myanmar credit suisse

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20 April 2012 Asia Pacific/Thailand

Equity Research Emerging Growth (Strategy)

Myanmar Market Strategy THEME

Overhyped Figure 1: Very small GDP by regional standards

5,862

1,595

1,012

708

430319

239 223 223 200104

45

0

300

600

900

1,200

1,500

1,800

CN IN KR ID TW TH MY HK SG PH VN My anmar

(US$ bn)

Source: International Monetary Fund (IMF), CEIC

■ Exciting developments, but no investment conclusion. Rapid political liberalisation, improved prospects for a lifting of Western sanctions and the initiation of economic reforms could be setting Myanmar on a higher growth path, but the country’s significance for equities investors remains limited.

■ Too small, with too many uncertainties. Although much welcome change is coming, a host of issues will likely keep Myanmar a marginal destination for institutional investors. Myanmar is the second-poorest country in Asia after Afghanistan, with an economy probably only 14% the size of Thailand’s. Purchasing power is low, and the country takes only 1% of Thailand’s total exports. The official growth figures appear exaggerated. A huge human capital deficit, an overvalued currency and weak institutions pose daunting development challenges.

■ Different from China or Vietnam. Comparisons with China or Vietnam appear misguided. China and Vietnam benefited hugely from the investment and expertise of overseas communities, and both had long experience with capitalism before their communist interludes. Myanmar lacks a prosperous overseas community and an experienced entrepreneurial class.

■ Few NJA stocks with Myanmar exposure. We identify only three stocks in NJA under coverage that will have significant interests in Myanmar in the next five years. The stock with the biggest planned investment—ITD—has lost money for four straight years and is unappealing as an investment. PTTEP and PTT could see upside from new gas finds, but an unrelated equity increase overhang leaves PTTEP unattractive.

Research Analysts

Dan Fineman 662 614 6218

[email protected]

Siriporn Sothikul, CFA 662 614 6217

[email protected]

Paworamon (Poom) Suvarnatemee, CFA 662 614 6210

[email protected]

20 April 2012

Myanmar Market Strategy 2

Focus charts Figure 2: Thai exports by destination—Myanmar takes

only 1% of the total

Figure 3: Officially reported real GDP growth too good to

believe

0

5

10

15

20

25

30

CN EU JP US

MY

SG ID VN PH

Cam

bodi

a

Mya

nmar

Laos

(US$ bn)

100

200

300

400

1998 2000 2002 2004 2006 2008 2010

(Index ed)

My anmar China

Source: Bank of Thailand (BOT) Source: Asian Development Bank (ADB)

Figure 4: Investment as a % of GDP—low number calls

into question the accuracy of official GDP

Figure 5: Public expenditure on education as % of GDP

43 42

36

29

2522 22 21 21

15 15

27

0

10

20

30

40

50

CN VN IN KR TH ID MY

TW HK

SG PH

Mya

nmar

(%)

7.5

5.04.4

4.1 3.93.2 3.1

2.51.9

1.3

0

3

6

9

MY TH IN KR HK PH SG ID CN My anmar

(%)

Source: ADB, Ministry of National Planning and Economic Development

Note: All data for 2001 with the exception of China (1999) and India (2000); Source: World Bank

Figure 6: Strong market rate for kyat a problem Figure 7: Military still in firm control of the Parliament

550

800

1,050

1,300

1,550

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(Ky ats/US$)

USDP (Pro-

military party )

51%

Reserv ed for

activ e soldiers

25%

Others

18%

NLD

6%

Source: The Irrawaddy News magazine Source: The Myanmar Union Election Commission

20 April 2012


Overhyped Exciting developments Exciting events are unfolding in Myanmar. The pace of political reform is rapid. Western countries could lift sanctions soon. Economic reforms are beginning. Though not large, the population is big enough to form a significant domestic market, at some point in time. Gas exports are significant and rising.

But starting from very small base That said, Myanmar remains too small to move the needle economically for any NJA country, 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’s exports. Most of the population is too poor to buy anything other than locally-produced subsistence goods. We expect growth to accelerate, but rapid expansion of the sort seen by China and others at similar stages of development is not assured. Official numbers showing double-digit GDP growth during 1999–10 appear exaggerated to us. Flat electricity consumption, slow import growth and low levels of investment indicate that the actual GDP growth rate has been more in the low-to-mid-single digits.

Major challenges remain Myanmar faces serious economic and political challenges. The country’s human capital is arguably the weakest in Asia outside East Timor. The currency is likely overvalued. The military consumes as much as two-thirds of the budget, leaving little for infrastructure and education. Inflation is structurally high. In contrast to China or Vietnam, there is no prosperous 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. The 2015 general election seems an especially risky event, as only then will the military be faced with the prospect of losing control of the government.

Few stocks with Myanmar exposure Although a number of NJA companies plan to invest in Myanmar, we identify only two groups—ITD and the PTT group—as having business ties of any size with the country in the next five years. We consider ITD unattractive due to its ongoing losses, while Myanmar’s potential appears too limited to justify buying PTT or its subsidiaries.

1-2 decades away from investability Myanmar is at least 1-2 decades away from being a significant destination for equities investors. Myanmar is a decade or more behind Vietnam, which itself is probably a decade away from being as significant as the Philippines as a stock market. Private equity investors could find much of interest in Myanmar in the next three to five years, but secondary market investors likely have a long wait.

