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Outbreak of swine flu. With reports that at least 103 people in Mexico have died from swine flu, jitters rippled across the world as to the potential impact from the outbreak. Prices of travel related stocks such as airlines fellsharply while healthcare related companies rose. Soybean prices supposedly fell on concerns that the flu outbreak could reduce demand for livestock feed, thus dragging down Crude Palm Oil (CPO) prices as well.BEST STOCKS
An excuse to correct. Instead, we feel that investors have been looking for a reason to take profit on the recent global run-up and the swine flu breakout in Mexico has provided just the reason to do so. Unless the news peters out quickly, we expect the swine flu jitters to provide fuel for further profit taking. Spotlight on news flow in the short term. Despite our view that the market may have over-reacted, with swine flu headlines likely to grab attention over the next few days, we feel it is important that investors are aware of the key sectors likely to be impacted by the news. Currently, we see the aviation, plantation and rubber glove sectors being the key sectors affected, with the former two negatively and the latter positively. A more detailed discussion on the respective sectors follows. Apart from this, if indeed the swine flu outbreak is more severe and longer lasting than currently anticipated, other travel related companies such as Genting could be affected while toll road operator PLUS could benefit from more local travel. For now, we feel that any impact will likely be short term and fundamentals will return to the fore once the bad news abates.
AVIATIONBEST STOCKS
Mayday! Mayday! Inarguably, the immediate concern of investors is the potential negative impact from the
spread of the virus, especially to humans, thus adversely impacting tourism and business activities, and possibly traveling and thus the aviation business. Taking the cue from SARS in 2003, we experienced a sharp contraction in passenger numbers, which led to many airlines suffering huge losses. With the current incident still very much confined within Mexico, United States and nearby countries, as well as the measures being taken to prevent the virus from spreading, we think the outbreak could be resolved soon. Although local airline companies have limited exposure to these locations, we are more cautions on Singapore Airlines (SIA), which has generally greater coverage. On top of that, this type of development always hurts market sentiment towards aviation stocks. Given this and airlines' passenger numbers and yield are already under tremendous pressure, we maintain our SELL recommendation on SIA (TP: SP9.00) as well as our TAKE PROFIT call for MAS (TP: RM2.50) and AirAsia (TP: RM0.93). With the Asian region still free from any swine flu cases and hence no significant impact to air passenger arrivals in Malaysia, we are maintaining our TRADING BUY recommendation on MAHB (TP: RM3.60).
RUBBER GLOVES
Proxy to medical services. Yesterday's run-up was driven by sentiment rather than any fundamental change in business. The share prices of all the rubber glove manufacturers have gone up by between 5% and 22% in a day, on expectation that the deadly swine flu outbreak would spur demand for rubber gloves in the medical segment. We believe that if the outbreak continues to spread, the rubber glove companies may experience a one-off jump in sales orders since there will be a strong chance of stock replenishment as: 1) most of their customers have been holding minimal stock level in view of the slower demand following the global economy crisis; 2) they may also replenish their stocks in anticipation of some discounts given that latex price has fallen close to 10% from RM4.60/kg in February to RM4.17/kg now. All the 5 rubber glove manufacturers under our coverage produce gloves for the medical segment but among them, we believe Hartalega and Kossan would be the main beneficiaries because more than 90% of their gloves are dedicated to the medical segment, with US and Europe as their largest target markets. We continue to maintain Overweight on the sector.
Timeline of Bird Flu outbreak
1959-1997
Outbreak of swine flu. With reports that at least 103 people in Mexico have died from swine flu, jitters rippled across the world as to the potential impact from the outbreak. Prices of travel related stocks such as airlines fellsharply while healthcare related companies rose. Soybean prices supposedly fell on concerns that the flu outbreak could reduce demand for livestock feed, thus dragging down Crude Palm Oil (CPO) prices as well.BEST STOCKSThe concerns. Before we analyse the potential impact of an outbreak of swine flu, we take a quick look at what this outbreak is about. Swine flu is a respiratory disease of pigs which typically does not infect humans although it does occur through proximity with infected pigs. The death rate is also typically low. In fact, it has been previously speculated that given some biological similarity between pigs and humans, south China, with
its high density of pigs, is the source of new flu mutations every year in the autumn season that are subsequently spread worldwide. The latest swine flu scare seems to have been caused by the A/H1N1 strain of the virus, which appears to be a cross between the bird flu, human flu and pig flu. With over 1000 people reportedly infected in Mexico and what appears to be a 10% death rate, this outbreak definitely seems more serious than previous incidents as it appears that human-to-human transmission is very likely. At the moment, the symptoms of the swine flu appear to be similar to that of a regular flu with fever, lethargy, runny nose and cough being among the reported symptoms.
