20180905-大华继显-Regional_Morning_Notes_21页_1mb

Regional Morning Notes Summary - 05 September 2018

Core Content

This document provides an overview of the regional market updates for the palm oil and automobile sectors, with a focus on Indonesia, China, Malaysia, and Thailand. It includes key market insights, stock performance, and analyst recommendations for various companies.

Main Points

Palm Oil Sector (Indonesia)

• Biodiesel Blending Expansion: Indonesia has extended biodiesel blending mandates to the non-PSO segment, increasing biodiesel consumption by 800,000 kl to 1 million kl in 2018, pushing total consumption to 4.0 million kl.
• CPO Price Support: The extension of the biodiesel contract to non-PSO players is expected to support CPO prices, which are projected to trade in the RM2,250–RM2,500/tonne range until 1H19.
• Implementation Impact: If the monthly blend reaches 478,878 kl, CPO prices could see a positive reaction.
• Penalties and Compliance: Penalties of Rp6,000/litre are imposed on both buyers and suppliers who fail to meet their biodiesel blending commitments.
• Company Impact: Increased biodiesel allocations to Wilmar, First Resources, and Golden Agri are expected to improve plant utilisation and downstream profit margins in 4Q18.
• Market Weight: Maintained due to the positive outlook on CPO prices, though no strong catalysts are expected in the mid-term.

Automobile Sector (China)

• 1H18 Earnings: Most Chinese auto companies reported results in line with or better than expectations, with improved margins. However, some companies like BAIC, DFM, and BYD faced downgrades due to margin concerns.
• Margin Risk: The market is more cautious about margin risks in 2H18, especially with price discounts and reduced profitability.
• Company Ratings:
  • Geely: Maintained BUY rating. Earnings momentum is strong with 54% yoy net profit growth in 1H18. Expected to outperform due to a strong product pipeline and economies of scale.
  • Brilliance: Maintained BUY rating. Net profit surged 54% yoy to Rmb3.57b, with positive developments in joint ventures and new plant introductions.
  • GAC: Maintained BUY rating. 1H18 net profit increased 24% yoy to Rmb6.91b, with a rebound in sales and improved margins.
  • GWM: Downgraded to SELL. Earnings forecast reduced due to price cuts.
  • DFM and BYD: Downgraded to SELL. Lower sales and margins led to revised earnings estimates and target prices.

Key Information

CPO Price Outlook

• CPO prices are expected to trade in the narrow range of RM2,250–RM2,500/tonne until 1H19.
• The extension of biodiesel contracts to non-PSO players supports this outlook.

Key Risks

• El Niño: A 65% chance of occurrence, which could impact palm oil production starting in 2H19.
• Biodiesel Production: Higher-than-expected production could affect CPO demand.
• Labour Shortages: Worse-than-expected labour shortages in Malaysia could affect production and costs.

Corporate Events

• Group Luncheon with Nexteer Automotive Group (1316 HK) – Hong Kong, 11 Sep
• Roadshow with VS Industry (VSI MK) – Singapore, 17 Sep
• Roadshow with China Traditional Chinese Medicine Holdings (570 HK) – Taipei, 20–21 Sep
• Roadshow with PT. Sarimelati Kencana Tbk (PZZA LJ) – Taipei, 25–26 Sep
• UOB Kay Hian Asian Gems Conference – Singapore, 9–10 Oct
• Roadshow with Digi.com (DIGI MK) – Canada, 30 Oct–2 Nov
• UOB Kay Hian Annual Regional 1H2019 Strategy Conference – Kuala Lumpur, 13 Nov

Top Picks

Palm Oil Sector

• Kim Loong Resources (KIML MK) – BUY
• Bumitama Agri (BAL SP) – BUY
• Wilmar Int'l (WIL SP) – BUY
• Lonsum (LSIP IJ) – BUY
• Tunas Baru Lampung (TBLA IJ) – BUY

Automobile Sector

• Geely Automobile (175 HK) – BUY
• GWM (2333 HK) – SELL
• DFM (489 HK) – SELL
• BYD Co Ltd (1211 HK) – SELL

Key Indices

Analyst Contact

• Leow Huey Chuen
  Email: hueychuen@uobkayhian.com
  Phone: +603 2147 1990

• Ken Lee
  Email: ken.lee@uobkayhian.com.hk
  Phone: +852 2236 6760

• Johnny Yum
  Email: johnny.yum@uobkayhian.com.hk
  Phone: +852 2236 6706

Summary of Key Sector Updates

Plantation (Indonesia)

• Biodiesel blending expanded to non-PSO players, boosting CPO demand.
• CPO prices expected to trade in a narrow range of RM2,250–RM2,500/tonne.
• Penalties for non-compliance with biodiesel blending targets.
• Companies like Wilmar, First Resources, and Golden Agri benefit from increased allocations.

Automobile (China)

• 1H18 results were in line or better than expectations.
• Margin concerns in 2H18 due to price discounts.
• Geely and GAC are preferred due to strong product pipelines and stable discounts.
• Downgrades for BAIC, DFM, and BYD due to lower sales and margins.

Conclusion

The document highlights the positive impact of biodiesel blending on CPO prices in Indonesia and the cautious outlook for Chinese auto companies due to margin risks. It recommends maintaining a market-weighted approach for the palm oil sector while selectively buying Geely and other companies with strong fundamentals in the automobile sector. Key risks include El Niño, increased biodiesel production, and potential labour shortages.