Dragon Fund: Consumer Staples 2016 Q3 UpdateSubsector to watch: Tobacco

Anthony GrelliElizabeth Cahill Ryan Lee

Consumers Staples Breakdown

Key Drivers for the Sector➕ Consumer Confidence

■ 104.1 in September the second consecutive month highest since recession.

➖ Commodity Prices

■ Oil rising from historic lows in Q1

■ Food price deflation is a major headwind

➖ Interest Rates

■ 81% chance interest rates will be raised in December

Consumer Sentiment

+ Highest since recession

+ Indicates a strong economy

+ Good for retail sales

Commodity Prices

Probability of Interest Rate Hike

➖ Dividends

➖ M&A Activity

➖ FX Exposure

Q3 Performance

Matrix: Our Views

Valuation**Sector is overpriced**

− Market turmoil early in year made staples attractive

− Fear of China having a hard landing

− Oil Price Drop− Bond Market Instability

Subsector to Watch: Tobacco

➕ Key Positives:+ Globally tobacco sales grew 5.2% in 2015.+ Low gas prices, rising wages increase buyer power+ Underpriced relative to the sector+ Stocks are down 6.9% we believe it is a good value investment. + New products such as non-combustible cigarettes, vapor devices and are entering the market. + Producers can counter the fall in volume by raising prices, maintaining revenue growth.+ The market mature, and highly consolidated therefore lowering the threat of new entrants.

➖ Key Risks Rising interest rates will reduce tobacco's use as a yield alternative, as investors look towards corporate bonds.

Government regulations, and litigation which are generally seen as a cost of doing business, remain a lingering threat.

- FX exposure. Tobacco producers sell a great deal of products overseas. A strong dollar could increase the popularity of generic, locally produced cigarettes.

Margins

+Low fixed costs

+Little advertising

+No threats

+Addictive product

+High pricing power

Dividend Yields

➕ 80% of the cost of a pack of cigarettes goes directly to shareholders

Tobacco Valuation & Growth

+ Tobacco valuation growing at a slower rate compared with consumer staples

+ EPS growth is consistent, and higher than the consumer staples sector

Global Smoking Rates

+ US Growth is up 5.2% yoy

+ World total is slightly down, but emerging market growth remains optimistic.

Questions?