Sold on Asian Consumers

05/18/2010 12:01 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Jardine Matheson is a well-run global conglomerate buoyed by Asia's increasing affluence, writes Carlton Delfeld in Around the World with

As history shows, a financial crisis is often followed by a debt crisis and history is repeating itself right before our eyes. But markets will overshoot on the down side and policymakers will do their darnedest to come up with ways and measures to survive.

Shanghai’s weakness—the index is down 16% since January—represents an eight-month low. The Shanghai Composite is this year’s worst performing index in Asia. More specifically, share prices of Chinese property companies have fallen more than 27% since January and more than 45% since their July 2009 peak.

Many point to what seem very attractive valuations of Chinese equities. On average, Shanghai stocks are trading at a price/earnings ratio of 16x for the current year, well below the long-term average. As a comparison, the [Standard & Poor’s] 500 index is trading on a price/earnings multiple of 14.5x.

But Chinese investors do not read the Asian Wall Street Journal nor pay much attention to fundamentals—the market is primarily driven by momentum and liquidity. At some point, Chinese investors will turn from real estate and back to the stock market and then the move could be explosive.

Amid the current sharp pullback in emerging markets and the weakness especially in greater China markets, I have been looking for long-term core opportunities. One macro theme that is hard to miss is the likely rise in consumer spending in almost all Asian emerging markets.

Euromonitor data shows that consumer spending during 2004-2009 rose 75% in Malaysia and India, 84% in Indonesia, and 121% in China. By 2014, the projected increase in consumer spending is double these numbers.

What is the highest quality, conservative way to play this trend? I really like Jardine Matheson (Singapore: JARD, OTC: JARLF)—a company that has almost two centuries of experience navigating the region. Based in Bermuda with good accountability and transparency, Jardine is actually a collection of operating companies, mainly Jardine Strategic Holdings (Singapore: JSH, OTC: JDSHF), PT Astra International (Jakarta: ASII, OTC: PTAIF) (Indonesia auto), Jardine Cycle & Carriage (Singapore: JCNC, OTC: JCYCF) and what I think is a real hidden gem—Dairy Farm International (London: DFIB, OTC: DFIHY).

Dairy is basket of retail companies ranging from supermarkets and hypermarkets, health & beauty, convenience (7 eleven), and specialty (IKEA in Hong Kong). Dairy offers a total of 5,000 stores focused on Southeast Asia but growing in India and China. Jardine and Dairy are known for the quality of its management, [which] together with some insider families owns more than 15% of the company.

In terms of margins, Dairy is in line with Wal-Mart Stores (NYSE: WMT), and the stock currently trades at a discount of about 35% of its net asset value.

Another, more liquid way to get at Dairy International is through the Templeton Dragon Fund (NYSE: TDF) which invests in China, Taiwan, and Hong Kong and has a 17% stake in Dairy International.

The risk factor is high and an 8% trailing stop loss a must.

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