Fundsupermart.com
Licensed dealer and Financial Adviser   CPFIS Registered Investment Administrator
 
Research  
Bookmark and Share
Share
Print
more
Government Stimulus to Preserve Thai Growth September 5, 2012
Thailand’s economy experienced a V-shaped recovery in 1H 2012, supported by domestic consumption and private investment. Due to a low base effect and a full recovery to pre-flood economic activity levels, growth for 2H 2012 is expected to be strong. But, is the land of a thousand smiles still attractive?
Author : iFAST Research Team


Understanding REITs


Key Points
  • Supported by the improvement in domestic consumption and private investment, Thailand’s economy rebounded sharply by 4.2% year-on-year in 2Q 2012 as compared with a marginal 0.4% growth in 1Q 2012.
  • Going forward, net exports are likely to remain a laggard contributor to the economic growth due to slowdown in external demand, while the on-going reconstruction and rehabilitation after the flood disaster is likely to boost imports. Hence, this may result in net exports growth staying in negative territory for the rest of 2012.
  • Due to the low base in 4Q 2011 and the positive effect of the import duty exemption that will end on 31 December 2012, private investment is likely to stay strong in 2H 2012.
  • We also expect that public investment will resume its role in supporting economic growth, given that the government has approved a THB350 billion post-flood budget to improve the infrastructure and water management systems over 2012-2014 in order to restore business confidence and attract private investments.
  • Going forward, the low base effect as well as the extension of the first-time car buyer incentive programme until mid-2013 are conducive of increased private consumption and will support Thailand’s economic growth.
  • To conclude, growth for 2H 2012 is expected to reach 9.0-9.8% after recording a 2.2% growth in 1H 2012 as Bank of Thailand believes that the economic growth for 2012 could reach 5.6-6.0%.
  • Based on market consensus as of 4 September 2012, the SET index is currently trading at estimated PEs of 13.4X, 11.2X and 10.0X based on 2012, 2013 and 2014 estimated earnings respectively, as compared with its fair PE of 12.5X.
  • Given the strong run-up in the Thai equity market, valuations currently appear relatively unattractive. We would thus advise investors who are currently invested in Thailand's equity market to consider more attractive markets such as the Greater China region and South Korea which offer investors much higher potential returns at current levels.

A V-Shaped Recovery in 1H 2012

After suffering a severe -8.9% year-on-year contraction in 4Q 2011 which reduced full year 2011 growth to a marginal 0.1%, Thailand’s economy started its V-shaped recovery in 1H 2012. Supported by the improvement in domestic consumption and private investment, Thailand’s economy rebounded sharply by 4.2% year-on-year in 2Q 2012 as compared with a marginal 0.4% growth in 1Q 2012 (refer to Chart 1). This is better than the consensus’ estimate for a 3.1% year-on-year growth rate and has also lifted the economic growth rate for 1H 2012 to 2.2%.

Chart 1: Contribution To GDP Growth (Constant 1988 Prices)

 

Decreased Global Demand & Strong Imports Weighed On Net Export Growth

Net exports, which contributed around 13.2% of 2Q 2012 GDP, contracted for 3 consecutive quarters starting from 4Q 2011. As shown in Chart 2, exports growth in 2Q 2012 still remain weak at 0.9% year-on-year after negative growth of -3.2% and -6.4% in 1Q 2012 and 4Q 2011 respectively. Although the export of manufacturing products such as vehicle steel, machinery, computer parts and electrical appliances have gradually recovered to offset previously pending orders, decreased demand from Europe is still exerting pressure on exports' recovery. On top of this, rice exports for the first six months of this year have declined steeply by -45.0% as a result of the government rice price guarantee scheme. The scheme sets a floor to rice prices and effectively lowered Thailand’s price competitiveness compared to other rice exporters such as Myanmar, Vietnam and India. As a result, the major rice buyers for Thailand including Indonesia, South Africa, Iraq and China are importing less rice from Thailand.

Chart 2: Year-on-Year Exports & Imports Growth

Meanwhile, imports growth in 2Q 2012 grew by 8.5% year-on-year mainly due to higher imports of capital goods such as machineries and equipments to repair the factories after flood and also for post-flood reconstruction projects. Imports of consumption goods such as food and beverages and daily products also inched up. Such growth was aided by the various on-going economic stimulus schemes by the governments such as the implementation of the daily minimum wages of THB 300 and the rice price guarantee scheme, which has led to an improvement in consumers’ spending power.

Going forward, net exports are likely to remain a laggard contributor to the economic growth due to slowdown in external demand, while the on-going reconstruction and rehabilitation after the flood disaster is likely to boost imports. Hence, this may result in net exports growth staying in negative territory for the rest of 2012.

