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.

 

New Zealand's Energy Genesis

One of the world’s lowest carbon dioxide emitting countries, New Zealand has a unique energy sector with 70% of energy derived from renewable energy sources such as hydropower, geothermal power and wind energy. New Zealand is faced with a geographical imbalance between electricity consumption and production as most electricity generation is located on the South Island whilst the demand is concentrated on the North Island. Electricity demand has grown in New Zealand by around 1.2% yearly since 1980 whilst energy supply has grown by 1.1% yearly in the same period. A significant opportunity for a strong business is the fact that New Zealand has one of the highest electricity customer churn rates in the world.

Genesis Energy is currently New Zealand’s largest state-owned electricity and natural gas retailer. Genesis Energy owns and operates a diverse portfolio of assets that includes hydroelectric, thermal and wind generation. The New Zealand government is readying a partial initial public offering of 49% of Genesis Energy on New Zealand’s stock exchange NZX. Investor interest should be piqued by its strong fundamentals:

·         27% market share of electricity retail nationwide;

·         43% market share for natural gas retail;

·         Produces 16% of New Zealand’s electricity – 3^rd largest producer in New Zealand;

·         Serves approximately 670,000 customers – 16% of the entire population – bearing in mind that New Zealand’s electricity sector suffers from high customer attrition rates;

Furthermore, investors should be keen on the company given its recent strong financial performance with NZ$90.25 million profit last year and revenue growth of 34% on the previous year.

Genesis Energy's Tokaanu Power Station

Looking forwards, Genesis Energy will capture more of the electricity production and generation market in New Zealand, particularly with an injection of private capital as well as continued government support. The expected higher wholesale electricity prices in New Zealand will also help maintain profitability. Future developments in Genesis Energy’s pipeline include a wind farm at Castle Hill near Masterton which has potential generation of over 2000 GWh per year, Rodney gas-fired Power Station near Kaukapakapa which could produce 480 MW per year, Slopedown Wind farm by Wyndham, hydropower plants by Lake Tekapo which could generate 960 GWh of electricity per year, and a 50:50 joint venture between Genesis and Contact Energy to develop LNG assets in Gasbridge. In addition, the company engages in the exploration and development of petroleum through its 31% joint venture interest in Kupe oil and gas project. Genesis Energy also holds flexible supply contracts for 100% of the Kupe gas.

With a bright future supported by strong capital investments, government support, strong revenue generation for a country of New Zealand’s size, this is a good investment choice to diversify an Asia-Pacific focused portfolio. Additionally, Genesis Energy has a dividend policy that intends to pay shareholders each year despite any economic downturn. Buy into the New Zealand energy genesis now!

How to Bet on Urbanisation

In 1978, China’s urban population stood at 172 million. In 2012, its urban population was 695 million. In 2030, there will be one billion Chinese (70% of the population) living in cities, with 221 cities boasting over a million inhabitants. As the urbanisation rate moves from 51% now to 70% by 2030, over 300 million Chinese will migrate from the countryside and into cities. This urbanisation indicates the advent of the Chinese middle-class, which currently composes 23% of the country’s total population, with that ratio around 40% in Beijing and Shanghai. The vast mechanisms of urbanisation have an enemy in the hukou, the household registration system which categorises Chinese people as either urban or rural dwellers. This categorisation is important as it determines their entitlements to social security programs such as pensions, education, unemployment benefits and healthcare. Easing the hukou system would fast-track urbanisation by providing better social security for de facto urban residents possessing a rural hukou.

Chongqing's Rise: A Symbol of Chinese Flash Urbanisation

Generally, urban residents consume about three times as much as rural dwellers. With a projected 270 million middle-class consumers in China by 2020, urbanisation will sharply increase domestic consumption with the expected growth in domestic consumption between now and 2030 equivalent to creating a market the size of Germany’s currently. Additionally, for the first time in 2013 consumption will drive China’s growth more than investments as China’s service sectors expand and single children become adults more accustomed to consumption than their cultural revolution-era parents. Further expected benefits of urbanisation by 2030 include an expected 5 billion square meters of paved roads merely in China’s cities, 170 new mass-transit systems (double the number of all mass transit systems in Europe currently), 40 billion square meters of floor space in 5 million buildings, and 50,000 skyscrapers (equivalent to building two Chicagos every year). There will also be efforts to enhance sewers and garbage management, strong real estate development, healthcare and education. There are evidently many opportunities with Chinese urbanisation, yet geographically the focus must be on China’s midsize cities away from China’s currently fast-growing eastern seaboard, as that will be where much of the burgeoning middle-class will arrive.

