An Empire to Rival Starbucks amidst a Vietnamese Caffeine Affliction: Trung Nguyen

Vietnam is the second largest producer of coffee beans worldwide (after Brazil), yet domestically there is a coffee affliction with a mere 70,000 tonnes of coffee consumed annually by Vietnam’s 90 million strong population (out of 1.3 million tonnes produced). Whilst this caffeine affliction has been blamed on a traditional preference for tea and the lack of a substantial middle class, the upside is that there is plenty of room for coffee demand in Vietnam to grow. Growth will also be aided by the increased exposure to other cultures through the internet and social network websites leading to a change in tastes, the emergence of Vietnam’s middle-class, a younger and more trend-influenced population with 68% of the country’s 90 million people under the age of 40, savvier coffee advertising, and the emergence of stores from international coffee brands such as Starbucks in Vietnam.

Vietnamese Robusta Coffee Beans

Coffee is ingrained in Vietnam’s history with coffee shops a common sight on the streets of Vietnam’s cities. Asia accounts for 31% of global coffee beans production with Vietnam their major producer, with its production of 1.3 million tonnes of coffee beans each year worth around US$3 billion. Despite being the world’s second biggest producer of coffee beans, 90% of Vietnam’s produce is marked for export. Most of Vietnam’s coffee beans are the low-grade robusta utilized in instant coffee (of which Vietnam are the world’s biggest producer), yet there is a movement among farmers to grow higher quality Arabica beans which can fetch a higher price. Yet despite their long history, large production base, and myriad coffee shops, Vietnam still consumes much less coffee per capita than even its neighbours. For example, Thailand consumes four times the coffee per capita that Vietnam does. Currently the Vietnamese coffee market is dominated by two products: ground coffee which accounts for two-thirds of sales and instant coffee which makes up 30% of sales. Profitability could be boosted by a shift in Vietnam’s coffee consumption to drinking more ground coffee in cafes that would use higher quality Arabica beans rather than the traditional drink of choice – green tea – or the instant coffee derived from robusta beans. Developing higher domestic coffee consumption could be facilitated by emphasizing the health benefits of moderate coffee consumption and creating products moulded to local tastes. A mark of the potential profitability of Vietnam’s coffee market is seen in various multinational companies’ efforts to invest in the country. Not only have Starbucks opened their first store, but Nestle currently buy about a quarter of Vietnam’s total coffee beans produced annually and this year invested US$270 million to build new factories to produce soluble coffee for the local market and decaffeinated coffee for export. Currently the country has only processed about 12% of its total bean production – merely processing more of their own beans could generate a coffee industry worth US$30 billion annually and create around 6 million jobs. Strong branding of its coffee beans, more processing of its coffee beans, and stronger domestic consumption are all factors that could drive Vietnam’s coffee industry. Major coffee industry players include Nestle, Trung Nguyen, and Vinacafe Bien Hoa (owned by Masan Group). It is the second supplier – Trung Nguyen – that has captured the imagination and is set to be a good investment as the Vietnamese caffeine affliction is transformed into a caffeine addiction.

Trung Nguyen is Vietnam’s biggest coffee retailer and largest domestic coffee brand, a fully privately-owned business foundedin 1996 by a group of medical students. Its CEO Dang Le Nguyen Vu, regarded as Vietnam’s Coffee King, has stated his company’s intention of becoming a “global coffee empire” to rival Starbucks by 2020. Trung Nguyen is involved in the entire process of coffee from production to processing to distribution through retail stores. They also currently export its products to more than 60 countries, with a focus on major Asian markets such as Japan, China and ASEAN. Notable products include the Trung Nguyen coffee brand, Weasel kopi luwak and Legendee simulated kopi luwak coffee, Passiona low-caffeine coffee, and G7 instant coffee. Currently Trung Nguyen owns countless plantations all over Vietnam and five coffee bean processing facilities with a combined ability to process around 35,000 tons of coffee annually. In fact, its plantations have world-class technology, including an Israeli irrigation system and Finnish fertilizer, in order to increase the quantity and quality of its coffee beans. Trung Nguyen also possess nationwide distribution channels with over 1,000 coffee shops and 60 cafes – astounding growth if you consider the first coffee shop only opened in October 1998 in Ho Chi Minh City. In addition, Trung Nguyen has franchises in Japan, Thailand, Cambodia, Malaysia, China, and Germany. Trung Nguyen’s 2012 revenue was US$200 million, a 32% increase from the previous year. Trung Nguyen hopes to double their 2012 revenue in 2013 with their hopes hinging on higher demand from ASEAN and Chinese markets for their ground coffee and G7 instant coffee (Vietnam’s top selling instant coffee brand, better than Nestle’s Nescafe). Trung Nguyen’s G7 instant coffee currently has a 38% share of the national market, compared to 35% for Vinacafe Bien Hoa and 22% for Nestle. Furthermore, their instant coffee exports have been growing by 25% annually, driven in particular by demand from South Korean and China.

Trung Nguyen Store in Ho Chi Minh City

In order to become a ‘global coffee empire’ to rival Starbucks, Trung Nguyen have put in motion plans to buy bean roasters in the USA and to open coffee shops in Seattle, New York City and Boston by 2013. Trung Nguyen are marketing their competitive advantage as the quality and authenticity of their coffee. Their coffee indeed boasts high quality as they create a specialty roast that emulates the taste of kopi luwak, the expensive coffee brewed from beans recovered from civets’ feces. If Trung Nguyen are able to stick to their proven coffee formula and their traditionally authentic coffee taste they may be able to appeal to US consumers’ desire to try different taste profiles from other countries, which could lead to a successful coffee chain on Starbucks’ home turf of Seattle. Trung Nguyen’s future strategy emphasizes reversing their current proportion of sales of 70% domestically and 30% internationally with a focus on developing its presence in China, the USA and Europe. However the domestic Vietnamese market is still an important component of Trung Nguyen’s strategy as they seek to increase the number of cafes nationwide to 200 by 2015. All this, the company hopes, will propel their revenues to US$1 billion by 2016 as well as laying the foundations for taking the company public on an international stock exchange by 2015.

