CIMB Navigating Thailand 2015 Dec 2014.pdf

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Navigating Thailand│2015

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Navigating Thailand│2015

December 12, 2014

NAVIGATING THAILAND

Tighten your seatbelts

We believe that the market has priced in a V-shaped recovery, while a U-shaped one is more likely. The economy is slowing down and more earnings cuts are likely. Valuations are not cheap given the 20% rise YTD. A stronger US$ and higher overseas rates could trigger outflows.

Figure 1: SET's forward P/E band

Title: Source:

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

4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 12M Fwd Core P/E +2SD : 17.0 +1SD : 14.5 -2SD : 7.2 -1SD : 9.6 Mean : 12.1

SOURCES: CIMB, COMPANY REPORTS

We remain cautious on the market with an unchanged end-CY15 index target of 1,610, based on 12.1x CY16 P/E (5-year mean). Our regional strategist, Mr Jason Todd, remains Underweight on Thailand. We prefer defensive counters (healthcare, alternative energy and utilities) and sectors that are less exposed to domestic demand (hotels). Our top picks are AOT, BGH, GUNKUL, KCE, MINT, RATCH and THCOM.

Laying the foundation

The government plans to introduce inheritance tax and raise value-added tax by 1% pt to 8% in Oct 15. The energy reform programme is likely to raise retail NGV prices by about 16% over the next couple of quarters. If the government were to bring the excise tax on diesel to be on par with that for other types of gasoline, diesel price should rise by 17%. Fewer farm subsidies are likely to cap the rebound in consumption in upcountry.

and the market has not factored this in yet. Therefore, near-term risks are high.

Themes: focus on defensive

and tourism

We believe that the weak economy will continue to weigh on domestic demand. Therefore, we focus on defensive sectors such as healthcare, which also benefits from medical tourism and utilities. They are less sensitive to a slow domestic recovery. Moreover, we believe that tourism will see strong rebound not only from higher tourist arrivals, but also from higher margins as occupancies approach optimum levels.

Infrastructure a long shot

The progress on government infrastructure projects has been disappointing. However, it seems to be the only hope for 2015 if the government can really speed up its infrastructure plans. We believe that

CIMB Analyst(s)

————————————————————————————————————————— Kasem Prunratanamala, CFA

T (66) 2 6579221

E [email protected]

Julia GOH

T (60) 3 2261 9097 E [email protected]

Show Style "View Doc Map"

Highlighted Companies Bangkok Dusit Medical (BGH)

A prime beneficiary of the ASEAN Economic Community (AEC), as patients from neighbouring countries are able to cross borders more easily to seek medical treatment in Thailand, thanks to its growing hospital network nationwide.

Gunkul Engineering (GUNKUL)

Gunkul has recurring income from two large 60mw wind farm projects in 2015-16 for both engineering, procurement and construction (EPC) and operations. This would account for an estimated 80% of its earnings by 2017. Its Myanmar exposure provides more earnings upside.

Ratchaburi Electricity (RATCH)

Its solid earnings growth of over 30% in 2014-2016, will stem from additional capacity of 750MW (13%) for its 40%-owned Hongsa coal-fired power plant in 2015-16.

Thaicom (THCOM)

New customer contracts and satellite projects will increase the upside potential to our earnings forecasts, which are already 11% higher than consensus in 2014 and 18% higher in 2015.

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Navigating Thailand│2015

December 12, 2014

KEY CHARTS

18% market EPS growth for 2015 way too

high

To date, consensus EPS forecasts have been lowered by 14% for 2014 and 11% for 2015, although the Stock Exchange of Thailand (SET) Index has moved up 20% YTD. 400.00 600.00 800.00 1,000.00 1,200.00 1,400.00 1,600.00 1,800.00 85 90 95 100 105 110 115 120 125 130

SET EPS 2014 SET EPS 2015 SET Index

SET is at 13.6x CY15 P/E

The SET’s valuation is close to 1 s.d. above its 5-year mean which is not attractive, in our opinion.

5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

12M Fwd Core P/E +2SD : 17.0 +1SD : 14.5 -2SD : 7.2 -1SD : 9.6 Mean : 12.1

Local institutions supporting the market

Domestic institutional investors have been net buyers of THB47bn YTD, while retail investors were net sellers of THB55bn.

Page 2 key charts to be inserted into in your report No chart title and source statement are needed

0 200 400 600 800 1000 1200 1400 1600 1800 -30000 -20000 -10000 0 10000 20000 30000 40000 40179 40238 40299 40360 40422 40483 40544 40603 40664 40725 40787 40848 40909 40969 41030 41091 41153 41214 41275 41334 41395 41456 41518 41579 41640 41699 41760 41821 41883 41944

Local Institutes(LHS) SET Index (RHS)

Net Buy/Sell SET

Sector allocation strategy

We focus on sectors with less exposure to domestic demand, such as hotels and petrochem, as well as defensive counters, such as healthcare, utilities and alternative energy. Our top picks are AOT, BGH, GUNKUL, KCE, MINT, RATCH and THCOM.

Weighting in SET Rec. Weighting OW/UW (ppt) OW/UW Hotel 1.3% 2.5% 124 OW Healthcare 3.0% 4.0% 98 OW Utilities 1.7% 2.6% 92 OW Petrochem 6.4% 7.2% 78 OW Alternative Energy 0.9% 1.5% 60 OW Technology 0.9% 1.4% 54 OW Transportation 4.2% 4.5% 34 OW Property 4.4% 4.8% 33 OW Mining 0.5% 0.8% 27 OW Construction 0.9% 1.0% 14 N Food 0.6% 0.7% 6 N Auto 0.2% 0.2% (1) UW Construction Materials 0.1% 0.0% (12) UW

Oil & Gas 12.2% 12.0% (22) UW

Agro 0.3% 0.0% (29) UW Banking 17.1% 16.3% (78) UW Media 1.4% 0.2% (109) UW Telecom 10.9% 9.5% (142) UW Retail 4.8% 2.6% (227) UW Total 71.7% 71.7%

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December 12, 2014

Figure 2: Top picks

Price Target Price

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

Airports of Thailand AOT TB Add 285.0 258.0 12,402 31.7 25.9 15.4% 4.08 3.69 13.5% 15.0% 18.3 16.2 1.2% 1.5%

Bangkok Dusit Med Service BGH TB Add 18.20 23.80 8,588 36.5 30.7 17.2% 6.23 5.57 18.0% 19.2% 25.9 22.9 1.1% 1.4%

Gunkul Engineering GUNKUL TB Add 30.00 32.00 804 44.4 36.6 56.8% 7.33 6.24 18.6% 18.4% 51.5 37.3 0.3% 0.5%

KCE Electronics KCE TB Add 38.75 45.00 666 11.3 10.3 27.1% 3.67 2.93 35.7% 31.5% 11.0 9.0 2.2% 2.6%

Minor International MINT TB Add 36.75 42.00 4,479 32.5 25.6 17.0% 5.23 4.60 17.0% 19.1% 24.0 19.1 1.0% 1.3%

Ratchaburi Electricity RATCH TB Add 61.25 69.00 2,705 13.1 12.1 20.3% 1.53 1.43 12.0% 12.2% 8.5 8.4 3.7% 3.9%

Thaicom THCOM TB Add 35.75 52.00 1,193 21.1 15.5 26.0% 2.32 2.12 11.5% 14.3% 7.5 6.0 2.4% 4.8%

Average 27.2 22.4 25.7% 4.34 3.79 18.0% 18.5% 21.0 17.0 1.7% 2.3%

P/BV (x) Recurring ROE (%) EV/EBITDA (x) Dividend Yield (%)

Company Bloomberg Ticker Recom. Market Cap

(US$ m)

Core P/E (x) 3-year EPS CAGR (%)

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December 12, 2014

Tighten your seatbelts

1. REVIEW

1.1 Political developments before the coup

The conflict started when the Yingluck government had amended the Amnesty Bill in its second reading in Oct 2013 to allow former prime minister Thaksin and protest leaders, among other individuals, to gain amnesty. Protestors thought that the bill would allow him to get back his seized assets of THB46bn. The government was late in responding to the protests.

