Mr & Mrs Asia
Moving up the J-curves
Special report
Spring 2010
Mr & Mrs Asia
Anirudha Dutta
Contents
anirudha.dutta@clsa.com
(91) 2266505056
Executive summary ............................................................................ 3
Amar Gill, CFA
Global growth engine ......................................................................... 4
(65) 65122337
Aaron Fischer, CFA
(852) 26008256
Bhavtosh Vajpayee, CFA
Rise of Asia’s middle class................................................................ 19
Sector profiles
(852) 26008388
Autos.........................................30
Property .....................................93
Daniel Tabbush
Banks ........................................40
Technology ...............................104
(66) 22574631
Consumer ..................................58
Telecoms..................................114
Elinor Leung, CFA
Education ...................................85
Transport .................................123
(852) 26008632
Geoff Boyd
Appendices
(65) 64167853
1: Penetration versus disposable income ............................................... 136
Nicole Wong
2: Consumer expenditure .................................................................... 138
(852) 26008207
Nimish Joshi
(91) 2266505054
Robert Bruce
(852) 26008522
3: Disposable income-penetration correlation ........................................ 140
4: Penetration of consumer goods ........................................................ 143
5: Chindonesia by numbers ................................................................. 144
All prices quoted herein are as at close of business 12 April 2010, unless otherwise stated.
The dragon, the elephant and the komodo
2
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Executive summary
Moving up the J-curves
J-curve hypergrowth over
the next five to 10 years
China, India and Indonesia’s (Chindonesia) consumer sectors should exhibit Jcurve hypergrowth over the next five to 10 years on rising incomes and a
propensity to consume and take risks. Easier access to finance, increasing
urbanisation and an optimistic outlook will also drive consumption. This report
examines the macro underpinnings of our thesis, particularly the burgeoning
middle class, and highlights our top picks in eight sectors on a five-year horizon.
Chindonesia contributed a
quarter of global GDP
growth in past five years
Chindonesia contributed more than 25% of global GDP growth over the past
five years and significantly outperformed developed economies in terms of
stockmarket returns. Even more noteworthy is that in the face of the 2008
global financial crisis, the emerging-market trio exhibited relative resilience
and maintained healthy growth trends.
Major consumer
sectors are on the cusp
of strong expansion
The emergence of Asia, particularly China, as a major consumer of industrial
metals, minerals and manufactured products has been evident over the past
decade. While India has been lagging China, its expansion rates remain
among the highest in the world. Major consumer sectors in the region are on
the cusp of five to 10 years of J-curve hypergrowth as the middle class enjoys
rising incomes and exhibits its propensity to consume and take risks.
Availability of finance, growing urbanisation and widely optimistic sentiment
will also be key drivers of this growth.
Middle class to make up
30% of Asia ex-Japan’s
population in five years
We estimate that the middle class makes up 19% of Asia ex-Japan’s
population, and that should rise to 30% in five years, or an 11% Cagr. The
aggregate number of those in the region’s middle class will increase from
570m currently to 945m by 2015. China will account for two-thirds of the new
members, while Chindonesia will represent 90% of the 375m increment. We
expect the social cluster’s consumption spending to increase from US$2.9tn
to US$5.1tn over this period.
Many sectors will witness
exponential growth
Our analysis also suggests demand growth in most sectors is likely to be
exponential, as average per-capita disposable income approaches the critical
US$3,000 level, beyond which discretionary spending kicks in. The best
example is car sales. While 2009 sales of 10.3m have made China the largest
autos market in the world, its total vehicle population is just 62m and
penetration remains low at 5%.
Our top picks
Our top picks in China (including Hong Kong), India and Indonesia include Air
China, Baidu, Bank of China, Cathay Pacific, China Resources Land, Dongfeng
Motor, HDFC Bank, Maruti Suzuki, SAIC and Unitech.
J-curve trajectory
Mobile subscribers
800
(m)
China
India
700
600
500
400
300
200
100
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Economist Intelligence Unit, CLSA Asia-Pacific Markets
19 April 2010
anirudha.dutta@clsa.com
3
Mr & Mrs Asia
Section 1: Global growth engine
Global growth engine
In our summer 2005 Chindia: The shape of things to come report, we wrote:
‘A sustained surge in consumption will primarily drive Chindia’s future growth
acceleration . . . Lifestyle change is visible with demand for better housing,
educational and healthcare services, financial services and infrastructure. No
other economy in the world has such a compelling demographic profile.’
Add Indonesia into the mix and we believe this emerging-market trio will
represent 90% of the region’s new middle-class entrants over the next five
years. Demographics and an increasing proportion of middle-income families
will drive consumption and consumerism in these three countries over the
next decade. In many cases, it will be a J-curve hypergrowth trajectory, akin
to what we have seen in the telecoms sector over the past 15 years.
Figure 1
Figure 2
Mobile subscribers
Asia ex-Japan private consumption¹
800
Telecoms sector enjoyed
J-curve hypergrowth
over the past 15 years
(m)
China
45
India
700
(%)
41.3
40
600
500
35
400
30
300
25.2
200
25
100
0
1995
20
1997
1999
2001
2003
2005
2007
Source: CLSA Asia-Pacific Markets
2009
1999
2001
2003
2005
2007
2009
¹ As a share of US private consumption. Source:
CEIC, CLSA Asia-Pacific Markets
Global economic data show China, India and Indonesia enjoyed real-GDP
Cagrs of 11.3%, 8.4% and 5.6% over 2004-09. Together they represented
over 25% of the world’s incremental growth. During the same period, the
three stockmarkets delivered 145-170% returns, versus the Dow Jones
Industrial Average’s (DJIA) 4%.
Figure 3
Chindonesia contributed
to a quarter of global GDP
growth in past five years
Real-GDP growth
16
(%)
Chindonesia¹
World
14
12.4
11.3
12
10
10.4
8.9
9.5
8.7
8.0
8
6
4.9
4.5
5.1
5.2
3.9
4
3.0
2
0
(0.8)
(2)
2004
2005
2006
2007
2008
09CL
10CL
¹ Weighted using nominal US$-denominated GDP. Source: CEIC, Datastream, IMF, CLSA Asia-Pacific Markets
4
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Section 1: Global growth engine
Figure 4
Major outperformance
over the past five years
Stockmarket returns versus gold and DJIA
500
MSCI China
MSCI India
Golds comdty
DJIA
MSCI Indo
400
300
200
100
0
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Source: Bloomberg, CLSA Asia-Pacific Markets
Resilience to financial crises
China, India and
Indonesia withstood the
global slowdown well
Impressively, these economies have shown relative resilience to the recent
global financial crisis. Over 2007-09, China, India and Indonesia delivered
real-GDP Cagrs of 9.1%, 6.8% and 5.3%, against the global growth rate of
1.1%. Government intervention and stimulus packages aided the expansion,
like elsewhere in the world.
Figure 5
High growth in
2008 and 2009
Real-GDP Cagr, 2007-09
10
(%)
9.1
8.4
8
6.8
6
5.3
4
2
1.1
0
World
China
India
Indonesia
Chindonesia¹
¹ Weighted using nominal US$-denominated GDP. Source: CEIC, Datastream, IMF, CLSA Asia-Pacific Markets
Domestic demand and
infra spend made up for
China’s decline in exports
19 April 2010
The market expected the global turmoil to hurt China given its high
dependence on exports. However, even as exports declined 18.1% and 5.5%
in 2009 for China and India, the two economies still reported healthy growth.
The size of China’s stimulus package (15% of GDP) meant that it was one of
the few global economies to weather the storm well. In comparison, India’s
stimulus measures were modest and mostly focused on direct and indirect tax
reduction and increased salaries for government employees, due as per the
recommendations of sixth Pay Commission. We should also see India’s 6.2%
GDP growth in 2009 in the context of a 23% below-normal rainfall last year, a
multi-decade low. In the past, similar severe shortages in rainfall had led the
economy into recession.
anirudha.dutta@clsa.com
5
Mr & Mrs Asia
Section 1: Global growth engine
Figure 6
High growth rates
despite poor monsoons
India’s GDP growth in relation to monsoons
(%)
25
(%)
Deviation of monsoon from normal
20
12
GDP growth YoY (RHS)
10
15
10
8
5
0
6
(5)
(10)
4
(15)
(20)
2
(25)
0
(30)
FY88
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
Source: IMD, CSO, CLSA Asia-Pacific Markets
Figure 7
Fiscal stimuli
Brazil
Fiscal stimuli
(% of GDP)
0.2
Britain
China
1.1
15.0
Investments and
other spending
Additional long-term measures
US$152bn, including investment
in housing over 15 years and an
extension of "Bolsa Familia" antipoverty programme
Infrastructure, schools and
housing - US$4bn
Tax cuts
Non-financial
bailouts
Credit line for exporters and
strategic industries
Key financial support
VAT reduction US$18bn
Loan for the auto industry US$3bn; working capital for
small businesses - US$14bn
1.1
VAT reforms for
companies; lower tax
on home sales;
increased tax rebates
on exports
Rebates and credits
on investments US$15bn
Income and payroll
tax - US$21bn
Indirect subsidies for auto and
consumer durable industries;
lower export tariff on steel
Funding guarantees US$358bn; capital
injections - US$53bn;
asset purchases US$72bn;
nationalisations US$215bn; liquidity
support - US$286bn
None
Public housing - US$60bn; rural
areas - US$15bn; infrastructure US$300bn; areas hit by
earthquake - US$130bn
Loan guarantees US$423bn; capital
injection - US$53bn
Loan guarantees US$520bn; capital
injection - US$185bn
Lending to non-bank
finance companies
0.4
None
1.6
Loan guarantees; fund
for bank recapitalisation
- US$222bn
2.0
Unsecured,
subordinated loans to
largest banks
Funding guarantees - US$1.5tn;
asset purchases - US$700bn (of
which bank capital - US$290bn);
AIG - US$150bn; conservatorship
- US$200bn; term programmes US$900bn; commercial paper and
money-market funds - US$2.3tn
1.1
US$4bn, mainly for
middle-income
earners
France
1.5
Infrastructure, research and
support for local authorities
Germany
3.1
Infrastructure - US$23bn; social
benefits
India
1.3
Infrastructure and social services
(education, health, housing) US$4bn; capital spending by
state governments - US$6bn;
refinancing of infrastructure
lending - US$8bn
Cuts in central excise
and custom duties;
removal of
surcharges from
personal income tax
Indonesia
1.6
Infrastructure - US$1.3bn;
business subsidies - US$0.5bn
Japan
2.0
Social benefits, reduction in
highway tolls and incentives to
hire workers
Reduction in personal
income tax US$4.7bn; cut in
import duties US$1.4bn
US$12bn, mainly
housing
Russia
1.1
Raised unemployment benefits
Cut in corporate tax US$15bn
USA
5.8
Energy - US$58bn; science US$17bn; infrastructure US$92bn; benefits - US$71bn;
education - US$159bn; health US$154bn; housing - US$13bn
US$275bn, of which
US$140bn to
individuals
Auto industry - US$8bn
Auto aid - US$2bn; loan
guarantees to non-financial
companies
Flow of credit at reasonable rates
to exporters, small businesses,
commercial-vehicle makers.
Small Industries Development
Bank of India made an
aggregate disbursement of
US$750m
None
Indirect support to
construction industry; pledge
to support other struggling
industries
Auto industry, loans or loan
guarantees to companies in
strategic industries
Loans for auto industry US$21bn
Authority to buy loan
portfolio from struggling
banks
Impact
(% of GDP)
0.2
6.0
2.4
1.3
5.8
Source: www.economist.com, CLSA Asia-Pacific Markets
6
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Section 1: Global growth engine
Domestic
economies held up
Figure 8
Figure 9
China’s real GDP
India’s real GDP
China real GDP growth
GDP growth ex-exports
(% YoY)
20
India real GDP growth
GDP growth ex-exports
(% YoY)
14
12
15
10
8
10
6
4
5
2
0
0
80
84
88
92
96
00
04
08
FY80
FY84
FY88
FY92
FY96
FY00
FY04
FY08
Source: CEIC, CLSA Asia-Pacific Markets
Narrowing the gap with global majors
Companies in China and
India are catching up
with global majors
It is interesting to see some other changes sweeping through the markets. In
2001, global outsourcing giant Accenture’s market cap and sales were 5x and
20x that of Infosys. Today, the two companies have the same market cap and
Accenture’s revenue is 5.2x that of the Indian player. In terms of profitability,
Infosys is within touching distance of Accenture. In an entirely different sector,
multinational ABB’s market cap was 25x that of Bharat Heavy Electricals (BHEL)
in 2001, so was its revenue. Now, its market cap is 1.8x that of BHEL and its
revenue in 2009 was 5.5x. Over the past decade, companies in China and India
have scaled up rapidly as they exploited the business opportunities thrown up
not only by the domestic market (BHEL) but also globally (Infosys).
Figure 10
In a decade, market
caps have converged
Accenture and Infosys market-cap differential
6
(x)
Market cap of Accenture
was 5x that of Infosys at
the start of the decade
5
4
3
2
1
0
Aug 01
Jan 05
Oct 06
Jun 08
Mar 10
Figure 11
Figure 12
Accenture and Infosys sales convergence
Accenture and Infosys’ net income
(x)
3,000
118.2
2,500
Revenue of Accenture
was 118x that of Infosys
in 1998; 5.2x in 2009
Infosys
(US$m)
Accenture
2,000
1,500
1,000
5.2
500
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
0
FY99
160
140
120
100
80
60
40
20
0
FY98
Infosys plays catchup
with Accenture
May 03
Source: Bloomberg, CLSA Asia-Pacific Markets
19 April 2010
anirudha.dutta@clsa.com
7
Mr & Mrs Asia
Section 1: Global growth engine
Figure 13
BHEL narrows the
market-cap gap with ABB
ABB and BHEL market-cap differential
30
(x)
Market cap of ABB was
25x that of BHEL at the
start of the decade
25
20
15
10
5
0
Apr 01
Nov 03
Feb 05
May 06
Aug 07
Nov 08
Figure 14
Figure 15
ABB and BHEL sales convergence
ABB and BHEL’s net income
Revenue of ABB was
25x that of BHEL in
1996; 5.5x in 2009
25.2
20
BHEL
(US$m)
Mar 10
ABB
3,000
2,000
15
1,000
10
5.5
0
5
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY96
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
(1,000)
FY96
0
FY00
25
4,000
(x)
FY99
30
FY98
35
FY97
BHEL has been able to
capitalise on the India
growth opportunity
Jul 02
Source: Bloomberg, CLSA Asia-Pacific Markets
Focus shifting from commodities to consumer
Dominance in industrial
commodities and
products is now a given
Over the past five years, the dominance of China and India, particularly the
former, both as a producer and consumer of minerals, metals, materials and
oil & gas has dramatically increased. As these commodities continued to grab
headlines, the focus on the consumer sector has been less significant.
The same is likely to
happen to consumer
sectors in five to 10 years
We expect consumers in China, India and Indonesia to drive consumption in
Asia over the next five to 10 years. During the next five years, these countries
will see a net addition of 103m people to the 20-60 years age group. We
believe consumption in these countries will grow strongly over the next five to
10 years, led by higher incomes, higher propensity to consume, better risktaking ability, easier availability and access to finance, rising urbanisation and
an optimistic outlook.
Figure 16
Figure 17
China apparent steel consumption¹
China crude-steel production¹
13CL
12CL
11CL
10CL
09CL
08A
10
07A
20
10
06A
20
05A
30
04A
40
30
03A
40
(%)
02A
50
01A
50
00A
60
99A
(%)
98A
60
93A
94A
95A
96A
97A
98A
99A
00A
01A
02A
03A
04A
05A
06A
07A
08A
09CL
10CL
11CL
12CL
13CL
China now accounts for
about 50% of the world’s
steel consumption
¹ As a percentage of world consumption and production. Source: AIIS, CLSA Asia-Pacific Markets
8
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Section 1: Global growth engine
Figure 18
Chindia’s contribution to world mineral production, 2008
Chindia has also added
major capacity in the
past 10-15 years
Mineral
Unit
World
production
China
production
India
production
Chindia as
% of world
Alumina
Copper
k tonnes
60,496
22,748
1,815
40.6
k tonnes
18,619
3,700
1,195
Crude steel
26.3
m tonnes
1,299
498
55.1
42.6
Iron ore
m tonnes
2,145
785
207
46.2
Gold
tonnes
2,385
282
3.75
12.0
Lead
k tonnes
8,558
3,030
124
36.9
Magnesium
k tonnes
11,600
2,188
2,512
40.5
Zinc
k tonnes
11,688
3,913
1,017
42.2
Source: CLSA Asia-Pacific Markets
As Figures 19-22 below show, China, India and Indonesia are at different
stages of the hypergrowth phase, with China already in the midst of it.
China’s growth is likely to remain strong over the next five years. India and
Indonesia, in most cases, are at the cusp of starting that stage. They will
commence their hypergrowth phase as a larger proportion of the population
enters the middle-income group over the next five years. Figures 23-24 show
the shift in consumption to the east is well underway.
Figure 19
Figure 20
Refrigerator penetration versus disposable income
Camera penetration versus disposable income
Ownership of refridgerator (% of household)
120
100
Thailand
Singapore
Malaysia
Ownership of camera (% of household)
120
Taiwan
Korea
HK
Japan
100
80
Malaysia
Taiwan
Korea
Thailand
80
HK
Japan
Singapore
Philippines
60
60
China
y = 21.546Ln(x) - 109.42
Philippines
2
R = 0.7631
40
Indonesia
India
20
y = 20.925Ln(x) - 110.78
40
2
R = 0.5642
China
Indonesia
20
Disposable income per capita (US$)
0
0
5,000
10,000
15,000
20,000
25,000
30,000
Disposable income per capita (US$)
India
0
0
5,000
10,000
15,000
20,000
25,000
30,000
Figure 21
Figure 22
PC penetration versus disposable income
Air-conditioner penetration versus disposable income
Ownership of PC (% of household)
100
80
Korea
70
Taiwan
60
50
China
30
y = 23.818Ln(x) - 153.98
Indonesia
India
10
0
China
Korea
40
R2 = 0.9472
Thailand
Philippines
20
Singapore
70
50
Malaysia
Disposable income per capita (US$)
30
Malaysia
20
Thailand
Philippines
Indonesia
India
10
0
0
5,000
10,000
15,000
20,000
Japan
HK
Taiwan
80
HK
Singapore
90
60
40
Ownership of air-conditioner (% of household)
100
Japan
90
25,000
30,000
0
5,000
y = 24.167Ln(x) - 161.44
2
R = 0.8195
Disposable income per capita (US$)
10,000
15,000
20,000
25,000
30,000
Source: Euromonitor
19 April 2010
anirudha.dutta@clsa.com
9
Mr & Mrs Asia
Section 1: Global growth engine
Chindonesia leads
in incremental
private consumption
Figure 23
Figure 24
Private-consumption growth
Consumption delta is moving east
600
Chindonesia
(US$bn increase)
USA
1,500
500
(US$bn increase)
1,000
400
500
300
200
0
100
China, India and Indonesia
(500)
0
(100)
USA and Eurozone
(1,000)
99 00 01 02 03 04 05 06 07 08 09
99 00 01 02 03 04 05 06 07 08 09
Source: CEIC, CLSA Asia-Pacific Markets
Supportive demographics
India should be the
biggest beneficiary of the
demographic dividend
Among developed
nations, the USA
is well placed
While India is likely to be the biggest beneficiary of the demographic
dividend, for China the challenge will be to become richer before it starts
growing old. Indonesia is another potential beneficiary in Asia. ‘Over the next
decade, the workforce of Indonesia will rise by another 21m people, whereas
Japan, Europe and Russia will see further demographic decline,’ says our
Indonesia country and research head Nick Cashmore.
Figure 25
Figure 26
US demographics, 2009
US demographics, 2015
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Male
15
India is best
placed to reap
demographic dividend
10
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Female
5
0
5
10
15
Male
15
10
5
Female
0
5
Figure 27
Figure 28
India demographics, 2009
India demographics, 2015
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Male
80
60
40
20
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Female
0
20
40
60
80
Male
80
60
40
20
10
15
Female
0
20
40
60
80
Source: US Census, CLSA Asia-Pacific Markets
10
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Section 1: Global growth engine
In China, demographics
is a concern
Figure 29
Figure 30
China demographics, 2009
China demographics, 2015
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Male
80
Indonesia is well placed
60
40
20
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Female
0
20
40
60
Male
80
80
60
40
20
Female
0
20
40
Figure 31
Figure 32
Indonesia demographics, 2009
Indonesia demographics, 2015
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Male
12
8
4
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Female
0
4
8
12
Male
12
8
4
60
80
Female
0
4
8
12
Source: US Census, CLSA Asia-Pacific Markets
A burgeoning consumer group
Youth and inexperience
drive consumption,
as does urbanisation
Our strategist Russell Napier wrote in his recent Solid Ground report ‘Buy
chaos, sell order’: ‘When it comes to economics, youth and inexperience, key
drivers of consumption, are often more rewarding than the age and guile that
brings conservatism and savings.’ For the purpose of this study, we focus on
the middle class because we believe the group will be the biggest driver of
Asia’s consumption story. The younger population entering the middle class
will not be tied down by the baggage of a socialist past and their propensity
to consume will be very different from the middle-aged generation.
The middle class will
make up 30% of the
population in five years
We estimate the middle class makes up 19% of Asia ex-Japan’s population
and this will rise to 30% in five years, or an 11% Cagr. During the same
period, the aggregate number of Asians in this social group will increase from
570m presently to 945m. To put it in perspective, this will be nearly three
times the population of the USA and nearly as much as India’s total. China
will account for two-thirds of those entering the Asia ex-Japan middle class,
growing its middle-class members to 600m. Altogether, China, India and
Indonesia will represent 90% of the 375m increment, with India’s total
reaching 140m. The new entrants, along with the rising incomes of the
existing members, will drive consumerism in the three economies.
19 April 2010
anirudha.dutta@clsa.com
11
Mr & Mrs Asia
Section 1: Global growth engine
Figure 33
Growth will be fastest
in India, but China
will remain dominant
Rise of the Asian middle class
1,000
(m)
900
800
700
Other Asia ex-Japan
Indonesia
India
China
10.7% Cagr
600
500
400
300
200
100
0
2009
2010
2011
2012
2013
2014
Source: Euromonitor, World Bank, CLSA Asia-Pacific Markets
Income and consumer-product penetration
The car and the
mobile stories are
likely to be repeated
It is clear that China and India are emerging as major centres for
consumption. In 2009, the mainland became the world’s largest market for
cars with sales of 10.3m units. Meanwhile, India also reached annual auto
sales of 1.6m cars. The two countries are also the largest mobile markets
globally by subscriber numbers. However, in most cases India is about eight
to 10 years behind China in terms of penetration, affordability and income
gap. As Figures 37-40 show, the correlation between various consumer
products and disposable income is very high.
Figure 34
China became
the world’s largest
car market in 2009
Total passenger-vehicle sales
(No.)
Europe
Japan
USA
Total
Australia
China
India
Indonesia
Korea
Malaysia
Singapore
Taiwan
Thailand
Total
1999
16,855,000
5,761,643
16,880,711
39,497,354
774,191
1,496,210
615,527
85,131
1,246,801
286,391
52,378
413,449
246,388
5,216,466
Figure 35
2009
17,525,000
4,808,000
10,430,936
32,763,936
929,366
10,300,182
1,631,777
608,000
1,449,000
529,298
73,005
294,423
520,000
16,335,051
Change
670,000
(953,643)
(6,449,775)
(6,733,418)
155,175
8,803,972
1,016,250
522,869
202,199
242,907
20,627
(119,026)
273,612
11,118,585
Figure 36
In notebook affordability, India lags China by 8-10 years
16
China notebook afforability
14
India notebook affordability
In air travel, China is already in a hypergrowth phase
Per-capita round-trip air travel
10.00
HK
12
Malaysia
Thailand
8
6
Brunei
y = 7E-05x
0.9716
2
R = 0.8855
Australia
USA
Japan
Korea
Indo, Phil, Cambodia
0.10
4
Singapore
New Zealand
1.00
10
China
2
2000
2002
2004
2006
2008
2010
2012
2014
Per-capita GDP (US$)
India, other Asian countries
0.01
0
1998
Change (%)
4
(17)
(38)
(17)
20
588
165
614
16
85
39
(29)
111
213
0
10,000
20,000
30,000
40,000
50,000
Source: CLSA Asia-Pacific Markets
12
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Section 1: Global growth engine
Figure 37
Figure 38
Asia: Correlation - disposable income and penetration
China: Correlation - disposable income and penetration
Microwave
PC
Cable TV
Dishwasher
Cassette/radio
Fridge
Telephone
Video camera
Cooker
Internet-enabled PC
Hi-Fi
Mobile phone
Satellite TV
Motorcycle
Vacumm cleaner
Air-conditioner
Black/white TV
Camera
Passenger car
DVD player
Colour TV
Tumble drier
Shower
Bicycle
CD player
Videotape recorder
Washing machine
Video game console
(%)
0
20
40
60
80
Broadband-enabled PC
Passenger car
Internet Enabled Computer
Videotape recorder
Shower
Dishwasher
Tumble drier
Vacumm cleaner
PC
Cooker
Microwave
Cable TV
Fridge
Cassette/radio
Washing machine
Air-conditioner
Hi-Fi
Camera
Video camera
Black/white TV
Motorcycle
DVD player
Mobile phone
Freezer
Video game console
Telephone
Colour TV
Bicycle
CD player
100
(%)
0
20
40
60
80
100
Figure 39
Figure 40
India: Correlation - disposable income and penetration
Indo: Correlation - disposable income and penetration
PC
Internet-enabled PC
Air-conditioner
DVD player
Broadband-enabled PC
Mobile phone
Dishwasher
Hi-Fi
Freezer
Passenger car
Camera
Telephone
Shower
Microwave
Colour TV
Motorcycle
Cassette/radio
Washing machine
Cooker
Video game console
Vacumm cleaner
Fridge
Satellite TV
Tumble drier
Cable TV
Video camera
Bicycle
Videotape recorder
Black/white TV
CD player
(%)
0
20
40
60
80
DVD player
Cable TV
Dishwasher
PC
Passenger car
Vacumm cleaner
Camera
Air-conditioner
Shower
Tumble drier
Mobile phone
Telephone
Microwave
Internet-enabled PC
Freezer
Fridge
Cooker
Hi-Fi
Broadband-enabled PC
Washing machine
Bicycle
Black/white TV
Video camera
Cassette/radio
Motorcycle
Colour TV
CD player
Video game console
Satellite TV
Videotape recorder
100
(%)
0
20
40
60
80
100
Source: Euromonitor
Access to finance
will be a key enabler
19 April 2010
A key driver of consumerism will be access and availability of finance.
Consumer-credit penetration in these countries is very low, but it will grow
steadily as a larger part of the population comes into the bankable category,
banks and other financial intermediaries spread their network and become able
to assess and price risk properly and the younger population’s propensity to
take credit increases. China will face a challenge as its banking system changes
from a command and control-driven regime to a more market-driven one.
anirudha.dutta@clsa.com
13
Mr & Mrs Asia
Section 1: Global growth engine
Figure 41
Figure 42
Credit-card penetration
Population catered by each bank branch
USA
Japan
HK
Korea
Taiwan
Sing
UK
Aus
Brazil
Malay
Thai
China
Phil
Indo
India
Indo
238
237
15.9
India
172
153
15.2
Thai
131
13.3
Malay
108
12.4
Phil
71
52
11.3
Japan
39
9.4
Korea
18
6.8
HK
12
6
5.3
Sing
3
(%)
3
0
24.4
China
194
50
100
150
200
4.3
Taiwan
250
('000)
3.8
0
5
10
15
20
25
30
Source: CLSA Asia-Pacific Markets
An upbeat middle class
The three countries’
middle class remained
optimistic amid slowdown
Optimism of China, India and Indonesia’s middle-income population was
evident in our two Mr & Mrs Asia studies (2007 and 2009). Their positive
attitude was unsurprising in 2007, as the survey took place amid a protracted
economic boom and soaring stockmarkets when unemployment was low and
incomes were rising. What took us by surprise was that in 2009, when seven
of the 11 countries where we conducted our survey reported negative GDP
growth, a significant number of our respondents were upbeat about their
future and employment prospects and wanted to buy property and cars. As
our head of thematic research Amar Gill then wrote, ‘On balance, Mr & Mrs
Asia are positive about the future.’
Figure 43
Desire to buy property
not dented by the
economic slowdown
Mr & Mrs Asia, 2009: Share of respondents planning to buy property in next 12M
Indonesia
34
HK
31
Malaysia
28
India
27
Philippines
22
Thailand
19
Singapore
18
Taiwan
16
Korea
14
China
14
Japan
(% of respondents)
6
0
5
10
15
20
25
30
35
Source: CLSA Asia-Pacific Markets
Discretionary spending
kicks in at US$3,000 percapita disposable income
14
We believe discretionary spending kicks in at per-capita disposable income of
about US$3,000. Our analysis also shows demand growth in most sectors is
likely to be exponential, the classic hockey-stick model, as a rising proportion
of the population reaches middle-income levels. The best example is car
sales. While China has become the largest car market in the world in 2009,
its total vehicle population is just 62m and penetration level remains low at
5% (1% in India and 3% in Indonesia). This compares to 80% in the USA.
Thus, it is easy to see why growth in car sales and most other sectors can be
high for many years to come. The sector that has probably surpassed the
hypergrowth phase is telecoms, which we believe is seeing stable growth.
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Section 1: Global growth engine
Figure 44
Optimism evident in
employment prospects
Mr & Mrs Asia, 2009: Expectations for employment prospects over next 12M
(%)
Improve
Remain same
Indonesia
Worsen
1
1
98
India
65
Philippines
30
51
Singapore
24
47
China
43
11
HK
5
22
43
59
8
Thailand
19
54
14
Korea
18
41
24
Japan
24
39
40
Taiwan
25
29
43
Malaysia
30
26
66
14
0
5
81
20
40
60
80
100
Figure 45
Even in China, ownership
levels continued to
see strong growth
GDP per capita versus vehicle density
Light-vehicle ownership (units/'000 population)
800
y = 0.0154x + 30.001
2
R = 0.9235
700
New Zealand
Australia
600
Japan
500
400
Malaysia
300
Taiwan
India
Pakistan
Vietnam
200
Korea
Singapore
Thailand
Hong Kong
Philippines
Indonesia
100
Nominal GDP per capita (US$)
China
0
0
10,000
20,000
30,000
40,000
50,000
Source: CLSA Asia-Pacific Markets
The auto story will get
repeated in other sectors
Many consumer sectors, from property to consumer electronics to fastmoving consumer goods (FMCG), will repeat the success of the car and the
telecoms story. Whenever a paradigm shift in technology takes place,
developing countries in Asia are likely to catch up faster as they leapfrog one
generation of technology and go straight into adapting the latest, as has
happened in the case of mobile telephony, at an early stage. With 726m
subscribers, China is the largest mobile-phone subscriber market in the world
today and India, with 519m subscribers, is the second-largest.
Who will be the winners?
While Asia’s consumption growth story is not in doubt, the winners are not
always clear. Certainly, not every company will be a winner, even though most
sectors are likely to witness robust growth. As we highlighted in our previous
19 April 2010
anirudha.dutta@clsa.com
15
Mr & Mrs Asia
Section 1: Global growth engine
Chindia reports, The shape of things to come in 2005 and A new economic
world order by 2020 in 2006, many winners will come from other countries. A
case in point is the consumer-durable market in India. In this intensely
competitive industry, where margins are very narrow, Korean players LG and
Samsung have been able to carve out a niche with attractive price points,
strong brand building and constant product innovation. LG, which expects a
turnover of Rs170bn in 2010, targets to have 12% of its global sales from
India by 2015. Meanwhile, Nokia’s sales from India are about Rs225bn and it
has emerged as the largest FMCG company in the country.
Figure 46
Mobile penetration
Technology and
low costs drive growth
Mobile penetration (%)
100
China
India
Indonesia
USA
80
60
40
20
GDP per capita (US$)
0
0
10,000
20,000
30,000
40,000
50,000
Source: Euromonitor, CLSA Asia-Pacific Markets
Figure 47
Figure 48
Cable-TV penetration versus disposable income
Washing-machine penetration versus disposable income
Ownership of cable TV (% of household)
100
HK
100
80
70
Korea
60
Taiwan
50
China
40
Philippines
30
20
10
Ownership of washing machine (% of household)
120
90
Japan
Malaysia
80
40
2
Malaysia
Indonesia
0
5,000
y = 21.656Ln(x) - 113.66
R2 = 0.7998
Philippines
R = 0.5138
0
Singapore
China
Thailand
India
Japan
HK
60
Singapore
y = 0.002x + 23.74
Thailand
Korea
Taiwan
Indonesia
20
India
Disposable income per capita (US$)
Disposable income per capita (US$)
0
10,000
15,000
20,000
25,000
30,000
0
5,000
10,000
15,000
20,000
25,000
30,000
Source: Euromonitor
Middle class’ consumption
spending will rise to
US$5.1tn in five years
16
This report uses Euromonitor’s disposable-income data, adjusted for grey
income. Our sector research heads have looked at their respective areas to
assess the potential, risks and challenges to the growth story and identify the
stocks they believe will be winners. We estimate Asian middle class’
consumption spending will rise from US$2.9tn to US$5.1tn over the next five
years. We assume modest currency appreciation of 20-22% for the renminbi,
the rupee and the rupiah over this period. Of the US$2.15tn increase, China
is likely to account for 69%, India 16% and Indonesia 4%. While China will
see the largest increase in absolute terms, India’s middle-class spending will
rise faster at an 18% Cagr (versus 15% for China).
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Section 1: Global growth engine
Figure 49
Increase in disposable
income will drive
consumption
Per-capita disposable-income Cagr with and without currency impact
14
(%)
12
10
8
6
4
2
0
China
India
Indonesia
Source: Euromonitor, World Bank, CLSA Asia-Pacific Markets
Growth rates in India
will rise, but China will
lead in aggregate spend
In general, we expect higher growth rates in consumer spend in India than
China. However, the latter will dominate in sheer absolute numbers. Looking
at the different penetration versus disposable income charts, it is evident that
China and Indonesia are ahead of India in the J-curve. While China is likely to
have a few more years of robust growth, India is at the cusp of the
hypergrowth phase and should enjoy an extended period of stronger growth
over the next five to 10 years vis-a-vis China. Autos, financial services,
consumers and telecoms are sectors where India is likely to experience higher
growth rates. In consumer, technology, air travel and real estate, China will
continue to outgrow India.
Top picks
Below we summarise the views of our sector heads and their top picks.
Notwithstanding cyclical ups and downs, we attempt to identify the best
players in each sector that are likely to capitalise from the emerging
opportunities. As the top picks we recommend here are based on a five-year
horizon, there may be instances where they are inconsistent with our nearterm recommendations, especially given the market run-ups over the past 12
months. Hence, in some cases present valuations may appear high. These
may not be QARP (quality at reasonable price) stocks, but QAAP (quality at
any price) stocks.
Autos: Hyundai,
Maruti, SAIC, Dongfeng
In autos, Geoff Boyd believes by 2020, China will have a vehicle population of
322m, up at a 16.6% Cagr, and about 35-44m in India (versus 14.8m now).
Over the next five to seven years, China should remain the more attractive
market. His top picks in the region are Hyundai Mobis, Maruti, SAIC A shares
and Dongfeng H shares.
Banks: Bank Central Asia,
HDFC Bank, Bank of China
One sector that has shown strong performance over the past decade is
banking and financial services, particularly in India and Indonesia. Faster
economic growth will drive credit penetration, so will favourable
demographics, easier access to credit, improved ability of banks to assess and
price risk and increasing choices of products and services for the consumer.
Daniel Tabbush estimates consumer credit can grow 15-23% in China, India
and Indonesia over the next five to 10 years, with Indian banks leading in the
profitability stakes. Bank Central Asia, HDFC Bank and Bank of China are his
top picks in the region.
19 April 2010
anirudha.dutta@clsa.com
17
Section 1: Global growth engine
Mr & Mrs Asia
Consumers: Sands China,
United Spirits, Baidu
Aaron Fischer expects discretionary spending to increase at a Cagr of 18% in
India, 15% in China and 13% in Indonesia. While he likes all three markets,
he believes India is the most compelling given that there is a greater appetite
to spend as income increases. Sands China, United Spirits and Baidu are his
top picks in the region.
Education: Megastudy
Nimish Joshi expects the education sector to be a big opportunity in both
China and India. Our Mr & Mrs Asia studies in 2007 and 2009 highlighted how
education remains one of the most important items in family budget, in good
and bad times. Korea’s Megastudy is our top pick given attractive valuations
and that the company has a China strategy. Other interesting companies in
the space are Educomp and New Oriental.
Property: China
Resources Land, Unitech
Nicole Wong finds striking similarities between the property sector in Hong
Kong in late 1960s/early 1970s and what is happening in China, India and
Indonesia now. Like Amar, she believes average incomes hide a lot and do not
reflect the true purchasing capacity of the middle-income families in these
countries. Low ownership and easier access to mortgages will drive strong
growth in the property markets in India. China Resources Land and Unitech
are her top picks in the region.
Telecoms/internet: China
Mobile, Bharti, Baidu
Elinor Leung believes China, India and Indonesia remain the three countries
with growth prospects in mobile telephony, although they are also
approaching middle age and therefore, the hypergrowth phase is likely over.
With increased competition and large investments in next generation of
technology, business is certainly challenging in the near term. In the longer
run, she is bullish on Bharti and China Mobile. Meanwhile, Elinor is very
excited about the next big thing in these countries - the internet. She
believes China has just entered the hypergrowth phase in this area and Baidu
is her top pick.
Technology: Acer,
Canon, Lenovo, Samsung
Electronics, MediaTek
In technology, Bhavtosh Vajpayee believes rising affordability and increasing
penetration will result in secular growth, and consumer demand will gain
share over enterprise spending. He also expects China to see hypergrowth in
the next five years, while India will enter that phase only from 2015, when its
affordability levels should reach where China was in 2008. Acer, Lenovo,
Canon, Samsung Electronics and MediaTek are Bhavtosh’s top picks to play
this opportunity.
Transport: Air China,
Cathay Pacific
Robert Bruce forecasts the number of air passengers in 17 countries in Asia to
reach 737m by 2014, or a Cagr of 8.5%. China will lead the boom and
become the world’s largest source of outbound passengers at 95m,
representing a tripling over the next 10 years. Robert’s growth expectations
for India over the next five years is a modest 8.9%, which will take the
number of passengers to 67m, nearly twice the present number. Air China is
his top sector pick. Cathay Pacific is Aaron’s next best pick to play the growth
in outbound air-passenger traffic.
18
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Section 2: Rise of Asia’s middle class
Amar Gill, CFA
amar.gill@clsa.com
(65) 65122337
Rise of Asia’s middle class
Beginning with Christopher Wood’s Asia’s Billion Boomers report in 2002, we
have been highlighting the power of the region’s long-term domestic-demand
story for nearly a decade. Our groundbreaking works, including the two Mr &
Mrs Asia surveys (2007 and 2009) on the middle class, support our view that
Asian countries will increasingly dominate global consumption. We estimate
that the middle class, defined as those with discretionary spending power,
makes up 19% of Asia ex-Japan’s population. This is set to rise to 30% in the
next five years, growing nearly 11% per annum. A large segment in China
getting past the threshold income - with per-capita incomes in China, India
and Indonesia in US-dollar terms rising 8-12% - helped by likely currency
appreciation, will drive the increase.
GDP per capita a
misleading indicator
for spending power
GDP per capita, often used as an indicator of spending power, is misleading,
as barely two-thirds of national income goes to households. The skew in
distribution also results in the average household getting much less than percapita estimates. However, official data exclude grey income from the parallel
economy. This could be 30% or more of GDP in developing Asia. The buying
power of the middle class is also underestimated if purely on nominal
exchange rates without adjusting for local currencies’ buying power.
Including grey economy,
middle class in Asia exJapan estimated at 570m
We take these factors into account and focus on median disposable income
adjusted for the grey economy. Discretionary spending appears to kick in at
around US$3,000 per capita, equivalent to US$10,000 per household with three
or more persons. Currently Asia ex-Japan has some 570m people, 19% of the
overall population, earning this level of income or higher. Forces in place that will
push up the middle-class numbers include: economic growth; a rising share of
GDP going to households as labour growth slows, a factor that will pull up wages;
the hordes just below who will cross into the threshold of middle-class income;
and appreciating currencies to lift the buying power of Asian consumers.
Figure 50
China at US$1,900
median income will have
large increase in segment
with discretionary
spending power
Median-income levels and % of population with discretionary spending power
(% of population)
Thailand
Malaysia
China
Indonesia
India and Indonesia at
lower income level but
percentage growth in the
middle class will be larger
Philippines
Korea
India
0
2,000
4,000
6,000
8,000
Taiwan
10,000
Singapore
12,000
Hong Kong
14,000 16,000
Median income (US$)
Source: CLSA Asia-Pacific Markets
An 11% Cagr set to take
the region’s middle class
to 945m in five years
19 April 2010
These numbers are necessarily all approximations but our analysis implies
compounded growth of near 11% pushing some 375m Asians into this income
segment over the coming five years, taking to 945m those with discretionary
spending power. China is likely to contribute to two-thirds and China, India
and Indonesia together represent more than 90% of those entering the Asia
ex-Japan middle class in this period.
amar.gill@clsa.com
19
Mr & Mrs Asia
Section 2: Rise of Asia’s middle class
Figure 51
Estimated to rise by
US$2.15tn over the next
five years, of which over
half will come from
existing middle-class
families, nearly 20%
from new entrants into
middle-class bracket and
about 1/4 from currency
appreciation
Growth in Asia ex-Japan discretionary spending, 2009-14
6,000
(US$bn)
5,000
557
387
4,000
1,206
3,000
5,092
2,000
2,941
1,000
0
Est 2009
discretionary
spending
Spending growth Spending by new
by current middle
entrants to
class
middle class
Currency impact
on buying power
Projected 2014
discretionary
spending
Source: CLSA Asia-Pacific Markets
Discretionary spending
set to grow faster than
middle-class size
Discretionary spending power will rise with higher incomes for the existing
middle class, new entrants into this income threshold and the effect of
appreciating currencies on buying power. We estimate discretionary spending
in the region to rise nearly 12% per annum. It should almost double over five
years in China while India’s discretionary spend is set to rise 126% on a
smaller base.
China is at 8%; Indonesia
at 5%; India at 2% of
US GDP per capita
These estimates, implicitly assuming an upswing in Asia with currency
appreciation, are subject to cyclical hiccups. Quite certainly, the growth will
not be in a straight line. However, the fast-developing Asian economies have
the building blocks in place for structural growth, namely education
investment, infrastructure, property rights, liberalisation of the economies,
high savings and investment, urbanisation, the shift from agriculture to
manufacturing, etc. China, Indonesia and India’s GDP per capita are just 8%,
5% and 2% of US income levels. As average incomes rise, the expanding
middle class will be an overarching theme for investing in Asia.
Estimating disposable incomes
Household disposable
income is just under twothirds of GDP for Asia
Disposable income is defined as household income less taxes. To the extent
that corporations are sizable and retain a large amount of profits, average
household income could be significantly lower than GDP per capita. A further
adjustment for available income to households is tax rates.
We use Euromonitor’s estimates of disposable income for this report. On
average, disposable income is about 64% of GDP per capita for the Asian
countries that we cover, excluding Japan. Disposable income is only around
60% of GDP per capita for China, Singapore, Korea and Thailand. In absolute
terms, the difference is striking in Singapore where GDP per capita for 2009
is US$36,902 but disposable income per capita is just US$22,290. While
Singapore’s GDP per capita is higher than that of Hong Kong, its average
disposable income is lower.
China’s disposable income
58% of its GDP per capita
20
China’s 2009 disposable income of US$2,136 is 58% of its US$3,697 GDP per
capita, as big companies retain a large share of the economic pie. For India,
disposable income at US$836 is 19% lower than GDP per capita, while
Indonesia’s disposable income of US$1,553 is two-thirds of its GDP per head.
amar.gill@clsa.com
19 April 2010
Mr & Mrs Asia
Section 2: Rise of Asia’s middle class
Figure 52
Singapore, Korea, China:
per-capita disposable
income lower than GDP
GDP and disposable income per capita, 2009
Singapore
Hong Kong
Korea
Taiwan
Malaysia
Thailand
GDP per capita
China
Disposable income per capita
Indonesia
Philippines
(US$)
India
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Source: Euromonitor, CLSA Asia-Pacific Markets
Grey income
Including grey economy,
emerging economies in
Asia at least 30% larger
Official figures, however, do not capture the grey economy. Black can be
viewed as a shade of grey. That is, crime and bribery are only part of
undeclared income. Other aspects of the grey economy not captured in
national accounts include income of street peddlers, unofficial contract staff,
prostitutes and the like, who do not fill tax returns, as well as doctors who
underdeclare their income, policemen on the take and politicians with bank
accounts in Switzerland. The grey economy in developing Asia is huge. Recent
reports estimate that in Afghanistan, bribery alone makes up 23% of GDP
while reports indicate that in 2006 Indians have US$1.5tn (1.5x its GDP then)
in Swiss bank accounts.
No official estimates
on the size of the
grey economy
Clearly, there are no official estimates on how large the grey economy is.
There is no tax adjustment for this additional portion of incomes, thus relative
to disposable incomes (after tax) it is likely to be a significant addition to
actual incomes and spending power in these countries. If the grey economy is
around 20% of GDP in China, then it would push up disposable incomes to
30% above the official data. We estimate the grey economy to be around
30% of GDP for India and Indonesia, implying around 35% higher disposable
incomes. We put it at around 20% of disposable income in the Philippines,
Malaysia and Thailand. Conservatively, we take it as immaterial in Singapore,
Hong Kong, Korea and Taiwan - although even in corruption-free Singapore,
the oldest profession is clearly thriving and is one sector importing talent
from around the region.
Who’s got spending power?
Income skew results
in median being
lower than mean
19 April 2010
The happy mean can hide an unhappy median. Mean income, based on total
income divided by total population, does not take into account the skew in
incomes. This can be severe in developing countries. While sounding
paradoxical, the average person’s income is usually not the average income.
Most often the average family income, ie, the median income, is quite a bit
lower than the mean. However, with the top quintile of households taking in
about half of total income in most countries, there is a large group with
spending power well above the average.
amar.gill@clsa.com
21
Mr & Mrs Asia
Section 2: Rise of Asia’s middle class
We use statistics from the World Bank on the dispersion of incomes. In China,
the top 20% get 52% of total household income. In India and Indonesia,
around 45% of total household income goes to the top 20%. The lowest
quintile for family income accounts for just 4% of total household income in
China and 8% in India and Indonesia.
Figure 53
Top 20% of households
take about 50% of
income in most places
Distribution of income in Asian economies
(%)
China
Hong Kong
India
Gini
coefficient
46.9
43.4
36.8
Lowest
20%
4.3
5.3
8.1
Fourth
20%
8.5
9.4
11.3
Third
20%
13.7
13.9
14.9
Second
20%
21.7
20.7
20.4
Highest
20%
51.9
50.7
45.3
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
34.3
31.6
49.2
44.5
42.5
42.0
8.4
7.9
4.4
5.4
5.0
6.3
11.9
13.6
8.1
9.1
9.4
9.9
15.4
18.0
12.9
13.6
14.6
14.0
21.0
23.1
20.3
21.3
22.0
20.8
43.3
37.5
54.3
50.6
49.0
49.0
Source: CLSA Asia-Pacific Markets, World Bank
The table below makes various adjustments to income. It gives the official
GDP per capita for 2009, shows the corresponding disposable income and
adjusts up for our ballpark estimates of the grey economy. From this, we
estimate median income using the World Bank data on income distribution.
What a dollar buys
in different markets
varies quite significantly
The last column adjusts income levels for purchasing-power parity. Generally,
national accounts of each country are converted into dollars at market
exchange rates for comparison. But what a dollar buys obviously varies quite
significantly. An annual income of US$10,000 is not only very different in
terms of buying power in the USA and Asia. Converted into local currency it
would also provide quite different standard of living in say Hong Kong,
Singapore or Korea compared to China, India or Indonesia.
