Dairy Farm (DFI) is a leading pan-Asian retailer that has 123 years of operating history. From a modest beginning of supplying fresh milk, the group has transformed itself into one of Asia’s largest retailers of daily necessities. DFI operates 4649 outlets and employs over 75,000 people. The stable of brands in its portfolio include Welcome, Cold Storage, the Giant hypermarkets, Shop N’ Save, 7-Eleven, IKEA and the Guardian stores, which are closely knitted with the heart of consumers.

DFI strives to offer consumers value-for-money through efficient, low-cost distribution of high-quality fresh foods and consumer/durable goods. While its convenience stores, IKEA and Maxim are more vulnerable to the economic downturn, DFI’s niche positioning in consumer staple products explains its recession-proof earnings (7-year earnings CAGR of 38%).

DFI has a defensible, asset light and cash generative business model, which enables it to expand rapidly while maintaining a low net gearing of 1%. Its stores now occupy prime locations across Asia. Welcome, along with its Park ’N Shop competitor enjoy a duopoly in the Hong Kong supermarket business with an estimated combined market share of near 70%. Mannings is consistently ranked as the most trusted pharmacy brand.

DFI’s success stems from its approach as a “modern retailer” in markets largely dominated by “traditional” retail outlets such as street hawkers and wet markets. Over time, growth potential will come from the switch in consumer preferences towards modern retail store format that offers competitive pricing realized through scale economies, broader product offerings and hygiene. DFI targets to add at least 400 new stores every year. Falling rentals will be an added earnings catalyst in the near-term.

DFI’s premium valuations reflect its growing profitability and solid retail presence. In addition to paying regular dividends since 2002 (~60% payout), DFI has paid out 3 special dividends, boosting the average annual DPS to US$0.21 over the past 4 years. DFI’s asset light model in mass-market retailing across the fast-growing Asia has achieved superior a ROE of ~100%. Key risks are rising competition and unemployment.