Beer: An Emerging-Markets Portfolio Mixer
Tapping into booze can offer a good play on emerging markets’ expansion and rising living standards.
As people in emerging markets grow wealthier, they don’t just want better food, housing and education to provide a better future for their children. Some of them also want better alcohol.
“As economies grow, we see consumers progressing from homemade moonshine to bottled beer. There are a lot of ways to play that,” says Mark Yusko, chief investment officer at Morgan Creek Capital Management, a $4 billion multiasset management firm based in Chapel Hill, North Carolina. “Then, as people become still more affluent, we see moves to higher-end beer, wine and, finally, spirits.”
In some countries, this trend has led to a spectacular uptick in alcohol consumption. In Vietnam the average person drinks 40 liters of beer a year, up from only three in 1995, according to Odile Lange-Broussy, portfolio manager for the $981 million LO Funds – Emerging Consumer Fund at Geneva-based private bank Lombard Odier. In China per capita consumption has risen from 18 liters in 2001 to close to 40 today, says Lange-Broussy.
Many investors believe that the best way to tap into emerging-markets alcohol is to invest in companies that have established a strong presence in the sector. For example, Oliver Bell, London-based manager of the $33 million T. Rowe Price Africa and Middle East Fund, cites Nigerian Breweries, a listed subsidiary of the Dutch brewer Heineken. “It’s got the high-end, aspirational Heineken brand but also low-end brands,” he says. He is also impressed by Heineken’s realization that Nigeria and other African countries are key markets for the future. The company demonstrated as much by holding its 2013 Global Investor Day in Lagos, Nigeria’s largest city.
Like other subsidiaries of developed-markets consumer goods companies, stock in Nigerian Breweries is not cheap, trading at a price-earnings ratio of 29. But Bell still sees Nigerian Breweries as a good value. “We’re very interested in the listed African brewing subsidiaries of major global multinationals, because you get all the great corporate governance and know-how from the group applied to a potentially massive market,” he says. He also forecasts that double-digit earnings growth will bring this ratio down below 20 within the next few years.
Investors who balk at such valuations have other alternatives. One option is to go into unlisted companies, as a private equity investor. In 2012 the $5 billion London-based alternative asset management firm Duet Group invested $90 million for a majority stake in Ethiopia’s Dashen Brewery. Another is to buy shares in local independent companies, some of which are more cheaply valued than are the subsidiaries of international companies.
One such company is the Chinese state-owned enterprise Kweichow Moutai Co., which produces the local spirit baijiu. Its stock trades at a multiple of only 12 times earnings. Morgan Creek has exposure to the company through allocations to various fund managers. As a producer of spirits, Kweichow Moutai also offers a play on the luxury segment of the Chinese alcohol market. Some of its bottles retail for hundreds of dollars.
Such indulgence can pose a quandary, though. Many Chinese luxury companies are suffering from the crackdown on corruption launched by President Xi Jinping. Businesspeople have been known to send gifts of Kweichow Moutai liquor to government officials. Yusko believes the company has adapted well to the new environment, though, by broadening its distribution network to a wider number of outlets, which has supported sales by making the liquor more of an impulse buy for wealthy consumers. Kweichow Moutai’s stock is up some 20 percent up on the year.
Lange-Broussy holds stock in Tsingtao Brewery Co., which has a 20 percent share of the huge Chinese beer market. “Tsingtao seems attractive to us because it’s a pure play on a beer market with growing volume, and its margins have quite a lot of room to increase,” she says. At the moment, Tsingtao is keeping operating margins relatively low, at around 12 percent, to increase its market share, but Lange-Broussy believes the company could boost margins to 25 percent, on a par with margins of U.S. brewers.
Some investors may prefer to go for well-established developed-market drink stocks with large developing-market presence, such as U.K.-headquartered Diageo. Its Africa, Eastern Europe and Turkey division is the strongest contributor to the company’s net sales growth.
Lange-Broussy acknowledges that for investors trying to tap into emerging-markets alcohol, there is a case for investing in a mixture of global stocks with a large emerging-markets presence and local emerging-markets stocks. On the other hand, “if you buy developed-market alcohol stocks, you’re investing in a mixture of faster and slower-growing markets.
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