Why is Thailand s price-earnings ratio relatively low?

Why is Thailand s P/E ratio relatively low and what can we do about? By Sethaput Suthiwart-Narueput Senior Vice President Research & information Division The Stock Exchange of Thailand Presentation to Fund Managers at Food f or thought seminar organized by Cigroup 22 February 27 Outline Why is Thailand s price-earnings ratio relatively low? What can we do about? 1

Thailand stock exchange now has the lowest P/E ratio in the region Un: Times 22.9 17.6 19.8 13.8 14.4 1..9 Thailand Korea Singapore Hong Kong Philippines Malaysia Indonesia Source: Bloomberg as of 21 February 27 Thai P/E ratio has been relatively low since 23 Un: Times P/E ratio of selected countries (23-January 27) 4 4 Thailand Malaysia Singapore Hong Kong 3 Philippines Indonesia 3 Taiwan 2 2 1 Jan-3 Mar-3 May-3 Jul-3 Sep-3 Nov-3 Jan-4 Mar-4 May-4 Jul-4 Sep-4 Nov-4 Jan- Mar- May- Jul- Sep- Nov- Jan-6 Mar-6 May-6 Jul-6 Sep-6 Nov-6 Jan-7 Source: Bloomberg as of 3 January 27 2

46% of listed companies in SET has P/E ratio of - times 4% Thailand 22% 12% % 6% 2% 2% 1% 1% % 1% 2% 2% - ' - '-1 1-2 2-2 2-3 3-3 3-4 4-4 4- -7 7- > 32% 2% Malaysia 3% 2% Singapore 13% 1% 6% 7% 3% 2% 2% 2% 1% 3% 1% 4% 9% 4% % 3% 2% 1% 1% 2% 1% 2% - ' - ' -1 1-2 2-2 2-3 3-3 3-4 4-4 4- -7 7- > - '- '-1 1-2 2-2 2-3 3-3 3-4 4-4 4- -7 7- > Source: Bloomberg as of 3 January 27 Thailand s P/E ratios are lower than Singapore and Malaysia for almost all industry groups Un: Times Other 8.1 9.4.9 Energy 8.7 9.7 9.3 Communication 11. 12.9 1.4 Technology 11.8.1 13.3 Finance 9.8 11.9 11.3 Industrial.2 11.1 12. Source: Bloomberg as of 31 May 26 3

and Thai lower P/E ratio is not a result of poor earnings of listed companies Point 1,2 1, 8 6 4 2 Thailand: SET Index Price index Derived earning index P/E ratio (RHS) Times 8 7 6 4 3 2 - Jan-1 Nov-1 Sep-2 Jul-3 May-4 M ar- Jan-6 Nov-6 Source: Bloomberg as of 3 November 26 In Singapore and Malaysia, equy prices and earnings move in the same direction. Point 2 18 16 14 12 8 6 4 2 Jan-1 Nov-1 Sep-2 Singapore: SESALL Index Price index Der ive d e arning index P/E ratio (RH S) Times 3 Jul-3 May-4 Mar- Jan-6 Nov-6 3 2 2 1 Point 3 2 2 Jan-1 Nov-1 Sep-2 Malaysia: KLCI Index Price index Der ive d e arning index P/E ratio (RH S) Times 2 Jul-3 May-4 Mar- Jan-6 Nov-6 2 1 Source: Bloomberg as of 3 November 26 4

Controlling for company-specific factors, Thailand discount in P/E ratio is found according to an econometric approach Un: Times Count ry premium P/E ratio given the same company s fundamental 2. 3. Note: the controlling factors are 1) market capalization, 2) dividend payout ratio (dividend payout / earnings), 3) qualy of earnings (cash flow from operation / net income), and 4) turnover ratio (total turnover / market capalization) Source: SET analysis based on 2-2 dataset consisting of 2,64 observations The full paper can be downloaded from http://www.set.or.th/setresearch Thailand P/E ratio discounts by industry group are also observed from the econometric approach Un: Times 3.7 3.7 2.4 1.7 Industrial Financial Communication Energy Note: The figures are Thailand discounts relative to Singapore Source: SET an alysis based on 2-2 d ataset

