How to Beat Warren Buffett?....Thai focused equity fund

[Stock lover]

ถ้าอยากฟังเก่งๆ อ่านภาษาอังกฤษเก่งๆ นี้ต้องไปเรียนที่ไหนครับ

[kongkiti]

Dear [[DEAR]],

Attached is the flash September 2013 result for the Thai Focused Equity Fund (TFE). For the month, the Fund gained 9.4%, while the SET index increased 10.0% in US$ terms. For the year, the Fund decreased 7.0% versus a 2.8% loss for the SET.

Global equity markets performed in a wide range, moving up in the middle of the month, then falling at month end, but still ending positively in all markets. At the beginning of September, markets faced fears of a US military strike against Syria based on Syria’s use of chemical weapons to attack their own civilians. A week later, Russia proposed for Syria to hand over weapons to prevent a US attack which eased tensions. Meanwhile, China reported that its industrial production growth jumped from 9.7% to 10.4% on a y-o-y basis (versus 9.9% on consensus). At mid of the month, Mr. Larry Summers withdrew his name from the race to succeed Mr. Ben Bernanke as Chairman of the US Federal Reserve. Investors believed that Summers would taper Quantitative Easing faster than Janet Yellen (the other candidate for Mr. Bernanke’s position).

Global market sentiment turned negative during the last week of the month, pressured by worries over the US debt ceiling and budget dispute. European stock markets were up the most, 7.9% on average, Asian and US stock markets were up 5.4% and 2.6% on average, respectively.

The Thai stock market gained 10.0% in US dollar terms, the second best performer, following India (+10.7%). Both the Thailand and India markets significantly underperformed in the previous month, due to the concerns of weakening currencies, declining GDP growth, and increasing current account deficits.

Our fund made a significantly gain in September. All of our six heavily weighted sectors contributed profit. The largest contribution to our gains came from our major holdings in communication (+3.2%), energy (+2.8%), and property (+1.9%), all of which we believe have strong fundamentals and truly impressive earnings growth over the next 12 months. Based on Bloomberg data, the Thai stock market is trading at a discount compared to the average regional markets. At the current price, the SET index is trading at 11.9x 2014 earnings with the earnings growth of 15.7%, versus the regional average of 12.5x 2014 earnings with average earnings growth of 12.9%. Our fund is trading at 10.4x 2014 earnings with average earnings growth of 46.7%.

The Thai economy showed signs of improvement in August. Thailand recorded a current account surplus (US$1,285 million), mainly supported by a trade surplus of US$2,214 million. The services & income posted deficit of US$929 million, due to the repatriation of profits and dividend of Japanese manufacturers. Meanwhile, the number of tourists increased significantly, up 28.1% y-o-y to 2.5 million tourists in August, mainly coming from China, Malaysia and Russia. Total international arrivals for January-August 2013 have already reached 17.4 million, up 21% y-o-y. To put this in perspective, in 1990 when we began operations in Thailand, the annual tourist arrivals were only 4 million!

Thai exports grew by 3.9% y-o-y and 7.4% m-o-m in August, reaching US$20.5 billion versus US$19.05 billion in July. Key exports drivers were manufactured products (+2.3% y-o-y), automobiles (+15.8% y-o-y) and plastic products (+10.3% y-o-y). Thailand’s automotive sector in August achieved the highest monthly export level in 25 years, 103,065 units. The Automobile Industry Authority forecasts that Thailand’s automobile exports will reach 2 million units in 2016 (1.2 million units in 2013). Meanwhile, August imports were US$20.6, down 2.1% y-o-y, due to a slowdown in imports of machinery, computers & parts. As a result, the trade deficit narrowed to US$95 million. The Chairman of the Federation of Thai Industries expects that exports in the fourth quarter should recover and show stronger growth.

More positive news, for the first eight months of 2013, the Board of Investment (BOI) reported that it received 1,310 project applications for tax exemption with a combined investment value of THB702 billion (+15% y-o-y).

Foreign Direct Investment (FDI) accounted for 45% of total investment value. Japan is the largest foreign investor with THB203 billion of investment year-to-date, due to their desire to outsource more of their supply chain after the disastrous Fukushima earthquake, caused Japan’s electricity shortages. We continue to see second and third tier Japanese manufacturing companies setting up new factories, and also big Japanese financial institutions acquiring local Thai financial companies.

