Shining a Light on Shadow Transport

What exactly is “shadow transport”? Well lets start with the pejorative term of “shadow banking” which conjures up images of special purpose vehicles (SPVs), money market funds without deposit insurance, and collateral debt obligations (CDOs). In short, shadow banking institutions accept relatively illiquid long-term assets in return for issuing shorter-term assets. It is similar to regular banks which take in relatively safe deposits and invest in riskier and less liquid loans. Yet, much of the pejorative finance occurs offshore in order to remove assets from banks’ balance sheets and is therefore not fully regulated.

By contrast, shadow transport happens in full view of governments, and even sometimes with the tacit consent of governments. They are a means to relieve the pressure from bustling cities. How do they relieve this pressure? By adding liquidity to a city’s transport system. Shadow transport encompasses the motorcycle taxis, tuk-tuks, vans shuttling people along motorways and other major traffic arteries, and the pick-up trucks posing as cheap taxis that are mobilized to move people from the government transport hubs (train and bus stations) to diffuse areas off the main road. Interestingly, the demand for shadow transport arose because there was not a costly transportation method to get from a certain place to another in a sprawling city. In other words, it is an unintended effect of a government’s official transport policy that drives the establishment of institutionalised systems of shadow transport which become implicitly sanctioned by governments.

It is mostly a developing city’s phenomenon, yet it is also not a bad idea for developed cities. Even developed cities’ citizens could do with less costly transportation and the opportunity to save time (perhaps the most valuable commodity). Imagine being able to hop off the tube station at Oxford Circus and hop on one of the many motorcycle taxis next to Topshop that could shuttle you to the Chinese Embassy or to Selfridges....

RMB Bloc Ascending

These are interesting times. We are seeing the ascendance of a Chinese RMB Bloc, displacing the once-omnipotent US Dollar. This change has been engendered by China’s increased trade with the East Asian region since its trade liberalization since the 1980s. In particular, China’s share of East Asia’s manufacturing trade has grown from 2% in 1990 to 22% currently. As China liberalizes its financial and currency markets, which it is rapidly doing, the RMB’s appeal will grow exponentially. A reference currency is one which exhibits significant co-movement with other currencies. By this definition the RMB is a reference currency for many other currencies already, yet may also one day supplant the USD as the world’s reserve currency.

A country’s rise to economic hegemony is typically accompanied by its currency becoming a major reference currency. Enter China. Currently, average co-movement of East Asian currencies is 40% higher for the RMB than the USD. In recent East Asian currency history from June 2005 to June 2008, 6 currencies followed the USD more closely than the RMB and EUR whilst 3 currencies followed the RMB more closely and one currency followed the EUR more closely. Fast-forward to June 2010 and the EUR does not have any followers anymore, whilst the RMB has gained an additional four currencies whilst the USD has lost three currencies. June 2010 also coincided with the resumption of RMB floating, which prompted the increase in the number of currencies tracking it as a reference point.

7 out of 10 countries in East Asia are constituents of the RMB bloc because their currencies track the RMB more closely than the USD. This means that they are inclined to follow the RMB’s appreciations and depreciations. So when the RMB moves by 1%, these East Asian currencies move in the same direction by 0.55%, whereas when the USD moves 1% these currencies move in the same direction by 0.35% on average. These countries are South Korea, Thailand, Singapore, Malaysia, Indonesia, and Taiwan. As an example, the Thai Baht and the RMB have appreciated by similar amounts against the USD since 2009. Why do these countries find it more advantageous to ensure their currencies track the RMB more closely than the USD? Because countries that are closely intertwined with the Chinese market in terms of exports or imports and particularly those with supply chains centered on China find it beneficial to maintain a stable exchange rate against the RMB. However, three economies still follow the USD more closely. These are Hong Kong, Vietnam and Mongolia. Yet Hong Kong is now the largest offshore depositor of the RMB and more RMB is flowing through Hong Kong than HKD. Additionally, the advent of the ASEAN free trade community from 2015 will bring more integrated trade with China, whilst Mongolia’s trade with China will soar once their massive gold, coal and copper mines are fully operational in a few years.