Even though the government later dissolved the House, the rallies still continued. The government then set the date for the general election on 2 Feb 2014, but the Democrat Party boycotted the election. Voting was disrupted in many constituencies, and the election was later nullified by the Constitutional Court on the grounds that the Election Commission (EC) had failed to hold polls across the entire country on the same day, since the eligible voters in 28 constituencies failed to cast their ballots due to disruptions by anti-government protesters. The Election Commission and caretaker government were forced to set a new election date.

The National Anti-Corruption Commission (NACC) resolved in early May 2014 to bring impeachment proceedings against Yingluck over the rice-pledging scheme. Thus, she was compelled to step down from being the caretaker premier, with Mr Niwatthamrong Boonsongpaisan becoming an acting caretaker prime minister.

Figure 3: Political events leading up to the May 2014 coup and SET index

Aug 4: Protest starts

Aug 8: House pass first reading of amnesty bill

Oct 31: House Passes 2nd /3rd reading

Nov 11: Senate rejects bill

Nov 20: Court says Senate bill amendment breaches

Constitution

Dec 2: Election; but with disruption; Yingluck continues as caretaker PM

Dec 9: PM dissolves House, call for snap poll

Dec 21: Democrats to boycott election

Jan 13: Bangkok Shutdown

campaign begins Jan 21: State of emergency Feb 2: Election

Feb 28: End of Bangkok shutdown Mar 21: Feb 2 election was

ruled unconstitutional

May 7: Court ordered Yingluck to step down

May 20: Martial law is declared May 22: Military coup

1,200 1,250 1,300 1,350 1,400 1,450 1,500 1,550 1,600 3 1 /0 5 /2 0 1 3 1 4 /0 6 /2 0 1 3 2 8 /0 6 /2 0 1 3 1 2 /0 7 /2 0 1 3 2 6 /0 7 /2 0 1 3 0 9 /0 8 /2 0 1 3 2 3 /0 8 /2 0 1 3 0 6 /0 9 /2 0 1 3 2 0 /0 9 /2 0 1 3 0 4 /1 0 /2 0 1 3 1 8 /1 0 /2 0 1 3 0 1 /1 1 /2 0 1 3 1 5 /1 1 /2 0 1 3 2 9 /1 1 /2 0 1 3 1 3 /1 2 /2 0 1 3 2 7 /1 2 /2 0 1 3 1 0 /0 1 /2 0 1 4 2 4 /0 1 /2 0 1 4 0 7 /0 2 /2 0 1 4 2 1 /0 2 /2 0 1 4 0 7 /0 3 /2 0 1 4 2 1 /0 3 /2 0 1 4 0 4 /0 4 /2 0 1 4 1 8 /0 4 /2 0 1 4 0 2 /0 5 /2 0 1 4 1 6 /0 5 /2 0 1 4 3 0 /0 5 /2 0 1 4 SOURCE: CIMB

1.2 Then came the May 2014 coup

After almost seven months of political deadlock between the anti-government People’s Democratic Reform Committee (PDRC), led by former Democrat Party’s secretary general Mr Suthep Thaugsuban, and the Yingluck government; the military, led by the then-army chief General Prayuth Chan-o-cha, staged a

‘‘

‘

If in 2016 there is a general

election and I am still qualified to stand, I intend to run for

parliament.

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December 12, 2014

coup on 22 May 2014. This was Thailand’s 12th_{coup after the country turned}

into a constitution monarchy in 1932.

The coup came as no surprise to us, as we believe that Mr Suthep had escalated the crisis, including setting up roadblocks, organising the Bangkok Shutdown in early Jan 2014, and blocking constituencies in many provinces in the South so that candidates could not register their applications, etc., in order to trigger a military intervention.

But we were surprised that the Yingluck government did not see it coming, despite the fact that the military announced martial law on 20 May without informing the government in advance and that it refused to withdraw soldiers and their shelters even though the situation was calmer in early 2Q14.

Both red shirt leaders and PDRC leaders walked into a trap, and they were locked up in a military barrack following two days of failed negotiations to settle their differences, after which the army chief declared a military coup. It was an easy coup on the part of the military, as leaders of both sides were locked up and their supporters could not do much without their leaders. Having learnt from the past coups, especially the one in 2006, the military this time round used stronger arm tactics. It has tried to disperse any political protests before ramping up the momentum. And even more than six months after the coup, the military still refused to lift martial law, despite the fact that there were few protests on the street. However, the curfew was lifted throughout the country on 13 Jun, about one month after the coup.

Figure 4: Khon Kean University students were arrested when holding out three fingers as a sign of protest against the military coup in front of Prime Minister Prayuth while he was giving a speech in Khon Kean province. The students were later released

SOURCE: Twitter@WassanaNanuam

1.3 Long honeymoon period

As the political crisis prior to the coup lasted longer than prior deadlocks, many Thais (generally from middle- and high-income segments) welcomed the coup as they thought that the coup would end the deadlock and allow the country to

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With the surge in economic activities in early 3Q14, many people thought that the economy had undergone a V-shaped recovery following a more stable political environment. They have forgotten that many people withheld their spending during the 7-month political stalemate. Thus, when political situation remained calm after the coup, many Thais started to spend money and this caused a big jump in economic activities. However, we believe that once this pent-up demand is exhausted, economic activities will cool down again. And the 3Q14 GDP growth of only 0.6% yoy confirmed our belief.

Figure 5: Long honeymoon period after the coup

Jan 13: Bangkok Shutdown campaign begins Jan 21: State of emergency Feb 2: Election

Feb 28: End of Bangkok shutdown Mar 21: Feb 2 election was ruled unconstitutional

May 7: Court ordered Yingluck to step down

May 20: Martial law is declared May 22: Military coup

Oct 6 All 250 National Reform Council members

appointed 1,200 1,250 1,300 1,350 1,400 1,450 1,500 1,550 1,600 1,650 1,700 Jan -14 Jan -14 Jan -14 F eb -14 Fe b-14 M ar -14 M ar -14 A pr-14 A pr-14 M ay-14 M ay-14 _Jun -14 Jun -14 Jul -14 Jul -14 Jul -14 Aug-14 Aug-14 S ep-14 Sep-14 O ct -14 O ct -14 N ov-14 N ov-14

Nov11 LTF tax breaks to end in 2016

SOURCES: CIMB

Figure 6: The Thai market EPS has been revised down 14% this year and 11% next year, but the market has risen 20% YTD

Title: Source:

400 600 800 1,000 1,200 1,400 1,600 1,800 85 90 95 100 105 110 115 120 125 130

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 SET EPS 2014 SET EPS 2015 SET Index

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December 12, 2014

2. Themes for Thai market in 2015

2.1 No election in 2015 means less noise in 1H15, but…

It is unlikely that a general election can take place in 2015, as a new constitution is not drafted yet and it may need to go through a referendum, which could take some time. Moreover, it is likely that the reform process will take a longer time than originally thought.