There looks to be a coffee market with strong potential to grow and the opportunity soon to invest in the leading Vietnamese coffee brewer with global ambitions. As major brewers coax the increasingly richer Vietnamese consumers to have three kilograms of coffee beans a year by 2017, up from one kilogram currently, Trung Nguyen are in an excellent position to provide exposure to the coffee industry, Vietnam, and a fast-growing multinational company.

 

Investing in Sustainable Housing: Lafarge

Lafarge Cement Plant

With an illustrious history dating back to France in 1833, Lafarge is currently the world’s largest cement manufacturer on a mission to deliver shareholder value by providing innovative solutions for one of mankind’s big worries this century – sustainable housing. As the world’s largest company within the building materials industry, Lafarge focuses on four major products: cement, construction aggregates, concrete and gypsum wallboard. Lafarge conducts its operations through over 1,000 subsidiaries, of which 82% are consolidated. Over the past 10 years, sales have remained strong  UR16 billion whilst their number of employees has decreased from 83,000 in 2001 to 65,000 currently, highlighting Lafarge’s successful push to increase worker productivity. Last year saw revenues of EUR15.816 billion and profits of EUR432 million. The company has marketed themselves as contributing to “building better cities” by addressing some of the key challenges of urbanization by helping to make more compact cities, more durable cities, more connected cities, and more beautiful cities. Lafarge have also had a knack for knowing when to sell struggling businesses in order to concentrate on its core businesses of cement, aggregates and concrete; in 2007 it divested its roofing division to a private equity group and also recently sold its European, South American and Asian gypsum operations. This ability will only enable the company to accelerate growth and innovation.

Lafarge Project: Two Towers in Marseille, France

Innovation runs through the company’s veins – its first international contract was for the delivery of 110,000 tonnes of lime to help construct the Suez Canal and it was an early pioneer of white Portland cement. Innovation remains at the core of Lafarge’s businesses as they see it enabling them to turn into a supplier of solutions and value-added products and services as well as building materials for the construction industry. The manifestation of this principle of innovation is the Lafarge Research Center, the world’s leading research facility in building materials, which utilizes EUR115 million per year. In the building sphere, the Lafarge Research Center have invented Agilia (a self-placing and self-levelling concrete which is fast to implement, very fluid and spreads effortlessly – it significantly improves working conditions on building sites), Chronolia (used in the same way as a conventional ready-mix concrete but it rapidly develops very high mechanical strength meaning that formwork can be removed just four hours after manufacture, allowing considerable productivity gains on the worksite), extensia (concrete specially designed for laying slabs and industrial floors subject to heavy loads due to traffic or storage – faster to implement and makes it possible to achieve high resistance to wear without adding a surface hardener), earth cement (a new binder for construction of earth houses which significantly extends their lifespan while retaining thermal comfort properties). The Research Center has also developed a new class of cements producing using less limestone manufactured at lower temperatures and requiring less energy than traditional Portland cement – means a 30% reduction in CO2 emissions during manufacture, developed thermedia range of concretes designed to reduce heat loss in buildings while retaining the same mechanical strength as standard concrete, and examined the main component of cement – clinker – to see if new binders with a different chemical composition can reduce CO2 emissions linked to cement manufacturing. On the preservation side, Lafarge Research Center has innovated by recycling old roads to recover the bitumen and aggregated in order to make new asphalt surfacing materials with better performance than traditional asphalt, creating hydromedia concrete to absorb rainwater and facilitate its natural runoff into the soil to allow natural groundwater to recharge and avoid saturation of stormwater management systems to reduce flooding risk, creating Ductal ultra-high performance concrete with a compressive strength eight times greater than that of standard concrete which gives it high resistance to external attack from abrasion and pollution and harsh weather conditions, and creating manufactured sand produced from crushing rocks as an alternative solution to natural alluvial sand which is becoming an increasingly rare and difficult-to-access resource. With a portfolio of over 1,000 patents, which has doubled since 2005, the Lafarge Research Center is an illustration of Lafarge’s focus on innovation as a competitive advantage.

Building Houses in One Day in Yaounde, Cameroon

 

Looking more closely at Lafarge’s major businesses, they are organised by product type. Lafarge orients the development of its businesses towards fast-growing markets, particularly in Asia the Middle-East. Fast-growing emerging markets account for 59% of Lafarge Group sales in 2012, compared to 32% in 2005. Moreover the geographic spread ensures limited risk as no emerging country represents more than 5% of total sales. Lafarge see innovation and performance as their two major drivers of growth. In total, they estimate that innovation contributed EUR150 million of EBITDA to their profit in 2012. On the performance side, Lafarge have reduced their expenditure by EUR1.5 billion between 2006 and 2012 and are aiming to produce the same quality at a cheaper price by using more alternative fuels in order to reduce their energy bill, producing an additional 15 million tonnes by 2015 with a minimum level of investment in their existing plants, and further developing a performance culture and accelerating transfer of know-how.

