BANGKOK On a bustling street in Bangkok's Silom district, workers are putting finishing touches to a new 7-Eleven store, another sign of the resurgence in Asian convenience stores on the front line of an economic rebound.
Underpinned by high savings rates and an expanding middle class, Asia's big convenience store operators outside Japan are witnessing sturdy profit growth and expanding margins.
Thailand's largest convenience store operator CP All (CPALL.BK), Singapore's Dairy Farm International Holdings Ltd (DAIR.SI), Southeast Asia's largest retailer, and Taiwan's President Chain Store Corp (2912.TW) have won broker recommendations in recent months.
What makes them a long-term play, say analysts, is a strategy shift into high-margin items such as ready-to-eat foods as well as a preference by consumers for the cheaper foods as a consequence of tighter spending in the downturn.
"The sector is a sure bet," said Gabriel Yap, senior dealing director at DMG & Partners Securities Pte Ltd in Singapore. "It all comes down to people having to eat."
"We think that over the next several years they will grow their earnings at a higher rate than the markets as a whole."
That optimism contrasts with the outlook in the United States and parts of Western Europe, where debt-burdened consumers complicate the retail picture.
Investment bank Morgan Stanley this month downgraded projections of next year's earnings at U.S. supermarket chains Safeway Inc SWY.N, Supervalu Inc (SVU.N) and Kroger Co (KR.N) to below consensus levels.
In Thailand, a country of 67 million people that emerged from recession in April-June, CP All saw a 42 percent surge in second-quarter profit that beat market forecasts by 12 percent.
The debt-free operator of about 5,000 7-Eleven stores wants to open up to 450 new outlets a year for the next five years, projecting a rise in 2010 earnings and adding ready-to-eat menus to lure cost-conscious customers.
The new menu could generate a gross profit twice that of non-food items, said analysts at KT ZMICO Securities Co Ltd.
"What we're seeing now is that people have started buying a bit more and everything is on track in terms of our growth, costs and expansion," says CP All chief financial officer Kriengchai Boonpoapichart.
LURE OF HOT FOOD
Singapore-based Dairy Farm International, with operations in Hong Kong, China and Malaysia, reported a 10 percent rise in net profit in the first half of the year, a period when it opened 207 stores, and said it would "trade well" for the rest of the year.
Its stock is up almost 35 percent this year, under-performing a near 50 percent rise in the benchmark index .FTSTI.
In Taiwan, which boasts Asia's highest density of convenience chains with one store for every 2,500 people, leader President Chain Store is moving away from basic products like milk, soft drinks and magazines to hot food.
"The shift toward offering ready-to-eat food and drinks along with chilled food products will be a prime margin enhancer for convenience retailers," said Macquarie analyst Patti Tomaitrichitr.
South Korea's big convenience stores are expected to post double-digit profit growth in 2009 as they expand operating hours and offer gift vouchers to lure customers from department stores.
Some of the biggest chains are private, such as Bokwang FamilyMart with about a third of the $5.5 billion South Korean market. Lotte Shopping Co (023530.KS), South Korea's top retailer and a local operator of 7-Eleven stores, has seen its shares rise 43 percent this year, in line with the KOSPI Index
Chinese supermarket chain and convenience store operator China Resources (0291.HK), with over 2,600 stores on the mainland and Hong Kong under brands like Vanguard and SUGUO, said this month it expected "significant improvement" in growth of store sales in its supermarket operation in the second half.
Much of the gains across the region are linked to a revival in Asia's export-driven economies and a pick-up in consumer confidence. But many chains are also benefiting from an apparent shift to discount-oriented shopping during leaner times.
Japan, however, has seen a different trend as retailers contend with the twin blows of deflation and rising unemployment.
Shares in leader Seven & I Holdings (3382.T) have lost almost 30 percent this year, number two Lawson Inc (2651.T) has shed 22 percent and third-ranked FamilyMart Co Ltd (8028.T) 28 percent.
Seven & I Holdings, which has about 12,000 7-Eleven stores in Japan, cut its full-year operating profit forecast by 12 percent due to a cool summer and weak consumer confidence. It is opening discount superstores.
"I expect some Japanese retailers to cut their (earnings) outlook," said Shun Tanaka, a retail analyst at Japan's SMBC Friend Research Center.
Despite a relatively upbeat outlook for Asia's big convenience stores, the share prices of many firms in the sector no longer look cheap, analysts say.
CP All, for example, trades at 21 times next year's projected earnings, according to Thomson Reuters data, indicating that its long-term earnings growth expectations are nearly double that of Thailand's benchmark stock index .SETI.
Taiwan's President Chain trades at 20 times next year's earnings, above the Taiwan Weighted Index's .TWII 17.5 times, while China Resources trades at 26 times projected 2010 earnings against the 17 times of Hong Kong's Hang Seng Index
DMG's Yap dismisses suggestions the sector may be overvalued.
"The level of P/E (price-to-earnings ratio) represents their strong, sturdy earnings growth and expansion story, " he said.
"I don't think they're overvalued and believe they still have a way to go."
($1= 33.58 Baht)
(Additional reporting by Taiga Uranaka in Tokyo and Rhee So-eui in Seoul; Editing by Dhara Ranasinghe)