WITH the banking sector trading at a 13% to 16% discount to the Kuala Lumpur Composite Index (KLCI) on a forward price-to-earnings basis while offering faster 2013 to 2014 earnings growth of 8.7% per annum versus 7.5% or 7.4% for the KLCI, valuations are undemanding enough to warrant a continued overweight' on the sector.
On the back of recent price weakness, we have upgraded CIMB from “sell” to “hold” and downgraded Hong Leong Bank to “hold” from “buy” due to the lack of catalysts in the near horizon.
We have added BIMB to our “buy” list given its strong growth momentum ahead and our “buy” list now comprises RHB Capital, BIMB, Hong Leong Financial Group and Public Bank.
The financial year 2012 fourth quarter results season was uneventful in that the year-end results of all banks under our coverage, with the exception of BIMB, were within expectations.
The quarter's operating profit at the Big 6 banks was flat year-on-year (y-o-y), +2% quarter-on-quarter (q-o-q), but overall results for the year were nevertheless decent with cumulative operating profit in 2012 rising 7.5% y-o-y.
With credit charge rates in 2012 being at an all-time low, recurring net profit rose by a faster pace of 9.7% y-o-y.
Malaysia's economy is expected to grow at a stable rate of 5.3% in 2013 versus 5.6% in 2012 and consequently, we expect operating profit growth momentum for the banks in our coverage to be sustained.
We see faster y-o-y operating profit growth of 10.6% in 2013 (7.5% in 2012), but slower y-o-y net profit growth of 8.7% versus 9.7% in 2012.
All in, we forecast a three-year (2012 to 2015) net profit compound annual growth rate of 8.8%.
Key assumptions include stable industry domestic loan growth in 2013 of 10.2% (10.4% in 2012), and an average net interest margin compression of about 5 basis points (bps) versus 12 bps in 2012.
Credit costs hit a low in 2012 on the back of economic strength and healthy loan recoveries but are likely to normalise in 2013 and thus we have modelled in a rise in credit charge-off rates to 21 bps in 2013 versus 18 bps in 2012.
Overall, we expect the average return on equity for the six banks to be lower at 15.7% in 2013 versus 16.5% in 2012.
WE stay “overweight” on the sector. UMW remains our top pick. Its premium valuation of 11 times 2013 price-to-earnings is justified by its market dominance and strong earnings momentum.
A sector catalyst is Asean market integration.
A featured article recently on the auto sector corroborates with our view last week that the news of the reduction in import duties of completely built-up units (CBUs) is a non-event since it is part of an ongoing process that started in 2006.
It also highlighted that the Government is showing no indication of looking to reduce excise duties although it wants car prices to fall.
This implies that it may use moral suasion to get the car companies to lower prices themselves.
The age-old issue of open approved permits was also discussed, where the grey market continues to thrive, offering luxury CBUs 35-65% cheaper than officially-imported cars.
The takeaway from the article is that the structural imbalances in the auto sector seem to favour the rich, who can enjoy cheaper luxury CBUs, whereas the man in the street has to bear with the burden of excise duties.
As for the potential risk of the government intervening to lower car prices, we believe that market forces are already putting this in motion with the industry hitting a saturation point of over 600,000 unit sales per year.
However, we do not see a destructive price war emerging.
In the fourth quarter of 2012, there were significant rebates offered across the industry and, as a result, UMW registered an 11% y-o-y decline in automotive operating profit while DRB-Hicom made an RM88mil operating loss.
UMW improved its market share by 1.8% to 47%. DRB-Hicom, which has 33% market share, clearly cannot afford to operate in this environment.
UMW is a clear beneficiary of any environment which favours lower prices. We continue to favour the stock for its unassailable industry position.
GLOBAL semiconductor sales grew for the third consecutive month in January, ticking up by an encouraging 4% y-o-y.
Despite this positive development, we remain prudent on the sector in view of the recent US budget cuts.
We would look to “buy” on further weakness. According to data from the Semiconductor Industry Association (SIA), global semiconductor sales for January grew 4% y-o-y US$24.1bil (RM74.71bil), extending its growth pace for the third consecutive month.
Once again, improvements were recorded in the Americas and Asia Pacific, where sales jumped 10% and 8% y-o-y respectively.
Not surprisingly, Europe and Japan remained in negative territory, registering declines of 5% and 12% y-o-y respectively.
Overall, the 4% uptick in global chip sales was in line with the World Semiconductor Trade Statistics (WSTS)'s forecast for 2013 (+4.1% y-o-y). Book-to-bill ratio rises above parity.
Likewise, we saw some encouraging data from Semiconductor Equipment and Materials International (SEMI), which showed that the January book-to-bill ratio of the semiconductor equipment industry returned above parity for the first time since May 2012, improving to 1.14 times from 0.92 times in December.
Bookings rose 17% month-on-month (m-o-m) while billings dipped 5% m-o-m.
Although the drop in billings had somewhat lifted and boosted January's book-to-bill ratio, we are still impressed with the spike given the strong demand for semiconductor equipment.
Indeed, SIA and SEMI's three consecutive months of positive data can be interpreted as solid evidence that the worst is over for the industry, as well as an indication that the drop in global semiconductor sales has hit bottom.
However, the US' recent US$85bil in spending cuts (estimated at 0.5% of 2013 gross domestic product may cause a ripple effect and hurt its domestic economy.
That said, this renewed risk could potentially cap growth of semiconductor sales in the Americas, which could in turn negatively affect global sales. Hence, we are being prudent and maintain our “neutral” calls on Malaysian Pacific Industries Bhd (MPI) and Unisem, with our fair values kept at RM2.70 and RM0.99 respectively.