 

Even outside East Asia, many currencies are following the RMB closely due to China’s trade dominance. These currencies include the Indian Rupee, Chilean Peso, South African Rand, Turkish Lura, and Israeli Shekel. The global financial crisis has exacerbated European and American economic difficulties and allowed the RMB to eclipse them in some parts of the world as a reference currency. In some ways, the renminbi has displaced the euro as the second most dominant global reference currency in the sense that there are more currencies outside East Asia that track the renminbi most closely compared with currencies outside Europe and the Middle East that track the euro. The movement to make China the world’s most popular reference currency is being spurred by China’s status as the world’s largest exporter, the world’s largest net creditor, and the world’s largest economy in purchasing power parity terms (by some measures). Given suitable financial sector liberalization measures instigated by the Chinese government, a global RMB bloc and its ascension to reserve currency status could be fact by 2025. 

Lao Hydropower: CK Power

One of the fastest growing countries in the world over the past ten years has been Laos. Laos’ recent growth rate has been a CAGR of 8.08% to attain a GDP of US$10 billion at the end of 2012. This country of 6.65 million people is classed as a “lower middle income economy” due to its GDP per capita of US$1,349, but it is well on track on achieve its long-term aim of middle-income status by 2020. They have been able to achieve this without an overreliance on debt with their debt burden modest compared to neighbouring Asian countries. Laos have so far managed to attract around US$450 million of FDI inflow yearly. In February 2013, Laos acceded to the World Trade Organization, an essential step in promoting its goods and services and attracting further FDI. Currently 75% of Laos’ workforce practices subsistence farming, which constitutes 30% of GDP. Other major contributors to growth are services, hydropower, construction, and food processing sectors. Mining contributes 11% of Laos’ GDP and 18% when support industries are considered. Natural resources - forestry, agricultural land, hydropower, and minerals - comprise more than half of the total wealth of Laos. In fact, the hydropower and mining sectors combined accounted for about one third of the country’s economic growth between 2005 and 2010. Furthermore, demand from its key trading partners - Thailand, China and Vietnam - is supposed to continue benefiting Laos’ continued economic growth.

An opportunity has therefore arisen to obtain exposure to Laos’ fast growing economy as well as to invest in its hydropower resource. The best part is that this investment can happen within the relative safety of a Thai holding company. Enter CK Power, which has just listed on the Thai SET stock exchange. It is the first Thai holding company with a core subsidiary abroad to list on the SET as well as the first listed company to generate most of its revenues from abroad. CK Power operates the newly-operational Nam Ngum 2 hydropower plant in Laos. Current assets include major stakes in hydropower plant Southeast Asia Energy Co in Laos, three solar power plants in the north of Thailand, and a cogeneration power plant in Bangpa. Last year the company made a net profit of THB112 million against revenues of THB2.5 billion.

Their listing on the SET managed to raise THB2.34 billion (US$75.29 million) with 220 million shares priced at THB13 each. On its first day of trading shares in CK Power hit THB15.9, a 30% increase due to its original THB13 share price being a 28% discount to its DCF value compared to peer Thai utilities companies’ discount of 10%. Major shareholders in CK Power after the listing are parent company Ch.Karnchang with 31.78%, Bangkok Expressway (23.22%), and Thai Tap Water (25%). Interestingly, foreign firms have so far shied away from this investment. On the back of the new listing and newly-operational Laotian hydroplant, its profit is targeted to rise to THB525 million by year-end. Therefore, a short-term move would be to wait until the share price is around THB14 and buy for a targeted year-end share price of THB18.

CK Power’s future investment projects that they already have in the pipeline make for a compelling case to invest long-term in CK Power to see their share price edge up around THB30 by 2019. CK Power plans to invest more than THB10 billion over the next few years in order to increase its power generation from 875 megawatts currently to 4,400 megawatts by 2022. CK Power has several investment projects in the pipeline, pointing to a potential 5-year growth of 69% CAGR. Plant BIC2 is scheduled to begin operations in June 2017 and plants NB1 and XPCL should be operational in 2019. CK Power also plans to acquire a 30% stake in Xayaburi Power in Laos from its parent company when the plant goes operational in 2019. The company is also planning to develop 8 small power plants in Thailand with a budget of THB5 billion per plant. In addition, they are looking at developing a hydropower plant in Myanmar along the Thanlwin River. Furthermore its parent company, Ch.Karnchang, has an excellent track record with hydropower project developments as well as having operated in Laos for 20 years. CK Power is also well leveraged to develop other hydropower projects in Laos. The Laos government has signed Memorandum of Understandings for 70 hydropower projects, of which only 30 are operational or being constructed. Therefore 70% of Laotian hydropower capacity is still available for development, perhaps by CK Power. On the debt front, the company’s total debts are THB2.2 billion, a debt-to-equity ratio of 0.98:1. They plan to fund future investment projects from its own retained earnings as well as further rights issues and borrowing from banks. However they are adamant that their debt-to-equity ratio will not exceed 2.5:1. Lastly, CK Power’s investments will undoubtedly have high demand due to Thailand’s increasing demand for electricity, with its current needs of 26,455 megawatts per year projected to rise to 54,256 megawatts per year in 2030.

