Trade talks, accounting changes bear watching

Trade talks, accounting changes bear watching

In the past week, the SET index rose above 1,610 points and tested the 1,640 resistance based on two main factors: progress in US-China trade talks and potential tariff termination in phases, and the addition of OSP, GPSC, BGRIM, SAWAD and other Thai small-cap stocks to the influential MSCI indices.

But the SET sank back towards 1,600 on Friday amid reports that President Donald Trump objected to tariff cancellations and after listed companies released weaker third-quarter results. Clearly, the Thai bourse is fragile and highly volatile in the face of positive and negative short-term news flows.

In the latter half of November, we expect the SET to be rangebound between 1,600 and 1,650 points. Negative factors could include disappointing third-quarter results and potential earnings downgrades by analysts. Developments in the trade war will add further volatility.

INVESTMENT THEMES

Impact from new accounting standards: Imminent changes in accounting standards will significantly affect financial statements of listed companies. Among them are provisions for staff expenses, fee income, operating and financial leases. Such changes will eventually lead to higher debt-to-equity (D/E) ratios.

Expect investors to shift funds and park them in stocks that will benefit from accounting changes in the form of greater revenue recognition. They include debt management companies and non-bank lenders.

The new accounting standards that will take effect next year and beyond are IFRS 9, TFRS 15, TFRS 9, TAS 32 and IFRS 17. In all, we expect them to affect the way listed firms recognise service revenues and liabilities, which will have an eventual impact on their earnings. Among the changes:

  • Office equipment rental will be booked as an interest expense.
  • Perpetual bonds will be booked as liabilities instead of equity.
  • Service fee income will be amortised, leading to lower retained earnings, reduced equity and higher D/E ratios.
  • Hedging instruments such as derivatives will be booked as provisions.
  • Provisions for staff retirement will lead to lower retained earnings, reduced equity and higher D/E ratios.

Obviously, all these changes will lead to higher debt. This is especially true for TAS 32, due to take effect next year, which effectively reclassifies perpetual bonds as debt instead of equity in the financial statement. This change will drive up D/E ratios, leading to more liquidity risk and higher cost of funds.

Strategically, these changes will cause banks to trim loan growth targets due to narrower lending space, which will make it even harder to extend credit (negative for banks due to the earnings downside).

Beneficiaries will be those managing debt and non-performing assets, as well as personal credit providers.

We recommend stocks relating to this theme, including KKP on the potential sale of non-performing assets (NPAs) and bad debt. KKP has key strength in debt management, especially NPAs. As the new accounting standard urges banks to unload NPAs, KKP has a fair chance to make a decent profit from managing them.

Meanwhile, BAM, the country's largest asset management firm, has submitted its filing to the SEC and should list on the bourse soon.

We expect players to compete for NPAs, and this could directly benefit KPP as a seller of NPAs that could enjoy unusually high prices.

Recommended debt management firms are JMT and JMART. MAI-listed CHAYO also runs a debt management company.

Personal loan providers such as SAWAD, MTC and KTC will also partly benefit from the changes, as some borrowers will turn to them given lower lending restrictions than banks.

Trade talks: If the US-China first-phase trade deal materialises, the 25% tariff on $250 billion in Chinese goods imposed by the US is the one with the largest expected impact on the global economy. Last month, Washington postponed an increase in this tariff to 30% pending the outcome of talks. Meanwhile, it has yet to decide whether to impose a 15% tariff (up from 10%) on a further $160 billion in goods slated for Dec 15.

The 25% tariff collection has already hurt the global economy, while the cancellation of a further increase will only prevent further damage.

We believe that global plays, which have been heavily oversold throughout this year on trade war jitters, could stage a rebound if the first phase of the trade deal is settled. Our recommended global plays are PTTGC, TOP, IVL, PTT and IRPC.


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