2008/2009 Guide to Asia's Blue Chip Companies

Consumers

Buying into the future

Smoking and shopping are an Asian pastime that builds businesses

Asia has long been famed for its passionate shoppers. It’s here, on the streets of Hong Kong, Singapore and Tokyo, rather than New York or London, where most of the world’s luxury goods are sold. But the news of retail store closings and a spending slump in the US and Europe are already affecting the consumer sector in Asia, through declining export demand and reduced spending from shaken consumers.

To be sure, the global slowdown will affect sales of those luxury brands, most of which hail from Europe, but it is less clear what the effect will be on Asia’s home-grown consumer groups. This year’s FA 100 constituents in the consumer category – Korea Tobacco & Ginseng (KT&G), Imperial Tobacco Company of India (ITC) and Lotte Shopping – all have some reason for optimism, even in the face of economic disruption from overseas. After all, the growing consumer markets in China and India present real opportunities to offset slower sales in more mature markets.

Chen Deming, China’s minister of commerce, says that China will overtake Japan to become Asia’s largest consumer market in 2009. And the Boston Consulting Group predicts that the overall Chinese consumer market will rank second only to the US by 2015.

Perhaps more important, two of the FA100 consumer players – India’s ITC and Korea’s KT&G – are tobacco businesses; a product that is more recession-proof than most.

KT&G has operations in the Middle East and Central Asia, and made news last February when it announced a $166 million investment in a cigarette plant in Russia. The plant, due to open in December 2009, will join the KT&G production facility in Turkey and a joint venture plant in Iran, which together offer KT&G a number of direct production lines for its brands, which include The One and Indigo. As well as its tobacco interests in Korea, KT&G also manufactures and sells ginseng products in Hong Kong, and is pursuing new business opportunities such as manufacturing pharmaceutical products.

Smoking may be a popular habit in Asia, but the health implications and government intervention in areas related to duty, advertising and other legislation means that diversification is part of the plan for KT&G and ITC.

ITC is India’s third-largest producer and the world’s eighth-biggest exporter of tobacco and tobacco products, but it has had to contend with changing market conditions. Its Insignia, India Kings and Classic Raw brands have been hit by high material costs, while double-digit inflation in India has dampened consumer spending and encouraged smokers to downgrade to cheaper brands. In addition, in October, the government banned smoking in public places following similar legislation in countries such as Britain and Thailand.

During the past few years, ITC, which has a market value of $17 billion and is 31.7% owned by British American Tobacco, has developed interests in technology outsourcing, retail and packaging, and is expanding a range of foods and personal care products. Diversification has moved the percentage of its non-tobacco sales from one-third three years ago to more than half today. Building on this, ITC’s information technology arm acquired US-based technology company Pyxis Solutions last August for approximately $25 million, to fuel its ambitions in the US.

Though the global financial crisis is affecting Korean exports and the value of the won, the country’s department stores, including Lotte Shopping, enjoyed bumper August sales figures – each of the country’s top three department stores posted their strongest annual growth in sales for three years. Promotions linked to the 60th anniversary celebrations of the country’s foundation prompted a jump in sales of luxury goods. Such figures are particularly important in Asia’s fourth-largest economy as department store sales generate more than half of the country’s gross domestic product.

Though figures for September showed a decline for the first time in 2008, the government’s $11 billion recovery package for 2009 should help stabilise economic jitters. Lotte Shopping, which runs Korea’s leading department store chain and the country’s third-biggest discount store, has also been pursuing its expansion plans, most recently with October’s takeover of Makro Indonesia. It bought the Indonesian discount store franchise for W215.6 billion ($149.4 million) and predicts that the store’s sales will grow 22% to W580 billion won by the end of the year.

The move into Indonesian builds on the overseas expansion started last year when the company launched eight Lotte Mart stores in China, and this year when its first foray into Russia resulted in the opening of the Moscow mall in September. By the end of this year Lotte Shopping hopes to open its first store in Vietnam.

Ranking by revenue
Country	Company	(million $)
SK	Lotte Shopping	10,855
IN	ITC	2,742
SK	KT&G	2,597

Ranking by net profit
Country	Company
IN	ITC	18.40%
SK	KT&G	1.80%
SK	Lotte Shopping	-6.80%

Ranking by revenue growth
Country	Company
IN	ITC	26.30%
SK	Lotte Shopping	6.80%
SK	KT&G	6.60%

Ranking by ROE
Country	Company
IN	ITC	27.70%
SK	KT&G	21.40%
SK	Lotte Shopping	8.80%

Share price
Country	Company	Share price, Nov 1, 2007	Share price, Nov 1, 2008	Currency
IN	ITC	172	154	INR
SK	KT&G	74,700	82,200	KRW
SK	Lotte Shopping	423,500	174,000	KRW