A blue chip stock is not necessarily a blue chip in Thailand.
My hunch was correct, unlike the press and much broker hype, January turned out to be a volatile month with many stocks not going anywhere and several big cap stocks correcting. Since the month of December was so charged, I felt January would be consolidation time. Blame it on the Bird Flu or whatever, nevertheless it shows that its a good idea to at times take a step back and a deep breath, which is what I did. On December 31, the SET benchmark index closed at 772 versus now, 4 weeks later, its bouncing off its 750 support, closing at 754 last Friday. The SET Bank index closed the year 2003 at 277 vs. 261 last Friday, January 23 '04. Let the Banks keep spurring while not on my radar screen.
In most developed countries' stock markets, blue chip shares, which are the large cap companies, are less volatile and most often have lower valuation and higher dividend yields then growth stocks. No, not in Thailand. Here on the SET large cap shares remain often the most volatile besides have the least dividend yields. Banks stocks have just proved this again by being all the hype a month ago, only to turn south during the latest market correction. The SET's biggest stock by market cap is PTT. It lost about 10% in value during the same time. Considerably more then the SET benchmark index correction, as expected. Still, I like PTT in the low 160's as stated in our member lounge a few weeks ago.
Because the SET does not have any other published index here we cannot conclude or prove that other SET averages did better or worse. I noted in my last article how the month of December saw a near 20% jump in the SET benchmark index vs. only a 1.7% upward move when all stocks where tabulated, on a simple average method. Never mind empirical evidence, I for one have noted many times over the years that big blue chip SET shares are most always, as a group, more volatile then their smaller cousins. Volatility in finance is risk by definition, which so deserves a discounted stock valuation, as compared to another group of less volatile securities. Why is this? Why does this theory not hold up on the SET? You know the answer, and seasoned members will smile as they too have seen this again and again over the years.
The answer is because the SET is and remains not rational. It is dominated by speculators and large cap institutional investors whom pay a dire premium for liquidity -all so nurturing pure and simple market distortions. But unlike the past, this reality is not a negative to us the rational individual investor. In the past it was, because the high dividend payouts of less liquid shares meant little in an environment of high Bank saving rates. Today the saving/investing environment is much different. Thai Bank savings rates are well below 2% and so is the local inflation rate, hence high annual dividend rates of 6-9% mean a heck of allot more today then in the previous bull market! Within a couple of months it will be dividend time again and I expect the market will soon focus on those stocks again. Hence, my view is before and after that prudent investing here means the opposite of investing in developed markets: own values, not liquidity. Own high dividend stocks, not large market cap shares which are far more volatile, on average. Don't let brokers or newspapers confuse you because in Thailand "blue chip’shares are not at all what global investors assume they are. Blue chip shares are usually stocks which are less volatile and pay higher dividends and are in stable industries. On the SET the true blue chip shares are the less liquid smaller cap darlings, before as now.
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After some hesitation, one of the stocks I currently still much like is NPC (126). This model portfolio selection has had a tremendous run already and yet remains firmly on my buy list. National Petrochemical is the smaller less liquid of the other shares in the Chemical sector. But, as you would expect from above, its the only one that pays a dividend. Further NPC has a lower valuation of the others and yes, is less volatile.
The regions petrochemical stocks are being rerated as the chemical cycle gathers momentum. History suggests that petrochemical stocks can be rated up to a PE of 20 during cyclical upturns. My own target price for NPC is around 175 based on a p/e of 16.5 for this year. With a single-digit gearing, NPC may increase its payout to 100%, which will increase its dividend yield to 6% this year and perhaps 9% next year. While NPC does not produce paraxylene, it has a much better balance sheet then debt loaded no dividend yielding big cap ATC. NPC may also soon announce a stock split which would be a real positive, in my view. According to the local press, NPC is "considering this now".
NPC produces mostly ethylene and olefin. Demand from China is mostly fueling these price increases. The world supply of ethylene is only 2-3% per year, but the world demand is about 5-6% per year. No new supply is coming on stream until later next year when IRAN will start supplying. Iran is expected to produce 10 million tons starting in 2006. NPC will also start producing HDPE (2 Quarter of this year), test runs for 3 months until August 1. Then will produce 250,000 tons per year. Of this they will export 85%. Major contracts to supply (80% of expected production) are already in place. 10 Dealers in Thailand want to sell this new product, so demand is high in Thailand as well. The current price of ethylene is 745 $ per tonne. Very Best Regards to all our members, Paul A. Renaud.
