Thai Beverage - CIMB Research 2017-05-12: 2Q17 Blindsided By Higher A&P And Lower Associate

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THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage - 2Q17: Blindsided By Higher A&P And Lower Associate

• 2Q/1H NP came in at 25%/54% of our FY17F, which we deem as a slight miss since 2Q is seasonally stronger. Key deviation was unexpectedly high A&P expenses.
• On sales, while all segments did poorer yoy as volumes dropped due to the mourning period, this was not unexpected and sales were in line with expectations.
• All segments also saw gross margins improve which was impressive.
• Negatives: higher A&P and lower associate contribution. But these are temporal and do not defray the long term thesis of Thaibev transforming into a regional play.
• We maintain our Add call with an unchanged TP of S$1.07.

2Q missed on higher A&P and lower associates contribution 

• We had been expecting a results beat on sustained beer gross margins and an overall pick-up in sales. We were right on the first, where in fact gross margins across all segments improved. On sales, we were half right in that sales were in line with our expectations, but still down 8.8% yoy due to the continual effects of the mourning period.
• However, A&P expenses were elevated after marketing activities were postponed from 1Q and associates were down 52.3%. Accordingly, 2Q net profit (-23% yoy) was a miss.

Beer volumes were down (2Q: -16% yoy); market share remained 

• Taken into context, beer’s 2Q net profit decline of 43.5% yoy was not too bad and mostly driven by higher A&P expenses. We deem sales as holding up pretty well (-13.9% yoy), given 
  1. sales in 2Q16 were inflated due to channel stocking on speculation of an excise tax hike, and 
  2. still weak on-trade consumption due to the mourning period. 
• Positives: 
  1. the sales decline was industry-wide and Chang maintained its market share, 
  2. GPM improved (2Q17: 23.4%, 2Q16: 21.4%) and gross profits were only down 6% yoy.

Downtrading in spirits segment 

• Spirits sales (2Q -7.2% yoy) were similarly affected by a high base effect due to channel stocking in 2Q16 and weak on-trade consumption, but the big miss came from higher A&P. Accordingly, 2Q net profit declined 11.1% yoy. That said, spirits’ sales decline was bigger than its 4.3% yoy drop in volumes; i.e. still downtrading to cheaper white spirits.
• We were initially constructive on a recovery as management cited downtrading trends had stabilised at the end of the previous quarter. The tone is now gloomier.

What to think of the overall higher A&P spend 

• This quarter’s results miss was mostly on higher A&P. 
• 2Q17’s group SG&A/sales was a higher 16.1% vs. 12.4% in 2Q16 (1Q17: 14.6%). Management elaborated that it had postponed marketing activities from 1Q17 to 2Q17 due to the mourning period and that it had to proceed with marketing events despite the weak consumption climate as cancelling the events would be more costly. 
• The big positive is that management said they will be more cautious with A&P spend for the rest of FY17.

Maintain Add; long term thesis intact 

• We believe Thaibev is merely facing mini headwinds due to the mourning period and consumption should normalise over time. Hence, we keep our EPS forecasts and remain positive on the long term thesis of transforming into a regional beverage play.
• We maintain our Add call with an unchanged SOP-based TP of S$1.07. Re-rating catalysts include M&A/corporate restructuring. Risks: weak consumption

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-05-12

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