Aberdeen New Thai Investment Trust — Fast-growing region supports growth prospects

Thailand’s economy is slowing, which partly reflects cyclical factors but also the impact of the US-China trade dispute, which has tipped the world into a trade recession. Exports, which account for around two-thirds of Thailand’s GDP, have been contracting and drought has contributed to weak domestic consumption. Thailand’s Q219 GDP growth of 2.3% year-on-year was the slowest in nearly five years and the Bank of Thailand (BoT) has lowered its GDP forecast for 2019 to 3.3%. It cut interest rates this August, while signalling further potential cuts in 2020. The BoT also approved a THB316bn (c £7.5bn) stimulus package, aimed at boosting consumption and tourism. Measures include debt relief and loans for drought-affected farmers, an extended free visa-on-arrival provision for several countries for a further six months, and spending money and rebates for domestic tourists who travel outside their home provinces. As shown in Exhibit 2 (RHS), Thai equities are not obviously inexpensive. Their mid-teens forward P/E multiple, however, is not demanding relative to other developing Asian markets (excluding China). Geopolitical developments are likely to continue to influence Thailand’s near-term economic and equity market outlook; however, prospects for the longer-term remain positive and over the past 10 years, Thai equities have significantly outperformed Asia and global markets (Exhibit 2 LHS). The Thai economy benefits from a number of positive secular trends, including urbanisation and rising incomes. Thai companies are also well-positioned to benefit from the rapid development of its CLMV neighbours, which as shown in the chart on the front page, are growing significantly faster than Thailand.

Launched in December 1989, ANW is the only investment trust specialising in Thai equities. Its investment objective is to provide shareholders with a high level of long-term, above-average capital growth through investing in companies listed in Thailand. The fund also provides investors with indirect exposure to Thailand’s fast-growing neighbours including Cambodia, Laos, Myanmar and Vietnam as many Thai companies have a significant and increasing presence in these countries. The manager follows a disciplined bottom-up approach to build a diversified portfolio of around 40 stocks, representing the Asian team’s highest-conviction investment ideas. Gearing is permitted up to 15% of NAV and the trust can invest up to 10% of NAV in unlisted companies, which have visible plans to list. The portfolio is typically very different from its SET Index benchmark, and historically has had a high active share of over 75%. As a result, the trust’s performance can diverge significantly from the benchmark.

The team thinks the near-term outlook for the Thai economy remains challenged given the weakness of the export sector, while relatively high levels of household debt (at nearly 80% of GDP) hampers private consumption. However, it believes ANW’s holdings should be relatively resilient in uncertain conditions, given their high-quality characteristics. Furthermore, the team also believes the government is likely to introduce more stimulus measures to help stabilise the economy. The new government’s budget should be revealed over the coming months and the team expects infrastructure spending to continue to be an area of focus, highlighting that the BoT forecast public investment to increase by 6.3% in 2020 (following 2.5% forecast for 2019). The manager notes that the return of General Prayut Chan-O-Cha as prime minister signals the continuation of business-friendly government policies. His previous government articulated Thailand’s current 20-year vision, which includes significant investment in infrastructure, digital technology and healthcare.

The team believes ANW is also an excellent play on the CLMV region. It is growing faster than Thailand and has a population of c 165m people, offering Thai companies a large and underpenetrated market for their goods and services. Access for foreign equity investors to CLMV is limited, but many of the ANW’s companies have a significant and growing exposure to the opportunities in these countries. Examples cited by the manager include AEON Thana Sinsap, TOA Paint, Mega Life and Osotspa, which already have CLMV revenues of between 10–30%. In its view, Thai companies can represent excellent proxies to investing directly in these countries, given their superior access to capital markets, longer-established brands and better corporate governance.

The manager follows a disciplined bottom-up investment process to identify quality companies that are mispriced relative to their long-term intrinsic value. ANW is managed by Aberdeen Standard Investment’s well-resourced Asian team which consists of over 40 equity investment professionals in the region, including three Thailand specialists, based in Bangkok. The team supports an intensive schedule of meetings with managements to enable in-depth knowledge of companies and detailed fundamental analysis. It believes the market often underestimates the sustainability of returns from high-quality companies. The team evaluates firms on multiple criteria, including management pedigree and track record of capital allocation, sustainable competitive advantages, balance sheet strength, and environment, social and governance (ESG) credentials. The manager believes that ESG factors are financially material, and have an impact on corporate performance, and that its engagement with companies enhances the value of its investments for shareholders.

Following a board review in May 2018, in consultation with the manager, the trust is permitted to invest up to 10% of NAV in unlisted companies which have visible plans for initial public listing (IPO). Gearing is permitted up to 15% of NAV. As at end-September 2019, the portfolio had 1.5% in unlisted equities and had net gearing of 4.3%.

As shown in Exhibit 3, the portfolio is well diversified across 13 sectors. Over the past 12 months to end-September 2019, the most significant change is a 4.0pp increase in exposure to the food & beverages sector. This reflects the participation in the listing of Osotspa in October 2018. The company is Thailand’s leading energy drinks producer with a portfolio of strong brands including M-150 and Lipo. These brands have wide recognition in the region, which in the manager’s view can support Osotspa’s expansion plans in CLMV markets. ANW was a cornerstone investor in the company at an attractive valuation prior to its IPO and the shares have nearly doubled in price since listing. Coca-Cola bottler, Haad Thip has also been a strong performer over the past year. The company has over 80% market share in southern Thailand and is benefitting from an increasingly hot and dry climate, and tourism in Phuket and Koh Samui.