The fact that Thailand is highly unlikely to have an election in 2015 may be taken positively by the market, as politics have created many negative noises over the past decade. However, we believe that the market expectation has already run too high and it should already have given the government the benefit of the doubt in managing the economy. Therefore, we believe that the disappointment on the government’s economic management is more likely to outweigh the positives arising from the calm political climate. And with more disappointments on the economic front, we believe that the resistance against the military government will be stronger and those who had earlier supported the coup may start changing their minds.

And since a general election is not likely to be held in 2015, rural economies will not be able to benefit from election campaigning activities. And if farm prices stay weak in 2015, it will be difficult to see a strong rebound in private consumption in the upcountry.

Figure 7: Real GDP (% yoy) and general elections

Northeastern Northern Greater Bangkok Election

1996 8.0% 9.6% 2.8% Y 1997 0.9% -1.1% -6.5% 1998 -6.3% -5.0% -9.5% 1999 5.8% 5.8% 4.3% 2000 0.5% -0.5% 6.1% 2001 1.1% 1.7% 5.4% Y 2002 5.7% 8.9% 3.8% 2003 8.9% 9.1% 5.7% 2004 2.7% 0.8% 6.9% 2005 1.9% 4.7% 4.5% Y 2006 5.5% 1.3% 4.3% Y 2007 5.4% 3.6% 4.9% Y 2008 -0.9% 0.8% 0.7% 2009 6.3% 1.9% -1.7% 2010 5.7% 3.5% 8.6% 2011 6.4% 4.6% 0.1% Y 2012 5.5% 6.2% 8.1%

2.2 Political labyrinth

Some may think that Gen Prayuth may want to contest in the next election to gain legitimacy. However, we think that the several policies that the government plans to implement over the next few months are not likely to win him popular support. For instance, higher NGV, LPG and diesel prices will hurt low-income people and businesses, while property and inheritance taxes will hurt middle- and high-income segments. Moreover, a higher VAT will affect everyone. Therefore, it is difficult to imagine that he would gain support from enough people to continue as an elected prime minister after the next election, even though the policies he plans to implement will be good for the country over the longer term.

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December 12, 2014

This would lead us back to the question on whether the election in early 2016 is still likely. The concern that Pheu Thai Party will win the election and become a new government will make the military government think twice about handing power back to the public. That said, the government may want to stay in power longer. But since we believe that the current government's economic performance is likely to be weak, there will be growing resistance in 2015. Therefore, the military government may not be able to stay very long either, even though it may still want to maintain martial law.

We expect the pressure to mount in 2H15. Therefore, it may have to reach a compromise with Pheu Thai so as not to encroach on each other's turf. With his younger brother being an assistant army chief, Gen Prayuth can still have strong support in the army after his retirement in Sep 2014. Therefore, we believe that this would be a better exit strategy for the current government, rather than incurring the risk of facing more resistance by staying longer. Although the Constitution Drafting Committee is likely to design a new constitution in such a way that there will be more appointed senators and probably some appointed members of Parliament as well, we believe that it will still be difficult to gain the necessary support from the general public.

2.3 Government needs to deliver infrastructure projects

Government infrastructure spending is probably the only hope to boost Thai economy in 2015, in our opinion. But the progress so far has been quite disappointing. One of the reasons is that due to efforts to fight graft in the system, the military government has set up a committee, called the Budget Monitoring and Scrutinising Committee, to review all major government and state enterprises projects that are worth more than THB1bn (US$30m). And since all government infrastructure projects are worth a lot more than THB1bn, they have to undergo the scrutiny of this committee. The committee has already asked some government agencies to review some of these projects, which caused some delay in the rollout of these projects.

The first major government project that is likely to be awarded first is the North Green Line project (Mo Chit-Sapanmai-Ku Kot) worth THB26.4bn (US$0.8bn). Based on our channel checks, the bidding results are likely to be known by Dec 2014, even though the Mass Rapid Transit Authority of Thailand (MRTA) announced earlier that the results will be known in Feb 2015. We believe that all major contractors will get their share of the project as it will be divided into four contracts. CH Karnchang (CK), which we believe is closest to the government, is likely to secure the biggest contract, i.e. contract 1, while Italian-Thai Development (ITD) is likely to get the second largest one, contract 2, followed by a joint venture between Sino-Thai Engineering (STEC) and AS Associates, i.e. STEC-AS for contract 3, and a JV of Uniq Engineering (UNIQ), Sino-Hydro Corp and China Harbour Engineering, i.e. UN-SH-CH for the forth one.

But after the North Green Line, we believe that Orange Line (Taling Chan – Min Buri) worth THB115bn (US$3.5bn) is likely to be the next one. The bidding process may start in 2Q15.

Although contractors are hopeful that the Pink Line (Khae Rai – Min Buri) worth THB59bn (US$1.8bn) can also roll out within this year, there is some risk that the project may be redesigned as the existing design is based on a light rail platform, which is not compatible with other mass transit lines that are heavy lines. The government may want the Pink Line and Yellow Line (Lad Prao – Samrong), worth THB57bn or US$1.78bn, to switch to heavy lines, thus making them compatible with the rest and more efficient for mass transit. If the authorities decide to change the design, then the Pink and Yellow Lines will have to go back to the drawing board, which would mean a few years of delay. In addition, the government is reported to have a plan to create a new government agency, the Rail Transport Authority of Thailand, to oversee both railway and electric trains. The Transport Minister, ACM Prajin Juntong,

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December 12, 2014

expects the new agency to be up-and-running in Jun 2015. This new agency will be tasked with the bidding process of all rail mass transits and maintaining them, while the State Railway Authority of Thailand (SRT) and the Mass Rapid Transit Authority of Thailand (MRTA) will be providing services to the public. This could also mean further delays in the bidding process of future mass transit systems, in our opinion.

Figure 8: North Green Line (Mo Chit-Sapanmai-Ku Kot)

Figure 9: Other mass transit systems by MRTA in the pipeline

Line Length (km) Stations Development plan

Orange 37.5

Taling Chan – Cultural Center 17.5 13 By 2019

Cultural Center – Bang Kapi 9.0 6 By 2019

Bang Kapi – Min Buri 11.0 8 By 2019

Pink 36

Khae Rai – Pak Kret 6.0 5 By 2019

Pak Kret – Lak Si Circle 12.0 10 By 2019

Lak Si Circle – Outer Ring Road 10.5 9 By 2019

Outer Ring Road – Min Buri 7.5 6 By 2019

Yellow 30.4

Lat Phrao – Phatthanakan 12.6 10 By 2019

Phatthanakan – Samrong 17.8 11 By 2029

SOURCES: MRTA, CIMB

Contract Description Distance (km) (THB bn) Value Bidders

1Civil work (Mor Chit-Sapanmai) 12.0

14.0 CK, STEC, ITD, UN-SH-CH*

2Civil work (Sapanmai-Ku Kot) 7.5

6.1 CK, STEC, ITD, UN-SH-CH

3Civil work (depot, park & ride) - 3.7

STEC-AS, CK, ITD, UN-SH-CH**

4Rail system - 2.6

STEC-AS, CK, ITD, UN-SH-CH

Total 19.5

26.4

* UN-SH-CH is a JV between Unique Engineering, Sino-Hydro Corp and China Harbour Engineering ** STEC-AS is a JV between STEC and AS Associates

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Figure 10: 10 Mass transit network – 464km

SOURCE: CIMB RESEARCH, COMPANY

Although public investments may pick up next year, it is still uncertain whether these public investments will crowd out private investments as capacity utilisation is still hovering around 60% (Figure 11), which is quite low. Moreover, public investments alone will not be sufficient to revive the Thai economy if private investments do not pick up as well, since private investments are more than three times larger than public investments (Figure 10).

