Hong Kong Food and Drink Report Q1 2012

BMI View: A reversal in Hong Kong’s booming property market will inevitably weigh on consumer purchasing power and curtail spending on higher value consumer goods. Global headwinds are also likely to weigh on Hong Kong’s export-oriented economy, with negative spillover effects on the labour market. These dynamics are likely to take their toll on the Hong Kong consumer, although we acknowledge that waning inflationary pressures should help lend some upward support to domestic demand. Longer-term, a population of just more than 7mn marks Hong Kong out as one of Asia Pacific’s smallest consumer markets and from a demographic standpoint there is little for consumer investors to get excited about. That said, Hong Kong’s status as a global tourism hub continues to work in its favour and this – coupled with high existing consumer spending levels – explains why firms continue to balance their push into the mainland, with market share preservation investments at home.

Headline Industry Data ?? 2011 Food Consumption Growth = 3.8%, CAGR Growth Forecast To 2016 = 2.1% ?? 2011 Alcoholic Drinks Sales Growth = 5.5%, CAGR Growth Forecast To 2016 = 2.9% ?? 2011 Soft Drinks Sales Growth = 5.2%, CAGR Growth Forecast To 2016 = 2.7% ?? 2011 Mass Grocery Retail Sales Growth = 4.8% CAGR Growth Forecast To 2016 = 3.6%

Key Trends And Developments Fonterra EM Expansion Highlights Promise For Dairy Industry Players – New Zealand dairy giant Fonterra has invested NZD8mn (US$5.9mn) in upgrading its Auckland-based production facility to ramp up production of ultra-high temperature (UHT) milk. As well as facilitating its investments in EMs, Fonterra's UHT upgrade should also provide it with a stronger platform to consolidate its footprint in existing export markets such as Singapore and Hong Kong. These markets have exhibited a strong rebound in domestic demand as they emerge from the global recession and BMI remains confident that boosting its presence in these markets will benefit Fonterra's future growth prospects. The relatively high per capita food consumption levels in these economies are further reasons for optimism on the company's earnings outlook as it steadily increases its market penetration.

Intensifying Competitive Pressures Could Undermine Uny's Growth Potential – Japanese supermarket operator Uny will enter into a joint venture with China's leading food and beverage company Tingyi (Cayman Islands) Holding Corporation to set up supermarkets in China. Via the joint venture, Uny aims to set up its first supermarket in China by February 2013. This gloomy outlook for Japan's MGR sector has prompted the country's leading retailers such as Lawson and Seven & I Holdings to look abroad for stronger growth opportunities, and Uny is the latest company to jump on the outbound mergers-and-acquisitions bandwagon. While Uny currently still operates the bulk of its stores in Japan, it is also planning to open its third supermarket store in Hong Kong in 2011.

Risks To Outlook Downside risks to our already cautious near-term consumer outlook would include a worse than anticipated decline in the domestic property market that would result in a sharp fall in domestic consumer confidence and spending. A sharper than anticipated cooling of the Chinese economy as tighter credit conditions start to take effect could also weigh on domestic consumer sentiment given the key trading relationship between the two countries.

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