To:May 10, 1998
From: Martin Siegel
Subject: Asian Trip
Non Japan Asian Overview
Growth reduction from 5.1% to 3.2%
Lower trade with affected neighbors
Lower than anticipated growth in China
Factors for GDP reduction
Weaker than expected export response
After 2060% devaluation it is still impossible to get LC for trade transaction
Lower dollar receipts from exports due to devaluation
Revised inflation upward from 5.7% to 8.3%
Adjustments to current accounts due to lower imports rather than stronger exports
Equity markets since January have had a gain in local terms of 281/6, without a sustained rally.
Currencies (exIndonesia) bad rallied an average of 16.3% since January.
What is required going forward
deleveraging and recapitalization of both the banking & corporate sectors.
New rights issues and debt/equity swaps (both causing dilution)
Deleveraging will also bring tight credit, which will affect returns on equity.
Goldman Sachs does not foresee a sustained recovery in dollar terms before 1 2 years after a banking crisis.
VIET NAM
Time Zone11 hours; ahead of New York
CurrencyDongRate as of April 24 13,000 = S 1.00
HotelNew World Saigon
TemperatureBetween 90 114 degrees
PopulationAprox 74 million in the country with 7 Million in Saigon
Brief History:
19941996Growth exceeded 9% annually, fueled by rising exports & tight financial policies.
With export growth averaging 30%
Inflation at 4%
1998export growth decelerates to 12.21%
Widening of official currency bands to l0% (October 97) and a 5.3%
Devaluation in February.
GDP forecast is an unrealistic 91/6
Current account deficit forecast 7% of GDP
Level of foreign reserves at $2Bil equivalent of 2 months of 1997 imports
Inflation remains at 4 5 %
Medium Term Potential is significant
Country is resource rich
Highly educated (86% literacy) population
Cheap labor
Country has an "upbeat” feeling, with people who seem quite industrious.
Major problems: A communist government that is nonresponsive to business needs.
Inefficient state owned enterprise sector.
A country that requires a great deal of "paper" to get something approved.
No real court system
A growing "antiforeign” mood pervading the country
Weak banking sector w/ nonperforming loans. Heavy reliance on foreign savings
There is a day to day shortfall of hard currency to meet import demands
Pressure an companies with dollar deposits to convert them to dong
El Nino has caused a drought, which has affected both the: rice and coffee crops.
Salaries:Per capita income is $250 for the country and $1500 for Saigon
Taxi driver is highly paid receiving $100 a month.
Bellboy in hotel has left his job as teacher ($35 a month) to become a bellboy ($90 )
Transportation5 years ago everyone used bikes. Now everyone uses motor bikes (Honda)
Probably only 3 traffic lights in all of Saigon. It has more deaths per capita on a
Daily basis than any other country in the world ( 9 10)
Schedule for Viet Nam
Arrived Sunday April 26 Flight time from New York (via Vancouver) 24 Y2hours
Sunday evening:Meeting with 6:30 withfrom Building Supply. at a
company rally. There are 60 distributors for the tile and they all attend
this quarterly gathering
Dinner with
Monday April 27Tour of Ho Chi Minh City
War Museum Notre Dame Church US Embassy
Saigon Waterfront
Saigon Water Park
Open and operational.
Current attendance is 9000 per week. It needs 10,000 for b/c
Most of the volume is weekend, and park did a weekend attendance
of 17,000 on opening weekend
Staff of 300 is currently being reduced.
Government owns 30% and Beta Capital ( TJK) also a holder.
Board Meeting of Building Supply)
Manufacture ceramic floor and wall tile
Tile being manufactmed in single and double fired kilns
Metropolitan Building ( see photos) has the tile throughout.
Have high pricedand starting a lower end
division.
Morgan Stanley currently working with a group to build a competing
facility
Dinner with , who lives in Saigon and
is publishing amagazine in Saigon.
Tuesday April 2eMeeting with Board ofJuice Company.
Company anticipates being operative in January.
Packaging, flavors, etc. occupy most of the discussions of a group
made up of Brits, Australians, Viets and Americans.
Meeting with Mark KenderlineDavies of Beta Capital.
Beta is a Uk operation with a total of $500 NO invested in ventures/
Beta has 3 Brits living in Saigon, looking for opportunities
for venture capital investments.
Currently they have $90 million invested in 14 joint ventures with
little success to date.(none profitable to date).
Dinner with. He is a "deal maker" and
apparently had great success with the Furama, hotel, and is assming Morgan
Stanley in setting up their tile/ceramic company. He only sets up the deal and
does not get mvolved, in the management
Wednesday April 290' Meeting with at his office.
