HLBank Research Highlights

Author: HLInvest   |   Latest post: Wed, 23 Oct 2019, 5:21 PM


Retail Strategy - Budget 2020 stimuli to drive 4Q interest

Author: HLInvest   |  Publish date: Wed, 23 Oct 2019, 5:21 PM

Budget 2020 as main trading catalysts for 4Q. On the back of improving optimism on trade war (amid the phase-1 deal between US and China), coupled with less austerity sounding Budget 2020 which market participants felt the change of tone vs. Budget 2019, we opine traders to lookout for sectors such as:- (i) Technology (automation, E&E and customized packaged investment incentives as well as weak ringgit ranging ~RM4.18/USD) (ii) Renewable energy (green investments tax allowance) (iii) Telecommunication (ongoing National Fiberisation and Connectivity Plan (NFCP initiatives) (iv) Construction (increased development expenditure by 2.4% YoY) (v) Tourism (to boost tourist arrivals to 30 million)

Time to scoop up some equities. In 4Q, we opine the slightly positive sounding Budget 2020 as well as window dressing in December (average 10-year December return: 1.98%) would be able to lift the broader market sentiment (although some earnings disappointment may surface in November). In addition, the earlier mentioned catalysts would bode well for stocks selections in 4Q.

Technology: We believe the broad technology sector will be benefiting under the E&E and automation incentives, which could result in higher demand for automation equipment moving forward; under this section we like ISTONE and KESM.

Power-related: With the increasing demand for rural electrification in Malaysia, PESTECH would be the favoured pick amid its power transmission infrastructure expertise. Meanwhile, for renewable energy stimulus, we like CYPARK.

Construction: Given the increase in development expenditure and potentially improving construction sector, we see precast concrete manufacturers such as OKA and KIMLUN to benefit from the initial stage of construction jobs.

Tourism: Under the Budget 2020, RM1.1bn was allocated for VMY2020, which the government intends to achieve 30m tourist arrivals. In this space, we like TUNEPRO for the Travel Insurance Play, Which Is a Proxy Towards Tourism Industry.


Source: Hong Leong Investment Bank Research - 23 Oct 2019

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FGV Holdings - Revisiting valuation

Author: HLInvest   |  Publish date: Wed, 23 Oct 2019, 5:14 PM

Weak near-term performance remains, but potential disposal of stake in MSM may re-rate FGV. While FGV’s performance will likely remain weak in 3Q19 (as CPO price only started recovering since Aug-19 and raw sugar cost will remain high for the rest of 2019), we believe FGV deserves a relook into, given its 51% stake in MSM Malaysia (MSM), which may re-rate FGV’s share price (if the stake disposal materialises). Recall, FGV confirmed that it was in talks with several parties to dispose part of its 51% stake in MSM. According to The Edge Financial Daily, there are at least 4 companies that are eyeing FGV’s stake in MSM including JAG Capital Sdn Bhd, Wilmar International (which later denied that it was in talks with FGV through PPB Group), and 2 other unnamed foreign companies.

Assessing potential impact of MSM stake sale on FGV. The disposal of its stake in MSM will likely result in FGV impairing its remaining stake in MSM (if it is a partial disposal) or incurring disposal loss (if it disposes its entire 51% stake), as we believe FGV will likely dispose its stake in MSM at below book value (given that MSM is loss making). However, we still view the potential disposal positively, as the disposal will reduce MSM’s share of losses to FGV and FGV’s net gearing.

Forecasts. We raise our FY19 net loss forecast by 47% to RM130.7m, to account for larger loss assumptions at sugar division and JV losses. We maintain our FY20-21 core net profit forecasts at RM7.1-18.0m based on average CPO price assumption of RM2,200/tonne and FFB output of 4.9m tonnes and 5.4m tonnes, respectively.

Upgrade to BUY with higher TP of RM1.22. We took this opportunity to switch our valuation methodology, to better reflect the value of FGV’s businesses. We now value FGV based on (i) EV/ha of RM20k on plantation segment (at 50% discount to regional peers to reflect its still weaker than peers’ performance), (ii) 0.6x P/B on MSM (to reflect MSM’s loss making position), and (iii) 8x FY20 for its logistic segment. Post revision of valuation methodology, we upgrade our rating on FGV to BUY (from Hold previously) with a SOP-derived TP of RM1.22 (from RM0.97 previously). Besides, we note that FGV is a proxy to rising CPO prices, given its high earnings sensitivity to CPO price movement.