In addition, more Chinese investors are coming to Thailand. China’s FDI, in termS of investment value, increased 25.2% y-o-y through August. According to the ASEAN Trade Association, Chinese investors are shifting their production bases to ASEAN countries to promote their brand image and facilitate exports to Europe and the US.

As demand continues to grow, the Industrial Estate Authority of Thailand (IEAT) will approve 13 new complexes to be developed by qualified private firms, resulting in combined investment of more than THB300 billion and an additional 30,000 rai (2.54 rai per acre) of land for the manufacturing sector. The IEAT governor said 18 companies had made proposals to set up new industrial estates, but only 13 met the qualifications. The approval will be announced by the end of this month.

Thailand’s economy has strong fundamentals: a low unemployment rate of 0.6%, low inflation rate of 2.0%-2.5%, and substantial foreign reserves (US$170 billon, approximately 9 months of import value). As a result, the Bank of Thailand is confident that the Thai economy will be resilient when the US begins to taper Quantitative Easing (QE).

On the political front, there were three major bills submitted to parliament for approval: the THB2.5-trillion budget for the 2014 fiscal year, the THB2.2-trillion borrowing bill for infrastructure projects, and the Senate amendment bill. The parliament already approved the THB2.5-trillion Budget for the 2014 fiscal year and the Senate amendment bill, while the THB2.2-trillion loan for infrastructure projects is under the process of the upper-house readings.

The critical bills that may heat the political climate are the Senate amendment bill and the THB2.2-trillion borrowing bill for infrastructure projects.

The senate amendment bill will change the structure of senators from partially elected to all elected. It requires all 200 senators to be elected. Under the current constitution, 74 of 150 senators are appointed (mainly by judges). The Prime Minister needs to submit the bill for the King’s endorsement in 20 days as required by law. On the other hand, the opposition Democrats filed at the Constitution Court to dismiss the senate amendment bill due to government representatives giving their voting cards for other representatives to vote on their behalf to pass several provisions of the senate amendment bill during the second reading. The court already accepted the cases. As a result, the opposition Democrats claimed that the Prime Minister may be guilty of acting inappropriately toward the King.

For THB2.2-trillion borrowing bill for infrastructure projects, there is a group formed by 57 civic organizations, called the People Assembly Reforming Thailand (PART), which disagrees with the government’s process and plans to launch a legal challenge to the government’s proposal and petition the Constitution Court against this bill. PART believes that government spending is regulated by budget laws while the borrowing bill is intended to avoid the regular budget procedure and the normal fiscal system. They are not against the investment for country development, just the procedure.

Meanwhile, the government is doing a road-show presentation around the country in order to make public understanding about its objectives and the necessity of infrastructure projects and investment plans. In conclusion, Thai people realize that the country needs an investment in infrastructure and logistics but have different thoughts on source and application of funding.

The SET’s trading activity increased significantly, up 14.3% in August, from US$1,219 million to US$1,403 million of average daily volume. Foreigners turned to be net buyers of US$307 million in September but still net sellers of US$3,387 million for the year. Retail investors remained less active this month, with participation at 50%. Foreigners and domestic mutual funds accounted for the remaining 24% and 26% of volume, respectively.

If you would like to discuss our performance and/or strategy, please give Katekao or me a call at 662-255-2040.

Best regards,
Doug

[kongkiti]

[kongkiti]

Dear [[DEAR]],

Attached is the flash October 2013 result for the Thai Focused Equity Fund (TFE). For the month, the Fund gained 3.3%, while the SET index increased 4.5% in US$ terms. For the year, the Fund increased 10.5% versus a 1.6% gain for the SET.

Global equity markets performed in the same direction with positive ending, supported by the expectation of the US Federal Reserve’s tapering delay to next year, the release of US debt ceiling and budget dispute, and the rising of company earnings. European stock markets were up the most, 5.4% on average, Asian and US stock markets were up 3.9% and 3.6% on average, respectively.

The Thai stock market peaked at 8% on October 18. The SET index then dropped 3% from the peak to the end of the month due to political issues on the amnesty bill.

Our fund also made a gain in October. Five of our six heavily weighted sectors contributed profit, only the energy sector made a loss. The largest contribution to our gains came from our major holdings in communication (+1.9%), and property (+1.4%), all of which we believe have strong fundamentals and truly impressive earnings growth over the next 12 months.

On the political front, there were several serious events that happened in the second half of the month.

