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The Latest Investor Letter from the Unknown Hedge Fund Manager That Has 20%-Plus Annualized Gains

January 15, 2014 | About:


Attached is the flash December 2013 result for the Thai Focused Equity Fund (TFE). For the month, the Fund lost 7.3%, while the SET index decreased 7.1% in US$ terms. For the year, the Fund decreased 5.3% versus a 12.8% loss for the SET.  




Gross AV

Net AV



A & C





SET Index



Below is a breakdown of our relative performance by key sector:




% of Port

Contribution to overall return















































Long SET50 Future/derivatives




21.0 %



Global equity markets ended in different directions. The US and European stock markets closed positively, supported by the improvement in global economic data, particularly in the US economy and the announcement of the Federal Open Market Committee (FOMC)’s US$10-billion tapering plan starting in January 2014, on signs of an improved labor market. US and European stock markets were up 2.7% and 2.4% on average, respectively. Asian stock markets were down 1.2% on average.

The Thai stock market was the worst performer in Asia, down 7.1%, pressured by political issues which led to delays on government spending and investment projects, combined with US “tapering”.

Our fund made a significant loss in December, in line with the market. All of our six heavily-weighted sectors showed losses, all of which we believe have strong fundamentals and have potential for truly impressive earnings growth over the next 12 months. 


A few investors have sent us some interesting economic analyses, essentially saying that the Thai economy is in big trouble and that foreign investors should get out now. We will run through a few of these arguments to present our counterpoints and give you our take on the current situation.

David Scott, a Thailand-based newsletter writer, concluded in his 20 December 2013 “A Strategist’s Diary”, that:

1)     Thailand is in a huge property bubble,

2)     Thai consumer is tapped out,

3)     Thai government and Thai corporates are over levered,

4)     Average listed stock is pricey, and

5)     The baht is in for a big devaluation.

Let’s look at these points one by one.

1) Thailand is in a huge property bubble,

When Thailand really had a huge property bubble in 1997, prices per square meter for townhouses and single detached houses rose a total of about 70% from 1990.

Over the last 5 years, prices per square meter for townhouses and single detached houses rose only about 20%, so there is no bubble there. However, prices for high rise condominiums have risen 60% over the last 5 years.  But these may not be comparable numbers, as property developers have concentrated more and more on selling premium-priced condos located very close to BTS light rail stations. In fact, prices for used condos in the prime Sukhumvit area have hardly budged in the last 5 years.

With respect to listed property companies, the recent political turmoil has definitely caused buying delays (and companies have responded by reducing planned launches), but the extension of the BTS light rail and the new high speed lines throughout Thailand are presenting incredible expansion opportunities.

Over the last 10 years, the most profitable and certain way to build a successful condo project has been to locate it within a couple hundred meters of a BTS station, but there were only 20 stations, and the areas around those stations are now saturated. 

Under the BTS expansion, the number of stations will be expanded from 20 to 500 by 2020! Bangkokians love the convenience of the mass transit, and we see no reason why they will suddenly stop buying. 

The high speed rail will also open up massive new development opportunities, as areas that currently take 1 or 2 hours to commute by car can be reached in less than 30 minutes. The shorter commute means land and condo prices will increase in the suburbs, especially if they are located near BTS or high speed rail stations.

In addition, the Bank of Thailand is currently cutting interest rates, which is definitely good for property prices.

2)  The Thai consumer is tapped out.

It is true that the Thaksin government promoted purchasing schemes for first-time home and car buyers as part of their populist agenda, and as a result, the young and low income consumer (income less than 10,000 baht or $312 per month) is over extended.  But is household debt now at scary levels?

In fact, only 12% of Thai households fall in the less than 10,000 baht/month category, and because of their low incomes, they represent much less than 12% of total spending.

Further, 48% of Thai households have no debt at all.  While household debt to GDP is now at about 78%, two thirds of this is collateralized debt backed by mortgages or automobiles.

3)  The Thai government and Thai corporates are over levered,

The Thai government currently has outstanding debt of 44% of GDP, but only 7% of GDP is government external, non-baht debt.  Thai corporates (including the debt of the state oil enterprises, PTT and PTTEP, which should borrow in USD to match their USD income) is another 34% of GDP.

Compare this with the US, where debt and unfunded mandates are $75 trillion, or 500% of its GDP of around $15 trillion.  Or Japan, with 214% of GDP, or Malaysia, with debt at 51% of GDP.

