SOURCE: Thai Capital Fund

Thai Capital Fund

May 23, 2011 18:01 ET

The Thai Capital Fund Reports First Quarter Earnings

JERSEY CITY, NJ--(Marketwire - May 23, 2011) - The Thai Capital Fund, Inc. (the "Fund") (NYSE Amex: TF), an emerging markets closed-end management investment company seeking long-term capital appreciation through investment primarily in equity securities of Thai companies, today announced its results for the quarter ended March 31, 2011 and commented on the economic outlook for Thailand.

The Fund's investments in Thailand are made through a wholly owned investment plan (the "Investment Plan") established under an agreement between SCB Asset Management Co., Limited ("SCBAM"), the Fund's investment manager, and the Fund. The Fund's investments through the Investment Plan are managed by SCBAM, located in Bangkok, Thailand. Daiwa SB Investments (Singapore) Limited, the Fund's investment adviser, provides SCBAM with advice regarding investments through the Investment Plan and manages the Fund's assets held outside the Investment Plan.

First Quarter Earnings Results

For the quarter ended March 31, 2011, the Fund earned net investment income of U.S. $76,000 (equivalent to income of U.S. $0.02 per share). Net realized and unrealized losses from investment activities and foreign currency transactions for the quarter ended March 31, 2011 were approximately U.S. $1,734,000 (equivalent to a loss of U.S. $0.50 per share). In comparison, for the quarter ended March 31, 2010, the Fund earned net investment income of U.S. $122,000 (equivalent to income of U.S. $0.04 per share). Net realized and unrealized losses from investment activities and foreign currency transactions for the quarter ended March 31, 2010 were approximately U.S. $3,735,000 (equivalent to a gain of U.S. $1.18 per share).

On March 31, 2011, the total net assets of the Fund were approximately U.S. $49.6 million. The net asset value ("NAV") per share on that date was U.S. $14.41, based on 3,440,992 shares outstanding. In comparison, on March 31, 2010, total net assets were approximately U.S. $40.7 million. The NAV per share on that date was U.S. $12.84, based on 3,172,313 shares outstanding. The Fund generated a negative investment return of 3.22% for the three months ended March 31, 2011, when measured against the NAV per share of U.S. $14.89 calculated on December 31, 2010. In comparison, the Stock Exchange of Thailand ("SET") Index increased 0.94% during the same period, in U.S. dollar terms.

As of March 31, 2011, the Fund had 99.53% of its net assets invested in Thai equities and 3.61% in Thai cash instruments. The remaining assets were made up of 0.84% in short-term U.S. dollar time deposits and liabilities in excess of other assets of negative 3.98%.

As of May 19, 2011, the Fund had total net assets of approximately U.S. $50.5 million, equivalent to a NAV per share of U.S. $14.69. On that same date, the Fund's shares on the NYSE Amex closed at U.S. $12.77, representing a trading discount of 13.07% to its NAV per share.

First Quarter Market Review & Outlook

In the first quarter of 2011, the SET Index closed at 1047.48, an increase of 14.72 points (+1.43%) since December 31, 2010. The Thai market posted a significant correction in January 2011, driven by concerns about China's tightening monetary policy and portfolio re-allocation by foreign investors from TIP markets (Thailand, Indonesia and Philippines) to other regions. Although local factors were positive in the fourth quarter 2010 earnings results for the financial sector were solid and the political situation saw progress on the constitutional amendments, external factors were overwhelmingly negative and led to significant foreign net selling.

In February 2011, the Thai market was highly volatile before closing slightly higher than the end of January 2011. Negative factors included foreign equity outflows during the month due to Asian inflation concerns and political risks in the Middle East such as Egypt and Libya. However, local market sentiment was supported by positive factors like progress on Thai politics and strong fourth quarter earnings results especially for companies in the energy sector.

In March 2011, the SET Index posted strong performance, especially in the second half of the month as foreign equity inflows returned to Asia and the Thai stock market following U.S. dollar weakness and potentials for earnings revisions in the region. Besides the foreign buying, internal factors like political optimism ahead of the mid-year election more than offset external turbulence such as the Japanese earthquake and nuclear crisis and tensions in the Middle East.

With stronger economic growth of both developed markets and emerging markets expected, global economic growth could be higher than 4% in 2011, although slower than last year's 4.9% pace. Emerging markets' exports and investments in 2011 have been stronger than market expectations. This has been the most significant change to the sources of growth in emerging markets this year, while private consumption has increased only marginally.

Global inflation has doubled over the past year, from about 2% to more than 4%, and inflation rates in many countries have risen to above the desired or targeted levels by most central banks. The problem for now is centered primarily in the emerging markets. Inflation pressure is beginning to spill over into industrialized countries as well due to rising commodity prices and possibly expectations. Above average trend growth could begin to add to inflation pressures as economic recovery progresses. In Thailand, inflation is not a major risk this year and is expected to peak by the end of the first half of 2011. Even though it is very likely that the government will remove some of the subsidies after the election, the government will have to continuously decrease the cost of living.

The disasters in Japan should have a significant impact on economic growth of Japan this year, while the impact on the rest of the world is likely to be quite modest. However, there is some upside risk as rebuilding gets under way in Japan. For Japan's immediate neighbors in Asian Emerging Markets, any negative impact on 2011 growth from Japan's woes and supply chain disruptions may simply offset the upside risk and result in stronger-than-expected exports. The impact from the crisis in Japan will be minimal to the Thai economy. Broadly, Thailand's food export sector may benefit as Japan will have to import more food for internal consumption. Also, this event might force Japanese manufacturers to move and diversify their production plants offshore, with Thailand being one of the potential beneficiaries. However, in the short-term, there might be some production disruption in the automotive and electronic components industry due to raw materials supply shortage, which might decrease Thailand's exports during the second quarter of 2011.

