Asia MicroStrategy:2Q/17earnings –what did we learn?

Earnings Wrap: Three takeaways from this reporting round

Positive earnings momentum continues in Asia ex Japan (MSCI) with CQ2-2017earnings coming ahead of expectations. This season (since end of June2017) so far has seen ASXJ earnings expectations upgraded by 1.8% and 2.3%for 2017and 2018respectively. Top-line growth and margins were slightly aheadof estimates; ROEs saw modest uptick.

Beneath aggregates, underlying trends are rather mixed; earnings

recovery remains narrowly based; it is largely about ‘BAHTS’. Whilst theratio of earnings upgrades to downgrades is quite balanced, the big index stocksthat mattered delivered. Asia’s own FANG stocks – the ‘BAHTS’ (i.e. Baidu,Alibaba, Hynix, Tencent and Samsung) together contributed around 1.3pp of1.8pp earnings upgrades. Earnings upgrades have come from Tech Sector(now the largest component of ASXJ Index), Financials/property, andResources sector. Laggards remain Consumers and Defensives. Countrywise, Korea continues to do the heavy lifting for the region (+3.9% this season)with upgrades seen in KR Tech sector and Banks, together with domestic HK(largely AIA, HK Real Estate) and Chinese Internet and financials/propertynames. These areas contributed the bulk of upgrades. India remains the worstin the region seeing another round of earnings disappointments – this time GSTintroduction taking the blame. Taiwan saw modest cuts (e.g. TSMC, Hon Hai) asestimates came below expectations but it was partly due to strong FX. NorthAsia was clearly far better than ASEAN with Mal, Thai and Indo all seeing cuts.Looking ahead, current consensus expectations for 2017E appearachievable with consensus expecting Asia ex to grow at 21-22% (Tech +45%).Excluding tech, earnings estimates are currently closer to 15%. At index level,earnings appear on track to hit year-end estimates. Solid corporate earningsgrowth (1H2017earnings +25% Y-o-Y; Tech +57%, Korea +40%) underpinsthis view. Our house 2017E earnings forecasts on ‘BAHTS’ are ahead ofconsensus, and that gives us additional comfort. There is a question regardingsustainability into 2018, however, at the current juncture, Asia ex’ earningsgrowth of ~11% does not seem excessive, even after allowing for high base.Implications: With multiples remaining rich relative to history, this earningsround has been supportive for equities. With current year expectationsachievable, the risk stems more from multiple de-rating rather than earnings, inour view. On the macro front, a weaker dollar and stronger commodity prices arecurrently supporting domestic growth and earnings. Any reversal of those trendsis a risk. Finally, investors should keep a close eye on DRAM/NAND prices –which we would argue have been one of the key drivers of Asia’s ‘earningsrecovery’. For now, our Tech team’s view on memory market outlook remainsbullish despite some market concerns around rising industry capex.

The last several months has been largely about ‘more fundamentals, less

Macro’, and stock performance being driven by earnings (India an exception).Until this trend reverses or select sectors become massively overpriced, it is bestto stay with the same strategy– i.e ‘Follow the Earnings’. Fig 18/19highlightstocks where MQ full-year FY17earnings estimates are materially different fromconsensus, and so far, the consensus earnings trend has moved in the directionof MQ estimates. Key Buy ideas: Baidu, Alibaba, PingAn, L&T, United Tractors.