One opportunity to invest in companies that will benefit from the Chinese urbanisation story is in the healthcare sector. As China’s population ages, the hukou system is eased, and the public become more aware of the dangers of air pollution, healthcare will play an increasingly crucial role. Two companies to invest in are Shandong Weigao and Shanghai Fosun.

Shandong Weigao, founded in 2000, specializes in manufacturing medical devices such as syringe needles, intravenous catheter needles, blood sampling needles, blood sampling products, blood bags, blood component segregator consumables, syringes, and infusion sets. Its orthopaedic products include steel plates and screws trauma products, spinal implants, and artificial joints. Its blood purification consumables consist of extracorporeal blood circuit for blood purification sets, and dialyzes. Shandong Weigao manufactures medical PVC granules, plastic packing bags, carton boxes, moulds, and industrial automatic equipments and parts. They also engage in research and development of medical devices, orthopaedic products and blood purification products. Shandong Weigao sells their products to hospitals, blood stations, other medical units, and trading companies specializing in selling medical products, both in China and internationally. It is currently listed on the Hong Kong stock exchange and trading at HKD7.620 within a 52 week range of HKD6.5-11.38. Interestingly Shandong Weigao has a 5-year dividend growth of 23%.

Conversely, Shanghai Fosun Pharmaceutical Group specializes in manufacturing and distributing pharmaceutical products as well as their research and development. Main products include those used to in treatment of metabolism and digestive tract system, cardiovascular system, central nervous system, bloody system and anti-infection diseases. Its products, distributed in China and internationally, include Atomolan, MoluoDan, and Composite Aloe. Through a 70% stake in Shenyang Hongqi, it has gained access to their anti-tuberculosis products and through Guilin Pharma they have access to their anti-malarial drugs. Furthermore, Shanghai Fosun holds a 10% stake in Californian Handa Pharmaceuticals who recently got approval from the US FDA for their generic ANDA for quetiapine extended release tablets. Shanghai Fosun Pharmaceuticals is currently trading at CNY12.55 on the Shanghai stock exchange and is planning a Hong Kong listing.

Another opportunity is in telecommunications, which has become a major part of generation Z’s lives. Two interesting investments here are Lenovo and ZTE, which combine world-class technology with the vast underdeveloped Chinese domestic market which will allow them a sheltered environment to grow quickly and perfect themselves before challenging for world domination in their sectors.

Lenovo, founded in 1984, has operations in more than 60 countries and sells its products in around 160 countries. Their world operations have been boosted by their 2005 acquisition of American company IBM’s personal computer division. Therefore today Lenovo are the world’s second-largest PC vendor by unit sales and the largest seller of PCs in China with a 31% market share. Lenovo are also the third-largest vendor by sales in the Germany PC market and control more than 40% of the USA’s market for Windows PCs priced above US$900. Interestingly Lenovo only established a mobile phone division in 2009 yet it is now the second largest vendor of smartphones in mainland China (better than Apple but not as good as Samsung) with a 10.5% market share and its LeGarden online app store has more than 2,000 programs available after two years of operations. Lenovo are aggressively angling to replace Samsung as mainland China’s top smartphone manufacturer, evidenced by their US$793 million mobile phone manufacturing and R&D facility in Wuhan that will be able to produce 30 to 40 million phones per year once construction is finished later in 2013. Additional strategies such as developing a smart television product that was released this year called LeTV also distinguish Lenovo. Their shares are currently trading at HKD$6.85 on the Hong Kong stock exchange, within a 52-week range of HKD$6.35-9.07.

            ZTE Corporation is a Chinese telecommunications equipment and systems company founded in 1985. ZTE is the world’s 4^th largest mobile phone manufacturer by unit sales and the world’s 5^th largest telecoms equipment maker by revenues. They are also the number one vendor globally for CDMA equipment, manufacturing around 40% of global CDMA equipment, and the third-largest vendor of GSM telecom equipment globally, accounting for 20% of the world market. ZTE hold 7% of the key 3GPP Long Term Evolution patents worldwide and also launched the world’s first smartphone with dual GPS/GLONASS navigation, the MTS945. ZTE’s main products are wireless, exchange, access, optical transmission and data telecommunications equipment and software, mobile phones, streaming media and video on demand. ZTE utilizes 10% of its annual revenues on R&D each year and was ranked world number one in Patent Applications by the World Intellectual Property Organisation in 2012 for the second year running. ZTE’s shares are trading at HKD$14.04 on the Hong Kong stock exchange, within a 52 week range of HKD$9.23-18.04. 

