I firmly believe that this century will be the Asian century. Asia has a rapidly growing middle class lead by the world's second largest economy - China. The strategy that investors need to deploy is to position themselves for long-term growth. Asia's corporations are modernizing and want to position themselves as global leaders. According to Interbrand, in 2012 only 2 of the top 10 global brands were Asian companies - Samsung (OTC:SSNLF) and Toyota (TM). As Asia grows richer, we as investors want exposure to companies that are going to benefit the most. Asia truly offers the investor an opportunity to be like Warren Buffett and invest for the long haul.
The Coca-Cola Company (KO)
Dividend Yield: 2.80%
Speaking of Buffett, there's no better way to start then with the Oracle's 2nd largest holding after Wells Fargo - Coca-Cola. Here in Asia, Coke is everywhere and I mean everywhere. It is the one constant that you can find in every store and every restaurant, either Coke or Coke Light as they prefer to call Diet Coke.
Coca-Cola has been able to control every aspect of their product in Asia from manufacturing to distribution. Coke's chief competitor PepsiCo, Inc. (PEP) has failed to do that. For instance, in Thailand it's very difficult to find a Pepsi now. Pepsi at one time was the number 1 soft drink in Thailand. Then the company tried to take over its distributor. When that failed, the distributor launched a Pepsi look-alike drink called "Est". Coke is now the number 1 soft drink in Thailand and "Est" is number 2. Pepsi is a distant third.
Coca-Cola just announced that they would increase their investment in Indonesia by $700 million. Indonesia is the world's most 4th most populous nation and consumption is growing as incomes rise. Coke sees Indonesia as being a very important growth market for the company.
From a valuation perspective, I still think Coca-Cola is attractive. The stock has a forward P/E of 17.24 and has an operating margin of 23.36%. Return on equity is an impressive 27.92%. I think there's no denying that Coke is a well-run company and the dividend has always been there for Coke investors.
Yum! Brands, Inc. (YUM)
Dividend Yield: 1.90%
I know when most think of fast food, they automatically want me to say McDonald's (MCD) and put that stock here. However, in my opinion Yum! has more potential than McDonald's in Asia. I follow the Peter Lynch way of thinking and go and look at a store's business. I can tell you that in Asia, there is more foot traffic in and out of KFC than a McDonald's. Yum! has done a phenomenal job of adjusting their menu to appeal to the palette of their customer in Asia.
The biggest worry about Yum! is its dependence on China for sales and profits. A controversy emerged last December when its chicken supply in China was found to have an increased level of antibiotics. Sales in China were down over 20% in January and February because of this news. However, this was better than expected as the company forecast sales to be down almost 25%. KFC has since launched an aggressive media campaign to restore its reputation and has eliminated more than 1000 small chicken farmers to get better control over its chicken supply.
Yum! has started expanding aggressively in other Asian nations such as Thailand and Vietnam. The model that the company rolled out in China is now being transitioned to other fast-growing Asian nations. Besides KFC, the company is also expanding its Pizza Hut and Taco Bell restaurants in Asia.
From a valuation perspective Yum! has a forward P/E of 17.66 and an operating margin of 16.34%. Yum! has less than $3 billion in debt on the balance sheet.
Apple Inc. (AAPL)
Dividend Yield: 2.40%
At first glance, you would think that Samsung should be in this spot. Samsung right now does have a better emerging markets strategy than Apple. In any Asian mall, it's very easy to find a Samsung store. Finding an Apple store is a different story and if you do, it'll likely be an Apple reseller under the name emachines or iStore. Walking through the malls, you'll see that most people are on a Samsung device rather than an iPhone.
The reason I put Apple here and not Samsung is because the Asian consumer wants an iPhone, not a Samsung phone. They just can't afford the iPhone. As their incomes grow, the first thing they want to buy is an iPhone.
In Asia, most customers are on prepaid phones; therefore, the phone isn't subsidized by the carriers like in the U.S. An iPhone that costs $199 in the U.S. with a contract, costs $800 and there's no negotiation. As incomes grow and Apple solidifies its emerging markets strategy, I look for Apple to benefit greater than Samsung.
