J.P. Morgan - Asia - Keep The Faith !!

Asia - Keep The Faith Asia Technicals Strategy: Charting The Course

MXAPJ’s inability to get past the strong 485-492 resistance zone and underperformance in the last 3-weeks is challenging a bullish absolute and relative view (end of underperformance, 7Feb14; good morning Asia, 26Mar14). Despite this weakness/ under-performance, momentum remains supportive and we would retain long/ outperformance positions with stops at 460 (current 475) and 27.4 (on relative index, vs. 28.2 currently). Ultimately a stronger upside will remain hostage to a clear breakout above the 485-493 resistance levels. In the meantime, keep the faith and use rotational opportunities – Top Outperform – India, Singapore, (Countries) and Energy (sectors). Top Underperform – China, HK (Countries) and Cons. Disc. (Sectors).

Figure 1: Top Technicals Picks

TOP PICKS		OUTPERFORM		UNDERPERFORM
COUNTRIES		INDIA		CHINA
		SINGAPORE		HONG KONG
		THAILAND
SECTORS		ENERGY		CONSUMER DISCRETIONARY

Source: J.P. Morgan.

· MXAPJ – Monthly chart (Figure 2) based on closing levels clearly shows the index capped by the Jul’11 falling trendline and contained in a “triangle”. A breakout from this formation is needed to determine trend direction. On the weekly charts(Figure 3), a third attempt at going past the 485-492 resistance zone faltered in mid-April. Although the index has pulled back 2.5% from mid-April highs, indicators such as MACD, RSI remain supportive of long positions. The index has retained its sequential “higher-highs and higher-lows” further supporting retention of long positions.

· MXAPJ vs. MXWO (Figure 4) – After a bottoming out in Jan/ Feb (see note of 07Feb14), relative index suggested outperformance action in late March (see report of 26Mar14). Relative performance has however unwound over the last 3-weeks and in the process the relative index has pulled back below its 40wma. Yet, the relative index’s RSI and MACD remain supportive for outperformance positions. Relative index has support at 27.4 (Mar’14 low) vs. current 28.2 levels – outperformance longs should use this as a stop loss.

· Rotational Opportunities (Countries) (Figure 5) – Rotational chart shows a substantial momentum fade for strong performers Indonesia and Philippines over the last 6-7 weeks. While these markets continue to outperform, this appears to be decelerating. In contrast, Thailand and Singapore appear to be gathering performance momentum. Korea, HK, China are both under-performing and show worsening momentum. Taiwan and India appear to be seeing momentum revival. See figures 7-14 for country charts

o TOP OUTPERFORM – INDIA (Figure 10), SINGAPORE (Figure 11), Thailand (Figure 13)

o TOP UNDERPERFORM – CHINA (Figure 7), HK (Figure 8)

· Rotational Opportunities (Sectors) (Figure 6) – Tech, consumer discretionary, materials and healthcare have lost substantial momentum in recent weeks while staples, energy have seen momentum revival along with financials. Recent outperformance for financials faces headwinds. See figures 15-18 for key sector relative charts.

o TOP OUTPERFORM – ENERGY (Figure 16)

o TOP UNDERPERFORM – CONSUMER DISCRETIONARY (Figure 15)

Figure 2: MXAPJ Monthly (Close Basis) Back to Text

Source: Bloomberg.

Figure 3: MXAPJ Weekly Back to Text

Source: Bloomberg.

Figure 4: MXAPJ vs. MXWO – Weekly Back to Text

Source: Bloomberg.

Figure 5: ROTATIONAL OPPORTUNITIES – COUNTRIES Back to Text

Source: Bloomberg.

Figure 6: ROTATIONAL OPPORTUNITIES – SECTORS Back to Text

Source: Bloomberg.

Figure 7: MSCI CHINA vs. MXAPJ Source: Bloomberg.

Figure 8: MSCI HONG KONG vs. MXAPJ Source: Bloomberg.

Figure 9: MSCI KOREA vs. MXAPJ Source: Bloomberg.

Figure 10: MSCI INDIA vs. MXAPJ Source: Bloomberg.

Figure 11: MSCI SINGAPORE vs. MXAPJ Source: Bloomberg.

Figure 12: MSCI INDONESIA vs. MXAPJ Source: Bloomberg.

Figure 13: MSCI THAILAND vs. MXAPJ Source: Bloomberg.

Figure 14: MSCI PHILIPPINES vs. MXAPJ Source: Bloomberg.

Figure 15: MSCI CONS DISC. vs. MXAPJ Source: Bloomberg.

Figure 16: MSCI ENERGY vs. MXAPJ Source: Bloomberg.