Source: Hong Leong Investment Bank Research - 23 Oct 2019

Labels: FGV
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Wah Seong Corporation - Not too late to the party

Author: HLInvest   |  Publish date: Wed, 23 Oct 2019, 5:12 PM

Wah Seong via its wholly owned subsidiary Wasco Coatings Ltd, announced that it has entered into a shareholders agreement with Medgulf Construction Company to setup a JV company (60% Wah Seong; 40% Medgulf) for the purpose of combining their expertise in the provision of anti-corrosion and concrete weight coating pipelines to the oil & gas industry in Qatar.


Qatar facility. We are positive on this news flow as it crystalizes Wah Seong’s prospects as a going concern post Nordstream 2. We understand that this JV will undertake work for Qatar petroleum’s Northfield expansion project over the next 3 years. Our channel check reveals that Qatar intends to increase its LNG production capacity from 77m to c.100m tons per year by 2024. In order to achieve this, a total of c.1200km of pipelines will need to be built. Although the announcement did not come with a contract award, we feel that this is the entrée to the main course, which should be awarded sooner than later. Nordstream 2 was a 2400km pipeline with a contract value of c.EUR600m-EUR700m (c.RM2.7bn); hence our pro-forma calculation implies that the Qatari JV co. can safely secure c.RM1.4bn over the 3 year period. This translates to an orderbook win of c.RM800m for Wah Seong on a standalone basis.

Riding Yinson. Wah Seong’s engineering segment has had a long history with FPSO asset owners. They have historically done work for Armada (TP RM0.44, BUY), Yinson (NR) and Modec for their topside modules. However contributions from the engineering segment were always eclipsed by the contributions from their pipe coating business. We understand that the fabrication work that they do for FPSO topside modules (electrification, water processing, electrification and flaring units etc.) account for c.10%-15% of the said FPSO’s capex value. Note that the capex for Marlim 2 FPSO amounts to c.USD1bn; thus assuming that Yinson awards the topside EPC work to Wah Seong, this implies that per FPSO topside module could result in an award of c.RM400m to Wah Seong. We understand that Yinson is bidding for 3 more FPSO charters (Pecan, PDB and Limbayung). Furthermore, Yinson mainly does the VLCC conversion in Singapore (Keppel and or Sembcorp) whilst Wah Seong has a 12ha yard in Batam. Mosaic theory implies that Wah Seong stands a very good chance to secure these jobs as Yinson secures more FPSO jobs moving forward.

Forecast. Raise FY20-21 earnings estimates by 18.2%-10.1%, as we factor in the accelerated crystallisation of its outstanding tenderbook of c.RM5.4bn (as at 2Q19) into our orderbook replenishment assumptions (from RM600m in FY20-21 to RM1bn).

Upgrade to BUY, TP: RM1.13. We are upgrading Wah Seong to a BUY with a higher TP of RM1.13 (from RM0.70) pegging it to a higher multiple of 12x (from 8x) a discount of 14% its domestic peers who are riding on the oil & gas upcycle (see Figure#1). We also take this opportunity to roll our valuation into FY20.


Source: Hong Leong Investment Bank Research - 23 Oct 2019

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SUNWAY - Venturing into UK student accommodations

Author: HLInvest   |  Publish date: Wed, 23 Oct 2019, 5:11 PM


Sunway announced that its subsidiary Sunway RE Capital Advisors (SG) Pte Ltd has executed a trust deed with RBC Investor Services Trust Singapore Ltd to establish a private trust in Singapore known as Sunway Residence Trust to acquire purpose-built student accommodations in the UK. Upon acquisition, a fund manager will be established to provide fund management services and appoint an operator to manage the properties acquired.


Positive on the news. We are positive on the news as this provides Sunway with a new source of recurring income. The Trust will be investing in high quality, well located student accommodations with potential for long-term capital appreciation and recurring income that will be yield accretive to the portfolio. As such, we believe this to be accretive to Sunway’s diversified earnings base over the long run.

Capital injection. The Trust will have an initial AUM of c.GBP38m or RM202m which is expected to be injected by the end of the year. Our pro-forma calculation implies that net gearing would increase to 0.38x from 0.36x (as at 2Q19) post injection. We note that this sum will be sufficient to acquire a student accommodation located in a prime location which has been earmarked for acquisition and will be announced at a later date.

Forecast. Unchanged pending further details on the potential acquisition.

Maintain BUY with an unchanged TP of RM2.17 based on a 10% holding discount from SOP-derived valuation of RM2.41. Sunway remains our top pick given its well integrated property and construction development. Its hidden gem, the healthcare business (with 4 new hospitals coming on stream over the next three years) has yet to be appreciated as it is embedded within the parent-co. These coupled with the resilient earnings from mature investment properties alongside its growing building materials business and quarry operations justifies for the re-rating of the stock.

