Khun Oranan Paweewun sees the glass half empty.
Khun Oranan Paweewun sees the glass half empty.
Since investing in higher-priced shares in USA is no guarantee against dubious accounting practices, why not conclude: Well -then we can just as well buy stocks at much lower stock valuations in Thailand! And collect high cash dividends while waiting appreciation. The below is a letter send to the Nation Newspaper on January 5th '03.
In an article published in the Nation Business section on January 4 called "Improving corporate governance in Thailand", the author Khun Oranan Paweewun seems to have fully bought the idea that corporate governance is always 100% better in developed countries. And if developed nations are now having scandals in their accountable accounting, then surely Thailand must be even further troubled. I politely disagree with this thinking.
I believe the author got this part wrong as it may well now be the other way around. For starters, many of these Western abnormalities were not "accounting irregularities" as he states, it was often outright fraud and deceit. Khun Oranan writes: "...if the US could not shield itself from poor accounting practices it would be impossible for emerging markets" which are notorious for their lower standards to avoid the same fate". Perhaps Khun Oranan was rolled into believing that if this is so bad in the US, it must be terrible here in Thailand. I suggest he reasons through this again and without any Thai complex.
For starters, the prolonged bull market in the US created just as many excesses and abuses as the Asian bull market did in the mid 1990’s. Just consider at the recent US SEC settlements and record billion dollar fine, slapped on to US broker/dealers. The same did not happen here with brokers in Thailand in 1997, instead more then half were forced to permanently close their offices.
Even post record US/EU market price correction, listed US/EU firms are still far higher valued then Thai listed companies and this despite Thai firms having a much higher long term growth rate. Even casual investors should note how average annual dividend yields are close to 1-2% in the US vs. some 4-7% on the SET. And if you exclude the few big cap stocks, expected cash dividend yields for 2003 are here often around 7-12%. This annual expected income is three to six times higher then in the US! (Some may still claim this is warranted due to the Baht currency risk, but duly note how the Thai Baht has actually appreciated over the last year vs. the US dollar. I for one think this gradual firming Baht trend will continue.)
While accounting standards, ethics and practices are no doubt superior in the US, the fact is this overregulated culture has now earned the distinction in my view in having the most complicated income and balance sheets and tax & litigation systems around the world. US accounting is very complex and so often too difficult to evaluate. It incorporates program accounting, patents, royalties, intangibles, pension liabilities, future promises etc.. Also, fund managers, the world over, are increasingly disillusioned with the outlook for corporate profits in the US & EU and are now questioning the quality and validity of these earnings. Partnerships, patents, royalties etc... how does one account for the true & fair value of such intangibles? Complex US accounting is what leads in stretching the legal limits into then questionable practices.
But regular high dividends cannot hide accounting irregularities as cold cash is paid out of real (not imagined nor made-up) profits. Again, excluding a few big cap stocks, Thailand has a far better record on that then the US, or most other developed countries for that matter!
The reality check is: since investing in higher-priced shares in good old USA is no guarantee against dubious accounting practices, why not conclude: Well -then we can just as well buy stocks at much lower stock valuations in Thailand! And collect high cash dividends while waiting appreciation.
This reality hitting home is why Thailand emerged as one of the best performing stock markets in the world in year 2002. I think this will continue into 2003. Yes, despite the now outdated saying that "if the US catches a cold, then emerging countries must get pneumonia". The US had its worst bear market in history and yet the SET averages shot up posting double digit return. And if you held high dividend paying smaller cap shares, the ones I mostly advocate, the annual returns were above 40%.
The author quotes a study by McKinsey & Company which states “that institutional investors would pay a 25.7-per-cent premium for Thai companies that comply with the good-governance guideline”. Why not quote Finance Professor Aswath Damodaran, NYU Leonard N. Stern, School Of Buisnness, USA whom wrote: "Firms with higher growth, lower risk, and higher dividend payout ratios, other things remaining equal, should trade at much higher multiples of earnings then other firms."
But, au contraire, in Thailand they do not. While I value Khun Oranan’s run down on improvements in Thai corporate governance, my own conclusion is that the risk premium demanded should expand in the US and rational investors will ever more learn to value simple accounting with high growth rates and solid cash dividends, year after year in now economically renewed Thailand. ***
Best Regards and Happy New Year to all our viewers,
Paul A. Renaud.