Figure 17: MSCI FINANCIALS. vs. MXAPJ Source: Bloomberg.

Figure 18: MSCI TECH vs. MXAPJ Source: Bloomberg.

Director of Asia Pacific Equity Research, Asia Technical Analysis Research

J.P. Morgan -Indian Equities

Indian Equities Internal Risks vs. External Returns

· Large cap indices declined for the second consecutive week; exporters gained , beta lagged

· Quarterly earnings reported increased 11% yoy; 53% surprised positively

· Consumer companies are reporting muted revenue growth with stable to improving margin performance

· Growth indicators disappoint; long bond yields soften

· Real rate are stabilizing at a higher level compared to last year; limited signs of changing household preference of Financial assets over Real assets

· Changing outlook on global commodity prices is supportive of Indian equity performance; local factors need to turn favorable for a sustainable performance.

Uneasy E’s. Two of the three Es (Earnings, Electoral hopes and Economic indicators) of near term equity performance were not supportive last week. Monthly economic indicators were disappointing. Quarterly earnings reported over the weak failed to boost equity performance. The third and arguably the most important “E” - electoral hopes, provided the cushion from disappointing real indicator. Votes have been cast in 438 of 543 seats. Expectations are high from the election results on May 16th. We saw some profit booking in cyclical and high beta sectors last week.

Figure 1: MSCI India sectoral change in average money flow – Last week vs. last month (INR mn)

Source: Bloomberg, J.P. Morgan

Real rates stabilizing higher. May to August last year was a difficult phase for the Indian financial market. The risk of QE-tapering triggered a sharp depreciation of INR (27%) and MSCI India (US$) correction of 30%. Government and RBI’s urgent policy measures restored investor confidence by September-October. Compared to the last mid-year, one notable difference is that the real rates are stabilizing at higher levels. The one year OIS rate is 140 bps higher now and CPI inflation is ~200 bps lower. A higher real rate makes India a better investment destination for foreign investors. For domestic investors, the desired change in preference from Real assets to Financial assets seems to be progressing at a slower pace.

Reduced redemptions in Equities, lower inflows in debt. After four months of consistent net flows into Indian equity schemes, March turned out to be a month of net redemption. For the complete fiscal year (FY14) the net redemption was 40% lower than the year before. Retail investors have been disinterested in equities for last six years now. The subscription trend in debt funds is relatively better compared to equities but saw reduced inflows compared to the previous year.

Figure 2: Net subscription into Equity schemes

Source: AMFI, J.P. Morgan

Figure 3: Net subscription into Debt scheme

Source: AMFI, J.P. Morgan

Disappointing monthly indicators. The first month of the new fiscal started with the continued trend of weak growth. Car sales declined 6% oya, with market leader Maruti reporting a 13% oya decline. The growth remains relatively better for two wheelers (18 %oya). PMI manufacturing remained unchanged at 51.3. The weak growth indicators and likely increased confidence in RBI’s inflation glide path seems to be helping long bond yields. The 10-year benchmark yield has softened by a significant 35 bps over the last month to 8.76% now.

4Q FY earnings season – Not disappointing. Key highlights are:

· ~40% of Indian large cap companies have reported earnings

· Adjusted profit for the J.P. Morgan covered large cap companies increased 11% yoy.

· Financials have reported better than expected performance on asset quality. Growth in NIMs and fee income has been mixed.

· IT Services companies managed to meet tempered down expectations. Guidance for the next fiscal have been mixed. Company managements seem to be more focused on margin performance.

· Consumer Staples companies have reported in-line sales but modest improvement in margin. Revenue growth has been more subdued in discretionary companies.

· Cement companies have reported better than expected operating earnings, despite a challenging demand environment.

· RIL reported in-line earnings supported by better refining margin and weaker INR. .

For our coverage universe, we expect an earnings growth of 14%, (Ex Tata Steel).

Table 1: Quarterly Earnings Growth – Large cap companies under J.P. Morgan coverage

Sector	4Q FY13 PAT (INR bn)	4Q FY14 Adjusted PAT (INR bn)	Adjusted PAT Growth (% YoY)
Consumer Discretionary	12	8	(35)
Consumer Staples	12	13	10
Energy	84	88	5
Financials	84	95	13
Health care	0	0	NA
Industrials	33	17	(48)
IT Services	88	123	39
Materials	21	22	6
Telecom	14	22	59
Utilities	3	2	(46)
Total	351	390	11
Ex Energy	267	302	13

