October 2010

Arisaig Partners is an independent investment management company founded in 1996. Our focus is on
dominant consumer sector businesses in emerging markets. We run an Asia Consumer Fund, an Africa
Fund, and a Latin America Fund, which has now opened to third party subscribers. In addition to our head
office in Singapore, we have research offices in Hong Kong, Mumbai, Dubai (the Africa team), Rio de
Janeiro (the Latin America team), and the United Kingdom.

Performance to 31 October 2010 (%)

NAV Size 10 yr 5 yr 3 yr 2 yr 1 yr 6 mth 3 mth 1 mth YTD Since Annualised
(USD) (USDm) Launch Return

Arisaig Asia Consumer Fund1 38.01 1,887.7 +457.3 +112.8 +13.6 +143.0 +53.6 +25.0 +16.2 +1.1 +43.1 +466.7 +13.4
2
Arisaig Africa Fund 14.51 295.9 +6.2 +52.4 +37.4 +19.0 +15.2 +6.8 +33.2 +27.4 +6.6
Arisaig Latin America Fund3 22.77 8.3 +65.5 +26.9 +16.8 +7.0 +39.8 +65.5 +65.5
1
Reflects the performance of Arisaig Asian Small Companies Fund from 31.12.96 to 21.1.00, Arisaig Asia Fund from 22.1.00 to 31.3.10 and thereafter the performance of AACF
2 th
Arisaig Africa Fund performance is measured since enlargement on 12 January 2007
3
Arisaig Latin America Fund was opened to third party investors on 1st November 2010

October Diary Highlights

The NAV of the Arisaig Asia Consumer Fund rose by 1.1% in October; the Arisaig Africa Fund by 6.8%; and the
Arisaig Latin America Fund by 7.0%.

In the Asia section, we discuss our plans to cap the Fund again; our reaction to concerns about valuations, with
particular reference to the power of compounding; and the prospects for organised retailing in China and India.

The Africa section is devoted to our recent trip to French West Africa where the satisfactory conclusion of elections
in the Ivory Coast would finally unlock the potential of our holdings, notably the Nestle and Unilever subsidiaries.

Our Latam Fund has now opened for subscriptions with about USD130m of declared interest to date. The 1%
entry charge will be waived during the month of November. We discuss here the results and prospects of Lojas
Renner and Natura in Brazil, Wal-Mart and Fragua in Mexico and Alicorp in Peru.

Diary contents Click to go to

Arisaig Asia Consumer Fund Arisaig Africa Fund Arisaig Latin America Fund Portfolio Summaries

What we look for in our stocks What our investors can expect from us

Market leadership dominant companies Alignment of interests capped funds, no

tend to do better; segregated portfolios, co-investment;
Scalability large target markets; Transparency holdings booklets, monthly
Strong moats brands, distribution, portfolio summaries, copies of research reports;
innovation; Coverage 15 analysts; five research offices;
Low capital intensity high ROCE; 150 target stocks;
Predictability compounding growth; Minimal trading active management destroys
Access management who welcome our value;
involvement. Focus consumer staples tend to out-perform,
so we wont be doing anything else.

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 October 2010

Fund Details

Geographic allocation (%)

AACF AFRF ALAF

China/Hong Kong 41.5 Nigeria 21.4 Brazil 45.4
India 36.8 Kenya 15.7 Mexico 27.3
Korea 5.3 South Africa 12.2 Chile 9.9
Indonesia 5.1 Morocco 11.9 Peru 7.3
Sri Lanka 3.2 Ghana 7.7 Colombia 5.5
Philippines 2.6 Turkey 7.3 Ecuador 2.4
Vietnam 1.9 Uganda 4.6
Pakistan 1.7 Ivory Coast 4.1
Egypt 4.0
Lebanon 3.9
Tunisia 3.2
Senegal 2.6

Cash 1.9 Cash 1.4 Cash 2.2

100 100 100

Sector allocation (%) Valuations (Dec 10/Mar11)

AACF AFRF ALAF AACF AFRF ALAF

Food & Beverage 44.2 37.3 18.5 EV/Sales (x) 2.8 2.5 2.1
Fast Moving Consumer Goods 24.4 12.5 34.5 PER weighted (x) 29.0 19.6 22.8
Retail 17.8 22.5 44.8 PER harmonic (x) 27.9 16.5 18.1
Fast Food 8.5 - - P/BV (x) 10.8 7.6 5.7
Services 3.2 8.8 - Yield (%) 1.7 3.9 2.0
Financial Services - 17.5 -