Fiscal Stimulus Restored Investment

Investment, which contributed around 21.6% of 2Q 2012 GDP, increased by 10.2% year-on-year in 2Q 2012, an improvement from a 5.2% and -3.6% growth in 1Q 2012 and 4Q 2012 respectively. Such an increase was mainly from the 11.8% year-on-year growth in private investment. Due to the government’s flood relief measures (that included providing soft loans and waiving off the import duty on replacement machineries), private investment in machinery and equipment in 2Q 2012 surged by 12.2% year-on-year. Private construction of commercial buildings also accelerated in order to make up for the delayed construction projects during the flood period.

In the public sector, owing to higher government disbursement for flood rehabilitation, public construction rose by 2.7% year-on-year in 2Q 2012. This, together with the higher public investment in machinery and equipments, resulted in a 4.0% year-on-year growth in total public investment in 2Q 2012, from a -9.6% contraction in 1Q 2012 (refer to Chart 3).

Chart 3: Year-on-Year Investment Growth

Due to the low base in 4Q 2011 and the positive effect of the import duty exemption that will end on 31 December 2012, private investment is likely to stay strong in 2H 2012. We believe that the potential for strong private investment going forward will be mainly driven by reconstruction rather than business expansion amid the current global uncertainty. This is further supported by the Business Sentiment Index and Industry Sentiment Index, the leading indicators for economic conditions, which have started to head south in June 2012 (refer to Chart 4). This indicates that business expansion is likely to slow down for the coming months.

Chart 4: Business & Industry Sentiment Index

We also expect that public investment will resume its role in supporting the economic growth, given that the government has approved a THB 350 billion post-flood budget to improve the infrastructure and water management systems over 2012-2014 in order to restore business confidence and attract private investments.

Consumption Boosted By Recovery Of Motor Vehicles Sales

Consumption, which contributed around 63.9% of 2Q 2012 GDP, increased by 5.4% year-on-year in 2Q 2012, an improvement from a 2.4% and -3.0% growth in 1Q 2012 and 4Q 2011 respectively (refer to Chart 5). Such an improvement was mainly supported by the 5.3% year-on-year growth in private consumption, especially from the consumption of durable goods.

Chart 5: Year-on-Year Consumption Growth

As a consequence of the pent-up demand in motor vehicles after the Japanese tsunami and the flood in Thailand, sales of passenger cars, pickup trucks and motorcycles surged by 77.6%, 62.3% and 1.5% year-on-year respectively in 2Q 2012. As a result, consumption for durable goods surged by 20.9% year-on-year in 2Q 2012, recovering from a -3.1% growth in the previous quarter.

Chart 6: Passenger Car Sales Picked-up Since May 2012

Apart from that, motor vehicle sales were also boosted by a government incentive wherein first-time buyers are entitled up to THB 100,000 in tax rebates. Other on-going government stimulus measures (i.e. daily minimum wages and rice price guarantee scheme) has also boosted consumers’ purchasing power and consequently increased the demand for clothing, household equipments and food and beverages.

Going forward, the low base effect as well as the extension of the first-time car buyer incentive programme until mid-2013 are conducive of increased private consumption and will support Thailand’s economic growth.

Conclusion

As of 4 September 2012, Thailand's equity market (represented by SET index) has gained 17.4% year-to-date (in SGD terms). Based on market consensus as of 4 September 2012, the SET index is currently trading at estimated PEs of 13.4X, 11.2X and 10.0X based on 2012, 2013 and 2014 estimated earnings respectively, as compared with its fair PE of 12.5X. We estimate its upside potential by end-2014 to be around 25.0%, if the market normalises to its fair level.

Similarly the case with Malaysia, Thailand is now one of the markets with lowest 3-year upside potential as compared with the other 16 markets that we cover. As such, Thailand equity market is rated as “3 stars – Attractive”, the second lowest rating after Indonesia to reflect its relative attractiveness as compared with those 5 stars markets such as China, Hong Kong and South Korea. In addition to global trade headwinds that could further dampen on Thailand's economic growth, the strong run-up in the Thailand's equity market has made valuations less appealing on both an absolute and relative basis. We would thus advise investors who are currently invested in Thailand equity market to consider more attractive markets such as the Greater China region and South Korea which offer investors much higher potential returns at current levels.

 

See Also:
Are Singapore REITs Still Attractive?
Malaysia: Near All-Time Highs, What's Next?

China’s True Economic Situation? Looking Further than Headline GDP Figures  




iFAST and/or its licensed financial adviser representatives may own or have positions in the funds of any of the asset management firms or fund houses mentioned or referred to in the article, or any unit trusts or Singapore Government Securities bonds related thereto, and may from time to time add or dispose of, or may be materially interested in any such unit trusts or Singapore Government Securities bonds. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website. If you have any queries about the above contents, please contact iFAST.