A SHARE OF THE SPOILS
A look at Thailand’s remarkable bull market run
‘Sell your house and buy stocks,” a banker told Spectrum over dinner a few months ago.
“If you buy some of the IPOs or stocks that are in vogue in the Thai market, you will not regret it, because you’ll soon be able to buy a better house and still have some cash left over.”
The banker was not literally telling laymen like us to sell the roofs over our heads, but was rather making a comment on what was happening on the Stock Exchange of Thailand (SET).
The SET, which has more than 800 companies listed, rose by 13.7% last year after having risen by more than 20% during 2016.
Thailand’s SET has been on a bull run for a few years thanks to the influx of funds, mostly from domestic investors, and this is expected to continue at least for the near future. Meanwhile, the smaller bourse — the Market for Alternative Investments (MAI) — slipped by 12.3% during 2017, although some companies listed on the MAI saw heavy trading and sharp increase in their share prices.
Last year was a good one for the Thai bourse, although foreigners were net sellers during the year.
During 2017, the total market capitalisation reached 17.6 trillion baht, up 16.6% from 15.1 trillion a year earlier, while the average daily turnover in 2017 was 47.8 billion baht, down nearly 5% from 50.2 billion baht in 2016.
According to data from the SET, retail investors were the largest net sellers of Thai shares in 2017 with 94.6 billion baht in net sell position, while foreign investors cashed out 25.8 billion baht, compared with net buying of 77.9 billion baht in 2016. If the net position from the MAI were
included, foreign investors were net sellers of 26.10 billion baht during 2017, against a 78.5-billion- baht net buy position in 2016. Institutional investors were net buyers of 103.6 billion baht in 2017, versus net sales of 8.7 billion baht in 2016, while brokers continued their buying spree at 16.7 billion baht, albeit at a slower pace from 25.4 billion baht in 2016.
Even though foreign investors have been net sellers of more than 26 billion baht in 2017 and nearly 78 billion baht net buy position in 2016, they were net sellers of nearly 157 billion baht in 2015.
In the past three years they have been net sellers of more than 105 billion baht in the Thai equities market, yet the market continues to rise.
Not too long ago foreign investors were the determining factor for the direction of the Thai stock market, but over the past few years the level of excess liquidity in the market has prompted domestic retail investors to take the lead.
“The retail players are the drivers and there is some feeling that the market is being played up in some sectors,” says Pipat Luengnaremitchai, head of Phatra Wealth Management, a unit of Phatra Securities. His views were echoed by nearly every major brokerage, be it Asia Plus Securities, Kim Eng Securities or Tisco Securities, who all say that the fear factor has started to take a foothold in
This is a bull market, and anything and everything seems to be going up, so why not enjoy the ride while it lasts?
KONGKIAT OPASWONGKARN, CEO, ASIA PLUS SECURITIES There needs to be some kind of system that helps educate investors about the pitfall risks.
PAIBOON NALINTHRANGKURN, CHIEF EXECUTIVE, TISCO SECURITIES
the minds of investors.
But as the rally continues, the composite SET Index continues to break new records each day and little has been come in any kind of warning from the authorities who are supposed to be warning about the possible formation of a bubble.
“Yes, there are some stocks that look very expensive and that is why we advise investors to look at fundamentals,” SET president Kesara Manchusree told Spectrum over a telephone interview.
While the party in the market continues, the bull run has helped push the composite SET Index to cross the 1,800 points within the first two weeks of trading this year.
The SET Index, which had not been able to close at above 1,800 points since late last year, finally managed to get past that psychological barrier on Jan 12.
The push that helped the SET Index cross the 1,800 points was the resurgence in the oil prices that had been subdued for the past few years.
Higher oil prices helped push the prices of petrochemical sector stocks and in effect pushing the composite index.
Oil prices that had been hovering at around US$50 a barrel managed to push itself up to a three-year high of around $70 a barrel.
The surge in oil prices have helped the heavyweights such as PTT Plc, PTT Exploration and Production, IRPC, Thai Oil, and others push the SET Index to reach new highs each closing day.
But amid the rise of the fundamentally good stocks are also those stocks that have little change in their fundamentals.
EXCESSIVE EXUBERANCE
The SET’s price-to-earnings ratio stood at 19.1 at year-end, compared with 18.6 a year earlier, and most analysts would believe that 18-19x forward P/E is about the right valuation for companies in the Thai market.
However the story is very different with some of companies trading on the bourse.
“If you look at the forward P/E then there are those that are trading at below the average while there are those that are trading at extremely high P/E,” Paiboon Nalinthrangkurn, chief executive of Tisco Securities says.
“There is some kind of irrational exuberance that one can see in some sectors although there are others that are undervalued.”
The SET’s continued surge has been attributed to the excess liquidity in the market where the low interest rates coupled with low yielding fixed income instruments have prompted investors to turn to pouring funds into the stock market.
According to available data, Thailand’s excess liquidity stands in excess of 300 billion baht, and part of the reason for the rise in liquidity has been the rising current account surplus.
The heavy liquidity according to Maria Lapiz, co-head of research at Kim Eng Securities, could suddenly dry up if oil prices hit $80 a barrel.
According to Ms Lapiz, Thailand’s current account surplus could suddenly turn on its heels, which would be detrimental to the economy and the stock market. But until that moment comes, the market is likely to continue to ride along.
Thailand’s bright economic outlook is giving a helping hand to the market’s growth as well as prompting investors to take a punt on the market.
“The index’s rise reflects investment confidence in line with economic growth and listed firms’ profitability,” said Ms Kesara of the SET.
“But it is advisable for investors to select stocks with good performance and growth potential, study companies’ information carefully and monitor domestic and global situations that can affect investment, in order to minimise risks.”
