Analyst: Shahnewaz Kabir shahnewaz@bracepl.

com

Consumer sector gaining momentum

Bangladesh which is still considered a Least Developed Country (LDC) has seen consistency in private consumption. In fact, the ninth largest population of the world is a boon for Bangladesh consumer sector. With majority of the population still living in rural areas where penetration of consumer companies is still low. This provides scope for organic growth for the sector. The consumer sector as a whole exhibits a greater degree of earnings stability compared to other local sectors. The consistent performance of the consumer sector of Bangladesh is represented in consistent growth in private consumption which totaled 75% of total GDP of Bangladesh in 2009. Consumer sector companies has maintained their revenue growth through creating brand loyalty and mass marketing. Bangladesh has seen rapid growth in Consumption with the development of the economy and industrialization.

Why we are optimistic about the sector

Chart: Private Consumption as percentage of total GDP (left chart) and Consumer Sector market capitalization as percentage of total equity market capitalization of DSE (right chart)

The consumer sector in general performed well during different economic situations. The positive factors about the consumer sector are:

Double-digit revenue growth of consumer-oriented companies for the last 10 years with 2010 average revenue growth being 13.4%. Such growth has been possible due to low base of the sector. Consumer sector maintained their profitability margins and increased their return on equity consistently Consumer sector companies paid high cash dividend; average dividend yield of the sector is higher than the market average Consumer sector outperformed DGEN, the benchmark index of Dhaka Stock Exchange (DSE) throughout the challenging time of 2011 Relatively younger population, rapid urban growth and economic development supports growth of consumption expenditure

Source: ADB, DSE, BRAC EPL Research, December 2011

Consumer sector companies listed in DSE

Consumer sector lacks proper representation in the capital market of the country. Consumer sector companies represent 16% of total equity market capitalization while private consumption is 75% of GDP. Based on product categories companies can be divided into five subsectors: Footwear, Fast Moving Consumer Goods (FMCG), Consumer Durables and Electronics, Food and Tobacco and Telecommunication. We have selected 15 companies on the basis of consistent revenue growth and return on equity. Table 1 and 2 on next page provides a list of the 15 consumer sector companies and brief description of their nature of business.

Consumer sector gaining momentum

Table 1: Consumer sector companies
Company Name Footwear Bata Shoe Apex Adelchi Footwear FMCG GlaxoSmithKline Reckitt Benckiser Keya Cosmetics Kohinoor Chemicals GQ Ball Pen Marico Bangladesh Limited Manufactures and markets pharmaceutical products and health drinks. Markets pest controls, antiseptics and cleaning agents. Manufactures and markets personal and home care products. Manufactures and markets personal and home care products. Manufactures and markets ball point pens. Manufactures and markets coconut hair oil which is their major product. Edible oil, hair dye, soap bars among other products. Nature of business Manufactures footwear for local shoe market. Manufactures footwear for export market and local market.

Durables and Electronics Singer Bangladesh Food and Tobacco BATBC Fu Wang Food Apex Foods National Tea Olympic Industries AMCL (Pran) Telecommunication Grameenphone Limited Provides mobile telecommunication services and information technology services in local market. Market leader in premium cigarette products; minor exporter of tobacco leaves. Markets packaged food items in the local market. Exports shrimp and fish. Manufactures and markets tea leaves. Markets packaged food items in the local market. Also manufactures markets drycell battery. Manufactures and markets beverages and packaged foods. Markets consumer electronics products.

