Many European and American multi-nationals have publicly listed subsidiaries locating in emerging markets. A 2018 survey by McKinsey found that 25% of the 438 businesses in Africa with over $1 billion in sales were subsidiary companies of foreign multi-nationals. Some of these subsidiaries are listed on public markets. Investing in these subsidiaries allows investors to own a piece of an emerging market subsidiary with better growth prospects than the parent company but with the benefits of a large multi-national providing corporate oversight to prevent corruption and other corporate governance issues from plaguing the company. On top of this, some of these subsidiaries are trading at single digit price to earnings ratios and double-digit dividend yields with a strong runway for growth and good competitive advantages. In this article I will discuss the advantages and disadvantages of investing in the emerging market subsidiaries of European and American companies and give a brief list of emerging market subsidiaries to look at.
Why do multi-nationals list their emerging market subsidiaries?
Multi-national typically list their emerging market subsidiaries for several reasons:
- To allow local citizens and institutions to invest in the company;
- To meet local expectations or laws around foreign ownership;
- Local laws not allowing the parent company to ‘squeeze out’ the minority shareholders and delist the company;
- To get around capital constraints regarding taking money in/out of the country; and/or
- To allow the national government to invest in the company and have a liquid market for its shares if it wishes to sell its stake in the future.
The main reason European and American multi-national’s list their emerging market subsidiaries is to allow local citizens to share in the profits of the local subsidiary. This can either be through direct ownership of shares in the company or indirect ownership via the national government owning shares in the company. In a 2003 article the then chairman of Unilever, Niall FitzGerald discussed Unilever’s listed subsidiaries in emerging markets with the Sunday Times:
Unilever’s shareholder base is dominated by European and American funds, but the multinational already has listed subsidiaries in several developing countries, such as India, Indonesia and Nigeria. Mr FitzGerald believes it may be necessary to float more of the operating companies on local stock markets. “You could, over time, come under pressure to have the shareholding more evenly spread,” he said.
Mr FitzGerald, in an interview with The Times, suggests Unilever may try to attract new investors from developing nations into the UK and Dutch parents or seek listings for local companies. “It helps us build the multi-local aspect of our business and may be an effective way to more evenly spread the shareholding to make it more accessible to Indian investors or Brazilian,” he said. He could envisage a dozen such quoted subsidiaries.
Advantages of Investing in Emerging Market Subsidiaries
The most significant advantage is that an investor gets pure-play exposure to an emerging market with wonderful demographics often via a company with strong competitive advantages. An investor can get pure play exposure to the fast-growing markets of India, Ghana, Nigeria and Tanzania with the security of the parent company running things. For example, Nestle has listed subsidiaries in Nigeria, the Ivory Coast, India, Malaysia and Pakistan. Nestle has been operating in these countries for decades and over this time has grown its brands into dominant players in their niche. These brands typically rely on Nestle’s reputation for quality and reliability to drive sales. Nestle’s corporate governance standards means investors may not be as exposed to corruption and fraud but still get the benefit of the growth available in an emerging market.
The competitive advantages of these subsidiaries also show in many of their financial results. Recently the Fundsmith Emerging Equities Trust (FEET, the emerging markets fund from Fundsmith) discussed these superior returns in during their 2019 AGM. As you can see in the slide below, many of the emerging market subsidiaries have higher returns on capital employed (ROCE) and growth than their parents.
As a reminder return on capital employed (ROCE) is an important indicator of company quality for Warren Buffett:
The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share. In our view, many businesses would be better understood by their shareholder owners, as well as the general public, if managements and financial analysts modified the primary emphasis they place upon earnings per share, and upon yearly changes in that figure (Berkshire Hathaway 1979 Letter to Shareholders).
Another advantage is the oversight the parent company provides. A major risk of investing in emerging markets is corruption and fraud. If you are investing along side a major multi-national, there is less likely to be corruption as the parent company will have processes and standards in place to minimise this. Typically, the parent company is entitled to nominate at least some of the directors and senior management of the subsidiary. In most cases where the parent company owns greater than 50% of the company, the parent appoints the entire senior management team. This is another way the parent can prevent corruption and fraud and ensure good corporate governance.
