Two ways to play Asia’s beverage boom

One of the most common questions I get asked in Asia is “What do you want to drink?”

There’s no shortage of answers to this. Living in Asia offers a plethora of drinks, reflecting the richness of different cultures, social norms and… weather.

The last point shouldn’t be downplayed. I’ve lost count of how many times well-meaning Asian friends have told me off for choosing a drink that didn’t suit the weather at the time.

For instance, in Thailand, fresh orange or lime juice drinks are often served containing salt. This is presumably because of the hot and humid climate, where there is a need to replenish the salt level in the body.

Meanwhile in Malaysia, the favourite drink is teh tarik. This consists of tea mixed with sweet condensed milk which has been ‘pulled’ to create a cappuccino-like white foam on top of the drink. There is also the less well-known cham, which contains coffee mixed with black tea.

Until quite recently, most of these drinks were only available to be enjoyed at roadside stalls, eateries or food courts. That is now changing and many of them are being modernised, re-packaged, marketed and distributed in modern shops.  

The green tea drinks offered by Starbucks are a great example of this. Based on personal observations, I would say they’re a huge hit, particularly among the ethnic Chinese population across Southeast Asia.

Similarly, a lot of the cool artisan cafés being set up nowadays contain one or two signature Asian drinks, suggesting that traditional Asian drinks will survive and thrive in the new Asia.

I think the Asian drinks market could be a huge opportunity. Let me tell you why.

Three reasons to be excited

I’m excited about this theme, because it offers something rather unique: direct exposure to what Asian consumers crave. After all, what is a simpler investment strategy than investing in something people really need – drinks.

But in a lot of cases, investors are being asked to hold stocks which only offer partial exposure (like Western multinationals that only focus a small amount of their energies on Asia). I’ve found a few companies that bypass all this.

A second reason is that some of these Asian drinks are likely to find new fans in global markets. They are different in a funky way and with the right management team, financial muscles, marketing and distribution, they could become lucrative brands elsewhere.

Thirdly, the theme is not covered much by sell-side analysts and therefore are less likely to be fully appreciated and priced in.

If you need further proof of the merits of investing in the Asian drinks industry, let’s look at the origins of one of the most famous drinks brands in the world.

Which global drinks brand began in Thailand?

In 1982, Dietrich Mateschitz, a young Austrian on a trip to Thailand discovered a syrupy tonic drink that was popular in Asia.

In 1984, after returning home, he quit his job and teamed up with Chaleo Yoovidhya, who owned a drinks company in Thailand. Each invested $500,000 into the new business and took a 49% stake (plus 2% for Yoovidhya’s son Chalerm).

After three years of tinkering with the formula and packaging, Mateschitz carbonated the drink and designed a sleek blue and grey metallic aluminium can.

The name he decided on was Red Bull.

Initially there was no market for the drink, but, as we all know, it is now one the world’s most famous drinks brands, making Mateschitz one of the richest men in Austria.

This should give you an idea of the potential that the Asian drinks market has. Today, I’m bringing you two stocks that offer meaningful exposure: Thai Beverage PCL (Singapore: Y92and Power Root Berhad (Kuala Lumpur: 7237).

First, I’ll talk through Thai Beverage.

Time to take a piece of Thailand’s beverage empire

Thai Beverage is one of the largest beverage players in Asia, involved in spirits, beer (brands such as Chang beer), non-alcoholic beverages and food and restaurants, and controlled by Mr Charoen Sirivadhanabhakdi, Thailand’s third richest man.

Thai Beverage came into existence in 2003 through the merger of 58 companies related to the alcohol industry. However, the company was only listed in Singapore in 2006.

I think this reflects the conservative view in certain circles in the Thai elite that it is not appropriate to have a liquor company listed in Thailand.

Over the last five years, Thai Beverage has yielded an annualised return of 29.9% versus UK-listed Diageo at 17.3%. Whilst earnings have doubled over that period, I think the buoyant share price performance reflects the company’s scarcity premium, ability to generate strong free cash flow and high growth potential.

The high growth potential is particularly in focus following the 2012 acquisition of Singapore-listed Fraser & Neave Ltd (Kuala Lumpur: F&N), a beverage and property company.

Another great example is to be found in Ichitan Group (Bangkok: ICHI), a subsidiary, which sells and distributes a number of Japanese-style green tea beverages. Since listing on 18 April, the stock has gained nearly 88%.

Thai Beverage is covered by ten analysts and trades on a price/earnings (p/e) ratio of 20.9 times 2014. Hardly a bargain, but that is often the case for Asian consumer stocks.

Now let’s turn to the second opportunity – a much smaller but intriguing Malaysian-listed company called Power Root.

Power Root could be the next Red Bull

Power Root develops and promotes herbal energy drinks fortified with two main rainforest herbs.

The first is tongkat ali. A flowering plant root found in the rainforest, tongkat ali is traditionally used to boost male potency. It was dubbed ‘Asian Viagra’ in a report by Sunday New Times.

The second plant, kacip fatimah, also found in the rain forest, is the female equivalent. Both of these herbs are indigenous to Malaysia and their properties for promoting physical well-being are highly regarded by Malaysians.

Over the last five years, Power Root has yielded an annualised return of 32.6% versus 9.1% for the Malaysian market. During the same period, earnings have tripled and the free cash flow generation has been strong.

Power Root lacks research coverage and is trading on a p/e of 14.3 times 2014 (historical). The company plans to expand overseas and make Power Root a household name globally. Not an easy task, but Red Bull shows it is possible.

I’ll be watching these companies with continuing interest.