ANW took advantage of share price weakness to purchase a new position in construction materials retailer, Siam Global House. The stock has traditionally traded at valuations that were viewed by the manager as unattractive. Siam Global House has a strong network of stores in the north and northeast of Thailand, targeting lower-income customers who are building/improving their own homes. They are typically from rural areas and this profile complements ANW’s other home improvement retailer, HomePro, which targets middle- to higher-income urban customers.

The trust has also recently initiated a position in unlisted company Asset World Corporation (AWC) as a cornerstone investor. AWC has a portfolio of hotel, commercial and retail property in Bangkok, which the manager believes is very attractive. AWC’s tenants include Marriott and the luxury Athenee Hotel, and the manager expects growth to be driven by improvements to the portfolio properties as well as through future acquisitions. AWC’s owner is one of Thailand’s most successful businessmen whose companies include Thai Beverage. It aims to raise up to THB48bn (around £1.2bn) later this year, potentially making it Thailand’s largest IPO.

The manager has also continued to take profits in oil exploration and production company PTTEP to switch into its parent company PTT, which it believes to be more defensive owing to its more diversified businesses and lower dependence on the price of oil. The manager expects PTT to list its forecourt retailing business, which it thinks can realise value for shareholders. ANW has also sold its position in media company BEC World, which has been a source of funds for some time as prospects for advertising revenues continue to weaken.

As shown in Exhibit 5 (RHS), ANW has delivered strong long-term performance to shareholders; over 10 years to end-September 2019, the trust’s annualised NAV and share price total returns have increased 15.4% and 16.3%, respectively. Exhibit 5 shows the trust has also outperformed the MSCI Asia ex-Japan index over one and three years, and by a significant margin over 10 years. However, ANW’s NAV performance has lagged the SET Index benchmark over all periods shown. This partly reflects the portfolio’s consistent underweight (or zero exposure) to many of the largest stocks in the benchmark, owing to factors such as the manager’s negative view on a company’s corporate governance track record, and the tendency to find better investment opportunities in less well-researched mid- and small-cap companies. The high tracking error against the benchmark means the trust’s performance can diverge meaningfully from the index.

ANW currently trades at a 14.2% discount to its cum-income NAV, which is slightly narrower than its three-year average of 14.8%. The board actively monitors the discount and has the authority (renewed annually) to selectively repurchase shares if this is deemed to be in the best interest of shareholders. It introduced a number of measures in May 2018 aimed at broadening the appeal of the trust, and tightening the discount. These included permitting the fund to invest in unlisted companies ahead of an IPO, a reduction in the management fee and the introduction of an interim dividend. ANW does not have a fixed life, however, if in the 12 weeks preceding its year end, the shares have been trading at an average discount in excess of 15% to the cum-income NAV, a special resolution to wind up the company will be proposed at the following AGM.

ANW is a conventional investment trust with one class of share; currently there are 16.5m ordinary shares in issue. During the current financial year (FY20) share repurchases have been de minimis. In FY19, 0.3% of shares were repurchased for a total consideration of £1.6m. ANW has a £15m three-year multi-currency facility with Industrial and Commercial Bank of China and as at end-September 2019, £5.7m was drawn and the trust had net gearing of 4.3%. An annual management fee of 0.9% is payable to Aberdeen Standard Investments, reduced from 1.0% from May 2018, which has resulted in a fall in ongoing charges in FY19 to 1.26%, from 1.35% in FY18.

In May 2018, the board introduced an interim dividend, payable in November, in addition to the annual dividend, payable in June or July. At the same time, the board also approved the allocation of management fees and interest costs to be apportioned 75:25 to the capital and income accounts respectively (previously all from income). The new allocation reflects the composition of expected total return for the trust over the long term and increases the proportion of net earnings available to pay dividends. This has allowed the dividend per share to rise substantially; for FY19 the total dividend of 18.0p per share is a 62% increase over the previous year (FY18: 11.1p). The board has declared an FY20 interim dividend of 8.0p per share (FY19: 7.0p).

ANW is a member of the AIC Country Specialists: Asia Pacific sector - Exhibit 9 shows this peer group of 10 funds with market capitalisations above £50m. There are a broad range of geographic mandates within this group and direct comparisons between funds may not be relevant. ANW is one of the smallest funds among peers, ranking ninth. It has the highest NAV total return over 10 years, which is significantly above the returns achieved by the other members of the group. Over one, three and five years, the fund ranks seventh, fourth and eighth, respectively. ANW has the highest dividend yield although its discount to cum-fair NAV is one of the widest, ranking seventh.

The board consists of four independent non-executive directors and is chaired by Nicolas Smith (appointed March 2013 and assumed his current role in June 2013). It recently announced the appointment of Anne Gilding, with effect from 18 October 2019. She has led the development of global communications, branding and marketing solutions for a broad range of companies, including Impax Asset Management, BMO, GAM, Vernalis and UBS. Senior independent director, Claire Dobie (appointed in December 2013 and assumed her current role in June 2016) will retire on 3 December 2019. The other members of the board and their dates of appointment are Andy Pomfret (September 2014) and Sarah MacAulay (December 2016)