Thai Beverage - Maybank Kim Eng 2021-03-28: A Cocktail For Success; Strong Brands With Cheap Valuation; Initiate BUY


Thai Beverage - A Cocktail For Success; Strong Brands With Cheap Valuation; Initiate BUY

  • Initiate coverage on Thai Beverage with BUY and target price of S$0.95, pegged to 20x FY21E EPS.
  • We believe Thai Beverage’s portfolio of top brands is well-poised to capture post-Covid recovery, driven by easing restrictions of on-premise consumption. Concurrently, its beer business is positioned for margin expansion as a result of positive operating leverage.
  • Thai Beverage's share price is trading at 15.1x FY21E P/E, -1 S.D below historical mean and 65% discount to peers.
  • Potential IPO of BeerCo is a near-term re-rating catalyst to Thai Beverage, which could lift our target price to S$1.24.

Thai Beverage - Business Overview

  • Thai Beverage (SGX:Y92) is a leading beverage company in Southeast Asia and the largest in Thailand. As of 30 September 2019, Thai Beverage has 19 distilleries, 3 breweries and 21 non-alcoholic beverage production facilities in Thailand.
  • Thai Beverage's business consists of four divisions –
    • spirits,
    • beer,
    • non-alcoholic beverages and
    • food.
  • Overall, the spirits division has the highest net margin at 19%, followed by its beer business at 3.3% and non-alcoholic drinks at 3.2%.
  • Thai Beverage also operates Japanese restaurants and ready-to-cook and ready-to-eat food businesses through the Oishi Group. The company has also expanded to quick-service restaurants, such as KFC franchise (it has > 250 stores).

Extensive distribution network a strength

  • Thai Beverage has an extensive distribution network covering 400,000 points of sales in Thailand.
  • Overseas, Thai Beverage has presence in over 90 countries. The Group has five production facilities in Scotland and has interests in two production facilities in Myanmar, which produce the top-selling whisky in the country; and it owns a distillery in China that produces the famous Yulinquan Chinese spirits.
  • Having an extensive distribution network is one of Thai Beverage’s major strengths and key factors that helped it to achieve its leading market position in Thailand’s beverage market. 88% of sales are generated from 400,000 point of sales (retail shops/ restaurants), while the remaining 12% are distributed to modern trade (supermarkets and hotels).

PASSION 2025 – a five-year transformation plan

  • In 2014, Thai Beverage unveiled “Vision 2020“, a six-year strategic roadmap for s companies, which the company focused on:
    1. Growth and Diversity.
    2. Brands and Reach.
  • Building on the success of “Vision 2020”, Thai Beverage revealed PASSION 2025 last year, which encapsulates its roadmap for the next 5 years. Going forward, the group aims to:
    1. Build new capabilities.
    2. Strengthen #1 positions.
    3. Unlock potentials.

Thai Beverage - Investment Thesis

Cocktails of strong brands to ride tailwind

  • Thai Beverage holds a diversified portfolio of strong brands such as Ruang Khao, Sangsom, Mehkong and Chang Beer, which owns 90%/40% of Thailand’s spirit/ beer market share and 43% in Vietnam.
    • Thailand:
      • Spirits:
        • Mehkong (National Spirits),
        • Ruang Khao,
        • SangSom,
        • Hong Thong,
        • Blend 285.
      • Beer
        • Chang.
    • Vietnam
      • Beer
        • Bia Saigon,
        • 333.
  • We believe Thai Beverage’s portfolio of market leading brands is poised to capture the tailwind of post-Covid recovery, driven by easing restrictions of on-premise consumption and reopening of borders.
  • In Thailand, the alcohol ban was largely lifted on 1 Feb 2021, except in Samut Sakhon, Bangkok, Nonthaburi, Pathum Thani and Samut Prakan, where pubs and karaoke parlours remain closed. With the recent lifting of the alcohol ban, restaurants are now permitted to serve alcohol and operate dine-in services until 11pm.
  • Meanwhile, the Thai authorities are preparing a plan to ease restrictions for vaccinated travellers to revive its tourism industry by 3Q21. Measures for vaccinated visitors include shortening the mandatory quarantine for all arrivals from two weeks to three days, or waiving it entirely.
  • Over in Vietnam, the authorities have taken a more targeted approach:
    • Bars, pubs, karaokes and cinemas to temporarily close in the hotpot of pandemic in some cities/ districts.
    • Closing duration is 2 weeks and these outlets can resume their business once the virus is contained.
    • Businesses in cities without community infected case can still operate as per normal.
  • At the same time, we believe Thai Beverage’s structural growth is intact.
  • In Thailand, the alcohol spirits market is expected to grow at a CAGR of 4.6% from 2019 to 2025, according to Globe Newswire. This will be driven by the rising demand from the younger population and strong sales of locally produced spirit Sura Khao, which Thai Beverage has a strong presence in. Collectively, Thai Beverage’s spirit brands own 90% market share in Thailand. The report also cited the affordability of Sura Khao and its widespread distribution through traditional retailers in rural areas as key drivers to its growth.
  • Thai Beverage is one of the leading market players within Thailand and Vietnam, where alcohol consumption per capita in Thailand has outpaced the rest of the region. Meanwhile, Vietnam is also forecasted to experience rising consumption of alcohol, driven by the low base and income growth.
  • As such, we believe Thai Beverage will continue to benefit from the secular trend of rising alcohol consumption within the region.

