THE TOP TEN
Product makers you can't do without
Anxious stock investors seeking shelter from this storm of instability could do worse than to knock on the door of Asia's consumer staples companies. As the region braces for a recessionary environment, there are several factors in their favour.
Many of these companies produce products classed as necessities, such as food and beverages, personal care items and even tobacco, meaning that demand should remain steady in a downturn.
"You can always buy one less shirt, but you still need soap to wash every day," is how Mohan Singh, head of Asia consumer equity research for Macquarie Group, describes their defensive appeal.
The recent softening of raw material prices should support demand, too, since their costs should fall. These firms are also based in underpenetrated Asia, where growth potential offers opportunities that counterparts in saturated western markets can only dream of.
Plus, private label products – a supermarket's own-brand sugar or milk, for example – are still not prevalent in this part of the world, so there are fewer chances for consumers to trade down.
CLSA estimates that private label penetration rates in the vast majority of Asian markets would be no more than 2% to 3% of total consumer sales.
Emerging market focus
One trend stands out in this month's Top 10, in which we rank the leading consumer staples companies in Asia (ex-Japan and Australia) by forecast 2008 return on equity (ROE). Eight of the businesses operate in emerging markets; three in India, three in Indonesia and two in mainland China, including Want Want China Holdings. Malaysia and Korea make up the numbers.
These companies are benefiting from the region's structural growth story and rapidly rising per capita incomes. Those that establish strong brand equity will gain market share and reap the revenue rewards. Economies of scale are critical in this segment.
"Smaller players have a cost base that is higher relative to their revenue base, compared with those with larger market share," says Singh. "In a downturn, people feel more comfortable buying a brand they know, so again it plays in their favour."
By their nature, consumer staples companies tend to be asset light, so they don't have much capital tied in up plant and machinery. It helps to explain some high ROE figures.
"If you have a high level of sales relative to your asset base, that is a factor that helps return on equity," explains Paul McKenzie, head of consumer research for Macquarie.
Huabao International is asset light and comes seventh on our list with a forecast 2008 ROE of 57.8%. It has a net cash ratio of 75%, meaning that for every US$100 it has in equity it holds net cash of US$75. The company supplies tobacco flavouring essence to nine of the top 10 cigarette brands in China.
The communist country is still a growth market for tobacco, at between 6% and 8% per annum, and Huabao is well positioned to capitalise on the government's strategy of industry consolidation. The top 10 brands have seen their market share rise from about 16% in 2002 to 38% by April this year.