Figure 54
GDP per capita
overestimates
median income
Per-capita GDP, disposable income adjusted for grey economy and PPP (2009)
(US$)
GDP per
capita
China
HK
India
Indonesia
3,697
29,912
1,035
2,333
Disposable
income
per capita
2,136
25,551
836
1,554
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
16,937
6,595
1,721
36,902
16,059
3,983
10,711
4,287
1,328
22,290
10,861
2,384
Disposable Median disposable Median disposable
income adjusted
income adjusted
income adjusted
for grey economy
for grey
for PPP
2,777
1,883
2,730
25,551
17,403
18,712
1,128
832
1,364
2,098
1,599
2,579
10,711
5,145
1,593
22,290
10,861
2,861
9,447
3,252
1,072
15,946
9,579
1,983
10,050
4,394
1,730
13,747
13,122
2,478
Source: CLSA Asia-Pacific Markets, Euromonitor, World Bank
For current spending
power of middle class, we
ignore PPP adjustments
22
Our interest is in the spending of the middle-class on discretionary items. In
most countries, these items are not very differently priced across countries,
ie, fridge, LCD television, notebook computer, iPod, and a car will have a fairly
similar price in various markets based on current exchange rates. There
might be some differences locally. For example, if a television is made in
Malaysia and exported to the region, it is likely to cost less at home.
Internationally traded products that might be cheaper in given markets where
they are manufactured will differ from country to country. The bulk of the
difference in PPP, however, comes from locally produced items rather than
amar.gill@clsa.com
19 April 2010
Mr & Mrs Asia
Section 2: Rise of Asia’s middle class
internationally tradable middle-class goods. We, thus, focus on median
disposable income without PPP adjustments. (If we adjusted for PPP, the US$stated incomes and size of the middle class would be much larger as most of
the markets we cover have undervalued currencies.)
Need to multiply percapita income by 3-5x to
get household income
Regionally, we find that car ownership takes off in Thailand when GDP per
capita is US$4,000 and mean disposable income is just below US$3,000
(while median income is only about US$2,000). Mean incomes of about
US$3,000 appears to be about the level where the ability to spend on
discretionary items kicks in, as car ownership reflects. This is not a very high
figure for annual income, but bear in mind the distinction between per-capita
income and household income: per-capita estimates divide by the whole
population including children and elderly dependents. Average household
income is higher than per-capita income by a factor representing the average
household size, which is between three and five in most of Asia.
For Thailand, at the income level where car ownership starts to shoot up, the
grey-adjusted mean income is about US$3,000, which translates to family or
household income of close to US$12,000 per annum. That is certainly a level
of income where households can afford to spend on discretionary items.
Figure 55
Car ownership takes off in
Thailand at disposable
income near US$3,000
which translates to
around US$10,000
household income
Car ownership and disposable income per capita
800
y = 0.0249x + 35.063
Light-vehicle ownership (units/'000 population)
2
R = 0.8803
700
New Zealand
600
Australia
Japan
500
400
Korea
Malaysia
India
300
Taiwan
200
Thailand
Hong Kong
Philippines
Indonesia
100
Disposable income per capita (US$)
China
0
0
5,000
Singapore
10,000
15,000
20,000
25,000
30,000
Source: Ashwin Chotai, Euromonitor, CLSA Asia-Pacific Markets
Figure 56
Just over 60% of the
region’s middle class is in
China, and 10% is in India
Composition of the middle class in Asia ex-Japan
Singapore
1%
Thailand
3%
Taiwan
4%
Philippines
1%
Malaysia
3%
Korea
9%
Indonesia
5%
India
10%
China
63%
Hong Kong
1%
Source: Euromonitor, World Bank, CLSA Asia-Pacific Markets
19 April 2010
amar.gill@clsa.com
23
Mr & Mrs Asia
Section 2: Rise of Asia’s middle class
Households in the bracket
is about one-fourth of the
figure for population with
spending power
We use US$3,000 as the level of individual income where discretionary
spending of Asia ex-Japan’s middle class kicks in. An estimated 570m in the
region are at this level of income or higher in 2009, or almost one-fifth of the
population. Of these, just over 60% or about 360m live in China. Close to
60m, or approximately 5% of India’s population, make up the next largest
segment of the middle class by this definition. India has more people with
some element of discretionary spending power than the entire 48m Korean
population. We estimate some 27m or 12% of Indonesians also have
discretionary spending power. (Note the number of households in the middle
class is around a quarter of the population estimate, given average
households of around four persons.)
The big shift
Drivers of middleclass growth
Economic growth is obviously a key factor determining how fast the middle
class grows. Other determinants include changes in the share of total GDP
going to households; how many people are just below the level of income
where discretionary spending kicks in; and changes in buying power of
consumers resulting from currency movements.
Figure 57
Currency appreciation will
help lift disposable
income in dollar terms
Projected five-year Cagr in median disposable income
China
India
Indonesia
Philippines
Thailand
Taiwan
Malaysia
Korea
Singapore
(%)
Hong Kong
0
2
4
6
8
10
12
14
Source: Euromonitor, World Bank, CLSA Asia-Pacific Markets
China will see the biggest
absolute increase in the
middle class in 2010-15
These factors are all working in favour of China, which will continue to have
the largest number of people joining the middle class over the coming years.
China’s GDP is likely to keep growing at around 9% per annum over the
medium term, as it continues to industrialise at a fairly rapid rate while some
55% of the population still lives in rural areas and works on the farms. As
growth in China’s total labour force slows, however (the result of its one-child
policy since the 1970s), factories in the coastal regions will have to offer
higher salaries to attract rural workers from further inland. Thus, households’
share of GDP, at around 60%, will rise. Conservatively, we expect the share of
GDP to households to rise by 1.25ppts over the next five years, adding
around 0.3ppts per annum to disposable-income growth.
The renminbi is also set to appreciate, which will strengthen the buying power
of the Chinese consumer. In our calculations, we assume Beijing would allow
the currency to appreciate to reduce its PPP undervaluation by half over the
next five years. This would lead to a 22% rise in the renminbi to
Rmb5.55/US$ by 2014, adding about 4% per annum to the buying power of
the Chinese. Our number is conservative against most street estimates.
24
amar.gill@clsa.com
19 April 2010
Mr & Mrs Asia
Section 2: Rise of Asia’s middle class
Figure 58
Median income for
China to rise from
US$1,900 to US$2,700,
pushing 17% of its
population into the middle
class in just five years
China: Large expansion of the middle class as median income rises
(% of population)
60
Increase in median income (2009-14)
50
Population above US$3,000 income
(area bottom right below line)
40
30
20
Per-capita income
(US$)
10
0
0
1,000
2,000
3,000
4,000
5,000
6,000
Source: CLSA Asia-Pacific Markets
Each year 3.5% of Chinese
cross the discretionaryspending threshold
China has a huge population and a large segment just under the level of
income where discretionary spending kicks in. For 2009, median income
adjusted for the grey economy is almost US$1,900. We estimate some 27% of
the population are at the US$3,000 level of income or higher. With renminbi
appreciation, per-capita disposable income in dollar terms should rise by 12%
per annum (allowing for some reduction in the relative size of the grey
economy). Median income should rise to US$2,700 by 2014 when about 44%
of the population earns US$3,000 income or more. China’s middle class,
growing at 11% per annum, is equivalent to 3.5% of the population crossing
the discretionary-spending threshold each year. This would add almost 250m
people, allowing its middle class to expand to just over 600m by 2014.
Discretionary-spending
power for additional 80m
in India in next five years
India will have the next largest increase in middle-class numbers of around
80m, taking it to almost 140m by 2014. In percentage terms, its growth is
set to be the highest. Some 5% of its population currently have middle-class
spending power, earning more than US$3,000. This should more than double
to 11% in five years: disposable income rising approximately 10% per annum
should take 1.2% of its population across the income threshold each year.
Figure 59
Middle class to rise from
19% of Asian population
in 2009 to 30% by 2014
Percentage of population in the middle class
Malaysia
China
Thailand
Asia ex-Japan
2014
Indonesia
2009
Philippines
India
(%)
0
10
20
30
40
50
60
70
Source: Euromonitor, World Bank, CLSA Asia-Pacific Markets
19 April 2010
amar.gill@clsa.com
25
Mr & Mrs Asia
Section 2: Rise of Asia’s middle class
Currently, India’s middle class is around one-sixth the size of China’s. On this
small base, we estimate by 2014, the Indian middle class will rise by 135%
(an approximately 19% Cagr). India should, thus, represent around one-fifth
of those entering the middle class in the region.
China and India will account for about 85% of the increase in the middle class
in Asia ex-Japan over the coming five years. Indonesia’s middle class is set to
nearly double to 54m. The region we term Chindonesia will account for more
than 90% of the region’s middle-class growth.
Figure 60
Actual increase unlikely
to be in a straight line
Asian middle class
1,000
(m)
China
India
Indonesia
Other Asia ex-Japan
900
10.7% Cagr
800
700
600
500
400
300
200
100
0
2009
2010
2011
2012
2013
2014
Source: Euromonitor, World Bank, CLSA Asia-Pacific Markets
Growth is subject
to economic cycle
In total, we estimate 375m people in Asia ex-Japan to join the middle-class
spending bracket over the coming five years, representing an increase of 66%
or a Cagr of 11%. From an estimated 570m at end-2009, the region’s middle
class should reach 945m by 2014. In reality, the growth, subject to the
economic cycle, is unlikely to be in a straight line.
We expect the renminbi
to appreciate to
Rmb5.55/US$ by 2014
We have also factored in modest currency appreciation. As indicated above,
we estimate the renminbi to appreciate by 22% over the next five years. We
assume the rupee and rupiah to also appreciate by about 20%, representing
about a third of their current undervaluation on our PPP estimates.
Figure 61
Currency appreciation
to add 4ppts per annum
to per-capita income
growth and pushes up
growth of middle
class by a third
Per-capita disposable income with and without currency impact
14
(%)
12
10
8
6
4
2
0
China
India
Indonesia
Source: Euromonitor, World Bank, CLSA Asia-Pacific Markets
26
amar.gill@clsa.com
19 April 2010
Mr & Mrs Asia
Section 2: Rise of Asia’s middle class
Currency effect to be a
bigger factor in boosting
Asia’s buying power
Without the currency effect, we calculate Asia’s middle class will reach 825m
in five years, or up 8% per annum. The currency effect adds one-third to our
middle-class growth estimates, boosting the size of this group by 15% for
2014. It would also strengthen the dollar buying power of existing middleclass members. Appreciating currencies will be an added factor, with the
renminbi set to resume its surging trend and other currencies being allowed
to appreciate more freely as well.
Discretionary-spending boom
Three key drivers
of discretionaryspending growth
The burgeoning of the middle class will lead to a massive increase in
discretionary-spending power for Asia. The spending surge will be a function
of (1) those currently in the middle class having rising incomes and thus
spending more (2) spending of those that enter into the middle class, and (3)
buying power of both groups lifted by currency appreciation.
We estimate the existing middle class will increase their spending by a Cagr
of around 9.5% in real terms. The size of the middle class is projected to
increase by 66%, but the income and spending power of new entrants into
this income threshold is much lower compared to the existing middle class.
Much of the expenditure of the new entrants will still be on basic goods; we
assume only half their spending would be discretionary. Hence on our
calculation the entrants to the middle class would only push discretionary
spending up by 16% over five years. This should help push discretionary
spending for the region up 73% over the next five years, or a Cagr of 11.6%.
Figure 62
Indonesia, India and
China lead growth in the
size of middle class and
in discretionary spending
within the region
Middle-class population and spending Cagr, 2009-2014CL
India
China
Indonesia
Asia ex-Japan
Philippines
Thailand
Malaysia
Taiwan
Growth in middle-class population
Korea
Growth in discretionary-spending power
Singapore
(%)
Hong Kong
0
5
10
15
20
Source: Euromonitor, World Bank, CLSA Asia-Pacific Markets
Chindonesia to account
for around 85% of
increase in spending
power of the region
On these estimates, consumption spending of the middle class will rise from
US$2.9tn to US$5.1tn over the next five years. Of the US$2.15tn increase,
China should account for 69%, India 16% and Indonesia 4%. Together, they
will account for around 85% of the increment.
China in absolute terms will see the largest increase in discretionary
spending. However, in growth terms, India’s middle-class spending will rise
faster. We estimate its middle class will more than double in size over the
next five years, boosting discretionary spending by 126% (18% Cagr),
compared to 99% for China (15% Cagr). We forecast 82% growth in
Indonesia’s discretionary spending, or almost a 13% Cagr, slightly higher than
the 12% Cagr we expect for the overall region.
19 April 2010
amar.gill@clsa.com
27
Mr & Mrs Asia
Section 2: Rise of Asia’s middle class
Figure 63
We estimate discretionary
spending in India to rise
126% in next five years
India’s middle-class spending, 2009-14
450
(US$bn)
400
60
350
96
300
250
New entrants into the
bracket to contribute
42% of the increase
76
200
417
150
100
185
50
0
Est 2009
discretionary
spending
Spending growth Spending by new Currency impact
by current middle entrants to middle on buying power
class
class
Projected 2014
discretionary
spending
Source: CLSA Asia-Pacific Markets
Consumption spending, particularly on discretionary items, is set for a takeoff
in Asia, driven by the burgeoning middle class. The bulk of this will be in the
China, India and Indonesia. Around two-thirds will be in China, but India is
set to see the fastest discretionary-spending growth in the region. Indonesia’s
discretionary spending is a fraction of China and India’s, but in dollar terms
its spending growth should surpass most other countries in Asia. This
underscores the need to pay greater attention to these three large emerging
Asian economies when examining discretionary spending regionally.
28
amar.gill@clsa.com
19 April 2010
Mr & Mrs Asia
Sector profiles
Autos - In high gear ......................................................................... 30
Banks - Lend me more...................................................................... 40
Consumer - Richer, younger and spending ....................................... 58
Education - Top priority at all times ................................................. 85
Property - Room to grow .................................................................. 93
Technology - Decade of the consumer ............................................ 104
Telecoms - Getting crowded ........................................................... 114
Transport - On the move ................................................................ 123
All prices quoted herein are as at close of business 12 April 2010, unless otherwise stated.
19 April 2010
anirudha.dutta@clsa.com
29
Mr & Mrs Asia
Autos
Autos - In high gear
Geoff Boyd
In 2009, China became the world’s largest car market, dethroning the USA.
As consumer aspirations and incomes rise, the large Asian countries are
becoming the growth engines of the global auto industry. We estimate that
China’s hypergrowth phase is likely to continue for the next five years and
that is when India will enter into a hyper-growth phase, based on GDP/capita
versus car penetration analysis.
geoff.boyd@clsa.com
(65) 64167853
Taewoon Kim
(82) 23978439
Top picks
Determining the hyper-growth timeframe
Astra Int’l
Market cap
Price
ASII IJ
US$20,039m
Rp44,550
Hyundai Mobis
Market cap
Price
012330 KS
US$13,370m
153,000 won
Maruti Suzuki
Market cap
Price
MSIL IB
US$8,979m
Rs1,372.0
Nissan Motor
Market cap
Price
7201 JP
US$39,588m
¥813
SAIC
Market cap
Price
600104 CH
US$19,312m
Rmb20.22
China had a 28.8% Cagr
passenger car sales 200209, versus India’s 11.9%
It is apparent that India and Indonesia’s auto markets should continue to
expand alongside continued economic growth, based on low penetration
rates. However, our goal is to focus on the question of if and when we might
see an acceleration of the growth rate (ie, a consistent 20-30% Cagr).
Any acceleration of the auto demand curve is likely to surprise investors, just
as it did with China in 2009, and of course, surprises drive stocks. China’s
steeper demand curve is not shocking when put into the context of Japan and
Korea before it, as Figure 65 details. However, 2009 car sales nearly doubled
most projections from 2005, so China’s timeframe for acceleration appears
underestimated (likewise, a 1995 study by the International Energy Agency
also appears to have estimated only half the overall auto population for both
India and China in 2010, although they were reasonably close with
Indonesia). We ask if the market might also be underestimating India or
Indonesia’s growth outlook.
Historical reference shows a wide range of outcomes
How fast has India and Indonesia expanded in the past decade, versus other
countries? Figure 64 might be surprising, as it implies that Indonesia grew at
a faster rate of growth than even China, at 614% versus 588%. However, it is
wrong to view it this way as Indonesia suffered some of the biggest hits from
the Asian crisis, and as a result had an artificially low base effect in 1999.
Reviewing a longer timeframe one can see that between 1990 and 2009,
Indonesia’s new car sales grew at a 4.3% Cagr, while India was at 10.7% and
China at 19.3% (China grew at a 22.7% Cagr overall from 2002-09, but
28.8% in the passenger car market.)
Figure 64
Figure 65
Passenger-vehicle sales
(units)
China, Korea and Japan’s vehicle history
1999
2009
Chg
Chg (%)
USA
16,880,711
10,430,936
(6,449,775)
(38)
Europe
16,855,000
17,525,000
670,000
4
Japan
5,761,643
4,808,000
(953,643)
(17)
Total
39,497,354
32,763,936
(6,733,418)
(17)
China
1,496,210
10,300,182
8,803,972
588
Korea
1,246,801
1,449,000
202,199
16
India
615,527
1,631,777
1,016,250
165
Taiwan
413,449
294,423
(119,026)
(29)
52,378
73,005
20,627
39
Singapore
Indonesia
85,131
608,000
522,869
614
Malaysia
286,391
529,298
242,907
85
Thailand
246,388
520,000
273,612
111
Australia
774,191
929,366
155,175
20
5,216,466
16,335,051
11,118,585
213
Total
Source: CLSA Asia-Pacific Markets
30
700
Vehicles/'000 population (units)
China
Japan
600
Korea
500
400
300
200
China 46 versus
Japan's 622 and
Korea's 356
100
0
1966 1973 1980 1987 1994 2001 2008 2015 2022 2029
Source: Korea Automobile Manufacturers Association (Kama), Japan
Automobile Manufacturers Association (Jama),CLSA Asia-Pacific Markets
geoff.boyd@clsa.com
19 April 2010
Mr & Mrs Asia
Autos
Using China’s history,
India’s auto population
could reach 60m by 2018
India and Indonesia are currently experiencing vehicle penetration rates of
12.8 and 29.1 per 1,000 people respectively. Focusing on this parameter,
China hit India’s current level of penetration in 2000 and Indonesia’s current
level in 2006, while Indonesia hit India’s current level in 1990. If we mapped
out China’s penetration level growth onto India’s projections, we derive an
auto market population of nearly 60m by 2018 (ie, similar to China in 2009),
which is 4x the current nearly 15m (a 16.8% Cagr). New car sales by 2018
might be 10.1m on an annual basis, on this metric.
However, Indonesia’s
history derives a
much lower outcome
However, using Indonesia’s history, and their growth projection from 1990
would derive an Indian car population of only 26.5m by 2018 (3.5m new car
sales by 2018). So, on the optimistic scenario, this methodology derives a
60m auto population, but the more pessimistic scenario, also based on an
actual country’s real world experience is much lower. The key driver of this
large gap was historical GDP growth between China and Indonesia.
Figure 66
Historical Cagr of new auto sales
(units)
1990
1999
2003
2005
2009
1990-09
Cagr (%)
1999-09
Cagr (%)
2003-09
Cagr (%)
2005-09
Cagr (%)
13,844,432
16,880,711
16,652,084
16,965,344
10,430,936
(1.5)
(4.7)
(7.5)
(11.4)
16,855,000
16,855,000
16,855,000
17,525,000
0.4
0.7
1.0
7,558,793
5,761,643
5,695,120
5,725,311
4,808,000
(2.4)
(1.8)
(2.8)
(4.3)
21,403,225
39,497,354
39,202,204
39,545,655
32,763,936
2.3
(1.9)
(2.9)
(4.6)
China
362,941
1,496,210
2,960,603
4,594,124
10,300,182
19.3
21.3
23.1
22.4
Korea
890,734
1,246,801
1,301,700
1,143,899
1,449,000
2.6
1.5
1.8
6.1
India
180,916
615,527
755,771
947,649
1,631,777
12.3
10.2
13.7
14.6
Taiwan
551,447
413,449
406,807
503,420
294,423
(3.2)
(3.3)
(5.2)
(12.5)
Singapore
35,181
52,378
97,823
131,882
73,005
3.9
3.4
(4.8)
(13.7)
Indonesia
224,478
85,131
314,115
489,201
608,000
5.4
21.7
11.6
5.6
Malaysia
162,515
286,391
420,449
547,434
529,298
6.4
6.3
3.9
(0.8)
Thailand
316,280
246,388
411,767
586,147
520,000
2.7
7.8
4.0
(2.9)
Australia
606,700
774,191
894,158
968,149
929,366
2.3
1.8
0.6
(1.0)
3,296,011
5,216,466
7,465,370
9,780,023 16,335,051
8.8
12.1
13.9
13.7
USA
Europe
Japan
Total
Total
Source: Ashvin Chotai, Automotive News, CLSA Asia-Pacific Markets
GDP per capita remains the key driver
During the motorisation
phase, car sales grow
much faster than GDP
Based on detailed empirical studies (ie, the International Energy Agency
study), GDP per capita is the most important driver for auto penetration. The
study’s key point is that during a motorisation phase, a country’s growth will
be faster than pure GDP growth. For instance, in Japan the number of cars
per capita more than quadrupled between 1965 and 1975, while per capita
GDP doubled. West Germany had a similar experience before Japan. We plot
the relationship between auto penetration and GDP in Figures 67-68.
GDP analysis we believe
derives a more likely
and narrow outcome
Thus, if we track an estimated GDP growth level, it should help us with our
India estimates. GDP per capita grew at a 5.4% Cagr from 1983 to 2007, but
was closer to 13% from 2001 to 2009, which includes rupee appreciation
versus the US dollar too. Overall, using our economics team forecasts, we
have 2018 GDP per capita at US$2,394 and 2020 at $2,632. Based on this
level of GDP growth in Korea and China, (1985 for Korea, 2007 for China) we
19 April 2010
geoff.boyd@clsa.com
31
Mr & Mrs Asia
Autos
derive the motorisation penetration level of 27-33 vehicles per 1,000 people.
This translates to a 35-44m auto population by the 2018-20 (versus 14.8m
now). In short, by doing this analysis, we believe we are deriving a more
likely and narrower level of confidence on the long-term outlook.
Figure 67
Figure 68
Overall global vehicle penetration vs GDP per capita
Vehicle penetration vs GDP per capita for Asian countries
Light-vehicle ownership
(unit/'000 population)
800
700
Light-vehicle ownership
(unit/'000 population)
180
y = 0.0156x + 15.827
R2 = 0.9537
160
y = 0.0225x - 11.243
R2 = 0.8965
New Zealand
Australia
600
India
Pakisatan
Vietnam
500
400
100
Singapore
Philippines
Malaysia
Taiwan
60
Hong Kong
0
10,000
20,000
30,000
40,000
China
Indonesia
20
Nominal GDP per capita (US$)
China
0
Philippines
40
Thailand
100
India
Pakisatan
Vietnam
80
Indonesia
200
Thailand
120
Japan
Korea
300
Malaysia
140
Nominal GDP per capita (US$)
0
50,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Source: World Bank, CLSA Asia-Pacific Markets
Indonesia appears
set to double its auto
population by 2018-20
Doing the same exercise for Indonesia, GDP per capita growth is US$5,536 in
2020. Overlaying this with Korea we find a penetration rate of 63 per 1,000
people or a vehicle population of 16.1m, more than double current levels.
Adding PPP into the GDP analysis
PPP analysis may
add more clarity
Thus far, the analysis has focused on GDP per capita, but according to our
economist, Eric Fishwick, purchase power parity (PPP) is designed to allow
comparison of real income levels across countries and, therefore, are
appropriate to use. If food, shelter, etc, is cheap in one country relative to
another, the point at which they can afford relative luxuries like cars, TVs,
etc, comes at a lower nominal income level.
Figure 69
PPP is designed to allow
comparison of real
income across countries
Vehicles per 1,000 people historical data points vs GDP per capita in PPP terms
Vehicles/'000 population (units)
50
45
40
Korea
Indonesia
China
India
35
30
25
20
15
10
5
GDP per capita based on PPP (US$)
0
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Source: Kama, CEIC, Jama, CLSA Asia-Pacific Markets
32
geoff.boyd@clsa.com
19 April 2010
Autos
China and Korea
were similar between
1983-87 and 2004-08
Mr & Mrs Asia
Reviewing GDP per capita in PPP terms, the numbers are remarkably similar for
China and Korea in 1983-87 (Korea) and 2004-08 (China), ie, US$3,614 for
China in 2004, US$3,825 for Korea in 1983, ending with US$5,970 for China in
2008 and US$5,851 for Korea in 1987. Likewise, the auto penetration rates are
similar, at 19.6 vehicles/1,000 people for Korea in 1983, and 38.4 by 1987,
while China was 20.7 in 2004 and 38.4 in 2008. This was a period of
hypergrowth in motorisation for both countries, with auto sales Cagrs at 21.3%
and 16.6% for Korea and China, and 27.3% and 22.7% if we review 1982-89
and 2002-09. This is shown in Figure 69. India’s PPP was US$2,780 in 2008,
getting closer to the US$3,500 level of China and Korea. Our calculations
suggest that by 2012 India might reach this level.
China moves towards 300m by 2020
Korea experienced accelerated growth of automobile penetration from the mid
1980s until the Asian Crisis of 1998-99. Since recovering, growth has been
strong and steady, now similar to that of Japan in the late 1980s. In terms of
the relationship between GDP and vehicle penetration, China is following the
same trend as the Japanese and Korean economies as they emerged.
We estimate a 279m
vehicle population
in China by 2020
By 2020, China will have moved to a 229 vehicle per 1,000 penetration rate if
we simply plot it based on the Korean experience, as the 2010 penetration is
the same as Korea in 1988 (both had similar rates the year after hosting the
summer Olympics). This implies a 322m vehicle population, nearly double the
176m that the IEA estimated in 1995, and their 2010 estimate was also half
the 2010 likely actual. However, our official forecasts on China are slightly
more conservative, at 279m. We believe there are some qualitative aspects
that will limit the growth rates set by Korea. The 279m level implies a 15%
Cagr in vehicle population (322m is a 16.6% Cagr), whereas India is at a
lower 10.4% Cagr to the 44m level mentioned previously, and Indonesia is
expected to experience a slightly lower 9.6% Cagr (these are just auto
population Cagr, not new car sales Cagr).
Higher motorisation levels
at same income countries
with auto manufacturing
Straight GDP growth forecasts are the most important element to estimating
the speed of auto penetration rates in developing countries, but there are
other bottom-up factors. Figure 70 details some of the parameters in China,
India and Indonesia. The 1995 IEA study found that there were higher levels
of growth at the same income in Latin America within countries that had
assembly facilities and/or a domestic automaking industry. Presumably this is
due to governments encouraging the local auto industry with a tax system
favouring auto ownership, rather than being a greater obstacle (as is the case
in Singapore or Hong Kong). This is an interesting point, as both China and
India fit this criteria, as did Japan and Korea before them. Indonesia is not
associated with its own manufacturers, but they do have assembly plants that
serve the Asean region through low tax barriers.
Tata’s Nano will help
accelerate headline
auto penetration
The most important bottom-up driver to actual headline vehicle sales growth in
India is likely to be Tata Motors’ introduction of the US$2,500 Nano, which
considerably lowers the price point of the cheapest vehicles. However, many
observers see this vehicle as a step up between a two wheeler and prior entry
level vehicles, and even forecast the auto market both ex-Nano and including
Nano. Ultimately however, it will likely cause competitive responses, and
enlarge the official growth forecasts on auto sales. The company’s guidance is
100,000 in FY11 and 250,000 in FY12 (13% of 2009’s total new vehicle sales).
This vehicle is expected to eventually be exported to Indonesia as well.
19 April 2010
geoff.boyd@clsa.com
33
Mr & Mrs Asia
Autos
Figure 70
Key auto-demand drivers
Demand drivers
China
India
Indonesia
GDP per capita
‰
US$3,263 - Based solely on GDP
per capita, a comparison with
Korea suggests hypergrowth will
run until GDP pc approaches 1215,000.
‰
US$1,016 - Based solely on
GDP pc India, is about seven
years behind China - due to
enter hypergrowth phase
within two years.
‰
US$2,254 - GDP pc almost
equivalent to China, suggests
automobile industry is set to
enter hypergrowth immediately.
Vehicle penetration
‰
46/1,000 as of 2009, very low.
Likely exponential growth.
Korea comparison suggests
continued hypergrowth for 10+
years.
‰
13/1,000 equal to that of
China 10 years ago. Suggests
hypergrowth phase is about
three years away.
‰
3/1,000 extremely low relative
to GDP per capita - represents
huge potential for growth in the
market.
Infrastructure
development Roads
‰
Focused on providing world
class infrastructure with more
capacity to support vehicles.
Rural highway length set to
rapidly expand, increasing rural
employment and income.
‰
Infrastructure lagging
economic growth.
‰
‰
Major plans to increase
development. Target to build
20km per day.
Of total road length 58% is
paved, densely populated areas
are in good condition, only 50%
of rural are in reasonable
condition.
Public transport
development
‰
Mass transit systems investment
increasing. Expecting 33%
increase in length of passenger
railways.
‰
Indian railways making a
turnaround - employee
productivity set to double by
2015.
‰
Poor public transport facilities,
mostly buses.
‰
Limited railway transport.
High savings rate of 49.2%.
‰
Savings rate of 32.9%.
‰
‰
Improved credit penetration.
28.9% savings but concentrated
at corporate & top 20% of
population. Interest rate is high
with funding rate of 11% and
lending/selling rate of 165 in car
and 30% in motorcycle.
Higher demand for luxury
vehicles. More emphasis on
mid-sized to large vehicles. Ebike sales of 20m expected in
2009.
‰
Predominantly small car
market. 2010 Auto Show saw
release of more small concept
cars. Tata’s Nano set to
expand auto market by 65%.
‰
Predominantly motorcycles.
‰
Most passenger vehicles are
seven seaters to accommodate
extended family and nannies.
Availability of
financing
‰
Consumer
preferences
‰
Demographics
‰
Dependency ratio set to turn
adverse by 2025. Median age
predicted to be 37.9 by 2020.
‰
About 50% of population to be
earning age. Low dependency
ratio, nuclear families.
‰
Relatively young population.
44% below 25 years. Large
family sizes, more dependents.
Regulation
‰
Urbanisation policy restricts free
movement of population.
‰
‰
‰
Government focus on ecological
sustainability; emission control
laws.
Open to FDI. No urbanisation
restrictions. Fuel subsidies
decreasing, still over regulated
labour markets.
Government expected to
increase registration tax from
10% to 20%.
Tax reforms adverse impact on
government revenue coming
to an end - improvement of
fiscal deficit to be spent on
infrastructure.
‰
‰
Asean Free Trade Area allows
free trade among Asean
countries for products with at
least 40% Asean content.
‰
Overall tax rate is high and
makes up about 30% of car
price.
Possible roadblocks
Sustainability of political
system; protests on the
increase could be demands for
democracy.
‰
Slow pace of democracy.
‰
‰
Over regulated labour
markets.
Demand is still predominantly
for motorcycles.
‰
‰
Pollution; vehicular exhaust
pollution could be taxed.
‰
‰
Road accidents are the biggest
cause of death in China.
International and domestic
terrorism threats; Maoist and
Naxalite posing internal
threats.
Traffic congestion too high in
densely populated areas.
‰
Interest rate set to rise.
‰
Potential excise duty increase.
‰
Source: CLSA Asia-Pacific Markets
34
geoff.boyd@clsa.com
19 April 2010
Autos
Demographics are
appealing in India
Mr & Mrs Asia
Moreover, India has a very young population, approximately 50% of whom
are under 25. There is a trend towards smaller, nuclear families instigating a
very low dependency ratio. In turn, this results in higher savings and a
greater ability to purchase vehicles, as well as explaining the preference for
small cars. Overall, competition is increasing in the market, proven at the
Indian Auto Show this year where plans were exposed for five new, small
concept cars to be launched in FY11, followed by two more in FY12.
Competition may also help pricing affordability.
In contrast, China has a rapidly ageing population with a dependency ratio
that is set to turn adverse by 2025. High domestic savings alleviates pressure
on the economy but there is some perception that pension reforms will be
realised. The Chinese market tends towards mid-sized to large cars with a
propensity for luxury vehicles as a demonstration of wealth. However, this
may be changing in the latest wave of growth, delivered more by pure
Chinese makers focusing on the entry level.
China’s government can
boost consumption via
more personal auto loans
Comparatively speaking, the ability to finance purchases differs considerably
between China, India and Indonesia. In China’s case, with a very high
domestic savings rate of 49.2%, there is substantial room to support growth
by banks or others in auto financing, which in 2009 was considered to be 2025% of all new auto sales, but may have been as low as 8-10% in 2008
(versus 60% in India and 80% in more developed markets).
Indonesia has a relatively high domestic savings rate but it is concentrated at
the corporate and top 20% of the population. Interest rates are also
traditionally high with a funding rate presently of 11% and a lending/selling
rate of 16% in car and 30% in motorcycle.
Stimuli may decline but
still a high level of road
penetration expected
‘If you build it, they will come’, was the mantra of a famous Bull Durham movie
classic Field of Dreams and also seems to be have been taken to heart by the
Chinese government. It is focused on providing world class infrastructure which
increases the capacity to support more vehicles. Projects are underway to
rapidly expand national roadway lengths. China plans to increase the operating
distance of national level expressways from approximately 55,000km in 2010
to 85,000km in 2020. Rural highway developments aim to increase length from
approximately 3.1m km in 2010 to 3.7m km by 2020. This progress, in
conjunction with upgrades from cement to bitumen surfaces should spark an
increase in rural incomes and employment. China’s mass transit system
investment has been increasing substantially with plans on track for a 33%
enlargement of passenger railway systems between 2006 and 2020. This will
be an additional 25,000km of new railways which could serve to diminish auto
sales, particularly more subway lines, but historically this tends to go hand in
hand with general economic growth.
Aspirational desire
versus actual need?
One barrier to growth is traffic congestion, which weighs on the purchase
decision. For instance, the “S curve” effect already seems to be showing signs
of limiting growth rates in cities like Beijing, where the number of additional
“ring roads” is limited. However, ultimately it tends not to affect the
“aspirational” interest in ownership. For instance, Korea has 25% of the
country’s population in the area of Seoul, which has an extensive subway, and
suffers significant traffic concerns too. This is undoubtedly affecting the
“need” of ownership, particularly among the young, but has not seemingly
been too much of an obstacle to actual auto ownership growth. One factor
however that may differ in markets like China is the advent of motorised
bikes, or E-bikes, which were expecting sales of 20m in 2009. But as with
19 April 2010
geoff.boyd@clsa.com
35
Autos
Mr & Mrs Asia
other emerging markets, these two wheelers are often stop gap measures for
many before they can afford their first car, particularly in seasonal cold
weather climates (less so closer to the equator).
India seems more
positive on road
development than before
India’s infrastructure development is severely lagging, perhaps to some
extent preventing economic and auto growth. Developments are increasing
but need to dramatically improve to sustain automobile penetration
acceleration. The target is to build 20km of new roads every day in line with
plans to construct 1.9m km of new rural roads and upgrade 0.2m km, a more
than 35% increase on the existing network. Currently, India is building 9km
per day, which is already up from just 2km per day when Kamal Nath took
office in May 2009. In this regard, the country seems incrementally positive.
Indonesia’s infrastructure is satisfactory in densely populated areas, but
areas of sparse population remains poor. Only 50% of roads in rural areas
are in reasonable condition. There are also poor public transport options
available, mainly consisting of buses as most railway networks are located
on the island of Java.
Pollution taxes could
prohibit growth, or push
it in alternative directions
Regulatory constraints in China include the urbanisation policy which restricts
the free movement of the population, although these are slowly being
removed. Beijing is also beginning to focus on the environmental impact of
such intensive growth and there is pressure for emission control laws to be
implemented. There is a possibility that vehicular exhaust pollution will be
subject to tax, further increasing the cost of purchasing and maintaining a
car. But conversely, this could lead to a strong push by Beijing for alternative
engines, such as hybrid or battery powered, which might include subsidies.
The internet has emerged as an important source of information about the
industry as access across India accelerates. As a result, media and
advertising exposure has been amplified, giving potential consumers greater
access to information on product differentiation, availability and choice.
Difficult to quantify,
but can not ignore
the inflationary impact
One issue that is difficult to quantify, although our strategist Russell Napier
often speaks of it, is the inflationary effect China will bear, and also
contribute to globally. Nearly 300m vehicles by 2020, in conjunction with
other fixed-asset-investment spend, etc, places upward pressure on
commodities, both in making the vehicle but also fuel related. This may
then lead to a slower level of penetration than what Korea’s impact was to
the world in its motorisation phase.
Overall conclusion
36
China’s growth track still
strong, a 15-20% Cagr
over the next five years
Perhaps surprising to some, our first conclusion is that medium term to 2015,
we do not necessarily believe India’s growth will be higher than China. China
appears equivalent to where Korea was in 1988 in terms of GDP and auto
penetration, and Korea grew new vehicle sales at a 22.4% Cagr from 198893. We see a robust five year vision for the China market generally, which
could average a 15-20% Cagr. This may “feel” high to some, but actually is
slightly below what Korea achieved and could be pushed by Beijing if this was
their goal via more aggressive personal financing availability (done ultimately
by Beijing to encourage a consumption driven side of GDP growth).
India will likely
experience hypergrowth
from 2015 onwards
We estimate India might experience hypergrowth, ie, accelerated and
sustainable growth rates of a 20% Cagr, by 2015-20. However, it appears early
to budget for this near term, unless factoring in pure incremental Nano vehicle
geoff.boyd@clsa.com
19 April 2010
Autos
Mr & Mrs Asia
growth on the overall market. Meanwhile, for Indonesia, we would need to see
ongoing accelerated GDP growth rates to believe that auto sales are going to
accelerate into the 20% growth range on a sustainable basis. This is not our
base case, but we do envision double-digit growth of a 10% Cagr to 2020.
Stock picks
Over the next three to
five years, the China story
remains more exciting
In terms of regional preference then, the China growth angle still excites us
more than India near term. Generally, China’s automakers held back on
capacity expansion entering 2009 and are still behind the demand curve. The
big foreign JVs also held back in capacity expansion as their global sales were
looking precarious entering 2009. However, the Chinese local automakers are
adding capacity, in some cases aggressively, and tend to be more labour
intensive, and were quicker to respond to the 2009 market conditions.
Overall, we still forecast high industry utilisation rates in 2010, helping boost
pricing at recent levels for this year.
Key risk is that the “E”
side of the industry PE
The key risk however is that the “E” side of the industry PE is inflated on this
demand surge and thus the fallout risk is such that there is more of a
derating of the industry profit margins mid-term, once there is an adequate
supply response, particularly by the foreign JVs. We view this as more of a 2H
2011-12 type scenario. The thematic issue of the Chinese investing in their
own brands remains ongoing and thus competition could intensify due to this
as well. Still, on a 2010 view, we would bet on industry profitability holding
firm, and even expanding YoY during 1H.
BYD is our top BUY,
but on valuations
we prefer SAIC
Within China, we prefer the pure Chinese automakers
Stocks we like - BYD has outperformed all expectations and surprisingly
further raised their sales target for 2010 from 700,000 vehicles to 800,000.
This remains a BUY, as we expect a detailed government plan on alternate
fuel vehicles to help sentiment. But valuation-wise, we prefer SAIC
(previously Shanghai Auto), which will most certainly be a force within China
in the medium term, and likely in the export market eventually. However, it is
only listed in the A-share market. H share-listed Great Wall continues to
increase sales monthly, expanding its product line and will be a minor
beneficiary of the cash for clunkers programme in China. Dongfeng was
lowered to Outperform from Buy on valuation concerns during 4Q09, but its
structural earnings in 2010 should be robust, especially if they can turn a
profit in commercial vehicles for the first time. This is a joint-venture partner
of Nissan in China, which is our top automaker pick in Japan currently (it also
has a partnership with Honda and Peugeot)
Stocks we do not like - Denway remains an Underperform. It was a sector
underperformer in 2009 and with Honda cautiously expanding while focusing
more on profits than growth, will mean Denway should underperform the market
again in 2010. We believe Denway will see unit growth of 6% in 2010 while the
market will grow at closer to 20% resulting in a continued loss of market share.
We see little in the way of catalysts, other than as a laggard play.
In India, our five-year
pick is Maruti Suzuki
19 April 2010
Stocks we like in India
Our top five-year pick in India Autos is Maruti Suzuki (Maruti Suzuki is Suzuki
Motor's consolidated subsidiary with 55% ownership). Indian car industry
growth is poised to accelerate over the next five years as India’s per capita
GDP is approaching levels where China and Korea saw the beginning of a
multi-year high growth phase for car sales. Maruti will be the key beneficiary
of this growth given its large product range in small cars, wide distribution
geoff.boyd@clsa.com
37
Autos
Mr & Mrs Asia
and service network and strong brand image. Even accounting for some nearterm market share losses to new competition, Maruti’s stock can deliver
superior returns on a five-year view. Note, though, our India autos analyst
Abhijeet Naik has downgraded Maruti at the start of the year, with a counterconsensus negative rating, on one-year concerns. Indeed, the stock has been
a big laggard in India YTD.
Hero Honda will benefit
from rural penetration,
but cars are a better story
Stocks we are less confident about
Incremental two-wheelers (2Ws) growth in India will come from rural areas.
Given its superior network and product portfolio to cater to these vicinities,
Hero Honda is a candidate as a five-year pick. However, we would place it lower
in our pecking order than Maruti, as cars are likely to substantially outpace 2Ws
in sales on a five-year view, on account of the big difference in penetration
levels between the two categories. Moreover, we see some risk of competition Bajaj, Honda Motorcycles and Scooters India and Yamaha - eating into Hero
Honda’s dominant 58% market share in 2Ws over the next five years (Hero
Honda is Honda Motor's 28%-owned equity-method subsidiary).
We are concerned
about Bajaj Auto’s
foray into small cars
If Bajaj Auto replicates its product successes of FY2010 in the coming years,
it has the potential to gain substantial market share from Hero Honda.
However, given Bajaj’s sketchy track record with new launches prior to
FY2010, this is not a certainty. We also have concerns on Bajaj’s foray into
small cars, as well as on the growth prospects for its three-wheelers (3W)
business. Bajaj’s export business has better prospects, especially if it
manages to penetrate larger markets like China and Indonesia. However, the
question marks on the domestic business make us reluctant to recommend
Bajaj as a five year pick.
Without JLR, we would
have been far more
positive on Tata Motors
While we are very positive on Tata Motors’ India commercial-vehicle and car
business, we are less sure of the long-term prospects of JLR. JLR should have
a better 12 months ahead on account of new launches and multiple cost
cutting measures, but we are not so confident of JLR’s ability to outperform
its luxury segment peers like Audi, BMW and Daimler on a five-year view,
given their superior product franchise.
M&M has strong competitive advantages in its UV and tractor businesses on a
five-year view. However, we view M&M’s entry into new business segments
like cars, 2Ws, trucks, aircraft etc with caution. This combined with the
conglomerate nature of the M&M stock pulls down M&M in our five-year
pecking order in the sector.
Hyundai is the best
play outside of Chindia
on the Chindia theme
38
Hyundai Motor stands out in Chindia
Hyundai Motor continues to be the global leader within the combined India
plus China, with a rising 6% share in China and a third plant planned to take
capacity close to 900,000 by 2012, from 600,000 now (3.5m globally).
Meanwhile a steady 19% share is occurring in India, thanks to strong
execution and a healthy brand image. The Indian share might be at risk from
Japanese moves to compete at lower price points, but likewise, Hyundai
believes a larger rural network will help them take some of Maruti Suzuki’s
dominating 50% market share. We prefer sister company Hyundai Mobis
currently versus Hyundai Motor, as it has been a laggard over the past six
months and yet has a very bright outlook. Kia Motor’s outlook remains
positive, but it has no presence in India. Korean automakers are generally
marginal performers in Indonesia, too, as the market tends to be dominated
by the Japanese manufacturers.
geoff.boyd@clsa.com
19 April 2010
Mr & Mrs Asia
Autos
Astra is our top pick
Astra is our top pick in Indonesia
Astra International remains the key stock on growing car sales in Indonesia. It
distributes half of the sales volume in the domestic market, having strong
partners such as Toyota, Daihatsu, Isuzu, Peugeot and Nissan Diesel. It also
owns a 50% stake in Astra Honda, which manufactures Honda motorcycles in
Indonesia. The automotive division accounts for about half of Astra's earnings,
with the remaining coming from palm oil, heavy equipment and mining service,
and financial services (largely auto-financing). Astra International will continue to
be the proxy to the Indonesia market given its diversified businesses, exposure
to consumer spending, and main commodities (palm oil, coal) in Indonesia. The
share-price performance will continue to be driven by commodity prices such as
coal and palm oil, as well as interest rates, inflation and GDP growth that drives
auto sales. Valuation is not extremely cheap at 14.8x 10CL PE, which is in line
with the market and at the high end of its historical PE band. Yamaha is vying
with Astra Honda for the No.1 spot in Indonesia’s two-wheeler market.
