Outbound investment: Local corporates move to expand in regional markets and further afield

Overseas investments by Thai corporates have grown significantly, overtaking inward foreign direct investment (FDI) for the first time in 2011. Encouraged by both the Bank of Thailand (BOT) and the government, cash-rich Thai firms leveraged the strengthening baht (until May 2013) to expand both regionally and further afield in developed markets, through both cross-border mergers and acquisitions (M&As) and greenfield investments. Small and medium-sized enterprises must now follow suit to achieve the scale necessary to compete in the ASEAN Economic Community from 2015 onwards. “This is probably the most exciting times for Thai corporates to invest abroad to secure resources in both raw materials and know-how, expanding customer base, acquiring distribution channels, and broadening markets,” BOT governor Prasarn Trairatvorakul told an investment conference in August 2013. Although Thailand still requires inward capital flows, its firms are emerging as internationally competitive players in sectors such as natural resources, plantations, beverages, real estate, hospitality and health care.

Rising Tide

While Thai direct investment (TDI) has trended consistently upwards over the past decade, rising from $500m in 2005 to $3bn in 2007 and $4.5bn in 2010, outflows have grown exponentially thereafter, rising 83.9% in 2011 to $8.2bn and 44.9% in 2012 to $11.9bn according to BOT figures. By mid-2013 some 41 Thai firms had invested abroad, according to the Board of Investment (BOI). The appetite of Thai firms was particularly noteworthy amidst a 17% slump in global FDI flows in 2012 and outpaced the 3% growth in outward investment by ASEAN as a whole, according to figures from the UN Conference on Trade and Development (UNCTAD). Late 2013 marked a slowdown in outward investment however, amidst outflows from emerging economies and a slumping baht, with TDI down to $5.5bn in the year leading to September 2013, from $7.8bn in the same period in 2012. At the same time, the BOT figures do not capture the full picture, given the offshore sources of financing for large acquisitions by Thai Charoen Corporation (TCC) Group and Charoen Pokphand Group in 2012. “Outward foreign direct investment (FDI) by Thai companies has been larger than inward FDI for the past three years,”

Christopher Bruton, director for Thailand and Indochina at Dataconsult, told OBG, a trend which is expected to continue going forward. “This is a sign of Thai firms seizing opportunities in high-growth economies in the region and farther afield.”

State Encouragement

Authorities have encouraged the trend of rising outflows of both direct and, more recently, portfolio investments. In 2012 the BOT announced its “Capital Account Liberalisation MasterPlan” to support outflows, in a bid to relieve upward pressure on the baht and encourage firms to diversify geographically, particularly to neighbouring countries.

This builds on gradual relaxation of rules on capital outflows from 2010. The Ministry of Finance abolished the $200m-a-year cap on outward investment and lending, and relaxed approvals for outward investment to deals over $50m. Alongside measures allowing individuals to purchase foreign property up to $10m, up from $5m previously, the Bank of Thailand also raised the cap on foreign portfolio investments to $20m and scrapped the $50m ceiling on firms’ offshore portfolio investments. The government has also sought to support offshore-investing firms through the BOI, which established an Overseas Investment Promotion Division in 2012 and an associated Investor Centre in 2013.

The new BOI investment strategy, announced in 2013 and due for enactment in 2015, also foresees support for outbound investment, a first for Thailand’s investment promotion strategy. The state-owned Export-Import Bank, meanwhile, aims to expand its insurance and credit support to Thai firms trading abroad, particularly regionally. The BOI is encouraging firms in labour-intensive sectors such as textiles to invest in neighbouring countries to benefit from market access advantages, partnering with investment promotion agencies in Cambodia, Laos, Myanmar and Vietnam (CLMV), Indonesia and Singapore to promote Thai investment. Whereas Thailand’s preferential market access to the US and EU under the Generalised System of Preferences (GSP) is ending in 2014, CLMV are expected to retain the GSP until 2018 at least. Growing investments in CLMV, with the stock of TDI rising from $8.24bn in 2007 (7.7% of TDI) to $28.89bn in 2011 (16.4%), according to BOT figures, have also driven growing cross-border trade.

