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A 360 degree view on Thai small-caps
Pon Van Compernolle's new book "360 Thailand", est. reading time: 15 minutes
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When Bangkok-based fund manager Pon Van Compernolle tweeted about his new book “360 Thailand” a few weeks ago, I got excited.
The book is a collection of Pon’s company meeting notes from over the past ten years. There are 109 companies featured in the book, including property developers, auto lenders, energy companies and consumer stocks.
To be clear, the book doesn’t discuss the entire universe of listed stocks in Thailand. Siam Cement is missing, for example, as is CP All, PTT, the private hospitals and the banks. It only includes a subset of Thailand’s listed companies - the ones that Pon happens to have met over the past decade. But in any case, it’s a fantastic resource to have.
In any case, it was a delight to read. In this post, I will try to summarise what I learnt from the book. As well as give you an overview of the opportunities currently available in the Thai stock market.
2. A snapshot of the Thai stock market
Thailand’s stock market is among the smaller in the Asia-Pacific, with a total market capitalisation of US$560 billion. There are roughly 50 companies with market caps above US$3 billion, and the remaining 800 stocks can be seen as small-caps or micro-caps.
To get a complete picture of the sector breakdown of the market, I ran a screen with no market cap limit and took the aggregated market cap for each Dow Jones’ “Industry Classification Benchmark” sub-sector.
By aggregate market cap, these are the most important sectors on Bangkok’s Stock Exchange of Thailand (SET):
Electricity generation companies such as Gulf Energy Development at 2.9%
Building materials companies such as Siam Cement at 1.4%
Most of these stocks are listed on the main board. But there’s also the so-called Market for Alternative Investments (“MAI”) board for high-growth companies and alternative investment products. There are currently 184 companies listed on the MAI.
The Thai stock market isn’t cheap. The SET index now trades at 18x forward earnings, compared to just 13x a decade ago. And that’s just the tip of the iceberg. I know from my personal experience that finding solid companies trading at low-teens P/E multiples is difficult. It certainly was not difficult back in the early 2010s.
3. Thailand through the eyes of the book
What’s great about the book is that it provides an honest, bottom-up view of the economy and how it’s changed over the past decade. The CEOs tell their own stories about how their companies are developing.
A few of the themes discussed in the book include the rise and fall of Thailand’s tourism industry, the 2010s boom in the Thai property market, the oil & gas sector, new Thai consumer brands, auto exports and investments in neighbouring countries.
Thailand is one of the premier tourist destinations in Asia. Close to ~15% of the economy is related to inbound tourism, a number only surpassed by Macao, Maldives and Cambodia. The main draws are Thailand’s beautiful beaches and its temperate climate. But one company in the book also made the case that Thailand’s service culture is also provides it with a competitive advantage. Thailand welcomes foreign tourists with open arms and a hospitable attitude.
Thailand tourism boom went on uninterrupted for decades. European tourists have flocked to Thailand thanks to its low prices and great flight connections. But from 2010 onwards, inbound tourism from mainland China has been the key growth driver. By mid-decade, close to 1/3 of all tourists were from mainland China.
When a tourist boat outside Phuket sank with 47 Chinese tourists, it caused a temporary backlash. But the number of inbound Chinese tourism kept growing.
The recent slump in Thai tourism is obviously due to COVID-19. It’s caused the Thai baht to US Dollar exchange rate to weaken about 10%.
The companies that participated in the boom include the airport monopoly Airports of Thailand and gateway service operator Bangkok Aviation Fuel Services. Hospitality companies such as Central Plaza Hotel and Minor International also benefitted. These companies are now in limbo, unsure of how fast the industry will recover - if it ever will.
3.2. Property development
Thailand has a well-developed property market. The housing starts per population ratio of 1.6% is among the highest in Asia and almost at Mainland Chinese levels. Transaction volumes in the 2010s reached levels only seen in the early 1990s.
The property sector weakened from 2016 onwards. The fact that the Chinese government imposed restrictions on capital outflows may or may not have played a role.
Some of the developers interviewed in the book comment that there’s been oversupply in certain areas. Properties were built farther and farther out of Bangkok’s metropolitan area.
Developers also complained about how competitive the industry had become - especially in Bangkok and Phuket. Some companies gave up on the Bangkok market altogether, in favour of other faster-growing regions such as Hua Hin.
Thailand created REIT regulation in 2012. Today, there are dozens of REITs listed. Divesting assets into REITs have become an avenue for developers to finance their growth. Savvy capital allocators have used REITs to their advantage. A few examples including Bangkok Land’s Impact Growth REIT, Golden Land’s Golden Ventures REIT and Fraser Property’s Ticon Freehold Property REIT.