Natural gas, rapid reform and the likely lifting of sanctions make Myanmar interesting…

…but it is still too small to matter economically to its neighbours

Daunting economic and political challenges

Only three NJA stocks with significant Myanmar exposure

1-2 decades away from investability for secondary market equities investors

20 April 2012


Exciting developments Rapid 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 reform Myanmar is still not democratic, but one academic we spoke to has described the pace of political reform as “dizzying.” Over the past two years, Myanmar has acquired a civilian leadership, released nearly a thousand political prisoners, allowed pro-democracy leader Aung San Suu Kyi to run in elections and eased controls on the media. The main opposition party, the National League for Democracy (NLD) won 43 out of 45 seats contested in the 1 April bye-elections, which independent monitors from EU and the US judged free and fair. Though we will note in a later section that political risk remains considerable, the trajectory of reform is highly positive.

Sanctions on their way out For much of the past decade, the US and EU have maintained a variety of sanctions ranging from visa restrictions and asset freezes of politically important Burmese, to a US ban on imports from and new investment in Myanmar. The US ban on exports of financial services to Myanmar effectively excludes it from the international clearing system for the US dollars (Figure 8)

Figure 8: The current sanctions regime Sanctioning entity Sanction

USA

No new investment by US individuals or companies

Ban on all imports from Myanmar

Ban on export of financial services to Myanmar

Ban on import of precious stones, even if processed in third country

Visa bans and asset freezes on prominent leaders and businessmen

Tourist advisories

Informal discouragement of IMF and World Bank assistance

EU

Ban on imports of timber, metals and minerals, precious stones

Ban on exports of equipment relevant to these industries

Denied access to preferential tariff rates

Visa bans and asset freezes on prominent leaders and businessmen (recently lifted)

Source: International Crisis Group

The successful 1 April bye-elections are leading to an easing of sanctions. The US will reopen its aid office, allow senior Myanmar leaders to visit the US and cease blocking the activities of multilateral development agencies. A full lifting of sanctions would require congressional legislation, but in the short run the Obama administration plans to waive sanctions on some economic sectors such as finance, agriculture, tourism and telecommunications. By suspending rather than lifting sanctions, the US hopes not only to reward the government for the free and fair April elections, but also to retain leverage in case conservatives seek to block further reform. The EU will begin consideration of its sanctions next week and will likely take a similar approach.

Companies might be reluctant to make major investments while the re-imposition of suspended sanctions remains possible, but the permanent removal of sanctions would potentially be a major event. Sanctions have effectively blocked any new investment from US firms, and even European and Japanese firms have been reluctant to invest due to reputational risk. Just the prospect of sanctions being removed has evoked tremendous interest from investors in the months leading up to the elections.

Several reasons to take note of Myanmar

Rapid political reform

Sanctions are easing

20 April 2012


Important economic reforms The new civilian government has already implemented one economic reform, and more could follow. The most significant reforms enacted and under consideration include:

■ Currency unification: Until this month, Myanmar was burdened with multiple exchange rates. The official kyat rate, MMK6.4/USD, was more than 100 times the market rate of MMK818/USD. The unrealistic official rate has discouraged foreign investment and created opportunities for corruption. With the help of the IMF, the government this month moved the official rate to a level close to the market rate. It is not entirely clear how the new currency mechanism will work, but a managed float like China’s appears most likely.

■ Central Bank reform: The Central Bank has historically been under the control of the Finance Ministry. The Wall Street Journal has reported that the government is considering legislation to give the bank more independence, but we do not know whether it would get full policy independence or merely operational independence.

■ Telecommunications licensing: At present, cellular penetration is just 1% and cell phones can cost 10 times or more than in other countries. Blackberries and foreign cell phones do not work in Myanmar (Figure 9). To improve the telecommunications infrastructure, the government is considering issuing operating licences to foreign companies.

Figure 9: Cell phone penetration rates

143

120 118 113100 97

92

65 63

1

168

0

30

60

90

120

150

180

HK SG TW MY TH KR ID PH IN CN My anmar

(%)

Source: International Telecom Union, Credit Suisse estimates

■ Financial sector reforms: The Central Bank governor told The Wall Street Journal that 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 is getting good advice. The government is consulting closely with the IMF on currency unification and other issues, and listening carefully to the recommendations of private economists and think-tanks. This government “gets it” on the economy, in our view.

Easy wins Political 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, these funds could be diverted to infrastructure and education. Please note that budget numbers have not been published since 2000, so only estimates are available.

Exchange rate unification has already been implemented, and reforms to the central bank, the telecommunications sector and financial sector under consideration

Reduced military expenditures and less grandiose white elephant projects represent easy wins for the economy

20 April 2012


2. Fewer white elephants: The previous military government had a penchant for extravagant, wasteful projects. IMF estimated that construction of the new capital, Naypyidaw, cost 2.4% of GDP, while one academic observer places the price tag at US$3–5 bn, or 10% or more of GDP. No outsider knows for sure why the capital was moved from Yangon, but some observers believe it was due to fears of a US invasion or for astrological and numerological considerations. Under a democratic government, taxpayers would probably prevent such wastage.

Moderately large population Myanmar’s population is big enough to form a significant domestic market at some point in time. Because a census has not been performed since 1983, no one knows the true population of Myanmar, but estimates range from 44 mn (Ministry of Home Affairs) to 59 mn (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 and Indonesia and considerably smaller even than Vietnam, the Philippines and Thailand, but larger than Korea, Taiwan or Malaysia (Figure 10).

