Myanmar: Maybe The Last Frontier Market In Southeast Asia

|
 |  Includes: EZIDF, ITRX, PKSGF, SGAPY, SSGPY, YMAIF, YONGY
by: Lewi Ilkanaev

Summary

Myanmar is an untapped, resource-rich nation with 60 million people.

Strategic location between China and India.

Political risk and unrest in some northern and eastern parts of the country.

[Originally published on Jun 5, 2014.]

History

Myanmar is a $55million+ market. Its geographic position makes it a very important partner for both China and India. After 40 years of dictatorship, the country has introduced reforms, the market is opening up and foreign investors are rushing into the market to look for business opportunities. The transformation is going down well. "New" government has kicked off speedy and extensive changes. Since taking office in March 2011, President Thein Sein and key ministers in Myanmar have reformed laws, taken steps to liberalize the tightly controlled state economy, signed ceasefire agreements with majority of the ethnic groups, enhanced freedom of expression by scrapping press censorship and allowing circulation of privately-owned newspapers in Burma for the first time in almost 50 years.

Politically, the military-turned-civilian government has continued to release more political prisoners. Notably, the military-dominated power has allowed opposition parties to hold seats in Parliament. Since 2011, there have been several independent media companies selling their newspaper. The World Bank is estimating Myanmar to grow at least at 6% over the next two years. Several car, food, oil and shipping companies have established offices or production plants in the country. Economic sanctions have been lifted, especially from the United States and Europe. Easing of economic sanctions is expected to lead to higher level of trade. Myanmar's total foreign trade reached US$8.5-13.3bn in 2012, contributing to about 27% of the country's GDP for the whole year. Key exports are natural gas, agricultural products, gems and jewelry as well as timber and garments. Rice export is an area that holds great potential for Myanmar, which was once the world's largest exporter under the British colonial rule. With its rich fertile land, all that is needed to ramp up production is modern agricultural machinery and better technology. [Source: Myanmar Executive Summary by KWR International Inc., Myanmars Moment by McKinsey Global Institute.]

Foreign Investors

Japan stands out as one of the most eager parties buying into Myanmar's growth prospects. The Japanese government not only waived US$3.36bn in bilateral debt, its overseas development bank - Japan Bank of International Co-operation (JBIC) - also provided nearly US$1bn of bridging loan to cover an outstanding debt to the World Bank and the Asian Development Bank so that the latter could resume lending. In addition, Japan announced an extra US$220m in soft loans for infrastructure and human resources development, which is the first of such lending in 26 years.

China is Myanmar's largest investor and its second largest foreign creditor, followed by Thailand. Together, these two countries have invested US$25bn out of Myanmar's official total cumulative foreign investment of US$42bn for 2012.

The Chinese have mainly invested in energy/natural resources and infrastructure development projects such as Nay Pyi Daw airport. Now, they are also targeting Myanmar's underdeveloped infrastructure and construction sectors as well as manufacturing due to availability of cheap labour.

Thailand's investments are mostly in oil and gas, through PTT Exploration and Production (PTTEP), the overseas arm of state-owned PTT. PTTEP operates the Zawtika gas project in the gulf of Mottama, while also being a partner in the Yetagun and Yadana offshore gas projects. Myanmar has the potential to achieve a $200 billion+ GDP by 2030. By 2030, the members of the consuming class can be at about 19 million from the 2.5 million in 2010. There are 500 million people living in countries bordering Myanmar and the closest parts of China and India, which are huge potential markets.

According to Thailand's embassy in Myanmar, new Thai investors are showing an interest in consumer goods manufacturing and agriculture ventures.
Myanmar, as a resource rich nation, faces problems in creating values in economic terms inside the country. Foreigners being interested in natural resources, the country has introduced a export stop on raw teak wood to keep value-add in the nation.

Despite having forest coverage as much as 48%, Myanmar is only earning US$500 per ton of teak and hardwood while competitors like Malaysia benefit by US$20,000 per ton thanks to the its wood-processing sector. Only finished or semi-finished wooden products will be allowed for export, thereby contributing to inflow of foreign investment in finished wooden product manufacturing sectors as well as production technology, generating more economic inflows, and bringing business opportunities to its people. Experts are guessing Myanmar will need US$650 billion of foreign investment until 2030 to fully realize its growth potential. [Source: Myanmar Executive Summary by KWR International Inc., Myanmars Moment by McKinsey Global Institute, Thematic Report on Myanmar by DBS.]

