CIMB Report 5.6.14 Equity Strategy

June 5, 2014

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT.

ASIA PACIFIC EQUITY STRATEGY LONG TERM ASEAN LONG TERM ASIA

Conviction| |

Navigating Asia - June-14: Taming temptation The tailwind from a benign global backdrop of low bond yields and market volatility, which has allowed endogenous factors to dominate country returns, cannot get much better. Volatility has been supressed but is not dead, and rates are likely to follow the uptrend in growth despite recently tamed market expectations. Interest rate-sensitive stocks have been given a reprieve but we are sellers into strength (particularly HK real estate). Our stock/country selection will be determined by politics and central bank action, underpinning the trade growth. We prefer cyclicals, value to growth stocks and politically leveraged (aspirational) sub-groups but hedge our bets with dividend growers.

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Figure 1: Volatility is suppressed not dead Title:

Source:

Please fill in the values above to have them entered in your report

10

20

30

40

50

60

70

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14

QE Period VIX Index

QE 1 QE 2 QE 3

SOURCES: CIMB, MSCI, DATASTREAM

Melt up or melt down? The evidence supporting a growth recovery scenario continues to build. However, the markets have not been tested by rising bond yields yet and there is growing complacency about how long the low/stable volatility will last. The possibility of a period of market turmoil is rising but this does not dent the increasingly attractive medium-term outlook.

Every market for itself Industry, sector and country cross-correlations are low. The rising cost of capital and cyclical recovery will cause these to rise in 2H. However, the fundamental and political conditions have improved for most externally exposed countries and we expect this headwind to be successfully absorbed.

How to hedge risks? We advise investors to buy value stocks, cyclicals and beneficiaries of the global recovery into 2H. Sell expensive, interest rate-sensitive stocks into strength. Our most aggressive call is to sell Thailand as we think that the market has become oblivious to economic risks. Vietnam has regained only half of its peak return YTD and still has significant upside potential. We are becoming cautious on Indonesia and are rotating into defensive stocks. India requires a leap of faith but not priced expensively, provided that growth does not disappoint even if politics does. China is the regions best-value asset for good reason. Nonetheless, stabilising growth should be enough for a strong 2H rally.

Sources: CIMB. COMPANY REPORTS

CIMB Analyst(s)

Jason TODD, CFA T (852) 2532 1123 E [email protected]

Rohit SHARMA T (852) 25391313 E [email protected]

Arup RAHA T (65) 6210 8412 E [email protected]

Shane LEE (Australia) T (61) 2 9694 6054 E [email protected]

Bertram LAI (Hong Kong/China) T (852) 2532 1111 E [email protected]

Avadhoot SABNIS (India) T (91) 22 66025151 E [email protected]

Erwan TEGUH (Indonesia) T (62) 21 30061720 E [email protected]

Dohoon LEE (Korea) T (82) 2 6730 6121 E [email protected]

Terence WONG, CFA (Malaysia) T (60) 3 20849689 E [email protected]

Edser TRINIDAD (Philippines) T (63) 2 836 3933

Kenneth NG, CFA (Singapore) T (65) 62108610 E [email protected]

Eric LIN (Taiwan) T (886) 2 8729 8380 E [email protected]

Kasem PRUNRATANAMALA, CFA (Thailand) T (66) 2 6579221 E [email protected]

Michael KOKALARI, CFA (Vietnam) T (84) 90 797 4408 E [email protected]

Asia PacificEQUITY STRATEGY

June 5, 2014

2

Table of Contents

Growth and politics .......................................................................................................................... 5

Aspirational India How much has been priced in? .................................................................. 7

Economics: Good times, again ...................................................................................................... 10

Country Outlook ........................................................................................................................ 15

Country outlook ............................................................................................................................. 16

Australia: Budget fizzle and plop .................................................................................................. 18

China/Hong Kong: Growth a favourable tailwind ......................................................................... 19

India: Optimism on positive election results ................................................................................. 20

Indonesia: Political roller-coasters ................................................................................................. 21

Korea: recovering from a tragedy .................................................................................................. 22

Malaysia: ETP annual report ......................................................................................................... 23

Singapore: M&A is the theme ....................................................................................................... 24

Thailand: Honeymoon period ........................................................................................................ 25

Vietnam: China tensions prompt foreign buying ........................................................................... 26

Appendix ........................................................................................................................................ 27

Full list of contributors

Jason Todd, CFA Rohit SHARMA Arup RAHA Shane LEE T (852) 2532 1123 T (852) 2539 1313 T (65) 6210 8412 T (61) 2 9694 6054

E [email protected] E [email protected] E [email protected] E [email protected]

Dohoon LEE Avadhoot SABNIS Terence WONG, CFA Kenneth NG, CFA T (82) 2 6730 6121 T (91) 22 66025151 T (60) 3 20849689 T (65) 62108610


Kasem PRUNRATANAMALA, CFA Erwan TEGUH Eric LIN Bertram LAI T (66) 2 6579221 T (62) 21 30061720 T (886) 2 8729 8380 T (852) 2532 1111


Michael KOKALARI, CFA Andrew TANG Peter P. SUTEDJA, CFA Dipojjal SAHA T (84) 90 797 4408 T (61) 2 9694 6076 T (62) 21 30061726 T (91) 22 66025164


Nigel FOO Chek Keng TJ OK Julia GOH Janice TAI T (60) 3 20849293 T (82) 2 67306134 T (60) 3 20849698 T (852) 2532 1127


Edser TRINIDAD

T (63) 2 836 3933


June 5, 2014

3

Figure 2: Country index targets and allocations

COUNTRY 2014 INDEX TARGET STRATEGIC (12mth)

Australia

52w Low 52w High

5,504 5,600

4632 5554

Australia

China

52w Low 52w High

60.46 78.00

50 66

China

India

52w Low 52w High

7,363 8,150

5119 7563

India

Indonesia

52w Low 52w High

4,903 5,225

3838 5091

Indonesia

Korea

52w Low 52w High

2,002 2,250

1770 2063

Korea

Malaysia

52w Low 52w High

1,870 2,030

1660 1889

Malaysia

Philippines

52w Low 52w High

6,791 7,777

5562 6966

Philippines

Singapore

52w Low 52w High

3,299 3,474

2953 3308

Singapore

Taiwan

52w Low 52w High

9,088 8,900

7663 9139

Taiwan

Thailand

52w Low 52w High

1,441 1,200

1200 1564

Thailand

1205

Vietnam

52w Low 52w High

558 630

462 609

Vietnam

5,3

19

5,6

00

5000

Australia

Last close Target Note: Market index data as of 2 June 2014. SOURCE: CIMB RESEARCH


June 5, 2014

4

Figure 3: Strategy top picks portfolio

Country Sector Price Target Price P/BV (x) Div Yield

(local curr) (local curr) CY2013 CY2014 CY2014 CY2014 CY2015 CY2014

OZ Minerals OZL AU Australia Materials Add 4.3 5.7 1,208 -15.9% 35.4 19.3 0.55 2.8% 3.7% 0.0%

BHP Billiton BHP AU Australia Materials Add 36.2 42.8 173,938 0.5% 13.6 12.3 2.05 17.8% 16.1% 3.6%

Rio Tinto RIO AU Australia Materials Add 59.4 78.9 97,900 6.1% 10.0 10.5 1.95 19.7% 19.7% 3.7%

Orica ORI AU Australia Materials Add 19.2 25.5 6,583 -0.7% 11.6 11.3 1.69 15.4% 15.9% 4.8%

Aristocrat Leisure ALL AU Australia Con Disc Add 5.2 5.9 2,644 14.6% 25.1 20.6 6.34 32.8% 33.8% 3.6%

Nine Entertainment NEC AU Australia Con Disc Add 2.2 2.5 1,880 -5.0% 13.3 14.3 1.07 7.7% 7.6% 2.8%

Transurban Group TCL AU Australia Industrials Add 7.5 7.3 13,150 3.6% 74.4 91.2 1.98 2.3% 2.6% 4.9%

Brambles BXB AU Australia Industrials Add 9.4 10.3 13,602 9.1% 21.5 21.3 4.25 20.9% 23.2% 3.3%

Primary Health Care PRY AU Australia Health Care Add 4.5 5.7 2,111 6.1% 14.4 13.1 0.82 7.0% 6.9% 4.9%

APA Group APA AU Australia Utilities Add 7.0 7.1 5,447 3.0% 27.9 26.8 2.49 8.9% 11.0% 5.2%

ICBC 1398 HK China Financials Add 5.2 7.4 208,855 9.8% 5.6 5.1 1.00 21.2% 20.0% 6.8%

China Const Bank 939 HK China Financials Add 5.8 9.0 185,402 12.5% 5.4 4.8 0.95 21.3% 20.6% 7.2%

AIA Group 1299 HK Hong Kong Financials Add 39.4 43.9 61,210 11.3% 21.7 17.5 2.17 13.2% 13.8% 1.2%

China Unicom 762 HK China Telecoms Add 11.5 17.1 35,473 36.0% 21.2 16.7 0.96 6.0% 7.5% 2.2%

China Mengniu Dairy 2319 HK China Cons Staples Add 37.6 44.3 9,484 26.4% 34.0 26.5 3.44 13.9% 15.6% 0.8%

Techtronic Industries Co 669 HK Hong Kong Con Disc Add 24.4 28.9 5,762 27.2% 20.5 16.7 2.89 18.5% 20.0% 1.3%

China Everbright 257 HK China Industrials Add 10.5 12.4 6,084 26.4% 32.3 26.4 3.21 12.7% 14.1% 1.0%

Sinopec Corp 386 HK China Energy Add 7.1 8.4 96,886 6.6% 9.9 9.1 1.09 12.6% 12.4% 4.4%

CNBM 3323 HK China Materials Add 7.0 10.0 4,895 12.3% 5.3 4.4 0.74 18.1% 17.1% 3.4%

China Railw ay Const 1186 HK China Industrials Add 6.7 9.3 9,087 14.6% 6.5 5.9 0.74 13.2% 13.1% 2.6%

Ashok Leyland AL IN India Industrials Add 34.0 40.0 1,521 22.3% na 223.5 2.72 1.2% 14.6% 0.4%