Source: Company Data and BRAC EPL Research, December 2011

Table 2: Consumer sector matrix

MCAP (BDT Million) 8,144 3,268 7,550 3,472 4,304 1,055 846 11,813 8,733 36,450 2,608 437 3,315 5,867 1,010 210,242 Book Value (BDT MN) 1,321 726 1,381 227 659 57 604 2,195 3,141 6,241 574.1 401 489 526 380 48,032 NPAT (BDT MN) 543 228 410 126 151 37 29 675 1,974 2,879 26.8 9 175 191 44 16,311 YTD Average Turnover P/B (BDT MN) 6.2x 4.5x 5.5x 15.3x 6.5x 18.5x 1.4x 5.4x 2.8x 5.8x 4.7x 1.1x 6.8x 11.2x 2.7x 4.4x 7.7 15.6 4.2 3.8 67.2 0.2 12.4 9.2 20.7 19.7 62.9 2.0 1.6 36.5 3.9 150.7

Name Bata Shoe Apex Adelchi Footwear Glaxo Smithkline Reckitt Benckiser Keya Cosmetics Kohinoor Chemicals GQ Ball Pen Marico Bangladesh Limited Singer Bangladesh BATBC Fu Wang Food Apex Foods National Tea Olympic Industries AMCL (Pran) Grameenphone Ltd

Ticker BATASHOE APEXADELFT GLAXOSMITH RECKITTBEN KEYACOSMET KOHINOOR GQBALLPEN MARICO SINGERBD BATBC FUWANGFOOD APEXFOODS NTC OLYMPIC AMCL(PRAN) GP

Free Float 30.0% 90.9% 18.0% 13.3% 66.4% 59.0% 62.2% 10.0% 25.0% 33.5% 87.7% 49.6% 95.7% 68.5% 57.3% 10.0%

P/E 15.0x 14.3x 18.4x 27.5x 28.4x 28.5x 29.6x 17.5x 4.4x 12.7x 101.0x 51.0x 18.9x 30.7x 23.2x 12.9x

Source: DSE, BRAC EPL Research, December 2011

Consumer sector gaining momentum

Consumer sector achieved consistent revenue growth
Consumer sector companies have achieved consistent growth of their revenue. Table 3 highlights revenue growth of the consumer sector companies for the last 10 years and also Cumulative Average Growth Rate (CAGR) of revenue during the 10 year period. Average growth of the sector has been double digit since 2003 which is well above the countrys GDP growth rate of 6%. Among the subsectors FMCG and Consumer Durables and Electronics sector experienced the highest growth which was driven by mass marketing by the companies and rising affordability for the mass population. Food and Tobacco which includes packaged foods and beverages also maintained growth owing mainly to the changing lifestyle of local people. With urbanization and industrialization of the society, people are consuming packaged food more and more which helped food companies to grow their revenue with a 10 year CAGR ranging from 10% to 20%. In the footwear sector, Apex being an export oriented company with smaller local base has achieved outstanding growth while mature company Bata with largest local base has maintained their growth over the years. It is surprising to note that, the consumer goods companies are yet to reach 100% of the rural population which is more than 70% of total population. Although many companies are bringing smaller packages of their products to reach the rural population, they are yet to reach the total population. With ninth largest population in the world Bangladesh still holds scope for organic growth for the consumer sector companies.

10 year CAGR of the companies was 16.4% on average.

With 70% of population living in rural area still remains under-penetrated, consumer sector have scope for organic growth.

