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Looking to get some of the vroom that comes with an investment in the developing economies of Asia but fearful of the whoosh that can signal big losses from a change in government policy, out-of-control inflation or the pricking of an asset bubble?
Try investing the stocks of a "platform" country. It won't eliminate all the risk of holding a stake in developing economies, but it can insulate your portfolio from the worst effects of country-specific upheavals.
My favorite platform country right now? Singapore, hands down. In this column I'll explain what a platform country is, tell you why I like Singapore, suggest some stocks to own outright and, in the attached video, describe an exchange-traded fund, or ETF, that will let you buy the best of the Singaporean stock market with just one trade.
Platform countries come in all sizes, as big as Australia (nearly 3 million square miles) and as small as Singapore (about 250 square miles). Whatever their geographic size, a platform country has a relatively small but extremely vigorous economy. (Australia's gross domestic product was $675 billion in 2006; Singapore's was $141 billion.)
The best-managed, most-competitive and most-farsighted companies have outgrown the limits of their domestic economies. Using their own economies as bases, they've expanded to attack opportunities in surrounding developing economies.
In the best of circumstances, the champion companies of a platform economy are better-managed and more-experienced international competitors than most of the companies in the surrounding developing economies. And those surrounding economies are bigger than the domestic economies of the platform country -- China's GDP is $10.7 trillion after correcting official exchange rates for purchasing-power parity -- and show high levels of growth that let the champions of the platform country put free cash flow to work at attractive margins.
That's kind of abstract, I admit. Let me put some flesh on those bones using the example of a couple of Singaporean companies to show the advantages of investing in a platform country.
Look to the horizon
If you look at just the domestic part of Singapore Telecommunications (SGAPY, news, msgs), it doesn't look like an especially interesting investment opportunity.In the fiscal fourth quarter of 2007, which ended in March, revenue from the company's Singaporean businesses grew by just 2.8% from the year-earlier quarter. Operating expenses climbed, and EBITDA (earnings before interest, taxes, depreciation and amortization) fell by almost 6% year over year.
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But extend your horizons, and you see very different results. In the wireless-phone arena alone, the company owns 21% of Thailand's Advanced Info Service (AVIZF, news, msgs) (17 million subscribers and 52% market share), 31% of India's Bharti Group (42 million subscribers and 29% market share), 45% of the Philippines' Globe Telecom (GTMEF, news, msgs) (14 million subscribers and 37% market share), 100% of Australia's Optus (7 million subscribers and 33% market share), 45% of Bangladesh's Pacific Bangladesh Telecom (1 million subscribers and 5% market share) and 35% of Indonesia's Telkomsel (29 million subscribers and 55% market share.) Collectively, what Singapore Telecom calls its associates saw pretax profit grow by 16% year to year.
Airlines in Asia
Even when the organizational structure is different, the end result is the same. Singapore Airlines (SPOAF, news, msgs) is much more integrated because of the strength of its core brand name in the air-passenger market. But the company has still, like Singapore Telecom, used its home market as a platform for tapping into bigger and faster-growing markets in the region.So, for example, wholly owned subsidiary SilkAir is a regional airline targeting secondary cities in the fast-growth markets of China, India, Thailand, Indonesia, Vietnam, Malaysia, the Philippines and Cambodia. Revenue climbed 20% in 2006.
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And Asian low-cost pioneer Tiger Airways, 49% owned by Singapore Airlines, saw passenger numbers grow by 75% in 2006.
Then there's Singapore Airlines Cargo, set up as a subsidiary, which has become the world's third-largest carrier of international freight. Recently, Singapore Airlines bought a 25% stake in Great Wall Airlines, a new air-freight carrier based in Shanghai.
And, finally, there's Singapore Airlines' international passenger operations. In fiscal 2007, operating profit in that business climbed 58%.
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