Brief Thailand: Small Cap Diary: Rajthanee Hospital, CAZ and more

In this briefing:

1. Small Cap Diary: Rajthanee Hospital, CAZ
2. Elections, Coups and Constitutions: Thailand’s Reckoning
3. Thai Election 2019: Defeat in Parliament, Victory in Senate
4. US Lake Charles LNG Liquefaction Plant Tendering for Contractors: Positive for TechnipFMC
5. Prayuth Accomplishes a Clear-Cut Victory, Assuring Stability (If Not Rapid Growth)

1. Small Cap Diary: Rajthanee Hospital, CAZ

We visited two small-cap companies from totally different industries today. These are the key highlights.

• Rajthanee Hospital, a small hospital chain based in Ayuthya, achieved 15.7% revenue growth CAGR since 2016 on the back of its proximity to industrial estates.
• CAZ has seen its backlog double to Bt2.5bn largely due to its good relations with major clients (PTT) and partners (Samsung and other Korean chaebol), which dole out projects in the oil & gas sector to it.
• Internally, CAZ follows a sophisticated cost control method sporting bar codes and GPS to track materials and dedicated cost-control staff.

2. Elections, Coups and Constitutions: Thailand’s Reckoning

Thailand went to the polls for the first time in six years last Sunday. The Election Commission will release results for 94% of the vote this Friday, with full and confirmed results released on 9 May. An elected government will be restored but the game has been rigged by the amended 2017 Constitution which allows the military to appoint the 250-strong Senate.

We asked our long-time Thai political correspondent, Professor Thitinan Pongsudhirak of Chulalongkorn University, to have a look at Thailand’s political history and to give us his views on the likely outcome. Dr. Thitinan forecasts the return of Prayut Chan-Ocha as prime minister but at the head of a very weak government in what looks likely to be a Pheu Thai coalition in the lower house. Thai politics looks set to become fractious, and interesting, once again.

3. Thai Election 2019: Defeat in Parliament, Victory in Senate

With over 90% of the votes counted, the Thaksinite party Peau Thai currently leads with a razor-thin margin of 10 seats, which will be easily overwhelmed by at least 200+ senators who will certainly support the Army faction that appointed them.

• This ensures policy continuity. The Thaksinite lead is simply too small to justify a mass protest and political uncertainty feared by foreign investors. The stock market reacted counter-intuitively by falling, and this seems like a good opportunity to buy from our vantage point.

• The strong showing of newbie party Future Forward, now Thailand’s third largest, should benefit TSC (Thai Steel Cable) on the sentiment level. Thanatorn’s uncle Suriya is part of the pro-Army party, though joining the government bloc may be tricky given Future Forward’s campaign stance.

• The Democrats performed poorly, losing much of their seats in both Bangkok and Southern Thailand (their home base), to Future Forward and Pracharat respectively. However, they may still end up in the government if Future Forward doesn’t pounce on the opportunity.
• Bhumjaithai was the only swing vote party that did well in this election, emerging as number 4. At the moment, they are the most likely party for the pro-Army government, given their friendly and flexible stance prior to the elections. The Party Leader’s family controls STEC.

4. US Lake Charles LNG Liquefaction Plant Tendering for Contractors: Positive for TechnipFMC

Energy Transfer LP (ET US) and Royal Dutch Shell (RDSA LN) have signed a Project Framework Agreement to further develop a large-scale LNG export facility in Lake Charles, Louisiana and move toward a potential final investment decision (FID). They have started actively engaging with LNG Engineering, Procurement and Contracting (EPC) companies with a plan to issue an Invitation to Tender (ITT) in the weeks ahead. We look at the potential contract size and winners and also the other US LNG projects that could be negatively impacted. More detail on the LNG project queue for this year in: A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies.

5. Prayuth Accomplishes a Clear-Cut Victory, Assuring Stability (If Not Rapid Growth)

After 18 years, the Thai (military) establishment has finally tamed Thaksin Shinawatra in the 2019 election, the first one since 2001 in which a party linked to Thaksin has not won a plurality.  Since the military coup of 1932, Thailand’s most stable and powerful institution has been the military — preserving order and continuity. In the 20th century, no single party ever had sufficient parliamentary support to govern Thailand on its own; so, even when the military was not directly governing, it was able to decisively influence weak coalitions of civilian parties. That changed in 2001, and parties linked to Thaksin have dominated all elections held since 2001 — but those governments have been brought down by 3 military coups since 2006. 

Albeit aided by a slew of rule-changes aimed at handicapping Pheu Thai and benefitting his own Palang Pracharat party, Prime Minister (and retired General) Prayuth Chan-ocha has now pulled off a peaceful electoral coup. In a sensational upset, Prayuth’s political vehicle (Palang Pracharat) won the nationwide popular vote count — albeit by declaring 6% of the votes cast invalid. Given that the composition of the House is based on proportional representation, Palang Pracharat is likely to be a very close second to Pheu Thai in the number of seats held in the House. (Pheu Thai won 137 of the 350 constituencies, to 97 for Palang Pracharat). Although the Future Forward party led by businessman Thanathorn will be the third-largest party in the House (and will likely align with Pheu Thai), the next two parties (Bumjaithai and Democrat) are likely to support Prayuth. With the support of all 250 Senators, the Prayuth-led coalition will have an overwhelming majority in a joint Senate-House sitting — which is where the Prime Minister is chosen. 

Prayuth will thus go down in Thailand’s history as a military-turned-civilian leader in the pantheon of Phibun (who was PM for 14 years, and the creator of modern Thailand), Sarit (his dynamic successor in the late-1950s) and Prem Tinsulanond (the iconic leader of Thailand in 1980-88 who created the modern Thai economic miracle). While Prayuth’s stewardship of the economy has been uninspiring over the past 5 years, the last two of them were slightly better, with a quickening of real GDP growth to a 4% annual handle. While we expect a period of political instability over the next 6 weeks as the election results are announced and fought over, the ultimate outcome will be a stable government led by Prayuth that will likely complete a decade in office. While growth will be less dynamic than it would be under a Thaksinite government, stability will allow Thai corporates to plan for the medium term (including growing their regional presence, as they have done in the past decade). While we remain cautious about the near-term, we are now moderately positive on Thailand on a 3-6 month view.