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Siam Investment Fund II Investment Committee Meeting : Thai Economy Thai Stockmarket Deal List

Siam Investment Fund II Investment Committee Meeting : Thai Economy Thai Stockmarket Deal List. Bangkok : 12 February 2001. Contents. Thai Economy Recent performance Outlook Thai Stockmarket Recent performance Outlook Deal List Pranda Jewelry Siam Continental Cable

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Siam Investment Fund II Investment Committee Meeting : Thai Economy Thai Stockmarket Deal List

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  1. Siam Investment Fund II • Investment Committee Meeting : • Thai Economy • Thai Stockmarket • Deal List Bangkok : 12 February 2001

  2. Contents • Thai Economy • Recent performance • Outlook • Thai Stockmarket • Recent performance • Outlook • Deal List • Pranda Jewelry • Siam Continental Cable • Loxley Business IT • Talad Thai • Lao Brewery • Bangkok Airways • Others

  3. Thai Economy

  4. Thai Economy : Recent Performance • Overall economic activity has continued to slow after the sharp pick up from 2Q98 to 3Q99. • The post-crash trends in the economy are replicated elsewhere in Asia, though Thailand’s trough was deeper and the pace of the recovery hampered by the scale of the problems in the banking sector • The recent slowing in the economy and a desire for change contributed to the losses of the Democrat Party in the recent election. • In office, the Democrats pursued a policy of gradual economic and political reform.

  5. Thai Economy : Recent Performance (cont.) • Investment activity is again weakening after the recovery through 1999. • The investment rise in 1Q00 reflected factory re-tooling plus aircraft purchases • BOI approvals have been strong (with a rising share of 100% owned Thai applications) • Exports remain a key driver • Import growth has recently begun to outpace export growth • The Trade and Current Account positions are strong. For 2000, the CA surplus represented 7% of GDP

  6. Thai Economy : Recent Performance (cont.) • Domestic demand growth remains patchy (mobile phone sales have been strong, sales of construction materials have been weak, car sales were strong but growth has tailed off)

  7. Thai Economy : Recent Performance (cont.) • Bank lending growth is still negative • The appetite to lend has been weakened by difficulties in identifying quality borrowers and the burden of NPLs. • There is disappointment with the bankrupty and foreclosure laws • Transfers to Asset Management Companies have accelerated the decline in reported NPLs (but remain in the background) • Loan quality concerns persist, especially in relation to relapses • The new government is talking of relaxing capital requirements and NPL classifications

  8. Thai Economy : Recent Performance (cont.) • Inflation and interest rates have eased eased • A (more independent) Bank of Thailand has introduced inflation targeting • The Baht exchange rate stabilised after a steady easing through most of 2000 • In recent weeks, the Baht has gained as the US$ slipped against the Euro

  9. Thai Economy : Recent Performance (cont.)

  10. Thai Economy : External Environment • Deteriorating external demand • US economic slowdown implies weaker demand for exports, though shape/extent of slowdown remains unclear • There have been concerted efforts by the Fed to engineer a soft landing in the US (a plus for emerging Asia) • Post-97, intra-regional trade has expanded, softening the potential impact of a US slowdown • Lower US interest rates (and oil prices) are pluses for emerging economies • US$ to remain subdued (with pressure off regional currencies) • Slowdown in capital flows to the US • No upward pressure on interest rates • China economy opening up in preparation for WTO entry

  11. Thai Economy : Domestic Environment • Thailand has reasonable prospects for domestic demand • We expect a fiscal stimulus from the incoming government, with :- • A rise in the fiscal deficit to 5% of GDP over the next two year (from 2.3% in 2000) • A tax reduction for listed companies (30% to 25%) • Increased allowances for housing and education • A delay in the increase in VAT from 7% to 10% • The proposed national Asset Management Company will remove the NPL overhang and provide a base to kick-start bank lending (assuming “quality” loan demand responds… a big if) • Rural consumer “confidence” will receive a boost from the proposed debt moratorium from farmers, a Bt1m payment to 70,000 villages and the setting up of micro-credit institutions

