For a long time, we had listened to talk about Emerging markets, especially with acronym of BRIC (Brazil, Russia, Indie and China), as an opportunity to diversify the geographic risk, but the feeling is that more and more these markets are correlated with developing countries. The proof is the economic slowdown in China and India, which had undermined the idea of China as world engine.
 
New emerging markets are stealing the show from BRIC and could be a good opportunity to active investors, which are able to assume risks concerning developing countries and semi strong efficient financial markets.
 
In this column, we will try to explain opportunities and threats for each Country, and give some ideas about our favorite companies.
We start today with the first Asia Emerging markets : Thailand

 
Considering China and India as the “only” engines of world growth means undervalue a whole Asian Continent, which records amazing growth rates reflex also in important performances on financial markets. In addition to Hong Kong stock exchange, first financial market in the world for number of transactions, and more and more selected for IPO, we can find also others financial places, which register high performances in spite of worldwide uncertainty. 


Macroeconomic Highlights :

The Country is one of founders of Association of South-East Asian Nations (Asean), and an important economic player in Asia, especially at this time when China and India give tiredness signals.
The GDP rate in the last quarter of 2011 sharp fell to -8.9% year over year, because of floods of last autumn. But the last numbers show an important recovery and have induced analysts to revised upward GDP estimates for full year 2012 in a range between 4.5% and 6%, according to Bloomberg’s consensus. The trade balance is still positive with $12 billion for 2011, even if it could become negative for 2012 because of huge charges for reconstruction after floods.
Despite Thailand is an emerging Country, it has excellent macro-economic ratios. The consumer price index is 2.5%, and jobless rate is very low to “natural rate” (0.7%). The Country shows also good ratios concerning government debt, with deficit/GDP of 2.5% for 2012 and debt/GDP of 48%, enviably to many Western Countries.


Key sectors of the country

Thailand holds a solid industrial ground with many enterprises in key sector as automotive and technology industries. In particular it is the third Asian producer in automotive sector and first in Asean, with 0.2 million cars produced each month. Thailand, thanks to low duty’s policy, has been able to attract the most important automotive brands, as Toyota, Isuzu, Nissan but also western company as Ford and Chrysler. Even if the new government has raised the minimum wage to $10 per day, the country is still attractive thanks also to its qualified man power. 
Other sectors, by now strengthened, are travel & leisure and agriculture, especially concerning sugar, where the Country is the second largest exporter after Brazil.  
The “only” weak point is the political structure, which is often subject of sudden change. The new government, inaugurated in 2011, holds a solid majority in parliament. After the decision to raise wages, it has reduced enterprise tax from 30% to 23% and another cut is forecasted in 2013.
In our ranking in partnership with Thomson Reuters, Thailand is ranked as first country concerning EPS revisions, showing the enterprises’ growth potential is not yet expressed.  
 

Thailand Stock Exchange : SET50

Concerning financial market, the Thailand stock exchange is important place for investors, which want to enter in new markets as Cambodia, Laos and Myanmar. The most important Thai Index is SET50, index based on the top 50 stocks listed on the Bangkok SET index having high market capitalization and high liquidity.  Since the beginning of the year, the index has record among the strongest performances in Asia and also in the world nearly +14%, and since 2009 +258%. The sectors with the heaviest weighting in the index are Oil & Gas (26%), Banks (22%) and Consumer services (12%). Among fifty companies, “only” ten are showing negative performances since early January. The index is trading 13.6 times companies’ earnings in line with others Asiatic indexes’ average. The first four index’s performances have been recorded by retail companies, especially BIG C Supercenter which has registered an amazing performance of +82% for the first six months of the year.
 
Outperformance of SET50 index vs. MSCI BRIC INDEX (2009 – 2012) :





Hot stocks : Our team has selected three companies, which could have an important potential.
 

Advanced Info Service : Opportunity on a mobile phone network

Advanced Info Service is a leading mobile operator in Thailand. The company provides cellular telephone system network, call center service, electronic cash card and payment services. As of December 31, 2010, the company registered 31.2 million mobile subscribers, reflecting 45% of market share, and 54% in term of revenue.  
AIS outperformed the SET index by 70% in 2011, driven by regulatory and competitive stability which drove high revenue growth as well as margin improvements. For the last seven quarters, the company recorded revenue’s double digit growth and for FY 2011 reached $ 4,148 million and EPS to $0.26. The increase revenue and lower operating cost improved the company’s gross margin which was 38% in 2010 and 40% in 2011. Also profitability ratios had increased, the return on assets raised from 12.77% in 2008 to 24.15% in 2011, and return on common equity had more than doubled in the same period. Total debts are reduced nearly 50%, for this reason company’s current ratio (current assets / current liabilities) was 1.13 at the end of 2011, against 0.73 in 2010.   
For the first three months of the year the group announced revenue of $1,135 million, up 11% compared to same period one year earlier. Earnings per share for 2012 and 2013 are revised upward regularly, by Thomson Reuters’s consensus. In fact the company could benefit from the rising demand for mobile broadband services and for 3G technologies.