Figure 10: Mid-sized population

1,349 1,203 240

95

64

53 49

2923

7 5

0

25

50

75

100

125

150

CN IN ID PH TH My anmar KR MY TW HK SG

(mn)

Source: National Statistical Office of Myanmar, Credit Suisse estimates

Significant gas reserves Natural gas is an additional point of interest. Although current production ranks far behind Malaysia, Indonesia and even Thailand (Figure 11), it rates better as an exporter (Figure 12). Because the economy is so undeveloped, internal consumption is low and exports high. Myanmar gas is particularly important for neighbouring Thailand, which imports 20% of its gas from Myanmar.

Mid-sized population

A significant gas exporter

20 April 2012


Figure 11: Natural gas production not high… Figure 12: …but gas exports significant

3,120

2,343

892

486 453330

149

0

500

1,000

1,500

2,000

2,500

3,000

3,500

ID MY TH Brunei My anmar VN PH

('000 Terjoules)

1,489

1,037

373 326

0

300

600

900

1,200

1,500

1,800

ID MY Brunei My anmar

('000 Terjoules)

Source: International Energy Agency (IEA) Source: IEA

Expansion is on the way. Two new pipelines are planned, one to southern China from the Shwe field of western Myanmar scheduled to open next year, and the other to Thailand, to supplement 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 rise

0

300

600

900

1,200

1,500

1,800

2,100

2,400

01 02 03 04 05 06 07 08 09 10 11 12E 13E 14E 15E 16E 17E 18E 19E 20E

(mmcfd)

Source: Wood Mackenzie

Gas is by far Myanmar’s most important product. In 2010, gas accounted for 43% of total exports and at market exchange rates, it likely is the most important source of revenue for the government, though the lack of published budget numbers makes it difficult to confirm.

It’s in East Asia Perhaps the biggest advantage Myanmar has is geography. Every East Asian country other than autarchic North Korea has either already reached developed status or has had an early period of rapid growth. Even Cambodia and land-locked Laos are now enjoying high growth. In the early stages of development, where Myanmar now finds itself, it seems that 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 acquisitive population the freedom to pursue their dreams. We would be surprised if Myanmar did not witness at least a short period of surging GDP.

Simple geography—i.e., location in East Asia—perhaps its biggest plus

20 April 2012


But starting from very small base Unfortunately, Myanmar remains too small to move the macro needle of any regional market for a decade or longer. We will discuss in a later section the opportunities for a handful of Thai firms with the potential to reap significant gains in Myanmar, but the country’s economic significance is still limited.

A small economy No one knows the true size of the Myanmar economy, but under any reasonable estimate it remains very small.

First, consider the difficulty of measuring the economy. GDP for 2010 is reported at MMK40.5 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 rate it equals US$50 bn. As will be discussed later, even this figure appears exaggerated, and IMF’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. It would only be 14% the size of Thailand, 19% the size of Malaysia and 23% the size of Philippines. India’s GDP is 35 times bigger, and China’s 130 times (Figure 14). Myanmar would need to grow at 10% per year for 16 years just to reach the Philippines’ current size.

Figure 14: Tiny economy

5,862

1,595

1,012

708

430319

239 223 223 200104

45

0

300

600

900

1,200

1,500

1,800

CN IN KR ID TW TH MY HK SG PH VN My anmar

(US$ bn)

Source: International Monetary Fund (IMF), CEIC

Based merely on considerations of size, Myanmar’s domestic market appears too small to boost 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 new exporters from Western countries further diminish the country’s significance for Thai exporters. Thailand’s exports to Myanmar are only about 1% of total Thai exports and less than one quarter of exports to Malaysia. The four million inhabitants of Laos take roughly as much of Thailand’s exports (Figure 15).

Myanmar is still too small to matter economically for its neighbours

Economy only about one-tenth size of Thailand’s

Takes only 1% of Thailand’s exports, i.e. less than one-quarter of what Malaysia takes

20 April 2012


Figure 15: Thai exports by destination—Myanmar takes only 1% of the total

0

5

10

15

20

25

30

CN EU JP US

MY

SG ID VN PH

Cam

bodi

a

Mya

nmar

Laos

(US$ bn)

Source: BOT

Low purchasing power Low purchasing power further limits Myanmar’s potential as an export market. The IMF gives Myanmar the second-lowest per capita GDP on a PPP basis in Asia after Afghanistan. Myanmar ranks poorly not just on an Asian scale, but on an African measure as well (Figure 16). A population this poor spends a large amount of its income on subsistence and has little left for discretionary purchases of imported goods.

Figure 16: Per capita GDPs on PPP basis—poor even by African standards

0

10,000

20,000

30,000

40,000

50,000

60,000

SG HK

TW KR

Equa

toria

l Gui

nea

Bots

wan

a

Gab

on MY

Sout

h Af

rica

TH CN

Nam

ibia

Ango

la

Swaz

iland

Rep

ublic

of C

ongo ID PH

Cap

e Ve

rde IN VN Pak

Laos

Nig

eria

Cam

eroo

n

Cam

bodi

a

Gam

bia

Sene

gal

Keny

a

Côt

e d'

Ivoi

re

Cha

d

Zam

bia

Gha

na

Bang

lade

sh

Tanz

ania

Beni

n

Burk

ina

Faso

Leso

tho

Mya

nmar

Afgh

anis

tan

(US$)

Source: IMF

Per capita GDP low even by African standards

20 April 2012


Extraordinary logistical challenges The difficulty of getting goods to customers further complicates the picture for potential exporters to Myanmar. Infrastructure is primitive and traditional markets and shops still dominate the retail sector. Outside of Yangon, the capital and one or two second-tier cities, the vast majority of purchases are of local goods sold in local wet markets or small shops.