  12. Thai Economy : Domestic Environment (cont.) • The uptick in the stockmarket (notably bank shares) to create a wealth effect • The PM-elect has said he will renegotiate the debt repayment schedule with the IMF • The new government intends to kickstart privatisation, focusing on the sale of shares in THAI, listing Thai Oil Power and corporatisation of CAT and TOT • The new government will finalise conversion of telecom concessions and review previous “pork barrel” concessions • The new government is expected to review pending legislation, including : • Bankruptcy Law • State Enterprise Corporatisation Law • Foreign Business Law • Much depends on confidence returning

  13. Thai Economy : Fundamental Risks • There is a questionmark over funding the fiscal stimulus/bank bail out • An increased fiscal deficit may undermine Thailand’s credit rating (raising offshore borrowing costs). Public debt represents 55% of GDP (though the % of foreign debt and % of long term debt in the private sector has fallen substantially) • There is potential for the Baht to weaken on fiscal concerns • The US economy may encounter a hard landing • Thaksin may be ejected (within 6 months) as prime minister on an adverse ruling from the constitutional court • During campaigning Thaksin pledged to guard Thai business against “unfair” competition from foreigners. There is already discussion of using planning regulations to deter the expansion of hypermarkets. This could impact FDI.

  14. Thailand : Summary Economic Outlook • Overall economic activity may exceed the BoT’s recent (downward) revised expectations, though the uptick will not be material. The underlying trends are moderate economic growth, subdued inflation and (relatively) low interest rates: • GDP growth in 2001 of 3-4.5% (against 4% in 2000) • Exports to grow 7-11% (19%) • Imports to grow 13-17% (31%) • CA surplus to narrow to US$8bn/6.4% of GDP (from US$9bn/7.3%) • Inflation to remain subdued at 1.5-2.0% (1.6%) • Lending rates to remain steady with MLR at 7.75%-8.25% (8.25%-8.5%) • Baht/US$ to remain in a narrow range Bt42-Bt46 (Bt37-Bt44)

  15. Thai Stockmarket

  16. The Stockmarket : Recent Performance (cont.) • Leading TIP market in 4Q00 • Strong showing in 2001 ytd.

  17. The Stockmarket : Recent Performance (cont.) • Banking and Finance Sectors lead market lower though Jan-Oct 00 • Then lead recovery (with communications sector)

  18. Thai Market Outlook : Neutral to Positive • Reasonable prospect of moderate economic growth (even if US slowdown is worse than current consensus) • Corporate earnings flat • Zero EPS growth projected in 2001 after a 200% plus jump in 2000 from a low base (ex-banks). Scope for growth in 2001 • Politics: • A dominant single party in parliament (for the 1st time) • Opportunity for decisive policy implementation (and responsibility) • Stability • New government to provide relief to banking sector (laying foundations for a resumption in new lending) • Prime Minister designate has significant telecommunications interests • Market valuations are modest • Current year PE of 12x (ex-banks)

  19. Thai Market Outlook : Neutral to Positive (cont.) • Foreign investors are underweight Thailand (though MSCI is due to announce a cut in Thailand’s weighting in June. Implementation will be in November) • There is the possibility of an upward re-weighting in the MSCI weighting if NVDR’s are included in the float calculation) • Asian stockmarkets could attract funds given a not, unsatisfactory economic outlook, low interest rates and a shift of investor interest from technology • Valuations compare favourably with the US (after slide in Asia in 2000) • Improved risk/reward profile of emerging markets (in relative terms) • Global emerging market investors are expected to give greater focus to trends in domestic demand and progress in restructuring in individual economies

  20. Thai Market Outlook : Neutral to Positive (cont.) • Ample scope for strategic shift in domestic savings from (low yielding) bank deposit to stocks/bonds • Retail investors encouraged by recent market uptick • Acceleration in privatisation • Scope for Thailand to enjoy outperformance relative to the region. That said, if the recent foreign buying proves short-term, selling pressure will be correspondingly greater • Upside potential if US economy enjoys soft landing • The risks are :- • The “honeymoon” ends early, with doubts cast over the ability of the new government to turn round the economy • Overseas selling pressure is heightened by recent purchases