Portfolio Concentration Performance metrics (Dec 10/Mar 11)

AACF AFRF ALAF AACF AFRF ALAF
No. of holdings 26 23 18 ROCE (%) 54 45 26
Top 10 holdings (%) 61.2 67.8 73.3 EPS growth (%) 22 14 26
Top 20 holdings (%) 87.9 96.5 97.8 Net margin (%) 10 12 10
Average market cap (USDm) 3,590 1,929 11,103

The Arisaig family of Funds are open-ended, BVI or Mauritius domiciled, investment companies and their daily valued NAVs are
published in the Financial Times and on Bloomberg. The Asia and Africa Funds are listed on the Irish Stock Exchange. This Diary is
intended to be for the information of holders of one or more of Arisaigs Funds. It is not intended to constitute investment advice and
should not be relied upon as such. Investors should be aware that, as the Funds are invested in the securities of some smaller
companies, share prices can be more volatile and trading liquidity much lower than those of larger companies.

Arisaig Partners (Mauritius) Ltd Arisaig Partners (India) Private Limited For all enquiries please contact Penny Hands or
IFS Court, TwentyEight, Villar Ville, First Floor, 16 P.J. Ramchandani Marg, Prisca Lim at investorrelations@arisaig.com.sg or call
Cybercity, Ebene, Colaba, Mumbai 400 001, India (65) 6532 3378.
Mauritius Tel (91) 22 2287 5031 Fax (91) 22 2287 5030

Arisaig Partners (Asia) Pte Ltd Arisaig Partners (Dubai) Limited Website www.arisaig-partners.com
7A Lorong Telok, Singapore 049019 Al Fattan Marine Towers II, First Floor,
Tel (65) 6532 3378 Fax (65) 6532 6618 Office 115, PO Box 34521, Dubai Marina, Dubai Artwork courtesy of Sophie Macpherson
Tel (971) 4399 4969 Fax (971) 4399 4970

Arisaig Partners (HK) Limited Arisaig Partners Servios Ltda

Suite 4701, 47th Floor, The Center Centro Empresarial Mourisco, Praia de Botafogo,
99 Queens Road Central, Hong Kong 501 Bloco I 1st Floor (Torre Po de Acar),
Tel (852) 2850 6335 Fax (852) 2850 6355 Office 121, Botafogo Rio de Janeiro RJ
Cep 22.250-040, Brazil