Disadvantages of Investing in Emerging Market Subsidiaries
The most significant disadvantage is that the interests of the parent company and the subsidiaries minority shareholders may not always be aligned. For example, the parent company could forcibly take over the company at a low share price. This may be because the reasons for the subsidiary being publicly listed are no longer applicable or maybe the parent company wants to increase its exposure to emerging markets, either way a takeover by the parent at an inopportune time can be detrimental to investment returns.
The parent company is also in charge of managing and setting the strategic direction of the subsidiary. This is good and bad, sometimes the parent company does a great job of setting the strategic direction of the subsidiary, other times a more local management team may be able to respond better. An investor in these subsidiary companies will have to investigate to what extent the company is locally managed versus managed by head office management who are rotated in and out of the subsidiary. For example, Hindustan Unilever and Nestle India are both run by local management and are primarily held accountable at a local level. As a result, they are better able to respond to changing business needs and are incentivised to maximise the success of the local business, although there may be less corporate oversight from the parent. Other companies prefer to fly in management on multi-year contracts from overseas. This means that corporate oversight from the parent is generally higher, but the overseas management may not be as familiar with the unique needs of the subsidiary as a local manager would be and may prioritise the interests of the parent over the subsidiary. This also means that local middle management may never be given the opportunity to be promoted to a more senior role – this can cause problems of its own including lack of motivation and middle management being poached by local competitors. There are pros and cons for each approach – some subsidiaries will manage these factors better than others and every country and company requires different management styles. Typically, investors prefer the parent company to be running things in the more corrupt jurisdictions. The devil is really in the details when it comes to assessing managerial competency.
Another disadvantage is the lack of re-investment opportunities for some subsidiaries. For example, at some point Nigeria or India will mature and Guinness Nigeria and Hindustan Unilever (for example) will have limited abilities to re-invest at attractive rates of return. Or maybe there may be short term issues which means it makes more sense to invest in other countries while these issues resolve themselves. This is not an option for the subsidiaries. Thus, the subsidiary becomes capital constrained. One possibility is for the parent company to acquire the subsidiary before it gets to that point, although this is not guaranteed to happen and even if it did it may not be on terms favourable to minority shareholders. If you invest in the parent company this is not an issue, i.e. they can just invest in any country they believe will result in the best risk adjusted returns.
Perhaps the largest disadvantage to investing in companies located in emerging markets more generally is currency risk. It doesn’t matter whether the company is growing at 30% a year or has a 10% dividend yield in local currency terms if the local currency depreciates by 50% against your home currency. This is the biggest risk when investing in these companies and should be factored into the returns you require from these investments. The macro can have a big impact on the micro.
The other major disadvantage is that these emerging market subsidiaries are often listed on obscure, difficult to access exchanges. To access many of these subsidiaries listed on the various African exchanges (for example), you will have to open a local brokerage account and possibly also a local bank/custody account. If you are interested in investing in companies listed on one of the African exchanges I recommend having a look at https://investinginafrica.net, in particular the How to Invest in Africa articles located here. These articles, while a little old do a great job of explaining how to open brokerage accounts in various African countries such as Zimbabwe, Zambia, Tanzania, South Africa, Malawi and more [note: most of these links are to archive.org due to the posts being taken down. Some of them don’t quite display correctly but are still readable]. I have not opened an account in any of these countries as of writing. For African share market data, I recommend https://www.african-markets.com/ and https://africanfinancials.com/. For Asian/South American countries not covered by Interactive Brokers, you will have to find out if any brokers in your country provide access to these markets, otherwise you will have to find a local broker. The lack of access is part of the reason why these subsidiaries often trade at such low valuations.
Overall, the publicly listed subsidiaries of well-known developed country multi-nationals allow an investor to access developing markets with the benefits of the parent company providing management oversight. Like all investments, it ultimately depends on the risk-reward characteristics of each subsidiary and this can only be determined through in-depth analysis of each subsidiary company and its operating environment. There are a few companies I am looking at, but I still have to open a local brokerage account to take advantage of any opportunities.
