The Thai equity market has been influenced by political issues that emerged in the fourth quarter of 2013. At a price-to-earnings multiple of 13.3 times forward 2014 earnings, the Stock Exchange of Thailand (SET) remains relatively cheap, compared to its regional peers, and offers an attractive risk-reward profile. Assuming earnings growth of 14.6% for 2014, our target range for the SET for the year is 1430-1470 points or a forward price-to-earnings ratio of 14.1-14.5 times. The upside in our earnings forecast is obtainable if the political situation stabilises and sentiment improves.
Recent gains in the SET Index have been fuelled by anticipation of negotiation between the ruling and opposition parties. Also, given benign inflation, there is a possibility that the Monetary Policy Committee will continue to trim the policy rate to support growth. Thus, with overall economic conditions still strong, we expect less downside risk than in the 2008 and 2011 crises, when the SET Index reached a price-to-earnings ratio of 7.5 and 11 times, respectively. Despite political tension, we expect Thailand to remain an attractive market for financial transactions. In 2013 it was ASEAN’s largest initial public offering (IPO) market with new issuance of $10.5bn. The $2.1bn IPO of BTS Rail Mass Transit Growth Infrastructure Fund was the largest in ASEAN and the eighth-largest globally. We were involved in other significant underwritings, such as the landmark IPO for CK Power, the power generation arm of Ch. Karnchang. The new issue pipeline is strong and the market is expected to rebound in 2014.
The Thai economy has consistently proven resilient in past crises and is expected to withstand recent setbacks. Thailand is the launch pad for investment in the region and local firms increasingly seek investments abroad. Last year, we advised Siam Cement Group in its acquisitions of two PVC manufacturers in Vietnam, and currently we are advising on an investment in a fibre-optic network to connect multiple countries in the region. The Laos market saw only a single new listing, but still reached over $1bn in market capitalisation.
This was driven by EDL-Gen, the generation arm of the national power company and the first firm listed there.
Together with our partner BCEL, the country’s only publicly listed bank, we advised on its initial public and secondary offerings. Currently, we are advising local authorities on a global custodian to help boost institutional investment. Recently, the country launched its first sovereign bond offering totalling $147bn.
In Myanmar, there has been a wave of political and economic liberalisation that has opened the country to investment. As such, foreign direct investment increased 50% year-on-year to $3.5bn for the fiscal year ending March 2014. The new Foreign Business Law and the designation of multiple economic zones, such as Dawei, which we advised, will continue to open key sectors like oil and gas to large international investors.
The planned opening of the country’s stock exchange in 2015 will offer a range of opportunities for privatisation. Combined with abundant natural resources and inexpensive labour, Myanmar offers upsides for investors willing to accept the uncertainty of a frontier market.
Vietnam is still wrestling with a banking crisis that continues to dampen its economic prospects and weigh on its capital markets. However, we believe that it has reached its trough after an extended period of slow growth, and corporate earnings and valuations of listed companies have or are close to bottoming. Long-term investors are returning with a renewed interest in the country’s 700 small- and mid-cap companies, which have reached “value stock” territory. Privatisation should continue, with a two-thirds reduction in corporate holdings of the sovereign wealth fund to be completed by 2015. At the same time, the government continues to increase the Foreign Ownership Limit in most industries. Led by Thailand, the aggregate GDP of Indochina has outperformed the global average.
Thailand’s capital markets are the largest in the region, and while growth has slowed in relation to developing neighbours, its advanced economy and infrastructure should enable it to remain the gateway to Indochina.
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