Wealthy Asia Market strategy Amar Gill, CFA Head of Research (Special Projects) [email protected] (65) 65122337 Xun Ming Ip (65) 64167856 5 September 2011 Asia ex-Japan Thematics Large-cap picks Commonwealth Bk (O-PF) China MGM (O-PF) EVA Airways (BUY) Genting Berhad (BUY) Golden Eagle (O-PF) LG H&H (O-PF) L’Occitane (BUY) Parkson Retail (BUY) Prada (BUY) Sands China (BUY) Shinhan Financial (BUY) Wynn Macau (BUY) Fat cats in fast lanes Surge in high net worth individuals www.clsa.com Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor® proprietary database at clsa.com Wealthy Asia Contents Executive summary.............................................................................. 3 Asian wealth surge .............................................................................. 5 Asian currency boost ......................................................................... 13 HNWI analysis - Key markets ............................................................ 16 Risks to Asian wealth ......................................................................... 25 Plays on Asian wealth ........................................................................ 28 Appendix: Extract from Dipped in gold - From head to toe................ 38 All prices quoted herein are as at close of business 1 September 2011, unless otherwise stated Return of key themes 2 [email protected] 5 September 2011 Executive summary Wealthy Asia Fat cats in fast lanes Asian wealth surge The Asia ex-Japan countries we examine are home to about 1.2 million high- net-worth individuals (HNWI), which we define as those with investible assets of US$1m and above (excluding the property they live in). This is just 0.06% of the adult population, puny in the context of its two city-states, Singapore and Hong Kong, where 1.5% of adults are fat cats. With per-capita GDP of US$20,000 (about half of the USA) approximately 0.4% of South Korea and Taiwan’s adults enjoy high net worth. That is 8x the ratio in China, and 20x India and Indonesia. As the region develops, the surge in Asian fat cats and the impact of their spending-power will be a multi-decade theme. HNWIs to rise by 2.4x Within five years we estimate there will be 2.4x as many HNWIs in the region in five years as in 2010. We project their numbers to grow at 19% per annum for the coming years, thus the ratio of HNWIs to adult population to double, yet still remain at only 0.13% for the region in 2015. Over this period, China will account for more than half of those getting into the wealth set for these countries. With rising net worth of those already in this category, we project HNWIs’ wealth in these countries to enjoy a 23% Cagr over the next five years, rising from about US$6tn to close to US$16tn by 2015. Asian currency boost In US-dollar terms, currency appreciation will boost HNWI growth, a driver of Asian spending power for internationally priced goods that is often underemphasised. We factor in an average 4% annual rise in Asian currencies over the coming years. The compounded effect lifts the numbers by just over one quarter, contributing to some 600,000 additional dollar millionaires in the region over the coming five years. Strongest growth in Five-year growth estimate in HNWIs by country HNWI numbers Indonesia, China with Indonesia India not far behind China Thailand India Philippines S Korea Malaysia Singapore Taiwan (%) Hong Kong 0 5 10 15 20 25 Source: CLSA Asia-Pacific Markets HNWI analysis: China will make up the largest part of the increase in wealth for these 10 Key markets countries, given our projected nominal-GDP growth of 14.5% pa, combined with a currency appreciating at 5% per year against the dollar. By our estimate, about 0.1% of its population or almost 900,000 mainland Chinese will move into the wealthy set over the next five years. Together with Hong Kong, this will make up more than 60% of the estimated increase in total wealth, with India a distant second, accounting for 15% of the projected rise in HNWIs’ investible assets for these countries. Indonesia, however, has the fastest estimated expansion in HNWIs at a 25% Cagr. Growth in HNWIs for India and Thailand will also be strong, at around 20% pa. Hong Kong, with a pegged currency, is likely to see the slowest growth in dollar millionaires, unless our stock-market and property-gain projections prove too conservative. 