Table 3: Revenue growth of the consumer sector companies

Revenue Growth Table Bata Shoe Apex Adelchi Marico GSK Reckitt Benckiser Keya Cosmetics Kohinoor GQ Ball Pen Singer Bangladesh BATBC Fuwang Foods Apex Foods NTC Pran (AMCL) Olympic Industries Grameenphone Limited Average Nominal GDP Growth Source: Company Annual Reports, December 2011 * 8-year CAGR. ** 7-year CAGR 4.0% 15.0% 9.4% -25.2% -0.1% 1.2% -12.7% 8.7% 13.5% 34.2% 8.1% 4.0% 11.9% -3.6% 7.4% 15.0% 1.1% 27.2% 53.6% -6.5% 8.3% 22.8% 32.4% 15.0% 5.0% 26.3% -2.0% 19.8% 86.4% 10.8% -0.3% 10.8% 6.2% 7.3% 16.5% -0.8% 3.0% 27.5% 56.8% 21.5% 2002 7.1% 0.0% 2003 1.9% 0.0% 2004 -8.7% 89.9% 2005 17.9% 27.9% 35.4% 5.5% 34.1% 140.2% 19.8% -5.3% 26.0% 7.3% 14.2% -11.0% 8.5% 2.9% 9.7% 50.2% 24.0% 11.3% 2006 26.2% 33.3% 30.9% 7.2% 33.9% 6.9% 13.3% -11.6% 54.2% 19.1% 10.0% 24.6% 12.2% 8.7% 43.2% 54.9% 22.9% 12.1% 2007 17.7% 51.3% 63.4% 10.4% 27.9% -12.5% 24.6% -7.6% 39.6% 8.2% -7.8% 46.3% -28.0% 6.7% 1.8% 19.0% 16.3% 13.7% 2008 1.6% 27.9% 83.1% 18.8% 14.5% -4.1% 4.4% 19.0% 24.7% 17.6% 11.0% -5.1% 61.3% 6.5% 37.9% 13.0% 20.8% 15.5% 2009 8.0% 3.5% 52.6% 60.1% 7.9% 4.0% 14.2% 5.0% -1.0% 25.3% 35.9% -20.4% 12.8% 12.3% 43.8% 6.4% 16.9% 12.6% 2010 13.4% 19.1% 32.1% 20.1% 8.7% -14.5% -3.1% 0.4% 10.0% 19.2% 3.3% 20.9% 45.3% 8.9% 17.1% 14.4% 13.4% 12.3% 10 Year CAGR 9.0% 33.9%* 48.4%** 14.1% 13.7% 15.3% 12.0% 2.9% 17.1% 13.7% 13.8% 10.6% 11.9% 7.3% 21.5% 29.1%*

Consumer sector gaining momentum

Stable margin; accelerated ROE growth
Consumer sector average return on equity stood at 36.1% in 2010

Chart 1 illustrates yearly earning before interest and tax (EBIT), earning before interest tax depreciation and amortization (EBITDA) and net profit after tax (NPAT) margin and return on equity (ROE) of the sector. Margins of the sector were consistent except for 2005-06 period when declined due to hike in fuel price. However, ROE of the sector grew consistently and particularly in 2007-10 period achieved exponential growth. In the last three years margin of the sector has been stable.
Chart 1: Average Margin and ROE of the sector

40.0%

35.0% 30.0%
25.0% 20.0% 15.0%

10.0% 5.0%
0.0%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010
ROE

EBIT Margin

EBITDA Margin

NPAT Margin

Source: Company Annual Reports, BRAC EPL Research, December 2011

Dividend yield higher than the market

Consumer sector has paid high dividend historically with dividend yield higher than the market since 2004. Average dividend yield of the sector was 2.0% in 2010 compared to market dividend yield of 1.6% only. Singer Bangladesh had the highest dividend yield (8.37%) in 2010 followed by BATBC (6.00%), Bata Shoe (3.83%) and Keya Cosmetics (1.96%). Historically, Bata Shoe, Apex Adelchi, Reckitt Benckiser, Keya Cosmetics, BATBC, Pran (AMCL) and Kohinoor Chemicals paid consistent and high dividend.
Chart 2: Dividend Yield of the sector and Market

10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2001 2002 2003 2004 2005 2006 2007 2008 Market 2009 2010 Consumer Sector Average
Source: DSE, BRAC EPL Research, December 2011

