THD: Thai Equities Are Still Too Pricey

seekingalpha04-02

Thailand has not been a happy hunting ground for investors in recent years.The macro/micro setup offers little hope of an equity turnaround anytime soon.Pending a step change in the fundamental ...

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All Public Co Ltd","APTPF":"Airports of Thailand Public Co., Ltd.","BK4174":"机场服务","BK4185":"保健护理机构","PUTRF":"PTT Public Ltd., Co.","BK4113":"食品零售","THD":"iShares MSCI Thailand ETF","EWS":"新加坡ETF-iShares MSCI","FDN":"First Trust Dow Jones Internet I","BK4585":"ETF&股票定投概念"},"translate_title":"THD：泰国股票仍然太贵","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"APTPF":1,"BDULF":1,"CVPUF":1,"EWS":1,"PUTRF":1,"THD":1,"FDN":0.9},"content_text":"Thailand has not been a happy hunting ground for investors in recent years.The macro/micro setup offers little hope of an equity turnaround anytime soon.Pending a step change in the fundamental outlook, I won't be buying this dip.   PyroskyData out of Thailand hasn't been all that encouraging since I last covered the largest and most liquid US-listed Thailand investment vehicle, the iShares MSCI Thailand ETF (NYSEARCA:THD) (see THD: Beware Of Thailand's 'Helicopter Money' Plans). To recap, Q4 2023 GDP not only fell short of expectations but actually saw a (seasonally adjusted) contraction relative to the previous quarter. This means that Thailand has still not fully regained pre-COVID highs, making it the major laggard within the ASEAN-5 (the other members being Indonesia, Malaysia, the Philippines, and Singapore). Note that Thailand's macro troubles also come despite help from a Chinese tourism recovery (albeit a rather gradual one so far), as exports to China (down YoY) and government spending headwinds more than offset positives elsewhere.   BloombergSlow economic growth isn't always bad news for equities, to be fair, as it tends to create a 'bad news is good news' type silver lining via policy rate cuts. After all, inflation is also firmly in deflationary territory, prompting calls from Thailand's newly elected government to cut rates this year. The Bank of Thailand's (i.e., the Thai central bank or the 'BoT') recent commentary indicates, though, that it has an eye firmly on household debt risks (currently over 90% of GDP) rather than growth and inflation. There's also the threat of capital outflow pressures if the BoT cuts ahead of schedule (note foreign outflows have only intensified year-to-date) and the possibility of stimulus from the fiscal side (in particular, the Digital Wallet Scheme) stoking inflationary pressures. Despite all the pessimism, the market has actually priced in an aggressive monetary easing path this year - likely the biggest contributor to the MSCI Thailand's pricey ~16x earnings multiple. In contrast, earnings revisions for the local Thai benchmark, the SET Index, have gone down by a big margin (see chart below), offering little support for current price levels. Thus, without catalysts or a sufficient pick up in earnings growth (currently expected in the high-single-digits for 2024), I don't see a particularly strong reason to own THD here. CIMB ThailandTHD Overview – The Largest and Most Liquid Thai ETF; Diversification Also Stands Out There aren't too many ways for investors to get Thailand equity exposure outside of iShares' MSCI Thailand ETF, the premier single-country Thailand tracker in the US. Specifically, the fund tracks the MSCI Thailand IMI 25/50 Index, a basket of over 130 Thai stocks subject to two key weighting constraints – a 25% cap on its largest holding and a 50% cap for the sum of all +5% single-stock holdings. While the ETF's fundamental approach remains consistent with prior quarters, THD has seen its net asset base further erode to $250m (vs $259m previously). The good news, though, is that iShares has kept its competitive ~0.6% expense ratio (primarily from management fees) in place. iSharesThe THD portfolio remains far better diversified than its Southeast Asian peers, many of which continue to lean heavily on Financials and Real Estate. Instead, all of THD's sector exposures remain within a 5-15% range, meaning performance isn't particularly dependent on the fortunes of any single sector. There remains a slight skew towards Energy and Consumer Staples, though at 14.2% (unchanged) and 11.7% (slightly lower), respectively, the fund isn't at all top-heavy. Elsewhere, there has been some reshuffling, most notably to Health Care (down to 9.8%) and Financials (up to 9.9%), along with Industrials (slightly down to 9.0%). iSharesWhile slightly narrowed at 134 holdings, the THD single-stock composition also remains fairly well balanced. State-owned oil and gas company PTT (PUTRF) is still the largest allocation at 6.2% (unchanged), followed by convenience store chain CP ALL (OTCPK:CVPUF) at 5.9% (also unchanged), Elsewhere, healthcare provider Bangkok Dusit Medical Services (OTCPK:BDULF) and Airports of Thailand (OTCPK:APTPF) remain staple holdings at a slightly higher 5.9% and 5.2%, respectively. With THD's holdings a long way off its weight caps, expect the status quo to sustain through the next rebalancing. iSharesTHD Performance – Off to a Poor Start in 2024; Mind the Valuation After a poor 2023 (down -12.2%), THD has started this year on another low note, already declining by -7.9% to date. As a result, the fund's total annualized return over the last five and ten years now stands at -5.6% and +1.1%, respectively – hardly a favorable reward for the incremental risk associated with Thai equities. The only positive here is THD's narrow tracking error (i.e., the performance differential relative to the ETF's benchmark MSCI Thailand IMI 25/50 Index) – a testament to the quality job iShares has done so far. iSharesDespite its recent drawdown, THD isn't really cheap. Note that relative to trailing earnings, the portfolio trades at ~16x P/E; by comparison, consensus estimates only call for high-single-digit earnings growth for Thai large-caps this year. As for the distribution, THD screens at the upper end of the Southeast Asian ETF universe, with its 3.1% trailing twelve-month yield (2.8% 30-day SEC yield) behind only the iShares MSCI Singapore ETF (EWS). Looking back, the income has also been fairly consistent, reflecting THD's cash-generative, blue-chip portfolio holdings. Thus, there's something here for income investors, though current valuations and the lack of fundamental support (both from earnings and the broader economy) should keep even income investors cautious about underwriting a position here. MorningstarFinal Say   Tourism may be picking up, but the rest of the Thai economic picture is deteriorating, which doesn't bode well for THD. Neither is the BoT's relative cautiousness to ease on account of household debt risks - despite low inflation pressures and growing pressure from the new Pheu Thai-led government. Earnings growth also remains quite lackluster following a series of sharp downward revisions in recent months; in context, the current high-teens earnings multiple doesn't strike me as particularly compelling. All in all, I remain on the sidelines here. 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