The 19% yoy decline in value of projects submitted for BOI privileges in 10M14 also does not bode well for the investment outlook next year. However, given the political uncertainties in 1H14, we hope that there will be a pick-up in BOI applications soon.

Figure 11: Public and private investments as a % of GDP

Title: Source:

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Private Public

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Figure 12: Private investments and capacity utilisation

Title: Source:

-30% -20% -10% 0% 10% 20% 30% 40% 40.0 45.0 50.0 55.0 60.0 65.0 70.0 75.0

Capacity utilisation Private investment (%yoy)

Figure 13: BOI applications submitted down 19% yoy in 10M14

Title: Source:

-60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 200 400 600 800 1,000 1,200 1,400 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 9M14 BOI applications submitted (THB bn) %yoy

2.4 Tourism recovery

No thanks to the political uncertainties in Thailand, tourist arrivals dropped significantly. Basically, tourist arrivals just turned positive by growing 6% yoy in Oct 14, following the government's measure to grant the exemption of visa fees to Chinese and Taiwanese tourists for three months, starting from 9 Aug 2014. As such, Chinese tourist jumped 67% yoy in Oct.

From our channel checks with the Airports of Thailand (AOT), the number of passengers who went through its six airports had gone up 11% yoy during 1-23 Nov 2014. Therefore, it remains to be seen whether the surge in Chinese tourists can be sustained after the end of the visa fee exemption in early Nov 2014. Furthermore, the rebound in tourist arrivals because of the exemption of visa fee to Chinese and Taiwanese tourists may not be as healthy as it seems, as we believe that most of these tourists come from lower-income segments, which

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December 12, 2014

law, which was put in place since 20 May 2014. In addition, the ongoing martial law is also the reason that many countries still have Thailand on travel alert. Specifically, 58 countries still have Thailand on travel alert, despite the calm political climate, vs. 66 countries in June after the coup. With travel warnings, many tourists are reluctant to travel to Thailand as their insurance may not cover accidents that are caused by political turmoil in Thailand. Thus, the tourist arrival recovery may take a longer time than expected and the rebound may be short-lived if the government still maintains martial law. But since Thai hoteliers have maintained a tight ship and have been through many crises over the past decade, we believe that they are prepared to cope with the prospects of a fragile recovery.

On the contrary, hotels in upcountry are not affected much by political turmoil. Thus, if tourist arrivals pick up, they should be running at close to optimal occupancy, i.e. around 75-80%. This should allow them to raise their room rates more aggressively. In addition, at the optimal occupancy level, hotels normally do not hand out many freebies, such as free breakfast, free Wi-Fi, or a free night after two or three paid nights. As such, their margins should increase nicely in 2015.

Figure 14: Tourist arrivals and political crises

Title: Source:

600,000 1,100,000 1,600,000 2,100,000 2,600,000 3,100,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2008 2009 2010 2011 2012 2013 2014

Airport shutdown May 10 unrest

Emergency decree

May 14 coup

Figure 15: Tourist arrival breakdown YTD

Title: Source:

ASEAN 27% China 19% Japan 6% Other East Asia 10% Russia 6% Other Europeans 16% USA 3% Other Americas 1% South Asia 5% Oceania 4% Middle East 2% Africa 1%

ASEAN China Japan Other East Asia Russia Other Europeans USA Other Americas South Asia Oceania Middle East Africa

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Figure 16: Travel warnings #countries

putting

Exercise

caution Reconsider need Thailand on

travel alert

(Level 1-3) to travel (Level 4-5) Special events

Apr-14 50 46 4

May-14 62 47 15 Declare martial law on 20 May, coup on 22 May

Jun-14 66 48 18 Lifted nationwide curfew on 13 Jun Jul-14 60 54 6

Six countries, Maldives, Laos, Cambodia, Vietnam, Nigeria and Kenya lifted travel Aug-14 60 54 6

Sep-14 58 54 4 UAE and Iran lifted travel warnings Oct-14 58 54 4

Nov-14 58 54 4

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3. 2015 ECONOMIC OUTLOOK

3.1 2015 Macro outlook

We believe that Thailand’s medium-term growth prospects remain positive with potential GDP growth of 5% once its economic engines start running again. However, considerable patience is needed before a proper upswing takes place. We are unlikely to witness any material improvement until next year when the government’s stimulus programmes are underway and private consumption starts to normalise in 2Q15 at the earliest. Exports will continue to see soft demand amid the uneven global recovery and lingering structural weakness. The tourism sector is showing signs of recovery with the number of incoming tourist arrivals only starting to rise above last year’s levels in Oct, five months after the coup in May. As such, we think a U-shaped recovery is more realistic and project economic growth of 3.3% next year (vs. estimated 0.6% in 2014).

Figure 17: Moderate pick-up in growth in 2015, annual GDP growth (real vs. nominal)

Title: Source:

-15 -10 -5 0 5 10 15 20 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015F % yoy Real GDP Nominal GDP

SOURCES: CEIC, CIMB RESEARCH

3.2 The recovery so far…

Real GDP growth has been quite flat through the year, posting a weak outturn of 0.2% yoy in 9M14 largely supported by net trade while domestic demand contracted. The economy turned around in 2Q-3Q but the recovery remains slow given the weakness in domestic demand and the fragile global recovery. Although the political situation has stabilised, a major change in government populist policies and the elimination of farming subsidies sent a shockwave through the rural economy.

Figure 18: GDP growth (demand side components) Figure 19: GDP growth (supply side components)

Title: Source:

-40 -30 -20 -10 0 10 20 30 40 1Q07 2Q08 3Q09 4Q10 1Q12 2Q13 3Q14 % yoy

Private consumption Govt. consumption Gross fixed capital formation Exports Imports

Title: Source:

-15 -10 -5 0 5 10 15 20 -30 -20 -10 0 10 20 30 40 1Q07 2Q08 3Q09 4Q10 1Q12 2Q13 3Q14 % yoy % yoy Agriculture Services Manufacturing (RHS) Construction

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Hopes are pinned on a revival in government stimulus to boost growth but little has been done so far and given the government’s poor track record of project execution, we think that the risk of delays remains high. Understandably, the military government has taken a more conservative approach on fiscal spending in order to clean up corruption in the public sector. As such, a new committee – the State Budget Monitoring and Scrutinising Committee – has been set up to review any government projects worth more than US$30m. However, we think that this is likely to create bottlenecks in launching government projects. Moreover, private investors are unlikely to make large commitments pending further clarity on government policies and effective execution of fiscal plans. The government is in the process of amending the Foreign Business Act (FBA), which has the unintended consequences of creating anxiety among foreign investors surrounding the investment environment.

Figure 20: Central government expenditure in FY2014 remains unchanged from previous years

Figure 21: Actual rate of capital expenditure spent continued to decline

Title: Source:

0 50 100 150 200 250 300 350

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

THB bn

FY 2014 FY 2013 FY 2012

Title: Source:

50 60 70 80 90 100 110 FY 2005 FY 2008 FY 2011 FY 2014 % spent

Current Capital Total

SOURCES: BANK OF THAILAND (BOT), CIMB RESEARCH SOURCES: MINISTRY OF FINANCE (MOF), CIMB RESEARCH

Figure 22: Total investment applications received Figure 23: Total investment applications approved

Title: Source:

0 50 100 150 200 250 300 350 400 450 500 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 THB bn

Investment applications Investment applications - foreign

Title: Source:

0 50 100 150 200 250 300 350 400 1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 THB bn

Investment approved Investment approved - foreign

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December 12, 2014

3.3 Exports not making the cut

Despite early signs of a turnaround in domestic demand, exports which are a key pillar of the Thai economy remain slack. Exports of goods never fully recovered from the 2011 flood crisis. Reports also suggest that orders were diverted elsewhere for fear of interruptions to production and logistics during the political crisis that started in Nov 2013. We believe that aside from cyclical, interim and exogenous factors that have prolonged the muted export performance, underlying these problems are structural issues.