Lafarge Cement has 161 plants in 58 countries and is the world’s number one cement supplier. The cement business produces a wide range of cements, hydraulic binders and limes for construction and renovation. The cement business has 161 production sites including 116 cement plants and accounted for 66% of Lafarge’s 2012 turnover. 22% of cement sales in 2012 were in Asia, 34% from the Middle-East and Africa, 15% from Western Europe, 12% from North America, 9% from Central and Eastern Europe, and 8% in Latin America. Cement is key to development in emerging countries – for 20 years the annual average growth for global cement demand has been 5%, the equivalent of 100 million additional tons of cement consumed per year. Despite the global financial crisis, global cement demand grew by 8% last year, supported by demand from large emerging markets such as China, Brazil, India and Sub-Saharan Africa where demography, urbanization and economic growth are propelling the need for housing and infrastructure. The building materials industry is a non-cyclical industry, which bodes well for the world’s largest operator, Lafarge.

Building on Sand in Vietnam

Lafarge is the world’s second largest aggregates supplier. Aggregates are fragments of rock measuring from 0.08 to 80 millimeters in diameter. They can be mixed with a binder – either cement to make concrete or tar to make asphalt – and used in the manufacture of houses, structures and bridges. They have three main functions: aggregates make a vital contribution as support to the strength of materials such as concrete, filling - aggregates make mixtures more compact and facilitate specific applications including drainage and heat retention, embellishment – aggregates have aesthetic qualities too. The aggregates business is essential for the manufacture of concrete, meaning that the two businesses are quite closely linked. Aggregates are also the most consumed natural substance in the world. For Lafarge’s aggregates business, they currently posseess 386 quarries and sold 188 million tons of aggregates worldwide in 2012. 54% of aggregates sales in 2012 were in North America, 31% from Western Europe, 10% from Central & Eastern Europe, 3.4% from Middle-East and Africa, 1.5% from Asia, and 1.1% from Latin America. Lafarge is seeking to consolidate its strengths in the aggregates business by developing business in emerging countries and pursuing sustainable quarry management. The aggregates market remains very fragmented with many independent operators and local producers. Lafarge therefore possesses several strong competitive advantages that could enable it to outcompete and acquire several of these independent operators including expertise throughout the value chain, cost reduction through economies of scale, experience and knowledge of local markets, proven quarry rehabilitation practices, and a global presence allowing sharing of best practices. Lafarge is also the only building materials company to conduct research into aggregates.

            Both the Lafarge Aggregates and Concrete businesses together have more than 1,400 production facilities and sales offices in 36 countries. Just the concrete business has 1,011 concrete plants, fitting for the world’s fourth largest concrete supplier. In 2012, Lafarge manufactured 31.8 million metric tons of concrete products. In the same year, 35% of concrete sales were from Western Europe, 31.4% from North America, 16.4% from the Middle-East and Africa, 10.2% from Asia, 3.9% from Latin America and 3.1% from Central and Eastern Europe. Here there is also clearly room to grow emerging market sales.

Casablanca's New Tram

The world’s socioeconomic dynamics are making Lafarge an excellent investment as they have a key role to play in meeting the world’s future construction needs and also have the means to meet these needs in emerging markets by leveraging their existing cement sales networks. The world population will exceed 9 billion people by 2050, which will challenge the world to provide efficient and sustainable housing and infrastructure for everyone. Today an estimated one billion people live in slums and two billion people lack access to electrical power. Lafarge has national initiatives providing affordable and efficient housing in India, Indonesia, Honduras and France. By 2025, half the world’s population will live in cities of between 100,000 and 500,000 inhabitants. Moreover by 2025, 50% of the world’s megacities will be located in Asia and two new ones will have developed in Africa. Over 4 billion people (including 150 million in developed countries) also currently do not have access to decent housing – therefore there is a need for affordable housing solutions which can be adapted to a variety of different geographies and that can be built quickly. Lafarge see a variety of action areas as able to facilitate affordable housing including microcredit programs, rehabilitation of slums in situ, a new generation social housing project in developed countries, and programs with real-estate developers. Lafarge projects include improving housing in the slum of Dharavi in central Mumbai by building solid and watertight concrete houses, with the concrete delivered in buckets by motorized tricycles. Previously a million people lived in Dharavi in shacks made of corrugated metal and other recovered materials. By 2030, India will need 10 million new homes every year and the solution used in Dharavi means there is a prospect of being able to replicate affordable and quick housing to meet this need. Another Lafarge project is building houses in Yaounde in just one day by using innovative stay-in-place formwork in combination with concrete. Every year 100,000 people arrive in Yaounde and Douala looking for housing.

Dharavi Slum in Mumbai

A twin concern is the need to improve the world’s energy efficiency as aresponse to greater population demanding energy and global warming. Also, buildings represent nearly 38% of global energy consumed, more than transport or industry. This is a twofold issue concerning both reducing the energy consumed during the manufacturing of its products, and developing products which can improve the energy efficiency of buildings over their entire lifecycle. The buildings’ construction and material manufacturing stages are responsible for 10% of the total CO2 emissions over the buildings’ entire lifespan – Lafarge’s solutions are reduced carbon cements and concretes and high-performance concretes requiring less volume to be used. In addition, occupancy of a building is responsible for 80% of its total energy consumption over its lifespan – Lafarge has designed concrete-based building solutions. The constructions’ end of life represents 7% of its total energy impact over its lifespan and here Lafarge offers high value second life solutions for concrete wastes such as being re-used in sub-layers for roads.

Linked is environmental preservation which requires reduction of the carbon footprint during cement manufacturing, optimizing the use of natural resources, and reducing water consumption during production. The building and the building sector’s final energy demand equals 31% of the world’s man-made energy related CO2 emissions. Additionally, the cement industry generates around 5% of the world’s CO2 emissions. Lafarge have committed to reducing the emissions from its cement business by improving the performance of its cement kilns, substituting some of the clinker with industrial residues, and controlled use of non fossil fuels.

