strongly by 18.5% despite the slight contraction of pubic investment growth (-3.4%).

…and more balanced

Apart from growth momentum, we always put our focus on the growth structure and its trend. This element will be very vital in the near future as we see more signs of weakness among the economies in G2 (US and Europe ). It is very encouraging to see that Thai economy has continued to firm up its balance growth structure. The economy in general has been driven by domestic factors as private consumption’s contribution to economic growth rose to 3.6% (from 2.1% in 1Q), with contribution from investment increasing modestly to 2.6%. Meanwhile, the country appeared to gain traction from net exports as it contributed 2.8% to growth against a drag of 2.4% in the previous quarter. This was partly due to a slight inventory adjustment in the current quarter as its contribution to growth from inventory fell slightly (-0.5%). We view that the current economic structure if sustained will be a good tool to help Thailand weather the upcoming global economic alignment.

IVL: Stronger earnings in 2Q10 - Positive

Results:


IVL announced stronger net profit in 2Q10 at Bt2,089m (EPS: Bt0.48), up 37% QoQ and 18% YoY. Its 1H10 earnings were Bt3,619m, up 26% YoY, representing 56% of the full-year estimate by the consensus.

These healthier net profits were mainly due to higher sales volume from the start-up of AlphaPET (line 2) and the realization of extra income of Bt563m from the acquisition of utility assets at the Rotterdam site at a lower price compared to the fair price. However, IVL was negatively hit by the depreciation of the Euro and US$ currencies against the Thai baht by 17% and 5% YoY throughout the first six months of 2010.

Looking forward, we expect IVL’s operating performance to remain strong as its overall product-to-feed margin will continue to benefit from lower feedstock costs (PX). Additionally, the greater production volumes from the full-quarter operation of new PET production facilities in the US will further enhance the overall performance in the quarter. However, there will be no gain from the bargain purchase of the assets at Rotterdam as was the case in 2Q10. Given its 1H10 earnings represent 56% of the 2010 profit estimate by the consensus, the market is likely to maintain its forecast at Bt6.5bn.

IVL announced that its subsidiary Indorama Polymers PCL (IRP) will set up a 75,000-ton/year SSP plant at Port Harcourt , Nigeria . This new capacity represents about 6% of IVL’s total PET production capacity. This is the first PET investment by IVL in Africa , which possesses demand for PET of about 450,000 tons/year. The competition in Africa is relatively low compared to other regions as there is currently only one PET producer on the continent. This new plant is expected to begin commercially operating in 3Q11.

Recommendation and valuation

Maintain a positive view:

We are positive to IVL due to the strong earnings growth, with a potential stock re-rating in the near future—although IVL’s share price currently trades at 15.0x of FY10 PER (estimated by consensus) compared to 13.0x-16.0x of the major petrochemical players in the region, we expect the stock price to be re-rated as IVL’s ROCE has significantly increased to 25% from 12%-16% over the past few years as a result of the completion of major expansion projects, particularly AlphaPET in the US. Additionally, the aggressive capacity expansion through acquisitions has caused IVL to be traded at a premium valuation to other petrochemical stocks. The consensus estimates IVL’s target price at Bt22.2.


Contractor: ITD will replace CK as the lowest bidder for the 1st contract of Blue Line – Neutral

Event - According to Kaohoon newspaper, a source from the Transport Ministry revealed that ITD will replace CK as the lowest bidder for the 1st contract of the Blue Line due to an error in the sum-up of the contract price. This refers to the MRTA consultant’s verification of the details of the bidding documents, with certain items in ITD’s bid being overstated by up to Bt60m. The source said that all bidders were informed of this issue and it was found to be acceptable. Thus, ITD becomes the lowest bidder (with the bidding price to be lowered from Bt10.79bn to Bt10.73bn) instead of CK (with a bidding price of Bt10.75bn).

Comment – Our sources from the MRTA, CK and ITD have not yet been able to confirm this news. In our view, if it’s true, this could be the reason behind the 11% price rally since last week. However, although this news is positive for trading sentiment, it is still not enough to turn ITD profitable. The project should raise ITD’s backlog at the end of 2010 to around Bt120bn (including subsidiaries), but this is still far from the turnaround level of Bt150-160bn required in our estimate. We maintain our view of expected losses of Bt0.55bn in 2010 given the risk that more exposure overseas might distort the profit margin. Maintain SELL rating with TP of Bt2.89 (P/BV of 1.1x).

Although this news is negative for CK, we view that it should minimally impact its 2011-12 outlooks. Stripping out this project would reduce new contracts in 2010 from Bt103bn to Bt92bn, as the 2nd contract of the Blue Line, SPP and Xayaburi worth totally ~Bt90bn would remain the key drivers. We maintain a BUY rating with a TP of Bt8.30 based on P/BV of 2.44x (average five-year PBV +0.5std)

Weekly Market update:

Weekly Market update:


In commodity

Steel – Soaring raw material prices KTZ is bullish on future demands for rebar but what has kept us cautious is steel margin which we haven’t seen clear sign for bottoming out.

Steel – Soaring raw material prices KTZ is bullish on future demands for rebar but what has kept us cautious is steel margin which we haven’t seen clear sign for bottoming out.