On the whole, Thailand appears to have diversified extensively its range of agriculture products to include rice, rubber, sugar, cassava, shrimps, canned pineapple and soy. It has also done well in terms of diversification of manufactured exports into sectors, ranging from textiles to electrical & electronics and automobiles. Thailand’s target export markets are also equally well diversified between the G3 countries, China, Australia, core ASEAN markets and CLMV (Cambodia, Laos, Myanmar, Vietnam).

However, its stagnant export performance has revealed underlying weakness in its industrial base and other structural impediments. Weakening growth of labour-intensive manufactured exports indicates a loss of comparative advantage in the low-wage and labour-intensive sectors. Thai enterprises in various industries are also adjusting their investment plans in preparation for the loss of Generalised System of Preferences (GSP) privileges in the EU. These include relocation of factories to countries that still enjoy the tariff privileges or those that have free trade agreements (FTAs) with the EU. Mid- and high-tech products suffer from limited local inputs and high trade dependency as Thailand remains an assembler and does not specialise as a manufacturer in research, design and innovation.

The entire export-oriented sector has been built on capital investment and a large pool of cheap labour, which is easily replicated in other low-cost countries. Instead, the country needs more durable technological capacities on the part of local producers and workers. As such, prospects for future development depend upon industrial restructuring through the creation of new growth industries, be it in agriculture or manufacturing.

Figure 24: Thailand's exports not picking up with global recovery, manufacturing production and OECD Composite Leading Index (CLI)

Figure 25: Thailand's major exports components

Title: Source:

-6 -4 -2 0 2 4 6 -40 -30 -20 -10 0 10 20 30 40 50

Jan-07 Feb-08 Mar-09 Apr-10 May-11 Jun-12 Jul-13 Aug-14

3MMA, % yoy 3MMA, % yoy

Exports, US$ terms MPI OECD CLI (RHS)

Title: Source:

-60 -40 -20 0 20 40 60 80 100 120

Jan-07 Feb-08 Mar-09 Apr-10 May-11 Jun-12 Jul-13 Aug-14

3MMA, % yoy

Agriculture products Agro industrial products Manufacturing products Mineral products

SOURCES: OECD, CEIC, CIMB RESEARCH SOURCES: CEIC, CIMB RESEARCH

3.4 Liquidity conditions stable

A current account surplus of US$7.3bn or 2.6% of GDP in 9M14 helped to offset outflows in the financial account, though the surplus came about due to a collapse in imports (-9.4% yoy) relative to exports (-0.7% yoy). Overall foreign

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reserves has declined US$7bn or 4% to US$161bn as at end-Oct, which covers nine months of imports and 2.7 times short-term external debt.

Generally liquidity conditions in the banking sector remain stable, with the high level of liquid assets held by banks relative to its deposits and borrowings at 27% as at Jun 14, which far exceeds the minimum legal requirement of 6%. This reflects that commercial banks have enough liquid assets to absorb deposit outflows. The loan to deposit (including B/E) ratio continues to trend higher but the slowdown in deposits and B/E is in part due to savers’ reallocation of savings towards investment in higher return assets such as stock, mutual fund and life insurance as a result of the low deposit interest rate environment. Competition between banks to mobilise deposits has also moderated.

Going forward, deposit mobilisation is expected to pick up in tandem with rising demand for credit with improvement in private confidence and clarity on government policies. However, competition for deposits will not be as strong as in 2013 given the expectations of a moderate recovery. Moreover, commercial banks continue to maintain strict lending standards, particularly for selected consumer segments.

Figure 26: Commercial banks' loan to deposit (incl. B/E) ratio Figure 27: Commercial banks’ ratio of liquid assets to deposits

Title: Source:

70 75 80 85 90 95 100 0 2 4 6 8 10 12 14 16 18 20

Jan-07 Dec-08 Nov-10 Oct-12 Sep-14 %

Loans Deposits (incl. B/E) LD ratio (incl. B/E) (RHS) % yoy

Title: Source:

20 22 24 26 28 30 32 34 36 38 -20 -10 0 10 20 30 40 50

Jan-08 Nov-08 Sep-09 Jul-10 May-11 Mar-12 Jan-13 Nov-13 Sep-14

% % yoy

Deposits Liquid assets Liquid asset to deposit (RHS)

SOURCES: BOT, CIMB RESEARCH SOURCES: BOT, CIMB RESEARCH

Figure 28: Balance of payments components Figure 29: Foreign reserves

Title: Source:

-7 -5 -3 -1 1 3 5 7

Jan-11 Dec-11 Nov-12 Oct-13 Sep-14 US$ bn

Current account Capital and financial account

Title: Source:

-10 -8 -6 -4 -2 0 2 4 6 8 10 145 150 155 160 165 170 175 180 185 190 195

Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14

US$ bn US$ bn

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December 12, 2014

3.5 Inflation and interest rate outlook

The GDP deflator eased further to 1.0% yoy in 3Q14 (2.0% in 2Q) and the consumer price index (CPI) rate also moderated to 2% (2.5% in 2Q), while the producer price index (PPI) rose 0.1% yoy (1.4% in 2Q). In 10M14, headline CPI rose 2.1% yoy (10M13: 2.3%).

The Bank of Thailand (BOT) proposed an average headline inflation target range of 1.5-4.5% in 2015, in the minutes of the Sep Monetary Policy Committee (MPC) meeting. We project average annual headline inflation of 2% in 2015 (vs. estimated 2% in 2014). Given that the inflation risks have abated amid lower oil prices and ample excess capacity, there is room for the central bank to lower rates if needed. If the fiscal stimulus is delayed and the risk of stagnation rises, we think that the BOT will be compelled to ease rates.

As at 26 Nov, the baht has declined 0.3% to THB32.8 against the US dollar vs. a 0.82% gain to 32.44 at end-Jun. We expect the THB/US$ to rise further to 36 by end-2015 as the dollar rebounds. Key support factors for the baht in the near term include calmer politics, an improved growth outlook and ample foreign reserves.

Figure 30: Inflation and interest rate Figure 31: Baht spot vs. trade weighted baht (Real Effective Exchanger Rate, REER)

Title: Source:

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14

% yoy; %

Headline CPI Core CPI Policy rate

Title: Source:

85 90 95 100 105 110 115 27.0 28.0 29.0 30.0 31.0 32.0 33.0 34.0

Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14

Index THB/US$

THB/USD REER

SOURCES: CEIC, CIMB RESEARCH SOURCES: BIS, CEIC, CIMB RESEARCH

3.6 Risks and issues to watch

Farm prices have fallen sharply this year, thus depressing both export values and farm incomes. A new scheme to give cash handouts to the rice farmers based on the area under paddy cultivation instead of the harvest-linked subsidy by the former government is underway. However, the first tranche of payments has barely started to trickle down by mid-Nov with only 10% payments made well short of the 30% earmarked. Aside from this, the government has not announced any other concrete policy to restructure the agriculture sector which employs over 42% of the country’s labour force and remains the largest employing sector but accounts for only 4% of the total wage bill. We believe that this is the root cause of Thailand’s large income disparity, wide political and social divisions, and risks Thailand being caught in the middle-income trap. With energy reforms in the pipeline, the government will soon raise the excise tax on diesel. However, thanks to the decline in global oil prices, the increase in retail fuel prices should be manageable. But the government is looking into other avenues to boost revenue streams, including the introduction of a property tax, inheritance tax, and may also raise the VAT next year, which does not bode well for consumption.

