Thai Beverage - CIMB Research 2016-09-02: Fortune lies in the hands of the beer holder

Thai Beverage - CIMB Research 2016-09-02: Fortune lies in the hands of the beer holder THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage - Fortune lies in the hands of the beer holder

  • ThaiBev has made strong market share gains since its rebranding exercise in Aug 15, and we believe the company is poised to make further gains.
  • Beer EBIT growth (1H16 +330% yoy) has done even better than volume growth (+61%) on price hikes and operating leverage. Expect further margin expansion.
  • Key competitor Leo’s immediate reaction of cutting prices was relatively ineffective and failed to swing market share. We view this as a small win for Chang.
  • The company will be changing its fiscal year end to Sep (prev. Dec FYE), effective Sep 16. For comparability, our numbers do not yet account for the change in FYE.
  • We trim our FY16-18F EPS but lift SOP-based TP on roll forward. Reiterate Add.

Beer market share gains only just starting to deliver 

  • The upturn in Chang’s fortunes has certainly driven ThaiBev’s share price performance (+40% YTD). We think there is another leg up. Chang is still behind Leo in market share, but we believe Chang can attain the top spot by 2017. 
  • Chang’s current market share is 40%, up from 30% before its rebranding exercise in 3Q15, but there is room for further market share gains. If we annualise 1H’s beer sales volumes, we estimate market share to be 45-50%. 
  • At its peak in 2003, Chang commanded a c.65% market share.

Chang underwent a fundamental brand repositioning for the future 

  • The question now is no longer sustainability, as Chang’s volumes have held steady in 2Q, but whether market share can continue to grow. We think the key will be successfully identifying with younger consumers’ lifestyle choices and ThaiBev appears to be ticking the right boxes. 
  • ThaiBev has already invested heavily in packaging and marketing to remove the stigma of Chang being a low-income beer. ThaiBev has also reconfigured its sales distribution, improving the freshness of beer in the channels.

Impact on bottomline even more impressive than volume growth 

  • As beer volumes grew a strong 61% yoy in 1H16, revenue was up a stronger 70% yoy as the positives from price hikes kicked in. EBIT did even better (+330% yoy) on higher operating leverage. We see scope for further margin expansion from: 
    1. lower packaging costs as the proportion of returnable bottles increases, and 
    2. lower depreciation, as a large proportion of PPE will be fully depreciated by 2017.

Reaction from competition relatively ineffective so far 

  • Key competitor Leo’s immediate reaction to Chang’s blitzkrieg-like market share gains has been to lower prices, but it ultimately made no difference as market share has remained unchanged. Recall that Leo has traditionally been priced at a premium to Chang. 
  • At the same time, Chang has been increasing prices as part of its efforts to reposition the brand. Retail prices of Chang are now at price parity with Leo.

Reiterate Add; execution falling into place 

  • ThaiBev is an entirely different beast now. Previously, only its spirits business was profitable while all its other business segments were breakeven, at best. The recent rebranding of the beer business has sprung a new growth driver, and beer now forms c.20% of the 1H16 group net profit. 
  • Our SOP-based target price of S$1.14 implies a 24.7x CY17 P/E, in line with Thai consumer stocks and the overall peer group of 24.7x.
  • Reiterate Add. We have a change of covering analyst with this note.

Jonathan SEOW CIMB Research | 2016-09-02
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.14 Up 0.920