The Kitchen of the World - Charoen Pokphand Foods (CPF)

With a vision to be the “Kitchen of the World”, Charoen Pokphand Foods is Thailand’s largest agribusiness firm, in a country where 66% of their GDP comes from exports and 12% of their exports are agricultural products. CPF is a publicly traded subsidiary of the Charoen Pokphand Group. CPF is also looking for investment opportunities in the USA and Europe to achieve geographic diversification when there are readily available distressed assets and the beginning of an economic recovery. With CPF shares currently trading at THB28.75 on the Bangkok SET stock exchange and a 52-week range of THB 28 to THB 42, now looks a good time to buy as there are fears of bird flu affecting the business. However with a one year return of 20% and strong company fundamentals, this is a good investment in a world-class agribusiness.

CPF was established in 1923 and now has operations in 24 countries worldwide. These are significant world operations, with the CPF UK business boasting a £120 million turnover last year. Through its parent company, CP, it has connections with telecommunications, retail and distribution services, petrochemical, automotives, real estate and electronic procurement. CPF’s annual revenues in 2012 were around US$4.5 billion with international sales representing half of their revenues. They count the UK’s Tesco and USA’s Costco as among their biggest buyers. They are currently the world’s largest integrated producer of shrimps and the world’s second largest producer of poultry. They have intense investment plans for the next few years to reach an ambitious target of THB700 billion (roughly US$24 billion) by 2016. CPF have earmarked THB75 billion over the next four years for investment projects, with around THB35 billion being used to expand its international feed, farm and food interests. In April 2013, CPF announced plans to construct its first integrated food-processing complex focused on producing ready meals, sausages, ham and bacon, soup, sauces and pre-mixed ingredients as well as an R&D center to develop new products. The integrated food processing complex will ensure efficient production costs and a supply of raw materials throughout the processing line using world-class manufacturing technology and an automated processing line that significantly reduces the number of workers needed from 400 to 20 per plant. The lower number of workers handling the processing ensures high food safety without contamination by any disease. The roughly six multiple sales growth will be driven by the company’s three strategies – an expansion of the existing livestock and farm sector, an increase in value-added products and potential acquisitions in Europe and the USA.

CPF - Kitchen of the World?

For a more detailed view, CPF has two core business lines: livestock business line and the aquatic business line. The aquatic business line mainly focuses on shrimp and fish. CPF have caught onto the rising trend in developed countries of healthy food by promoting “Probiotic Farming” which avoids the use of drugs and chemicals. The livestock business line focuses in three areas on different types of products: feed, farm and food. Feed focuses on producing livestock feed in the forms of concentrate, powder and pellets for broilers, layers, pigs and duck. Here CPF is a leader and pioneer worldwide in its manufacture and distributes feed products to more than 600 sales outlets throughout the country as well as selling directly to many large animal farms in Thailand. A fully computerised production process ensures a high and consistent quality of produce. Farm focuses on animal breeding, animal farming and basic meat processing. Here CPF is a worldwide leader in R&D of natural animal breeding. The Company produces parent stock broiler chicks, parent stock layer chicks, parent stock swine, broiler chicks, layer chicks, layers and piglets for distribution to animal farms and domestic sales representatives. Grandparent stock used in livestock breeding are imported from abroad to breed parent stock which are then raised on the Company’s farms. CPF utilize good farm management practices and the evaporative cooling system, an advanced technology to raise livestock which has been an effective method in preventing disease and ensuring high quality products. Food includes semi-cooked meat, fully-cooked meat and ready-to eat producers. These products are distributed to wholesalers and retailers, fast food restaurants and supermarkets. They also have excellent distribution channels in Thailand as they own, through CP All, all the 7-11 convenience stores in the country where CP-branded food products are easily evident. CPF export these products all over the world but mainly to the European Union, Japan and other Asian countries, importantly using the CPF brand. CPF has shown that they are a company that can truly compete globally by meeting global standards for their fresh products and for cooked food products.

Popular Produce?