High growth still a hope, not a reality Although we expect growth to improve with an easing of sanctions and implementation of reforms, Myanmar’s GDP has yet to show rapid expansion. Rapid growth remains a potential, not a reality.

The official numbers indicate that Myanmar has already been generating great growth for over a decade. The government reported 1999–10 GDP CAGR of 12.1% and double-digit growth 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 since 1998.

Figure 17: Officially reported real GDP growth too good to believe

100

200

300

400

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(Index ed)

My anmar China

Source: ADB

Almost certainly, however, the official numbers exaggerate both the level and growth of GDP. Consider these data points:

■ Electricity consumption declined in 2010 and was flat over 2005–10 (Figure 18). The large 2010 decline raises questions about the quality of the electricity data, but that also raises questions about the GDP numbers.

■ From 1998 to 2010, nominal GDP saw a 30% CAGR on our calculations, but imports grew just 6% p.a.

■ Investment as a percent of GDP is just 15%, roughly half of Korea’s and one-third of China’s (Figure 19).

Goods hard to get to market for foreign firms

Official numbers give higher growth than in China

But power consumption, import and investment numbers indicate GDP exaggerated

20 April 2012


Figure 18: Weak electricity consumption contrasts with

strong reported GDP

Figure 19: Investment as % of GDP—low number calls

into question accuracy of official GDP

4,353 4,355

4,438

4,701

4,579

4,936

4,000

4,250

4,500

4,750

5,000

2005 2006 2007 2008 2009 2010

(mn kw h)

43 42

36

29

2522 22 21 21

15 15

27

0

10

20

30

40

50

CN VN IN KR TH ID MY

TW HK

SG PH

Mya

nmar

(%)

Source: Asian Development Bank Source: Asian Development Bank (ADB), Ministry of National

Planning and Economic Development

The latter point seems especially telling. Every Asian country that has enjoyed extended periods of 8%+ growth has had investment rates well above 20%, and most other than India have had 30% or more. The 15% officially reported number would be barely sufficient to cover 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 the Pacific estimates growth in 2007/08 and 2008/09 at 5.5% and 2.0%, respectively, while IMF calculates rates at 5.5% and 4.5% respectively. The Economist Intelligence Unit estimates 3.4% and 0.9%, respectively (Figure 20). We consider these figures as good as any 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 numbers

5.5 5.5

3.4

2.0

4.5

0.9

0

2

4

6

8

Economic and Social Surv ey of Asia

and the Pacific

IMF The Economist Intelligence Unit

(%)

2007/08 2008/09

Source: The Economic and Social Survey of Asia and the Pacific, IMF, The Economist Intelligence Unit

Actual GDP growth probably only at 3–5%

20 April 2012


Less important than Vietnam or Bangladesh To put Myanmar’s significance in perspective, consider two of its peers—Vietnam and Bangladesh. Compared with Myanmar, Vietnam’s population is 67% larger, its GDP is 128% bigger and its per capita GDP is 117% higher, yet Vietnam took only 3% of Thailand’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 Bangladesh conferences (Figure 21Error! Reference source not found.).

Figure 21: Myanmar smaller and poorer than Vietnam and Bangladesh Bangladesh Myanmar Vietnam

Nominal GDP (US$ bn) 106 45 104

GDP per capita based on PPP (US$) 1,585 1,448 3,143

Population (mn) 164 53 88

Source: International Monetary Fund (IMF)

Much less important than Vietnam or Bangladesh, so why the hype?

20 April 2012


Major challenges remain Although we believe a short growth surge is likely, Myanmar faces serious economic and political challenges to overcome if it is to achieve sustainable growth. The country is starting in a deeper hole than previously closed economies that have opened up such as China, Vietnam and Cambodia. It would be perilous to assume that Myanmar will necessarily follow their paths to higher growth.

Human capital deficit Myanmar’s human capital deficit is daunting. Two generations grew up in isolation from the outside world starting from 1962 when a new military government turned the country to autarchic socialism, and the dictatorship closed universities for prolonged periods to stifle student activism. Investment in education has been woefully inadequate. Myanmar spends 1.3% 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 in Myanmar are over 50.

Figure 22: Public expenditure on education as % of GDP

7.5

5.0

4.44.1 3.9

3.2 3.1

2.51.9

1.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

MY TH IN KR HK PH SG ID CN My anmar

(%)

Note: All data for 2001 with the exception of China (1999) and India (2000); Source: Worldbank

Inadequate infrastructure The primitive telecommunications system is emblematic of a national infrastructure unable to support a manufacturing export economy. Blackouts are frequent in cities and much of the countryside goes dark at night.

Excessive military spending Excessive military spending explains much of the under-investment in education and infrastructure. The military takes two-thirds of the national budget according to one estimate, compared with 5–10% in other ASEAN economies (Figure 23). Reduction of military spending will likely require both continued progress in democratisation and sustainable peace agreements with ethnic insurgents on the borders.

Country still faces huge challenges

Large human capital deficit

Infrastructure inadequate for manufacturing

Military budget crowds out infrastructure and education expenditures

20 April 2012


Figure 23: Military spending as % of total budget is huge

66.0

9.5 8.95.5

0

15

30

45

60

75

My anmar TH MY ID

(%)

Source: World Bank, Harvard Ash Centre

Overvalued currency Although unification of the multiple exchange rates is a major positive, an excessively strong currency poses serious risks. Gas export receipts, sale of state assets requiring repatriation of capital flight funds and investors arbitraging high local interest rates have helped the market kyat rate rise 77% the past five years (Figure 24). In a sense, the currency appreciation is a healthy sign of increasing confidence, but the strong kyat threatens Myanmar with the Dutch Disease. As happened to the Netherlands after the discovery of oil in the North Sea in the 1960s, Myanmar faces the risk that a strong kyat resulting 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 under heavy pressure at the current exchange rate. The country’s few manufacturers are struggling to survive.