Not surprisingly, the sudden escalation in political unrest across the Middle East & North Africa has brought market fears towards tight spare capacity immediately. Consequently, potential supply disruption has been the main driver for the rally in oil prices in the last few weeks. The geopolitical risk premium in the oil market is likely here to stay. The events in Japan will also further tighten fundamentals in the thermal coal, liquefied natural gas, oil and oil products markets. As a result, a shortage in the thermal coal market is expected this year and possibly in 2012, particularly if European imports rise on any shift away from nuclear power generation. Converging financial, fundamental and geopolitical trends suggest that oil prices will be well supported with upside risk. Crude oil prices are expected to average well above USD100/barrel in 2011, with Brent prices ranging between USD115-125/barrel through 2015.

As the U.S. economy improves, the Board of Governors of the U.S. Federal Reserve should have started to wind down liquidity by raising the federal funds rate for the first time in years by the end of this year. This could potentially trigger money fund flows from emerging markets or from commodities back to U.S. markets. However, we believe it is too early to react to this risk, as normally, the market responds three to six months before the actual increase. As of now, there may be a reverse flow where money from U.S. bonds moves out from U.S. markets and into emerging markets, commodities or currencies due to expectations of rising U.S, bond yield and concerns about higher inflation. These fund flows could potentially last into the first half of this year and will drive up the SET Index, especially large caps where they have potential for earnings upgrades.

According to the Prime Minister's announcement and the current political situation, an announcement dissolving the Thai parliament and calling for an election is expected by the end of May 2011. Historically, the SET Index has performed positively before elections. The sectors that should benefit the most are commerce, banking, media and other domestic consumption related sectors. In terms of valuation based on forecasted EPS growth of 13.4% for 2011, the Thai stock market is trading on price to earnings (PER) for 2011 of 12.4x and price to book value (P/BV) of 1.9x with a dividend yield of 3.67%. (Source: Bloomberg forecast as of 3/31/2011).

Investment Strategy

The Thai market rose about 6% in March 2011. The main reason for the increase was the high price of oil, which directly impacted the energy and petrochemical sectors in the Thai market. Moreover the SET Index also moved in response to the announcement of the potential dissolution of the Thai parliament in May 2011. We expect that the short term target for the SET Index for the period before the new election should be around 1,140 - 1,180, thus we plan to re-allocate some portion of the Fund's energy-related holdings to low beta stocks or increase the cash level from less than 2% to 8-10%.

The ten largest equity classifications of the Fund held at March 31, 2011 were:

                                                             Percentage of
   Industry                                                   Net Assets

1. Petrochemicals                                                    21.68%
2. Banks                                                             20.28
3. Energy                                                            17.96
4. Property Development                                               9.78
5. Agribusiness                                                       7.18
6. Construction                                                       6.60
7. Transportation                                                     6.33
8. Commerce                                                           3.93
9. Health Care Services                                               3.04
10. Electronic Components                                             2.75

The ten largest equity positions held by the Fund at March 31, 2011 were:

                                                             Percentage of
   Issue                                                      Net Assets

1. Indorama Ventures Public Co., Ltd                                 10.38%
2. Bangkok Bank Public Co., Ltd                                       7.30
3. Charoen Pokphand Foods Public Co., Ltd                             7.18
4. IRPC Public Co., Ltd                                               6.71
5. TMB Public Co., Ltd                                                6.69
6. PTT Public Co., Ltd                                                6.19
7. The Siam Cement Public Co., Ltd                                    5.01
8. PTT Chemical Public Co., Ltd                                       4.59
9. Sino Thai Engineering & Construction Public Co., Ltd               4.20
10. Kasikornbank Public Co., Ltd                                      4.12


                                       Net Realized
                                      And Unrealized       Net Increase
                                     Gains (Losses) on    (Decrease) in
                       Net            Investments and       Net Assets
For the Quarter     Investment        Foreign Currency       Resulting
 Ended            Income (Loss)*       Transactions*      From Operations
                 -----------------   -----------------   -----------------

                  Total      Per      Total      Per      Total      Per
                 (000's)    Share    (000's)    Share    (000's)    Share
                 -------   -------   -------   -------   -------   -------

March 31, 2011   $    76   $  0.02   $(1,734)  $ (0.50)  $(1,658)  $ (0.48)
                 =======   =======   =======   =======   =======   =======

March 31, 2010   $   122   $  0.04   $ 3,735   $  1.18   $ 3,857   $  1.22
June 30, 2010        506      0.16       506      0.16     1,012      0.32
September 30,
 2010                260      0.08    12,991      4.12    13,251      4.20
December 31,
 2010                (67)    (0.02)    2,457      0.74     2,390      0.72
                 -------   -------   -------   -------   -------   -------

For the Year
 Ended December
 31, 2010        $   821   $  0.26   $19,689   $  6.20   $20,510   $  6.46
                 =======   =======   =======   =======   =======   =======


                               Net Asset            Market          Share
For the Quarter Ended            Value              Price**        Volume**
                           -----------------   -----------------   -------

                            High       Low      High       Low     (000's)
                           -------   -------   -------   -------   -------
March 31, 2011             $ 15.12   $ 13.15   $ 14.00   $ 11.22       301

March 31, 2010             $ 12.84   $ 10.92   $ 10.82   $  8.65       180
June 30, 2010                13.22     12.28     11.30      9.80       193
September 30, 2010           17.36     13.16     15.18     10.61       351
December 31, 2010            18.60     14.77     17.38     12.75       510

*  Net of Thai withholding tax.
** As reported on the NYSE Amex.

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