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Thailand Royal Moneymaker

King Bhumibol Adulyadej attracts investors to a country reeling from its 18th coup since World War II. The $5 billion of shares he controls have outperformed the beaten-down Thai stock market.

Mondays are different in Thailand. It’s the day of the week on which the world’s longest-reigning monarch, Bhumibol Adulyadej, was born. And in this Southeast Asian nation, the sidewalks, trains, ferries and food stalls selling fiery curries take on a canary-colored glow as Thais—from chief executive officers to street sweepers—pay respect to their king by dressing in the royal color of yellow.

Investors are finding reasons to be enthusiastic about Bhumibol too: The $5 billion of shares that the 79-year-old king controls through the Crown Property Bureau, the asset management company established by Thailand’s government, are weathering the nation’s vicissitudes better than most. In September 2006, the Thai military deposed Prime Minister Thaksin Shinawatra in a bloodless coup. The Stock Exchange of Thailand Index, whose 136 percent surge had made it the world’s third-best performer in 2003, shed 15 percent, or $23 billion, in one day in December. On July 11, the SET stood at 846.28, even with a 24 percent rise this year. That’s less than half of the 1753 it scaled in 1994 before the devaluation of the Thai baht sparked an Asiawide financial meltdown in July 1997. Since the currency crisis, Thailand, Southeast Asia’s second-biggest economy, has lost ground against Muslim insurgents seeking in- dependence in a nation that’s more than 90 percent Buddhist.

The military junta that overthrew Thaksin de- clared and then partially revoked martial law and dissolved parliament. Throughout the turmoil, Bhumibol’s shares outperformed the SET. “The king has been a rock in Thai society,” says Judy Benn, executive director of the American Chamber of Commerce in Thailand.

Bhumibol’s biggest holding, his 30 percent–owned Siam Cement Group Pcl, is Thailand’s largest industrial group. It employs 24,000 and makes products rang- ing from petrochemicals to building supplies. Siam Cement shares traded at 278 baht on July 11. That’s a 16-fold jump—five times the rise in the SET—from its low of 17 baht in June 1998. Siam Commercial Bank Pcl, Thailand’s third-biggest lender, which is 21 per- cent owned by the king, is up 42 percent this year as of July 11—almost double the rise in the SET. A third royal-controlled company, Deves Insurance Pcl—87 percent owned by Crown Property—gained 36 percent this year and 500 percent from June 1998.

As a whole, Thailand’s exchange has lagged be- hind other major stock markets. On July 11, the Stock Exchange of Thailand had the lowest price- to-earnings ratio of the 14 exchanges in Asia tracked by Bloomberg. The SET’s 2007 P/E ratio of 14.8 was about a third of the 40.4 for the CSI 300 Index of stocks traded in Shanghai and Shenzhen. “Now is an excellent time to buy Thailand,” says Doug Barnett, managing director at Bangkok-based Quest Management Corp., which runs a $320 mil- lion hedge fund in which billionaires Julian Robert- son and John Templeton invested. “It’s so cheap it would take a 40 percent rally just to catch up with the average for the rest of Asia.” Analysts at Lon- don-based HSBC Holdings Plc and Sydney-based Macquarie Bank Ltd. are advising clients to consid- er Thai stocks. “Investors should rotate out of the priciest markets into those that have so far missed out on the fun, such as Thailand,” says Garry Evans, Hong Kong–based Asian equities strategist at HSBC. Evans predicts a 70 percent chance of a res- toration of democratic government in Thailand by early next year. “The market could very dramatical- lDy increase by as much as 50 percent,” he says.

Democracy came a step closer on July 6, when a junta-appointed assembly backed a new draft constitution. If the constitution is approved in a national referendum, a general election may take place as early as Nov. 25, Thailand’s election commission says.

Investors, spooked by the military takeover and junta-appointed interim government, are wading into Thailand and looking for bargains. They’re betting that companies backed by a king who has survived on the throne for 61 years may be among the safest in Thailand, an agricultural and manu- facturing country of 65 million that’s the world’s biggest exporter of rice and Southeast Asia’s largest auto assembly hub.

"The set Index remains more than 60 percent below its all-time high," says Mark Mobius, who oversee $30 billion at Templeton Asset Management Ltd. in Singapore, and whose biggest Thai holdings include king-controlled Siam Cement and Siam Commercial Bank.

“It provides comfort to know that the major shareholder in these companies is the royal family, who are highly respected in the kingdom,” says Robert Penaloza, Bangkok-based CEO of Aberdeen Asset Management Co. “We have found some very attractive valuations,” says Penaloza, who oversees $2.2 billion and also owns Siam Cement and Siam Commercial Bank shares.