Figure 24: Strong market rate for kyat a problem

550

800

1,050

1,300

1,550

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(Ky ats/US$)

Source: The Irrawaddy News magazine

Currency appears overvalued

20 April 2012


Inefficient financial system Myanmar’s banking system fails to provide some of the most basic financial services. Few in Myanmar trust banks with their savings, depriving institutions of deposits, and banks engage in little lending. Excessively strict LDR rules prevent most farmers from obtaining credit, and repressive liquidity requirements force banks to keep most of their assets in government bonds. Credit card and ATM transactions are still almost entirely impossible to conduct in Myanmar.

Structurally high inflation Myanmar has a history of high inflation that could require years of tight monetary policy to wring from popular expectations. Inflation during 2006–11 was 10.7% on a CAGR basis, in large part due to central bank monetisation of public sector debts (Figure 25). Given the fairly slow GDP growth, these are uncomfortably high numbers.

Figure 25: History of high inflation

9.9

1.5

17.9

20.9

0

5

10

15

20

25

2007 2008 2009 2010

(%)

Source: ADB

As in Vietnam, where hyper-inflation in the 1980s left locals with a preference for dollars and gold over dong, a history of demonetisation has left the people of Myanmar distrustful of the kyat as a store of value. The most recent demonetisation was in 1987, when the government 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 the country’s savings are in gold, dollars or stuffed in mattresses.

Conglomerates and uncompetitive SOEs The structure of Myanmar’s corporate sector weighs on prospects. The IMF estimates that SOE losses absorbed 23% of tax revenue in the middle of the last decade. Key SOEs are connected with the military and none could be considered globally competitive. Unwieldy conglomerates dominate the private sector. Even by Asian standards, Myanmar conglomerates are unfocused and concentration of ownership appears undesirably high. Conglomerates acquired much of their assets in a series of privatisations before the 2010 elections. The political opposition has characterised the privatisations as de facto asset-stripping, whereby the military allocated valuable assets to friends. Given the weakness of domestic financial institutions, it will be hard to privatise SOEs without selling them to the existing conglomerates, leading to an even greater concentration of ownership of the economy.

Financial system not providing capital to private sector

High inflation will be hard to wring from the system

Uncompetitive corporate structures

20 April 2012


Bubble risk The success in attracting foreign investment poses perhaps the greatest risk to sustainable growth. The 2006 bubble in Vietnam highlights the dangers of big increases in capital inflows to Frontier Markets with weak financial systems. The inflows led to property bubbles, overvalued currencies and misallocated resources. We fear that Myanmar-mania could lead to a de-stabilising boom and bust.

Political risk remains We are more optimistic about politics than other aspects of the Myanmar development story, 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 supportive We 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, Than Shwe, who resigned as head of state and head of the military-dominated State Peace and Development Council last year. The reformist speaker of Parliament, almost all cabinet members and most of the MPs are also former military officers. The military component in Parliament has voted in favour of various reformist measures, and Than Shwe seems to have genuinely removed himself from day-to-day governance.

Some observers believe that Than Shwe is engineering a transition to partial or full democracy to ensure himself a peaceful retirement. His predecessor, Ne Win, spent his dying 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 future military strongman from punishing Than Shwe and his family.

Business community a possible driver of reform We consider the small but influential business community as another force for reform. Although key SOEs and crony businesses have historically found it profitable to operate under heavy protection against foreign competition, increasingly, businessmen have come to believe that the removal of sanctions and reform of the economy could open exciting opportunities for the domestic sector. We believe that lobbying by local businesses has played a key role in pushing the reform agenda.

But 2015 still an uncertainty Myanmar has come a long way politically over the past 12 months, but it has much farther to go before it can create a stable democracy. So far, the military-dominated government has 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 664 seats in Parliament, and 25% of all seats are still reserved for sitting military officers. The vast majority of the remaining seats are held by the pro-military Union Solidarity and Development Party (USDP). Altogether, forces associated with the military control 80% of the 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 bubble

Considerable political risk remains

Encouraging that military has supported political reforms

Business community also seems supportive

But 2015 elections could be a flash point for renewed instability

20 April 2012


Figure 26: Military still in firm control of the Parliament

NLD

6%

Others

18%

Reserv ed for activ e

soldiers

25%

USDP (Pro military

party )

51%

Source: The Myanmar Union Election Commission

The 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 if they were conducted fairly. We likely will not know if those elections will be free and fair until they are complete. If they are not free and fair, Myanmar could again suffer instability and international sanctions. Some pessimists believe that the military will allow only enough liberalisation to see sanctions lifted and that a later confrontation between conservatives and pro-democracy forces is inevitable.

We tend to agree with the optimists who argue that the democratic genie is wiggling out of the bottle and that at some point reform achieves self-sustaining momentum. However, we see significant risk that back-tracking and renewed confrontation is possible.

Ethnic minority issue unresolved Ethnic minority insurgencies pose an additional political risk. Only 68% of the population is ethnic Burman, with the rest Shan, Karen, Kachin, Karenni, Wa, Royhinga and numerous other ethnic groups (Figure 27). Several dozens of these groups have armed movements and histories of conflict with the military dating back to independence. Most larger groups have 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 to reconcile with minorities, a military offensive against the Kachin late last year raised questions as to whether the army would allow diplomacy to work.