Figure 71
Asian automakers valuations with some large-cap global names
Company
Ashok Leyland
Astra International
Bajaj Auto
BMW
BYD
Changan Auto - B
Daihatsu Motor
Daimlerchrysler
Denway Motors
Dongfeng Motor
Faw Car - A
Fiat Ord
Ford Motor
Fuji Heavy
Futian Vehicle - A
Geely Auto
Great Wall Motor
Harley-Davidson
Hero Honda
Hino Motors
Honda Motor
Hyundai Mobis
Hyundai Motor
Isuzu Motors
Jiangling Motors - B
Kia Motors
Mahindra & Mahindra
Maruti Suzuki
Mazda Motor
Mitsubishi Motors
Nissan Motor
Peugeot Sa
Proton
Renault
SAIC Motor
Scania AB
Suzuki Motor
Tata Motors
Telco
Tianjin Auto - A
Tofas-Turk Otomo
Toyota Motor
Volkswagen Stamm
Weichai Power
Code
Mkt cap EV (US$m)
EV/Ebitda (x)
AL IS
ASII IJ
BJAUT IS
BMW GR
1211 HK
200625 CH
7262 JP
DCX GR
203 HK
489 HK
000800 CH
F IM
F UN
7270 JP
600166 CH
175 HK
2333 HK
HOG UN
HH IS
7205 JP
7267 JP
012330 KS
005380 KS
7202 JP
200550 CH
000270 KS
MM IS
MSIL IS
7261 JP
7211 JP
7201 JP
UG FP
PROH MK
RNO FP
600104 CH
SCVB SS
7269 JP
TTMT IS
TELCO IN
000927 CH
TOASO TI
7203 JP
VOW GR
2338 HK
(US$m)
1,687
20,039
6,810
30,542
22,866
3,706
3,998
89,910
4,166
15,210
4,933
15,732
42,844
4,166
2,904
3,726
2,331
7,702
9,448
2,432
64,923
13,370
23,129
4,679
2,313
8,702
6,786
8,979
5,159
7,874
39,588
6,735
836
13,611
19,312
13,060
11,824
9,175
4,023
2,197
2,023
138,343
44,222
7,941
10CL
9.4
9.7
13.0
3.2
15.9
na
4.0
8.8
320.5
6.9
12.6
3.9
5.9
6.7
na
9.6
5.6
19.6
12.0
7.6
8.3
4.5
7.5
10.0
na
7.1
10.1
9.4
18.4
9.1
6.1
1.9
2.5
4.7
18.1
15.6
6.8
7.0
4.7
13.4
6.5
13.7
2.4
6.7
10CL
2,052
25,807
6,628
24,806
22,654
na
4,891
81,556
2,916
13,700
4,791
22,521
50,836
6,771
na
3,389
1,470
13,138
8,094
4,876
97,339
12,419
22,536
6,611
na
10,718
7,001
7,548
10,214
9,715
71,773
9,678
575
21,042
15,916
18,659
15,562
15,658
10,506
2,234
2,540
239,575
31,424
6,836
11CL
8.0
8.3
12.0
2.5
10.2
na
3.5
6.9
289.5
6.0
10.3
3.2
4.3
5.8
na
7.5
4.4
15.9
10.7
6.5
6.9
3.6
7.0
7.7
na
7.3
9.2
7.9
9.2
7.3
4.9
1.4
2.1
3.7
15.4
10.7
5.8
5.5
3.6
32.7
5.3
10.1
1.8
5.3
PE (x)
10CL
15.2
14.8
16.4
22.4
23.8
7.5
16.4
43.3
10.2
13.5
21.0
33.8
12.8
37.5
14.5
15.2
12.9
33.1
17.9
42.8
14.0
9.1
11.1
33.7
8.4
10.5
7.4
15.0
na
79.4
16.5
na
8.8
26.4
13.0
26.8
30.4
17.8
11.9
37.2
9.6
39.5
18.9
12.4
11CL
12.5
12.7
15.0
11.6
14.8
6.2
13.7
23.9
9.3
12.2
17.5
12.3
9.7
16.6
12.6
12.9
11.1
17.8
16.5
14.9
10.1
8.3
10.5
16.3
7.4
10.0
6.9
13.2
23.8
39.8
9.4
6.4
8.1
6.6
11.4
17.4
21.5
10.9
7.3
23.4
8.6
15.0
10.7
11.0
PB (x)
10CL
1.7
3.8
7.9
1.1
5.3
1.3
1.0
2.2
1.6
2.4
4.0
1.2
na
1.0
4.1
3.0
1.8
3.2
6.5
1.1
1.3
1.6
1.4
1.6
1.9
1.3
1.9
2.9
1.0
na
1.1
0.4
0.5
0.6
2.7
3.7
0.9
4.6
3.1
3.7
1.9
1.1
0.8
3.3
11CL
1.6
3.3
5.9
1.0
3.9
1.1
1.0
2.0
1.5
2.1
3.6
1.1
30.4
1.0
3.4
2.4
1.6
3.3
5.3
1.1
1.2
1.4
1.2
1.5
1.6
1.1
1.6
2.4
1.0
41.1
1.0
0.4
0.4
0.5
2.3
3.3
0.8
3.4
2.3
3.3
1.7
1.1
0.8
2.6
Div yield (%)
10CL
2.5
3.4
1.8
1.6
0.0
1.5
1.3
0.9
2.5
0.0
1.6
1.7
0.0
0.7
1.1
0.9
0.1
1.2
2.0
0.9
1.6
0.8
0.8
0.6
3.2
0.0
3.0
0.6
1.1
0.0
2.6
0.0
1.0
0.0
0.0
2.1
0.6
1.6
2.4
1.5
4.6
1.1
2.3
0.5
ROE (%)
11CL 10CL 11CL
3.4
11.9
13.4
3.9
27.7
28.0
2.1
57.3
45.2
2.4
4.9
8.9
0.0
25.4
27.7
2.4
22.7
23.2
1.6
6.7
8.1
1.5
5.0
9.0
2.7
16.9
16.6
0.0
19.3
16.6
1.6
21.8
20.8
2.0
2.8
9.3
0.0 (44.6) (20.5)
1.1
3.0
6.2
0.9
29.6
25.7
1.0
25.9
24.3
0.1
14.0
14.5
1.2
13.5
19.2
2.2
40.3
35.2
1.2
2.2
8.7
2.3
9.5
12.1
0.8
19.1
17.7
0.8
12.6
12.1
1.0
3.6
7.6
4.3
24.0
23.1
0.0
12.9
12.1
2.9
28.3
24.7
0.8
21.5
20.1
1.1
(6.3)
4.2
0.0
3.9
10.5
4.5
6.5
10.5
3.5
(0.2)
6.9
1.0
5.5
5.7
2.8
2.0
8.1
0.0
20.1
19.7
2.5
14.8
20.5
0.8
3.4
3.9
1.6
28.2
34.7
2.4
28.2
34.7
na
14.2
13.7
5.5
21.8
20.3
1.7
2.8
7.0
2.8
4.5
8.0
0.6
31.7
26.1
Source: CLSA Asia-Pacific Markets
19 April 2010
geoff.boyd@clsa.com
39
Mr & Mrs Asia
Banks
Daniel Tabbush
daniel.tabbush@clsa.com
(66) 22574631
Suangsuda Sinsadok
(66) 22574630
Top picks
Bank Central Asia
BBCA IJ
Market cap
US$16,026m
Price
Rp5,850
Bank of China
Market cap
Price
Bank Rakyat
Market cap
Price
CCB
Market cap
Price
3988 HK
US$142,983m
HK$4.37
BBRI IJ
US$11,774m
Rp8,650
939 HK
US$203,323m
HK$6.75
HDFC Bank
Market cap
Price
HDBK IB
US$19,945m
Rs1,950.0
ICICI
Market cap
Price
ICICIBC IB
US$24,334m
Rs965.0
Banks - Lend me more
Banks in China, India and Indonesia will see strong growth over the next five
to 10 years, given low rates of credit penetration to the private sector and
consumers in general, strong economic growth and a growing middle class. In
the pages that follow, we model how credit/GDP, loan/deposit ratio and profit
growth may look given historical relationships and our forecasts.
One conclusion is that Indonesian banks have ample scope for continued high
growth, with a limited need for capital or deposits. At the same time, India’s
state banks show the greatest value over time, but with the most need for
capital. Given their above and the higher-quality service, we prefer the
private-sector banks. Within Asia, we are Overweight these three countries
due largely to long-term growth prospects, but also cyclical strength.
Figure 72
Average annual credit growth over the past 20 years¹
India
Indonesia
China
Korea
Philippines
Australia
UK
Singapore
Thailand
HK
Malaysia
USA
France
Taiwan
Japan
(%)
0
2
4
6
8
10
12
14
16
18
20
¹ China, Malaysia data begins 1997, most others 1990-91. Source: CLSA Asia-Pacific Markets
Service standards
becoming important
Figure 73
Figure 74
Reason for choosing the present bank
Reason for choosing the next bank
Proximity
42.8
Salary acct
39.6
Own decision
27
Strong ATM network
18.4
Service provided by bank
More suitable savings account
15.9
Lower charges
8.8
Reference from friends
4.2
Student acct
(%)
1.8
0
10
41
27
Lower costs/charges
6.7
Demat acct
50
Better products
21.6
Parents/spouse
68
Better customer-service standards
20
30
40
50
Other reasons
9
0
(%)
20
40
60
80
Source: CLSA Asia-Pacific Markets
Credit penetration
Credit growth can
persist at high rates
for many years
40
The fastest growing markets in Asia will see some of the most attractive bank
stock investments in Asia and possibly the world, over the coming five years.
This has already proven to be the case for India’s and Indonesia’s banks,
while there is not long-term data for China’s banks. Over 10 years India’s
bank stocks are up 300-3,000% compared with 100% or lower for most in
Asia. Over five years Indonesia’s bank stocks are up 150-250%, and India’s
banks stocks are up 115-425%. With structurally strong returns and limited
loan penetration, credit growth can persist at high rates for many years with
daniel.tabbush@clsa.com
19 April 2010
Mr & Mrs Asia
Banks
little risk of nasty NPL formation. The likelihood of the latter is made greater
with an exogenous shock, sharply higher interest rates in a short span of time
and ahead of a real economic slowdown. This is something we are not
forecasting.
Figure 75
Bank performance over 10 years and five years with dividend
5Y (%)
Axis Bank
BoI
SBI
BCA
HDFC
BoB
BRI
HDFC Bank
Bank Mandiri
Union Bank
ICICI
Punjab
Canara
Danamon
Corp Bank
CCB
BOC
ICBC
BoCom
IDFC
OBC
CMB
Stock change
Div yield
Total returns
420
333
238
232
207
183
180
186
142
136
130
117
6
12
9
13
7
13
17
4
22
14
9
15
426
345
246
245
215
197
197
190
164
150
139
132
Axis Bank
BoI
HDFC
BoB
SBI
OBC
HDFC BANK
ICICI
Corp Bank
Bank Mandiri
Union Bank
BCA
95
45
25
16
20
19
15
15
13
11
7
17
3
112
65
43
15
15
13
11
7
5
3
Canara
BRI
Punjab
CCB
BOC
ICBC
BoCom
IDFC
CMB
Danamon
(11)
10Y (%)
Stock change
Div yield
Total returns
3,084
1,855
1,269
912
757
549
570
420
303
24
50
21
40
21
45
9
22
33
37
32
31
3,108
1,905
1,290
952
778
594
579
442
335
37
32
31
28
26
22
15
15
13
11
7
3
41
28
26
22
15
15
13
11
7
3
(18)
(59)
Note: BoI = Bank of India; SBI = State Bank of India; BCA = Bank Central Asia; HDFC = Housing Development Finance Corp; BoB = Bank of
Baroda; BRI = Bank Rakyat Indonesia; CCB = China Construction Bank; BOC = Bank of China; ICBC = Industrial and Commercial Bank of China;
BoCom = Bank of Communications; IDFC = Infrastructure Development Finance Corp; OBC = Orient Bank of Commerce; CMB = China Merchants
Bank. Source: Datastream, CLSA Asia-Pacific Markets
Low credit/GDP suggests
room for growth in China,
India and Indonesia
Of these fast-growing countries, credit/GDP is lowest in Indonesia at 26%,
followed by 47% in India and 127% in China. For China, the figure we believe
is inflated, given the lack of a corporate bond market as well as the banks
being used (the three state banks) to support infrastructure lending and loans
to state-owned enterprises (SOE). Data is insufficient to adjust for this, we
believe China’s credit/GDP ratio would be more in line with India if stripping
out most SOE/government-related loans. Possibly a better gauge of relative
banking penetration is consumer credit, where figures are low for all three, at
8% for Indonesia, 9% for India and 17% for China.
Figure 76
Consumer credit to GDP
in China is low, although
total credit to GDP is high
Credit to GDP by country and consumer credit to GDP, 2009
(%)
Hong Kong
Credit to GDP
153
Consumer credit to GDP
56
China
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Australia
Japan
127
47
26
92
116
34
109
140
84
136
90
17
9
8
40
64
2
50
54
19
81
24
Source: CEIC, CLSA Asia-Pacific Markets
19 April 2010
daniel.tabbush@clsa.com
41
Mr & Mrs Asia
Banks
Given the past relationship with credit growth and GDP growth, we see the
highest multiple in Indonesia at 3.9x, meaning for GDP growth of 4.5% loan
growth is 17.6%. The next highest is in India at 3.0x and followed by China
at 1.7x. While there tends to be less data for China than other fast growing
countries, the difference in the multiple is still interesting. To us it suggests
that China’s credit growth versus its GDP growth is not at all out of line with
peers, and in fact is better contained. This flies in the face of the generally
greater concerns on China’s credit expansion than that of India or Indonesia.
China’s credit growth
is not of concern
Figure 77
Average multipliers of loan growth to GDP growth and deposit growth to GDP growth
Loan growth to
real GDP growth (x)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Average
China
India
Indo
2.0
1.1
0.7
1.6
2.7
2.1
1.1
0.9
1.3
1.3
1.6
3.8
1.7
4.9
2.9
0.7
4.2
2.8
1.7
4.2
2.1
2.7
4.1
2.5
3.9
2.8
3.7
5.8
2.9
2.5
2.6
1.6
3.0
1.4
3.3
3.4
2.9
3.2
6.2
(2.2)
(68.0)
3.6
3.9
4.2
4.2
5.2
4.3
2.6
4.4
5.1
2.3
3.9
Deposit growth to
real GDP growth (x)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Average
China
India
Indo
2.1
1.8
1.6
1.9
2.1
2.2
1.5
1.9
1.4
1.2
2.1
3.2
1.9
14.2
3.1
3.1
3.6
1.7
2.1
4.6
2.7
2.2
4.2
2.5
4.2
2.0
1.7
2.6
2.5
2.5
3.0
1.6
3.4
2.1
3.2
3.6
2.6
3.2
4.0
5.7
(4.6)
11.5
2.8
3.4
1.0
1.4
1.4
3.1
2.6
2.0
2.5
3.1
2.9
Source: CEIC, CLSA Asia-Pacific Markets
A 15-20% Cagr of loan
growth likely over
the next five years
Given the historical relationship of loan growth to GDP growth, and our
assumptions for long-term GDP growth, we arrive at a likely per annum loan
growth range for each system over the coming several years. This would be
21-27% for India, 21-28% for Indonesia, and 12-17% for China. Feeding this
into the numbers, this would put credit growth to GDP at 39% for Indonesia
in five years, 69% for India and 138% for China.
Figure 78
India is likely to see
the fastest loan growth
Credit to GDP, loan growth and deposit growth
Credit to GDP (%)
2009A
2010CL
2011CL
2012CL
2013CL
2014CL
Loan growth based on GDP assumption
2010CL
2011CL
2012CL
2013CL
2014CL
Deposit growth based on GDP assumption
2010CL
2011CL
2012CL
2013CL
2014CL
China
India
Indonesia
126.9
131.2
139.0
140.1
141.2
138.2
47.3
49.2
52.1
58.0
64.6
68.6
25.8
26.8
28.9
31.9
35.1
39.2
16.5
16.5
14.9
14.9
11.6
23.4
25.2
27.0
27.0
21.0
21.2
24.3
25.5
25.5
27.5
19.2
19.2
17.3
17.3
13.5
25.5
27.5
29.5
29.5
22.9
15.5
17.8
18.6
18.6
20.1
Source: CEIC, CLSA Asia-Pacific Markets
42
daniel.tabbush@clsa.com
19 April 2010
Mr & Mrs Asia
Banks
In five years, credit
growth/GDP can be
of concern in China
Only on the China figures would we possibly be concerned with the relatively
high figure in five years. However, this concern is somewhat mitigated by the
lack of alternative forms of capital and banks being used for fiscal lending.
Compared with Organisation for Economic Cooperation and Development
(OECD) countries currently, this figure is not overwhelming, nor is it
especially high versus Hong Kong’s 153%, at present. Estimating loan growth
in this way - as a function of GDP growth - suggests per annum loan growth
of 25% for India and Indonesia, and 15% for China, also figures which do not
appear wild (especially for China).
Figure 79
China’s credit
to GDP is low
Credit to GDP (latest actual with China estimate in five years)
260
(%)
240
220
200
180
160
140
120
100
USA
France
UK
HK
China (est)
Australia
Source: CEIC, CLSA Asia-Pacific Markets
Fee income growth
for Indian banks
is accelerating
Indian banks have traditionally underutilised their distribution network and
vast client base and moved into a harvest phase only over the past five years,
supported by technological advancement. Rising affluence, favourable
demographics and accelerating urbanisation has boosted the demand for
financial products. As such, the sector’s fee-income growth has accelerated to
a 27% Cagr over FY04-09 versus a mere 10% over FY99-04. We estimate
fees from the distribution of third-party products and on card transactions to
more than double over the next five years to Rs240bn, accounting for almost
26% of total fees in FY14.
Figure 80
Retail fee income likely
a Rs240bn opportunity
for Indian banks
India: Retail fee
300
(Rsbn)
250
Life insurance
General insurance
Mutual funds
Credit card
(% YoY)
60
Growth (RHS)
200
70
50
Slowdown in
life- insurance sales
40
150
30
100
20
50
10
0
0
FY05
FY06
FY07
FY08
FY09
10CL
11CL
12CL
13CL
14CL
Source: Company reports, CLSA Asia-Pacific Markets
19 April 2010
daniel.tabbush@clsa.com
43
Mr & Mrs Asia
Banks
Loan-to-deposit ratios
We assume China’s
deposit growth will be
ahead of its loan growth
Limited risks to bid up
deposits aggressively . . .
Our assumptions for more aggressive GDP growth over time in Indonesia
versus China also lift our loan-growth assumptions. One result is that China’s
state bank ends up having the lowest LDRs after five years, at 51%. This is
even lower than now, as we are assuming that the same deposit growth trends
persist, which have been greater than loan growth. Bank Central Asia (BCA)
still has one of the lowest LDRs at 64%, versus Mandiri’s 87%, Danamon’s
117% and Bank Rakyat Indonesia’s (BRI) 109%. Other than Corporation Bank
at 62%, other state banks in India come in at 67-73%, with SBI at the high
end of the range. Of the private Indian banks, ICICI ends up with one of the
highest LDRs in these countries, at 90% - something which is not in practice
easy to achieve given the Reserve Bank of India (RBI) reserve requirements
and limitations on wholesale funding. From this, one conclusion in general is
that we see limited risk from these banks to bid up deposits aggressively, to
fund high growth. The exceptions remain Danamon, BRI and ICICI.
Figure 81
China’s banks will
have lower LDRs
LDR by bank, 2009
ICICI Bank
Bank Danamon
BRI
SBI
BoB
Canara Bank
India
China Citic
Punjab
HDFC Bank
Oriental Bank
Bank of India
Union Bank
Axis Bank
Indonesia
Corp Bank
Bank Mandiri
BOC (HK)
CMB
China
BoCom
CCB
ICBC
BCA
(%)
0
20
40
60
80
100
Source: Company reports, CLSA Asia-Pacific Markets
India and Indonesia
look attractive on
credit/GDP ratio
44
Overall, Indonesia looks the best, with a credit/GDP ratio still low after five
years, so limited concern of excessive buildup in misplaced credit. Meanwhile,
each bank, other than Danamon, BRI and ICICI, would not see their LDRs
stretched by year five at the projected growth rates. On the surface, China will
appear more stretched, with credit/GDP rising to 138% by year five, although
we reiterate the distortions here of government directed lending to SOEs partly
due to a lack of a corporate-bond market. Their LDRs actually become lower
after five years based on historical growth rates of loans, deposits and our GDP
growth assumptions. India looks the most like Indonesia on credit/GDP, with
still low figures after five years.
daniel.tabbush@clsa.com
19 April 2010
Mr & Mrs Asia
Banks
Figure 82
China and India’s LDR
are likely to decline
Projected LDR
(%)
ICBC
BOC
CCB
BoCom
CMB
China Citic
SBI
BoB
OBC
HDFC Bank
ICICI
Corp Bank
Canara
Axis Bank
Punjab
BoI
Union Bank
Bank Mandiri
Danamon
BRI
BCA
China
India
Indonesia
09A
51.1
63.9
55.6
60.4
63.4
75.8
79.5
78.6
72.9
74.2
98.8
67.5
76.4
71.6
75.0
72.7
71.8
65.7
88.6
82.8
48.5
61.7
76.3
71.4
10CL
50.0
62.4
54.3
59.0
61.9
74.1
78.2
77.3
71.6
73.0
97.1
66.3
75.1
70.4
73.7
71.5
70.6
69.0
93.0
86.9
50.9
60.3
75.0
74.9
11CL
48.8
61.0
53.1
57.7
60.5
72.4
76.7
75.9
70.3
71.6
95.4
65.1
73.8
69.1
72.3
70.2
69.3
72.8
98.2
91.7
53.7
58.9
73.6
79.1
12CL
47.8
59.7
52.0
56.5
59.3
70.9
75.3
74.4
69.0
70.3
93.5
63.9
72.3
67.8
70.9
68.8
68.0
77.0
103.9
97.0
56.8
57.7
72.2
83.7
13CL
46.8
58.5
50.9
55.3
58.0
69.4
73.8
73.0
67.6
68.9
91.7
62.7
70.9
66.5
69.6
67.5
66.7
81.5
109.9
102.7
60.1
56.5
70.8
88.6
14CL
46.0
57.5
50.1
54.4
57.1
68.3
72.7
71.8
66.6
67.8
90.3
61.7
69.8
65.4
68.5
66.5
65.6
86.5
116.7
109.0
63.8
55.6
69.7
94.0
Source: Company reports, CLSA Asia-Pacific Markets
Figure 83
Indonesia’s credit to
GDP remains very
low in five years
Projected LDR and credit to GDP in five years
ICBC
BOC
CCB
BoCom
CMB
China Citic
SBI
BoB
OBC
HDFC Bank
ICICI
Corp Bank
HDFC
Canara
Axis Bank
Punjab
BoI
IDFC
Union Bank
Bank Mandiri
Danamon
BRI
BCA
China
India
Indonesia
LDR (%)
46
58
50
54
57
68
73
72
67
68
90
62
na
70
65
68
66
na
66
87
117
109
64
56
70
94
Credit to GDP (%)
18.1
15.6
15.4
6.0
3.8
3.2
14.3
3.9
1.8
2.8
4.8
1.3
2.2
3.5
2.2
4.2
3.7
0.5
2.5
5.6
1.8
5.4
3.3
62.3
47.8
16.1
Source: CLSA Asia-Pacific Markets
19 April 2010
daniel.tabbush@clsa.com
45
Mr & Mrs Asia
Banks
China’s state owned
banks will need
to raise capital
Banks in China, India and Indonesia have high ROEs at 15-22%, so that
internally generated capital is good. Average dividend payouts are low for
most of these banks, further supporting capital ratios over time. Where we
must assume that new BIS guidelines will see banks being better capitalised,
we model the implications of this over the coming five years, given high rates
of growth. Assuming no capital raisings, India’s Infrastructure Development
Finance Corp (IDFC) would be by far the best capitalised after five years, with
equity/loans at 16%, followed by BCA at 15%. The government banks in
India would be the most capital starved with equity/loan ratios averaging 6%.
China’s state banks would see equity/loans decline from 11% to 9% over this
period, suggesting a degree of capital-raising, but possibly less than what
some are concerned about. We also note, that there is likely be some riskweighting relief in China, more than anywhere else, due to high SOE lending,
further limiting the amount of new capital over this period.
Figure 84
Banks in China, India and
Indonesia have high ROEs
Payout ratio by bank versus average ROE by bank over the past five year
(%)
Payout, 09A
5-year avg ROE
ICBC
50
16
BOC
45
13
CCB
50
18
BoCom
35
15
7
19
China Citic
25
13
SBI
20
15
BoB
20
14
OBC
10
11
HDFC Bank
18
15
ICICI
34
10
Corp Bank
20
16
HDFC
36
22
Canara
20
17
Axis Bank
20
16
Punjab
31
18
BoI
15
18
IDFC
20
15
Union Bank
20
18
Bank Mandiri
28
13
Danamon
30
17
BRI
21
26
BCA
38
24
CMB
Source: Company reports, CLSA Asia-Pacific Markets
Capital implications
Indian state-owned banks
need to raise capital
46
The implications for capital raising are far higher at state banks in India than
any of the banks we examine in these three high growth countries. To reach
10-12% equity/loan ratios, given the rates of growth we have discussed,
these banks would need to raise capital equivalent to 170-260% of current
capital. Of the three state banks in China, Bank of China would need to raise
the most capital at Rmb225-418bn over the period, equivalent to 50-90% of
capital today. This compares with its peers at 45-80% of capital. BCA, IDFC
and Bank Danamon would be the only banks to be able to return capital and
still maintain a 12% equity/loan ratio. At a slightly lower target equity/loan
ratio of 11%, one bank would be added to this list: ICICI.
daniel.tabbush@clsa.com
19 April 2010
Mr & Mrs Asia
Banks
Figure 85
Bank Central Asia,
IDFC and Danamon
are best placed
Projected equity to loans
(%)
ICBC
BOC
CCB
BoCom
CMB
China Citic
SBI
BoB
OBC
HDFC Bank
ICICI
Corp Bank
HDFC
Canara
Axis Bank
Punjab
BoI
IDFC
Union Bank
Bank Mandiri
Danamon
BRI
BCA
09A
12.0
10.6
11.0
9.9
8.3
10.8
10.2
8.4
10.5
16.7
24.0
9.5
15.5
9.0
15.9
9.0
9.0
28.0
8.7
17.1
23.9
13.9
22.7
10CL
11.2
9.8
10.4
9.2
8.2
10.0
9.3
7.6
9.2
15.2
20.7
8.7
14.4
8.3
14.6
8.3
8.4
25.2
8.1
15.2
21.4
13.2
21.4
11CL
10.5
9.0
9.8
8.6
8.1
9.4
8.3
6.8
8.0
13.6
17.7
7.8
13.1
7.6
13.2
7.5
7.7
22.3
7.4
13.2
18.8
12.3
19.6
12CL
9.9
8.5
9.4
8.2
8.1
8.8
7.3
6.0
6.9
12.1
14.9
6.9
11.8
6.8
11.7
6.8
6.9
19.5
6.7
11.3
16.3
11.2
17.9
13CL
9.4
7.9
9.0
7.8
8.2
8.3
6.5
5.2
5.9
10.7
12.5
6.1
10.7
6.1
10.4
6.0
6.3
17.1
6.0
9.7
14.1
10.3
16.3
14CL
9.1
7.7
8.8
7.6
8.5
8.1
6.0
4.8
5.3
9.9
11.0
5.7
10.1
5.7
9.8
5.7
6.0
15.7
5.7
8.2
12.0
9.3
14.6
Source: Company reports, CLSA Asia-Pacific Markets
Figure 86
Bank of China will need
to raise more capital
Capital required to meet 10%, 11% and 12% of equity to loans
(local ccy in m)
Capital required to meet
Equity to loans
10%
11%
12%
10%
11%
12%
97,741
209,293
320,845
15
31
48
BOC
224,747
320,991
417,234
44
63
82
CCB
112,615
207,612
302,609
22
40
58
BoCom
88,392
125,591
162,790
48
68
89
CMB
36,502
60,109
83,716
37
61
86
China Citic
37,619
57,500
77,380
35
54
72
SBI
778,927
973,706
1,168,484
118
148
178
BoB
276,688
330,057
383,426
186
221
257
OBC
116,515
141,265
166,015
136
164
193
1,938
39,900
77,861
1
19
37
(66,101)
(385)
65,332
(13)
(0)
12
78,421
96,688
114,956
136
168
200
ICBC
HDFC Bank
ICICI
Corp Bank
HDFC
Canara
Axis Bank
Punjab
As % of existing capital
(3,022)
26,748
56,517
(2)
17
37
206,040
254,303
302,565
142
176
209
7,017
37,419
67,820
4
23
42
246,238
303,177
360,116
144
178
211
BoI
204,076
254,649
305,223
136
169
203
IDFC
(42,482)
(34,997)
(27,513)
(61)
(50)
(40)
217
Union Bank
147,839
182,249
216,659
148
182
Bank Mandiri
11,269,748
17,529,987
23,790,225
32
50
67
Danamon
(4,011,985)
(2,047,325)
(82,664)
(26)
(13)
(1)
4,020,191
10,074,304
16,128,417
14
36
58
(16,889,396) (13,201,706)
(9,514,016)
(61)
(48)
(34)
BRI
BCA
Source: CLSA Asia-Pacific Markets
19 April 2010
daniel.tabbush@clsa.com
47
Mr & Mrs Asia
Banks
Figure 87
India’s privatesector banks are better
placed than the PSUs
Equity-to-loans ratio at year five
IDFC
BCA
Danamon
ICICI
HDFC
HDFC Bank
Axis Bank
BRI
ICBC
CCB
CMB
Mandiri
China Citic
BOC
BoCom
SBI
BoI
Canara
Corp Bank
Union Bank
Punjab
OBC
BoB
(%)
0
2
4
6
8
10
12
14
16
Source: CLSA Asia-Pacific Markets
Profit growth and valuations
48
We forecast ROAs
to increase in
China and India . . .
Not only can we gather how these fast-growing banks will see credit/GDP
trends materialise over the next five years, we can too profile ROAs and
therefore, profit Cagrs. In general, we assume rising ROAs in China, given
improved efficiency gains, fee penetration and margins. For India, we assume
continued ROA improvement, for similar reasons, but not for Housing
Development Finance Corp (HDFC), which may see some ROA decline from
exceptionally high levels. For Indonesia’s banks, we see more ROA decline
widespread here, given their exceptionally high starting point and aggressive
focus from other banks globally and in Asia to enter this market. Still their
ROA remains good, at 1.6-2.3% by year five. The net results for a five year
Cagr is highest for India at 30%, followed by Indonesia at 25% and China at
20%. HDFC Bank and Baroda come in highest at 32% with ICBC and China
Merchants Bank (CMB) the lowest, at 19%.
. . . but Indian private
banks are among the
most expensive in Asia
Given current valuations, using market capitalisation, banks’ PE ratios come
in considerably over this period, but few of the banks compare with the low
multiples at India’s state banks. Oriental Bank, Canara and Corporation Bank
come in at 1.5x PE on year five against these assumptions. India’s private
banks come in the most expensive, with HDFC at 10x and HDFC Bank at 7x.
Of China’s state banks, Bank of China (BOC) remains the least expensive at
4.2x, with ICBC as the most expensive at 5.3x. Indonesia’s banks are in a
similar range at 4-7x, with BRI as the least expensive and Danamon the most
expensive. The only caveat we would highlight if making investment decisions
against this alone is that this does not take into account the high capitalraisings public-sector-undertaking (PSU) banks in India need, which are likely
to mean greater PEs. This is not a feature of BCA or Danamon, where they
have the least risk of raising new capital over this period.
daniel.tabbush@clsa.com
19 April 2010
Mr & Mrs Asia
Banks
Figure 88
ROA to decline
in Indonesia
Projected ROAs
ROA
(%)
ICBC
BOC
CCB
BoCom
CMB
China Citic
SBI
BoB
OBC
HDFC Bank
ICICI
Corp Bank
HDFC
Canara
Axis Bank
Punjab
BoI
IDFC
Union Bank
Bank Mandiri
Danamon
BRI
BCA
China
India
Indonesia
09A
1.09
1.00
1.22
0.89
0.81
1.09
0.97
1.06
1.04
1.33
1.04
1.08
2.33
1.24
1.40
1.22
0.77
2.81
1.06
1.69
1.96
2.44
2.42
1.02
1.33
2.13
10CL
1.09
1.00
1.22
0.89
0.81
1.09
0.97
1.06
1.04
1.33
1.04
1.08
2.33
1.24
1.40
1.22
0.77
2.81
1.06
1.69
1.96
2.44
2.42
1.02
1.33
2.13
11CL
1.14
1.05
1.28
0.93
0.85
1.15
1.02
1.11
1.10
1.40
1.09
1.13
2.28
1.30
1.47
1.28
0.81
2.95
1.11
1.66
1.92
2.39
2.37
1.07
1.39
2.08
12CL
1.20
1.10
1.34
0.98
0.89
1.20
1.07
1.17
1.15
1.47
1.15
1.19
2.24
1.37
1.54
1.34
0.85
3.10
1.17
1.62
1.88
2.34
2.32
1.12
1.44
2.04
13CL
1.26
1.16
1.41
1.03
0.94
1.26
1.12
1.22
1.21
1.54
1.20
1.25
2.19
1.44
1.62
1.41
0.89
3.25
1.22
1.59
1.84
2.29
2.27
1.18
1.51
2.00
14CL
1.32
1.22
1.48
1.08
0.98
1.33
1.18
1.28
1.27
1.62
1.26
1.31
2.15
1.51
1.70
1.48
0.93
3.42
1.29
1.56
1.80
2.25
2.23
1.23
1.57
1.96
Source: Company reports, CLSA Asia-Pacific Markets
Figure 89
Banks in all three
countries will show
strong profit growth
Projected net profit based on ROA
Net profit (based on ROA)
(local ccy in m)
ICBC
BOC
CCB
BoCom
CMB
China Citic
SBI
BoB
OBC
HDFC Bank
ICICI
Corp Bank
HDFC
Canara
Axis Bank
Punjab
BoI
IDFC
Union Bank
Bank Mandiri
Danamon
BRI
BCA
09A
129,337
85,230
113,213
30,150
16,522
15,914
101,817
28,064
13,468
29,396
39,822
11,040
27,619
30,966
25,013
35,914
20,897
10,236
19,574
6,654,818
2,013,039
6,933,434
6,911,754
10CL
11CL
12CL
13CL
14CL
147,083
179,977
217,102
261,884
306,810
114,874
140,565
169,560
204,536
239,623
130,797
160,048
193,063
232,887
272,838
36,375
44,510
53,691
64,767
75,877
19,219
23,517
28,368
34,220
40,090
20,475
25,054
30,222
36,456
42,710
132,039
173,566
231,432
308,591
392,040
37,732
49,599
66,135
88,184
112,031
17,132
22,520
30,028
40,039
50,867
39,583
52,032
69,380
92,510
117,527
48,101
63,229
84,309
112,418
142,818
13,697
18,004
24,007
32,010
40,667
32,965
40,444
50,333
62,639
74,273
39,999
52,579
70,108
93,482
118,761
31,380
41,249
55,001
73,338
93,170
46,998
61,779
82,376
109,840
139,543
25,557
33,595
44,796
59,731
75,883
11,873
15,607
20,810
27,748
35,251
24,163
31,762
42,352
56,471
71,742
8,989,088 10,954,070 13,475,053 16,576,219 20,710,044
2,705,963
3,297,476
4,056,361
4,989,897
6,234,292
9,515,355 11,595,376 14,263,950 17,546,674 21,922,514
9,049,771 11,028,017 13,566,019 16,688,120 20,849,851
Source: Company reports, CLSA Asia-Pacific Markets
19 April 2010
daniel.tabbush@clsa.com
49
Mr & Mrs Asia
Banks
Figure 90
Indian banks stand
out with highest
profit growth
Five-year net-profit Cagr
HDFC Bank
BoB
Punjab
SBI
Canara
OBC
Axis Bank
Corp Bank
Union Bank
BoI
ICICI
IDFC
BRI
Mandiri
Danamon
BCA
BOC
HDFC
China Citic
BoCom
CMB
CCB
ICBC
(%)
16
18
20
22
24
26
28
30
32
Source: CLSA Asia-Pacific Markets
Figure 91
Indian state-owned
banks have low multiples
Projected PE based on ROA
Market capitalisation to
earnings multiple (x)
Market cap to earnings multiple (x)
ICBC
BOC
CCB
BoCom
CMB
China Citic
SBI
BoB
OBC
HDFC Bank
09A
14.2
12.8
12.1
13.5
20.9
18.3
14.2
6.6
4.7
26.3
10CL
11.1
8.7
9.4
10.4
16.4
11.9
9.8
5.9
4.3
20.6
11CL
9.1
7.1
7.7
8.5
13.4
9.7
7.4
4.5
3.3
15.6
12CL
7.5
5.9
6.4
7.1
11.1
8.0
5.6
3.4
2.5
11.7
13CL
6.2
4.9
5.3
5.9
9.2
6.7
4.2
2.5
1.9
8.8
14CL
5.3
4.2
4.5
5.0
7.9
5.7
3.3
2.0
1.5
6.9
ICICI
Corp Bank
HDFC
Canara
Axis Bank
Punjab
BoI
IDFC
Union Bank
Bank Mandiri
Danamon
BRI
24.5
5.5
27.7
5.2
16.0
8.0
9.7
19.5
6.8
14.7
18.8
13.5
20.8
4.7
22.5
4.4
14.5
6.2
7.0
17.7
5.7
10.3
15.7
9.3
15.8
3.6
18.3
3.4
11.0
4.8
5.3
13.4
4.4
8.4
12.9
7.6
11.9
2.7
14.7
2.5
8.2
3.6
4.0
10.1
3.3
6.9
10.4
6.2
8.9
2.0
11.8
1.9
6.2
2.7
3.0
7.6
2.4
5.6
8.5
5.0
7.0
1.6
10.0
1.5
4.9
2.1
2.4
5.9
1.9
4.5
6.8
4.0
BCA
China
India
Indonesia
17.1
15.3
13.4
16.0
13.4
11.3
11.1
12.1
11.0
9.2
8.5
10.0
8.9
7.7
6.5
8.1
7.2
6.4
4.9
6.6
5.8
5.4
3.9
5.3
Source: Datastream, CLSA Asia-Pacific Markets
50
daniel.tabbush@clsa.com
19 April 2010
Mr & Mrs Asia
Banks
We expect strong
price appreciation even
assuming static multiples
Even if we assume static PEs from 2009A over time, the price appreciation of
these bank stocks, based on these assumptions, would be 227% higher in five
years. This is actually low considering the historical price rise for India and
Indonesia bank stocks over the past five years, as we discussed earlier. SBI
shows the highest upside at 330% with HDFC as the lowest upside at 178%.
China’s banks show the lowest upside on average at 183%, with India best at
252% followed by Indonesia at 209%. We point out that these estimates do
not presume any PE expansion over time or over a positive cycle. This further
assumes far lower credit growth in China over forecast years.
Figure 92
Among Indian private
banks, HDFC Bank and
ICICI Bank stand out
Price appreciation¹
(%)
10CL
11CL
12CL
13CL
14CL
ICBC
BOC
CCB
BoCom
CMB
China Citic
SBI
BoB
OBC
HDFC Bank
ICICI
Corp Bank
28
46
29
29
27
54
45
13
8
28
18
16
56
79
58
58
56
89
90
49
41
68
55
52
89
116
91
91
88
128
154
98
89
124
106
103
127
161
130
130
127
175
238
164
151
199
175
171
166
205
170
170
166
222
330
235
219
280
250
244
HDFC
Canara
Axis Bank
Punjab
BoI
IDFC
Union Bank
Bank Mandiri
Danamon
BRI
BCA
China
23
17
10
27
38
11
19
43
20
45
28
36
51
54
45
67
81
45
56
74
46
76
56
66
88
105
93
123
142
94
109
114
80
117
92
100
134
174
158
198
223
158
178
163
121
167
137
142
178
248
228
278
310
228
253
229
176
234
196
183
India
Indonesia
21
34
58
63
110
101
179
147
252
209
¹ Based on static market cap to asset multiple as 09A during years 1-5. Source: Datastream, CLSA AsiaPacific Markets
Figure 93
China’s banks show the
lowest upside at 183%
Average upside per year for the above banks
250
(%)
200
150
100
50
0
10CL
11CL
12CL
13CL
14CL
Note: Price appreciation based on static market cap to asset multiple as 2009A during years one to five.
Source: CLSA Asia-Pacific Markets
19 April 2010
daniel.tabbush@clsa.com
51
Mr & Mrs Asia
Banks
On banks market
capitalisation/GDP,
Indonesia appears cheap
As a further gauge to how likely these scenarios are and the potential for
stock upside, we look finally at market capitalisation to GDP. Where Indonesia
begins at the lowest level as at 2009A at 6.1%, China begins at the highest
level as at 2009A, at 14.3%. India is in between at 9.2%. For perspective,
these figures compare with the USA at 5%, the UK at 17%, Thailand at 14%
and Singapore at 38%, so clearly a large variance. By year five, China would
rise to 22%, India to 16% and Indonesia to 10%. The most important
distortion here will be large new listings, which will likely be unique to China,
at least with Agricultural Bank. The total market capitalisation we use in these
calculations are for banks under our coverage, which includes 13 banks in
India, six banks in China and four banks in Indonesia. One conclusion is that
Indonesia continues to appear cheap when considering bank market
capitalisation to GDP, and considering other factors: high Cagr and high ROA.
Figure 94
Market capitalisation to GDP
GDP
(local ccy in bn)
China
33,535
37,811
41,571
47,391
54,026
61,589
2009A
2010E
2011E
2012E
2013E
2014E
India
61,253
72,659
86,005
98,046
111,772
127,420
Mkt cap
Indonesia
5,613,000
6,538,000
7,535,000
8,589,900
9,792,486
11,163,434
China
4,803
6,411
7,845
9,464
11,416
13,374
India
5,658
7,134
9,297
12,298
16,273
20,527
Mkt cap to GDP (%)
Indonesia
344,117
465,812
567,637
698,274
858,975
1,073,189
China
14.3
17.0
18.9
20.0
21.1
21.7
India
9.2
9.8
10.8
12.5
14.6
16.1
Indonesia
6.1
7.1
7.5
8.1
8.8
9.6
Source: CEIC, Datastream
Figure 95
Room for appreciation
Current bank market capitalisation to GDP
HK
Singapore
Malaysia
Australia
UK
Taiwan
Thailand
China
Indo
Korea
India
Phil
USA
Japan
(%)
0
10
20
30
40
50
60
Source: CEIC, CLSA Asia-Pacific Markets
Top three recommendations
Growth opportunities will
remain strong for the
next five to 10 years
Over the next five to 10 years, while the growth opportunities remain strong,
banks will have to sooner or later differentiate themselves to win customer
loyalty, particularly early in a market like India. And therefore, in the longer
run banks will need to evolve into financial brands with a perception of
customer service levels and delivery of the same. This drives our choice of
top picks for the next five to 10 years.
Effective leveraging of
technology is important,
as seen in India
What will also differentiate winners is the use of technology or rather the
effective use of technology. In India, the effective leveraging of technology is
what gives the private sector banks an edge over their public sector brethren
52
daniel.tabbush@clsa.com
19 April 2010
Mr & Mrs Asia
Banks
despite their physical reach being limited. On the other hand, while PSU
banks have rolled out technology platforms, implemented core banking
solutions and recently embarked on brand building campaigns, their services
are yet to improve significantly and they are not leveraging on the technology
to give customers more.
Figure 96
Technology has
differentiated private
banks from the PSUs
Types of saving accounts
Axis
12
HDFC Bank
12
ICICI
11
BoB
9
BoI
5
SBI
5
Central Bank
4
PNB
4
Union Bank
4
0
2
4
(No.)
6
8
10
12
14
Figure 97
Private banks
are significantly
ahead of PSU banks . . .
Customer-service and technological positions
Customer service
Inherited strong IT and
product strategy from parent
Foreign banks
Standardising service experience
Advanced treasury
Focused on customer service and
product innovation
Private banks
. . . especially
Tier-II PSU banks
Tier I PSU banks
Tier II PSU banks
75-100% C BS
Rebranding and repositioning
Poor IT platform
Legacy customer relationships
Implementation of technology
Source: CLSA Asia-Pacific Markets
19 April 2010
daniel.tabbush@clsa.com
53
Mr & Mrs Asia
Banks
Figure 98
PSU banks have been a decade behind private banks in terms of information technology
Areas
Areas where
where PSU
PSU banks
banks
lag
lag behind
behind private
private banks
banks
Private
Private banks
banks
PSU
PSU banks
banks
1995-early 2000s
2005
2008 to date
100%
100% computerised
computerised
100%
100% CBS
CBS platforms
platforms
Stabilised
Stabilised IT
IT network,
network,
launch
launch internet
internet banking
banking
and
and other
other services
services
Leverage
Leverage technology
technology
to
to improve
improve
customer
customer service
service
Limited
Limited computerisation
computerisation
No
No CBS
CBS platform
platform
60%
60% branches
branches
computerised;
computerised; 11%
11%
branches
branches under
under CBS
CBS
About
About 100%
100% branches
branches
computerised;
computerised; about
about 80%
80%
branches
under
branches under CBS
CBS
Segmentation
Segmentation
of
of customers
customers
Online
Online trading
trading
Internet
Internet banking
banking
Cash-management
Cash-management
services
services
ATMs;
ATMs; debt
debt card
card
and
and credit
credit card
card
Cross-selling
Cross-selling
of
of products
products
Phone
Phone banking
banking
Remittances
Remittances
Note: CBS = Core banking solutions (ERP software). Source: CLSA Asia-Pacific Markets
Bank Central Asia is our
best pick in the region
Where market capitalisation remains low to GDP in Indonesia and a rising
middle class can mean better growth relative to our expectations based on
GDP alone, it stands out as the most interesting country. Within Indonesia,
BCA is our top recommendation. This is partly due to good valuations even
after year five, like many banks, but also it has one of the highest levels of
capital, so with more margin for error. BCA furthermore controls the market
in Indonesia for transaction banking, which is unique. A seemingly strong
management team also adds to BCA’s attraction, with a good balance on
conservatism, growth and returns.
HDFC Bank is among
our top picks given its
sterling track record
We also include HDFC Bank as a top three recommendation, given its
historical strong price appreciation, well above average profit growth over the
coming years and its strong capital base. It can further extract more returns
from its relationship with HDFC as well as its product sales from non-banking
businesses, above and beyond our estimates. At 280% price appreciation
over five years, it stands out as one of the best in all these countries, and
where that growth rate is well below what it has seen in the past; eg, it can
prove too conservative.
Bank of China makes
it on to this list on
attractive valuations
Bank of China is our final recommendation, given its lower valuations versus
peer state banks, its above average price appreciation over five years versus
peer state banks, and a far better profit growth profile. ICBC and CCB should
see 19% average annual profit growth over five years, not bad in absolute
terms, but the lowest of the group we have looked at here and lower than the
23% for BOC. Where its equity/loan ratio falls below peers in year five to
7.7%, we remind that this does not take into account likely lower risk
weightings on SOE loans that will see risk-weighted assets fall for all three
state banks. At 4.2x PE in five years, BOC is also one of cheapest in these
three countries, compared with growth.
Risks
An economic downturn
is the biggest risk
to our forecasts
54
The greatest risks to our five year projections are primarily GDP growth
assumptions, which drive our loan growth and deposit growth, over the period.
At the same time, we are taking a clinical view of the outlook based on growth,
where, in practice, growth is often interrupted by a bad loan cycle or an
daniel.tabbush@clsa.com
19 April 2010
Mr & Mrs Asia
Banks
economic downturn. A more positive risk is our implicit rather than explicit
assumption for a growing middle class, which could add substantially to credit
demand and the overall relationship between credit growth and GDP growth.
Regulatory risks
The second risk is likely from the regulatory side. As the markets grow in
terms of size and penetration, regulators in different countries will look
towards new regulations, which in most cases are likely to be perceived to be
favouring customers and protecting customer interests. Pro-customer
regulations have been implemented in developed markets, including the USA
and Australia, and regulatory intervention could hurt retail fee growth in
China, India and Indonesia.