With the rise of global warming and more extreme weather, more durable cities with longer-lasting buildings and infrastructure are needed. Lafarge solutions include ultra-high performance concrete Ductal and Thermedia as well as Hydromedia. Lafarge have solved a problem in Vietnam of building on the loose ground of river deltas and along coastlines by using a special cement called Soilcrete which incorporates 60% slag (steel mill waste with properties of a hydraulic binder) which is injected directly into the sand to ensure stability. As a strip of land along the South China Sea, Vietnam has many rivers and deltas which makes the ground loose and unstable and therefore constructions are fragile. Soilcrete reduces cracks in massive structures and helps Vietnam build stronger housing, a necessity as each year they gain another million inhabitants.

Lafarge helping renovate Erbil in Iraqi Kurdistan

The world is also seeing a shift towards more compact cities, particularly in developing countries. To help limit urban sprawl, vertical buildings are more commonplace now and older buildings are being renovated to save ground space, keep cities compact, preserve quality of life and provide fluid transportation. There will be a 70% urbanisation rate globally by 2050. Different concrete is needed for different parts of vertical construction: very high strength concrete for foundations and lower parts, lightweight concrete for the upper parts, and insulating concrete for partitions at each level. Lafarge supplies these needs.

Urban dwellers increasingly expect to travel easily and swiftly around their own cities and between cities. By 2025, there will be a 52% increase in city travel worldwide. Lafarge’s cements, aggregates and concretes help make cities better connected as they are used for building train and metro lines, highways and railways, bridges and tunnels, ports, stations, and airports. Lafarge has helped build a new tram line in Casablanca in 2012 which is enabling better transportation for its 3.6 million inhabitants. Lafarge are also involved in building Cairo’s third metro line, to open in 2019.

There will be around 2 billion new urban dwellers by 2050, which increases the importance of beautiful cities. Lafarge have played a role in renovating and preserving one of the world’s oldest continuously inhabited settlements, the citadel of Erbil in Iraqi Kurdistan, which was constructed 8,000 years ago. Lafarge was also involved in building terminal 4 at Madrid-Barajas airport, which uses concrete shaped into particularly bold forms and bright colours in order to provide a mirror of the city of Madrid and attract travellers stopping over to venture into the city. Madrid’s new terminal doubles the capacity of the airport from 35 million to 70 million passengers per year, positioning it as the main hub for traffic between Europe and South America. 

Africa's Hilton: Azalai Hotels

Timbuktu: Mali's famous export

Mali is more famous for Timbuktu, the Sahara Desert, and the Dogon People. Perhaps these things helped the Azalai Hotels Group in its rise towards becoming Africa’s own Hilton hotel chain, yet the Azalai Hotels also deserve a mention as a famous Malian export in their own right.

Afropolitans are on the rise, using Asian, European and American capital to invest in African opportunities. The rush of Chinese capital, goods and labour into Africa as well as Chinese demand for African resources is boding well for the continent. Trade between Africa and China increased by 20 times since 2000, valued at US$206 billion in 2012. Investments bounds for Africa have also increased due to the search for yield as opportunities have shrunk in debt-laden Europe and a slower-growing America. A variety of factors are making the African continent more attractive to investors. 7 of the world’s fastest-growing economies are now in Africa. Sub-Saharan Africa’s population is around 900 million now and projected to reach 2.1 billion by 2050, the fastest growing region worldwide. Furthermore, the African continent currently has the youngest population with 40% of people under the age of 15. McKinsey have assessed the value of consumer industries including retail, telecoms, tourism and banking in Africa at US$620 billion by 2020, 51% of the revenue increase for all African industries. These factors all portend the emergence of a middle-class in Africa intent on acquiring and experiencing the same luxuries that the European, Asian and American middle-class have already been enjoying. Some multinational companies are already tapping into the continent:

Afropolitans Rising?

·         Walmart, the world’s largest retailer, acquired South African Massmart for US$2.4 billion;

·         Procter & Gamble spent US$27 million developing a soap factory in Nigeria;

·         L’Oreal have implemented measures to increase African revenues by 20% annually by targeting Africa’s burgeoning middle-class.

In Ouagadougou, Burkina Faso

Enter Azalai Hotels. Founded in 1994, it is the first privately owned hotel chain in West Africa. It now has six hotels in five countries – Mali, Benin, Senegal, Burkino Faso, and Guinee-Bissau. Altogether there are 700 rooms in three and four star hotels that target the business traveller market with guests paying £50 to £90 a night. The Azalai Hotels Group is valued at around £50 million, employing 800 people. A privately-held African company, 90% of the company is owned by one family and the remaining 10% owned by specialist West African venture capital fund Cauris Management. 2012 saw revenues of £12 million, down 8% from 2011 due to the Islamist insurgency in Northern Mali and the counterattack by the French. Azalai Hotels Group have shrewd management in the form of American and French educated Mossadeck Bally, CEO and founder of the Group, who was named African Businessman of the Year in 2011 by the African Development Bank. The Group also has plans to expand with three hotels being developed in Abidjan, Dakar (Senegal), Timbuktu and Conakry (Guinea) with further plans to target Niger, Togo and Nigeria. This geographical diversification should protect investors’ money despite corruption, potential government interference, and political instability in West Africa.

This is an opportunity to invest in a high-growth business despite it facing adversity. With plans to list on the Abidjan stock exchange in the commercial capital of the Ivory Coast, it will soon be possible to acquire shares in West Africa’s only privately-owned hotel chain, a veritable Hilton one day.