its high density of pigs, is the source of new flu mutations every year in the autumn season that are subsequently spread worldwide. The latest swine flu scare seems to have been caused by the A/H1N1 strain of the virus, which appears to be a cross between the bird flu, human flu and pig flu. With over 1000 people reportedly infected in Mexico and what appears to be a 10% death rate, this outbreak definitely seems more serious than previous incidents as it appears that human-to-human transmission is very likely. At the moment, the symptoms of the swine flu appear to be similar to that of a regular flu with fever, lethargy, runny nose and cough being among the reported symptoms.
How far has it spread? Apart from Mexico, the US has confirmed 20 cases in 5 states, with Canada confirming 6 cases although no deaths have been reported in these countries. Suspected cases have been reported in Spain, Israel and New Zealand although suspected cases reported in France were subsequently confirmed to be negative. In an effort to contain the virus, China and Thailand have banned hog and pork imports from Mexico and the US while Russia has banned meat imports from the 2 countries. Indonesia has banned all pork imports. The World Health Organisation (WHO) has, however, said that there is no sign swine flu spreads via contact with meat.BEST STOCKS
A danger to Asia? With the spectre of the SARS epidemic fresh in mind in Asian countries, authorities have stepped up efforts to prevent the spread of swine flu to Asia, particularly given the high density of pigs in certain East Asian countries, which could provide the ideal hosts for further mutation. Hong Kong said it will hospitalise air travellers who have a fever while other Asian countries are also on high alert. As such, we feel that the possibility of the swine flu spreading in a major way to Asia is limited.
An over-reaction? While we certainly do not want to downplay the seriousness of a fatal disease nor the outbreak in Mexico, we do note some similarities between the panic generated by the current outbreak and that sparked by a resurgence of bird flu cases in East Asia in 2003. While the WHO has repeatedly highlighted the possibility of a pandemic arising from bird flu, we note that there have been only 421 confirmed cases of bird flu mortality since 2003. After the experience dealing with SARS, Asian countries seem to have done a good job of containing the bird flu. As such, with the quick reaction from governments worldwide, we feel that swine flu could also be contained before it reaches pandemic levels. We note, however, that the key risk here is human-to-human transmission, which was an unconfirmed factor for bird flu.
An excuse to correct. Instead, we feel that investors have been looking for a reason to take profit on the recent global run-up and the swine flu breakout in Mexico has provided just the reason to do so. Unless the news peters out quickly, we expect the swine flu jitters to provide fuel for further profit taking. Spotlight on news flow in the short term. Despite our view that the market may have over-reacted, with swine flu headlines likely to grab attention over the next few days, we feel it is important that investors are aware of the key sectors likely to be impacted by the news. Currently, we see the aviation, plantation and rubber glove sectors being the key sectors affected, with the former two negatively and the latter positively. A more detailed discussion on the respective sectors follows. Apart from this, if indeed the swine flu outbreak is more severe and longer lasting than currently anticipated, other travel related companies such as Genting could be affected while toll road operator PLUS could benefit from more local travel. For now, we feel that any impact will likely be short term and fundamentals will return to the fore once the bad news abates.
AVIATIONBEST STOCKS
Mayday! Mayday! Inarguably, the immediate concern of investors is the potential negative impact from the
spread of the virus, especially to humans, thus adversely impacting tourism and business activities, and possibly traveling and thus the aviation business. Taking the cue from SARS in 2003, we experienced a sharp contraction in passenger numbers, which led to many airlines suffering huge losses. With the current incident still very much confined within Mexico, United States and nearby countries, as well as the measures being taken to prevent the virus from spreading, we think the outbreak could be resolved soon. Although local airline companies have limited exposure to these locations, we are more cautions on Singapore Airlines (SIA), which has generally greater coverage. On top of that, this type of development always hurts market sentiment towards aviation stocks. Given this and airlines' passenger numbers and yield are already under tremendous pressure, we maintain our SELL recommendation on SIA (TP: SP9.00) as well as our TAKE PROFIT call for MAS (TP: RM2.50) and AirAsia (TP: RM0.93). With the Asian region still free from any swine flu cases and hence no significant impact to air passenger arrivals in Malaysia, we are maintaining our TRADING BUY recommendation on MAHB (TP: RM3.60).