As an initial starting point, I have made a non-exhaustive list of the developing market publicly listed subsidiaries of large European and American companies below. Companies with publicly listed subsidiaries include Nestle, Unilever, Diageo, British American Tobacco, LafargeHolcim and Heineken amongst others. There may be a few minor errors in this list, compiling this information was at times difficult since the websites for some of the developing country subsidiaries and country stock exchanges were rather primitive. You can sort the table by country or parent company. Note: some of these companies are not technically considered subsidiaries since the parent owns less than 50% of the company.
|Subsidiary Company||Country||Exchange||Ticker||Parent Company Holding (%)||Parent Company|
|Zambian Breweries Plc||Zambia||Lusaka Stock Exchange||ZAMBR||54.00||AB InBev|
|Ambev SA||Brazil||B3 (Brasil Bolsa Balcão)||ABEV3||61.85%||AB InBev|
|Budweiser Brewing Company APAC Ltd||Asia Pacific||The Stock Exchange of Hong Kong||1876||87.22%||AB InBev|
|British American Tobacco Zambia||Zambia||Lusaka Stock Exchange||BATZ||78.00%||British American Tobacco|
|British American Tobacco (Malaysia) Berhad||Malaysia||Bursa Malaysia||BAT||50.00%||British American Tobacco|
|BAT Uganda||Uganda||Uganda Securities Exchange||BATU||50.00%||British American Tobacco|
|British American Tobacco Zimbabwe Ltd||Zimbabwe||Zimbabwe Stock Exchange||BAT||43.13%||British American Tobacco|
|Carlsberg Brewery Malaysia Bhd||Malaysia||Bursa Malaysia||CARLSBG||51.00%||Carlsberg Group|
|Coca Cola FEMSA S.A.B. de C.V||Central and South America||Mexican Stock Exchange (BMV) and New York Stock Exchange (NYSE)||BMV: KOFUBL NYSE: KOF||27.8% (Voting: 32.90%)||Coca-Cola|
|Coca-Cola İçecek A.Ş.||Middle East||Istanbul Stock Exchange||CCOLA||20.09%||Coca-Cola|
|Embotelladora Andina S.A.||Chile, Brazil, Paraguay and Argentina||Santiago Stock Exchange and New York Stock Exchange||NYSE: AKO-A and AKO-B SSE: ANDINA-A and ANDINA-B||7.30%||Coca-Cola|
|Colgate-Palmolive India||India||National Stock Exchange of India||COLPAL||51.00%||Colgate-Palmolive|
|Guinness Ghana Breweries||Ghana||Ghana Stock Exchange||GGBL||80.39%||Diageo|
|Guinness Nigeria||Nigeria||Lagos Stock Exchange||GUINNESS||58.02%||Diageo|
|United Spirits Ltd||India||National Stock Exchange of India||MCDOWELL-N||54.78%||Diageo|
|Seychelles Breweries Ltd||Seychelles||MERJ Exchange||SBL||54.40%||Diageo|
|East African Breweries||East Africa (Kenya, Uganda, Tanzania)||Dar es Salaam Stock Exchange and Uganda Securities Exchange||EABL||50.03%||Diageo|
|Glaxo Smithkline Bangladesh Limited||Bangladesh||Dhaka Stock Exchange||GLAXOSMITH||81.98%||Glaxo Smithkline Plc|
|Glaxo Smithkline Consumer Nigeria||Nigeria||Lagos Stock Exchange||GLAXOSMITH||46.40%||Glaxo Smithkline Plc|
|Glaxosmithkline Sae||Egypt||Cairo Stock Exchange||BIOC||91.20%||GlaxoSmithKline Plc|
|Glaxosmithkline Pharmaceuticals||India||National Stock Exchange of India||GLAXO||75.00%||GlaxoSmithKline Plc|
|Glaxosmithkline Consumer Healthcare||India||National Stock Exchange of India||GSKCONS||72.50%||GlaxoSmithKline Plc|
