As we enter the second half of 2020, Covid-19 remains a serious challenge worldwide, with more than 12.3 million cases and deaths exceeding 550,000. Concern is now centred on acceleration in new infections, which are now reaching more than 200,000 per day.
Despite the rise in new cases, daily death rates are declining. We are also encouraged that medical services worldwide are getting a better handle on the virus and that infected patients tend to be younger, meaning they are typically better able to manage the symptoms and recover.
But the clouds have yet to part; Brazil and India continue to report large increases in new infections and now rank second and third, respectively, in total cases. The US leads the world with over 3.1 million and 133,000 deaths.
Many countries are also contending with a second wave, including Japan, Korea, and now Australia, where the 5 million residents of Melbourne have entered a new six-week lockdown.
Economically, the situation remains dire for many businesses and recovery now looks likely to be slower than previously expected. That said, Thailand has been relatively successful in controlling the outbreak, with no new local cases for more than 45 days.
However, with the pandemic still ongoing, fully reopening the country for tourism is a difficult prospect. The near-term economic outlook thus remains gloomy.
The Bank of Thailand recently revised its GDP forecast for 2020 to -8.1% from -5.3%. The cut was largely predicated on a plunge in export value and tourist arrivals.
But Thailand isn't suffering alone -- the IMF recently revised down its global GDP forecast to -4.9% from -3%, which would mark the biggest contraction since the Great Depression from 1929-32.
SET REVIVING
Training our focus on the SET, the index closed out the first half of the year at 1,339.03 points, down 15.2% from the beginning of the year. Over the past three months, however, the Thai equity market has outperformed. Indeed, since touching a low of 969.08 in March, the SET has been on a strong uptrend, surging 38.2% to the end of June.
Although the overall outlook for Thai businesses is still downbeat, especially for tourism or export-related firms, the domestic environment provides some reasons to be hopeful. Many local firms are finding enough traffic from the local market to sustain performance.
Anticipating more substantial improvement in the pandemic later this year, we believe the SET will remain on a flattish uptrend, reaching 1,480 to 1,500 by year-end. The containment of Covid-19, along with the flood of liquidity worldwide and historically low interest rates, will keep stock markets attractive for capturing superior returns.
In our current investment strategy, we recommend stocks focused on the domestic economy with robust business portfolios that stand to gain from easing of the lockdown and domestic travel stimulus. We recommend BEM, PTG, CBG and SCC.
We believe BEM has passed its low and the easing of the lockdown and resumption of work in offices (versus at home) will help passenger levels return to normal through the rest of this year.
We also anticipate dividends totalling 260 million baht from BEM's investments in CKP and TTW to provide a cushion against a decline in profit. Normalisation of operations should result in second-half profit doubling from the first half, followed by a 58% year-on-year jump in 2021.
PTG is another beneficiary of lockdown easing as the corresponding return in domestic travel lifts petrol usage, particularly upcountry where most of the company's PT service stations are located.
Moreover, the phased-in reopening of the economy is allowing for normalisation in the logistics and transport sectors, home to PTG's major clients. We believe the company has passed its lowest point and is set for a big jump in profit in the second half. Although we still expect full-year profit to decline 10% year-on-year, it should then recover quickly and jump 19% year-on-year in 2021.
EXPORTS LIFT CBG
In the drinks space, CBG should be one of the few companies in Thailand to generate profit growth, which we estimate at 6% year-on-year. Although domestic demand for energy drinks has softened, this is being offset by strong demand in the CLMV (Cambodia, Laos, Myanmar and Vietnam) markets as well as the company's new functional drink products.
Revenue is expected to increase 20% year-on-year in 2020, underpinned by growth in both domestic and export sales. CBG is also expanding its production lines and expects profit to grow by another 7% next year.
Finally, SCC, one of the country's largest conglomerates, is expected to regain strength in both the plastic and packaging units. Global recovery in demand, especially from China, will boost plastic usage and catalyse sales for SCC.
Locally, the rising popularity of e-commerce stands to boost demand for packaging. Another key factor for SCC is the resumption of government megaprojects in the second half; demand for construction materials should improve significantly, providing SCC with more substantial benefits in the second half of 2020 compared with the first half.