This is a chance to invest in a world-class company deriving from an emerging market with geographic diversification. CPF invests in world-class technology and upholds high health and safety standards as well as re-invests a large amount of retained earnings into investment projects. Buying into CPF also allows exposure to one of the fastest-growing stock exchanges in the world right now, Bangkok’s SET as well as a non-cyclical food industry. Buy now while the price is around THB28.75 and hold for the long-term as the stock price soars, both as CPF truly becomes the “Kitchen of the World” and as the Thai Baht continues its rise against the Major Currencies – USD, EUR, CHF, and JPY.

Don’t write off Coal Just Yet: China Shenhua Energy Company Limited

Don’t write off coal just yet. Two factors will ensure that coal remains key for China’s energy needs:

·         coal gasification technology that turns coal into sythnetic gas known as syngas which burns as cleanly as natural gas and can be used to generate power or make chemicals or fertilizers; and

·         Coal will take over oil as the world’s main energy source by 2015.

With the second largest reserves of coal in the world (13% share) and the largest consumer of coal-derived electricity worldwide (generating 1.95 trillion kWh of electricity per annum), China is a key market for any investor looking to exploit this energy trend. Coal provides 70% of China’s energy needs. However most coal reserves are located in the North and West of China, which provides a logistical challenge for coal companies to supply the electricity to the more heavily populated Eastern coastal areas. It has been suggested that, at current consumption levels, China has enough coal to sustain its energy needs for the next 100 years. China has 7 large coal mining companies: China Shenhua Energy Company, China Coal, Shaanxi Coal and Chemical Industry, Shanxi Coking Coal Group, Datong Coal Mine Group, Jizhong Energy, and Shandong Energy. The largest coal mining company also happens to be the most heavily invested in new coal gasification technologies – China Shenhua Energy Company (CSEC), which is a wholly-owned subsidiary of the Shenhua Group.

Will pollution be a memory of China's Past?

Founded in 1995, CSEC is the largest coal-producing company in the world and the largest coal supplier in China. CSEC is a wholly-owned subsidiary of the Shenhua Group and is listed on the Hong Kong and Shanghai stock exchanges with a market capitalization of around CNY408 billion. CSEC boasted revenue of CNY250 billion, a 19.6% increase in 2012 from the year before. The company’s coal output also reached 304 million metric tons, up 7.8% from 2011. CSEC generated 208 billion kWh of electricity in 2012, roughly 10% of China’s entire coal-derived electricity. The company also owns 62 coal mines, railways of 1,466 kilometers, coal ports in Huanghua and Tianjin, and a shipping company with 11 ships. These assets enable the company to take advantage of extremely low transportation costs and economies of scale. CSEC’s Shendong mining area is the world’s highest producing volume underground mine and they also own China’s largest open-pit coal mine located in Inner Mongolia, with an estimated annual coal output of 20 million tonnes. CSEC constructed the world’s first commercial coal liquefaction plant in Inner Mongolia in 2003, costing US$3.2 billion and the world’s first coal-to-olefin (coal-to-liquid) plant in 2008. They also jointly built, with Dow Chemical Company, Yulin Integrated coal, power and chemicals plant. Looking at all these assets, one must think this company has huge amounts of debt, but it is not highly leveraged with one-third of capital investment being financed by retained earnings.

The stalwarts of China's energy future

The future is rosy for CSEC as well with several capital investments beginning operations. CSEC began construction in April 2012 of a coal gasification plant costing CNY16 billion and expected to begin operations by 2015. The plant will produce around 3 billion cubic meters of syngas every year. CSEC have also partnered with Australia’s leading renewable energy producer, Hydro Tasmania, to jointly develop China’s wind power industry and share technology involving photovoltaic and thermal power generation. Collaborations with Shell and Sasol look to develop coal-to-liquid and coal-to-chemical facilities. Yet there is a risk for CSEC in developing these new technologies, which would place them in competition with large oil-gas companies such as PetroChina and Sinopec. Additionally, CSEC increasingly looks abroad to invest with assets in Mongolia, Indonesia and Australia on their radar.

Chinese demand for coal and projected future growth in demand as well as the strong assets of China Shenhua Energy Company should help sustain long-term growth in its share price. CSEC raised US$8.9billion in 2007 in what was then the largest ever IPO on the Shanghai stock exchange, with the shares more than 30 times oversubscribed. Currently CSEC’s shares are at HKD 27 on the Hong Kong stock exchange and CNY 20.49 on the Shanghai stock exchange. Aim to buy at current prices and sell at around CNY30 by November this year as the coal price rises from its current low, or alternatively hold long-term. The Chinese government supports a policy of consolidation of companies in strategic industries such as coal. Such a policy bodes well for CSEC in an industry where there are 25,000 enterprises and the top 10 producers account for only 29% of the market.

