The Dow has rallied 20% in the past three days, recording its strongest performance since 1931. Although most Asian liquor stocks have weakened in the past month, the rally has been kind to them. Our view is that investors should consider the sector for its defensive qualities.
|One-month change||DVD yield|
|Pernod Ricard SA||-13.61%||2.31%|
|Kweichow Moutai Co Ltd-A||0.72%||1.37%|
|Guangzhou Zhujiang Brewery-A||-0.88%||1.48%|
|Beijing Yanjing Brewery Co Ltd-A||-1.30%||0.37%|
|China Resources Beer||-2.72%||0.51%|
Singapore has closed its bars as of today, but home drinking could still buttress liquor consumption.
Investors should consider the following:
1. Liquor is a solid investment in the face of an economic slowdown. Very few of our clients were around in the 1930s, but most will recall that the world was then in the throes of the Great Depression. However, there was one consumer sector that thrived – liquor. By late 1933, prohibition had been lifted and, by the end of the decade, liquor consumption had risen by a CAGR of 7%, despite one-quarter of the workforce losing their jobs.
2. The fiscal stimulus means that governments would be averse to curbing liquor consumption. The end of prohibition in the 1930s also boosted government finances at a time of deficit spending. Excise taxes raised US$1.35bn, which was half the federal government‘s revenue.
Many governments are embarking on fiscal stimulus. Singapore has just unveiled US$45bn stimulus to buttress consumption. It includes measures such as US$1,000/month income support for self-employed workers.
During the 1997-98 Asian crisis, Asian spirits consumption rose 4% per annum, despite the contraction in many overall economies.
3. Some Asian liquor stocks are relatively immune to the restrictions placed on bars. For instance, most THBEV SP’s products are consumed in-house (off-premises in the industry jargon). In fact, almost the entirety of its core white spirits business in Thailand is consumed in people’s homes, as opposed to in bars. The ratio is lower for brown spirits and beer. In Vietnam, half of SABECO’s beer is consumed in homes.
4. The oil price collapse is the principal story in commodities, but the soft commodities rout is overlooked. Spirits producers use molasses and brewers use barley. The inputs for these products include sugar, which is the single largest ingredient in spirits production.
The sugar price has dropped by almost as much crude oil – it is down 28% YTD. This should buttress the operating margins of both spirits and beer producers. Packaging prices are down, as aluminium, which is used in plastic, has collapsed.
5. Several liquor players pay high dividends. Yields are c3% on average, which starts to look even more attractive as it is now more than three times the US risk-free rate (10-year T-Bills). The FCF yield averages 4%, which suggests dividend payout rates can be maintained.
6. Corporate action could take place. ABInBev, the world’s largest beer producer, has built up a war chest for Asia. ABInBev’s recently listed arm, Budweiser APAC, has hinted it may look for acquisitions of regional brewers. THBEV SP (Buy, TP SGD1.30) is a potential target, in our view.