fx risk exposure of asia pacific breweries

FIN3115: FINAL PROJECT PRESENTATION

ASIA PACIFIC BREWERIES LIMITED

Presented by: G2 Group 8

Agenda

•Introduction

•Foreign Exchange Risk Exposure

•Country-specific Risks

•Other Risks

•Analysis of Risk Exposure & Management

•Recommendations

•Conclusion

• Incorporated as Malayan Breweries Limited (MBL) in 1931

• Joint venture between Fraser & Neave (F&N) Group and Heineken International

• Major Events• Acquisition of Anchor Beer in 1941• Demand boom for beer after WWII• Purchased South Pacific Brewery of Papua New

Guinea in 1958• Began marketing Heineken in Singapore in 1984

History & Development

INTRODUCTION | Forex Risk Exposure | Country Risk | Other Risks | Analysis | Recommendations | Conclusion

History & DevelopmentSignificance dominance in the home market during 1980s

Maturing Market

Embarked on Regionalization Strategy

Renamed as Asia Pacific Breweries Limited in 1990


APB Brand Portfolio• 40 beer brands with key brands being Tiger Beer, Heineken,

Anchor, Baron's Strong Brew, ABC Extra Stout.• Enables APB to reach across various market segments in

different countries• Avoid spillover effect from any individual brand


APB TodayCorporate Information: • Listed on SGX • 36 breweries in 13 countries• Successfully market their beer portfolio marketed to over 60 countries• As of 2009, APB major market share, based on revenue, are Indochina

(40.8%), Singapore (24.2%), New Zealand (18.2%).


APB TodayCurrent Performance: Out-performed in most of the financial ratio and standard as compared to the industry• ROA = 16.13 7.75 times the Industry (2.08) • ROE =22.81 5.14 times higher than the Industry (4.44)

Management Changes: • Recently appointed Board Members: Chairman

Simon Israel , CEO Roland Pirmez • First half of 2010: GM and CEO positions of

breweries in China, Indonesia, New Caledonia and Sri Lanka

• Group HR Director appointed on 21 Oct 2010


Reasons for Regionalization

• Similar marketing and advertising campaigns can be used

Asian Culture

• Large drinking population

New Market with Young Population

• Access to wider consumer base

Extensive Distribution Network


Reasons for Regionalization

• Increasing labor cost and labor scarcity in Singapore during 1980s

• Lower labor cost in developing countries

Labor Market Imperfection

• Engaged in Joint Venture and Acquisitions• Retain control

Intangible Asset

• Access to wider consumer base

Trade Liberalization


Transaction Exposure

• Currency risk when a firm faces contractual cash flow invoice in another currency

• Sources raw materials internationally & locally, particularly Australia & Europe

• Manage forex exposure to AUD & Euro for A/P; various foreign currencies for A/R

Introduction | FOREX RISK EXPOSURE | Country Risk | Other Risks | Analysis | Recommendations | Conclusion

Transaction Exposure

• Look beyond international suppliers• E.g. JV with domestic glass manufacturer to build

Greenfield glass bottle plant in Thailand• Built potential local suppliers’ capacity by sending

specialists to work with them• Contract farming of barley in North India

Operational Techniques

• Forward market hedge• Uncertain exposures: Cover 50-90% of anticipated exposure

of 12-month forward• Forward long contracts: $65,667,000; short contracts:

$36,823,000 (2009)

Financial Contracts


Economic Exposure

• Possibility that the value of the firm may be affected by unanticipated changes in the exchange rate

Asset Exposure• Effect of volatile exchange rates on home currency

value of assets & liabilities• JV in Mongolia had USD loans but Mongolian

Tugrik revenue• Depreciation of Tugrik led to exchange loss of

$5.9M


Economic ExposureOperating Exposure• Effect of volatile exchange rate on operating CFs• Determined by market structure & ability to mitigate effect of

forex changes by adjusting its markets, product mix & sourcing

CompanyPercentage

Appreciation of Domestic Currency

Percentage Impact on Profit Before Tax

2009 2008

APB 10% -1.16% -0.66%

Foster's Group Ltd 10% -0.70% -1.59%

SAB Miller 10% -1.56% -0.80%

Diageo 10% -1.38% -1.13%

Average of the 3 competitors 10% -1.21% -1.17%

SENSITIVITY ANALYSISImpact of 10% strengthening of domestic currency against all other currencies that the company is exposed to on its PBT


Economic Exposure

• Rising prices of agri-products increase beer production costs

• Source for alternative sources of yeast, hops & malt to reduce price of imports - reduces effect of exchange rate fluctuations

Flexible sourcing policy

• 35 breweries in 12 countries• Leverage on undervalued currencies & underpriced

factors of production in foreign countries (E.g. China)• Provide flexibility to produce in different countries

based on prevailing interest rates

Selection of low cost production sites


Operating Exposure

• Export market spreads over 60 countries worldwide• Stabilize operating cash flows through diversification

of export market • Market risk management

Diversification of markets

• Portfolio of over 40 beer brands & brand variants to reach out to different target markets