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Arisaig Asia Consumer Fund
Performance
The Asia Fund was up 1.1% in October, taking its year-to-date
gain to 43.1%. The hot money flows into emerging markets
have largely bypassed our portfolio in favour of large-cap index
stocks. Thats fine by us. We needed to take a breather.
Client Feedback
The marketing team have finally finished a global tour that has
taken them to meet all 85 or so of our institutional investors in the
USA and Europe accounting for about 95% of our investor base
(the remainder being in Asia).
Their first conclusion is that we cannot easily cope with too many
more. As we like to meet all investors at least annually, having
many more will start to become unmanageable. Indeed, we have
hosted over 200 visits to our Singapore office so far this year
which is more than we would wish. So, with this in mind, we will
shortly be capping the Fund again.
Uppermost on all our investors minds has been the question of
valuations. There is no doubt that, with the one year forward PER
of our Asia Fund now nudging 25x, short term valuations have
moved ahead of the 18x to which we have been more
accustomed. Our Africa and Latam Funds are trading on forward
PERs of 17x and 19x by comparison.
The first thing to say in response is that we simply dont know
how a portfolio of dominant consumer businesses with a weighted
average ROCE of 54% sitting in the epicentre of one of the
greatest socio-economic shifts in the history of our planet (the rise
of two billion consumers) should be valued. It certainly shouldnt
be with respect to next years earnings.
But for those who insist on thinking short term, we would only add
that the likes of Nestle and Colgate in India have traded at about
30x one year forward earnings for the past 30 years; and have,
incidentally, returned 28% and 27% per annum respectively to
shareholders over this period, net of dividends. It feels to us as if
investors are starting to acknowledge that other names in our
portfolio show the same sort of long term potential.
The second thing to say is that it is simply not do-able to sell
USD100m of a stock that trades only about USD1m per day and
expect to be able to buy it back in a year or twos time at a lower
rating. As we have seen before, the earnings dynamic of our kind
of businesses means that they burn off valuations more rapidly
than people expect. We would just end up begging others to sell
our stock back to us. Put another way, the replacement value of
our portfolio is a lot higher than its market value.
Which brings us to the third and most important point the power
of compounding. What matters more than short term valuations is
that we own for the long haul the alpha generating businesses
that have what it takes to compound earnings come rain or shine
(in short: scalability, high gross margins and low capital intensity).
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October 2010
In other words, it makes a great deal more sense to let the best
businesses do the heavy lifting for us than to make the mistake of
trying to time or finesse markets and sectors.
Sometimes people forget the simple maths: USD1m invested in a
business that compounds its earnings at 15% would be worth
USD16m in 20 years. This would be USD12m if the valuation
compressed from say 25x to 18x in a straight line over that
period. However, USD1m invested in a fund rotating across
sectors within a universe growing its earnings at say 6% (which is
what history suggests is likely) would be worth USD3m in
20 years; and, no doubt, less taking account of transaction costs
and the inevitable misjudgements along the way.
Whilst others might fret about valuations, we dont. Individual
stocks may take a breather and be de-rated from time to time, but
none of this matters alongside the strong likelihood that, two
decades hence, they will be very much larger businesses than
most of us are capable of predicting. The biggest risk is a
dramatic decline in population on account of a Malthusian
disaster (e.g. famine, war or holocaust) or an exogenous shock
such as a meteor strike.
Frankly what worries us a great deal more is the possibility of a
bubble in emerging markets and our waking up one morning to
find our portfolio trading on 50x. Then we really would be in a
quandary. With the US seemingly ready to print whatever it takes
to lift itself off the floor, this is not inconceivable.
Urbanisation and Reform
The best safeguard against the bubble scenario is of course
economic rebalancing, and a permanent boost in Chinese
domestic demand. Given that residents of wealthy cities in China
spend four times as much as their rural peers on consumer
goods, urbanisation will play a key role.
A significant brake on this process is the hukou registration
system. This arcane relic of the Mao era command economy
divides Chinas citizens into rural and urban residents, thereby
enshrining a two tier system of entitlement to public services such
as health, education and pensions. The inability to claim an urban
hukou discourages many rural Chinese from moving to the cities.
The main stumbling block to reform is Chinas underdeveloped
fiscal base, which cannot support mass conversion of rural
Chinese to a universal system of public service provision.
However, Bo Xilai party boss of Chongqing and one of the
rising stars of the Communist Party has launched an innovative
pilot scheme seeking to circumvent this issue.
In short, this will allow farmers to exchange their land for city
residency rights and housing. The municipality can then develop
the farm land, helping to finance urban public services for the
erstwhile farmers. It is still early days, but if Bos plan succeeds, it
could provide a model for national level reform.