Ganbei (cheers) to Tsingtao Beer

Founded in 1903 by enterprising British and German merchants in the city of Qingdao on China’s East Coast, Tsingtao Brewery Company Limited has become a conglomerate intent on domestic and Asian domination. Not only is the Chinese beer industry ripe for long-term investment, Tsingtao Brewery is leading the charge.

Fact: China’s beer industry is the most profitable in the world. This is a fact that investors have caught onto – Tsingtao is trading at 24 times estimated earnings and China Resources at 27 versus Anheuser Busch’s 15 and Carlsberg’s 10. In 2012, Chinese beer breweries produced 49.02 million kiloliters, which put China as the world’s largest beer market ahead of the USA. Just last year, China’s beer industry production grew by 5% – double the 2.5% growth for the global market. Compared to stagnant beer sales in developed markets, China’s beer consumption per capita has the potential to increase to two times the level in the USA. Per capita beer consumption in 20 major Chinese provinces averages less than 33 liters, way below 100 in some European countries, 40 in South Korea and Japan and 65 in Brazil. After three decades of consolidation in the Chinese beer industry, three domestic brands dominate - China Resources Snow Brewery, Tsingtao Brewery and Yanjing Brewery – and three foreign brands - Anheuser-Busch InBev, SAB Miller and Carlsberg. With 80 breweries and a 21 percent market share, the largest beer manufacturer by production volume is China Resources Snow Breweries – a joint venture between China Resources Enterprises Ltd and the world’s second largest brewery SAB Miller. Tsingtao Brewery follows with 16%, Beijing Yanjing Brewery (11%), Anheuser Busch (11%), and Carlsberg (8%). Perhaps the greatest immediate push for growth by any of the major brewers in China is Anheuser-Busch who produced around 5.8 million tons of beer in 2012 and has plans to invest RMB20 billion in constructing around ten new manufacturing plants to achieve its aim of 15 million tons by 2015. However, operating margins at domestic brands Tsingtao and Yanjing are less than 10%, which is significantly below the 15% mark at Carlsberg and Anheuser Busch. Furthermore, the price of beer in China right now is far below the international level, which means there may be room to leverage this to increase profits.

One area of the Chinese beer market where there will be a battle for control is in premium draught beers, currently just 5% of China’s overall beer market. This is tiny compared to 50% in developed markets such as France and Germany and 30% in the USA. By 2020, premium beer is projected to account for 25% of China’s annual production as a wealthier middle class emerges and brand awareness and lifestyle become more dominant issues. Anheuser Busch currently dominates China’s premium beer market with a 45% share. Tsingtao is second with a 15% share followed by Heineken (7.5%) and Carlsberg (6%). Now that they are investing in this market segment, Tsingtao, Yanjing and China Resources are likely to see their premium segment grow more rapidly than foreign brands as they are helped by their vast sales network, nationwide presence, cost advantage, and the fact that they are producing a Chinese product that is a sign of China’s economic development. The domestic brewers are attracted by the allure of higher profit margins of around 50% for premium beers as opposed to 30% for mainstream products as premium beers are typically priced 30-50% higher than regular beers.