Although the share of household debt to GDP remains high at 82.3% as at end-2Q14 (vs. 61% in 2009), growth has moderated from double-digit pace over

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the last four years to 8% as at mid-2014. Given the high percentage of indebted households and muted economic growth, the debt servicing ability of households remains an important risk factor that could dent potential consumption. As at end-2Q14, the debt servicing ability of households deteriorated slightly and the delinquency and NPL ratios of consumer loans edged up to 6% (vs. 5.8% in 1Q14) mainly due to auto leasing and other personal loans. The upside is household liquidity remains high as reflected by the ratio of household financial assets to household debt, which stabilised at 2x. Ultimately, the sustainability of the recovery rests on continued political stability and private sector participation. Greater clarity on government policies and effective execution of fiscal plans will help to restore investor confidence and drive private investment. After the last coup in 2006, the military government stayed for a year. But there is a growing possibility is that it may stay for longer this time.

Figure 32: Nominal farm income and farm production Figure 33: Thailand’s primary commodity prices

Title: Source:

-40 -20 0 20 40 60 80

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 % yoy

Nominal farm income Farm production

Title: Source:

0 100 200 300 400 500 600 700 0 10 20 30 40 50 60 70 80 90 100

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14

Price Price

Rubber (THB/kg) Sugar (US$/lb) Rice (US$/M T) (RHS)

SOURCES: BOT, CEIC, CIMB RESEARCH SOURCES: BLOOMBERG, CIMB RESEARCH

Figure 34: Thailand household debt Figure 35: Ratio of household financial assets to debt

Title: Source:

0 10 20 30 40 50 60 70 80 90 0 2 4 6 8 10 12 1Q03 2Q04 3Q05 4Q06 1Q08 2Q09 3Q10 4Q11 1Q13 2Q14 % THB tr Title: Source:

0.0 0.5 1.0 1.5 2.0 2.5 3.0 0 5 10 15 20 25 30 1Q11 4Q11 3Q12 2Q13 1Q14 Times THB tr

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4. RISKS

4.1 Strong economic headwinds

Exports is Thailand’s biggest economy driver, forming 73% of GDP in 9M14. At the beginning of this year, the authorities expected exports to expand by 4% yoy in 2014. A few months later, the government lowered its 2014 export growth forecast to 3% and subsequently to 2%. It now projects zero export growth in 2014, after exports contracted by 1% in 9M14.

In our view, there are structural reasons for Thailand’s weak export performance, including:

1) Thailand is not part of the major supply chain for high-end electronic parts, which are used in mobile gadgets such as the iPhone and iPad. As such, Thailand’s exports of computers and parts have underperformed total exports over the past decade (Figure 35). Exports of computers and parts accounted for 12% of Thailand’s total exports in 2000 but only comprised 7% in 2013. Thailand’s failure to move into the higher value-added computers and parts supply chain could be due to the series of political crises. It would take significant time and effort for Thailand to attract foreign investment in new technology. It would also require a more stable political environment. Therefore, we do not expect Thailand’s exports of computers and parts to turn around in the near term.

In addition, an economic slowdown in China will also hurt Thailand's export performance. Note that Thailand’s exports to China contracted 5% vs. flat growth for total exports in 10M14. A further slowdown in China will also weigh down Thailand's export growth in 2015.

Figure 36: Exports of computers and parts vs. total exports

Title: Source:

-20% -10% 0% 10% 20% 30% 40% 50% 60% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 9M14

Thai exports (%yoy) Exports of computer and parts (%yoy)

2) Thailand’s auto exports, which were strong in the past decade, have started to face competition from its neighbouring countries in 2014. The weaker auto exports could also be attributable to the country’s political problems, which are forcing the carmakers to diversify their investments away from Thailand. Indonesia appears to be a natural choice, given its large domestic market. Auto exports only contributed 5% of Thailand’s total exports in 2000 but rose to 14% in 2013 and 9M14.

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December 12, 2014

Figure 37: Thailand’s auto exports facing more competition from neighbouring countries

Title: Source:

-30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 9M14

Thai exports (%yoy) Auto exports (%yoy)

3) Thailand’s farming subsidies have reduced the competitiveness of certain agricultural exports such as rice. This, in turn, has weighed down export performance over the past few years.

Figure 38: Weak farm exports weighed down export growth

Title: Source:

-30% -20% -10% 0% 10% 20% 30% 40% 50% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 9M14

Thai exports (%yoy) Agriculture exports (%yoy)

4.2 Weak farm prices and lack of major stimulus measures

Although the political situation remained calm after the coup, the major change in government policies – the elimination of farming subsidies – sent a shockwave through the rural economy, in our opinion. The farmers have become dependent on farming subsidies as the previous governments provided support to upcountry farmers. The sudden change in government policy, without a proper plan to cushion the blow, makes it difficult for the upcountry population, especially given the weak farm prices. The price of paddy rice has fallen 13% YTD, while the price of smoked rubber third grade has plunged 25%

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December 12, 2014

amount to around THB40bn in 2014. However, the subsidy disbursement has been very slow in 2014, as the government aims to minimise corruption in the disbursement process.

As for rubber, Thailand produced about 4.4m tonnes last year. Thus, a 25% decline in rubber price would translate into farmers’ lost revenues of around THB82bn in 2014. The government tries to compensate the rubber farmers by providing subsidies similar to those for rice farmers, as well as setting up a THB6bn fund to support rubber prices. However, the government’s measures have failed to prop up rubber prices in 2014. Therefore, the rural economy has suffered badly in 2014, as reflected in the weak retail same-store-sale growth (SSSG).

Figure 39: Paddy rice price fell 13% YTD Figure 40: Rubber price dropped more than 20% YTD

Title: Source:

-30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 2,000 4,000 6,000 8,000 10,000 12,000 THB/ton %yoy Title: Source:

-40% -20% 0% 20% 40% 60% 80% 100% 20.00 40.00 60.00 80.00 100.00 120.00 140.00 THB/kg %yoy

SOURCES: Office of Agricultural Economics SOURCES: Office of Agricultural Economics

The rice subsidies gave farmers an incentive to grow more rice and the country’s rice output has increased from about 30m tonnes in 2005 to 37.7m tonnes in 2013. Given the 18m tonnes of rice inventory under the Yingluck government’s rice-pledging scheme, Thailand’s huge rice stockpile is likely to continue to put pressure on rice prices next year.

The high rubber prices a few years ago encouraged farmers to plant more rubber trees, causing the mushrooming of rubber plantations beyond the Southern region (traditional rubber-growing area in Thailand). Hence, there was a big spike in rubber output over the past couple of years. In our view, the higher rubber output will continue to weigh on rubber prices in 2015 as well.

Figure 41: Thailand's annual output of paddy rice and rubber

Title: Source:

2.0 2.5 3.0 3.5 4.0 4.5 20.0 25.0 30.0 35.0 40.0 45.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Paddy rice output (m tonnes) Rubber output (m tonnes) (RHS)

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4.3 Further cuts in earnings forecasts likely

The market consensus for EPS growth was 11% for this year and 14% for next year at the beginning of the year and had been quite stable even after the May 2014 coup. However, after the release of disappointing 2Q14 corporate results, market consensus for EPS growth this year was revised down to 7% but next year’s growth was revised up to 17%.