 October 2010

Chinese Grocery Wars
A further indication of the underdevelopment of Chinese domestic
consumption is that organised retail accounts for just 20% of the
total retail market, as opposed to 45% in Thailand or 90% in the
US. The current leader controls not more than 1% of the national
grocery market, suggesting huge rewards for the industry
consolidators.
Of the foreign chains, the two truly successfully players are
Taiwans RT-Mart and Frances Carrefour, with sales of around
USD7bn and USD6bn respectively, and excellent sales densities
(over USD4,000/sq. m per annum). It is no surprise that both core
management teams trace their roots to Taiwan.
Wal-Mart, whilst sizeable (USD6bn sales), has not gained traction
in terms of profitability, as indicated by its low sales density
(USD1,500/sq. m). Wal-Marts mistake was to assume that
centralised distribution and the standardised big box model, so
successful in the US, would work in China. With regional tastes
varying greatly, and the supplier base fragmented, this proved to
be ill-judged.
Turning to the domestic players, state-owned China Resources
Enterprises is the nations largest operator in terms of system-
wide revenues (i.e. including franchisees). Yet despite its huge
scale, CRE has poor sales density of USD1,800/sq. m, and
hence low profitability. The underlying reasons are a messy
structure, muddled thinking on format and reckless expansion.
Guilty of similar mistakes in the past was our holding Lianhua,
with sales slightly below those of CRE on a system-wide basis.
Today, what was once a stereotypically cumbersome SOE is a
compelling turnaround story with ample potential for operating
leverage as low sales density (USD2,000/sq. m) increases.
Indian Retail Change We Can Believe In?
On the face of it, with only 5% of retail formal in nature, the
consolidation story in India is even more compelling. Indeed,
Indians spend just USD3 per year in hypermarkets and
supermarkets, compared with USD180 for the Chinese. However,
organised retail in India has been a troubled sector with no one
yet able to create a model that is both fast growing and
sustainable.
There are several reasons for this. Firstly, the creation of a
centralised distribution network is hampered by poor
infrastructure and a complex sales tax regime. Secondly, a land
grab amongst deep-pocketed tycoons has pushed up rents in the
new malls that have just sprung up. Third is the suffocating
ubiquity of the neighbourhood kirana stores; low rents, zero tax
and willingness to accept razor thin margins makes them a tough
act to beat. But, most importantly, Indias chronic infrastructure
problems (congested roads and no parking) means that city
dwellers are simply unwilling to travel far to buy daily groceries.
Even if the politicians were to bend to pressure to allow foreign
firms to participate in this sector, we doubt that the likes of
Wal-Mart, Carrefour or Tesco would make much of an impact for
a long while yet. Meanwhile, the business models of the local
players, Pantaloon, Shoppers Stop and Trent, whom we have
followed very closely for a decade (we are just completing
another large report on them), continue to evolve.
Indeed, we suspect the ultimate winners have yet to show
themselves. An investor who had watched Wal-Mart grow from a
USD30m company in 1972 to a USD4.5bn one in 1984 and
concluded that it was ex-growth would have been sadly mistaken.
Given the astonishing immaturity of modern retail in India, we feel
we can afford to wait until the water becomes less muddy.

Our second China supermarket holding, Wumart is the most
efficient and well managed amongst the domestic players, with
sales density of USD3,100/sq. m driving strong net margins of
over 4%. Since 2004, sales and EPS have compounded at 32%
and 29% respectively. Its preference for dominating a region
(initially Beijing) and then expanding gradually into neighbouring
areas (e.g. Tianjin), together with its technologically superior point
of sales system, stand it in good stead to be an ultimate winner.
The huge dominance of traditional retail means, incidentally, that
in contrast to China suppliers do not feel the need to treat
modern retailers with due deference. They are quite happy
selling to the kirana stores who pay up quickly and dont demand
discounts, explaining, of course, why the likes of Nestle and
Colgate India enjoy such high margins and negative working
capital cycles.

Key Markets Local currency performance (%) Key Currencies Performance vs USD (%)
October YTD 12 mth October YTD 12 mth
Hong Kong 3.3 5.6 6.2 Hong Kong 0.1 0.0 0.0
China 12.2 (9.1) (0.6) China 0.3 2.3 2.4
Taiwan 0.6 1.2 12.9 Taiwan 2.0 4.4 6.2
South Korea 0.5 11.9 19.1 South Korea 1.3 3.5 5.1
Indonesia 3.8 43.4 53.5 Indonesia (0.3) 5.2 7.2
Philippines 4.1 39.8 46.8 Philippines 1.8 7.2 10.6
Malaysia 2.9 18.3 21.1 Malaysia (0.8) 10.1 9.7
Singapore 1.5 8.5 18.5 Singapore 1.8 8.6 8.3
Thailand 0.9 34.0 43.7 Thailand 1.4 11.5 11.7
Vietnam (0.4) (8.5) (22.9) Vietnam 0.0 (5.2) (8.4)
India (0.2) 14.7 26.0 India 1.2 4.7 5.7
Pakistan 5.5 10.8 13.3 Pakistan 0.5 (1.9) (2.4)
Sri Lanka (4.6) 97.3 124.3 Sri Lanka 0.1 2.5 2.9

