YUANTA RESEARCH CENTER	Thai
BREAKFAST April 4, 2001

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• Telecom and electronic stocks lead SET retreat
• More pain for tech counters
• Thaksin tells the nation the truth about country’s economic and social ills
• First day of Constitutional Court case rattles the market
• METCO: Solid fundamentals but clear and present danger for speculators
• Battered brokers: Only ASL expected to post net profit in 1Q01
• Retail sales grew by only 3% in first quarter
• ATC < Bt3.00 : SELL > Shareholders will have to bail out ATC yet again

Market Movers

• Telecom and electronic stocks lead SET retreat

Electronics and telecom shares led the SET index lower yesterday, with sentiment hurt by Monday’s fall in high-tech stocks on the Nasdaq and more losses in regional markets. The SET was also weighed down by fears that Prime Minister Thaksin Shinawatra would paint a gloomy picture of the
economy during his televised public address last night.

The SET index ended 4.54 points down at 285.57, a decline of 1.57%. Trading volume rose to Bt4.6bn compared with Bt3.3bn on Monday. Meanwhile the baht snapped a six-day losing streak to rise 0.1% to 45.14 to the dollar.

All shares in the electronics sector closed lower yesterday, with Hana Microelectronics dropping 6.5% to Bt58. Telecom stocks witnessed a similar sell-off although Advanced Info Service bucked the losing trend by gaining Bt2 to Bt400.

Banking stocks also softened, with Bangkok Bank falling 3.34% and BankThai, Friday’s star performer, plunging 15.4% to Bt11.

Tender offer speculation helped Muramoto Electron gain 28% to Bt96 at one time during the session following its 29% surge on Monday. The stock, however, closed up only Bt7 or 9.33% at Bt82 on heavy trading volume of Bt936.7mn – one fifth of the day’s total turnover.

• More pain for tech counters

Sharp falls on Wall Street last night promise another bruising session for the SET today. With the Nasdaq tumbling more than 6% to a 29-month low of 1,673, electronics and telecom shares will almost certainly face more selling pressure.

Thaksin’s 20-minute televised address last night on Thailand’s economic woes failed to contain anything not already known to financial markets. What’s likely to be of more immediate concern to investors is the National Counter Corruption Commission’s strong accusations against the Prime Minister at the opening of yesterday’s Constitution Court hearing. In a televised court session, the NCCC accused Thaksin of trying to conceal his wealth through irregular share transfers.

The case, which was given greater prominence in local newspapers than Thaksin’s economic pep talk, threatens to throw Thailand into political confusion at a time when the country appeared to have formed its most stable government since the Anand Panyarachun era. Although a verdict is not expected for many months, the court case against Thaksin is likely to act as an additional anchor on market sentiment.

• Thaksin tells the nation the truth about country’s economic and social ills

Analysts looking for something new in Prime Minister Thaksin Shinawatra’s televised speech last night were probably disappointed. However, Thaksin’s was not aiming to impress analysts, the stock market or currency market. It was very clear that he was addressing the country’s 61mn people in a “State of the Nation” speech.

Seated behind a desk, Thaksin seemed comfortable, confident and spoke in direct, simple language. He produced numerous statistics, accompanied by easy to understand graphs and charts. Thaksin spent most of his 20-minute speech talking about the problems facing the country. He listed Thailand’s economic problems, ranging from low agricultural commodity prices, slowing exports, low capacity utilization in the agricultural sector, the large glut in the property sector and the large unresolved bad debt in the financial system. Thaksin expressed concerns about the growing level of poverty and the increasing number imprisoned on drug-related charges.

Thaksin admitted that the public sector debt had risen to more than half of GDP and that future debt servicing would curtail the government’s ability to increase spending on new investment projects. He also said that given the latest economic indicators, GDP this year would expand by only 3-4%, far below his election campaign promise of maintaining growth rates of 5-7%.

Thaksin’s policy initiatives were given in only very general terms. Much more details were already provided in his government’s policy statement before parliament on February 26.

At this point, it is difficult to gauge the general public’s reaction to the speech, but we believe that Thaksin’s “coming clean” on a few of his election promises didn’t dent his popularity. Thaksin is setting a precedent for all future prime ministers by taking responsibility for the country’s economic management and clearly conveying the economic situation and his government’s policies directly to the people.

• First day of Constitutional Court case rattles the market

The Thai stock market was rattled a little yesterday during the televised first day of the Constitutional Court case against Thaksin. There is nothing new in the National Counter Corruption Commission’s (NCCC) presentation. But, the serious tone and allegations stirred up the market’s concerns once again that Thaksin’s tenure as prime minister could be cut short by an unfavorable ruling.