  21. Deal List

  22. Pranda Jewelry • Introduction • Thailand’s largest jewelry manufacturer and exporter. • The company targets low to medium range coloured gem/diamond jewelry in gold/silver settings, for the mass market. Major customers include QVC, a 24 hour TV shopping network in the U.S. • Key competitive advantages are :- • A track record in of delivering large volumes of a consistent high quality • A large, well trained pool of skilled labour • Government support of the export sector in Thailand • Pranda has a capacity of 5m pieces p.a. through four manufacturing plants (three in Thailand and one in Vietnam). • The company has created brand names in each product category (which it aims to build through a reputation in design, quality and punctual delivery). • Estimated 2000 revenues of B2.2bn / US$56m (Bt2.2bn/US$60m in 1999)

  23. Pranda Jewelry (cont.) • Introduction (cont.) • PRANDA is listed on the SET (with a market cap. of Bt625m /US$15m). • 85% of the shares are held by the Tiasuwan family (which also manages the company). • The company encountered severe financial problems in the wake of the July 97 crisis, given exposure to foreign currency loans, excessive inventory and a drop in demand. • The company is in debt restructuring (which includes rescheduling, a proposed debt write off and an equity injection). Total ST debt was Bt1.7bn. • Aside from seeking a debt write off,steps taken by management to counter the business downturn include :- • Inventory collection and recycling • Downsizing local and overseas subsidiaries • An increased emphasis on exports.

  24. Pranda Jewelry (cont.) • The company is projecting modest sales growth of 6% p.a. for the next five years, a steady 40% gross margin with an expanding net margin (with lower interest costs and a tight rein on SGA). • Operating Income is projected to rise from Bt168m in 2000 to Bt390m in 2006. • Transaction Overview • The company is seeking to raise Bt130-200m (US$3-5m) in equity, which will be used for debt reduction (through a “Dutch” auction). • The amount of the equity injection depends on the outcome of debt restructuring plan. The original equity requirement figure was Bt400m. • The debt restructuring terms are due to be finalised in February. • The adviser is Nava Vickers Ballas (though Finansa has maintained close, ongoing ties with the company for the past four years)

  25. Pranda Jewelry (cont.) • Transaction Overview (cont.) • A share price chart is shown below. Trading in the shares has been very thin (16,000 shares traded in January between Bt13.5-14.5). • The pricing of new equity is expected to be between the current share price and the book value (Bt21, before adjustment for debt forgiveness)

  26. Siam Continental Cable (SCC) • Introduction • SCC manufactures electrical wire and cable under the “Continental” and “Crown” trade names. The target customers are both government projects and private users. • Khun Thwatchai Prueksathaporn, the current chairman, inherited the cable business from his father and established Siam Continental Cable in 1989. He has an extensive experience in the wire and cable business. • The company owns two factories: one in Bangkok and one in Rayong. The second factory was granted an 8-year tax privilege from the Board of Investment. • The lists of the products include: • Building wire, flexible wire, electrical cable made from copper wire or strand insulated with PVC. • Automotive electric wire • Bared copper wire • Non-insulated aluminum wire • Steel reinforced non insulated aluminum wire • General purposed aluminium wire • Electrical grade PVC pallets.

  27. Siam Continental Cable (cont.) Introduction (cont.) • All of the company's products meet the requirement of the “Thai Industrial Standard” no. TIS 11-2531 granted by the Ministry of Industry. • The total value of the domestic electrical wire and cable market is approx. Bt13bn and is growing at around 10% p.a.. Of the total domestic market, 80% is made up by high voltage aluminium wire and the rest is household copper cable. • SCC ranks 5th in the industry (where political connections/delivery/(localised) specifications are strategic advantages for domestic companies) • On completing the second factory, the company planned to draw money from an approved syndicated loan of Bt634m, to finance operations. Unfortunately, all of the participating banks and financial institutions were closed down by the government. • The Company’s turnover peaked in 1996 at Bt469m (US$19m) declining to Bt32m (US$0.7m) in 2000(E). The collapse was mainly due to a lack of working capital and lack of funds to support a letter of guarantee from the banks to tender for sizable projects from State Enterprises.