Petronet LNG PLNG IN India Energy Add 155.4 180.0 1,962 -2.8% 14.2 14.2 2.16 16.3% 21.1% 1.9%

Tata Communications TCOM IN India Telecoms Add 352.1 427.0 1,689 na na 95.6 7.50 7.7% 18.4% 1.3%

Titan Co Ltd TTAN IN India Con Disc Add 320.2 300.0 4,786 7.8% 38.8 35.1 9.57 30.2% 28.6% 0.7%

Tata Pow er Company TPWR IN India Utilities Add 105.9 100.0 4,823 8.4% 38.0 25.9 2.13 8.5% 11.5% 1.7%

Maruti Suzuki MSIL IN India Con Disc Add 2372.1 2260.0 12,065 20.3% 25.5 20.0 3.06 16.4% 17.8% 0.6%

Hero Motocorp HMCL IN India Con Disc Add 2541.5 2820.0 8,545 15.8% 24.0 17.1 7.36 47.6% 48.5% 2.4%

ICICI Bank ICICIBC IN India Financials Add 1469.4 1756.0 28,596 10.2% 18.0 16.2 2.15 13.7% 14.0% 1.6%

Bharti Airtel BHARTI IN India Telecoms Add 353.9 375.0 23,820 17.4% 52.1 31.0 2.23 7.6% 8.2% 0.3%

Hindalco Industries HNDL IN India Materials Add 160.7 195.8 5,587 -0.4% 11.8 13.1 0.82 6.4% 8.4% 0.6%

Kalbe Farma KLBF IJ Indonesia Health Care Hold 1585 1520 6,291 7.5% 39.1 33.2 7.91 25.6% 26.9% 1.5%

Indofood Sukses INDF IJ Indonesia Cons Staples Add 6900 8000 5,130 5.3% 18.2 15.1 2.29 15.5% 16.8% 2.1%

Gudang Garam GGRM IJ Indonesia Cons Staples Add 53800 66000 8,765 4.0% 23.9 19.4 3.24 17.3% 17.3% 2.6%

Matahari Department Store LPPF IJ Indonesia Con Disc Add 14300 16400 3,533 31.1% 36.3 25.2 101.02 -875.0% 185.8% 1.1%

Surya Citra Media SCMA IJ Indonesia Con Disc Add 3400 3700 4,209 14.5% 38.2 28.7 13.90 54.9% 55.5% 1.8%

Telekomunikasi Indonesia TLKM IJ Indonesia Telecoms Add 2520 2900 21,509 8.9% 16.7 15.7 4.16 27.5% 26.9% 3.3%

Jasa Marga JSMR IJ Indonesia Industrials Add 5975 6800 3,440 13.2% 36.5 23.6 3.84 17.3% 20.8% 1.1%

Perusahaan Gas Neg PGAS IJ Indonesia Utilities Add 5225 6100 10,725 2.9% 15.1 12.7 3.76 31.4% 29.2% 3.6%

Eco World Dev ECW MK Malaysia Financials Add 5.1 8.0 397 0.7% 53.9 62.1 3.78 6.2% 3.7% 0.2%

Gamuda GAM MK Malaysia Industrials Add 4.6 5.2 3,261 8.1% 14.3 13.7 1.86 13.6% 14.9% 2.5%

Genting Malaysia GENM MK Malaysia Con Disc Add 4.3 5.7 7,464 12.6% 20.1 14.4 1.50 10.8% 12.7% 2.3%

IJM Corp Bhd IJM MK Malaysia Industrials Add 7.0 8.0 3,138 12.4% 19.5 16.7 1.52 9.4% 10.8% 2.6%

Mah Sing Group MSGB MK Malaysia Financials Add 2.3 3.0 1,004 17.0% 11.4 9.3 1.48 16.7% 17.6% 4.0%

RHB Capital Bhd RHBC MK Malaysia Financials Add 8.4 11.6 6,609 4.6% 11.5 10.5 1.19 11.6% 12.3% 2.7%

SapuraKencana Petro SAKP MK Malaysia Energy Add 4.1 6.7 7,552 42.8% 25.9 15.2 3.93 19.3% 21.8% 0.0%

UMW Oil & Gas UMWOG MK Malaysia Energy Add 4.0 5.0 2,698 65.7% 46.3 27.2 7.32 15.8% 40.1% 0.5%

YTL Corporation YTL MK Malaysia Utilities Add 1.6 1.9 5,167 5.0% 12.9 11.6 1.15 10.4% 10.0% 2.2%

Samsung Electronics 005930 KS South Korea Information Tech Add 1470000 1700000 211,645 16.0% 8.4 8.0 1.40 18.9% 17.1% 1.2%

LG Electronics 066570 KS South Korea Con Disc Add 76300 85000 12,205 158.7% 78.0 14.9 1.01 7.0% 10.1% 0.5%

LG Innotek 011070 KS South Korea Information Tech Add 126500 150000 2,846 na 164.2 25.9 1.63 7.5% 10.1% 0.0%

OCI 010060 KS South Korea Materials Add 175500 235000 4,091 na na 38.4 1.42 3.8% 7.2% 0.3%

Hyundai Mobis 012330 KS South Korea Con Disc Add 292000 400000 27,783 9.9% 9.4 7.9 1.19 16.2% 15.1% 0.7%

Hyundai Mipo Dockyard 010620 KS South Korea Industrials Add 164500 193000 3,216 -20.1% na na 1.13 -4.9% 1.5% 0.5%

SK Telecom 017670 KS South Korea Telecoms Add 222000 262000 17,521 27.6% 11.1 9.1 1.22 14.3% 14.4% 4.2%

Shinhan Financial Group 055550 KS South Korea Financials Add 45650 60000 21,159 8.6% 12.0 9.4 0.76 8.4% 9.0% 1.9%

KB Financial Group 105560 KS South Korea Financials Add 34300 50000 12,953 7.8% 10.5 7.7 0.49 6.5% 7.2% 2.3%

BS Financial Group 138930 KS South Korea Financials Add 16000 19000 3,665 8.9% 10.2 7.7 0.81 11.1% 11.1% 2.8%

DBS Group DBS SP Singapore Financials Add 17.0 20.8 33,077 1.6% 11.0 11.0 1.14 10.6% 11.0% 3.5%

Ezion Holdings EZI SP Singapore Energy Add 2.2 2.5 2,254 47.6% 13.6 10.4 1.92 21.5% 24.2% 0.1%

Frasers Centrepoint FCL SP Singapore Financials Add 1.9 2.1 4,256 13.1% 12.0 11.0 0.81 7.6% 7.6% 2.2%

Global Logistic Prop GLP SP Singapore Financials Add 2.7 3.5 10,307 8.2% 35.2 31.8 1.15 3.7% 4.3% 2.1%

Keppel Corporation KEP SP Singapore Industrials Add 10.7 13.2 15,428 -9.9% 10.3 12.3 1.82 15.4% 15.0% 3.6%

Singapore Post Ltd SPOST SP Singapore Industrials Add 1.7 1.9 2,516 2.5% 22.2 22.0 4.81 22.2% 24.1% 3.8%

UOL Group UOL SP Singapore Financials Add 6.7 8.4 4,113 4.0% 14.9 13.9 0.73 5.3% 5.8% 2.2%

Thai Beverage THBEV SP Singapore Cons Staples Add 0.6 0.7 12,693 73.6% 21.8 18.4 4.01 23.1% 22.1% 2.5%

Catcher Technology 2474 TT Taiw an Information Tech Add 280.0 355.0 7,006 17.4% 15.2 14.6 2.50 18.3% 19.6% 1.8%

Largan Precision 3008 TT Taiw an Information Tech Add 1980.0 2450.0 8,841 51.2% 27.6 16.5 6.23 44.0% 39.4% 1.4%

Simplo Technology 6121 TT Taiw an Information Tech Add 159.0 178.0 1,632 5.8% 15.1 13.1 2.42 19.2% 18.6% 4.3%

Asustek Computer 2357 TT Taiw an Information Tech Add 328.0 380.0 8,110 5.5% 11.5 10.8 1.72 16.7% 18.0% 5.9%

Hon Hai Precision 2317 TT Taiw an Information Tech Add 93.1 100.0 40,687 8.1% 11.5 10.1 1.42 15.1% 14.9% 1.9%

Grape King Inc. 1707 TT Taiw an Cons Staples Add 132.0 168.0 572 20.1% 20.6 17.9 4.87 30.6% 27.7% 3.8%

St. Shine Optical 1565 TT Taiw an Health Care Add 748.0 900.0 1,255 18.4% 23.6 20.1 8.15 44.4% 40.9% 3.0%

Green Seal Holding 1262 TT Taiw an Materials Add 216.0 300.0 971 26.8% 24.8 20.0 3.37 20.6% 21.4% 1.2%

E.Sun Financial 2884 TT Taiw an Financials Add 19.3 23.0 4,142 5.7% 11.8 10.5 1.22 11.9% 11.2% 1.8%

Fubon Financial 2881 TT Taiw an Financials Add 42.9 49.5 14,597 9.6% 12.9 11.1 1.20 11.4% 11.5% 3.2%

Airports of Thailand AOT TB Thailand Industrials Add 195.0 218.0 8,537 24.6% 24.1 21.7 2.79 13.5% 15.0% 1.8%

Total Access Comm DTAC TB Thailand Telecoms Add 126.0 138.0 9,143 14.6% 23.1 20.4 8.07 41.8% 44.0% 5.7%

Mega Lifesciences PCL MEGA TB Thailand Health Care Add 21.7 25.0 575 16.4% 30.1 26.9 4.45 17.6% 20.1% 0.9%

Central Plaza Hotel CENTEL TB Thailand Con Disc Add 33.0 38.5 1,365 16.6% 33.7 28.4 3.96 14.4% 16.0% 1.5%

Bangkok Dusit Med BGH TB Thailand Health Care Add 16.6 19.5 7,880 12.9% 41.0 33.3 5.68 18.0% 19.2% 1.2%

Supalai PCL SPALI TB Thailand Financials Add 20.5 24.0 1,078 21.8% 12.2 8.2 1.97 26.2% 26.2% 4.9%

Thaicom THCOM TB Thailand Telecoms Add 41.0 46.0 1,377 76.9% 36.0 24.2 2.66 11.4% 14.3% 2.1%

Robinson Department ROBINS TB Thailand Con Disc Add 57.0 59.0 1,940 15.3% 31.9 32.1 5.13 16.6% 20.4% 1.6%

Siam Commercial Bank SCB TB Thailand Financials Add 166.0 197.0 17,266 14.1% 11.2 10.7 2.03 20.0% 20.4% 3.7%

Indorama Ventures IVL TB Thailand Materials Add 26.5 26.0 3,910 na na 27.5 2.01 7.5% 11.3% 1.0%

FPT Corp FPT VN Vietnam Information Tech Add 44400 85000 720 12.5% 8.2 6.6 1.48 24.1% 24.5% 4.5%

Military Bank MBB VN Vietnam Financials Add 13300 18200 706 2.0% 7.7 7.1 0.91 13.4% 15.7% 9.0%

PetroVietnam Drilling PVD VN Vietnam Energy Add 83500 101630 1,083 13.4% 10.9 10.7 2.08 20.4% 22.0% 4.7%

Hoa Phat Group HPG VN Vietnam Materials Add 49000 63003 1,113 32.1% 10.8 9.2 2.15 25.1% 22.0% 3.5%

ROE (%)Company Ticker Recom.