The next BRICs are Cities – Introducing The Five CAILA Axes

Shanghai

Forget about BRICs. The next wave of development is coming from a cluster of major cities in developing countries – the “Five CAILA Axes” around which the world’s economic progress until 2030 will spin. Each axis has a political and economic power center, but these are not mutually exclusive and there is some political and economic spill over:

·         China Axis – Beijing-Shanghai

·         ASEAN Axis – Jakarta-Bangkok

·         India Axis – Delhi-Mumbai

·         Latin Axis – Mexico City-Sao Paulo

·         Arab Axis – Cairo-Istanbul

Beijing

The world’s top 100 cities produce half of the world’s total economic output. From 1950 to 1970, 65% of the growth of these megacities was in the developing world. Fastforward to 2000 to 2013 and the developing world constitutes 90% of this growth. Not only that, the world’s biggest cities carry political weight, facilitate global integration, and are innovation hubs. Economic progress is a function of population growth, human capital and productivity enhancements. By 2025, emerging market cities will have more higher-end and middle-income households than developed cities. For example if we take China as a microcosm for the world. We see there are 13 cities with populations over five million and these 13 cities are responsible for 25% of China’s total GDP. What the drivers of this contribution? Their ability to attract the highest quantity and quality of talent, the most investment, and the city network effects all feed growth and stimulate innovation. For example, Shanghai has access to 100,000 more university graduates each year so that 28% of its labour force is university educated. There are also 500,000 expats living in Shanghai. The functions of economic development are all happening fastest in the “Five CAILA Axes”.

The “Five CAILA Axes” were chosen due to a variety of factors. Above all however these cities are reaching hegemonic proportions in their parts of the world as well as globally due to their economic strength and business activity, aided by political clout. It is anticipated that strong economic and business activity will have a positive knock-on effect for development in other dimensions such as human capital, culture and other social factors (though these are also taken into account). The factors measured are:

·         Economic aspects include the gross domestic product, GDP per capita, cost of living, efficiency of city transportation and communication infrastructure, and provision of international financial services.

·         Business activity includes aspects such as the value of a city’s capital markets, the flow of goods through ports and airports, and the presence and strength of multinational corporations.

Bangkok

·         Human capital evaluates a city’s ability to attract talent based on the size of its foreign-born population, the number of residents with university education, the quality of universities, number of quality hospitals, and number of international schools.

·         Cultural factors include the number of major sporting events, number of museums, number of international travellers, number of world heritage sites, number of skyscrapers, and a measure of the diverse range of social activities and attractions.

·         Political engagement examines the influence a city has on global policy, the number of embassies and consulates and international organizations, and the amount of political conferences hosted within the city.

Jakarta

The most promising Axis of the “Five CAILA Axes” is the China lever, consisting of the power center Beijing and the financial hub Shanghai. They are already ranked 6^th and 7^th respectively for business activity globally and both cities place in the top 15 in the world for innovation. Notably, Shanghai currently has the 9^th highest GDP of any city in the world at US$460 billion and Beijing follows closely at 12^th with US$359 billion. By 2025, Shanghai will have the third highest GDP, after New York and Tokyo, whilst Beijing will have the fifth highest GDP in the world. Moreover from now until 2025, Shanghai and Beijing will record the two highest GDP growth rates of any cities in the world at around CAGR 6.6%. On the population front both cities have grown significantly in the past years with Beijing growing by 50% to reach 18.25 million people and Shanghai growing 41% to reach 21.77 million. By 2025, Shanghai and Beijing will have populations approximating 30 million people making them the third and fourth most populous cities globally. Their people meanwhile enjoy GDP per capita roughly double China’s national average at US$13,848 for Shanghai and US$13,447 for Beijing. Come 2025, Shanghai and Beijing will have the 4^th and 5^th highest number of households with annual income over US$20,000 (roughly 6 million households each), only after Tokyo, New York and London. Thus by 2025, this part of the Axes will command roughly 65 million people, US$2.5 trillion GDP, and 12 million high-income households.

