Thailand strategy Don’t forget the Fed

Please refer to page 38 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie may be an Issuer of Derivative Warrants on securities mentioned in this report. THAILAND Average SET 12M forward PER Source: Bloomberg, SET, Macquarie Research, April 2016 (weekly data from January 2008 to May 2016) Macquarie Thailand New Money Ideas BBG Mkt cap 3M ADV Price Target TSR code Rec (US$ bn) (US$ m) (Bt) (Bt) (%) Domestic plays SCB OP 12.7 27.5 134.00 183.00 40 KBANK OP 11.7 41.4 174.00 222.00 30 TISCO OP 1.0 2.0 43.00 49.00 20 ADVANC OP 13.7 66.2 165.00 228.00 45 JASIF OP 1.5 4.9 9.75 11.70 29 CPN OP 7.3 9.3 57.75 63.50 11 LH OP 2.8 3.8 8.55 10.50 29 SPALI OP 1.0 2.5 20.40 23.50 21 External plays PTT OP 24.1 49.3 301.00 340.00 17 PTTGC OP 7.4 22.7 59.50 76.00 33 BA OP 1.4 4.1 24.50 37.00 55 CENTEL OP 1.5 2.6 39.75 47.50 21 New Money ideas Average 12M forecast TSR (%) 29 Average upside to target (%) 25 Average dividend yield (%) 4.7 SET index (31 May 2016) 1,424 12M index target (mid 2017) 1,475 Upside to target (%) 4 Share prices as at close on 31 May 2016 Source: Bloomberg, Macquarie Research, June 2016 Analyst(s) Macquarie Securities (Thailand) Limited Alastair Macdonald, CFA +662 694 7753 alastair.macdonald@macquarie.com Karn Lertchaipattanakul +662 694 7774 karn.lertchaipattanakul@macquarie.com Macquarie Capital Limited Anthony Ng +852 3922 1561 anthony.ng@macquarie.com 1 June 2016 Thailand strategy Don’t forget the Fed Event  The Thai market, along with most global markets, has benefited from major central banks’ quantitative easing policies via compression of discount rates and expansion of PE multiples. We borrow our colleague Jason Todd’s analysis of this phenomenon in ‘Australian Equity Strategy: Singin’ in the Rain – What price for yield?’, 19 May 2016, to draw a sobering conclusion for Thai PE multiples. If US interest rates rise in line with our economists’ forecasts and historical relationships between Thai and US rates are broadly maintained, the Thai market faces potential PE multiple compression of 250-300bp. Applying this on a static basis to the current consensus 12M forward PER of 14.5x for the SET index would imply a potential drop of up to 20%. The mitigating factors are that we expect the upward drift in rates to be fairly gradual over the next couple of years and earnings should be growing. However, we maintain a cautious outlook with a projected 12M SET index target of 1,475 implying a TSR of 7% (c. 4% upside, c.3% yield). Impact  New money ideas. We drop PTTEP (share price close to our TP) and AP (lightening exposure to developers). We add TISCO (recently upgraded to OP) and JASIF (licensing fears lifting), primarily for their attractive dividend yields. Our NMI list remains positioned primarily in the themes of ‘sustainable dividends’ (4.7% simple average 2016E yield) and ‘recovery plays’, rather than ‘quality growth’, which we view as mostly overpriced in the Thai market.  SET index target & recommended weightings. With little movement in earnings forecasts over the past couple of months, we maintain our mid-2017 SET index target at 1,475. We maintain recommended overweights for a Thai benchmarked portfolio in banks, telecoms, property and petrochems.  Thai economy. The Thai economy continues its long and grinding recovery. Domestic consumption and investment demand and external trade remain soft and growth remains largely reliant on government spending and tourism.  Quants of interest. Our quant team observes no clear winners amongst quant factor styles over the past few weeks but highlights that profitability was the worst performing factor. Outlook  The Thai market has continued to trade sideways since our previous report, ‘Thailand strategy: Running to stand still’, 21 April 2016. The good news is that earnings forecasts appear more stable and policy overall is supportive (fiscal policy supportive, monetary policy arguably slightly tight, but returning to neutral as headline inflation recovers with oil prices). Foreign ownership is low relative to history and local fund flows appear robust. The bad news is that we expect rising interest rates and further soft domestic and external demand in the near term (please see ‘The Global Macro Outlook: Firming US growth’, 17 May 2016, by Peter Eadon-Clarke & team for details of our global macro views). In a base case scenario of only modest upside for the SET, we think dividend yields will remain an important element of total equity returns. 14.313.613.211.611.710.910.49.79.710.189101112131415161.5 -2.02.0 -2.52.5 -3.03.0 -3.53.5 -4.04.0 -4.54.5 -5.05.0 -5.55.5 -6.06.0 -6.5(PER, x)10Y Thai Gov't yield Macquarie Research Thailand strategy 1 June 2016 2 Selected key charts  We believe compression in government bond yields has helped to support for the Thai equity market via lower discount rates and PER multiple