Figure 99
Key regulatory changes regarding retail fees
Australia
Australia capped the interest rate on credit cards
India
Banks disallowed from charging ATM interchange fees to customers
SEBI bans upfront load on mutual funds - makes distribution fees more
transparent
USA
The Card Act 2009 caps/monitors charges and fees on credit cards
Source: CLSA Asia-Pacific Markets
19 April 2010
daniel.tabbush@clsa.com
55
56
Figure 100
Asian banks valuations
Price
MCap
(US$bn)
Rec
MCap/
MCap/
asset (%) deposits
21.47
85.60
30.05
203.00
102.23
70.00
26.0
3.0
7.7
55.2
27.0
185.7
BUY
BUY
O-PF
O-PF
U-PF
SELL
15.3
16.3
10.1
12.0
23.6
8.1
16.3
5.03
11.13
7.65
6.57
6.51
17.33
143.0
61.1
203.3
37.8
249.5
52.3
BUY
BUY
BUY
O-PF
O-PF
SELL
1,310
2,925
2,040
1,050
185
325
650
470
300
350
400
920
2,000
10.6
17.9
20.0
24.3
4.9
1.9
5.3
1.6
3.4
4.3
3.9
7.1
30.1
5,800
6,000
2,000
8,700
4,500
PE (x)
PB (x)
ROAE (%)
ROAA (%)
CAR (%)
10CL
11CL
09A
10CL
11CL
09A
10CL
11CL
09A
10CL
11CL
09A
10CL
11CL
19.6
19.1
12.5
17.7
30.5
13.9
20.4
14.6
18.2
21.1
16.7
15.8
31.4
16.3
11.6
14.4
15.5
15.5
14.3
16.8
20.4
10.7
13.1
14.0
12.4
12.7
11.6
17.4
1.95
2.03
1.54
2.58
3.59
1.42
13.9
1.83
1.84
1.42
1.41
3.32
1.40
12.6
1.72
1.66
1.36
2.08
2.93
1.31
2.28
14.8
11.7
7.6
12.9
24.1
5.3
2.10
16.3
13.4
9.5
12.7
24.1
8.6
1.92
16.6
13.3
9.9
14.2
24.5
11.7
14.5
1.16
0.95
0.60
0.73
1.66
0.24
15.8
1.37
1.15
0.80
0.81
1.71
0.48
16.1
1.37
1.20
0.82
0.97
1.80
0.68
1.09
16.9
15.6
13.3
16.5
15.8
13.7
1.26
15.5
16.4
13.9
15.6
13.9
14.5
1.30
14.4
16.9
12.6
15.8
14.4
14.7
15.4
11.8
9.0
8.6
14.7
15.0
13.4
12.1
13.2
9.9
9.3
16.1
16.5
14.8
13.3
17.2
9.6
8.4
14.1
22.1
21.3
15.4
14.7
7.4
6.9
11.1
18.6
18.2
12.8
12.6
6.4
5.7
8.9
16.1
15.0
10.8
2.73
1.77
1.71
1.94
4.22
3.64
2.67
2.30
1.43
1.49
1.72
3.42
2.85
2.20
2.07
1.23
1.29
1.50
3.03
2.41
1.92
16.6
19.5
21.6
14.5
20.2
18.8
18.5
16.7
20.4
22.9
16.4
20.0
18.0
19.1
17.2
20.6
24.2
17.9
20.0
17.4
19.6
1.03
1.01
1.27
1.11
1.19
0.93
1.09
1.04
1.13
1.31
1.15
1.25
0.97
1.14
1.12
1.24
1.40
1.19
1.36
1.05
1.23
11.1
12.0
11.9
11.7
12.4
9.5
11.4
12.3
13.6
11.8
10.9
13.6
11.6
12.3
12.1
12.8
11.5
10.7
13.5
11.6
12.0
BUY
BUY
BUY
BUY
BUY
BUY
O-PF
O-PF
O-PF
U-PF
U-PF
U-PF
U-PF
21.7
61.1
33.0
24.2
51.8
5.7
7.6
5.9
7.0
6.0
6.1
9.1
10.8
19.2
27.4
na
42.4
40.0
na
6.5
8.9
6.8
8.2
7.1
7.3
10.7
13.6
16.3
18.9
29.4
30.0
27.0
22.0
6.3
8.3
6.4
7.7
9.2
5.5
8.7
13.0
14.8
15.5
26.1
23.7
20.6
19.3
7.0
8.1
5.6
7.5
7.5
6.3
8.5
12.9
13.0
12.1
22.7
18.5
16.9
16.3
6.0
6.8
4.7
6.1
5.7
5.4
7.0
10.5
10.7
2.95
5.30
4.19
2.07
3.24
0.99
1.57
1.23
1.52
1.28
1.18
1.83
2.02
2.26
2.57
4.99
3.69
1.94
2.87
0.88
1.37
1.05
1.34
1.13
1.04
1.57
1.80
2.02
2.21
4.48
3.20
1.81
2.53
0.78
1.19
0.89
1.16
0.98
0.91
1.35
1.59
1.78
19.1
19.4
16.3
7.8
15.6
16.8
20.2
20.7
20.9
14.6
23.2
22.6
16.5
18.0
17.7
20.1
16.6
9.7
15.8
13.3
18.1
20.2
19.0
16.1
17.4
20.0
14.8
16.8
19.7
20.9
18.5
11.0
16.5
13.8
18.8
20.5
20.4
18.5
17.9
20.7
16.1
17.9
1.53
2.51
1.45
1.04
3.05
1.12
1.14
1.17
1.13
0.84
1.32
1.32
1.01
1.43
1.54
2.57
1.53
1.26
2.93
0.87
1.00
1.14
1.01
0.87
1.02
1.16
0.90
1.37
1.61
2.63
1.61
1.31
2.89
0.88
1.03
1.17
1.07
0.97
1.06
1.21
0.95
1.41
19.4
10.5
17.0
19.2
23.8
13.5
15.4
16.1
13.8
13.2
13.9
15.0
12.4
15.6
18.9
10.7
15.1
18.5
20.0
12.8
14.6
15.2
13.5
12.5
14.5
15.0
12.3
14.9
18.2
11.1
13.6
17.7
18.5
12.4
14.6
15.0
13.8
12.0
14.9
15.3
12.1
14.6
12.2
16.0
1.5
11.7
5.0
BUY
BUY
BUY
O-PF
U-PF
25.1
45.3
19.5
32.5
37.5
32.0
32.1
48.0
27.7
37.9
52.6
39.7
16.7
20.7
27.1
15.3
17.6
19.5
13.6
16.2
15.3
12.4
15.0
14.5
11.3
14.3
11.0
10.6
13.7
12.2
3.17
5.19
2.49
3.81
2.87
3.51
2.73
4.30
2.19
3.06
2.55
2.97
2.34
3.64
1.92
2.50
2.32
2.54
20.2
27.2
11.8
27.6
15.4
20.4
21.6
29.0
15.2
27.3
18.0
22.2
22.4
27.6
18.5
25.9
17.8
22.4
1.77
2.60
0.97
2.61
1.92
1.97
1.98
2.92
1.38
2.79
2.68
2.35
2.11
2.95
1.58
2.88
2.59
2.42
18.1
18.7
21.8
15.1
20.8
18.9
14.2
19.3
15.2
14.1
20.6
16.7
12.0
19.0
14.8
14.2
19.4
15.9
16,100
21,100
44,000
64,000
57,000
22,000
16,500
15,000
2.0
1.8
6.6
18.3
20.1
12.3
8.0
7.1
BUY
BUY
BUY
BUY
BUY
BUY
O-PF
U-PF
6.8
6.7
4.7
7.5
8.4
4.8
8.9
5.7
6.7
12.7
12.5
8.3
13.1
14.5
7.9
17.7
20.5
13.4
8.1
11.8
23.9
34.1
20.0
13.6
10.1
12.4
16.7
7.3
7.3
7.0
9.1
8.8
7.1
5.9
7.8
7.5
6.2
6.2
6.1
6.9
7.6
6.4
8.7
6.6
6.8
1.05
1.14
0.77
1.03
1.31
1.01
1.13
1.01
1.06
0.94
1.00
0.70
0.96
1.20
0.91
1.07
0.89
0.96
0.85
0.90
0.63
0.86
1.05
0.81
0.99
0.80
0.86
13.0
10.1
3.3
3.2
6.6
7.9
12.2
8.3
8.1
13.5
14.6
10.5
10.9
14.2
13.5
18.6
12.2
13.5
14.3
15.4
10.9
13.2
14.6
13.5
11.7
12.7
13.3
0.84
0.63
0.20
0.20
0.41
0.36
0.89
0.47
0.50
0.96
0.95
0.68
0.75
1.01
0.68
1.54
0.76
0.92
1.04
1.04
0.73
0.94
1.10
0.73
0.99
0.82
0.92
14.7
14.1
15.0
14.0
15.1
14.2
14.9
11.9
14.3
14.7
14.5
15.1
14.1
16.2
13.1
15.8
11.9
14.4
14.1
14.7
16.2
14.6
17.6
12.7
15.9
12.0
14.7
5.80
15.00
8.70
11.50
4.7
15.5
16.5
13.2
BUY
BUY
BUY
U-PF
14.7
19.3
15.8
17.4
16.8
19.2
24.5
20.3
19.5
20.9
14.5
18.3
62.5
16.9
28.0
12.0
15.0
14.6
14.8
14.1
9.7
11.8
12.4
12.4
11.6
1.61
2.47
2.13
3.86
2.52
1.47
2.24
1.90
3.35
2.24
1.32
2.02
1.74
2.84
1.98
11.6
14.2
3.1
24.5
13.3
12.8
15.2
13.8
24.1
16.5
14.4
17.5
14.6
24.7
17.8
1.08
1.26
0.24
1.22
0.95
1.27
1.36
1.13
1.24
1.25
1.46
1.57
1.22
1.33
1.39
17.3
14.3
16.1
14.7
15.6
17.2
14.4
16.3
14.5
15.6
17.2
14.2
16.1
14.7
15.5
Continued on the next page
Mr & Mrs Asia
19 April 2010
09A
Banks
daniel.tabbush@clsa.com
Hong Kong (HK$)
BOC (HK)
18.96
Wing Hang
79.55
BEA
29.35
StanChart
213.60
Hang Seng
109.30
HSBC
82.70
Avg (HK banks only)
China (Rmb)
BOC
4.37
BoCom
9.68
CCB
6.75
China Citic
6.02
ICBC
9.68
CMB
21.20
Average
India (Rs)¹
Axis Bank
1,177
HDFC
2,822
HDFC Bank
1,950
ICICI Bank
965
IDFC
174
Oriental
338
Baroda
643
Corp Bank
492
Union Bank
300
BoI
367
Canara
417
Punjab
990
SBI
2,092
Average
Indonesia (Rp)
Mandiri
5,300
BCA
5,850
BTN
1,560
BRI
8,650
Danamon
5,300
Average
Korea (won)
Busan Bank
11,900
Daegu Bank
15,250
Hana Fin
34,950
Kookmin
53,600
Shinhan
47,450
Woori
17,250
KEB
13,900
IBK
14,500
Average
Malaysia (RM)
AMMB
5.00
CIMB
14.22
Maybank
7.50
Public Bank
12.04
Average
Target
19 April 2010
Asian banks valuations (cont’d)
Price Target
Rec
MCap/
asset (%)
MCap/
deposits
09A
10CL
11CL
09A
10CL
11CL
09A
10CL
11CL
09A
10CL
11CL
09A
10CL
11CL
50.00
60.00
22.50
45.00
2.3
2.1
0.4
3.4
BUY
BUY
O-PF
SELL
10.1
10.4
6.2
19.3
11.5
12.6
13.5
8.4
23.5
14.5
16.2
15.2
6.0
17.6
13.7
14.7
13.4
5.6
16.0
12.4
13.1
11.4
5.0
14.2
10.9
1.72
1.32
0.75
2.28
1.52
1.55
1.23
0.68
2.16
1.41
1.40
1.13
0.62
2.12
1.32
10.2
9.9
11.0
13.2
11.1
10.3
10.4
10.5
13.9
11.3
10.5
11.3
10.8
15.0
11.9
0.73
0.76
1.18
1.23
0.97
0.72
0.80
1.15
1.26
0.98
0.73
0.87
1.18
1.30
1.02
17.5
14.0
29.0
14.0
18.6
17.5
14.0
29.0
13.0
18.4
17.5
13.0
29.0
13.0
18.1
18.60
23.80
8.10
24.3
21.8
20.8
BUY
BUY
U-PF
8.3
15.8
13.9
12.7
11.4
19.6
23.9
18.3
16.8
17.0
14.9
16.2
13.0
12.5
14.3
13.3
10.6
10.9
13.5
11.6
1.34
1.81
1.70
1.62
1.30
1.68
1.70
1.56
1.18
1.61
1.61
1.47
9.0
10.4
11.0
10.1
10.2
12.5
10.7
11.1
11.7
13.6
11.2
12.1
0.79
0.97
1.02
0.93
0.99
1.29
1.06
1.11
1.14
1.42
1.11
1.22
16.7
19.6
16.5
17.6
15.5
16.0
14.6
15.4
13.9
14.4
13.5
14.0
25.20
18.50
16.50
26.00
65.00
41.00
14.00
12.00
16.59
16.00
11.00
5.4
1.6
2.5
5.1
16.4
9.9
3.2
2.9
3.6
6.5
2.2
BUY
BUY
BUY
BUY
O-PF
O-PF
U-PF
SELL
SELL
SELL
SELL
9.4
5.1
7.5
28.1
11.5
10.4
5.0
6.1
5.8
7.7
3.1
9.1
12.6
6.0
9.2
47.3
40.3
27.0
27.8
7.0
6.9
10.6
3.7
18.0
124.1
27.3
89.3
22.8
47.6
16.2
75.0
29.4
41.8
14.6
11.1
23.3
17.4
13.9
16.3
22.3
23.4
18.8
38.6
28.7
17.7
12.7
16.4
20.6
8.6
10.0
10.4
17.9
15.3
14.9
12.5
12.4
10.1
9.2
10.2
12.0
1.44
0.95
0.97
1.43
2.48
1.52
1.29
1.16
1.14
1.07
1.00
1.31
1.35
0.90
0.92
1.43
2.24
1.52
1.20
1.16
1.09
1.04
0.96
1.26
1.20
0.85
0.86
1.41
2.02
1.45
1.07
1.14
1.01
0.98
0.92
1.17
1.0
3.8
1.1
6.5
6.2
11.2
1.9
3.9
2.7
7.6
7.6
4.9
6.4
7.2
5.9
6.4
10.1
8.2
3.3
4.0
6.3
8.3
4.5
6.4
12.1
9.5
8.5
7.9
13.9
10.1
9.1
9.3
10.3
11.0
7.1
9.9
0.08
0.22
0.08
1.37
0.28
0.83
0.06
0.22
0.15
0.57
0.29
0.38
0.54
0.39
0.48
1.31
0.51
0.59
0.13
0.22
0.33
0.62
0.18
0.48
1.04
0.52
0.68
1.49
0.72
0.66
0.38
0.47
0.55
0.81
0.28
0.69
14.6
11.1
11.6
11.3
11.5
11.5
10.9
11.1
10.1
11.3
13.0
11.6
14.7
11.5
11.6
10.8
11.2
11.2
11.4
10.6
11.2
11.1
11.6
11.5
14.5
11.3
11.3
10.3
11.2
11.0
10.8
9.7
10.9
10.4
11.1
11.1
190.0
125.0
106.0
23.0
11.4
33.0
1.1
7.1
6.9
8.9
3.7
4.5
2.1
1.7
BUY
BUY
BUY
O-PF
O-PF
U-PF
SELL
12.1
14.3
21.2
13.9
8.8
14.7
9.6
14.0
15.8
20.8
28.8
20.6
11.1
19.6
12.7
19.4
11.1
14.9
13.9
18.0
12.2
16.3
27.4
14.0
9.0
11.2
12.2
12.5
10.4
14.4
26.9
11.1
7.0
8.1
9.6
9.1
8.6
11.9
13.6
8.5
1.17
1.81
2.05
1.29
1.30
1.57
1.19
1.53
1.09
1.66
1.85
1.18
1.20
1.46
1.14
1.40
1.00
1.49
1.66
1.08
1.09
1.34
1.06
1.26
11.2
12.6
15.5
7.5
11.1
9.8
4.4
11.6
12.6
15.4
15.9
9.9
12.0
10.5
4.3
13.2
14.9
19.4
18.2
12.4
13.3
11.8
8.1
15.6
1.20
1.12
1.64
0.87
0.84
0.98
0.36
1.13
1.40
1.36
1.78
1.16
0.88
1.06
0.37
1.32
1.65
1.67
2.08
1.44
0.98
1.17
0.67
1.56
15.3
15.7
16.6
16.8
16.0
12.7
14.3
16.1
15.6
15.9
16.9
16.9
16.4
12.7
13.9
16.3
15.7
16.0
16.9
16.7
16.6
12.6
13.7
16.4
550
3,400
195
77.4
49.7
31.1
U-PF
U-PF
SELL
3.4
2.6
1.8
2.6
5.4
3.5
3.4
4.1
28.4
15.9
14.3
19.5
25.1
21.4
16.0
20.8
15.8
10.8
10.4
12.3
0.83
0.89
0.89
0.87
0.75
0.85
0.85
0.82
0.72
0.80
0.82
0.78
3.0
5.9
6.5
5.1
3.2
4.1
5.4
4.2
4.6
7.6
8.0
6.8
0.11
0.18
0.13
0.14
0.14
0.17
0.14
0.15
0.21
0.32
0.22
0.25
11.8
na
na
11.8
11.8
na
na
11.8
11.8
na
na
11.8
55.72
27.12
23.99
26.06
83.2
76.4
59.6
54.1
BUY
BUY
O-PF
U-PF
13.9
13.4
12.7
8.2
12.1
23.6
23.9
20.7
16.4
21.2
18.9
18.9
19.6
22.9
20.1
15.3
14.4
15.5
14.1
14.8
14.3
13.2
13.5
12.7
13.4
3.20
2.47
2.02
1.78
2.36
2.85
2.30
1.91
1.69
2.19
2.63
2.13
1.79
1.59
2.04
16.2
16.5
9.9
6.6
12.3
18.6
16.3
12.9
10.8
14.7
18.2
16.4
14.0
11.4
15.0
0.83
0.84
0.61
0.35
0.66
0.97
0.99
0.89
0.63
0.87
1.02
1.06
1.00
0.67
0.94
10.2
10.8
13.7
11.5
11.5
11.8
11.6
14.1
11.8
12.3
12.2
12.1
14.6
11.7
12.6
19.00
34.00
55.00
3.00
47.00
24.00
25.00
25.00
187.2
39.3
33.7
132.5
183.3
168.0
23.5
52.6
O-PF
O-PF
O-PF
U-PF
U-PF
U-PF
SELL
SELL
7.0
16.7
11.3
7.3
9.7
13.6
13.8
18.3
12.2
15.0
13.6
7.8
18.8
12.8
7.9
10.7
15.1
15.3
20.1
13.6
19.4
17.9
na
na
14.8
na
20.6
18.5
29.7
28.9
22.5
17.9
18.6
14.5
14.5
17.1
na
15.3
14.7
21.2
na
16.2
13.3
14.2
8.2
11.8
12.9
17.3
10.8
9.9
13.6
11.8
12.0
10.8
11.2
0.59
1.35
1.37
0.38
1.10
1.35
1.33
2.34
1.23
2.03
1.90
0.76
1.49
0.98
0.88
1.08
1.46
1.44
1.94
1.25
1.81
1.72
0.71
1.37
0.93
0.85
1.01
1.32
1.35
1.79
1.17
1.62
1.55
(1.1)
(1.6)
11.6
(6.3)
5.8
9.5
4.9
7.2
3.8
13.1
11.7
5.2
10.0
6.7
(1.4)
7.2
10.2
6.8
(3.9)
5.1
14.6
13.1
8.9
12.1
7.4
5.0
9.7
14.0
10.2
15.8
10.4
15.7
14.5
(0.10)
(0.22)
0.97
(0.43)
0.46
0.86
0.50
0.69
0.34
1.04
0.89
0.53
1.22
0.65
(0.11)
0.62
0.94
0.69
(0.36)
0.52
1.22
1.06
0.96
1.38
0.86
0.43
0.91
1.38
0.99
1.41
1.04
1.32
1.18
na
na
na
na
na
na
na
na
na
15.5
14.9
na
na
na
na
na
na
na
na
na
15.0
14.5
na
na
na
na
na
na
na
na
na
14.7
14.3
PE (x)
ROAE (%)
ROAA (%)
CAR (%)
57
Mr & Mrs Asia
¹ Japanese and Indian banks - 09A, 10CL and 11CL. Source: CLSA Asia-Pacific Markets
PB (x)
Banks
daniel.tabbush@clsa.com
Philippines (P)
Banco de Oro
43.50
Metrobank
50.50
Rizal
21.00
BPI
46.00
Average
Singapore (S$)
DBS
14.94
UOB
19.94
OCBC
8.97
Average
Taiwan (NT$)
ChinaTrust
18.55
E.Sun
13.85
Sinopac
11.60
Yuanta Fin
20.45
Cathay Fin
54.40
Fubon Fin
39.00
Shin Kong
13.05
Chang Hwa
14.65
First Fin
18.20
Mega Fin
18.75
Taishin Fin
13.25
Average
Thailand (Bt)
Bangkok Bk
121.0
Kasikornbank
93.0
Siam Comm
85.0
Ayudhya
19.7
Krungthai
13.1
Siam City
32.0
Thai Military
1.3
Average
Japan (¥)¹
MUFG
512
SMFG
3,285
Mizuho
190
Average
Australia (A$)
CBA
58.40
WBC
27.84
ANZ
25.36
NAB
27.65
Average
USA (US$)
BAC
18.66
NY Mellon
32.54
PNC
65.27
Citigroup
4.64
JPM
46.14
WFC
32.42
BB&T
34.05
US Bancorp
27.51
Average
Asian average
Overall average
MCap
(US$bn)
Mr & Mrs Asia
Consumer
Aaron Fischer, CFA
aaron.fischer@clsa.com
(852) 26008256
Huei Suen Ng
(852) 26008126
Top picks
Baidu
Market cap
Price
BIDU US
US$21,720m
US$626.16
Sands China
Market cap
Price
1928 HK
US$13,382m
HK$12.90
United Spirits
Market cap
Price
UNSP IB
US$3,800m
Rs1,335.9
Unilever Indo
Market cap
Price
UNVR IJ
US$10,343m
Rp12,200
Consumer - Richer, younger and spending
Over the next five years, we expect discretionary spending to increase by
18% per annum in India, 15% in China and 13% in Indonesia. Rising income,
the existing low penetration rate of many consumer products and other
factors such as falling savings rates and increased credit-card penetration are
key drivers. We like all three markets but India is the most compelling with a
greater appetite to spend when incomes increase, as measured by an R² of
78%. Also, the country has more favourable demographics given its much
younger population versus other countries including China, which will allow
for surging consumption of the young, while China has to save for the elderly.
Across Asia and in Chindonesia, we expect greater growth in spending on
discretionary items versus staples. Consumer electronics, branded clothing
and footwear, video games and drinks should grow the fastest in most
countries. Tourism will also be a high growth segment for China and India,
but less so for Indonesia for the time being.
Below we highlight stocks we like over the medium term. We have selected
companies which are exposed to faster growing product categories and
regions; management with a better track record and companies which
typically enjoy industry leading positions with sustainable competitive
advantages. These factors typically result in greater profitability and further
scope for above average earnings growth and hopefully higher dividends.
Despite current rich valuations for some of the names, we believe a portfolio
of the below stocks will provide investors with exposure to rising
Chindonesian consumption and generate superior investment performance.
Figure 101
In the consumer
sector, there are 28
stocks to choose from
Preferred consumer stocks
Country
China
Category
Consumer electronics
Toys & Games
Tobacco
Branded/Luxury goods
Soft drinks
Leisure, travel
Gaming & Leisure
Sporting goods
Department stores
Advertising
Cosmetics & Toiletries
Stocks
Gome, Skyworth, Suning
Tencent, Netease
Huabao
Ports Design, Hengdeli, Parkson
Asian Citrus
Ctrip
Sands China, Wynn Macau, SJM, Melco Crown
Anta
Parkson
Baidu
Hengan, Amorepacific
India
Jewellery
Alcohol
Tobacco
Apparel
FMCGs
Tobacco
Snack foods and drinks
Consumer products
Titan Industries
United Spirits
ITC
Pantaloon, Shoppers Stop
Hindustan Unilever
Gudang Garam
Mayora
Unilever Indonesia
Indonesia
Source: CLSA Asia-Pacific Markets
Why China, India and Indonesia?
Biggest and
fastest-growing
58
Large populations and rising incomes
These three countries have the largest populations in Asia and we expect their
disposable incomes to grow at the fastest rates in the region. They also have
the fastest-growing middle class in Asia, estimated at 11%, 19% and 15% per
annum over the next five years for China, India and Indonesia. For developing
countries, higher incomes are the biggest driver of consumption growth.
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
Figure 102
Large population
= higher growth in
disposable income
Disposable income per capita versus population growth, 2009
1,400
(m)
(%)
Population (LHS)
Growth in disposable income per capita growth
1,200
12
10
1,000
8
800
6
600
4
400
2
200
0
0
HK
Mal
Sg
Phil
Korea Taiwan
Thai
Indo
India
China
Source: Euromonitor, CLSA Asia-Pacific Markets
Figure 103
China, Indonesia
and India stand out
Population, disposable income growth versus middle-class growth
Country
China
India
Indonesia
Thailand
Korea
Taiwan
Philippines
Singapore
Hong Kong
Malaysia
Population
(m)
1,328.0
1,168.8
230
64.7
48.7
23
92.1
4.7
7.1
28.1
Growth in disposable
income per capita (%)
10.4
7.6
7.4
7.4
5.7
5.7
5.1
4.9
4.2
4.2
Growth,
2009-14 (%)
11.1
18.6
14.6
8.1
0.3
0.3
11.2
1.0
0.8
5.8
Source: CLSA Asia-Pacific Markets
Low penetration rates
The penetration rates of many consumer items are very low in these
countries versus other markets in Asia, particularly developed markets such
as Japan, Korea, Australia, Singapore and Hong Kong.
Figure 104
Penetration rates of consumer durables as a percentage of household
(%)
Disposable income¹ (US$)
Air-conditioner
Cable TV
Camera
Colour TV
Dishwasher
DVD
Internet-enabled PC
Microwave
Mobile phone
PC
Refrigerator
Vacuum cleaner
Video camera
Washing machine
China
7,019
53
49
23
97
0
40
13
29
88
31
60
28
0
71
India
4,414
2
34
5
34
1
2
5
16
18
6
18
32
0
21
Indo
HK Japan
Mal
5,313 77,436 64,473 19,133
7
84
85
26
1
90
62
12
15
93
85
95
87
100
99
97
4
20
25
17
4
94
72
37
2
72
66
26
23
78
97
37
45
99
93
93
15
77
92
38
25
100
99
85
33
86
98
71
0
29
38
23
28
95
99
92
Phil
Sing Korea Taiwan
6,483 88,831 29,651 32,877
11
74
51
88
36
49
71
62
68
89
96
96
90
99
99
99
4
18
7
20
19
59
38
58
12
80
98
81
29
69
80
49
66
99
96
93
24
82
81
72
48
99
100
100
37
78
86
47
0
16
22
7
38
93
99
98
Thai
8,561
14
8
82
97
2
33
14
61
80
28
87
12
3
51
Asia
9,704
34
39
26
78
3
27
15
31
63
27
50
36
3
53
¹ Per household. Source: Euromonitor
19 April 2010
aaron.fischer@clsa.com
59
Mr & Mrs Asia
Consumer
Penetration
remains low . . .
Figure 105
Figure 106
Refrigerator penetration
Washing-machine penetration
Taiwan
Korea
HK
Sing
Japan
Thai
Mal
China
Asia
Phil
Indo
India
100
100
100
99
99
87
85
60
50
48
25
18
0
. . . for most items
(%)
20
40
60
80
Korea
Japan
Taiwan
HK
Sing
Mal
China
Asia
Thai
Phil
Indo
India
100
99
99
98
95
93
92
71
53
51
38
28
(%)
21
0
20
40
60
Figure 107
Figure 108
Internet-enabled-PC penetration
Air-conditioner penetration
Taiwan
Japan
HK
Sing
China
Korea
Asia
Mal
Thai
Phil
Indo
India
88
85
84
74
53
51
34
26
14
11
7
(%)
2
0
20
40
60
80
100
Korea
Taiwan
Sing
HK
Japan
Mal
Asia
Thai
China
Phil
India
Indo
80
100
98
81
80
72
66
26
15
14
13
12
5
(%)
2
0
20
40
60
80
100
Source: Euromonitor
Other factors
Other factors include population growth, urbanisation trends, falling savings
rates, increased credit card penetration, improved social welfare such as
healthcare, education, pensions and rising conspicuous consumption. These
topics have been discussed in detail in our earlier reports such as Mr & Mrs
Asia and China Brands Index. Savings rates and credit card penetration is
highlighted below.
Figure 109
Figure 110
Household savings/disposable income¹
Credit card per capita
China
Singapore
Hong Kong
India
Malaysia
Korea
Indonesia
Thailand
Australia
Taiwan
Japan
Philippines
USA
(%)
0
10
20
30
40
Japan
USA
HK
Korea
Singapore
Taiwan
UK
Malaysia
Thailand
Philippine
China
India
Indonesia
0.0
0.5
1.0
1.5
2.0
2.5
3.0
¹ 2009. Source: CEIC, CLSA Asia-Pacific Markets
Middle-class spending to grow 12% in five years
As a result, we expect middle class consumption to increase by 12% in Asia
ex-Japan from 2009-14. We expect to see a significantly higher rate for the
three nations, with India at 18%, China at 15% and Indonesia at 13%.
60
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
Discretionary consumption is obviously more sensitive to changes in income
than spending on consumer staples and therefore we expect faster growth in
this area over the coming five years.
Figure 111
China, India and
Indonesia lead the pack
Middle-class discretionary-spending Cagr, 2009-14CL
India
China
Indonesia
Asia ex-Japan
Philippines
Thailand
Malaysia
Taiwan
Korea
Singapore
(%)
Hong Kong
0
5
10
15
20
Source: CLSA Asia-Pacific Markets
As mentioned in the opening, the key driver of increased consumption is from
rising incomes. The sensitivity to increases in spending as a result of rises in
incomes depends on a number of factors but can be best compared by
looking at different product categories and different countries.
India is the most
sensitive to
higher incomes
Starting with product categories, we find that the penetration of microwaves,
cable television and dishwashers will increase the most with increases in
income. We have also analysed the sensitivity to increases in spending on
consumer goods by country. India, Philippines, Indonesia and Thailand show
bigger growth in consumption of these selected items when income rises. This
should be no surprise as these nations have lower penetration of these items
versus developed countries such as Japan, Hong Kong and Singapore.
Consumers here are prone to trading up price points and spend more on
luxury goods, high-end travel and invest/save more of the higher income.
Figure 112
Penetration rates
are largely a function
of income levels
Average R² for all consumer products by country
India
Philippines
Indonesia
Thailand
China
Singapore
Asia
Malaysia
Korea
Taiwan
HK
Japan
(%)
0
10
20
30
40
50
60
70
80
90
Source: Euromonitor
19 April 2010
aaron.fischer@clsa.com
61
Mr & Mrs Asia
Consumer
Figure 113
PCs are sensitive
to income growth
Asia: Correlation between disposable income per capita vs penetration rate
Microwave
PC
Cable TV
Dishwasher
Cassette/radio
Fridge
Telephone
Video camera
Cooker
Internet-enabled PC
Hi-Fi
Mobile phone
Satellite TV
Motorcycle
Vacumm cleaner
Air-conditioner
Black/white TV
Camera
Passenger car
DVD player
Colour TV
Tumble drier
Shower
Bicycle
CD player
Videotape recorder
Washing machine
Video game console
(%)
0
20
40
60
80
100
Note: Using linear correlation. Source: Euromonitor, CLSA Asia-Pacific Markets.
We note the penetration rate of specific items jumps when incomes reach
critical inflection points. We compare incomes for Asia as well as penetration
rates for each consumer item.
Penetration rates
are catching up . . .
Figure 114
Figure 115
Internet-enabled-PC penetration
Air-conditioner penetration
100
80
China
India
Japan
Indo
USA
120
100
China
India
Japan
Indo
USA
80
60
60
40
. . . for most
consumer products
40
20
20
0
0
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
1977 1983 1989 1995 2001 2007 2013 2019
Figure 116
Figure 117
Refrigerator penetration
Washing-machine penetration
140
120
China
India
Japan
Indo
USA
140
China
Japan
120
India
Indo
USA
100
100
80
80
60
60
40
40
20
20
0
0
1977 1983 1989 1995 2001 2007 2013 2019
1977 1983 1989 1995 2001 2007 2013 2019
Source: Euromonitor
62
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
Which market?
We like growth
markets. . .
Given the better growth profile, we prefer India, then China and then
Indonesia. China and India have got a wider variety of investible stocks with
decent market cap and liquidity.
Taking a longer term view, we also have a preference for India as consumer
spending is very dependent on demographics. Sluggish consumption in Japan
for the last few years proves the point. As highlighted in the below chart,
India enjoys a much younger population than China.
As our strategist Russell Napier highlighted in his most recent Solid Ground
report, ‘Buy chaos, sell order’: ‘China will need to mobilise more savings to
support its ageing population, whereas India can focus on mobilising its
savings to facilitate consumption . . . Youth is probably the key ingredient for
a population moving towards a consumer society. The older generation in
India and China remember the deprivations of a different age and the risks or
apparent stupidity of borrowing to consume. However, the youth of both
countries increasingly comes with less of such baggage. In an era of growth,
debt is good or not bad, and higher living standards make debt less
dangerous. Indian and Chinese households save more because they need to
protect themselves from negative outcomes. Such negative outcomes are just
less likely for those ‘possessing youth, innocence and a bad haircut. India has
a lot more youth than China; this will be a key strength in making the
transition from mercantilism and will promote higher returns for investors.’
Figure 118
. . . with favourable
demographics
Percentage of population by age
0-14
15-24
25-59
60+
Japan
HK
Singapore
China
Thailand
Asia
Indonesia
Malaysia
India
Philippines
(%) 0
20
40
60
80
100
Source: CLSA Asia-Pacific Markets
What products?
All consumption-related
19 April 2010
Consumer expenditure is a broad category and includes housing, transport,
education, medical and communications. For the purpose of this section, we
focus on regular consumer items such as clothing and footwear, household
products and personal care, food, tobacco and leisure spend - those items
that fall into the categories which are addressed by our consumer research
team’s coverage. Other spending includes housing, transport including autos,
communications and education. The importance of each category varies by
country. Typically the bigger categories are clothing & footwear, packaged
food, consumer electronics, tobacco, drinks and then cosmetics and toiletries.
aaron.fischer@clsa.com
63
Mr & Mrs Asia
Consumer
Figure 119
Consumer expenditure by country as a percentage of total
(%)
Alcoholic drinks
Clothing and footwear
Consumer appliances
Consumer electronics
Consumer health
Cosmetics and toiletries
Hot drinks
Household care
Packaged food
Pet products
Soft drinks
Tobacco
Toys and games
China
7
26
6
17
2
3
1
1
15
0
5
16
1
India
15
10
7
20
2
6
2
4
19
0
2
11
1
Indo
1
na
7
na
5
5
4
3
39
0
10
26
na
HK
5
na
1
na
7
16
2
2
41
1
17
8
na
Japan
7
22
4
10
4
5
2
1
28
1
9
5
2
Mal
2
24
5
20
3
6
2
2
21
0
4
9
1
Phil
12
na
5
na
4
9
3
5
33
0
16
14
na
Sing
3
22
5
22
5
7
1
1
17
1
3
10
3
Korea
6
15
7
17
3
7
1
1
25
1
3
12
1
Thai Taiwan
19
13
na
na
8
0
na
na
5
13
12
16
3
2
4
2
27
36
1
3
10
15
11
na
na
na
USA
6
25
4
10
4
4
1
2
25
2
7
7
4
Source: Euromonitor
China
Faster growth in
discretionary spend
We do not actively forecast growth in every consumer product category so we
lean on Euromonitor’s estimates. Across its selected categories, the
intelligence provider expects a 10% Cagr for a basket of consumer items for
2009-13. This differs from our 15% Cagr in middle-class spending, as we are
focused more on discretionary items whereas about two-thirds of
Euromonitor’s categories are staple products. We forecast an 8% Cagr in
staples and a 15% Cagr in discretionary consumer sales for 2009-13, and 1520% growth for autos and 25% for luxury items.
Figure 120
Consumer staples versus discretionary
Cagr, 09-13CL (%)
8
15
Consumer staples
Consumer discretionary
Source: Euromonitor, CLSA Asia-Pacific Markets
Luxury goods
lead the way
In terms of product categories, we expect the fastest growth in luxury goods
at a 25% Cagr, followed by consumer electronics at 18% - this is the secondlargest product category after clothing and footwear. Next up is toys and
games at 13% and then apparel and soft drinks at 10%. We discuss a
number of categories in more detail.
Figure 121
Clothing and footwear is
the biggest category
Consumer expenditure
Tobacco
15.7%
Toys and games
1.3%
Soft drinks
4.8%
Pet food and care
0.1%
Packaged
food
14.5%
Household care
1.1%
Hot drinks
0.7%
Cosmetics and toiletries
2.6%
Alcoholic drinks
7.0%
Clothing
and footwear
25%
Consumer
electronics
18.3%
Consumer appliances
6.0%
Consumer health
1.7%
Source: Euromonitor
64
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
Figure 122
Driven by luxury goods
Consumer categories
Category
Luxury goods
Consumer electronics
Gaming
Toys and games
Clothing incl branded sports apparel
Soft drinks
Consumer appliances
Alcoholic drinks
Cosmetics and toiletries
Household care
Footwear
Packaged food
Consumer health
Tobacco
Pet food and pet care products
Hot drinks
Cagr, 09-13CL (%)
25.0
18.3
18.0
12.9
10.2
10.3
9.3
8.2
7.8
7.1
7.0
7.0
5.6
5.2
4.8
4.3
Source: Euromonitor, CLSA Asia-Pacific Markets
Luxury goods and branded clothing, and footwear
We expect 25% growth in luxury goods sales in China over the next five
years. In some respects this is due to the low base, but the luxury goods
market in China has been growing rapidly over the last few years. One
estimate puts growth in luxury goods at 40% for 2009. China now accounts
for between 15-20% of all luxury goods sales globally.
Figure 123
Exponential demand
with income
Swiss watch imports per capita versus GDP per capita
Swiss-watch imports (US$/capita)
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
Hong Kong
Singapore
UAE
Spain
China
0
Thailand
Russia
10,000
Saudi
Arabia
20,000
Taiwan
Italy
France
30,000
Japan
USA
UK
Germany
40,000
50,000
GDP/capita (US$)
Source: Federation of Swiss Watch Industry, CLSA Asia-Pacific Markets
More growth in
luxury segment
Branded goods including price points below the traditional luxury brands such
as Louis Vuitton, Hermès and Chanel will continue to see exceptional growth
over the coming years. In our China Brand Index report, published last year,
we highlight the increasing importance of brand image for consumers when
making purchasing decision.
Ports is perceived
as a foreign brand
Ports Design, the Hong Kong-listed Chinese luxury goods company would be
the most direct way to play luxury goods growth in China. The chart below
shows a survey of affluent Chinese consumers conducted by MasterCard (Brand
Preference of the China Affluent, May 2008), which highlights Ports as the
seventh most preferred luxury brand in China.
19 April 2010
aaron.fischer@clsa.com
65
Mr & Mrs Asia
Consumer
Figure 124
Quality and image
determine brand
decision making
Brand image is increasingly important in China
Quality & reliability
Brand image/design
Performance
Price/value
Convenience/location
Innovation
Customer service
(% of total votes cast)
Friends' recommendation
0
5
10
15
20
25
30
Source: China Reality Research
Figure 125
Foreign brands dominate
aspirational fashion, so
European names adopted
Most preferred fashion brands
Chanel
15.3
Giorgio Armani
15.1
Gucci
11.4
Dior
8.6
Louis Vuitton
8.4
Versace
7.4
Ports
6.7
Only
6.7
Prada
5.5
Calvin Klein
(%)
5.2
0
2
4
6
8
10
12
14
16
18
Source: MasterCard Worldwide Insights, ‘Brand Preference of the China Affluent’, May 2008
We expect 20% growth in branded sportswear over the coming years. In our
CRR brand survey, foreign brands such as Nike and Adidas led the way in
terms of consumer preference. Nonetheless, Li Ning, Anta and Dongxiang
have been growing aggressively and have huge store networks.
Sportswear consumers
mostly favour
Adidas and Nike
Figure 126
Figure 127
Adidas and Nike the leaders
Store network for sportswear companies
8,000
361
Degrees
4%
Anta
5%
(No.)
Dongxiang
Li Ning
Anta
7,000
Others
23%
Adidas
30%
6,000
5,000
4,000
3,000
Li Ning
12%
Nike
26%
2,000
1,000
0
2006
2007
2008
2009
2010
Source: China Reality Research, CLSA Asia-Pacific Markets
66
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
Deceleration of store
expansion is a good sign
Anta plans to increase their store count to 7,200 by the end of 2010,
representing 9% YoY growth (versus 16% in 2009), 3,408 for Dongxiang
(14% versus 18% in 2009) and 7,800 for Li Ning (+2% versus 2% decline in
2009). We are positive on the deceleration of store expansion plans for both
Anta and Dongxiang, as it will be more focused on organic growth with store
efficiency improvement (rather than pushing more inventories into retail
channels by aggressively rolling out new stores). For Anta, most of its new
openings will take place in lower tier cities, which have high population
density but are underpenetrated by Anta.
The general apparel market remains very niche and fragmented with the top
five brands only accounting for 30% of the brand points. A majority of the
most popular brands are domestic names that operate in the mass market,
such as Septwolves, Goldlion and Youngor, with the only foreign brand, Calvin
Klein, making it into the top five brands. The best way to play growth in
branded apparel is through the department store stocks.
Low inventory
risk, beneficiary
of mild inflation
Top pick Parkson
Department stores in China pursue a concessionaire-led business model
without taking on inventory risk. As revenue is linked to gross sales, they are
beneficiaries of mild inflation. We expect average-selling-price (ASP) growth
to be the major driver of same-store-sales (SSS) growth in 2010, given brand
owners’ cost pass-through, product-mix trade up and less discounting. The
operators with the most leased store properties still have a good proportion of
fixed leases (50-90%), meaning rental costs are not linked to SSS growth.
Most operators have a decent degree of operating leverage, which should
translate into margin expansion as SSS growth accelerates in 2010.
Consumer electronics
Consumer electronics is the second-largest consumer category and is also
expected to be one of the fastest growing over the coming five years. All
categories are expected to grow in double digit terms with better growth in
in-home consumer electronics as consumers add items and trade up brands
and price points. Computers are expected to grow at a slower rate given the
already high penetration rate. Key beneficiaries are Gome and Skyworth,
which are currently not under our coverage.
Figure 128
Consumer electronics
(US$m)
In-home consumer electronics
Portable consumer electronics
In-car consumer electronics (aftermarket)
Computers
Total
2009
67,782.4
49,708.0
9,362.0
31,714.6
126,852.4
2010
80,923.8
57,778.0
11,139.0
35,972.9
149,840.8
2011
98,758.5
67,415.3
12,989.2
40,486.1
179,163.0
2012
121,262.5
79,035.6
14,912.0
45,887.2
215,210.1
2013
139,000.7
92,195.0
16,887.5
51,617.1
248,083.2
Cagr, 09-13 (%)
19.7
16.7
15.9
12.9
18.3
Source: Euromonitor, CLSA Asia-Pacific Markets
Toys and games
Toys and games are expected to show a 13% Cagr with video games leading
the charge at 17%.
Figure 129
Strong growth in
children items given
one child policy
Toys and games
(US$m)
Traditional toys and games
Video games
Total
2009
2010
2011
2012
6,529.2
2,734.7
9,263.8
7,186.5
3,235.2
10,421.7
7,979.7
3,797.5
11,777.2
8,902.1
4,413.7
13,315.9
2013 Cagr, 09-13 (%)
9,983.5
5,092.9
15,076.4
11.2
16.8
12.9
Source: Euromonitor, CLSA Asia-Pacific Markets
19 April 2010
aaron.fischer@clsa.com
67
Mr & Mrs Asia
Consumer
Games are booming
China’s online-games market is booming, with massively multiplayer online
role-playing games (MMORPGs) growing rapidly, casual games taking off and
broadband penetration accelerating. China will follow the Korean model where
online dominates the gaming market. The market is still underpenetrated,
especially given the lack of entertainment alternatives. Demand will be even
stronger when broadband coverage reaches rural areas. Online games are a
highly profitable business with ROIC of more than 200%.
Figure 130
Market doubled
from 2007 to 2009
Online gaming revenue
35
(Rmbbn)
29
30
25
21
20
14
15
10
8
5
5
0.2
0
2001
1
2002
3
2
2003
2004
2005
2006
2007
2008
2009
Source: Companies, CLSA Asia-Pacific Markets
Higher end/value added
segments growing at
a much faster pace
Cosmetics and toiletries
The growth for the cosmetics and toiletries segment is 8% per annum over
the next four years but we expect rapid growth in higher end segments such
as premium cosmetics, men’s grooming products and baby care. There are no
pure plays on cosmetics growth. One might look at Hengan in sanitary
napkins and diapers or some of the cosmetics names outside China such as
Unicharm, Shiseido and Amorepacific.
Figure 131
Cosmetics is a highgrowth industry
Cosmetics and toiletries Cagr, 2009-13
Babycare
Men's grooming products
Premium cosmetics
Fragrances
Deodorants
Skincare
Sun care
Colour cosmetics
Cosmetics and toiletries
Hair care
Depilatories
Oral hygiene
Oral hygiene ex power toothbrush
Bath and shower products
15
12
11
10
9
9
9
8
8
8
6
4
4
(%)
3
0
2
4
6
8
10
12
14
16
Source: Euromonitor, CLSA Asia-Pacific Markets
68
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
A mixed bag
Packaged foods and drinks
For packaged foods and drinks we expect a 7-10% Cagr over the coming
years. Faster segments include chilled processed foods (+13%), baby foods
(+9%), fruit/vegetable juice (+13%), ready-to-drink (RTD) tea and coffee
(13%) and Asian specialty drinks (+12%). Our two preferred plays in this
space include Want Want China and Asia Citrus. Asian Citrus owns the largest
orange plantation in China, with 10% of market share in the orange sector
and 30% of citrus output. Strong demand for high quality fruit from modern
retailers should drive growth.
Want Want generates around 25-30% of sales from rice crackers, 45% from
dairy and beverages and 25% from snacks. The company is stepping up
growth in all segments, even lower margin categories. Dairy and beverages is
the current focus with expected growth of 40-45% in 2010.
Figure 132
More consumption
of rice crackers
Want Want China - Key product categories and targeted growth
% of sales
25-30
45
25
Rice crackers
Beverage/Dairy
Snacks
2010 growth (%)
25-30
40-45
20-25
Source: Company, CLSA Asia-Pacific Markets
Lower growth
Tobacco
Tobacco consumption is one of the larger categories for a Chinese consumer,
next to packaged food as well as consumer electronics. However, the adult
smoking prevalence in China is expected to gradually decline going forward
thanks to sluggish population growth as well as rising environmental and
health concerns. Growth in the next four years is expected at 5% per annum.
This compares to 7% five years ago. We expect rapid growth in the low-tar
segment, which is where Huabao operates.
Figure 133
Higher growth in
low-tar segment
Forecast sales of cigarettes by tar level as percentage of value growth, 2008-13
Low-tar cigarettes
Mid-tar cigarettes
Cigarettes
High-tar cigarettes
(%)
0
5
10
15
20
25
30
Source: Euromonitor
Pillar industry
19 April 2010
Tourism
China has announced that tourism will become a pillar industry for the
country. The tourism industry requires lower capex investment, but provides
high social and financial return. It is also one of the easiest ways for the
government to boost domestic consumption.
aaron.fischer@clsa.com
69
Mr & Mrs Asia
Consumer
We are set for a rapid increase in travel as there is a very high correlation
between travel and GDP per capita.
Figure 134
Figure 135
Passenger roundtrips to GDP per capita
China’s growth in outbound travellers
10.00
45
Roundtrips per capita
0.9457
y = 8E-05x
Singapore
2
R = 0.888
New Zealand
1.00
Malaysia
Australia
35
US
30
Thailand
25
Japan
Korea
(m)
40
20
Indo, Phils, Cambodia
0.10
15
China
10
0
10,000
20,000
5
GDP per capita (US$)
India, other Asian countries
0.01
30,000
40,000
0
50,000
1994
1996
1998
2000
2002
2004
2006
2008
Source: CLSA Asia-Pacific Markets, CEIC, SAO Group, Tiger Airways
Favourable
government policy
China’s government has set goals for 2015, which we think are conservative:
‰
Tourism revenue to account for 4.5% of GDP (up from 3.8% in 2008) or
12% of service revenue
‰
Domestic tourists to expand at a 10% Cagr to 3.3bn
‰
Inbound overnight tourists to expand at an 8% Cagr to 90m
‰
Outbound tourists to expand at a 9% Cagr to 83m
‰
Urban citizens to take two trips per year and travel to account for about
10% of their total annual spending
‰
500,000 new job creation
This implies that tourism revenue should expand at about a 13% Cagr over
2009-15. Domestic revenue growth will likely be higher at about a 14% Cagr.
These are easy goals as they are in line with historical tourism revenue fiveyear Cagr of 12.7% (domestic tourism revenue at a 13.9% Cagr).
Figure 136
China tourism revenue
2004
2005
2006
2007
2008
15CL
Cagr, 04-08
(%)
Cagr, 09-15
(%)
15,988
18,321
21,192
25,730
30,067
60,737
15.5
10.6
4.3
4.2
4.2
4.2
3.8
4.5¹
Total
684
770
894
1,083
1,153
2,733
12.7
13.1
Foreign receipts
213
241
271
306
279
547
9.5
10.1
Domestic
471
529
623
777
875
2,187
13.9
14.0
Nominal GDP (Rmbbn)
Tourism % of GDP
Tourism revenue (Rmbbn)
Tourists (m)
Inbound overnight
Domestic
Outbound travellers
42
47
50
55
53
90¹
10.0
7.8
1,102
1,212
1,394
1,610
1,712
3,300¹
14.5
9.8
29
31
35
41
46
83¹
17.8
8.8
¹ Government goals. Source: China Year Book, CLSA Asia-Pacific Markets
China’s tourism industry is still in its infancy. China has the lowest entitled
annual leave in the world. In China, there are only three major holidays: May
Holiday, National Holiday and Chinese New Year Holiday (about three days
70
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
each). Annual leave policy is new to China. Regulation on annual leave was
only introduced in 2008 and may not have been fully adopted. Under the
regulation, Chinese employees are entitled to five days of annual leave if
working accumulatively for one to 10 years, 10 days after working cumulatively
for 10-20 years and 15 days after working for over 20 years. Most Asian
countries have a minimum of seven days annual leave requirement. Employees
in France are entitled to 30 days annual leave, the highest in the world.
