Keep Going Up?

The Stock Exchange of Thailand (“SET”) has recorded impressive return since the start of 2016, with its trading pattern backed by an upward trend line and support as per the 200D-MA.

Thai SET Index_Jul 16.jpeg

On a fundamental front, SET may appear overvalued, with its price-to-earnings ratio (PER) exceeding 20 times (which is significantly higher than its historical average of 14.45 times since 1989).

PER_Graph.png

From another angle, the price-to-book ratio (PBR) of the SET is currently at a reasonable valuation point of 1.86 times which is relatively lower than historical average of 2.20 times (since 1989).

PBR_Graph.png

In addition, the current dividend yield of SET of 3.29% is relatively higher than historical average of 3.02% (in another words, the valuation of SET appears reasonable at this point in time).

Div_Yield.png

The reasonable dividend yield of SET is supported by an increasing dividend payout ratio of SET since 2000:

Div_Payout.png

On a separate note, we are seeing a decreasing return on equity, ROE for SET (i.e below 10%). The higher dividend payout trend may have potentially led to lower funds being retained in the companies for business expansion / growth, which in turn will affect future earnings / profitability of the listed companies.

ROE_Graph.png

Furthermore, the market cap-to-GDP for SET appears to be on the higher side at this juncture (signifying potential overvaluation):

Mkt Cap to GDP_Thai.png

Statistical Test 1: P/E vs ROE

PER vs ROE_2.png

PER vs ROE_1.png

PER vs ROE_3.png

In summary – based on the relationship PER vs ROE, it appears that PER of SET of 21.96x is relatively higher than the forecasted PER of 18.64x (signifying potential overvaluation of SET)

Statistical Test 2: P/E vs Dividend Payout

PER vs DivPyt_2.png

PER vs DivPyt_1.png

PER vs DivPyt_3.png

In summary – based on the relationship PER vs Dividend Payout Ratio, it appears that PER of SET of 21.96x is relatively higher than the forecasted PER of 20.64x (signifying potential overvaluation of SET). The statistical relationship based on dividend payout ratio is relatively strong if compared to PER vs ROE.

Statistical Test 3: PBR vs ROE

PBR vs ROE_2.png

PBR vs ROE

PBR vs ROE_3.png

In summary, the statistical relationship of PBR vs ROE appears weak. Based on this statistical relationship, the current PBR of SET of 1.86x is marginally lower than its forecasted value of 1.97x.

Final Words

On a weight of “evidence”, SET appears potentially overvalued. Further, we may see future headwinds affecting the Thailand’s economy:

In the 2016 Thailand Economic Monitor released today by the World Bank, fiscal stimulus and tourism are highlighted as the key drivers of economic growth in Thailand, but the economy still faces headwinds on the path to a broad-based and sustained recovery. The slowdown has exposed structural challenges in implementing public investment, maintaining or raising export competitiveness, and addressing skills mismatches, the report said. The aging of the working-age population will begin to affect the Thai economy within the next five years. Kiatipong Ariyapruchya, senior country economist, noted that due to the issue of ageing, Thailand’s working population would shrink by 11 per cent from now until 2040, from 49 million to 40 million. He noted that major headwinds to the Thai economy would also involve a possible delay in mega projects as well as low export competitiveness. In the first quarter, public spending and tourism were major contributors of Thailand’s ecomic growth.

http://www.nationmultimedia.com/breakingnews/Thailands-economy-expected-to-grow-2-5-in-2016-30289300.html

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE. 

Author: Ken Utau

Data Scientist, Markets Analyst and Food Lover

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