Mr. Scott shows many examples of how Thai corporates have taken on more debt, but is this excessive debt or just an optimal amount of debt used to deliver higher equity returns?

On a combined basis, EBITDA (cash flow) from listed Thai companies covers their combined interest obligations by more than 7.8x times, so it is very unlikely that there will be widespread defaults on bank loans. This compares with the 1997 EBITDA to interest coverage of only 1.8x.

Further, net debt to equity for listed Thai companies is now only 0.6 vs 1.0 in 1997.

4)  The average listed stock is pricey,

Mr. Scott cites Banpu Coal, HomePro, Big C Supercenter and 3 banks, saying “the Good Stuff still looks expensive”.

We were large shareholders of Banpu from 1995 until 2 years ago, when plunging fracking gas prices induced electric utilities in the US to switch from coal to gas.  Since the electric utilities had long-term, take-or-pay coal contracts, they were forced to take the coal from US coal producers and then ship it onward to Asia, knocking coal prices in Asia from $130 per ton to $80 per ton.  This spoiled the earnings growth story for us, and we sold.  Until coal prices bottom, I agree that this is not a buy, even though the company management is very good.

HomePro and Big C were interesting investments until 2011, when international investors bid the price of all retail stocks to more than 25x earnings, at which time, given their 10-15% EPS growth, we felt they were too expensive, and sold.

We generally don’t own banks, because most of the earnings that they book in the good years tend to get clawed back when non-performing loans increase in bad times.

So we agree, this particular list of stocks is not interesting, but at current prices they are not “the Good Stuff”.   However, there are about 450 listed stocks in Thailand, and the average of all stocks is trading on 9.5x 2014 EPS, with 12% EPS growth. 

Compare this with the US, where the average net profit margin for listed companies is at an all-time high of 11% versus an average over the last 60 years of around 7%.  And the market’s Schiller P/E is > 25x, higher than all but 3 weeks in 1929 (in data prior to the late 1990’s bubble). 

By comparison, the overall Thai market looks cheap!

And what about our portfolio? Our weighted average P/E is only 8.4x our expected 2014 earnings, with EPS growth of around 50%! (Please see a detailed description of our core positions after this macro-economic discussion).

5) The baht is in for a big devaluation.

As mentioned before, Thai public debt to GDP is not excessive at 44%, and only 7% of total public debt is external debt (not denominated in Thai baht).  Thai corporates, after getting badly burned in 1997 doing the yen/baht carry trade, have learned to borrow only in the currency in which they get paid, so except for short-term trade financing, corporates have very little foreign-currency denominated debt.

In 1997, just before the massive Thai baht devaluation from 25 to 55 baht per USD, Thailand’s external reserves were only 25% of their total (public + corporate) external debt.

Today, international reserves are a healthy 127% of external debt.

So, a bit of baht weakening may take place based on differential interest rates, but the Morgan Stanley, Merrill Lynch, CLSA, Tisco and Kbank economists we consulted are looking for a low of 34 – 34.25 baht/USD sometime this year, and all but Merrill are looking for strengthening in 2015, versus the current 33.1 baht/USD.  And since we don’t really have an opinion of the baht, we are fully hedged on our USD/baht exposure.

Another of our investors sent us a Forbes article by Jesse Columbo, titled “Thailand's Bubble Economy Is Heading For A 1997-Style Crash”.

He makes similar arguments about how total debt, leverage and external debt have grown, but also reports that “the government is running a budget deficit to support its spending”. 

The money was spent on:

· A subsidy scheme for first-time home buyers that will cost the government 12 billion baht in lost revenues

· A three-year debt moratorium program that will cost 1.5 billion baht per year

· A 2012 corporate income tax cut from 30 percent to 23 percent, which resulted in a 52 billion baht revenue loss. Corporate income taxes were further cut to 20 percent in 2013, which is expected to cause a further 22 billion baht revenue loss.

· Personal income tax has been cut to promote consumption, which will result in a 32 billion baht revenue loss in 2013.

· A fuel subsidy that cost 90 billion baht.

· Free computer tablets for students that cost the government 16 billion baht in 2012 and is expected to cost 12 billion baht this year. 

· A salary increase for government officials that cost 18 billion baht in 2012 and is expected to cost 23 billion baht in 2013.

· A rubber subsidy that will cost 21.2 billion baht

Taken together, all this spending totals 269 billion baht, compared with total GDP of about 11,000 billion baht.  This is only about 2.5% of GDP, which really doesn’t seem that profligate.