On October 18, the scrutiny committee voted to revise the amnesty bill from “scrapping convictions or charges against protesters involved in political unrest since the September 19, 2006 (bloodless coup) to May 10, 2011, excluding amnesty for leaders” to “amnesty for all people involved in political unrest, including soldiers, protest leaders, and authorities, but excluding people found guilty under the lese majesty law, from June 1, 2004 to August 8, 2013”.

This revised version, named “blanket amnesty”, brought up the public opposition by several groups with different opinion:

- the red-shirt group, former Prime Minister Thaksin’s supporters, disagreed on this revised version and opposed giving amnesty to former Prime Minister Abhisit and former Deputy Prime Minister Suthep who ordered to kill protesters during the May rally in 2010.

- the anti-Thaksin group disagreed on this revised draft because it would whitewash the crimes of Thaksin.

- the people in general also disagreed on this draft that pardoned everyone who committed offenses; people felt that all wrongdoings should go thru the court.

On October 24, Dr. Thaksin Shinawatra gave an interview with a local newspaper stating his support for the blanket amnesty bill. He said the country needs to “reset” for the sake of future generations. His statement heated the public’s negative reaction against him and led to a mass rally.

On October 30, there were about 20,000 people that joined the rally, led by the Democrat Party, to pressure the government to withdraw this revised amnesty bill.

On October 31, the House of Representatives (MPs) passed the revised amnesty bill in the second and third readings at 4:30 a.m. (what hard workers!). The bill was passed with 310 votes while four Pheu Thai MPs (red-shirt representatives) abstained and Democrat MPs (opposition party) staged a walkout. The bill was submitted to the House of Senators for reading and approval. The first reading will be held on November 11.

On November 1 until now, there were over a hundred thousand people (combining with several groups) who have demonstrated against this blanket amnesty bill.

On November 5, Prime Minister Yingluck called on Senators to feel free to use their judgment. She expected rejection in the upper house. Meanwhile, the number of protesters significantly increased and consisted of a wide variety of people.

On November 6, the government announced that it will not resume efforts to push through the blanket amnesty bill if it is rejected by the Senate. After rejection, the bill will be sent back to the House of Representatives which will have 180 days to resuscitate it. The Pheu Thai Party said its MPs will withdraw all six amnesty and unity bills pending in the House.

On November 7, the Prime Minister Yingluck called on anti-amnesty bill demonstrators to stop protesting against her government. She said the government will respect the will of people. Meanwhile, the objective of some protesters has been changed from amnesty bill rejection to parliament dissolution as they believe that the government has lost the people’s trust. On the other hand, a majority of people accepted the first reading that forgave protesters, excluding leaders and authorities. Some people disagreed to pressure for parliament dissolution as they believed it is a political game to scramble for power and their own benefit.

On positive news, after the lower house approved the THB2.2 trillion infrastructure bill, it was submitted to the upper house. On October 9, it passed the first reading of the Senate, next will be a vote for the second and the third reading (final approval). However, we expect the opponents of the bill will file in the Constitution Court to block its approval into Law. Meanwhile, the representatives of the private sector said that they will support the government’s THB2.2 trillion infrastructure investment program, which they agreed will help save logistics costs and enhance Thailand’s competitiveness.



In more positive news, the Automotive Industry Club reported that car exports hit an all-time high in September, with 118,253 units, increasing 16.8% y-o-y and 13.5% m-o-m. The value of the exports for September was THB52.3 billion, up 7.1% y-o-y. For 9M13, a total of 874,341 units were exported, up 14.2%, with the export value of THB282.7 billion, up 7.9%. The main markets were the middle-east countries and Australia.

The Bank of Thailand reported weak economic data in September. Thai exports fell 6.3% y-o-y, pressured by a slowdown in manufactured products (-0.8% y-o-y), while agricultural products, automobiles and integrated circuits and parts had a positive growth. September imports also fell 6.1% y-o-y, due to a contraction in capital goods (-11.3%), semi-finished and raw materials (-3.2%), which produced a trade surplus of US$2.6 billion. The tourism sector significant expanded, with 2.1 million foreign tourist arrivals which increased by 27.6% y-o-y, mainly came from China, Malaysia and Russia. However, the services & income account posted a deficit of US$3.1 billion, due to the repatriation of profits, which caused a current account deficit of US$534 million.

The Bank of Thailand revised its GDP growth forecast down to 3.7% in 2013 from 4.2% and down to 4.8% in 2014 from 5.0%, due to weak domestic consumption and delays in both export recovery and government spending.

