Credit suisse myanmar market strategy _ 2012 04 20


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Overhyped _ Myanmar Market Strategy

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Credit suisse myanmar market strategy _ 2012 04 20

  1. 1. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S.Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision.20 April 2012Asia Pacific/ThailandEquity ResearchEmerging Growth (Strategy)Myanmar Market StrategyTHEMEOverhypedFigure 1: Very small GDP by regional standards5,8621,5951,012708430319239 223 223 2001044503006009001,2001,5001,800CN IN KR ID TW TH MY HK SG PH VN Myanmar(US$ bn)Source: International Monetary Fund (IMF), CEIC■ Exciting developments, but no investment conclusion. Rapid politicalliberalisation, improved prospects for a lifting of Western sanctions and theinitiation of economic reforms could be setting Myanmar on a higher growthpath, but the country’s significance for equities investors remains limited.■ Too small, with too many uncertainties. Although much welcome changeis coming, a host of issues will likely keep Myanmar a marginal destination forinstitutional investors. Myanmar is the second-poorest country in Asia afterAfghanistan, with an economy probably only 14% the size of Thailand’s.Purchasing power is low, and the country takes only 1% of Thailand’s totalexports. The official growth figures appear exaggerated. A huge humancapital deficit, an overvalued currency and weak institutions pose dauntingdevelopment challenges.■ Different from China or Vietnam. Comparisons with China or Vietnamappear misguided. China and Vietnam benefited hugely from the investmentand expertise of overseas communities, and both had long experience withcapitalism before their communist interludes. Myanmar lacks a prosperousoverseas community and an experienced entrepreneurial class.■ Few NJA stocks with Myanmar exposure. We identify only three stocks inNJA under coverage that will have significant interests in Myanmar in thenext five years. The stock with the biggest planned investment—ITD—haslost money for four straight years and is unappealing as an investment.PTTEP and PTT could see upside from new gas finds, but an unrelatedequity increase overhang leaves PTTEP unattractive.Research AnalystsDan Fineman662 614 6218dan.fineman@credit-suisse.comSiriporn Sothikul, CFA662 614 6217siriporn.sothikul@credit-suisse.comPaworamon (Poom) Suvarnatemee, CFA662 614
  2. 2. 20 April 2012Myanmar Market Strategy 2Focus chartsFigure 2: Thai exports by destination—Myanmar takesonly 1% of the totalFigure 3: Officially reported real GDP growth too good tobelieve051015202530CNEUJPUSMYSGIDVNPHCambodiaMyanmarLaos(US$ bn)1002003004001998 2000 2002 2004 2006 2008 2010(Indexed)Myanmar ChinaSource: Bank of Thailand (BOT) Source: Asian Development Bank (ADB)Figure 4: Investment as a % of GDP—low number callsinto question the accuracy of official GDPFigure 5: Public expenditure on education as % of GDP434236292522 22 21 2115 152701020304050CNVNINKRTHIDMYTWHKSGPHMyanmar(%) 3.93.2 TH IN KR HK PH SG ID CN Myanmar(%)Source: ADB, Ministry of National Planning and EconomicDevelopmentNote: All data for 2001 with the exception of China (1999) and India(2000); Source: World BankFigure 6: Strong market rate for kyat a problem Figure 7: Military still in firm control of the Parliament5508001,0501,3001,5502001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011(Kyats/US$)USDP (Pro-military party)51%Reserved foractive soldiers25%Others18%NLD6%Source: The Irrawaddy News magazine Source: The Myanmar Union Election Commission
  3. 3. 20 April 2012Myanmar Market Strategy 3OverhypedExciting developmentsExciting events are unfolding in Myanmar. The pace of political reform is rapid. Westerncountries could lift sanctions soon. Economic reforms are beginning. Though not large, thepopulation is big enough to form a significant domestic market, at some point in time. Gasexports are significant and rising.But starting from very small baseThat said, Myanmar remains too small to move the needle economically for any NJAcountry, including Thailand. Although impossible to determine with any accuracy,Myanmar’s GDP is probably only 14% the size of Thailand’s. It takes only 1% of Thailand’sexports. Most of the population is too poor to buy anything other than locally-producedsubsistence goods. We expect growth to accelerate, but rapid expansion of the sort seenby China and others at similar stages of development is not assured. Official numbersshowing double-digit GDP growth during 1999–10 appear exaggerated to us. Flatelectricity consumption, slow import growth and low levels of investment indicate that theactual GDP growth rate has been more in the low-to-mid-single digits.Major challenges remainMyanmar faces serious economic and political challenges. The country’s human capital isarguably the weakest in Asia outside East Timor. The currency is likely overvalued. Themilitary consumes as much as two-thirds of the budget, leaving little for infrastructure andeducation. Inflation is structurally high. In contrast to China or Vietnam, there is noprosperous overseas community ready to inject capital and expertise upon liberalisation.We are positive on the political outlook but feel compelled to note the remaining risks.Conservatives in the military may yet block reform, and ethnic insurgencies continue. The2015 general election seems an especially risky event, as only then will the military befaced with the prospect of losing control of the government.Few stocks with Myanmar exposureAlthough a number of NJA companies plan to invest in Myanmar, we identify only twogroups—ITD and the PTT group—as having business ties of any size with the country inthe next five years. We consider ITD unattractive due to its ongoing losses, whileMyanmar’s potential appears too limited to justify buying PTT or its subsidiaries.1-2 decades away from investabilityMyanmar is at least 1-2 decades away from being a significant destination for equitiesinvestors. Myanmar is a decade or more behind Vietnam, which itself is probably a decadeaway from being as significant as the Philippines as a stock market. Private equityinvestors could find much of interest in Myanmar in the next three to five years, butsecondary market investors likely have a long wait.Natural gas, rapid reformand the likely lifting ofsanctions make Myanmarinteresting……but it is still too small tomatter economically to itsneighboursDaunting economic andpolitical challengesOnly three NJA stocks withsignificant Myanmarexposure1-2 decades away frominvestability for secondarymarket equities investors
  4. 4. 20 April 2012Myanmar Market Strategy 4Exciting developmentsRapid political change is driving a major reassessment of Myanmar’s growth prospects.Political liberalisation is opening the path for an end to sanctions and economic reform,and potentially could allow for greater exploitation of natural resources.Dizzying pace of political reformMyanmar is still not democratic, but one academic we spoke to has described the pace ofpolitical reform as “dizzying.” Over the past two years, Myanmar has acquired a civilianleadership, released nearly a thousand political prisoners, allowed pro-democracy leaderAung San Suu Kyi to run in elections and eased controls on the media. The mainopposition party, the National League for Democracy (NLD) won 43 out of 45 seatscontested in the 1 April bye-elections, which independent monitors from EU and the USjudged free and fair. Though we will note in a later section that political risk remainsconsiderable, the trajectory of reform is highly positive.Sanctions on their way outFor much of the past decade, the US and EU have maintained a variety of sanctionsranging from visa restrictions and asset freezes of politically important Burmese, to a USban on imports from and new investment in Myanmar. The US ban on exports of financialservices to Myanmar effectively excludes it from the international clearing