Commerce – Bottomed out, new catalysts lined up

Sector SSS has surmounted the year’s worst at -1% YoY in 3Q24TD and will march back up for the rest of 3Q24F and 4Q24F, backed by better sentiment and purchasing power after the setup of a new government, with the FY2025 government budget likely to be approved on time plus new stimulus ahead, the return of traffic after flooding recedes and more tourists. Sector earnings are expected to bottom in 3Q24F and rise to this year’s best in 4Q24F, up QoQ on seasonality and YoY on store and margin expansion amid revived SSS. We keep our 2024F sector earnings growth at 14%, not yet factoring in upside from government stimulus (welfare card in Sep and digital wallet in 4Q24) and an interest rate cut. Our picks are CPALL and HMPRO.

The worst is behind, better SSS ahead. In 3Q24TD, SSS is expected to be down 1% YoY on average, the weakest for the past three quarters, partly from weaker sentiment and partly from traffic disruption caused by heavy rains and flooding in some areas. However, we expect SSS to improve for the rest of 3Q24F and 4Q24F, underwritten by: 1) potentially better sentiment and purchasing power after the setup of a new government, with the FY2025 (Oct 2024-Sep 2025) government budget likely to be approved on time (more government disbursement off last year’s low base in Oct 2023-April 2024) plus new stimulus ahead; 2) return of traffic as the rainy season ends and flooding recedes; 3) a continued rise in tourists.

Earnings wise, we expect sector earnings to touch bottom in 3Q24F, then improve to this year’s best in 4Q24F, up QoQ from seasonality and YoY from continued store and margin expansion plus revived SSS growth. We keep our 2024F earnings growth at 14%, backed by SSS growth of 0.3%, store expansion of 5% YoY and EBIT margin expansion of 10bps YoY.

Upside from new government stimulus. The government is planning to spend Bt145bn starting this month in an urgent new measure to give a Bt10,000 cash handout to 14.5mn vulnerable persons via the welfare card, as a part of the digital wallet scheme. Payment of Bt10,000 to the remainder of the 50mn Thais eligible for the digital wallet (Bt450bn budgeted) will begin with Bt5,000 in either cash or as a digital wallet in 4Q24F, with the other Bt5,000 provided via the digital wallet in 2025F. At this point, the measure is eliminating all prior spending conditions with regards to products or store types or locations. The measure will be sent to Cabinet for approval on Sep 17. The revised conditions will benefit all retailers under coverage as it opens the way for all to participate; we have not yet put this into our forecasts. Our sensitivity analysis suggests that a 1% rise in SSS will raise sector earnings by 1%.

Upside from interest rate cut. A sensitivity analysis suggests that each 25bps cut in interest rate will raise sector earnings by 0.8%. If the BoT cuts policy rate by 75bps over twelve months, as the INVX economist expects, earnings upside could be 2.5%.

Top picks: CPALL and HMPRO. We raise our sector DCF target prices by 10% after rolling over TP to mid-2025 from end-2024. We raise our rating for CRC to Outperform but keep other ratings unchanged. CPALL is our pick, with an attractive valuation (trading at 25x 2024PE, -2SD over its 10-year PE) and poised to report the sector’s best growth YoY in 2H24F. We also like HMPRO, whose valuation is undemanding (trading at 21x 2024PE, -2SD over its 10-year PE) with resilient growth in 2H24F and as an investment target for Vayupak Fund type A: it has the sector’s highest dividend yield at 3.7% p.a., an “AA” SET ESG Rating and robust financial status and growth.

Key risks are changes in government policies and purchasing power. Key ESG risks are energy & waste management, sustainable products (E) and product quality management, labor practices and data privacy (S).