The NCCC made very strong allegations against Thaksin. At one point, the NCCC Secretary-General Klanarong Chantik told the court that the stock transfers appeared to be part of share manipulation and tax evasion schemes. He went on to give details of how the share transfers violated the Securities and Exchange Commission Act, how the share transfers allowed Thaksin and his nominees to avoid paying taxes and how the nominees were used to hide the real shareholder in numerous transactions.

Thaksin’s lawyers will get their chance to present in front of the 13 Constitutional Court judges today starting at 9:00am. They are expected to focus on technicalities instead of trying to refute the NCCC’s facts in the case, particularly 1) the legitimacy of the NCCC panel that found Thaksin guilty, 2) whether Thaksin was exempt as the asset disclosure law was passed two months after Thaksin took up the post as Deputy Prime Minister and 3) allegations that the NCCC panel was biased and too hasty in delivering its verdict.

We heard nothing from yesterday’s proceedings, which would make us change our initial impression – this will turn into a long, drawn-out, political trial. Again today one local newspaper mentioned that the proceedings could take up to a year. Another highlighted a split in the voting patterns of the 13 judges. Listening to the allegations made against Thaksin yesterday, reminds us that the major shareholders of almost all of the large companies listed on the SET are guilty of the same charges. It is also refreshing to see that the Prime Minister of Thailand is being held to a higher standard.

Stock Movers

• METCO: Solid fundamentals but clear and present danger for speculators

What a difference a tender offer rumor makes. Last month shares of Muramoto Electron (METCO) were languishing below Bt50 after coming within touching distance of Bt80 during last January’s post-election rally. In the past few trading sessions, METCO has been the market’s darling, rising to a peak of Bt96 yesterday before ending the day at Bt82, an overall gain of Bt7. This compares with a 1.6% fall for the overall market

Trading of METCO shares was particularly heavy yesterday, with its volume of Bt936.7mn accounting for one-fifth of total market turnover.

The catalyst for the speculative frenzy is a rumor that the Japanese parent, which owns about 67% of METCO, will make a tender offer of Bt130-150 for the remaining shares in preparation for delisting the company.

Investors are hoping for a repeat of the GSS Array Technology saga whose shares quadrupled in less than a year after ACT Manufacturing, an international electronics manufacturer, made a tender offer of Bt163 a share.

Management of METCO yesterday came out with another firm denial that its major shareholder would make a tender offer. “They will keep their shares but there are no plans to buy any more – definitely not,” said METCO director Mamoru Fukami.

Although we have not actively followed the stock, we recognize that METCO is a well-run company with healthy cash flows and strong dividend stream over the past five years.

The company notched up another splendid performance last year, reporting a net profit of Bt346mn, with EPS growth of 17%. Gross and operating margins saw little change although sales surged 24% to Bt7.4bn (see table above). METCO’s first quarter (ending December 2000) has been less impressive, with earnings skidding 16% year-on-year to Bt148mn and gross margins declining from 13.5% to 11.1% despite runaway revenue growth of 93%.

The company’s financial position is solid, with net gearing standing at 0.2X in 1Q01. The company spent about Bt1.4bn in capital expenditure over the last five quarters. METCO achieved Bt600-800mn in operating cash flow each year during 1999-2000. Given its slowing investment requirements, free cash flow turned positive at Bt300mn in 1Q01. We calculate METCO’s net book value at Bt109 per share. Last month METCO paid a dividend of Bt5 a share.

Given management’s denial that a tender offer is in the pipeline, investors should think twice before buying the stock on the strength of market rumors. Japanese companies have no record of making open tender offers in the market. In general, Japanese manufacturers prefer long-term partnerships with Thai companies and tend not to actively trade shares of joint ventures.

On a fundamental basis, however, the stock appears attractive given that it is trading well below its book value of Bt109. Based on 2000 EPS, METCO is trading at a PER of only 5X and 3X EV/EBITDA. Even factoring in a possible 20% decline in earnings this year EV/EBITDA is likely to stay the same as free cash flow will turn positive this year.

To sum up, METCO is attactive for long-term investors willing to hold what is normally a very illiquid stock. Speculators may strike gold as they did in the GSS Array Technology case but may just as easily walk away with badly burned fingers if the rumors prove false. 

• Battered brokers: Only ASL expected to post net profit in 1Q01

Daily volumes on the Thai stock market averaged a healthy Bt8.46bn in the first quarter, a rise of 161% compared to 4Q00 and up 33% year-on-year.