system for theUS dollars (Figure 8)Figure 8: The current sanctions regimeSanctioning entity SanctionUSANo new investment by US individuals or companiesBan on all imports from MyanmarBan on export of financial services to MyanmarBan on import of precious stones, even if processed in third countryVisa bans and asset freezes on prominent leaders and businessmenTourist advisoriesInformal discouragement of IMF and World Bank assistanceEUBan on imports of timber, metals and minerals, precious stonesBan on exports of equipment relevant to these industriesDenied access to preferential tariff ratesVisa bans and asset freezes on prominent leaders and businessmen (recently lifted)Source: International Crisis GroupThe successful 1 April bye-elections are leading to an easing of sanctions. The US willreopen its aid office, allow senior Myanmar leaders to visit the US and cease blocking theactivities of multilateral development agencies. A full lifting of sanctions would requirecongressional legislation, but in the short run the Obama administration plans to waivesanctions on some economic sectors such as finance, agriculture, tourism andtelecommunications. By suspending rather than lifting sanctions, the US hopes not only toreward the government for the free and fair April elections, but also to retain leverage incase conservatives seek to block further reform. The EU will begin consideration of itssanctions next week and will likely take a similar approach.Companies might be reluctant to make major investments while the re-imposition ofsuspended sanctions remains possible, but the permanent removal of sanctions wouldpotentially be a major event. Sanctions have effectively blocked any new investment fromUS firms, and even European and Japanese firms have been reluctant to invest due toreputational risk. Just the prospect of sanctions being removed has evoked tremendousinterest from investors in the months leading up to the elections.Several reasons to takenote of MyanmarRapid political reformSanctions are easing
  5. 5. 20 April 2012Myanmar Market Strategy 5Important economic reformsThe new civilian government has already implemented one economic reform, and morecould follow. The most significant reforms enacted and under consideration include:■ Currency unification: Until this month, Myanmar was burdened with multipleexchange rates. The official kyat rate, MMK6.4/USD, was more than 100 times themarket rate of MMK818/USD. The unrealistic official rate has discouraged foreigninvestment and created opportunities for corruption. With the help of the IMF, thegovernment this month moved the official rate to a level close to the market rate. It isnot entirely clear how the new currency mechanism will work, but a managed float likeChina’s appears most likely.■ Central Bank reform: The Central Bank has historically been under the control of theFinance Ministry. The Wall Street Journal has reported that the government isconsidering legislation to give the bank more independence, but we do not knowwhether it would get full policy independence or merely operational independence.■ Telecommunications licensing: At present, cellular penetration is just 1% and cellphones can cost 10 times or more than in other countries. Blackberries and foreign cellphones do not work in Myanmar (Figure 9). To improve the telecommunicationsinfrastructure, the government is considering issuing operating licences to foreigncompanies.Figure 9: Cell phone penetration rates143120 118113100 979265 6311680306090120150180HK SG TW MY TH KR ID PH IN CN Myanmar(%)Source: International Telecom Union, Credit Suisse estimates■ Financial sector reforms: The Central Bank governor told The Wall Street Journalthat financial sector reforms are being contemplated, though he provided few details.We believe that the government is not only eager to jump-start the economy, but that it isgetting good advice. The government is consulting closely with the IMF on currencyunification and other issues, and listening carefully to the recommendations of privateeconomists and think-tanks. This government “gets it” on the economy, in our view.Easy winsPolitical reform could also lead to two easy wins:1. A peace dividend: The military now consumes two-thirds of the budget,according to one academic study. Were civilian control to be established, thesefunds could be diverted to infrastructure and education. Please note that budgetnumbers have not been published since 2000, so only estimates are available.Exchange rate unificationhas already beenimplemented, and reformsto the central bank, thetelecommunications sectorand financial sector underconsiderationReduced militaryexpenditures and lessgrandiose white elephantprojects represent easy winsfor the economy
  6. 6. 20 April 2012Myanmar Market Strategy 62. Fewer white elephants: The previous military government had a penchant forextravagant, wasteful projects. IMF estimated that construction of the new capital,Naypyidaw, cost 2.4% of GDP, while one academic observer places the price tagat US$3–5 bn, or 10% or more of GDP. No outsider knows for sure why thecapital was moved from Yangon, but some observers believe it was due to fearsof a US invasion or for astrological and numerological considerations. Under ademocratic government, taxpayers would probably prevent such wastage.Moderately large populationMyanmar’s population is big enough to form a significant domestic market at some point intime. Because a census has not been performed since 1983, no one knows the truepopulation of Myanmar, but estimates range from 44 mn (Ministry of Home Affairs) to 59mn (Ministry of Immigration and Population) or even 62 mn (IMF). Taking the midpoint,Myanmar would rank as a mid-sized Asian population, far smaller than China, India andIndonesia and considerably smaller even than Vietnam, the Philippines and Thailand, butlarger than Korea, Taiwan or Malaysia (Figure 10).Figure 10: Mid-sized population1,349 1,203 2409564534929237 50255075100125150CN IN ID PH TH Myanmar KR MY TW HK SG(mn)Source: National Statistical Office of Myanmar, Credit Suisse estimatesSignificant gas reservesNatural gas is an additional point of interest. Although current production ranks far behindMalaysia, Indonesia and even Thailand (Figure 11), it rates better as an exporter (Figure12). Because the economy is so undeveloped, internal consumption is low and exportshigh. Myanmar gas is particularly important for neighbouring Thailand, which imports 20%of its gas from Myanmar.Mid-sized populationA significant gas exporter
  7. 7. 20 April 2012Myanmar Market Strategy 7Figure 11: Natural gas production not high… Figure 12: …but gas exports significant3,1202,343892486 45333014905001,0001,5002,0002,5003,0003,500ID MY TH Brunei Myanmar VN PH(000 Terjoules)1,4891,03737332603006009001,2001,5001,800ID MY Brunei Myanmar(000 Terjoules)Source: International Energy Agency (IEA) Source: IEAExpansion is on the way. Two new pipelines are planned, one to southern China from theShwe field of western Myanmar scheduled to open next year, and the other to Thailand, tosupplement the existing pipeline. Gas production is set to increase sharply by 2013–14,and Wood Mackenzie forecasts that production will not peak until 2016.Figure 13: Myanmar gas production set to rise03006009001,2001,5001,8002,1002,40001 02 03 04 05 06 07 08 09 10 11 12E 13E 14E 15E 16E 17E 18E 19E 20E(mmcfd)Source: Wood MackenzieGas is by far Myanmar’s most important product. In 2010, gas accounted for 43% of totalexports and at market exchange rates, it likely is the most important source of revenue forthe government, though the lack of published budget numbers makes it difficult to confirm.It’s in East AsiaPerhaps the biggest advantage Myanmar has is geography. Every East Asian countryother than autarchic North Korea has either already reached developed status or has hadan early period of rapid growth. Even Cambodia and land-locked Laos are now enjoyinghigh growth. In the early stages of development, where Myanmar now finds itself, it seemsthat all an East Asian nation needs to do to generate rapid growth for 3–5 years is: (1)establish internal peace, (2) open up to foreign investment and (3) allow their acquisitivepopulation the freedom to pursue their dreams. We would be surprised if Myanmar did notwitness at least a short period of surging GDP.Simple geography—i.e.,location in East Asia—perhaps its biggest plus