OCBC: The World’s Strongest Bank with a Fortress Balance Sheet

This is a massive bank focused on the less sexy parts of finance, yet that is where its value lies. Oversea-Chinese Banking Corporation (OCBC) is Singapore’s second largest bank by assets (SG$225 billion). It is also the largest local bank in Singapore by market capitalization, but the smallest local bank by global presence. Accolades abound for OCBC:

·         Bloomberg has rated OCBC as the world’s strongest US$100 billion asset bank both in 2011 and 2012;

·         Global Finance 2012 has rated them among the World’s 50 Safest Banks;

·         Asian Banker 500 rated them Strongest Bank in Southeast Asia 2012;

OCBC's Fortress Balance Sheet

·         Most Innovative Bank in Asia-Pacific by Asia TrailBlazer Awards 2012;

·          FinanceAsia in 2012 awarded them as one of the top 10 companies in Singapore for Best Corporate Governance, Best Investor Relations, Most Committed to a Strong Dividend Policy, and Best Corporate Social Responsibility.

This is clearly a bank that takes risk management, innovation, transparency, shareholder value, and corporate governance seriously – all pluses this side of the 2008 financial crisis. With OCBC’s shares currently trading at SG$10.86 on the Singapore stock exchange within a 52 week range of SG$8.14-11.2 and with a one year return of 32%, now is a good time to buy for a long-term hold.

OCBC is one of the largest listed banks in the ASEAN region and has 20,000 employees globally. Founded in 1932 from the merger of three local banks (the oldest was founded in 1912), OCBC is the oldest existing Singapore bank. Globally, the bank has 530 branches in 15 countries/territories, including Singapore, Malaysia, Indonesia, China, Hong Kong, Vietnam, Brunei, Japan, Australia, UK, and USA. However 411 branches are located in Indonesia, 55 in Singapore, 44 in Malaysia, and 24 in China. Some interesting footnotes form their history include the fact that they were OCBC was one of only four foreign banks to have branches in China in the 1950s and has had a presence in China since 1925, and that they were the first local Singapore bank to begin consolidation in the local banking sector by acquiring Keppel Capital Holdings Ltd in 2001. Operating in 15 countries, OCBC’s Banking Services business include consumer banking services (deposits, mortgages, car loans, personal loans, credit cards, securities trading for individuals), business banking (comprehensive financial services for large corporate, financial institutions, government agencies and SMEs), investment banking (capital markets and mezzanine capital financing in Asia Pacific, syndicated lending, corporate finance in Asia Pacific, Islamic financing), transaction banking (cash management, trade finance, custody/nominee services), and global treasury (foreign exchange activities, money market operations, fixed income and derivatives trading, structured treasury products for hedging, Islamic Shariah-compliant products). Notable subsidiaries include OCBC Securities with membership of both the Singapore and Hong Kong exchanges; the insurance business Great Eastern Holdings with 4 million policyholders throughout Singapore, China, Indonesia, Vietnam and Brunei and the largest insurance group in Singapore and Malaysia by total assets and market share; the asset manager Lion Global Investors with total assets under management of SG$30 billion; the Bank of Singapore (formerly ING Asia Private Bank) offering wealth management services to high-net worth individuals across Asia from offices in Singapore, Hong Kong, Manila and Dubai; and the Singapore Island Bank which operates as an internet bank called finatiQ.

OCBC's Singapore Headquarters

In 2012, OCBC managed a net profit after tax of US$564 million, 16% less than in 2011 but largely due to benign factors including a smaller spread between loan and deposit rates (and subsequently lower net interest margin) and an increase in operating expenditure as OCBC invested in expanding outside Singapore. In fact, the three-month Sibor interest rate has declined from 3.5% before the financial crisis started in 2008 to 0.37% currently. The smaller margin between loan and deposit interest rates has been a challenge for Asian banks generally this year as the world’s major central banks, including the Bank of Japan and US Federal Reserve, kept their benchmark rates low and continued quantitative easing in an attempt to kick-start their economies. More positively, the decrease is despite the fact that OCBC’s volumes of loans issued actually increased by 3% in 2012 from the previous year as well as more positive market sentiment increasing brokerage fees from OCBC’s securities business and profit from their life insurance business (a growth area for Asia as a middle class develops).

OCBC have also been planning for the future in an effort to grow their market share. Their New Horizons III strategy of 2011, in the mould of a command economy’s five-year plan, is an effort to use a balanced scorecard approach in sculpting strategy. They are investing to expand its business into the ASEAN market nations, Hong Kong and mainland China as they see these markets have high economic growth potential as well as possessing a cultural affinity with Singapore. OCBC perceive an opportunity to expand its Islamic Banking and Takaful insurance in the Muslim-dominated Malaysia too. OCBC has also been building up its wealth management business, with assets under management in the business increasing by SG$11 billion from a year ago to SG$55 billion and now constituting one-third of OCBC’s total revenue. This emphasis on wealth management comes at a time of unprecedented growth in the number of new millionaires in Asia, with millionaires (defined as those with over US$2 million in assets) at US$28 trillion currently and expected to increase to US$48 trillion by 2017. Included in OCBC’s New Horizons III strategy is their aims to maintain their position as one of the top 3 corporate banks and wealth managers in the combined Singapore-Malaysia market as well as to mete out a reputation for product innovation by ensuring 15% of revenue derives from new products each year. OCBC also wish to maintain their position as Asia’s highest rated bank for its strong balance sheet and risk management (executed in accordance with Basel III requirements). Productivity is targeted as OCBC strive to be an efficient, low-cost banking service provider as well as cultivating diversity and cross-border management skill-sets in its staff to support overseas expansion efforts. Shareholder value is also essential in OCBC’s strategy as they aim to deliver 10% EPS growth annually, sustain ROE above 12%, target a minimum dividend payout of 45% of core earnings, return excess capital to shareholders via share buyback programmes, and divest non-core assets in order to invest the gains in core area growth opportunities.

