Two favorites re-recommended

In this issue we want to re-focus on two earlier recommendations. Their stock prices have moved up considerably but not as much as their combined earnings per share Further their combined share trading volume levels are much higher than even a few months ago. Six months ago President Rice (50) and STA (90) hardly had any volume and strictly because of that where ignored. (No need to dwell on this forever more but we point out again that liquidity does have a premium but not an endless one).

Remember you buy the company first and the volume levels second and not the other way around. Regardless of what these funds would have you believe. Still, volume does have it's merits and the world being what it is surely today both of these current favorites merit considerably higher price valuations. They are in the right industries, they export plenty and their earnings are soaring. We believe their management's are above average. Finally and most importantly the average volume levels on an average day recently are far more than before.

The table below represents the 22-day consecutive trading period 'til March12:

I then went back to last July 21-27 '97 Tisco Highlights (to me the most reliable data) to see what average shares these stocks were then trading at.*

The cumulative trailing P/E on STA then was shown to be 3.7 and the stock price ending that week was 32. The average volume for that week was 13,660 or only some 13% of what it is now as averaged over a longer period of time.

The cumulative trailing P/E on PR then was shown to be 2.9 and the stock price ending that week was 22.75. The average volume for that week was a mere 7,100 or not even 10% of what it now as shown above, averaged during a much longer time period.

The combined trailing p/e of STA and PR last July '97, when the SET was heated-up, was 3.3, today the combined average trailing p/e is still a very low 4.25. All the while the average daily Baht volume levels have soared by a factor of 22.

Currently, with a combined average volume of daily shares trading nearly 10 times the volume then (and a Baht volume level as shown above far more than even than). These two stocks are still selling at a trailing p/e of 3.5 for STA and 5 for PR.

Of course when looking at volume levels it is always important to consider actual volume in Baht amount not shares traded. Clearly both of these have soared in trading volume while their stock price valuations have not.

Observing the SET for a long time has always shown to me that as volume level raises so do valuations. I strongly believe both these companies are still very undervalued and would increase positions in both.

Now turning to the fundamentals:First and foremost it is worth noting again that both these companies reported excellent 1997 audited earnings. Besides rarely showing the reported earnings to begin with, the Bangkok Post and the Nation still and as so often, have the numbers wrong in their daily business news stock tables. Both P/E's and earnings are wrongly stated. I personally have long ago given up trying to correct these flagrant misstatements; in the past even when I pointed this out on various other smaller shares, they still would not change and correct. So let me re-state them here, just so there is no confusion:

STA reported numbers far above expectation and actually but in a smaller way so did PR. (PR stated that in fact their earnings did include a small currency loss which nevertheless was right in line with my estimate. As such I expect some of this to be recovered in the 1 Quarter, as the Baht seems to be stabilizing below the 48 Baht per US $ it was at the very end of 1997).

The important thing to keep in mind is that all the while these two companies are in the right industries, i.e. almost all exported for STA and to some extend benefiting from the current economic crisis like PR. They are still trading at very low valuations despite now having now much higher average trading volume levels as shown above.

They are clearly not in some of the suddenly new "troubled" export or local industries. Like pork production which is suffering some special problems which we do not yet understand the outcome, or various tropical fruits, which is a big, export item. Tropical fruits are down in harvest, considerably so, due to the hotter than usual season this year.

PR had a recent price increase in their basic core product from 4 to 4.50 Baht, per pack. The full effect will be most beneficial in the 1 Q. of 98. The company is set to increase production this year with a new plant soon to start production. Export products have a much higher margin for PR and these are obviously doing very well. The company does not suffer much from the liquidity squeeze so often reported being a problem for various exporters in Thailand due to their solid connection with Saha Pattanibul. Who in fact owns indirectly 30% of the PR's shares. While there are some new cost pressures such as imported packing material and the price of raw material of broken rice, I am convinced these are not so significant so to offset the positives of:

1. the price increase on it's core product
2. the dramatic continued growth of their 2 subsidiaries.

The company posted the following to the SET on February 16th '98: "President Rice Products Plc reasoned for 8.99 percentage points of descend in its performance, citing the main cause was Bt21.27 m value of losses on foreign exchange. However, considering merely its operation the company could make net profit Bt114 m higher compared with the same period a year ago, or 47.87% up."

On STA, clearly the reported 1997 earnings were outstanding and far above my estimate. The stock price did not react much due to the company around the same time declaring a meager dividend of only 4 Baht per share. While I did think the declared dividend would be much higher in fact it is the right thing to do for this company. As seasoned investors have rightfully always pointed out that in Thailand they pay these high "macho" dividends but then need to borrow money to finance all the expected future growth. With prime bank interest rates on Baht borrowings at near 16%, it simply does not make sense in the current squeezed money market environment, to pay impressive dividends so only to increase perhaps massively, the interest expenses. STA is growing fast and needs working capital. The company keeping its dividend low simply means the firm will much decrease its expected interest expense. Short-term investors may be disappointed but we are not! Remember STA is a world class producer of natural rubber and it's related added value products. STA has a dominant market share along with 4 other Thai producers.Thailand is the world largest producer and exporter of rubber products. Up to 75% of STA's exports is made to the major tire companies in the world, including Bridgestone, Yokohama and Semperit and Michelin. Since this is an important commodity, the price along with customer relationship is the most important. STA excels on both fronts as it has good long-term relationships with these customers and due to the Baht devaluation it has the pricing edge. In 1996, Thailand supplied some 32% of total global rubber demand. Since the US, Japan and Europe are the major buyers of STA products the Baht currency devaluation is of major benefit to them and STA. This is rather different than other regional export industries, which have high intra-SE Asia trade, and so the relative competitiveness has been canceled due to near all these currencies having been mutually devalued.

The gross margin in the 3 & 4 Quarter was an amazing high ~20%, and while this may not be sustained the total profitability for '98, seems still on the rise. In 1998 STA will start producing blocked rubber (BR) a new product much in demand which will complete STA's dominance in this industry. This should boost total sales in '98 by some 10 to 12%. The company has already invested some 250 mill Bt. in this project whose product will have an attractive margin of about 12%. As previously stated STA is very aware about the need to add value to its core business. It has some 14 subsidiaries, 8 of which purely add value to the basic commodity. These over 500mill. BT investments, besides higher margins bring various advantages to the company including:

1. overall synergy to the business
2. reduction of seasonally of earnings
3. reduction of risk due to volatility of rubber prices.
4. More bargaining power when purchasing rubber from local producers

Due to the capital increase completed late last year and the strong cash flow (besides the now low dividend announced), STA 's currently relative high Debt/Equity ratio should quickly fall to below 60% in 1998. Also, STA shows a relatively low cost of funds a long term loan of only 12% on 500 mill. Bath. This is a 5 year loan, 1996-2001 and can be re-financed should Thai interest rates fall sharply.This is all very good news for this favorite as the company has relatively high working capital requirements.

I recommend to keep buying STA and PR for long term capital appreciation.

Best personal regards to all our valued subscribers.!

Paul Renaudwww.thaistocks.com

* I chose that week purely as it was an overheated time on the SET. The float of the Thai Baht then prompted a massive SET rally. The SET index was at 658 and the average daily volume was 6.2 Bill. The SET peaked during this period and has lingered well below 600 ever since.

STA AUDITOR'S REPORT:

The ShareholdersSRITRANG AGRO-INDUSTRY PUBLIC COMPANY LIMITED

We have examined the accompanying consolidated balance sheets of SRI TRANG AGRO-INDUSTRY PUBLIC COMPANY LIMITED AND SUBSIDIARIES and the balance sheets of SRI TRANG AGRO-INDUSTRY PUBLIC COMPANY LIMITED as at December 31,1997 and 1996 and the related statements of income , changes in shareholders equity retained earnings and cash flows for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

As discussed in Note 9 to financial statements, the Company recorded its investment in associated companies by the equity method.However , the financial statements of associated companies that the Company accounts for its investment on the equity method for the years ended 1997 and 1996 we reexamined by the associated companies auditors. The equity in net income of the associated companies for 1997 and 1996 which are presented as part of the equity in net income of the associated companies was approximately Baht 131.2 million and Baht 48.4 million respectively.

In our opinion, based on our examination and reports of other auditors, the financial statements referred to above present fairly the financial position of SRI TRANG AGRO-INDUSTRY PUBLIC COMPANY LIMITED AND SUBSIDIARIES and of SRI TRANG AGRO-INDUSTRY PUBLIC COMPANY LIMITED as at December 31, 1997 and 1996 and the results of their operations and cash flows for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.