  8. 8. 20 April 2012Myanmar Market Strategy 8But starting from very small baseUnfortunately, Myanmar remains too small to move the macro needle of any regionalmarket for a decade or longer. We will discuss in a later section the opportunities for ahandful of Thai firms with the potential to reap significant gains in Myanmar, but thecountry’s economic significance is still limited.A small economyNo one knows the true size of the Myanmar economy, but under any reasonable estimateit remains very small.First, consider the difficulty of measuring the economy. GDP for 2010 is reported atMMK40.5 tn. Translated at the previous official rate for 2010, that equals to US$7.3 tn,making Myanmar the world’s second-largest economy. Translated at the new market rateit equals US$50 bn. As will be discussed later, even this figure appears exaggerated, andIMF’s estimate places GDP at US$45 bn.If we take IMF’s number as close to the truth, Myanmar appears a very small place. Itwould only be 14% the size of Thailand, 19% the size of Malaysia and 23% the size ofPhilippines. India’s GDP is 35 times bigger, and China’s 130 times (Figure 14). Myanmarwould need to grow at 10% per year for 16 years just to reach the Philippines’ current size.Figure 14: Tiny economy5,8621,5951,012708430319239 223 223 2001044503006009001,2001,5001,800CN IN KR ID TW TH MY HK SG PH VN Myanmar(US$ bn)Source: International Monetary Fund (IMF), CEICBased merely on considerations of size, Myanmar’s domestic market appears too small toboost growth even in Thailand, much less Myanmar’s mega neighbours, China and India.Myanmar’s tendency to import heavily from China and the imminent arrival of newexporters from Western countries further diminish the country’s significance for Thaiexporters. Thailand’s exports to Myanmar are only about 1% of total Thai exports and lessthan one quarter of exports to Malaysia. The four million inhabitants of Laos take roughlyas much of Thailand’s exports (Figure 15).Myanmar is still too small tomatter economically for itsneighboursEconomy only about one-tenth size of Thailand’sTakes only 1% of Thailand’sexports, i.e. less than one-quarter of what Malaysiatakes
  9. 9. 20 April 2012Myanmar Market Strategy 9Figure 15: Thai exports by destination—Myanmar takes only 1% of the total051015202530CNEUJPUSMYSGIDVNPHCambodiaMyanmarLaos(US$ bn)Source: BOTLow purchasing powerLow purchasing power further limits Myanmar’s potential as an export market. The IMFgives Myanmar the second-lowest per capita GDP on a PPP basis in Asia afterAfghanistan. Myanmar ranks poorly not just on an Asian scale, but on an African measureas well (Figure 16). A population this poor spends a large amount of its income onsubsistence and has little left for discretionary purchases of imported goods.Figure 16: Per capita GDPs on PPP basis—poor even by African standards010,00020,00030,00040,00050,00060,000SGHKTWKREquatorialGuineaBotswanaGabonMYSouthAfricaTHCNNamibiaAngolaSwazilandRepublicofCongoIDPHCapeVerdeINVNPakLaosNigeriaCameroonCambodiaGambiaSenegalKenyaCôtedIvoireChadZambiaGhanaBangladeshTanzaniaBeninBurkinaFasoLesothoMyanmarAfghanistan(US$)Source: IMFPer capita GDP low even byAfrican standards
  10. 10. 20 April 2012Myanmar Market Strategy 10Extraordinary logistical challengesThe difficulty of getting goods to customers further complicates the picture for potentialexporters to Myanmar. Infrastructure is primitive and traditional markets and shops stilldominate the retail sector. Outside of Yangon, the capital and one or two second-tiercities, the vast majority of purchases are of local goods sold in local wet markets or smallshops.High growth still a hope, not a realityAlthough we expect growth to improve with an easing of sanctions and implementation ofreforms, Myanmar’s GDP has yet to show rapid expansion. Rapid growth remains apotential, not a reality.The official numbers indicate that Myanmar has already been generating great growth forover a decade. The government reported 1999–10 GDP CAGR of 12.1% and double-digitgrowth every year since 1998. Even during the GFC in 2009, official GDP grew 10.6%(Figure 17). Based on the official numbers, Myanmar has grown faster than China since1998.Figure 17: Officially reported real GDP growth too good to believe1002003004001998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(Indexed)Myanmar ChinaSource: ADBAlmost certainly, however, the official numbers exaggerate both the level and growth ofGDP. Consider these data points:■ Electricity consumption declined in 2010 and was flat over 2005–10 (Figure 18). Thelarge 2010 decline raises questions about the quality of the electricity data, but thatalso raises questions about the GDP numbers.■ From 1998 to 2010, nominal GDP saw a 30% CAGR on our calculations, but importsgrew just 6% p.a.■ Investment as a percent of GDP is just 15%, roughly half of Korea’s and one-third ofChina’s (Figure 19).Goods hard to get to marketfor foreign firmsOfficial numbers give highergrowth than in ChinaBut power consumption,import and investmentnumbers indicate GDPexaggerated
  11. 11. 20 April 2012Myanmar Market Strategy 11Figure 18: Weak electricity consumption contrasts withstrong reported GDPFigure 19: Investment as % of GDP—low number callsinto question accuracy of official GDP4,353 4,3554,4384,7014,5794,9364,0004,2504,5004,7505,0002005 2006 2007 2008 2009 2010(mn kwh)434236292522 22 21 2115 152701020304050CNVNINKRTHIDMYTWHKSGPHMyanmar(%)Source: Asian Development Bank Source: Asian Development Bank (ADB), Ministry of NationalPlanning and Economic DevelopmentThe latter point seems especially telling. Every Asian country that has enjoyed extendedperiods of 8%+ growth has had investment rates well above 20%, and most other than Indiahave had 30% or more. The 15% officially reported number would be barely sufficient tocover depreciation of the existing capital base. Most likely, the denominator in the equation—GDP—is exaggerated, leading to an excessively low investment ratio.Considering the statistical anomalies, the Economic and Social Survey of Asia and thePacific estimates growth in 2007/08 and 2008/09 at 5.5% and 2.0%, respectively, whileIMF calculates rates at 5.5% and 4.5% respectively. The Economist Intelligence Unitestimates 3.4% and 0.9%, respectively (Figure 20). We consider these figures as good asany and assume that growth in the past decade has been in the low- to mid-single digits.Figure 20: Outside GDP growth estimates far below official numbers5.5 and Social Survey of Asiaand the PacificIMF The Economist Intelligence Unit(%)2007/08 2008/09Source: The Economic and Social Survey of Asia and the Pacific, IMF, The Economist Intelligence UnitActual GDP growth probablyonly at 3–5%
  12. 12. 20 April 2012Myanmar Market Strategy 12Less important than Vietnam or BangladeshTo put Myanmar’s significance in perspective, consider two of its peers—Vietnam andBangladesh. Compared with Myanmar, Vietnam’s population is 67% larger, its GDP is128% bigger and its per capita GDP is 117% higher, yet Vietnam took only 3% ofThailand’s 2011 exports. Bangladesh’s population is triple the size, with a GDP 132%larger and per capita GDP 9% higher, yet investment banks are not holding Bangladeshconferences (Figure 21Error! Reference source not found.).Figure 21: Myanmar smaller and poorer than Vietnam and BangladeshBangladesh Myanmar VietnamNominal GDP (US$ bn) 106 45 104GDP per capita based on PPP (US$) 1,585 1,448 3,143Population (mn) 164 53 88Source: International Monetary Fund (IMF)Much less important thanVietnam or Bangladesh, sowhy the hype?
