Thailand’s Amazing Exporters
A smorgasbord of growth and value.
We had planned to deliver in this update our most comprehensive list to date ever, on a comprehensive table called: A smorgasbord of growth and value. This is a big task, which due to its comprehensiveness is taking longer than anticipated. We plan to show at least 33 firms, which show revenue and earnings growth even after adjusted for FX gains and losses. Because I am determined to make this list most accurate and very complete along with some research comments, I ask you please be patient until the end of the year. As for Jan. 2 1999 we will have a dream list of proportions, which will make you, awe in amazement.
Thaistocks.com will use this list to show more of what we long have written about.
This comprehensive table demonstrates the positive change in the economic equation that the Baht devaluation has brought to many Thai smaller and medium sized companies engaged either in exporting directly or in supplying materials predominantly to the export sector. Of these, the greatest devaluation beneficiaries have been those companies with a high proportion of local material content in their finished product and who add value with Thai labor and then market their output to the now higher paying (in Baht terms) U.S., Japanese and European markets.
Even some companies with a previously moderate proportion of export business have been able to boost overall results handsomely with a stronger than normal contribution from exports taking up any slack due to weaker domestic sales and doing so with higher unit profit. The numbers shown and checked for accuracy will strongly support these conclusions.
Generally a reliable guide to identifying these winners is a strong increase in sales revenue since the Baht devaluation in July of 1997. Greater competitiveness allows for higher Baht sales prices and often-increased volumes.
A number of companies which wrote off their devaluation induced forex losses at Baht 46 vs. the US $ on Dec 31 '97, have enjoyed windfall gains from the retraction of the dollar to B 39.44 at the end of the third quarter. Therefore, a comparison is shown between the recorded earnings and the generally lower operating profit, free of forex changes. The '98 P/E ratio shown (average less than 3) is based on 9 months operating earnings and thus understates full year earnings. So p/e's are well less than 3 for full '98 Earnings even free of FX gains or losses. With pay-out ratios of often 50 to 60% percent, you can imagine the dividend yield anticipated in April/May of 1999.
The solid fundamentals of these companies are buttressed by often very low debt ratios and deep discounts to book value. This only emphasizes what bargains a liquidity-induced drought can produce. Finally the 5-year high/low price range shows the relative historical cheapness of these shares, despite the fact that many of these companies are enjoying better operating performance than they ever did in the past.
Outlook Beyond 1998.Whereas the average exchange rate to the dollar for the first 9 months of 1998 was close to B42, in the third quarter the average exchange rate strengthened about 15% to around B36. However, it is important to note that with the Yen's strengthening back to around Y120 at the start of the quarter, the B3.3 cross rate has maintained itself at around the year's average level. Japan probably provides around half the export revenue for our favorite 33. While we acknowledge the importance of the improved USD/Baht competitiveness to the so far reported performance of our chosen stocks, nevertheless at around current levels we believe that they are still very competitive. Although the rich margins of the past months will contract somewhat next year, we don't believe they need do in proportion to the Bath's recent appreciation.
As long as the Chinese and others don't devalue, Thai companies will maintain an improved world competitive position, which will allow them to pass on some moderate price increases. The overall result will be the maintenance of profit levels at a plateau from 1999 and onwards, well above historical levels.
We do not expect the Baht to again appreciate to a level where these companies again face the competitiveness problems of the mid-nineties! So long as Thailand needs to maintain a strong trade surplus into the foreseeable future, they will need this type of company to continue strong and to grow as much as possible. In effect The Bank of Thailand will be prepared to use its considerable exchange rate influence to support these companies profitability so that they keep helping Thailand to restore its external trade foundation. The Chuan government is just now emphasizing on the need to apply more resources to develop the agri/food and value added textile sectors as the importance and growth in contribution to the countries exports has been so apparent. They are in fact the new sunrise industries.
"Prisoners of old thinking".The Chuan government is used to dealing with the real world and is not deluded by the world of the SET big-cap-chasers that are still stuck in the mindset that our "30 turnarounds" are from the "no-growth sunset sectors". These are the same industries that established Thailand's export base a decade ago before the economy ran of the rails. They are the ones, which are earning Thailand's foreign exchange these days, and circumstances (including exchange rates) will require that they continue to so well into the future. Don't be part of the masses that are victims or prisoners of old thinking or who, due to sheer size, are stuck only buying hugely liquid shares.
We at Thaistocks feel that the market's "blind spot" as to the value of these stocks provides a great opportunity to establish a highest dividend yield portfolio on Thailand's recovery in companies that are really growing. This portfolio will easily provide a double-digit dividend yield while its share prices will inevitably appreciate to a higher plateau as the reality of these stocks true value inevitably unfolds.
We are focused and determined to research, visit and follow these at length and so publish our findings all along; and this in a most objective way to our valued subscribers. We look forward finally sharing this work with you by year-end. Subscribers will be the first to see this!
Best Regards,
Paul A. Renaud
