SOURCE: Thai Capital Fund
The Thai Capital Fund Reports Third Quarter Earnings
JERSEY CITY, NJ--(Marketwire - November 3, 2008) - The Thai Capital Fund, Inc. (the "Fund")
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The Fund's investments in Thailand are made through a wholly owned investment plan (the "Investment Plan") established under an agreement between SCB Asset Management Co., Limited ("SCBAM"), the Fund's investment manager, and the Fund. The Fund's investments through the Investment Plan are managed by SCBAM, located in Bangkok, Thailand. Daiwa SB Investments (Singapore) Limited, the Fund's investment adviser, provides SCBAM with advice regarding investments through the Investment Plan and manages the Fund's assets held outside the Investment Plan.
THIRD QUARTER EARNINGS RESULTS
For the quarter ended September 30, 2008, the Fund earned net investment income of U.S. $178,000 (equivalent to income of U.S. $0.06 per share), resulting in net investment income for the nine months ended September 30, 2008 of approximately U.S. $629,000 (equivalent to income of U.S. $0.20 per share). Net realized and unrealized losses from investment activities and foreign currency transactions for the quarter ended September 30, 2008 were approximately U.S. $7,935,000 (equivalent to a loss of U.S. $2.51 per share). As a result, net realized and unrealized losses for the nine months ended September 30, 2008 were approximately U.S. $11,691,000 (equivalent to a loss of U.S. $3.69 per share).
In comparison, for the quarter ended September 30, 2007, the Fund earned net investment income of approximately U.S. $160,000 (equivalent to income of U.S. $0.05 per share), resulting in net investment income for the nine months ended September 30, 2007 of approximately U.S. $676,000 (equivalent to income of U.S. $0.21 per share). Net realized and unrealized gains from investment activities and foreign currency transactions for the quarter ended September 30, 2007 were approximately U.S. $3,476,000 (equivalent to a gain of U.S. $1.10 per share). As a result, net realized and unrealized gains increased to approximately U.S. $8,747,000 (equivalent to a gain of U.S. $2.77 per share) for the nine months ended September 30, 2007.
On September 30, 2008, the total net assets of the Fund were approximately U.S. $30.9 million. The net asset value per share on that date was U.S. $9.78, based on 3,163,037 shares outstanding. In comparison, on September 30, 2007, total net assets were approximately U.S. $41.3 million, equivalent to a net asset value per share of U.S. $13.09, based on 3,157,405 shares outstanding. The Fund generated a negative investment return of 26.30% for the nine months ended September 30, 2008, when measured against the net asset value per share of U.S. $13.27 calculated on December 31, 2007. In comparison, the Stock Exchange of Thailand ("SET") Index decreased 31.04% for the same period, in U.S. dollar terms.
As of September 30, 2008, the Fund had 89.69% of its net assets invested in Thai common stocks and 9.83% in Thai cash instruments. The remaining assets were made up of 0.26% in short-term U.S. dollar time deposits and other assets in excess of liabilities of 0.22%. As of October 31, 2008, the Fund had total net assets of approximately U.S. $22.1 million, equivalent to a net asset value per share of U.S. $6.99. On that same date, the Fund's shares on the American Stock Exchange ("AMEX") closed at U.S. $6.58, representing a trading discount of 5.87% to its net asset value per share.
THIRD QUARTER MARKET REVIEW
In the third quarter, the portfolio return in Thai Baht terms was -18.56% while the return of the SET Index benchmark was -22.39%; thus the Fund outperformed the benchmark by 3.83%. Mainly, the portfolio declined less than the market by being underweight in the energy sector and increasing its cash position. Moreover, the Fund was also overweight in two outperforming sectors, the banking and property sectors. Year to date performance, the Index was down 30.48% and the portfolio return was down 25.39%, outperforming the benchmark by 5.09%.
In the third quarter of 2008, the SET Index dropped 172.05 points or 22.39% to 593.54 from the June 30th close of 768.59. At the beginning of the quarter the SET Index declined in line with global equity markets due to the risk of higher inflation from rising oil and agricultural prices. This led to a downward revision in global growth and a trend to increase interest rates to curb inflation. Afterward, crude oil and commodity prices decreased dramatically resulting in a sell off in the energy sector and global equity markets moved down. In addition, increased investor concern about the financial sector originating from subprime loan problems and the need for additional capital resulted in investors allocating funds out of equity assets. In addition, sentiment in commodity markets worsened significantly, fueled by concern of a global economic slowdown, and investors sold off again from the energy sector and allocated funds to cash. The U.S. dollar appreciated compared to other currencies due to fund inflows to the U.S. market. Nevertheless, a positive factor is the reduced inflationary pressure as a result of lower crude oil prices toward the end of the quarter due to the expected slowdown in global demand.