Source: Bloomberg, J.P. Morgan

Figure 4: Quarterly Earnings: Meet/ Beat expectations composition

Source: J.P. Morgan

Internal Risk vs. External Returns. Over the last four years, Indian equity investors have experienced an interesting combination of returns being influenced by external factors while risks primarily influenced by internal drivers. The external factors of easy global liquidity, India’s relatively more diversified earnings growth profile among key EM countries, and commodities not being a major source of growth have all helped equity performance. On the other hand, local growth and inflation dynamics have consistently failed to turn supportive. There is a hope that post the new Government, internal risk may reduce gradually. Aside of this hope there is an element of risk-dynamics that seems to be changing:

· Global commodity prices have not been the source of primary risk for sometime now. More importantly, the fundamental (ex the geo-political risks) outlook continues to get better. See below the forward curve of the Brent crude oil price. Also, the outlook on China’s growth complexion has likely reduced the outlook on commodity risk.

· IMD forecast of a sub-par monsoon has increased uncertainty on India’s current year growth and inflation. The timing of this risk is also complicated as the investment cycle is extremely weak, inflation is high and governments’ fiscal situation is also under pressure. But, the direct risk of a sub-par monsoon now is significantly lower giver the increased importance of non-agri economic activities

· India’s fundamental vulnerability is getting more indigenized. In a contrast to 2004 to 2008, when a slew of new sectors ranging from Insurance, Retail, Aviation, etc were investing, hardly any new sector, with the exception of Internet, seem to be focused on growth. The road towards a higher growth trajectory will have to start with higher corporate and investor confidence. A convincing action plan by the next Government could change the perception around the internal risk and external return dynamics, in our view.

Figure 5: Brent crude forward curve (US$ / bbl)

J.P. Morgan - Jet Airways (India) Ltd

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Jet Airways (India) Ltd. (JETIN IN) AirAsia receives flying licence (AOP) approval from DGCA to launch domestic air services shortly		Underweight Price: Rs231.90 07 May 2014 Price Target: Rs206.00 PT End Date: 30 Mar 2015

AirAsia India receives flying license to commence domestic air services shortly: Low cost carrier AirAsia India (the three-way JV between AirAsia, Tata Sons and Telestra Tradeplace) has finally been granted an air operator’s permit (or flying license) by the DGCA. (However, the validity of the permit is subject to the final verdict of the Delhi high court). The application by AirAsia has finally received approval after a year since application. AirAsia is expected to start operations by June – July with 2-3 A320 aircraft (increasing to 8-10 in a year). The airline will use Chennai as its hub, initially connecting tier two cities. We reiterate our UW on JET Airways as competition is expected to increase post the liberalization of the Indian aviation sector.

Figure 1: AirAsia’s Shareholding Pattern (%)

Source: Economic Times

· Ticket pricing key variable: AirAsia has highlighted that they will price their tickets at a ~30% discount to existing airlines. We will monitor pricing trends in the industry in the backdrop of the emerging competition.

Figure 2: Domestic India Airline Market share (%)

Source: Financial Express

Sequence of events for the AirAsia approval

· Feb 20, 2013: AirAsia announces three-way JV to set up a new low-cost airline at an initial investment of $30 mn

· Mar 6, 2013: Gets FIPB approval; a formal clearance comes on April 5

· Sep 20, 2013: AirAsia gets no-objection certificate from the civil aviation ministry

· Oct 4, 2013: AirAsia India applies for an air operators’ permit from the Directorate General of Civil Aviation

· Jan 20, 2014: DGCA seeks fresh objections from public before issuing permit to AirAsia

· Feb 21, 2014: DGCA disposes of objections and says permit will be granted shortly upon completion of formalities

· May 7, 2014: DGCA issues AOP for AirAsia India to launch commercial operations; the clearance is subject to the decision of the Delhi HC, whose hearing is scheduled for July 11

AirAsia BHD (AIRA.KL) is covered by J.P. Morgan analyst Corrine Png.

Investment Thesis

We have an UW rating on JETIN as competition is expected to increase post the liberalization of the Indian aviation sector

Valuation

Our Mar'15 PT of Rs206 is based on a 7.75x EV/EBITDAR mulitple which is in line with the average of the listed Asian Airlines stocks

SOTP valuation table

SOTP
FY16E EBITDAR (Rs MM)	35,322
Target EV/EBITDAR Multiple (x)	7.8
Enterprise Value (Rs MM)	273,744
(-) 7x FY16E Lease Rentals (Rs MM)	149,938
(-) FY15E Net Debt (Rs MM)	100,384
Equity (Rs MM)	23,421
NOSH (MM)	113.6
Target Price (Rs)	206

Source: J.P. Morgan

Risks to Rating and Price Target

Upside risks to our UW rating and price target include : Increased Network synergies from Etihad, gains in market share, and revival in the domestic demand environment.