In this article, we would like to share our views on the recent developments in Thailand and explain why we remain Neutral on the market.
4th Jan 2022
- Despite some signs of recovery in Thailand’s economy, we think that the overall economic recovery in 2022 will remain weak, as Thailand’s economy is heavily dependent on tourism. There are doubts on the feasibility of its experimental “Phuket Sandbox” programme, and the number of tourists remains below pre-pandemic levels.
- Vaccination rates are picking up in Thailand, but we see notable vaccine hesitancy within certain groups in Thailand, meaning it could take a longer time for Thailand to become fully-vaccinated. The efficacy of existing vaccines towards the Omicron variant is also uncertain for now.
- The Bank of Thailand has kept interest rates at record lows for a 13th consecutive meeting. With inflationary pressures remaining low, they will likely keep monetary policy accommodative.
- SET Index earnings are expected to rebound 12% in 2022, mainly led by Food & Beverages (F&B), Industrial Materials & Machinery, and Electronic Components sectors. This is due to the upcoming economic reopening, as well as supportive government policies.
- SET Index is trading at forward PE of 15.5X, above our fair P/E of 15X of the market. With no upside potential, we maintain our 2.5 Stars “Neutral” Star Rating on the market.
Following the market’s crash in earlier 2020 amid the outbreak of the unprecedented Covid-19 pandemic, the SET Index (which represents Thailand’s equity market) has undergone a sharp rebound and managed to extend its rally into the year 2021 (Figure 1). Likewise, Thailand’s economy has also shown a strong recovery in 2021, after a year of the Covid-induced economic downturn.
However, we expect the economic outlook of Thailand to remain gloomy as the country is still dragged by the resurgence of Covid-19 cases, with Thailand reporting an average of 4,000 new daily Covid-19 cases in December 2021.
Figure 1: SET Index historical performance since 2020
Q3 2021 GDP shrank less than expected, but is still hampered by the Covid-19 pandemic
Thailand’s gross domestic product growth in Q3 2021 declined by -1.1% YoY from a growth of 0.1% in Q2 2021. The downtick was mainly attributed to the re-imposition of Covid-19 curbs across the country during the third quarter of 2021. Specifically, domestic consumption was the worst hit due to tougher restrictions that limited domestic activity. On top of that, the intermittent lockdown measures domestically also acted as a drag on market sentiment towards Thailand’s economy, exerting huge downward pressures on Thailand’s public investment. However, the negative effect was minimal as the local businesses returned to the steady economic recovery path following the restrictions lifted, and the vaccine rollout gained momentum. Therefore, we opine that the GDP growth in Q4 2021 is expected to rise by 0.6% YoY alongside the continued recovery.
Regarding the GDP growth projection for 2022, despite there being some signs of recovery in Thailand’s economy, we reckon that the economy will recover at a relatively weak pace in 2022, with an expectation of 1.0% growth throughout 2022 (Figure 2). Such a projection was made because Thailand’s economic recovery path is still highly dependent on its tourism sector, which remains hampered by the uncertainty from the virus’s resurgence.
Figure 2: Thailand Yearly GDP YoY Growth Projection
Resurgence of Covid-19 cases may fail the “Phuket Sandbox” program
Thailand’s government has been looking at ways to bring back foreign tourists even amid the Covid-19 pandemic, as the tourism sector contributed 20% of GDP in pre-pandemic times. In response, the government launched an experiment known as “Phuket Sandbox” in July, which reopened Phuket for fully vaccinated travellers from low and medium-risk countries. The travellers would then be given the green light to travel to other parts of Thailand after 14 days in Phuket.
As part of the continual efforts to revive the domestic tourism sector, the Thai government commenced a phased reopening of the country. Starting in November 2021, Thailand will allow fully vaccinated tourists from 63 low-risk countries to visit with no quarantine required, provided they pass a COVID-19 test upon arrival.
Yet, the resurgence of Covid-19 cases in Phuket casts doubt on the feasibility of this “Phuket Sandbox” program. Following the further easing of border restrictions, the daily Covid infections in Phuket has spiked to over 100 again. On top of that, the new highly transmissible Omicron variant also poses greater uncertainty for the Sandbox program. Despite this, Tourism and Sports Minister Phiphat Ratchakitprakarn has revealed that Thailand will not take a step back from their reopening plans, as another round of lockdowns would hurt the economy even harder. With that, any setbacks to this quarantine-free travel program would hurt Thailand’s plan to expand this model to more areas, to rescue its vital tourism industry.
We think that the reopening may be fruitless, as Thailand continues to struggle with the spread of Covid-19, including the new variant of the virus. Although the number of tourists has already gradually increased following the introduction of this sandbox program (Figure 3), and is expected to rise further amid the easing of restrictions earlier in November, it is still far from pre-pandemic levels. Furthermore, even though Thailand has waived the quarantine requirement for the fully-vaccinated, foreign travellers may not have the enthusiasm to visit Thailand as many countries still require quarantines for travellers returning from abroad, especially those back from higher-risk countries like Thailand.
Figure 3: Number of international tourists in Thailand
Thailand’s vaccination rate picking up; Covid-19 cases in a downtrend
Daily Covid-19 cases in Thailand have seen a declining trend after hitting the record highs in mid-August with more than 20,000 new cases per day (Figure 4). In December, the number of daily confirmed Covid-19 cases dropped below 4,000, at its lowest levels since June this year. In addition, the vaccination rate has started to pick up since H2 2021, where 73.0% of Thais have gotten at least one vaccine shot, and 64.9% have gotten both vaccine shots as of end-2021. Despite this solid progress, the nation’s vaccination rate remains relatively low compared to other Southeast Asian countries like Malaysia, Singapore and Cambodia, amid high vaccine hesitancy rates. Vaccine hesitancy in Thailand is especially notable among lower-education and lower-income groups, as well as among the youth population, mainly driven by concerns over purported vaccine side effects. As such, we think it may take a longer time for Thailand to achieve its target of full vaccination within the nation.