The SET’s trading activity decreased significantly, down 16.2% in October, from US$1,403 million to US$1,176 million of average daily volume. Foreigners turned to be slight net buyers of US$37 million in October but are still net sellers of US$3,350 million for the year. Retail investors remained less active this month, with participation at 55%. Foreigners and domestic mutual funds accounted for the remaining 21% and 24% of volume, respectively.

If you would like to discuss our performance and/or strategy, please give Katekao or me a call at 662-255-2040.

Best regards,

Doug

[ReRedrum]

ขอบคุณมากครับ

[kongkiti]

Update เดือน Nov13 แล้วครับ
บรรยายสถานการณ์ยาวมากๆ
http://www.questthai.com/market.html

[kongkiti]

จัดเต็มครับ

A few investors have sent us some interesting economic analyses, essentially saying that the Thai economy is in big trouble and that foreign investors should get out now. We will run through a few of these arguments to present our counterpoints and give you our take on the current situation.

David Scott, a Thailand-based newsletter writer, concluded in his 20 December 2013 “A Strategist’s Diary”, that:

1) Thailand is in a huge property bubble,
2) Thai consumer is tapped out,
3) Thai government and Thai corporates are over levered,
4) Average listed stock is pricey, and
5) The baht is in for a big devaluation.

Let’s look at these points one by one.

1) Thailand is in a huge property bubble,

When Thailand really had a huge property bubble in 1997, prices per square meter for townhouses and single detached houses rose a total of about 70% from 1990.

Over the last 5 years, prices per square meter for townhouses and single detached houses rose only about 20%, so there is no bubble there. However, prices for high rise condominiums have risen 60% over the last 5 years. But these may not be comparable numbers, as property developers have concentrated more and more on selling premium-priced condos located very close to BTS light rail stations. In fact, prices for used condos in the prime Sukhumvit area have hardly budged in the last 5 years.

With respect to listed property companies, the recent political turmoil has definitely caused buying delays (and companies have responded by reducing planned launches), but the extension of the BTS light rail and the new high speed lines throughout Thailand are presenting incredible expansion opportunities.

Over the last 10 years, the most profitable and certain way to build a successful condo project has been to locate it within a couple hundred meters of a BTS station, but there were only 20 stations, and the areas around those stations are now saturated.

Under the BTS expansion, the number of stations will be expanded from 20 to 500 by 2020! Bangkokians love the convenience of the mass transit, and we see no reason why they will suddenly stop buying.

The high speed rail will also open up massive new development opportunities, as areas that currently take 1 or 2 hours to commute by car can be reached in less than 30 minutes. The shorter commute means land and condo prices will increase in the suburbs, especially if they are located near BTS or high speed rail stations.

In addition, the Bank of Thailand is currently cutting interest rates, which is definitely good for property prices.

2) The Thai consumer is tapped out.

It is true that the Thaksin government promoted purchasing schemes for first-time home and car buyers as part of their populist agenda, and as a result, the young and low income consumer (income less than 10,000 baht or $312 per month) is over extended. But is household debt now at scary levels?

In fact, only 12% of Thai households fall in the less than 10,000 baht/month category, and because of their low incomes, they represent much less than 12% of total spending.

Further, 48% of Thai households have no debt at all. While household debt to GDP is now at about 78%, two thirds of this is collateralized debt backed by mortgages or automobiles.

3) The Thai government and Thai corporates are over levered,

The Thai government currently has outstanding debt of 44% of GDP, but only 7% of GDP is government external, non-baht debt. Thai corporates (including the debt of the state oil enterprises, PTT and PTTEP, which should borrow in USD to match their USD income) is another 34% of GDP.

Compare this with the US, where debt and unfunded mandates are $75 trillion, or 500% of its GDP of around $15 trillion. Or Japan, with 214% of GDP, or Malaysia, with debt at 51% of GDP.

Mr. Scott shows many examples of how Thai corporates have taken on more debt, but is this excessive debt or just an optimal amount of debt used to deliver higher equity returns?

On a combined basis, EBITDA (cash flow) from listed Thai companies covers their combined interest obligations by more than 7.8x times, so it is very unlikely that there will be widespread defaults on bank loans. This compares with the 1997 EBITDA to interest coverage of only 1.8x.

Further, net debt to equity for listed Thai companies is now only 0.6 vs 1.0 in 1997.

4) The average listed stock is pricey,

Mr. Scott cites Banpu Coal, HomePro, Big C Supercenter and 3 banks, saying “the Good Stuff still looks expensive”.