The Banking sector

Banking sector reforms should improve banking systems and functionality in order to:

1) provide credit, raise capital for local companies;

2) handle the wave of foreign investments and

3) to re-align and re-engage with the global financial system.

Already, Myanmar's central bank is considering local joint ventures with foreign lenders to help overhaul the country's financial system. It is expected that JVs for foreign banks will eventually be followed by wholly owned subsidiaries and then full branches. In 2010, the financial service sector contributed $200 million to GDP and around 7000 jobs. In 2030, the sector will contribute $11.1 billion to GDP and create about 400,000 jobs. Although there are four state owned and 19 private banks, the penetration of banking products is very low. A large informal banking sector exists, consisting of money lenders and "hundis", an informal network that facilitates domestic and international remittances, including those of an estimated three million to five million overseas workers from Myanmar. Many of these informal lenders charge high interest rates of 10 to 20% per month. The inability to easily transfer funds into the country also severely restricts the flow of capital. [Source: Myanmar Executive Summary by KWR International Inc., Myanmars Moment by McKinsey Global Institute, Thematic Report on Myanmar by DBS, IMF and www.tradingeconomics.com]

Infrastructure

The huge influx of visitors and the reduction of car import taxes have led to congested roads and overburdened infrastructure. In order to tackle rising population and further economic development and growth, the Myanmar government has called for ambitious infrastructure development and introduced a new master plan for Yangon. Decentralize CBD to avoid over-concentration in the future. Drawing expertise from urban planners in Singapore, the Yangon City Development Committee (YCDC), in coordination with the government's Division of Urban Planning, announced plans to decentralize Yangon's central business district (CBD) by shifting it outward. The urban planning authority announced that construction will soon begin on an outer green belt with four new towns surrounding Yangon's CBD within a 10- to 15-kilometer radius. Yangon's new master plan: expand CBD outwards.

Furthermore, the government wants to improve and enlarge the local airport and also build a new one. Tourism is expected to further surge as the country is opening its doors. Part of the master plan also includes the development of Hanthawady International Airport in central Bago region (80km from Yangon). This airport with a planned capacity of up to 12m visitors is targeted to commence construction in July this year and set to complete by 2016. Moreover, the country needs to build roads, make sure its electricity grid is solid and improve its water supply. Due to its geographical position ports and railways are essential for trade to be done through Myanmar. The number of people living in large cities (>200,000) is likely to double from current 13% to a quarter by 2030. [Sources: Myanmars Moment by McKinsey Global Institute]

Industrial Zones

At the moment, there are two industrial zones planned. One of them is a 51/49 Joint Venture with Japanese multinational companies such as Mitsubishi and Sumitomo. The other zone is closer to the Chinese oil and gas ventures. As a matter of fact you can see Chinese and Japanese predominance in foreign direct investment. Sources: Myanmars Moment by McKinsey Global Institute

Tourism & Property

The country has a shortage of quality hotels to support booming tourism. Out of the 8000 hotel rooms in Yangon, property consultant Jones Lang LaSalle reported that only 1,500-2,500 are of international standard. This translates to a maximum of 912,500 room nights against 1m tourist arrivals last year. As a result, hotel room rates in Yangon have more than tripled to US$250-300 from US$80 in 2011. Myanmar's tourist arrivals are expected to grow by 30% in 2013 to 1.3m, and rising to 2m by 2015. In view of the supply crunch, the government has been encouraging developers to build hotels. Hilton will open their first 300-room hotel in Yangon in 2014, while French hotel chain Accor is in talks to partner with Max Myanmar to open a Novotel Hotel in Yangon. In total, Jones Lang LaSalle estimates that international hotel supply in Yangon will triple to c.6,242 rooms by 2015. Even then, the supply situation is likely to still remain tight, providing room for hoteliers to raise room rates progressively. Compared to tourist arrivals of 6.5m to Vietnam and 3.5m to Cambodia, market watchers expect ample room for tourism growth in Myanmar since it is also a country rich in cultural heritage, not unlike its Indochina neighbors.