The well-hopped standard pilsner with 4.7% alcohol - Tsingtao Beer, produced by Tsingtao Brewery Company Limited, has been the best selling beer in China ever since 2002 and the most widely exported Chinese beer (82 countries). Tsingtao Brewery has 60 breweries in 19 locations across China. Tsingtao Brewery is currently China’s second largest brewer by capacity and has been listed on both the Hong Kong and Shanghai stock exchanges since 1993. In fact, Tsingtao accounts for about 16% of the domestic market and 50% of China’s beer exports. 2012 was a great year for Tsingtao as their revenue increased 13% from the last year with their revenue growth contributing to half the entire growth of the Chinese beer industry in 2012. However, net profit for Tsingtao Brewery in 2012 was around US$450 million, which was short of analysts’ expectations as sales growth was hit by rising labour, packaging and raw materials (barley) costs. Tsingtao was rated the top Chinese brand by foreigners according to an Interbrand survey, with Lenovo and Huawei in second and third respectively. This has largely been a result of cleverly deployed marketing campaigns using the 2008 Olympic Games, US National Basketball Association and the annual international Tsingtao Beer Festival. Tsingtao also set up a partnership with Anheuser-Busch to use their existing supply-lines and relationships to successfully penetrate the North American market and become the number one selling Asian beer brand on the continent. Faced with ever-increasing costs in China, Tsingtao Brewery have adopted a strategy of investing in companies and assets in less developed countries as well as continually focusing on increasing their products’ value in order to maintain a balance between price and high-quality. Tsingtao’s expansion strategy prioritises the domestic Chinese market, Asian markets and emerging markets in Latin America, ASEAN and the Middle-East. 2012 saw the completion of Tsingtao Brewery’s new plants in central and northwestern China that will help the company to produce more than 10 million kiloliters by 2014, about one-fifth of China’s entire beer production. Tsingtao Brewery is aiming to expand market share in China by raising sales volumes in central and northwestern China as the Eastern market is saturated. In 2011, they opened a manufacturing plant in Bangkok to service South-East Asia, which is the first overseas foray by a Chinese brewery. By setting up their plant in Thailand, they can avoid tariffs in Thailand, logistics can be shortened, and freshness of beers guaranteed as well as access to cheap labour. One arm of its global strategy is based on building a premium beer brand. To compete in the high-end market where foreign breweries have developed greater advantages, Tsingtao has introduced Augerta, using a German formula, and Yipin Draft, which uses hops from the Czech Republic.

There is a lot of room for growth in China’s beer market, but now the key will be through innovation. The companies that look at innovative distribution channels such as e-commerce and the development of logistics dealing with retail terminals could differentiate themselves from both domestic and international competitors. Innovation also has to follow the change in beer consumption behaviour in China which is shifting from drinking the most volume to enjoying the drink. Buying Tsingtao Brewery shares are a long-term bet and are currently priced at CNY37.4 on the Shanghai stock exchange and HKD52.2 on the Hong Kong stock exchange with 11% one-year return and dividend growth of 5.05%. So grab a Tsingtao beer and say ‘ganbei’ because that’s what one billion people will be doing very soon.

Siamese Twins: The Australian Dollar’s Mandarin Connection

Australia – culturally, economically and politically, has a Mandarin connection. In the economic sphere, this connection means that the Australian Dollar remains influenced by China. Recent data showing a deceleration in factory activity in mainland China for April hurt market sentiment and sent the AUD tumbling to around 1.0250. Now is a good time to buy AUD and take advantage of its Mandarin Connection.

Growing bilateral trade

China is Australia’s largest trading partner as a result of China’s voracious appetite for iron ore, liquefied natural gas, and coal. Exports to China facilitated Australia’s strong economic performance despite a global economic recession since 2007. Conversely, Australia’s technological advantages have been sourced by China to aid in their economic development. 

In 2011, total trade with China (imports plus exports) totalled AUD$121.1 billion. When compared with the size of Australia’s economy at AUD$853 billion, trade with China was 13.5% of its GDP. Notably, Australian exports (22.5% growth) are growing faster than imports (7.5% growth), pointing to a widening trade surplus that is getting bigger and bigger as China’s burgeoning economy requires more hard commodity inputs. In fact, the largest Australian export products to China were iron ore (AUD$44 billion), coal (AUD$4.5 billion), crude oil (AUD$2.9 billion) and wool (AUD$2 billion).

Siamese Twins: Attached at the Hip

In 1990 just 4.6% of Australia’s exports were bound for China; Last year the figure was 27%. The strong growth in bilateral trade between China and Australia is engendering an economic Siamese twin relationship akin to that of Canada and the USA. Yet it is still some ways off the Canadian-US relationship where 74% of Canadian exports go to the USA and 50% of Canadian imports derive from the USA. Given the growth in trade between China and Australia they could be heading to a level similar to that of Canada and the USA, which will re-define the political and economic relationship between both countries. This is already evident in the Australian Central Bank’s announcement last year of plans to invest 5% of its foreign reserves in Chinese government bonds, which followed swiftly a previous announcement that Australia was becoming the third country after the USA and Japan to establish a direct currency trading link with China.

Recently there have been concerns that Australia’s blissful growth during the world economic crisis could be set for a ‘hard landing’. This has been compounded by a sizeable fall of around 20% in the prices of iron ore and coal since the middle of 2012 amid concerns of slowing economic growth in China. The world and investors need to adjust to a paradigm shift of China as a country with strong economic growth, yet from a larger base this will necessarily begin to slow. Over time, investor sentiment will set correct expectations and this will provide support for the AUD as Chinese data is seen as positive signs of world economic recovery.