Delhi

Moving down to South-East Asia, the ASEAN association of 10 nations will go live in 2015. Taken together, they are the world’s 8^th largest economy. The free trade area will provide impetus to both Jakarta as a political center for the region due to ASEAN’s headquarters being located there and Bangkok as a financial/service hub for the neighbouring regions due to its strategic location. Currently Bangkok has the 36^th highest GDP worldwide with US$280 billion whilst Jakarta has the 42^nd highest with US$221 billion. They have both also experienced rapid population growth with Jakarta swelling 35% over the past decade to reach 26.75 million people and Bangkok experiencing a 45% increase to 14.54 million. Their residents also boast GDP per capita three times their nation’s average with Bangkok’s at US$14,301 and Jakarta’s at US$11,409. By 2025, Jakarta will be the world’s 8^th most populous city, backed by the second largest increase in the middle-class that will take place outside China, and Bangkok will be the 40^th largest. Corresponding to this growth will be Jakarta’s 1.3 million households with an annual income above US$20,000 whilst Bangkok will have 1 million of these households. This is another Axis by 2025 that will wield around 60 million people, US$1 trillion GDP, and 2.3 million high-income households.

Mumbai

If the 21^st century belongs to China, then the 22^nd century may belong to India. Its two premier cities are Delhi (the political hub) and Mumbai (the financial and cultural center). In fact, Mumbai is the fastest growing megacity in the world in terms of its business activity, a characteristic that will continue through this century. Both cities are behemoths with Delhi’s population growing 40% since 2003 to 22.83 million people and Mumbai’s population at 20 million currently. GDP is high with Mumbai placing 41^st among cities worldwide with US$227 billion whilst Delhi places 43^rd with US$211 billion. However, size also poses challenges with GDP per capita quite low in both cities, US$2,800 in Mumbai and US$2,000 in Delhi. Yet come 2025 and Mumbai and Delhi will be the second and fifth most populous cities in the world, with a collective population of 75 million people consisting of 2.9 million households with annual income above US$20,000 in Mumbai and 2.4 million such households in Delhi. Furthermore, by 2025 Mumbai (4^th) and Delhi (7^th) will have some of the highest number of children below the age of 15 within the cities, signalling a potentially large workforce in the coming years after. Thus the Indian Axis will encompass 75 million people, US$1 trillion GDP, and 5.3 million high-income households.

Mexico City

The Latin world is split between the Spanish and the Portuguese speakers. Financially Sao Paulo is ascending, whilst Mexico City’s proximity to the USA lends it political supremacy. Economically, Sao Paulo has the 10^th highest GDP of all cities worldwide at US$401 billion, followed by Mexico City at US$340 billion in 14^th place. Population-wise, Mexico City boasts 21 million compared to Sao Paulo’s 11.32 million. The Latin Axis is also quite well-off compared to other Axis with GDP per capita in Mexico City US$25,000 and in Sao Paulo US$17,785. They are also quite innovative internationally with Sao Paulo placing 17^th and Mexico City 23^rd worldwide. Looking at 2025, Sao Paulo and Mexico City will be the eighth and ninth most populous cities in the world, with both approaching 32 million people each. Both Mexico City (8^th) and Sao Paulo (14^th) will also have some of the highest number of children below the age of 15 within the cities. Income-wise, Sao Paulo will have the 10^th highest number of households with annual income over US$20,000, with 2.4 million, whilst Mexico City comes in at 12^th with 1.5 million. The Latin Axis will hold 65 million people, US$1.3 trillion GDP, and nearly 4 million high-income households.

Istanbul

The Arab world has many potential financial centers, yet perhaps the most secular and stable is Istanbul. Meanwhile politically Cairo’s population dwarfs many neighbouring countries (it would be the 5^th largest Arab country) and it is home of the Arab League of Nations. Istanbul’s population has increased by 26% in the past decade to hit 13 million currently whilst Cairo’s population is at 26 million. In fact, Cairo is home to half of Egypt’s hospital beds and university desks, 20% of its buildings were built in the last 10 years, and 60% of the Arab League’s media and publishing outlets are located in Cairo. Currently Istanbul’s GDP is the 28^th highest globally at US$301 billion whilst Cairo places in the top 60 cities with US$128 billion. By 2025, Cairo (12^th) and Istanbul (25^th) will have some of the highest number of children below the age of 15 within the cities. Cairo and Istanbul will be the 6^th and 25^th most populous cities in the world. Cairo will have 2.2 million households with annual income above US$20,000 and Istanbul will have 900,000 such households. Together the Arab Axis will control 60 million people, US$900 billion GDP, and nearly 3 million high-income households.