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Arisaig Africa Fund
Performance
The Funds NAV per share rose 6.8% for the month of October.
We are now up 33.2% for 2010.
Once again the portfolio was broadly strong. Nineteen of our
counters rose. Of the four losers, three were Middle Eastern
financial names (Tunisie Leasing, Blom Bank, and CIB) and the
last was Guinness Ghana Breweries, which reported
disappointing FY10 results.
Our top performers were a mixed bunch. Some were winners
extending good runs for the year, including Unilever Nigeria and
Nestle Nigeria (up 17.1% and 14.2% for the month). Others were
playing catch-up, including Solibra and Unilever Cote d'Ivoire,
which returned 30.5% and 22.6% in October, but which lag for the
year, up 1.8% and down 17.0% respectively (before dividends).
French West Africa Part I: Cote dIvoire (Big Picture)
The Africa squad ventured back to the Cote dIvoire and Senegal.
This has been a poor year on the economic front with anemic
growth. Inflation is however benign and interest rates on the
Euro-pegged CFA franc are low. The countrys prospects are still
closely aligned to soft commodity prices. The development of a
value-adding processing industry will be a vital step forward.
With mobile telephony now entering a mature phase, strategists
are looking to logistics/transshipment and retailing as the engines
of economic growth. Tourism, once embryonic, has all but
petered out. The cocoa industry suffers from twenty years of
underinvestment in plants and hence decreasing productivity
Nestle has gone so far as to build a large new R&D centre in the
country in an effort to improve the planting stock. Other crops like
rubber, palm oil, and coffee are increasingly important but the
country remains highly sensitive to changes in the price of cocoa.
Abidjan is also an expensive place to do business in terms of fuel,
utilities, and rent. This sits uneasily with its pretension to be at the
hub of West Francophone Africa and its 100 million population. It
still enjoys the advantage of a much superior infrastructure to its
regional competitors (including Senegal) but that advantage is
slipping.
French West Africa Part II: Cote dIvoire (Companies)
Of our holdings, SGBCI (the local subsidiary of Soc Gen) seemed
the best positioned. We met management who were
uncharacteristically upbeat about the future. SGBCI continues to
set terms in the marketplace. With a 23% share of bank assets it
is twice as large as its nearest competitors, which include
Ecobank and BNP Paribas. Profits are strong and the programme
of branch retrenchment has now been reversed.
Discussions with SGBCI (and Ecobank) confirmed our long-held
view that the choice pickings in financial services reside in the
very top tier. The 80/20 rule applies accurately. Outside the top
half dozen names the rest of the pack (which includes the
expansionist Nigerians) are struggling to break even with the
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October 2010
leftovers. The Moroccan Attijariwafa Bank, now the third largest in
Africa, seemed the most promising of the newer players.
SGBCI has a fabulous record of value preservation in the teeth of
a very difficult business climate, and in fact has grown its market
share from 19% to 23% in the last three years.
One key factor for its success is the high financing requirements
of the agricultural industry which is a stable and recurring user of
SGBCIs balance sheet strength. Compare and contrast to other
African countries where due to higher lending costs and fewer
investment opportunities, companies finance themselves from
cashflow and banks are stuck owning Treasuries.
We also met our two local F&B and FMCG holdings Nestle
Cote dIvoire and Unilever Cote dIvoire. Both are export-
orientated businesses tasked with supplying affiliated Nestle and
Unilever units with products they manufacture in their large
Abidjan plants (stock cubes and coffee sachets in the case of
Nestle, detergents and bar soaps for Unilever).
In this context transfer pricing is a key component of profitability.
Consequently, dramatic changes in both companies results are
driven by their domestic operations and are hence sensitive to the
Ivoirian economys vagaries. On the other hand, both companies
offer only a tiny fraction of their parents global brands Nestle
Cote dIvoire, for instance, carries only six of Nestles global
portfolio of 72 product lines. Per capita consumption of branded
FMCG products is low compared to Ghana, which is a close peer
in both household income and infrastructure quality.
The two companies are quality plays on Ivoirian consumption
which has at least stayed resilient in difficult economic
circumstances. Both are geared as the result of capacity
expansion, which should however yield substantial benefits down
the line.
The final holding, Solibra, is undergoing a solid year with turnover
up and the breweries operating at full capacity. Profits have been
consistently steady through the troubles and plans for
substantial investment are in place. The company trades at 7.4x
FY10 earnings with a 10.2% yield and a 31% ROCE.
French West Africa Part III: Senegal
The dogs barked and the caravan moved on to Senegal. Dakar
ranks as one of the most pleasant destinations on the Sub-
Saharan map. Investment, particularly in real estate, both
commercial and residential, has continued apace. The area to the
north of the city Les Almadies is now mushrooming into a
vibrant agglomeration of villas, restaurants and retail outlets
which would not look out of place in parts of the Mediterranean.
Our key meeting was with Sonatel, the leading mobile telephony
operator in Senegal and Mali. The company generates a
spectacular EBITDA margin of 57%; has an ROCE of 42%; and a
juicy 10.1% dividend yield. We were told that 12% of the