Energy – $80 oil price again Last week, WTI and Dubai prices rose 2%-5% as speculators increased a bet. We expect WTI price to stay above $80 as market is optimistic on fuel demand to increase alongside the improved prospects for US economic recovery.

Chemical – All petrochemical prices increased Last week, all petrochemical prices increased in tandem with oil price movement.

Coal – The seventh consecutive week falls Last week, the BJI index further dipped $0.5 to $94.5/ton due to expected decrease in Chinese coal demand as a result of government policy on the pollution emission.

Building a high-rise palace for every peasant

Chinese Housing Market:


Building a high-rise palace for every peasant?

? Soaring prices for high-end residential property in China have generated widespread comparisons with the recent housing boom in the US that ended in the subprime debacle. In fact, the only recent example of soaring property prices coinciding with double digit vacancy rates, soaring credit and construction growth but low average mortgage loan-to-values and an incestuous relationship between politicians, banks and developers was Ireland, where a similar hoarding pattern developed until the market collapsed along with the economy in 2008. Housing cconstruction in Ireland went from 5% of GDP to 15% in a decade (similar to current Chinese levels), at which point the country was annually producing five times more housing per capita than the UK while Irish bank lending to the non-financial private sector had more than trebled in a decade to 200% of GDP by 2008.

? In China , with negative real interest rates and casino like domestic stock markets as the only alternatives, real estate is the primary repository of personal wealth and is being hoarded as an inflation hedge like gold bullion, which helps explain the 20-25% plus vacancy rates for newly purchased apartments. Substantial hidden wealth in the ‘grey’ economy (which is probably over 10% of GDP) has also supported prestige developments. Nonetheless, the scale of price appreciation has become a source of widespread popular discontent among the younger generation of self describing ‘house slaves’ and that, as much as the threat to the banking system, is driving attempts to tame the market without killing it.

Weekly Market update

Weekly Market update:

In commodity

Steel – Soaring raw material prices KTZ is bullish on future demands for rebar but what has kept us cautious is steel margin which we haven’t seen clear sign for bottoming out.

Steel – Soaring raw material prices KTZ is bullish on future demands for rebar but what has kept us cautious is steel margin which we haven’t seen clear sign for bottoming out.

Energy – $80 oil price again Last week, WTI and Dubai prices rose 2%-5% as speculators increased a bet. We expect WTI price to stay above $80 as market is optimistic on fuel demand to increase alongside the improved prospects for US economic recovery.

Chemical – All petrochemical prices increased Last week, all petrochemical prices increased in tandem with oil price movement.

Coal – The seventh consecutive week falls Last week, the BJI index further dipped $0.5 to $94.5/ton due to expected decrease in Chinese coal demand as a result of government policy on the pollution emission.

Today’s company update

TOP: 2Q10 earnings results

PTTAR: Weak earnings as expected!

DCC: 2Q10 analyst meeting – defensive with growth

BANPU: China coal production below target

DELTA: 2Q10 net profit of Bt1.1bn beat our expectation

Property sector: Residential Market Survey by AREA

Technical Analysis

However, the index has thus far chosen the method of correcting within a day by moving up and down in a limited frame. Although the index has continued to advance, it has not been enough to eliminate or reduce the overbought condition.

Let Punch! - Speculate buy (PSL, UMI), Buy at the support (AH)

Morning call: BANPU (BUY/ TP Bt791), SGP (HOLD)

BANPU: 2Q10 Earnings preview – YoY slowdown due to lower equity income

Expected 2Q10 earnings of Bt 3.4bn, down 14%YoY

We project BANPU’s 2Q10 earnings at Bt 3.4bn, down 14%YoY but up 27%QoQ. The YoY earnings slowdown was caused by the 31% drop in equity income, especially from BLCP. Meanwhile, the QoQ earnings surge was attributable to the rise of the ASP following the uptrend in coal prices.

Maintain “Buy” with mid-11 target price of Bt 791

As a result of solid demand and the strong coal price outlook, BANPU will benefit the most as the majority of its earnings are from the coal business. Moreover, the acquisition of CEY (if successful) will provide 16-30% earnings upside and add value to BANPU by 12-24%. As such, we iterate “Buy” BANPU with the next 12 months sum-of-the-parts target price of Bt 791.

SGP: Weaker earnings expected in 2Q10!

Weaker profits expected in 2Q10:

We estimate SGP to post its 2Q10 net profits at Bt300m, up 7.2% YoY but down 8.5% QoQ. Its 1H10 earnings were expected at Bt628m, up 15.2% YoY, representing 45% of our full-year estimate. The YoY improvement was mainly due to improving LPG consumption; meanwhile, the QoQ weakening performance was the result of the softening demand as a result of political riot in Bangkok . Looking forward, we expect its profitability to gradually rise due to a peak demand season in later half of the year and the realization of earnings from the investments in Vietnam and Singapore .

Maintain HOLD:

Although SGP share price exceeds our current 12-month price target of Bt14.7, we maintain HOLD rating to SGP as our fair price is set on 9.0x PER. We believe that if SGP could close the acquisition deal in China , its share price will be re-rated to 10.0x PER as the other LPG trading players in the region have been traded at 12.0x PER. As the current share price is partly reflected this acquisition deal, key risk is the success of the deal, which should be completed prior this Sep 2010.

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Starting in SET trade

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