Mkt. Cap

(US$ m)

3-year EPS

CAGR (%)

Core P/E (x)

SOURCES: CIMB, MSCI, DATASTREAM, BLOOMBERG


June 5, 2014

5

Growth and politics At the start of 2014, we were bullish on the Asian equity markets prospects. Our base-case scenario assumed stronger global growth (risks being country and not region specific), that the rising bond yields and capital flight were overplayed as downside risks and that Asian equities had become value assets with potential to surprise consensus on the upside.

Figure 4: Inflation Breakeven Yield in different QE periods

Title:

Source:


-1

1

2

3

4

5

6

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14

QE Period US Gov 10 Y Yield 10 Y TIPS Breakeven Yield

QE 1 QE 2 QE 3

SOURCES: CIMB, Bloomberg, DataStream

Entering 2H, we are still comfortable with our key calls. We did not anticipate the bond rally YTD. However, it has been successfully absorbed by the equity markets. Similar to other periods of easing central bank policy, both bonds and equities have rallied in tandem.

There is a sniff of complacency creeping into equity markets. Should the bond rally dissipate (dip below 2.5%), we would be surprised if the equities do not suffer a setback, given the lingering unease about the health of the global economy and the fact that the new normal does not mean that the zero interest rate policy (ZIRP) will continue infinitely. On the other hand, we think that the consensus expectations of limited volatility and the possible resulting market reaction are too sanguine if there is a bond sell-off (we expect valuation compression if yields are too low or rise too fast).

At the current juncture, our concern is not why bonds have rallied so strongly (consensus appears to have attributed this off to a combination of factors including positioning - portfolios being short duration, the carry - Chinese are back buying USTs, falling supply, ECB easing and a compression in the term premium in reaction to a lower growth and inflation path - the new normal). Instead, our concern is that the margin of error has shrunk to zero if rates do not rise in an orderly fashion and/or if central banks do not deliver on market expectations on the policy front.

The lower yields are pro-cyclical stocks and will support growth assets. However, the debate in the recent months has been about the level at which rates will peak (a lower peak), rather than whether the rates would go up. We see the current global bond rally as a reprieve for interest rate-sensitive sectors across Asia (i.e. real estate) but not an indication that the recent performance will be sustained. Further improvement in global growth is likely to push rates up in 2H (more modestly than previously expected, given the short duration positioning and lower growth expectations). The magnitude of the interest rate increase would be a function of investors confidence in the sustainability of economic recovery, rather than the speed at which policy is unwound. In

Jason TODD, CFA T (852) 2532 1123 E [email protected]

Rohit SHARMA T (852) 2539 1313 E [email protected]


June 5, 2014

6

other words it is not the end of the quantitative easing (QE) that will drive rates up but the investors confidence in economic recovery.

The potential for an increase in bond yields will add another headwind to the externally-exposed economies across the region that have seen rates move in the opposite direction of market expectations YTD. This should not pose a major threat to the growth/equity market outlook, given the improvement in current account deficit (CAD) positions, rebuilding of forex reserves, limited inflationary pressures and in some instances, more robust political backdrop.

However, the global backdrop has been sufficiently benign to allow endogenous factors to dominate country performance across the region. Bond yields and/or volatility are unlikely to fall much further from current levels and despite the expected improvement in economic growth, the muted recovery along with rising cost of capital and expected returns (via higher volatility) may cause a period of market turmoil, albeit temporary, before year-end.

Figure 5: Asian equities are now value assets... Figure 6: with the value still concentrated in the North

11.8

15.3

6

8

10

12

14

16

18

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

World vs Asia (x) Forward PE

MSCI Asia Pacific x Japan MSCI World x Asia Pacific

Title:

Source:

Please fill in the values above to have them entered in your report14.3

10.5

7

9

11

13

15

17

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

ASEAN vs North Asia Forward P/E

ASEAN North Asia

SOURCES: CIMB, MSCI, DATASTREAM SOURCES: CIMB, MSCI, DATASTREAM

This environment will likely result in two factors- politics and economic growth- dominating country and sector performance in 2014. We expect the economic backdrop to become more favourable in North Asia than in Southeast Asia as Korea and Taiwan capitalise on the US recovery. Similarly, we anticipate an uptick in Chinas economy in line with the global economic recovery as Chinas growth cycle has always been in sync with the global growth cycle. Chinas economic growth is likely to be led by exports, which should in turn, boost large portions of the domestic economy. The popular argument is that even if exports recover, overall economic growth will be slow as there is downward pressure from the property and credit overhang. Our economics team believes that there is pressure from the overhang but it is not significant enough in the near term to derail economic recovery, given the accommodative policy settings that provide a growth cushion (refer to the economic commentary by Arup Raha on page 10).

Our key calls are:

Value over growth (momentum) stocks;

Cyclicals over defensives (information technology, industrials, materials);

Beneficiaries of global demand recovery (autos- Korea over India, capital goods);

Structural consumer over cyclical consumer (internet, gaming, hotels); and

Beneficiaries of political change;


June 5, 2014

7

Aspirational India How much has been priced in? India has become a tough buy for value investors at 16x one-year forward P/E and at a 30% premium over the regional benchmark. Sustained share price upside is now predicated on a reversal of multiple years of policy paralysis and entitlement-based politics. India represents a strategy based on aspiration but our analysis of what is in the price suggests that the market is still far from reaching the extremely high valuation estimates or that consensus is unrealistic about future implied earnings growth.

Figure 7: Future operational value* remains modest

*proportion of current value attributed to future earnings

Figure 8: Implied EPS growth below nominal GDP in the long run

Title:

Source:


-30%

-15%

0%

15%

30%

45%

60%

75%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

+1S

-1SD

Av erage

Title:

Source:


4.5%

6.9%

9.3%

11.7%

Dec-04 Mar-06 Jun-07 Sep-08 Dec-09 Mar-11 Jun-12 Sep-13 Dec-14

Implied growth

Implied 'g' of MSCI India

Average= 10.2%

Implied = 11.2%

SOURCES: CIMB, MSCI, DataStream SOURCES: CIMB, MSCI, DATASTREAM

There have been signs of stabilising economic growth in India but market expectations are elevated. We do not think that India needs much to go right to trade at higher valuations from current levels. A clearer (and more credible) reform roadmap should be enough to drive further multiple expansion of 1-2 P/E points (at 16x one-year forward P/E, each point is equivalent to ~7% upside for the index) without pushing the Indian market into outright expensive territory. We think that an interesting method to address the valuation concerns is analysis based on what is implied in the current valuation multiples. Our model indicates that the Indian markets valuations are not expensive and that it has significant re-rating potential if growth is successfully delivered:

1. Our future operations value model (the residual value after subtracting the capitalised value of current earnings) shows that the market has priced in only 25% of its value based on future earnings (Figure 7). This is in comparison to its long-term average of 38% and past peak cycles (2000, 2007 and 2009) in excess of 60%. In addition, the implied value for future earnings appears low relative to the forward multiple. For instance, during past periods when the market traded at 17-18x forward P/E (2005-2007), around 40-50% of its value was attributed to future earnings growth.

2. Our implied terminal growth model (Figure 8) priced the Indian market at 11%. This is slightly above the long-term average of 10% but in line with earnings delivered and projected for the next two years. In a steady state, if we were to assume that real GDP recovers to 6-7%, inflation falls to 6-7% and profit share is unchanged, we arrive at long-term earnings growth rate of 12-14%. Although this is hypothetical, it does provide reasonable upside to the markets current valuations.

Top picks based on implied growth in

current stock prices and forward growth expectations

Company Ticker Recom.

Tata Power Company TPWR IN Add

Petronet LNG PLNG IN Add

Wipro WPRO IN Add

Glenmark Pharmac GNP IN Add

HCL Technologies HCLT IN Add

Tech Mahindra TECHM IN Add

Cadila Healthcare CDH IN Add

Dr Reddys Laboratories DRRD IN Add

Ultratech Cement UTCEM IN Reduce

Reliance Industries RIL IN Reduce

NTPC Ltd NTPC IN Reduce

Bharat Heavy Electricals BHEL IN Reduce

Container Corporation CCRI IN Reduce Sources: CIMB, BLOOMBERG, MSCI


June 5, 2014

8

3. The market is not expensive based on our composite valuation model [average of next twelve months (NTM) P/E and P/BV) that is currently below the historical 10-year average. By sector, consumer staples and cement appear expensive but there are still stocks in the IT, healthcare, consumer discretionary and utilities sectors that are trading well below their long-term averages.

