Thai Beverage (THBEV SP) - UOB Kay Hian 2017-03-31: The Awakening Giant

Thai Beverage (THBEV SP) - UOB Kay Hian 2017-03-31: The Awakening Giant THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage (THBEV SP) - The Awakening Giant

  • THBEV’s performance is expected to be on an upward trend with expected earnings growth of 9% CAGR over FY16-19. The spirits business is expected to maintain its dominant market position while its beer business’ market share is expected to continue improving from the Chang beer rebranding. 
  • Initiate with BUY and SOTP-based target price of S$1.09.


Commencing positive coverage. 

  • We initiate coverage on Thai Beverage (THBEV) at BUY with an SOTP-based target price of S$1.09. 


Initiate with BUY; target price S$1.09. 

  • We value THBEV using SOTP, deriving a target price of S$1.09. The major part of THBEV's value comes from the spirits business which accounted for 73% while the beer business accounted for 15% of our valuation. Its valuation remains attractive at the current level with its FY17F PE of 20.4x being lower than its global peers’.

Spirits business; a strong cash cow. 

  • Spirits products are expected to be THBEV's core products, contributing the largest part of revenue and EBITDA. As THBEV owns more than 90% market share of spirits consumption in Thailand, we expect its spirits sales to grow amid resilient demand as consumers could switch among a wide range of products at different price points.

The new Chang beer to continue driving beer market share and growth. 

  • The new version of Chang beer has successfully regained its beer market share since the product was launched in Aug 15. THBEV’s beer market share has climbed to above 40% in 1QFY17 from below 30% before the campaign started. We expect this positive trend to continue and Chang beer should be able to grow its market share further.

Overall improving trend in performance. 

  • We expect THBEV to post a 10% revenue CAGR in FY16-19, driven by the beer business. Overall gross margin is expected to be maintained at a healthy level of around 30%. We forecast a 9% net profit CAGR in FY16- 19.

Investment Highlights

Spirits to remain a strong cash cow. 

  • The spirits business has been THBEV’s backbone, contributing more than 50% of group revenue and more than 80% of EBITDA. As THBEV has more than 90% market share of spirits consumption in Thailand, sales volume and margins of this business is expected to continue to be strong. We expect this segment’s revenue and EBITDA to grow in line with spirits consumption in Thailand. 
  • Although growth is expect to be slow, demand is rather stable as consumers could switch among a wide range of products with different price points. 

The new Chang beer to continue its positive momentum. 

  • Since the launch of its new Chang beer in Aug 15 via changes in beer taste, bottle colour, and rebranding to have a premium look, its market share has jumped to above 40% in 2016 from below 30% in 2014. 
  • We expect this positive trend to continue and Chang beer should be able to regain its market share to around 50%. 
  • Furthermore, THBEV removed all other Chang beer categories and retained only one “Chang Classic”. As a result, production cost could drop and margins could improve on economies of scale and better cost management. 

Overall performancing is improving. 

  • We expect THBEV to post 10% revenue CAGR in 2016-19. 
  • Although we do not expect the spirits business to see exciting growth, this segment will still underpin group revenue and profit. 
  • The beer business is expected to be the key growth driver during the next few years with estimated revenue CAGR of 14% in 2016-19 as Chang beer regains its market share. Overall gross margin is expected to maintain at around 30% as THBEV could pass on higher production cost and the excise tax hike to consumers. Therefore, we forecast net profit CAGR of 9% in 2016-19. 

Further M&A deals could be the catalyst. 

  • THBEV has been actively expanding into many new businesses as management’s strategy is to have a more diversified portfolio. The company’s target is to have more than 50% revenue contribution from non-alcohol beverages by 2020 and more than 50% of sales from overseas. Therefore, we could see many M&A deals. 

Valuation remains attractive. 

  • We use sum-of-the-parts methodology to value THBEV. Our target price is S$1.09 with the spirits business accounting for 73% of our valuation and the beer business accounting for 15%. 
  • Currently trading at 20.4x 2017F PE, valuation remains attractive vs peers’, and is lower than that for global peers’ 24.3x 2017F PE for spirits companies, 22.9x for beer companies and 23.2x for non-alcoholic beverage (NAB) companies.


SOTP target price of S$1.09. 

  • We value: 
    1. the spirits business at 17x EV/EBITDA, in line with global peers; 
    2. the beer business at 15x EV/EBITDA, a premium to the global peers’ average of 13.7x as we see THBEV’s beer business is currently on a strong uptrend; 
    3. the NAB business at 3x EV/sales, a discount to peers’ 3.7x as THBEV’s NAB business is still loss-making and a recovery would take time; and 
    4. the food business at 13x EV/EBITDA, is in line with local peers’. 
  • FCL and FNN, in which THBEV owns 28% each, are valued based on their latest market values. 