ENJOY THE RIDE
Many investors who focus on the fundamentals of companies have started to take a back seat or are waiting for some kind of clarity on what to invest in.
“This is a bull market, and anything and everything seems to be going up, so why not enjoy the ride while it lasts?” says Kongkiat Opaswongkarn, the chief executive officer of one of the country’s largest brokerages, Asia Plus Securities Plc.
“But you should remain cautious, because in a momentum play there is usually no major correction, but it is difficult to find stocks that are good long-term plays.”
He says valuations of companies in the oil and gas sector are good bet but one should be careful about the small capitalised stocks that are witnessing price earnings multiples that would scare investors away.
Questions have been raised on the P/E of many companies that are trading at what can be considered to be excessive valuations, especially in the tourism, energy and petrochemical sectors.
“Some of the energy-related businesses that are trading at high multiples are trading at multiples that are unthinkable, considering their business is more like a fixed-income one,” Mr Kongkiat said without naming names.
A quick look at some of the companies shows that Erawan Group Plc is trading at 48x P/E, while Airports of Thailand Plc is trading at 49x P/E.
In the energy sector, the likes of Energy Absolute Plc is trading at 68x P/E, while the newly listed Gulf Energy Development Plc (Gulf ) is trading at 70x P/E.
This is after the shares dipped to 74 baht after hitting a high of 82 baht from the initial public offering price of 45 baht on Dec 6.
There are many stocks that can be put on the list of companies that have high P/E and yet continue to see their valuations rise, and some of these stocks are big names.
“In today’s world, the name of the game seems to be that one should play the big names because there is a feeling that these are too big to fall,” says another analyst, who asked not to be named.
The IPO market has also been a hotbed for punters and in 2017 the market capitalisation generated from allocating IPO shares to the general public reached an all-time high of 426 billion baht, surpassing the SET’s 280-billionbaht target, with 42 securities listing on both stock exchanges.
Of the 42 securities, 38 were listed companies, three were real estate investment trusts (REITs) and the remaining one was an infrastructure fund.
During 2017, Gulf emerged as the biggest IPO by market capitalisation, with nearly one-fourth of the total market value generated from IPO share sales.
Gulf was also the biggest IPO issue in terms of fund mobilisation. The power-generating firm raised 24 billion baht from the primary market.
The 46 IPO shares’ fundraising size combined for 106 billion baht in 2017, up substantially from 52.8 billion in the previous year.
Two stocks — Information and Communication Networks Plc (ICN) and Humanica Plc (Human) — have more than doubled their IPO price on the first day of trade. ICN shares gained 151.1% on the MAI, while Human shares gained 101.3% on the SET.
Industrial equipment distributor Siameast Solutions Plc (SE) was the third-best IPO on its debut on the MAI, surging 70.6% from its offering price, followed by Do Day Dream Plc (DDD), the maker and distributor of Snail White skincare products, with a 60.4% gain, and Triple i Logistics Plc (III), which rose 57.3%.
WARNING SIGNS >>
While euphoria grips the investment community, brokers are starting to fire warning signals but few investors are willing to listen.
“I am outside Thailand at the moment and meeting investors, and when we say that Thailand’s market is expensive, nobody wants to hear us,” said another head of a research house, who asked not to be named, when contacted by Spectrum.
But some brokers are already sending daily notes to clients to clearly state they are downgrading some of these high P/E stocks, and asking investors to take a closer look at the valuations of many of these companies that have had a good run in the past 12 months.
Economists believe a “feelgood factor”, spurred by reminisces of when the country was enjoying double-digit growth, has taken hold, even though the economy is not doing quite as well as that.
They warn a reality check may be looming in the second half of the year, when the economic data is released.
Thailand’s economic momentum started to pick up after the second quarter of 2017 and the economy is expected to post a growth of at least 4% .
It nearly hit 4% growth during 2017 but the year-on-year base of comparison during the second half of this year is likely to be subdued as the last two quarters of 2017 had seen good growth.
“You will start to see the tone change in the second half of the year as the data may not look as rosy as it did in the first half of the year,” Ms Lapiz of Kim Eng says.
Mr Paiboon says what is more surprising is the fact that not many analysts are covering the stocks that are listed on the market.
With about 688 companies listed both on the SET and the MAI, the coverage by most brokers does not exceed 200.
“There is already a mismatch there,” he says. “If nearly 500 stocks are not covered, then there needs to be some kind of system that helps educate investors about the pitfall risks.”
But Ms Kesara says the SET’s previous attempts to help expand coverage of the smaller capitalisation stocks have all ended in failure, as not many people are reading them.
“We then decided to give investors a snapshot for companies listed on the MAI and a twopage factsheet for companies on the SET, so that investors can analyse the data and make the right decision themselves,” she added.
Ms Kesara says more than 100 of the 150 companies listed on the MAI have this snapshot, while adding that the maturity of Thai investors has grown over time.
Yet there is little the authorities can do to temper the market exuberance, Ms Kesara says, because their job is to check the facts provided by the companies and not to issue warnings.
“If we feel that the stock has gone up very quickly without any major story or issue, then we put a cash balance on the stock, but if you have noticed even when that is placed, the activities of the investors do not go down,” she said.
Cash balance has been used in the past with many stocks and all it does is prompt investors to fork out money for every share they buy. This prohibits investors from undertaking margin trading or other forms of trading.
“In this kind of market, what we tell investors is that they should look at rationalising their portfolios and that they should keep the fundamentally good stocks with them while weeding out the others,” Ms Kesara says.
Despite the warnings, investors remain bullish on the equities as the global economy seems to be on an uptick, and with United States’ Dow Jones Industrial Average hitting new highs each day, the likelihood that the Thai market would see any kind of major correction seems remote.