THD ETF: China-Led Tourism Rebound To Reignite Thai Growth Story

2023 is shaping up to be a great year for Thai equities and, by extension, the iShares MSCI Thailand Capped ETF (NYSEARCA:THD). Given Thailand’s heavy reliance on tourism (~11% of GDP pre-COVID), the return of its top customer, mainland Chinese tourists, will be a massive boost for the Thai equity story. Alongside a re-acceleration in tourist growth, services exports should soar, adding to the near-term GDP growth algorithm. Over the mid-to-long term, the Thai government’s efforts to incentivize high-growth industries like electric vehicles and green energy also bode well for the structural economic growth potential; the well-diversified THD portfolio will benefit from the first and second-order impacts. Finally, with inflation easing, investor sentiment turning, and the Thai central bank (Bank of Thailand or ‘BoT’) hiking into positive economic momentum, THD investors also stand to benefit from further FX appreciation.

Fund Overview – A Low-Cost, Diversified Play on Thai Equities

With $381m in net assets and an expense ratio of 0.58%, the iShares MSCI Thailand ETF offers US investors a relatively low-cost vehicle to gain exposure to Thai equities. The ETF tracks the price and yield performance of the MSCI Thailand IMI 25/50 Index (before fees), spanning large, mid, and small-cap segments of the Thai market (~99% of the free float-adjusted market cap). An overview of the key facts is per the graphic below:

The THD portfolio comprises 135 stocks at the time of writing, with its top holding, CP ALL (OTCPK:CVPUF), the country’s largest convenience store operator, making up 6.2% of the portfolio. The second-largest holding is state-owned oil and gas company PTT (OTCPK:PUTRF) at 5.2%, followed by Thai airport operator Airports of Thailand (OTCPK:APTPF) and private healthcare giant Bangkok Dusit Medical Services (OTCPK:BDULF) at 5.0% and 4.9%, respectively. The fund allocation is relatively diversified, with the largest ten holdings representing ~42% of the portfolio.

On a YTD basis, the ETF has returned 2.3% and has appreciated by 55.2% since its inception in 2008. The 2022 performance was flattish at +1.6% and +1.2% in NAV and market price terms, respectively, helped by the Chinese ‘u-turn’ on its zero-COVID policy toward year-end. Relative to the US-listed iShares MSCI Emerging Markets ETF (EEM), the fund has outperformed on a one-year timeline but underperformed on a five-year timeline, reflecting the outsized COVID impact on Thailand’s tourism-dependent economy.

The trailing distribution (paid on a semi-annual basis) yield at 2.3% isn’t the highest, so more income-focused investors will want to look elsewhere. Given the long-term growth potential of the Thai economy and the fund’s exposure to growth areas like consumer (staples and discretionary comprise ~19% of the portfolio) and industrials, though, there’s a lot to like here for growth-focused investors.

China Reopening Supports Tourism-Driven Upside

Thailand is entering 2023 with good news as mainland Chinese tourists are now allowed to return, providing a significant boost to the country’s tourism and growth. Having already hit its 10m tourist target in 2022, the government now aims to attract an incremental 5m Chinese tourists this year – a significant milestone not only because Chinese tourists were the biggest in number pre-COVID but also because they are the biggest spenders (per capita).

A meaningful pickup in Chinese visitors likely won’t materialize until H2 2023, though, given the addition of flight and airport capacity tends to lag demand. Supporting the case for a more gradual recovery is Reuters‘ recent report (citing VariFlight data) of international flights to and from China still at a high single-digit % of pre-COVID levels in December. While we likely won’t see a pickup in the data until later this year, equities are a forward-looking asset class, so expect tourism-driven earnings revisions to boost equity valuations in the meantime. Given its broad-based exposure to the Thai economy, THD is well-positioned to benefit.

Another key growth driver is on the private investment front, with the government offering even more incentives in its latest update. Of note, the Thai Board of Investment’s five-year plan comprises seven pillars to attract and incentivize high-growth industries like electric vehicles (EV) to relocate their regional bases. Thus far, the approval of tax cuts and subsidies in 2022 for EVs (under the ‘next-generation autos’ category) has already resulted in the relocation of 150k/year of production capacity by Chinese EV giant BYD (OTCPK:BYDDY). Building on its early wins with BYD and Tesla (TSLA), the Federation of Thai Industries now expects a significant increase in domestic EV sales in 2023 to 25k to 35k units as well. Beyond the first-order impact, progress here should also drive significant second-order benefits (e.g., via employment growth and consumption) for the THD portfolio over the long run.

Slowing Inflation and Rate Hikes Offer an Added Boost

Thailand experienced a slowing of inflation in January, with headline CPI decelerating to +5.0% YoY (vs. +5.9% YoY in December) on lower food and transportation costs. Perhaps more importantly, core inflation (excluding the more volatile food and energy prices) was also down ~20bps to +3.0% YoY. As global supply chain pressures ease this year, the only hurdle to a pause in rate hikes is the potential for demand-pull inflation from the broader Thai economic recovery. For now, the BoT seems comfortable with inflation expectations – the recent shift to a 25bps hike at the last meeting is a case in point, potentially signaling the monetary tightening cycle may be coming to an end sooner rather than later. A shift from a tightening to a neutral stance should relieve much of the valuation pressure over the last year, and as a result, THD’s diversified basket of equities should see multiple expansion.

Also alleviating the inflationary pressures is the appreciation of the Thai Baht in recent months; assuming this sustains along with the positive economic momentum, lower imported inflation should accelerate the BoT’s exit from its tightening cycle. In line with this view, expect more THB appreciation in 2023, as an economic upswing, improved current account balance, and positive investor sentiment drive portfolio inflows.

China-Led Tourism Rebound to Reignite the Thai Growth Story

Through its diversified exposure to the Thai economy, THD offers investors a low-cost vehicle to ride the unfolding tourism-driven recovery in Thailand. The key driver in the coming months will be the pace of growth of mainland Chinese tourists, the sector’s biggest and highest-spending customer pre-COVID, as travel restrictions continue to be rolled back. In addition to the near-term tailwinds, the Thai economy is poised for a structural boost from the re-shoring of EV and green energy production – BYD’s decision to build out its regional hub in Thailand via a factory with 150k/year of production capacity is case in point. Given the backdrop of easing inflation and inflow-driven currency appreciation in anticipation of more robust economic prospects in 2023, THD ETF offers investors many ways to win.