This article is part of Morningstar’s Guide to Investing in Asia where we navigate the potential risks for the chance of fantastic rewards from across the region.
Mead Johnson Nutrition (MJN)
Developed markets already represent the minority of profits for pediatric nutrition company Mead Johnson at just around one quarter and will likely diminish in importance due to growing demand within Asia and Latin America. Many developing nations within these regions are both generating robust wage growth and introducing more women into the labour force, contributing to a growing middle class that sees paediatric products, particularly those of leading multinationals, as aspirational brands that warrant premium prices.
Mead Johnson commands leading share in many developing regions, but these areas are also more fragmented, since foreign brand prices are still out of reach of much of the population. Over time, we expect Mead Johnson to generate outsize growth by raising prices at a rate that trails wage increases, which would broaden its customer demographic and consolidate the market at the same time.
Standard Chartered (STAN)
Standard Chartered's focus on financing trade in emerging markets served it well during the financial crisis, but the ongoing slowdown in China means that the tide is turning rapidly. Unfortunately for investors, this focus means Standard Chartered is among the most exposed to the steep falloff in the prices of energy and other commodities that began in late 2014 and saw the price of oil cut in half.
We see growing evidence that some of its recent excess returns were due, at least in part, to underpricing risk and that regional competitors are becoming material competitive threats, and we recently reduced our moat rating to none. We project that slow growth and rising loan losses mean that returns on equity will be in the mid-single-digits for the next several years and that a dilutive rights issue is likely.
Intel Corp (INTC)
Intel is the world's largest chipmaker. Intel is the pre-eminent leader in the integrated design and manufacturing of microprocessors found in traditional personal computers. With the rise in interconnectivity of devices ranging from PCs to smartphones and tablets, Intel strives to provide the most powerful and energy- efficient silicon solution to any product "smart and connected." Additionally, the data centres used to facilitate the information stored, analysed, and accessed by various front-end devices are largely run with Intel server chips.
GlaxoSmithKline (GSK)
As one of the largest pharmaceutical companies, GlaxoSmithKline has used its vast resources to create the next generation of health-care treatments. The company's innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat, in our opinion. The magnitude of the company's reach is evidenced by a product portfolio that spans several therapeutic classes, as well as vaccines and consumer goods. The diverse platform insulates the company from problems with any single product. Additionally, the highest revenue generator, Advair, represents close to 20% of total revenue.
rom a geographic standpoint, Glaxo is strategically branching out from the developed markets into emerging markets. Glaxo's consumer and vaccine segments well positions the firm in these price sensitive markets. While this strategy will likely create some challenges like the potential legal violations that arose in early 2013 in China, we believe the fast-growing emerging markets will help support long-term growth and diversify cash flows beyond developed markets.
Unilever (ULVR)
Unilever's scale and scope give it competitive advantages, and with 58% of sales generated in emerging markets, the firm offers substantial exposure to growth markets. However, although we view the shift in emphasis to personal care from packaged food as a net positive, Unilever will likely have limited success in expanding its volumes and margins simultaneously, given the highly competitive nature of its categories.
Management's stated objective is to achieve organic sales growth, driven by volume, at an above-market rate; we view this as an appropriate strategy that will likely consolidate the firm's moat over time. As retail is a low-margin, volume-driven business, this should help cement Unilever's place as a primary vendor that is entrenched in its customers' supply chains globally.
The company should benefit from tailwinds from the structural shift to faster-growing personal care from food, the potential disposal of the developed-markets spreads business, geographic whitespace opportunities and premiumisation in laundry and beauty care; these tailwinds should help Unilever achieve volume-driven organic growth.
