• Thai domestic alcohol growth trends, SABECO turnaround progress and partnerships with global brewers were the hot topics during our US NDR.
• We like Thai Beverage for its stabilised domestic alcohol business and regard the continuous improvements at SABECO as a medium-term earnings driver.
• M&As in Vietnam, especially involving SABECO, could unlock value. Maintain ADD with a slightly higher SOP-based Target Price of S$0.96.

Maintain ADD; Stabilised Domestic Business and Improving New Unit

• We held an NDR for THAI BEVERAGE (SGX:Y92) to meet US investors on 8-12 Jul. We like that its domestic revenue has stabilised and view improvements in SABECO as a medium-term earnings growth driver. Tie-ups with global brewers, especially involving SABECO, could unlock value for Thai Beverage, in our view.
• The stock now trades at 18.4x FY20F P/E, below its 5-year historical mean of 20.4x. We raise FY19-21F EPS by 0.1- 0.2% for higher revenue, but with lower gross margins (GPM) and higher finance costs. Stay ADD on Thai Beverage, with higher SOP-based target price of S$0.96.
• Potential catalysts are higher revenue and margins. Risks are weak revenue and margins.

Thailand Spirits and Beer

In stable growth mode

• Key questions raised by investors during our NDR revolved around:
  1. potential sales volume trends for Thai spirits and beer; and
  2. Thai Beverage’s ongoing strategies to lift its Thai beer market share.

Domestic spirit and beer sales volumes still growing

• Thai Beverage still expects its 2H19F Thai alcohol new cabinet was sworn in on 16 Jul and local media reported that the new government could launch several stimulus measures, including a 23% increase in the minimum daily wage from THB325 (US$10) to THB400 (US$13), a 2-year corporate income tax waiver for start-ups, a 5-year personal income tax waiver for newly-graduated workforce and a 10% reduction in personal income taxes for all. Such plans could country’s beer, white liquor and mixed liquor sales in Jan-May 2019 remained in positive territory, rising by 11.2%, 1.2%, and 10.5% y-o-y, respectively.

Keeping ear close to beer

• Thai Beverage’s Thai beer market share still stands at 40% as at 2QFY19 and its marketing strategies now target regional/city level (vs. nationwide previously). These strategies involve Thai Beverage conducting ground checks to determine the root causes of its lagging market share vs. competitors at individual city/regional level despite having higher overall brand equity.
• Thai Beverage still aims to be the Thai market leader in beer by 2020F with a market share of 45%; but we think it may require more time to reach its target.

Vietnam Beer

Sowing seeds

• Thai Beverage shared some of the SABECO has 40% beer market share in Vietnam, with a strong presence in rural regions. SABECO’s near-term aim is to strengthen brand equity especially in Ho Chi Minh city.

Raising awareness of Saigon Beer and redefining beer portfolio.

• SABECO believed Special Beach Festival 2018.
• Thai Beverage said SABECO is currently undertaking a brand portfolio review exercise that would lead to clearly-defined segments for each product within the Saigon Beer range.
  • Motivating human flip side, ensuring product consistency (beer taste and quality) is a challenge. To mitigate this and strengthen controls on the brewing process, SABECO is now prioritising production at its wholly-owned breweries;
  • Raw material cost optimisation plans still midway. Thai Beverage guided that it is still in the process of optimising SABECO’s raw material costs, with one of the potential methods being joint procurement with Thai Beverage, which enjoys more favourable pricing terms. However, it admitted that this could be a medium-term process, given that SABECO has 26 breweries with varying ownership stakes and different procurement contracts.

SABECO targets MI

• At its Annual General Meeting (AGM) in Apr 2019, SABECO guided for 6% sales volume growth, 8% growth in revenue and 7% growth in CY19F PAT before MI. 1QCY19 revenue/net profit grew 19%/11.6% y-o-y (above SABECO’s PAT before MI target of 7%) likely due to sales volume and price increases (we understand SABECO raised ASPs in Oct 2018 and Mar 2019).
• While Thai Beverage’s GPM contracted to 23.5% to 9.2% for 27% of SABECO's VND4.7tr target for CY19F, and 10% y-o-y; and cost optimisation and operating leverage to bear fruit.

Partnership with global peers?

• During its Annual Information Meeting (AIM) 2019, Thai Beverage said it was open to collaboration with global brewers, largely to deleverage its balance sheet after the SABECO acquisition (Thai Beverage’s 1H19 net debt-to-EBITDA ratio stood at 4.7x).
• During the NDR, news broke on another global brewer, Anheuser-Busch InBev (AB InBev) looking to price the IPO of a minority stake of its Asia-Pacific subsidiary, Budweiser Brewing Company APAC Limited (Budweiser) which considers Vietnam Vietnam beer market as of when 2QCY19F but with a stronghold in the mainstream segment. Thai Beverage stated that it was open any partnerships but there was no further guidance on the form of any tie-up and target debt-to-EBITDA ratio. We think Thai Beverage’s priority in any such partnership would be operational benefits (i.e. differing product offerings, synergies in marketing campaigns) vs. pure monetary motivation.
• According to a GlobalData report commissioned by Budweiser for its IPO CAGR and 4.8% sales value CAGR for the Asia-Pacific beer market. Hence, we believe Vietnam would continue to gain attention for prospective brewery M&As, which could have positive spillover benefits to SABECO.
• SABECO’s current share price (VND283k/share as at 25 Jul 2019; share price has rallied 5.8% YTD) is below the VND320k price tag that Thai Beverage paid to Thai Beverage’s acquisition price. According to news reports then, the indicative price ranges for the Budweiser IPO implied 28.5-33.5x FY20F P/E based on Bloomberg consensus earnings estimates.

Myanmar

Spirits: Powering market share increase

• Thai Beverage is entering the Myanmar beer market via its associate Fraser & Neave (F&N, SGX:F99), which has established a Myanmar joint venture company – Emerald Brewery Myanmar Ltd. According to F&N, the joint venture will invest over US$50m in a greenfield brewery that will produce and market a portfolio of Thai Beverage’s beer ready for commercial 500,000 hectolitres.

Thai Beverage's 3QFY19F Results Preview

Forecast 9MFY9/19F core y-o-y

• Thai Beverage’s core net profit in 2H is typically softer than in 1H; with 3Q being stronger than 4Q historically. We estimate 3QFY9/19F revenue could have grown 3.1% y-o-y to THB62.6bn, as we think alcohol sales volumes were still on an uptrend, but finance costs likely rose to THB1.7bn (vs. THB1.6bn in 3QFY9/18) due to borrowings for previous acquisitions; while associate earnings could have fallen from a high base of THB2.1bn in 3QFY9/18.
• We expect 3QFY9/19F core core net profit could have grown 6.2% to THB19.0bn (vs. THB17.9bn in 9M18).

Valuation and Recommendation

• We raise our FY19/20/21F revenue share price rallying 38.5% YTD, Thai Beverage is still trading at 18.4x FY20F P/E, below its 5-year historical mean of 20.4x. Our SOP-based Target Price rises to S$0.96 (from S$0.94) due to our EPS increases and our lower net debt assumptions, as we expect Thai Beverage to utilise its operational cash to deleverage more quickly over FY19-20F.

Source: CGS-CIMB Research - 25 Jul 2019