• Create unique customer perceptions and instill brand loyalty for its beer brands

• Create inelastic demand which reduces exposure to exchange risk

Product differentiation


Translation Exposure

• Different reporting currency (SGD) & functional currencies will affect FS when there’s unanticipated exchange rates changes

• No direct effect on reporting currency CFs; only a realizable effect on net investment in the event of liquidation

• APB suffered a paper loss of S$37.9M & S$14.7M in 2008 & 2009 respectively

• APB does not hedge against translation exposure


Country Risk: Mongolia

• Increasing real GDP from 0.2% in 2001 to 10.2%• Growing drinking culture• Liberal and receptive to foreign investments countryHowever, •Political system lacks transparency•Corruption level is high

Volatile forex market (SGD$7.3 million in 2009 & +SGD$4.0 million in 2010)

Joint Venture undertaken to penetrate Mongolian beer market MCS-Asia Pacific Brewery LLC (MCS-APB)

2007: Mongolia

Fluctuating exchange rate movement exposes APB to unanticipated cash flow liquidity

Introduction | Forex Risk Exposure | COUNTRY RISK | Other Risks | Analysis | Recommendations | Conclusion

Country Risk: Indochina

1993: Vietnam

1994: Cambodia

2008: Laos

• Economy opening up gradually• WTO membership• Alcoholic sales growth - 36.6% per year• High level of corruption• High tax regime : 45%• Downward pressure on profit margin

=> increase capacity => gain from economies of scale

=> requires investment => finance in USD, revenue in VND

potential currency mismatch

52% profit in 2009

JV Vietnam Breweries Ltd & Wholly owned APB (Hanoi)

Introduction | Forex Risk Exposure | COUNTRY RISK | Other Risks | Analysis | Recommendations | Conclusion

Other RisksInterest rate risk

• Investment portfolios & debt obligations are exposed to varying interest rates

• APB utilizes a combination of fixed & variable exchange rates

• Sensitivity analysis

Credit risk• APB contracts with a diverse range of

counterparties• Maintain a broadly diversified portfolio of financial

instruments along geographic lines

Introduction | Forex Risk Exposure | Country Risk | OTHER RISKS | Analysis | Recommendations | Conclusion

Hedging reduces volatility of contractual cash flows invoiced in another currency• Reduced bankruptcy costs and refinancing costs• Reduced corporate taxes• Possession of asymmetrical information and economies of

scale in hedging compared to shareholders

Operating techniques of hedging is also used• Natural hedging• Cost-benefit analysis should still be used

Analysis of APB’s Risk Management

Gain from Transactional Exposure Hedge

Introduction | Forex Risk Exposure | Country Risk | Other Risks | ANALYSIS | Recommendations | Conclusion

Exposed to Economic Risk• Currency mismatch between their loans and revenue in

Mongolia and Vietnam• Needs to manage this risk to prevent the huge loss in

Mongolia from happening again

Well Managed Operating Risk• Operating exposure is reasonably well managed as its

exposure to exchange rate movements was lower than its competitors

• Flexible sourcing policy, low cost production sites, diversified markets and product differentiation



• Investors depend on accounting data to form expectations and opinions about the operations of the company

• May affect its cost of capital• Significant losses might affect the future cash flow of the

company and hence its market value• Should look into hedging at least part of

the exposure


Unhedged Translational Exposure


Recommendations

• APB should be open to other financial instruments to hedge their forex risk

• Possibility that a forward contract is unavailable, but options and currency swaps etc are

• Currency swaps have the added benefit of locking in the interest rates

• Options and swaptions can be used to hedge uncertain cash flows

Resolve the currency mismatch

Introduction | Forex Risk Exposure | Country Risk | Other Risks | Analysis | RECOMMENDATIONS | Conclusion

Hedge Translational Exposure• Balance sheet and derivative hedges • Derivative hedge involves speculation which is against

the company’s policy• Balance sheet hedge to match local currency assets and

liabilities• For example, local subsidiary can finance their local

assets using financing in local currency

Commodities Hedge

• Hedge against price fluctuations of commodities• Explore options such as alliances with local producers

and use of derivatives contracts


Recommendations

Further Diversification

• About half (42%) of its revenue comes from Indochina• APB is vulnerable to country-specific economic and political

shock • Advisable to increase its breadth to new markets and

increase its depth in existing markets• China is viewed as promising market - account for 79% of

growth in the region• Western and northern China are untapped markets

Recommendations


Conclusion

• APB strategy of entering emerging markets has proved to be successful to the group

• 75% of their revenue in 2009 came from overseas markets• Strong performance in recent years• Joint ventures have worked well in light of challenging

local environment• Moving forward, they will need to look at alternative

hedging instruments and techniques• As they become more diversified, they will be more

exposed to foreign exchange risk and country risk

Introduction | Forex Risk Exposure | Country Risk | Other Risks | Analysis | Recommendations | CONCLUSION

fx risk exposure of asia pacific breweries

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