As stated earlier, Hilton (NYSE:HLT) and Accor group (OTCPK:ACRFY) have announced plans to set up new hotels in Yangon. Regional airlines are also boosting their services to Myanmar. Residential housing has a lot of catching up to do. Since population in major cities of the country is soaring. The real estate market particularly in Yangon was buoyant in 2012 due to continued tight supply on the back of growing demand. Apartments/condominiums remain the mainstay accommodation due to affordable pricing. For a city of 5m, there is a massive supply shortage. A total of 1070 units of condominiums were added in 2011, followed by 1100 units in 2012. Demand is reportedly highest in mid-to-high income sector in good locations. Based on approximately 2% p.a. population growth in Yangon, and a household size of 4.87, the city would need at least 25k new homes each year. However, only about 1500 units are expected to be delivered in 2013 and just slightly more in 2014. Local and foreign businesses in Myanmar are highly disadvantaged by soaring price of industrial land. Prices have soared in Thilawa and Dawei (SEZs). For now, $0.20 to $0.30 per square meter is charged for industrial parks. That seems justifiably cheap in comparison to $3.90 in Indonesia, $4.00 in China and $6.90 in Thailand. Vietnam is at about $0.10 per square meter. Another threat for a successful development of manufacturing and other industries is the poor record and regulation of land ownership. Basically it is very hard to find out who owner of a property is.

[Source: Myanmar Executive Summary by KWR International Inc., Myanmars Moment by McKinsey Global Institute]

Oil, Gas and other resources

Myanmar, the oldest oil producers in the world, is believed to have vast oil reserves. Myanmar exported its first barrel of oil in 1853. The industry was nationalized in 1962, following the seizure of power by the military regime. From 1662 to 1988, oil exploration and production were mainly controlled by Myanmar Oil and Gas Enterprise (MOGE). In 1998, the government passed foreign investment legislation to draw foreign technologies and capital. By 2007, foreign companies were involved in 16 onshore blocks and many more offshore blocks. Today, Myanmar's oil output remains small. The scale of oil reserves is difficult to predict because of very limited exploration. However, strong bidding interests for recent oil blocks up for bids highlights strong hopes among oil and gas majors of rich finds in Myanmar. Official data shows that Myanmar exported US$3.5b worth of gas, mainly to neighboring Thailand in FY12 compared with US$2.5b a year ago and US$2.4b in 2008-2009. Myanmar is believed to be rich in natural gas reserves, which government officials estimate to range between 11 trillion and 23 trillion cubic feet. Currently, the country produces around 19,600 barrels of crude oil and 1.475 billion cubic feet of natural gas each day. Last year, Myanmar awarded nine onshore blocks to foreign companies. This year, the Ministry of Energy has invited bids for another 18 onshore blocks in various parts of the country. The list of 59 pre-qualified companies showed a significant increase in interest from the West i.e. companies based in Europe, the US and even Australia. The easing of sanctions has partly inspired confidence in foreign MNCs to initiate investments in Myanmar.

Myanmar accounts for 90 percent of the global value of jade production and ranks among the top producers in the world of gems including rubies and sapphires.

[Sources: Myanmar Executive Summary by KWR International Inc., Myanmars Moment by McKinsey Global Institute, Thematic Report on Myanmar by DBS.]

Agriculture

The nation is the 28th largest in the world by area, but with 12.25 million hectares of arable land and permanent crops, the 25th largest in terms of agricultural land. Myanmar was known as the rice bowl of Asia, though its agricultural output has fallen far behind its potential. Reviving the sector could be a great opportunity to supply the global demand for food. Water is becoming an increasingly critical resource for many countries around the world, and Myanmar is well placed on this front. It has an estimated 24,164 cubic meters per person per year, more than ten times the per capita endowment of China and India, around four times that of Thailand and the Philippines, and more than double the per capita endowment of Vietnam, Indonesia, or Bangladesh. Myanmar's water resources also mean that it has considerable potential to use hydropower more extensively - hydropower already account for three-quarters of electricity-generating capacity - although there are social and environmental challenges in developing this power source. According to the government, agriculture - including crops, livestock, fishery, and forestry - accounted for 44 percent of GDP in 2010. A survey suggests that 52 percent of workers were employed in the agriculture sector in 2010. Currently, Myanmar's largest crops by value are paddy, beans, pulses, and oil seeds. The agricultural sector, excluding forestry, could grow at a compound annual rate of 4.3%.

[Sources: Sources: Myanmar Executive Summary by KWR International Inc., Thematic Report on Myanmar by DBS.]

