Thai Beverage - CIMB Research 2017-01-03: New competing beer brand unlikely to be a concern

THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage - New competing beer brand unlikely to be a concern

The investment thesis of Thaibev is centered around Chang making further market share gains, while maintaining its dominant foothold in the spirits business.
Key competitor Boon Rawd has already launched a new Leo to little effect. Our channel checks show they have a new product in the pipeline (likely launch Jan 17).
On balance, we are not worried about the impact of Boon Rawd’s moves and are confident Chang will at least be able to maintain its beer market share in FY17.

In our view, the recent pullback on consumption during Thailand’s mourning period is temporary, and not structural, in nature. Maintain Add and SOP-based TP.

Management’s target is for Chang to be the no.1 beer brand in Thailand by 2020, with a quantifiable target of a market share of above 45%.
We believe this is achievable, and see the recent share price weakness as a function of the market’s over-optimism (which initially priced in a much quicker pace of market share gains) and broader concerns on consumption weakness.
At 19.6x CY17 P/E, we think the stock now represents a more attractive entry point.

In terms of market share, we do not think much will change in FY17. We do not see Chang losing market share even against the backdrop of weak consumption and competitors launching new products. The new Leo (launched 4Q16) does not appear to be gaining ground. There was no change in taste or packaging, only a tweak to the bottle label.
We think Leo is wary of introducing too many changes for fear of losing its market-leading position, even if it did lose significant share since Chang’s rebranding.

We understand Boon Rawd, in a further retaliation, is planning to launch a new brand called U beer. U beer is not yet in the retail channels but we think launch will likely be in early-1Q17.
Our channel checks also reveal that the intention is to market U beer in the mass market segment to rival Chang. Alcohol content will be similar to Leo and Singha (i.e. 5%). However, we do not think this will be a threat to Chang, with restrictions on marketing activities the biggest hurdle for Boon Rawd in promoting a new beer brand.

Chang’s sales is c.80/20 off-trade/on-trade. After on-the-ground conversations, we understand the slightly lower percentage of on-trade sales is partly due to legacy issues where Chang was previously branded as a value beer which meant that on-trade channels (i.e. restaurants/bars) were less inclined to carry Chang. However, following Chang’s rebranding, we see scope for further penetration into the on-trade channels.

Within the non-al segment, we visited an Oishi factory and left impressed by the high levels of automation. That said, the non-al segment is still generating small net losses.
We understand the main drag is the low utilisation levels at Sermsuk (Est cola sales are not yet optimal). Management is targeting to be EBITDA positive in FY17, and EBIT positive in FY18.

We remain positive on the group’s long-term merits and believe Chang is on track to becoming the market leader. Rerating catalysts are M&A and corporate restructuring.
Key risks include prolonged weakness in consumption or loss in beer market share.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-01-03

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