Lunch withof Templeton
Feels great frustration, in finding opportunities in Viet Nara.
Little near range potential
Cost of production here vs. other Asian countries is too high
Government has great shortage of hard currency.
Most joint ventures are too small to consider.
Tour of the Ceramic Factory. (see photos)
Conclusions of Viet Nam:
When everyone was looking for the "new" Korea and "new" Indonesia, they focused upon Viet Nam and the next major investment opportunity. With the problems that have beset SouthEast Asia there seems to be ample opportunities without having to look to Viet Nain. The country has a long, long way to go before it warrants any investments on our part.
Thursday April 30:
9:3 0 Depart Ho Chi Minh City to Bangkok
Arrive Bangkok 2:30 PM
THAILAND
Time Zone11 hours ahead of New York
CurrencyBahtRate as of April 2e 38 = $1.00
HotelSukhothai Hotel
TemperatureBetween 90 110
Brief DataBalance of Payments
For 5th month trade and current account recorded a surplus
January US $800+Mil surplus vs deficit of $1517 a year earlier
45% decline YOY on imports (US $3.3 in January)
Exports contract 8% YOY to US $4.2 Bn
Limited access to export credit
Similar devaluation's by Thai neighbors
Erosion of competitiveness through high inflation
Sluggish to negative growth with main trading partners
Gross reserves $26.2 Bn end of February = 5 months of 1997 imports Manufacturing production index declined in January by 16.4 % YOY
Banking system plagued by nonperforming loans estimated to reach 301% of total lending by the end of 1998.
GDP projected to contract by 3 3 ½ % during 1999
Anticipated average inflation projected at 11.6% vs 4.4% in first half of 1997
OutlookIn 1999 Goldman anticipates export growth of 9.5% and import growth of 7.0%
with a current account surplus of $ 5.7Bn US
Goldman also anticipates currency to be at 35 in 6 12 months. They believe the
currency is 19.60/a undervalued as of March 1998.
Goldman anticipates inflation to peak at 1617% before going to 6.5% in 1999.
Finance Co.Currently 56 finance companies are permanently closed
FRA ( Financial Sector Restructuring Authority) to auction the loan portfolio
BankruptcyNew bankruptcy laws being enacted but at present it is difficult to
foreclose or liquidate an insolvent debtor, and I am not sure that this
matter is addressed in the new Bankruptcy laws.
Main change in bankruptcy laws was to permit a form of Chapter 11
In the past bankrupt companies could only be liquidated not
rehabilitated.
No "due dilligence' has been done an the assets being offered.
Only 70 judges to hear 100,000 cases.
Cases come before the judges based on filing. Size of the company is immaterial.
One case has been in the courts for 31 years.
Asset Plus Securities Company Ltd arranged meetings in Thailand.
Thursday April 30Meeting with Asset Phis
M
P
Brief discussion and overview of Thailand before we leave for meeting
with the Sun Group. As an aside, M favorite Thai stock is Tasco, which
has the asphalt monopoly in Thailand.
Meeting Thaveesak Vaykornvichitr, President
Sun Wood Industdes Public Company Limited
Stock price 33 baht10 Moon shares outstanding
Manufacturer of teak and danish indoor/outdoor furniture
Stock has been dormant until devaluation, but as a dollar exporter
the stock has been up.
Range of stock: hi 110 Low 5 currently 33
Debt: S 1.5 Million in foreign debt and 13 Million in baht debt
Growth 10% per year, and anticipate 15% growth in 1999.
65% family controlled
Earned 6 Baht in 1st quarter ( only declared 3)
Wants to do a 2 mil. share private placement when price is 60.
Annual report is available.
MeetingAdisorn ThanammNampool, Exec. Vice President
Land & Houses
Private home real estate.
Mortgage rate 17 % and not easy to foreclose.
Currently in Bangkok there are 10 Million people in 2.5 Million homes
700/6 of Land & Houses competitors are now out of business due to
bad debts. (They had debt/equity ratio of 2: 1, while he had a ratio of
only 1: 1).
No fear of Japan, but a great fear of Chinese devaluation.
Stuck us as a red "wheelerdealer" and added very little value added.
Thursday Dinner The Executive Dining Room at the Siam Commercial Bank
Jada Wattansiritham, Senior Executive Vice President The Siam Commercial Bank Pcl.
also attending from the bank:
Somchai Sairyalaksiri , Sr. Vp and Mgr. Treasury Dept
Uthayophas Vp & mgr. Capital Markets
others attending:
Pimpaka Nichgaroon analyst for Asset Plus
Sheik and Marty
Friday May 1stMeeting: Pacific Group
A major land developer and real estate packager in Bangkok
Anthony James Chairman and James With
Banks still have a large insolvency hole to fill.
