Going global: Singapore companies to leverage on Asia’s rise

Singapore companies can leverage on Asia’s rise. We see While China is widely expected to overtake the US as the largest global consumer market, we believe one should not ignore the potential from Asean, which has been largely overlooked. We believe Singapore companies have the potential to benefit from this trend.

And, investors could potentially reap high returns given that these companies are smaller and are therefore overlooked, and hence could offer better value. Singapore is pushing for more internationalization of companies, and is targeting to achieve 1,000 companies with S$100m - S$500m in revenue in a decade.

Identifying Singapore winners on Asia’s continued rise. We continue to believe the best stock returns in Asia Pacific over the next few years will be beneficiaries of both China and emerging Asean’s rising consumption trends. In our view, Singapore companies are at a position to leverage off both markets.

At the same time, valuations are not excessive vs peers. Consumer stocks in HK trade at an average PE of 18x compared to Singapore’s 13x. We also believe corporate governance for Singapore-listed companies may be less of an issue vis-à-vis the ones at emerging markets.

There is value in this overlooked market. STI is flat YTD this year, versus its regional peers such as KLCI, JSI and SET and KLCI, which are up c.12%, 10% and 1%, respectively. The focus has largely been on these developing markets, particularly Indonesia and Thailand, which are now trading at c.16x and c.13x PE.

While this is not surprising given Singapore’s more developed status and open economy, we believe there is value to be extracted given its regional exposure and ability to ride on the rising consumption trend.

Singapore stocks are capable of a re-rating as they grow into regional behemoths over the next few years. We approach outperformance over the long term with stocks that are capable of re-rating over the next few years. We rely on 3 main factors to source for potential winners of this trend. They are: (i) companies that can capitalize on emerging Asean; (ii) companies that can capitalize on China; (iii) companies that have competitive advantages in their market niches.

M&A activities by MNC picking up. There have been a couple of deals where larger corporations have been taking or buying stakes in companies in the region. Examples are Little Sheep (Yum Brands!), Hsu Fu Chi (Nestle), Permanis (Asahi), F&N (Kirin), C&O Pharmaceutical (Shionogi), etc. These hidden gems will provide immediate share price catalyst and exceptional returns when they are discovered.

PE funds focusing on South East Asia, less focus on China/India: Bain & Co. In Bain & Company’s Global Private Equity Report 2011, it shared that PE funds are increasingly focused on South East Asia, bypassing giants like China and India. There was a reported surge in interest by almost three times in 2011, from 2010, on the South East Asian market. Singapore and Indonesia were named as the top two markets in South East Asia, being the wealthiest and largest in this region.