Railway journeys are special.
I’ve got warm memories of traversing the interiors of Asia as a young man. Prior to each trip – like an explorer from the Victorian age – I invested numerous hours putting together an itinerary on a shoestring budget.
These journeys offered a young Westerner a chance to enjoy a Shangri-La like world, filled with quaint railway stations. Hawkers would hurl themselves onto carriages to sell food and beverages and magically leave just in time.
It was an opportunity to observe rural life adhering to ancient rituals.
Sadly, aged railway systems are not fit for new Asia.
Thailand is a prime example. The Thai railway system is more than a century old and hasn’t seen a thorough upgrade for countless decades.
This is to change now.
This upgrade will transform Thailand – and make investors a fortune
The planned dual-track railway system would link the border province of Nong Khai (adjacent to Laos) to Map Ta Phut in Rayong, the industrial heartland of Thailand.
The 867km railway project is estimated to cost Bt400bn ($12.1bn) and this is part of Thailand’s infrastructure plan between 2015 and 2022. The construction of the dual-track railway is hoped to begin in 2016.
The catalyst for the Thai railway upgrade is the country’s status as a major economy within the Mekong region, named after the snarling river running through six countries including China (specifically Yunnan Province and Guangxi Zhuang Autonomous Region), Cambodia, Laos, Myanmar and Vietnam.
The so-called ‘CLMV’ group of countries (Cambodia, Laos, Myanmar and Vietnam), are the last frontier economies in Asia. The economic potential is enhanced by the fact that CLMV is the de facto buffer zone between China and India, which means it carries enormous geopolitical importance.
The overall vision is to build a dual-track railway system from Yunnan province in southern China to run through Laos, Thailand, Malaysia and end in Singapore. The chances of this happening are high. China has pledged to help Laos finance its railway system, and Malaysia has worked for many years on finishing its dual-railway system.
Idle parts of the Mekong region will see integration, modernisation and a chance to capitalise on China’s economic power. It will also allow these countries to reduce high logistics costs which act as a heavy tax on commerce.
I believe China will be one of the key investors in this project.
Why China will be a big investor in the Thai railway boom
Thailand’s relationship with China has been capricious through the years. In the past, Chinese schools and names were forbidden in Thailand. In the 1990s, a prime minister came under intense scrutiny as he was allegedly born in China and assumed Thai citizenship later (which would have made him ineligible to become PM).
Over the last decade or so things have improved, helped by the fact that many leading Thai business families are of Chinese descent. They have strong connections with the political and economic elites of modern China.
Hua Lampong, Bangkok’s main railway terminal, is located next to Yaowarat, China-town, which has served as the business home for the Chinese community over 200 years.
So we should not be surprised that Chinese are set to be involved in upgrading the Thai railway system….
Last week, the Chinese premier, Li Keqiang, attended the fifth summit of the Greater Mekong Subregion (GMS) Economic Cooperation in Bangkok. GMS was set up in 1992 by the Asian Development Bank to foster cooperation.
Thailand, the host, hoped the summit would endorse 215 development projects, of which 123 involve an investment of about $51.3bn. Thailand would contribute to 78 projects in both investment schemes and technical assistance, worth more than $5bn, or Bt177.96 bn. These projects involve mainly transport infrastructure.
Even more recent news points to an increasingly positive relationship. The Thai prime minister, Prayut Chan-o-cha, and his entourage visited China on Thursday and Friday. During the visit, a landmark deal was signed whereby the Chinese will help to build and finance the thorough upgrade of the Thai railway system.
So who will benefit from these deals?
The big winners of the railway upgrade
Undoubtedly, Chinese banks and construction companies will be involved in various parts of the project.
I think China will follow the model adopted by European and American firms in the past whereby ‘soft loans’ (extremely low interest) are provided by financial institutions which have political support/guarantee by the government.
In return they will offer chunks of the project to companies which have the technical expertise and experience to execute massive infrastructure projects.
The salient point is that the civil work – worth about 40% of the total cost – will have to be done by local contractors. Given the big size there will be a number of local contractors which are set to benefit – and one is a company I’ve mentioned in the past.
How to play the Thai railway boom
I think that Italian-Thai Development (ITD) looks like an interesting play on the Thai railway boom. It is the largest contractor in Thailand with a wealth of experience in mass transit systems, expressways, railroads, airports and dams. We first highlighted this stock in August 2012, and it has since gained more than 100%.
As of end of September, ITD had an order book of Bt307bn, equivalent to seven years of its annual sales. The company is likely to get parts of the railway upgrade project and mass transit railway extensions in Bangkok.
The stock is darn expensive as it trades on a price/earnings ratio of 51.7 times 2015 earnings, though the high number is misleading as it has a lumpy earnings profile.
In spite of the obnoxious valuation, there are two factors that suggest that a further upside lies ahead in the long-term.
Two reasons to be excited about ITD
Firstly, last month ITD raised capital through a private placement via three local fund management companies and high-profile local investors. We love to follow the path chosen by leading local investors as they have superior local knowledge. If they believe in the future growth prospect of the company, foreigners should take it seriously, and vice versa.
Secondly, ITD is involved in the Bt1.9trn Daiwei project, the deep-sea port in Myanmar, which will allow ships to avoid using the Malacca Strait to deliver cargo to Thailand/Mekong region/Southern China. The project needs to be endorsed by Chinese or Japanese investors to take off. If the dual-track railway deal goes ahead, the chances of this happening would increase enormously. The dual-track railway is a necessary complement in order to transport freight efficiently within Thailand and to the Mekong region.
I’ll be watching this closely going forward.
Also, this is my final New World for 2014. Thanks to everyone for a great year. I hope you have an enjoyable festive season and I’ll speak to you all again in 2015.