 October 2010

Senegalese governments annual revenues come directly and
indirectly from Sonatel.
The bottom line is that revenue growth has already slowed down
to a mid-single digit pace and that many of the existing growth
drivers have now run out of steam. Looking around for future
combustion management are considering markets beyond
Senegal, Mali, Guinea Conakry, and Guinea Bissau.
We remain long term owners on the thesis that future earnings
from telephony will remain predictable and highly visible, and that
valuations do not capture the value to be reaped from Internet
subscriptions. As it stands, the current earnings multiple of 8.4x
and price/free cash flow multiple of 7.1x are very attractive,
reflecting the difficulties of trading in the BRVM (where all trades
must be pre-funded), the low liquidity of the exchange, and the
thin coverage of BRVM names by international stockbrokers.
Our meeting schedule also took in an encounter with the MD of
Dakar port. Here the fruits of Middle Eastern investment were
evident: in partnership with the Dubai Ports World (ex-P&O)
group, the ports capacity is expanding from 500,000 to 2 million
TEUs (twenty-foot equivalent units) a year, which will, in tandem
with the overhaul of the Dakar-Bamako railway line, open up the
transport corridor serving the isolated Sahel countries.

Key Markets Local currency performance (%) Key Currencies Performance vs USD (%)
October YTD 12 mth October YTD 12 mth
Egypt 1.6 9.4 (1.6) Egypt (1.2) (5.1) (5.1)
Ghana 0.7 23.6 28.0 Ghana (0.8) (0.2) (0.2)
Kenya 0.6 43.5 51.1 Kenya 0.1 (6.1) (6.8)
Lebanon (1.4) (9.4) (10.4) Lebanon N/A N/A N/A
Morocco 2.3 16.3 12.9 Morocco 1.8 (2.4) (4.5)
Nigeria 8.6 20.2 14.8 Nigeria 2.5 (0.9) 0.1
South Africa 3.3 10.0 15.4 South Africa (0.5) 5.7 11.7
Tunisia (9.8) 19.4 26.2 Tunisia 1.8 (5.1) (6.8)
Turkey 4.4 31.1 45.8 Turkey 0.9 4.6 5.1
Uganda 6.9 63.1 72.1 Uganda (2.0) (17.0) (17.9)
Francophone West Africa 4.5 16.9 15.6 Francophone West Africa 1.8 (3.2) (5.7)

