New Purchase Recommendation

First an update on President Rice (46), which is one of my core recommendations. The stock price has been stagnant for some time.

PR is one of the several smaller stocks I currently like, here is an update on a research visit just completed today. My latest full report on PR can be seen in the Feb.15th "99 issue.

I just spoke to management of PR and was assured things are proceeding well and as expected. I maintain my strong buy rating on PR. The official annual "98 report has not yet been released. The company maintains a mailinglist and you can fax to 66 02 374 7956 to request this report.

At Farmhouse Bakery, PR’s profitable subsidiary, sales have slowed in the first half of this year to flat growth level, but PR is confident this is a temporary "stabilization" after very fast growth in previous years. Management feels confident that "the second half of the year will be much better and so growth is resuming".

As to their core business of instant rice noodles, the costs of raw materials have decreased about 6% in the second quarter "99. This due to slightly lower prices on broken rice price and packaging. So this will continue to benefit the bottom line.

PR has also noticed a considerable pick-up in sales of instant rice noodles since May 1 "99. While the company cannot be sure this will be maintained, it seems the cyclical low on domestic instant rice noodles consumption, has been reached. (This is one more reason I am now also recommending GFPT -see below, the Thai economy is recovering). The company is relatively confidant this resumption of demand will continue; still PR does not have much spare capacity to meet much incremental higher demand. In my own opinion, there could well be a rights offering forth coming forth soon. This only so for PR to start on new capacity expansion, which was delayed in "97, when, the economic crisis then emerged.

I would view a right offering on PR as a positive development. It would generate more shares outstanding and so liquidity should improve. Larger investor would so also get a hold of more shares, through such a rights offering. A rights offering would focus some good news on yet another growing smaller cap. firm in Thailand which is operating at full capacity even while the trailing p/e remains below 5. Management did not mention Anything about any such potential rights offering. This is my interpretation.

GFPT (9.60), a new purchase recommendation."In 1999 there is stronger demand for processed chicken in Japan and even the European Union. So we expect to sell more, around 80,000 tones this year," Adirek Sripratak, area president of the Charoen Pokphand conglomerate. May 28th "99.

GFPT Manufactures and Distributes frozen chicken and its by-products under its own brand name "GFPT" and its customer brand names as "Common Food" and "Nichirei Corp". GFPT is currently ranked as one of Thailand’s largest exporter of frozen chickens. Products marketed by the company include, whole chicken, chicken breast, chicken fillet and deboned drumsticks to semi-finished chicken meat such as boiled chicken meat and grilled chicken meat. Evisceration chicken accounted for 46% of 1998 revenues; feedmill, 44%; chicken’s farm, 6%; processed food production and distribution, 3% and egg hatching, 1%.

Here you can see a long term (and separate short term) graph on GFPT: 209.207.203.164/thset/graphs/forever/gfpt.html A fact sheet with some good historical numbers on GFPT: profiles.wisi.com/profiles/scripts/cos01.asp?cusip=C764A0030&B1=Load+Profile History on some key accounting numbers: www.set.or.th Scroll down a bit and hit "Highlights" then enter stock symbol.

Industry review: In 1998 the global chicken production dropped as many of the world’s leading countries which raise chicken were affected by natural disasters. More importantly, the uncertain weather due to the El Nino effect caused drought and floods and so hurt the chicken raising business of many countries worldwide. Especially Brazil, which is the world third biggest chicken raising country, after the US and China. Due to the drought, the chicken production in Brazil sank by 3% in 1998. ("98 Annual report of GFPT).

Facing the opposite but equally bad fate as Brazil, many parts of China were heavily flooded. So Chicken feeding was severely affected by China as well. In Thailand chicken feeding was effected by some obstacles as well, especially the domestic economic recession making the consumers reduce their consumption. Also, the rising price of imported raw materials due to the weakness of the Thai Baht. In Thailand in 1998, about 780 million chicken were raised for the production of 848,000 tons of chicken. A slight decrease from 1997, by 3.2%

What is most interesting to me is the domestic consumption. In 1998, about 588,000 tons of chicken was consumed, this is a sharp decrease from 700,000 tons in 1997. Consumption actually decreased 16% only due to the Thai economic recession. This means chicken consumption is relatively elastic in Thailand and so it’s consumption should snap back, along with the local economy. So GFPT is also a play on the domestic Thai economy which is now slowly recovering.

In 1998, Thailand exported about 260,000 tons of chicken or about 26 Billion Baht. This is an increase of 35% and 65%, respectively.

The reasons exports are so strong are among the following:

1. Depreciation of the Thai Baht on world currency markets.
2. Brazil got hit with a very bad drought (El Nino effect). It lost very important market share in the EU, which is now Thailand’s major export market.
3. Heavy floods in China, which is a major competitor for the Japanese market.]
4. EU banned chicken from China due to health quality standards.
5. Mad cow disease has increased Chicken consumption in the EU.
6. Unlike pork, processed chicken production is a business Thailand is competitive in world markets. Low labor rates and lately more stable weather conditions help.