  13. 13. 20 April 2012Myanmar Market Strategy 13Major challenges remainAlthough we believe a short growth surge is likely, Myanmar faces serious economic andpolitical challenges to overcome if it is to achieve sustainable growth. The country isstarting in a deeper hole than previously closed economies that have opened up such asChina, Vietnam and Cambodia. It would be perilous to assume that Myanmar willnecessarily follow their paths to higher growth.Human capital deficitMyanmar’s human capital deficit is daunting. Two generations grew up in isolation fromthe outside world starting from 1962 when a new military government turned the country toautarchic socialism, and the dictatorship closed universities for prolonged periods to stiflestudent activism. Investment in education has been woefully inadequate. Myanmar spends1.3% of GDP on education, compared with almost 8% and 5% for Malaysia and Thailand,respectively (Figure 22). Because of the decline of universities, a majority of PhDs inMyanmar are over 50.Figure 22: Public expenditure on education as % of GDP7. TH IN KR HK PH SG ID CN Myanmar(%)Note: All data for 2001 with the exception of China (1999) and India (2000); Source: WorldbankInadequate infrastructureThe primitive telecommunications system is emblematic of a national infrastructure unableto support a manufacturing export economy. Blackouts are frequent in cities and much ofthe countryside goes dark at night.Excessive military spendingExcessive military spending explains much of the under-investment in education andinfrastructure. The military takes two-thirds of the national budget according to oneestimate, compared with 5–10% in other ASEAN economies (Figure 23). Reduction ofmilitary spending will likely require both continued progress in democratisation andsustainable peace agreements with ethnic insurgents on the borders.Country still faces hugechallengesLarge human capital deficitInfrastructure inadequate formanufacturingMilitary budget crowds outinfrastructure and educationexpenditures
  14. 14. 20 April 2012Myanmar Market Strategy 14Figure 23: Military spending as % of total budget is huge66.09.5 8.95.501530456075Myanmar TH MY ID(%)Source: World Bank, Harvard Ash CentreOvervalued currencyAlthough unification of the multiple exchange rates is a major positive, an excessivelystrong currency poses serious risks. Gas export receipts, sale of state assets requiringrepatriation of capital flight funds and investors arbitraging high local interest rates havehelped the market kyat rate rise 77% the past five years (Figure 24). In a sense, thecurrency appreciation is a healthy sign of increasing confidence, but the strong kyatthreatens Myanmar with the Dutch Disease. As happened to the Netherlands after thediscovery of oil in the North Sea in the 1960s, Myanmar faces the risk that a strong kyatresulting from rising gas exports will prevent the emergence of a manufacturing economy.One of the few export successes of recent years—bean and pulse sales to India—is underheavy pressure at the current exchange rate. The country’s few manufacturers arestruggling to survive.Figure 24: Strong market rate for kyat a problem5508001,0501,3001,5502001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011(Kyats/US$)Source: The Irrawaddy News magazineCurrency appearsovervalued
  15. 15. 20 April 2012Myanmar Market Strategy 15Inefficient financial systemMyanmar’s banking system fails to provide some of the most basic financial services. Fewin Myanmar trust banks with their savings, depriving institutions of deposits, and banksengage in little lending. Excessively strict LDR rules prevent most farmers from obtainingcredit, and repressive liquidity requirements force banks to keep most of their assets ingovernment bonds. Credit card and ATM transactions are still almost entirely impossible toconduct in Myanmar.Structurally high inflationMyanmar has a history of high inflation that could require years of tight monetary policy towring from popular expectations. Inflation during 2006–11 was 10.7% on a CAGR basis, inlarge part due to central bank monetisation of public sector debts (Figure 25). Given thefairly slow GDP growth, these are uncomfortably high numbers.Figure 25: History of high inflation9.91.517.920.905101520252007 2008 2009 2010(%)Source: ADBAs in Vietnam, where hyper-inflation in the 1980s left locals with a preference for dollarsand gold over dong, a history of demonetisation has left the people of Myanmar distrustfulof the kyat as a store of value. The most recent demonetisation was in 1987, when thegovernment declared all bills of 75 kyat or less—three-quarters of the currency by value—no longer legal tender. Bank deposits are just 10% of GDP, indicating that much of thecountry’s savings are in gold, dollars or stuffed in mattresses.Conglomerates and uncompetitive SOEsThe structure of Myanmar’s corporate sector weighs on prospects. The IMF estimates thatSOE losses absorbed 23% of tax revenue in the middle of the last decade. Key SOEs areconnected with the military and none could be considered globally competitive. Unwieldyconglomerates dominate the private sector. Even by Asian standards, Myanmarconglomerates are unfocused and concentration of ownership appears undesirably high.Conglomerates acquired much of their assets in a series of privatisations before the 2010elections. The political opposition has characterised the privatisations as de facto asset-stripping, whereby the military allocated valuable assets to friends. Given the weakness ofdomestic financial institutions, it will be hard to privatise SOEs without selling them to theexisting conglomerates, leading to an even greater concentration of ownership of the economy.Financial system notproviding capital to privatesectorHigh inflation will be hard towring from the systemUncompetitive corporatestructures
  16. 16. 20 April 2012Myanmar Market Strategy 16Bubble riskThe success in attracting foreign investment poses perhaps the greatest risk tosustainable growth. The 2006 bubble in Vietnam highlights the dangers of big increases incapital inflows to Frontier Markets with weak financial systems. The inflows led to propertybubbles, overvalued currencies and misallocated resources. We fear that Myanmar-maniacould lead to a de-stabilising boom and bust.Political risk remainsWe are more optimistic about politics than other aspects of the Myanmar developmentstory, but even here we worry that many observers are overlooking the considerable risks.We believe that Myanmar will continue to reform politically, but a lot can still go wrong.Much of the military apparently supportiveWe find the apparent support from much of the military for reform as highly encouraging.The reformist president is a former general close to the previous military strongman, ThanShwe, who resigned as head of state and head of the military-dominated State Peace andDevelopment Council last year. The reformist speaker of Parliament, almost all cabinetmembers and most of the MPs are also former military officers. The military component inParliament has voted in favour of various reformist measures, and Than Shwe seems tohave genuinely removed himself from day-to-day governance.Some observers believe that Than Shwe is engineering a transition to partial or fulldemocracy to ensure himself a peaceful retirement. His predecessor, Ne Win, spent hisdying days under house arrest after losing power, and his military protégé—Khin Nyunt—and some Ne Win family members were given stiff jail sentences. According to this theory,the 78-year-old Than Shwe hopes that a transition to civilian rule will prevent a futuremilitary strongman from punishing Than Shwe and his family.Business community a possible driver of reformWe consider the small but influential business community as another force for reform.Although key SOEs and crony businesses have