2 Companies - one favored, one no longer...
A larger conglomerates whose group of companies produces mainly textile garments and footwear as well as electrical goods, computer parts and plastic products. The security symbol is SUC and the current price is around 13.75. I rate these shares a buy for yield because I am not convinced double-digit growth is realizable this year and next.
The current book value is 29 Baht per share and there are 300 mill. shares outstanding. SUC trades well with usually over 200,000 shares per day changing hands. Last years dividend was 1.50 per share, which should be maintained.
Company address: 1828 Sukhumvit 58 rd., Bangjak, Phra Khanong, Bangkok 10250. You can write for an annual report, which I am sure they will send you. Still highly recommended is you send this request letter via registered mail.
Below are some comments on SUC mostly taken out of their latest available annual report and supplement document send us at mid year.
SUC (13.75) "We are bullish about Thailand's future, as a new political and ethical ethos takes hold. The wild days of playing by no rules are over. Those commercial organizations that will survive and bring prosperity to Thailand will have to uphold the principles of good corporate governance to a fault." From the SUC 1997 Annual Report
The Saha-Union Group (hereby called SUG) comprises 56 operating companies in Thailand and overseas, including over 20 joint ventures. Total number of employees is 21,483 at the end of 1997. This is a reduction of 3.4% over 1996. SUC implemented a hiring freeze during 1997 due to the bad economic situation.
SUG divides lines of business into four basic groups: Manufacturing, Electronics and Computers, and Energy, these being:
Textiles: operating 12 companies in the category. Exports accounts for at least 60% of revenues (4.8 Bill for all of 1997).
Footwear: Operation 4 companies in this sector with revenues of 2.7 Bill Baht for 1997. Exports here accounted for 80% of total sales.
Plastics and Rubber: Operating 11 firms in this sector generating 2.3 Bill Baht in revenues for the comparable '97 year. Exports here amounted to 61% of the total.
Electronics & Information Technology: The two operating companies in this sector generated 1.4 Bill Baht for 1997, which was a 22.9%, increase over 1996. Because the electronics side is a contract manufacturer producing state-of-the-art hard disks drives exclusively for IBM's world distribution system, 100% of production went to exports.
Energy: Currently SUG has 10 cogeneration power projects in China with total generating capacity of 398 MW. Five began commercial operation (electricity and steam in 1996; 3 more began in 1997 and the remaining 2 will start up in 1998. In 1997 SUG received the first dividends from the China project. Some are coal operated and this raises some environmental concerns. (see below)
In Thailand, SUG formed a joint energy venture -Union Power Development Co. LTD. To build a 1400MW power plant using coal fired fuel at Hin Krut District in Prachuab Kiri Khan Province under the Electricity Generation Authority of Thailand's Independent Power producer IPP program. This with a 25 year power purchase agreement. Construction was expected to begin in late 1998 with completion planned for 2002.
SUG's energy business is expected to become a substantial source of revenues within the next five years. Not the least reason being the cancellation of many other IPP projects in 1997, this due to the economic crisis. Much of the competition is now gone in the private power production program. Electricity demand in Thailand is a leading indicator for economic activity and after many months of demand dropping, power consumption has started to pick up.
SUG also held a 10% stake in Union Finance PCL which was closed by the Thai government in 1997 and so this one no longer plays a role with Saha Union.
For SUG, Textiles and Footwear are far from being "sunset industries". They in fact continue to be a core businesses with excellent prospects for continued growth and improved profitability. The firm is strongly committed to constantly achieve efficiency gains through upgrading technology and skill enhancement of workers and management.
Saha Union International has several foreign offices. In the US, in San Francisco and Atlanta. In Hong Kong and Taipei, in London and Shanghai.
Unlike the rest of Thailand, 1998 is a mild growth year in sales for SUC.
Sales For First 6 months of 1997 vs. First 6 months of '98 In Millions of Thai Baht (as supplied to Thaistocks.com by SUC)
Textiles: 2,398 3,195 Footwear 2,388 3,970 Electronics 997 902 Plastics & Rubber 1,746 2,019 'Other Sectors 1,311 1,884
Five largest shareholders as of September 12, 1997 is:
- Saha-Union Holding Co. LTD (19.07%)
- Thailand Securities Depository Co LTD (18.80%)
- Union Capital Co. LTD (9.93%)
- Union Business Management Co. LTD (7.55%)
- Chase Nominees LTD (5.45%)
Contact name at SUG is Mr. Paritha Menasveta (Business Development). Telephone number in Bangkok is 311 5111 (up until-9).