Cairo

Many of the world’s megacities are showing signs of exhausting their economies of scale and consequently their GDP per capita and population growth have slowed. This trend is expected to continue. However there is no fixed limits beyond which cities cannot grow productively – Tokyo, Osaka and Hong Kong are expected to still be near the top of many rankings. Rather the hurdle to urban growth is the ability to keep pace with and manage their expansion. Megacities are highly complex beasts requiring long planning horizons and extraordinary managerial skills. Of course European and North American megacities will still be major contributors to world economic output and progress, yet is the “Five CAILA Axes” that are best placed to keep pace with change and manage will contribute a majority to economic progress. Together they control 325 million highly-educated people (4.5% of a projected 8 billion world population), US$6.7 trillion (9% of a projected US$80 trillion world output), and 26.6 million high-income households. Watch these various axes flex their levers to aid world economic progress.

Insuring the Emerging Masses: Thailand's Case

Insurance is one of those luxuries that mature economies take for granted. Yet insurance is a burgeoning industry in emerging markets now as their citizens get richer and desire the typical middle-class trappings. Thailand is one such market with low life and non-life insurance penetration among the population. Thailand possesses the second largest economy in the ASEAN region after Indonesia, with the industrial and service sectors dominating it. Thailand’s economy is heavily reliant on exports, constituting 67% of their USD329 billion economy. With a population of around 69 million people, they have the third lowest unemployment rate in the world at just 0.5% (after Monaco and Qatar). Furthermore the Thai economy seems buoyant this year, forecast to grow in a range of 5-6%. On the insurance front, Thailand has life insurance penetration of 2.7% (premium as % of GDP) (US$9.22 billion), whilst it has non-life insurance penetration of 1.7% (US$6.02 billion). Compare this to mature economies and one can smell the opportunity – Taiwan has life insurance penetration of 14% and 3.1% for non-life insurance penetration, whilst Japan has life insurance penetration of 8.8% and non-life insurance penetration of 2.2%.

Thai insurance penetration rates are exceptionally low, yet they also possess several factors that will enable rapid growth in the provision of insurance products. Thailand’s middle class is growing rapidly and life expectancy has increased markedly from an average of 69 years in 2000 to 74 years currently. Another demographic factor is the estimated 30% of the Thai population that will be over 60 years old by 2025. In addition, traumas such as the massive floods in 2011 and riots in 2010 has raised the need for insurance in the national consciousness. For example the floods were the fifth costliest insured loss event in the past 35 years with estimated losses of US$20 billion. Thailand is also being promoted by the World Bank as the insurance hub for ASEAN when the free trade area goes live in 2015 in order to facilitate development of insurance industries in neighbouring countries.

Unique Insurance Products in Emerging Markets

Looking forward, the life and non-life insurance markets are growing at around 20% year-on-year. In life insurance this growth is being driven by attractive tax benefits to incentivise savings, whilst growth in non-life insurance is driven by increased education of consumers and more focused distribution channels. Emergence of health insurance and pensions across Southeast Asia is a growth opportunity, one expedited by the global financial crisis. Over time, pension and retirement-related assets will become the largest source of wealth in the region. In this major growth area, competition among insurers is strong with many engaging in price discounting in order to get an edge. In other products, motor insurance premiums are expected to increase by 10% this year. Premiums for property insurance regarding flood cover have risen and many insurers are also simply refusing to cover floods. Demand for professional indemnity insurance is also increasing and more insurers are offering this product to meet demand. Additionally, workers’ compensation insurance is mandatory and managed/subsidized through a government program. The only real challenges for insurers currently are the possibility of lower interest rates in Thailand, which could hit demand for insurance products, and higher reinsurance costs. Many insurers in emerging markets have historically abstained from purchasing catastrophe reinsurance in order to maximize their retained premium. Yet, the apparent frequency and severity of catastrophes in the Asia-Pacific is increasing, prompting insurers to re-think their approach to reinsurance. One challenge insurers have to grapple with however is that as they try to target the growing middle-class they are unable to simply pass on the increased cost of reinsurance as affordability is a key factor in selling insurance to first-time buyers.