Figure 137
Too much work,
not enough play
Paid annual leave and public holidays in OECD countries
(days)
Austria
Portugal
Denmark
Finland
Germany
Spain
Italy
France
Belgium
Ireland
Norway
Australia
New Zealand
Greece
Sweden
Netherlands
Switzerland
UK
USA¹
Mexico
Canada
China
Japan
Paid annual leave
22
22
25
25
24
22
20
30
20
20
25
20
20
20
25
20
20
20
10
12
10
0-5
10
Paid public holidays
13
13
9
9
10
12
13
1
10
9
2
7
7
6
0
0
0
0
10
6
8
11
0
Total paid holidays
35
35
34
34
34
34
33
31
30
29
27
27
27
26
25
20
20
20
20
18
18
16
10
¹ The USA does not have legal annual leave and public holidays, but in general, companies offer standard
10 days annual leave and 10 days public holidays. Source: OECD
Chinese people only take
one leisure trip per year
Macau’s gaming revenue
growth to average 15%
over the next five years
Chinese people have taken far fewer trips per year than people in developed
countries. On average, Chinese people only take one leisure trip per year,
compared to up to five trips in the USA. Given the limited number of holidays,
many Chinese people normally return home to visit their family during the
long public holidays like Chinese New Year. The government’s goal is to
encourage urban citizens to double their leisure trips by 2015.
Gaming
Asian gaming is a high growth segment that benefits from rising incomes and
increased appetite to spend on leisure and travel. In Macau, growth in gaming
revenues overtook the Las Vegas Strip in 2006 and average growth in 200209 was 28% per annum. Singapore’s first casino opened recently in February
2010 and its second is coming at the end of April this year. In other markets
such as Malaysia, Philippines and Cambodia, casinos already exist.
We believe spending on gaming and leisure activities should accelerate when
there is a social safety net in place, especially in countries such as India and
China. As of now, Macau’s gaming market is mainly supported by Chinese
tourists. We expect revenue growth in Macau to average around 18% per
annum for the next five years.
19 April 2010
aaron.fischer@clsa.com
71
Mr & Mrs Asia
Consumer
Figure 138
Explosive growth in
recent months
Monthly gaming revenue
(MOPm)
16,000
(%)
Monthly gaming revenues
YoY growth (RHS)
14,000
80
70
60
12,000
50
10,000
40
30
8,000
20
6,000
10
4,000
0
(10)
2,000
(20)
(30)
0
Jan 09
Mar 09
May 09
Jul 09
Sep 09
Nov 09
Jan 10
Source: CLSA Asia-Pacific Markets
More spending on leisure
when incomes rise
Figure 139
Figure 140
Domestic trips per passenger per year
Average spending per domestic trip
6
(No.)
600
5
4.7
500
4
(US$)
449
392
400
2.7
3
2.4
303
300
2.1
2
1.4
1.0
1
0
200
125
100
81
80
Korea
China
0
USA
Japan
Korea
UK
Taiwan
China
USA
Japan
UK
Taiwan
Source: Euromonitor
The ad market will
benefit from China’s
consumption growth
Advertising
The advertising sector will be a major beneficiary of the secular growth in
China’s consumption market. The nation’s adspend growth has a low
correlation with GDP growth given the export-led economy, but its correlation
with private consumption is close to 70%, similar to the USA. The advertising
sector will be the ultimate beneficiary of growing consumer spending as
corporations in various sectors compete for market share.
Figure 141
Search has been
the fastest-growing
ad platform
China online advertising
Revenue
(Rmbbn)
2006
2007
2008
09CL
10CL
11CL Cagr (%) Cagr (%)
04-08
09-11CL
Display ad
4.66
7.71
12.97
13.69
17.11
21.18
66.0
17.8
Paid search
1.39
2.90
5.02
7.12
10.69
14.72
78.1
43.1
Total
6.05
10.61
17.99
20.81
27.80
35.90
68.9
25.9
23.8
YoY change (%)
Display ad
50.3
65.5
68.2
5.5
25.0
Paid search
47.9
108.6
73.1
41.9
50.1
37.7
Total
49.8
75.4
69.6
15.7
33.6
29.2
Display ad
77.0
72.7
72.1
65.8
61.5
59.0
Paid search
23.0
27.3
27.9
34.2
38.5
41.0
% of online ad
Source: CLSA Asia-Pacific Markets
72
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
Best positioned
for consumption
Figure 142
Figure 143
China’s adspend vs private consumption
USA’s adspend vs private consumption
35
(%)
Nominal GDP
16
30
Private consumption
12
25
Adspend
Nominal GDP
Private consumption
Adspend
(%)
8
20
4
15
0
10
(4)
5
0
(8)
1996
1998
2000
2002
2004
2006
2008
1996
1998
2000
2002
2004
2006
2008
Source: Euromonitor
Stock picks
Our key stock picks
The following stocks benefit from the faster growth expected in the following
product categories.
Parkson is our top department-store pick. It’s nationwide and well-diversified
store network leads to its relative resilience to SSS weakness in specific
cities. We expect 10% SSS growth in 2010 which will translate into 28% EPS
growth in 2010 followed by 25% EPS growth in both 2011 and 2012. We
prefer Parkson to it’s peers due to its:
‰
Nationwide retail network - two thirds of new openings will be in cities
where the group has an existing presence, which allows for cost savings
and reduces execution risk
‰
Potential earnings accretive M&A, ie, store injections from the parent and
buyout of minority stakes in operating stores
‰
One of the highest ROEs in the sector, which justifies a higher PE
‰
Greater liquidity in the shares and longer trading history versus its peers
Anta is our top
sporting-goods pick
Our top sporting-goods pick is Anta given its high exposure to low-tier cities;
better management of inventory risk in retail channels; enhanced brand
equity with sponsorship deal of COC and accelerated investment in A&P; and
that its valuation will converge with market leader Li Ning
Baidu is our top pick
Baidu is our top pick in the advertising space. Search advertising has been
the fastest-growing advertising platform in China, growing at a 78% Cagr
over the past three years. However, it is still in its infancy, accounting for
28% of total online ads, compared to over 50% in the USA and Korea. Using
global benchmarks, we believe its online share could grow to 41% in China by
2011 as more advertisers become familiar with the advertising model and
large corporations are transferring more budget to search. Baidu will continue
to be the dominant operator in the search market. Its market share may
reach 77% if Google decides to exit China.
Play China’s tourism
boom through Ctrip
Ctrip is the best play for the tourism boom in China as it is the dominant
online travel agent in China and has been gaining market share from
traditional travel agents. The company already has a leading position in hotel
reservation and air ticketing businesses. It has been actively expanding its
leisure travel or “Package Tour” business which helps individual travellers to
book hotels, air tickets and even tour guides for their holidays. Ctrip is also
expanding into inbound and outbound travels. Recently, it acquired the Wing
On Travel business. This will give Ctrip access to the Hong Kong market which
is a target destination for Chinese tourists. Wing On Travel has a strong
brandname and partnership across the region. They also have extensive
19 April 2010
aaron.fischer@clsa.com
73
Mr & Mrs Asia
Consumer
expertise in group tour and leisure travel which will be complementary to
Ctrip. Coupled with ezTravel in Taiwan, the acquisition will also enable Ctrip to
offer better service to their customers travelling around Greater China.
Spending on gaming
and leisure activities
to accelerate
Spending on gaming and leisure activities should accelerate when there is a
social safety net in place, especially in countries such as India and China. As
of now, Macau’s gaming market is mainly supported by Chinese tourists. We
expect revenue growth in Macau to average around 18% per annum for the
next five years. Key stock picks include Sands China, Wynn Macau and
SJM. Our top pick is Sands China, which has the largest footprint in Macau
with the most aggressive expansion plan. In the next four years, gaming
revenue is likely to grow by 98% while supply will only increase by 30%.
Alongside its high operating leverage and aggressive cost-cutting, this will
translate into above-average earnings growth over the next five years.
Huabao is the best play on tobacco growth. The company has a leading
market position in tobacco and fragrances with growth driven by the household
product fragrance market and more focus on sales of cigarettes with low tar,
which is expected to register stronger growth going forward. The company is
also in talks with a number of M&A targets, which could be a catalyst.
Top online-game
picks: Netease
and Tencent
Our preferred plays are Netease and Tencent in the internet and games
space. Tencent is the largest gaming operator in China. Tencent’s gaming
revenue should be relatively resilient compared to its peers given their large
user base. Also, they are dominant in the casual game market and do not
compete directly with Shanda or Netease. Casual games remain a small
segment in China, but has great growth potential. The casual game revenue
contributes 60% of Korea’s online gaming industry.
Netease is the third-largest gaming operator in China. The gaming business
should maintain double digit growth for the next two years with World of
WarCraft (WoW) as the new growth driver. The company resolved their
disagreement with GAPP in February and will likely launch WoW’s second
expansion pack Wrath of the Lich King (WLK) in the middle of 2010. Its
advertising business is also turning around given the cyclical recovery and the
restructuring of their sales force and content on its portal.
Consumer electronics is the second-largest consumer category and is also
expected to be one of the fastest growing over the coming five years. Key
beneficiaries are Gome and Skyworth.
Figure 144
Our top picks
Faster-growth categories and stock beneficiaries
Category
Consumer electronics
Toys & games
Tobacco
Branded/Luxury goods
Soft drinks
Leisure, travel
Gaming & leisure
Sporting goods
Department stores
Advertising
Cosmetics & toiletries
Stocks
Gome, Skyworth, Suning
Tencent, Netease
Huabao
Ports Design, Hengdeli, Parkson
Asian Citrus
Ctrip
Sands China, Wynn Macau, SJM, Melco Crown
Anta
Parkson
Baidu
Hengan, Amorepacific
Source: CLSA Asia-Pacific Markets
74
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
India
Next, we focus on the world's second most populous nation after China. The
large Indian middle class, also the fastest growing in Asia is a very lucrative
consumer base. In addition, many large multinational firms are planning or
have already set up their manufacturing base in India which would provide
enormous employment opportunities and growing incomes.
Figure 145
Fastest-growing
middle class in Asia
Growth in the middle class over the next five years
India
Indonesia
China
Philippines
Thailand
Malaysia
Singapore
Hong Kong
Taiwan
(%)
Korea
0
2
4
6
8
10
12
14
16
18
20
Source: CLSA Asia-Pacific Markets
The retail market in India is still extremely fragmented with the top-10
players accounting for only 2% of total retail sales, providing huge scope for a
shift to organised retail. Pantaloon Retail leads in terms of market share of
the total retail market in India.
Figure 146
Very fragmented
Retail market share
Company
Pantaloon Retail India
2005
2006
2007
2008
2009
0.2
0.2
0.4
0.5
0.6
Reliance Retail
-
0
0.2
0.3
0.4
Spencer's Retail
-
0.1
0.1
0.3
0.3
LG Electronics India
0.2
0.2
0.2
0.2
0.2
Titan Industries
0.1
0.1
0.1
0.2
0.2
Amway India Enterprises
0.1
0.1
0.1
0.1
0.1
Vishal Retail
-
0.1
0.1
0.1
0.1
Aditya Birla Retail
-
-
0.1
0.1
0.1
Godrej & Boyce
0
0.1
0.1
0.1
0.1
Next India Retail
0
0
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0
0.1
0.2
0.3
-
Others
99.3
98.9
98.2
97.5
97.6
Total
100
100
100
100
100
Shopper's Stop
Subhiksha Trading
Source: Euromonitor
Alcohol and
consumer electronics
are top priority
19 April 2010
Indian consumers typically spend most of their income on consumer
electronics, alcoholic drinks, packaged food and apparel/footwear. Growth in
the toys and games segment is the highest at 26% driven by a larger young
population. Other areas of growth are notably the consumer electronics, and
clothing and footwear segment at 22% and 13%.
aaron.fischer@clsa.com
75
Mr & Mrs Asia
Consumer
Figure 147
Split differ slightly
to that of China
Consumer expenditure
Toys and games
1%
Tobacco
10%
Soft drinks
2%
Alcoholic
drinks
15%
Clothing
and footwear
10%
Packaged
food
18%
Household care
4%
Hot drinks
2%
Cosmetics and
toiletries
6%
Consumer
electronics
22%
Consumer
appliances
8%
Consumer health
2%
Source: Euromonitor
Figure 148
Fun and games in India
Consumer categories
Category
Cagr, 09-13 (%)
Toys and games
25.5
Consumer electronics
21.9
Clothing and footwear
13.4
Soft drinks
12.7
Consumer appliances
11.6
Pet food and pet care products
11.2
Alcoholic drinks
10.2
Packaged food
8.8
Cosmetics and toiletries
7.6
Hot drinks
7.2
Consumer health
5.4
Household care
4.4
Tobacco
3.1
Source: Euromonitor, CLSA Asia-Pacific Markets
Biggest and
fastest-growing
Consumer electronics
Similar to China, consumer electronics is the largest consumer category and
is also expected to be one of the fastest growing over the coming five years
(22% per annum). All segments in this category are likely to grow in double
digit terms with better growth in portable consumer electronics (as opposed
to China where growth is coming from in-house consumer items). Computers
should grow at a higher rate given the low penetration rate for PCs.
Figure 149
Consumer electronics
(US$m)
2009
2010
2011
2012
In-home consumer electronics
7,768
8,548
9,488 10,729
Portable consumer electronics
10,654 13,537 17,280 22,074
In-car consumer electronics (aftermarket)
128
165
217
283
Computers
2,237
2,687
3,245
3,949
Total
18,550 22,249 26,985 33,086
2013 Cagr (%)
09-13
12,370
12.3
28,258
27.6
363
29.8
4,857
21.4
40,992
21.9
Source: Euromonitor
76
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
Youth demand
Apparel and footwear
The growth in this segment, 18% per annum is driven by the demand from
young people who constitute more than 50% of the population in India. The
youth in India have increasingly become more economically empowered and
have more disposable income than before. The luxury market however is still
small and most consumption of luxury items happen when they go abroad.
In terms of exposure to the apparel and footwear market, Pantaloon has 5%
of market share in this segment followed by Madura Coats (4%) and Bata
India (2%). Private labels account for 47% of retail sales in this category.
Quick takeup
of video games
Toys and games
Toys and games are expected to show a 26% Cagr with video games leading
the charge at 42%, much higher than China due to lower penetration rates.
Figure 150
Toys and games
(US$m)
2009
2010
2011
2012
2013
Cagr (%)
09-13
862
1,034
1,246
1,512
862
20.2
Traditional toys and games
Video games
Total
254
359
511
728
254
41.8
1,116
1,393
1,757
2,240
1,116
25.5
Source: Euromonitor, CLSA Asia-Pacific Markets
Makeup to grow fastest
Cosmetics and toiletries
In the cosmetics and toiletries segment overall growth is similar to China’s
8% but much of this growth is in colour cosmetics, fragrances and
deodorants, as well as premium cosmetics, at 19%, 18%, 11% and 13%
respectively.
Figure 151
Expect more
growth from cosmetics
from a low base
Growth in cosmetics segment
Colour cosmetics
19
Fragrances
18
Premium cosmetics
13
Deodorants
11
Skincare
9
Depilatories
9
Hair care
9
Men's grooming products
9
Cosmetics and toiletries
8
Sun care
8
Oral hygiene ex power toothbrush
6
Oral hygiene
6
Babycare
6
Bath and shower products
4
0
5
10
15
20
Source: Euromonitor
19 April 2010
aaron.fischer@clsa.com
77
Mr & Mrs Asia
Consumer
Large players dominate
Tobacco
Volume sales of tobacco in India dipped slightly in 2008, due to a combination
of factors. Cigarettes registered a sharp decline in volume sales, as a result of
legislative factors aimed at drastically reducing consumption. Tobacco
consumption in India should increase off a low base from 2008 onwards. In
India, the largest player ITC‚ enjoys an 84% share of the cigarette market by
value. ITC's competitors in the cigarette business include VST Industries‚
Godfrey Phillips (25%-owned by Phillip Morris) and Golden Tobacco. The four
companies control 95% of the market; the rest being contraband cigarettes.
Despite losing volume shares as it shut down production of its unfiltered
cigarettes following the hike in excise duty, ITC continued to benefit from its
wide product portfolio and strong distribution network.
Figure 152
Retail sales of
tobacco still rising
Retail sales of tobacco
12.0
(US$bn)
11.5
11.0
10.5
10.0
9.5
9.0
8.5
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Euromonitor
Alcoholic drinks
Unlike tobacco sales, alcoholic drinks still registered 5% growth (in US-dollar
terms) in 2009 even with the economic crisis and terrorist attacks in Mumbai
affecting sales in early 2009. The fastest-growing segment is wine at 20%
growth per annum in the next five years. Beer comes second at 12%.
Figure 153
Prefer wine to spirits
Alcoholic-drinks sales Cagr, 2009-14
Wine
19.9
Beer
12.0
Spirits
9.2
RTD/high-strength
premixes
7.1
(%)
0
5
10
15
20
25
Note: RTD = Ready to drink. Source: Euromonitor
78
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
Stock beneficiaries
Titan Industries
With organised retailing at a nascent stage, it is difficult to choose a winner at
this stage. Most companies have ambitious growth plans and new players are
all set to emerge as and when regulations change, particularly those related
to foreign direct investments (FDI). Profitable and sustainable models are yet
to emerge. In the discretionary space, we highlight Titan Industries which is
India's largest manufacturer and retailer of watches and jewellery. It has a
65% market share in the organised watch segment and an 80% share in
organised jewellery‚ which is just 4% of the country's total jewellery market
given the large unorganised retail market. The company should benefit from
growth in incomes and a shift towards organised retail.
United Spirits
Meanwhile for exposure to growth in the alcohol market, we highlight United
Spirits as our preferred pick. The firm is the largest liquor company in India
with more than 50% of the market. It is part of the UB group‚ which also has
interests in brewing (United Breweries) and airlines (Kingfisher Airlines).
United Spirits has been at the forefront of consolidation in the domestic liquor
industry and its closest competitor today is less than one-fifth its size.
However, note that our India consumer analyst Mahesh Nandurkar has
recently downgraded the stock to Underperform due to concerns on nearterm earnings downgrades and runup in the share price.
Hindustan Unilever
For exposure to consumer staples in India, we highlight Hindustan Unilever,
India’s largest FMCG firm, as our preferred choice. We expect HUL to capture
more market share as it increases ad spend. We believe that these efforts
along with price cuts are likely to yield results and it is just a matter of time
before volume growth bounces back and share stabilises.
Indonesia
Has the largest potential
for consumer goods
growth in Southeast Asia
Favourable demographics
driving demand for
consumer products
Indonesia has the largest potential for demand growth in consumer goods
among Southeast Asian markets. Basic consumption dominates as domestic
consumption accounts for two-thirds of the GDP and nearly a half of
household expenditure is on food. Urbanisation, a growing middle class,
strengthening purchasing power and consumerism will drive growth in the
next decade. Average monthly per-capita expenditure in urban areas is 80%
higher than in rural areas.
Figure 154
Figure 155
Number of people aged below 24
Increase in workforce, 2010-20
70
60
50
(%)
Aged 24 and under
India
135.7
China
50.1
39.1
30
36.8
34.3
30.5
18.2
12.3
8.9
20.5
Brazil
23.1
22.0
20
7.5
22.7
Indonesia
44.3
40
10
Aged 60+
14.9
Phils
12.3
USA
11.4
Japan
(7.5)
Russia
(9.3)
(m)
Europe (21.1)
0
India
Indonesia
Europe
China
USA
Japan
(50)
0
50
100
150
Source: CLSA Asia-Pacific Markets
Per-capita consumption for categories such as skin care, liquid detergents,
men’s grooming products, conditioners, biscuits, coffee, ice creams, juices
and dairy products is much below regional peers. Euromonitor expects double
digit growth in a lot of these categories including consumer appliances, which
is expected to grow at 12% per annum.
19 April 2010
aaron.fischer@clsa.com
79
Mr & Mrs Asia
Consumer
Good brands, distribution
networks and local
knowledge crucial
Skincare and dairy are
fast-growing segments in
a developing economy
Companies are gearing for greater competition in the world’s fourth largest
populated country and are expanding production capacities fast to keep up
with rising demand. Companies with good brands, distribution networks and
local knowledge will be the winners.
Figure 156
Figure 157
Skincare market-size Cagr, 09-13CL
Dairy market-size Cagr, 09-13CL
China
15.6
Vietnam
Vietnam
15.4
Indonesia
Thailand
India
13.5
Indonesia
13.2
India
13.0
Brazil
Thailand
Taiwan
(%)
3.4
0
5
9.2
6.2
6.1
Singapore
4.1
USA
9.2
Malaysia
4.4
Mexico
10.1
HK
7.2
Philippines
11.3
Philippines
7.4
South Africa
14.6
China
8.1
Malaysia
19.0
15.5
10
15
20
4.9
Korea
4.5
Japan
(%)
3.2
0
5
10
15
20
Source: CLSA Asia-Pacific Markets
Figure 158
Large growth in
appliances and tobacco
Retail market of consumer items
Items
Cagr, 09-13 (%)
Consumer appliances
16.2
Tobacco
12.2
Consumer health
11.9
Soft drinks
11.0
Packaged food
9.9
Pet food and pet care products
9.6
Hot drinks
9.3
Cosmetics and toiletries
8.4
Alcoholic drinks
7.3
Household care
6.5
Source: Euromonitor
80
Plenty of smokers
in Indonesia
In terms of consumption of durables, incomes are directed towards packaged
foods and tobacco. Tobacco consumption should grow at 6% over the next
four years. Our top pick in basic consumption is Gudang Garam. After 10
years of complacency, the company is finally turning around and the company
is making sincere efforts to revamp the business. Gudang Garam is now
Indonesia’s largest maker of kretek (cigarettes made with a blend of tobacco,
cloves and other flavours), having overtaken HM Sampoerna last year.
Managed well
A change in the ideology of the top management is evident from a number of
initiatives taken by the company. Not only is the distribution being managed
in house by newly hired, very respected and experienced people from the
industry, the company is also hiring brand managers, marketing planners and
trainers for the first time. The company launched three mild kreteks last year
and one machine made kretek. The stock is trading at 13x 10CL PE with a
good 20%+ ROE and potential for higher cash returns. It used to trade at 16x
PE before 1997.
aaron.fischer@clsa.com
19 April 2010
Mr & Mrs Asia
Consumer
Figure 159
Gudang Garam is a
beneficiary of continued
demand for tobacco
Consumption of various consumer durables, 2009
Alcoholic Drinks
1%
Consumer Appliances
7%
Consumer Health
5%
Cosmetics and toiletries
5%
Tobacco
27%
Hot Drinks
3%
Soft Drinks
9%
Household care
3%
Packaged
food
40%
Source: Euromonitor
A snack food player
We also like Mayora, which has been manufacturing snack foods and drinks in
Indonesian since 1977. It is Indonesia’s largest biscuit and candy maker with
excellent franchise and a strong foothold in the traditional stores. The second
generation of the founding family have joined the business after returning from
education in the USA. Inorganic growth is part of a longer term strategy rather
than the next two years. The company has increased production capacity for
biscuits, coffee and candies. It has launched digestive biscuits to gain share in
the growing healthy products market. Indonesia’s per capita consumption of
biscuits at 1.1kg is much lower than Malaysia’s at 1.9kg and its per capita
consumption of coffee at 0.5kg is the lowest among its peers.
But the key risk is that Mayora distributes all its products sold domestically
(75% of sales) through a single related party, Inbisco Niagatama, an unlisted
company the Mayora family owned. Management does not plan to bring the
distribution in house for now but may do so after two years. The distributor
makes 6% distribution margins and bears the risks of bad debts and sales
returns. At 9x 10CL PE and 20% ROE, the stock is cheap and at a significant
discount to peers even though it has related party risks and is illiquid.
Still low consumption
of staples such as
biscuits and coffee
Figure 160
Figure 161
Per-capita consumption of biscuits
Per-capita consumption of coffee
Singapore
4.0
Hong Kong
Singapore
2.6
South Korea
1.9
Malaysia
Taiwan
1.6
India
1.1
(kg/capita)
0.4
0
1
2
1.1
Malaysia
1.1
Thailand
1.2
South Korea
1.8
Indonesia
1.6
Hong Kong
1.9
China
2.1
Thailand
3
4
5
1.1
Taiwan
0.5
Indonesia
0.5
0.0
0.5
(kg/capita)
1.0
1.5
2.0
2.5
Source: Euromonitor
19 April 2010
aaron.fischer@clsa.com
81
Mr & Mrs Asia
Consumer
Wide margins and high
ROEs with pricing power
We also like Unilever Indonesia which is trading at high valuations thanks
to its high ROE (85%) and excellent EVA™. As purchasing power and
urbanisation increases, consumption of men grooming products, conditioners,
skincare, dairy and liquid detergents will grow. Globally, foods make up 54%
of Unilever sales while in Indonesia, foods make up only 25% of revenue
meaning that there is huge potential in the foods category. The company has
major expansion plans this year and we expect 17% top line growth for the
next few years.
Unilever has defended
its market share and
expanded margins
Unilever has defended its market share and expanded margins from 13-14%
in the 1990s to 22-24% now. Unilever has a 75-year track record and
incredible brands with products at multiple price points. Nearly 1.8m small
stores/vendors sell Unilever products across Indonesia. A good distribution is
a key strength as Indonesia is the world’s largest archipelago with more than
6,000 inhabited islands. There is a lack of efficient land, air and sea
infrastructure.
Lifestyle pick
Figure 162
Figure 163
Indonesia’s urban and rural population
Regional per-capita income, 2007
200
180
160
140
120
100
80
60
40
20
0
(m)
1950
Urban
East Kalimantan
Rural
Jakarta
Riau
Papua
Kalimantan
Sumatra
Java
Bali
(US$)
Sulawesi
1965
1980
1995
2010F
2025F
0
2,000
4,000
6,000
8,000
Source: Population Division of the United Nations Secretariat, BPS
82
aaron.fischer@clsa.com
19 April 2010
19 April 2010
Figure 164
Valuations
Company
Ccy
Price
Rec
Mkt cap
(US$m)
PE (x)
Earnings growth (%)
PB (x)
EV/Ebitda (x)
09A
10CL
11CL
09A
10CL
11CL
09A
10CL
11CL
09A
10CL
11CL
Rp
1,610
BUY
306.8
18.7
15.1
12.0
8.2
38.9
25.1
3.2
2.8
2.3
11.4
9.6
7.1
Anta Sports
HK$
13.50
BUY
4,336.5
20.3
20.2
17.0
42.2
17.4
18.7
5.0
5.1
4.3
15.8
15.4
10.8
Asian Citrus
HK$
6.60
BUY
655.5
9.0
7.5
6.4
18.0
22.4
18.0
1.4
1.2
1.1
7.0
5.8
4.9
Bajaj Hindusthan
Rs
138.8
BUY
602.9
13.0
2.8
6.1
nm
218.2
(54.1)
1.8
0.8
0.7
7.5
2.5
3.6
BCML
Rs
93.6
BUY
544.0
11.1
4.3
5.8
120.4
90.0
(25.4)
2.6
1.3
1.1
7.8
3.0
3.0
Belle
HK$
10.92
BUY
11,871.7
26.6
24.5
20.7
28.2
30.4
18.8
4.4
4.6
3.9
18.9
16.0
12.7
Changyu Wine
HK$
66.07
BUY
4,490.5
30.8
24.2
21.3
18.4
21.5
14.0
11.2
9.5
8.4
21.0
16.3
14.2
China Dongxiang
HK$
5.39
BUY
3,936.8
20.5
16.0
13.8
8.6
15.2
16.6
4.1
3.3
2.8
13.9
9.4
7.1
China Resources Ent
HK$
28.10
BUY
8,678.0
23.3
12.6
24.5
26.0
84.1
(48.1)
2.6
2.3
2.2
14.7
12.6
10.8
China Yurun Food
HK$
23.95
BUY
5,016.2
21.4
18.5
15.7
54.1
23.8
18.2
4.5
4.0
3.4
18.5
14.9
12.4
CP All
Bt
27.5
BUY
3,823.1
23.0
18.8
16.1
46.9
39.8
17.0
5.9
6.4
6.6
11.0
9.4
8.1
Foster's
A$
5.43
BUY
9,757.6
17.0
14.2
13.0
(7.7)
22.8
9.5
2.8
2.6
2.4
11.7
9.8
9.1
Gudang Garam
Rp
27,600
BUY
5,900.5
13.6
13.2
11.2
65.6
38.4
17.7
2.3
2.5
2.1
7.5
7.7
6.5
Huabao
HK$
9.89
BUY
3,974.0
20.6
20.5
17.3
20.5
18.8
18.7
7.2
6.8
5.9
16.9
15.8
12.4
JB Hi-Fi
A$
20.01
BUY
2,017.2
26.2
16.4
13.3
23.2
49.3
24.1
9.5
6.9
5.6
16.0
10.2
8.3
Kalbe Farma
Rp
2,100
BUY
2,369.7
15.0
18.7
15.9
22.6
34.9
18.0
2.8
3.6
3.0
7.6
9.7
8.0
LG H&H
won
296,500
BUY
4,715.8
32.1
21.7
17.1
19.1
57.8
27.0
7.9
6.2
4.7
23.6
20.1
17.1
Olam
S$
Orion
won
Parkson Holdings
RM
Parkson Retail
HK$
PCSC
NT$
Ramayana
Rp
SM Prime
BUY
3,930.2
25.2
19.9
15.0
29.6
40.9
32.8
3.9
3.3
2.8
13.7
10.7
8.7
BUY
1,374.9
44.8
7.7
19.6
nm
513.8
(60.6)
3.2
2.3
2.1
30.4
24.2
22.7
5.77
BUY
1,864.7
13.2
17.0
14.0
(18.5)
(9.7)
24.4
2.6
2.6
2.3
10.7
9.2
7.2
12.60
BUY
4,559.2
37.2
26.7
21.4
10.2
28.2
25.1
8.6
6.5
5.4
22.8
16.8
13.2
NT$80.0
BUY
2,636.1
17.9
15.9
13.5
23.9
20.0
17.8
4.2
4.1
3.7
11.8
10.4
9.0
980
BUY
762.2
13.5
15.8
13.3
(22.9)
41.4
19.0
1.8
2.6
2.3
5.2
7.6
6.3
P
9.80
BUY
2,919.7
19.1
16.8
15.2
2.5
17.2
10.9
2.6
2.4
2.2
11.4
10.2
9.4
SR Sugars
Rs
69.9
BUY
501.4
5.2
1.4
3.6
285.8
171.4
(61.6)
1.6
0.6
0.5
3.6
0.7
1.2
Top Glove
RM
13.50
BUY
1,278.7
15.8
15.6
13.7
40.4
45.1
14.0
3.5
4.1
3.5
9.3
9.6
8.3
Uni-President China
HK$
4.67
BUY
2,166.7
23.6
16.7
14.5
126.5
15.9
14.7
2.9
2.2
2.0
12.3
8.0
7.0
Uni-President Ent
NT$
36.7
BUY
4,342.5
20.2
15.3
14.3
104.4
24.6
6.7
2.4
2.0
1.9
50.8
43.0
40.5
Universal Robina
P
25.00
BUY
1,241.5
13.3
18.1
168.3
16.1
1.0
1.4
6.7
8.2
Want Want China
HK$
5.81
BUY
9,891.6
29.6
25.1
21.1
19.2
25.7
19.1
9.4
9.3
8.5
21.9
16.8
13.9
Woongjin Coway
won
36,900
BUY
2,465.5
21.2
17.0
15.5
0.7
25.0
10.0
4.2
4.5
4.3
8.4
7.0
6.4
Billabong
A$
11.62
O-PF
2,731.9
19.6
17.3
13.6
(16.0)
33.7
26.7
2.2
2.3
2.1
11.9
10.7
8.6
Café de Coral
HK$
18.72
O-PF
1,340.6
24.1
23.1
19.9
(1.5)
10.2
16.0
4.2
4.2
3.9
13.3
12.4
10.7
Colgate-Palmolive
Rs
714.5
O-PF
2,200.7
25.0
24.3
22.1
19.6
17.5
9.9
28.5
23.8
19.4
24.1
21.1
18.6
Dabur
Rs
178.1
O-PF
3,491.6
30.6
27.3
23.2
11.1
32.2
17.6
13.5
11.5
9.0
23.6
21.0
17.7
Dairy Farm
US$
7.16
O-PF
9,659.6
22.0
22.6
20.2
10.6
16.4
12.0
14.7
23.9
16.1
13.3
14.0
12.2
Godrej Consumer
Rs
285.1
O-PF
1,989.8
30.0
23.9
20.5
49.4
42.5
16.4
12.5
11.2
9.3
24.0
19.0
16.2
Golden Eagle Retail
HK$
16.00
O-PF
4,005.0
101.9
29.9
24.0
(59.4)
274.0
24.5
8.5
7.6
6.2
24.0
19.3
15.2
Hengan
HK$
57.10
O-PF
8,805.2
32.6
26.9
22.2
58.6
22.1
21.5
7.7
6.9
6.2
22.9
18.7
15.0
Hengdeli
HK$
3.32
O-PF
1,741.3
23.2
21.1
17.8
9.7
29.9
18.7
3.5
3.6
3.2
17.2
15.0
12.6
Hindustan Unilever
Rs
223.8
O-PF
11,055.4
29.1
22.5
20.2
(5.7)
14.6
11.7
24.7
18.6
16.6
23.6
17.9
16.0
Continued on the next page
83
Mr & Mrs Asia
2.75
292,000
Consumer
aaron.fischer@clsa.com
Ace Hardware Indo
84
Figure 165
Valuations (cont’d)
Company
Ccy
Price
Rec
Mkt cap
(US$m)
PE (x)
Earnings growth (%)
PB (x)
EV/Ebitda (x)
09A
10CL
11CL
09A
10CL
11CL
09A
10CL
11CL
09A
10CL
11CL
Rp
3,825
O-PF
4,013.8
19.0
17.4
15.0
77.9
23.2
15.9
3.3
3.1
2.7
9.9
9.6
8.8
ITC
Rs
271.2
O-PF
23,309.2
25.7
22.7
19.2
6.5
28.9
17.8
6.2
5.8
5.0
16.5
14.4
12.1
KT&G
won
61,700
O-PF
7,687.2
10.9
9.4
9.4
(19.2)
15.2
(1.3)
2.1
1.9
1.7
7.1
6.4
6.4
Li & Fung
HK$
39.00
O-PF
19.0
36.2
27.0
22.5
39.7
62.9
21.2
7.4
7.7
6.7
28.3
22.8
18.8
Myer
A$
3.32
O-PF
1,798.4
13.1
10.7
9.5
25.2
64.6
12.0
2.9
2.2
2.0
10.1
6.3
5.6
NWDS China
HK$
7.20
O-PF
1,564.8
21.4
18.6
14.1
9.6
16.5
32.1
2.6
2.4
2.1
10.8
8.1
5.5
Shinsegae
won
543,000
O-PF
9,193.2
19.8
14.7
13.1
(15.6)
42.3
12.5
2.3
2.0
1.8
13.0
10.6
9.6
Shopper's Stop
Rs
405.2
O-PF
320.0
990.6
37.1
26.8
nm
2,849
38.5
5.1
4.7
4.0
22.5
14.0
11.3
Tingyi
HK$
Titan Industries
Rs
Tsingtao Brewery
HK$
Unilever Indonesia
19.44
O-PF
14,024.8
36.1
29.4
23.7
47.2
24.2
24.1
9.5
8.0
6.7
17.0
14.4
11.5
1,905.7
O-PF
1,916.0
27.8
25.7
19.6
35.3
52.2
31.1
8.7
8.2
5.8
17.4
16.5
12.4
40.30
O-PF
7,017.8
40.2
29.9
25.5
82.3
27.7
17.5
6.1
5.3
4.8
20.1
16.1
13.9
Rp
12,200
O-PF
10,342.9
30.8
26.2
22.3
16.0
36.0
17.5
22.8
21.9
19.1
21.5
19.1
16.1
Wesfarmers
A$
32.37
O-PF
34,887.2
23.1
18.4
14.8
20.9
52.0
25.9
1.3
1.5
1.5
12.0
9.6
8.2
Wilmar Intl
S$
6.99
O-PF
32,110.1
15.6
19.0
15.2
22.9
(10.2)
25.1
2.7
2.6
2.3
16.0
14.5
11.5
Woolworths
A$
Amorepacific
won
BAT Malaysia
RM
China Foods
HK$
David Jones
O-PF
32,230.9
20.3
16.1
14.4
3.4
32.7
11.4
4.8
4.3
3.8
11.2
8.7
7.8
U-PF
5,046.4
31.4
20.4
17.4
17.0
40.6
17.1
4.9
3.6
3.1
18.5
12.7
11.0
45.54
U-PF
4,054.6
16.8
17.5
18.2
(13.0)
9.5
(4.0)
27.8
25.3
22.2
11.8
12.2
12.7
6.60
U-PF
2,375.3
34.2
28.0
23.3
18.1
15.8
20.3
3.5
3.2
3.1
15.9
12.8
10.8
A$
4.70
U-PF
2,191.7
19.1
13.5
12.3
3.3
29.9
9.7
3.9
3.2
3.1
11.4
8.0
7.4
Dynasty Fine Wines
HK$
2.65
U-PF
425.3
20.4
21.7
19.8
9.6
(1.0)
9.3
1.7
1.8
1.7
9.3
9.8
8.9
FEDS
NT$
NT$28.2
U-PF
1,083.6
25.2
14.4
10.8
500.1
36.4
32.8
2.1
1.4
1.1
11.8
7.4
5.5
Hana Tour Service
won
53,100
U-PF
553.7
(696.4)
32.6
26.5
(115.7)
nm
23.1
7.0
6.5
5.8
181.7
22.1
17.7
Harvey Norman
A$
3.64
U-PF
3,601.6
18.5
12.2
10.9
(5.3)
36.4
11.6
2.2
1.7
1.6
10.2
7.3
6.7
HDS
won
102,500
U-PF
2,084.8
12.1
9.5
8.8
(9.3)
20.9
8.7
1.5
1.2
1.1
9.4
7.5
6.7
Hite Brewery
won
142,000
U-PF
1,266.6
16.2
10.0
8.9
84.2
42.7
13.1
2.4
1.7
1.5
10.6
7.0
6.3
LG Electronics
won
117,500
U-PF
17,069.5
9.3
8.4
8.2
351.5
12.7
2.6
1.9
1.5
1.3
4.7
3.9
3.8
Li Ning
HK$
28.45
U-PF
3,841.8
29.0
24.0
20.3
33.2
17.4
18.1
9.9
7.9
6.3
19.0
16.0
13.1
Lotte Shopping
won
317,000
U-PF
8,264.6
15.1
11.3
10.6
(15.1)
28.1
5.9
1.1
0.9
0.8
10.0
7.7
7.1
Nestle India
Rs
2,699.3
U-PF
5,894.8
39.0
33.0
27.8
10.3
31.7
18.8
42.3
36.1
29.0
24.5
20.8
17.6
Pantaloon
Rs
409.8
U-PF
1,766.1
46.7
42.7
35.1
6.8
33.8
24.0
2.7
2.7
2.5
15.1
14.1
12.5
PCD Stores
HK$
2.63
U-PF
1,432.3
33.4
29.9
23.1
41.9
36.5
29.6
3.9
3.6
3.2
23.7
17.4
13.1
United Spirits
Rs
1,335.9
U-PF
3,800.3
47.4
36.1
28.7
52.7
46.2
25.9
4.0
3.5
3.2
18.6
17.4
15.8
China Mengniu Dairy
HK$
26.50
SELL
5,074.8
30.1
32.4
32.6
nm
(11.4)
(0.5)
7.1
5.6
5.0
16.1
16.3
15.8
Intime Dept Store
HK$
7.63
SELL
1,722.9
30.0
28.0
23.6
(2.0)
13.6
19.0
3.3
3.2
2.9
18.7
15.0
12.2
Jollibee Foods
P
58.00
SELL
1,337.1
21.7
21.2
18.9
3.7
11.8
11.9
2.9
2.6
2.1
9.1
8.2
5.1
San Miguel
P
74.50
SELL
5,265.0
20.0
20.6
15.2
1.7
10.9
27.2
1.4
1.4
1.3
9.6
10.0
8.6
Esprit
HK$
62.95
U-R
9,683.4
14.2
16.3
(18.5)
6.3
3.9
4.4
8.5
9.7
Ports Design
HK$
20.70
U-R
1,460.8
28.6
21.0
3.4
17.6
9.2
6.8
21.1
14.9
Source: CLSA Asia-Pacific Markets
18.2
15.8
5.9
12.4
Mr & Mrs Asia
19 April 2010
28.28
815,000
Consumer
aaron.fischer@clsa.com
Indofood
Mr & Mrs Asia
Education
Nimish Joshi
nimish.joshi@clsa.com
(91) 2266505054
Top pick
Megastudy
Market cap
Price
072870 KQ
US$1,101m
193,400 won
Education - Top priority at all times
We expect the education sector to benefit from a young and aspirational
population in Asia, particularly China and India. Our Mr & Mrs Asia studies in
2007 and 2009 highlighted how education remains one of the most important
items in family budget, in good and bad times. As we wrote in the 2007
report: ‘Mr & Mrs Asia place particular emphasis on their offspring. Practically
all want their children to achieve a tertiary education and expectations on
academic achievement are high. A high proportion of household budgets also
go toward education.’
India - A US$40bn market
India’s education sector will reap the dividend of favourable demographics
over the next decade or two. By 2020, about 470m of the local population
should be in the 5-24 years age group. Most stakeholders recognise the need
to put a majority of these young people through formal/vocational education.
Importantly, the government realises its inability to educate such a large set
and therein lies the opportunity for the private sector.
Figure 166
A target market of 470m
Indians for education/
training providers
India demographics, 2020
80+
75+
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
Male
Female
(m)
80
60
40
20
0
20
40
60
80
Source: CLSA Asia-Pacific Markets
Figure 167
Public education
system has failed
India’s education statistics
Public education system has failed
361m children
should be in school
Drop-out rates
Grades 1-4 - 16% (25m)
Grades 5-8 - 43% (39m)
Grades 9-12 - 68% (78m)
219m children
are in school
Private schools have disproportionate enrolments
90m children
in 75,000
private schools
129m children
in 950,000
public schools
40% of children attend
7% of India's schools
At least 15,000 schools
charge >Rs1,250pm
Source: India’s Department of Education, media reports, NGO studies, CLSA Asia-Pacific Markets
19 April 2010
nimish.joshi@clsa.com
85
Mr & Mrs Asia
Education
Figure 168
Opportunity for the private sector - Segments within India’s education system
Schooling
Market Cagr (to 2012)
K-12 schools
US$20bn
13-14%
Core education segment,
w ith high propensity to spend
among middle class
Regulatory ambiguity continues
to hinder unfettered grow th
Tutoring
US$5bn
15-16%
High usage of external tuition
among urban middle class
Un-regulated market;
scattered by locality
Books
US$2.0bn
11%
Grow ing in sync with enrolment
grow th of schools
Grow th hindered by
reuse of books
Stationery
US$1.3bn
14%
Shift in spending to more
expensive options driving grow th
in urban areas
Rural spend needs to provide
the grow th booster - play on
income grow th
Preschool
US$1bn
35%
11% of urban children in
preschools, rising
Likely to remain an urban
phenomenon
Educational CD-ROMs
US$120m
30%
Increasing use in urban middle/
upper middle class households
ASP decline likely as
competition increases
Multimedia in schools
US$30m
75-80%
Installed base has passed critical
mass - adoption to accelerate
Fee structure in schools w ill
need to uptrend to expand
target market long term
Private professional
colleges
US$7bn
16-17%
Career focus - engineering,
medicine, MBA preferred
Regulations clearer than for K-12 but
fee structure is partly regulated
Test
preparation
US$1.7bn
19-21%
Career focus - engineering,
medicine, MBA preferred
Few national chains, but very large
number of regional players
Vocational
training
US$1.4bn
22%
Employability in focus as services
such as banking, airlines, retail grow
Scalability may remain an issue
Child skill
enhancement
US$800m
30%
High adoption in middle/upper
middle class in urban areas
Scalability may remain an issue
IT training
US$225m
20-30%
Indian IT industry reaching
limit on engineer hiring,
given supply constraints
Constant competition from
graduate courses in IT, w hich
are preferred by some employers
Teacher training
E-learning
Finishing school
US$70m
60-70%
Emerging segments, high growth
Scalability challenges may remain
for the next five years
Professional courses
Skill development
Opportunities with the government
ICT @ schools
US$90m
70%
Bid pipeline improving as more
public schools open up to ICT
L1 bidding process keeps margins
lower, high debtor days
Other areas in PPP
Unknown
Policy shift apparent towards PPP
Very few scale success stories
as of now
Source: CLSA Asia-Pacific Markets
86
nimish.joshi@clsa.com
19 April 2010
Education
Mr & Mrs Asia
India’s education failure
is well documented . . .
India’s education and training sector offers private institutions an estimated
US$40bn market, with a potential 16% five-year Cagr. With 142m of the
361m school-age children not attending classes, the system’s shortcomings
are well documented. However, the opportunities for organised private-sector
involvement do not enjoy such recognition. Turning education into a
profitable, high-growth business is a long-term investment theme. Corporate
initiatives are beginning to address the needs of India’s youth by tapping into
the propensity of the middle class to spend more on education.
. . . but commercial
opportunities are
less well recognised
Education is a substantial market when compared with the US$24bn that
the government spends each year on defence, which includes revenue and
capital expenditure. Further, the private-sector segment is nearly as big as
the combined annual budget for power, roads, airports, ports and telecoms
(based on the country’s FY07-12 Five-Year Plan). Private spend on
education is also nearly five times the annual Union Budgetary outlay for
the segment. Overall, education accounts for just 7% of India’s privateconsumption expenditure.
Huge growth potential
for those on the bus
In our view, the time for stronger private-sector participation in education has
come, and large publicly listed companies will emerge. The biggest listed
entity (Educomp) in the space has less than US$220m of revenue from the
Indian market in FY10CL. The largest part of the pie is in the K-12 segment
and its adjacent markets (tutoring, preschools), and private professionalcourse colleges (engineering, medical and business). A slew of other areas,
such as test preparation, preschools and vocational training, are each worth
US$1-2bn.
A US$40bn market
We estimate the Kindergarten to Grade 12 (K-12) segment at US$20bn,
private professional colleges at US$7bn and tutoring at US$5bn. These are
the largest segments of the total private education market that we estimate
to be worth some US$40bn. Other meaningful and fast-growing areas include
vocational training at US$1.4bn, test preparation at US$1.7bn and preschools
at US$1bn. Our proprietary work indicates a growing shift towards private
schooling. India’s 75,000 private schools account for 7% of total institutions,
but enrol 40% of the country’s 219 million students – even as some 142
million children are not in the school system.
Diversity promises
consolidation
The combined market capitalisation of listed education companies in India is
only about US$2.5bn, on 2009 revenue of US$500m. We see consolidation
ahead, as national chains emerge. Test prep and tutoring appear most
segmented, being spread thinly between small regional players; while areas
such as e-learning, teacher training and online tutoring are nascent. K-12 and
private professional colleges are the most scalable segments on offer.
Regulatory clarity
can catalyse growth
The liberalisation debate will intensify as India’s policy planners struggle with
a failed public system amid continued resistance to the commercialisation of
education. Court judgements have talked of a ‘reasonable surplus’ for schools
and higher-education establishments, without clarifying the scale of profits
that constitute the surplus. In the absence of centralised or regionally
consistent regulation, profit is likely to come from the provision of services
such as land leases, intellectual property and school management.
Nonetheless, recent policy actions indicate a more liberal and welcoming
environment ahead for private participation.
