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Two investor outfits argue that you can reap gains from Thailand's small-cap stocks.

As equity markets waver worldwide, investors are rediscovering value stocks. Where to find them in Asia? A surprising answer could be the largely overlooked small-capitalization stocks on the Stock Exchange of Thailand (SET).

That's the contrarian thesis proposed by Paul Renaud of the website www.thaistocks.com and two Americans, Doug Barnett and Lance Depew, of the hedge fund Quest. Both companies are based in Thailand, Renaud on the resort island of Phuket, Quest in Bangkok (they are not affiliated with each other).

Thailand has had one of the region's worst-performing stock exchanges. The benchmark SET composite index has declined 87% in dollar terms over the past five years, to a recent 300. But the two companies argue that its performance is distorted by a composite index weighed down by large-cap stocks. "Thailand's big-cap stocks are the ones with all the problems," says Renaud, a Swiss national who has lived in Thailand since 1989.

To test his beliefs, in January 1999 Renaud created a model portfolio of 30 small-cap Thai stocks. By Mar. 23 of this year, the portfolio had risen 64% in local currency terms and 39% in dollar terms. (The S&P 500 for the same period was down about 1%.) Quest's hedge fund also claims to have beaten the S&P 500-and over a longer period. Since 1990, its portfolio of stocks has returned 413% in dollar terms net of all fees. The S&P 500 returned only 287% in the same period. It should be pointed out that the Quest fund has declined in both the last three years (10%) and the last 12 months (19%).

SET SMALL-CAPS FOR GAINS
Two picks each from Renaud and Quest
Name	Thesis
RENAUD:
President Rice	Rice and noodle maker sells at three times earnings, 11% dividend, 25% below book value.
SE-Education	Country's largest bookstore chain. Stock sells at five times earnings, pays a 9% dividend.
QUEST:
Regional	Shipping line sells at 20% of book value; pretax
Container Lines	earnings grew 41% over last two years.
KCE	Maker of printed circuit boards sells at four times earnings, 10% below book value.

What kind of stocks are there in the small-cap sector? Renaud's picks include President Rice, a major rice and noodle producer. Its stock sells at about three times earnings, pays an 11% dividend and sells at 25% below book value. Earnings have increased 21% a year for the last four years, on sales that grew 34% a year.

SE-Education is the country's largest bookstore chain. Sales have been growing at 50% in the past couple of years; 29% growth in same-store sales. The stock sells at five times earnings and pays a 9% dividend. Quest likes Regional Container Lines, a shipping company. After a 10% earnings drop in 1998, the company has increased its pretax earnings by 41% a year, to $24 million in 2000, on revenues that grew 11% a year, to $317 million. The stock sells at 20% of book value. kce, a maker of printed circuit boards, exports 98% of its output. Sales are expected to grow 33% this year, to $120 million. The stock sells at four times earnings and at a 10% discount to book value.

Don't bother asking your broker about these stocks; the chances are that he's never heard of them. That's because only 130 of the SET's 336 listed companies have analyst coverage. On top of this, there's a question of liquidity: Only 45 stocks on the exchange have market capitalizations of more than $100 million. Most of the market's stocks are both small cap and neglected. That obscurity can be an opportunity. "Underfollowed and illiquid can be a recipe for great value," says Depew.

David Loomis, the head of research at Vickers Ballas Thailand, agrees. "There is a large segment of the market that doesn't get covered but [nevertheless] has good performance. It's a Graham and Dodd paradise" (a reference to Benjamin Graham and David Dodd, the pioneering U.S. value investors).

To be sure, such bargains aren't wart-free. Liquidity is one. Many stocks don't trade for days, even weeks. Another issue is that Graham and Dodd never had to worry about currency or country risks. But these may be manageable. First, currency. The lowest that Thai baht has ever traded was 57 to the dollar in January 1998. Today, after hitting a high of 36 in December 1998, it is at 46. Can it drop to 57 again or lower? Sure, but that's a worst-case scenario.

Next is country risk. Thailand still has systemic risk, Loomis warns. But there is cautious optimism about Prime Minister Thaksin Shinawatra's reform program. "I'm a mild Thaksin bull," says Renaud.

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