Figure 9: Room for further multiple expansion Figure 10: Not all sectors have re-rated

Title:

Source:


5

7

9

11

13

15

17

19

21

23

Jan-95 Feb-97 Mar-99 Apr-01 May-03 Jun-05 Jul-07 Aug-09 Sep-11 Oct-13

MSCI India - 12 Months Forward P/E

MSCI India - 12m Forward P/E Mean + Stdev Mean - Stdev

Title:

Source:


-10%

0%

10%

20%

30%

40%

50%

60%

Sources of Price Return: Last 4 months

EPS Growth NTM P/E Expansion Price Change SOURCES: CIMB, MSCI, DATASTREAM SOURCES: CIMB, MSCI, DATASTREAM

4. At the stock level, we find many individual names that are trading at

significant discounts to their historical average P/Es and their share prices do not reflect their future earnings potential (i.e. stocks with share prices that reflect low or minimal terminal growth compared to their actual earnings potential). We use an inverted DCF that allows us to factor an implied terminal growth rate into the share price (we assume risk-free rate of 8.5%; market risk premium of 9.5% and calculated beta for each company based on five years of data). We found that little or no growth was factored into the share prices of TPWR, PLNG, MTCL, WPRO, GNP, HCLT, TECHM, CDH, DRRD and TCS, while high growth was assumed for UTCEM, RIL, NTPC, BHEL, CCRI and SAIL.

Figure 11: Stocks that look cheap and expensive based on implied g

Company Ticker Recom. Price Target Price Mkt. Cap P/E P/B P/B & P/E YTD Low ROE Div Yield

(local curr) (local curr) (US$ m)Forward

(2-year)

Historical

(5-year)CY2014 CY2014

Avg. Premium

over 5 Yr avg (%) CY2014 CY2014

Low implied terminal growth but high near term growth expectations

Tata Power Company TPWR IN Add 106.1 100.00 4,849 2.0% 46% 87.42 25.9 2.13 -1% 49% 8.5% 1.7%

Petronet LNG PLNG IN Add 157.3 180.0 1,994 4.1% 22% 14.50 14.4 2.19 -7% 44.7% 16.3% 1.8%

Mindtree Ltd MTCL IN Hold 1,523 1,500 1,075 5.6% 14% 57.24 12.7 3.29 14% 9.8% 29.2% 1.8%

Wipro WPRO IN Add 499.1 640.0 20,815 5.7% 15% 14.86 13.8 3.13 -7% 4.4% 25.0% 1.9%

Glenmark Pharmac GNP IN Add 539.6 680.0 2,474 5.9% 18% 17.26 18.2 3.84 12% 7.8% 23.8% 0.4%

HCL Technologies HCLT IN Add 1382.8 1680 16,356 6.3% 23% 48.97 14.3 4.02 19% 15.5% 32.7% 1.4%

Tech Mahindra TECHM IN Add 1895.9 2200 7,486 7.6% 15% 13.30 15.1 4.05 23% 11.1% 30.5% 1.3%

Cadila Healthcare CDH IN Add 924.5 1250 3,200 7.8% 29% 22.50 18.6 4.47 -13% 18.1% 26.7% 1.2%

Dr Reddys Laboratories DRRD IN Add 2413.95 3080 6,939 8.0% 15% 31.86 17.9 3.84 -36% 4.6% 23.6% 0.6%

Tata Consultancy Serv TCS IN Hold 2129.85 2345 70,522 8.3% 15% 32.74 19.7 6.39 -2% 6.3% 36.3% 1.7%

High implied terminal growth but low near term growth expectations

Ultratech Cement UTCEM IN Reduce 2450.3 1833 11,359 12.3% 12% 7.64 28.1 3.58 51% 49.2% 13.7% 0.4%

Reliance Industries RIL IN Reduce 1082.2 850 59,131 12.8% 3% 9.62 14.2 1.63 -4% 34.9% 12.1% 0.9%

NTPC Ltd NTPC IN Reduce 159.25 115 22,197 13.2% -5% 7.23 14.5 1.47 -29% 37.6% 10.3% 2.9%

Bharat Heavy Electricals BHEL IN Reduce 248.6 170 10,286 14.0% -27% 8.52 18.3 1.74 -51% 68.2% 9.8% 1.1%

Container Corporation CCRI IN Reduce 1153.9 800 3,803 15.7% 4% 4.17 23.2 3.04 22% 59.9% 13.7% 1.1%

Steel Authority of India SAIL IN Hold 91.65 70.2219534 6,399 20.1% -3% -20.92 18.4 0.87 -8% 58.4% 4.9% 0.3%

Implied

Terminal

Growth Rate

EPS Growth



June 5, 2014

9

Figure 12: Equity market can continue to grow vs. GDP Figure 13: on average we are not concerned

20

40

60

80

100

120

140

160

Mar-03 Jun-04 Sep-05 Dec-06 Mar-08 Jun-09 Sep-10 Dec-11 Mar-13

India market cap to GDP ratio

Title:

Source:


-2.5

-1.5

-0.5

0.5

1.5

2.5

Jan-04 Mar-05 May-06 Jul-07 Sep-08 Nov-09 Jan-11 Mar-12 May-13

Composite Valuation Indicator

MSCI India - Composite Value Index + 1 STDEV - 1 STDEV

Undervalued

Expensive

SOURCES: CIMB, MSCI, DATASTREAM SOURCES: CIMB, MSCI, DATASTREAM


June 5, 2014

10

Economics: Good times, again

We believe that the pace of global economic activity will pick up this year. The main driver of this upswing is the US economy. Growth in Europe has also been gaining traction and, in Japan, we can cautiously say that stimulus is slowly leading to autonomous growth in domestic demand. Against this backdrop, we are looking for a strong cyclical upswing in Asian (including China) growth in 2H14.

US Economy to Drive Global Growth

The US economy is likely to be the main driver of a global economic upswing in the second half of this year. Monetary policy settings are still loose and the drag from the fiscal side is over. Furthermore, housing prices are starting to firm, the auto industry is surging, wealth is being created and, despite there still being significant slack in the labour market, incomes have been rising.

Exports Will Drive Asian Economies

Chinas growth cycle has always been in sync with the global growth cycle and as the global economy recovers, so should China. Exports should lead, which should, in turn, carry large portions of the domestic economy with it. There is a popular argument that even if exports recover, there is enough of a downdraft from a property and credit overhang that overall growth will slow. Our belief is that while the overhang bit may be true, we do not think it will bite enough in the near term to derail a recovery. Policy settings will help.

Given the nature of the recovery, North Asia should do better than ASEAN as Korea and Taiwan have greater exposure, through higher-end electronics and electricals, to a recovery in the US. Modest signs have already started to emerge. In ASEAN, Malaysia and Singapore are expected to benefit the most from a global uptick. We put Malaysia ahead of Singapore as its exposure to the uptick is greater and, besides that, it starts from a relatively good domestic position of enjoying non-inflationary growth.

Politics Good and Bad

In India, Indonesia and Thailand, politics is playing a relatively large, if not crucial, role. In India, there is a new government in place and there are a lot of hopes and expectations. There is hope in Indonesia, too, with presidential elections scheduled for July. In Thailand, with the coup, it is almost all politics right now. However, even without the political uncertainty, there are plenty of reasons to be cautious about the economy.

Our view

We believe that the pace of global economic activity will pick up this year. Poor weather was largely responsible for the lethargy in US activity and, with the weather now improving, so should activity. Growth for the euro area turned positive in the second half of 2013 and that momentum has been maintained in 2014. In Japan, we can cautiously say that stimulus in Japan is slowly leading to autonomous growth in domestic demand.

China presents a trickier outlook: an overhang of investment in the property sector and fears about the unraveling of a credit boom are being countered by a likely improvement in the export outlook. We think that the cyclical forces, with a little help from the policymakers, should come out ahead and better growth numbers can be expected from the Chinese economy in the second half of this year. Exports should lead and, in turn, provide an impetus for parts of domestic demand (see China: Forget the landing, could the economy fly again?).

So, all told, we are looking for a cyclical upswing in growth in the second half of this year. It will be led by exports and China will be very much a part of it.

Arup RAHA T (65) 6210 8412 E [email protected]


June 5, 2014

11

Figure 14: US, euro area and China GDP growth

Title:

Source:


0

2

4

6

8

10

12

14

-6

-4

-2

0

2

4

6

1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14

US Euro area China (RHS)

% yoy % yoy

SOURCES: BLOOMBERG, CIMB RESEARCH

The cyclical recovery will differentiate itself across countries. Asias exports await two stimuli from the US industrial production and consumer demand. The former is still sluggish as inventories have been run down and, besides, most of activity has been in the energy sector. The latter, until now, has not been able to behave with its usual exuberance as energy costs have been eroding disposable income. That has now changed and we expect the US consumer to resume their traditional patterns of spending.

Given the nature of the recovery, North Asia should do better than ASEAN as Korea and Taiwan have greater exposure, through higher-end electronics and electricals, to a recovery in the US. However, at the next step there is a further differentiation. While exports will lead to higher incomes, we anticipate a better consumption response in Taiwan than in Korea where household debt is high and near-term consumer sentiment appears low.

Hong Kong, too, will benefit from a pick-up in global growth. The domestic economy is also doing well with unemployment at a 16-year low and stable domestic consumption. The cyclical upswing in China should help tourism receipts and, overall, a healthy growth number can be expected. However, there is risk, too the property market appears to be overheated and remains vulnerable to any global interest rate shock or a growth shock from the mainland.

In ASEAN, Malaysia and Singapore are expected to benefit the most from a global uptick but there are some structural issues as the shale gas revolution in the US has provided headwinds to the petrochemical sector. We put Malaysia ahead of Singapore as its exposure to the uptick is greater and, besides that, it starts from a relatively good domestic position of enjoying non-inflationary growth. In Singapore, while first quarter growth was good and there are clear benefits from external stimuli, there is pressure domestically and policy settings are likely to stay tight to continue cooling down the property sector and also to counter price pressures for a tight labour market.


June 5, 2014

12

Figure 15: Malaysia and Singapore exports growth

Title:

Source:


-50

-40

-30

-20

-10

0

10

20

30

40

50

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

% yoy

Malaysia Singapore

SOURCES: CEIC, CIMB RESEARCH

In India, Indonesia and Thailand, politics is playing a relatively large, if not crucial, role. In India, there is a new government in place with the single largest mandate of any political party since 1984. The new prime minister, Narendra Modi, contested the elections on the promise of a smaller, more efficient government and there are a lot of hopes riding on his ability to deliver the reforms that would resurrect Indias growth trajectory. He inherits a struggling economy, with GDP growth in 2013-14 expected to be the second year with a sub-5% clip. Besides that, inflation has been high and the Reserve Bank last raised rates in January 2014.