Analysts may just cut 2014 forecasts but did not slash 2015 numbers in Aug 2014, as they hoped that the economy would see a V-shaped recovery after the coup as the economic activities seemed to have picked up nicely. However, they may have forgotten that during the 7-month political stalemate, people may not be in the mood to spend money, and the roadblocks and political protests may make it difficult for people to come out to shop. As such, when the political situation calmed down after the coup, any pent-up demand was released. Once this demand was exhausted, economic activities have slowed down again. As a result, the market consensus for EPS growth this year is now revised down to 2% and that for next year stands at 18%. We believe that the market is still optimistic about next year’s outlook and that the EPS growth number could be revised down to single digits.

Figure 42: Thai market EPS has been revised down 14% this year and 11% next year, but the market has risen 20% YTD

Title: Source:

400 600 800 1,000 1,200 1,400 1,600 1,800 85 90 95 100 105 110 115 120 125 130

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 SET EPS 2014 SET EPS 2015 SET Index

4.4 Further delay in auction of 1800 MHz licences likely

We have become less optimistic about the visibility of spectrum auctions taking place as per scheduled in Jul-Aug 15 as the government still has many milestones to hit before proceeding with the auctions. Based on the existing regulatory structure, the National Broadcasting and Telecommunications Commission (NBTC) will have to resume the spectrum auction process in Feb 15 or not later than Mar 15 in order to hold an auction in Jul 15. However, the ongoing transition from the ICT Ministry into the Digital Economy Ministry has led to more uncertainties regarding the NBTC’s authority to allocate spectrum.

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Figure 43: Digital Economy Ministry framework Figure 44: Digital Economy Ministry structure

SOURCES: CIMB, Bangkok Post, COMPANY REPORTS SOURCES: CIMB, Bangkok Post, COMPANY REPORTS

In Jul 14, the NCPO ordered the NBTC to postpone the planned spectrum auction for 1800MHz for 12 months in order to give SOE telcos (TOT and CAT) a longer grace period to come up with their survival plans. On 21 Jul 14, Deputy Prime Minister General Prawit Wongsuwan set up the Digital Economy working group, with Deputy Prime Minister MR Pridiyathorn Devakula as the chairperson alongside eight other members. The group is tasked with drafting the ministry bill. The military government has proposed a digital economy policy framework that will involve 1) the transition of the ICT Ministry to the Digital Economy Ministry, 2) the amendment of the Frequency Allocation Act to restructure the NBTC and place it under the supervision of the Digital Economy Ministry, and 3) the amendment of the Telecoms Business Act. The market is likely to be confused with the misalignment of the junta government’s Digital Economy Policy and the NBTC’s mandate to auction 1800MHz spectrum in Jul-Aug 15 as planned. This implies higher uncertainties with regard to the spectrum auction. The visibility of the spectrum auction is certainly the key swing factor to determine mobile operators' share price performances in FY15.

True will be a prime beneficiary of the lengthy delay in the 4G spectrum auction, as the award will weaken its now superior competitiveness in spectrum holding, regulatory cost and 3G/4G first-mover advantage. On the contrary, AIS will clearly benefit the most if the spectrum auctions can happen on time as AIS’s bandwidth limitation will be resolved, thus allowing it to regain its competitiveness.

4.5 Energy reform and impact on retail gas prices

With the recent appointment of Energy Committees of the National Reform Council, we believe that the government is likely to continue to remove subsidies for NGV and raise the excise tax on diesel. The military government has raised NGV prices by THB1/kg to THB11.50/kg on 1 Oct 2014 and another THB1/kg on 3 Dec 2014 to THB12.50/kg. Meanwhile, the government also raised the LPG prices by THB1.03/kg to THB24.16/kg, thereby removing the remaining subsidy for LPG.

With recent sharp plunge in oil prices as well as gas prices, we believe that NGV prices will not have to rise much following the subsidy removal. That said, the

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cost of NGV should now be about THB8/kg vs. THB9/kg before the sharp plunge in oil prices. The cost to transport gas should remain stable at about THB5.56/kg. So, the new cost of NGV should be about THB14.5/kg, including 7% value-added tax, down from THB15.58/kg previously. With the current market price of THB12.50/kg, the retail NGV price would have to rise by another THB2.00/kg or about 16%.

Which one has higher impact on the public? (LPG vs. NGV) Between

LPG and NGV, we believe that the LPG price increase will impact the public more than the NGV price increase. This is due to 1) the number of vehicles using LPG accounts for 3.27% of Thailand’s total 35.4m vehicles. This compares with only 1% for NGV; and 2) LPG price increase will impact not only the transportation sector but other segments like cooking gas, industrial, and petrochemicals as well, while NGV is used only in the transportation sector.

Figure 45: Thailand's energy reforms by EPPO

Energy reform Party impacted Impact Date

1 Acceleration and restructure of solar power sector EA, GUNKUL, SOLAR, SPCG Positive 18-Aug-14

Clarification of gas pipeline separation PTT Positive

2 Restructuing of petroleum price for diesel, gasoline, gasohol Oil fund, Ministry of Finance Negative 28-Aug-14

3* Price lifting for LPG and/or NGV PTT, PTTGC PTT (+) 4Q14F

PTTGC (-)

4* New Power Development Plan 2015 (PDP 2015) announcment RATCH, GLOW, EGCO Positive Nov-14

Including new potential bidding capacity for coal and gas-fired power plant BANPU, IRPC

Including potential increase in alternative energy capacity in PDP 2015 Note: 3* and 4* are the expected announcement assumed by CIMB

Figure 46: Brent vs. Gasohol 95 Figure 47: Brent vs. diesel prices

Title: Source:

30 32 34 36 38 40 42 44 60 70 80 90 100 110 120 130 140USD THB

Brent (USD) Gasohol 95 (THB)

Title: Source:

25 26 27 28 29 30 31 60 70 80 90 100 110 120 130 140USD THB

Brent (USD) Diesel (THB)

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

The retail prices of diesel are likely to move up as well. Prior governments tried to cap diesel prices below THB30/litre to limit the impact on transportation cost and the cost of living. To date, Brent oil prices have plunged more than 30%, but the retail prices of gasoline in Thailand have not come down as much,

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about THB33.20/litre, representing a 17% increase (+THB4.81/litre) from the current level. Again, we believe that the government will split the increases into several instalments. However, if oil prices move up significantly in the future, retail gasoline prices in Thailand will become more volatile.

Figure 48: Price structure of petroleum products (28 Nov 2014)

UNIT:BAHT/LITRE EX-REFIN. TAX M. TAX OIL CONSV. WHOLESALE VAT WS&VAT MARKETING VAT RETAIL

(AVG) B./LITRE B./LITRE FUND FUND PRICE(WS) MARGIN

ULG 19.1895 5.6000 0.5600 9.6500 0.2500 35.2495 2.4675 37.7170 3.4047 0.2383 41.36 GASOHOL95 E10 20.2928 5.0400 0.5040 4.1500 0.2500 30.2368 2.1166 32.3534 1.8192 0.1273 34.30 GASOHOL91 20.0649 5.0400 0.5040 2.4500 0.2500 28.3089 1.9816 30.2906 1.8593 0.1302 32.28 GASOHOL95 E20 21.3051 4.4800 0.4480 0.7000 0.2500 27.1831 1.9028 29.0859 1.7702 0.1239 30.98 GASOHOL95 E85 26.9844 0.8400 0.0840 -8.2300 0.2500 19.9284 1.3950 21.3234 1.4548 0.1018 22.88 H-DIESEL 20.3479 0.7500 0.0750 4.3000 0.2500 25.7229 1.8006 27.5235 1.7444 0.1221 29.39

Figure 49: Price structure of petroleum products (27 Dec 2013)