Consumer sector gaining momentum

Trading at High PE Ratio
Consumer sector has been traded with high price to earnings (PE) multiples historically compared to the market PE which has always been driven by expectations of high earnings growth and high dividend payment of the sector. However, among the companies Bata Shoe, Apex Adelchi Footwear Limited, BATBC and Keya Cosmetics has been historically traded with low PE ratios. However, PE multiples of GlaxoSmithKline, Reckitt Benckiser, Singer Bangladesh has been high.
Table 4: Price/Earnings ratio
2001 Bata Shoe Apex Adelchi GSK Reckitt Benckiser Keya Cosmetics Kohinoor GQ Ball Pen Marico Singer Bangladesh BATBC Fuwang Foods Apex Foods NTC Pran (AMCL) Olympic Industries Grameenphone Ltd. Market Source: DSE, December 2011 6.4x 6.3x 8.4x 18.4x 13.9x 14.5x 23.6x 18.4x 21.4x 6.4x 36.0x 15.8x 0.3x 7.1x -10.4x 18.6x 8.1x 5.1x 18.9x 35.9x 6.9x -12.0x 21.1x 10.4x 7.0x 15.1x 30.8x 7.7x 19.7x 21.1x 8.3x 8.7x 17.4x 61.3x 13.3x 27.8x 26.8x 18.1x 8.6x 15.2x 15.0x 7.9x 16.8x 11.0x 14.0x 7.2x 6.0x 13.6x 10.7x 7.7x 31.0x 11.2x 18.9x 15.1x 21.6x 10.9x 7.8x 29.1x 7.3x 29.9x 29.2x 17.1x 25.3x 16.8x 7.7x 19.7x 19.5x 7.1x 15.7x 6.5x 8.6x 2002 8.1x 19.5x 19.9x -11.7x 9.6x 10.8x 11.5x 2003 8.3x 12.9x 27.8x 17.1x 10.7x 10.3x 12.1x 2004 13.5x 9.1x 9.4x 15.4x 10.2x 17.8x 8.1x 2005 8.2x 5.9x 33.3x 10.3x 8.4x 19.4x 7.8x 2006 6.0x 7.0x -94.7x 7.9x 9.6x 19.2x 24.0x 2007 9.4x 9.6x 51.6x 12.6x 6.7x 16.9x 10.0x 2008 9.8x 14.1x 27.8x 12.6x 22.6x 11.8x 165.4x 2009 16.1x 13.7x 27.0x 37.2x 20.3x 10.8x 23.3x 25.2x 24.4x 11.9x 37.2x -64.8x 24.8x 27.3x 11.3x 15.5x 25.7x 2010 16.5x 20.3x 33.2x 45.5x 14.6x 41.8x 42.8x 26.8x 82.1x 14.9x 46.1x 67.7x 21.8x 31.5x 33.1x 31.0x 29.2x

Outperformed the Market in 2011

The consumer sector outperformed the benchmark index, DGEN Consumer sector retraced 27.1% throughout the year 2011. The market went through massive correction YTD while DGEN lost 39.8% throughout the year with DGEN losing 39.8% of its value. Chart 3 illustrates rebased consumer sector market capitalization and rebased DGEN. The consumer sector lost 27.1% YTD up to December 15, 2011 while DGEN lost 39.8%. Only three companies retraced higher than DGEN while other 12 companies outperformed DGEN. Fu Wang Food lost only 8.2% YTD followed by Bata Shoe and National Tea which retraced 8.8% and 13.2% respectively. Singer Bangladesh lost the most (-45.7% YTD) followed by Glaxo Smithkline (-44.5% YTD) and Olympic Industries (-40.5%).
Chart 3: Rebased consumer sector MCAP and DGEN
110 100 90 80 70 60 50

Source: DSE, BRAC EPL Research, December 2011

Rebased Consumer Sector Mcap

Rebased DGEN

Consumer sector gaining momentum

Demography of Bangladesh supports consumption
Relatively younger population, rising literacy rate, increasing labor participation rate, urbanization, improving social environment and quality of life are the major drivers behind consistent growth of the consumer sector of Bangladesh. Commendable external sector performance has created the economic platform for consumption as well. Private sector credit growth and availability of consumer loan have increased consumption further as it has enabled middle income and low income level people to go for consumption of luxury items. In fact many products previously considered luxury items has become part of life style and necessity with change in life style. Table 5 illustrates some of the variables capturing the economic and social development of Bangladesh which in turn supports the growth of private consumption.

Younger population, rising literacy rate, rapid urbanization are major factors supporting private consumption.