4-Traders target price for the end of the year is 200 THB.
 

PTT : In order to diversify the risk

PTT Plc. is fully integrated gas and oil company. The nation’s Ministry of Finance owns around 51.6% stake in the company. The group, through its associated companies, is engaged in the exploration, development and production of oil and natural gas. In add the company is involved in the transmission, processing, marketing and distribution of refined petroleum products. Thanks to various departments, the company is involved also in research of alternative fuels and new energy application technique. At the end of 2010, the company had 43 projects in 12 Countries, especially in the Asean markets.
Since January the share has recorded +4%, and for full year 2011 the same flat performance of SET50 Index. PTT plc. is the more capitalized company in the Index with a weighting of 12.5%.    

In full year 2011, the group recorded high revenue of $79,663 million, up 28% against 2010, with earnings per share up 26% to $1.21. Contrariwise, the net income before extraordinary items margin decreased to 5.16% against 5.35% in 2010, and is expected to 4.55% for this fiscal year. However the decrease could be compensate by revenues’ growth. Relatively to our peer, composed by oil & gas enterprises from emerging Asian countries, PPT shows sales, EBITDA and net income growth above than average. Important sector’s investments had increased company’s debt exposition with the ratio “total debt / total assets” of 29% against average sector of 11.7%, and a current ratio, which decreased to 1.14 against 1.35 in 2010. For the first three months of the year, the group recorded revenues of $22,341 million, with YoY growth of 28% and earnings per share to $0.40.
At the current price the company is trading 8 times FY earnings estimates, little below average peer. 
PTT invests in green energy through its subsidiaries, especially in oil palm planting, which is used to produce biodiesel. The increasing demand of natural gas by power, industrial and domestic sector have spurred the growth of natural gas demand in all Countries of Asia, especially in China and India, which offers significant growth opportunities for the company.
Contrariwise, risks could come from Thai government, which owned 51% of stake, this means non autonomy regarding prices, imports and exports. The company is also influenced by oil & gas prices fluctuations, which could impact the enterprise’s results.

4-Traders target price for the end of the year is 430THB.


Charoen Pokphand Foods : Frozen food industry in expansion

Charoen Pokphand Foods is agro-industrial and food company, is engaged in animal feed production, meat processing and the manufacturing of food products. The company operates around 110 subsidiaries. As the end of 2011, 60% of revenue was recorded in Thailand, 22% in the rest of Asia and less than 15% in Europe. The company’s business is divided into two divisions: livestock business and aquaculture business.
Since beginning of the year the share has outperformed the Index about 5% with a performance of nearly 20%. In 2011 the company recorded +35%, outperforming largely the index, which remained flat. Since 2009, the share recorded a performance of 1150%.
CPF has shown a robust financial performance in recent years. In 2011, the company registered revenues of $6,761 million, up 9% year over year. Net income margin has increased from 2% in 2008 to 7.68%. Same trend has been followed by all profitability ratios: Return on Common Equity increased from 7% in 2008 to 26%. Return on assets, for the same years, passed from 3% to 11%. Due to robust financial performance in the past few years, the company’s debt to EBITDA ratio has decreased from 8.55% in 2007 to 2.77% in 2010, even if in 2011 it has increased to 3.57%, because of the total debts increased +42%, especially long term debts.
At the current price the company is trading with a strong discount compared to the industry average: “only” 10.8 times FY 2012 earnings.

How we saw before, Thailand is a main market, the company should bet in important geographic diversification. This process has started with important investments in Russia and in Malaysia, but other steps are necessaries.
According to Datamonitor’s estimate global frozen food could increase 16%, with frozen meat products as largest segment 41% of total market. In add the Asia-Pacific should be the market with the strongest growth. All these elements could give a huge opportunity to CPF in order to boost its development.      
For these reasons, in the last months, Thomson Reuters’ analysts had revised regularly upward the earnings per share for this year and also for next year.

4-Traders target price for the end of the year is 45THB
 


Bullish potential in Thailand

According to our data, we forecast that Thailand could be among high return indexes in the world for this year. At the moment, political risks seem under control. The next challenges are to liberalize some strategic sectors, giving an opportunity to important foreign investments, and reduce social inequality, which is still very high.
These targets could be reached by important majority in Parliament; in this case we could imagine Thailand as Asian star for financial investment, with important potentials at acceptable prices.


Oscar Salza