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Asia-Pacific Equity Research
Consumer staples
July 2012
Consumer staples
Consumer staples team
Erwan Rambourg*
Head of Consumer Brands & Retail Equity Research
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6572
[email protected]
Christopher K Leung*
Consumer & Retail Analyst, Greater China
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6531
[email protected]
Cathy Chao*
Consumer & Retail Analyst, Greater China
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6570
[email protected]
Sean Monaghan*
Senior Gaming and Southeast Asia Analyst
The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch
+65 6658 0655
[email protected]
Permada Darmono*
Southeast Asia Analyst
The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch
+65 6658 0650
[email protected]
Karen Choi*
Consumer Analyst, Korea
The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch
+822 3706 8781
[email protected]
Jena Han*
Associate, Korea
The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch
+822 3706 8772
[email protected]
Amit Sachdeva*
Consumer & Retail Analyst, India
HSBC Securities and Capital Markets (India) Private Limited
+91 22 2268 1240
[email protected]
Abel Lee*
Non-Tech Analyst, Taiwan
HSBC Securities (Taiwan) Corporation Limited
+886 2 6631 2866
[email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
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Consumer Staples – Asia
Food
Food Retail
Beverages
HPC
Tobacco
Sun Art
Tingyi
LG H&H
ITC
Wumart
CRE
Amorepacific
Huabao
E-Mart
Meiji Holdings
L’Occitane
KT&G
Woolworths
Ezaki Glico
Shiseido
Japan Tobacco
Puregold Price Club
Uni-President China
Unilever Indonesia
BAT Malaysia
Sumer Alfaria Trijaya
China Yurun
Godrej
Orion Corp
Hindustan Unilever
Nongshim
Unicharm
Indofood
Kao
Asia-Pacific Equity Research
Consumer staples
July 2012
Sector structure
Charoen Pokphand Foods
Non-alcoholic
Alcoholic
China Mengniu
Tsingtao
Inner Mongol ia Yili
Kweichow Moutai
Ito En
Wuliangye
Coca-Cola West
Hite Jinro
Yakult Honshe
Asahi Group
Kirin Holdings
San Miguel
Source: HSBC
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Thai Beverage
400
Jul 2008:
Melamine found in milk and infant formula
in China; affects local producers including
Sanlu, Mengniu, and Yili
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Asia-Pacific Equity Research
Consumer staples
July 2012
Sector price history
Jul 2011:
Sun Art, China's largest
hypermarket, lists in
Hong Kong
300
250
Sept 2011:
Live pig from China Yurun Group
tests positive for clenbuterol, an
illegal feed additive
200
150
Feb 2008:
China food CPI
peaks at 23.3%
100
50
0
Jan-2000
Jan-2001
Jan-2002
Jan-2003
Jan-2004
Jan-2005
Jan-2006
MSCI Asia ex Japan Index
Jan-2007
Jan-2008
Jan-2009
Jan-2010
Jan-2011
Jan-2012
MSCI Asia ex Japan - Consumer Staples Index
Source: MSCI, Bloomberg (index base = 100 starting Jan-2000), HSBC
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Consumer staples
July 2012
Consumer Staples: EBIT margin – asset turnover (2010-11)
3.6
3.4
High asset turn efficient
volume driven strategies
3.2
10.8%
High asset turn and high
margins; profitable industry
leaders strategies
Sumber Alfaria Trijaya
3.0
CP All
Mewah International
2.8
2.6
Dairy Farm Intl Holdings
Nestle India
Asset Turnover (x)
2.4
Unilever Indonesia
President Chain
2.2
2.0
Hindustan Unilever Ltd
Sun Art
1.8
Wumart Stores Inc.
1.6
Thai Beverages
LG Household
1.4
Olam International
Indofood CBP
1.2
Godrej Consumer Products
BAT Malaysia
Dabur India
1.0
Nongshim
0.8
CJ Cheil Jedang
Amorepacific
Wilmar International
Vinda Intern
Hite Jinro
0.6
Nvc Lighting
ITC
Hengan
China Fishery Group Ltd
High margins; niche
players or brands with
strong pricing power
KT&G
Golden Agri-Resources
Low ROA companies.
Business restructuriung may
be required
0.2
Kuala Lumpur Kepong
IOI Corporation
Orion Corp
Pacific Andes Intl Holdin
Uni-President
0.4
1.01x
Astra Agro Lestari
Indofood Agri Resources
Genting Plantations
First Resources
Bumitama Agri Ltd
0%
10%
20%
30%
40%
50%
60%
EBIT Margin (%)
Source: Thomson Reuters Datastream, HSBC
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Asia-Pacific Equity Research
Consumer staples
July 2012
Sector description
This category comprises companies which sell the most common consumer products, such as food,
beverages, household items, tobacco and prescription drugs. This sector is smaller than its counterpart,
consumer discretionary. The larger players are food producers Tingyi and Want Want in China, India’s
ITC, which sells cigarettes, paper, packaged foods and personal care, palm oil processor Wilmar in
Singapore and Unilever Indonesia.