historically found it profitable to operateunder heavy protection against foreign competition, increasingly, businessmen have cometo believe that the removal of sanctions and reform of the economy could open excitingopportunities for the domestic sector. We believe that lobbying by local businesses hasplayed a key role in pushing the reform agenda.But 2015 still an uncertaintyMyanmar has come a long way politically over the past 12 months, but it has much fartherto go before it can create a stable democracy. So far, the military-dominated governmenthas released dissidents, liberalised censorship and allowed generally free and fair bye-elections but has given up no real power. The bye-elections opened only 7% of the 664seats in Parliament, and 25% of all seats are still reserved for sitting military officers. Thevast majority of the remaining seats are held by the pro-military Union Solidarity andDevelopment Party (USDP). Altogether, forces associated with the military control 80% ofthe seats in Parliament as well as all important cabinet positions and regional governments(Figure 26). Aung San Suu Kyi is still barred by law from serving as president.High risk of property bubbleConsiderable political riskremainsEncouraging that militaryhas supported politicalreformsBusiness community alsoseems supportiveBut 2015 elections could bea flash point for renewedinstability
  17. 17. 20 April 2012Myanmar Market Strategy 17Figure 26: Military still in firm control of the ParliamentNLD6%Others18%Reserved for activesoldiers25%USDP (Pro militaryparty)51%Source: The Myanmar Union Election CommissionThe 2015 general elections remain a huge medium-term overhang. The 1 April bye-elections posed no immediate threat to the control of government by pro-military forces,but the 2015 general elections would likely deprive the military of control of government ifthey were conducted fairly. We likely will not know if those elections will be free and fairuntil they are complete. If they are not free and fair, Myanmar could again suffer instabilityand international sanctions. Some pessimists believe that the military will allow onlyenough liberalisation to see sanctions lifted and that a later confrontation betweenconservatives and pro-democracy forces is inevitable.We tend to agree with the optimists who argue that the democratic genie is wiggling out ofthe bottle and that at some point reform achieves self-sustaining momentum. However, wesee significant risk that back-tracking and renewed confrontation is possible.Ethnic minority issue unresolvedEthnic minority insurgencies pose an additional political risk. Only 68% of the population isethnic Burman, with the rest Shan, Karen, Kachin, Karenni, Wa, Royhinga and numerousother ethnic groups (Figure 27). Several dozens of these groups have armed movementsand histories of conflict with the military dating back to independence. Most larger groupshave reached de facto cease fires with the military, but the Kachin and Wa, among others,have not agreed to stop fighting. Although the president has made sincere efforts toreconcile with minorities, a military offensive against the Kachin late last year raisedquestions as to whether the army would allow diplomacy to work.Continuing ethnic conflictscould block full removal ofsanctions and keep militaryspending high
  18. 18. 20 April 2012Myanmar Market Strategy 18Figure 27: Ethnic minorities almost one-third of the populationMon2%Indian2%Chinese3%Other5%Karen7%Rakhine4%Shan9%Burman68%Source: Central Intelligence Agency (CIA)The ethnic struggles pose two economic risks. First, the US has linked its remainingsanctions with a resolution of ethnic conflicts. Second, pipelines and logistical links betweenthe gas fields and China and Thailand pass through Kachin and Karen territory, respectively.The security of those infrastructure investments requires a resolution of the conflicts.Bigger challenges than Vietnam or China had facedIt would be dangerous to assume that Myanmar will follow the hugely successful path ofChina, or even the moderately successful economic career of Vietnam. We note significantadvantages that those countries enjoyed vis-à-vis Myanmar:(1) Overseas communities: Vietnam benefited from the return and investment ofoverseas Vietnamese in America, while overseas Chinese in Hong Kong, Taiwan andSoutheast Asia contributed hugely to China’s development. Myanmar lacks a large,prosperous overseas population who can offer capital and expertise.(2) History of capitalism: Both China and Vietnam benefited from a class of capitalistswho were able to use their business skills once the communist interlude ended.Vietnam’s south had been continually capitalist until the 1975 unification of thecountry, and southerners had to wait only about 13 years before reforms againallowed private business to operate. Chinese capitalists spent about 25 years in HongKong or Taiwan or lying low on the mainland, but re-emerged as active mainlandinvestors after Deng’s reforms began in 1979. Myanmar lacks these human resources.A large number of the Indian and Chinese capitalists forming the core of the colonialera business class were forced to leave after independence in 1947, and a bigdomestic capitalist class never developed. The imposition of autarchic socialismduring 1962–88 kept private businesses extremely small and uncompetitive.(3) Technical skills: Although grossly inefficient, the Chinese communists’ effort to buildheavy industry in the 1950s and 1960s left the country with a large pool of technically-skilled engineers and ample science and technology universities. Myanmar lacks goodscience and technology institutes and skilled workers. Although China and Vietnamcut themselves off from the West, they drew heavily on technical assistance from theSoviet Union. Myanmar, from 1962 to 1988, cut itself off from everyone.Growth, but from very low baseWe believe that Myanmar can accelerate growth, but the challenges it faces may keepgrowth from reaching the take-off levels achieved by China, Thailand, Malaysia andothers, and could limit sustainability. Because the base is so low, Myanmar needs at leastone to two decades of rapid growth to achieve enough size to matter to neighbouringeconomies, or to have a stock market of meaningful size.Unlike China or Vietnam,Myanmar lacks overseascommunity who can providecapital and expertiseGrowth to accelerate, butfrom very low base
  19. 19. 20 April 2012Myanmar Market Strategy 19Few stocks with Myanmar exposureMyanmar remains too small to have a significant impact on most NJA stocks. We identifyonly three stocks likely to have significant investments in or sales to Myanmar over thenext five years: Italian-Thai Developments (ITD.BK, Bt3.52, UNDERPERFORM, TPBt2.50), PTT Exploration & Production (PTTE.BK, Bt173.00, UNDERPERFORM, TPBt175.00) and PTT Public Company Limited (PTT.BK, Bt335.00, NEUTRAL, TPBt376.00). The first we consider a poor investment and non-Myanmar events will mattermost for the latter two.Dawei and Italian-Thai DevelopmentITD is by far the NJA stock with the greatest Myanmar potential. ITD’s Dawei investment isa potential game-changer for the stock.The Dawei project would create a land bridge linking Myanmar with Thailand and byextension, Indochina. Dawei is located in the southernmost region of Myanmar, 300 kmwest of Bangkok. The plan is to build two deep sea ports, three industrial zones for heavy,medium, and small-scale industries, residential areas and a commercial complex in a 250sq km area. Eventually, oil and gas pipelines to Thailand would be added. The heavyindustries would include an integrated steel mill, a petrochemicals complex and a fertiliserplant. The first phase is targeted for completion in 2015 with the final completion in 2020.In theory, Dawei would provide a cheaper, quicker transport link to Indochina thanpassage through the Straits of Malacca and Singapore. Originally, 4,000 MW of coal-firedelectric capacity was planned, but local environmentalist opposition has forced thegovernment to now plan on gas-fired power.Figure 28: Dawei industrial and logistics projectSource: Bangkok PostOnly three NJA stocks withsignificant MyanmarexposureDawei a potentially game-changing project for ITD, butprospects for both theproject and ITD are clouded