Source: Hong Leong Investment Bank Research - 23 Oct 2019

Labels: SUNWAY
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Automotive - Sep 2019 TIV: 2018’s Low Base Effect

Author: HLInvest   |  Publish date: Wed, 23 Oct 2019, 9:08 AM

Sep 2019 TIV was 44.7k units, dropped 12.7% MoM, mainly due to consumer withholding purchases prior to Budget 2020 announcements and shorter working days in the month. However, TIV improved by +43.0% YoY due to low base effect post effective SST implementation in Sep 2018. YTD TIV dropped by 2.6% YoY to 443.0k units mainly due to high base effect of GST exemption period. We expect continued strong demand for Proton, Perodua and Toyota new models to sustain TIV for remaining months of the year. We are maintaining at 596.6k units (-0.35% YoY) for 2019 TIV forecast, as we expect reversal to positive growth in Oct-Dec 2019. We maintain OVERWEIGHT on automotive sector with top picks of DRB (BUY; TP: RM3.50) and BAuto (BUY; TP: RM2.85).

Malaysian Automotive Association (MAA) reported Sep 2019 TIV at 44.7k units, a strong growth of +43.0% YoY due to low base effect post effective SST implementation in Sep 2018. However, TIV dropped 12.7% MoM, due to ending of Merdeka Day sales campaigns, combined with consumer withholding purchases in anticipation of potential goodies from Budget 2020 and the shorter working days effect in the month. YTD TIV declined by 2.6% YoY to 443.0k units, mainly due to strong demand during GST exemption period in Jun-Aug 2018. We maintain our 2019 TIV forecast at 596.6k units (-0.35% YoY) as we expect sustainable monthly sales volume of 50k units in 4Q19, supported by continued strong demand for new model launches by Proton, Perodua and Toyota.

We maintain our OVERWEIGHT rating on the sector with a stock selective approach with 5 BUY and 2 HOLD recommendations. Our top picks include DRB (BUY; TP: RM3.50) and BAuto (BUY; TP: RM2.85).


Source: Hong Leong Investment Bank Research - 23 Oct 2019

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CIMB Group - Thai pre-provision profit fell again

Author: HLInvest   |  Publish date: Wed, 23 Oct 2019, 9:06 AM

Largely in line. CIMB Thai (95%-owned) registered 3Q19 core profit of THB298m (tripled QoQ, +68% YoY), bringing 9M19 sum to THB555m (+3% YoY). This is largely in line with our and consensus expectations, making up 78% and 73% of respective full-year forecasts; its contribution to overall group’s PBT is minimal (<10%).

QoQ. Core earnings tripled, thanks to lower allowance for bad loans (-15%) and tax charges (-93%). Otherwise, pre-provision profit was down 8% on the back of soft top line growth (+2%) vs a quicker rise in opex (+5%); net interest margin (NIM) continued to decline during the quarter (-7bp).

YoY. The fall in impaired loan provision (-37%) and taxes (-69%) helped to lift up core profit by 68%. Without these, pre-allowance earnings would have contracted by 26% due to negative Jaws; although fees and investment income rose 31% and jumped 80x respectively, these were insufficient to mask the adverse effect of NIM slippage (- 41bp) and opex accelerating by 19%.

YTD. Similar to above, core bottom-line showed a 3% improvement, owing largely to smaller bad loan allowances (-33%). Again, the presence of negative Jaws from weak revenue (+1%) and higher opex (+18%), dragged pre-provision profit down by 27%.

Other key trends. Net loans and deposits maintained their growth momentum at 10% and 6% YoY respectively. With these, sequential net loan-to-deposit ratio was still at an elevated level of 117% (-3ppt QoQ). As for asset quality, gross non-performing loan ratio ticked up 10bp QoQ to 4.6%, arising from slower repayment abilities of few corporate and retail accounts.

Outlook. NIM compression at CIMB Thai is seen to linger on the back of the plan to switch to lower-yielding but safer assets. However, this will be compensated by lower bad loan provision. Cost-wise, personnel expenses will continue to creep upwards owing to its Fast Forward expansion strategy. That said, we will get more updates from the pre-closed period meeting with management later this week.

Forecast. Unchanged as CIMB Thai’s 3Q19 results were within expectations.

Retain HOLD and GGM-TP of RM5.45, based on 0.91x 2020 P/B with assumptions of 8.7% ROE, 9.3% COE, and 3.0% LTG. This is below its 5-year mean and sector’s 1.00x. The discounts are warranted due to its lower ROE, which is 1ppt beneath its 5- year and industry average. Although we think there is opportunity to trade the stock at this price level, we are not inclined to upgrade CIMB as there are better banking picks in the sector. Also, it has a relatively high foreign shareholding (>25%), making it more susceptible to sell-off and its dividend reinvestment scheme is EPS dilutive in nature.


Source: Hong Leong Investment Bank Research - 23 Oct 2019

Labels: CIMB
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