Share Price Bt12.30
Target Price Bt16.00
Fate Of The Dragon
We expect quarterly net profit to peak in 4Q13, up 46.6% qoq to Bt318.0m, and to increase 24.9% yoy to Bt1.7b in 2013. Although rubber prices have dropped sharply due to the high stockpiles, tightened credit policy and shadow banking effect in China, we think all negative factors have been reflected in rubber prices. Maintain BUY with a new target price of Bt16.00.
• 4Q13 earnings to peak. We expect quarterly earnings to peak in 4Q13, up 46.6% qoq, to Bt318.0m, driven by sales growth of 12.4% qoq and 6.0% yoy to Bt24.1b. We expect a lower gross margin due to the bearish market effect in the quarter, which tends to result in more difficulty in controlling margins.
• 2013 was an impressive year. We expect full-year revenue to drop by 7.2% yoy to Bt90.4b due to rubber prices, while earnings would increase by 25.4% yoy to Bt1.7b due to the total sales volume of 1.1m tonnes. In addition, its utilisation rate of 77%, coupled with its new hedging strategy, would help to control gross margin during the rubber market downturn. Meanwhile, we expect 2014 sales volume to reach historical high, with a possible growth of 7.0% to 1.2m tonnes or 10% of global demand.
• Surplus is narrowing. We cited from the IRSG report that world natural rubber consumption could grow by 4.4% and 5.2% to 11.9m tonnes and 12.5m tonnes in 2014 and 2015 respectively. Meanwhile, supply could grow by 3.9% in 2014 and result in a lower surplus than 2013 – down by 37% to 240,000 tonnes from 384,000 tonnes.
• Current stockpiles. Stockpiles in China are back up to a worrying level. Its inventories in Qingdao (China’s main hub for the commodity) increased to 304,300 tonnes in Jan 14 from 290,700 tonnes in Dec 13 and 259,600 tonnes in Oct 13. Rubber inventories in Shanghai also rose to 204,541 tonnes. Furthermore, there are 200,000 tonnes of stock in Thailand that are planned for sale in Mar 14. We think it could affect the outlook of some traders, but the deteriorated quality of stocks would not affect the markets and STA.
• Effect of the dragon. China’s shadow banking is one of the current top concerns, which are continuing to pressure the market sentiments and affect the demand of the whole commodity markets. However, the total debt to GDP of China is still in line with major developed countries and China’s debt is denominated in its local currency. We think the central bank of China will be able to control risks in the system.
• Bottoming out. Technical specified rubber grade 20 (TSR20) dropped by 16.3% ytd to US$1.90/kg and ribbed smoked sheet grade 3 (RSS3) dropped by 16.2% ytd to US$2.08/kg primarily due to concerns of a slowdown growth in China, shadow banking and tightened credit policy. Even though its GDP is estimated to grow at the same rate as last year’s 7.5% or lower, and its financial risks would not be easy to solve overnight, we believe that all the factors have been reflected in the rubber price and China could benefit from global growth improvement. At the current price at US$1.90/kg, we expect TSR20’s price to have bottomed out.
• We cut our 2013 sales and net profit forecasts by 8.0% and 9.2% respectively, due to the falling rubber prices, but increase the net margin to Bt3.0 per kg on lower CESS expenses.
• For 2014, we raise our average TSR price assumption to US$2.4/kg from US$2.55/kg, and forex assumption to Bt33.9/US$1 from Bt30.9/US$1.
• Key risks include: a) decrease in rubber price, b) slow growth and high stockpiles in China, c) effect from Thai government decreasing its stockpile, and d) price subsidy program from Thai government.
• Limited downside. We estimate downside risk by assuming average TSR price at US$2.0/kg. We think price downside is limited. We expect STA to pay dividends of around Bt0.50-0.60/share, or a 4.0-4.8% dividend yield.
• Maintain BUY with a new target price at Bt16.00, pegged at 12.0x 2014F PE, or +1.0SD to its 4-year average of 9.2x, to reflect its largest global market share and historical sales volume, which we expect to grow 7.0% to 1.2m tonnes, or 10% of global demand in 2014.
SHARE PRICE CATALYST
• Bottoming out of rubber prices.
• Shadow banking issue in China could be resolved.
Publish date: 11/02/14