Thailand has historically had numerous smaller insurers, yet new insurance regulations raising the minimum capital requirements for insurers will be a major driver for consolidation. Coupled with strong growth prospects in the insurance industry as a whole, investing in the top Thai insurers would be good for one’s wallet. In the life insurance market, the top five insurers dominate 70% of the market, a concentration that is extremely high compared to Europe and the USA. The market leader is AIA with 20% followed by Muang Thai (16%), and SCB Life (14%). Meanwhile the non-life insurance market is more fragmented with the top five insurers controlling around 40% and a greater range of products and distribution channels allowing for more competition. Five high-growth non-life insurers to watch include:

Thai Insurers are avoiding flood cover

·         Bangkok Insurance has a market capitalization of THB30.27 billion, profit of THB928.67 million, revenue of THB9.58 billion, and 1211 employees. Its share price is currently THB396, up 64% from last year and 114% from five years ago. They engage primarily in providing non-life insurance including motor insurance, travel insurance, personal accident and health insurance, property insurance, third party liability, marine and cargo insurance, fire insurance, and reinsurance services for both domestic and overseas markets.

·         Dhipaya Insurance Public Company Limited has a market capitalization of THB12.53 billion, profit of THB641.12 million, and revenue of THB9.75 billion. Its share price is THB41.75 currently, up 90% from a year ago and 152% from five years ago. They primarily engage in the non-life insurance business providing motor insurance, marine and transportation insurance, health and cancer insurance, travel insurance, private and public property insurance, machinery insurance, aircraft insurance, insurance to cover void construction contracts, and burglary insurance.

·         Muang Thai Insurance has market capitalization of THB6.08 billion, profit of THB118.41 million, revenue of THB5.39 billion, and 780 employees. Its share price is currently THB104, up 43% from last year. They were incorporated in 2008 and currently market their products through the 830 retail branches of Kasikornbank and through various insurance agents and brokers. They are the number two provider of life insurance in Thailand. They are number seven on the non-life insurance side, engaging in providing property insurance, all risks insurance, terrorism insurance, insurance for SME, marine and air cargo insurance, fleet insurance, engineering and machinery insurance, personal accident and health insurance, motor insurance, gem and gold insurance, airplane insurance, and trademark insurance.

·         Syn Mun Kong Insurance has a market capitalization of THB 9.12 billion, profit of THB720.24 million, revenue of THB 8.13 billion, and 1802 employees. Its share price is around THB460 currently, up 76% from last year and 673% in the past five years. They engage mainly in the provision of non-life insurance with an emphasis on motor insurance, fire insurance for properties, marine and transport insurance, travel insurance, and health and personal accident insurance. They operate through 101 branches throughout the country.

·         Navakij Insurance, incorporated in 1933, had THB2.12 billion revenue in 2012 and THB220 million profit. They have 454 employees and 27 branches throughout Thailand. They principally engage in the provision of non-life insurance, including motor insurance, fire insurance, marine insurance and other insurances. They have a market capitalization of THB2.37 billion. Their share price is currently THB79, a 40% increase from last year. After scoring a THB104 million profit in Q1 2013, which is a 234% growth rate, Navakij insurance are reaping the benefits of their rapid expansion into new insurance products.
 

Joining the 0.1% through Opportunity Arbitrage

The winner-takes-all dynamism of free market capitalism is not only concentrating wealth in the world’s top 0.1%, but it is leading to shifts in the geographical patterns of millionaires. The past few decades of rapid technological progress and globalization has enabled the fortuitous and talented to prosper more than ever before whilst the vast majority (including the global middle-class) have struggled more. The wealthiest that already occupy places at the apex do not need to move. It is the ones underneath that would benefit from the idea of “opportunity arbitrage” by moving to less saturated markets.

Singapore

In 2012, there were 63,000 people with US$100 million or more in liquid, investable assets and 12 million people worldwide with more than US$1 million. The latter number was a 9.2% increase from 2011. In total, the 12 million people or this 0.1% possessed US$47.2 trillion, 39% of the world’s wealth. Breaking this down, 3.4 millionaires are located in North America, 3.3 million in Asia, and 3.1 million in Europe. Meanwhile in Singapore 16% of their population are millionaires. Currently, there are 18,000 centa-millionaires in the Asia-Pacific, more than both North America with 17,000 and Europe with 14,000.

Tokyo

So what’s the secret to joining this elite 0.1%? I would promulgate ‘opportunity arbitrage’. Arbitrage exists as a result of market inefficiencies. In the world today, the litany of regulations governing movement of workers, capital and entrepreneurs ensures the existence of a significant gap between potential profit and ‘fair value profit’ within and between different countries. Potential profit is the unknown quantity of cash that one could generate in a given country, whilst ‘fair value profit’ is the estimated and quantifiable amount of cash that one should generate in a typically competitive market for the respective good/service that one can provide. Thus, opportunity arbitrage is a strategic move to a different country in order to exploit different market conditions between countries in order to increase one’s potential profit greater than the fair value profit. Different market conditions could include the competitiveness of the specific market, the regulatory burden, tax burden and incentives, consumer tastes and preferences, etc. The current problem is that the rise of the wealthy 0.1% worldwide is coinciding with the whittling away of the global middle-class. The solution here is, as German Chancellor Angela Merkel suggested for unemployed young Europeans, get mobile and engage in “opportunity arbitrage”. Find that country where your individual skills and experiences can best unlock your ‘fair value profit’ to enable you to join the world’s 0.1%.