There is hope in Indonesia, too, with presidential elections scheduled for July. In the meantime, the economy hit a bit of a speed bump in the first quarter but that should pass. The current account has improved and inflation is likely to decline, possibly enabling lower rates in the second half of the year. There is some risk that if the fiscal deficit exceeds the constitutionally mandated ceiling of 3%, oil subsidies may need to be lowered and that might preclude a rate cut (see Putting fuel subsidies under the spotlight).

In Thailand, it is almost all politics right now. The military has staged a coup and it is uncertain when a civilian government will be elected/instated. The move probably sets back the economys ability to recover. Thailands exports have a structural problem as they are not in the supply chain for the solid state storage devices that go into smartphones and tablets. Its specialisation is more toward hard disk drives that go into PCs, demand for which is declining. Further support from monetary policy is unlikely as real rates are already negative. That leaves fiscal policy as a possible source of stimulus and the military has signalled that it may start infrastructure projects to revive the economy. Given the extreme uncertainty, it is difficult to make a judgment on how politics is likely to evolve. Even without the political uncertainty, however, there are plenty of reasons to be cautious about the economy (see Thai economy: The politics aside).

The US$ is likely to be strong versus both the euro and the yen and most Asian currencies. The RMB and the KRW are possible exceptions in the medium term based on economic considerations and while the INR and IDR are being driven by political optimism in the short term, they both should be weaker over the medium term on fundamental grounds.


June 5, 2014

13

Figure 16: Exchange rates

Title:

Source:


70

75

80

85

90

95

100

105

110

115

120

800

900

1000

1100

1200

1300

1400

1500

1600

1700

1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014

per US$1per US$1

USD/KRW USD/JPY (RHS)

SOURCES: BLOOMBERG, CIMB RESEARCH

Interest rates across the region should follow the Fed, which effectively means that they will stay pat. However, there are likely to be some exceptions. Bank Negara is likely to modestly raise the policy rates as growth picks up while Bank Indonesia could reduce them as inflation comes off and the current account stabilises. In India, inflation is still persistent but another hike remains unlikely until the rest of the policy package becomes clear.


June 5, 2014

14

Our main forecasts are below.

Figure 17: Advanced and regional economies' growth forecasts (% yoy)

Figure 18: Inflation outlook for selected Asian countries (% yoy)

Country 2013 2014F 2015F

US 1.9 2.5 3.1

Eurozone -0.4 1.1 1.5

Japan 1.6 1.4 1.3

Australia 2.4 3.1 3.5

China 7.7 7.6 7.4

Hong Kong 2.9 3.5 3.8

India 4.7^ 4.7 5.3

Indonesia 5.8 5.4 5.7

Korea 3.0 3.6 3.8

Malaysia 4.7 5.5 5.2

Philippines 7.2 6.5 6.5

Singapore 3.9 5.0 5.0

Taiwan 2.1 3.2 3.5

Thailand 2.9 1.5 4.0

Asia Ex - Japan 6.3 6.2 6.3

Asia Ex - Japan & China 4.2 4.2 4.6

Asia Ex - Japan, China & India 4.0 4.0 4.3

Country 2013 2014F 2015F

US 1.5 1.7 2.0

Eurozone 1.3 0.9 1.3

Japan 0.4 2.6 1.7

Australia 2.5 2.9 2.7

China 2.6 2.6 3.0

Hong Kong 4.3 4.0 3.6

India* 5.9 9.5 7.8

Indonesia** 6.4 5.3 5.1

Korea 1.3 2.0 2.7

Malaysia 2.1 3.0 3.5


Singapore 2.4 2.5 2.4

Taiwan 0.8 1.2 1.6

Thailand 2.2 2.4 3.2

Asia Ex - Japan 3.2 3.5 3.6

Asia Ex - Japan & China 4.1 4.9 4.6

Asia Ex - Japan, China & India 3.3 2.9 3.2 *India annual GDP (factor cost; constant price) with fiscal year starting 1 Apr

^Estimate

SOURCES: BLOOMBERG, CEIC, RBI, CIMB RESEARCH

*India annual WPI with fiscal year starting 1 Apr

. **Dec year-end CPI

SOURCES: CEIC, CIMB RESEARCH

Figure 19: Central banks' benchmark policy rate (% p.a.) Figure 20: Currency outlook

Country 2013 Current 2014F

US 0.0-0.25 0.0-0.25 0.0-0.25

Eurozone 0.25 0.25 0.0-0.25

Japan 0.0-0.1 0.0-0.1 0.0-0.1

Australia 2.50 2.50 2.50

China 6.00 6.00 6.00

Hong Kong 0.50 0.50 -

India 7.75 8.00 8.00

Indonesia 7.50 7.50 7.00

Korea 2.50 2.50 2.75

Malaysia 3.00 3.00 3.25


Taiwan 1.875 1.875 2.00

Thailand 2.25 2.00 1.75

Exchange rate vs US$ 2013 25-May-14 2014F (end-year)

Euro dollar () 1.37 1.36 1.26

Japanese yen () 105.3 102.0 108.0

Australian dollar (A$) 0.89 0.92 0.86

Chinese renminbi (Rmb) 6.05 6.24 6.16

Hong Kong dollar (HK$) 7.75 7.75 7.85

Indian rupee (INR) 61.80 58.51 58.50

Indonesian rupiah (Rp) 12,171 11,615 11,800

Korean won (KRW) 1,050 1,025 1,115

Malaysian ringgit (RM) 3.28 3.21 3.38

Philippine peso (PP) 44.40 43.67 46.00

Singapore dollar (S$) 1.26 1.25 1.28

Taiwan dollar (TW$) 29.81 30.14 31.00

Thai baht (THB) 32.71 32.56 35.00 SOURCES: BLOOMBERG, CIMB RESEARCH SOURCES: BLOOMBERG, CIMB GROUP TREASURY


June 5, 2014

15

Country Outlook


June 5, 2014

16

Country outlook We are Underweight on Australia. The market is now trading at a NTM P/E of 14.7x (0.7 s.d. above its 10-year average) and close to our year-end target of 5,600. Our strategists, Shane Lee and Andrew Tang, think that 2H14 (and beyond) will continue to feature a robust IPO and M&A environment but that aggregate performance will be partly weighed down by the financial sector. The investors that think that the global bond markets will remain range-bound should consider selling momentum stocks and buying value. Investors that decide to stick with momentum should be confident that earnings growth will remain strong and in this context, it is important to screen for earnings quality. We maintain our Overweight recommendation on large-cap resources. Other sectors that we like include consumer discretionary, energy, healthcare and industrials (see Page 18).

We are Overweight on China. Our strategist, Bertram Lai, maintains his MSCI China year-end target of 78, equivalent to 10.1x forward P/E. Fears of a slowdown in Chinas economic growth remain at the fore but are increasingly dispelled by recently published data that indicates stabilisation. We see a moderation in the level of scepticism on Chinas GDP growth and returning interest in cyclical sectors such as banks that trade at depressed valuations. While overall momentum remains sideways into Jun, we think that further news of targeted selective support for growth should see the market, and in particular, selected cyclicals and financials re-rate in 2H as the risk premium contracts due to less calamitous growth prospects. Nevertheless, the headwinds surrounding growth, the shadow banking system liabilities and structural imbalances will take some time to dissipate (see Page 19).

We are Overweight on India with a Nifty target of 8,150, based on 17.1x P/E, (10% upside to target). Our strategists, Avadhoot Sabnis and Dipojjal Saha, view the resounding general election victory of the Modi-led National Democratic Alliance (NDA) as a game changer because it gives the government space to pursue economic reforms without the compulsions of post-poll coalitions. The phenomenally positive election results provide grounds for optimism that there may be significant positive surprises on economic reforms, which could kickstart a new capex cycle in FY17 onwards. They believe that FY15 will be a year of earnings consolidation, with economic recovery to start in FY16, primarily led by consumer spending, followed by a pick-up in the capex cycle. Despite the sharp YTD rally (Nifty has risen 14%), valuations are still hugging long term averages, thereby leaving ample room for re-rating should reforms materialise. (see Page 20).

We are Neutral on Indonesia. Our strategists, Erwan Teguh and Peter Sutedja, maintain their index target of 5,225 that is only 6% above the current level They believe that earnings will be largely flat, at best, before picking up in 3Q-4Q14. Erwan thinks that the market has priced in earnings recovery and to a certain extent, a favourable presidential election outcome, although we maintain that there is room for further re-rating, especially if there is a positive election outcome. As current political uncertainties could override any positive news on macros and earnings, we suggest that investors favour defensive stocks, including consumer companies that are enjoying resilient demand and will benefit from the elections. (see Page 21).

We are Overweight on Korea. Our strategists, Dohoon Lee and TJ OK, maintain our end-2014 KOSPI target of 2,250 points, based on 9.5x CY15 P/E (in line with its historical average since 2006). While consensus 2014 EPS estimates continue to be downgraded due to the stronger Won and weaker-than-expected domestic consumption growth as a result of the Sewol ferry accident, we think that the worst is over and expect sentiment to recover as the government seeks to normalise public opinion and stimulate growth. We think that improved consumer sentiment due to better growth prospects could lead to the anticipated uptick in demand. We recommend that investors add to

Country Recommendations

Australia

China/Hong Kong

India

Indonesia

Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

Vietnam

Sector Recommendations

Consumer Discretionary

Consumer Staples

Energy

Financials

Healthcare

Industrials

Materials

Technology

Telecom

Utilities


June 5, 2014

17

their positions in companies with individual catalysts and place less emphasis on a sector-positioning perspective, given that the index may be under valuation pressure due to the ongoing consensus earnings downgrades (see Page 22).

We are Neutral on Malaysia. Our strategist, Terence Wong, continues to view the Economic Transformation Programme (ETP) as the key catalyst for the market and retains his end-2014 KLCI target of 2,030, based on a bottom-up approach. The 2013 annual report for the ETP showed commendable results in terms of the implementation of ongoing projects although the announcement of new projects remains stuck in low gear compared to previous years. Accordingly, private investments sustained robust momentum of 13.6% in 2013, with the services sector leading the pack. Our sector top picks are oil & gas, construction and property. (see Page 23).

