Floods Dry Up While Thai Economy Warms Up

by: Peter Pham

A country which is well known for its scenic beauty and has become a staple of the tourist industry belies the growth of its productive economy. Thailand's strong economic growth helps to keep any potential social unrest under control, along with the presence of beloved 84 year old King Bhumibol Adulyadej. Even though the floods last year and the sluggish European economy have had a considerable impact on Thailand's exports, the overall economy seems mostly immune to it. Growth in the second quarter was 4.2% and outpaced much more dismal forecasts of 1.7%. There has been an exorbitant rise in the FDI which has flown into the Thai economy.

In the first half of 2012, FDI into Thailand rose 62% from Bt206.2 billion to Bt332.2 billion year over year. A majority of the FDI which came into Thailand was from Japan, which put the current Japanese investment in the Thai economy at Bt210.8 billion ($6.8 billion USD). Per capita GDP has risen at a CAGR of 6.4% since 2007 and stood at just under $5,000 at the end of 2011. GDP growth for 2012 has exceeded expectations on the strength of strong foreign investment.



Metal Products, Machinery and Transport

THB 122.3 billion

Electronic and Electrical Appliances

THB 81.3 billion

Service and Public Utilities

THB 54.7 billion

Chemicals, Paper and Plastics

THB 31.5 billion

Agriculture and Agricultural Products

THB 18.4 billion

Since Sept 2009, the iShares MCSI Thailand Index ETF (NYSEARCA:THD) has seen its AUM double to $657 million, while the price has more than tripled off the low in 2009 near $20 per share. This strong performance of the ETF is expected to continue as Thailand is now expected to grow 5% to 6% during the 2nd half of the year.

The banking system of the country is well managed with sound fiscal policies, which gives it an edge not only locally but also helps the sector stand out regionally. Moody's has reaffirmed the health of the Thai banking system as stable for at least the next 18 months. THD runs light on banks, compared with many other single-country emerging market ETFs with only 33% exposure to them, followed by about 20% from the energy companies and lastly consumer, basic materials and telecoms account for 27% of the assets in the fund.

Siam Commercial Bank (OTCPK:SMCBF)

Siam Commercial Bank, one of the 2,000 largest companies in the world, has been at the forefront of the Thai banking sector. The bank provides a wide assortment of services ranging from wholesale banking, Business Banking, Retail Banking and Special Assets. In addition to these four broad service categories, the bank has five major subsidiaries which are as follows;

· SCB Securities Co., Ltd.

· SCB Asset Management Co., Ltd.

· Siam Commercial Leasing PCL

· Siam Commercial Samaggi Insurance PCL

· Siam Commercial New York Life Insurance PCL

In its latest quarter, SCB saw net profit rise 23% from an increase in both fee and net interest income. Net margins for the year have been over 32%, signaling a return to normal after the 2nd half of 2011 saw margins drop into the low 20% region in the aftermath of the floods. Financials project out for the 2nd half of 2012 to a CY 2012 rise of 8.9% in top line revenue and ~42% rise in net income. While the Thai economy is still coming to terms with the devastating floods of 2011, which has affected margins, especially in the insurance divisions, the offsetting FDI has kept the economy strong, and SCB is handling much of that business. SCB is a large and dynamic institution which, according to 2011 surveys, is ranked 2nd in mutual fund assets under management with a 25% market share in country.

While the global economy looks very fragile at this point, there is still plenty of capital looking to be invested and much of that is flowing into Southeast Asia. With the Bank of Thailand resisting, if just barely, the urge to de-value the Baht by lowering interest rates in the face of QE in the 1st world, that will protect traditional lending by the banks. In the medium term, the Baht should slowly appreciate versus the USD and the Euro.

This will be important as SCB's capital adequacy ratio under Basel II has been slowly falling since 2009 and stood at a combined Tier I+II level of 14.5% with 11.2% in Tier I assets. The bank's Non-performing loan ratio has fallen to 2.25% down from 2.69% a year ago. Lastly, its loan to deposit ratio has steadily improved over the past 4 quarters from 1.07 to 0.97.


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Advanced Info Services (OTCPK:AVIFY)

With telecom being an important growth story the world over, looking at the leader in the Thai market is important. Advanced Info Services has had a great year. Founded in 1986, AIS is Thailand's largest mobile phone operator in terms of subscribers with 34.1 million, having grown 1.8% in the past year. On Forbes list of top 2000 global companies, AIS is ranked at 1167. AIS while nominally a Thai company has significant investment from Singapore as Temesek, one of Singapore's Sovereign wealth fund, controls both parent InTouch who owns 45% of AIS as well as Singapore Telecom (OTCPK:SGAPY) who owns 23.3%.

It is one of the few GSM operators in a world dominated by CDMA. It has subsidiaries all up and down the telecom supply chain such as import and distribution of mobile handsets, fiber optics, call center services, international telephone and gateway, etc.

In the 2nd Quarter of 2012, income rose by 42.3% to Bt8.71 billion year over year, while revenue rose just 13%. Year to date, the stock is up 51.6% to Bt212 per share. AIS is raising its semi-annual dividend to Bt5.90. AIS user breakdown has just over 10% on contractual plans which account for 25% of total subscription revenue, but year over year voice revenue in Q2 2012 was off 0.1% YoY, while data revenue rose 9.6%, and it plans on introducing lower cost data plans to attract more low-end users.


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PTT Exploration & Production Pcl (OTCPK:PEXNY)

PTT Exploration & Production Pcl, part of Thai state oil conglomerate, is the only Thai company on the Fortune Global 500 list for 2012. In Q2 revenues were Bt52 billion, up 18.5% year over year. In spite of this, higher expenses and income taxes dragged net profit by 31% to Bt7.73 billion.

PTT, like all oil and gas companies, must continuously be in search of new reserves to replace and improve current production levels. So, PTT has submitted a plan to the Myanmar government in this regard for investments worth $3 billion which will be aimed towards exploring potential oil and gas reserves on its neighbor's extensive reserves. In addition to this, PTT Exploration & Production Pcl's wholly owned subsidiary PTTEP Africa Investment Co will complete the takeover of Cove Energy on Oct. 5, after beating out the bid by Royal Dutch Shell (NYSE:RDS.A). Once the deal is complete, PTTEP would be involved in onshore exploration in Mozambique as well as the seven deep-water off shore blocks in Kenya. For its future prospects, PTT is targeting more assets in West Africa as a growth center for the future as well as making investments in North America, most likely Canadian oil sands now that the LNG export terminals are in production in Kitimat, B.C.

To finance all of this expansion PTT will do both debt and equity financing, announcing both a 650 million share offering as well as a Bt5 billion hybrid bond sale that took place in June. Having smartly shifted its debt load from baht to USD, it has implicitly lowered its future borrowing costs due to the devaluation of the dollar in the next few years. Its plan is to spend as much as $20 billion by 2016 to secure new reserves.


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