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Casino attendance more resilient. Depending on the severity of the outbreak, we believe that the negative impact on Genting Highlands visitors' arrivals is unlikely to be significant. More importantly, we note that Resorts' earnings are more heavily dependent on casino patronage, which we believe would reflect greater resilience as a large majority (85%) comprises the captive domestic day trippers market. During the SARS period in 2003, where the epicentre of the outbreak (China/Hong Kong) was closer to Malaysia, Resorts continued to register an operating profit growth of 0.6% (excluding loss contribution from Star Cruises), while revenue declined by only 2.6%. Even at the peak of the outbreak in 2Q03, Resorts remained profitable, with revenue and operating profit declining by 10.1% and 22.1% y-o-y respectively. We believe that any further selldown on the stock presents an opportunity to accumulate on weakness, noting that even during the SARS period, Resorts traded at a low of 12.4x PER. Assuming that news flow deteriorates and we were to assign a more conservative 10x FY09 PER (lower end of 9x-22x historical PER band), Resorts would be priced at RM2.28/share (35% discount to RNAV). As such, we see any further selldown in its share price to below the RM2.20 level as an opportunity to accumulate. Nonetheless, given the recent strength in its share price performance and the limited upside to our RM2.50 fair value, we are putting our call on Resorts under review.
Casino attendance more resilient. Depending on the severity of the outbreak, we believe that the negative impact on Genting Highlands visitors' arrivals is unlikely to be significant. More importantly, we note that Resorts' earnings are more heavily dependent on casino patronage, which we believe would reflect greater resilience as a large majority (85%) comprises the captive domestic day trippers market. During the SARS period in 2003, where the epicentre of the outbreak (China/Hong Kong) was closer to Malaysia, Resorts continued to register an operating profit growth of 0.6% (excluding loss contribution from Star Cruises), while revenue declined by only 2.6%. Even at the peak of the outbreak in 2Q03, Resorts remained profitable, with revenue and operating profit declining by 10.1% and 22.1% y-o-y respectively. We believe that any further selldown on the stock presents an opportunity to accumulate on weakness, noting that even during the SARS period, Resorts traded at a low of 12.4x PER. Assuming that news flow deteriorates and we were to assign a more conservative 10x FY09 PER (lower end of 9x-22x historical PER band), Resorts would be priced at RM2.28/share (35% discount to RNAV). As such, we see any further selldown in its share price to below the RM2.20 level as an opportunity to accumulate. Nonetheless, given the recent strength in its share price performance and the limited upside to our RM2.50 fair value, we are putting our call on Resorts under review.
PLANTATION
Mixed impact. The swine flu will have a mixed and indirect impact on the oil palm industry. Presumably, the pandemic will cause a slowdown in demand for pork, which will reduce the demand for soybean meal, the main produce of soybean. Soybean and soybean meal price have already fallen by some 4% in reaction to the flu. The price of soybean oil is relatively resilient as the drop in soybean meal demand will result in lower crushing, hence reducing the supply of soybean oil. Having said this, soybean oil's price resilience may not translate into the same for palm oil as the spread between the two edible oils is much narrower than the usual range of US$100 – 200 per tonne. The flu could well be a trigger for the spread to normalise i.e. palm oil price will need to correct to a lower level.
Mixed impact. The swine flu will have a mixed and indirect impact on the oil palm industry. Presumably, the pandemic will cause a slowdown in demand for pork, which will reduce the demand for soybean meal, the main produce of soybean. Soybean and soybean meal price have already fallen by some 4% in reaction to the flu. The price of soybean oil is relatively resilient as the drop in soybean meal demand will result in lower crushing, hence reducing the supply of soybean oil. Having said this, soybean oil's price resilience may not translate into the same for palm oil as the spread between the two edible oils is much narrower than the usual range of US$100 – 200 per tonne. The flu could well be a trigger for the spread to normalise i.e. palm oil price will need to correct to a lower level.
RUBBER GLOVES
Proxy to medical services. Yesterday's run-up was driven by sentiment rather than any fundamental change in business. The share prices of all the rubber glove manufacturers have gone up by between 5% and 22% in a day, on expectation that the deadly swine flu outbreak would spur demand for rubber gloves in the medical segment. We believe that if the outbreak continues to spread, the rubber glove companies may experience a one-off jump in sales orders since there will be a strong chance of stock replenishment as: 1) most of their customers have been holding minimal stock level in view of the slower demand following the global economy crisis; 2) they may also replenish their stocks in anticipation of some discounts given that latex price has fallen close to 10% from RM4.60/kg in February to RM4.17/kg now. All the 5 rubber glove manufacturers under our coverage produce gloves for the medical segment but among them, we believe Hartalega and Kossan would be the main beneficiaries because more than 90% of their gloves are dedicated to the medical segment, with US and Europe as their largest target markets. We continue to maintain Overweight on the sector.