19 April 2010
nimish.joshi@clsa.com
87
Mr & Mrs Asia
Education
Encouraging steps
by the Indian
government recently
India’s Human Resource Development Minister, Kapil Sibal, is taking multiple
reformist measures. The parliament passed The Right of Children to Free and
Compulsory Education Bill in 2009, which envisages free and compulsory
education to children in the 6-14 age group. The overall focus on quality of
education, be it through more qualified teachers, higher teacher-to-student
ratios, improved infrastructure and higher capital commitment by the central
government is likely to spur greater opportunities for private players in the
public-private-partnership (PPP) domain. Similarly, the Union Cabinet has
approved The Foreign Educational Institution (Regulation of Entry and
Operation) Bill, which will facilitate the entry of foreign universities in India.
China: Rapid growth ahead
Demographics and
urbanisation are
two key drivers
Favourable demographics and rapid urbanisation are the two key growth
drivers of China’s education and training industry. The country has a formal
urbanisation policy and target, which restricts free movement of the
workforce from rural to urban areas. The urbanisation process picked up in
the 1980s and on average about 1% of its population moves to urban cities
every year.
However, China’s population pyramid suggests it should start growing old by
2025 and its dependency ratio should turn adverse. This is due to Beijing’s
one-child policy, which has been in place since the 1980s, and a fall in fertility
rates. Currently, there are 420m in the 5-24 age group. However, this could
go down to 350m if the one-child policy persists, which could limit the growth
potential of education providers in the longer term.
One-child policy could
impact demographics
for another decade
Figure 169
Figure 170
Demographic profile of China 2005
Demographic profile of China 2020
80+
75+
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
(80) (60) (40) (20)
Male
Female
(m)
0
20
40
60
80
80+
75+
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
(80) (60) (40) (20)
Male
Female
(m)
0
20
40
60
80
Source: US Census, CLSA Asia-Pacific Markets
Large and fastgrowing market
88
China’s education market is large and fast-growing. Per International Data
Corporation (IDC), in 2008, China's education market totalled Rmb1,613bn,
including Rmb1,052bn of public spending on education, of 65.2% of total.
Private spending on education totalled Rmb560.78bn, or 34.8% of total.
According to World Bank statistics, China has the world’s second-highest
number of student enrolment (including primary, secondary and higher
education) of 216m in 2006, approximating India’s 244m. With a strong
emphasis on developing the nation’s higher education, the total number of
post-secondary student enrolments in China increased sixfold between 1997
and 2007, from 3.2m to 19m, or a 19% annual growth rate.
nimish.joshi@clsa.com
19 April 2010
Mr & Mrs Asia
Education
We expect the industry to continue to expand in China, driven by several macro
factors, including rising middle-class population, positive government policies
and growing demand for higher education. As part of its latest five-year
development plan (2006-10), the country intends to increase its education
expenditure considerably from the 2.2% in 2005 to 4% of GDP by 2010 and
further improve the enrolment ratios at all levels.
China’s education reform has had five dominant tendencies:
Five key aspects of
education reform
‰
From central regulation to local autonomy
‰
From elite to mass education
‰
From specialisation to breadth
‰
From public to private
‰
From national to international
China’s economic growth has intensified competition in the labour market.
The drive of Chinese people to upgrade their knowledge and skills has created
significant demand in the training sector, especially in the areas of language,
soft skills and IT training. About 6m fresh graduates enter the workforce
every year, creating tremendous demand for such training. Limited highquality education resources and imbalance in their distribution allow afterschool tutoring to emerge as a new area of spend in the private domain.
Big markets - after-school
tutoring and employability
enhancement
Figure 171
China’s educational structure
Typical age
29
3
2
PhD
PhD
1
Doctorate degree entrance exam
TV
TV and
and radio
radio
university/spareuniversity/sparetime
time university/
university/
self-taught
self-taught exam
exam
adult
adult education
education
3
2
1
Workforce
26
Master’s
Master’s
Workforce
23
Master’s entrance examination
Workforce
Bachelor
4
3
2
1
University/
University/
institute
institute
Diploma
Bachelor/diploma
4
3
2
1
Vocational
Vocational
university
university
2
1
Specialised
Specialised
college
college
19
National entrance
examination
Workforce
High-school
diploma
3
2
1
Senior
Senior middle
middle
school
school
Certificate of
Graduation/diploma
3
2
1
Specialised
Specialised
secondary
secondary
school
school
Certificate of
graduation/diploma
3
2
1
Vocational
Vocational
secondary
secondary
school
school
Junior
Junior middle
middle school
school
6
5
4
3
2
1
Primary
Primary
Compulsory education
Workforce
3
2
1
16
13
7
Source: Finnish National Board of Education report
19 April 2010
nimish.joshi@clsa.com
89
Education
Mr & Mrs Asia
Highly saturated
education market in China
While consulting firm JLJ values the market for traditional English language
training at US$2.2bn, it is highly saturated, with more than 50,000 service
providers. In contrast, IDC expects the children’s education sector to grow
rapidly and exceed US$18bn by 2013, as parents find it increasingly
important to supplement their children’s compulsory education.
Tier-2 cities provide a
good opportunity
JLJ writes: ‘Unlike the saturated markets found in Tier-1 cities, where intense
competition already exists, opportunities for growth are still found in Tier-2
cities. The education and training market in Tier-2 cities is still relatively new
and fragmented, generally dominated by small domestic service providers
with no apparent market leaders in many of the sectors. Consequently, first
mover advantages can still be enjoyed if the services provided are able to
meet the needs of the Chinese customers.
Figure 172
Fragmentation
in Tier-2 cities
China’s regional markets for education and training
Source: JLJ
Regional governments
are encouraging
select type of training
English language training sector in Tier-2 cities has potential for foreign
investment. This is primarily due to a lack of good English language speakers
in Tier-2 cities, which has led companies to offer premium salaries to hire
such candidates; the financial rewards of language training can be significant
in Tier-2 cities, driving demand for related courses by reputed service
providers. In addition, sector-based development encouraged by local
governments to develop local economies, creates niche markets within the
education and training services industry, eg, IT training. For example, the IT
industry in Nanjing is rapidly growing due to the increasing popularity of
business process outsourcing (BPO) and is expected to reach a market value
of US$8bn by 2010; 10,000 new workers were employed in Nanjing’s BPO
industry in the first quarter of 2009.’
Overcapacity, IPR
protection and regulatory
clarity remain key issues
According to JLJ, overcapacity in certain segments remains a key worry,
especially in the children education sector, where competition continues to
intensify even as companies expand rapidly despite falling birth rates.
Protection of intellectual property rights remains another issue. In the
education and training industry, businesses are categorised into core and
non-core education services, where institutions issuing degrees fall under the
90
nimish.joshi@clsa.com
19 April 2010
Mr & Mrs Asia
Education
“core” category and those that do not issue degrees fall under the ”non-core”
category. Providers of core education services are heavily regulated and
require long approval processes.
Figure 173
More than 90%
of IT companies
provide training
Chinese IT companies that are providing training for employees
100
(%)
92.7
90.8
90
80
68.3
70
60
61.3
50
40
30
20
10
14.8
0
Entry-level
Operations
Language
Management
skill
Others
Source: China Sourcing, CLSA Asia-Pacific Markets
Stock picks
Megastudy remains
our top pick
Our preferred education pick in Asia is Korea’s Megastudy. Already a leading
player at home, the company has formed a joint venture to tap the Chinese
market. Initially, the 40% owned entity will develop partnerships with elite high
schools in Shanghai, Guangzhou, Wuhan, Chongqing and Chengdu and source
online content from lectures at these schools. Due to language differences,
Megastudy may set up different online sites by province. Given that China is 20
times Korea’s population, and that Megastudy seems to have formulated a
viable strategy to enter this market, we are bullish on its prospects here.
We currently rate the three Indian companies in our education coverage
(Educomp, NIIT and Everonn) Underperform. While Educomp’s service
portfolio is well diversified and it has leadership position in multiple segments,
we are uncomfortable with its accounting policies. NIIT’s execution ability
remains dubious and Everonn lacks depth in segments in which it operates.
Case studies: Government measures to nurture talent
Founded in December 2008, Hangzhou Institution of
Service Engineering (HISE) aims at developing
practice-oriented talent. It focuses on cultivating
students’
foreign-language
abilities
(listening,
speaking, reading and writing). It also provides
training to help students develop vocational traits and
simulates and enterprise environment for them to gain
experience on real posts. There is a “three-three”
system for the constitution of teachers, namely a third
of the teachers are overseas returnees and foreign
teachers, a third part-time teachers from enterprises
and a third high-level professional teachers.
In March 2009, in order to solve the talent shortage in
the software-outsourcing industry, Xi’an municipal
19 April 2010
nimish.joshi@clsa.com
government decided the administrative committee of
Xi’an Hi-tech Industry Development Zone and Xi’an
University of Arts and Science should join hands in
establishing Xi’an Software Outsourcing College.
Attached to the college are Xi’an Software Outsourcing
Talent Training Base and Software Outsourcing Talent
Practice Base, which shoulder the tasks of academic
education, skill training, internship training, high-end
talent cultivation and focus on the cultivation of
project managers, software-technology engineers,
basic outsourcing operators, etc. The college is
planning an initial output of 10,000 students every
year and a longer-term scale of 15,000 to 20,000
students annually.
91
Mr & Mrs Asia
Education
Interesting companies in this space in China are New Oriental, China Distance
Education, ChinaEdu Corp, ChinaCast Education and ATA. However, we do not
formally cover any of these stocks.
Figure 174
Valuations
Company
Code
Educomp
EDSL IS
Megastudy
072870 KQ
NIIT
NIIT IS
Price
(local ccy)
EPS Cagr (%)
FY10-12
FY11
FY12
FY11
FY12
FY11
FY12
PE (x)
EV/Ebitda (x)
PB (x)
743.8
23.4
19.4
16.2
9.7
7.9
4.1
3.3
193,400
14.5
13.5
11.9
8.5
7.0
3.4
2.8
68.0
20.9
12.6
11.4
13.7
11.1
1.9
1.7
Source: CLSA Asia-Pacific Markets
92
nimish.joshi@clsa.com
19 April 2010
Mr & Mrs Asia
Property
Property - Room to grow
Unitech
Market cap
Price
Vista Land
Market cap
Price
SMRA IJ
US$629m
Rp860
UT IB
US$4,160m
Rs78.1
VLL PM
US$384m
P2.02
45
40
35
30
25
20
15
10
2008
Summarecon
Market cap
Price
50
2006
1813 HK
US$2,155m
HK$5.79
(%)
55
2004
KWG
Market cap
Price
60
2002
012630 KS
US$2,162m
31,300 won
Hong Kong: Home ownership
2000
Hyundai Dev
Market cap
Price
Figure 175
1998
HDIL IB
US$2,348m
Rs305.1
1996
HDIL
Market cap
Price
1994
FLI PM
US$556m
P1.04
1992
Filinvest
Market cap
Price
The first striking similarity between Hong Kong in the 1970s and today’s
Chinese and Indian property market is the strong underlying housing
demand, which is underpinned by a low homeownership ratio (ie, strong
aspiration for housing), low leverage (ie, room to gear up) and high income
growth (ie, appetite for leverage, as future burden is expected to ease with
growth in income). Hong Kong’s homeownership ratio back in the late-1960s
and early-1970s hovered around the 20-30% range.
1990
1109 HK
US$10,419m
HK$16.32
1988
CR Land
Market cap
Price
Home ownership, a key driver of demand
1986
BSDE IJ
US$874m
Rp690
1984
Bumi Serpong
Market cap
Price
1982
ELTY IJ
US$553m
Rp250
1980
Bakrieland
Market cap
Price
1978
Top picks
On the back of high income growth, rapid urbanisation, an emerging middle
class and access to mortgages, China, India and Indonesia are the most
attractive property markets in Asia, and countries like Korea and Philippines
are less so. While trying to forecast how these markets will grow, we believe
it is worthwhile to see the growth of the property market in Hong Kong. We
believe that over the next ten years, these markets, particularly China, will
grow the same way as Hong Kong did in the late 1960s and early 1970s.
China, India and Indonesia are characterised by strong underlying demand
for housing, low household leverage, high income growth and growing
penetration of mortgages.
1976
nicole.wong@clsa.com
(852) 26008207
1961
Nicole Wong
Source: Hong Kong Annual Digest of Statistics (1986, 1992), Euromonitor
And, the standard of living was poor too: in 1971, some 42% of Hong Kong’s
population still remained in shared living spaces being contained within a
room/cubicle.
Figure 176
Poor living
conditions boosted
aspiration for housing
Hong Kong: Distribution of domestic households by types of accommodation
Types of accommodation
House/stone structure
Whole self-contained flat/tenement floor
Room/cubicle
Bed space
Veranda, etc
Roof-shack
Temporary structure and derelict boat
Other land
Total
1961
Number
57,419
75,958
313,912
57,841
21,368
12,283
114,259
13,597
666,637
1971
%
8.6
11.4
47.1
8.7
3.2
1.9
17.1
2.0
100.0
Number
68,037
327,767
356,317
14,099
17,161
4,982
27,507
30,800
846,670
%
8.0
38.7
42.1
1.7
2.0
0.6
3.3
3.6
100.0
Source: Hong Kong Census (1961, 1971)
19 April 2010
nicole.wong@clsa.com
93
Mr & Mrs Asia
Property
In China, low “effective”
home ownership will
continue to drive demand
Demand set to
be unleashed in
Tier-2 cities . . .
. . . even as demand
in Tier-1 cities
remains strong
Tier-2 cities’ ownership
ratio is below 25%
The low home-ownership ratio, combined with poor living conditions, created
strong aspirations among the population for better housing, underpinning the
first wave of demand for housing in the late 1960s and early 1970s, as soon
as mortgages became more accessible. Looking at China today, we observe a
very similar pattern: a low “effective” home-ownership ratio (ie, ownership of
private homes after 1999, when personal mortgages became available) of 3050% for Tier-1 cities (8% of national population), and less than 25% for
second-tier cities (92% of national population), suggesting the need for first
homes or upgrades remains strong.
Figure 177
Figure 178
Beijing
Shanghai
36%
households
bought
since 1999
46%
households
bought
since 1999
Figure 179
Figure 180
Guangzhou
Tianjin
34%
households
bought
since 1999
23%
households
bought
since 1999
Figure 181
Figure 182
Hangzhou
Wuhan
46%
households
bought
since 1999
23%
households
bought
since 1999
Source: CEIC
Estimated house
ownership maybe high . . .
94
Our estimated home-ownership rate is 60.7% as of 2001. The government
estimated unmet housing demand at about 25m units at the start of the 11th
plan period in April 2007. While home ownership appears to be quite high,
what the figures do not reveal is the poor quality of a large part of the
housing stock and therefore, the aspirational need to upgrade. Only 33% of
urban houses had more than two rooms as of 2001. Moreover, 20% of urban
homes and 60% of rural homes in India are not permanent structures. Also,
as Indian families increasingly move away from joint families to nuclear
families, demand for housing will continue to keep increasing.
nicole.wong@clsa.com
19 April 2010
Mr & Mrs Asia
Property
. . . but unmet demand
is also very high
Figure 183
Figure 184
India: Quality of urban housing, 2007
India: Quality of urban housing, 2007
Temporary
4%
No exclusive
room
2%
More than
two rooms
33%
Semipermanent
16%
One room
35%
Permanent
80%
Two rooms
30%
Total 59m urban households
Source: India’s Planning Commission, CLSA Asia-Pacific Markets
In Indonesia, there is no available data on historical trends for home
ownership. However, the increasing income per capita has made housing
more affordable, especially with the rising middle-income segment. The
number of households has grown to 61.5m as of the end of 2008.
Figure 185
No available data on
home-ownership
trends in Indonesia
Indonesia: Growth of households
62
(m)
62
61
61
60
60
59
59
58
57
57
56
56
55
54
53
2003
2004
2005
2006
2007
2008
Source: Euromonitor
Can households increase leverage?
Underleveraged
households in Hong
Kong in the 1960s
While leverage data for Hong Kong from the 1970s is not available, it is
reasonable to assume that the same was quite low. Until the late-1960s,
mortgages were difficult to get and available for a maximum duration of just
three years. Even basic banking services were hard to access; until the late1960s one required a referee to open an account.
Increase in demand from
middle classes drove first
innovation in mortgages
Then in the late 1960s and early 1970s, seeing an increase in housing
demand from among the middle-income classes, Wayfoong Finance and Hang
Seng Bank, two major banks in Hong Kong, started offering mortgages of
seven years. Prior to these mortgages were typically just for three years.
Leverage in the Chinese
property market is
heading down, not up
China and India are now at a similar stage. In China, the loan/deposit ratio
stands at just 67.1%, while personal mortgages became available only in
1999. By 2008, China’s total outstanding mortgage loans as a ratio of the
total value of primary units sold (defined by the aggregation of values of
primary properties transacted between 1997-08 and so does not include the
increase in the market values of these properties) was 28%, down from 53%
of 2003. The low leverage clearly leaves room for households to gear up, and
for pentup demand to be unleashed.
19 April 2010
nicole.wong@clsa.com
95
Mr & Mrs Asia
Property
Figure 186
This suggests a cashrich property market
China: Outstanding mortgage loans/property value sold
60
(%)
50
40
30
20
10
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: CEIC, CLSA Asia-Pacific Markets
Indian mortgage market
started developing
in the 1990s . . .
The mortgage industry in India was nascent till the middle of the 1990s
when, led by housing finance companies like HDFC, a mortgage market was
created and longer duration mortgages (seven years plus) were made
available. Even now, the mortgage to GDP ratio is well below international
levels at just 7% of GDP. Loan/value (LTV) ratios have increased though the
maximum available LTV is 85% with the average value being less than 70%
(68% for HDFC). The government has also introduced interest subvention
schemes for “affordable housing” categories, ie, loan values of less than
Rs1m to boost demand.
Figure 187
. . . but mortgage
penetration remains one
of the lowest in India
Mortgages as a percentage of GDP
Denmark
93
UK
86
USA
80
Germany
48
HK
41
Taiwan
39
Singapore
32
Malaysia
29
Korea
26
Thailand
17
China
12
India
(%)
7
0
20
40
60
80
100
Source: European Mortgage Federation, Asian Development Bank, HDFC
Mortgages to
GDP is only 2.2%
96
In Indonesia, property-related credit has grown by a Cagr of 31% over the
past seven years. Mortgages were just becoming available in the early 2000s
since the end of the first Asian financial crisis. Nonetheless, mortgage-to-GDP
is only a mere 2.2%, showing how unleveraged the property market is. The
latest survey by Bank Indonesia also reveals that 71% of buyers use
mortgage financing.
nicole.wong@clsa.com
19 April 2010
Mr & Mrs Asia
Property
Some 71% of
homebuyers use
mortgage
Figure 188
Figure 189
Indonesia: Home-purchase method
Indonesia: Property-related credit
Hard cash
9%
30
(US$bn)
Instalments
20%
Construction & real estate
Mortgage
25
20
15
10
Mortgage
71%
5
0
2003
2004
2005
2006
2007
2008
2009
Source: Bank Indonesia
Income growth to propel property demand
Fast income
growth in China . . .
A third similarity we find is the rapid income growth today in China. This
boosts demand for housing by increasing appetite for leverage, since the
future burden of debt is expected to ease as incomes grow.
Figure 190
Hong Kong and China: Income growth
Hong Kong
(by household)
1958-1967
1971-1976
1976-1981
1981-1986
1986-1991
1991-1996
Cagr (%)
7.8
15.0
18.3
10.8
14.9
10.4
China (per cap
urban population)
1992-96¹
1996-01
2001-06
2006-08
Cagr (%)
32.3
8.2
12.0
15.7
¹ 1991 income data not available. Source: CLSA Asia-Pacific Markets
. . . and India
In India, while growth has not been as spectacular like in China or Hong
Kong, it has picked up to near 10% per annum now from 6% levels in 198100. In 2009, income growth has been moderate due to the global financial
crisis and the resultant slowdown, but in 2010 average income growth is
expected to be in double digits. Indonesia’s income growth (dollarised) has
grown by a Cagr of 14% in the past 10 years, making houses more affordable
to many more people.
Figure 191
Indonesia, meanwhile,
has seen accelerating
income growth
Indonesia: Per-capita income growth
2,500
(US$)
2,000
1,500
1,000
500
0
1995
1997
1999
2001
2003
2005
2007
2009
Source: IMF, BPS Indonesia
19 April 2010
nicole.wong@clsa.com
97
Mr & Mrs Asia
Property
Figure 192
India: Income growth per-capita PPP
Cagr (%)
1981-86
6.6
1986-91
6.8
1991-96
6.2
1996-01
5.4
2001-06
8.8
2006-08
9.4
Source: CLSA Asia-Pacific Markets
The truth about affordability
Are homes in China
unaffordable?
Absolute PE may seem
high, but a mostly flattish
trend is less worrying
Investors are sometimes bothered by the seemingly unaffordable or
unreasonable property prices in some emerging markets. For example, in
China, the home price to income ratio stands at some 12-16x average annual
income - considered to be very high.
Figure 193
Figure 194
Beijing home price-income ratio
Shanghai home price-income ratio
20
(x)
16
(x)
14
16
12
10
12
8
8
6
4
4
2
0
0
2001 2002 2003 2004 2005 2006 2007 2008
2001 2002 2003 2004 2005 2006 2007 2008
Figure 195
Figure 196
Shenzhen home price-income ratio
Guangzhou home price-income ratio
18
16
14
12
10
8
6
4
2
0
(x)
16
(x)
14
12
10
8
6
4
2
0
2001 2002 2003 2004 2005 2006 2007 2008
2001 2002 2003 2004 2005 2006 2007 2008
Source: CEIC, Sofun
Affordability is not a
big concern in India
98
The affordability measure in India looks less of a concern. In India
affordability of houses is measured by matching the buyer and the seller. The
market addressed by the listed developers is usually of a standard two
bedroom house in the city suburbs where the average cost of such a house is
Rs3.5-4.0m currently. The buyer here is an employee working for a services
firm (say tech industry) with an annual post tax household income of about
Rs0.7-0.75m. This puts the value of a house as 5x annual salary - affordable.
The affordability chart below tracks the monthly mortgage payment that an
average household (five-year IT-industry experience, married) has to make as
a percentage of their post tax monthly salary. The house purchased here is
assumed to be a standard 1,000sf two-bedroom apartment in an IT city/large
city suburb (Bangalore, Gurgaon, Chennai, etc).
nicole.wong@clsa.com
19 April 2010
Mr & Mrs Asia
Property
Figure 197
India: Monthly mortgage payments/post tax household income
(%)
49
50
43
37
40
26
25
FY04
30
FY03
31
35
35
20
10
FY09
FY08
FY07
FY06
FY05
FY02
0
FY99
Income growth in FY11:
10% + 6% from incometax slab readjustment
57
45
43
FY01
Mortgage rate in FY11:
9% versus 8.25% current
60
60
FY11CL
61
FY10CL
70
Property price
increase in FY11 - 7%
FY00
Key assumptions:
Source: CEIC, CLSA Asia-Pacific Markets
Affordability not a big
concern in Indonesia
For Indonesia, again the affordability metrics look to be not too intimidating.
Houses in the suburbs of Jakarta have just a 7.1x price-to-income ratio. This
is further helped by the fact that domestic consumption in Indonesia has high
growth potential. The number of middle-class households in Indonesia is
likely to increase by nearly 50% by 2012. The proportion of middle and
upper-middle-class households will increase from 29% now to 41% by 2012.
Note that a middle-class household is defined as having income of Rp2.253.25m per month. No wonder property developers are mostly targeting this
growing upper-middle-class segment. This, coupled with swift urbanisation,
has been a strong driver to growth. Also, Indonesia has a young population,
where 44% are below 24 years old.
The truth about
affordability
Hong Kong started out with average home prices at a whopping 19x annual
income in 1972, when the homeownership ratio was just 18%. The problem
here is in both the mismatch and the distortion of numbers - two factors that
investors would watch out for in analysing an immature and fast-growing
property market.
Figure 198
Hong Kong: Home price/median household income ratio
20
18
16
14
12
10
8
6
4
2
0
(x)
1972
1977
1979
Dec 81
Jun 82
Dec 82
Jun 83
Dec 83
Jun 84
Dec 84
Jun 85
Dec 85
Jun 86
Dec 86
Jun 87
Dec 87
Jun 88
Dec 88
Jun 89
Dec 89
Jun 90
Dec 90
Jun 91
Dec 91
Jun 92
Dec 92
Jun 93
Dec 93
Jun 94
Dec 94
Jun 95
Dec 95
Jun 96
Dec 96
Jun 97
Dec 97
Hong Kong had a high
home price/income
ratio in 1972-82
Source: CEIC data, CLSA Asia-Pacific Markets
Only a small portion
of the population is
effective participants
19 April 2010
First, in such markets, only a small proportion of the population are effective
participants. In the early-1970s, with a home ownership ratio at just 18%
(1972), only the top 20-25% earners in Hong Kong were eligible to become
nicole.wong@clsa.com
99
Mr & Mrs Asia
Property
homeowners. Extrapolating this across the broad population in the 1970s
would produce a picture of stretched prices and insufficient demand. However,
with hindsight, we see that property prices trended upwards in every year
except one (in 1974 following the October 1973 Oil Crisis) throughout the
1970s. The home price-to-income (ie, the ratio of the average home price to
average annual income) ratio only becomes relevant in the 1980s as the
home ownership ratio grew (to 30-40%), and close to half of the population
became homeowners. Investors pondering the Chinese housing affordability
issue should carefully consider this point.
Figure 199
Prices may have seemed
stretched, but they
continued to rise
Hong Kong: Property prices for class-B (medium size) units
9,000
(HK$/sf)
HK Island
Kowloon
New Territories
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1965
1969
1973
1977
1981
1985
1989
1993
1997
Source: CEIC data, CLSA Asia-Pacific Markets
Home price to income
will always look higher
in emerging markets
Another issue to consider is the potential understatement of middle-class
incomes, with this group providing the backbone of housing demand. The
middle class typically accounts for a small portion of the population so the
average income statistics in an emerging market are likely to reflect the bulk
of the lower-income bracket. This is also the case in present day China, and is
illustrated in 2007 statistics released by the Shanghai Labour Insurance
Bureau, which offer a more detailed analysis of incomes by profession. While
the official per-capita income for Shanghai was Rmb2,175 per month in 2007,
a secretary in Shanghai, for example, makes Rmb4,309, 98% above the
stated average per-capita income for Shanghai, while a Western-style chef
would earn 172% more, and a life insurance consultant 283% more.
Figure 200
Average income does
not tell the whole story
Shanghai: Income by profession, 2007
Job category
Quoted avg per-cap income (per govt statistics)
Junior accountant
Sales
Human resources assistant
Secretary
IT - project manager
Bank clearance staff
Mid level government officials
Monthly (Rmb)
2,175
3,172
3,210
3,390
4,309
7,343
5,572
5,119
Above avg (%)
46
48
56
98
238
156
135
Source: Shanghai Labour Insurance Bureau
Rising income drives
up home/PE ratio
100
In fact, the home price-to-income ratio tends to lead income growth during
periods of economic expansion. Except for 1981-86 (when Hong Kong was
troubled by the confidence crisis with prices collapsing between 1982 and 84)
home price growth has always outstripped income growth.
nicole.wong@clsa.com
19 April 2010
Mr & Mrs Asia
Property
Figure 201
Hong Kong: Income versus home-price growth
Cagr (%)
1971-76
1976-81
1981-86
1986-91
1991-96
Income
15.0
18.3
10.8
14.9
10.4
Average home price
16.0
22.5
(3.3)
29.3
14.1
Source: CEIC, CLSA Asia-Pacific Markets
Hong Kong is unique
In some ways, Hong Kong was probably a unique market. First, the
government’s high-land-price policy, which was strengthened further with the
50-hectare land supply cap following the 1984 Sino-British Joint Declaration,
restricted land supply and intensified the appeal of property as a wealth
store. Second, the US-dollar peg in place since 1983 meant the Hong Kong
government could not use interest rates as a macro tool to control
speculation (the negative real interest rates for much of the early-1990s was
a consequence of this lack of control). Third, as a small and open market,
Hong Kong is significantly influenced by inflows and outflows of liquidity.
Even without special
factors, home prices tend
to outstrip income growth
However, two factors are common to most other countries also - confidence in
income growth, and a growing fear of purchasing-power erosion. A typical
home buyer is generally more comfortable with making a purchase after
experiencing a number of years of high income growth, as they will
extrapolate their future income expectations based on previous growth rates.
At the same time, buyers also feel the pain of eroded purchasing power in the
housing market if they have not yet purchased, but house prices have grown
faster than their incomes (which usually will be the case as home prices are
driven by buyers in the upper-income bracket whose incomes tend to grow
faster than average). This tends to motivate purchases while still affordable.
Growth momentum is
more important for a
fast-expanding market
So, rather than trying to decide whether a certain home price-income multiple
is comfortable or excessive, a better way to assess demand in a fast-growing
market like Hong Kong in the 1970s or China today would be to look at
momentum in the economy and incomes, which drive growth of the most
relevant group, the high-middle-income class.
Figure 202
Expanding middle class is
a key variable to watch
Hong Kong: Growth in population and households
(%)
1976-81
1982-86
1987-91
1992-96
Number of households
4.6
3.5
1.7
3.1
Population
2.8
1.3
0.8
2.3
Source: CEIC, CLSA Asia-Pacific Markets
Stock picks
Ability to build,
makes CR Land our
top pick in China . . .
. . . and its ability to sell
19 April 2010
China Resources Land (CR Land) has just shown its capability to build, with a
50% YoY growth in residential completion in FY08 (including commercial
properties completed the growth would be 157%) versus 12% of China
Overseas Land & Investment (Coli)and 19% of Vanke. The company has also
shown its capability to sell, posting a 42% YoY growth in contracted sales in
the challenging FY08 versus Coli’s 22% and Vanke’s 9%. Strong performance
continued into 1H09, with CR Land posting a contracted sale YoY growth of
more than five times, versus Coli’s 46% and Vanke’s 27%.
nicole.wong@clsa.com
101
Property
Mr & Mrs Asia
Quality assets
We see CR Land’s landbank quality as matching peers Coli and Vanke, being
equally diversified geographically but with more exposure towards higher
growth second-tier cities. By region, CR Land is more geared towards the
higher growth region of western China. The landbank is also one of a proven
quality. Despite the scale, 72% of the landbank by GFA has been tested with
phase one already launched.
Not just rental
properties, but prime
retail rental properties
The scale of completion which is equivalent to Coli in 2004 or Vanke in
2001 is on a low base that promises a prolonged period of high growth
before scale slows CR Land. One competitive advantage CR Land has over
its larger peers is the rental portfolio it owns and with the help of its
parent’s land injections is able to avoid a long investment period which
locks up capital. It has a prime portfolio, with Shenzhen Mixc shopping
mall its crown jewel. Retail is the best kind of rental property in China in
our view given strong consumption growth, and accounts for 70% by GFA
of the completed rental portfolio.
KWG is our next pick
KWG’s two new project launches in Guangzhou and continued sales of four
past relaunches in Guangzhou, Beijing and Suzhou will continue to support
sales momentum. The witnessed brand recognition has translated into rising
selling prices, hence margin expansion.
The seventh success
The successful launch of Chengdu Cosmos, KWG’s seventh out of eight new
project launches outside Guangzhou, is proving its execution ability outside
its home turf. Meanwhile, the new launches of Summit and International
Creative Valley and five developments in Guangzhou, Beijing and Suzhou will
continue to drive sales momentum.
Accelerating momentum
Momentum accelerated in the past two months with contracted sales
increasing by another 36% or Rmb1.6bn, higher than the monthly average of
Rmb700m in July-August, Rmb600m in 2Q09 and Rmb400m in 1Q09, fuelled
by both volume and ASP growth. This translates into a total of Rmb6bn in the
first ten months, which is equivalent to three times the contracted sales in
FY08. Together with the Rmb1.2bn unbooked sales carried forward from
FY08, we estimate Rmb2.6bn of it is expected to be booked in 2009, we
estimate 55% of FY10CL development bookings are secured.
Margin expansion
Selling prices of non-Guangzhou projects have seen 20-76% increases since
initial launches, now fetching premium over the neighbouring projects. While
better market sentiments have helped, we believe this also signals increasing
recognition of the KWG brand, which will translate into margin expansion.
India top picks:
Unitech and HDIL
We rate India’s Unitech as a key long-term pick in the property sector. The
company is probably the most diversified real estate player in the country. At
312m sf, it enjoys a landbank that can last it a decade. The company is
predominantly residential, with two-thirds of the NAV accruing from
residential development. While 2008 was a tough year for Unitech, the
company has now deleveraged from a gearing of 2.1x to 0.5x in 12 months.
Execution has improved with workers count up 6x over the past 12 months.
Our FY11CL NAV of Rs126 per share leaves plenty of room for the stock to
play catchup.
Housing Development & Infrastructure (HDIL) is a Mumbai centric player with
95% of its NAV coming from the city. Mumbai is the most attractive property
market in India with a land constrained, island like geography, raising barriers
102
nicole.wong@clsa.com
19 April 2010
Mr & Mrs Asia
Property
to entry. Land is expensive, but HDIL’s edge as the largest slum redeveloper
makes it source land cheaply for its projects. The company is probably the
best in execution and has demonstrated a strong appetite for large projects
by successfully undertaking rehabilitation of 80,000 slum dwellers at
Mumbai’s airport in the heart of the city. Additionally, the company has a
125m sf landbank in Mumbai’s outskirts, whose monetisation has just begun.
Our NAV of Rs511/share leaves enough room for upside.
Indonesia: Summarecon,
Bakrieland and
Bumi Serpong
Our top picks in the Indonesian property sector are Summarecon, Bakrieland
and Bumi Serpong. All are trading at 39-60% discounts to their NAVs.
Figure 203
Valuations
Company
Code
Price
(local ccy)
Target
(local ccy)
Mkt cap
(US$m)
Rec
PE (x)
PB (x)
10CL
11CL
10CL
11CL
Current NAV Price disc to
(local ccy)
NAV (%)
China
CR Land
1109 HK
16.32
24.5
10,419
BUY
17.4
13.6
2.1
2.0
24.0
(32.0)
KWG
1813 HK
5.79
8.6
2,155
BUY
11.4
7.9
1.5
1.3
10.8
(46.3)
NWC Land
917 HK
2.88
3.6
2,085
BUY
7.8
8.1
0.6
0.5
6
(52.0)
Yanlord Land
YLLG SP
1.95
2.3
2,712
BUY
10.3
8.0
1.2
1.0
3.1
(37.1)
China Vanke
200002 CH
8.88
10.1
14,580
BUY
12.4
11.2
2.1
1.6
na
na
Beijing Capital
2868 HK
2.91
3.1
780
O-PF
8.3
7.1
1.1
1.0
5.43
(46.4)
Shimao Property
813 HK
13.98
15.7
6,356
O-PF
10.0
8.1
1.8
1.4
17.4
(19.7)
Coli
688 HK
16.66
17.5
17,432
U-PF
16.3
13.6
2.5
2.3
15.9
4.8
Agile Property
3383 HK
9.98
11.7
4,572
U-PF
11.4
10.6
1.3
1.5
13
(23.2)
Guangzhou R&F
2777 HK
13.52
12.0
5,406
U-PF
11.1
8.9
2.0
1.9
20
(32.4)
Shanghai Forte
2337 HK
2.38
2.2
772
U-PF
8.6
7.5
0.8
0.7
4.4
(45.9)
Rest of Asia
Unitech
UT IB
Sobha
SOBHA IB
78.10
101.0
4,160
BUY
26.6
19.7
1.8
1.6
126
(38.0)
307.10
309.0
675
BUY
25.5
20.2
1.7
1.6
386
Filinvest
(20.4)
FLI PM
1.04
1.4
556
BUY
10.8
9.3
0.6
0.6
2.9
(64.1)
Vista Land
VLL PM
2.02
3.5
384
BUY
6.3
5.0
0.5
0.4
7.2
(71.7)
Summarecon
SMRA IJ
860
1,000.0
629
BUY
27.4
21.5
3.0
2.7
1,335
(35.6)
Bakrieland
ELTY IJ
250
410.0
553
BUY
32.5
28.3
0.9
0.9
570
(56.1)
Bumi Serpong
BSDE IJ
690
1,000.0
874
BUY
23.9
20.1
3.1
2.7
1,495
(53.8)
HDIL
HDIL IB
305.05
408.0
2,348
O-PF
15.4
13.1
1.5
1.4
511
(40.3)
HDC
012630 KS
31,300
45,000.0
2,162
O-PF
10.2
4.6
0.9
0.8
45,000
(30.4)
DLF
DLFU IB
333.75
340.0
12,718
U-PF
29.2
23.2
2.3
2.2
340
(1.8)
Source: CLSA Asia-Pacific Markets
19 April 2010
nicole.wong@clsa.com
103
Mr & Mrs Asia
Technology
Bhavtosh Vajpayee, CFA
bhavtosh.vajpayee@clsa.com
(852) 26008388
Vaibhav Dhasmana
(852) 26008270
Top picks
Acer
Market cap
Price
2353 TT
US$7,771m
NT$91.2
Canon
Market cap
Price
7751 JP
US$61,146m
¥4,275
Lenovo
Market cap
Price
992 HK
US$6,956m
HK$5.67
MediaTek
Market cap
Price
2454 TT
US$19,004m
NT$550.0
Samsung Elec
Market cap
Price
005930 KS
US$126,760m
830,000 won
Technology - Decade of the consumer
The rise of technology demand from the consumer in Asia is a well known
trend. We shall focus on what is driving this and how long it can last.
Successive milestones in affordability and penetration - reached first by the
urban Chinese consumer, and now by the rural Chinese resident, will be further
boosted as India approaches a meaningful scale in tech demand by the middle
of this decade. The years between 2010 and 2020 should therefore further
boost the share of consumer demand in overall tech, a secular trend that will
overlay with cycles in business spending. We see this theme in three parts:
‰ Rising affordability has two drivers. Multiple years of pricing drops in
tech products has combined with increased income levels to drive large
jumps in affordability ratios (income/average selling price). These ratios
suggest there are many more years of growth to come. For example, rural
China is reaching affordability levels seen in urban China in 2004-05, and
if history is a guide, rural China is set to become a new demand driver for
tech, even as urban China enters a major replacement cycle (eg, higher
spec handsets, gradual 3G adoption and CRT-to-LCD conversion).
‰ Penetration of key tech products is rising in China and India, but will
remain low relative to global comparisons even by 2014. India, which
appears 10-12 years behind China in most penetration measures, could
actually drive the next leg of growth. In effect, if 2010-15 promise to be
years of China’s consumption boom, India could follow over 2015-20.
‰ The above trends confluence to one result. Consumer demand will gain
share over enterprise spending through the next decade. While
enterprise spend is still the dominant part of tech, and we expect a
cyclical revival here over 2010-11 (as argued in our March 2010 Phoenix
rising report), there is no doubt that companies geared towards the
consumer will make better long-term investments, especially when “long
term” implies three years or more.
Rising affordability as incomes grow and ASPs fall
ASPs have fallen sharply through this decade, especially since 2004, when
annual declines have been as much as 12% for notebook PCs and handsets,
and over 20% for LCD TVs. When combined with rising incomes, this makes
an interesting case for affordability increases for the Asian consumer.
Figure 204
Average selling prices
600
(US$)
2004
(US$)
2009
2,500
-23% Cagr
500
-8% Cagr
2,000
-12% Cagr
400
300
Technology products
have become cheaper
200
1,500
-13% Cagr
1,000
-15% Cagr
500
100
0
0
Feature
phone
Game console
iPod
LCD TV
(RHS)
Notebook PC
(RHS)
Source: Gartner, DisplaySearch, CLSA Asia-Pacific Markets
104
bhavtosh.vajpayee@clsa.com
19 April 2010
Mr & Mrs Asia
Technology
Overlaying growth trends
Aside from rising affordability, we also expect overlaying trends of growth as
more and more Asian consumers become buyers of tech devices. For
example, rural China is approaching affordability levels now that can be
compared to urban China in 2005. This implies a tipping point is at hand
where rural China demand can boom, even as urban China is in the thick of a
replacement cycle - especially in televisions and handsets. These trends, in
our view, will make China the single largest market for tech products by
2013, when China should account for 28% of the world’s LCD TV and
smartphone annual shipments, and at least 21% of PCs shipped. By 2012,
rural China would reach the current levels of affordability as urban China especially for PCs and LCD TVs. This implies that the current penetration cycle
in rural China should convert to a replacement cycle by 2013-14, driving the
next leg of demand.
Figure 205
Rural China is
approaching urban China
affordability of 2005
Per-capita income to average selling price
Affordability ratio (x)
Urban China 2005
Rural China 2009
2.0
8.9
0.8
5.8
1.9
9.4
2.2
6.4
PC total
Handset
LCD TV
CRT TV
Source: CLSA Asia-Pacific Markets
Increasing affordability
in rural China will drive
tech-product penetration
Figure 206
Figure 207
Affordability in rural China
Penetration of tech products
16
(%)
2005
09CL
60
12CL
14
09CL
12CL
40
10
8
30
6
20
4
10
2
0
0
PC total
Handset
LCD TV
CRT TV
Figure 208
(%)
Mobile phone
PC
LCD TV
Figure 209
High affordability in urban China . . .
40
2007
50
12
High affordability in urban
China speeds up productreplacement cycle
(%)
2005
09CL
. . .is catalysing a replacement cycle
100
12CL
35
2007
(%)
09CL
12CL
80
30
25
60
20
40
15
10
20
5
0
0
PC total
Handset
LCD TV
Mobile phone
CRT TV
PC
LCD TV
Source: Gartner, DisplaySearch, CLSA Asia-Pacific Markets
Figure 210
We expect China to
be the world’s No.1
tech market by 2013
China consumption - Cagr and as a share of global demand
(%)
Handset
LCD TV
PC
Smartphone
Consumption Cagr, 2008-13
China
7
32
20
41
Global
5
10
10
36
China as % of global demand
2008
19
13
14
15
13CL
23
28
21
28
Source: World Bank, IMP World Economic Outlook Database, CLSA Asia-Pacific Markets
19 April 2010
bhavtosh.vajpayee@clsa.com
105
Mr & Mrs Asia
Technology
India’s is likely to catch
up with China by the
middle of this decade
India’s booster kicks in by 2015
On current metrics, India’s affordability ratios for technology devices look
abysmal compared to China. This is well known, but India’s likely catch up with
China by the middle of this decade is the more interesting prospect. By 2014,
India will approach affordability levels seen in China in 2007-08. In effect, just
as the China demand approaches maturity levels, India should kick in.
Figure 211
India trails China
on affordability . . .
Affordability ratios, 2009
50
China
(x)
India
45
40
35
30
25
20
15
10
5
0
Feature
phone
Game
console
iPod
LCD TV
Notebook PC
Desktop PC
Figure 212
. . . India 2014
= China 2008
Notebook-PC affordability
16
China notebook afforability
14
India notebook affordability
12
10
8
6
4
2
0
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: CLSA Asia-Pacific Markets
Expect Asia ASPs to move
to a discount to the USA
106
This cycle of penetration and replacement has implications for relative ASPs
as well. Between 2004 and 2008, Asia ASPs for handsets have been on an
average higher than the USA, catering as they did to the urban, uppermiddle class consumer. The affluence of “early adopters” in the consumption
cycle has provided a useful ASP benefit to device manufacturers, but this
will need to change. As the consumption trend becomes more broad-based,
with rural consumers also joining in, and the market matures, we expect
Asia ASPs to move to a discount to the USA. Figure 215 shows how this
could play out for handsets.
bhavtosh.vajpayee@clsa.com
19 April 2010
Mr & Mrs Asia
Technology
Figure 213
Year 2014 should be a
tipping point for India
on handsets too
Handset affordability
90
China handset afforability
80
India handset affordability
70
60
50
40
30
20
10
0
1998
2000
2002
2004
2006
2008
2010
2012
2014
Figure 214
Consumption a 10-year cycle
Overlaying drivers of technology consumption
Urban India penetration
Rural China replacement
Rural China penetration
Urban China replacement
2010
2015
2020
Source: CLSA Asia-Pacific Markets
Figure 215
Shifting
Price differentials between Asia and the USA
ASPs - Asia vs USA (%)
2004 2005 2006 2007 2008 2009 2010 2011 2012
2013
Basic phones
(6)
(20)
(15)
(3)
(3)
(15)
(14)
(17)
(20)
Enhanced phones
52
40
38
48
41
31
22
13
6
(1)
Smart phones - Entry-level
18
14
11
17
10
7
1
(6)
(12)
(17)
Smart phones - Feature
Total
(23)
2
5
17
18
9
3
(1)
(4)
(9)
(13)
14
11
17
21
14
7
3
(3)
(8)
(12)
Source: Gartner
By mid-decade, China will still lag in penetration
China and India
will continue to trail
their BRIC peers
19 April 2010
Despite rapid growth, both China and India will continue to trail their BRIC
peers, Brazil and Russia, on penetration indices till the middle of the decade.
This boosts our case that the consumption trend emerging in Asia is likely to
last well beyond a few years, and we consider the entire decade ahead as a
likely prospect for growth and penetration gains.
bhavtosh.vajpayee@clsa.com
107
Mr & Mrs Asia
Technology
Figure 216
Year 2014 is not the
end of growth for PC
demand in China or India
PCs per 1,000 population
(units)
Australia
Brazil
China
Hong Kong
India
Japan
Korea
Middle East/Africa
Russia
Taiwan
USA
World average
2005
650
117
67
389
18
521
367
15
122
473
582
123
2010
907
253
151
587
38
633
470
30
253
539
850
196
2014
1,095
411
258
855
62
705
510
52
309
559
1,177
274
2005
655
191
97
537
29
619
635
15
76
827
679
210
2010
1,047
448
218
895
65
735
715
39
211
905
1,081
361
2014
1,410
765
367
1,495
116
817
674
94
283
887
1,652
550
2005
54
81
45
21
112
6
65
78
72
71
75
29
2010
123
88
98
42
149
34
87
95
112
79
95
57
2013
129
89
121
56
161
46
92
100
117
83
103
66
Figure 217
Home PC penetration
could be a decadelong growth story
Home PCs per 1,000 households
(units)
Australia
Brazil
China
Hong Kong
India
Japan
Korea
Middle East/Africa
Russia
Taiwan
USA
World average
Source: Gartner
Figure 218
Handset penetration
and replacement are
both multiyear trends
Handset penetration
(%)
Argentina
Australia
Brazil
China
Hong Kong
India
Japan
Korea
Russia
Taiwan
USA
World
Source: CLSA Asia-Pacific Markets
Shifting priorities for technology investing
Asia-Pacific ex-Japan is
already 28% of global
consumer tech spend
108
Global IT spend’s centre of gravity will shift as the Asian consumer rises.
While business spending is still the dominant part of global IT spend, its share
has receded each year this decade. Driven by consumption, Asia-Pacific exJapan is already 28% of global consumer tech spend, by value, larger than
North America and Western Europe.
bhavtosh.vajpayee@clsa.com
19 April 2010
Mr & Mrs Asia
Technology
Asia Pacific already
makes up 28% of global
consumer tech demand
Figure 219
Figure 220
Enterprise IT spending, 2009
Consumer IT spending, 2009
Mid East/Africa
4%
Mid East/Africa
14%
Japan
12%
Asia Pac
10%
Japan
4%
N America
37%
LatAm
5%
West Europe
16%
Asia Pac
28%
West
Europe
29%
East Europe
3%
N America
17%
East Europe
9%
LatAm
12%
Source: CLSA Asia-Pacific Markets
This consumption wave has meant significant market share losses for the
West, with Asia-Pacific having been the biggest gainer over 1999-09. The
next decade should further accelerate this process.
