Thailand’s economy prospers on king’s sufficiency philosophy

 South Africa's National Financial Daily

August 5, 2007
By William Mellor

Mondays are different in Thailand, because it’s the day of the week on which King Bhumibol Adulyadej, the world’s longest-reigning monarch, was born.

So, on the first day of every week, the country’s pavements, trains, ferries and food stalls take on a canary-coloured glow as Thais – from chief executives to street sweepers – pay their respects by dressing in yellow, the royal colour.

Investors are finding reasons to be enthusiastic about Bhumibol too: the $5 billion (R35.5 billion) of shares that the king controls through the Crown Property Bureau – the asset management company established by Thailand’s government – are weathering the nation’s vicissitudes better than most.
Last September the Thai military deposed Prime Minister Thaksin Shinawatra in a bloodless coup. The Stock Exchange of Thailand (SET) index, whose 136 percent surge had made it the world’s third-best performer in 2003, shed 15 percent, or $23 billion, in one day in December.
This week the SET stood at 859.76 points. Even with a 27 percent rise this year, that’s less than half of the 1 753 points it scaled in 1994 before the devaluation of the Thai baht sparked a financial meltdown across Asia in July 1997.

Since the currency crisis, Thailand, southeast Asia’s second-biggest economy, has lost ground against Muslim insurgents seeking independence in a nation that is more than 90 percent Buddhist.

The military junta that overthrew Thaksin declared and then partially revoked martial law and dissolved parliament. And throughout the turmoil, Bhumibol’s shares outperformed the SET.

Bhumibol’s biggest holding is his 30 percent share in Siam Cement Group, Thailand’s largest industrial group. It employs 24 000 people and makes products ranging from petrochemicals to building supplies.

Siam Cement shares traded at 272 baht (R65.36) this week. That is 16 times their low of 17 baht in June 1998. In comparison, the SET has quadrupled from its 1998 low.

Siam Commercial Bank, which is 21 percent owned by the king, is up 41 percent this year. A third company, Deves Insurance, which is 87 percent owned by Crown Property, has gained 28 percent this year and 500 percent from its 1998 low.

In total, the companies controlled by Crown Property account for more than 7.5 percent of the market capitalisation of the SET, according to Bloomberg data.

Before Thaksin and his family sold their biggest holdings, companies they controlled accounted for as much as 10 percent.
As a whole, Thailand’s exchange has lagged behind other major stock markets. This week the SET had the lowest price:earnings ratio of the 14 biggest exchanges in Asia. The SET’s value of 12.6 times estimated 2007 earnings was a third of the 38.5 for the CSI 300 index of stocks traded in Shanghai and Shenzhen.

“Now is an excellent time to buy Thailand,” says Doug Barnett, the managing director at Bangkok-based Quest Management, which runs the $350 million Thai Focused Equity Fund, in which billionaires Julian Robertson and John Templeton invested.
“It’s so cheap it would take a 40 percent rally to catch up with the average for the rest of Asia.”
Analysts at London-based HSBC Holdings and Sydney-based Macquarie Bank are advising clients to consider Thai stocks.
“Investors should rotate out of the priciest markets into those that have so far missed out on the fun, such as Thailand,” says Garry Evans, Hong Kong-based Asian equities strategist at HSBC. Evans predicts a 70 percent chance of a restoration of democratic government in Thailand by early next year. “The market would increase by as much as 50 percent,” he says.

Democracy came a step closer on July 6 when a junta-appointed assembly backed a new draft constitution. If the constitution is approved in a national referendum, a general election may take place as early as November 25, Thailand’s election commission says.
Investors, spooked by the military takeover and junta-appointed interim government, are now wading into Thailand and looking for bargains. They are betting that companies backed by a king who has survived on the throne for 61 years may be among the safest in Thailand, an agricultural and manufacturing country of 65 million that is the world’s biggest exporter of rice and southeast Asia’s largest car assembly hub.
“The SET index remains more than 60 percent below its all-time high,” says Mark Mobius, who oversees $30 billion at Templeton Asset Management in Singapore, and whose biggest Thai holdings include Siam Cement and Siam Commercial Bank.