London

There has been concern that labour productivity has increased significantly faster than real wages, whereas in the past the two have moved in tandem. Opportunity arbitrage can potentially ensure a more efficient global labour and enterprise market, which should enable labour productivity and real wages to re-engage. What’s more, opportunity arbitrage should have a positive influence on global social mobility which has stagnated in the past decade, with the top 1% globally retaining wealth generation through generation whilst those at the bottom find it more difficult to escape the cycle of poverty. It is worth remembering too that much of the opportunity arbitrage should occur in the fast-growing emerging markets of Asia, Africa and Latin America. The world’s economic centre of gravity is shifting towards Asia. This is where for example 50% of Chinese who are classed as millionaires today weren’t in 2009 and where 60% of 2019’s millionaires are currently not affluent to that degree. Asia and Africa is also where you find the youngest average age of millionaires, at 35 years old for Africa and 37 years old for Asia, suggesting that opportunity arbitraging to these regions could make you wealthier sooner. Also by 2016, Asia will have 26,000 centa-millionaires, North America will have 21,000 and Europe will have just 15,000.

Riyadh

One worry that people may have is of a growing income inequality. Yet, entrepreneurs’ innovations are desirable. They positively disrupt society by introducing a product that everyone in society desires to purchase. Yet because everybody desires to purchase the product and there is only one entrepreneur (seller), economic well-being is unequal. However, theoretically everybody has exchanged cash for the product because it will make them economically better-off. Yet there are also examples of wealthy individuals profiting by seizing control of natural resources, lavishing investment banker bonuses on themselves, and benefiting from corporate excesses linked to continually soaring CEO pay and abuse of non-executive directorships. But the simple point is that most of the world’s wealthy are entrepreneurs that have enriched the world with their contributions.

More millionaire mansions?

It would be beneficial for many in the saturated Western economies to uproot and employ ‘opportunity arbitrage’ in emerging markets in Asia where their expertise and entrepreneurship may achieve ‘fair value profit’. Yet most will likely not, burdened as they are by the familiar. It is here that an oft-quoted adage is apt, “It is not the strongest that succeed, but those most adaptable to change”. Here’s to an avant-garde conception of entrepreneurial Darwinism where a global entrepreneurial class arbitrages business opportunities by moving seamlessly across borders.

Steely Resolve: Millcon Steel Industries

The volume of steel consumed worldwide has been the barometer for measuring economic development. This is because steel is a basic raw material both for the construction industry and for many industrial goods. Steel consumption increases when economies grow due to government investment in infrastructure, housing and transport and corporation investment in factories. Conversely, economic recession typically coincides with a dip in steel production as investments are halted. Furthermore steel grades and stronger alloys are constantly being improved; for example steel rods used as reinforcement material with cement or concrete were improved into ribbed bars then cold twisted deformed bars and now thermo-mechanically treated bars. Technology has also been responsible for shrinking the time needed to transform iron ore to steel to just one day. Steel is the most recycled material in the world, with recycled steel constituting half of steel produced in OECD countries as even after decades of use it can be sent back to furnaces as scrap to be remade into new steel. Steel is also hardly labour-intensive with about 1,000 workers producing 1 million tonnes. Steel as a basic industry generates significant upstream and downstream employment with around 4 persons employed in other industries per worker in the steel industry. For all its qualities, steel is now referred to as a sunset industry in developed countries, yet in developing countries it is mostly just a dawn. One country showing some steely resolve is Thailand where the steel industry has been buoyant and the party looks like it will continue for some time with the commencement of the ASEAN economic community in 2015.

The Thai steel industry started from the steel re-rolling business, which still dominates Thailand today where rolled steel products account for 21.4 million tonnes per year and semi-rolled products account for 8.8 million tonnes per year. Thailand imported all raw material, semis and finished products for a total of 14.96 million tonnes in 2011. High-grade steel products are typically imported from Japan, South Korea, Taiwan, USA, and Europe, which accounted for 6.59 million tonnes or 45% of overall steel demand. Thailand exported merely 0.73 million tonnes of steel products, with 53% of that going to ASEAN nations. Thailand’s overall steel demand has increased on average 7.3% per year in the past 12 years. 54% of steel is consumed by the construction industry, 16% by the automotive industry, and 13% by machinery and industrial. There are plenty of opportunities in the industries driving steel demand for the steel industry to continue its growth in Thailand.