Both Banks of Bangkok and TFB will have to return to the market
for an equal amount of money next year.
They have put most of the money that they have raised with the
Central bank where they receive 171/9, rather than lend those funds
to customers.
Country has to look to do privatization's, such as Thai Air.
Meeting. Donaldson Hartman, Salomon Brothers
Most knowledgeable person we met. Has spent 4 years
here. Speaks fluent Thai.
TFB has 30% Non performing loans and using a theoretical 60%
recovery rate, but things are eroding too quickly.
Property loans, manufacturing loans and mortgage loans
are all going delinquent.
All banks will underperform the Thai stock index (SEI)
Currency at 38 Baht is an uarealistic level. It was brought about
by the purchase of Balit to purchase TFB and BB sold stock
Would anticipate a rate of +1 45 B.
Two thirds of all foreign currency debt is held by Japan. The
Japanese banks came to Thailand to get a license, but instead of
Just lending to Japanese Joint ventures in Thailand, they expanded to
Thai companies:
currently:40% loans to Japanese Joint Ventures
60% to locals.
The Japanese banks would love to cut their exposure in half but they
cannot.
Weakness in the bankruptcy code. It has taken Siam City Insurance
thirty years to resolve its bankruptcy.
FRA (similar to Fobaproa in Mexico), as you are buying the loans of
the company rather than control and administration of the company.
Big problem: Special law that the company is not allowed
to buy back their open loans.
IFTC (?) coming with a 100/a, 10 year convertible note Salomon
Note is for project financing.
70% of the loan export related
currently selling at 20, which is 1 ½ times book.
they have 22 ~6% nonperforming loans and 501/6 recovery
they are much more conservative than Bank of Bangkok
Donaldson Hartman, Salomon Brothers continued
Would look at Patra, which is a sub of TFB (49% owner) 6% real estate exposure vs 12 % normal trading at 3x book Merrill looking to buy stake m Patra brokerage.
Although he sees a large Japanese influence on the results in Thailand, his greatest fear is a Chinese devaluation.
Meeting Lunch IMS Cable Commumications Co. Ltd
Burin Borriboon Chairman
(Burin's other role is that of advisor to the King on his investments)
He particularly watches dollars of exports and capital inflows.
Expects another severe downturn.
Expects Baht to get to 50 but not reach the old high of 57
Would not invest in, the country until December
He would look to buy a diversified company rather than just an export company.
The Asian games are m December and that is a big plus for Thailand
His favorite stock is an auto parts exporter (?)
MeetingAsset Plus Securities Co. Ltd
Dr. Kongkiat Opaswongkam President & CEO
Meeting set up by George Teo
Asset Plus has two minority shareholders
5% Singapore government
5% Soros
Expects the baht to range from 4245. Any higher level
would be dangerous for the country.
Feels generally upbeat about the country, but anticipates
more problems before the market tuna
Stock choices would be GSS (?) and Safari Park
Dinner Meeting Asset Plus Paul Napolitano Equity department
His favorite stock selections
Bardm:TFB, BB and Bank of Asia
Finance CompaniesNational Finance and Patra
Exporters GSS
LeisureSafari Park
Saturday May 2nd Depart Bangkok at 10:30 to Phuket
Saturday May 2nd
MeetingFANTA SEA a part of SAFARI WORID (a public company)
Pitipong Limrat Director of Administration (Educated Cal State)
Pin Kewpaisal Chairman and 52% owner
Visitors to Phuket1997 2.8 million
1998 3.5
19.99 4.0 (est)
In February there were 1,997 Ilights into Phuket
Anticipate park opening in October
95% of visitors come in groups and have worked out a deal with
all group owners to bring their people to park
Asians spend 3.75 nights and Europeans spend 6 nights.
+ running a bus (11 hours) from Bangkok to park.
Building a 34000 seat theater and 34000 seat restaurant and
shopping plaza.
Anticipate 3 shows nightly
Minimum time you can stay is 3 1/2 hours:
1: 15 min for a "Sigftied & Roy" type show
:45 min for a buffet dinner
balance of time to shop and walk about
Only other entertainment in Phuket is a transvestite show.
Tickets will be 1200 Babt ($30) of which 300 will go to tour operators
Anticipate spending 700 B ($18) at gift shops.
Shares outstanding: 160 million after a 47.5 million private sale
at 20 Baht.