Global Investment Policy: London - Rise of the Modern City-State

The world should gradually move towards a paradigm of global economic progress as opposed to merely national economic progress. Not only would this view be more economically efficient, it would also enable fostering of common human interest rather than national interests. One of the major blocks of such a paradigm shift would be the rise of modern city-states such as London, New York, Hong Kong and Singapore. Already 80% of all innovation happens in major cities worldwide and this number is set to grow to 95% by 2030. As the centres of innovation, these cities should divest themselves of national encumbrances and truly become international cities for international citizens contributing to global progress.

The future of humanity - megacities

Cities rather than nations are now driving humanity forwards. Cities are discovering new ways of doing things, adopting new strategies, creating innovation, and fundamentally generating growth for the world. Yet city-states aren’t a new phenomenon; we all know of cities such as Athens, Sparta, Babylon, Rome, Samarkand, and Venice that played central roles historically. Moreover these city-states have been governed for their citizens rather than the wider regions within which they are situated. Modern equivalents include Hong Kong and Singapore, which evidence the clout that places like London, Paris and New York could wield if they were able to combine the benefits of a city-state with their historical benefits. As an illustration, the top 25 cities worldwide hold 51% of the world’s wealth and the five largest cities in India and China hold 50% of their country’s wealth. These city-states should be self-governed and allowed to pursue their own economic interests without jealous government interference, which will eventually cause spill-over of economic prosperity into other regions. It is also often cities that can institute policies benefiting humanity as a whole better than national governments – climate change is one example where cities such as London and New York introduced congestion taxes and where the C40 network of major cities have taken action against climate change. Even multinational businesses are differentiating their strategies by megacities rather than nationally as companies can perceive more commonalities between Beijing, New Delhi and Frankfurt than they can between Frankfurt and Heidelberg. Indeed, Singapore was hardly urbanized and had a reputation for slums when it was given independence at the end of the second world war, yet its ability to focus solely on city and urbanisation policy was transformational for the city-state which now boasts the world’s highest GDP per capita at US$57.500 measured by purchasing power parity, with Norway, the USA, Hong Kong and Switzerland following them. By 2050, the world’s wealthy citizens will be dominated by Asian city-states: Singapore (US$137,710), Hong Kong (US$116,639), and Taiwan (US$114,093). This should serve as a warning to potential city-states within the C40 as to the kind of growth they can attain if they gain their independence.  

Potential City-States?

The economies of many of the world’s top 40 cities are already divorced from that of their neighbouring countries. In fact, their main investment flows are derived from other major cities so that the most important place to London is New York and Hong Kong and for New York the most important are London and Tokyo. For a global citizen, they will move between these major cities; for those coming from neighbouring countries to these major cities it can feel like a completely different world. Despite an ostensible economic recession, London’s economy grew by 12.5% between 2007 and 2011, which was twice as fast as the rest of the United Kingdom. In London also, gross value added per capita was 70% higher than the national average. Furthermore, London’s property valuations rose 15% or £140 billion just since 2007. In fact, London’s real estate is worth more than all the property in the rest of the United Kingdom added together. Additionally, EU policy would be divergent – London would have revelled in joining the Eurozone where the Euro would have consolidated London as the number one global financial centre. The benefits of independence do not just flow one way; many nations would be better off without their major cities as so much of a country’s economic, political and cultural policy is distorted with too much concentrated in one place. For instance, without London, the United Kingdom would have an economy less reliant on financial services and more focused on manufacturing as well as an economy with a lower unemployment rate than in London – this can all make a difference to economic policy.

London - Perhaps the World's Foremost City-state?

