NEW VIRUS STRAIN HITS INVESTMENT ONCE MORE

Just as it seemed we had turned the corner on the coronavirus, the world is now contending with the emergence of more contagious variants. The most concerning appears to be the Delta variant that is spreading in various parts of the world, including Thailand. Another variant to watch is Lambda, which researchers are just beginning to understand.

Total cases worldwide have now surpassed 185 million, with more than 4 million deaths. New cases are hovering around 400,000 per day, much better than in early May when infections were increasing by 600,000 per day or more. While debate over the efficacy of vaccines is ongoing, there is still a heavy consensus that they are the best way to quell the spread of the virus. As of this week, some 3.2 billion people have been vaccinated with at least one dose, representing 24% of the world population.

In Thailand, new topped 9,000 yesterday, with deaths above 70 for the second day. Bangkok and neighbouring provinces account for 20-25% of the country’s total. In June alone, there were around 100,000 new cases, raising the total to more than 300,000.

What is disconcerting is that the numbers are still rising despite the imposition of restrictions including a ban on in-restaurant dining in red zones and the closure of some businesses deemed risky, including most construction. That led authorities yesterday to announce a fresh two-week lockdown in Bangkok and nine other provinces including mall closures (except supermarkets, pharmacies and phone shops) and curfews in a final push to bring down infections.

There is no doubt that the country’s worsening Covid situation will exacerbate already weak economic conditions. The improvement in activity seen in April and May has effectively stalled. There is now plenty of market chatter regarding further revisions to GDP forecasts to 1% or lower for 2021, versus 1-2% currently.

At the same time, Thailand is experiencing vaccine delivery delays, resulting in below-target vaccination rates. About 8.6 million people have now received one shot and 3.1 million — just 4.5% of the population — have received two doses. At this rate, herd immunity of 70% is many months away.

SANDBOX UNDERWHELMING

We have grown increasingly concerned that economic recovery could again be pushed back, perhaps to late 2021 or even early 2022. Although the Phuket Sandbox kicked off on July 1, the results have been underwhelming, with just a few thousand participating tourists expected in the next few weeks — if Covid can be kept at bay on the island.

While the SET managed to muscle through the 1,600-point level in early June, peaking at 1,642.80 in mid-June, the latter half of the month was another story with the index pulling back to between 1,570 and 1,590. The index sank close to 1,540 this week as investor concern about Covid and a new lockdown intensified.

Nevertheless, we continue to see investment opportunities in selected sectors, specifically those that are export-related or tend to perform during lockdown scenarios, such as food and some commerce segments.

Average daily turnover remains high overall, though down from 100 billion baht per day to 91 billion. Local funds and foreign funds remained net sellers at 4 billion and 10 billion baht, respectively, in June.

Given the lingering Covid worries, we believe the SET will stay below 1,600 in the short term with a trading range between 1,550 and 1,600. Our stock picks this time around — BDMS, BEC, JWD and KCE — are businesses that fare well during lockdowns and those with heavy export exposure.

Bangkok Dusit Medical Services (BDMS) is the largest hospital chain in the country.

Though the pandemic has actually resulted in fewer people getting sick due to social distancing, an increased focus on hygiene and the work-from-home trend, BDMS saw its revenue related to Covid approach 20% of its total after the third wave emerged in April, compared with less than 5% in the first quarter of 2021. Occupancy has also risen to 75% from around 45% in the first quarter.

On a year-on-year basis, BDMS’s operations have improved significantly as well.

Finally, the reopening of tourism could be a positive catalyst for growth into 2022, and thus we believe the worst has passed for BDMS.

BEC REVIVAL

The Channel 3 operator BEC World has struggled since the arrival of the digital TV platform. Profit has declined heavily, and new channels have captured market share from BEC. These factors alongside the pandemic-related economic shutdown in 2020 resulted in huge losses.

But the company has cut costs significantly and is coming back to life with a new business model that aims to reinvigorate performance this year.

For example, BEC’s dramas will start being simulcast with Netflix and as a result should generate revenue more rapidly. Although the new virus wave has slammed the economy, we believe BEC is now well prepared to handle it. The company should turn a profit of 860 million baht this year and 1.1 billion in 2022, a big turnaround for the media leader.

JWD Infologistics Plc (JWD) is also back in the spotlight, targeting annual revenue of 10 billion baht in the next five years. It will add new high-margin businesses to its portfolio this year to enhance profit and is on track for better-than-expected warehouse business performance.

We note that recently, the major shareholders of TU and COM7 purchased shares and announced they would be partners with JWD. We expect this to enhance JWD’s logistics businesses down the road.

Lastly, we are back in love with the printed circuit board (PCB) exporter KCE Electronics Plc. European automakers are now seeing business normalise as their countries loosen pandemic restrictions and resume economic activity. A clear example of the move to normalisation has been the Euro 2020 football tournament. And thanks to the baht’s weakness, KCE as an exporter is set to enjoy higher margins. Hence, we expect the company to almost double its profit year-onyear in 2021.