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Arisaig Latin America Fund
Performance
The NAV of the Arisaig Latin America Fund rose 7.0% in October
and is now up 39.8% year-to-date. This compares to an increase
in the MSCI Latin America Index of 11.7% year-to-date.
Our strong performance has been driven by the underlying
earnings growth of our stocks. Our 18 names reported net profit
growth of 26% in the six months to end June 2010. This follows
on from the 19% compound annual growth they recorded over the
five years to end December 2009.
The interest in all things Brazil (an interest, incidentally, which has
yet to spread to the other countries in the region) has resulted in
a degree of re-rating. Whereas the portfolio was trading at
20x 2009 earnings as of December 2009, this number has risen
to about 23x 2010 earnings as of today.
We have no view as to whether current valuations are expensive
or cheap; what we do know is that our businesses are likely, on
account of their pricing power and market positions, to compound
their earnings at 15 to 20% for the coming many years; and that
their growth will significantly outstrip the growth rates of the
commodity, heavy metals, utilities and financial services sectors
that dominate the regions capital markets. This view is based on
the evidence of both the developed and developing world.
Latam Fund Launch
The team spent two weeks criss-crossing the US on the final leg
of the Fund roadshow meeting a further
52 institutions. The Fund is now open for subscription. The initial
entry charge of 1% (payable to the Fund to compensate existing
investors for the cost of getting new investors invested) will not
apply during the month of November.
We have had declarations of interest so far to the tune of about
USD130m from a nicely balanced list of mainly existing Arisaig
investors including endowment funds, family offices and wealth
managers and have already started to edge subscription monies
into some of our stocks. It looks like we are on target to reach
our USD150m cap on the Fund at this stage.
Another quarter of solid results
Meanwhile, back at the coal face, where we are happy once more
to reside, our holdings have started reporting third quarter results.
These, happily, have met or surpassed our estimates.
At the centre of the Brazil consumption story sits H&M look-alike,
Lojas Renner, an apparel and accessories retailer with
126 outlets. The company has just reported excellent third quarter
numbers: a 17% increase in revenues (driven by 11% same store
sales growth); a 3.3% increase in EBITDA margin to 18.5%
(contrast H&M which does 25%), resulting in a 60% increase in
EPS.
Renner is well on target to open a further 15 stores per annum for
the next five to ten years, having secured anchor tenant status in
many of the new malls that are slated for construction. This
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compares to the 660 stores that H&M has in Germany, France
and the UK, a region in terms of population only just larger than
Brazil.
Furthermore, Renner has already started to segment the market
by launching so called 4,000 sq. m Renner Compact stores. It will
also shortly be launching even smaller 700 sq. m outlets aimed
exclusively at the high end female consumer. Again, contrast
H&M which has developed five different formats.
Wal-Mart Mexico also reported strong third quarter results with
sales growth in Mexico of 9.7% and 8.0% in the newly acquired
Central America business, combining to give overall revenue
growth of 9.5% on a pro-forma basis. Group wide EBITDA margin
was stable at 9.2%, although we expect this to increase further
over time as the much lower margin Central America business
benefits from integration with the Mexican one. This process will
be enhanced on completion of a new distribution centre to be
cited on the border between Mexico and Guatemala.
During the third quarter the Mexican business opened 54 new
outlets of varying shapes and sizes and remains on target to
open between 200 and 250 per annum for the next five years at
least. Meanwhile its main competitor Soriana continues to
struggle having opened only 29 in the year so far. We plan to
make Wal-Mex one of our larger holdings in the expanded Fund.
Meanwhile, Fragua, the largest drugstore chain in Mexico,
reported a 9.9% increase in revenues year-on-year on the back of
better than expected 1.6% same store sales and the opening of
18 new outlets in the third quarter, which boosted sales space by
13.8%. Having focussed, as we knew it would, on squeezing
efficiencies from its supply chain and logistics, gross margins
have increased from 17.1% to 18.2% feeding into an increase in
EBITDA margin from 4.8% to 6% and hence a 38% increase in
net profits year-on-year.
Even accounting for the rapid store expansion of about 100 new
stores to add to the existing 804, the company continues to
generate enormous free cash flow for a business of its size,
amounting to about USD25m per quarter to add to the USD80m
currently sitting on its balance sheet (roughly 10% of the market
cap). The risk here is that it spends the monies unwisely on a
large acquisition although this would run contrary to its highly
cautious and conservative history of organic expansion.
Peru not just the home of Paddington Bear
Often overlooked as a completely irrelevant outpost, Peru seems
determined to prove that it has more than just llamas, bowler hats
and Machu Picchu to offer.
Crucially the country has turned its back on the policies of 21st
Century Socialism espoused by regional basket cases
Venezuela and Bolivia. Certainly its 7% per annum growth rate
since 2003 (9.8% last year, one of the worlds fastest); stable
inflation rate (about 3% since 2005); autonomous Central Bank;
and fiscal deficit of only 1.5% of GDP, testifies to its success. As


