Thailand: Port in the Storm?

The Wall Street Journal Home Page

Eased Controls, Risks
May Help Shares Buck
Broad Asian Selling

By JAMES HOOKWAY
March 4, 2008

BANGKOK, Thailand — The end of capital controls in Thailand could help make the country’s stock market one of Asia’s better performers in 2008, some equity analysts suggest.

An early indication of Thailand’s potential appeal came yesterday, when the benchmark Stock Exchange of Thailand Index fell 0.3% to 842.92 while other leading Asian markets swallowed substantial losses following Wall Street’s battering last week.

Strengthening consumer confidence following the installation of a new pro-business government allied with popular former Prime Minister Thaksin Shinawatra now looks set to drive Thai stocks higher, analysts say. Despite the political risks still shadowing Thailand — mainly tension between the armed forces and the new civilian government elected in December’s parliamentary polls — most reckon the uncertainty that resulted from the military coup that toppled Mr. Thaksin in September 2006 has lessened.

Mr. Thaksin himself appeared sufficiently confident in the new government’s stability to return from 17 months of self-imposed exile last week to face several corruption charges filed against him following his ouster.

Analysts say banking and property stocks are well-positioned to benefit from Thailand’s nascent economic revival, pointing to accelerating credit growth and a leap in imports in January, which jumped 40% from a year earlier.

Bangkok Bank PCL, for instance, is a favorite pick of many analysts, who are counting on lending growth to increase in line with Thailand’s general economic improvement. Shares of the country’s biggest bank by assets closed up one baht at 131 baht ($4.22) yesterday. Ian Gisbourne, an equity strategist with Phatra Securities in Bangkok, says the stock could reach 167 baht over the next 12 months, up 27% from yesterday’s close.

On the property side, Phatra Securities recommends Quality Houses, which closed one baht higher at 2.50 baht a share yesterday. Mr. Gisbourne expects the stock to hit 2.74 baht over the next 12 months, up 9.6%. “It’s best to buy real assets in Thailand at this point, and that means banks and property,” he says.

Thailand’s financial markets have endured a difficult couple of years, stymied by the conflict between the country’s armed forces and conservative political establishment and Mr. Thaksin, a billionaire populist who parlayed his success in the telecommunications business to become prime minister in 2001. Since the 2006 coup, the index has increased 20%, but it lags significantly behind gains in other Asian markets.

The uncertainty prompted by Mr. Thaksin’s departure deepened in December 2006, when the central bank introduced capital controls, requiring, among other things, foreign investors to deposit 30% of the money they brought into the country with government regulators. The policy was intended to prevent speculation in the Thai currency and slow the rise of the baht against the U.S. dollar, which policy makers feared would make Thai exports too expensive compared with competitors in China and elsewhere.

The move, however, triggered the biggest daily selloff by value in the history of the Thai stock exchange on Dec. 20, 2006. The central bank quickly waived restrictions on foreign capital destined to the stock market, but the broader stigma of the misstep remained, rattling investors who were already concerned about the military’s ability to manage Thailand’s economy and compete with rivals such as China, the Philippines and Vietnam for foreign direct investment.

Friday’s central-bank announcement ending all capital controls, though widely expected, indicates that the new government is bent on changing investors’ perceptions of Thailand, says Phatra’s Mr. Gisbourne.

He expects Asia-based fund managers to increase their weighting in Thailand in relation to the rest of the region’s markets, many of which have slumped severely on the threat of a recession in the U.S. “In that context, the residual political risk in Thailand is not as big an impediment as it was last year,” Mr. Gisbourne says.

Indeed, the situation has changed so much that some local and foreign broking firms are looking at companies that have been widely ignored for months.

For example, Shin Corp., the telecommunications company that Mr. Thaksin founded and was later sold by his family to an investor group led by Singapore state investment company Temasek Holdings Pte. Ltd., is getting a fresh appraisal. Shin’s share price slumped sharply after the coup as investors worried that the anti-Thaksin military would try to reverse the Temasek sale. The sale had been widely criticized because it was structured to permit Mr. Thaksin’s family to avoid paying capital-gains taxes on the deal.

Now, Citigroup, among others, is recommending Shin stock as a way to get exposure to the company’s primary asset — market-leading mobile-phone company Advanced Info Service, or AIS — at a bargain price. In a research report released last week, Citigroup analysts Karen Ang and Anand Ramachandran said that at 29.50 baht a share — where it also closed yesterday — Shin was trading at a 39% discount to its net asset value. “With AIS counting for 96% of Shin Corp.’s net asset value, we see Shin as a cheaper proxy to AIS, which we believe is fairly valued,” the analysts said.

Citigroup’s 12-month target price for Shin is 39 baht, 32% above yesterday’s close. Shin’s historic high is 48.50 baht a share, reached on the day when Mr. Thaksin’s family sold their shares.

There are some risks associated with Shin, however, notably its limited liquidity. The company’s free float in the Thai market is 4% of its equity, while the minimum stock-exchange requirement is 15%. Although Shin is likely to be given additional time to meet the exchange’s requirement, it is possible that Temasek or other shareholders could choose to sell their Shin shares on the market at a discounted price in order to meet free-float minimum. Or they might opt, instead, to delist the stock.

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  1. […] stimulus scheme issued on Tuesday, if implemented efficiently, would benefit the Thai economyWall Street Journal:The end of capital controls in Thailand could help make the country’s stock market one of […]

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