Within building materials, the book mentions retailer Home Product Center (“HomePro”) - Thailand’s version of Home Depot. HomePro made the point that the industry is only 1.5% of GDP compared to 3.0% in the United States and therefore has room to grow. The book also mentions tile manufacturer Diamond Building Products and door & window manufacturer Buildersmart.
3.3. Oil & gas
While Thailand is a net importer of oil & gas, it does have a significant oil & gas industry. Exploration mostly takes place in the Gulf of Thailand.
Thailand’s oil output has been steady but its reserves are shrinking. The country’s natural gas output has risen somewhat in the past decade.
Much of production takes place in the shallow parts of the Gulf of Thailand. There is also joint development between Thai and Malaysian companies in basins bordering the South China Sea, though these areas have now become disputed with overlapping territorial claims between Thailand and China.
3.4. Consumer brands
There was also a great number of consumer brands featured in the book. Several of them have had decent success in the region. Some argue that young Thais tend to be up-to-date with the latest trends in fashion, cosmetics and so on. That could be an explanatory factor behind these companies’ success.
A few examples of consumer brand success stories mentioned in the book include:
Body Glove Thailand (now called BGT Corporation), which sells California-style fashion wear.
Jeans company MC Group was also featured, though is facing significant competition from overseas fast-fashion brands.
Before its acquisition by Unicharm, DSG International was Thailand’s largest producer of disposable diapers.
Within the jewelry industry, Jubilee Enterprise had become a leading retailer of diamond jewelry with almost 100 outlets at the time of Pon’s interview with them.
3.5. The auto industry
Thailand’s auto penetration of around 200 vehicles per 1,000 population makes the market is one of the more developed in Southeast Asia. But the high auto penetration is also a reflection of poor public transport systems in Bangkok and other major Thai cities. A few years ago, fewer than 6% of daily commuters used rail mass transit in Bangkok compared to 40% in Singapore. While Bangkok public transport system is expanding, it’s happening at a slow pace.
The major Japanese auto companies have chosen Thailand as a base for assembly of vehicles for Southeast Asian export markets. Industrial parks run by the likes of Amata have sprung up to cater to multinational companies, including those from Japan. And a range of Thai auto component makers such as Aapico Hitech, Eastern Polymer Group have become local suppliers to them.
Up until 2018, the Thai auto industry was growing steadily. In fact, Thailand represented close to 50% of ASEAN auto production, even though its population is only a fraction of the total. But since 2018, the global auto industry has been in a downturn, with further challenges presented by COVID-19. It’s a sector with clear recovery potential.
3.6. Thailand as a springboard for developing Asia
Another key theme in the book was how Thai companies had begun to expand to other countries throughout the region such as Vietnam, Cambodia and Myanmar.
Thai labour is not as competitive as it used to be. Strong tourism to Thailand drove up the value of the Thai baht, making low-end manufacturing less competitive than in say Vietnam.
In addition, several of the products that Thailand used to be strong in - including hard drives, fax machines and cameras - have become outdated.
On the positive side for Thailand, companies also reported that multinationals were closing their factories in China and coming to Thailand instead. Some cited fears of tariffs or higher expenses, and others felt that China was becoming less open to manufacturing exports.
In any case, Thailand continues to be used as a logistics hub thanks to the strength of Laem Chabang Port and decent road infrastructure.
Meanwhile, one company reported that it was losing its best employees to Singapore because of its higher salaries and better standards of living. Unless Thailand is able to move up the value chain, it feared that Thailand would continue to see a brain drain.
4. Companies worth highlighting
Here is the full list of companies mentioned in the book, for those who want to dig deeper:
Among the companies featured, the ones with the highest historical return on equity include the following:
I will now go through five stocks in the book that I think stand out. I’ve disregarded the most illiquid stocks such as Karmarts, S Khonkaen Food and Jubilee Enterprises. I’ve also excluded companies that trade at excessive valuation multiples.
4.1. Union Auction (AUCT TB)
Union Auction (AUCT TB — US$161 million) is an auto auction service with a 30 year history in Thailand. It has a similar business model as US-based auction company Copart: linking buyers and sellers together in large-scale open-air auctions. Increasingly, those auctions are held online or over the phone.
In 2015 when the company was featured in Pon’s book, it had a 50% market share in Thailand with 15 bidding sites and 26 storage facilities. 90% of the vehicles sold were autos and the rest motorcycles and other assets. Over a hundred thousand vehicles were transacted yearly through the company’s auctions.
The company is exceptionally profitable with a 36% return on equity. Buyers know that the vehicle is officially registered and that the seller gets paid. Back in 2015, the company believed that it could double its scale in five years and that’s exactly what the company was able to achieve.
Today, the stock isn’t necessarily undervalued at 20x P/E. But the business does appear to be scalable with a high return on reinvested capital.