Key themes
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Erwan Rambourg*
Head of Consumer Brands &
Retail Equity Research
The Hongkong and Shanghai
Banking Corporation Limited
+852 2996 6572
[email protected]
*Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
and is not registered/ qualified
pursuant to FINRA regulations
Consumers still need basic supplies even when an economy is faltering. Consumer staples stocks normally
outperform when the economy shrinks and are considered defensive. The sector has underperformed MSCI
Asia ex Japan in the last decade. Correlation with MSCI Asia is higher (0.84 vs 0.74 for consumer
discretionary) but the sector is more responsive to liquidity conditions in the local economy (or M1 supply,
the amount of money in circulation.). This underperformance can be explained by the low growth nature of
some of the F&B industries. This sector is also one of the most sensitive to (food) inflation.
Another key theme is product re-pricing, which allows companies to pass on inflation to consumers. After
facing inflationary pressure in the last few years most F&B companies in Asia have strategies to deal with
rising food prices. Some have developed new brands while others have started to increase product prices,
with industry leaders often taking the lead. Examples include Tingyi, the biggest supplier of instant
noodles and ready-to-drink tea in China, Wings, a leading maker of soap and household goods in
Indonesia, and Indofood, a major food company in the same country.
Others have made attempts to accelerate the shift in product mix towards higher-priced and higher-margin
products (for example, Mengniu, a leading producer of dairy goods in China). We like the long-term
growth story of the F&B sector. It is probably one of the best ways to build exposure to income growth in
rural China, India and Indonesia.
Note also that China is expected to replace the US as the world’s largest grocery market by 2014.
Sector drivers
Food and beverage
Key demand drivers include rising income, growing urbanisation, and shifting consumer preference. Rising
income means higher affordability, and this translates into higher food demand. Growing urbanisation means
a larger market. Urban consumer preferences are shifting to more convenient and healthy food, and this
allows food and beverage companies to take advantage of trading-up effects by launching more premium
products that carry higher margins. Other drivers include product innovations and M&A activities.
Food retail
Drivers include urbanisation, the modern retail channel taking share from the traditional channel, and
consumption upgrades to higher priced/branded products.
Household and Personal Care (HPC)
The key sector driver is brand equity. As the market matures, companies that have brand power and the
ability to meet customer tastes continue to gain market share with margin improvements. They can be
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Asia-Pacific Equity Research
Consumer staples
July 2012
either local (for example, LG H&H in Korea) or global brands. In most cases, growth is achieved through
price hikes or the launch of new products rather than increases in volume.
Tobacco
Thanks to its defensive character, gains in market share and shareholder returns (share buybacks and
dividends) are key drivers. Global brands appear to be gaining continuous market share in Asia but
regulatory risk such as tax hikes and anti-smoking campaigns remain long-term risks.
Key segments
China food and beverage
This sector is usually broken into two categories – upstream and downstream – and then divided into
different sub-sectors based on product segments. The competitive landscape varies across sub-sectors, but
there are common secular drivers that support demand growth, such as rising income and urbanisation.
Common product segments include hog-slaughtering, instant noodles, beer, dairy, soft-drinks, and spirits.
In a more competitive industry like beer, M&A plays a key role as the aim is to capture market share to
generate economies of scale and long-term benefits.
Upstream F&B companies (e.g., sweetener makers) tend to have low pricing power and their margins are
sensitive to soft-commodity price movements. Downstream F&B players (instant noodle and soft-drinks
makers) tend to have higher brand power and therefore their margins tend to be more resilient as they can
pass through part of the cost pressure to consumers. Other ways to mitigate input cost pressure include
hedging, product-mix upgrades, and change in product formulation.
China food retail
Of all the grocery retail formats in China, hypermarkets are not only growing the fastest by taking market
share from other traditional store formats but also consolidating the most rapidly, with the top players
becoming increasingly dominant. Hypermarkets and supermarkets are the two major modern retail
channels, accounting for 14% and 44% of total store-based grocery retailer sales, respectively.
Looking ahead, we expect hypermarkets to continue growing faster than supermarkets for two reasons:
 The format is far less penetrated than supermarkets.
 Evolving shopping behaviour should benefit hypermarkets most. Recent government policies have
focused on raising the income of lower-income groups. As these people get richer their consumer
aspirations increase and they tend to buy more non-grocery products. This will favour hypermarkets,
which generate much higher sales from mass-market priced non-grocery products than supermarkets
(40% vs 4%). Also, with rising car ownership, the car parking facilities at hypermarkets attract a
growing number of shoppers who drive.
India HPC
This fast-moving consumer goods (FMCG) sub-segment is growing rapidly, supported by increased
income levels in urban and rural India. The largest sub-category comprises soaps, shampoo and shower
gels; skincare and colour cosmetics are also important. Premium products only represent 4% of the total
market but the growth rate is nearly double that of the overall personal care category.