A Sign of Asia's New Private Wealth

This is a great bank to invest in with strong risk management, innovation, and a focus on core corporate banking and wealth management activities. Its strengths are borne out in the multitude of accolades OCBC have accumulated including:

·         Best ASEAN SME Bank of the Year 2012 from Asian Banking & Finance Retail Banking Awards;

·         Best Private Wealth Management Bank, Southeast Asia 2012 from Alpha Southeast Asia;

·         Online Securities Platform of the Year 2012 from Asian Banking & Finance Retail Banking Awards;

·         Online Innovation of the Year 2012 from Asian Banking & Finance Retail Banking Awards;

·         Best Trade Solution in Southeast Asia 2011 – Alpha Southeast Asia Deal Awards;

·         Best Yuan Trade Settlement Solution in Southeast Asia 2011 – Alpha Southeast Deal Awards;

·         Best Project Finance for Real Estate 2010 – Asiamoney Deal Awards;

·         Best IPO Deal of the Year in Southeast Asia 2011 – Alpha Southeast Asia 5^th annual Deal & Solution Awards;

·         Ranked 1^st in Currency Products and Interest Rate Products for SGD, MYR, IDR (Vanilla Hedging/Structured Hedging Instruments) from Asia Risk Corporate Rankings 2010.

Mongolian Millions from Mining: Erdenes Tavan Tolgoi

A Mongolian Breakthrough?

In 2010, the state-owned Erdenes MGL LLC formed a new company - Erdenes Tavan Tolgoi - which would hold the licenses and manage the Tavan Tolgoi deposit. The Tavan Tolgoi deposit is one of the world’s largest undeveloped coal coking mines. Together with the gigantic copper and gold mine Oyu Tolgoi, these two mines have the ability to transform Mongolia, with a population of around 2.8 million people, into a Qatar or Brunei that becomes one of the world’s richest countries by GDP per capita just on the back of its abundant commodities. With eye-popping potential, foreign investors who manage to jump on this bandwagon could be set for millions of Benjamin Franklins.

Part of it is buying into the future Mongolian economic miracle. Mongolia transitioned from a one-party communist political system into a democratic system in the 1990s. The Economic Political Stability Index 2013 and Economic Freedom Index 2013 highlight that Mongolia, ranking 75^th out of 177 countries, fares above average in the world. Corruption is also down with Mongolia ranking 94^th out of 174 countries on the 2012 Corruption Perception Index. Yet there have been some political problems with the government in 2012 suspending South Gobi Sands mining licenses and then asking to renegotiate the Oyu Tolgoi investment agreement. Economically, Mongolia, bordering two monoliths - Russia and China, is the most sparsely populated country in the world with just 2.8 million people within a country boasting more than 6,000 known mineral deposits that could enable Mongolia to become a major determinant in global gold, copper, zinc, coal, oil, uranium and molybdenum markets. Since the 1990s, Mongolia’s economy has shifted from largely agriculture-driven to a reliance on the minerals industry. Mongolia also has one of the world’s fastest growing economies with real GDP growth averaging 13.5% annually over the next five years, comparing favourably with China’s at 8% and India’s at 7.6%. Yet due to an undiversified economy and inflationary monetary and fiscal policy, Moody’s have given Mongolia a speculative grade B1 credit rating. The mining boom has increased foreign direct investment into Mongolia from US$100 million in 2003 to US$6.1 billion in 2012 with the majority of those flows derived from China, Canada and the Netherlands. In addition, Mongolia possesses competitively priced raw materials, low operating costs for foreign companies, a low corporate tax rate, favourable tax credits and cheap labour culminating in a favourable investment environment. In fact, according to the World Bank’s 2012 Ease of Doing Business Rankings, Mongolia is ranked very similar to Italy and higher than China and Russia.

Yurts are disappearing as Mongolians move to Cities

To the mine itself, Tavan Tolgoi is located in the middle of the Gobi Desert. It has enough coking coal to supply China for 43 years. The mine is still being developed but this year exports from the mine totalled around US$1 billion when Mongolia’s GDP was around US$9 billion. By 2020, the mine should contribute US$4 billion of exports. The mine boasts 6.4 billion tons of coal of which 1.8 billion tons are high-quality coking coal and 4.6 billion tons are thermal coal. All infrastructures to make the mine truly operational, such as water and electricity supply, roads, and railroads, are being developed. Tavan Tolgoi is 540 kilometers south of Ulaanbaatar, the Mongolian capital and 270 kilometers from the Chinese border. The company Erdenes Tavan Tolgoi plan a US$3 billion initial public offering on the Hong Kong stock exchange, which would be a great opportunity to cash in on one of the world’s largest coking coal mines.

Tavan Tolgoi Mine

Yet there have been some worries. In February 2013, Erdenes Tavan Tolgoi’s mismanagement and weak world coal prices forced it to suspend shipments to its main customer Chalco as it was so short of cash. Yet in April, they resumed shipments to Chalco. Mongolia’s Erdenes Tavan Tolgoi have also realised they need foreign expertise to really generate a strong profit-making mine and have launched a tender in May 2013 for a contract to mine the west Tsankhi portion of Tavan Tolgoi as well as for technological assistance. There is also worry over Mongolia’s new draft investment law that mandates that Mongolian citizens must possess a 34% equity stake in any mining project as well as giving Mongolian state-owned companies a pre-emptive right to any mining or exploration licenses that are transferred from one entity to another. Yet it is likely to change significantly as a result of uproar from the Mongolian business community who worry that the draft law in its current state could rein in foreign investment in mining and hinder its trickle-down to other sectors such as logistics. It must also be remembered that Mongolia’s regulatory environment is more conducive to the starting and operation of a local firm than its neighbors China and Russia so it is not all that bad on a relative scale.

