Thai Beverage - CIMB Securities 2015-09-21: When four become one


Thai Beverage - When four become one

  • Upcoming 3Q15 results will be weak due to high adspend and efforts to clear old stocks in the channel. High adspend could filter into 4Q15. 
  • Key reason is Thai Bev undertaking a rebranding exercise for beer. It is collapsing three lesser-known sub-brands into its one main brand product, Chang Classic. 
  • The Chang Classic brand will be used for both the domestic and export markets. 
  • Previous amber bottles will be replaced by a green bottle packaging. The market perceives green as more premium. Price gap with Leo has closed previously. 
  • We view this as part of the Vision 2020 plan to groom category champions across geographical boundaries. 
  • We maintain our Add rating and trim SOP target price to S$0.85. 

We warn that 3Q results could fall short of consensus expectations 

  • We understand that Thai Beverage had in Aug 15 consolidated four Chang sub-brands into one, and launched a new packaging for its flagship Chang Classic. Due to the new packaging launch, Aug beer sales to its trade channels had been held back so as to clear inventory. A spike in advertising and promotion activities in Aug/Sep is also to be expected. This means beer EBITDA would be poor in 3Q15. But this is re-positioning and re-branding for the long-term The short-term earnings blip is temporary. 

Focusing on poor 3Q beer 

  • EBITDA misses the point. The three sub-brands (Chang Export, Chang Light, Chang Draught) were not strong to begin with, they were created to compete with Leo - the market leader in the only segment that is growing. 
  • Plus, years of excise duty hikes have seen Chang Classic scale down its alcohol content (lower costs) and close its price gap with Leo. 

Aspirations to claw back domestic beer market share 

  • Thai Beverage currently has a 30% market share, primarily driven by Chang beer. Key competitor Boon Rawd has a 66% market share, primarily driven by Leo. We believe that the new packaging design and a further step-down in alcohol content are reflective of the company’s latest bid to recapture market share among younger drinkers. 
  • Management aspires to grow its current market share towards the 45-50% range. 

Bomb blast not a big drag; seasonality and ad spend bigger factors 

  • We checked if the recent bomb blast at the Erawan Shrine, or impending rules that ban the sale of alcohol near schools, had any impact. Management believes that whilst the bomb blast will pose some drag to the tourism trade and on-premise sales, the effect will be minor as: 
    1. the tourist trade has already not been strong since 2013, and 
    2. the blast happened in the low season when sales are usually weaker anyway. 
  • Management believes that the bigger effect is attributed to its own rebranding move. 

Earnings catalyst for 2H15 not present, corporate action the driver 

  • Thai Beverage’s share price has retreated 12% over the past month, partly due to expectations of a poor 3Q, as well as the bomb blast. We believe the factors driving a weak 3Q are temporary, and beer profitability stands to come back stronger in FY16. 
  • We cut FY15-17 earnings estimates by 2-4%, factoring in a slower consumption market and higher ad spend for 2H15. We expect beer earnings to bounce back in 2016.

Kenneth NG CFA CIMB Securities | Jonathan Seow CIMB Securities | 2015-09-22
CIMB Securities Analyst Report ADD Maintain ADD 0.85 Down 0.87