Both articles complained about the rice subsidy scheme, in which rice is bought at 15,000 baht per ton plus polishing cost of 9,000 baht per ton, but then sold internationally at around 12,000 baht per ton.  Accumulated losses since the scheme began in 2011 total around 600 billion baht, or 200 billion baht per year (less than 2% of GDP).  Total deficit spending (deficits only from 2008 until present) averaged 2.5% per year.

Compare this with the US government that takes in $2.9 trillion in taxes per year but spends $3.8 trillion per year on a $15.8 trillion economy. This amounts to about 5.7% of GDP deficit per year. So in comparison, the rice subsidy losses are fairly small. 


Core Positions: Let’s look at our top 4 positions:

SPCG (17% of our portfolio) is the largest solar farm operator in Thailand. SPCG’s stock price dropped 48.5% from its peak in May 2013 (THB33.0 per share) while installed generating capacity increased 335%, from 55 megawatts (MW) to 239 MW.  The remaining 21 MW will begin generating income in 1Q2014.  Based on results of their projects that have operated since 2011, SPCG generates revenue of THB18 million per MW with net margins of approximately 45%. 

SPCG, at the current price of THB17.0, is trading at 7.1x P/E with over 100% earnings growth in 2014.

Contrast this with Elon Musk’s Solar City (SCTY), the largest provider of rooftop solar systems in the US, with only 156MW of installed capacity spread over more than 80,000 separate customer installations. 

Both SPCG and SCTY pay for the entire installation cost up front.  However, SPCG sells its power to the Thai Provincial Electricity Authority at 36 cents per KWh for the first 10 years, and 14 cents per KWh thereafter (S&P rates the Thai government at BBB+).  SCTY, in contrast, sells their power to 80,000 individuals at a discount to the average retail price of 15 cents per KWh.

SCTY lost $94 million in 2013 and is expected to lose around $160 million in 2014, but is trading on 34.7x Price/Sales with the market capitalization of US$5.3 billion.  SPCG, with a larger installed base, already running profitably, and with great growth prospects is trading at only 3.2x Price/Sales and a market cap of just $435 million, less than one tenth the SCTY valuations!

After the completion of its solar farm, SPCG will begin work on both industrial and residential solar roof projects, with a target of 10,000 residential roofs in 2014.  We believe that this solar roof business will become one of its growth drivers. 

Meanwhile, the Thai government is launching an 800MW plan to provide one solar farm for each village in Thailand.  SPCG believes that they will win contracts for about 200 MW from this program.

SPCG also has an excellent relationship with Kyocera of Japan, which provided the solar modules for all of SPCG’s solar farms.  The Japanese government has announced a 33 cent per kilowatt-hour (KWh) feed in tariff for solar farms built in Japan, and Kyocera will be a large participant in this plan. 

Kyocera is very happy with the build quality of SPCG’s Thai solar farms, and has asked them to provide engineering and construction on all of Kyocera’s solar projects worldwide.  Since SPCG has plenty of cash flow from their existing solar farms to cover all of their overhead and staffing expenses, we have suggested that SPCG provide these engineering and construction services to Kyocera in exchange for equity stakes in the solar farms, which will provide a continuing income stream rather than just a one-off fee income.

STPI(17% of our portfolio), the largest world-class steel fabricator in Thailand, has over 30 years’ experience in design, supply and fabrication of “ASTM stamp” high pressure, high temperature and cryogenic vessels and piping systems which are used for Power & Process Plants, Refinery Plants, Industrial Equipment, and LNG liquefaction facilities. 

STPI also won an award from Woodside Petroleum’s subsidiary for its excellent safety record. STPI completed 262 modules requiring 49 million man-hours, without a lost time incident while building the Pluto LNG Train 1 project. 

STPI enjoys a huge competitive advantage on labor costs.  STPI pays their ASTM stamp certified welders only US$3 per hour versus more than US$100 per hour for western operators.  This may seem like very low pay, but Thailand’s minimum wage is only $1 per hour, so by Thai standards, STPI’s welders make a very attractive wage and so labor turnover is low.

STPI is currently ramping up module fabrication for Inpex Corporation of Japan, an LNG importer who is building its Ichthys project Onshore LNG Facilities in northern Australia.  STPI’s contract is worth US$740 million, and will generate revenues of around $400 million in 2014, with net margins of 25%.  At the current price (THB14.3), it trades at 7.1x P/E 2014, with EPS growth of 100% .

