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Key Points

• SET Index went up by 59.7% as at 21 Oct 2009, supported by favourable macro condition, higher liquidity from increased foreign participation, receding political risk.
• Stock market dived on concern of Thai king’s health.
• While downside risk is present due to political risks and concerns on health of the Thai king, we believe that the overall macro conditions would be largely unaffected.
• Valuation remains attractive. Estimated corporate earnings growth of SET Index components for 2009, 2010 and 2011 are 28.8%, 15.9% and 15.6% respectively. Thai market is currently trading at 12.1X 2009 PE. Forward PE for 2010 and 2011 stand at 10.4X and 9.3X respectively (as at 21 Oct 2009).

SET INDEX PERFORMANCE REVIEW

Thailand emerged as one of the top five performing markets under our coverage. On a year-to-date basis, the Stock Exchange of Thailand (SET) Index rose by 59.7% (in local currency term) as at 21 Oct 2009.

FACTORS CONTRIBUTED TO SET’S STRONG PERFORMANCE

The strong performance is contributed by several factors:

Favourable Macro Conditions

Thailand economy has officially come out of recession with the second quarter of 2009 recording a positive quarter-on-quarter growth of 2.3%. In the previous two quarters, the economy has declined -1.8% and -5.9% on a quarter-on-quarter basis.

In September, Thailand’s consumer price index contracted by 1.0% year-on-year, a pace that is unchanged since August 2009. On a month-on-month basis, the inflation rose 0.2% on higher food and fuel prices. We believe that the inflation rate should be back to the positive territory when the base-year effect of 2008 trails off as the year comes to an end. With benign inflationary pressure, we believe that the government will maintain its benchmark rate low in the next three to six months to support economic growth. The Monetary Policy Committee (MPC) kept its benchmark rate and its 1-day repurchase rate unchanged at 1.25% in their August 2009 meeting.

The decline in exports has stabilized with August exports falling 18.4% year-on-year, signifying growth compared to July drop of 25.7% year-on-year. Orders for agriculture products, electronics and auto parts are picking up.  Albeit staying below 50 points mark which indicates business optimisms, we are seeing an improvement of business sentiments with August advancing to 46.1 points from 45 points in July.

Improving Foreign Participation in Thai Market

We see increasing foreign interests on Thailand’s equity market. In the first quarter of 2009, Thailand market experienced a net selling of 5.5 billion baht by foreign investors. However, the market recorded a net buy of 26.0 billion baht in the second quarter of 2009. This was due to an increase in risk appetite of foreign investors following signs of economic recovery as well as a weaker US dollar as compared to most Asian currencies. Looking back to 2008, foreign investors registered a net selling of 162.4 billion baht. However, by end of September 2009, the market has seen a net buying position of 49.5 billion baht, suggesting rooms for further foreign participation.

Corporate Earnings Have Potential to record Earnings Surprise 

During the second quarter earnings announcements, most sectors announced strong results. Sectors such as commodities, consumer staples, banking, petrochemical and property generally registered strong results in the second quarter of 2009. We observed that most commodity companies continue to recover from poor first quarter earnings, contributed by higher product prices. Recovery in sales saw exporters turning around, especially those from electronics and food industries. Banks also reported robust results in the second quarters of 2009. Following the downgrade of consensus earnings forecast in the second half of 2008, we believe that the consensus earnings upgrade is underway as the worst is behind us, reducing chances of earnings disappointment.

Receding Political Risk

Short term political risks seem to have receded as recent demonstration has been peaceful. Pro-Thaksin’s supporters are losing momentum as they have twice postponed scheduled demonstrations to 30 August and subsequently 5 September.

Nonetheless, investors should note that political risk remains as the key risk in Thailand market. We reckon that the market will remain sensitive to the political development in Thailand. Any inverse news on politics will potentially trigger a sell-down in the market.

Short-term Pullback on concern of Thai’s King Health

Recently, Thailand stock market pulled back on concern over their king’s health. King Bhumibol Adulyadej was hospitalised on 20 Sep 09 and the stock market fell by 2.87% between 21 Sep 09 and 15 Oct 09 on wide spread rumours of the deteriorating king’s health. SET Index subsequently rebounded by 3.52% in a single day trading on 16 Oct after a Thailand Finance Minister, Mr. Korn Chatikavanij denied these rumours.

Although the king is a constitutional monarch with moral authority rather than legal powers, concern for king’s well-being reflects the reverence of Thai public holds for the king. Thai government has disclosed that next monarch after King Bhumibol will be the Crown Prince Vajiralongkorn. King Bhumibol, being the world’s longest serving monarch, has gained much popularity among Thais. His son has yet to obtain a broad public popularity as compared to his father. We believe that the market may succumb to selling pressure should there be any adverse news on the health of Thai king. While downside risk is present due to political risks and concerns on health of the Thai king, we believe that the overall macro conditions would be largely unaffected.

VALUATION REMAINS ATTRACTIVE

Despite the strong run up in the past few months, market valuation remains low as compared to its peers. Estimated corporate earnings growth of SET Index components for 2009, 2010 and 2011 are 28.8%, 15.9% and 15.6% respectively. In terms of valuation, the market is currently trading at 12.1X 2009 PE. Forward PE for 2010 and 2011 stand at 10.4X and 9.3X respectively (as at 21 Oct 2009).

The market has surged 87.1% as of 21 Oct since hitting its low in October 2008 and a 59.7% increase year-to-date. Any short term correction is considered healthy at this point. We believe that the magnitude of such a correction will be small as investors who previously missed the boat in the previous run-up are waiting for opportunities to buy into the market. We maintain our 3.5 stars rating on Thailand market.