Continuing ethnic conflicts could block full removal of sanctions and keep military spending high

20 April 2012


Figure 27: Ethnic minorities almost one-third of the population

Mon

2%

Indian

2%

Chinese

3%

Other

5%

Karen

7%

Rakhine

4%

Shan

9%

Burman

68%

Source: Central Intelligence Agency (CIA)

The ethnic struggles pose two economic risks. First, the US has linked its remaining sanctions with a resolution of ethnic conflicts. Second, pipelines and logistical links between the 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 faced It would be dangerous to assume that Myanmar will follow the hugely successful path of China, or even the moderately successful economic career of Vietnam. We note significant advantages that those countries enjoyed vis-à-vis Myanmar:

(1) Overseas communities: Vietnam benefited from the return and investment of overseas Vietnamese in America, while overseas Chinese in Hong Kong, Taiwan and Southeast 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 capitalists who were able to use their business skills once the communist interlude ended. Vietnam’s south had been continually capitalist until the 1975 unification of the country, and southerners had to wait only about 13 years before reforms again allowed private business to operate. Chinese capitalists spent about 25 years in Hong Kong or Taiwan or lying low on the mainland, but re-emerged as active mainland investors 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 colonial era business class were forced to leave after independence in 1947, and a big domestic capitalist class never developed. The imposition of autarchic socialism during 1962–88 kept private businesses extremely small and uncompetitive.

(3) Technical skills: Although grossly inefficient, the Chinese communists’ effort to build heavy 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 good science and technology institutes and skilled workers. Although China and Vietnam cut themselves off from the West, they drew heavily on technical assistance from the Soviet Union. Myanmar, from 1962 to 1988, cut itself off from everyone.

Growth, but from very low base We believe that Myanmar can accelerate growth, but the challenges it faces may keep growth from reaching the take-off levels achieved by China, Thailand, Malaysia and others, and could limit sustainability. Because the base is so low, Myanmar needs at least one to two decades of rapid growth to achieve enough size to matter to neighbouring economies, or to have a stock market of meaningful size.

Unlike China or Vietnam, Myanmar lacks overseas community who can provide capital and expertise

Growth to accelerate, but from very low base

20 April 2012


Few stocks with Myanmar exposure Myanmar remains too small to have a significant impact on most NJA stocks. We identify only three stocks likely to have significant investments in or sales to Myanmar over the next five years: Italian-Thai Developments (ITD.BK, Bt3.52, UNDERPERFORM, TP Bt2.50), PTT Exploration & Production (PTTE.BK, Bt173.00, UNDERPERFORM, TP Bt175.00) and PTT Public Company Limited (PTT.BK, Bt335.00, NEUTRAL, TP Bt376.00). The first we consider a poor investment and non-Myanmar events will matter most for the latter two.

Dawei and Italian-Thai Development ITD is by far the NJA stock with the greatest Myanmar potential. ITD’s Dawei investment is a potential game-changer for the stock.

The Dawei project would create a land bridge linking Myanmar with Thailand and by extension, Indochina. Dawei is located in the southernmost region of Myanmar, 300 km west 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 250 sq km area. Eventually, oil and gas pipelines to Thailand would be added. The heavy industries would include an integrated steel mill, a petrochemicals complex and a fertiliser plant. 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 than passage through the Straits of Malacca and Singapore. Originally, 4,000 MW of coal-fired electric capacity was planned, but local environmentalist opposition has forced the government to now plan on gas-fired power.

Figure 28: Dawei industrial and logistics project

Source: Bangkok Post

Only three NJA stocks with significant Myanmar exposure

Dawei a potentially game-changing project for ITD, but prospects for both the project and ITD are clouded

20 April 2012


Figure 29: Investment plans on Dawei Southern deepwater port

4-Lanes Toll Highway link to Thai border

Border check-point

Road to Dawei Airport

93 mn m3 reservoir

Coal-fired power plant

Roads network within the industrial estate

Irrigation systems

Waste water treatment system

Townships

Residential areas

First Phase (2011–2015)

Areas for one-stop governmental services

Further development of roads network and water system within the industrial estate

Expansion of Toll Highway link to Thai border from 4-lanes to 8-lanes

Commercial complex Second Phase

(2013–2018)

Improvement of water channels

Northern deepwater port

Further development of roads network and water system within the industrial estate

Railway network

Electricity grid lines

Third Phase (2016–2020)

Gas and Oil pipelines to Thailand

Source: Office of the National Economic and Social Development Board (Thailand)

For ITD, Dawei is potentially huge. The Myanmar government gave ITD exclusive rights for 75 years to develop Dawei, which it plans to do through Dawei Development Corporation (DDC). ITD hopes to sell 49% of DDC and retain 51% ownership. A local Myanmar investor plans to take 25%. The total investment cost for Dawei has been estimated at US$8 bn. Apart from the special zone itself, ITD has also won a contract from the Myanmar government to build the road link with Thailand, and a separate major power project is under consideration. The project has attracted interest from overseas investors in 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 becomes a reality:

(1) ITD: ITD seems a weak vehicle to spearhead such a massive effort. ITD’s book value is just US$262 mn, and it has lost money for four straight years (Figure 30). We are not sure if it is financially capable of leading the project.

(2) Political opposition: Environmentalists have already blocked the coal-fired electrical plants, and we cannot rule out the possibility that NGOs and locals will oppose construction of polluting industrial plants as well.