The Revelation of Vietnam's Masan Group

The abbreviation MSN may be better known as Microsoft’s instant messenger software, but it is already a well-known stock code to investors frequenting the Ho Chi Minh City stock exchange. It belongs to Masan Group Corporation, the food, banking and natural resources conglomerate that possesses the third largest market capitalization on Vietnam’s exchange (circa US$1 billion). Besides the exposure to one of Vietnam’s premier corporations, Vietnam’s own economic growth and development can also be tapped into, particularly within the fast-growing non-cyclical financial services, food and natural resources sectors. This growth is mirrored in the benchmark VN Index, which tracks the Ho Chi Minh City stock exchange, being the best-performing in Asia so far this year by increasing 32% since January 2013.

Seeking Alpha in Vietnam

Doi Moi reforms that opened up Vietnam’s markets have ensured low labour costs and higher worker productivity for the past ten years, which has supported Vietnam as Southeast Asia’s fastest growing economy, with a compound annual growth rate of 7.1%. Despite two decades of breakneck growth, Vietnam still has latent potential to unlock within its myriad untapped natural resources and its domestic consumption. Vietnam has a suitable demographic to support potentially strong domestic consumption. 68% of the country’s 90 million people are under the age of 40 and the country’s workforce is projected to increase, which points to rising income levels. Real GDP per capita has also increased from US$560 in 1989 to US$3,355 currently, which has helped double the size of Vietnam’s middle-class just over the past five years. In Vietnam, it is the emergence of a middle-class that is driving growth in non-cyclical financial services, food and beverages sectors, which account for 55% of total consumption. Vietnam also possesses an abundance of unexplored natural resources, particularly mineral resources, agriculture and energy. Vietnam boasts 7% of the world’s bauxite reserves, 7% of the world’s tungsten production, and significant amounts of rare earth, titanium, iron ore, copper, gold, nickel, zinc, tin, lead, chromite and manganese. Meanwhile, agriculture, forestry and fisheries makes up 21% of Vietnam’s GDP and the country is a major player in the world rice, rubber, cashew, coffee and seafood markets. Vietnam also has Southeast Asia’s third largest petroleum reserves with strong current capacity to produce crude oil and natural gas and with prospective reserves of 4.5 billion barrels of oil and 23 trillion cubic feet of natural gas.

The Masan Group has controlling ownership stakes in Masan Consumer, Techcombank, Masan Resources and 68 other subsidiaries. The Group seeks to maintain a Vietnamese conglomerate of businesses focused on non-cyclical sectors such as consumption, services, natural resources, and infrastructure. They want to achieve sustainable cash flows by building cash flow generating businesses in order to combat potential macroeconomic volatility that is a concern with developing economies. Therefore, Masan Group does not engage in asset trading or short-term speculation and they do not hold any minority stakes in companies, believing that they should always hold majority ownership in order to actively drive value and best practices in their companies. Masan Group focus on hiring professional managers at all levels of the organization and to incentivize them with the opportunity to become shareholders. Masan Group’s businesses are also not interlinked or partnered with each other, so Masan Consumer and Masan Resources do not borrow from Techcombank, meaning there is increased transparency and prevention of conflicts of interest. They achieved an EBITDA of US$142 million last year and are aiming for US$1 billion by 2016. Masan Group also seek to achieve sustainable growth by operating three market-leading businesses that are in the top three within their respective industries and that aim to be world-class. Linked to this goal is the attainment of economies of scale by being a market leader in each industry, as this is imperative to compete in Vietnam’s economy where there is a fragmented local private sector and intense competition from multinational companies and state-owned enterprises. It is telling that Masan Group have attracted major shareholders globally, such as BankInvest, R.F Chandler, Dragon Capital, TPG Capital, Kohlberg Kravis Roberts and Goldman Sachs. KKR had initially made the biggest investment in Vietnam ever by purchasing 10% of Masan Group in April 2011 for US$159 million and has since doubled its share in 2012. Additionally, leading Japanese food and beverage company, House Foods Corporation took a 1.85% stake in Masan Group Corporation in December 2012 as they sought to take advantage of the tremendous growth opportunities in the Vietnamese market.

Masan Consumer is Vietnam’s second largest food company. Their products include instant foods such as noodles, sauces and condiments, cereals, and coffee. It is estimated that 90% of Vietnamese households purchase Masan Group’s food and beverages products. Our key brands include Chin-su, Tam Thai Tu, Nam Ngu, Omachi, Oh Ngon and Tien Vua. Since 2007, Masan Consumer has grown its fish sauce business from a 3% market share to 76% share now, soya sauce from 42% to 78%, chilli sauce from 14% to 37%, and instant noodles from 1% to 16% to become the second biggest instant noodles supplier. Instant coffee has grown to a 44% market share just within the last three years. Masan Consumer’s net revenue has increased from VND660 billion in 2007 to VND 7,057 billion currently, approximately 81% compound annual growth rate in this period. Meanwhile net income has increased from 12% in 2007 to 32% now. Masan Consumer has a bright future due to its strong food and beverages business, the fact that per capita food spending in Vietnam is relatively low compared to other Asian economies, and that Vietnamese have a habit of spending much more of their disposable income on food than Asian countries (62.5% compared to 58% in Thailand, 53% in Malaysia, 44% in South Korea, 41% in Singapore, and 37.5% in Hong Kong). These factors suggest there is considerable room for growth as incomes rise and the burgeoning middle-class acquires a busier lifestyle that requires more convenient foods. A concomitant development is the importance of quality and brand recognition to consumers in Vietnam.