Timeline of Bird Flu outbreak
1959-1997
A highly pathogenic strain of H5N1 caused flu outbreaks with significant spread to numerous farms, resulting in great economic losses in 1959 in Scotland in chickens and in 1991 in England in turkeys. The precursor of the H5N1 influenza virus that spread to humans in 1997 was first detected in Guangdong, China, in 1996, when it caused a moderate number of deaths in geese and attracted very little attention. In 1997, in Hong Kong, 18 humans were infected and 6 died in the first known case of H5N1 infecting humans. On 28 December to 29 December 1997, 1.3 million of chickens were killed by Hong Kong Government. The government also suspended the import of chickens from mainland China.
2003
January-Human disease associated with influenza A subtype H5N1 re-emerged for the first time since an outbreak in Hong Kong in 1997. Three people in one family were infected after visiting Fujian province in mainland China and 2 died.
December- animals in a Thai zoo died after eating infected chicken carcasses. Later that month H5N1 infection
was detected in 3 flocks in the Republic of Korea.
January-Human disease associated with influenza A subtype H5N1 re-emerged for the first time since an outbreak in Hong Kong in 1997. Three people in one family were infected after visiting Fujian province in mainland China and 2 died.
December- animals in a Thai zoo died after eating infected chicken carcasses. Later that month H5N1 infection
was detected in 3 flocks in the Republic of Korea.
2004
January -A major new outbreak of H5N1 surfaced in Vietnam and Thailand's poultry industry, and within weeks spread to 10 countries and regions in Asia, including Indonesia, South Korea, Japan and China.
October- Researchers discovered H5N1 is far more dangerous than previously believed because waterfowl, especially ducks, were directly spreading the highly pathogenic strain of H5N1 to chickens, crows, pigeons, and other birds and that it was increasing its ability to infect mammals as well
January -A major new outbreak of H5N1 surfaced in Vietnam and Thailand's poultry industry, and within weeks spread to 10 countries and regions in Asia, including Indonesia, South Korea, Japan and China.
October- Researchers discovered H5N1 is far more dangerous than previously believed because waterfowl, especially ducks, were directly spreading the highly pathogenic strain of H5N1 to chickens, crows, pigeons, and other birds and that it was increasing its ability to infect mammals as well
2005
January - An outbreak of avian influenza affected thirty three out of sixty four cities and provinces in Vietnam, leading to the forced killing of nearly 1.2 million poultry. Up to 140 million birds are believed to have died or been killed because of the outbreak.
April - there begins an unprecedented die-off of over 6,000 migratory birds at Qinghai Lake in central China over three months. This strain of H5N1 is the same strain as is spread west by migratory birds over at least the next ten months.
August- H5N1 spread to Kazakhstan, Mongolia and Russia. Later in 2005 H5N1 spread to Turkey, Romania, Croatia and Kuwait.
January - An outbreak of avian influenza affected thirty three out of sixty four cities and provinces in Vietnam, leading to the forced killing of nearly 1.2 million poultry. Up to 140 million birds are believed to have died or been killed because of the outbreak.
April - there begins an unprecedented die-off of over 6,000 migratory birds at Qinghai Lake in central China over three months. This strain of H5N1 is the same strain as is spread west by migratory birds over at least the next ten months.
August- H5N1 spread to Kazakhstan, Mongolia and Russia. Later in 2005 H5N1 spread to Turkey, Romania, Croatia and Kuwait.
2006
January and February- H5N1 spread to other Asian countries (such as India), north Africa, and Europe. In July and August 2006 significantly increased numbers of bird deaths due to H5N1 were recorded in Cambodia, China, Laos, Nigeria, and Thailand while continuing unabated a rate unparalleled in Indonesia.
September- Egypt and Sudan joined the list of nations seeing a resurgence of bird deaths due to H5N1.
November and December- South Korea and Vietnam joined the list of nations seeing a resurgence of bird deaths due to H5N1.
January and February- H5N1 spread to other Asian countries (such as India), north Africa, and Europe. In July and August 2006 significantly increased numbers of bird deaths due to H5N1 were recorded in Cambodia, China, Laos, Nigeria, and Thailand while continuing unabated a rate unparalleled in Indonesia.
September- Egypt and Sudan joined the list of nations seeing a resurgence of bird deaths due to H5N1.
November and December- South Korea and Vietnam joined the list of nations seeing a resurgence of bird deaths due to H5N1.