5 September 2011 [email protected] 3 Executive summary Wealthy Asia Risks to Asian wealth Asian economies are extremely open and a global downturn is a significant risk for the region’s expansion. Key concerns relate to how robust China’s growth is, the risk of an unexpected dollar rally, and if Asian assets do not rise to the extent assumed. Our sensitivity analysis indicates the projections are much more sensitive to assumptions on currency and GDP growth than stock-market returns. Asia’s rich generally have a larger part of their wealth in properties than equities. Only one-sixth of the growth in HNWIs for the region is driven by projected stock-market gains. Savings from annual income along with investment yields underpin the increase in wealth over the coming years. Plays on Asian wealth Rising Asian wealth has positive implications for a range of sectors from high- end retail, autos, properties, leisure and gaming, travel, hotels, healthcare, pharmaceuticals, as well as for asset managers with distribution in the region. Listed companies with upside from rising Asian wealth have an aggregate US$600bn capitalisation and are set to outperform market indices. Superlative prospects inevitably will attract competition. The most compelling investments are companies generating positive economic value with a durable competitive advantage to allow them to continue to be value-creators, where stock prices are at attractive valuations. Prefer franchise Among EVA®-positive companies with business franchises catering for Asian businesses catering to wealth, our key picks are Prada, L’Occitane, Parkson Retail, Golden Eagle, Ports Asian wealth Design and LG Household & Health Care in the consumer space; Sands China, Wynn Macau, China MGM and the Genting group offer gaming exposure; EVA Airways and Formosa International are among the plays for travel and high-end hotels; while asset management in the region provides upside for Commonwealth Bank of Australia and Shinhan Financial, among others. Attractive valuations on a Franchise businesses to play on Asian HNWI theme (sorted by ROIC) number of franchise plays Code ROIC EVA®/IC ROE EV/Ebit on Asian wealth (%) (%) (%) (x) Titan Industries TTAN IB >100 >100 43.7 19.6 Wynn Macau 1128 HK >100 >100 90.9 15.5 Ctrip CTRP US >100 90.2 16.4 20.3 China MGM 2282 HK 94.0 85.1 88.6 13.7 Formosa International 2707 TT 85.4 80.7 42.0 24.3 Golden Eagle 3308 HK 60.0 50.5 29.1 16.0 Evergreen 238 HK 54.6 39.8 15.7 2.0 Megastudy 072870 KQ 52.8 40.8 23.3 7.2 L'Occitane 973 HK 40.0 28.6 20.7 12.5 Ports Design 589 HK 29.4 19.4 29.0 8.5 Sands China 1928 HK 25.6 19.1 22.7 19.4 Prada 1913 HK 24.4 18.5 28.0 14.8 Tata Motors TTMT IB 23.7 40.5 32.0 4.6 Parkson Retail 3368 HK 22.8 14.3 25.0 13.3 LG H&H 051900 KS 22.4 13.8 30.7 17.4 Amore Pacific 090430 KS 22.4 12.5 18.1 18.2 Genting Singapore GENS SP 22.1 16.0 19.0 12.1 Genting Berhad GENT MK 22.0 12.4 18.2 5.3 China Merchant Bank 3968 HK 21.9 12.4 21.9 8.6 Hengdeli 3389 HK 20.0 9.4 19.3 10.2 Commonwealth Bank CBA AU 19.8 17.9 19.8 9.8 Genting Malaysia GENM MK 18.0 5.5 13.0 6.2 Shinhan Financial 055550 KS 15.7 6.5 15.7 6.4 Celltrion 068270 KQ 15.4 4.6 19.1 27.0 Chinatrust Financial 2891 TT 11.7 2.9 11.7 12.5 OCBC OCBC SP 10.5 2.5 10.5 12.4 Cathay Pacific 293 HK 9.5 3.7 13.2 9.1 EVA Air 2618 TT 9.1 5.2 13.8 10.6 Note: Financials are averaged for 2011-12; PE not EV/Ebit for banks. Source: CLSA Asia-Pacific Markets 4 [email protected] 5 September 2011 Section 1: Asian wealth surge Wealthy Asia Asian wealth surge There were 1.2m HNWIs We examined wealth distribution in 10 of the most significant economies in in the region as of 2010 Asia that we cover. We estimate these countries have almost 1.2m HNWIs, defined as those with investible assets of US$1m or above (excluding their first homes). While a fairly large number are already in the wealthy set, they comprise just 0.06% of the population. We estimate less than one person of every 15,000 to be in the category of HNWIs in this region. HNWIs approximately Our study does not include analysis of the Western world, nevertheless it 1.5% of adult population allows comparisons of this Asian average with the more developed economies in Singapore and HK in the region. HNWIs in Singapore and Hong Kong make up approximately 1.5% of their adult populations. These richer city-states have high wealth concentrations even by global standards. South Korea and Taiwan, with per- capita GDP of around US$20,000 are about half the US per-capita income level; HNWIs are approximately 0.4% of adults.