Sunday, September 24, 2006

Beer, Banks and Bras...Dealing with the Thai Coup

It’s been an interesting time to be away. I have been away for just over a week in Western Europe, combining some business with some vacation, and as is evident, no blogging! I apologize for the silence...back to business!

Markets, of course, especially the emerging markets have been fascinating. What a week! A military coup in Thailand was achieved bloodlessly. Poland’s coalition government collapsed. Ecuador's President Alfredo Palacio hit the capital markets of South America by saying his government may seek to restructure its external debt. Hungary’s prime minister admitted lying which resulted in street riots. He explained himself with this wonderful quote:

"There is not much choice. There is not, because we screwed up. Not a little, a lot. No European country has done something as boneheaded as we have.Evidently, we lied throughout the last year-and-a-half, two years... You cannot quote any significant government measure we can be proud of, other than at the end we managed to bring the government back from the brink. Nothing."

One might have expected a Mayer Rothschild moment...yes, that Rothschild who is famous for two quotes,” Give me control of a nation’s money and I care not who makes her laws” and his more famous, “Buy on the sound of the war-cannons; sell on the sound of the victory trumpets.” That kind of a panic simply did has not happened.

It appears, for the Thai market at least, that a stalemate of sorts has been broken. Thailand is Asia’s cheapest market on a P/E basis, it was prior to the “crisis” and it remains so after. Based on HSBC estimates, Thailand trades at 9.5 times 2007 earnings estimates compared to emerging Asia’s 11.1 times.However, a very modest earnings growth of an anemic 3.5% compares to 14.3% for the emerging Asian markets. Economist forecasts for GDP growth next year hover around 4.5%. Not exactly growth that will make your socks roll up and down.

Thailand’s significance as a capital market is modest, representing only about 2.4% weight in the Morgan Stanely (MSCI AC Asia ex-Japan) So utilizing index funds or ETF’s does little to provide Thai exposure. The market is up fairly strongly from its June lows despite the coup.

Two closed end funds trading in the States focus on Thailand. The Thai Fund (TTF) trades at a slight premium to net asset value of a current 3.53% versus what has been an extraordinary premium on average over the last ten years of 26.74%. Though it is difficult to justify paying $1.04 for a dollar’s assets, at least the historical premium is down to liveable levels. The management expense ratio is quite high at 1.76%. The Thai Capital Fund (TF) trades at a higher premium to NAV, currently 4.91%. Management expense ratio here is substantially higher at 2.46%. There has been substantial difference recently between these funds in terms of their performance over the last twelve months...TTF is down 6.79% and TF is up 16.94%

Other direct investments in Thailand are racy but somewhat interesting. No ADR’s are available unfortunately, but if you are set up to trade internationally, these may be of some interest. Thai Beverage Public Company is the largest beer and spirits producer in Thailand with market shares of 60% and 74% respectively according to Deutsche Bank research. Not much history as a public company because this is a relatively new IPO.Cash flow from operations has substantially exceeded net income for the last five years. Free cash flow has also been consistently generated.Trading at 9.5 times trailing twelve months EBIT and generating returns on capital for the period of some 21%, the stock seems cheap. Drinking may be a defensive way to sit out the revolution. The Bloomberg symbol is TBEV.BK Given the free cash flow and the IPO, the balance sheet is solid.

Siam Commercial Bank (SCB.BK) has a return on equity for the last year that exceeds 18% and return on assets in excess of 2%. It appears very well capitalized with Tier One capital exceeding 13%.

Hong Kong based Top Form International (0333.HK) is the world’s largest brassiere manufacturer producing 63 million brassieres last year...producing some 35% of them in Thailand. The customer list is impressive with Vanity Fair, Maidenform, and Warnaco all being customers. Chinese production represents about 55% of the total with the Philippines producing the balance. Because of its fairly high Thai production base, the company backed off with the news of the coup. The company has moved its product line upscale to “Sew Free” seamless bras and its average selling prices accordingly. Debt to total assets is only about 15%, return on capital is about 38% for the TTM period, and the ratio of enterprise value to EBIT is merely 6.1 times. The textile business is a tough business worldwide and subject to pesky quotas and trade regulations. Margins in China are compressing somewhat due to labor costs but should be offset by weakness in the Thai baht as uncertainty about the Thai situation remains.

World markets have shrugged off the emerging markets’ news of last week quite well. Sentiment in Asia seems quite positive since the political logjam has been broken. But further reckoning of the delays in the Thai election and budget may lead to delays in purchasing decisions and in infrastructure investment. The much anticipated “contagion” effect of this coup did not occur largely because of the very subdued reaction of the Thai market itself and the apparent harmony in which the country finds itself. Other than getting an extra day off, most workers and businesses suffered little interruption. The simultaneous firing of war cannons and sounding of victory trumpets provided little opportunity for investors to panic. Sorry, but no quick over-reaction opportunity this time Mr. Rothschild. However, a few ideas to ponder with great balance sheets, good profitability and excellent value.

Disclaimer: Neither I, my family, or clients have a current position in any of the securities mentioned in this post.


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