We are Neutral on Singapore. Our strategist, Kenneth Ng, is now less positive on the markets outlook following the poor 1Q14 earnings season and recently lowered his CY14 FSSTI target to 3,474 based on 13.8x CY15 P/E (0.5 s.d. below the FSSTIs 10-year trading range). We see challenges to EPS growth and ROEs from: 1) lower developer margins as restrictions cap volumes and selling prices;,2) sliding margins for industrials after bonanza years, 3) poor earnings for planters, given the rising risks due to El Nino, 4) lack of pricing power for airlines and shippers, and 5) domestic cost pressures and slower ASEAN demand across other sectors. However, the M&A theme is still alive and kicking in Singapore. On a portfolio basis, we are positive on REITs and banks due to the promise of expanding margins and delivery of non-interest income (see Page 24).

We are Neutral on Taiwan. Our strategist, Eric Lin, maintains an end-2014 TWSE index target of 8,900 and expect the market to continue to find support at current level thanks to improving tech sector visibility, year-end metropolitan elections and recovery of US and China economy. Corporate-driven credit expansion should continue given the resilient demand from both China-based Taiwanese corporations and local Chinese enterprises. We expect rate hikes to improve insurers' investment returns, but the outlook of their underwriting business is unconfirmed due to regulatory shifts.

We are Underweight on Thailand. Our Thailand strategist, Kasem Prunratanamala, remains cautious on the Thai market and recently cut his end-2014 target to 1,200, now based on 10.7x CY15 P/E (lowering earnings growth estimates from 10% in 2014 and 13% in 2015 to 5% yoy in both years.) Most foreign investors are already Underweight on the market. However, as the share prices have not fallen significantly since the declaration of martial law, we do not think that they will rush back in due to the lack of new catalysts and the uncertainties ahead. (see Page 25).

We are Overweight on Vietnam. Our Vietnam strategist, Michael Kokalari, maintains his 630 year-end target. We are fairly sanguine about all the recent political events as the benchmark VN-Index only declined 3% in May, with foreigners as net buyers nearly every day in May. We are more concerned about the governments slow progress in cleaning up Vietnams circa 15% NPL problem and the delay in raising foreign ownership limits (efforts have slowed due to complacency as a result of the markets steep run-up in 1Q). Credit only expanded ~1% YTD, which has weighed on GDP growth that only reached 5.0% in 1Q. We are Overweight on the consumer staples, energy, technology and utilities sectors (see Page 26).


June 5, 2014

18

Australia: Budget fizzle and plop The consumer discretionary sector was the largest drag (-1.8%) in May following the much publicised deficit tackling Federal budget. The release of a 6.8% fall in the Westpac Consumer Sentiment index in the week following the Budget added to the selloff in retail exposed names (JBH, SUL, MYR and HVN). High-yield defensives such as Diversified financials, Utilities and Telstra, were supported by the global bond market rally.

IPO and M&A activity has also been a feature this month. Spotless launched its A$1.0bn IPO the third largest in Asia Pacific (ex-Japan) year-to-date. Private equity has been actively rolling out existing positions through a string of IPOs and markets have responded favourably to takeover bids (TWE, GFF and SAI). We think this will continue to feature beyond this year.

Half way through the month Iron Ore fell below US$100/t. Increasing global supply softer demand from China and increasing short positions in Chinese rebar and iron ore futures put downward pressure on the spot price. RIO, FMG and BHP sold off in response to the weakness in the price of iron ore. However, news of solid production output, rumours of a divestiture of BHPs Nickel West business and the long awaited approval of RIOs Iron Ore development in Guinea lent some support for the sector late in the month.

Market Outlook/Investment Strategy We think the selloff in consumer discretionary is overdone. Most of the spending cuts outlined in the budget will be offset by the repeal of the A$7bn carbon tax. Moreover, many of these proposed appropriation bills may not become policy, given the challenge the government faces in pushing the bills through the Upper House. We prefer electrical retailers HVN and JBH and stocks leveraged to a global growth ALL and CWN.

At this stage, we maintain our overweight recommendation on large-cap resources. There are already signs that the pickup in US growth following the cold winter and targeted Government investment in infrastructure projects is leading to stronger manufacturing and in time this should help support bulk commodity prices.

The market is trading on a 12m forward PE of 14.7x (0.7 std devs above its 10-year average) and near our year-end target of 5,600. Global bond market have been relatively range bound in the past 10 months. Those investors that think global bond markets will continue to remain range bound should consider selling momentum and buying value. Investors that decide to stick with momentum should be confident that earnings growth will remain strong and in this context its important to screen for earnings quality. Investors buying value should avoid structural headwinds such as those faced by the mining services sector. In our view, stocks CAB, TME, SKE, ORI, OZL and FMG make the grade.

Figure 21: S&P/ASX 200 Earnings Trajectory

200

250

300

350

400

450

500

550

Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

S&P/ASX 200 EPS

2014

201320122011

20102009

2008

2007

2006

2005

2015

2016

SOURCE: CIMB, THOMSON REUTERS, I/B/E/S

Shane LEE T (61) 2 9694 6054 E [email protected]

Andrew TANG T (61) 2 9694 6076 E [email protected]

Performance USD (%) 1m 3m 12m

MSCI Australia 0.8 6.3 7.5

MSCI Asia Pacif ic x Japan 2.6 6.3 6.2

S&P/ASX 200 ^ 1.1 2.5 12.9

AUD-USD 0.2 (3.8) 4.0

Sector performance, (%) 1m 3m 12m

Consumer discretionary (1.6) 1.3 9.6

Consumer staples 3.2 6.9 2.9

Energy 2.4 8.7 4.9

Financials 0.7 8.9 9.6

Healthcare 3.2 3.9 16.5

Industrials 2.6 8.0 11.0

IT 2.3 9.8 11.4

Materials (1.9) (1.3) 1.7

Telecoms 3.5 10.0 10.1

Utilities 1.0 6.7 3.9

MSCI Australia 0.8 6.3 7.5

Valuations FY13 FY14 FY15

Index level 5,519

Index Target 5,600

PE (x) 16.4 15.2 14.2

EPS grow th (%) (3.0) 8.1 6.4

PBV (x) 2.06 1.98 1.90

Dividend yield (%) 4.30 4.54 4.79

^ Local index performance in local currency Sector Recommendations


Consumer Staples

Energy

Financials

Healthcare

Industrials

Materials

Technology

Telecom

Utilities


June 5, 2014

19

China/Hong Kong: Growth a favourable tailwind While fears of a slowdown in China growth remain at the forefront of investors minds, data indicate that we may already have passed the point of danger and a stabilisation is imminent. June PMI shows an increase in new orders and new export orders, providing support to our thesis. Led by an improvement in OECD CLI, China as a manufacturing exporter should see external demand improve, which should drive performance in cyclicals and bring about a rebound from overly bearish sentiment. Domestically, a raft of small fiscal measures from government appears now to be broadening into a number of minor monetary measures to ease structural issues in financing. For example, the State Council has opened the municipal bond channel for local governments and indicated that further selective RRR cuts are in the works to support rural economies. We think the growth rate bottomed in 1Q or it will in the current quarter and we expect it to accelerate in 2H14 to hit the governments target of 7.5% for the year (from 7.4% in 1Q14).

While investors primarily remain cautious, we detect a moderation in the level of scepticism on Chinas GDP growth, with returning interest in cyclical sectors trading at depressed valuations, such as banks.

Market Outlook/Investment Strategy While we expect the overall market to maintain its sideways trajectory into June, we think that further news of targeted selective support measures for growth will see the market and, in particular, selected cyclicals and financials rerate into the end of the year as the risk premium contracts on the back of less dismal growth prospects. What we are unlikely to see is a major economic or earnings event that will stimulate a rerating; rather, it will be the acceptance that growth has bottomed and that several sectors offer attractive value given increasingly visible earnings prospects.

We reiterate our 2014 target for the MSCI China of 78 points, equivalent to 10.1x forward earnings. Financials, given its valuation discount, is the most likely to outperform on a GDP surprise. We remain Overweight on financials, with ICBC and CCB as our preferred exposure. Selected cyclicals, such as those in the railway sector, are benefitting from restructuring support and trading at low valuations CRCC is our preferred exposure here.

Figure 22: MSCI China

5

7

9

11

13

15

17

19

21

23

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Ex-Fin PE China PE

12-months Forward PE

SOURCE:CIMB Research

Bertram LAI T (852) 2532 1111 E [email protected]


MSCI China 3.6 1.3 1.5


CSI 300 ^ 0.0 3.1 (16.1)

RMB-USD NA NA NA


Consumer discretionary (1.2) (5.8) (4.7)

Consumer staples (3.8) (3.5) (2.5)

Energy 3.2 5.9 (1.8)

Financials 6.1 5.5 (6.3)

Healthcare 0.7 (12.7) 10.8

Industrials (1.3) (4.2) (1.8)

IT 8.9 (6.3) 67.5

Materials (3.7) (4.2) (7.1)

Telecoms 2.5 4.7 (5.7)


MSCI China 3.6 1.3 1.5


Index level 60.4

Index Target 78.0

PE (x) 8.8 8.2 7.4

EPS grow th (%) 10.3 7.5 10.2

PBV (x) 1.22 1.15 1.03

Dividend yield (%) 3.90 4.01 4.31

^ Local index performance in local currency



Consumer Staples

Energy

Financials

Healthcare

Industrials

Materials

Technology

Telecom

Utilities


June 5, 2014

20

India: Optimism on positive election results The Modi-led NDA was swept into power with results that exceeded the forecasts of most pollsters. The BJP, the largest constituent of the NDA, itself bagged 282 seats (required majority: 272 seats), in what is the best-ever performance by a single party since 1984. In our view, this resounding victory of the Modi-led NDA in the general election is a game changer.