Rise of craft beers not a threat in Southeast Asia

  • Rising global disposable income and the shifting consumer preferences have contributed to the growth of craft beer. According to DataBridge Market Research, the craft beer market is expected to achieve a CAGR of 12.3% to US$35.3b from 2020-2027, driven by growing demand for different types of beer.
  • However within Southeast Asia, Euromonitor International has cited that craft beer remains relatively immaterial at < 1% of total beer volume.
  • In Thailand, the mainstream segment (mass or local lagers) such as Leo, Chang and Singha still accounts for 94% of the market share. Within the premium market (5% of total market share), the Heineken brand captures 94-95% of the segment. Overall, Thai craft beers and international brands hold only 0.5-1% of the total market.
  • The Thai craft beers still have a small proportion in the entire market due to unfavourable regulation, which makes it hard for small brewers to produce their craft beers in Thailand. As such, most microbrewers have their beers produced outside Thailand and import them back for sales in the country, causing the cheapest craft beers to cost 300% more than local brands.
  • A research conducted by the Leuven University showed that beer demand is positively correlated to the income per capita in developing countries. However, if the income per capita has exceeded US$27,000 per year, there will be a decrease in beer consumption due to increasing health consciousness and a shift towards more expensive alcoholic substitutes like wine.
  • Given the GDP per capita in Thailand and Vietnam is forecasted to be below the US$27,000 benchmark, we believe mass market lager brands like Leo, Chang and Bia Saigon will remain dominant.
  • Even in Singapore, which has amongst the highest disposable income in Southeast Asia, craft beers make up just under 3% of the beer market by volume. This is because Singapore’s craft beer breweries are brewpubs and they do not have the distribution network and pub outlets to distribute across the country. Additionally, the cost of craft beers compared to mainstream brands also plays a part in craft beers small market share.
  • As such, we believe craft beer brands are unlikely to be able to replicate Thai Beverage’s extensive distribution network, as it is time consuming and requires capital, and as consumer preference changes only slowly.
  • Without the distribution network and cost competitiveness, craft brewers are unlikely to gain significant market share, we believe.

Non-alcoholic beverage division – inflection point

  • Thai Beverage’s NABs are at an inflection point, as the segment swung back into profitability in FY20 after six consecutive years of losses. Despite lower FY20 revenue, Thai Beverage’s NAB division’s turnaround is driven by gross margin expansion to 37.2% (+3.7ppt) and stringent cost controls on advertising and promotions expenses (-8% y-o-y).
  • With the easing of movement restrictions and reopening of borders, the NAB market in Thailand is forecasted to rebound 13% y-o-y to US$6.1b in 2021, driven by recovery across soft drinks, juices and bottled water.
  • Given Thai Beverage’s diversified portfolio of NAB products, it is well-positioned to capture the anticipated bound in the NAB market across all carbonated, non-carbonated and bottled water sub-segments.
  • With the forecasted recovery in the NAB market and Thai Beverage’s prudent cost controls on advertising, we believe Thai Beverage could sustain its earnings momentum.