FOURTH QUARTER MARKET OVERVIEW
In the fourth quarter, we expect the SET Index to rebound and move in a narrow trading range. Although Thai politics should move in a more positive direction, given the increased likelihood of Parliament being dissolved and a new election being called, external factors remain turbulent and are likely to prevent a sustained rally in the stock market. We believe that risk aversion is still too high to support a sustained rebound, while the valuations are too compelling to call for a sustained dip. It seems that investors while forced to conduct shorter-horizon trading in order to outperform the market. Given the falling inflation theme and potential improvement in the political scene, we prefer domestic plays, such as banks, and property and consumer defensives, such as retailers and healthcare.
With the global economy at risk, the U.S. economic slowdown has materialized, and could turn into a severe downturn. Given the turmoil in the global financial markets, aggressive de-leveraging in the banking system and another round of write-offs, financing conditions may deteriorate further. The risk of a more serious global economic downturn is increasing. The IMF forecasts that the United States and parts of Europe are already in or close to a recession, and that the recession will continue until late 2009, with the outlook being subject to considerable downside risks. Although a recovery is projected to occur progressively in 2009, the pick-up is likely to be unusually gradual, held back by continued financial market de-leveraging. The IMF cut its global growth projections to 3.9% from 4.1% for 2008, and to 3.0% from 3.9% for 2009. U.S. economic growth was revised up to 1.6% from 1.3% for 2008, and down to only 0.1% from 0.8% for 2009.
The Thai market has been affected by several financial and economic developments. The first and immediate was the write-down of investments related to CDOs and Lehman Brothers debt by Thai banks. But a more severe and prolonged impact is expected from developments that are linked directly to the real economy. These include (i) higher cost of funds, (ii) slowing private consumption, (iii) drying investments, (iv) slowing exports and (v) lower tourist arrivals.
1) Higher cost of funds. The first impact of the global financial crisis is the write-down of investments, related to the sub-prime crisis and the collapse of Lehman Brothers, by Thai financial institutions. However, the amounts are insignificant compared to their capital bases. The global credit crunch has resulted in a sharp rise in short-term rates around the world, despite interest rate cuts. More importantly, financial institutions as financial intermediaries are not functioning well, and none are willing to lend. As a result, Thai corporations are finding it difficult to obtain overseas financing. This could continue until the tight credit condition subsides, but that is unlikely to happen anytime soon following continued de-leveraging in global financial markets. Hence, most debt financing would have to be raised locally. In our view, corporations that depend on overseas financing would be the worst affected. In addition, a tightening foreign credit market could result in banks increasing deposit rates and ultimately squeezing their net interest rate margin.
2) Slowing private consumption. Given the weak consumer confidence caused by fears of a global recession, coupled with the political uncertainty, Thailand's private consumption should remain weak for at least another four quarters. Development Bank of Singapore ("DBS") economists forecast that growth in private consumption in Thailand will remain sluggish in 2009 (2.7% in 2008 and 3.2% in 2009), with further downside risk.
3) Drying private investment. Given concerns about a global recession as well as political tension in the country, local and especially foreign investors are unwilling to invest in Thailand. Hence, foreign direct investment numbers should also remain sluggish for at least another four quarters.
4) Exports will slow down. Slowing consumption in major economies in the world will inevitably result in a sharp drop in demand for Thailand's products. This will be exacerbated by softening agricultural product prices, which would further hurt export value. DBS economists forecast that Thai export growth will decelerate from 9.0% in 2008 to 5.2% in 2009. Further downside risk would depend on the severity of the global economic turmoil.
5) Lower tourist arrivals. The global economic slowdown and domestic political tension will result in lower tourist arrivals in Thailand in the next three to four quarters. This would have a negative impact on the hospitality industry.
Headline inflation in Thailand fell from 9.2% in July to 6.4% in August, while core inflation fell sharply from 3.7% to 2.4%. The sharp drop in inflation was due to the fall in global oil prices and the government's six-month economic assistance package. The economic assistance package will expire in January 2009. Hence, the forecast sequential inflation rate would be much lower at 2.5% (M-o-M) for February 2009, when the measures may be reversed. We believe that inflation should not be a major concern for 2009.
Policy bias shifted towards growth. Given the deteriorating economic outlook, the Bank of Thailand has signaled a shift in its policy bias from fighting inflation towards growth in the post-meeting statements made on October 8, 2008. An interest rate cut of 75 basis points is expected. We believe that interest rates will be lowered from 3.75% presently to 3.50% by the end of the fourth quarter of 2008 and to 3.0% by the first half of 2009. This implies a total cut of 75-100 basis points over the next two or three quarters.