  28. Siam Continental Cable (cont.) • Transaction Overview • The Company is seeking to raise Bt300-400m to restructure debt as well as to fund its working capital. • Currently, the Company is in default and has outstanding debts of Bt700m. It is understood that the Bt700m can be bought back at c.Bt300m. • It has not yet appointed a financial advisor. • An incoming investor is in a strong position to negotiate, given the financial pressure on the company and the urgency to raise funds • A satisfactory restructuring may well create a viable and attractive business. • Likely exit through an IPO in 2003/4.

  29. Loxley Business IT (LOXBIT) • Introduction • A private system integrator, 100% owned by Loxley Plc. (a listed conglomerate with links to the Lamsam family of Thai Farmers Bank) • Major companies in the LOXBIT group: • Loxbit (targeting customers in the private sector) US$17m sales, US$0.4m net profit in 2000 • PCC (targeting the public sector) 100% owned, US$12m sales, US$0.8m net profit in 2000 • Point Asia 41% owned. A leader in ISP / web portal / ASP/ e-commerce in Thailand. • Loxbit is focused mainly on the Telecommunication and Banking sectors with key competencies in data communication, transaction automation and electronic payment systems. • Loxbit's business is split approximately 70% hardware, 30% services. In future, there will be a greater emphasis on services. • Key competitive advantages are:- • Existing customers tend to be repeat buyers (and require ongoing servicing) • Experienced management (ex. IBM 10-20 years of experience) • 150 experienced technicians • SingTel acquired 31% of PointAsia for US$30m in early 2000. Plans to list PointAsia were dashed by the collapse in internet valuations.

  30. Loxley Business IT (cont.) • Transaction Overview • Seeking to raise US$10mm in equity or a convertible instrument • Proceeds will be used for: • Loxbit debt repayment : US$ 4.3 million. • Loxbit working capital : US$ 2.2 million • PCC working capital : US$ 3.5 million • The company has proposed a 21.4% stake in LOXBIT for US$10m (negotiable) • Pricing implies 20-30x P/E ratio (year 2000) • Value is only attributed the major revenues making companies (Loxbit, PCC, Point Asia). Zero valuation is given to the small subsidiaries (Loxdata, OSI, etc.) • Exit : Potential SET listing within 2 years

  31. Thai Agro Exchange (Talad Thai) • Introduction • Thailand’s largest wholesale market for agricultural products with an estimated 70% market share. • The company opened the market in Nov. 1995 . • Talad Thai serves as a marketing, logistics center for farmers, wholesalers, and retailers. • Close to the Ring Road around Bangkok, the market is conveniently located conveniently for access by trucks from all over Thailand. • Currently, the market accommodates 8,000 vendors and 5,000 truck deliveries a day with a daily turnover of Baht 2-3 million. • Talad Thai has been developing property on the 500 rai (80 ha) site (such as shop houses).

  32. Thai Agro Exchange (cont.) • Introduction (cont.) • The economic crisis in 1997 slowed its operation and triggered financial problems. • The company successfully completed its debt restructuring with reduced interest rates, a debt haircut and extension of repayments. • In 1999 the company generated Bt 246m (US$ 6.1m ) revenue from the market operations and Bt 82m (US$ 2m) from the sales of shop houses on the site. • The company booked a profit of Bt 98m (US$2.5m) in 1999. • Around 60% of the shares are held by the Angkhawatana family. • The company plans to list on the stock exchange of Thailand in 2002 and is now in the process in selecting a financial advisor.

  33. Thai Agro Exchange (cont.) • Transaction Overview • Around 30-40% of the company is available to new investors,of which 17.5% (Bt 350m=US$ 8.3 m on a book value basis) is new shares and the balance is from existing shareholders. • One of the existing shareholders is fund managed by Nikko. This fund holds a 5% stake and is looking to sell as the fund is maturing. • The new funds will be used for the construction of cold storage and food processing facilities in the market. • The company is currently revising its financial projection in the light of the completed debt restructuring. • Exit would most likely be through an IPO.

