Thai Stock Market Distortions.

Thai Stocks: high growth at low valuation along with attractive dividend yields and often low balance sheet gearing.

One can see from the above table the latest relative valuations given to several markets around the worl as of June 18 '04. Of course p/e is only one measure of market valuation. The current cash dividend yield and price-to-book ratio's are some other measurements investors can look at. Regardless of how you value shares, Thai stocks are consistently placed in the lower ranges, as showed above. This should strike the rational global investor as odd because Thailand also ranks among the fastest growing economies around the world, last year and this year.

Many positive developments have occurred in Thailand recently.  Thai corporate balance sheets are presently the least leveraged they have been in well over a decade. Also, many questionable firms are now long gone: pruned out by the devastating 1997 Asian economic crisis. Inflation rates, the level of domestic interest rates, fiscal responsibility all rank more favourably in Thailand than in many other countries (inflation and local bank interest rates are no higher in Thailand than in the US, for example). Even the local Baht currency has been appreciating gradually versus the US Dollar over the past 3 years. More and more US Dollar based investors are rightfully realizing that currency risks truly go both ways; as the US Dollar has declined recently in value compared to many other world currencies.

Another little known Thai stock bourse fact is that the "one share one vote" is law in Thailand. Unlike other stock markets (including the US), companies on the SET cannot issue several classes of shares, this prevents them from possibly taking advantage of minority investors. There is no allowance or tolerance to have listed firms issue a class A and class B stock, where one set of shareholders get to vote and get a dividend, while the other class does not. This often abusive practice in the West is not allowed on the Thai stock exchange.

While many would argue that the US has the most transparent equity markets in the world; two caveats come to mind. First, recent history shows the US is no haven when it comes to good corporate behavior. US stocks with their complicated pension, patent and royalties' accounting standards are far more complex to understand and analyze than the simpler Thai companies. There are no multimillion dollar golden parachutes given to executives in Thailand. Corporate compensation in the US at senior levels is way out of proportion -and one reason why US products and services are increasingly uncompetitive in the today's new World. Litigation through class action lawsuits is another key risk every US firm bears. Class action law suits do not exist in Thailand.

One might ask the question why is Thailand's stock market only trading at a p/e of 10, growing at a faster rate and yielding 3-4 times more annual dividends than an average US stock? Or why is it that on the SET that proven growth stocks can be purchased at a discount to the market's average valuation, despite still paying attractive annual cash dividends? Whereas in the US, growth stocks trade at premiums often with no dividends.

I believe the reasons are simpler (but not as obvious) than most people think.

The above reasons cause a large majority of the national savings pool to not participate in the local stock exchange.  Liquidity is King on the SET, and this sole requirement is over-chased and over-valued. This liquidity trend, instead of more rational parameters such as high dividends, low p/e's and high growth rates causes the lower valuation rankings we see in Thailand today.

This phenomena of "Thai stock market distortion" has been in vogue for over a decade and has resulted in market inefficiencies that can be explored by alert individual investors. A pure "vacuum of value" has emerged in mid- and small-cap Thai shares.  These shares represent the real Thailand. This why Thai large cap shares are often trading at respectable valuations. But the smaller, neater, faster growing companies have all been left behind .

Another inefficiency is that the local SET index benchmark is hardly representative. It is heavily tilted towards the larger cap stocks, as the index is tabulated on a market cap weighted basis.

Because of the persistently low interest-rate environment so far this decade, more and more investors are waking up to the reality that Thailand has many fast growing companies, with high dividend rates and yet artificially induced low valuations. Many of these unknown companies have been the real investment performance stars (all during troubling times around the world).  Thaistocks.com has been identifying these companies for the past seven years.

Best Regards,

Paul A. Renaud.