Aberdeen New Thai stock selection and currency drive interim 14.6% NAV return

Aberdeen New Thai stock selection and currency drive interim 14.6% NAV return – Aberdeen New Thai (ANW)

Thai equities and enjoyed a positive half year to the end of August 2019 with particular gains for Sterling investors. The Stock Exchange of Thailand Index (SET Index) rose by 15.2% on a sterling-adjusted total return basis as the Thai baht strengthened over 11% against the pound. In local currency terms the SET Index eventually gained some momentum through the period with a 5% increase by early July only to fall rapidly through August to settle at the period end slightly ahead.

By comparison, ANW’s NAV rose by 14.6%, while the share price gained 14.5% in value. The company’s says that  this small NAV underperformance against the SET Index was partly due to the portfolio being underweight to the services and technology sectors and stock selection therein. The manager’s added value through stock selection stock selection in financials and food, together with gearing within the portfolio, added to relative performance.

Portfolio commentary

In financials, Aeon Thana Sinsap is one of the largest non-bank issuers of credit cards and personal loans for household products, targeting low to mid-end clients. Non-bank financial institutions, such as AEONTS, have benefited from easier rates, as demand for consumer, credit card and personal loans has increased, supporting healthy profit growth.

In the food and beverage industry, leading beverage and personal care products manufacturer Osotspa saw robust sales across all segments and healthy margin expansion in its domestic operations, as well as abroad. Soft drink producer Haad Thip also helped boost the company’s performance thanks to the hot and dry weather driving up sales for its products. In addition, the lower price of sugar brought down some of its operating costs. In the services sector, Home Product Center, a home improvement retailer, lifted performance. Its profits grew as gross margins benefited from a good product mix and disciplined control of operating expenses.

The portfolio’s underweight in the energy and utilities sector detracted during the period, mainly from Gulf Energy Development, a non-holding, as the utility surged on expectations that it would generate long term benefits from bids for new infrastructure projects.  The drop in exports and weaker domestic consumption hampered the automotive sector, which plays a key role in revenue generation in Thailand. Interhides, which produces leather coverings for cars, along with automotive lighting equipment manufacturer Thai Stanley Electric, both dampened ANW’s gains. Interhides embarked on expanding its capacity to capitalise on a shift in demand for leather tanning services from China. The related capital expenditure, coupled with the company cancelling a contract with a significant partner, caused a decline in revenues.

However, the manager believes that Interhides’ earnings outlook remains positive in the long run as it is well placed in the region to fill the supply gap for car leatherware. With this in mind, the portfolio’s exposure to the holding was increased. The company’s overweight position to Thai Stanley detracted during the period, as its earnings were challenged by a slowdown in domestic automotive sales in the wake of the general election, as consumers held back in light of political uncertainties. In the context of the trade war pressuring trade and manufacturing in China, both holdings were also affected in the supply-chain disruption.

In line with the ANW’s new investment policy approved by shareholders in June 2018, the manager introduced several small-cap holdings into the portfolio.  During the period, a position was initiated in Siam Global House, a retail chain that sells home-related products for construction, repair, decoration and renovation. This is a business that benefits from its exposure to wider Thai demand and the increasing interest in domestic DIY.

Over the period, the portfolio’s exposure to recent introduction Krungthai Car Rental and Leasing was raised on an attractive valuation amidst expectations of a pick-up in the auto sector following the government’s stimulus efforts. The manager also added to Tesco Lotus Retail because of the property giant’s good performance and expectations that commercial rents will continue to increase.

The manager took profits from Banpu, Advanced Info Service, Eastern Water Resource Development and Electricity Generating on relative strength, and top sliced PTTEP that had done relatively well this year. The proceeds were used to continue to build the company’s existing holding in PTT, which recently announced plans to develop a gas pipeline in the Northeast to increase the group’s existing capacity. Meanwhile, Siam Cement was pared due to anticipated headwinds for the chemicals sector as the spike in crude prices is expected to drive up energy costs.

Top ten investments at 31 August 2019

ANW: Aberdeen New Thai stock selection and currency drive interim 14.6% NAV return