We do not expect the US Federal Reserve to cut its benchmark interest rate when it meets Dec 18-19, having already made three cuts this year, which we believe have helped the sluggish economy and lessened the impact of the trade dispute with China.
The US-China dispute has been negatively affecting the stock market in Thailand since the second quarter of this year. The impact worsened in the third quarter, with SET index aggregate earnings dropping 18% year-on-year. The index has been on a downward spiral for the fifth successive month.
We expect both corporate earnings and manufacturing production to remain subdued in the fourth quarter of 2019. The manufacturing production index contracted for a sixth straight month in October, with automotive among the industries on a downward trend.
Upside for the bourse appears limited, while political uncertainty could further dampen investor confidence, feeding negative sentiment about industrial estates, contractors and transit operators.
Global equities are expected to drift sideways if the US and China fail to sign the phase-one trade deal they have been talking about for the past several weeks. A US threat to impose more tariffs on $156 billion in Chinese imports starting Dec 15 is still on the table. This fact alone appears to be keeping Beijing from agreeing to a deal.
We do not expect much euphoria over equities even if a trade pact is signed, as Washington has sent mixed signals by also showing its support for the pro-democracy movement in Hong Kong. This has angered Beijing and shaken its faith in America's willingness to accommodate Chinese requests.
INVESTMENT STRATEGY
The SET index is likely to trade in a range of 1,550 to 1,650 in the near term. It could stage a bull run towards 1,650 points if a trade deal is signed this month. If not, and new US tariffs go ahead, the index will be rangebound between 1,550 and 1,620.
We recommend an equal division of equity holdings between defensive and alpha stocks, particularly those linked with US-China trade talks and Chinese business. Our picks for December are as follows.
BCH: We have a Buy rating on BCH and a discounted cash-flow-based target price of 20 baht, assuming weighted average cost of capital (WACC) of 7% and terminal growth of 3%. The stock's valuation looks attractive, trading at 32 times estimated 2020 earnings, which is below the six-year average level of 37 times.
CBG: We have a Buy rating and a target price of 123 baht, which implies a 2020 price/earnings ratio of 38. We believe earnings will continue to track upward from 2019.
CPF: Our sum-of-the-parts target price is 33 baht. The key catalyst is improvement in Vietnamese swine prices, which we believe bottomed out in the third quarter of 2019. Key downside risk is an outbreak of Asian swine flu in Thailand; however, CPF operates a closed system on its farms, which should prevent a disease outbreak.
PTTEP: We have a Buy call on PTTEP and a discounted cash-flow-based target price of 140 baht, assuming WACC of 9% and zero terminal growth. We forecast crude oil prices to hover at $60-63 a barrel over the course of the year in light of several positive factors.
SPALI: We have a Buy call on SPALI and a target price of 20 baht, which implies a 2020 P/E of 8, or 0.5 standard deviations below the five-year average. The key catalyst is the government's residential stimulus package, which should serve as an earnings growth driver in the fourth quarter of 2019 and into 2020.
TASCO: Our target price is 24.18 baht, based on a Bloomberg consensus with four analysts rating the firm a Buy and one each recommending Hold and Sell. We have a positive view of sales volume and average selling prices, which are expected to increase in 2020 on strong demand.
TMB: We estimate a new target price at 2.06 baht based on a total new asset value of 1.9 trillion baht and an average return on equity between TMB and TBANK of 10%, as well as synergy benefits, which we believe will drive ROE higher in the foreseeable future. We have a Buy rating on TMB and a target price of 1.86 baht, which implies a price-to-book value of 0.79 times, or 1.75 standard deviations below the five-year average. Our target price has yet to reflect the synergy benefit from TBANK.