..and at least three market-specific factors have caused the Thailand discoun t according to the extended model The panel data model: PE = α + βthai _ dum + β Malay _ dum + β DVD + β QEARN + β MCAP The extended model: + β TURN + β EPS _ gr + e 1 6 2 3 4 4 PE =.78.36RF _ RATE.9RANK.12V _ RETURN (.21) (.169) (.12) (.23) +.6DVD (.4) +.77QEARN +.4MCAP +.1TURN (.7) (.2) (.2) Three market factors that generate Thailand discount are: 1. Risk-free interest rate P/E discount 2. Shareholder rights P/E discount 3. Volatily of the market return P/E discount..w here the variables are defined as follow s: PE DVD QEARN MCAP TURN EPS _ gr RF _ RATE RANK V _RETURN is price-earnings ratio of firm i at time t is dividend payout ratio = dividend payout / earnings of firm i at time t is qualy of earnings = cash flow from operation / net income of firm i at time t is market capalization of firm i at time t is turnover ratio = total turnover / market capalization of firm i at time t is earning per share growth of firm i at time t is risk-free interest rate (interest rate on 1-year government bond) is shareholder rights (rankings by IMD World competiveness yearbook) is the volatily in market return 6

and descrip tive stati stic of each variables are: Variables P/E ratio (times) Mkt Cap. (Mln. USD) Dividend payout ratio (%) Qualy of earning (times) Turnover ratio (%) EPS growth (%) Thailand (7 obs.) Mean Maximum Minimum Std. Dev. Malaysia (1,13 obs.) 9.9 29.3 1.3.1 186.3 3,442.2 1.9 449.3 3.2 99.9 1.8 21.9 1.7 13.8.1 1.3 26.2 483.7.9 1.9 31.4 681. -91.9 84.4 Mean Maximum Minimum Std. Dev. 12.4 29.8.9. 23.6 3,77.2 2. 42.4 3.2 99.3. 2.9 1.8 24..1 1.8 18.9 444.1.9 38.7 27.1 999.9-336.4 6.4 Singapore (71 obs.) Mean Maximum Minimum Std. Dev. 11.6 29.4 1.. 232.1 3,99..6 49.6 39.9 99.7.3 23.7 1.6 21.1.1 1.7 24.7 39..7 43.1 38.1 82-3733.3 189. Source: SET an alysis based on 2-2 d ataset Thai market has been more volatile than other markets in the region 9 8 7 6 4 3 2 % 9-day volatily of historical closing price (199-Jan 27) Thailand Malaysia Singapore Hong Kong Jan-9 Jul-9 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan- Jul- Jan-6 Jul-6 Jan-7 and what account for this high volatily? Source: Bloomberg as of 3 January 27 7

Supply side: Thailand stock exchange is relatively small Country Market cap (Billion USD) GDP (Billion USD) Market cap-to-gdp (Percent) Korea 718 787 91 Taiwan 476 34 138 Singapore 27 117 22 Malaysia 181 131 138 Thailand 124 173 72 Source: W orld Federation of Exchanges; Bloomberg as of end-december 2 Supply side: Even the largest listed companies in Thailand stock exchange are still relatively small Un: Million USD Airline : market capalization Bank : market capalization 11,7 19,24 11,94 1,149 2,,634 Singapore Airline Malaysian Airline Thai Airways DBS Singapore Maybank Malaysia BBL Thailand Telecom : market capalization 24,26 8,472 6,831 Source: Bloomberg as of 31 May 26 SingTel Telekom Malaysia AIS 8

Supply side: Free-float percent of listed companies in SET is relatively low Un: Percent Simple averaged free float percent of listed companies in selected exchanges 88% 39% 49% 4% SET HKEX SGX NYSE Source: Stock exchange of Thailand and Bloomberg as of 31 October 26 Demand side: Transaction in the stock exchange is dominated by local retail investo rs Foreign investors Transactions by investor type Local instutions Local investors Un: Percent 43 3 6 29 32 6 19 4 23 18 6 21 8 28 34 11 41 12 47 6 66 62 77 72 76 71 62 47 1997 1998 1999 2 21 22 23 24 2 26 27 Source: SETSMART as of 31 January 27 Note: SET and MAI 9

Demand side: Investor ba se is small compared to other countrie s in the region As of the end 2 No. of investors No. of investors: population 4,, 4% 34% 3,, 3% 28% 3% 2,, 2% 2%,,.42% 8% % Thailand* Singapore Hong Kong Korea** Taiwan Japan % * whout double count ** from www.krx.co.th Source: AOSEF; The Population Reference Bureau Plus greater policy risks P/E Ratio End- November 26 End December 26 Indonesia 24.9 2.1 Malaysia 17.14 17.3 Philippines 1.49 1.7 Hong Kong 13.82 14.6 Singapore 13.7 14.44 Korea 12. 12.21 Thailand.2 9.4 Source: Bloomberg

Outline Why is Thailand s price-earnings ratio relatively low? What can we do about? Developing the second Thai capal market master plan (26-2) Areas of d evelopment 1 2 3 ก ก 2 ก ก ก (Market P/E) ก ก ก ก ก ก ก ก ก ก 4 ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก 6 7 ก ก ก ก (Financial leracy ) ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก... ก ก ก ก ก ก 11

Implementing the second Thai capal market master plan (26-2) 2) ก 1 : ก ก 2 : ก 3 : ก 4 : ก 6: ก : ก ก ก ก ก กก (capal gain tax exemption) ก free float ( strategic shareholders) ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก ก Thank you 12