Table 5: Socio-economic variables

Socio-economic Variables GDP per Capita (USD) Real GDP Growth Rate Private sector credit (% growth) M2 (% growth) Human Development Index Urban population (% of total) Life expectancy at birth, total (years) Labor force (% growth) Literacy rate (% of total) Female labor participation rate (% of female population) Median Age (years) 2005 441.6 6.00% 16.90% 16.70% 0.432 25.3% 64 2.57% 47% 57% 57% 58% 58% 2006 446.7 6.60% 18.10% 19.30% 0.441 25.7% 65 2.51% 2007 487.2 6.40% 15.00% 17.10% 0.449 26.2% 65 2.30% 2008 559.7 6.20% 25.00% 17.60% 457 26.7% 66 2.24% 2009 620.0 5.70% 14.60% 19.20% 0.463 27.1% 66 2.18% 56% 58% 59% 23.3 2010 659.8 6.00% 24.20% 22.40% 0.469 27.6% 67 2.42%

Source: Bangladesh Bank, World Bank, IDB, BRAC EPL Research, December 2011

Major economic and social factors that induce consumption include:

Relatively young population Consistent GDP growth rate Growing urban population Increasing labor participation Improving health condition Rising literacy rate Introduction of mass consumerism

We have discussed these driving factors in details in our previous consumer sector report titled Consumer goods continue to drive Bangladesh Economy.

Consumer sector gaining momentum

Future Outlook
The economic and socio environment of Bangladesh is supportive of private consumption growth. We expect the growth of the consumer sector to continue with the growth in income level of mass population. With the economic development, the spending pattern will change considerably. In a pattern witnessed in many other developing countries discretionary expenditures as a percentage of total consumption expenditures will increase. There are some future catalysts for the growth of consumer sector:

Growth of export sector: Bangladesh is on the verge of speeding up the external sector as large importers are looking for alternatives to China. Although infrastructure presents a huge limitation, recent improvement in power sector, investment in infrastructure development has created hope. Also Bangladesh is looking for new markets for exporting. With the growth of external sector employment situation and affordability of the mass people will improve. Remittance: Remittances have emerged as a key driver of economic growth and poverty reduction in Bangladesh. Remittance has increased affordability of the rural population and remittance growth is a major revenue driver for many sectors of Bangladesh including the consumer sector. Female empowerment: With female empowerment female participation in the labor force is expected to increase which might increase per capita disposable income. Regulation of illegal import: Illegal importing of cheap products create unfair competition for local manufacturers. Proper implementation of trade laws can help growth of local companies. Bangladesh government is imposing strict laws to decrease illegal trades. Increase in the representation in stock market: Consumer sector is under-represented in the capital market. There are large multinational consumer companies in Bangladesh which includes big brands like Unilever, Nestle, and Coca-Cola. If these companies get listed in the stock exchange, consumer sector will get more representation in stock exchange.

Historically, the consumer sector maintained good growth and the socioeconomic condition provides background for robust growth in future. Since the sector has low base it can easily maintain its high growth for quite some time. We expect more multinational and big local conglomerates involved in consumer product business to get listed in future and improve representation in capital market. Although the sector currently looks expensive, we should stay vigilant about the sector as it can provide more fresh investment opportunity in future.

Consumer sector gaining momentum

IMPORTANT DISCLOSURES
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Sajid Huq Amit Parvez Morshed Chowdhury Ali Imam Khandakar Safwan Saad Aasim Tajwaar Matin M M Shahnewaz Kabir Shawon Farjad Siddiqui Senior Research Analyst Research Analyst Investment Analyst Research Associate Research Associate Research Associate Research Associate sajid.huq@bracepl.com parvez@bracepl.com imam@bracepl.com safwan@bracepl.com tajwaar.matin@bracepl.com shahnewaz@bracepl.com farjad.siddiqui@bracepl.com 01755 541 254 01730 357 154 01730 357 153 01730 357 779 01730 727 913 01730 727 918 01730 727 924

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