Energy Targets

Since 2011, TDI has been driven by cross-border M&As, which reached $5bn and $5.46bn in 2011 and 2012, rather than Greenfield investment, which dropped to $4.44bn and $2.41bn in the two respective years, down from a peak of $8.3bn in 2009. The target markets for acquisitions have also broadened both to the ASEAN region, which accounted for 19% of TDI in 2012, according to Bangkok Bank, and to developed markets like Europe (15%), the US (8%) and Japan (7%). Other key destinations for TDI in 2012 were Hong Kong (14%), the Cayman Islands (13%), Mauritius (5%) and China (5%). Large corporates like state-owned PTT, Siam Cement Group, Indorama, Charoen Pokphand and Thai Union Frozen have led TDI in the past decade. The exploration and production wing of PTT has been the most active, securing greenfield assets in Myanmar, Australia, Canada and Indonesia, with foreign supplies accounting for 20% of its output in 2013. In mid-2012, however, PTT Exploration and Production outbid rival Royal Dutch Shell to acquire 91.37% of London-listed Cove Energy, an independent holding a stake of 8.5% in the Rovuma gas field in Mozambique, for $1.9bn. While PTT’s petrochemical subsidiary PTT Global Chemicals has expanded to Vietnam, a new subsidiary, PTT Green Energy, was incorporated in 2007 to manage investments in oil palm plantations in Indonesia. Thai investors have also been active in non-oil energy, including thermal-coal producer Banpu, which raised its stake in Australia-listed Hunnu Coal, active in Mongolia, from 12% to 100% for AUS$477m ($446m) in late 2011 and fully acquired Centennial Coal for AUS$2.5bn ($2.34bn) in 2010. In the power sector, Thai firms expanded both in Laos, a traditional provider of hydroelectric power to the Thai grid, to Australia, with Ratchaburi Electricity buying 80% of Transfield Services Infrastructure in 2012 with plans to invest AUS$1bn ($935.1m) in renewable energy by 2015, and Electricity Generating Co. (EGCO) buying the Boco wind farm for AUS$112m ($104.73m) in July 2013.

Industrial Targets

Leading industrial groups have also followed suit. CP Group, Thailand’s largest conglomerate that already operates hundreds of offshore subsidiaries ranging from research and development in the US to petrochemicals and retail investments in China, has proven the most eager. In early 2013, CP completed the acquisition of 15.6% in Ping An Insurance, China’s second-largest life insurer, for a record $9.4bn, financed by $5.5bn in loans syndicated by UBS. The TCC Group, Thailand’s second-largest firm, operating in property, beverages, retail and hospitality, has spread geographically but remained focused on its core sectors. Following the acquisition of hotels in Australia over the past five years and greenfield investments in distribution and agro-processing in Vietnam, TCC outbid rival Overseas Union Enterprise for the single largest Thai acquisition abroad. The $11.2bn buy-out of Singapore-listed Fraser and Neave, active in carbonated beverages alongside commercial and residential property in Asia, has given TCC a foothold in the beverage markets of key Asian economies like Myanmar and Indonesia and a portfolio of properties in key hubs like Singapore, Hong Kong and Tokyo.

While these two deals represented the single largest Thai investments, the focus of TDI has broadened both sectorally and geographically. Leading Thai sugar producer Mitr Phol, affiliated to Banpu, has also invested heavily in Australia, investing AUS$313m ($292.7m) in 2012 to acquire MSF Sugar, Australia’s third-largest sugar producer. ASEAN’s largest fully-integrated flat steel-maker Sahaviriya Steel Industries seized on the strong baht and distressed assets in Europe to acquire UK-based Teesside Cast Products, Europe’s second-largest steel smelter, for $469m in 2011. While the plant continued to record losses of £274m in 2012 following delays in restarting the plant, other Thai ventures in Europe have proven more successful. The world’s largest canned tuna producer, TUF, acquired the European MW Brands for €680m in October 2010, boosting Europe’s share of TUF’s turnover from 11% to 33%, building on its acquisition of the US-based “Chicken of the Sea” in 1997. The Thai-based, Indian-owned Indorama has 39 production sites in 22 countries.

Services

Thai-based groups have long expanded in the hospitality sector regionally, but companies in retail and health care have joined hotel operators as they expand further afield. The Central Group, already active in Indonesia and China, purchased Italian department store operator La Rinascente for €205m in May 2011 and used the vehicle to acquire the 120-year old Illum department store in Denmark in March 2013, with plans to invest BT2bn ($65.4m) in its renovation.

While leading Thai banks like Bangkok Bank and Siam Commercial Bank maintain limited branch presences in ASEAN, the takeover of Bank of Ayudhya by Bank of Tokyo UFG Mitsubishi will lead to aggressive expansion in neighbouring countries in coming years, according to the Japanese acquirer. The move to establish qualified ASEAN banks and gradual liberalisation of the regional banking market will likely lead to further internationalisation of Thai banks. “Going forward, we expect Thai banks to seek growth through M&As and expand regionally regardless of their sitting on the buy or sell side, bucking the overall downward trend in global banking M&A,” Sira Intarakumthornchai, CEO of PwC Thailand, told local press in May 2013. As Thai corporates diversify geographically, increasingly through M&As, they are establishing strong global supply chains, spreading risks beyond Thailand and scaling up to compete in a common regional trade area from 2015 onwards. Although the weakness of the baht from mid-2013 onwards has curbed investor appetite to some extent, structural drivers and state encouragement will likely prompt further TDI outflows in coming years.