There is also a difference in the business culture between London and the UK, which requires their own respective policies. Whilst an immigration cap may be good for the UK, it is stifling on innovation, competitiveness and creativity for London. London’s openness to foreign ownership of its companies and skilled foreign labour had made its competitive advantage its ease of getting things done, yet the imposition of UK-beneficial immigration policies, bank levies and bonus caps is damaging London’s competitive advantage. Even more damaging has been the UK government’s intervention into what was previously regarded as sacrosanct – the rule of law whose tradition can be traced to 18^th century A.V. Dicey – the government hounds perfectly legal tax avoidance schemes, naming and shaming companies such as Apple and Starbucks. These policies interfere with London’s competitive advantage and push more international business to other major cities that are more accommodating. Accordingly, Singapore has been rated this year as the easiest place in the world for small and medium-sized enterprises to do business, and the third easiest place for multinational companies, by a World Bank report that rated factors such as complexity of procedures to start a business, enforcing contracts, registering property, and rule of law. In the same report Hong Kong came second and the USA came fourth with the UK not in the top ten. Additionally, Singapore ranked second behind Switzerland in the World Economic Forum’s 2012 Global Competitiveness Index, which compared nearly 150 economies across criteria including infrastructure, education, innovation and efficiency. Clearly London, as a city-state could top many of these rankings with its world-class universities (3 out of the top 5 universities in the UK) and infrastructure (5 major international airports and world-class underground tube system) as well as historical benefits such as the rule of law, political stability, the home of liberalism and sitting between the timezones of Tokyo and New York that, if leveraged without UK government interference, could be more productive for humanity’s progress as a whole. And unlike many other major cities, London’s non-domicile tax rules allow the wealthy to come to London and be taxed on only what they bring into the city. What partly contributes to city-states such as Singapore and Hong Kong’s dominance and success is that they are so open to international skilled workers with one-third of Singapore’s labour force derived from foreigners – one of the highest proportions in the world with the exception of places like Dubai and Doha.

Hong Kong - A Model to Replicate?

In terms of public services and taxes city-states are more efficient in their use of these funds. This should certainly be something that piques the attention of city-state dwellers. The average Londoner earns £37,000 per year, 53% more than average UK earnings. The Office for National Statistics measured that the average Londoner contributes 70% more (£16,000 each more a year) to the UK’s tax income than people in the rest of the UK. Actually the taxes paid by Londoners compares to 45% of London’s GDP and public spending in London is just 35% of London’s GDP – you can imagine where the difference is sent. 20% of UK GDP is made in London and yet London has 10% of the UK’s population. Such a situation where too much of a city’s GDP is transferred via the tax system to other parts of the country is bad for both sides. The city pays too much tax which is not allocated efficiently for those citizen’s benefit, and those in receipt of the cash become too dependent on it. Hong Kong has experienced a 40% increase in GDP per capita over the last 10 years and this with the incentivizing feature of a 15% flat tax rate. Imagine London and New York with these tax rates and an efficient allocation of this money in the form of government spending. The money that was transferred out of London to other parts of the UK (if we consider each area should have the same government spending as taxes raised), £18 billion last year, could fund over 150 hospitals of the size and complexity of Great Ormond Street, 2,000 new well-equipped schools across London with top teachers and the newest textbooks, or 6 new cross-rail projects – all just in one year. Thinking about that it is a totally unacceptable situation for one of the world’s most vibrant economic and social centers not to be independently managed and governed.

The socio-economics of cities also differs from their countries. In Europe population growth is slowing with people having less children. But major cities like London diverge from this pattern with population growth increasing and the city becoming more youthful. Middle-aged and poor are leaving London and this is what is arguably controlling income equality in major cities. Those that can contribute with their education and/or useful skills can make a living in these centers of world innovation, while those who cannot leave for smaller cities. Even graduates who flow to these major cities from around the world require greater resolve and qualifications to make a living, as it arguably should be in major cities where those all over the world desire to be in. Many large cities have a large share of younger age groups with 20% of London consisting of ages 25-35. Additionally, a recent survey revealed that there are now more ethnicities other than white ethnic British in London – surely this is a telltale sign of the evolution of an international city-state which should be governed by itself.

The Global Travelator for the new
Entrepreneurial/Professional
Economic Class

In fact, for the goal of human progress as a whole, these global cities which are already developing an international monoculture – better for global innovation and togetherness – should be given their independence. They have already lost much of their specific national cultural identity as they amalgamate cultures, religious beliefs, ideas, food and people from all over the world. These major cities compete with each other in the extent of their international monoculture in order to attract the smartest and richest global citizens as well as the multinational enterprises that bring investments and jobs to these cities. An unselfish relinquishment of major cities by their current sovereign masters would raise living standards for billions; they must examine this now as it is evident that inequalities between London and other
 English cities will only increase. London, Chongqing and Buenos Aires will have more in common with each other and this commonality will just become greater. These major cities are all attractive to a group of entrepreneurial and highly-skilled professionals that are this world’s elite migrants on a global travelator which moves them from major city to major city, contributing to global economic progress. They have an ambivalent attitude towards the country outside their host city and are truly global citizens. The rise of this kind of thinking will only increase with globalisation and is inevitable. The sooner the world begins to think of humanity’s common good, the better it is for the world’s progress as well as living standards worldwide.