Valuation breakdown. 

  • The spirits business accounts for 73% of our target price, followed by the beer business (15%), NAB (8%) and affiliated companies (8%).

PE comparison. 

  • Our target price is S$1.09, or 23.9x 2017F PE, equivalent to +1.5SD above its 5-year historical average PE. With the strong outlook for THBEV this year, an upward PE re-rating from its historical avarage is possible. 
  • Furthermore, THBEV’s current PE at 20.4x is still lower than that of global spirits peers’ average of 24.3x 2017F PE, 22.9x for beer companies and 23.2x for NAB companies. 

Business Outlook


Well established in an almost monopoly position. 

  • THBEV’s spirits business has been well established. Popular brands range from the very low-end white spirits such as Ruang Khao to the mid-range brown spirits such as Mekhong, Hong Thong and Blend 285. 
  • As spirits consumption comes mainly from low- to middle-income consumers and THBEV’s brands are popular among these groups, THBEV’s spirits sales dominate with a market share of as high as 90%. Most of the competitors are imported spirits which are in a totally different segment and therefore, THBEV has almost no competitors in the low- to mid-range segments. 

Resilent demand; volume growing with the market. 

  • Spirits consumption in Thailand is quite resilient as it does not fluctuate much along economic performance. As there is a wide range of spirits with different price points, consumers could switch among different brands depending on their purchasing power. 
  • As THBEV dominates the spirits segment, its spirits sales volumes are expected to grow. In 2006-16, its average sales volume growth was 2% CAGR. Even when volumes dropped in some years, they would rebound. 
  • With the recent slowdown in the Thai and global economy, the growth in spirits consumption was almost flat. As we expect the economy to improve, we also expect spirits sales to pick up with a 7% CAGR in 2016-19. 

Cost pass through. 

  • As the market leader, THBEV’s could always increase their prices when raw material prices or the tax increase. Over the past 10 years, THBEV’s average selling price for spirits has risen by 6% per year. 
  • In our earnings model, we assume average selling price to rise by 4% per year in 2016-19. 


The rebranding of Chang beer; more premium image with easier-to-drink taste.

  • THBEV launched Chang beer in 1995 and beat Boonrawd’s Singha beer to be the number one before Boonrawd launched Leo beer in 1998 to fight back. With the launch of Leo beer, Chang beer saw its market share fall to below 30%. THBEV finally came up with a rebranding strategy in Aug 15 to take back Chang beer’s market share through various steps. 
    1. First, the bottle is changed from brown to green to adopt a more premium look that is similar to other popular premium beers in Thailand, such as Heineken and Carlsberg. 
    2. Second, THBEV kept only one brand, Chang Classic, and the other three brands - Chang Export, Chang Draught and Chang Light - were removed. 
    3. Third, the taste is now smoother and easier to drink with the alcohol level dropped to 5.5% from 6% previously. 
    4. Lastly, it took on a common ending slogan - Brew the friendship – which enhanced brand awareness and lifted consumer perception of the brand. 
  • THBEV also raised Chang beer’s selling price to the same level as that of Leo beer (previoulsy, at a lower price, Chang beer was perceived to be of a slightly lower brand). 

Market share has been improving since the launch of the new Chang beer. 

  • With the rebranding of the new Chang beer, THBEV’s beer market share has jumped to above 40% in 2016 from below 30% in 2014. 
  • We see momentum to continue and THBEV’s beer market share market share could possibly rise further to around 50% within the next few years, claiming back its leadership position in the beer market. 


NAB and food segments will take time to show improvement. 

  • The NAB business is still loss-making at both EBITDA and net profit levels due to low sales volume after the termination of PepsiCo and SSC, THBEV’s subsidiary, in Oct 12. THBEV launched its own carbonated brand – Est - in Nov 12 and this new brand needs time to become well known with a lot of marketing expenses needed. Therefore, the NAB business has been reporting net losses of Bt1.4b-1.7b per year since 2013. Although we expect some margin improvement from increasing sales volume and better economies of scale, we see the NAB business to continue making losses as the Est brand is still weak amid intense competition. 

For the food business, net margins have been very thin at only 1-2% in the past five years. 

  • We see a slight margin improvement on better cost control. Although both segments are weak, they do not have much impact on THBEV as their combined revenue contribution is only around 13% of total revenue. 