That was the good news for stockbrokers. The bad news is that average daily volumes have been falling steadily since hitting a high of Bt12.5bn in January in response to Thaksin Shinawatra’s landslide election victory.

In February average SET turnover dropped to Bt7.34bn a day. March was worse, with daily volumes down to Bt5.17bn. That still looks good in comparison with volumes in recent days, which are averaging about Bt3.5bn a day.

Among four listed pure securities companies, - Adkinson (ASL), ABN Amro (AST), KGI Securities One (SONE) and Seamico (ZMICO) – we expect only ASL to report a net profit in the first quarter. We expect ASL to announce earnings of Bt5mn compared with a loss of Bt34mn in the previous quarter.

ZMICO and SONE will see some improvement in their 1Q01 bottom lines thanks to gains in market share but will still report substantial losses. ZMICO’s market share grew from less than 4% to 6% in 1Q01 thanks to new branch openings and the recruitment of marketing officers from other brokers. However, we expect it will post a Bt51mn loss despite more than a threefold increase in brokerage fees from 4Q00.

SONE saw its market share climb from 3.66% in 4Q00 to 4.82% in 1Q01. However, this was far below its market share of 7-8% in 1H00, before the messy battle between the company’s management and its Taiwanese shareholders.

Our 1Q01 forecast for securities companies is based on three key assumptions:

1. No change in average commission rates from the 0.17% seen in 4Q00.
2. No gain or loss on securities trading even though the SET Index rose 8.5% to 291.94 at the end of1Q01)
3. The industry’s cost structure remains unchanged from the previous quarter

With stock market volumes falling to pre-election levels, we recommend investors to steer clear of securities companies for the time being. We have a HOLD recommendation on CNS and ASL and SELL ratings on AST, SONE and ZMICO.

• Retail sales grew by only 3% in first quarter

According to the Thai Retailers Association (TRA), retail sales grew by a disappointing 3% in the first three months of this year. With the current poor economic environment, the Association is projecting sales growth for the full year of not more than 5%.

We suspect mom-and-pop stores and other small businesses will bear the brunt of the slowdown in consumer expenditure. The TRA’s president Pittaya Jearavisidkul was quoted in The Nation newspaper today as saying that retail sales in the modern trade sector grew by 8% last year to Bt250bn.

In the same article, the finance director of Siam Makro (MAKRO) said that the company had seen flat growth in same store sales in the first quarter of this year.

Although listed consumer plays will be hurt by the slowdown, we believe earnings for MAKRO and BigC Supercenter (BIGC) will remain relatively resilient thanks to their specialized niches in the retail trade. Unlike small retailers, they can also achieve earnings growth through branch expansion and greater emphasis on in-house products.

Advertising spending is growing at roughly the same sluggish pace as retail sales. In the short-term, the deceleration in growth will limit earnings potential for BEC World (BEC) and Grammy Entertainment (GRAMMY). Nevertheless, we maintain a BUY rating on both stocks as their dominant market positions and strong core businesses will ensure they are among the first to rebound when consumer spending picks up.

• ATC < Bt3.00 : SELL > Shareholders will have to bail out ATC yet again

Yesterday, we spoke with the management of Aromatics (Thailand) (ATC) about additional support from the company’s shareholders. The management refuted a newspaper article, which said that ATC would receive $180mn in financial support from the Petroleum Authority of Thailand (PTT), Siam Cement (SCC), Banpu and the Crown Property Bureau. In fact, ATC has already received support in the form of $207mn in credit lines from its shareholders. This was part of its $453mn debt restructuring plan worked out last year. The company said they can draw down the remaining $16.6mn from shareholders in July.

The management did say that PTT has offered another $90mn in contingency support in the event that the aromatics industry does not improve.

At this point, we believe that ATC will have to draw down additional loans from its shareholders. The management expects aromatics prices to stabilize at the current level before rebounding in the third quarter of this year as demand starts picking up again. With the current price structure, ATC is hemorrhaging red ink.

Last year, ATC booked a net loss of Bt4.8bn due to 1) forex losses of Bt2bn, 2) interest expenses of Bt2.1bn and 3) a change in its accounting policy, resulting in an additional Bt700mn in depreciation charges each year. In 2000, ATC generated EBITDA of Bt899mn, which was clearly not enough to cover its interest expenses of Bt2.1bn.

This year, doesn’t look any better. ATC needs $50mn, $30mn for interest payments and $20mn for repayment of its principal which stood at Bt27bn at the end of last year. The weak baht is further hurting the company’s chances of meeting these commitments. As a result, we are maintaining our SELL recommendation on ATC.

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