|PT Indocement Tunggal Prakasa Tbk||Indonesia||Indonesia Stock Exchange||INTP||51.00%||HeidelbergCement Group|
|Tanzania Portland Cement Public Limited Company (Twiga Cement)||Tanzania||Dar es Salaam Stock Exchange||TPCC||69.25%||HeidelbergCement Group|
|Bralirwa||Rwanda||Rwanda Stock Exchange||BRL||75.00%||Heineken N.V|
|Grupa Żywiec S.A||Poland||Warsaw Stock Exchange||ZWC||65.20%||Heineken N.V|
|Nigerian Breweries Plc||Nigeria||Lagos Stock Exchange||NB||55.95%||Heineken N.V|
|Heineken Malaysia Bhd||Malaysia||Bursa Malaysia||HEIM||51.00%||Heineken N.V|
|United Breweries Limited||India||National Stock Exchange of India||UBL||46.52%||Heineken N.V|
|China Resources Beer (Holdings) Co. Ltd.||Hong Kong||The Stock Exchange of Hong Kong||291||20.67%||Heineken N.V|
|Lafarge Africa Plc.||Nigeria||The Nigerian Stock Exchange||WAPCO||83.80%||LafargeHolcim|
|Lafarge Cement Zimbabwe Limited||Zimbabwe||Zimbabwe Stock Exchange||LACZ||76.50%||LafargeHolcim|
|Lafarge Cement Zambia Plc||Zambia||Lusaka Stock Exchange||LAFA||75.00%||LafargeHolcim|
|Bamburi Cement Limited||Kenya||Nairobi Securities Exchange||BAMB||58.60%||LafargeHolcim|
|Holcim (Liban) S.A.L.||Lebanon||Beirut Stock Exchange||HOLC||52.10%||LafargeHolcim|
|Jordan Cement Factories Company P.S.C.||Jordan||Amman Stock Exchange||JOCM||50.30%||LafargeHolcim|
|LafargeHolcim Maroc S.A.||Morocco||Casablanca Stock Exchange||LHM||50.00%||LafargeHolcim|
|Huaxin Cement Co. Ltd.||China||Shanghai Stock Exchange||600801 (A Shares) 900933 (B Shares)||41.80%||LafargeHolcim|
|Cadbury Nigeria||Nigeria||Lagos Stock Exchange||CADBURY||56.20% (effective interest)||Mondelez International Inc.|
|Nestle Cote d’Ivoire S.A||Cote d’Ivoire (Ivory Coast)||Bourse Régionale des Valeurs Mobilières (Regional Securities Exchange)||NTLC||79.60% (Voting: 86.50%)||Nestle|
|Nestle India Ltd||India||National Stock Exchange of India||NESTLEIND||34.3% (Voting: 62.80%)||Nestle|
|Nestle (Malaysia) Bhd||Malaysia||Bursa Malaysia||NESTLE||72.60%||Nestle|
|Nestle Nigeria Plc||Nigeria||Lagos Stock Exchange||NESTLE||66.20%||Nestle|
|Nestle Pakistan Ltd||Pakistan||Pakistan Stock Exchange||NESTLE||59.00%||Nestle|
|HM Sampoerna||Indonesia||Indonesia Stock Exchange||HMSP||92.50%||Phillip Morris|
|Gillette India||India||National Stock Exchange of India||GILLETTE||75.00%||Procter & Gamble|
|Procter & Gamble Hygiene and Health Care||India||National Stock Exchange of India||PGHH||70.64%||Procter & Gamble|
|Procter & Gamble Health||India||National Stock Exchange of India||PGHL||51.81%||Procter & Gamble|
|PZ Cussons Ghana||Ghana||Ghana Stock Exchange||PZC||90.00%||PZ Cussons|
|Pz Cussons Nigeria||Nigeria||Lagos Stock Exchange||PZ||73.00%||PZ Cussons|
|Reckitt Benckiser (Bangladesh) Limited||Bangladesh||Dhaka Stock Exchange||RECKITTBEN||82.96%||Reckitt Benckiser Group plc|
|Sanofi India||India||National Stock Exchange of India||SANOFI||60.40%||Sanofi|
|Unilever Indonesia Tbk||Indonesia||Indonesia Stock Exchange||UNVR||84.99%||Unilever|
|Unilever Nigeria||Nigeria||Lagos Stock Exchange||UNILEVER||72.32%||Unilever|
|Hindustan Unilever||India||National Stock Exchange of India||HINDUNILVR||67.18%||Unilever|
|Unilever Ghana||Ghana||Ghana Stock Exchange||UNIL||66.56%||Unilever|