Of the total exports of chicken and chicken products of GFPT, about 55% are to Japan, the EU takes 35%, and the balance goes to "others". Brazil is a big competitor but Japan is much closer to Thailand than Brazil!

As to trends in 1999:After the end of El Nino, Brazil is expected to recover soon. However, China wills unlikely emerge quickly from the severe floods until after mid "99. Therefore the world chicken production volume in 1999 will unlikely be much different from that in the previous year. Thailand’s chicken production in "99 was expected to grow in the same phase as in 1998. That is, it will not only extend to reach the demand for export (even while competition is fierce), but also the local consumption which is likely to rise as the economy recovers by mid "99.

Animal feed is the biggest expense (raw material) and uncertainty, as some 35% of this must be imported. Recently there have been many reports of government here decreasing taxes and providing other helpful measures as Thailand is concerned about this industry. Similar Thai and Japanese plans on local financing help are forthcoming and the domestic bond market has now awakened (see below). Still, the often refusal of Thai Banks to borrow has created some problems to firms like GFPT.

Management.The management is dominated by the Sirimongkolkasem Family and they own close to 55% of all the outstanding shares. The salaries for the top 15 people in senior management is show at 9.74 mill. Baht. While I never met any of them, a respected and knowledgeable subscriber did and likes this company.

Revenues:Consolidated sales increased from 5015 mill. in "97 to 5835 last year. In 1998 the total export volume grew by some 25%. And these could have been even more had it not been for some liquidity problems financing this fast growing business.

Accounting observations and ratios:The ratio of liabilities to equity dropped from 2.58 in "97 to 1.25 in "98. The profit from operations in 1998 was 309 million Baht or 5.42 per share, so GFPT’s capital structure is improving and debt is being paid off.

On the balance sheet I note a considerable reduction in inventories from 731 mill. to 581 mill at the end of "98. I also noted under "Machines and Equipment under installation soared from 16.9 Mill at end of "98 from only 4.7 mill . the year before.

Under Bank overdrafts and Loans from Banks (footnote 15, page 108) I see a reduction in loans already. Total loans in local and foreign currency have been reduce impressively from 924 mill. Baht in "97 to 600 mill at end of "98. Of this bank overdrafts and bank loans in local currency are shown at 393 mill. Baht. Here every one percent reduction in local interest rates saves GFPT some 4 million Baht in annual interest expense. I also noted some 150 mill. Baht in US dollars worth of short term loans, this was an increase form "97’s, 95 mill. Baht.

Long term loans however show an increase to 373 mill. Baht form 237 million in "97. Overall interest expense decreased from 27.8 mill. Baht in "97 to 21.7 mill Baht last year.

A minor concern: One minor concern about this company is that historically they were not particularly profitable before the Baht devaluation - return on equity was in single digits or less. They"ve got just enough debt that if profitability returns to levels of 1993-1996, they could be in trouble. Contrast this with CM, which historically has performed well, year after year. This is the one side opinion, the other side is that historically China and Brazil were big competitors and they seem to be less now. Remember, China devalued in 1994 and so no doubt had a competitive advantage back then.

On a risk adjusted basis GFPT is likely to do better than most Thai companies, because the company is so cheap in relation to book value and current earnings. And in the short term it seems to have special advantages in its favor. So I remain enthused about this firm and recommend buy.

Here is what Jardine Flemming just wrote on May 24th "99:"Not Chickening out - GFPT weathers the recession. Chicken exporter GFPT is the exclusive supplier of the strong McDonald’s business in Thailand and Singapore; exports to the latter are up, and low commodity prices (corn, soya) are keeping chicken feed prices down. The company is also venturing into Korea. TRADING BUY."

Here is an article on Chicken, just released today May 28th "99:

"Zero growth seen for Thai chicken sales".BANGKOK, May 28 (Reuters) - Thailand’s largest chicken exporter said on Friday it sees flat Thai chicken exports in 1999 but predicted a better year in 2000. Adirek Sripratak, area president of the Charoen Pokphand conglomerate, said he expected zero growth for sales this year because of the high competition in the world market.

"I believe that the export volume will not rise but the value could be higher because we export more processed chicken which are value added products," he told Reuters. Commerce ministry data show that last year Thailand exported 274,773 tones of chicken worth 25.29 billion Baht. Of the total exports, processed chicken accounted for around 62,300 tones worth 8.65 billion Baht while rest were frozen chickens.

"In 1999 there is stronger demand for processed chicken in Japan and even the European Union. So we expect to sell more, around 80,000 tones this year," he said. However, higher competition in the frozen chicken market especially in Japan, a major buyer of Thai product, could hit Thai sales.