Marketing strength and distribution network to drive volume growth

  • We believe its most profitable spirits business is likely to remain resilient despite COVID-19, driven by consumers’ preference for off-premise consumption. This should offset the sluggish demand from the beer business, which is impacted by reduced on-premise consumption due to COVID-19 measures.
  • Euromonitor International has identified three key alcohol consumption trends in a post-Covid world:
    • On-premise apocalypse: Clubs, pubs and live venues would be the llenged in the short to medium term.
    • Home as an entertainment pub: Anecdotal information suggests that the pandemic has provided a substantial boost to sales of countertop devices emulating the mixology or draught experience at home.
    • COVID-19 puts on brake for premiumisation: Collapse of on-trade consumption and economic concerns may change consumer habits.
  • Overall, the shift in consumer preference towards home-based drinking is positive for Thai Beverage, as ~ 80% of its spirit consumption are mainly driven by off-premise sale. In addition, the pandemic and economic concerns have stalled the premiumisation trend. This bodes well for Thai Beverage as most of its products are targeted at the mass-market population.
  • We remain constructive on post-Covid recovery and estimate a FY20-23E revenue CAGR of 4.51% for its spirits and 7.3% for its beer business. This is driven by a volume CAGR of 3.5% for spirits and 7.6% for beer over the same period of time, which is in line with the industry’s estimate.
  • Thai Beverage's market-leading position is attributable to its extensive distribution network and marketing power. Management shared that the group has > 90% channel penetration in Thailand.
  • Based on a study by global market research company IPSOS, Chang Beer continued to be the “top-of-mind” brand from 2015-2018. The success is driven by experiential marketing activities to engage consumers on several platforms across areas of interest, such as soccer, food, music and lifestyle.
  • Thai Beverage was also a key sponsor to bring live broadcast of 2018 FIFA World Cup matches to Thai audience and its an official sponsor for the Thai national football team and 23 football clubs in the Thai League. In the international football scene, Chang is the official Beer Partner of Leicester City FC.
  • We believe Thai Beverage’s marketing strength can be replicated in Vietnam, where consumers’ behaviour ís similar to Thais. In Vietnam, Thai Beverage has already built a sizeable distribution network and has achieved > 70% channel penetration.
  • Marketing strategy in Vietnam includes:
    • Saigon beer brand is a shirt sponsor for English Premier League’s Leicester City FC.
    • Launched “Pride of Vietnam” gala with celebrities and soccer players.
    • “Under-the-cap” promotions with prizes such as Mercedes cars.
    • Rebranded Saigon Special to a green bottle and saw 30% increase in sales.
  • As a result of its marketing strength and extensive distribution network, beer volume growth in Vietnam jumped 32.8% in 2018-2019.
  • On the back of volume growth and aggressive cost cutting measures, its beer division benefitted from operating leverage. This has resulted in the beer division’s net margin to more than double to 5.7% in 1QFY21 from 2.7% in 1QFY20. The main driver to net margin expansion has been aggressive cost cuts. Total administrative and distribution cost shrank 26% y-o-y% to THB3.7b, driven by improved cost management for transportation and lower bonus awards in Vietnam.
  • Going into FY21E, we expect Thai Beverage to keep its admin and selling expenses stable at 13% of total sales given its ongoing cost management programme.
  • The cyclical upturn post recovery is expected to provide further uplift to the current high brewery utilisation rate (~80% in FY20). On the back of an anticipated 7% growth in FY21E revenue, core PATMI is forecasted to jump 18% to THB26.9m due to operating leverage.

Thai Beverage - Financial Analysis


  • We forecast revenue growth of 4% for Thai Beverage in FY21E and 5% in FY22-23E, while our PATMI forecasts for the same period are 18%, 8% and 5% y-o-y respectively. Overall, we anticipate Thai Beverage to achieve a FY20-23E PATMI CAGR of 10%.
  • Throughout our forecast horizon of FY21-23E, we expect revenue and earnings growth to be primarily driven by revenue growth and positive operating leverage. As a result, we expect Thai Beverage's net margins to be within the range of 10% over the same period, an uptick from FY20 net margin of 9.9%.

Balance sheet and cash flow

  • We assume capex to remain relatively stable at 2-2.2% of total sales from FY21-23E. It primarily comprises of maintenance capex as there is no visible expansion plan.
  • At the same time, Thai Beverage's free cash flow is projected to be positive over the same period.

Thai Beverage - Valuation summary; BeerCo IPO could raise target price by 30%

  • Our target price of S$0.95 for Thai Beverage is based on 20x FY21E EPS, a 5% premium vs its 5-year historical mean of 19x. In our view, this is warranted as Thai Beverage is well positioned for an 18% y-o-y FY21E PATMI growth as COVID-19 eases and operating leverage from its beer business increases. We believe Thai Beverage is compelling as the stock is trading at only 15.1x FY21E P/E, or -1 S.D below its historical mean.
  • Thai Beverage is trading at a 65% discount to its global peers. We referenced global peers with businesses in spirits, beer, non-alcoholic beverages and F&B restaurants. We observe excluding Kweichow Moutai (600519 CH), which is trading at a significantly higher 55.2x FY21E P/E, other peers are still trading at an average of 26.4x FY21E P/E, or a 68% premium to Thai Beverage.

BeerCo IPO can push target price up by 30% to S$1.24

  • We also see the potential listing of its Thai beer division and SABECO (collectively BeerCo) as a near-term catalyst to Thai Beverage's share price.
  • In a regulatory filing on 5 Feb, Thai Beverage confirmed its intention to spin off and list its brewery unit BeerCo on the SGX mainboard. It has received a no-objection letter from the SGX for the listing of ~ 20% of BeerCo.
  • According to Bloomberg, the group is seeking an estimated US$10b valuation for BeerCo and it could list by 1H21. This could lift our target price for Thai Beverage to S$1.24.

Is BeerCo’s US$10b valuation a realistic target?

Kareen Chan Maybank Kim Eng Research | 2021-03-28
SGX Stock Analyst Report BUY INITIATE BUY 0.95 SAME 0.95