  20. 20. 20 April 2012Myanmar Market Strategy 20Figure 29: Investment plans on DaweiSouthern deepwater port4-Lanes Toll Highway link to Thai borderBorder check-pointRoad to Dawei Airport93 mn m3reservoirCoal-fired power plantRoads network within the industrial estateIrrigation systemsWaste water treatment systemTownshipsResidential areasFirst Phase(2011–2015)Areas for one-stop governmental servicesFurther development of roads network and water system within the industrial estateExpansion of Toll Highway link to Thai border from 4-lanes to 8-lanesCommercial complexSecond Phase(2013–2018)Improvement of water channelsNorthern deepwater portFurther development of roads network and water system within the industrial estateRailway networkElectricity grid linesThird Phase(2016–2020)Gas and Oil pipelines to ThailandSource: Office of the National Economic and Social Development Board (Thailand)For ITD, Dawei is potentially huge. The Myanmar government gave ITD exclusive rightsfor 75 years to develop Dawei, which it plans to do through Dawei DevelopmentCorporation (DDC). ITD hopes to sell 49% of DDC and retain 51% ownership. A localMyanmar investor plans to take 25%. The total investment cost for Dawei has beenestimated at US$8 bn. Apart from the special zone itself, ITD has also won a contract fromthe Myanmar government to build the road link with Thailand, and a separate major powerproject is under consideration. The project has attracted interest from overseas investorsin Thailand, Japan, the Middle East and Europe. Investors from Japan, the Middle East,China, South Korea and PTT have been indentified as potential investors.All told, Dawei could transform ITD’s finances. ITD’s market cap is just under US$500 mn.Dawei makes some sense to us, but it faces several daunting obstacles before it becomesa reality:(1) ITD: ITD seems a weak vehicle to spearhead such a massive effort. ITD’s book valueis just US$262 mn, and it has lost money for four straight years (Figure 30). We arenot sure if it is financially capable of leading the project.(2) Political opposition: Environmentalists have already blocked the coal-fired electricalplants, and we cannot rule out the possibility that NGOs and locals will opposeconstruction of polluting industrial plants as well.(3) Ethnic minorities: The pipeline and highway and rail links pass through ethnic Karenterritory. The main Karen insurgent group, the Karen National Liberation Army, hascomplained that locals are not being properly compensated. Fighting near the plannedroad has been common.(4) Not what Myanmar most needs: Myanmar should certainly exploit its potential as alogistics hub, but heavy industry does not meet its most immediate needs. For now,the country should be focusing on light industry that could employ its big, under-utilised labour force.(5) Integrated steel plant? Myanmar would not seem a promising location.Dawei project large relativeto ITD’s balance sheetDawei’s obstacles: ITD’sfinancial weakness, politicalopposition, ethnic conflicts
  21. 21. 20 April 2012Myanmar Market Strategy 21Even if we felt more confident of Dawei’s prospects, we would be uncomfortable with ITD.Its continuing losses and poor disclosure make it a highly risky investment. We maintainan UNDERPERFORM rating on the stock.Figure 30: ITD earnings—losses in five of last six years-1,1711,135-2,288-1,595-1,055-1,698-3,000-2,000-1,00001,0002,0002006 2007 2008 2009 2010 2011(Bt mn)Source: Company dataPTTEP and gas prospectsPTTEP is the NJA company with the greatest current Myanmar exposure and the greatestpotential for new business. Even here, though, Myanmar’s potential for accelerated growthis a relatively small factor for the stock.PTTEP has done businesses with Myanmar for over 20 years. In 2011, Myanmaraccounted for 8% of PTTEP’s sales and 30% of its reserves. PTTEP plans 20% of its totalcapex for the next five years in Myanmar.Figure 31: PTTEPs exposure to MyanmarDCQ (mmscfd)Project nameStake(%) Export toThailandDomesticNoteYadana 25.5 565 150ProductionYetagun 19.3 460 n/aDevelopmentZawtika (M-9 andpart of M-11)80 240 60Targets first gas at end-2013, US$4 bninvestmentM-3 100 Second drilling program in 4Q12M-11 100 To reduce stake to partners within 2012PSC-G 100ExplorationEP-2 100Expected licenses to be officially awardedin 2Q12Source: Company data, Credit Suisse estimatesExisting projectsPTTEP has two large existing offshore projects in Myanmar, Yadana and Yetagun. PTTEPowns 25.5% and 19.3% of the Yadana and Yetagun concessions, respectively, with 80%and 100% of their gas output sent to Thailand through two pipelines owned by theconcessionaires. Yadana and Yetagun are the only two viable projects close enough toThailand to pipe economically.PTTEP has greatest currentMyanmar exposure of anyNJA company undercoverageYadana and Yetagun theonly two major producingoffshore projects inMyanmar
  22. 22. 20 April 2012Myanmar Market Strategy 22Figure 32: Ownership structures of Yadana, Yetagun and Zawtika projectsTOTAL, 31.2 TOTAL, 40.9TOTAL, 20.0Chevron, 28.3PTTEP, 80.0PTTEP, 19.3PTTEP, 25.5Chevron, 20.5MOGE, 15.0 MOGE, 19.30255075100Yadana Yetagun Zawtika(%)Source: Company dataFigure 33: Yadana—80% of output sold to Thailand Figure 34: Yetagun—100% of output sold to ThailandSource: Company data Source: Company dataPTTEP’s 80%-owned concession in Zawtika targets initiation of production at the end of 2013.Total daily production is targeted at 300 mmscfd, of which 80% would be piped to Thailand.More projects in exploration stageThere are positive exploration results with flow of gas and condensate in the first round ofdrilling in 2011 of the M3 Block in the Gulf of Maottama. The second drilling is scheduledin 4Q12. If the second drilling is successful, PTTEP has committed to drill three more wellsin 2013 before deciding whether to proceed with the project.Given the block’s proximity to land, M3 gas would be sold to the domestic market inMyanmar. Due to the shallow water and shorter distance to shore, PTTEP estimates thatthe project would be economical with a reserve size of 1.5Tcf or more, assuming 200mmscfd volume over 20 years. If the exploration outcome is positive, managementexpects the first gas in 2016. Based on previous projects in Myanmar where delays weretypical, however, we expect that M3 would start its first production in 2018.PTTEP has signed a PSC for offshore Block M11 in 2005. Block M11, also located in theGulf of Moattama, is a deepwater acreage which PTTEP plans to partly divest to partnerswho are more experienced in offshore drilling.Zawtika project to start atend-2013M3—second round ofexploration drillings in 2012to confirm positive findOutput likely to be sold toMyanmarM11—PTTEP plans to dilutestakes to partner withdeepwater experience