2007
January-Japan, Hungary, Russia, and the United Kingdom joined the list of nations seeing a resurgence of bird deaths due to H5N1. February- Pakistan, Turkey, Afghanistan, and Myanmar joined the list and Kuwait saw its first major outbreak of H5N1 avian influenza.
March- Bangladesh and Saudi Arabia each saw their first major outbreak of H5N1 avian influenza and Ghana in
May. As H5N1 continued killing many birds and a few people throughout the spring in countries where it is now endemic, in June Malaysia and Germany saw a resurgence of bird deaths due to H5N1, while the Czech Republic and Togo experienced their first major outbreak of H5N1 avian influenza.
July- France and India also saw a resurgence of bird deaths due to H5N1 In January, Japan, Hungary, Russia, and the United Kingdom joined the list of nations seeing a resurgence of bird deaths due to H5N1. In February, Pakistan, Turkey, Afghanistan, and Myanmar joined the list and Kuwait saw its first major outbreak of H5N1 avian influenza.
January-Japan, Hungary, Russia, and the United Kingdom joined the list of nations seeing a resurgence of bird deaths due to H5N1. February- Pakistan, Turkey, Afghanistan, and Myanmar joined the list and Kuwait saw its first major outbreak of H5N1 avian influenza.
March- Bangladesh and Saudi Arabia each saw their first major outbreak of H5N1 avian influenza and Ghana in
May. As H5N1 continued killing many birds and a few people throughout the spring in countries where it is now endemic, in June Malaysia and Germany saw a resurgence of bird deaths due to H5N1, while the Czech Republic and Togo experienced their first major outbreak of H5N1 avian influenza.
July- France and India also saw a resurgence of bird deaths due to H5N1 In January, Japan, Hungary, Russia, and the United Kingdom joined the list of nations seeing a resurgence of bird deaths due to H5N1. In February, Pakistan, Turkey, Afghanistan, and Myanmar joined the list and Kuwait saw its first major outbreak of H5N1 avian influenza.
2008
January -China's health ministry has confirmed a 22-year-old man has died from H5N1 in central Hunan province
February- H5N1 killed a school teacher from northern Vietnam in the country's 51st death from the disease, and health officials fretted that the virus would spread further.
March-H5N1 virus confirmed as the cause of death for a 25 year old female from Sennoris District, Fayum Governorate, Egypt.[18]
June- Hong Kong found the H5N1 bird flu virus at a poultry stall in Sham Shui Po. 2,700 birds were ordered to be killed by the local government. A new regulation requires all live chickens not sold by 8pm to be killed. Retailers who keep live poultry after 8pm are now subject to a fine of HK$50,000 and six months imprisonment.
January -China's health ministry has confirmed a 22-year-old man has died from H5N1 in central Hunan province
February- H5N1 killed a school teacher from northern Vietnam in the country's 51st death from the disease, and health officials fretted that the virus would spread further.
March-H5N1 virus confirmed as the cause of death for a 25 year old female from Sennoris District, Fayum Governorate, Egypt.[18]
June- Hong Kong found the H5N1 bird flu virus at a poultry stall in Sham Shui Po. 2,700 birds were ordered to be killed by the local government. A new regulation requires all live chickens not sold by 8pm to be killed. Retailers who keep live poultry after 8pm are now subject to a fine of HK$50,000 and six months imprisonment.
2009
February -H5N1 killed a 23-year-old woman named Lý Tài Múi from Nà Cáng, Quảng An, Đầm hà, Quảng Ninh, Vietnam. H5N1 virus confirmed as the cause of death for a 32-year-old man from Quang Binh, Vietnam.
March- H5N1 virus confirmed as the cause of death for a 3 year old boy from Đồng Tháp, Vietnam. State media reported H5N1 might be the cause of a death of a female in Bạc Liêu, Vietnam.
April -H5N1 virus confirmed as the cause of death for a 23-year-old woman from Thanh Hoa, Vietnam.
February -H5N1 killed a 23-year-old woman named Lý Tài Múi from Nà Cáng, Quảng An, Đầm hà, Quảng Ninh, Vietnam. H5N1 virus confirmed as the cause of death for a 32-year-old man from Quang Binh, Vietnam.
March- H5N1 virus confirmed as the cause of death for a 3 year old boy from Đồng Tháp, Vietnam. State media reported H5N1 might be the cause of a death of a female in Bạc Liêu, Vietnam.
April -H5N1 virus confirmed as the cause of death for a 23-year-old woman from Thanh Hoa, Vietnam.
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