Robert Penaloza, the Bangkok-based chief executive of Aberdeen Asset Management, says: “It provides comfort to know that the major shareholder in these companies is the royal family, who are highly respected in the kingdom.
“We have found some very attractive valuations,” adds Penaloza, who oversees $2.2 billion and also owns Siam Cement and Siam Commercial Bank shares.

The king, stern looking and still straight backed, has honed his staying power during 18 coups d’état and 26 changes of prime minister. In 1932, a takeover by military officers and civil servants ended the Thai monarchy’s absolute rule and reduced the royals to a constitutional role similar to Britain’s Queen Elizabeth 2. In one remnant of the monarchy’s former absolute power, it remains a crime punishable by imprisonment to criticise the king.

In 1935, King Prajadhipok abdicated and the crown passed to 10-year old Ananda Mahidol, Bhumibol’s older brother, who was living in Switzerland.
In December 1945 Ananda went back to Thailand to be officially crowned. Six months later, he was found in his bed in the Grand Palace in Bangkok with a bullet in his forehead and a Colt pistol beside his body. Three men were convicted of the murder in 1954 and executed in 1955. Historians still describe the death as an unsolved mystery.

When Bhumibol took over at the age of 18, Thailand almost didn’t have a monarchy, says Mechai Viravaidya, a former chairman of Krung Thai Bank.
Bhumibol, who was educated in political science, government and law at the University of Lausanne in Switzerland, worked to restore royal prestige. He travelled the countryside and set up farms, fisheries and irrigation projects, winning support in a nation where half of the people lived in poverty.
Today, the king has a 5 260ha property empire. About 1 214ha are in and around Bangkok, Thailand’s capital, where some downtown plots sell for $74 million a hectare, according to the Thai unit of CB Richard Ellis, the world’s largest commercial property brokerage.

The king also holds an 87 percent stake in Munich-based hotel chain Kempinski. Crown Property, through its CPB Equity unit, reported that Kempinski and smaller holdings in Thai companies were valued at $716 million in 2005.

“Bhumibol has re-established the monarchy against all the odds,” says historian Chris Baker. “The Crown Property Bureau is the biggest corporate group in Thailand.”

For all of his wealth, Bhumibol shuns the billionaire lifestyle. He eats the cheapest form of unmilled rice for its health benefits.
Bhumibol has travelled outside his homeland only once in the past 40 years, to neighbouring Laos.

Instead, he has focused on establishing what he terms a “sufficiency economy”. The guidelines call for steady, sustainable development rather than high-risk, blind growth. Increasingly, investors are looking to the king’s economic strategy as a stabilising force.
Marc Faber, who manages $300 million in Hong Kong and owns shares of Siam Cement and Siam Commercial Bank, says he may selectively increase his Thai holdings. “Since all the other emerging markets have risen so much, Thai shares are now inexpensive,” says Faber.
The king’s holdings have suffered profit declines as Thailand’s economy has slowed. Economic growth may drop to 3.8 percent this year from 5 percent in 2006, according to the central bank.

In the first quarter, Siam Cement’s net income fell 14 percent to 8.21 billion baht. Siam Commercial Bank’s first-quarter profit dropped 12 percent to 3.69 billion baht on declining loan growth.

Siam Cement and Siam Commercial Bank still provide most of Crown Property’s revenue. Crown Property, which doesn’t release a financial report, said in faxed answers to questions from Bloomberg that revenue totalled the equivalent of $400 million last year – 80 percent of it in the form of dividends paid by its two biggest companies.