The king, stern looking and still straight backed, has honed his staying power during 18 coups d’état and 26 changes of prime minister. In 1932, a take- over by military officers and civil servants ended the Thai monarchy’s absolute rule and reduced the royals to a constitutional role similar to Britain’s Queen Elizabeth II. In one remnant of the monarchy’s former absolute power, it remains a crime punishable by imprisonment to criticize the king.

In 1935, King Prajadhipok abdicated and the crown passed to 10-year-old Ananda Mahidol, Bhumibol’s older brother, who was living in Switzer- land. In December 1945, Ananda traveled to Thailand to be officially crowned. Six months later, he was found dead in bed in the Grand Palace in Bangkok with a bullet in his forehead and a Colt pistol beside his body. Three men were convicted of the murder in 1954 and executed in 1955. Historians describe the death as an unsolved mystery. When Bhumibol took over at age 18, Thailand almost didn’t have a monarchy, says Mechai Viravaidya, former chairman of Krung Thai Bank Pcl, Thailand’s second-biggest lender.

Bhumibol, who was educated in political science, government and law at the University of Lausanne in Switzerland, worked to restore royal prestige. He traveled the countryside and set up farms, fisheries and irrigation projects, winning support in a nation where half of the people lived in poverty. Royal family members lobbied the government to return real estate and shares the mon- archy lost in 1932. The king’s popularity gave the royals a stronger hand, says Paul Handley, author of the King Never Smiles (Yale University, Press, 512 pages, $38)

Today, the king has a 13,000-acre (5,260-hectare) property empire. About 3,000 acres are in and around Bangkok, Thailand’s capital, where some downtown plots sell for $30 million an acre, according to the Thai unit of CB Richard Ellis Group Inc., the world’s largest commercial real estate brokerage. The king’s choicest land holdings are the sites of Central World, Thailand’s biggest shopping mall; the Suan Lum Night Market, a tourist attraction that’s slated for re- development; Rajdamnoen Avenue, a boulevard where Crown Property owns most of the buildings and the government wants to create the Avenue des Champs-Élysées of Asia; and the Four Seasons and Dusit Thani hotels. The king also holds an 87 percent stake in Munich-based hotel chain Kempinski AG. Crown Property, through its CPB Equity Co. unit, reported that Kempinski and smaller holdings in Thai companies were valued at $716 million in 2005.

“Bhumibol has re-established the monarchy against all the odds,” says Chris Baker, a Bangkok- based historian who wrote A History of Thailand (Cambridge University Press, 320 pages, $60) with Pasuk Phongpaichit. “The Crown Property Bureau is quite simply the biggest corporate group in Thailand.”

For all of his wealth, Bhumibol shuns the billionaire lifestyle. He eats the cheapest form of un- milled rice for its health benefits, according to Handley’s book. After his brother’s death, he and his immediate family moved out of the gold-spired Grand Palace, whose grounds cover 60 acres, and into the smaller Chitrlada Palace in the Dusit area of central Bangkok. He has traveled outside his homeland only once in the past 40 years, to neigh- boring Laos. Instead, he has focused on establish- ing what he terms a “sufficiency economy.” The guidelines call for steady, sustainable development rather than high-risk, blind growth.

Increasingly, investors are looking to the king’s economic strategy as a stabilizing force. “The Crown Property Bureau wouldn’t like to see its rep- utation and, by extension, the king’s reputation, besmirched,” says Michael Backman, author of Asian Eclipse: Exposing the Dark Side of Business in Asia (John Wiley & Sons, 350 pages, $29.95).

Marc Faber, who manages $300 million in Hong Kong and owns shares of Siam Cement and Siam Commercial Bank, says her mat selectively increase his Thai holdings. "Since all the other emerging markets have risen so much, Thai shares are now inexpensive,” Faber says.

The king’s holdings have suffered profit declines as Thailand’s economy has slowed. Economic growth may drop to 3.8 percent this year from 5 percent in 2006, according to the central bank. In the first quarter, Siam Cement’s net income fell 14 percent to 8.21 billion baht ($262 million) from 9.55 billion baht a year earlier. Siam Commercial Bank’s profit dropped 12 percent to 3.69 billion baht on declining loan growth. Siam Cement and Siam Commercial Bank still provide most of Crown Property’s revenue. Crown Property, which doesn’t release a financial re- port, said in faxed answers to questions from Bloom- berg News that revenue totaled the equivalent of $400 million last year—80 percent of it in the form of dividends paid by its two biggest companies.