·         Within construction, massive infrastructure development of the mass transit (MRT) in Bangkok and irrigation systems in Northern Thailand as well as thousands of new condominiums throughout the country are bright spots.

·         Within industry, many Japanese companies are setting a trend of relocating factories to low-cost Thailand and companies generally are investing in new appliances and machinery requiring steel as an input.

·         The automotive industry (Thailand is 8^th largest car exporter worldwide) in particular looks promising with 2.1 million cars being produced in Thailand in 2012 with that number set to rise to 3 million cars by 2015.

·         Steel machinery demand is also projected to increase due to farm machine needs and petrochemical plant needs.

The coming of the AEC in 2015 is expected to support continued Thai steel growth due to rising ASEAN demand, the ongoing THB2 trillion government transport infrastructure investment, and expansion of automotive, construction and machinery sectors. The fact that the ASEAN market is taking its toddler steps towards industrialisation means that there is vast room for growth; ASEAN steel consumption is around 90kg per person per annum compared to OECD countries where it ranges from 200-500kg per person per annum. As such, steel demand from ASEAN nations is expected to increase from 50 million tonnes in 2010 to 200 million tonnes in 2030, a four-fold increase.

One such Thai company that is on course to take advantage of these macroeconomic trends is Millcon Steel Industries, which is Thailand’s second largest steel manufacturer by revenues after multinational Tata Steel’s Thailand operations. The company was founded in 1998 and currently employs around 630 people. They manufacture and distribute steel products, both locally and internationally. Its four main products are concrete steel bars (such as round bars and deformed bars used in the construction industry), high tensile thread steel bars used in construction of high tension work, rolled steels and structural steel products (including hot-rolled coils, cutting products and steel fabrication), and steel pipes used in construction, furniture and spare parts of automotive industries. The company operates two production plants in Bangkok and currently has a market capitalization of around THB3.06 billion. Major institutional investors in Millcon Steel Industries include the Thailand Prosperity Fund II (6.55% share), Aero Sun Investments Limited (6.10%), HSBC Private Bank (3%), and UBS (2.23%). Its production plants utilize machinery and management systems with a Europe standard globally recognized under Automation PLC Rolling Mill and Automation PLC Furnace. The company has also diversified its business to the transport and logistics business under a subsidiary, Million Miles Co Ltd, which provides transportation services to deliver goods for Millcon, enabling them to trim one of their major expenses. Domestically, Millcon Steel Industries has been engaged on several major projects including Suvarnabhumi Airport, Rama VIII bridge, the Bangna-Bangkok Expressway, and the Mass Rapid Transit System. Internationally, they have facilitated construction of the Golden Ear Bridge in Canada, Sutong Bridge in China, Cross City Tunnel in Sydney Australia, and the Sheikh Zayed Bridge in Abu Dhabi.

Millcon Steel Industries is currently trading at THB1.82 on the Bangkok stock exchange.  Revenue has increased steadily from THB9.8 billion in 2008 to THB15.27 billion in 2012. Yet its share price is 25% down from last year due to several years of consecutive losses. Yet these losses are more due to overinvestment rather than structural factors. Millcon Steel Industries invested THB2.9 billion in 2010 on a melting shop to support its long products rolling operations, with capacity of 500,000 tonnes per year. To mitigate dependence on import of raw steel, Millcon initiated the Green Mill Project aimed at producing high-grade raw steel within Thailand. The project has received THB5 billion of financial support from the Thai Board of Investment. The finished products are in high demand from industries such as the automobile industry which require high-grade steel.

Despite the ostensibly negative consecutive losses, there are several positives. The Green Mill Project will be completed this year, enabling local sourcing of high-grade steel as well as more efficient steel production to aid profit margins by a projected 7% this year. Furthermore, revenues should grow 15% this year to around THB16.6 billion due to the elevated rail project in Greater Bangkok and other public infrastructure works as well as an increase in overall steel demand. This is a stock that has long-term potential, especially as the AEC comes into force in 2015 allowing free movement of steel within the 10 ASEAN countries. With the stock around THB1.82 it is a good time to buy into this steel trend and maintain steely resolve as the stock soars to around THB10 by 2015.