Techcombank is the third largest joint-stock commercial bank in Vietnam by total assets and the most profitable bank in Vietnam measured by Return on Equity. Techcombank has the third largest total deposits of all private sector banks in Vietnam and champions a focus on its core retail and SME banking businesses. FinanceAsia magazine awarded them “Vietnam’s Best Bank 2011”. Just founded in 1992, Techcombank has already developed a diversified financial products and services offering for both Vietnam’s 50 million strong work force and its 305,000 private companies. Techcombank has the third largest network of branches in Vietnam with 307 and the largest number of ATMs with 1,205. Net profit has grown from VND 510 billion in 2007 to VND3,154 billion currently. Techcombank has the second largest total deposits base among private sector banks in Vietnam, with VND88,648 billion in total deposits at the end of 2011. Techcombank’s emphasis on branch banking and retail customers is their attempt at developing a competitive advantage of fast acquisition of customers and gaining low cost funding from deposits. Techcombank will continue to experience fast growth in tandem with Vietnam’s banking sector, which is growing faster than its GDP. Additionally with 68% of Vietnam’s population under 40 years old, the banking sector looks blissful. Only 20% of Vietnam’s population has a bank account, which compares quite negatively to all its major neighbours such as Philippines (45%), Indonesia (50%), India (56%), China (64%), Thailand (72%), and Malaysia (78%). Looking at owners of credit cards as a percentage of its population, only 0.6% of Vietnam’s citizens own credit cards compared to 1.5% in India, 5% in the Philippines, 6% in Indonesia, 11.1% in Malaysia, 21.3% in China, and 30% in Thailand. Therefore, banks such as Techcombank with strong fundamentals and a core of retail customers have a great long-term future.

Handy Resources?

Masan Resources’ goal is to be Vietnam’s largest private sector natural resources company. In moving towards that goal, they completed Vietnam’s largest M&A deal in 2010 by acquiring Nui Phao Mining Joint Venture Company Ltd, which had world-class tungsten and base metal mining projects and is expected to be the largest producer of tungsten in the world outside of China as well as one of the largest single-point producers of fluorspar and bismuth globally by 2015. Tungsten has been applied in the production of wear-resistant abrasives and cutters and knives for drills, milling and turning tools for metalworking and mining and petroleum industries, as a replacement for gold or platinum jewellery due to its similar density, in producing heavy metal alloys such as high speed steel, as an alternative to depleted uranium in kinetic energy penetrators, in producing grenades and missiles to create supersonic shrapnel, in producing fluorescent lighting, as scintillation detectors in nuclear physics and nuclear medicine, and in light bulbs, rocket engine nozzles, cathode-ray tubes, and vacuum tube filaments. Fluorspar is used as a flux to lower the melting point of raw materials in steel production to aid the removal of impurities, in the production of aluminium, the production of opalescent glass and cooking utensils, to make hydrogen fluoride and hydrofluoric acid, and to replace glass in some high-performance telescopes and camera lens elements. Conversely, Bismuth is used as an ingredient in some pharmaceuticals, in cosmetics such as eye shadows and nail polishes, and as a replacement for lead such as in bullets and less-lethal riot gun ammunition.

  

Masan Group Corporation shares are currently trading at VND113,000 within a 52 week range of VND85,000 to VND135,000. Buy now and hold long-term for this is one of the best shares to gain exposure to Vietnam’s unique economic development story.

The Sugary Wilmar International

Just founded in 1991, Singapore’s Wilmar International is already Asia’s largest agribusiness and has the second largest market capitalisation of any company on the Singapore stock exchange. Wilmar International is currently trading at SGD$3.41 within a 52 week range of SGD$2.99 to SGD$3.92. What makes the company attractive to buy and hold long-term is its current push into the competitive global sugar market as well as its focus on Asian and African commodity markets.

Singapore’s Wilmar International recently took delivery of the largest amount of sugar on record on the ICE futures exchange in New York. Although they are more often referred to as the world’s leading producer and trader of palm and lauric oils, they have been steadily strengthening their grasp on sugar. Wilmar International commenced their sugar production and trading in 2010 after acquiring Australian sugar company Sucrogen and Indonesia’s PT Jawamanis Rafinasi and PT Duta Sugar International. Sucrogen is Australia’s largest sugar producer and Australia is the world’s third largest sugar exporter after Brazil and Thailand. Wilmar International have developed all parts of the sugar supply chain with a strong production, refining, trading and distribution network. Wilmar International has continued to build its sugar business by purchasing sugar mills and refiners in Morocco and Indonesia. They are now one of the world sugar market’s top five traders. Demand growth from China and India for sugar is expected to facilitate Wilmar International’s sugar business profitability.

Wilmar's Oil Palm Plantations

Wilmar International’s strategy is to rely on an integrated business model that involves owning businesses across the origination, processing, branding, merchandising and distribution of agricultural commodities. They own 450 manufacturing plants and extensive distribution networks in 50 countries. Wilmar International is the largest supplier of cooking oil in China and a major vegetable oil supplier in India and China. They are also the largest palm oil refiner in Indonesia and Malaysia and one of the largest globally. Wilmar International are the world’s leading manufacturer of palm biodiesel and a leading importer of edible oils into East and South-East Africa. Consumer pack oils is a major business for them as they are the largest merchandiser globally and the leading brand in India. Their substantial oilseeds, specialty fats and oleochemicals manufacturing has made them a leading player in China. Wilmar International’s integrated business model also dictates they possess a ship fleet to augment their logistical efficiency and flexibility.

This is an interesting company to watch as Asian commodities are booming and will continue to grow as the Asian middle-class grows. Look to buy into Wilmar International at around SGD$3.20 and hold long-term. If their shares go the way of major commodity players such as Glencore or even Cargill, then they could look very profitable.