From a market perspective, this is a big positive as it creates space to pursue economic reforms without the compulsions of post-poll alliances. The key areas for reforms are well known and include the introduction of GST, simplification of the land acquisition process, expediting approvals, an auction process for natural resources, lowering subsidies, reforms in the power sector, etc. The list is long, but now there is a clear political mandate to resolve these issues, and the market could well be surprised at the speed at which they are addressed. On growth, our view is that FY15 will be a year of consolidation, with economic recovery starting from FY16, led primarily by consumer spending, followed by pick-up in capex cycle. What the phenomenally positive election results provide is ground for optimism that there could be significant scope for positive surprises on economic reforms which can kick-start a new capex cycle from FY17 onwards.

Market Outlook/Investment Strategy

Despite the sharp YTD rally (Nifty up 14%), valuations are still hugging long term averages, thereby still leaving ample room for re-rating if reforms actually materialise. At current levels, the market is trading at 15.2x forward earnings, just above its long-term average of 14.5x. On a relative basis, India continues to trade at a premium to the region, but given its stronger growth expectations, it seems well placed on a PEG basis vs. peers. Most market timing indicators also show valuations as not being pricey at all. On a sector basis, consumer staples and cement appear expensive while while some sectors such as IT services, healthcare, financials and utilities still have stocks that are trading below their long-term averages. With a firm government in place, we think the implementation of reforms could jumpstart earnings in coming years, leading to a rerating. Our Nifty target of 8,150 on 17.1x P/E is based on a similar premise.

Figure 23: The best ever performance by a single party since 1984!

0

50

100

150

200

250

300

350

400

450

1984Congress

1989 JanataDal

1991Congress

1996 BJP 1998 BJP 1999 BJP 2004Congress

2009Congress

2014 BJP

(Seats

for

sin

gle

larg

est

part

y)

SOURCES: BLOOMBERG, CIMB

Avadhoot SABNIS T (91) 22 6602 5151 E [email protected]

Dipojjal SAHA T (91) 22 6602 5164 E [email protected]


MSCI India 10.5 20.3 15.6


CNX NIFTY (50) ^ 10.0 18.3 24.0

INR-USD (1.9) (4.7) 4.0


Consumer discretionary 10.3 20.3 18.7

Consumer staples 3.4 11.5 (2.6)

Energy 19.3 40.6 26.1


Healthcare (3.9) 0.7 7.4


IT (3.3) (9.7) 30.0

Materials 24.2 43.8 32.9

Telecoms 11.9 26.9 13.0

Utilities 28.7 43.8 17.3

MSCI India 10.5 20.3 15.6


Index level 7,363

Index Target 8,150

PE (x) 18.5 16.1 14.0

EPS grow th (%) 8.0 15.1 14.7

PBV (x) 2.82 2.52 2.24

Dividend yield (%) 1.45 1.58 1.79


*FY Mar 2014



Consumer Staples

Energy

Financials

Healthcare

Industrials

Materials

Technology

Telecom

Utilities


June 5, 2014

21

Indonesia: Political roller-coasters The market went on a roller-coaster ride in Apr, rallying 3.0% initially from end-Mar levels to a peak of 4,921 on the eve of the 9 Apr election. Then, following unexpected election results, the market gave up 3.2%, dropping to a bottom of 4,766 the next day. Nevertheless, the index still gained 1.5% mom by the end of the month, buoyed by net foreign inflows. Since the Apr sell-offs following the election, the JCI has slightly underperformed PCOMP by 1.3%, while still outperforming the other ASEAN-5 markets by 4-13%.

As of 30 May 2013, the market was trading at 14.2x forward 12-mo P/E (0.4s.d. below 3-yr average) and 2.7x forward 12-mo P/BV (0.8s.d. below 3-yr average). The market, we believe, has priced in an earnings recovery and to some extent, a positive election outcome, though we maintain that there is room for further re-rating, especially if there is a positive election outcome.


After three consecutive months of no/positive earnings revisions, the momentum turned negative in Apr, mainly due to downgrades for the coal sector as our analyst incorporated lower benchmark prices; and downgrades for the auto sector following weak results. The above overwhelmed upgrades for plantations, retail and construction. We believe that earnings will be largely flat, at best, before taking off in 3Q-4Q14.

We have probably seen the worst of macros and a recovery could well be on the way, supported by better external growth. Unfortunately, such improvements may be overlooked by investors, given rising political uncertainties following the 9 Apr legislative election. In particular, the market may react in completely different ways to the outcome of the presidential election, with potential euphoria should Jokowi win and selling pressure otherwise.

As current political uncertainties could override any positive news on macros and earnings, we suggest that investors revisit defensive picks. We reiterate our defensive picks, which include consumer companies which are enjoying resilient demand and have the plus point of benefiting from the elections (i.e. KLBF, INDF, GGRM, LPPF, SCMA); telco companies (TLKM); and utility companies (JSMR, PGAS).

Figure 24: Indonesia valuations now trades at 0.4SD below 3-yr mean

Title:

Source:


10x

11.5x

13x

14.5x

16x

17.5x

JCI Rolling forward P/E

3yr MA


Erwan TEGUH T (62) 21 3006 1720 E [email protected]

Peter P. SUTEDJA, CFA T (62) 21 3006 1726 E [email protected]


MSCI Indonesia (0.7) 6.2 (15.5)


JCI ^ 1.5 7.2 (1.2)

IDR-USD 1.8 1.2 19.7


Consumer discretionary (5.2) 4.6 (17.8)

Consumer staples (3.7) (1.6) (21.5)

Energy 11.5 21.0 (15.0)

Financials (0.5) 8.0 (13.5)

Healthcare 0.1 9.9 (7.0)

Industrials (2.5) 13.7 1.9

IT NA NA NA

Materials 1.7 0.8 (24.6)

Telecoms 7.4 9.8 (8.9)

Utilities (3.0) 4.7 (21.9)

MSCI Indonesia (0.7) 6.2 (15.5)


Index level 4,912

Index Target 5,225

PE (x) 16.6 15.0 13.3

EPS grow th (%) 3.7 10.9 12.9

PBV (x) 3.75 3.08 2.70

Dividend yield (%) 2.40 2.58 2.91




Consumer Staples

Financials

Industrials

Materials

Telecom

Utilities


June 5, 2014

22

Korea: recovering from a tragedy The KOSPI reached 1,995 points on 30 May (up 1.7% mom), backed by strong performance in the tech (+4.1% mom) and consumer staples (+3.4% mom) sectors. Foreign investors were net buyers of Korean equities for 15 consecutive days in May, buying a total US$1.7bn. The best performing sectors were tech, consumer staples and transportation while the media and telecom, construction and energy and chemical sectors underperformed.

While consensus 2014 EPS estimates continue to be downgraded due to a stronger KRW and weaker-than-expected domestic consumption growth as a result of the Sewol ferry accident, we think that the worst is over and expect sentiment to recover as the government seeks to normalise public opinion and stimulate growth. Credit card usage seems to have recovered in May (see figure below) and the government is planning to preload budget execution, which should offset the downward pressure from falling domestic consumption.

Upside surprises could come from the materialisation of pent-up demand. We have been highlighting the potential for upside to consumption growth on the grounds that household income growth has outpaced expenditure for the past 10 quarters. We think improved consumer sentiment on better growth prospects could lead to the anticipated materialisation of demand. If the Korean government allows group tours for students and public servants in the near future, it may also further signal that public sentiment has fully recovered to its pre-crisis level.


We maintain our end-2014 KOSPI target at 2,250 points, based on 9.5x CY15 P/E, in line with its average since 2006. The KOSPI currently trades at 10x 12m forward P/E, the highest since May 2011. While the KOSPI has corrected 1% year to date, consensus EPS estimates for 2014 and 2015 have been cut by 13% and 10%, respectively, driving up the valuation level. We believe further upside to the KOSPI hinges upon a turnaround in earnings revisions on the back of the normalisation of KRW appreciation and improvement in consumer sentiment.

Our stock selection is geared towards companies with individual catalysts and less of a sector-positioning perspective given that the index may be under valuation pressure due to the ongoing consensus earnings downgrades. Our top picks are Samsung Electronics, LG Electronics, LG Innotek, OCI, Hyundai Mobis, Hyundai Mipo, SK Telecom, Shinhan Financial and KB Financial, BS Financial.

Figure 25: Key macro indicators of Korea

-2%

2%

6%

10%

14%

18%

-10%

0%

10%

20%

30%

40%

50%

Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14

Export (LHS) Industrial production (LHS) Retail sales (RHS) SOURCE:CIMB, QUANTIWISE

Dohoon LEE T (82) 2 6730-6121 E [email protected]

TJ OK T (82) 2 6730 6134 E [email protected]


MSCI Korea 3.8 7.1 12.9


KOPSI ^ 2.2 1.9 0.6

KRW-USD (0.7) (4.5) (9.3)


Consumer discretionary 2.4 2.6 16.3


Energy (8.4) (13.0) (22.1)


Healthcare 0.0 (1.8) 29.8


IT 7.4 12.5 15.0

Materials (0.1) 4.6 5.4

Telecoms (3.7) 3.9 (0.2)

Utilities (2.7) 6.1 58.3

MSCI Korea 3.8 7.1 12.9


Index level 2,002

Index Target 2,250

PE (x) 12.2 9.9 8.8

EPS grow th (%) (5.2) 22.9 13.1

PBV (x) 1.07 1.08 0.98

Dividend yield (%) 1.05 1.24 1.37




Consumer Staples

Energy

Financials

Industrials

Materials

Technology

Telecom


June 5, 2014

23

Malaysia: ETP annual report The 2013 annual report for the Economic Transformation Programme (ETP) showed commendable results in terms of the implementation of ongoing projects though the announcement of new projects remains stuck in low gear compared to previous years. About 83.4% or RM18.1bn of the planned ETP investments for 2013 was realised (RM11.6bn in 2012). Accordingly, private investments sustained robust momentum of 13.6% in 2013, with the services sector leading the pack. We still expect double-digit growth of 13.2% for private investments in 2014 despite the tougher operating environment. For the Strategic Reform Initiatives (SRIs), the focus will be on how to ensure the smooth and orderly implementation of GST on 1 Apr 2015.

