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MARKET OVERVIEW Panning for nuggets of gold on the SET Laying bare the market-capitalisation heavyweights reveals value in energy By SHARAD APTE and ALLAN SCHULTE Oh, what a difference a year makes. Or ten. At the end of 1995, the SET was near its all-timehigh of 1,789.16 set in 1994. Bangkok Bank described the period as its golden years, and the country saw significant yearon- year growth in foreign direct investment. Bangkok Bank, Thailand’s largest publiccompanyat thetime,hadrecently recorded its first year of netprofit exceeding 10 billion baht. By 1998, however, as investors will painfully remember, the market sank to nearly 200, investment driedupandBangkok was left with countless abandoned construction sites.
For the most part, that value has been recreated: the total market capitalisation of the SET has rosen by 80% since 1995, or an average of 6% annually, despite all the market volatility. Of course, the investors have changed over the past 10 years too. So too has the nature of the investments themselves. Bangkok Bank remains the nation’s largest bank, but its fortunes have not mirrored those of the broader market. In December 1995, the company had a market capitalisation of 216 billion baht. At the end of 2005, it stood at just over 200 billion baht. Bangkok Bank was not alone. Of all themajor banks, only Kasikornbank (formerly Thai Farmers Bank) has seen a significant increase in its market capitalisation since 1995.Thebanking industry as a whole went from 27% of the SET in 1995 — nearly a third of the market’s total value — to 16% of the SET’s market value today. At the time, True Corp (formerly TelecomAsia) represented the secondmajor element of the SET in 1995 — communications stocks accounted for over 578 billion baht—nearly21%of total market value — in December of 1995. By the endof 2005,however, telecomsaccounted for only11%of total market value, or 560 billion baht.  In large part, thedecline of the banking
and telecoms equities was part of a
broader worldwide phenomenon. Commercialbanks,
insurers and brokers were
merging throughout Asia, Europe and
America. At the time, it appeared as if
the era of ‘‘riskless equity’’ had finally
been reached, and that new super
financial-service companies would mint
money and turn customers and shareholders alike
into millionaires.TheInternet,
alongwith the communications companies
that provided its access,were going
to generate massive increases in ‘‘teledensity’’—
or access to communicati onlines.Of course, neither hypothesis ultimately proved completely correct. So where has all the new value on the SET been created? In a word, Energy. Over the past 10 years, the energy and utilities industry has increased nearly eightfold, from 167 billion baht to 1.3 trillion. That is nearly a quarter of the SET’s total market value today. PTT alone accounts for 12% of the total market. (For comparison purposes Bangkok Bank accounted for 8% of total market value in 1995.)Evenwithout PTT, the energy and utilities industry is still the market’s second largest overall sector. To no one’s surprise, an Egat listing in 2005 would only have further weighted the market toward energy. The rise of the energy sector also parallels broader international trends. What’s interesting this time is that the leading industry’s wealth is asmuchdue to foreign externalities as it is to domestic market conditions or corporate initiatives. Worldwide highs in oil prices are driving record profits at energy companies and PTT is no exception. A view of the Thai energy industry’s future thus depends primarily on one’s view of long-range oil-price forecasts. Movements in these three industries — banking, telecoms and energy — account for significant structural changes to the SET since 1995. In comparison, a number of other, though smaller, industries have also seen significant changes in position over the past 10 years. The consolidation and listing of PTT Chemical has increased the petrochemicals and chemicals industry by 500% to over 165 billion baht. Fuelled largely by the government’s push into medical tourism, the health care services industry has increased by 632%. Though they are still small in relative terms, these industries have become multi-billion-dollar creators of value for shareholders. Looking further, the values of the electronic components and personal products industries have quadrupled. Automotive, entertainment, food and professional services have tripled. Andagribusiness,transport and mining have doubled. In fact, only four industries are smaller in absolute terms today than they were in 1995:machinery and equipment, paper and printing, household goods and the a forementioned communications. Despite setbacks, Bangkok Bank was still one of the SET’s largest companies at the end of 2005. It, along with the other companies in the top five — PTT, AIS,PTTEPandSiamCement—account for 35% of the SET’s total market value. Although the market remains heavily weighted toward the top, the strong performance and growth of other industries such as petrochemicals, health-care services, agribusinesses and transportation all suggest that there are nuggets of gold scattered all across the SET. Sharad Apte is the managing director of L.E.K.’s Southeast Asia practice. Allan Schulte is a consultant with L.E.K. They can be reached at 02-654-3500 or via e-mail at s.apte@lek.com and a.schulte@lek.com
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