(3) Ethnic minorities: The pipeline and highway and rail links pass through ethnic Karen territory. The main Karen insurgent group, the Karen National Liberation Army, has complained that locals are not being properly compensated. Fighting near the planned road has been common.

(4) Not what Myanmar most needs: Myanmar should certainly exploit its potential as a logistics 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 relative to ITD’s balance sheet

Dawei’s obstacles: ITD’s financial weakness, political opposition, ethnic conflicts

20 April 2012


Even 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 maintain an UNDERPERFORM rating on the stock.

Figure 30: ITD earnings—losses in five of last six years

-1,171

1,135

-2,288

-1,595

-1,055

-1,698

-3,000

-2,000

-1,000

0

1,000

2,000

2006 2007 2008 2009 2010 2011

(Bt mn)

Source: Company data

PTTEP and gas prospects PTTEP is the NJA company with the greatest current Myanmar exposure and the greatest potential for new business. Even here, though, Myanmar’s potential for accelerated growth is a relatively small factor for the stock.

PTTEP has done businesses with Myanmar for over 20 years. In 2011, Myanmar accounted for 8% of PTTEP’s sales and 30% of its reserves. PTTEP plans 20% of its total capex for the next five years in Myanmar.

Figure 31: PTTEP's exposure to Myanmar DCQ (mmscfd)

Project name Stake (%) Export to

Thailand Domestic

Note

Yadana 25.5 565 150 Production

Yetagun 19.3 460 n/a

Development Zawtika (M-9 and

part of M-11) 80 240 60

Targets first gas at end-2013, US$4 bn investment

M-3 100 Second drilling program in 4Q12

M-11 100 To reduce stake to partners within 2012

PSC-G 100 Exploration

EP-2 100 Expected licenses to be officially awarded in 2Q12

Source: Company data, Credit Suisse estimates Existing projects

PTTEP has two large existing offshore projects in Myanmar, Yadana and Yetagun. PTTEP owns 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 the concessionaires. Yadana and Yetagun are the only two viable projects close enough to Thailand to pipe economically.

PTTEP has greatest current Myanmar exposure of any NJA company under coverage

Yadana and Yetagun the only two major producing offshore projects in Myanmar

20 April 2012


Figure 32: Ownership structures of Yadana, Yetagun and Zawtika projects

TOTAL, 31.2 TOTAL, 40.9

TOTAL, 20.0

Chev ron, 28.3

PTTEP, 80.0

PTTEP, 19.3PTTEP, 25.5

Chev ron, 20.5

MOGE, 15.0 MOGE, 19.3

0

25

50

75

100

Yadana Yetagun Zaw tika

(%)


Figure 33: Yadana—80% of output sold to Thailand Figure 34: Yetagun—100% of output sold to Thailand

Source: Company data Source: Company data

PTTEP’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 stage

There are positive exploration results with flow of gas and condensate in the first round of drilling in 2011 of the M3 Block in the Gulf of Maottama. The second drilling is scheduled in 4Q12. If the second drilling is successful, PTTEP has committed to drill three more wells in 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 in Myanmar. Due to the shallow water and shorter distance to shore, PTTEP estimates that the project would be economical with a reserve size of 1.5Tcf or more, assuming 200 mmscfd volume over 20 years. If the exploration outcome is positive, management expects the first gas in 2016. Based on previous projects in Myanmar where delays were typical, 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 the Gulf of Moattama, is a deepwater acreage which PTTEP plans to partly divest to partners who are more experienced in offshore drilling.

Zawtika project to start at end-2013

M3—second round of exploration drillings in 2012 to confirm positive find

Output likely to be sold to Myanmar

M11—PTTEP plans to dilute stakes to partner with deepwater experience

20 April 2012


Figure 35: PTTEP’s M3 and M11 blocks


In addition to M3 and M11, in December 2011 Myanmar’s Energy Ministry declared PTTEP 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 target dates in February. Once the PSCs are signed, planned exploration activities will follow. If there is a positive find, we expect the project start-up to be in 2018 at the soonest.

Future opportunities

Myanmar could offer more blocks. PTTEP expects to see more opportunities for deepwater blocks off the Rakhine and Tanintharyi coasts and more blocks (both deepwater and shallow water) in the Moattama offshore area.

How Myanmar’s growth prospects fit in

PTTEP’s existing production and the new Zawtika field are piped to Thailand and thus not dependent on economic events within Myanmar. Only M3 and other possible new ventures would benefit from accelerated growth in Myanmar. Geography and size make gas from those projects uneconomic for export to Thailand or China, and thus they would benefit from growth in domestic Myanmar gas demand.

In conclusion, although Myanmar gas is highly important to PTTEP, the country’s economic development matters much less.

PTT—limited downstream opportunities PTT also could invest in projects selling into Myanmar’s domestic market, but options could be limited. PTT expressed interest in investing in the planned 4,000MW coal-fired power plants in Dawei, but, as noted, opposition from environmentalists forced the government to scuttle the project. Opportunities for development of gas-based petrochemical investments in Myanmar also seem limited as Myanmar’s natural gas so far has been dry with no ethane or propane content. As such, there is no opportunity to recreate PTT’s complex in Thailand, which takes wet gas from the Gulf of Thailand. Gas from 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, if commercialisation proved feasible, CNG, refineries, fertiliser production and methanol plants. CNG is widely used in Myanmar with 45 refuelling stations, with plans to install more stations along the domestic pipeline corridor.

