Concerns over manufacturing

The sector is the largest in Thailand’s economy, making up close to 30 per cent of overall gross domestic product – double the size of the wholesale/retail trade sector and 4 times larger than the agriculture sector. But the manufacturing sector was the worst performing non-agriculture sector in the Thai economy. The sector shrank 0.33 per cent year-on-year in the first quarter of 2016. On the other hand, the smaller sectors (ie financial intermediaries and hotels/ restaurants) collectively contributed 50 per cent of GDP growth during the last three years, according to a report from DBS Bank.
In fact, Thailand’s manufacturing sector still contributed 6.5 per cent of GDP growth during 2013-15. This is far better than the manufacturing sector in Singapore, which contracted 5.2 per cent in 2015 and 1 per cent in 1Q16.
Weak export growth could be one of the reasons behind the stagnant Thai manufacturing sector. A major reason for this could be competition from neighbouring countries such as Vietnam, the Philippines, and Myanmar, as many operators relocate their production bases to lower production costs and capture international trade benefits.
DBS Bank forecast 2016 GDP growth of 6.7 per cent for Vietnam and 6.3 per cent for the Philippines, compared with 3.4 per cent for Thailand.

Tisco Securities
We derived a new SET Index target of 1,460 based on a 2017 price-to-book value of 1.7 times and price to earnings (P/E) of 14x. While our P/E target is below the five-year historical average forward P/E of 15.7x, this discount is attributed to the unexciting domestic story and significant uncertainties over the election timeline. We believe the discount will remain in place until most of the political uncertainties are lifted after the August 7 referendum on the draft constitution. Despite the SET’s 9-per-cent rally year to date, we expect continued fund flows (due to the stable baht), undemanding valuations and government fiscal spending. Subsequently, we see four key drivers that will help the SET Index reach our target:
1) The stability of the baht and elevated commodity prices, leading to outperformance of petrochem stocks, notably PTTGC, SCC and IRPC; 2) acceleration in fiscal spending, which is positive for the construction materials space; 3) undervaluation of big banks (particularly KBANK and SCB) and declining non-performing loans, and 4) tourism arrivals growth driven by the continued surge in Chinese tourists, which should be positive for AOT.
On the flip side, we expect baht strength to eventually fizzle out as the Bank of Thailand comes under increasing pressure to either lower rates, or intervene in the foreign exchange market. Furthermore, weak consumer spending and high household debt means some of the retail industry’s SSG growth in 1Q16 is unlikely to prove sustainable. Finally, we expect the market to remain cautious ahead of (and possibly after) the August 7 referendum. Nonetheless, positive news flow from government-driven infrastructure project approvals and continued mini-stimulus packages should limit downside.
Note that we are negative on the retail sector given the sluggish consumption outlook and stretched valuations, and media competition in digital TV space. We are also negative on media stocks due to rising competition from cable, satellite and digital media and dampened advertising revenue.
Research Department
Trinity Securities
This week, we have to monitor two following key factors expected to influence capital markets across the world.
1) 2nd Report of US 1Q16 GDP. Recently, market expects the US growth at 0.9 per cent.
2) Statement of Janet Yellen, Fed chairman
In our view, if the US GDP comes out better than expected and/or Yellen's statement is in line with the FOMC's other members. Investors are expected to weigh more from 28 per cent current probability on the Fed's likely hike in the June 14-15 FOMC meeting.
This could prompt the USD and bond yield to rise, which could pressure stock markets and currencies in emerging markets again. Such factor combined with Thailand's MOF preparing to launch government bonds worth more than Bt66 billion in June. Thus, we believe high probability for Thailand's bond yield to rise further in June. This could be a key reason for capital movement from stock markets to capital markets as the phenomenon 'Tactical Asset Allocation.'
This week's investment strategy: wait & see until the SET Index to fall to the first point of our purchase at 1350-1370 points. If the index drops at that range, focus on food group (CPF, TU, TFG) and electronics group (KCE). These are attractive groups for investment because of: 1) good earnings momentum in 2nd & 3rd quarters; and 2) positive sentiment from the baht depreciation.