Aberdeen New Thai Investment Trust — Long-term Thai equities specialist

Thailand’s GDP growth recovery has picked-up faster than many expected. Second quarter GDP rose by 3.7% year-on-year, its fastest pace in four years and well ahead of expectations, prompting the Bank of Thailand (BoT) to upgrade its 2017 GDP forecast to 3.8% from 3.4% previously. The recovery has been driven by exports, tourism and public spending. Exports have continued to surprise positively in the third quarter, reflecting strong economic recoveries in ASEAN (accounting for 25% of Thailand’s total exports) as well as China and the US (each accounting for 12%). August 2017 exports increased 13.2% over the previous year, significantly greater than the 5% consensus expectation. Tourism accounts for nearly 16% of GDP and continues to be a resilient contributor to the economy. According to Visa International, Bangkok is the world’s most visited city and is one of the most popular destinations for tourists from China.

The one-year official mourning period for the passing of King Bhumibol ended in late October 2017. Succession to the Crown Prince Maha Vajiralongkorn has been smooth and his coronation is expected to be announced shortly. The mourning period dampened consumption and state sector spending, thus there is scope for recovery as Thailand returns to ‘business as usual’. Household debt remains high at around 80% of GDP, though it has been stabilising. Public finances, however, are in better shape with public debt to GDP at around 50%. Furthermore, the government appears determined to push through ambitious public investment plans. These include a Transport Action Plan to improve the speed of travel of goods as well as connect the East-West and North-South economic corridor. Another key initiative is the Eastern Economic Corridor (EEC) plan, aimed at developing this region into an economic zone, attracting innovation industries and foreign investment. Around THB1.5tn (US$45bn) is expected to be invested over five years, including favourable tax incentives for private sector investors and workers.

As shown in Exhibit 2, the SET index has performed strongly since the beginning of 2016 and is now trading on a prospective P/E of around 15x, which is high relative to its own history, though middle of the range amongst markets within the MSCI AC Asia ex-Japan index. IMF projections show that prospects for Thailand’s and ASEAN countries’ growth, however, are favourable compared to the world, and more than double that of advanced economies (as shown in the right hand chart of Exhibit 2).

ANW was launched in 1989 and continues to be the only LSE-listed investment trust specialising in Thailand. The trust’s objective is to provide a high level of long-term, above average capital growth through investment in Thailand. Indirectly, the fund also provides investors with a nascent exposure to the Kingdom’s populous and fast growing neighbours, including Cambodia, Laos, Myanmar and Vietnam (CLMV), as many of its holdings have established businesses in these countries. The portfolio is relatively concentrated and reflects the managers’ bottom-up stock selection in the absence of benchmark constraints. It is focused on identifying cash-generative companies with strong balance sheets. As a result, although the managers target capital growth rather than income, the portfolio consistently generates a high revenue income, which in turn supports ANW’s above peer group average dividend yield.

The managers are positive about the investment potential within Thailand. Economic recovery has already surprised positively, underpinned by exports, tourism and public spending, however, they see reasons to believe growth can broaden and strengthen:

The managers believe the portfolio is well-placed to benefit from these themes, with its exposures to domestically-oriented companies, including Siam Cement and Land & Houses (public spending), and Minor International (tourism).

The managers follow a disciplined, bottom-up approach to stock selection. A well-resourced Asian team, including four Bangkok-based investment managers, enables the managers to conduct over 1,000 meetings a year with company managements and undertake in-depth analysis of portfolio and potential investments. The team focuses on companies with strong cash flows and solid balance sheets, where management has experience of business cycles, that exhibit good corporate governance, yet trade at reasonable valuations. Top-down considerations are secondary as they seek companies that can provide stable returns through economic cycles. Given the managers’ long-term investment horizon, they are able to develop a deep understanding of a company’s business and its management’s honesty and competence over multiple years of engagement. This is a differentiating factor and key in helping mitigate investment risk.

The managers are agnostic to benchmark weightings and focus on individual stocks in building a well-diversified portfolio, which can diverge significantly from the index. Exposure to any single stock is limited to 10% of net assets and gearing is permitted up to 15% of net assets. Reflecting ANW’s long-term investment horizon portfolio, turnover is typically around 10-15% per annum.