Exporters such as Thai Union Frozen Products Pcl, owner of the U.S. Chicken of the Sea brand of canned fish, have been hit by a rising baht, which soared 16 percent against the U.S. dollar in 2006. This year, it’s up another 7 percent as of July 11. In January, Ford Motor Co. said it may not proceed with $1 billion of new investments at a plant in Rayong that makes mostly one-ton pickups and exports to 130 countries. Adding to the country’s woes, clashes with Muslim rebels have claimed 2,000 lives in three southern provinces since 2004. Last New Year’s Eve, three bomb blasts rocked Bangkok, killing three people and injuring 42. Travel to Thailand’s beaches and nightclubs is slowing. The government predicts a 7 percent increase in visitors to 14.8 million this year compared with a 20 percent rise in 2006.

Much of the royal family’s shares and real estate stem from the days when Thailand was called Siam and the monarchy owned everything. The Chakri dynasty was founded by Bhumibol’s great-great- great-grandfather, Rama I, in 1782. The fourth king in the dynasty, Mongkut, who ruled 1851–68, was immortalized in the 1951 Rodgers and Hammer- stein musical The King and I. The 1956 film version, which like the New York stage production starred YTul Brynner as the king, is banned in Thailand.

The fifth Chakri monarch, Chul- alongkorn, set up the Bureau of the Privy Purse in 1890. Historian Baker describes it as the palace’s first investment arm. In 1906, the royal family founded the country’s first bank, Siam Commercial. The sixth king, Vaji- ravudh, an uncle to Bhumibol, started Siam Ce- ment in 1913. The company’s main product was packed in wooden barrels and transported by boat on Bangkok’s canals. The abdication of Prajadhipok and the death of Ananda made Bhumibol, also known as King Rama IX, the dynasty’s ninth king. In 1950, he married Sirikit Kitiyakara, daughter of the Thai ambassador to France. The couple have four children: Crown Prince Maha Vajiralongkorn, 55, and Princesses Ubol Ratana, 56, Sirindhorn, 52, and Chulabhorn, 50. Like many Thai men, in 1956 Bhumibol shaved his head and lived in a temple for two weeks as an ordained monk. For leisure, he played jazz saxophone and composed music that’s been performed on Broadway. His song, “Blue Night,” was featured in the 1950 musical Michael Todd’s Peep Show, Handley says.

In the early 1950s, the king was driving across a mud flat when his jeep got stuck. Villagers pulled the vehicle out. He realized that a simple dam could turn the marshy area into a lake to raise fish and provide irrigation and drinking water. It was the first of 3,000 royal agricultural projects, in- cluding crop substitution programs that encourage hill tribes to grow coffee, tea, fruit and vegetables instead of opium.

After the war in neighboring Vietnam ended in the 1970s, Japanese investors began moving into Thailand for its cheap labor. Bhumibol exerted his influence during times of stress. In 1992, troops fired on pro-democracy demonstrators in Bangkok. The king summoned the military strongman of the day, Suchinda Kraprayoon, and the protest leader, Chamlong Srimuang, to the palace. Millions of Thais watched on television as the rivals prostrated themselves before the king, who lectured them on their duty. Suchinda resigned as prime minister a week later.

In the decade leading up to the 1997 financial crisis, economic growth in Thailand averaged 8.6 percent a year. “Thailand had gone deeply into debt, had invested in many projects that were clearly in- appropriate and had allowed speculative markets in stocks and property to run riot,” a 2007 report by the United Nations Development Programme said. In just one example of the excess, Bangkok-based entrepreneur Dumri Konuntakiet paid $283 million to Grand Metropolitan Plc’s Pillsbury Co. for Bumble Bee Seafoods Inc. in 1989. He persuaded banks to put up 85 percent of the money. Six years later, unable to meet loan repayments, Dumri, then 4D3, put a bullet through his head.

Disaster of the financial kind struck on July 2, 1997. The baht plunged to 55 to the U.S. dollar from a rate of 25 to the dollar six months earlier. Half of the loans held by Thai banks defaulted. Hundreds of companies collapsed. The king’s companies didn’t es- cape. Siam Cement’s debt totaled $6 billion—$4.5 billion of it in dollars, Siam Cement President Kan Trakulhoon says. It had foreign exchange losses of $1.5 billion. Nonperforming loans at the king’s bank, Siam Commercial, rose to 40 percent.

Siam Cement met with local and foreign banks to reschedule loans, in essence admitting it was at risk. Siam Commercial was the first lender to accept a government offer to inject 32.5 billion baht in capital in exchange for equity. In the process, Crown Property’s shareholdings in the bank were reduced by half. In 2005, Crown Property in- creased its stake by swapping 181 acres of property for Siam Commercial shares.