Figure 221
Enterprises still large in
PCs, but receding rapidly
Enterprise share of notebook shipments is falling; consumer share has risen
80
(%)
75
70
65
Enterprise share falling;
consumer share has risen
60
55
Desktops (enterprise share)
50
Notebooks (enterprise share)
45
Enterprise share overall
40
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: CLSA Asia-Pacific Markets, Gartner
Figure 222
Enterprise share of
handsets declines as AsiaPacific consumption rises
Business share of handsets
2009
17.4
2008
18.0
2007
18.6
2006
20.1
2005
21.4
2004
22.8
2003
24.1
2002
25.1
2001
26.1
2000
27.1
1999
28.1
1998
29.1
10
12
14
16
18
20
22
24
26
28
30
(%)
32
Source: Strategy Analytics
19 April 2010
bhavtosh.vajpayee@clsa.com
109
Mr & Mrs Asia
Technology
Figure 223
Asia Pacific is
gaining share, driven
by consumer spend
IT-spending share, 1999-09
(ppts)
Total
Hardware
Software
Services
Telecoms
North America
(2.0)
(5.7)
(2.3)
(0.5)
(2.0)
0.8
0.8
0.3
0.8
1.1
(4.1)
(2.1)
(3.8)
(2.0)
(5.6)
Eastern Europe
Western Europe
Asia Pacific
2.3
4.7
2.5
0.3
3.1
(0.4)
(1.4)
2.7
0.8
(1.1)
Middle East and Africa
2.1
0.5
0.3
0.7
3.0
Latin America
1.3
3.2
0.3
(0.1)
1.4
Japan
Source: Gartner, CLSA Asia-Pacific Markets
Business spend is a cycle; consumer spend is secular
We expect business capex on technology to stage a revival from 2H2010, as
argued in our recent Phoenix Rising report. Even as this becomes the primary
catalyst for technology stocks in 2010-11, it is worth noting that business
capex is a cycle. Years of underinvestment should drive a renewed hardware
refresh within enterprises. Yet, business spending on technology is not a
secular theme - its expected two year up-cycle pales before the consumption
story, which may last up to 10 years, as discussed above.
Investors should
overweight consumer
spending plays
This implies that investors should overweight consumer spending plays for
longer term investing horizons. Over a 12-18 month period, the business
capex upturn may crowd out consumption plays in tech, but there is no doubt
that consumption plays should outperform when the time horizon extends
beyond three years. A sample of Asian tech stocks with meaningful revenue
exposure to consumer demand is presented in Figure 224.
Figure 224
Prefer OEMs and
market-share dominators
Consumer spending revenue exposure for select stocks
Lenovo
Fujitsu
Canon
Catcher
Alpha Networks
Hon Hai
Acer
Realtek
These include Acer,
Samsung, Lenovo,
MediaTek, Canon
Asustek
D-Link
Compal
Quanta
Wistron
Kyocera
Foxconn Tech
(%)
Richtek
20
30
40
50
60
70
80
90
Source: CLSA Asia-Pacific Markets
110
bhavtosh.vajpayee@clsa.com
19 April 2010
Mr & Mrs Asia
Technology
Stock picks
Acer
Acer has gained 14ppts of market share in notebooks over 2004-09, and
remains the most competitive ASP player in the space. About 70% of Acer’s
revenues are exposed to consumer spend.
Figure 225
Attractive pricing drove
impressive market-share
gains over 2004-09
Acer’s market-share gains in notebooks, 2004-09
16
(ppts)
14
14
12
10
9
8
6
6
5
4
2
0
(2)
(1)
(4)
(6)
(5)
Dell
HP
Acer
Fujitsu
Toshiba
Asus
Source: Company, CLSA Asia-Pacific Markets
Lenovo
Lenovo is mostly known for enterprise PCs and notebooks. However, about
30% of its revenues come from consumer demand and this is rising, thanks
to the growth of China PC consumption. Lenovo takes a 25% share in China’s
PC shipments, a share that has mostly stayed steady despite rising
competition. (HP is No.2 at 15%, Dell is next at 7%).
Figure 226
Has remained in a
narrow band for years
Lenovo’s China market share
32
(%)
30
28
26
24
22
20
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
Source: CLSA Asia-Pacific Markets
Canon
19 April 2010
Canon is the pre-eminent global camera brand. It also operates in the
imaging (copiers, printers) business, which has a consumer component.
About half of Canon’s revenues are thus exposed to consumer demand.
bhavtosh.vajpayee@clsa.com
111
Mr & Mrs Asia
Technology
Figure 227
Camera demand has
boomed in China in 2009,
and is starting a multiyear
penetration cycle
Global DSLR camera sales and regional market shares
Others
2%
Japan
11%
Asia
ex-Japan
35%
Europe
32%
USA
20%
Note: DSLR = Digital single-lens reflex. Source: CLSA Asia-Pacific Markets
Samsung Electronics
Samsung Electronics has been a steady share gainer in both handsets and
LCD TVs. Between 2004-09, Samsung has nearly doubled its handset market
share and raised its LCD TV share by 8ppts. We expect Samsung’s
combination of innovation, broad product portfolio and mid-range ASPs to
continue to drive share gains.
Figure 228
Close to doubling
since 2004
Samsung's handset market share
(%)
2004
2005
2006
2007
2008
Nokia
31
32
35
39
40
38
Samsung
11
13
11
14
17
20
6
7
6
7
9
10
LG
Sony Ericsson
2009
6
6
7
9
8
5
14
18
22
14
9
5
RIM
0
0
0
1
2
3
HTC
0
0
0
1
1
1
Apple
0
0
0
0
1
2
33
24
18
14
14
16
Motorola
Others
Source: CLSA Asia-Pacific Markets
Figure 229
Also a gainer from
shifting LCD TV shares
Change in LCD-TV market share, 2004-09
Vizio
15
Toshiba
5
Sony
5
Sharp
(20)
Samsung
8
Philips
(14)
LGE
2
Funai
(25)
(ppts)
9
(20)
(15)
(10)
(5)
0
5
10
15
20
Source: Companies, CLSA Asia-Pacific Markets
112
bhavtosh.vajpayee@clsa.com
19 April 2010
Mr & Mrs Asia
Technology
MediaTek is geared to China consumption with its handset semicon product
range that has revolutionised the handset market. MediaTek powered
handsets are also grabbing share in other emerging markets, such as India,
even as its launch of 3G solutions promises to drive further profitable growth.
Deals with Microsoft and Qualcomm bode well for its smartphone solution.
MediaTek
Figure 230
MediaTek's market share in its product segments
MediaTek to benefit from
handset penetration and
commoditisation in Asia
(%)
2004
2005
2006
2007
2008
09CL
10CL
11CL
In Chinese handsets
4
28
51
66
69
75
76
69
In China
3
20
28
39
42
50
48
43
In emerging markets (ex-CN)
0
1
3
8
13
23
33
36
In global handset shipment
0
3
6
12
17
26
31
31
Source: Company, CLSA Asia-Pacific Markets
Figure 231
China handset market
On the rise
2004
2005
2006
2007
2008
09CL
10CL
11CL
China market size
81
112
170
241
293
360
433
482
YoY (%)
27
38
52
42
21
23
21
11
Branded handsets in China
68
90
131
160
180
228
276
318
YoY (%)
16
32
45
22
13
26
21
15
Whitebox handsets in China
13
22
38
81
113
132
158
164
148
71
78
113
38
17
20
4
16
19
23
34
38
37
36
34
YoY (%)
As % of total China market
Source: Gartner, Strategy Analytics, CLSA Asia-Pacific Markets
Figure 232
Valuations
Company
Code
Price
(local ccy)
Performance (%)
PE (x)
PB (x)
ROE (%)
EV/Op Ebitda (x)
FCF yield (%)
1M
3M
1Y
10CL
11CL
10CL
11CL
10CL
11CL
10CL
11CL
10CL
11CL
Acer
2353 TT
91.2
(6.0)
(6.9)
54.3
14.6
11.9
2.4
2.1
16.8
18.7
8.8
7.4
0.5
4.7
Canon
7751 JP
4,275
5.7
8.2
34.4
27.5
19.6
2.1
2.0
7.6
10.3
7.3
6.0
2.7
4.6
Lenovo
992 HK
5.67
4.4
2.0 189.3
16.9
0.0
4.0
0.0
25.0
0.0
7.3
-
1.7
-
MediaTek
2454 TT
550
2.2
(1.4)
78.3
13.5
11.4
5.1
4.5
40.3
42.0
10.9
9.0
7.2
8.6
830,000
6.7
2.6
37.6
7.5
8.2
1.5
1.3
22.2
17.3
3.5
3.4
6.2
7.3
Samsung Elec 005930 KS
Source: CLSA Asia-Pacific Markets
19 April 2010
bhavtosh.vajpayee@clsa.com
113
Telecoms
Elinor Leung, CFA
elinor.leung@clsa.com
(852) 26008632
Timothy Chan, CFA
(852) 26008631
Top picks
Bharti Airtel
Market cap
Price
China Mobile
Market cap
Price
BHARTI IS
US$26,498m
Rs308.20
941 HK
US$202,950m
HK$78.60
Mr & Mrs Asia
Telecoms - Getting crowded
China, India and Indonesia are the remaining mobile markets with growth in
Asia. But the sector has already enjoyed the demographic dividend as
telephony penetration has dramatically deepened in the past decade, helped
by declining costs and an increasing number of operators. Competition is
further intensifying in India and China given the launch of new networks,
but incumbent operators China Mobile and Bharti are still likely to emerge
as the winners longer term. China Mobile has an aggressive data strategy
and will be the first to migrate to 4G. Bharti is best positioned for 3G given
its strong balance sheet and leadership in 2G. 3G licensing in India is likely
to lead to consolidation. In Indonesia, Telkom is likely to perform the best at
least in the short term given easing competition and smaller operators
facing capex constraints.
It’s all about China, India and Indonesia
India, China and Indonesia are the remaining countries with mobile growth in
Asia. However, even these countries are entering middle age with mobile
penetration of 43% for India, 56% for China and 70% for Indonesia. Future
growth will likely be driven by rural expansion. India and China may continue
to add 9-10m new subs per month until maturity, implying an 11% subs Cagr
for China and a 17% Cagr for India. Indonesia is expected to add ~1.2m new
subs per month with total subs growing at a 13% Cagr for the next five
years. Mobile penetration may reach 127% for Indonesia, 100% for China
and 65% for India by 2014.
When a country reaches
40% mobile penetration,
it exits hypergrowth stage
A few years ago, we created an Asian mobile-growth curve by comparing
mobile penetration against incremental mobile penetration across Asian
countries. The curve has successfully predicted different growth phases of
the mobile market. Historically when a country reaches ~40% mobile
penetration, it exits the hypergrowth phase and mobile penetration will then
increase at a steady 6-8% per year until maturity.
Growth is stabilising
in China, as it is in India
This is fitting well with what is happening in China. China’s mobile market
reached 56% penetration by the end of 2009 and has entered a steady
growth phase. While there is still plenty of growth before the market becomes
mature, the force of secular growth will not be as strong because operators
have to reach deeper into the rural market for growth, while facing stronger
competition on 3G. China is no longer adding record new subscribers every
month as in the last five years. Growth is stabilising with ~9m new
subscribers per month.
Rural markets will drive
growth in India . . .
With a 43% mobile penetration, India is also stepping down to a more stable
growth phase. This is particularly relevant in India as urban markets that led
the mobile boom, has reached 75% penetration and there are four phones
out of five members per household, which is high even adjusting for dual SIM
cards. While rural markets in India are vast with 70% of the 1.1bn
population, the rural penetration is already 1.2-1.5 mobile phones per
household. Affordability may be a concern on rural growth in India, but
pricing is commoditised. India operators are sharing towers and outsourcing
operations to lower cost.
. . . and in Indonesia
Indonesia’s mobile penetration is higher at about 70% by the end of 2009
(unique user penetration of about 50%). Growth has also entered a steady
growth phase. Major growth is likely to come from rural areas outside Java.
114
elinor.leung@clsa.com
19 April 2010
Mr & Mrs Asia
Telecoms
Figure 233
Asian mobile growth
peaks at 40% penetration
Annual change in mobile penetration
Annual change in mobile penetration (%)
18
16
14
Stable growth phase
India at 43%
12
China at 56%
Hypergrowth phase
10
8
6
4
2
0
(2)
0
40
60
80
Figure 235
Mobile penetration
Mobile subscribers
China
800
60
India
700
50
Indonesia
600
(%)
China
(m)
India
Indonesia
500
400
30
300
20
200
10
100
0
0
2004
2005
2006
2007
2008
2009
2004
2005
2006
2007
2008
Figure 236
Figure 237
China’s mobile subs net adds
India’s mobile subs net adds
12
20
(m)
10
2009
(m)
15
8
6
10
4
5
2
Sep 09
Mar 09
Mar 08
Mar 07
Sep 07
Mar 06
Sep 06
Mar 05
Sep 05
Mar 04
Mar 09
Sep 09
Mar 08
Sep 08
Mar 07
Sep 07
Mar 06
Sep 06
Mar 05
Sep 05
Mar 04
0
Sep 04
0
Sep 08
70
40
Competition will
intensify with 3G rollout
100
120
Mobile penetration (%)
Figure 234
Sep 04
Robust growth in
mobile penetration in
the past few years
20
Source: CLSA Asia-Pacific Markets
China - China Mobile is a long-term winner
China and India still
have the best
long-term growth
This will be a difficult year for China and India’s telecoms sector given intense
competition. However, China and India will still outperform for the long term
given relatively low mobile penetration. China Mobile and Bharti will likely
emerge as stronger operators when competition stabilises.
China: 3G price war
has just started . . .
In China, China Telecom and Unicom launched their new CDMA and WCDMA
service respectively in 2009. Given the empty network and limited window of
opportunity, China Telecom relaunched their CDMA service with a big bang
19 April 2010
elinor.leung@clsa.com
115
Mr & Mrs Asia
Telecoms
marketing campaign and aggressive handset subsidies. Unicom has a small
balance sheet and is cautious about large scale handset subsidies, but has
been competitive on pricing. Their single tariff 3G packages have eliminated
all domestic long distance and roaming fees. China Mobile’s new subs market
share fell to 48% in December 2009, compared to 92% a year before.
. . . and will weigh on
near-term profitability
China’s 3G war has just started and a price war will be negative for
everyone. Both China Mobile and Unicom will be more aggressive in ramping
up their 3G user base in 2010 with better coverage and handset supply. The
market share shift has eased MIIT’s concern over China Mobile’s dominance.
China Mobile may start retaliating once its new subs market share falls
below 50%. The worsening competition and 3G start-up costs will weigh on
profitability this year.
China Mobile’s data
strategy is impressive
However, China Mobile remains a preferred play for the long term. China
Mobile will likely remain the dominant mobile operator in China with over
65% market share despite new competition. The company will be the first to
launch 4G as all their TD base stations are 4G ready and can be migrated to
4G through software upgrades. They will launch a 4G trial network in
Shanghai Expo this year. Their data strategy is also impressive. The company
launched “Mobile Market” last year which is an open platform for people to
write data applications, similar to “Apple store”. China Mobile plans to offer a
wide range of data services from music downloads to eMoney and eReader. It
may take some time to fully rollout the data services and educate users.
However, the increasing popularity of smartphone may accelerate the
adoption of the data services. This should help generate new revenue and
boost Arpu for the company.
Figure 238
China’s mobile subscriber net add and net add market share
Feb 09 Mar 09
Apr 09 May 09
Jun 09
Jul 09 Aug 09 Sep 09
Oct 09 Nov 09 Dec 09
Jan 10
Feb 10
Net adds (m)
China Mobile (GSM/TD)
6.75
6.49
5.83
5.12
5.02
4.55
5.26
5.43
5.10
4.58
4.24
5.12
5.52
Unicom (GSM/WCDMA)
1.64
1.85
1.14
0.68
0.21
0.68
0.81
0.94
1.32¹
1.41
1.56
1.66
1.21
China Telecom (CDMA)
1.70
2.21
1.87
2.20
2.37
2.45
2.08
2.97
3.14
3.07
3.10
3.05
3.01
Total net adds
10.1
10.6
8.84
8.00
8.25
7.68
8.15
9.34
9.56
9.06
8.90
9.83
9.73
China Mobile (GSM/TD)
66.9
61.5
65.9
64.0
60.8
59.2
64.6
58.2
53.3
50.6
47.6
52.1
56.7
Unicom (GSM/WCDMA)
16.3
17.5
12.9
8.5
10.4
8.9
9.9
10.0
13.8
15.5
17.5
16.9
12.4
China Telecom (CDMA)
16.8
21.0
21.2
27.5
28.7
31.9
25.5
31.8
32.8
33.9
34.8
31.0
30.9
Total
100
100
100
100
100
100
100
100
100
100
100
100
100
Market share (%)
¹ Excluding 0.5m 3G trial customers that the company added between May and September. Source: Companies, CLSA Asia-Pacific Markets
Figure 239
China’s mobile subscriber and market share
Feb 09 Mar 09
Apr 09 May 09
Jun 09
Jul 09 Aug 09 Sep 09
Oct 09 Nov 09 Dec 09
Jan 10
Feb 10
Subscribers (m)
China Mobile (GSM/TD)
471
477
483
488
493
498
503
508
513
518
522
527
533
Unicom (GSM/WCDMA)
136
138
139
140
140
141
142
143
145
146
148
149
150
China Telecom (CDMA)
31
33
35
37
39
42
44
47
50
53
56
59
62
637
648
657
665
673
681
689
698
708
717
726
736
746
China Mobile (GSM/TD)
73.9
73.7
73.6
73.5
73.3
73.1
73.0
72.8
72.5
72.2
71.9
71.7
71.5
Unicom (GSM/WCDMA)
21.3
21.3
21.1
21.0
20.9
20.7
20.6
20.5
20.4
20.4
20.3
20.3
20.2
China Telecom (CDMA)
4.8
5.1
5.3
5.6
5.8
6.2
6.4
6.7
7.1
7.4
7.7
8.0
8.3
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Total subs
Market share (%)
Total
Source: Companies, CLSA Asia-Pacific Markets
116
elinor.leung@clsa.com
19 April 2010
Mr & Mrs Asia
Telecoms
Strong balance
sheet puts China Mobile
ahead of the pack
China Mobile recently announced that it is in talks with Shanghai Pudong Bank
and it could acquire a 20% stake of the bank for Rmb40bn. The acquisition
may put pressure on the near term share price as investors would prefer to
pay out the cash as dividends. However, we believe this is a positive strategic
move and will help accelerate the development of its mobile payment/banking
in China. China Mobile has been working on mobile payment for several years,
but has made little progress. Banks, in general, are unwilling to partner with
telcos to provide payment or banking services as the mobile service may
compete head-on with their existing business. It is difficult for its peers to
compete on the same ground given their weaker balance sheets. Once on 4G,
China Mobile will be back on an equal playing field.
Figure 240
China Mobile
leads by a margin
China’s mobile revenue
(Rmbbn)
2004
2005
2006
2007
2008
9M09
204
243
295
357
412
327
China Unicom (GSM)
48
52
59
63
65
52
China Unicom (CDMA)
24
28
27
28
22
0
0
0
0
0
5
21
276
323
382
447
505
400
China Mobile (GSM)
74
75
77
80
82
82
China Unicom (GSM)
17
16
16
14
13
13
China Unicom (CDMA)
9
9
7
6
4
0
China Telecom (CDMA)
0
0
0
0
1
5
100
100
100
100
100
100
China Mobile (GSM)
China Telecom (CDMA)
Total
Market share (%)
Total
Source: Companies, CLSA Asia-Pacific Markets
India - Bharti to emerge stronger
India: Hyper-competition
unlikely to end soon
India’s competition has also worsened with Reliance and Tata launching their
new GSM service. Pricing is the easiest strategy for small operators to gain
market share. Tata’s new “per second” billing and Reliance’s “Simply Reliance”
promotions have driven up subs growth, but undermined profitability. Most
telcos recorded over 20% QoQ core earning decline in 2QFY10. Bharti has
been the best performing operator as they have been cautious and selective
in responding to competition, but still experienced 7.8% QoQ earning decline
in 2QFY10. The hyper-competition may not end soon especially with
upcoming 3G licensing and new capacity.
We like Bharti’s
execution capabilities
and strong balance sheet
However, Bharti will likely emerge the strongest operator when competition
stabilises given its strong execution and balance sheet. 3G licensing may also
accelerate industry consolidation. Risk is their global expansion which is
unlikely to be cheap and may generate little synergies.
Subscriber growth
remains robust
Bharti has continued to grow subs at a robust 38.8% YoY to 118.9m and
maintain stable revenue in 3QFY10 despite intense competition with steep
tariff cuts and per second billing offers. Management is determined to
maintain its focus on revenue market share, which has increased 1ppt in the
past 12 months and is 11ppts ahead of its own subscriber market share.
Besides a growing presence in the non-mobile business, Bharti’s key
competitors also trail significantly in network, distribution, servicing and
value-added-service offerings.
19 April 2010
elinor.leung@clsa.com
117
Mr & Mrs Asia
Telecoms
Figure 241
Figure 242
India: Mobile market share, Feb 2010
India: Leading operators net adds
Others
9%
6
(m)
5
Idea (incl Spice)
11%
Bharti
23%
Tata
11%
Bharti
RCom
BSNL
Voda
Tata
Idea
4
3
2
Reliance
18%
1
Feb 10
Dec 09
Oct 09
Aug 09
Jun 09
Apr 09
Feb 09
Dec 08
Apr 08
Oct 08
0
Voda
17%
BSNL
11%
Aug 08
Bharti still dominant
Bharti is best positioned for 3G given its strong balance sheet (0.05x debt to
equity) and leadership in 2G. Bharti has the highest mobile value added
services (MVAS) share at 11% of Arpu among India telcos. MVAS growth has
been held back by 2G spectrum crunch and delay in 3G. However, 3G
auctions will be in FY10. Bharti will benefit from late-mover advantages and
its 3G rollouts will ride on much of the 2G physical infrastructure, including
towers. Mobile number portability (MNP) is now delayed to March 2010 and
will likely see even further delays.
Jun 08
Bharti is the 3G
play in India
Source: Companies, CLSA Asia-Pacific Markets
Pressure on Arpu and margin is temporary
Arpu is declining
in China and India . . .
New competition has accelerated Arpu decline in China and India. China
Mobile and Bharti’s Arpu fell 9% YoY to US$11 and 29% YoY to US$5, in
3Q09. Revenue per minute fell to a new low of US$0.2 in China and
US$0.1 in India. The lower average Arpu in India is likely due to
affordability. Also, subscriber number is inflated due to subscriptions to
life-time prepaid cards.
. . . and margins
are under pressure
Ebitda margin has also been under pressure given slowing revenue growth
and higher marketing expenses, but remains high at 51% for China Mobile
and 40% for Bharti. India telcos have been burdened with high regulatory
fees (licensing and spectrum fees) which could amount to 20-30% of
revenue, compared to 3-4% for China telcos. Excluding regulatory fees,
Bharti has one of the highest Ebitda margins in the region.
Figure 243
Figure 244
Monthly Arpu
Revenue per min
16
(US$)
14
China Mobile
Telkom
Bharti
0.040
12
0.030
10
0.025
8
0.020
6
0.015
China Mobile
Bharti
0.010
4
2Q06
(US$/min)
0.035
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09
Source: Companies, CLSA Asia-Pacific Markets
118
elinor.leung@clsa.com
19 April 2010
Telecoms
Mr & Mrs Asia
ROE remain high and will be trending up
Peak capex is
behind us in China
China Mobile and Bharti’s ROE remain high at about 25% despite Arpu and
margin pressure this year. ROE should trend up in the next five years as the
companies maintain mid to high single-digit growth. Rising data usage will
help support Arpu. Also, capex peaked in 2009 and started declining. China
Mobile’s capex may decline by about 10% this year as 2G capex may drop by
half given slowing user growth. 3G capex will start coming down in 2011.
Bharti’s total capex may jump by 77% in FY2011 due to 3G rollout, but will
start declining in FY2012. Bharti’s mobile network has covered 84% of the
population but 2G capex is on a decline with an 11% reduction in FY2010 and
another 30% reduction in FY2011-12.
Late mover advantages on 3G?
While 2G voice is being
commoditised, there are
few takers for 3G services
China and India are behind the world’s 3G adoption curve. However, 3G has
seen little success in the world with high investment and low demand.
Although China and India are benefitting from the improved economies of
scale on 3G, it is unlikely 3G are value-adding. The way ahead for the
telecoms industry is data and data applications as voice is being
commoditised very quickly. 3G is likely to be the future, but China and India
are still pretty much voice-driven markets. Both countries are still developing
economies and affordability remains a concern. High capex investments on
3G would likely accelerate commoditisation of 2G voice but is unlikely to lift
up overall Arpu by a large margin. The telecoms sector is an upfront capital
intensive business with high fixed costs and low variable costs. The risk is
that once a network has been built, the incentive is to fill the capacity at
whatever cost since capex has been made. 3G price wars are not
unforeseeable. Although India’s 3G auction can alleviate the problem of
spectrum crunch, competition is likely to get worse.
Regulatory risks - Not major
Asymmetrical regulation
unlikely on China Mobile
There had been talks on asymmetrical regulations to be imposed on the
dominant player China Mobile post restructuring, but these were deemed
unnecessary as the market share shift occurred faster than expected. China
Mobile has been ceding mobile net adds market share to China Telecom
resulting in more balanced competition. At present, China Mobile’s net adds
market share has dropped to about 50% from about 80%. The regulator’s
focus has now been moving to 3G development from curtailing China Mobile’s
dominance. In China, mobile-number portability (MNP) is still under pilot
studies and is unlikely to be commercially rolled out in 2010.
In India, MNP
likely to be delayed
In India, MNP which was targeted to be implemented in Metro and A-circles
by December 2009 has been delayed again to 1Q10 and is to be
implemented in one go across all 22 circles. Considering that several
operators are not yet ready with infrastructure for MNP implementation
there could be even further delays.
Internet is the next big thing
In China, internet
is entering the
hyper-growth phase
19 April 2010
While the mobile market is entering middle age, China’s internet has just
entered a hyper-growth phase. Internet users have tripled over the past three
years to 384m and China has become the largest market in the world, but
penetration remains low at 27%. We expect internet users to double again in
the next three years given falling equipment and PC prices. Broadband has
become the key growth driver for telcos, which have been boosting their
broadband capex by about 30% per year. China Mobile had reportedly offered
to invest Rmb100bn on broadband if the government allows it to enter the
elinor.leung@clsa.com
119
Mr & Mrs Asia
Telecoms
fixed broadband market. Mobile broadband could also surprise on the upside
in China given low fixed-line penetration. PC pricing has been falling fast
especially with the increasing popularity of netbooks and smartphones.
Baidu and Tencent
are our top picks
We believe there is a broadband boom in China and internet companies will
be the biggest beneficiaries as they ride telcos’ infrastructure investment.
Online advertising and gaming are already proven online business models.
Internet operation is generally near-monopoly given network effect. Many
enjoy near-100% ROIC. Our top picks for the sector are Baidu and Tencent.
A landmark year for Baidu
This will be a landmark year for Baidu with economic recovery, launch of
Phoenix Nest and Google’s exit from China. Google has rerouted all traffic to
its Hong Kong website where there is no censorship. This places Google back
to its position four years ago when it operated offshore and its market share
was only 15%. Its effort to circumvent Chinese laws has enraged Beijing and
there will be consequences. Baidu will be the immediate and largest
beneficiary. Valuation still looks reasonable at 1.2x 11CL PE/growth.
Figure 245
Internet user growth is
a secular locomotive
China internet user growth
700
(m)
Internet users
(%)
Penetration (RHS)
642
600
556
500
470
400
47
35
298
300
50
41
384
60
40
30
29
210
200
100
23
34
3
0
5
111
94
80
59
16
10
10
8
7
6
20
22
137
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 10F
11F
12F
Source: CNNIC, CLSA Asia-Pacific Markets
Figure 246
In China, Indonesia and
India internet penetration
still has a long way to go
Internet users as a share of population
90
(%)
China
India
Indonesia
Japan
USA
80
70
60
50
40
30
20
10
2012F
2011F
2010F
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0
Source: Economist Intelligence Unit, CLSA Asia-Pacific Markets
120
elinor.leung@clsa.com
19 April 2010
Mr & Mrs Asia
Telecoms
Figure 247
Household-internet
penetration is
yet to take off
Internet subscription household penetration
(%)
80
China
India
70
Indonesia
60
Japan
50
USA
40
30
20
10
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0
Source: Economist Intelligence Unit, CLSA Asia-Pacific Markets
Tencent’s recent
correction is a
buying opportunity
Tencent’s shares have faced pressure due to concerns over slowing gaming
revenue growth. Gaming risk is valid, but Tencent is not a pure gaming
operator. The company’s business model will likely be more resilient given its
large user base, dominance in SNS and the casual game market and
diversified revenue. Tencent’s 4Q09 results have proven the sustainability of
its business model. Despite slower gaming revenue, its online community
business posted phenomenal growth in 4Q09 given a rapid growing user
base. Increasing SNS applications and games have encouraged users to
spend more time on the platform. We believe the recent correction provides a
buying opportunity. The stock is trading at 1.2x 11CL PE/G (26x 11CL PE
against a three year EPS Cagr of 22%). Our earnings forecast is likely to be
conservative as we assume little growth from new games.
Apart from China, broadband has also become a new growth driver for other
emerging markets. However, fixed-line penetration in other emerging markets
is relatively low and it is likely to take a longer time for the internet markets
such as India and Indonesia to be built up.
Figure 248
Fixed-line is on a
structural decline
Fixed-line population penetration
(%)
80
China
India
Indonesia
Japan
USA
70
60
50
40
30
20
10
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0
Source: Economist Intelligence Unit, CLSA Asia-Pacific Markets
19 April 2010
elinor.leung@clsa.com
121
Mr & Mrs Asia
Telecoms
Figure 249
Asian telcos valuations
Integrated
Rec
Ccy
Price
10CL
11CL
10CL
11CL
10CL
11CL
10CL
China Telecom
BUY
HK$
4.00
18.7
14.9
4.1
3.6
9.9
11.5
2.1
2.2
Chunghwa Telecom
BUY
NT$
61.50
12.7
12.9
5.4
5.6
10.0
9.6
10.4
10.3
KT
O-PF
won
46,550
8.1
7.4
3.1
2.8
12.2
13.3
6.2
6.8
PLDT
O-PF
P
2,535
10.5
9.6
6.1
5.9
7.7
8.2
8.5
9.0
SingTel
O-PF
S$
3.18
12.6
12.0
8.9
7.9
5.6
6.7
4.1
4.4
Telkom
O-PF
Rp
8,050
12.4
11.6
4.3
4.0
6.5
7.7
4.1
5.3
China Unicom
U-PF
HK$
9.18
28.9
22.8
4.5
4.1
(5.1)
0.4
2.0
2.0
MTNL
U-PF
Rs
74.35
na
na
20.5
na (101.7)
48.1
1.3
1.3
PCCW
U-PF
HK$
2.30
11.9
11.2
6.1
5.7
8.4
8.8
3.5
3.5
Rs
288.05
68.1
53.9
8.6
8.0
0.2
1.1
0.9
0.9
RM
3.49
20.3
20.3
5.2
4.9
0.4
3.9
5.8
5.8
17.2
14.8
5.6
5.0
4.1
6.4
3.5
4.5
Tata Communications U-PF
Telekom Malaysia
SELL
Weighted average
PE (x)
EV/Ebitda (x)
FCF/EV (%)
Yield (%)
11CL
Wireless
LG Telecom
BUY
won
7,800
8.1
7.0
2.2
1.7
11.8
20.2
4.5
4.5
Maxis
BUY
RM
5.29
14.3
12.8
8.3
7.8
8.2
8.8
9.1
10.2
SK Telecom
BUY
won
174,000
7.8
6.6
2.3
2.0
18.3
22.9
6.6
6.9
Bharti Airtel
O-PF
Rs
308.20
11.8
10.6
6.6
5.6
0.1
6.6
0.0
0.0
Reliance Comm
O-PF
Rs
176.50
8.1
7.7
6.3
5.7
(9.6)
1.5
0.0
0.0
StarHub
O-PF
S$
2.33
15.1
13.3
7.7
7.0
6.0
8.2
8.6
8.6
Taiwan Mobile
O-PF
NT$
60.50
11.2
11.1
7.5
7.4
7.4
7.6
8.0
8.1
China Mobile
U-PF
HK$
78.60
11.9
11.4
5.0
4.5
5.5
8.6
3.6
3.8
Digi
U-PF
RM
22.52
16.0
15.4
7.5
6.9
4.5
5.6
8.3
9.0
Far EasTone
U-PF
NT$
38.10
13.9
13.7
4.5
4.3
10.8
12.2
6.5
6.6
Globe Telecom
U-PF
P
985
10.5
10.0
4.2
4.0
8.0
9.0
8.1
8.6
Idea Cellular
U-PF
Rs
67.85
23.1
22.2
7.9
7.2
(2.5)
(0.6)
0.0
0.0
Indosat
U-PF
Rp
6,000
21.2
17.4
5.2
4.7
2.4
3.8
1.9
2.3
MobileOne
U-PF
S$
2.10
13.1
11.9
6.8
6.2
7.9
10.6
6.1
6.7
Axiata
SELL
RM
3.77
18.0
16.0
7.0
6.4
2.6
3.9
0.0
0.0
Weighted average
12.2
11.6
5.4
4.8
5.1
8.3
3.6
3.7
Weighted average (overall)
14.1
12.8
5.5
4.9
4.7
7.6
3.6
4.0
Source: CLSA Asia-Pacific Markets
122
elinor.leung@clsa.com
19 April 2010
Mr & Mrs Asia
Transport
Transport - On the move
Robert Bruce
robert.bruce@clsa.com
(852) 26008522
Top picks
AirAsia
Market cap
Price
AIRA MK
US$1,144m
RM1.33
Air China
Market cap
Price
753 HK
US$21,003m
HK$8.06
Cathay Pacific
Market cap
Price
293 HK
US$8,448m
HK$16.66
Travel within Asia is set to outgrow other regions, with the increasing
affluence of Asians and the gradual move to more leisure time. We expect
airline-passenger trips in 17 countries to increase from 416m in 2007 to
737m by 2014, or an annual growth rate of 8.5%. China will lead the surge:
by 2015, the country will become the world’s largest source of outbound
departures at 95m, representing a 3x increase over 10 years. A majority of
the travel aspirations remain within the domestic market but regional
countries will also benefit over the medium term as consumers become more
adventurous. Air China is an obvious play for exposure to growing
international travel by mainlanders.
Figure 250
Figure 251
China: Domestic air travellers
China: International air travellers
250
(m)
18
16
14
12
10
8
6
4
2
0
200
150
Jet Airways
Market cap
Price
JETIN IB
US$1,039m
Rs531.2
Qantas
Market cap
Price
QAN AU
US$6,138m
A$2.93
100
50
0
Singapore Airlines
SIA SP
Market cap
US$13,254m
Price
S$15.46
In 2009, intra-Asia Pacific
air travel was the largest
aviation market globally
1987 1990 1993 1996 1999 2002 2005 2008
(m)
1987 1990 1993 1996 1999 2002 2005 2008
Source: CEIC, CLSA Asia-Pacific Markets
Travel within the Asian region set to outperform other regions, with the
increasing affluence and gradual move to more leisure time. Recently, the
International Air Transport Association (IATA) confirmed that in 2009 intraAsia-Pacific travel had surpassed the number of passengers in North America
as the world’s largest aviation market. Asia-Pacific’s passengers numbered
647m compared to 638m who flew within North America (including domestic
markets). By 2013, IATA forecasts that an additional 217m passengers are
expected to take to the skies within Asia Pacific. For 2010 IATA is forecasting
12% passenger growth in Asia versus 6.2% in North America and 4.2% in
Europe, thus even though the slowdown in Asia was less severe the rebound
is still expected to be stronger.
Figure 252
China market to
accelerate its dominance
Asia: Passenger growth, 2007-14
Country
GDP/capita Passengers
(US$) 2007 (No.)
Australia
56,847
34,760,500
Bangladesh
696
2,020,000
Brunei
41,980
522,000
Cambodia
974
1,337,000
China
5,548 106,580,000
Hong Kong
33,404
23,891,500
India
1,361
36,856,000
Indonesia
3,037
29,600,000
Japan
36,794
74,446,500
Lao PDR
1,013
154,500
Malaysia
7,375
16,296,000
New Zealand
37,426
8,135,500
Philippines
2,009
10,178,000
Singapore
42,657
17,513,500
Korea
20,300
25,696,000
Thailand
5,173
23,256,000
Vietnam
1,256
4,448,800
Total
415,691,800
Passengers 2007-14CL Per-capita trips Per-capita trips
14CL (No.)
Cagr (%)
2007 (No.)
14CL (No.)
54,296,160
6.6
1.65
2.34
3,927,861
10.0
0.01
0.02
754,419
5.4
1.34
1.85
1,728,391
3.7
0.09
0.11
327,853,430
17.4
0.08
0.24
26,381,850
1.4
3.46
3.64
67,018,556
8.9
0.03
0.06
46,419,176
6.6
0.13
0.19
89,264,379
2.6
0.58
0.71
357,801
12.7
0.03
0.05
18,211,282
1.6
0.61
0.63
10,369,803
3.5
1.92
2.27
13,328,043
3.9
0.12
0.14
19,961,656
1.9
3.82
4.14
23,011,296
(1.6)
0.53
0.46
28,983,673
3.2
0.36
0.44
6,693,069
6.0
0.05
0.07
737,423,176
8.5
0.13
0.21
Source: IATA, country statistics and airport authorities, CLSA Asia-Pacific Markets
19 April 2010
robert.bruce@clsa.com
123
Mr & Mrs Asia
Transport
China - A growing dragon
A 14.2% Cagr over the
last ten years in China . . .
The Chinese aviation market has grown at 14.2% per annum over the last 10
years to a market of 115m passenger round trips in 2009. The domestic
market has been the strongest growth driver at a 14.7% Cagr compared to
the international market at 8.8%, while the Hong Kong/Macau routes are
mature with just 3.2% growth. The domestic market dominates a majority of
trips accounting for 94% of passenger trips and 80% of passenger traffic,
measured by revenue passenger kilometres (RPK).
. . . as the propensity
to travel grows
The development of the Chinese propensity to travel both domestically and
internationally is growing. China Reality Research’s recent study indicates that
with the recovery in consumer confidence travel becomes one of the most
aspirational discretionary-spending goals. In October 2008, when confidence
sank, 26% of respondents had plans to travel. This compares to 49% in April
2009 and then 36% in 2010, with 15% planning on a reduction in travel while
49% plan to do a similar amount of travel this year. Travel remains the
highest growth category ahead of children’s extracurriculum classes (30%)
and home appliances and electronics which have declined from a peak of 36%
in November 2009 to 21% of respondents in February 2010 looking to expand
their purchases. A majority of the travel aspirations remain within the
domestic market but regional markets will also benefit over the medium term
as consumers’ become more confident and adventurous.
Figure 253
Travel an aspirational
goal in China
What do you plan to buy in the next six months?
Travel
Children's extra-curriculum
Feb 10
Home appliance & electronics
Nov 09
Jul 09
Car
Apr 09
Property
Jan 09
Oct 08
Other
(% of total respondents)
No big purchases planned
0
10
20
30
40
50
Figure 254
Fascinate exploring
their own country first
If you plan to travel in the next six months, where do you plan to go?
Europe
2%
USA
1%
Other
1%
Not sure yet
8%
Elsewhere in Asia &
Australia
4%
Same or nearby
provinces
35%
HK, Macau or
Taiwan
6%
Elsewhere in
mainland China
43%
Source: CRR
124
robert.bruce@clsa.com
19 April 2010
Mr & Mrs Asia
Transport
Indonesia - Domestic-led growth
The fourth-largest airtravel market in Asia
The Indonesian air travel market is the fourth-largest in Asia with an
estimated 38m passengers travelling in 2009. The market is led by the
domestic market which accounts for 81% of passenger trips or 4.4x the size
of the international market with 35m domestic passengers taking a round trip
in 2009 compared to 7.9m international passengers.
Figure 255
Wealth and international
hub status drive traffic
Airline passenger round trips, 2007
Passenger round trips
GDP per capita (US$)
Per-capita trips
China
106,580,000
2,560
0.08
Japan
74,446,500
34,318
0.58
India
36,856,000
939
0.03
Australia
34,760,500
43,199
1.66
Indonesia
29,600,000
1,921
0.13
Korea
25,696,000
21,655
0.53
Hong Kong
23,891,500
29,854
3.46
Thailand
23,256,000
3,742
0.36
Singapore
17,513,500
36,383
3.82
Malaysia
16,296,000
6,956
0.61
Philippines
10,178,000
1,626
0.12
New Zealand
8,135,500
30,431
1.92
Vietnam
4,448,800
835
0.05
Bangladesh
2,020,000
463
0.01
Cambodia
1,337,000
648
0.09
Brunei
522,000
31,901
1.34
Lao
154,500
674
0.03
Source: IATA, country statistics and airport authorities
Indonesian outbound
exceeding volatile
tourist visits
The domestic market has enjoyed a 15% Cagr over the past 11 years,
maintaining growth in every year with the exception of 2000. In contrast the
international market for trips in Indonesia has only grown at a Cagr of 6.7%,
which has been held back by international tourist visits to Indonesia growing
at just a 2.5% Cagr since 2000, with significant declines in 2003 and 2005-06
following the Bali Bombings that specifically targeted foreign tourists.
Figure 256
Domestic market
has seen a 15% Cagr
Indonesia: Domestic passenger market growth
40
(m)
Domestic passengers
YoY growth (RHS)
(%)
35
50
40
30
30
25
20
20
15
10
10
0
5
0
(10)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Statistical Bureau of Indonesia
19 April 2010
robert.bruce@clsa.com
125
Mr & Mrs Asia
Figure 258
Indonesia: International passengers
Indonesia: Tourist arrivals
7
Tourists (LHS)
(m)
(%) 30
25
20
15
10
5
0
(5)
(10)
(15)
YoY growth
6
5
4
3
2
1
2008
2007
2006
2005
2004
2003
0
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1998
16
14
12
10
8
6
4
2
0
(2)
2002
(%)
YoY growth (RHS)
2001
International passengers
(m)
2000
9
8
7
6
5
4
3
2
1
0
1999
International passenger
growth of 6.7%
Figure 257
2009
Transport
Source: Statistical Bureau of Indonesia
India - An elephant on the move
The fastest growing
market in Asia
The Indian domestic aviation market had been growing at a 26% Cagr over
the previous five years to March 2009, and was the major growth driver
compared to the international market at a still respectable 14.8%. While the
Indian domestic travel industry shrank in 2009 as domestic capacity was
reduced by 16% HoH in 1H09 following the slowdown in growth and the fall
out from the impact of the terrorist Mumbai attacks, there is now an
expectation of strong growth returning with 2H09 adding 3% HoH.
Figure 259
A 26% five-year Cagr
India: Airline passengers
45
(m)
Domestic
International
40
35
30
25
20
15
10
5
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
Source: Government statistics
126
Domestic growth
was stimulated by
the entry of LCCs
One of the reasons for the growth in the domestic market was due to the
entry of new carriers, both full service and low-cost carriers (LCC). For
example India’s second largest carrier, Kingfisher, only commenced operations
five years ago and already has 22% market share. While LCC’s, such as
Indigo, Spicejet and GoAir, have all emerged in recent years to grow the
aviation market and now account for 33% market share.
India has one of the
highest penetration
rates of LCCs
In fact, Indian LCC’s have one of the highest penetration rates globally with
the South Asian region having an estimated 46% of seat capacity of the total
market, which is significantly higher than the global average of 21.7% and
even surpasses the EU at 36.1% penetration, despite the LCC market having
been established for only 20 years. This growth in India has been obtained
despite the traditional elements for LCC not being present: lack of secondary
airport alternatives, no dedicated budget terminals and an inability to have
robert.bruce@clsa.com
19 April 2010
Mr & Mrs Asia
Transport
significantly different pay scales for pilots. However, with the industry being
so young, the companies have been able to assess the various legacy models
that have been operating globally and with a low cost workforce generally
adopted the LCC model that has leaders showing success and higher growth
such as Ryanair, Easyjet and Southwest.
Figure 260
New players and LCCs
have eroded Air
India’s market share
India: Airlines’ market share
30
(%)
25
25.2
22.2
20
18.0
15.3
15
12.2
10
5.4
5
1.8
0
Jet
Kingfisher
Air India
Indigo
SpiceJet
GoAir
Paramount
Source: DGCA, CLSA Asia-Pacific Markets
Figure 261
LCCs have the highest
penetration in South Asia
LCC capacity (seats) penetration
South Asia
Lower S America
SW Pacific
EU
Central America
Western Europe
Europe
SE Asia
North America
Central/S America
Southern Africa
Global
Asia Pacific
Africa
East Europe (ex Russia)
Middle East
Eastern Africa
NE Asia
Caribbean
North Africa
Central/W Africa
Upper S America
Central Asia
(%)
0
10
20
30
40
50
Source: Centre for Asia Pacific Aviation
India’s air travel market
is the third-largest in Asia
19 April 2010
India’s air-travel market is the third-largest in Asia with an estimated 35.5m
passenger round trips taken in FY09. The domestic market now accounts for
56% of passenger trips. Market penetration is only 3.2% of round trip per
capita in India, which is the third-lowest in the region. Based on our forecasts
of GDP per capita rising from US$939 in 2007 to US$1,361, as well as the
population expanding by a 0.5% Cagr, we expect the number of passenger
round trips to grow to 67m by 2014, an 8.9% Cagr.
robert.bruce@clsa.com
127
Mr & Mrs Asia
Transport
Infrastructural
bottlenecks plague
India’s growth
The growth of the Indian market is supported by policies for the removal of
infrastructure bottlenecks that could restrict capacity growth:
‰ The Airports Authority of India (AAI) has planned investment of US$3.1bn
over the next five years;
‰ 100% tax exemption for airport projects for a period of 10 years;
‰ Government plans to develop 300 unused airstrips should help create the
number of low cost terminals that are utilised in the LCC model.
Lowering of sales tax
rates on ATF will help the
growth of the market
In addition, the operating costs of airlines should benefit from the government
guideline to remove expatriate pilots by July 2011, 4% lower fuel excise tax and
the limitation on airport fees at AAI after rate hikes in 2009. However, employing
expat pilots was the industry’s response to a lack of availability of pilots in the
domestic market.
Figure 262
Singapore and
Hong Kong show the
benefit of hub creation
Asian passenger trips by penetration rate, 2007
Country
Singapore
Hong Kong
New Zealand
Australia
Brunei
Malaysia
Japan
Korea
Thailand
Indonesia
Philippines
Cambodia
China
Vietnam
India
Lao PDR
Bangladesh
USA
Passenger
round trips
17,513,500
23,891,500
8,135,500
34,760,500
522,000
16,296,000
74,446,500
25,696,000
23,256,000
29,600,000
10,178,000
1,337,000
106,580,000
4,448,800
36,856,000
154,500
2,020,000
384,700,000
Per-capita GDP
(in current US$)
36,383
29,854
30,431
43,199
31,901
6,956
34,318
21,655
3,742
1,921
1,626
648
2,560
835
939
674
463
46,630
Per-capita passenger
round trips
3.82
3.46
1.92
1.66
1.34
0.61
0.58
0.53
0.36
0.13
0.12
0.09
0.08
0.05
0.03
0.03
0.01
1.66
Source: IATA, country statistics and airport authorities, CLSA Asia-Pacific Markets
Civil aviation and per-capita wealth
128
Double-digit growth
possible till per-capita
GDP reaches US$4,500
A review of US aviation history suggests that double digit growth in per head
passenger traffic is possible up to a US$4,500 GDP/capita. US passenger traffic
per capita expanded from 0.22 in 1954 to 0.81 in 1968 at a 10% Cagr. After per
capita GDP reached US$4,500, growth in flight frequency per head began to slow
to low single digit per annum, reaching around 2.2 trips per passenger by the
middle of the 1990s.