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Asia-Pacific Equity Research
Consumer staples
July 2012
These sub-categories tend to have high gross margins but are also associated with high operating costs
such as advertising and promotion. The pace of innovation has also picked up, making life quite tough for
the smaller players. Category attractiveness (high growth and high margins) have led to introduction of
many new products from domestic and multinational players. But the market is crowded and creating
successful new brands is difficult and expensive.
In the long run we see HPC in India being dominated by three or four players. We see multinationals such
as Hindustan Unilever, L’Oreal and P&G outpacing domestic players in several of these categories.
Korea FMCG
With population growth slowing and consumers tending to spend less on everyday necessities as their
incomes rise, volume growth in the Korean FMCG sector has stagnated. Companies are searching for ways
to increase market share and margins by raising prices or changing their portfolio mix to offer more
premium products. However, it is not easy to raise prices because the government tends to keep a close eye
on consumer prices. Cosmetic companies tend to be less affected by such regulatory risks and have found
ways around price resistance that include repackaging and have thus enjoyed relatively stable margins.
As it is becoming more difficult to expand in the domestic market, some FMCG companies are seeking
opportunities elsewhere. For example, Orion’s overseas confectionery sales were bigger than those
generated by its domestic business in 2011. Cosmetic companies such as AmorePacific and LG H&H
have also entered the China market and they expect it to emerge as a growth driver in the longer-term.
Valuation
Price-to-earnings (PE) is the most common valuation methodology to value Chinese food and beverage
companies as it can better capture the company’s earnings growth momentum and is easy to compute. Other
common valuation methodology for Chinese food and beverage companies include DCF and EV/EBITDA.
The best methodology for Korean consumer is the sum of the parts. The EV/EBITDA valuation method
can be used to capture operating value.
As with the consumer discretionary sector, PE valuations have largely stayed in 10-20x band, with the
only exceptions being 2007 (a touch over 20x) and 2008 (10x). However, unlike in the discretionary
sector ROEs are not rising; at around 15-17% they translate into a PB multiple of 2.5x.
Consumer Staples: Growth and profitability (calendarised data)
2008
2009
2010
2011e
2012e
Growth
Sales
EBITDA
EBIT
Net profits
39.0%
27.1%
28.7%
28.6%
-8.6%
5.7%
5.5%
7.5%
25.5%
11.6%
10.3%
12.3%
37.0%
23.5%
23.2%
21.6%
5.4%
10.1%
12.3%
14.6%
Margins
EBITDA
EBIT
Net profit
13.5%
11.8%
8.7%
15.6%
13.6%
10.2%
13.9%
12.0%
9.1%
12.5%
10.8%
8.1%
13.1%
11.5%
8.8%
6%
1.3x
0.1x
20%
5%
1.0x
0.2x
20%
7%
1.0x
0.3x
18%
5%
1.1x
0.3x
18%
4%
1.1x
0.3x
18%
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
Note: based on all HSBC coverage of consumer staples; each figure represents the market cap-weighted average across the sector
Source: company data, HSBC estimates
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Asia-Pacific Equity Research
Consumer staples
July 2012
Sector snapshot
Core industry driver: Inflation
Key sector stats
Consumer staples
Trading data
ADTV (USDm)
Aggregated market cap (USDm)
Performance since 1 Jan 2000
Absolute
Relative to MSCI Asia
3 largest stocks
Correlations (5-year) with
MSCI Asia
6% of MSCI Asia ex Japan
493
135,514
198.3%
4.9x
ITC, KT&G, WANT WANT
110
105
100
95
90
0.85
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan04
Source: MSCI, Thomson Reuters Datastream, HSBC
05
06
07
08
09
10
11
12
China CPI
Top 10 stocks
China
Korea
India
Malaysia
Indonesia
Singapore
Taiwan
Thailand
Philippines
15x
10x
Source: MSCI, Thomson Reuters Datastream, HSBC
PB vs ROE
19
4.0
3.5
18
3.0
17
2.5
16
2.0
15
1.5
Dec-04
Source: MSCI, Thomson Reuters Datastream, HSBC
Weights (%)
25.4
18.4
13.4
10.0
9.2
8.2
7.1
6.5
1.8
20x
Fw d ROE % (LHS)
Source: MSCI, Thomson Reuters Datastream, HSBC
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Dec-11
Country
25x
Dec-10
Country breakdown
650 P rice level
600
550
500
450
400
350
300
250
200
150
100
50
0
Dec-09
Source: MSCI, Thomson Reuters Datastream, HSBC
PE band chart
Dec-08
6.9%
5.7%
5.5%
5.2%
5.0%
4.5%
4.0%
3.9%
3.6%
3.5%
Dec-07
ITC
KT & G
WANT WANT CHINA
HENGAN INTL
HINDUSTAN UNILEVER
UNI PRESIDENT
WILMAR INTL
IOI CORP
TINGYI CYISL
CP ALL PCL
Source: China National Bureau of Statistics, HSBC
Dec-06
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2
3
4
5
6
7
8
9
10
Index weight
Dec-05
Stocks
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Stock rank
Fw d PB (x )