Generally, we feel positive that the qualitative and quantitative targets have been mostly achieved. All 12 National Key Economic Areas (NKEAs) achieved 102% of their KPIs in 2013 (118% in 2012). ETPs six SRIs met 95% of their KPIs in 2013 (93% in 2012). Other notable results were 1) commitment to a total of 196 projects worth RM219.3bn since the ETP launch in Oct 10, which will contribute RM143.5bn to GNI and create 437,816 new jobs by 2020, 2) the 42.5% rise in GNI per capita to US$10,060 in 2013 from US$7,059 in 2009, 3) private investments topping the RM148.4bn target by 8.6% to reach RM161.1bn in 2013, making up 61% of the years total investments (vs. 51.7% in 2009), 4) realisation of 83.4% or RM18.1bn of the RM21.7bn planned ETP investments for 2013 (vs. 88.6% in 2012 and 84% in 2011), 5) a 38.1% rise in government revenue to an estimated RM220.4bn from RM159.7bn in 2010, and 6) a narrowing of the fiscal deficit to 3.9% of GDP in 2013 from 6.6% in 2009.


We continue to view the ETP as the key catalyst for the Malaysian stockmarket and retain our end-2014 KLCI target of 2,030pts based on a bottom-up approach. Our preference remains for the ETP winners, i.e. the oil & gas, construction and property sectors. We expect the oil & gas sector to benefit from positive newsflow on Petronass US$27bn Rapid project as well as RM5bn worth of fabrication works in 2H14. The construction sector will benefit from positive newsflow from the RM25bn MRT2 project and the award of RM10bn-15bn worth of IPP, water and toll highway projects by the government. As for the property sector, we expect the sales momentum for developers to pick up pace in 2H, ahead of the implementation of 6% GST in Apr 2015.

Figure 26: 196 projects worth RM219.3bn in investments announced since 2010

SOURCE: ETP ANNUAL REPORT 2013, PEMANDU

Terence WONG, CFA T (60) 3 2084-9689 E [email protected]


MSCI Malaysia 0.4 3.1 (0.6)


FBMKLCI ^ (0.3) 2.2 5.5

MYR-USD (1.4) (1.7) 4.4


Consumer discretionary 1.1 1.2 (7.5)


Energy (8.0) (8.7) (7.1)


Healthcare 4.7 13.1 1.4


IT NA NA NA

Materials 0.9 3.3 (4.7)

Telecoms (0.5) 4.1 1.7


MSCI Malaysia 0.4 3.1 (0.6)


Index level 1,864

Index Target 2,030

PE (x) 17.1 16.4 14.9

EPS grow th (%) (0.5) 4.2 10.1

PBV (x) 2.07 2.06 1.91

Dividend yield (%) 2.82 3.00 3.23

^ Local index performance in local currency Sector Recommendations


Consumer Staples

Energy

Financials

Healthcare

Industrials

Materials

Technology

Telecom

Utilities


June 5, 2014

24

Singapore: M&A is the theme After a poor 1Q14 earnings, we are less positive. Our end-CY14 FSSTI target has been knocked down to 3,474 pts (13.8x CY15 P/E, -0.5 s.d. of FSSTI 10-year trading range). The bearish stance is driven by a trend of poor corporate profits recently. With QE unwinding, local factors of higher costs, property oversupply and easing corporate earnings, we expect the FSSTI to be fully valued at -0.5 s.d. Our top picks are DBS, EZI, FCL, GLP, KEP, SPOST, UOL and THBEV.


While the Singapore market is not expensive at all, valuations alone are no reason for performance. Challenges to EPS growth and ROEs lie in: 1) lower developer margins as restrictions cap volumes and selling prices; 2) industrials margins sliding after bonanza years; 3) poor earnings for planters with rising risks from El Nino; 4) a lack of pricing power for airlines and shippers; and 5) domestic cost pressures and slower ASEAN demand, across other sectors.

Recently, we downgraded commodities and consumer (from Overweight) to Underweight. A growing likelihood of El Nino can raise the supply of soy. The soy-CPO price gap is now about its tightest ever, suggesting that CPO price risk is probably tilted towards the downside. In the consumer sector, there are signs that retail and consumption is slowing not just in Thailand but also in across ASEAN e.g. Singapore retail malls are guiding a weaker outlook. Thailands political uncertainties could stay for a while and that will affect tourism in the region. Our grouse with some consumer stocks is that their valuations are relatively stretched and not priced for a period of growth challenges. We upgrade telcos and REITs to Overweight from Neutral. As corporate earnings slow, we reckon that it is time to turn more defensive in our country portfolio.

The theme that is alive and kicking in Singapore is M&A. Capitaland is privatizing CMA, Wheelock is privatizing Hotel Properties, UIC is privatizing Singland, KKR is buying up Goodpack, Ali Baba is taking a stake in SingPost. The common thread across these companies is that they have hard assets or an infrastructure network that is worth something. We think that pessimism in property-related stocks is past its peek. Property names that trade at deep discounts to NAV and have willing buyers who are likely to privatise them will remainy the flavor of the year, but it is not the only sector that will benefit; stocks with hard assets and a network will be attractive as Goodpack and SingPost has proven. On a portfolio basis, we raise REITs to Overweight. Our top REIT picks are FCT and OUE-HT. Banks remain an Overweight, given the promise of expanding margins and delivery of non-interest income.

Figure 27: CIMB Singapore top sector picks and least preferred

Financials Overweight

Property Neutral

REITs Overweight

Telcos Overweight

Transport Underweight

Capital Goods Neutral

Commodities Underweight

Gaming Neutral

Comsumer Neutral

Others

Yangzijiang, Swiber, Ezra

Wilmar, Indofood Agri, Noble

M1, Singtel Starhub

SingPost

DBS UOB

City Dev, Wing Tai, HK Land

TOP PICKS LEAST PREFERRED

CCT, PCRT, FEHT

GLP, FCL, UOL, HoBee

FCT, OUEHT

SIA, Tiger, NOL

Keppel, STE, Ezion, Mermaid

Super Group, Biosensors

CWT

Thai Bev, Petra, Raffles Med

Genting Singapore

Straco, OEL, Guocoleisure SOURCE:CIMB Research

Kenneth NG, CFA T (65) 6210-8610 E [email protected]


MSCI Singapore 1.2 8.1 1.4


FSSTI ^ 1.5 7.0 0.3

SGD-USD 0.2 (1.1) 0.2



Consumer staples (2.6) 3.8 7.1

Energy NA NA NA


Healthcare NA NA NA


IT NA NA NA

Materials NA NA NA

Telecoms 2.5 10.1 3.8

Utilities NA NA NA

MSCI Singapore 1.2 8.1 1.4


Index level 3,302

Index Target 3,474

PE (x) 15.3 14.3 13.1

EPS grow th (%) (3.9) 7.3 9.3

PBV (x) 1.44 1.38 1.31

Dividend yield (%) 3.44 3.53 3.75



Capital Goods

Commodities

Consumer

Gaming

Financials

Property

REITs

Telecom

Transport


June 5, 2014

25

Thailand: Honeymoon period The National Council for Peace and Order (NCPO) has acted quickly to win the support of local farmers by releasing the money owed to them under the former governments rice pledging scheme. The new administration is also trying to gain the confidence of the business community by announcing the launch of some infrastructure projects such as the dual-tracking rail system and electric train project. Thus, we believe the Thai market is now in a honeymoon period, with local investors believing that the military intervention has resolved the political crisis and brought back stability to the country.

As such, retail investors, local institutions, and brokers proprietary desks have been buying more aggressively, especially after the declaration of martial law on 20 May 2014. In contrast, foreign investors are more negative than they were before, and have been aggressive sellers.


Nevertheless, as most foreign investors already underweight Thailand, we do not think there will be very much more selling pressure. And as stocks have not fallen significantly since the declaration of martial law, we also do not think foreign buyers would rush back into the market given the lack of new catalysts and the uncertainties ahead. As such, we believe the market will likely move sideways for now.

We believe that not only is the military likely to stay in power for some time to make sure that the situation stays under control, it also wants to complete political reforms first before handing power back to civilians. A new government is expected to be set up soon, along with the national legislation council and political reform body. A new constitution is expected to be drafted and the process could take some time. As such, we believe it may take longer than two years before Thailand has a new election.

Meanwhile, although the situation under military rule is still under control, some anti-coup protests have already taken place. But with the protest leaders still in custody or closely watched by the military, we do not think that these rallies will gain momentum soon. However, once they do, this could potentially be a de-rating catalyst for the market.

We remain cautious on the Thai market, having just recently cut our 2014 target to 1,200, now based on 10.7x CY15 P/E, assuming earnings growth this year and next year of 5% each, down from 10% and 13%, respectively. Stocks that we recommend investors pick up on the possibility of further market sell-offs include AOT, DTAC and MEGA.

Figure 28: SET EPS (THB) and political crises

Title:

Source:


-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F

SET's EPS (THB) %yoy

19 Sep coup

Yellow shirts

Yingluckdisqualified

Airportclosure

May unrest

Jul 11 -- PT won landslide victory

Nov -- PDRC rally

SOURCE:CIMB Research

Kasem PRUNRATANAMALA, CFA T (66) 2 657-922 E [email protected]


MSCI Thailand (1.9) 4.9 (11.8)


SET ^ 1.4 7.6 (6.4)

THB-USD 1.4 0.9 8.0



Consumer staples 3.8 10.0 (2.9)

Energy (4.7) (0.0) (10.5)

Financials (1.4) 7.8 (12.2)

Healthcare 4.4 27.2 (8.8)

Industrials (2.8) (0.9) 4.2

IT NA NA NA

Materials (1.5) (1.5) (10.5)

Telecoms (3.8) 7.9 (19.8)

Utilities (0.0) 8.4 5.8

MSCI Thailand (1.9) 4.9 (11.8)


Index level 1,441

Index Target 1,200

PE (x) 13.8 12.6 11.2

EPS grow th (%) 7.7 10.0 12.1

PBV (x) 1.93 1.91 1.74

Dividend yield (%) 3.28 3.52 3.94




Consumer Staples

Energy

Financials

Healthcare

Industrials

Materials

Technology

Telecom

Utilities


June 5, 2014

26

Vietnam: China tensions prompt foreign buying Top five picks: FPT, Vietnams leading technology company trading at 8x P/E

CIMB Report 5.6.14 Equity Strategy

Documents

Transcript of CIMB Report 5.6.14 Equity Strategy