As at the end of September 2017, ANW held 40 stocks across a broad range of sectors (as shown in Exhibit 3) and the portfolio’s sector positioning is little changed compared with a year ago. Although the turnover for the past 12 months has picked up slightly to 17% from 12% in the prior year, it nevertheless remains low and consistent with the managers’ long-term investment horizon. The most significant change over the year is a 4.0 percentage point decrease in commerce. This largely reflects the disposal of long-held Big C in an attractive tender offer. The trust also sold Amarin Printing and Publishing due to its deteriorating operating environment, taking the media and publishing weight down 1.9 percentage points. The weight in property development increased 2.6 percentage points, reflecting the purchase of Land & Houses, one of Thailand’s leading property developers, with an attractive land bank and experienced management team. ANW was able to take advantage of an unjustified sharp sell-off in this stock on bad news. The trust also added to Advanced Info Services on easing competitive pressures in the telecoms industry.

ANW recently participated in the IPO of TOA Paints, raising the chemicals sector exposure from zero to 1.5%. The company has a strong brand and market position, commanding a 50% share of the Thai paint market. Prospects are bright for its expansion plans into Vietnam, Malaysia and the region. The share price has performed strongly since its listing.

ANW continues to provide investors with an element of exposure to the faster growing economies of Cambodia, Laos, Myanmar and Vietnam (CLMV). Many of its portfolio companies have capitalised on their strong balance sheets and corporate reputations to build a growing presence in the region, including Siam Cement, Siam City Cement and AEON Thana Sinsap.

As shown in Exhibits 4 and 5, ANW’s NAV total return has lagged its SET benchmark over one, three, five and 10 years, with relative weakness over three months accounting for a large part of the longer-term underperformance. Absolute returns, however, have been strong, with annualised three and five year returns of 9.9% and 10.0% respectively. Reflecting the managers’ focus on quality companies, this has been achieved with a portfolio that, compared to the SET index, is less risky and volatile as measured by its beta of around 0.9 over three and five years.

ANW is currently trading at a 16.4% discount to NAV (including income), which is wider than the three-year average of 15.6% though well within the period’s 11-21% range. The trust does not have a fixed life, although under its Articles of Association, if in the 12 weeks preceding the financial year end the shares have traded at an average discount to NAV (including income) in excess of 15%, a special resolution to wind up the company will be proposed at the AGM. The board is committed to narrowing the discount to NAV and has been actively promoting the trust as well as buying back shares.

ANW is a conventional investment trust with one class of shares and 17.7m ordinary shares in issue. Since 28 February 2017, ANW has bought back and cancelled around 0.9m shares, representing 4.7% of the shares in issue at the start of the financial year. This is similar to the pace of purchases in the previous year.

ANW has a US$10m three-year multi-currency loan facility with Scotiabank, which runs until October 2018. As at end September 2017, £2.7m has been drawn down equating to gross gearing of 2.4%. An annual management fee of 1.0% is paid out of revenues to AAMAL, a wholly-owned subsidiary of Aberdeen Asset Management. There are no performance-related fees and for the year ended February 2017, the ongoing charge was 1.4%.

ANW pays an annual dividend each July relating to the previous financial year. Although the trust’s primary objective is capital growth over income, it has a long track record of paying good dividends, and for FY17, paid 10.30p, a significant increase on the 8.50p paid for FY16. In part, this increase reflected currency translation gains in sterling terms. Historically, the trust has paid out almost all of its revenue earnings, and future dividends may therefore fluctuate in accordance with income received from its portfolio. The managers’ approach to invest in cash-generative, high quality companies should help support the continuation of appreciable dividend payments.

Exhibit 8 shows ANW against a peer group of the ten largest Asia Pacific country specialist closed-end funds (there are 14 funds in total in this group). It is, however, the only fund with exclusive focus on Thailand, thus making comparisons less meaningful as performance is heavily influenced by individual markets and not just manager performance. ANW stands out as having the strongest NAV total returns over 10 years, though it has lagged in more recent periods. It is also notable for having the second highest dividend yield amongst peers.

The board consists of four members, all of whom are non-executive and independent: