Why often the best values here remain ignored.
Why often the best values here remain ignored.
Liquidity does have a deserved premium but to the institutions and pure traders this premium is thought to be endlessly priced. Hence, the best and most profitable of Thai shares get totally ignored...and their dividend yields have so climbed to astonishing levels. This, even during the worst economic crisis Thailand has ever seen.
The case for the value small cap. shares:
The reasons for the Asian crisis have been explored in some dept with many good (and average) books on this subject now published. A few of the better ones have been summarized for our readers earlier this year. In our opinion, one of the best books on this mighty topic is "The Politics of the Asian Economic Crisis", Edited by T.J. Pempel. (1999). (Speculators no doubt have little patience on reading books like this, but we do).
But what is most interesting about all of these books we have seen is that are that they do not explain one very obvious phenomena: most all Institutional investors must (only due to size!) ignore all but the largest capitalized companies in emerging markets which has lead over the years to huge and untold misallocation of resources. Big companies get all the attention and smaller SET firms get completely ignored.
And this has been going on for over a decade! Smaller listed firms in Thailand for years, have been totally neglected. It is high time to seek out these small capitalized "values’shares. As we have indeed delivered on since our inception.
Hence in emerging markets, individual investors whom are value not liquidity obsessed have huge advantages over most of the mammoth institutions.
In the above mentioned book on pages 90 and 91 the authors (at some length), explain some of the problem on why the Asian stock market meltdown occurred. But not once do they pinpoint the real issue. The chapter spells out well how these institutions collectively invest tens of billions of dollars into the capital markets of developing countries. And all this money comes from millions and millions of people mostly from the developed world. Then some 100 fund managers, which must manage this all, allocate "top down". Meaning the bigger the market capitalization the more money is invested. Of course and as argued extensively elsewhere -most all funds so go to the largest of capitalized shares and in the process over 95% of all other shares get ignored. Yes, all else is ignored. In not one of these many books have we found this "misallocation of resources" blamed nor even explored on the effects it had on the Asian crisis. How can it be that it is not even explained; when I have with my own professional eyes seen this go on for over a decade?
Liquidity does have a deserved premium but the institutions and pure traders think this premium should be endlessly priced. Hence, the best and most profitable of Thai shares get totally ignored...and their dividend yields so have climbed to astonishing levels. This, even during the worst economic crisis Thailand has ever seen.
Most of all, they as a group have totally outperformed the local market averages for three years running! While neither brokers nor punters will tell you about this we will and have for long shared our insights on these veritable Thai, "diamonds in the rough".
There are only two requirement when seeking these values out:
1) come with a few million Baht not with Millions of Dollars and
2) be prepared to wait a year, not an hour or day.
As to the "no liquidity" argument: Liquidity is all *relative* to how much capital you got to move. Liquidity for individual investors is very different then liquidity for institutions! This is why the word "liquidity" is one of the most abused in the our business. The only reason these shares are so cheap is because they are (by institutional standards) not liquid. But to whom? This liquidity argument is only valid if you are a speculator/punter. Far more un-seasoned investors have been brain washed on this so called liquidity argument then is warranted. Many institutions bring this up as the reason they do not invest but they fail to explain that their liquidity requirement is on investing millions of Dollars and so is very different then an individual investor.
Typical comment:
"Given the lack of liquidity, you can't expect research analysts to waist their time reporting on such counters , as there is no volume to warrant it...."
"Exactly", is our answer and hence it is "values galore", as both brokers and institutions ignore all these. But for the millions of sophisticated and traveled individual investors -which are now empowered through the internet....they will magnate to the decade long forgotten most profitable and grossly undervalued Thai shares.
Another classic excuse used by those whom cannot buy these value shares is they claim often these smaller firms are family controlled and so abuses occur with unrelated business transactions.
Or, dominant family member shareholders sell valuable company assets for cheap or purchase assets in the company name for far amounts far above fair market value. Indeed this can and has happened; but it is rare and while concerning is hugely exaggerated by those stuck in only owning big cap. shares.
Lastly, we would argue that the record mostly shows that many such abuses have in fact occurred in larger capitalized shares, not the many mostly honest smaller ones. As the backbone of Thailand is hard working and for the most part, honest. The long record simply shows that it is the big that has been far too often the most ugly and corrupt here. (But by no means all!).
Just consider one local example. In Phuket there are 2 very large real estate projects and one very large business; by far the island’s biggest connected groups. Yet, all three have their troubles:
1) Consider the most chic Blue Canyon country club. Many or all of the new condominium owners there cannot get their land title and have been waiting on this for years.
2) Patong Tower. A classic mammoth tower, of the highest or worst kind? This is a 37 or 38 floor high Condominium building completed some 3 years ago. Yet at night there are no lights on. To our knowledge it is virtually all empty for 2-3 years already. Can you imagine some 38 floors yet mostly un-occupied...and this for years. It is the islands biggest high rise yet most all empty, despite the continued Phuket real estate boom.
3) Safari’s "Fantasie" , here is a veritable white elephant at Kamela beach. This listed stock has lost more then 2/3 of its value since their opening and most believe they are loosing
millions of Baht per month all the while there has been a tourist boom here. It is another more liquid bigger cap. stock, which we are sorry we ever brought up to subscribers in late 1998 as the red ink is flowing ever since.
Foreigners come here often bragging about their highest level Thai connections. We say get beyond those and look at the real Thailand! As too often in the past it is the high level connections which have sometimes less than a good record on honesty and straight forward dealings here.
Best Regards,
Paul A. Renaud.