4.2. MK Restaurants (M TB)
MK Restaurants (M TB — US$1.5 billion) is a multibrand restaurant group. It has four restaurant concepts:
The Suki restaurants “MK Suki” and “MK Gold”
Thai restaurants “Na Siam” and “Le Siam”
Japanese restaurants “Yayoi”, “Miyazaki” and “Hakata”
Coffee shop and bakery chain “Le Petit”
A key guiding principle of the company is “to listen to customers’ feedback and strive to make them happy”.
The company has been successful in Thailand and throughout the region. At the time of Pon’s interview in 2014, it had 500 branches, including 31 in Japan and 6 in Singapore. The goal was to double the store count from 500 to 1,000 outlets for all brands but it looks like the company was not able to achieve its goal.
As many other restaurants, however, MK was hit hard by COVID-19, with significant decreases in revenue. However, it has not experienced any major cash burn and the company’s enterprise value is lower than it was back in 2019. The arrival of Omicron also brings some optimism after 2 years of protracted crisis. The stock currently trades at 18x P/E against pre-pandemic earnings.
4.3. Namyong Terminal (NYT TB)
Namyong Terminal (NYT TB — US$172 million) is the largest roll-on / roll-off terminal operator in Thailand. It fully owns Terminal A5 in Laem Chabang Port. It also owns a 20% investment in Terminal C0 in the same port. Terminal A5 has maximum capacity of 1.2 million cars and warehouse capacity of 115,000 square metres. Terminal C0 is used as spare capacity to ensure that A5 is fully utilised.
The company’s customers include car makers and shipping transporting vehicles across the region. It has an 80% market share in Thailand’s export and import terminal Ro/Ro market. Thailand is a major car exporting nation, with around 1 million vehicles exported in 2019. While the country’s car exports deteriorated during COVID-19, they are now a recovery path.
Namyong Terminal trades at 17x current-year earnings. But against peak 2018 earnings - when Thailand’s auto exports were at their highest level - the number is closer to 14x.
4.4. PTG Energy (PTG TB)
PTG Energy (PTG TB — US$739 million) is a Thai gas station operator.
At the time of Pon’s interview in 2017, the company had 1,600 gas station, adding new stations at a rate of 300-350 per year. While the company started out as a provider of fuel, it increasingly became focused on non-oil businesses such as convenience stores under the “Max Mart” brand, food & beverages under the “Punthai Coffee” and “Coffee World” brands as well as an auto care businesses. It had 240 car maintenance outlets connected to its gas stations. It also had plans to launch rest areas for truck drivers.
One of the “moats” that PTG has is its PT Max Card membership, which incentivises customers to consume more at PT gas stations, Max Marts, food & beverage outlets, etc. Today, it has many millions of card holders.
At the time of the interview, PTG was mostly located upcountry - north of Bangkok. The company planned to expand into inner and outer Bangkok as well. Its long-term target was to have 4,000 gas stations throughout the country.
Just like for Canada’s Couche-Tard, there is a fear that electric vehicles will make gas stations obsolete. The government just rolled out an EV incentive program. But there’s been little progress up until now. In 2021, only 3,600 electric vehicles were sold in Thailand, out of total auto sales volumes of 760,000.
PTG currently trades at around 13x P/E. The company does have a certain amount of debt. But return on equity continues to stay in the 20-25% rate, so growth is both possible and likely.
4.5. Major Cineplex (MAJOR TB)
Major Cineplex (MAJOR TB — US$561 million) is Thailand’s largest cinema operator, run by the energetic entrepreneur Vicha Poolvaraluck.
The company defines its mission more broadly than just being a cinema operator - more as a provider of entertainment lifestyle services. And indeed, other than movie screens, the company also offers bowling, karaoke, ice-skating and lifestyle malls connected to their screens.
At the moment, Major Cineplex has above 800 screens under management. There’s obvious growth potential in the Thai cinema industry, as the US has 7-8x more screens per capita. The risk is that Netflix will take relative market share. But the cinema industry has been resilient in the past, despite challenges from VHS tapes and movie channels from the 1980s onwards.
Earnings dropped significantly during COVID-19, so near-term P/E ratios do not contain much signal. But against 2019 earnings, the P/E ratio is currently around 14x. The company has a strong-enough balance sheet able to weather the storm. I wrote about Major Cineplex in this prior write-up, in case you want to learn more about them.
Pon Van Compernolle’s book 360 Thailand was a delight to read. It gives you access to company meeting notes that under normal circumstances, only fund managers have access to. It also gives you a snapshot of how the Thai economy has developed over the past decade across several industries.
The Thai stock market isn’t cheap. The currency may have some recovery potential if and when inbound tourism comes back to prior levels. A subset of companies mentioned in the book that have identifiable “moats” and decent valuation multiples includes Union Auction, MK Restaurants, Namyong Terminal, PTG Energy and Major Cineplex.