Current price is 26 Bahl Range: Hi 188 Lo 10
Pays out 60% in dividends, which is a 10% yield
Tax: have set up an arrangement with government
first 8 years no tax
nexi 5 years 15% tax
Staff of 700: Salary range: monthly
10% highest40,000 Baht
30% middle10 20,000 baht
60% lowunder 10,000 Baht
minimum wage is 160 baht a day ($4.50)
Investment cost 2.850 Bil Bahl ( $75 nail)
Depart Phuket Sunday morning to Jakarta
JAKARTA
Arrive: Sunday May 3rd 4:00 PM
HotelRegent
Population24 million
Rupiah when arrive7500 = $1.00
Temperature98 degrees
Time zone12 hours ahead of New York
Background Information:
GDPAfter 8% real GCP growth in early 97, economy now headed for a 10% contraction
Anticipate only a 2% expansion in 1999 due to Lack of credit coupled with prohibitive
cost of imported inputs. ( Only 2 months supply in the pipeline)
Inflation:1998 Estimate (Goldman) 501/6.
February CP1 was 13% for the month ( 4WY6 annualized)
Goldman estimates inflation peaking at 60% in 98 and 20% in 1999.
Current Account Trade balances movmg towards surplus as no pick up in exports ( 2%) and imports down by 3 5 0/6.
There is $74Bil US private debt not being serviced
International reserves have declined from 20.2Bil to 12.2 Bil.
Key factor Unlike Korea and Thailand where many of the problems are in the banking
sector, Indonesia has a predominantly corporate crisis.
Of the 212 banks that are in existence, 54 have been taken over and it is
estimated that there will only be 20 30 banks at the end of the year.
Subarto and his family are entrenched in many businesses.,
BankruptcyIndonesia’s private sector debt estimated at US $74b. There remains a big question as to what legal recourse creditors have in the case of debtor default or bankruptcy.
The bankruptcy laws are similar to Dutch laws but area considered antiquated, with slow and inefficient courts which are usually not impartial.
Meetings and schedules were set up by Edward Lee, Managing Director of Institutional Sales of Dakareksi Securities and Daniel Offit of Goldman Sachs.
DinnerSunday May 3rdTom Lembong;
Makindo Brokers (Brokers to the Kingo
He believes Subarto is quite sick and only has 1824 months to live.
His two favorite stocks are:
Semen Gresik (the partially government owned cement company)
PT Daya Guna, Samudera (the fishery company)
Monday May 4hBreakfast Edward Lee
Danareska, Securities an overview of Indonesia
MeetingMs. Mari Pangestu Director
Centre for Strategic and International Studies
Also: Dean of the Graduate Business School in Jakarta.
The two major problems facing Indonesia currently are the
students and the private debt, which is really a private sector
generated problem.
Currently 1315 million open unemployment out of 7090 million
It will be the elite of the Army who will determine the outcome of events
No one even talks about domestic debt. The rupiah would have to be
fixed at 56000 for that to work and that is not feasible.
There is no export growth recovery and there are no dollars coming in.
There is much more concern with a China devaluation or a Chinese banking
crisis than with the Japanese problem. Normally Japan would be one of the
biggest donors of long term foreign aid, but she does not see that this time./
She anticipates more (larp) shock waves from Korea.
The problems in Indonesia bave not yet cycled through the middle class.
(pre the big riots) the stores are crowded but people are slowly beginning to
downscale, but not the same yet as Thailand.
Anticipates 50% infation for the calendar year ( weak demand).
Indonesia has to move from a real estate led economy to an export
driven economy . Thailand has, but Indonesia has not yet. (?)
MeetingPT Bintuni Minaraya Tbk.
Johnson Sihombing Director
Anwar Pulukadang President Director
The largest fishery in the world.
11,000 people employed 100% export except fish meal which is
sold in Indonesia)
620 fishing boats 3 vessels to Umsport the second largest fishery only
has 30 fishing boats).
Currently at 80% of capacity.
They are needed by Indonesia. 95% net foreign currency and they do
not have to import anything and spend dollars. ( a textile firm would have
to import 30% of their product).
They employ an entire family; The husband fishes; the wife works in the
factory., the children go to the company school = happy employees.
They plan to hire an additional 5,000 people for tuna canning.
Who they sell to:
China 40%; lb~ 25% ( ~ buy the tuna and currently can it)
25% Japan ( shrimp & fish fillet). The balance to Singapore & Taiwan.
With the new cannery they will be able to sell directly to the US (private brands)
When the rupiah was 2500 their gross margin was 50% When the rupiah was
10,000 their net margin was "/o,
Numbers which may or not be correct