  34. Lao Brewery • Introduction • Lao’s first and only brewery , established in 1971. In 1993, the government granted • Lao Brewery a20 year sole manufacturing concession, • 51% of the company is held by Loxley /Italian Thai Development (both listed companies in Thailand) and 49% is held by the Lao Government (Ministry of Finance) • Lao Brewery has an annual brewing capacity of 80 m litres and abottling capacity of 60 m litres. • 90% of output is in bottles, 8% in draft kegs, and 2% in cans. • Sales reached 50m litres in 2000 and are forecast to rise to 80m litres by 2005 (after expansion of the bottling line) • Current consumption of beer in Laos is c. 9.5 litres per capita, versus 13-14 liters per capita in Thailand. • There is growth potential in Laos in the provincial cities. (60% of sales are currently in Vientiane) • Revenues for year 1999 and 2000 were US$19.6 m andUS$31.1 m respectively. Net profits were US$8.5m and US$13.1m respectively. • Approx. 70% of net income is paid out as dividends on an annual basis. For 2000, Loxley/ITD will receive around US$4.5m.

  35. Lao Brewery (cont.) Introduction (cont.) • Under AFTA, beer tariffs in ASEAN will reduce by 2006. This will intensify the competition for Lao Brewery. • Almost all of the sales are made for cash. • Lao Brewery is debtfree. • There is a complex tax sructure (with four kinds of tax). The MoF receives (100% of the ) tax and (49% of the ) dividends, implying a potential conflict. • There is a high import content (in raw materials). • Historically, cost and tax increases have been passed on in pricing TransactionOverview • Due to financial pressures at home, both ITD and Loxley plan to divest their combined 51% stake. The indicated asking price is US$30m. • Asia Pacific Brewery (APB) has expressed interest in purchasingthis stake for US$25 million (prior to news of a recent increase in business tax). • CDC Capital Partners is interested to form a consortium withSIFII to bid for the stake. • Preliminary valuations indicate a value of US$22-24m (based on either a dividend discount model or on a listing).

  36. Lao Brewery (cont.) Transaction Overview (cont.) • Specific issues relating to this investment include the country risk, foreign exchange risk, a clear understanding of the concession terms, repatriation of dividends and taxation. • Proposed exit is through a combination of listing in Singapore/Thailand and/or sale to a strategic investor. There is no listed brewery company in Thailand. • Lao Brewery management (all local) sees value in a strategic partnership which improves procurement, provides technical support and gives access to offshore marketing. They would prefer a step by step approach (rather than giving a company like APB control from the outset).

  37. Bangkok Airways (BKKAIR) • Introduction • Formed in 1986 by Dr. Prasert Prasarttong-Osoth as the first private airline carrier in Thailand. • BKKAIR has two specific business lines: a) Aviation transport service and b) Airport operations. • In aviation, BKKAIR currently operates 9 ATRs and 1 Boeing 717 on more than 10 regional and domestic routes, principally serving the tourist markets. Koh Samui is by far the most important destination (c. 70% of aviation revenues), followed by BKK-Siam Reap (c.10% of revenues). 90% of customers are foreign. Around 45% of bookings derive from interline agreements with 42 international carriers. • In airport services, BKKAIR owns and operates two international airport a)Samui, in the South of Thailand b)Sukhothai, in the North of Thailand

  38. Bangkok Airways (cont.) • Introduction (cont.) • The company has plans to build a third airport, in Trad, in the East of Thailand, to carry tourists to Koh Chang (the second largest island of Thailand). The airport application is currently awaiting approval from the Ministry of Transport and Communications. • BKKAIR has been managed by an independent management team of industry professionals since 1995. • Estimated 2000 revenues are Bt2.6bn/US$60m (Bt2.2bn/US$55m in 1999). • The company is projecting sales growth of 10% p.a. for the next five years. • BKKAIR is expected to list on the SET in the year 2002-2003

  39. Bangkok Airways (cont.) • Transaction Overview • BKKAIR is seeking to raise a total of Bt1.3bn (Bt1bn in debt and Bt300n in equity) to fund several projects to support continued growth of the company and improve efficiencies in its existing operations. • The capital expenditure includes the following items: • Samui airport expansion • Deposits on 2 Boeing 717 and 6 ATRs (to replace the existing ones) • Acquisition of Boeing 717 spare parts • BKKAIR is in the process of finalizing the term sheet with the syndicated banks and financial institutions. After the debt has been finalized, BKKAIR will start the equity process.

  40. Deal sheet : Others

  41. Priority Deal list

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