We were large shareholders of Banpu from 1995 until 2 years ago, when plunging fracking gas prices induced electric utilities in the US to switch from coal to gas. Since the electric utilities had long-term, take-or-pay coal contracts, they were forced to take the coal from US coal producers and then ship it onward to Asia, knocking coal prices in Asia from $130 per ton to $80 per ton. This spoiled the earnings growth story for us, and we sold. Until coal prices bottom, I agree that this is not a buy, even though the company management is very good.

HomePro and Big C were interesting investments until 2011, when international investors bid the price of all retail stocks to more than 25x earnings, at which time, given their 10-15% EPS growth, we felt they were too expensive, and sold.

We generally don’t own banks, because most of the earnings that they book in the good years tend to get clawed back when non-performing loans increase in bad times.

So we agree, this particular list of stocks is not interesting, but at current prices they are not “the Good Stuff”. However, there are about 450 listed stocks in Thailand, and the average of all stocks is trading on 9.5x 2014 EPS, with 12% EPS growth.

Compare this with the US, where the average net profit margin for listed companies is at an all-time high of 11% versus an average over the last 60 years of around 7%. And the market’s Schiller P/E is > 25x, higher than all but 3 weeks in 1929 (in data prior to the late 1990’s bubble).

By comparison, the overall Thai market looks cheap!

And what about our portfolio? Our weighted average P/E is only 8.4x our expected 2014 earnings, with EPS growth of around 50%! (Please see a detailed description of our core positions after this macro-economic discussion).

5) The baht is in for a big devaluation.

As mentioned before, Thai public debt to GDP is not excessive at 44%, and only 7% of total public debt is external debt (not denominated in Thai baht). Thai corporates, after getting badly burned in 1997 doing the yen/baht carry trade, have learned to borrow only in the currency in which they get paid, so except for short-term trade financing, corporates have very little foreign-currency denominated debt.

In 1997, just before the massive Thai baht devaluation from 25 to 55 baht per USD, Thailand’s external reserves were only 25% of their total (public + corporate) external debt.

Today, international reserves are a healthy 127% of external debt.

So, a bit of baht weakening may take place based on differential interest rates, but the Morgan Stanley, Merrill Lynch, CLSA, Tisco and Kbank economists we consulted are looking for a low of 34 – 34.25 baht/USD sometime this year, and all but Merrill are looking for strengthening in 2015, versus the current 33.1 baht/USD. And since we don’t really have an opinion of the baht, we are fully hedged on our USD/baht exposure.


Another of our investors sent us a Forbes article by Jesse Columbo, titled “Thailand's Bubble Economy Is Heading For A 1997-Style Crash”.

He makes similar arguments about how total debt, leverage and external debt have grown, but also reports that “the government is running a budget deficit to support its spending”.

The money was spent on:

· A subsidy scheme for first-time home buyers that will cost the government 12 billion baht in lost revenues
· A three-year debt moratorium program that will cost 1.5 billion baht per year
· A 2012 corporate income tax cut from 30 percent to 23 percent, which resulted in a 52 billion baht revenue loss. Corporate income taxes were further cut to 20 percent in 2013, which is expected to cause a further 22 billion baht revenue loss.
· Personal income tax has been cut to promote consumption, which will result in a 32 billion baht revenue loss in 2013.
· A fuel subsidy that cost 90 billion baht.
· Free computer tablets for students that cost the government 16 billion baht in 2012 and is expected to cost 12 billion baht this year.
· A salary increase for government officials that cost 18 billion baht in 2012 and is expected to cost 23 billion baht in 2013.
· A rubber subsidy that will cost 21.2 billion baht

Taken together, all this spending totals 269 billion baht, compared with total GDP of about 11,000 billion baht. This is only about 2.5% of GDP, which really doesn’t seem that profligate.

Both articles complained about the rice subsidy scheme, in which rice is bought at 15,000 baht per ton plus polishing cost of 9,000 baht per ton, but then sold internationally at around 12,000 baht per ton. Accumulated losses since the scheme began in 2011 total around 600 billion baht, or 200 billion baht per year (less than 2% of GDP). Total deficit spending (deficits only from 2008 until present) averaged 2.5% per year.

Compare this with the US government that takes in $2.9 trillion in taxes per year but spends $3.8 trillion per year on a $15.8 trillion economy. This amounts to about 5.7% of GDP deficit per year. So in comparison, the rice subsidy losses are fairly small.

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[rattypor]

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