  23. 23. 20 April 2012Myanmar Market Strategy 23Figure 35: PTTEP’s M3 and M11 blocksSource: Company dataIn addition to M3 and M11, in December 2011 Myanmar’s Energy Ministry declaredPTTEP a winner of two onshore exploration rights—EP2 (1,344km2) and PSC-G(13,333km2). The PSC contract signing, however, has been delayed from the initial targetdates in February. Once the PSCs are signed, planned exploration activities will follow. Ifthere is a positive find, we expect the project start-up to be in 2018 at the soonest.Future opportunitiesMyanmar could offer more blocks. PTTEP expects to see more opportunities fordeepwater blocks off the Rakhine and Tanintharyi coasts and more blocks (bothdeepwater and shallow water) in the Moattama offshore area.How Myanmar’s growth prospects fit inPTTEP’s existing production and the new Zawtika field are piped to Thailand and thus notdependent on economic events within Myanmar. Only M3 and other possible newventures would benefit from accelerated growth in Myanmar. Geography and size makegas from those projects uneconomic for export to Thailand or China, and thus they wouldbenefit from growth in domestic Myanmar gas demand.In conclusion, although Myanmar gas is highly important to PTTEP, the country’seconomic development matters much less.PTT—limited downstream opportunitiesPTT also could invest in projects selling into Myanmar’s domestic market, but optionscould be limited. PTT expressed interest in investing in the planned 4,000MW coal-firedpower plants in Dawei, but, as noted, opposition from environmentalists forced thegovernment to scuttle the project. Opportunities for development of gas-basedpetrochemical investments in Myanmar also seem limited as Myanmar’s natural gas so farhas been dry with no ethane or propane content. As such, there is no opportunity torecreate PTT’s complex in Thailand, which takes wet gas from the Gulf of Thailand. Gasfrom Zawtika (M9), targeted to start in 2013, is also dry gas.PTT’s main opportunities in Myanmar are for power plants in the M3 block area, ifcommercialisation proved feasible, CNG, refineries, fertiliser production and methanolplants. CNG is widely used in Myanmar with 45 refuelling stations, with plans to installmore stations along the domestic pipeline corridor.PTTEP currently holds100% of both M3 and M11blocksTwo more onshoreexploration rights to besignedMore bidding to comeMyanmar an importantsource of gas for PTTEP,but growth prospects of thecountry matter relatively littleLimited investment optionsfor PTT parent since mostMyanmar gas is dry
  24. 24. 20 April 2012Myanmar Market Strategy 24Under any realistic scenario, we expect Myanmar to provide less than 5% of PTT parent’srevenues for 5–10 years.Credit Suisse’s energy analyst Poom Suvarnatemee discusses the significance ofMyanmar for PTT and PTTEP in greater detail in Valuing the Myanmar Hype.Nothing else of consequenceBesides ITD and the PTT group, we do not expect any other NJA countries to dosignificant amount of business with Myanmar over the next five years. A number ofcompanies are looking at Myanmar for exports or investment, but the contribution torevenues for none is likely to exceed 1–2% for several years, or much, much longer.Myanmar unlikely to providemore than 5% of PTT parentrevenues for 5–10 yearsNo other NJA firms havesignificant businessinterests in Myanmar
  25. 25. 20 April 2012Myanmar Market Strategy 251-2 decades away from investabilityGDP growth looks set to accelerate, but the stock market is likely 1-2 decades from beingbig enough to merit international investor attentions. In the mean time, the country will beof greatest interest to private equity funds and FDI investors.Only two companies on OTCMyanmar’s stock market has only two listed companies. The market is OTC and tradesare recorded on a whiteboard in a one-room exchange. Daiwa Securities hopes to help thecountry set up a new exchange, but the main factor limiting Myanmar’s emergence as aninvestable market is not the lack of a platform, but the underdevelopment of the economyand corporate sector. It will take decades for both to reach a state of developmentsufficient to support a liquid market.Vietnam precedent discouragingVietnam’s precedent is not encouraging. Vietnam began opening up its economy in 1988,but now 24 years later the market remains too small and illiquid for the vast majority ofinvestors to consider. Total trading on Vietnam’s two markets averaged just US$34mn/day in 2011, and no stocks traded even US$1 mn/day (Figure 36).Figure 36: None of Vietnam’s top stocks trades even US$1 mn/day0. 0.50.4 0.4 VIC HAG FPT VCB MBB EIB VNM BVH MSN(US$ mn)Source: BloombergPossible candidate for private equityFor the foreseeable future, there will be very few opportunities for secondary marketinvestors, but Myanmar could be of interest to private equity funds. Although Vietnam isstill too small to support an active secondary market, private equity investors are active.We believe that similar opportunities could appear in Myanmar. If Myanmar follows theVietnam path, a property bubble could also provide some trading opportunities, butforeigners will likely find it difficult to exploit. Once sanctions are fully lifted, we would alsoexpect the government to issue a sovereign bond, which could prove of interest to fixedincome investors.Driven by global liquidityAs with frontier markets in general, global liquidity will likely matter as much as events onthe ground for interest levels in Myanmar. Given the rapid pace of political reforms, we arenot surprised that investors are paying attention to the country, but if risk aversion globallyincreases, we would expect interest levels to drop sharply, even if reforms continued.At least 1–2 decades fromhaving investable secondaryequities marketOnly two companies in theOTC marketMyanmar’s equitiesdevelopment is 10–20 yearsbehind Vietnam, andVietnam is 10–20 yearsbehind PhilippinesBest opportunities forforeseeable future in privateequitySurging interest in Myanmaris a creature of excessglobal liquidity
  26. 26. 20 April 2012Myanmar Market Strategy 26Companies Mentioned (Price as of 19 Apr 12)Italian-Thai Developments (ITD.BK, Bt 3.56, UNDERPERFORM, TP Bt 2.50)Masan Group Corp (MSN VM, D 117,000, NOT RATED)PTT Exploration & Production (PTTE.BK, Bt 175.50, UNDERPERFORM, TP Bt 175.00)PTT Public Company Limited (PTT.BK, Bt 351.00, NEUTRAL, TP Bt 376.00)(Masan Group Corp, đ17,000, Not rated)(Vietnam Dairy Products JSC, đ90,000, Not rated)(Vincom JSC, đ99,000, Not rated)(Bao Viet Holdings, đ73,000, Not rated)(Saigon Thuong Tin Commercial, đ25,200 Not rated)(Vietnam Export-Import Commer, đ18,200, Not rated)(JSC Bank for Foreign Trade, đ33,500, Not rated)(Military Commercial Joint, đ15,400, Not rated)(Hagl JSC, đ30,200, Not rated)(FPT Corp, đ59,500, Not rated)Disclosure AppendixImportant Global DisclosuresDan Fineman & Paworamon (Poom) Suvarnatemee, CFA each certify, with respect to the companies or securities that he or she analyzes, that (1)the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of hisor her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.See the Companies Mentioned section for full company names.3-Year Price, Target Price and Rating Change History Chart for ITD.BKITD.BK ClosingPriceTargetPrice Initiation/Date (Bt) (Bt) Rating Assumption17-Sep-09 3.3 3.14-Mar-10 2.54 2.5332334455667720-Apr-0920-Jun-0920-Aug-0920-Oct-0920-Dec-0920-Feb-1020-Apr-1020-Jun-1020-Aug-1020-Oct-1020-Dec-1020-Feb-1120-Apr-1120-Jun-1120-Aug-1120-Oct-1120-Dec-1120-Feb-12Closing Price Target Price Initiation/Assumption RatingBtO=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