As his country reeled, Bhumibol outlined his goals in his December 1997 birthday address. He urged Thailand to stop trying to become one of Asia’s “growth tigers.” “So many projects have been implemented, so many factories have been built, that it was thought Thailand would become a little tiger, and then a big tiger,” the king said. “People were crazy about becoming a tiger.” Instead, he said, Thais needed to settle for an economy suffi- cient for their needs. “We have to take a careful step back- wards,” he said.

Amid the carnage at the time, companies controlled by the king stood out for their transparency, Backman says in his book. Executives talked

to creditors and discussed how to reschedule loans. Siam Cement issued $2.5 billion of local currency debentures to replace foreign exchange loans and paid back all of its debts. No one was fired from its staff. “We never asked for a haircut,” Kan says.

The story was different elsewhere. Prachai Leop- hairatana, founder of Thai Petrochemical Industry Pcl, which was Thailand’s biggest defaulter ever, stopped paying interest on $2.7 billion of debt in 1997. He kept creditors and the government at bay for eight years before being forced out, enabling the company to be taken over and debt repaid.

Crown Property has embraced the king’s philosophy of sufficiency, says Chirayu Isarangkun Na Ayuthaya, who as director general of the bureau is the king’s chief money manager. That means in- vesting in a few companies that are essential to the country’s stability, he says. “The bureau’s policy fo- cuses on long-term and low-risk investments,” Chi- rayu writes in The Crown Property Bureau on the Path of Sustainability. “The bureau chooses to in- vest in businesses that not only boost social and economic value but are also linked to the country’s monarchy and the country’s history.”

Speaking outside a May sustainability conference in Bangkok, Chirayu elaborates on the king’s investment policy. “It’s not about profits alone, although profits are important,” he says. “Otherwise, Siam Commercial Bank would not have survived for more than 100 years and Siam Cement for almost that long.”

Goldman Sachs Group Inc. got a glimpse of the strategy when the New York–based investment bank began a $46 million takeover bid for Bangkok’s Regent Hotel in 1999. The hotel, since renamed the Four Seasons, is built on land owned by Privy Purse. Both the king and Crown Property were minority shareholders in Rajadamri Hotel Pcl, the company that owned it. Goldman bid as much as 48 baht a share for Rajadamri, or 11 per- cent more than the bid of Royal Garden Resort Plc, a local company. The king and Crown Proper- ty declined to sell their combined 13 percent stake. Goldman ended up with 41 percent. It never gained management control of Rajadamri and in 2003 sold out for $19 million.

“The original founders, including the Crown Property Bureau, had a genuine affinity for the hotel,” says William Heinecke, 59, a U.S.-born Thai citizen who led the competing offer. “We were small shareholders and we rallied other small shareholders, and we decided we would not give in.” Edward Naylor, a Hong Kong–based spokes- man for Goldman Sachs, declined to comment.

Heinecke’s Minor International Group, a com- pany made up of Royal Garden Resort and Minor Food Group Pcl, is now Thailand’s largest hospi- tality firm. Today, the king is the fifth-biggest shareholder in Minor International, which owns four Marriott and four Four Seasons hotels. Minor International shares jumped 112 percent from Jan. 1, 2006, to July 11, compared with the SET’s 19 percent gain. That values the king’s 2.04 percent investment at $24.2 million.

The royal succession is one cloud on Thailand’s horizon that few Thais speak about publicly. Bhumibol turns 80 on Dec. 5 and millions of Thais wear wristbands inscribed with the words “Long Live the King.’’ In the past few years, doctors have treated him for back, heart and prostate conditions. Bhumibol’s only son, Crown Prince Vajiralongkorn, is most likely to succeed his father. He’s a career soldier who studied at the Royal Military College of Australia in Duntroon and is married with children. The crown could also pass to the unmarried Princess Sirindhorn, who shares her father’s popu- larity, Handley says. A 1974 constitutional change enabled a woman to ascend to the throne.

“The crown is the one single unifying force in Thailand,” says Korn Chatikavanij, former chairman in Thailand of JPMorgan Chase & Co., who’s now deputy secretary-general of the Democrat Party, which was the main opposition group when Thak- sin was prime minister. “Every change means uncer- tainty, but the Thai people’s respect for the king transcends the person and reflects a deep, instinc- tive respect for the institution.”

Even so, without the world’s longest-reigning monarch, investors would have one less measure of stability as they navigate Thailand’s crisis- prone shores.


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