India is entering the
hyper growth phase
Growth in the civil-aviation industry does not correlate with the macro economy
in a straight-line fashion (see Figure 264). In 2007, there were 416m passenger
round trips, domestic and international, from 17 countries in the Asia-Pacific
region, equating to 0.13 per person. Singapore and Hong Kong have the highest
penetration rates, where the development of regional hubs has meant that
passenger throughput with fifth-freedom traffic (an airline can carry revenue
traffic between foreign countries as a part of services connecting its home
market) is more important than other end of destinations, such as Australia and
New Zealand, where a strong domestic network offsets the lack of hub.
robert.bruce@clsa.com
19 April 2010
Mr & Mrs Asia
Transport
Figure 263
USA showed strong
growth as GDP rose
to US$25,000
US passenger traffic and per-capita GDP
3.5
(x)
Px traffic per capita
70,000
(US$)
GDP per capita (RHS)
3.0
60,000
2.5
50,000
2.0
40,000
1.5
30,000
10% Cagr till 1970
1.0
0.5
20,000
Stagnant
since
90's
Tailing off to single digit p.a. growth
10,000
0
0.0
1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Source: CEIC, CLSA Asia-Pacific Markets
Figure 264
India still at a nascent
development stage
Per-capita air travel versus GDP, 2007
10.00
Per-capita round-trip air travel
y = 7E-05x0.9716
R2 = 0.8855
Singapore
HK
New Zealand
1.00
Brunei
Malaysia
Thailand
Australia
USA
Japan
Korea
Indo, Phil, Cambodia
0.10
China
Per-capita GDP (US$)
India, other Asian countries
0.01
0
10,000
20,000
30,000
40,000
50,000
Source: SAP data from Tiger Airways prospectus, CLSA Asia-Pacific Markets
Air travel growth
strongly correlated
to per-capita GDP
Explosive growth on the front end of the curve. Developing countries
experience exponential growth in air travel as per capita wealth picks up - per
capita passenger traffic for relatively wealthier Asean economies like Malaysia
and Thailand are as much as 3-6x higher than regional peers such as China
and Indonesia. This is meaningfully higher than the per capita wealth
differential of 1.5-2x.
Figure 265
Per-capita passenger air travel in emerging Asia, 2007
Country
Passenger
round trips
Per-capita GDP
(in current US$)
Per capita passenger
round trips
China
106,580,000
2,560
0.08
India
36,856,000
939
0.03
Indonesia
29,600,000
1,921
0.10
Malaysia
16,296,000
6,956
0.61
Thailand
23,256,000
3,742
0.36
Note: Data as of 2007. Source: SAP data from Tiger Airways Prospectus, CLSA Asia-Pacific Markets
19 April 2010
robert.bruce@clsa.com
129
Mr & Mrs Asia
Transport
Growth drivers are the
wealth effect, geography
and infrastructure
The wealth effect appears less relevant at the other end of the curve, as we
note the major differences in air- traffic frequency among developed AsiaPacific economies like New Zealand, Australia, Korea and Japan (GDP per capita
US$20,000-40,000). With the gradual disappearance of the “low-base” income
factor, other drivers such as infrastructure and geography (eg, Australia’s land
mass versus Japan supported by a high speed rail system) begin to take a
more significant role.
Figure 266
Per-capita passenger air travel in developed Asia, 2007
Country
Passenger
round trips
34,760,500
74,446,500
8,135,500
25,696,000
Australia
Japan
New Zealand
Korea
Per-capita GDP
(in current US$)
43,199
34,318
30,431
21,655
Per capita passenger
round trips
1.52
0.58
1.92
0.53
Note: Data as of 2007. Source: SAP data from Tiger Airways Prospectus, CLSA Asia-Pacific Markets
China’s growth likely
to remain strong . . .
. . . for the next
five years at least
India’s hyper growth
phase is likely to
start around 2014
Given this diminishing wealth impact, we prefer aviation plays in earlier-stage
economies. Air China, China Eastern and China Southern control close to 79%
of the Chinese market following a number of consolidation moves, and are
direct exposures to the more frequent Chinese flyer. While we have harboured
concerns over the high debt and material balance sheet uncertainties on the
latter two, the recent capital injections have shown that they remain well
supported by the government, meaning financial stress is less of a concern.
AirAsia is well exposed to the growing Asean market, especially to Indonesia.
An extrapolation of the above would suggest that as China’s per-capita GDP
rises from US$2,560 to US$5,548 over 2007-14, with an appreciating currency,
per-capita passenger traffic should move from 0.08 to 0.24 round trips per
head, resulting in the Chinese market growing at an astonishing 17.4% per
annum to 327m passenger trips. Asia’s third-largest market India is likely to
cement this position and potentially close in on Japan’s No.2 position with a
growth rate of 8.9% to 67m passenger flights. India’s GDP should rise by 5.5%
per annum to US$1,361 by 2014, with trips per capita increasing from a low
0.03 to 0.06. In Indonesia, with GDP per capita increasing to US$3,037 at a
6.8% Cagr, flight penetration will deepen from 0.13 to 0.19 per capita, with the
total number of passenger trips increasing by a 6.6% Cagr to 46.4m.
Figure 267
China offers 17% growth
Per-capita air travel versus GDP, 2014
10.00
Per-capita round-trip air travel
HK
Singapore
y = 6E-05x0.9863
R2 = 0.8807
New Zealand
1.00
Brunei
Malaysia
Thailand
Korea
Australia
Japan
Indo, Phil, Cambodia
0.10
China
Per-capita GDP (US$)
India, other Asian countries
0.01
0
10,000
20,000
30,000
40,000
50,000
Source: CLSA Asia-Pacific Markets
130
robert.bruce@clsa.com
19 April 2010
Mr & Mrs Asia
Transport
Intra-Asia demand versus global demand impact
Keeping costs down
necessary to benefit
from the growth
In the region, companies with cost advantages will be better positioned to tap
the growth of the new middle class. Singapore Airlines has the benefit of lowcost capital, with cheap funding in Singapore to finance a regular upgrade of its
fleet, while enjoying a competitive advantage over ailing national airlines in the
region. The low-cost carrier AirAsia has the right business model to capitalise
on the desire to travel for the budget-conscious new middle class in the region.
Asean open skies
to drive additional
leisure traffic
On top of the growing affluence the Asian markets are also expected to benefit
from the continuing liberalisation of flights within the region. Last year has seen
either the partial or full liberalisation of aviation markets for international flights
from other Asean nations in Indonesia, Malaysia, India, China, Vietnam,
Philippines and Cambodia. Further liberalisation will occur in 2015.
European open skies
added significantly
more competition
The market where open skies has seen to have been successful is in Europe,
with the formation of a single aviation market. There was a significant
difference to Asean with this agreement not coming about as a result of
countries negotiating an open skies agreement, rather it was imposed on them
by a central authority as a result of the treaty they signed when joining the
European Community. Open skies have generally worked well overall in Europe.
There has not been excessive instability although there has been a moderate
degree of restructuring. The benefits being significantly more competition,
especially from the low cost carriers which now have 36% market share.
Air Asia, Jetstar and
Tiger set to benefit
Thus, the LCCs in Asia are set to benefit with the likes of AirAsia, Jetstar Asia
and Tiger Airways having already benefitted from the recent liberalisation of
flights between the short haul major routes of Jakarta, Singapore and Kuala
Lumper. In this situation, the losers have tended to be the legacy carriers like
Singapore Airlines and Malaysia Airlines who have previously operated in a
protected market, where the LCCs lacked sufficient landing slots to offer
attractive frequency.
Figure 268
Asean is leading the
way with open skies
Asia’s aviation-market liberalisation
2004
2009
2015
Australia
Brunei
Cambodia
China
Hong Kong
India
Indonesia
Laos
Macau
Malaysia
Philippines
Sri Lanka
Thailand
Vietnam
Unrestricted
Unrestricted access to
capital cities and some
secondary points
Limited access to capital
cities, limited access to
secondary points
No access
Source: CLSA Asia-Pacific Markets
19 April 2010
robert.bruce@clsa.com
131
Transport
Mr & Mrs Asia
Strengthening currencies will boost travel
Some 95m outbound
tourists by 2015
China consumers’ rising disposable income combined with increased leisure
time has already resulted in a large growth in outbound tourist numbers. We
had already estimated that by 2015, China would become the world’s largest
source of outbound departures at 95m, up from 29m in 2004, and rising to
120m in 2020. While the financial crisis has temporarily halted the growth, a
renminbi at equilibrium would appreciably accelerate this process. Appreciating
currencies in other markets, namely India, would spur a similar outbound
tourism boom. The preferred plays on the appreciating currency are Air China
with the largest outbound proportion of passengers compared to the other two
major carriers that are more domestic focussed and also it has 77% of its debt
in US dollars creating a direct translation gain on appreciation.
Air China is China’s major
international carrier
Air China has the largest proportion of international traffic of the three major
mainland carriers. It announced it would inject fresh capital into Shenzhen
Airlines, lifting its stake from 26% to a controlling 51%. Compared to its 2005
bid, the deal appears attractively priced. We view this development positively
as consolidation should result in less aggressive fare discounting and
improved load factors from more efficient capacity scheduling.
Cathay Pacific’s Asian
network provides a
conduit for China access.
Cathay Pacific is also well positioned to benefit from the growing outbound
market and business international traffic accessing China through Hong Kong.
Cathay Pacific has two direct exposures, firstly its Dragonair business with a
fleet of 29 aircraft focusing on regional short haul routes particularly Chinese
cities, and secondly a 17% stake in Air China. We believe Cathay Pacific and
other regional airlines are benefitting from the removal of substantial supply
capacity in airlines and shipping has tightened up supply and provides a base
for recovery in 2010. This has already lifted higher utilisation rates and now
with a mild demand improvement, the higher loads are leading to less
discounting. Airlines need three demand drivers to be profitable: leisure
traffic in economy, bellyhold cargo and premium passengers. Some 30% of
Cathay’s revenue comes from airfreight and 40% of passenger revenue from
the premium cabins. Thus, the decline in freight and business traffic hurt
them disproportionately more than other carriers. In 2009 they only had one
leg driving them, and now we believe they are moving back to all three legs.
SIA has a premium
position in long haul
Singapore Airlines has seen its market share in Singapore decline from the
growth in LCCs but still maintains a strong market share in the premium
business market and a very strong network in Southeast Asia connecting to
long-haul routes. Thus, while LCCs have taken share in the regional shorthaul routes they maintain a clear competitive advantage in premium and
feeding into long-haul routes. In addition, SIA holds a 33% shareholding in
Tiger which partially hedges SIA against the encroaching LCC carriers.
In India, despite the competitive nature of the market, Jet Airways is well
positioned to benefit from the strong growth with its differentiated international
product. Its budget airline, Jet Lite, has also turned profitable after capacity
rationalisation. However, a weak balance sheet remains a concern.
Capacity cut in downturn
results in high utilisation
as demand rebounds
132
The carriers have reduced capacity over 2009 by 7% on average as they
decreased utilisation of aircraft, disposed of older aircraft and parked excess
aircraft. This has pushed load factors to significantly higher levels with many
carriers reporting more than 80% seat utilisation in 4Q09. However, with the
airlines still having the ability to work the assets harder and significant
capacity coming from 2013 with the delayed 787 aircraft from Boeing, we see
there being ample capacity to cater for the expected growth.
robert.bruce@clsa.com
19 April 2010
Mr & Mrs Asia
Transport
Figure 269
Passenger capacity
has dropped 6-8%
Passenger capacity
70
(bn)
ASK (LHS)
(%)
ASK growth
8
68
6
66
4
64
2
62
0
60
(2)
58
(4)
56
(6)
54
(8)
(10)
52
Jan 06
Jul 06
Jan 07
Jul 07
Jan 08
Jul 08
Jan 09
Jul 09
Figure 270
Load factors
bouncing back
Asian passenger load factors
85
(%)
(ppts)
Passenger load factor
Load-factor change (RHS)
6
4
80
2
75
0
(2)
70
(4)
65
(6)
60
Jan 07
(8)
Jul 07
Jan 08
Jul 08
Jan 09
Jul 09
Source: AAPA data, CLSA Asia-Pacific Markets
Other businesses
catering to tourists
will also benefit
In the consumer sector, those with businesses in near markets with a close
geographic proximity to China, namely: Hong Kong, Korea, Japan and
increasingly Taiwan, will be beneficiaries of increasing mainland customers.
The key standouts are Lifestyle in HK, the owner of the largest departmentstore operation in the city; its counterpart in Taiwan, Far East Department
Stores; HK cosmetics retailer, Sa Sa, which already has the largest reliance
on mainlanders for its Hong Kong sales at one third. Other beneficiaries will
be China-based online travel agency, Ctrip and regional hotel chains such as
Shangri-La, Mandarin Oriental, Regal and Hongkong & Shanghai Hotels. The
Middle East, namely Dubai, as well as Singapore, Thailand and Malaysia could
expect to benefit from a surge in Indian outbound travellers.
Just as a boom in outbound tourism could be expected from Asian currency
equilibrium, a similar pattern would be likely for domestic tourism in Asia’s
largest markets. Key beneficiaries here would be domestic hotel chains such
as Indian Hotels, Hotel Leela and ITC in India.
19 April 2010
robert.bruce@clsa.com
133
Mr & Mrs Asia
Transport
Competing high-speed transport
From an infrastructure perspective, emerging Asia’s sizable land mass and
relative underpenetration make railway and tollroad exposures interesting
particularly on a per capita basis.
Southeast Asia has
lower rail penetration
Figure 271
Figure 272
Railway coverage per km²
Railway coverage per capita
USA
UK
Japan
Korea
Taiwan
China
India
Indonesia
Malaysia
Thailand
Philippines
USA
UK
Japan
Korea
Taiwan
China
India
Indonesia
Malaysia
Thailand
Philippines
(m/km²)
0
20
40
60
80
(m/capita)
0
0.2
0.4
0.6
0.8
Source: Statistical Bureau of Indonesia
Korea has more mature
highway development
Figure 273
Figure 274
Highway coverage per km²
Highway coverage per capita
USA
UK
Japan
Korea
Taiwan
China
India
Indonesia
Malaysia
Thailand
Philippines
USA
UK
Japan
Korea
Taiwan
China
India
Indonesia
Malaysia
Thailand
Philippines
(m/km²)
0
10
20
30
(m/capita)
0
40
0.1
0.2
0.3
Source: CIA World Fact Book, CLSA Asia-Pacific Markets
China rail builders are
all seen as expensive
While China South Locomotive, China Railway Group and China Railway
Construction are all longer term exposures to China’s infrastructure buildout,
our railway analyst Manop Sangiambut expects near-term new rail
construction order growth to be negative due to a record high 2009. We are
fundamentally bearish on China Railway Group and China Railway
Construction, but find value in the latter. While China South Locomotive is in
the growth “sweet spot” of rolling stocks, its valuation is stretched.
Figure 275
Regional infrastructure spending
Infra spending (US$m)
China
Hong Kong
India
Indonesia
Korea
YoY (%)
FY08CL
FY09CL
FY10CL
FY11CL
FY09CL
FY10CL
214,965
355,361
396,162
430,067
65.3
5,880
6,128
6,995
6,781
4.2
50,009
46,252
61,691
80,000
4,467
4,742
5,738
% of GDP
FY11CL
FY08CL
FY09CL
FY10CL
FY11CL
11.5
8.6
4.9
7.5
7.4
6.7
14.1
(3.1)
2.7
2.9
3.0
2.6
(7.5)
33.4
29.7
4.1
3.8
4.2
4.2
6,077
6.2
21.0
5.9
0.9
0.9
0.8
0.8
15,057
18,590
29,697
25,160
23.5
59.7
(15.3)
1.6
2.3
2.6
1.8
Malaysia
5,723
6,276
8,257
8,291
9.7
31.6
0.4
2.6
3.4
3.9
3.4
Philippines
5,406
5,749
6,883
6,706
6.4
19.7
(2.6)
3.2
3.6
3.9
3.4
Singapore
3,906
4,620
5,302
5,203
18.3
14.8
(1.9)
2.1
2.7
2.6
2.2
Taiwan
15,011
16,920
17,959
16,953
12.7
6.1
(5.6)
3.8
4.6
4.5
3.8
Thailand
12,679
13,190
15,770
15,544
4.0
19.6
(1.4)
4.6
5.1
5.4
4.7
333,106
477,829
554,455
600,783
43.4
16.0
8.4
3.9
5.5
5.4
4.9
Total
Source: CLSA Asia-Pacific Markets
134
robert.bruce@clsa.com
19 April 2010
Mr & Mrs Asia
Transport
Figure 276
Regional transport and infrastructure valuations
Price
(local
ccy)
Target
(local
ccy)
Air China
8.06
AirAsia
1.33
PE (x)
PB (x)
EV/Ebitda (x)
ROE (%)
10CL
11CL
10CL
11CL
10CL
11CL
10CL
11CL
8.24
12.6
10.8
2.4
2.0
8.5
7.9
20.7
19.5
1.70
6.3
5.4
1.1
0.9
7.6
7.0
19.7
18.9
16.66
19.60
10.2
10.3
1.4
1.2
5.8
5.7
14.3
12.7
531.20
700.00
14.6
4.5
4.7
2.3
8.0
5.6
37.9
68.1
2.96
4.50
26.3
8.1
1.1
1.0
4.2
2.4
4.4
13.4
15.46
18.44
12.5
11.2
1.4
1.3
4.9
4.5
11.6
12.3
China South Loco
5.95
4.60
29.0
22.3
3.3
3.0
14.4
11.8
11.9
14.0
Hankyu Hanshin
430
500
15.3
14.6
1.1
1.1
11.8
11.5
7.4
7.5
749,000
733,500
16.3
13.0
1.3
1.3
8.2
7.7
8.5
10.0
Rail
Cathay Pacific
Jet Airways India
Qantas Airways
Singapore Airlines
Rail
JR Central
JR East
6,600
7,050
13.0
11.4
1.3
1.2
7.0
6.5
10.8
11.3
JR West
345,000
356,640
17.5
14.2
1.1
1.0
8.1
6.6
6.0
7.3
Kintetsu
293
190
52.1
49.3
2.8
2.8
20.6
20.5
5.4
5.7
29.20
33.00
23.8
21.8
1.5
1.4
18.5
17.0
6.4
6.7
MTRC
Odakyu Elec Rail
781
550
61.0
48.8
2.7
2.6
14.9
14.3
4.5
5.5
SMRT
2.13
2.22
16.6
14.4
3.8
3.5
9.3
8.3
23.7
25.2
Tokyu
402
330
18.8
13.4
1.3
1.2
11.2
10.1
6.8
9.0
ComfortDelGro
1.56
1.87
13.1
11.5
1.8
1.7
5.9
5.4
14.2
15.2
Hopewell Highway
5.30
5.78
15.2
13.2
1.9
1.9
10.2
9.0
12.4
14.2
283.05
325.00
19.1
15.4
3.9
3.0
9.0
8.1
22.5
21.9
1,950
2,520
14.3
12.4
1.7
1.5
9.1
9.3
12.6
13.1
10.70
4.62
0
53.5
2.1
2.1
26.6
13.7
(2.6)
3.9
0.64
0.80
37.7
27.7
0.8
0.9
7.4
7.0
2.0
3.1
25
30
18.8
15.8
2.2
2.0
7.0
6.3
12.2
13.2
Roads
IRB Infra
Jasa Marga
Shipping & logistics
China Cosco
FSL Trust
ICTSI
Kawasaki KK
378
497
30.0
11.0
1.0
0.9
10.8
7.4
3.2
8.5
8.03
9.60
12.8
10.6
1.3
1.2
6.9
5.9
10.4
12.0
Mitsui OSK Lines
685
747
13.7
11.0
1.2
1.1
7.5
6.7
9.2
10.5
Nippon Yusen
377
456
41.1
14.7
1.0
0.9
7.6
5.9
2.4
6.5
MISC
Pacific Basin
Precious Shipping
6.38
8.00
15.1
17.0
1.1
1.0
7.8
8.0
7.2
6.1
18.30
17.00
8.3
6.4
1.1
1.0
7.0
5.9
13.7
16.2
23
22
7.9
5.6
0.6
0.6
4.0
3.2
7.7
10.1
Thoresen Thai
Shipbuilding
Cosco Singapore
1.65
1.65
20.8
16.1
3.1
2.8
7.3
5.4
15.8
18.6
19,950
13,000
5.4
6.8
1.2
1.0
2.7
2.9
23.9
16.0
Hyundai Heavy
237,000
210,000
6.5
8.9
1.2
1.1
3.8
4.5
20.4
13.0
Hyundai Mipo
152,000
100,000
7.2
9.4
1.0
0.9
(0.4)
(1.2)
14.9
10.4
25,300
20,000
7.5
9.2
1.5
1.4
11.7
12.2
22.5
15.6
1.33
1.44
11.7
11.3
3.0
2.5
9.0
9.4
28.7
23.9
Ezion
0.8
1.2
10.2
7.4
2.5
1.9
10.4
6.9
27.3
28.8
Ezra
2.4
3.0
14.7
12.5
1.7
1.5
17.2
12.3
13.5
12.9
Keppel
9.4
9.8
14.0
15.3
2.3
2.2
8.6
9.4
17.2
14.7
SembCorp Marine
4.3
4.3
11.3
15.1
3.8
3.4
6.2
8.6
36.7
23.7
30.1
34.5
14.9
13.9
1.5
1.5
27.8
22.7
10.6
10.9
DSME
Samsung Heavy
Yangzijiang
Offshore
Diversified Infra
Cheung Kong Infra
Source: CLSA Asia-Pacific Markets
19 April 2010
robert.bruce@clsa.com
135
Mr & Mrs Asia
Appendices
Appendix 1: Penetration versus disposable income
Internet-enabled PC
PC
Ownership of internet-enabled PC (% of household)
120
100
80
Taiwan
40
40
Malaysia
0
5,000
10,000
15,000
20,000
25,000
30,000
DVD player
Ownership of DVD player (% of household)
80
2
R = 0.8183
70
Taiwan
60
China
Malaysia
Japan
0
5,000
Malaysia
Taiwan
Japan
HK
Singapore
China
Thailand
40
Philippines
Indonesia
India
20
Disposable income per capita (US$)
Disposable income per capita (US$)
0
10,000
R = 0.7998
15,000
20,000
25,000
0
30,000
5,000
10,000
15,000
20,000
25,000
30,000
Refrigerator
Malaysia
y = 20.925Ln(x) - 110.78
2
Korea
R = 0.5642
Taiwan
Singapore
Thailand
80
30,000
60
Korea
Ownership of camera (% of household)
100
25,000
2
80
Camera
120
20,000
y = 21.656Ln(x) - 113.66
100
Singapore
Indonesia
India
0
15,000
Korea
Philippines
10
10,000
120
Thailand
20
5,000
Ownership of washing machine (% of household)
140
HK
y = 19.807Ln(x) - 127.73
30
0
Washing machine
90
40
Disposable income per capita (US$)
India
0
India
50
Indonesia
10
Disposable income per capita (US$)
Indonesia
Malaysia
Thailand
Philippines
20
0
100
China
30
Thailand
China
(20)
2
R = 0.9472
50
Philippines
20
y = 23.818Ln(x) - 153.98
60
Japan
HK
Singapore
Taiwan
70
HK
Singapore
Korea
80
2
R = 0.8037
60
Japan
90
y = 25.516Ln(x) - 175.48
Korea
Ownership of PC (% of household)
100
HK
Japan
Ownership of refrigerator (% of household)
140
y = 21.546Ln(x) - 109.42
120
100
2
Korea
Thailand
R = 0.7631
Taiwan
Malaysia
HK
Japan
Singapore
80
Philippines
60
China
60
40
Philippines
40
China
Indonesia
20
Disposable income per capita (US$)
India
0
0
5,000
Indonesia
India
20
10,000
15,000
20,000
25,000
30,000
Disposable income per capita (US$)
0
0
5,000
10,000
15,000
20,000
25,000
30,000
Source: Euromonitor
136
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Appendices
Vacuum cleaner
Air-conditioner
Ownership of vacuum cleaner (% of household)
120
90
100
Korea
R2 = 0.7139
Malaysia
HK
China
30
Malaysia
20
Disposable income per capita (US$)
0
Thailand
Philippines
Indonesia
India
10
0
5,000
10,000
15,000
Korea
40
Taiwan
20
0
HK
60
Indonesia
China
Thailand
Japan
2
R = 0.8195
Singapore
50
Philippines
y = 24.167Ln(x) - 161.44
Taiwan
80
70
Singapore
India
40
Japan
y = 19.279Ln(x) - 109.42
80
60
Ownership of air-conditioner (% of household)
100
20,000
25,000
30,000
0
5,000
Disposable income per capita (US$)
10,000
15,000
20,000
25,000
30,000
Cable TV
Ownership of cable TV (% of household)
100
90
y = 0.002x + 23.74
80
2
70
Korea
60
Taiwan
50
Japan
Singapore
Philippines
India
30
10
R = 0.5138
China
40
20
HK
Thailand
Malaysia
Disposable income per capita (US$)
Indonesia
0
0
5,000
10,000
15,000
20,000
25,000
30,000
Source: Euromonitor
19 April 2010
anirudha.dutta@clsa.com
137
Mr & Mrs Asia
Appendices
Appendix 2: Consumer expenditure
China, 2009
India, 2009
Misc
3%
Hotels
4%
Education
6%
Education
3%
Leisure
3%
Communications
3%
Transport
4%
Alcohol/tobacco
3%
Healthcare
9%
Alcohol/tobacco
3%
Clothing & footwear
4%
Housing
12%
Hong Kong, 2009
Misc
2%
Hotels
6%
Clothing & footwear
9%
Education
2%
F&B
42%
Transport
4%
Alcohol/tobacco
1%
F&B
12%
Misc
15%
Hotels
8%
Communications
2%
Housing
20%
Leisure
13%
Healthcare
3%
Household goods
7%
Transport
15%
Household goods
4%
Indonesia, 2009
Education
7%
Leisure
2%
F&B
36%
Healthcare
4%
Clothing & footwear
9%
Housing
11%
Household goods
5%
Misc
11%
Leisure
2%
F&B
32%
Communications
11%
Hotels
3%
Housing
16%
Communications
2%
Transport
6%
Alcohol/tobacco
5%
Clothing & footwear
4%
Japan, 2009
Household goods
7%
Healthcare
5%
Malaysia, 2009
Hotels
8%
Misc
11%
Education
2%
Leisure
12%
Communications
4%
Alcohol/tobacco
3%
F&B
14%
Education
2%
Clothing & footwear
3%
Housing
25%
Hotels
10%
Misc
8%
F&B
14%
Clothing & footwear
3%
Leisure
5%
Housing
21%
Communications
7%
Transport
21%
Transport
10%
Healthcare
4%
Alcohol/tobacco
1%
Household goods
4%
Household goods
5%
Healthcare
3%
Source: Euromonitor
138
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Appendices
Philippines, 2009
Education
5%
Singapore, 2009
Alcohol/tobacco
2%
Hotels
6%
Misc
9%
Leisure
1%
Communications
1%
Misc
13%
Hotels
8%
F&B
36%
Clothing & footwear
3%
Education
3%
Housing
16%
Transport
8%
Leisure
12%
Healthcare
3%
Alcohol/tobacco
2%
Clothing & footwear
2%
Housing
22%
Household goods
5%
Korea, 2009
Household goods
6%
Transport
18%
Communications
3%
Healthcare
8%
Taiwan, 2009
Hotels
7%
Education
6%
Clothing & footwear
4%
Housing
18%
Leisure
7%
Hotels
5%
Alcohol/tobacco
3%
F&B
15%
Misc
14%
Misc
8%
Education
7%
F&B
23%
Leisure
5%
Household goods
4%
Transport
11%
Housing
18%
Clothing
& footwear
4%
Healthcare
10%
Household goods
6%
Healthcare
5%
Thailand, 2009
Alcohol/
tobacco
2%
Communications
5%
Transport
7%
Communications
6%
USA, 2009
Hotels
7%
Alcohol/tobacco
2%
Misc
10%
Education
1%
Hotels
6%
F&B
24%
Leisure
7%
Misc
14%
Education
2%
Communications
2%
F&B
8%
Alcohol/tobacco
5%
Transport
19%
Healthcare
6%
Clothing & footwear
7%
Housing
7%
Household goods
5%
F&B
7%
Clothing & footwear
4%
Housing
19%
Leisure
9%
Communications
2%
Transport
11%
Healthcare
19%
Household goods
5%
Source: Euromonitor
19 April 2010
anirudha.dutta@clsa.com
139
Mr & Mrs Asia
Appendices
Appendix 3: Disposable income-penetration correlation
China
Hong Kong
Broadband-enabled PC
Passenger car
Internet-enabled PC
Videotape recorder
Shower
Dishwasher
Tumble drier
Vacuum cleaner
PC
Cooker
Microwave
Cable TV
Fridge
Cassette/radio
Washing machine
Air-conditioner
Hi-Fi
Camera
Video camera
Black/white TV
Motorcycle
DVD player
Mobile phone
Freezer
Video game console
Telephone
Colour TV
Bicycle
(%)
CD player
0
20
40
60
80
Passenger car
Cooker
Cassette/radio
Hi-Fi
Camera
Videotape recorder
Bicycle
Washing machine
Vacuum cleaner
Dishwasher
Video game console
Fridge
Cable TV
Tumble drier
Freezer
Air-conditioner
PC
Shower
Broadband-enabled PC
Microwave
Black/white TV
Colour TV
Internet-enabled PC
Mobile phone
DVD player
Telephone
Satellite TV
Motorcycle
Video camera
CD player
0
100
India
(%)
10
20
30
40
50
60
70
80
90
Indonesia
PC
Internet-enabled PC
Air-conditioner
DVD player
Broadband-enabled PC
Mobile phone
Dishwasher
Hi-Fi
Freezer
Passenger car
Camera
Telephone
Shower
Microwave
Colour TV
Motorcycle
Cassette/radio
Washing machine
Cooker
Video game console
Vacuum cleaner
Fridge
Satellite TV
Tumble drier
Cable TV
Video camera
Bicycle
Videotape recorder
Black/white TV
CD player
(%)
0
20
40
60
80
DVD player
Cable TV
Dishwasher
PC
Passenger car
Vacuum cleaner
Camera
Air-conditioner
Shower
Tumble drier
Mobile phone
Telephone
Microwave
Internet-enabled PC
Freezer
Fridge
Cooker
Hi-Fi
Broadband-enabled PC
Washing machine
Bicycle
Black/white TV
Video camera
Cassette/radio
Motorcycle
Colour TV
CD player
Video game console
Satellite TV
Videotape recorder
100
(%)
0
20
40
60
80
100
Note: Linear correlation. Source: Euromonitor
140
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Appendices
Philippines
Japan
Air-conditioner
Internet-enabled PC
Dishwasher
DVD player
Camera
Fridge
Vacuum cleaner
Shower
PC
Broadband-enabled PC
Cassette/radio
Cooker
Microwave
Tumble drier
Satellite TV
Freezer
Washing machine
Mobile phone
Video game console
Passenger car
Cable TV
Black/white TV
Hi-Fi
Colour TV
Video camera
Motorcycle
CD player
Videotape recorder
Bicycle
Telephone
(%)
0
20
40
60
80
CD player
PC
Telephone
Mobile phone
Motorcycle
Freezer
Passenger car
Cable TV
Internet-enabled PC
Black/white TV
Bicycle
Shower
Cooker
Broadband-enabled PC
Video camera
Microwave
Air-conditioner
Dishwasher
Tumble drier
Satellite TV
DVD player
Videotape recorder
Hi-Fi
Video game console
Vacuum cleaner
Washing machine
Fridge
Cassette/radio
Camera
Colour TV
100
Malaysia
(%)
0
10
20
30
40
50
60
70
Singapore
Internet-enabled PC
Broadband-enabled PC
Videotape recorder
PC
Cooker
DVD player
Camera
Video game console
Vacuum cleaner
Cassette/radio
Air-conditioner
Dishwasher
Freezer
Microwave
Satellite TV
Video camera
Fridge
Hi-Fi
Cable TV
Passenger car
Washing machine
Mobile phone
Motorcycle
Telephone
Tumble drier
Shower
Colour TV
Black/white TV
Bicycle
CD player
Camera
Video camera
Cooker
Vacuum cleaner
Microwave
Dishwasher
Bicycle
Video game console
Freezer
Tumble drier
Broadband-enabled PC
PC
Fridge
Hi-Fi
Cable TV
DVD player
Cassette/radio
Internet-enabled PC
Air-conditioner
Mobile phone
Motorcycle
Telephone
Shower
Black/white TV
Colour TV
Videotape recorder
(%)
Washing machine
CD player
(%)
Passenger car
0
20
40
60
80
100
0
20
40
60
80
100
Note: Linear correlation. Source: Euromonitor
19 April 2010
anirudha.dutta@clsa.com
141
Mr & Mrs Asia
Appendices
Korea
Taiwan
Motorcycle
Camera
Cooker
DVD player
Hi-Fi
Telephone
Dishwasher
Freezer
Air-conditioner
Vacuum cleaner
Video game console
Satellite TV
Fridge
Microwave
CD player
Tumble drier
Mobile phone
Broadband-enabled PC
PC
Cassette/radio
Colour TV
Passenger car
Internet-enabled PC
Bicycle
Black/white TV
Washing machine
Cable TV
Video camera
Shower
Videotape recorder
(%)
0
20
40
60
80
Tumble drier
Cooker
Vacuum cleaner
PC
Camera
Hi-Fi
Shower
Bicycle
Dishwasher
Microwave
Motorcycle
Freezer
Washing machine
Broadband-enabled PC
Passenger car
Internet-enabled PC
Fridge
Videotape recorder
Air-conditioner
CD player
Black/white TV
Mobile phone
DVD player
Cassette/radio
Satellite TV
Cable TV
Video camera
Colour TV
Video game console
Telephone
100
Thailand
(%)
0
20
40
60
80
100
Asia
Videotape recorder
Dishwasher
Shower
Internet-enabled PC
Camera
Vacuum cleaner
Cassette/radio
Broadband-enabled PC
PC
Video game console
Passenger car
Hi-Fi
Satellite TV
Cable TV
Washing machine
Video camera
Motorcycle
Cooker
DVD player
Air-conditioner
Freezer
Tumble drier
Mobile phone
Microwave
Fridge
CD player
Black/white TV
Telephone
Colour TV
Bicycle
Microwave
PC
Cable TV
Dishwasher
Cassette/radio
Fridge
Telephone
Video camera
Cooker
Internet-enabled PC
Hi-Fi
Mobile phone
Satellite TV
Motorcycle
Vacuum cleaner
Air-conditioner
Black/white TV
Camera
Passenger car
DVD player
Colour TV
Tumble drier
Shower
Bicycle
CD player
Videotape recorder
(%)
Washing machine
(%)
Video game console
0
20
40
60
80
100
0
20
40
60
80
100
Note: Linear correlation. Source: Euromonitor
142
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Appendices
Appendix 4: Penetration of consumer goods
Microwave
Vacuum cleaner
100
China
100
90
India
90
80
Indo
80
70
Japan
70
USA
60
60
50
50
40
40
30
30
20
20
10
10
0
India
Indo
Japan
USA
0
1977
1984
1991
1998
2005
2012
2019
DVD player
1977
1984
China
100
90
India
90
80
Indo
80
70
Japan
70
USA
60
1998
2005
2012
2019
China
India
50
50
40
40
Japan
30
30
USA
20
20
10
10
0
1994
1991
Camera
100
60
China
Indo
0
1998
2002
2006
2010
2014
2018
1977
1985
1993
2001
2009
2017
Colour TV
100
90
80
70
60
50
China
India
Indo
40
Japan
30
USA
20
10
0
1977
1984
1991
1998
2005
2012
2019
Source: Euromonitor
19 April 2010
anirudha.dutta@clsa.com
143
Mr & Mrs Asia
Appendices
Appendix 5: Chindonesia by numbers
China
2007
2008
2009
10CL
11CL
11.5
9.9
16.7
19.5
17.1
Breakdown of real GDP
Private consumption¹
Public consumption
na
na
na
na
na
11.3
12.1
33.0
10.9
11.6
7.4
4.9
13.9
9.7
8.7
Exports, goods & services³
23.1
14.4
(9.5)
27.9
20.2
Imports, goods & services³
15.9
8.2
(0.5)
37.1
27.3
Real GDP growth
13.0
9.6
8.7
10.0
8.0
Consumer prices (y/e)
6.5
1.2
1.0
3.8
2.0
Consumer prices (average)
4.8
5.9
(0.7)
3.5
2.9
Producer prices (y/e)
5.4
(1.1)
1.7
9.5
4.5
Rmb/US$ (y/e)
7.3
6.8
6.8
6.6
6.2
Rmb/US$ (average)
7.6
7.0
6.8
6.7
6.4
1-year savings rate (% y/e)
4.1
2.3
2.3
2.8
2.8
1-year lending rate (% y/e)
7.5
5.3
5.3
6.1
6.1
25.8
17.6
(16.1)
33.0
20.0
GFCF²
Domestic demand
Prices
Currency & interest rates
External sector
Carry effects are
massive in 2010
exports and imports
Exports (US$, % YoY)
Imports (US$, % YoY)
20.3
18.7
(11.2)
47.5
26.0
Trade balance (US$bn)
315.4
360.7
249.3
193.2
147.5
Current account balance (US$bn)
371.8
426.1
284.1
222.5
137.1
- as a % of nominal GDP
FDI (US$bn)
Adjusted resource gap (% of GDP)
External debt (total, US$bn)
Debt service ratio (% exports)
International reserves (US$bn, y/e)4
10.6
9.4
5.8
3.9
2.1
121.4
94.3
36.5
45.6
59.3
14.1
11.5
6.5
4.8
3.0
373.6
374.7
na
na
na
2.0
1.8
na
na
na
1,528
1,946
2,399
2,667
2,864
Money supply
Stimulus starting
up again in 2011 but
much more modestly
Money supply M1 (y/e)
21.0
9.1
32.4
28.0
22.0
Money supply M2 (y/e)
16.7
17.8
27.7
20.0
20.0
Financial institutions loans (y/e)
16.1
18.8
31.7
17.0
20.0
Financial institutions loans (% of GDP)
98.4
99.0
122.1
126.7
138.2
(0.6)
0.4
2.2
2.3
3.0
Nominal GDP (US$bn)
3,498
4,519
4,910
5,643
6,511
Nominal GDP per capita (US$)
2,647
3,403
3,679
4,207
4,830
26,581
31,405
33,535
37,811
41,571
22.9
18.1
6.8
12.8
9.9
Industrial production
18.5
12.9
11.0
20.0
16.0
Retail sales
16.8
21.6
15.5
23.0
20.0
Government sector
General government deficit (% of GDP)
Nominal GDP
Nominal GDP (Rmbbn)
Nominal GDP (Rmb, % YoY)
Other data
Unemployment (% y/e)
Population (m)
4.0
4.2
4.3
na
na
1,321
1,328
1,335
1,341
1,348
¹ Deflated by CPI. ² Deflated by GDP deflator; ³ Deflated by estimated G&S deflators; 4 PBoC foreign
exchange balances. Note: % YoY rates unless otherwise stated. Source: IMF, World Bank, China
Economic News, CEIC
144
anirudha.dutta@clsa.com
19 April 2010
Mr & Mrs Asia
Appendices
India
2007/08 2008/09 09/10CL 10/11CL 11/12CL
Breakdown of real GDP
Confidence good
but this is still an
early cycle recovery
Domestic investment
to offset weaker net
exports in 2011/12
Private consumption
Public consumption
9.8
6.8
3.7
5.5
6.3
9.7
16.7
10.4
6.4
4.2
GFCF
15.2
4.0
7.5
13.1
15.8
Domestic demand
10.7
6.7
5.6
8.3
10.0
Exports, goods & services
5.2
19.3
(7.0)
21.2
13.2
Imports, goods & services
10.0
23.0
(5.9)
14.8
17.8
9.2
6.7
6.8
8.8
8.6
Wholesale prices (y/e)
7.5
1.2
10.4
9.6
5.1
Wholesale prices (average)
4.7
8.4
3.7
9.0
8.0
Rs/US$ (y/e)
40.0
51.0
45.2
42.0
40.5
Rs/US$ (average)
Real GDP¹
Prices
Currency & interest rates
40.1
46.5
47.4
43.7
41.1
Reverse repo rate (% y/e)
6.0
3.5
3.5
4.5
5.0
Prime lending rate (% y/e)
12.5
12.0
11.5
12.0
12.5
Exports (US$, %YoY)
28.9
13.7
(9.8)
33.7
24.2
Imports (US$, %YoY)
35.1
19.4
(8.7)
30.6
21.0
Trade balance (US$bn)
(91.5)
(118.7)
(110.3)
(138.5)
(160.4)
Current account balance (US$bn)
(15.7)
(28.7)
(49.7)
(93.8)
(115.9)
- as a % of nominal GDP
(1.3)
(2.4)
(3.8)
(5.7)
(5.5)
FDI (US$bn)
15.9
17.5
31.2
38.2
31.2
External sector
Current account
blown out by import
prices in 2010
Adjusted resource gap (% of GDP)
External debt (total, US$bn)
Debt service ratio (% exports)
International reserves² (US$bn, y/e)
0.0
(0.9)
(1.4)
(3.4)
(4.0)
223.3
224.0
250.0
275.0
300.0
5.8
5.3
7.6
8.5
9.1
299.2
241.4
260.0
279.3
284.6
Money supply
Best private sector
credit cycle in Asia
Money supply M1 (y/e)
18.6
9.2
19.6
21.1
21.1
Money supply M3 (y/e)
21.2
18.8
18.5
22.5
22.5
Private sector credit (y/e)
21.0
17.0
15.0
21.6
28.0
Private sector credit (% of GDP)
52.1
54.1
56.6
58.0
62.7
2.6
5.8
6.5
5.1
4.7
Government sector
Central gov't deficit (% of GDP)
General gov't deficit (% of GDP)
4.0
8.5
9.7
na
na
Central gov't debt (% of GDP, y/e)
57.3
56.3
57.1
52.6
48.7
General gov't debt (% of GDP, y/e)
84.2
82.5
83.8
na
na
Nominal GDP (US$bn)
1,235
1,202
1,296
1,665
2,097
Nominal GDP per capita (US$)
1,098
1,054
1,120
1,419
1,763
49,479
55,744
61,253
72,660
86,008
15.5
12.7
9.9
18.6
18.4
1,124
1,141
1,157
1,173
1,189
Nominal GDP
Nominal GDP (Rsbn)
Nominal GDP (Rs, % YoY)
Other data
Population (m)
¹ At factor cost. ² Excluding gold and SDRs. Note: All figures % YoY growth rates, unless otherwise
stated. All data refer to fiscal years starting April. Source: CMIE, Reserve Bank of India, IMF, ADB, World
Bank, IIF, CEIC
19 April 2010
anirudha.dutta@clsa.com
145
Mr & Mrs Asia
Appendices
Indonesia
2007
2008
2009
10CL
11CL
Private consumption
5.0
5.3
4.9
5.4
4.8
Public consumption
3.9
10.4
15.7
8.9
3.8
GFCF
9.3
11.9
3.3
12.0
13.0
Domestic final sales
6.0
7.5
5.4
7.5
6.9
Exports, goods & services
8.5
9.5
(9.7)
23.5
16.4
Imports, goods & services
9.1
10.0
(15.0)
30.0
19.8
Real GDP growth
6.3
6.0
4.5
7.0
6.5
5.5
11.5
2.6
6.0
4.5
Breakdown of real GDP
Rural income will
drive consumption
Prices
For inflation to stay in
BI’s 4-6% target range,
interest rates must rise
Consumer prices (y/e)
Consumer prices (average)
5.8
9.5
4.8
5.2
5.0
21.9
9.7
4.7
9.5
3.0
Rp/US$ (y/e)
9,419
10,950
9,400
8,800
8,400
Rp/US$ (average)
9,164
9,757
10,356
9,106
8,563
8.0
9.3
6.5
7.3
8.0
13.1
14.3
12.8
13.2
13.7
Exports (US$, % YoY)
14.0
18.3
(14.4)
29.5
18.2
Imports (US$, % YoY)
15.4
36.9
(27.7)
32.0
22.0
Trade balance (US$bn)
32.8
22.9
35.2
43.5
47.1
Current account balance (US$bn)
10.5
0.1
10.6
18.5
20.5
- as a % of nominal GDP
2.4
0.0
2.0
2.6
2.3
FDI (US$bn)
2.3
3.4
2.3
3.5
4.0
Wholesale prices (y/e)
Currency & interest rates
BI policy rate (% y/e)
Base lending rate (% y/e)
External sector
Buoyant exports will keep
current account in surplus
despite surging imports
Adjusted resource gap (% of GDP)
3.0
0.7
2.4
3.1
2.8
136.6
149.1
157.4
161.8
163.8
Debt service ratio (% exports)
19.2
14.2
16.0
12.6
10.9
International reserves (US$bn, y/e)
56.9
51.6
66.1
88.0
102.0
External debt (total, US$bn)
Money supply
More profitable for banks
to lend in a strengthening
demand environment
Money supply M1 (y/e)
29.7
1.5
10.7
11.3
11.6
Money supply M2 (y/e)
19.3
14.9
12.4
13.7
15.0
Private sector credit (y/e)
27.6
30.8
10.1
24.5
20.5
Private sector credit (% of GDP)
24.9
26.0
25.2
27.0
28.2
Government sector
Public sector deficit (% of GDP)
1.3
0.1
2.4
2.6
1.7
35.2
32.8
31.3
29.7
27.4
Nominal GDP (US$bn)
431.0
510.5
546.9
717.9
880.1
Nominal GDP per capita (US$)
1,910
2,234
2,362
3,061
3,705
Nominal GDP (Rptn)
3,951
4,951
5,613
6,538
7,535
18.3
25.3
13.4
16.5
15.3
4.7
3.7
2.1
4.8
5.5
Public sector debt (% of GDP, y/e)
Nominal GDP
Nominal GDP (Rp, % YoY)
Other data
Industrial production
Unemployment (% y/e)
Population (m)
9.1
8.4
7.9
7.0
6.5
225.6
228.5
231.5
234.5
237.6
Note: % YoY rates unless otherwise stated. Source: IMF, IFS, CEIC, CLSA estimates, Bank Indonesia
Source: Eye on Asian Economics 2Q10 ‘Fibrillation USA: Recovery in a creditless world’
146
anirudha.dutta@clsa.com
19 April 2010
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CLSA Securities Malaysia Sdn Bhd
Suite 20-01, Level 20
Menara Dion
27 Jalan Sultan Ismail
50250 Kuala Lumpur
Tel: (60) 3 2056 7888
Fax: (60) 3 2056 7988
USA - New York
Credit Agricole Securities (USA) Inc
15/F, Credit Agricole Building
1301 Avenue of The Americas
New York 10019
Tel: (1) 212 408 5888
Fax: (1) 212 261 2502
Hong Kong
CLSA Limited
18/F, One Pacific Place
88 Queensway
Hong Kong
Tel: (852) 2600 8888
Fax: (852) 2868 0189
Philippines
CLSA Philippines, Inc
19/F, Tower Two
The Enterprise Center
6766 Ayala corner Paseo de Roxas
Makati City
Tel: (63) 2 860 4000
Fax: (63) 2 860 4051
USA - San Francisco
Credit Agricole Securities (USA) Inc
9/F, 388 Market Street
San Francisco, CA 94111
Tel: (1) 415 392 3500
Fax: (1) 415 392 3558
India
CLSA India Ltd
8/F, Dalamal House
Nariman Point
Mumbai 400021
Tel: (91) 22 6650 5050
Fax: (91) 22 2284 0271
Singapore
CLSA Singapore Pte Ltd
80 Raffles Place, No.18-01
UOB Plaza 1
Singapore 048624
Tel: (65) 6416 7888
Fax: (65) 6533 8922
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CLSA Sales Trading Team
Australia
China (Shanghai)
Hong Kong
India
Indonesia
Japan
Korea
(61) 2 8571 4201
(86) 21 2020 5810
(852) 2600 7003
(91) 22 6622 5000
(62) 21 573 9460
(81) 3 4580 5169
(82) 2 397 8512
Malaysia
Philippines
Singapore
Taiwan
Thailand
UK
US
(60) 3 2056 7852
(63) 2 860 4030
(65) 6416 7878
(886) 2 2326 8124
(66) 2 257 4611
(44) 207 614 7260
(1) 212 408 5800
CLSA is certified ISO14001:2004
© 2010 CLSA Asia-Pacific Markets ("CLSA").
Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market
by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%.
14/04/2010
Performance is defined as 12-month total return (including dividends).