Thursday, April 20th, 2017
Our current top positions in the Clime International fund include the following names:
Microsoft (Office365, LinkedIn, Xbox, Azure, Surface)
|Roche (Herceptin, Avastin, MatThera / Rituxan, Medical Diagnostics)|
|Oracle (Software, hardware systems and services)|
|Alphabet (Google, YouTube)|
|Diageo (Johnnie Walker, Smirnoff, Tanqueray, Baileys, Captain Morgan, Guinness)|
|Baidu (Search engine, iQiyi)|
|American Express (Amex Platinum, Amex Gold)|
|Cognizant (Consulting, IT infrastructure, business process, outsourcing services)|
|Medtronic (Medtronic, Medical Devices & Diagnostics)|
|Yum Brands (KFC, Taco Bell, Pizza Hut)|
|Unilever (Dove, Axe, Lux, Radox, Rexona, Simple, Lipton, Knorr)|
All of these companies are using their entrenched industry positions to access growth opportunities in Asia. Management teams of these well run businesses are well aware that there is very significant growth opportunities available in the Asian consumer market and they continue to optimise their business plans to ensure they capture a growing share of an ever expanding market.
By example, Unilever’s largest emerging markets by company sales include the likes of India, China and Indonesia. By 2050 Indonesia will be one of the top 5 economies in the world by size.
Figure 1. Unilever top 15 emerging markets
Source. Company reports, Bernstein estimates
Another example of focus on the Asian consumer is Diageo, where in the most recent results presentation by the CEO, he highlighted Scotch, India and the US as Diageo’s strategic priorities for this financial year, which are also the main topics for the company’s upcoming Capital Markets Day on the 9th of May, which we will be attending in person.
Investors might be surprised to learn that the returns generated by Scotch and India are below the group average even though they have been active in the Indian market for many years. However, we believe that a significant improvement is underway for both these divisions over the next few years, which drives an inflection in Diageo’s group cash flow returns on investment, which is already an impressive number in the low-20%s.
Figure 2. Returns improvement in key growth engines, Scotch and India
Source. Credit Suisse estimates, Credit Suisse HOLT (dotted line shows Diageo group average)
Today Yum China released same-store sales numbers, which were very impressive. This added to our confidence in our longer-term growth assumptions and reinforces our view that the stock is one of the best ways to play the improving consumer disposable income trends in the Asian region. We have recently been building up our position in Yum China to a top 10 position and are very pleased with the short-term fundamental trends. With the first quarter results representing the most difficult comparison of the year, we fully expect that comparative numbers will remain at least in the mid single digits for the remainder of the year. We assume a long-term revenue growth target in of 4-5% per annum for the next 5 years. Our fair value target of $33 still represents some upside in the name even after a strong share price rally in April so far.
China is entering a period of normalised GDP growth in the mid-single-digit range as it transitions away from being an export and government-driven economy. We do believe that consumption trends will remain relatively strong even as the overall economy slows down medium-term. This will continue to benefit Yum China and help them sustain growth numbers in same store sales of at least mid-single-digits per our forecasts.