• A new drink-driving law in Vietnam has dampened expectations in the high-growth market for Thai Beverage (SGX:Y92), with local reports of beer sales being heavily affected since the new regulation was enacted on 1 Jan 20. We see more severe effects for Sabeco if Vietnam’s regulatory rules encompass wider public restrictions.
• Maintain HOLD with Target Price at SGD0.90.
• Entry price: S$0.75.

What’s New

Vietnam woes ahead?

• Recent reports surfaced of beer sales in Vietnam being affected by a new drink-driving law enacted on 1 Jan 20. Under the new law, motorbike drivers who have been drinking will be fined up to US$345, while car drivers under the influence could face a penalty of up to US$1,800. Such drivers face a two-year licence suspension and stiffer penalties.
• Around 6,300 drivers across the country have been fined in the two weeks since the law was introduced.

A spanner in the works of festivity.

• According to local media reports, beer sales have dropped at least 25% since the introduction of the new law. This leads up to the festive Lunar New Year period which is seasonally stronger for beer sales. Vietnam contributes about 24% of Thai Beverage’s group revenue in FY19.

Barring new regulation, still some weakness in Sabeco.

• Not accounting for the new regulation, Sabeco reported a weaker quarter, with a decline in net sales (-7% y-o-y) in 4Q19, in line with lower sales volume and a result of higher tax from changing one of its breweries from an associate to subsidiary. Sabeco is Thai Beverage’s beer business entity in Vietnam, and holds about 40% of the market in the country.

But demographics and middle-income growth still in favour in the longer term.

• Vietnam’s growing middle class and youthful population has helped drive expectations for the beer industry, with a 284% surge in beer consumption between 2004 and 2018, according to Euromonitor. Approximately 60% of the population is under the age of 40.

Stock Impact

Spectrum of regulatory rules to curb consumption effectively…

• The stricter regulations in Vietnam appear to be initially centered on the hazards of drink driving rather than a general clampdown on alcohol usage. We note a wider range of measures in countries such as Russia which has led to a more substantial consumption decline, such as restriction on public consumption and sales.
• According to the World Health Organisation, the implementation of alcohol control measures has reduced total alcohol consumption in Russia by 43% from a peak in 2003 to 2016.

…although downside risk is likely to remain.

• However, we opine that regulatory risk will likely remain if stricter alcohol policies are enacted. Beer companies may also face higher competition as prices are lowered to garner consumers’ support.

Earnings Revision / Risk

• None.

Valuation / Recommendation

Maintain HOLD.

• We value:
  1. the spirits business at 17x EV/EBITDA, in line with global peers’;
  2. the beer business at 15x EV/EBITDA, in line with peers’ average;
  3. the non-alcoholic beer (NAB) business at 2x EV/sales, a discount to peers’ 3.0x as Thai Beverage’s NAB business is still loss-making; and
  4. the food business at 14x EV/EBITDA, in line with local peers’.
• Frasers Property (SGX:TQ5) and F&N (SGX:F99), in which Thai Beverage owns 28% each, are valued based on market value.
• Entry price is S$0.75.

Share Price Catalyst

• Consumption growth from Thai government stimulus.
• Gaining market share in the beer segment.
• M&As.

Source: UOB Kay Hian Research - 28 Jan 2020