07/22/2015
Asia / Consumer services
A rising middle class in ASEAN has fuelled changing consumer spending habits, presenting opportunities in the modern grocery retail sector.
Growing wealth, urbanisation, affluence, and a rising middle class in ASEAN has fuelled changing consumer spending habits from needs to wants, better consumption, and shopping experiences. We see ASEAN’s modern grocery retail sector continuing to develop at a fiscal year 2014-17 forecast earnings compound annual growth rate of 4-28%, driven by store openings and margin expansions. We have identified the fastest areas for growth in ASEAN grocery retail to be in Indonesia, the Philippines, and convenience store formats.
Penetration of modern retail in Malaysia, Thailand, Indonesia, and the Philippines remains low, at less than 50%. With ASEAN’s middle-class population expected to double to 500 million by 2020, we believe the demand for better quality food and shopping experiences will drive the growth of modern grocery retail going forward.
Store expansion remains a key theme in the growth of modern grocery retailers. Companies are developing scale to strengthen their bargaining power and are constantly looking to improve operating efficiencies. Dairy Farm International, Sheng Siong Group, Big C Supercenter, CP All, and NTUC Fairprice are among the more efficient grocery retailers in the region.
We like the sector for its attractive return on equity, defensive qualities, strong cash-generating ability and headroom for earnings growth. We like Dairy Farm International for its attractive valuations, Sheng Siong Group for its growth traction and yield, and CP All for its strong earnings growth. We are neutral on Big C Supercenter as growth is expected to be slower going forward. We are avoiding Indonesian plays due to high valuations of around 30 times price earnings.
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