Thai Beverage - CIMB Research 2016-12-05: Beer in the limelight

THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage - Beer in the limelight

The investment thesis of Thaibev is centered around Chang making further market share gains, supported by its dominant foothold in the spirits business.
Chang has already done well but needs to do better. Key competitor Leo’s efforts to snatch back market share have been fruitless so far.
Maintain Add, with an SOP-based TP of S$1.07.

The upturn in Chang’s fortunes has certainly driven Thaibev’s share price performance in 2016. We think there is another leg up. 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.
In response to Chang’s stellar gains, Leo first reduced prices but to little effect. It recently launched a new product but its efforts again proved futile as it failed to regain any market share. Leo likely needed to do more – it did not change the taste of the beer or the bottle, but merely tweaked the position of its label. While Leo still has the leading market share of c.50%, we think Chang will be nibbling away at that.
The question now is no longer sustainability, but it is whether market share can continue to grow. Chang’s market share has somewhat stagnated and has held steady for two consecutive quarters. It appears to be doing the right things and connecting with younger consumers. However, we draw caution that the unfortunate mourning period will hinder marketing activities.

Nagging at the back of our minds is 3Q16’s yoy decline in spirits (sales -7.2%).
Recent guidance suggests weak consumption patterns. Management said that within spirits, the higher ASP brown spirits were not doing well and led the overall decline while its lower ASP white sprits registered small growth. Historically, such behaviour is typically seen during periods of economic weakness as consumers down-trade.
We will be watchful to note that this situation does not derail our investment thesis.
The secondary impact on 3Q’s weaker spirits sales came from the overstocked channels. Channel inventory is currently about three weeks for white and 4-5 weeks for brown (vs. two weeks typically).

Non-al should gradually do better. Of its non-al product lines, water is doing the best driven by greater health awareness among consumers.
The non-al segment’s gross margins also continue to improve on the back of better product mix and more favourable packaging costs. However, profitability is still negligible with A&P eroding the majority of profits.
Still little signs that 100Plus is taking off in a big way in Thailand. Nonetheless, we view this segment as a longer-term story.

We view Thaibev as a dual-engine beast. Previously, only its spirits business was profitable while all other business segments were at best breakeven. The recent rebranding of the beer business has sprung a new growth driver.
Maintain Add as we remain positive on beer.
Key risk is a prolonged period of weak consumption from the mourning period.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-12-05

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.070 Same 1.070