Calling All Bottom Fishers
Bangkok's stock market has plummeted almost 30% since Thailand devalued its currency on July 2 and its financial system imploded. But Dennis Lim, Singapore-based director of Templeton Asset Management (Singapore) Ltd., isn't selling out. A value investor who likes to buy stocks on the cheap, Lim is snapping up shares of blue chips such as Siam Cement Co. "To long-term investors like us, this is really an opportunity."
Many like-minded bottom-fishers are doing the same thing as a currency crisis rolls across east Asia and causes one bourse after another to hit the skids (chart). Indeed, while many pessimists fret that the slew of devaluations signals an end to Asia's decade of stellar growth, Lim and other bulls believe the stresses pulling at Asia, while severe, are a short-term phenomenon. "It's the same thing you heard when the Mexican peso crisis occurred," says Gary Greenberg, chief investment officer of Peregrine Asset Management (Hong Kong) Ltd. Just as Mexico and other Latin American countries regained their footing after the Mexican currency collapse, Greenberg adds, so, too, will Asia. If you have "the stomach for short-term volatility," counsels Merrill Lynch Dragon Fund Senior Portfolio Manager Kara Tan Bhala, Asia currently offers a rare opportunity to rake in profits.
But right now, persuading investors to stay put is difficult. The $1.4 billion T. Rowe Price New Asia Fund suffered $32 million in redemptions in early August, while GT Global New Pacific Growth Fund saw $23 million head out the door. Outflows may accelerate if the bad news continues. The International Monetary Fund announced a $17.2 billion Thai rescue package on Aug. 21. The same day, the Bank of Thailand admitted that its foreign reserves had dwindled to $6.6 billion after repaying the $23.4 billion it borrowed to defend the baht. Since then, the baht and stock market continue to fall. By yearend, the Bangkok market--already down 50% over the past 12 months--could fall an additional 15%, says Gregory Miller, senior analyst at Montgomery Asset Management in San Francisco.
MINEFIELDS EVERYWHERE. Still, sentiment could change in a hurry. Bhala believes that corporate profits, now under unrelenting pressure, will rebound by 1998. "The stock markets should start discounting this soon," she predicts. If that attracts new money from the U.S., says Merrill Lynch & Co. international investment strategist Douglas Johnson, markets could turn around sharply. He notes that Thailand's market capitalization of about $74 billion is not much less than the $77 billion value of U.S. retailer Wal-Mart Stores Inc. Other Asian markets are similarly small.
As stock-pickers begin moving back into Asia, they are trying to avoid numerous minefields. For example, in a region known for lax accounting standards and disclosure requirements, balance sheets are virtually irrelevant indicators of corporate health. "You could find out the hard way there's no equity in the company anymore," warns Peregrine's Greenberg. So he's asking companies what currency their debt is denominated in, when it falls due, and how they'll pay it off. Although he's not making any major buys, other managers are taking a closer look at low-glamour, well-managed smaller companies. One such company is American Standard Sanitaryware (Thailand), an affiliate of the U.S. plumbing equipment maker and the region's biggest exporter of toilets and basins. Another pick is Malaysian Oxygen, a supplier of industrial gases.
QUICK STUDIES. Already, the crisis is forcing Asian companies to become better managed. With $4 billion in offshore debt and baht-denominated revenues, Siam Cement's currency losses will range from $500 million to $1 billion, depending on how much further the Thai currency falls, says Templeton's Lim. While other Thai companies plan to stagger their currency hits over five years, Siam Cement's management has won kudos for deciding to write off the losses during this fiscal year.
But in many cases, it is still too early to assess the full extent of the currency damage. That's why Hugh Young, managing director of Aberdeen Asset Management Asia in Singapore, likes companies that are "focused, professional, and don't do silly things." He favors Singapore Airlines, Singapore Press Holdings, and the country's four largest banks--Development Bank of Singapore, Oversea-Chinese Banking, Overseas Union Bank, and United Overseas Bank. These "classic six" stocks will average 12% earnings growth this year, he says. They are trading at an average of 12 times estimated earnings, and their share prices are declining by about 5% annually.
Another reasonable bet: export-oriented companies that will benefit from devaluations. Jakarta-listed Modern Photo Film Co., which assembles and exports 60% of Fuji Photo Film Co.'s cameras, is trading at 15 times earnings. Bangkok-listed K.R. Precision supplies hard-disk drive components to Seagate Technology Inc., which is opening plants in Thailand and the Philippines. After writing off a foreign-exchange loss of $3.5 million, K.R. is trading at 10 times next year's earnings, says Deutsche Morgan Grenfell analyst Andrew C. Dobson.
Investment pros also are looking at consumer stocks that have sustained big losses. They argue that the region's growing middle class will continue to expand despite the summer's economic shock. One beneficiary could be Putera Surya Multidana, an Indonesian company that finances motorcycle purchases. Its stock--now trading at 12 times this year's earnings--has fallen 75% in dollar terms since mid-August. But Peregrine Brokerage Inc. director John Sullivan says the company's unique franchise in a country where few people can afford a car will translate into compound earnings growth of more than 50% annually through 1999.
Some big phone companies also remain in favor. Telekomunikasi Indonesia, whose multiple has dropped from its post-IPO high of 22 in 1995 to 16 in late August, is on many buy lists. The company rakes in revenues from long-distance satellite calls since it covers a 3,100 mile archipelago. Philippine Long Distance Telephone Co., which gets much of its income in U.S. dollars and has a current price-earnings ratio of 15, is also worth a look. In late August, a Chinese rocket launched the first Philippine communications satellite, owned by a PLDT-controlled consortium. This should help PLDT "enter a new cycle of growth," says Joven Babaan, head of research SBC Warburg in Manila.
China's strong economy, which is expected to grow 11% this year, is helping Hong Kong's market shrug off much of Asia's currency turmoil. One real winner for the Merrill Lynch Pacific Fund, is Hutchison Whampoa Ltd., a Hong Kong conglomerate. It's a leader in the cargo container business and is investing heavily in the Pearl River Delta and Shanghai. Hutchison Whampoa's share price has doubled since the fund bought in during the summer of 1995.
Although each passing week brings more bad news to Asia's beleaguered bourses, patient investors will find plenty of opportunity for profits, says Matthew Dobbs, regional managing director of Schroeder Investment Management in Singapore. That may be the first good news investors in the region have had in months.