This week, I cover news on Starbucks, Singtel, and Singapore REITs.
Macro in Asia
Starbucks opens Coffee Innovation Park outside Shanghai
Coffee giant Starbucks has opened a US$220 million Coffee Innovation Park just outside of Shanghai, China.
The complex includes a roasting plant, as well as a distribution centre, and is the largest investment the firm has made outside of the US.
Why it’s happening
- Some companies are still pretty bullish on the Chinese consumer, despite all the negative headlines on the Chinese economy.
- China’s not traditionally a coffee-guzzling country but the growth is there for it to offer up a real alternative to tea.
- According to Meituan Dianping – one of the China’s biggest F&B delivery companies – orders from coffee shops jumped 250% year-on-year in the second quarter of 2023. That made it the fastest-growing category in the beverages space.
Why it matters
- Seeing an American company invest meaningfully in China right not exactly a popular thing to do.
- In fact, a recent survey released by the American Chamber of Commerce in Shanghai said that optimism among US businesses in China was at a “record low” – not great vibes.
- But large American firms, like Starbucks, rely pretty heavily on the world’s second-largest economy and this investment shows that not all sectors are “off limits” for foreign investors.
- Watch closely for any further deterioration in the broader business environment in China for foreign companies, mainly through the introduction of new laws and regulation from the Chinese Communist Party.
Starbucks has been a noticeable presence in the China coffee scene since opening its first coffee outlet in Beijing in 1999.
While international coffee consumption growth is in the region of just 2%, in China it’s 30%. Added to that is how much runway there is for expansion – China’s annual per capita coffee consumption is just 12 cups versus 380 cups in the US.
In China, coffee cultivation and coffee beverage R&D and production are actually encouraged sectors for foreign investment.
So, while the headlines on American businesses in China do tend to be negative, there can be some rare exceptions to the rule.
Singtel to sell 20% stake in data centre business to KKR
Singapore Telecommunications Ltd (SGX: Z74) – better known as Singtel – agreed to sell a 20% stake in its regional data centre business to private equity firm KKR for S$1.1 billion (US$807 million).
The deal values Singtel’s data centre business at around S$5.5 billion.
Why’s it news?
- Singtel has had a pretty rough time of it in recent years as it tries to figure out new growth avenues.
- One part of that strategy has been to focus on untapped digital growth in the 5G era and monetizing the value of its quality infrastructure assets. That now looks like it’s starting to pay off.
- Meanwhile, KKR is looking at diversifying away from taking over whole companies and, instead, wants to become broader asset manager. That involves looking at investing into “alternative assets” like real estate and infrastructure.
Why it matters?
- Asia’s demand for data is huge and, naturally, data centres will benefit. The regional data centre market in Asia is expected to grow at an average of 17% per year for the next five years.
- Singtel’s share price has struggled for many years now as telcos in Asia are generally seen as stodgy businesses. This deal might help change that narrative.
- Investors should see if Singtel can unlock value in any other of its businesses in the near future as it continues to try to reinvent itself.
Singtel selling to a big private equity house is a positive sign that the telco has assets that are worth acquiring.
It has an array of “associate” telcos within its business, that include stakes in dominant regional telecoms providers in countries like Indonesia, the Philippines, and India. It also owns Optus, one of the main telecoms providers in Australia.
If Singtel can find that growth and get its dividend payout ratio back to more secure levels (as a percentage of operating profit), it could be back in favour once more.
Tim's money tip of the week
In Singapore, real estate investment trusts (REITs) are a popular investment option given they provide steady streams of dividends.
However, if we end up buying individual REITs, it’s important to remember that the sponsor (or parent firm) needs to be a very strong entity.
Many REITs listed in Singapore have relatively short track records and may lure investors in with a high dividend yield.
But from a property or tenant perspective, they may not be that well diversified or managed. Some of the best-known and strongest sponsors in Singapore include the likes of Mapletree, Frasers, and CapitaLand.
In times like these, where interest rates are high and markets on edge, it’s better to stick to “tried and tested” if you are venturing into the world of REITs.
Story of the week
It was only last year that Thailand decriminalised the recreational use of cannabis. Now, the new Thailand Prime Minister is saying his party will “rectify” the current cannabis policy.
Around 6,000 dispensaries popped up in Thailand following legalisation, offering everything from cannabis bus to oil extracts and gummies.
It seems like the question of whether to permanently legalise drug use will continue to rumble on in Thailand.