UNIT:BAHT/LITRE EX-REFIN. TAX M. TAX OIL CONSV. WHOLESALE VAT WS&VAT MARKETING VAT RETAIL

(AVG) B./LITRE B./LITRE FUND FUND PRICE(WS) MARGIN

ULG 25.9942 7.0000 0.7000 10.0000 0.2500 43.9442 3.0761 47.0203 0.9623 0.0674 48.05 GASOHOL95 E10 26.2972 6.3000 0.6300 3.3000 0.2500 36.7772 2.5744 39.3516 1.1013 0.0771 40.53 GASOHOL91 26.0681 6.3000 0.6300 1.2000 0.2500 34.4481 2.4114 36.8595 1.1406 0.0798 38.08 GASOHOL95 E20 26.5090 5.6000 0.5600 -1.3000 0.2500 31.6190 2.2133 33.8324 1.6333 0.1143 35.58 GASOHOL95 E85 26.9851 1.0500 0.1050 -11.6000 0.2500 16.7901 1.1753 17.9654 5.9015 0.4131 24.28 H-DIESEL 27.3249 0.0050 0.0005 -0.7000 0.2500 26.8804 1.8816 28.7620 1.1477 0.0803 29.99

Figure 50: Brent vs. LPG and NGV retail prices

Title: Source:

5 7 9 11 13 15 17 19 21 23 25 20 30 40 50 60 70 80 90 100 110 120 130 140USD THB Brent (USD) LPG (THB) NGV (THB)

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PTT is prime beneficiary of higher NGV and LPG prices. Currently, the

demand for NGV is 8,787 tonnes per day or 8.8m kg per day, equivalent to 3.2m tones p.a. Of this, only 19% of total consumption is for taxis and public buses, the two key segments that are likely to be subsidised given the impact on the general public. PTT currently subsidises an additional THB1/kg for these two segments, bringing the NGV price for these two segments down to THB9.5/kg.

PTT incurred losses of THB19bn from NGV subsidies in 2013 due to its low, capped price of THB10.5/kg vs. its actual cost of THB16/kg, based on 9.5m kg demand per day. The loss of THB5.2/kg for NGV comes from PTT’s high cost structure – THB11/kg for the gas cost, THB3.7/kg for other operating costs including SG&A and depreciation, as well as transportation cost of THB1.5/kg for delivery from the 20 mother stations at the pipeline to the 356 daughter stations. Hence, we estimate that the NGV loss could swell to THB16.7bn in 2014 or 16% of its 2014 net profit if this NGV price cap continues.

We estimate that every THB1/kg increase in NGV and LPG prices would result in an upside of 2.4% and 0.7%, respectively, to our 2015 net profit forecast of THB110bn for PTT. In terms of valuation upside, every THB1/kg price increase in NGV and LPG would result in an upside of 1.8% and 1.1%, respectively, to PTT’s SOP target price of THB400.

Figure 51: NGV’s impact on PTT

Quantity (mtpa) Price (US$/tonne)

Sold at capped price/cost 3.3 313

Estimate impact to PTT Quantity (mtpa) THB/kg

Sold at netback 3.3 10.0

Price increase 3.3 1.0

% price increase 10%

2014F 2015F

No of month impacted 1.0 12 month

Impact to after tax earnings 219 2,628 THB m

CIMB 105,720 110,730 THB m

BB consensus 101,193 107,367 THB m

CIMB's net profit forecast 0.2% 2.4%

BB consensus net profit forecast 0.1% 0.8%

No of shr outstanding 2,856 2,856 mn shares EPS impact 0.077 0.920 THB/shr Valuation impact at P/E 8x 0.61 7.36 THB/shr Target price 0.2% 1.8% CIMB 400 400 THB/shr BB consensus 353 353 THB/shr

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Figure 52: LPG’s impact on PTT's GSPs

Quantity (mtpa) Price (US$/tonne

Production 2.7 406

Sold at netback 0.7 616

Sold at capped price 2.0 333

Estimate impact to PTT Quantity (mtpa) THB/kg

Current price 2.0 10.7

Market price na 28.0

Price increase 2.0 1.0

% price increase 9%

2014F 2015F

No of month impacted 1.0 12 month

Impact to after tax earnings 133 1,600 THB m

CIMB 105,720 110,730 THB m

BB consensus 101,193 107,367 THB m

CIMB's net profit forecast 0.1% 0.7%

BB consensus net profit forecast 0.1% 0.8%

No of shr outstanding 2,856 2,856 mn shares EPS impact 0.047 0.560 THB/shr Valuation impact at P/E 8x 0.37 4.48 THB/shr Target price 0.1% 1.1% CIMB 400 400 THB/shr BB consensus 353 353 THB/shr

4.6 Capital outflow?

There are some concerns that there will be some outflows as US dollar is strengthening and overseas interest rates move up as the Bank of Thailand may not be ready to raise domestic interest rates amid a weak economy. Foreign investors held THB687bn (US$21bn) of Thai bonds as at end-Oct 14, or about 10% of the total value of the bond market of THB6.7tr. About 90% of foreign holdings are in Thai government bonds, while the remaining 10% are in Bank of Thailand bonds.

Foreign holdings peaked at about THB863bn (US$26bn) or about 13% of total bonds outstanding in Apr 2013 before concerns over the tapering of the US Fed's QE stimulus programme surfaced. Since then, THB176bn (US$5.3bn) had been withdrawn from the bond market. Thus, if local rates do not move up when overseas rates rise, there could be some outflows from the Thai bond market, in our opinion.

Figure 53: Foreign holdings of Thai bonds

Title: Source:

0% 2% 4% 6% 8% 10% 12% 14% 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 Ja n -0 9 M a r-0 9 M a y-0 9 Ju l-0 9 S e p -0 9 N o v-09 Ja n -1 0 M a r-1 0 M a y-1 0 Ju l-1 0 S e p -1 0 N o v-10 Ja n -1 1 M a r-1 1 M a y-1 1 Ju l-1 1 S e p -1 1 N o v-11 Ja n -1 2 M a r-1 2 M a y-1 2 Ju l-1 2 S e p -1 2 N o v-12 Ja n -1 3 M a r-1 3 M a y-1 3 Ju l-1 3 S e p -1 3 N o v-13 Ja n -1 4 M a r-1 4 M a y-1 4 Ju l-1 4 S e p -1 4

Foreign investors % of total

CIMB Navigating Thailand 2015 Dec 2014.pdf

Table of Contents

NAVIGATING THAILAND

Tighten your seatbelts

Laying the foundation

Themes: focus on defensive

and tourism

Infrastructure a long shot

KEY CHARTS

18% market EPS growth for 2015 way too

high

SET is at 13.6x CY15 P/E

Local institutions supporting the market

Sector allocation strategy

Tighten your seatbelts

1. REVIEW

1.1 Political developments before the coup

1.2 Then came the May 2014 coup

‘‘

‘

‘

1.3 Long honeymoon period

2. Themes for Thai market in 2015

2.1 No election in 2015 means less noise in 1H15, but…

2.2 Political labyrinth

2.3 Government needs to deliver infrastructure projects

2.4 Tourism recovery

3. 2015 ECONOMIC OUTLOOK

3.1 2015 Macro outlook

3.2

The recovery so far…

3.3 Exports not making the cut

3.4 Liquidity conditions stable

3.5 Inflation and interest rate outlook

3.6 Risks and issues to watch

4. RISKS

4.1 Strong economic headwinds

4.2 Weak farm prices and lack of major stimulus measures

4.3 Further cuts in earnings forecasts likely

4.4 Further delay in auction of 1800 MHz licences likely

4.5 Energy reform and impact on retail gas prices

4.6 Capital outflow?