  27. 27. 20 April 2012Myanmar Market Strategy 273-Year Price, Target Price and Rating Change History Chart for PTTE.BKPTTE.BK ClosingPriceTargetPrice Initiation/Date (Bt) (Bt) Rating Assumption18-May-09 118 10130-Jul-09 138 1322-Sep-09 138.5 13010-Sep-09 147.5 14828-Oct-09 151.5 138 U16-Nov-09 138 13612-Jan-10 148.5 14118-Jan-10 149 1491-Feb-10 135 13627-Apr-10 150 15529-Apr-10 149 1574-Jun-10 147.5 15222-Jun-10 149 15413-Jul-10 144 R24-Aug-10 143.5 U31-Aug-10 143.5 15221-Sep-10 144.5 15428-Oct-10 171 1564-Jan-11 167 1694-Feb-11 178 18325-Jul-11 182.5 16328-Nov-11 159 14710-Jan-12 181 15612-Mar-12 179 169101132130148138136141149136155157152154 152154156169183163147156169URU9611613615617619620-Apr-0920-Jun-0920-Aug-0920-Oct-0920-Dec-0920-Feb-1020-Apr-1020-Jun-1020-Aug-1020-Oct-1020-Dec-1020-Feb-1120-Apr-1120-Jun-1120-Aug-1120-Oct-1120-Dec-1120-Feb-12Closing Price Target Price Initiation/Assumption RatingBtO=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered3-Year Price, Target Price and Rating Change History Chart for PTT.BKPTT.BK ClosingPriceTargetPrice Initiation/Date (Bt) (Bt) Rating Assumption19-May-09 218 16314-Jul-09 222 18517-Aug-09 235 2272-Oct-09 261 25228-Oct-09 251 280 N2-Dec-09 225 2733-Dec-09 227 2478-Mar-10 235 2614-Jun-10 251 28313-Aug-10 250 28521-Sep-10 287 29915-Nov-10 332 3204-Jan-11 330 34621-Mar-11 343 36213-Jan-12 322 374163185227252280273247261283 285299320346362374N16321326331336320-Apr-0920-Jun-0920-Aug-0920-Oct-0920-Dec-0920-Feb-1020-Apr-1020-Jun-1020-Aug-1020-Oct-1020-Dec-1020-Feb-1120-Apr-1120-Jun-1120-Aug-1120-Oct-1120-Dec-1120-Feb-12Closing Price Target Price Initiation/Assumption RatingBtO=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not CoveredThe analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisses totalrevenues, a portion of which are generated by Credit Suisses investment banking activities.Analysts’ stock ratings are defined as follows:Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceivedrisk) over the next 12 months.Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months.Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months.*Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute totalreturn potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**,with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities.Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industryfactors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return ofthe relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analysts coverageuniverse**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholdsreplace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively.**An analysts coverage universe consists of all companies covered by the analyst within the relevant sector.
  28. 28. 20 April 2012Myanmar Market Strategy 28Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,including an investment recommendation, during the course of Credit Suisses engagement in an investment banking transaction and in certain othercircumstances.Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24months or the analyst expects significant volatility going forward.Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expectedperformance of an analyst’s coverage universe* versus the relevant broad market benchmark**:Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.*An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector.**The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months.Credit Suisse’s distribution of stock ratings (and banking clients) is:Global Ratings DistributionOutperform/Buy* 46% (59% banking clients)Neutral/Hold* 42% (57% banking clients)Underperform/Sell* 10% (51% banking clients)Restricted 2%*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy,Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investorsdecision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or themarket that may have a material impact on the research views or opinions stated herein.Credit Suisses policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to CreditSuisses Policies for Managing Conflicts of Interest in connection with Investment Research: Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannotbe used, by any taxpayer for the purposes of avoiding any penalties.See the Companies Mentioned section for full company names.Price Target: (12 months) for (ITD.BK)Method: Our 12-month target price of Bt2.5 for Italian-Thai Developments is based on three-components valuation which takes into account BV,forecast contribution of existing backlog, and value of future works.Risks: Risks to our Bt2.5 target price for Italian-Thai Developments include: 1) delays in flow of new contracts and 2) margin assumptions beingaffected by the cost of raw materials, especially steel, cement and oil. In addition, ITD has invested about B3bn in a Spacial Prospecting license forpotash deposit in Thailand. However, mining license has not been granted, raising a risk on potential write-off of this investment.Price Target: (12 months) for (PTTE.BK)Method: Our 12-month target price for PTTEP of Bt175/share is set based on Discounted Cash Flow assuming Weighted Average Cost of Capital(WACC) at 10.5%, Cost of Equity (COE) at 12.0%, Cost of debt at 4.5%, Beta at 0.8, 50%-50% weighted of CS oil price assumption and currentforward curve of oil prices.Risks: Risks to PTTEPs target price of Bt175/share are 1) a strong Baht exchange rate; 2) oil price fluctuation; 3) start-up of new fields, especiallyArthit field; and 4) political risks in Myanmar.Price Target: (12 months) for (PTT.BK)Method: We arrive at Bt376/sh target price for PTT based on Sum-Of-The-Part (SOTP) valuation at the target price of its affiliates, which haverecently been upgrades.Risks: Key risks to our target price of Bt376 for PTT include: 1) oil prices, 2) refining margins , 3) petrochemicals margins, 4) the Thailand economyand therefore gas demand growth, and 5) construction risks on new projects.Please refer to the firms disclosure website at for the definitions of abbreviations typically used in thetarget price method and risk sections.See the Companies Mentioned section for full company names.The subject company (PTTE.BK, PTT.BK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client ofCredit Suisse.Credit Suisse provided investment banking services to the subject company (PTTE.BK, PTT.BK) within the past 12 months.Credit Suisse has received investment banking related compensation from the subject company (PTTE.BK, PTT.BK) within the past 12 months.Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ITD.BK, PTTE.BK,PTT.BK) within the next 3 months.Important Regional DisclosuresSingapore recipients should contact a Singapore financial adviser for any matters arising from this research report.
  29. 29. 20 April 2012Myanmar Market Strategy 29The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ITD.BK, PTTE.BK, PTT.BK)within the past 12 months.Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares;SVS--Subordinate Voting Shares.Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may notcontain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.For Credit Suisse Securities (Canada), Inc.s policies and procedures regarding the dissemination of equity research, please visit of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.Principal is not guaranteed in the case of equities because equity prices are variable.Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that.For Thai listed companies mentioned in this report, the independent 2010 Corporate Governance Report survey results published by the ThaiInstitute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Italian-ThaiDevelopments(Very Good), PTT Exploration & Production(Excellent), PTT Public Company Limited(Excellent).Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk.Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reportswritten by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities underTaiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are importantdisclosures regarding any non-U.S. analyst contributors:The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analystslisted below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions oncommunications with a subject company, public appearances and trading securities held by a research analyst account.• Dan Fineman, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Thailand) Limited.• Siriporn Sothikul, CFA, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Thailand) Limited.• Paworamon (Poom) Suvarnatemee, CFA, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Thailand) Limited.For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at or call +1 (877) 291-2683.Disclaimers continue on next page.
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