THREE years ago, American investor Bill Ackman was shorting China's currency. Now he is going long on the country's coffee drinkers.
Revealing a stake of about 1.1. per cent in Starbucks Corp on Tuesday, he said he thinks China is the US coffee chain's "single-largest unit growth opportunity", which could help the company's under-performing shares double in the next three years.
"We expect that China will grow nearly twice as fast as Starbucks' overall earnings and represent an increasingly larger percentage of the company's earnings," the billionaire hedge fund investor and philanthropist said in a presentation at a conference in New York on Tuesday.
Starbucks' stock rose as much as 5.6 per cent after Mr Ackman disclosed that his hedge fund management company Pershing Square owned 15.2 million shares. They closed up 2.1 per cent at US$57.71 in New York, giving the company a market value of about US$77.9 billion and making Mr Ackman's stake worth about US$878 million.
Mr Ackman will be hoping that the Seattle-based company's performance follows the path of his other fast-food investments, which have largely been successful. His gamble on Restaurant Brands International Inc, the owner of Burger King, Tim Hortons and Popeyes Louisiana Kitchen, has been a bright spot for Pershing Square. Its shares have risen more than 70 per cent since the group was founded in 2014.
An investment in burrito chain Chipotle Mexican Grill Inc is also starting to pay off after languishing for months in the wake of an illness outbreak and other incidents at the stores. The stock has gained 55 per cent this year.
China is a major pillar of Starbucks' plans for growth and a market that it eventually sees as surpassing that in the US. The company is aiming to triple revenue in the country over the next five years and almost double the number of stores to 6,000 by the end of fiscal year 2022.
But there have been bumps in getting that ambitious plan off the ground. Same-store sales in the latest quarter fell 2 per cent in the region as the coffee field has become increasingly crowded.
To reignite growth, Starbucks said it is joining forces with Alibaba's Ele.me unit to begin delivery of its drinks and baked goods in China. The chain, which began the pilot last month in Beijing and Shanghai, plans to expand the programme to more than 2,000 locations by the end of the year.
Some investors are also concerned that growth could be hindered if Chinese consumers sour on American brands amid rising trade tensions. As a tit-for-tat trade war heats up, it is possible that China could employ a similar strategy as the one it used when South Korea installed a missile defense system - shuttering stores and factories owned by Korean companies and stoking boycotts.
In his 2016 letter to investors, Mr Ackman said he had built large short positions in China's currency to "protect the portfolio in the event of unanticipated weakness in the Chinese economy". While Chinese consumers do not seem to be putting down their coffee cups yet, Starbucks is more exposed than many other US restaurant chains because it owns most of its roughly 3,400 stores in the country, rather than selling franchise rights. But this practice could also shield it from a backlash because it is seen as a good employer, and founder Howard Schultz travels to the region often for public events.
A Starbucks spokesman said: "We view the active, engaged dialogue that we have with shareholders as critical input into our strategic approach, and we value constructive feedback on delivering long-term shareholder value.
"We look forward to maintaining a productive dialogue with Mr Ackman as we do with all of our shareholders."
Last month, the company said it was planning structural changes, including layoffs, starting at the top levels to help make decisions faster. Same-store sales growth in the US has stalled in recent months, with consumers spending less in the afternoon and shunning frappuccinos.
Starbucks named a new chief financial officer (CFO)on Monday - Patrick Grismer, who joins from Hyatt Hotels Corp, where he was CFO.
In June, former finance chief Scott Maw announced plans to retire this year, which spooked investors already worried about stability after Mr Schultz stepped down as chairman in the middle of this year. (He is now chairman emeritus.)
Mr Ackman cited management turnover and leadership transition as one of the main drags on the share price. The issues affecting US same-store sales are temporary though, he said. He is encouraged by management's recently announced plans to reinvigorate sales through new premium products, new concepts for boutique stores, healthier offerings and a roll-out of an improved mobile ordering and payment app, according to Tuesday's presentation.
Speculation began to swirl about a new Ackman bet in August, when he said Pershing Square had built up a position valued at about US$800 million in a company he did not identify. The 52-year-old pledged in March to end three years of under-performance at Pershing Square, calling its most recent returns at the time "particularly unsatisfactory".
Last week, Pershing Square reported a net return of 15.8 per cent on its investments this year through the end of September, compared with gains of about 8 per cent for the S&P 500 during the same period. BLOOMBERG