Consumer goods

Myanmar has one of the biggest untapped consumer markets. Only 4 percent of Myanmar's citizens are members of the consuming class, compared to 35% worldwide. The rise of the consuming class in emerging markets in recent decades has been a dramatic transformation and source of economic growth. The consuming class consists of consumers with incomes of more than $10 a day measured on a PPP basis, sufficient for spending not just on basic necessities such as food and shelter but also on discretionary goods and services. As recently as 1990, out of a total global population of roughly five billion, the consuming class had about one billion members, the vast majority of whom were in North America, Western Europe, and Japan. But over the past two decades, surging incomes have more than doubled the size of the consuming class to 2.4 billion people, or 35% percent of the world's population in 2010. In that year, one billion of these consumers lived in Asia. By 2025, MGI research suggests, the global consuming class will grow to 4.2 billion consumers, or more than half the predicted global population of 7.9 billion. Of these consumers, 2.5 billion are expected to live in Asia. Regarding telecommunications, Myanmar has the lowest penetration of telecommunications infrastructure of any ASEAN country. Less than 3 percent of citizens had access to a mobile phone in 2011. In February 2013, a single basic SIM card was retailing at $25-30 in Yangon. However, in mid-April, the price of the same SIM card dropped to $2, which is likely to drive a large increase in penetration.

[Sources: Myanmars Moment by McKinsey Global Institute, Thematic Report on Myanmar by DBS.]

Manufacturing

Myanmar's labour costs today are comparatively low, this is giving the country a chance to boost output in labour-intensive manufacturing sectors such as textiles, apparel, leather, furniture and toys at a time when some of this manufacturing is leaving China. Although labour productivity is very low, experts say the country has a big future in manufacturing also because of its geographical position. To compete in the region, Myanmar will need to improve productivity. On the back of that higher productivity, there is scope over time to make the transition to more value-added sectors, following the example of Thailand, Malaysia and other Asian economies. Not to forget about Myanmar's power generation. Manufacturing needs electricity. In comparison to other nations in the region, only 13% of the population in Myanmar has access to electricity. This compared to 24% in Cambodia, 41% in Bangladesh, and 65% in Indonesia, seems very low. Not to mention China, Thailand, Vietnam and Malaysia (all above 98%). On average, electricity is available for four to five hours in production plants. Then generators are used in order to guarantee electricity for another four to five hours. This causes unnecessary high costs of production. Apart from that skilled workers play a major role in the development of the manufacturing sector. In Myanmar, only 5% of the country's workers have a higher education. This is a poor record compared with other nations in the region.

[Sources: Myanmars Moment by McKinsey Global Institute]

Conclusion

Myanmar will be moving into manufacturing. Now the economy is heavily dependent on agriculture. Low labour costs offer Myanmar a competitive advantage in manufacturing. However, productivity is weak. The situation of Myanmar can be compared to Thailand in the 1980s. Myanmar has to use its agrarian economy for the raw materials to feed manufacturing activities such as food, textiles, handicrafts and furniture. Vietnam has made use of the low labour costs as well. Logistics play a huge role as well. As one of the worst connected countries in Asia, Myanmar has to make sure to improve its capabilities in transport. If the country welcomes foreign direct investment, improves its logistic system, facilitates trade with its neighbors, keeps the regulation low and makes sure that electricity is supplied, then the nation will prosper and become a regional player.

Here are some Myanmar plays

  • Yoma - (OTCPK:YMAIF) (Property development in Myanmar)
  • Interra Resources - (OTC:ITRX) (Oil & gas exploration)
  • Super Group - (OTCPK:SSGPY) (Owns one instant beverages packaging facility in Myanmar) F&N (Brewery in Myanmar)
  • Ezion - (OTCPK:EZIDF) (Service rig in Myanmar)
  • Parkson Retail Asia - (OTCPK:PKSGY) (Formed JV to operate department stores in Myanmar) Sin Heng (Rental and trading of cranes)

Here are some firms in negotiation stage/about the enter the market:

  • Yongnam - (OTCPK:YONGY) (Consortium submitted bidding proposal for two airport projects in Myanmar (Yangon International Airport and the Hanthawaddy International Airport)
  • SingTel - (OTCPK:SGAPY) (Vying for a telecommunications license)
  • ISDN (MOU to explore coal mining opportunities)
  • UPP (Set up JV for drilling and blasting of rock and/or crushing of blasted rock materials)
  • MDR (Set up JV to provide after-sales services of telecommunication devices to consumers in Myanmar)

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.