Furthermore, the newly-detected and possibly vaccine-resistant Omicron variant poses fresh risks to the recovery outlook in Thailand, as the efficacy of existing vaccines toward this new virus variant is still unknown. If it turns out that existing vaccines are not effective against the Omicron variant, we do not rule out the possibility of a fresh wave of coronavirus in 2022, which could derail the nation from its recovery path towards its endemic phase.
Figure 4: Daily New Covid-19 Cases in Thailand
Bank of Thailand maintains an accommodative monetary policy to support the economy
With the aim of supporting the economy to tide through the fallout of the pandemic, the Bank of Thailand (BoT) left its interest rate unchanged at a record low for the 13th consecutive meeting in December.
In its December meeting, BoT decided to keep the policy rate unchanged at a 10-year low of 0.50% to support the nation’s economic recovery. BoT also pledged to continue providing ample liquidity, lower-for-longer interest rates, and credit measures to distribute additional liquidity to affected businesses and households. At this juncture, underlying inflationary pressures in Thailand are still low, allowing the BoT to maintain its accommodative monetary policy for an extended period of time.
Moving forward, we expect the Bank of Thailand will continue to hold the policy rate at 0.50% for the entire 2022 (Figure 5), as the economic growth is likely to be uneven amid a persistent virus threat and fragile economic recovery outlook.
Figure 5: Thailand’s Policy Rate Projection
Slight rebound in earnings in 2022 led by Food & Beverages, Commerce, Industrial Materials & Machinery and Electronic Components
SET Index earnings are expected to rebound 12% in 2022, mainly led by Food & Beverages (F&B), Industrial Materials & Machinery, and Electronic Components sectors (Figure 6).
The F&B sector is expected to see earnings growth of 99% in 2022, supported by the pent-up demand from the global and domestic markets. Despite signs of a COVID-19 resurgence, we think that full lockdowns remain very unlikely in regions like the United States and the European Union, due to fairly high vaccination rates in these regions. To add on, we can see signs of a recovery in export numbers, with the increased demand for food and beverage products. Furthermore, the Thailand government is also in the midst of reopening the country, which might help to boost the domestic demand for F&B products.
Likewise, the Commerce sector is expected to witness an impressive earnings growth of 39% in 2022, alongside the global economic recovery. Despite the uneven recovery thus far, we foresee enhanced foreign demand for local goods and services heading into 2022, while pent-up demand will also be unleashed strongly after the economic re-opening, both of which would support the growth of this sector.
The Industrial Materials & Machinery and Electronic Components sector are each expected to grow earnings by 39% in 2022, supported by robust demand for electronics products and supportive investment promotion policy from authorities. A few months ago, the government approved an enhanced investment promotion policy for the electronics industry to add benefits for front-end capital and technology-intensive manufacturing, such as wafer fabrication and IC substrates. Investments in wafer manufacturing will be granted a corporate income tax exemption of 10 years, while investments (at least ?1.5 billion) in advanced integrated circuits, IC substrates, and printed circuit boards will get a corporate income tax exemption of 8 years.
Similarly, the Thailand Board of Investment has also approved an increase in benefits granted to companies that invest in Research & Development, to stimulate competitiveness and technology upgrades. Firms spending not less than 1% of their total sales, or not less than ?200 million for the first three years in Research & Development, will receive and corporate income tax exemptions for up to 5 years. Firms adding Research & Development investment to the main operation can potentially enjoy the longest combined tax exemption period available of 13 years. The government also continues to offer additional tax incentives to encourage companies to take part in Human Resources development to support rapidly changing technologies.
Figure 6: SET Index and Sector Earnings Estimates
Takeaway: Remain Neutral on the outlook of Thailand amid the resurgence of the Covid-19 cases
We remain neutral on the outlook of Thailand. Despite recent positive announcements on GDP and export figures, we believe that the resurgence of Covid-19 cases and relatively slow vaccination rollout will be the main risks to the country’s outlook.
The SET Index earnings are expected to expand by 12% in 2022, and grow by another 12% in 2023. Meanwhile, SET Index is trading at forward PE of 15.5X based on forward 2023 earnings, which is above our fair P/E of 15X of the market. With no upside potential, Thai equities are less attractive than other markets.
As such, we think that investors can opt to allocate their investments to other countries that could provide higher potential upside, and maintain our 2.5 Stars “Neutral” Star Rating on the market.
Chart 7: SET Index Price and Forecasted EPS
Table 1: Projections and potential upside for SET Index
| Thailand (SET Index) | FY20 | FY21 | FY22 | FY23 |
| PE Ratio (X) | 23.5 | 19.4 | 17.4 | 15.5 |
| Expected Earnings Growth YoY | -44% | 65% | 12% | 12% |
| Earnings Per Share (EPS) | 52.0 | 85.6 | 95.5 | 107.0 |
| Projected Fair Price(based on fair P/E Ratio of 15.0X) | – | – | 1,433 | 1,605 |
| Potential Upside from Today (%) | – | – | -14% | -3% |
| Dividend Yield (%) | 2.9% | 2.5% | 2.7% | 3.0% |
| Source: Bloomberg Finance L.P., iFAST compilations, iFAST estimates. Data as of 31 Dec 2021. |
