Wednesday, 27 August 2014

Accessing the Chinese consumer - from Fonterra to Danone and then Want Want

I have long been a supporter of the positive structural trends around the baby food market and my current investment in Danone is driven by that theme with its associated growth potential and pricing power.  I was pleased then to see a general validation of this theme by Danone's old New Zealand sparring partner Fonterra who noted:

Fonterra announced a partnership (and a 20% stake purchase) in a Chinese premium baby food producer called Beingmate and you cannot fault the growth potential.

Generally, at prevailing prices, I am still finding more opportunities in the international listed but materially China-focused / influenced names...and still see potential in names such as Remy Cointreau (latest thoughts here) and Pernod Ricard (here). Luxury also has potential too...more about this later in the week.

One more locally listed name I looked at (to the day!) a year ago is Want Want who I described back then (link) as 'the beverage and snack foods concern Want Want, which is Taiwanese-owned, but does 90% of its business in China and has its main listing in Hong Kong'.  

Today the company's sales are around half beverages/dairy products ('Hot-Kid milk', 'Mr Bond coffee', Laoweng herbal tea plus various Want Want branded products) and around a quarter each in rice crackers and snack food products (biscuits, sweets etc).  Their sales are a nice mixture of new and old and fits in perfectly with China's changing consumer culture. Note the continued full year progress in the numbers below.
Progress in the first half however was more muted with headline operating profits (in US$s) actually falling - although other earnings measures showed a modest rise.  

The reason for this?  Nothing to do with snacks or rice crackers (which both continued to grow profit at a 10%+ clip) but all to do with the beverages side where (like Danone) higher input prices impacted them.  

Interesting that this structural growth story is trading near a 2 year low in Hong Kong.  Of course it is still trading at around a x20 prospective EV/ebit but does now have a 2.5%+ yield.  

From a value investing perspective I still prefer Danone in the low Euro50s but as the above chart shows there are trading opportunities even in a quite expensive Want Want due to the strong underlying themes.

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