FIN3115: FINAL

PROJECT
PRESENTATION
Presented by: G2 Group 8

ASIA PACIFIC
BREWERIES
LIMITED

Agenda
Introduction
Foreign Exchange Risk Exposure
Country-specific Risks
Other Risks
Analysis of Risk Exposure &
Management
Recommendations
Conclusion

History & Development

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

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

History & Development

Significance dominance in the
home market during 1980s
Maturing Market
Embarked on Regionalization
Strategy
Renamed as Asia Pacific
Breweries Limited in 1990
INTRODUCTION | Forex Risk Exposure | Country Risk | Other Risks | Analysis |

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

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

APB Today
Corporate 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%).

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

APB Today
Current 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
INTRODUCTION | 2010
Forex Risk Exposure | Country Risk | Other Risks | Analysis |

Reasons for
Regionalization
Asian
Culture
Similar marketing and advertising
campaigns can be used

New Market with Young

Population
Large drinking population

Extensive Distribution
Network
Access to wider consumer base

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

Reasons for
Regionalization
Labor Market Imperfection
Increasing labor cost and labor scarcity in
Singapore during 1980s
Lower labor cost in developing countries

Intangible Asset
Engaged in Joint Venture and Acquisitions
Retain control

Trade Liberalization
Access to wider consumer base
INTRODUCTION | Forex Risk Exposure | Country Risk | Other Risks | Analysis |

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 |

Transaction Exposure
Financial
Contracts
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)

Operational
Techniques
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
Introduction | FOREX RISK EXPOSURE | Country Risk | Other Risks | Analysis |

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

Economic Exposure
Operating 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
Impact of 10% strengthening of domestic
currency against all other currencies that the
company is exposed to on its PBT

SENSITIVITY
ANALYSIS
Company

Percentage
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%

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

Economic Exposure
Flexible sourcing policy
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
Selection of low cost production
sites
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
Introduction | FOREX RISK EXPOSURE | Country Risk | Other Risks | Analysis |

Operating Exposure
Diversification of markets

Export market spreads over 60 countries

worldwide
Stabilize operating cash flows through
diversification of export market
Market risk management
Product differentiation

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

Translation Exposure
Different reporting currency (SGD) &
functional currencies will affect FS when
theres 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
Introduction | FOREX RISK EXPOSURE | Country Risk | Other Risks | Analysis |

Country Risk: Mongolia

2007:
Mongolia

Joint Venture undertaken to penetrate Mongolian

beer market MCS-Asia Pacific Brewery LLC (MCSAPB)
Increasing real GDP from
0.2% in 2001 to 10.2%
Growing drinking culture
Liberal and receptive to foreign investments country
However,
Political system lacks transparency
Corruption level is high
Volatile forex market
(SGD$7.3 million in 2009 & +SGD$4.0 million in 2010)

Fluctuating exchange rate movement exposes APB

to unanticipated cash flow liquidity
Introduction | Forex Risk Exposure | COUNTRY RISK | Other Risks | Analysis |

Country Risk:
1994:
Indochina
Cambodia

1993:
Vietnam

52% profit
in 2009

2008: Laos

JV Vietnam Breweries Ltd & Wholly owned APB

(Hanoi)

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

Other Risks
Interest 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 |

Analysis of APBs Risk

Management
Gain from Transactional Exposure
Hedge

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

Analysis of APBs Risk

Management
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

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

Analysis of APBs Risk

Management
Unhedged Translational Exposure
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

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

Recommendati
ons
Resolve the currency
mismatch

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

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

Recommendati
ons
Hedge Translational
Exposure

Balance sheet and derivative hedges

Derivative hedge involves speculation
which is against the companys 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
Introduction | Forex
Risk Exposure | Country Risk | Other Risks | Analysis |

Recommendati
ons
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
Introduction | Forex Risk Exposure | Country Risk | Other Risks | Analysis |

Conclusio
n
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 |

Q&A