does the fact that per capita incomes have doubled and poverty
as a percentage of the population plummeted from 50% to 35%
over the past six years.
That said, Peru still has a long way to go: a higher percentage of
people live in the countryside versus even, for instance, in
Argentina and modern retail remains virtually non-existent. These
factors, of course, play into the hands of brand-owning
businesses that are able to master distribution into the hinterland,
none more so than our holding Alicorp (the former Unilever
business) with 50% to 70% market shares in eleven categories
including pasta, juices, mayonnaise, cookies, margarine,
detergents and shampoo. With revenues of USD1.3bn the
company is more than twice the size of its closest competitor,
Nestle Peru, which does sales of USD400m.
In fact our intrepid analyst, Joao, spent a day with the companys
impressive CFO (likely, in our view, to take over as CEO in due
course) at his offices in Lima last week and was able to reconfirm
that Alicorp exhibits all the hallmarks that we look for in an FMCG
business of this nature: a focus on product tiering (viz. the
74 brands in its portfolio); a dedicated distribution network (even
so, its exclusive distributors reach only one third of the countrys
200,000 outlets); and a willingness to use its distribution reach to
try out new categories (in barely three years Alicorp has stolen a
40% market share in laundry detergents from under the nose of
P&G).
Meanwhile the growth of its branded business has significantly
outstripped that of its commoditised divisions (vegetable oils and
flour) resulting in a steady rise in EBITDA margin from 12% in
2006 to 17% in 2010 and hence in ROCE from 10% to 21% over
the period. Meanwhile, the stock continues to fly under the radar
with foreign ownership standing, we believe, at barely 2%.
Natura
The ever itinerant Joao also attended the Natura Day at their
superb HQ set in a forest in the outskirts of Sao Paulo. Although
we usually eschew large gatherings, preferring one-on-one
meetings with our holdings, this event offers the opportunity to
meet all of the companys senior management (CEO, CFO and
Vice Presidents) as well as spend time with a wide range of
employees including sales ladies (known as consultants) with
whom Joao had lunch, an experience which hardened his desire
to join their ranks as a part time consultant himself (a career path,
it seems, that many financial analysts that track the stock end up
pursuing!).
Key Markets Local currency performance (%)
October YTD 12 mth
Argentina 13.8 29.6 42.1
Brazil 1.8 3.0 14.8
Chile 2.4 37.2 48.2
Colombia 8.1 37.0 48.8
Jamaica (0.3) 0.0 3.5
Mexico 6.7 10.7 24.2
Peru 7.6 25.0 24.3
8 of 8 Arisaig Diary We are a CarbonNeutral organisation and a signatory of the UNs Principles of Responsible Investment.
October 2010
The day confirmed our view that the growth opportunity in Brazil,
already the worlds second largest toiletries and cosmetics
market, remains huge, both in terms of market penetration
(currently only 52% of Brazilian homes buy one or more Natura
items per year) and product range (whilst 91% of Brazilian
households use shampoo, only one in ten use a Natura product).
The strength of the company resides in the high quality of its
merchandise and willingness to innovate. Its glossy catalogue is
reprinted every three weeks with at least half the products on
offer less than eighteen months old. Meanwhile its direct selling
distribution model circumvents the countrys poor retail
infrastructure. With only 900,000 consultants (contrast Avons
1.5 million sales force) there is still a great deal left on the table in
Brazil.
Natura delivered strong third quarter numbers with revenues
increasing by 21% year-on-year, an increase in gross margin to
an all-time high of 71.6%, an increase by 1.6% in the productivity
of its consultant force and an increase in the number of
consultants by 17% year-on-year. Meanwhile, the company has
continued to take market share (now 13%) from its two rivals
Avon (10%) and Unilever (9%). In fact, Avon reported revenue
growth of only 7% for the comparable period.
The companys strong operating results were offset, however, by
a significant increase in its tax rate to 34% and an increase in
SGA costs as it builds infrastructure in Peru, Colombia and
Mexico. We accept that the risks lie in poor execution of its
overseas initiatives where its track record has been mixed
following failed efforts in the past in France and the US (both
ludicrously ambitious in our view). Its new approach, however, of
building local production and distribution centres in neighbouring
markets and the hiring, finally, of an individual to lead this
initiative suggest a more considered approach this time round.
Meanwhile, the possibility of a change in the way that VAT on
cosmetics is levied in Brazil from next March may destabilise the
market. We see, however, this development as working to
Naturas advantage given its ability to absorb the tax rise more
easily than its competitors as a result of industry-leading gross
margins.
It comes as no surprise to us that Natura has been ranked the
best company to work for in Brazil for five years in succession.
With Joao shortly to have a foot in both camps, Arisaig Partners
may have to up its game as the premier employer
Key Currencies Performance vs USD (%)
October YTD 12 mth
Argentina 0.1 (3.9) (3.4)
Brazil (0.7) 2.7 3.7
Chile (1.1) 3.7 8.5
Colombia (2.0) 11.2 8.6
Jamaica 0.7 4.4 4.1
Mexico 2.0 6.0 6.9
Peru (0.4) 3.2 3.9

 October 2010

9 of 8 Arisaig Diary We are a CarbonNeutral organisation and a signatory of the UNs Principles of Responsible Investment.