S & J Enterprises, (15) one of the first firms I wrote extensively about at thaistocks.com; today it is no longer favored. On March 10th ’99, I removed if from my favored buy list and stated so instantly at the subscribers lounge. Yes, I believe there are better values out there!
While I do not have the conviction to recommend an outright "sell" as the stock is still cheap and selling way below book value of 53 per shared and a p/e of less than 6, on a ’98 operating basis. Still, I feel with the SET being back to near 300 other shares are more attractive and with better medium term potential. The stock may well run up a bit from its bottoming-out process but there are better shares out there than forever boring and tiny S & J.
My sad conclusion after knowing this company for 9 years is that regardless what management says, they act, as they simply do not care by being completely indifferent about their stock price and so terrible valuation. In Thailand actions count a lot more than words. An example on not wanting to understand the concept of "cost of capital"; this firm (in this way) is a classic example of Thailand’s hindrances to needed reforms. They never understood any of the advantages in having a public firm correctly valued. (Today I think S & J should have never been a listed firm).
Management has often been far too pessimistic and has not moved fast enough to new export markets. They are seemingly more interested in running this company for employees and management, then for the true owners. The shareholders are so left with a company which could well be a "wall flower", hence forever undervalued. Pack your bags and go elsewhere, I say.
Stated reasons for moving this company off the buy list:
- The company did not sell their electrical power project as indicated more than once they soon" would. The cost of capital is high on this very capital intensive "puppy" and stalling in the selling of this project is a disappointment as this was a previously positively noted expectation.
- The company is not successful in China as I earlier thought they could be. While this was a very small project (see SET release below). I view this as mild negative. S & J does not export much (10% of sales) and now lost even the China entry card.
- After trying for years to convince them differently, management is continuously complacent about anything to do with shareholder value. Thaistocks.com is sensitive to the "small cap. equal boring cap, syndrome and S & J fits the description. Let it keep sleeping, as there are many others worthier your capital.
- Management for years has told me they would "heed to my concerns" and release more news and be generally more open "in the future", so to attract more shareholders and so have their stock price more fairly valued. This has not happened to any degree. The company is never in the news nor does it want to be. It ‘s earnings are never reported by any business press nor will a search on the internet or otherwise bring more information.
- The company is not minimizing the cost of capital through being concerned about their stock valuation and so has it’s own agenda. While honest and honorable, this company is not run with the shareholders in mind and this is not likely to change anytime soon.
After a long initial write up in July of '97, I changed my mind one month later and reversed my position on Aug. 15th '97 at the then stock price of 36-38. The firm is just not very export oriented and the new power project seemed bad timing. Last year, when the stock dipped below 12, I stated to reconsider this firm based on now record lowest valuation and hopes the power project would sell.
Submitted to the SET on March 9, 1999
Subject : Termination of company’s subsidiary To : Director and Manager Stock Exchange of Thailand
Referring to the Board of Directors meeting No. 2/1999 on March 9, 1999 the Board voted to the close its subsidiary KUNMING XIEZHONG COSMETICS CO., LTD. on
November 2, 1998. As follow : Type of business Manufacturing and distributing cosmetic Registered capital US$ 1,000,000.00 Investment ratio 70% of registered capital amounting to US$ 700,000.00 or Appx. 17,850,000.00 Baht. Called up capital 56% of registered capital Paid up ratio US$ 392,000.00 or appx. 9,400,000.00 Baht.
Return on investment Received capital investment back of US$ 230,451.33 or appx. 8,476,992.40 Baht with loss on investment 931,159.13 Baht which is included in 1998 annual report. The loss is not material to companies operation. Cause of termination
- China prohibition of direct-selling which is a major channel.
- Economic slowdown in the Pacific Rim reduces the success probability in said investment.
Many of the world’s computers are apparently not ready for year 2000? Thailand is certainly not as ready as in the US but then again Thailand is far less dependent on modern technology. What will this do to earnings and share prices? Will there be a mini panic on the stock exchange? Surely a sell off in the SET because of a major malfunction could be viewed as an immense buying opportunity down the road. I advocate keeping some cash for that eventuality only months away.
For the comprehensive web page on this whole subject and below article point your browser to:
"Asia will face big Y2K hit"
November 13, 1998. Web posted at: 10:52 AM ET by David Legard
(IDG) -- A total of 40% of companies worldwide will experience a mission-critical information technology failure because of the year 2000 problem. But the rate of those affected in Asia will be higher, according to Jim Duggan, research director at Gartner Group Inc.