Due to the widespread adoption of hydraulic fracturing and directional drilling (fracking) technology, and large offshore finds of deep water gas, there are hundreds of billions of dollars of LNG development projects around the world, providing a huge opportunity for STPI.  The Managing Director mentioned that there are several of these large projects that have asked him to bid on contracts worth $750 million to $1 billion each, so demand is very strong. 

STPI recently bought additional yard space near the Thai Navy port in Sattahip, which will add about 25% to their production capacity.

THCOM (10% of our portfolio), is an Asian satellite operator, currently operating two satellites with coverage of two continents, Asia and Australia.  One satellite focuses on broadcasting services, and the other one focuses on broadband internet direct-to-satellite services (THCOM is the only provider in Asia and Australia of direct broadband). 

THCOM had been losing money from 2005 through 2011 due to its large ($400 million) investment in the IPstar broadband satellite, and the inability of their sales and marketing department to sell more than 20% of its capacity. 

In August 2011, THCOM hired a fabulous new CEO, Ms. Suphajee Suthumpun, the former General Manager of Global Technology Services for IBM ASEAN.  With her marketing expertise and strategic vision, she turned the company from loss-making to profitable. 

Her first objective was to get IPstar above its breakeven rate of 32% capacity utilization.  Her predecessor was always trying to sell broadband internet direct to users in other Asian nations (whose local telecoms firms put up stiff resistance).  Suphajee realized that IPstar’s digital capability could offer a cost effective solution for digital mobile phone operator’s backhaul service (when digital signals are moved between base stations).  In 2012, THCOM signed a backhaul deal for all of IPstar’s Japanese capacity, bringing the satellite close to breakeven. 

In 2013, they signed a similar deal with China’s SinoTone, bringing utilization to 54%.  They also sold off their money-losing Cambodia mobile phone subsidiary, boosting net profit by 647% over 2012.

Last week, THCOM successfully launched a broadcast satellite (called THCOM6), which covers ASEAN (64% of capacity) and South Africa (36% of capacity).  THCOM6’s ASEAN allocation was fully sold before launching, due to high demand, particularly due to Thailand’s demand from the 24 new digital channels. 

THCOM plans to expand into South Africa, and has already sold 2% of its total capacity there.  Overall, THCOM6, at 66% capacity utilization, is already well above its EBIT break-even level (50% run rate) before its launching. 

In addition, there are several upside potentials from:

1) its new satellite (THCOM7), launching in 2H14 under a 15-year lease from AsiaSat (a Chinese satellite operator);

2) more bandwidth sales to Australia, India, Indonesia, Philippines, and South Africa;

3) sales of a new, turnkey digital cinema package to 1,000 theaters in Thailand in partnership with an unlisted cinema company called Kantana, and the potential to do an even larger cinema project in Indonesia; and

4)  in-flight airline streaming media services all over Asia-Pacific. 

At the current price (THB35.75), THCOM is trading at 21.7x 2014 EPS with the earnings growth of 36%.  

SAMART (5% of our portfolio), is a diversified, technology-related company and a leader in the mobile handset business.  There are significant changes in Thai telecom and media industries that benefit SAMART.

Thai mobile telecom industry: 1) system changes from 2G to 3G; and 2) the 20 year revenue-sharing concession agreements between the Thai government and service providers are all ending in the next one to five years; the only way for the operators to remain as going concerns is to transition their subscribers from 2G (25% revenue sharing, short remaining life) to 3G (5% revenue sharing, 15 year remaining life).  The decreased revenue sharing is designed to repay the operators for the costs of installing new base stations for 3G.

As a result, operators are doing massive promotions to induce demand for 3G mobile phones.  SAMART benefits due to a significant rise in its own, low-priced local-brand mobile phones sales.  It offers generic mobile handsets with similar functions and appearance to Samsung phones, but with lower durability and significantly lower price. 

Besides gaining handset volume sales, its smart phone business also offers higher net margins (10-15%) than its feature phone handset (5-7%).  We expect to see high demand momentum in smart phones continuing in this year, supported by the service providers’ push (as they pay less revenue-sharing) and more frequent model changes by users so they can use the latest technology.

Thai media industry: 1) The Thai broadcast system is changing from analog to digital television; and 2) more over-the-air channels will be available to the public (from 4 to 24 commercial channels).  The Thai National Broadcast and Telecom Committee (NBTC) plans to transform from analog to digital TV broadcasting within 5 years by offering a subsidy coupon worth THB1,000 per household to purchase a new digital set-top box.  Thailand has 22 million households with two TVs on average.  SAMART is one of nine companies that will be allowed to sell set-top boxes and antennas by NBTC.  SAMART aims to get at least a 10% market share on this business.