Most listed companies are unlikely to be able to avoid the negative impact of the global economic malaise. Despite our conservative forecasts and bearish view towards the Thai market, the severity of the global economic slowdown could be stronger than we earlier estimated. Thus, we revised our earnings per share growth forecast in Thailand for fiscal year 2009 to 3.0%, from 8 to 9% previously.
INVESTMENT STRATEGY
According to our market view as mentioned above, we still hold positions in the property and banking sectors, which we expect to rebound in the fourth quarter of 2008 and might hold these positions to the first half of 2009, because if interest rates decline as we expect, it will be positive to both sectors in the medium term. For commodities-related sectors (i.e., energy and chemical sectors), we expect to maintain an underweight position until the second half of 2009 or until there are some signs of improvement in world consumption. Since markets are still expected to move sideways or sideways to down, we still plan to maintain a cash level between 12-15% and try to time the market volatility in order to enhance performance of the portfolio.
The ten largest equity classifications of the Fund held at September 30,
2008 were:
Percentage of
Industry Net Assets
--------------
1. Banks 22.70%
2. Energy 18.53
3. Property Development 13.41
4. Media & Publishing 8.15
5. Communication 7.26
6. Commerce 5.68
7. Health Care Services 4.33
8. Food & Beverage 2.23
9. Finance & Securities 1.21
10. Mining 1.18
The ten largest equity positions held by the Fund at September 30, 2008
were:
Percentage of
Issue Net Assets
--------------
1. Bangkok Bank Public Co., Ltd 11.02%
2. Kasikornbank Public Co., Ltd 9.98
3. PTT Exploration and Production Public Co., Ltd 8.29
4. PTT Public Co., Ltd 7.15
5. Advanced Info Service Public Co., Ltd 5.00
6. Bangkok Chain Hospital Public Co., Ltd 4.29
7. Amarin Printing & Publishing Public Co., Ltd 4.20
8. Quality Houses Public Co., Ltd 3.26
9. BEC World Public Co., Ltd 3.00
10. TRC Construction Public Co., Ltd 2.16
QUARTERLY RESULTS OF OPERATIONS*
Net Realized
And Unrealized Net Increase
Gains (Losses) on (Decrease) in
Net Investments and Net Assets
For the Quarter Investment Foreign Currency Resulting
Ended Income (Loss)* Transactions* From Operations
--------------- ------------------ ------------------
Total Per Total Per Total Per
(000’s) Share (000’s) Share (000’s) Share
------- ------ --------- ------- --------- -------
March 31, 2008 $ -0- $ -0- $ 2,016 $ 0.64 $ 2,016 $ 0.64
June 30, 2008 451 0.14 (5,772) (1.82) (5,321) (1.68)
September 30, 2008 178 0.06 (7,935) (2.51) (7,757) (2.45)
------- ------ --------- ------- --------- -------
For the Nine
Months Ended
September 30,
2008 $ 629 $ 0.20 $ (11,691) $ (3.69) $ (11,062) $ (3.49)
======= ====== ========= ======= ========= =======
March 31, 2007 $ 107 $ 0.03 $ 427 $ 0.14 $ 534 $ 0.17
June 30, 2007 409 0.13 4,844 1.53 5,253 1.66
September 30, 2007 160 0.05 3,476 1.10 3,636 1.15
December 31, 2007 (136) (0.04) 1,334 0.42 1,198 0.38
------- ------ --------- ------- --------- -------
For the Year Ended
December 31, 2007 $ 540 $ 0.17 $ 10,081 $ 3.19 $ 10,621 $ 3.36
======= ====== ========= ======= ========= =======
PER SHARE SELECTED QUARTERLY FINANCIAL DATA
Share
For the Quarter Ended Net Asset Value Market Price** Volume**
------------------- ------------------- ---------
High Low High Low (000’s)
--------- --------- --------- --------- ---------
March 31, 2008 $ 13.97 $ 11.75 $ 13.55 $ 9.45 392
June 30, 2008 14.50 11.89 13.60 10.86 300
September 30, 2008 11.77 9.78 11.00 7.78 323
March 31, 2007 $ 10.33 $ 9.38 $ 11.88 $ 9.15 610
June 30, 2007 11.94 10.63 13.20 10.65 597
September 30, 2007 13.73 11.74 15.85 10.35 608
December 31, 2007 14.09 12.35 15.48 12.05 402
* Net of Thai withholding tax.
** As reported on the American Stock Exchange, LLC.