Among Asian countries, only Taiwan, South Korea and Singapore feature in Gartner's Level 2 readiness list (see below), and none made it to Level 1, Duggan said. Level 2 readiness indicates a predicted Y2K-related mission-critical failure among 33% of a country's companies, while Level 1 finds that 15% of a nation's companies are expected to suffer a Y2K-related mission-critical failure.
Asian countries in Level 3 (50% failure) include India, Malaysia, North Korea, and, importantly, Japan, Duggan said at a meeting entitled The Y2K Bug: Threat to Business Community, held in Singapore today. "Because of the size and importance of its economy, Japan's lack of Y2K readiness could cause major problems to ripple out," he said. Also important is the presence of China in Level 4, where 66% of companies are expected to suffer a mission-critical failure.
China's extensive and growing trade links could cause year 2000 problems for its neighbors, Duggan said. The remaining Asian countries in Level 4 include Cambodia, Indonesia, Laos, Pakistan, the Philippines, Thailand and Vietnam. Non-Asian countries whose lack of year 2000 readiness could have regional impacts include Germany (Level 3) and Russia (Level 4), Duggan said.
Duggan said there is also considerable variation in year 2000 readiness in different industry sectors. The private sector is generally better prepared than government; large businesses better prepared than small business; and the financial sector better prepared than engineering, transport, services or construction industries.
Singapore is an exception, with a well-prepared government sector but a woefully unprepared small and medium-size enterprise (SME) sector, according to Toh See Kiat, chairman of local company CommerceNet Singapore Ltd. "We know that of around 92,000 SMEs in Singapore.
Less than 100 have applied for a government grant to help with their Y2K problems," he said at the conference. "The problems are ignorance and fears that consultancy could be expensive and that consultants are playing up the Y2K problem for their own benefit." But the economic problems in Asia have not hit year 2000 projects, according to Duggan. "Y2K budgets have generally come through undamaged, while longer-term advances such as E-commerce infrastructure have been delayed," he said. "Not enough is still being done about Y2K, but no less is being done than before."
One hopeful sign is that year 2000-prepared banks and large multinationals are beginning to put pressure on their smaller business partners to become year 2000-compliant, even to the extent of removing them from preferred supplier lists if they don't comply, Duggan said.
Overall, Gartner believes that the year 2000 problem won't cause the global business meltdown that some analysts have predicted, but that it will cause a negative impact on the world economy that will be felt for three to five years.
Y2K corporate failure rate predictions by Country:
Level 1 (15%): Australia, Belgium, Bermuda, Canada, Denmark, Holland, Ireland, Israel, Switzerland, Sweden, U.K., U.S.
Level 2 (33%): Brazil, Chile, Finland, France, Hungary, Italy, Mexico, New Zealand, Norway, Peru, Portugal, Singapore, South Korea, Spain, Taiwan.
Level 3 (50%): Argentina, Armenia, Austria, Bulgaria, Colombia, Czech Republic, Egypt, Germany, Guatemala, India, Japan, Jordan, Kenya, Kuwait, Malaysia, North Korea, Poland, Puerto Rico, Saudi Arabia, South Africa, Sri Lanka, Turkey, United Arab Emirates, Venezuela, Yugoslavia
Level 4 (66%): Afghanistan, Bahrain, Bangladesh, Cambodia, Chad, China, Costa Rica, Ecuador, Egypt, El Salvador, Ethiopia, Fiji, Indonesia, Kenya, Laos, Lithuania, Morocco, Mozambique, Nepal, Nigeria, Pakistan, Philippines, Romania, Russia, Somalia, Sudan, Thailand, Uruguay, Vietnam, Zaire, Zimbabwe.
Y2K corporate failure rate predictions by Industry:
Level 1 (15%): Insurance, Investment services, Banking, Pharmaceuticals, Computer Manufacturing
Level 2 (33%): Heavy Equipment, Aerospace, Medical Equipment, Software, Semiconductors, Telecom, Retail, Discrete Manufacturing, Publishing, Biotechnology, Consulting
Level 3 (50%): Chemical Processing, Transportation, Power, Natural Gas, Water, Oil, Law Practices, Medical Practices, Construction, Transportation, Pulp & Paper, Ocean Shipping, Hospitality, Broadcast News, Television, Law Enforcement
Level 4 (66%): Education, Health care, Government Agencies, Farming & Agriculture, Food processing, Construction, City & Town Municipal Services.
Best personal regards to our valued subscribers!
Paul Renaud,prenaud@thaistocks.com
