Buy what the Asians like to buy

“Yaa kit maak”, was the warning I used to receive from colleagues when I worked as an investment professional in Thailand. It simply means ‘don’t think too much,’ which was their polite way of saying that Westerners tend to over complicate things.

It annoyed me at first, but I learned to value their approach, linked to the Buddhist belief that there is a virtue in trying to think as little as possible as everything is transient.

Right now there is a tremendous amount of soul-searching among Western investors regarding Asia and its future. Many worry about China and the state of its financial institutions. Others worry about the effect of bond tapering by the Fed. Sill others worry about how long economies such as Indonesia and Thailand can maintain their momentum. It’s why so much Western money is pulling out of Asia right now.

But really this story is simple. It’s not about China or the Fed or Western banks. It’s about Southeast Asia – and the sudden emergence of a new economic powerhouse.

Think about all the investment in ports, rail and commercial property that is being undertaken in Southeast Asia right now. Think about how tourism, banking, insurance and retail are all booming as the middle classes have become accustomed to their newfound wealth. The reality, as I’ll explain today, is that these countries don’t really depend on Western money anymore.

In fact, while Western financial institutions are exiting, Asian peers are on a spending spree – largely because they are being forced to add strategic assets to stay competitive in their own backyard. And that is especially true of Thailand…

Foreign bank claims on Asia fading

In early July Japan’s largest bank, Bank of Tokyo-Mitsubishi UJF, announced it will buy a 25% stake in Bank of Audhya (BAY), a leading Thai commercial bank, from GE Capital (GE). This is an interesting deal. If approved it would mark the biggest acquisition ($5.6bn) by a Japanese bank in the region. But it also indicative of what is happening across Asia in recent months.

For the first five months of this year for example, Board of Investment (BOI) data shows that Japan accounts for 48.3% of all foreign direct investments (vs 32.9% in 2007) in Thailand. In contrast the US and Europe account for 3.9% (vs 23.0% in 2007) and 13.8% (vs 12.0% in 2007) respectively.

GE Capital is not the only Western institution that has decided to head for the exit in Asia. In May, Goldman Sachs sold its stake in ICBC, China’s largest bank, to Singapore sovereign wealth fund Temasek. HSBC sold its stake in Ping-An, China’s second biggest insurer, to a Thai tycoon. Citigroup, JP Morgan and The Capital Group reduced their holdings in Agricultural Bank of China, the biggest lender in China, and Bank of America sold ther majority of its holdings in China Construction Bank at the end of 2012.

But this isn’t a new story. The fact is that Western financial institutions’ prominence in Asia has been fading for a very long time.

During the Asian financial crisis in 1997 for example, foreign bank claims stood at 60% of the GDP of the Association of Southeast Asian Nations (ASEAN). Since then foreign bank claims have dropped to about 24% in 2012.

And if we look at Thailand, the drop is even more astonishing: from 70% in 1997 to 17.9% by end of 2012.

Playing the Asia money game

The obvious investment implication is that in order to capture economic growth transmitted through the Asian banking system we need to buy Asian banks, rather than Asian focused ETFs or funds. And within that group it makes sense to identify banks that could be merger & acquisition targets.

Thai Military Bank (TMB), the country’s seventh largest lender, is an interesting example.

The Dutch financial services company ING Groep NV (ING) is seeking to sell its 31% stake in TMB, supposedly to help to repay a $13bn state bailout.

If the TMB deal goes through ING is set to make a nice profit, as the stock price of TMB has more than doubled in value since it was acquired in 2007.

There is already a string of interested parties – the bidders are reported to come from China, Japan, Malaysia or South Korea. They are keen on acquiring a Thai bank as the country is the gateway to the Mekong region, the last untapped consumer market in the 10-member countries of Southeast Asian Nations (ASEAN). Many of their key customers are already involved in the Mekong-region and it is an imperative for them to assist them.

The stock trades on a price to earnings (PE) ratio of 15.1 times and price to book value (PBV) of 1.78 times 2013 earnings. I think the stock should fetch a minimum PBV of 2.0 times to match the pricing of Bank of Audhya, but could attract a higher price due to scarcity value.

The only snag is that Thailand’s Ministry of Finance holds 26.1% of TMB. Foreign banks can only buy up to 25% of a Thai bank without Bank of Thailand approval, but a stake of up to 49% requires approval from the Thai central bank, and more than 49% requires approval from the Thai government.

But even if we are wrong about an imminent sale, TMB’s share price has come down nearly 20% from its peak this year, making it an attractive target for other Asian institutions looking to extend their influence in this fast developing and independent economic powerhouse.


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