Hype over hemp stocks: Proceed with caution

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Cannabis plants on display at an expo in Buri Ram province.

Hemp and cannabis-related businesses have become an investment trend in Thailand after the Food and Drug Administration (FDA) opened up the market to products using the plants’ non-psychoactive ingredients.

Firms that announced plans to produce hemp products have seen healthy bumps in their share prices. But the industry has yet to prove there is demand among Thai consumers, and more established players overseas have struggled to turn profits.

Risks abound investing in this untested industry, and analysts warn shareholders may lose money if many of these businesses fail as a result of inconsistent regulations or a lack of economy of scale.

OVERHYPED?

Asia Plus Securities (ASPS) warns against investing in hemp stocks, suggesting investors approach the industry with caution.

Share prices have increased considerably from the beginning of the year and the industry presents many risks because the plant was illicit for decades.

The FDA recalled the first seven licences it awarded to businesses to import hemp seeds, including a subsidiary of SET-listed DOD Biotech Plc (DOD), in order to amend licence details, which caused some negative sentiment in related stocks.

Stocks such as JKN Global Media (JKN), Chayo Group (CHAYO), Rojukiss International (KISS) and Beauty Community (BEAUTY) slipped in price as they all signed memorandums of understanding with DOD agreeing to let the company supply them with hemp oil.

DOD expects the FDA to return its subsidiary’s licence within 1-2 weeks, according to ASPS.

The brokerage studied the hemp and cannabis business in other countries such as the US and Canada and found most companies there reported losses, even though they have planted and commercially manufactured hemp-infused products for over two years. The problems range from production control and R&D investment to marketing expenses.

In the long term, some analysts believe hemp and cannabis still have plenty of room to grow. According to studies, cannabidiol (CBD) extracts in the US market will grow an average of 21% annually between 2020-2025.

The segments with the highest growth are beverages, cosmetics, skincare and consumer products.

In terms of the Thai market, DOD expects to be able to import hemp seeds by the end of this month.

It usually takes 4-6 months to develop the hemp plants and CBD, meaning production would begin by the end of the third quarter, said DOD. The output for hemp extraction would then reach downstream businesses in the fourth quarter this year.

Although this business is likely to grow according to US market trends, the prices of Thai stocks associated with hemp and cannabis businesses this year have increased considerably, said ASPS.

Studies on hemp businesses in the US and Canada found they recorded only marginal growth, and Thai investors are recommended to invest carefully in hemp stocks, said the brokerage.

HIGH PROFITS OR HIGH RISK?

A listed company recently saw its share price surge after releasing information about a hemp investment project to the press without first having filed the data through the SET electronic channel.

SET senior vice-president Manpong Senanarong said the bourse urges investors to carefully consider information that listed companies provide to the market about new businesses, such as hemp-cannabis.

If the news significantly affects share prices, the SET will ask the company to clarify by providing additional information.

Usually when listed firms make any significant investment, they must seek approval from their board of directors and then submit a report to the SET for disclosure to the public.

This process allows investors to better analyse the company’s business trends, he said.

“Do not invest based on a news report without considering an analysis of the company’s project because there could be risks involved,” said Mr Manpong.

REGULATORY ROUNDUP

Korapat Worachet, director of research and investment services at Capital Nomura Securities, sees opportunities for investing in hemp and cannabis businesses, both domestically and internationally. Overseas, these investments cover both hemp and cannabis, and the number of opportunities could rapidly grow as more companies open up their regulations on the plant.

Each country is different and provides varying regulatory and financial challenges, he said.

In the US, each state has the power to legalise cannabis within the state, yet the plant remains illegal on a national level.

Canada has fully legalised cannabis for recreational use and has long grown hemp for industrial purposes.

Many European countries have become more lenient, at least in terms of criminal enforcement relating to the plant, making hemp and cannabis more prevalent all over the world.

“The hemp and cannabis market is getting bigger and it is one of the most interesting investment themes this year,” said Mr Korapat.

“I have to admit these companies are still not doing very well profit-wise, but if the market expands and its economy of scale increases, profits will likely improve.”

BE STRATEGIC

Rhatsarun Tanapaisankit, head of global investing and futures at Bualuang Securities, said investing in cannabis and hemp stocks is high risk as most companies are still in the research phase.

“I recommend investing through an exchange-traded fund [ETF] for better diversification,” he said. “ETFs invest in many large companies and thus can help reduce the risk.”

Mr Rhatsarun advises investors to set the stop-loss point at 7-10% and halt the purchase of more hemp-related stocks until clearer information is available, as the current investment environment on segments such as bond yields and US inflation are likely to escalate over time.

He said to set the stop-loss point and cut losses, discipline is necessary because the price of this type of investment can drop by as much as 75%.

“If the stock price moves in the wrong direction by 7-10%, it means we may have misread something or there may be some information out there we don’t know about,” said Mr Rhatsarun.

“We have to wait and see until there is clear data.”

The world’s largest ETF named ETFMG Alternative Harvest (symbol MJ) has over 50 billion baht in assets under management in 32 cannabis research companies.

MJ’s price moved to a peak of US$40.05 on Sept 28, 2018, representing an increase of over 40% from $27 about a month before.

In 2019, MJ’s price declined throughout the year, then touched its lowest point at $9.72 on March 20, 2020, a roughly 75% drop from its peak.

This year ETF prices are still moving sideways, starting from $15 at the beginning of the year, then peaking at $33 in February before falling to $23.44 on March 23, just over 50% of its all-time high.

Win Phromphaet, chief investment officer at Principal Asset Management Co, said cannabis and hemp have great potential in medicine.

He said compared with other countries in the region, Thailand has the lead in the sector and is the only country in Southeast Asia that has legalised the use of hemp for pharmaceutical research and the healthcare industry.

This resulted in a positive shift in the public perception of the plant, said Mr Win.

He said many Thai asset management companies are open to investment in this sector and some ETFs are investing in companies that are developing cannabis products for medical use.

Principal Asset Management is looking at possibilities for this type of investment, said Mr Win.

“It is good Thailand has a new business to create growth, but investors must be careful and should not blindly march together on an investment,” he said.

Investors should know even if excitement over news announcements about cannabis and hemp investment projects cause stock prices to rise in the short term, the projects may not eventually succeed, said Mr Win.

Investors must think about what will happen if everyone follows the same path, he said.

Having many companies flock to the business creates a higher likelihood of oversupply, said Mr Win, increasing the chances of an unsuccessful investment.