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YUANTA
RESEARCH CENTER
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Thai |
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- BankThai expected to lift banking shares
- Baht falls to 3-year low against the dollar
- Education is the key to Thailand’s ability to sustain long-term economic growth
- BankThai makes its trading debut today
- KTT <Bt1.70 : SELL> Those left holding KTT shares will just get Bt1.36 in cash
- SCC < Bt260 : SHORT-TERM SELL > Trying to get the most out of its property portfolio
Market Movers
The Thai stock market opened weaker yesterday on the overnight losses on Wall Street. However, selective buying in the property, food and commerce sectors allowed the market to post a modest gain of 0.78 points to 287.88. These three sectors gained 4.2%, 3.3% and 2.4%, respectively. The food sector’s rise was largely due to Thai Union Frozen’s (TUF) Bt6, or 10.2%, price increase on the second highest volume in the market. This stock is one of our favorites due to its attractive share price, as well as the fact that it benefits from the weak baht and doesn’t have the negative sentiment against it like the electronics sector. The banking sector declined, however, by 1.0%, probably as investors are preparing to buy back into the sector today with the first day of trading in BankThai. Trading volume yesterday continued to be quite subdued with only Bt2,695mn worth of shares trading hands. Foreigners, again, sold more than they bought with net sales of Bt168mn.
We expect to see a very volatile day today with the initial trading in BankThai. As the former Union Bank was suspended with a share price of Bt2.2, this one stock has the potential to move the SET index by several points. We are expecting it to trade well over its book value of Bt7. Assuming just this price, the market cap of BankThai would be Bt10.5bn or just under 1% of the SET’s total capitalization. If the stock doubles or triples from Bt2.2, it will move the SET index by 2-3 points. We expect the impact to be much greater, however, with the potential for spill-over buying of other banking shares. We could also see early profit-taking, as investors won’t want to hold over the weekend, especially with the spate of earnings warnings and the potential for another down day on Wall Street.
Yesterday, the baht fell to Bt44.75 - 44.80 to the dollar, the lowest level for the baht since March 1998. Currency traders are expecting the baht to gradually weaken further in the near-term to around Bt45 due to four reasons:
- The expected weakness in Asian currencies due to the economic problems in Japan.
- The government’s repayment of $700mn to the IMF at the end of this month on its $14.3bn debt.
- Slowing export growth which resulted in only a small trade surplus in February of $104mn.
- Accelerated foreign debt repayment by the private sector following numerous recent debenture issues.
|
Country |
% change in currency since end of February |
|
Thailand (baht/US$) |
-3.76% |
|
Japan (yen/US$) |
-5.14% |
|
Singapore (S$/US$) |
-3.06% |
|
Korea (won/US$) |
-5.19% |
|
Phillipine (peso/US$) |
-2.3% |
|
Indonesia (rupiah/US$) |
-5.70% |
The weak baht will be positive for exporters, however, such as TUF and the electronics companies. TUF is one of our favorite stocks at the moment. Even after yesterday’s 10% price gain, the stock is currently trading on a prospective PE ratio of only 5.3x, while the yield on its Bt5.1 per share dividend (XD April 5) stands at 7.8%.
Government Policy Statement on EducationThis next bit is not real market-moving news, nor is it likely to be of interest to stock punters. Nevertheless, we believe that it is noteworthy that PM Thaksin pledged that he would personally lead the education reform effort and bring about the compulsory 12-year free education program within one year. Actually the government has to implement this program, as the right of all Thais to free 12 years of education is enshrined in the 1997 Constitution and a 2002 deadline for implementation is set out in the 1999 Education Act. But, it is still heartening to see Dr. Thaksin take up this issue personally.
Like Thaksin’s other social programs, this one will cost a lot of money. The government will need about Bt100bn to finance this program from 2003 to 2007. In this case, we think the money is being very well spent.
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In lieu of the 1997 Constitution and the 1999 Education Act, the Government is determined to launch educational reforms with the aim of developing Thailand into a knowledge-based society, which is a pre-requisite for becoming a knowledge-based economy. The reforms will provide the Thai public with equal access to life-long education and training, enabling them to acquire knowledge and capital to generate income and to eventually pull the country out of the economic and social crisis. Towards this end, the Government will abide by the principle that "Education Builds the Nation, Empowers the Individual and Generates Employment." |
It’s interesting to look at the development of the education sector over the last 15 years. In 1985, only 40% of students completing primary education (pratom 6) went on to lower secondary school (mathayom 1), which ranked Thailand far below the educational standards of neighboring countries like Malaysia, Philippines, Indonesia and China. Case studies in the early and mid-1980’s clearly indicated that the vast majority of students in rural areas would continue their education if lower secondary schooling was free and near their homes.
It wasn’t until the Anand government in the early 1990’s that a number of important policy changes were implemented to achieve the goal of higher secondary school enrollment. The basic education level was increased from pratom 6 (age 11) to mathayom 3 (age 14). Secondly, primary schools in rural areas were expanded to include lower secondary school classes. Thirdly, through special government support programs, public schools could offer free tuition to approximately 70-80% of the lower secondary students. The results were immediate with the student transition rate from primary to lower secondary doubling from 40% in 1985 to 80% in 1995. The most amazing statistic is that of those students proceeding on to lower secondary school, a very high percentage would continue on to upper secondary school and then to higher education.
The great pity, though, is the large baby boom generation went through the education system in the mid-1980’s and early 1990’s, just missing the benefits from these policy changes. This sadly reflects in the education estimates of the Thai labor force. According to the National Statistical Office’s November 2000 Labor Force Survey, 67.4% of the current employed have only a primary school education or less. Some economists have attributed the economic crisis partly on the relatively low education level of the country’s workforce.
