GE Shifts from Thai Banking to Myanmar Infrastructure
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General Electric (NYSE: GE) has sold 7.6% of its 32.9% stake in Thailand’s Bank of Ayudhya Pcl for $462 million and is reviewing bids from Singapore’s OCBC and Malaysia’s CIMB for the remaining 25%. Ayudhya is not in bad shape and, according to Citigroup, its profits are likely to double in two years, after increasing by 115% since 2008, due to an increase in demand for consumer loans. This sale will help them put behind their days as a financial company and complete the transition back to a manufacturing and research powerhouse.
While GE moves away from banking and finance, it is looking to expand in Myanmar. After 60 years of crippling isolation from the U.S. and much of the E.U., sanctions have been lifted in the past year. Within days of President Obama giving the green light to American firms to invest in Myanmar, GE inked a $2 million deal to provide X-ray machines to a local hospital.
Myanmar has a population of approximately 60 million, has lived in isolation for more than 22 years, and is extremely under-developed in virtually all sectors. With $13 billion in investments, China is the biggest source for FDI in Myanmar, followed by Thailand with $9 billion. Opposition leader Aung San Suu Kyi visited US on Sept. 8, but she was quick to reassure her country’s long time ally that her visit should not “in any way be seen as a hostile step towards China.” Nonetheless, Myanmar offers tremendous opportunities for growth for US firms in every sector, particularly due to its gas reserves and raw material assets. The Asian Development Bank has predicted that its per capita income (PPP) could triple by 2030. The severe lack of infrastructure means a shortage of skilled labor but it also represents nearly virgin investment territory.
Other companies are also resuming their operations in the country. Coca-Cola (NYSE: KO) has sent its first shipment to the country since 1962 while Pepsi (NYSE: PEP) has signed an agreement with Diamond Star Co. to distribute its branded products to the country. Coke was preparing months in advance for the opening up of Myanmar. Both Coke and Pepsi will find strong demand not only for soft drinks but for bottled water. It is a verity in these frontier markets that fresh water is a rare commodity. Water purification will be one of the first industries to gain traction.
A month ago, GE opened its first office in the country. On 24th September, the company announced that it is leasing two jets to Myanmar’s national airline. However, that growth in Myanmar is going to be “very slow;” therefore investors shouldn’t expect any significant gains coming from there in the near future. This is a long-term investment at the infrastructure level.
Overall, General Electric has been strong this year. Its latest Q2 earnings release showed growth in almost all sectors. The latest quarterly revenues were up 2% YoY to $36.5 billion while earnings were up 2% YoY to $3.65 billion. Its current expansion strategy is focused towards growth in the mining sector, which has been depressed and is both starved for capital and ripe for new investment. Since the beginning of the year, the SPDR S&P Metals and Mining ETF (NYSEMKT: XME) has fallen by 10% while GE has risen by 27%. Mining is currently a part of GE’s Transportation business unit. The Q2 revenues from this segment were $1.6, a 27% increase YoY and profits were $300 million, 58% percent YoY. In 2011, it earned $2 billion from mining, which the division’s CEO Lorenzo Simonelli is planning to push to $5 billion by 2016.
The mining equipment manufacturers such as Caterpillar (NYSE: CAT) and Joy Global have also witnessed declining shares amid falling commodity prices and a China slowdown, which has caused a significant decrease in demand for copper and iron-ore. Since January, CAT and JOY have fallen by 2.4% and 26%. Caterpillar recently lowered guidance based on a slow 2nd half of 2012.
Some analysts believe that China’s mining sector has hit bottom and is going to show improvements in 2013 and beyond. Global QE may help create this and China’s infrastructure stimulus will provide a short-boost; but this is an economy already suffering from over-investment in infrastructure. However, buying strong properties now at relatively distressed prices is smart. Almost $4.15 billion of M&A activity has occurred in the mining and services sector, up more than 50% from 2011.
GE itself has so far announced that it is going to buy the Australian mining equipment manufacturer Industrea ltd. for $695 million, as well as Virginia based Fairchild International. GE Mining will be headquartered in Industrea’s home of Brisbane, Australia. JOY and the London listed Weir Group are GE’s next most likely takeover candidates. Unlike contemporary equipment manufacturers, GE is going to focus on providing a whole service package that is suitable in the current economic environment. This will work as long as they can realize economies of scale within the entire value chain.
Management believes its revenues will jump 10% in 2012 while EPS will also witness “double-digit growth” in 2012 and 2013. The focus will remain on acquisitions, particularly in mining, of up to $3 billion, although the management has stated that it is more comfortable with smaller takeovers as they are easier to integrate into GE’s existing business units. On the other hand, CAT has reduced its earnings forecast for 2015 from $15-$20 per share to $12-$18 per share. CAT’s CEO Douglas Oberhelman has recently blamed the slowing economy on tight monetary policy by the Fed in 2012, whining for more QE which he got in spades. Unlike GE, CAT will remain cautious of expansion through acquisitions in the current environment. GE has more than $74 billion in cash after spending more than $17 billion in the past five quarters.
This reversal of top line revenue shrinkage makes them well-positioned to deploy across SE Asia, taking advantage of the recent strength in the U.S. dollar to get the most out of their investment bucks in some of the cheapest markets (relatively) in the world. GE is trading at a P/E of 18.6 but only 13 times future earnings; it carries a 3% yield despite having broken into a three year high, which underscores the idea that investors see value there now. GE looks well positioned across a number of sectors to grow in Southeast Asia and China over the next 4+ years as we are betting on an Obama re-election, which should not hurt things.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company and PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.