Growth in travel to Thailand’s beaches and nightclubs is slowing, partly because clashes with Muslim rebels have claimed 2 000 lives in three southern provinces since 2004. Last New Year’s Eve, three bomb blasts rocked Bangkok, killing three people and injuring 42.
The government predicts a 7 percent increase in visitors to 14.8 million this year compared with a 20 percent rise in 2006.
Much of the royal family’s shares and property stem from the days when Thailand was called Siam and the monarchy owned everything.
The Chakri dynasty was founded by Bhumibol’s great-great-great-grandfather, Rama the First, in 1782.
The fifth Chakri monarch, Chulalongkorn, set up the Bureau of the Privy Purse in 1890. Baker, who co-authored A History of Thailand, describes it as the palace’s first investment arm. In 1906 the royal family founded the country’s first bank, Siam Commercial.
The sixth king, Vajiravudh, an uncle to Bhumibol, started Siam Cement in 1913. The company’s main product was packed in wooden barrels and transported by boat on Bangkok’s canals.

Like many Thai men, in 1956 Bhumibol shaved his head and lived in a temple for two weeks as an ordained monk. For leisure, he played jazz saxophone and composed music that’s been performed on Broadway.
Bhumibol exerts his influence during times of stress. In 1992 troops fired on pro-democracy demonstrators in Bangkok. The king summoned the military strongman of the day, Prime Minister Suchinda Kraprayoon, and the protest leader, Chamlong Srimuang, to the palace. Millions of Thais watched on television as the rivals prostrated themselves before the king, who lectured them on duty. Suchinda resigned as prime minister a week later.

In the decade leading up to the 1997 financial crisis, growth in Thailand averaged 8.6 percent a year. Thailand had gone deeply into debt, had invested in many projects that were clearly inappropriate and had allowed speculative stocks and property markets to run riot, according to a 2007 report by the UN Development Programme.

Disaster of the financial kind struck on July 2 1997. The currency plunged to 55 baht to the US dollar from a rate of 25 baht six months earlier. Half of the loans held by Thai banks defaulted, and hundreds of companies collapsed.
The king’s companies didn’t escape. Siam Cement’s debt totalled $6 billion – $4.5 billion of it in dollars, says company president Kan Trakulhoon. It had foreign exchange losses of $1.5 billion.

Siam Cement met with local and foreign banks to reschedule loans, in essence admitting it was at risk. Non-performing loans at Siam Commercial rose to 40 percent. The king’s bank was the first lender to accept a government offer to inject 32.5 billion baht in capital in exchange for equity. In the process Crown Property’s shareholdings in the bank were reduced by half.
As his country reeled, Bhumibol outlined his goals in his December 1997 birthday address. He urged Thailand to stop trying to become one of Asia’s “growth tigers”.

Instead, he said, Thais needed to settle for an economy sufficient for their needs. Amid the carnage at the time, companies controlled by the king stood out for their transparency.

The story was different elsewhere. Prachai Leophairatana, founder of Thai Petrochemical Industry, which was Thailand’s biggest defaulter ever, stopped paying interest on $2.7 billion of debt in 1997. He kept creditors and the government at bay for eight years before being forced out, enabling the company to be taken over and debt repaid.

Crown Property has embraced the king’s philosophy of sufficiency, says Chirayu Isarangkun Na Ayuthaya, who as director-general of the bureau is the king’s chief money manager. That means investing in a few companies that are essential to the country’s stability, he says.
The royal succession is one cloud on Thailand’s horizon that few Thais speak about publicly. Bhumibol turns 80 on December 5 and millions of Thais wear wrist bands inscribed with the words “Long Live the King”.

In the past few years, doctors have treated him for back, heart and prostate conditions. Bhumibol’s only son, Crown Prince Vajiralongkorn, is most likely to succeed his father. He is a career soldier.

“The crown is the one single unifying force in Thailand,” says Korn Chatikavanij, former chairman in Thailand of JPMorgan Chase, now deputy secretary-general of the Democrat Party, which was the main opposition group when Thaksin was prime minister.

“Every change means uncertainty, but the Thai people’s respect for the king transcends the person and reflects a deep, instinctive respect for the institution,” he says. – Bloomberg, Beijing

Business Report – Thailand’s economy prospers on king’s sufficiency philosophy

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