Based on the 1999 enrollment statistics from the National Education Commission, we clearly see an encouraging picture. The transition rate from primary to lower secondary remains high with 83.9% of the students aged 12-15 enrolled in lower secondary school. 82.4% of those completing lower secondary are going on to upper secondary. Just as total enrollment in lower secondary school virtually doubled from 1989 to 1995, total enrollment in upper secondary rose 73.2% from 1.05mn in 1993 to 1.83mn in 1999.
Primary and secondary school enrollment statistics
|
1987 |
1989 |
1991 |
1993 |
1995 |
1997 |
1999 |
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Transition rate from primary to lower secondary |
37.8% |
43.4% |
54.8% |
68.5% |
80.5% |
91.2% |
87.1% |
|
Lower secondary school gross enrollment ratio* |
n.a. |
n.a. |
44.6% |
57.2% |
68.6% |
81.8% |
83.9% |
|
Transition rate from lower secondary to upper secondary |
74.9% |
79.3% |
85.4% |
86.9% |
83.6% |
86.1% |
82.4% |
|
Upper secondary school gross enrollment ratio* |
n.a. |
n.a. |
25.1% |
30.1% |
37.7% |
49.3% |
58.5% |
* gross enrollment ratio equals school enrollment
divided by total school age population
Source: National Education Commission
Quality of education is also the issue. Obviously, the Ministry of Education has had difficulties in coping with a 73.2% increase in upper secondary school enrollment in just six years. The biggest challenge has been finding enough qualified teachers to teach mathematics, science, physics and computer subjects.
With the Bt100bn budget to be spent on the upper secondary school education system in the five-year period from 2003 to 2007, there should be a dramatic improvement in the quality of education. Businesses and the Thai economy will certainly benefit from 70-80% of the young people entering the workforce having an upper secondary education versus only 25% just 10 years ago.
Stock Movers
BankThai (BT) is expected to be the hot stock in the market today when it makes its trading debut. The stock should attract fundamentally-based investors as it virtually has a clean balance sheet, as well as short-term traders due to its very limited free float of 10mn shares. BT, which was formed from the consolidation of Union Bank and 13 closed finance companies, is assuming Union Bank’s listing status after being suspended for almost three years.
There should be significant share price appreciation from Union Bank’s pre-suspension price of Bt2.2. When trading begins, BT’s shares are expected to trade well above its book value of Bt7.07/share. However, investors shouldn’t get too caught up in chasing after the limited script available in the market, as the FIDF will need to sell some of its current 99.3% holding in the bank soon after the transfer of NPLs to the new Thai AMC by mid-year.
Some investors have been deceived into believing that they will still have a chance to swap Krung Thai Thanakit (KTT) shares into BT shares. But, we are 100% confident that this rumor is groundless. In December and January, shareholders of KTT were given the chance to swap 4 KTT shares for 1 BT share. Supposedly, there are still 15mn shares of KTT left in the market that didn’t take up these two rounds of share swap offers. BT’s CEO Pirasilp confirmed earlier this week that there will be no third round. Instead, BT will buy the remaining KTT shares at Bt1.3566/share before delisting. The tender offer period is expected to be around late April. As the bank has made its intentions very clear, it seems ludicrous that KTT’s shares are still trading in the market at Bt1.70. Given the warm reception for BT shares, we feel sorry for those who did not swap. We advise them to SELL NOW. Otherwise, they will have no choice, but to accept Bt1.3566/share.
Yesterday SCC Group announced yesterday that its wholly-owned subsidiary, Cementhai Property Co.,Ltd., will be turn to be more focused on profit generation for the group. Cementhai Property’s portfolio is composed of more than 10,000 rai of prime land plots and 3 industrial estate projects. The total asset value is about Bt10bn, of which 70% is in industrial estates and another 30% in undeveloped land and office buildings.
The company has 3 industrial estate projects – Nong Kae in Sara Buri with an area of 3,500 rai, Ban Kai in Rayong (3,500 rai), and Mab Ta Phut in Rayong (1,600 rai). The first 2 projects are already operating with 35-40% occupancy, most of which is taken up by the SCC group. The remaining 4,200 rai accounts for 20% of the total 20,000 rai currently available in industrial estate projects nationwide. For Mab Ta Phut, the company will start development early next year. The investment budget for industrial estate development is about Bt1-2bn.
For the undeveloped land and office buildings, the company has many plots throughout Thailand. 700 rai are in prime locations in Bangkok, particularly 300 rai in Dong Muang and areas located near the Chao Phya River. Moreover, the company has 25 building properties in hand including the group’s headquarters buildings. Of the 25 properties, 15 are currently being rented.
The company expects to achieve revenue of about Bt600-700mn this year. Since the assets were bought 30-40 years ago at very low prices, Cementhai Properties should be sitting on very good capital gains even with the sharp weakening in property prices over the last three years.
This news is significant simply because the SCC Group is looking at ways to maximize cash flow and earnings potential of its assets. However, in terms of SCC’s overall sales last year of Bt126bn, the forecast revenue from its new property division represents only 0.5%. So, there won’t be much impact on SCC’s bottom-line.
On a fundamental basis, SCC’s shares are very attractive at the current share price of Bt260. However, we don’t see any positive news, which will turn sentiment around. Domestic cement demand will be flat, at best, this year, while the company’s petrochemical and pulp & paper divisions will be contributing less due to softening prices. In the near-term, we are maintaining our SHORT-TERM SELL recommendation on the stock.
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