PTTEP currently holds 100% of both M3 and M11 blocks

Two more onshore exploration rights to be signed

More bidding to come

Myanmar an important source of gas for PTTEP, but growth prospects of the country matter relatively little

Limited investment options for PTT parent since most Myanmar gas is dry

20 April 2012


Under any realistic scenario, we expect Myanmar to provide less than 5% of PTT parent’s revenues for 5–10 years.

Credit Suisse’s energy analyst Poom Suvarnatemee discusses the significance of Myanmar for PTT and PTTEP in greater detail in Valuing the Myanmar Hype.

Nothing else of consequence Besides ITD and the PTT group, we do not expect any other NJA countries to do significant amount of business with Myanmar over the next five years. A number of companies are looking at Myanmar for exports or investment, but the contribution to revenues for none is likely to exceed 1–2% for several years, or much, much longer.

Myanmar unlikely to provide more than 5% of PTT parent revenues for 5–10 years

No other NJA firms have significant business interests in Myanmar

20 April 2012


1-2 decades away from investability GDP growth looks set to accelerate, but the stock market is likely 1-2 decades from being big enough to merit international investor attentions. In the mean time, the country will be of greatest interest to private equity funds and FDI investors.

Only two companies on OTC Myanmar’s stock market has only two listed companies. The market is OTC and trades are recorded on a whiteboard in a one-room exchange. Daiwa Securities hopes to help the country set up a new exchange, but the main factor limiting Myanmar’s emergence as an investable market is not the lack of a platform, but the underdevelopment of the economy and corporate sector. It will take decades for both to reach a state of development sufficient to support a liquid market.

Vietnam precedent discouraging Vietnam’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 of investors to consider. Total trading on Vietnam’s two markets averaged just US$34 mn/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/day

0.90.9

0.8

0.7

0.5 0.5

0.4 0.4 0.4

0.3

0.0

0.3

0.6

0.9

1.2

STB VIC HAG FPT VCB MBB EIB VNM BVH MSN

(US$ mn)

Source: Bloomberg

Possible candidate for private equity For the foreseeable future, there will be very few opportunities for secondary market investors, but Myanmar could be of interest to private equity funds. Although Vietnam is still 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 the Vietnam path, a property bubble could also provide some trading opportunities, but foreigners will likely find it difficult to exploit. Once sanctions are fully lifted, we would also expect the government to issue a sovereign bond, which could prove of interest to fixed income investors.

Driven by global liquidity As with frontier markets in general, global liquidity will likely matter as much as events on the ground for interest levels in Myanmar. Given the rapid pace of political reforms, we are not surprised that investors are paying attention to the country, but if risk aversion globally increases, we would expect interest levels to drop sharply, even if reforms continued.

At least 1–2 decades from having investable secondary equities market

Only two companies in the OTC market

Myanmar’s equities development is 10–20 years behind Vietnam, and Vietnam is 10–20 years behind Philippines

Best opportunities for foreseeable future in private equity

Surging interest in Myanmar is a creature of excess global liquidity

20 April 2012


Companies 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 Appendix Important Global Disclosures Dan 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 his or 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.BK ITD.BK Closing

Price Target

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O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

20 April 2012


3-Year Price, Target Price and Rating Change History Chart for PTTE.BK PTTE.BK Closing

Price Target

Price

Initiation/ Date (Bt) (Bt) Rating Assumption 18-May-09 118 101 30-Jul-09 138 132 2-Sep-09 138.5 130 10-Sep-09 147.5 148 28-Oct-09 151.5 138 U 16-Nov-09 138 136 12-Jan-10 148.5 141 18-Jan-10 149 149 1-Feb-10 135 136 27-Apr-10 150 155 29-Apr-10 149 157 4-Jun-10 147.5 152 22-Jun-10 149 154 13-Jul-10 144 R 24-Aug-10 143.5 U 31-Aug-10 143.5 152 21-Sep-10 144.5 154 28-Oct-10 171 156 4-Jan-11 167 169 4-Feb-11 178 183 25-Jul-11 182.5 163 28-Nov-11 159 147 10-Jan-12 181 156 12-Mar-12 179 169

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3-Year Price, Target Price and Rating Change History Chart for PTT.BK PTT.BK Closing

Price Target

Price

Initiation/ Date (Bt) (Bt) Rating Assumption 19-May-09 218 163 14-Jul-09 222 185 17-Aug-09 235 227 2-Oct-09 261 252 28-Oct-09 251 280 N 2-Dec-09 225 273 3-Dec-09 227 247 8-Mar-10 235 261 4-Jun-10 251 283 13-Aug-10 250 285 21-Sep-10 287 299 15-Nov-10 332 320 4-Jan-11 330 346 21-Mar-11 343 362 13-Jan-12 322 374

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The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's 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 perceived risk) 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 total return 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 industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector.

20 April 2012


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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 being affected by the cost of raw materials, especially steel, cement and oil. In addition, ITD has invested about B3bn in a Spacial Prospecting license for potash 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 current forward curve of oil prices. Risks: Risks to PTTEP's target price of Bt175/share are 1) a strong Baht exchange rate; 2) oil price fluctuation; 3) start-up of new fields, especially Arthit 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 have recently 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 economy and therefore gas demand growth, and 5) construction risks on new projects. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target 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 of Credit 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 Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

20 April 2012


The 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.

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For Thai listed companies mentioned in this report, the independent 2010 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Italian-Thai Developments(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. Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan 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 important disclosures 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 analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications 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 www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

20 April 2012 Asia Pacific/Thailand

Equity Research

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