"Exports from the U.S. to Russia have been blocked by Russia’s economic crisis so this year a lot of American chicken legs have been sent to Japan," he said. Japan is the biggest buyer of Thai chicken. It purchased around 50 percent of Thailand’s total exports.

Official data show that in 1998, Japan bought around 130,000 tones of Thai frozen chicken and 34,937 tones of processed chicken. However Adirek said that Thai chicken exports should recover next year as the Asian and world economy recovered. "

Here is GFPT’s latest news item filled with the SET:The President The Stock Exchange of Thailand Subject:To submit the consolidated financial statements for quarter 1/1999 ended March 31, 1999 and the clarification on its performance Attachment: Consolidated financial statements for the quarter 1/1999 ended March 31, 1999 GFPT Public Company Limited would like to submit the consolidated financial statements for the quarter 1/1999 ended March 31, 1999. The company would like to report on its performance which was changed exceed 20%. It was because in quarter 1/1999, the company earned 66.09 million Baht or earnings per share was 1.16 Baht whereas in quarter 1/1998, the company earned 199.97 million Baht or decreased by 66.95% . The company would like to report on its results as follows: In quarter 1/1998, the company had profit from unrealized foreign exchange gain 211.94 million baht. The amount of 129.21 million Baht was the profit from the parent company and the amount of 82.73 million Baht was the profit from one subsidiary company respectively. The whole amount of unrealized foreign exchange gain was shown in other revenue item. In quarter 1/1999, the company had profit from operation which it had already included the unrealized foreign exchange loss 10.05 million Baht. This whole amount of loss from foreign exchange was shown in the selling and administrative expenses item.

The Thai government knows the importance of the agri-export industry.The Commerce Ministry for example just announced it will allocate 750 million Baht over the next five years to compensate the discount in packing credit as a reward to exporters who are successful in penetrating new export markets, Deputy Commerce Minister Pravich Ratanapien said. The financial support is part of the Government’s promotion aimed at reaching the targeted 4 percent export growth. Under the program, the Export-Import Bank of Thailand (EXIM) will lower the rate of packing credit by 5 percent to exporters who are able to penetrate or expand into new markets including countries in Africa, South Asia, China, eastern Europe, the Middle East, Latin America, and neighboring countries. (Business Day May 26th "99)

Agriculture has been viewed by decision makers as playing a leading role in reviving the local economy and absorbing redundant workers from the manufacturing and service sectors which are still deep in recession.

Business experts call for urgent steps to boost farm products. For example, THAI Farmers Research Centre (TFRC) Co Ltd has urged the government to "restructure production, hasten exports, improve production systems and reduce price intervention for agriculture to combat the adverse effects of falling prices on the world market and improve competitiveness".

Thailand just unveiled a new drive on Wednesday May 26, to spur exports towards this year’s four percent growth target. These ministers hope this will pull the economy out of crisis. In fact the domestic economy is recovering as I pointed out.

As was reported by the Nation Newspaper on May 26, 1999:

New marketing, finance and tax measures will be introduced to help exporters penetrate 127 markets around the world, a statement issued by the Export Promotion Department said. The campaign is intended to encourage small- and medium-sized exporters to explore new markets rather than already saturated markets in the United States, Southeast Asia and Europe. ""Exporters will not have to wait for the government to spearhead expansion into new markets as these three measures will subsidize exporters,"" an export promotion official said.

The government set its export growth target at four per cent this year in a bid to turn around the crisis-stricken economy with one per cent growth in Gross Domestic Product. Early indications are hardly encouraging as exports slid 3.8 per cent in dollar terms in the first quarter of this year to a level well below government targets. Exports from January to March reached 13.1 billion dollars -- a drop of 522 million dollars compared to the same period in 1998. Four per cent export growth would take total exports to 56.6 billion dollars compared to 54.5 billion dollars last year.

The new scheme will stream Thai exports into seven geographical zones comprising its regional neighbors, the Middle East, Africa, Latin America, Eastern Europe, South Asia and China, the statement said. A category grouping Thailand’s closest export markets comprises Vietnam, Cambodia, Myanmar and Laos. The commerce ministry has already set aside an annual budget of 150 million Baht (four million dollars) to subsidize interest payments of loans from the state-run Export Import bank, the statement said. (AFP)

I note, Thai corporate bond issues are growing significantly in "99 because companies are having difficulty obtaining loans from banks. These are reluctant to extend new credit in the face of mounting yet now peaking, loan defaults. In time this will be good for the domestic bond market in Thailand. For sure dis-intermediation will now take place away from bank borrowings. Good news for secondary companies in Thailand as it will generally reduce the cost of borrowing.

I think we will see many more announcements on this by various SET companies as these will quickly see the benefits of by passing the banks.

Over the past many months I have recommended several stocks which appear very undervalued and yet have overall growing earnings and good long-term fundamentals. I advocate a portfolio of all these and to so be fully diversified.

Best Regards to all Subscribers!

Paul A. Renaud.

www.thaistocks.com