Apple, though, continues to make missteps. Just this week the company was forced to apologize to Chinese consumers over warranty confusion. Apple had to take this step because the Chinese market is so important to the company's future growth. In China there are approximately 85 million iOS users compared to 160 million active Android users. To catch up with Android, Apple needs to get a deal done with China Mobil. China Mobil has almost 700 million users that can't have an iPhone. Apple can't grow in China without a deal with China's largest mobile phone carrier.
From a valuation perspective, we all know that Apple is incredibly cheap. The stock's forward P/E is only 8.59 and the PEG ratio is 0.54. Operating margins are an impressive 33.46%. And we all know about the massive cash pile on hand.
We all must remember what the late great Steve Jobs envisioned. He never saw Apple products as something for the masses and instead targeted the higher-end consumer. Consumers in Asia want to be high-end consumers.
Starbucks Corporation (SBUX)
Dividend Yield: 1.50%
What excites me about Starbucks is that the company has only 800 stores in China and 7 stores in India. 807 stores for 2.5 billion people? In Asia typically most are tea drinkers; however, that is beginning to change. As incomes have risen, drinking coffee is seen as a status symbol. In China it's estimated that 1/3 of all households are now drinking coffee in the home. Last quarter Starbucks reported revenue of $214.1 million in the Asia-Pacific region. This is a gain of 28% from the previous year. The company has more than 3,400 stores in 13 countries and regions in Asia compared to almost 12,000 stores in the U.S.
In China Starbucks is looking to rapidly expand beyond its 800 stores. The company is also looking at getting its coffee into grocery stores with their pre-packaged coffee and bottled drinks. By 2015 the company hopes to have over 1500 stores in 70 Chinese cities. Starbucks CEO Howard Schultz said at the company's shareholder meeting that he's "very optimistic about the Chinese economy and the future of China".
Starbucks just announced that it would roll out 100 new stores in Indonesia and 100 new stores in the Philippines over the next 4 years. The company currently has 700 stores in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. Starbucks CEO Howard Schultz said that "with a population of more than 600 million people, an emerging middle class that is driving strong consumption and a robust and resilient economy, Southeast Asia represents a compelling growth opportunity for Starbucks".
In order to succeed in India, Starbucks has partnered with Tata Coffee, part of Tata Global Beverages (OTC:TTAEY). The partnership opened its first store in Mumbai in October 2012. Currently in India, only 2 percent of the population can afford a Starbucks latte on a regular basis. Even though 2 percent of 1.2 billion is still a large market, the growth will increase as incomes in India rise. In India Starbucks has only 7 stores compared to the Cafe Coffee Day which has over 1000 locations.
In order to succeed in India, Starbucks had to make some changes. The thrifty Indian nature forced Starbucks to cut back its prices. In Beijing a 12-ounce cappuccino costs $4.34. In Mumbai Starbucks priced the same drink at $2.14. Starbucks also incorporated Indian fare into the menu with tandoori paneer rolls, murg tikka paninis, and elaichi mawa croissants to go along with muffins and cheesecake. The store's interiors are also decorated to appeal to Indian consumers. Each store has handcrafted wooden screens, painted vintage trunks, and thick tables of solid Indian teak.
There's plenty of room for Starbucks to grow in India. It is estimated that the coffee sector in India is currently a $230 million business. Five years ago, the sector was only $40 million. Over the next 10 years, coffee will be a multi-billion dollar business in India and Starbucks is finally positioned to benefit from this growth in India.
From a stock standpoint, Starbucks is still attractive. The company has a forward P/E of 22.05, still reasonable for a growth stock. Operating margins are an impressive 13.66%. The company has only $549 million in debt, so the balance sheet can easily finance expansion and the dividend.
As investors we must keep in mind that Asian consumers are extremely brand-obsessed. Their purchases are a reflection of who they are and status symbols. We want to be invested in those companies that will stand the test of time and have businesses with high barriers to entry and strong management that can execute. These 4 stocks fit those criteria.