  • As THBEV targets to have more than 50% revenue contribution from NAB by 2020 and more than 50% of sales from overseas, there could be many M&As in the pipeline. We expect any M&A deals to be in beverage-related sectors, such as beer and dairy in Asean as THBEV is already quite established in this region. 
  • Funding could come from internal cash flow and debt. THBEV still has high balance sheet flexibility as its net D/E ratio is currently very low at only 0.3x. 

Earnings Outlook

Spirits revenue to be the strong base while beer revenue to be growth driver.

  • Although we expect spirits sales CAGR at only 7% in 2016-19, this segment is expected to underpin group revenue as it contribute more than 50% of total revenue. The strongest growth is likely to come from beer sales which we estimate a 14% CAGR in 2016-19 on the back of Chang beer continuing to regain its market share. 

Overall gross margin to maintain. 

  • We expect overall gross margin to maintain at around 30% in 2017-19. We expect spirits’ gross margin to be stable at 33%, in line with its average historical performance, as THBEV would likely be able to pass on cost increases cost increases to consumers. On the other hand, the other businesses are expected to see improvement but might not be large enough to have a significant impact on overall gross margin. 
    1. Beer. Gross margin is expected to reach 22.5% in 2017 (2016: 20.3%), in line with its previous high, as THBEV has recently raised selling prices while sales volumes are also expected to rise. Furthermore, the repackaging of Chang beer in green bottles also resulted in lower packaging cost as the reused ratio has improved to 60% recently from 50% when the brown bottles were used. The main reason is because white spirits’ producers usually use old brown beer bottles for packaging and they could not use the green bottles. Note that since the repackaging, packaging cost has dropped to 11.2% of selling prices in 2016, down from the 13.2% in 2015. We expect the packaging cost to further decreased by 1.0ppt. 
    2. NAB. Gross margin is expected to improve to 35% (2016: 33%) due to rising sales volumes and economies of scale. 
    3. Food. Gross margin to also improve slightly on better cost control. 

Earnings CAGR of 9% in 2016-19. 

  • Assuming revenue CAGR of 10% in 2016-19 with stable gross margin of around 30% and a slight increase in SG&A due to higher marketing cost to boost beer sales, we forecast net profit CAGR of 9% in 2016-19. 

Cash flow growing in line with rising earnings. 

  • We also expect cash flow to grow in line with rising net profit. Due to THBEV’s good distribution management, working capital-to- sales ratio has been very stable and we expect this trend to continue. Also, there should be no significant capex required for spirits and beer production in the near term as utilisation is currently at only around 60% for spirits and 50-60% for beer. 

Expect high dividend payout. 

  • We expect the dividend payout ratio to stay at a high of 75% during the next three years. Note that THBEV’s dividend payout policy is set at 50% of net profit and its historical average payout ratio has been around 70%. 

Risk Factors

Hikes in excise tax and production cost. 

  • Excise tax, packaging cost and raw materials are the top three largest costs for spirits and beer. Any increase in the costs of these three items would impact gross margin and sales volume. Although THBEV could always pass on cost increases to customers, there could be a time lag (1-2 weeks) before it can raise selling prices. 
  • Furthermore, raising prices too fast will also impact sales. The excise department was recently reported to be considering raising the tax ceiling on alcohol beverages as it considers changing the tax base from wholesale to retail prices. The revision, however, might not have impact on the actual effective tax rate. 

Increasing competition. 

  • Competition is the major concern for beer, NAB and food businesses. Maintaining market share and boosting sales come via high marketing and promotion costs. 
  • For beer, THBEV’s main competitor is Boonrawd which is currently the number one in beer sales with its Leo brand. Since Boonrawd has been losing market share to Chang beer in the last two years, Boonrawd could come up with some strategies to protect its market share. Recently, we saw a slight change in the Leo logo and the launch of U Beer from Boonrawd in Dec 16. However, the target group seems to be different from Leo and Chang. U Beer’s taste is a more easy-to-drink, has lower alcohol content that targets the younger generation and is distributed only through some bars, pubs and a few retail stores. 
  • For NAB, competition has been very strong in both the ready-to-drink tea (RTD tea) and carbonated drinks. Low sales volumes and high marketing cost will continue to exert pressure on THBEV’s NAB business. 

Uncertainty in M&A deals. 

  • As THBEV targets to to have more revenue contribution from NAB and overseas, many M&A deals are expected. However, such deals are not certain. 

Kingpai Koosakulnirund CFA UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-31
UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 1.09 Same 1.09