Meanwhile, there is another potential project that benefits SAMART. The government plans to invest THB30 billion in telecom network coverage nation-wide via the Telecomm Organization of Thailand (TOT), a state enterprise.  SAMART has a good relationship with the TOT, and has worked for many years with TOT on building telecommunication networks and providing total network solutions, system design and installation.  As a result, SAMART expects that it will win this project. 

The speed of technological change requires continual investment for both government and private sectors.  We believe that SAMART, with its technology-related expertise and work experience, will benefit from this investment. 

At the current price (THB14.4), SAMART trades at 8x 2014 EPS with approximately 30% EPS growth.


On the political front, Thai political tensions continued to rise after a temporary pause during the King’s December 5th birthday. All opposition Democrat Party MPs resigned from the Parliament to join the anti-government campaign. Therefore, Prime Minister Yingluck announced the dissolution of the House of Representatives on Dec 9 and the King has endorsed a royal decree for new elections on February 2, 2014.

However, opposition leader Abhisit Vejjajiva, newly voted the head of the Democrat Party, has announced that his party will not participate in the election. He maintains that many Thais have lost faith in political parties and elections.

(In a recent meeting, Abhisit said he actually supports elections after a revision of the current election rules, but was pressured by Bangkok power brokers to boycott the election. Abhisit, a former prime minister, also said that he does not support the unilateral appointment of a People’s Democratic Reform Committee (PDRC) by Suthep Thaugsuban, leader of protracted, anti-government street protests that have at times turned violent and resulted in a number of deaths on both sides.)

Led by Suthep, anti-government protesters are doing their utmost to block the Feb. 2 election. On Dec. 23, they blocked candidate registration venues throughout the country but were unable to prevent the majority of candidates from eventually registering.  Exceptions were in southern Thailand, stronghold of the Democrat Party, where anti-government protesters successfully prevented some candidates in 8 southern provinces from entering registration venues. Those blocked candidates are now challenging the incident in court.

On New Year’s Day, Suthep announced “a siege of Bangkok” beginning on January 13, which he said could last a month (covering election day on February 2), or until Yingluck’s caretaker government resigns.  

As of Jan. 7, the stalemate continues.  It is unclear what the military, which has tried to avoid taking sides, will do in the near future.


So should we be worried, or is now a great opportunity to take advantage of discount prices on great companies?

We did a regression of Thai stock earnings performance versus subsequent total performance over the period from 2006 – 1q2011.  This period included the 2006 military coup, exchange controls, the 2008 world-wide banking crisis, 2009 airport closure by anti-Thaksin yellow-shirt protesters, deadly street fighting in 2010, nationwide flooding in 2011, and a continuing insurrection in the South.


As you can see, the top 20% best EPS growth companies 2006 – 1q2011 average total return was 239%.

Thai market average total return was only 79%.

And the bottom 20% EPS growth companies had average total return of only 33%.

So the stock market, for all its flaws, accurately rewarded the companies that created value and punished the companies that destroyed value, even with all of the political noise!

We believe the main reason that we can ignore politics over the medium term is because all factions are strongly pro-business capitalists, and what they are really arguing about is who gets to run things and enjoy the benefits of power.

Whichever party ends up running the country will certainly continue Thaksin’s populist policies which have brought real benefits to lower and middle class Thais, such as increasing free education from 4 years to 12 years, the $1 universal healthcare, a minimum wage increase from 140 – 160 baht per day to 300 baht per day, and the One Tambon One Product program in which the government helps villages identify marketable products and then helps them package and market the product overseas.

So in the medium term, politics doesn't matter, and any drops in the stock market due to political fears are great buying opportunities.


The SET’s trading activity was significantly down 20.3% in December, from US$1,067 million to US$850 million of average daily volume.  Foreigners were significant net sellers of US$1,241 million in December, and are net sellers of US$6,096 million for the year.  Retail investors remained less active this month, with participation at 48%.  Foreigners and domestic mutual funds accounted for the remaining 30% and 22% of volume, respectively.

It is interesting to note that, as of the end of December, the entire cumulative net buy by foreigners since the 2008 bottom has now been sold off, and the first few days in January have seen a net buy by foreigners.  We believe foreigners now have nothing left to sell.

If you would like to discuss our performance and/or strategy, please give Katekao or me a call at 662-255-2040.

Best regards,


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Canadian Value

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