Thai Beverage: Boosted by F&N/FCL contributions August 14, 2017 2485

PSR Recommendation: ACCUMULATE Status: Maintained
Target Price: 1.05
  • 9M17 Revenue and Core EBITDA were in line with our full year FY17e expectations
  • Intense competition in alcoholic beverages with Singha stepping up the game and entry of a new Spirits rival
  • Growing its wholly-owned Food business in Thailand via acquisition of 240 KFC stores
  • Maintained Accumulate with unchanged SOTP-derived TP of S$1.05


The positives

  • Higher revenue in Spirits cushioned lower contributions from other segments. Spirits recorded higher sales volume due to a low base of spirits’ sales in 3Q16 as agents started to delay the stock piling after ThaiBev increased price of spirits after Songkran Holiday last year.
  • Gross profit margin improved. Economies of scale gain in Spirits, lower bottle and raw material costs in Beer and increased selling prices in Food offset the slower sales volume in NAB.

The negatives

  • Market share in 9M17 declined 4.1pp to 38.4% of total beer sales in Thailand. Management stated that the decline in volume share was due to a change in bottle size from its competitor, Singha. According to ThaiBev, Singha’s move to change its bottle size from 500ml to 620ml has only boosted its volume share without increasing unit share. ThaiBev’s Beer units sold in the market remains unchanged. Its channel check with independent market research and key distributing agents, such as Big C, reported a decrease in total domestic beer sales in 3Q17.
  • Higher advertising and promotion expenses in Alcoholic Beverages weighed on profitability. The delayed marketing activities due to mourning period in Thailand and the relaunch of Federbräu, drove up advertising and promotion expenses. Core NPAT, excluding F&N/FCL and F&N recognition of fair value gains, decreased 4.4% YoY in 3Q17. Management noted a moderation in 4Q17 advertising and promotion expense.


FY18 outlook remains positive. We expect a pick-up in alcoholic beverages sales volume in FY18 after the effect of mourning period in Thailand subside in Oct-17.

In near term, we expect 4Q17 demand for alcoholic beverages to remain slow as we enter the dry season in the fourth quarter (Jul-Sep). However, the excise tax hike in 16 Sep-17 could lead to a volume spike in early-Sep as retailers build up inventories two weeks prior to the tax hike. Details of the impending excise tax has yet to be disclosed.

Maintained Accumulate with unchanged SOTP-derived TP of S$1.05

We remain optimistic of a recovery in consumer sentiment in Food & Beverages in Oct-17. On-trade consumption should turnaround after the impact of mourning period is over and a broader economic recovery takes effect in Thailand. We are also positive that the Group could expand its margin during the impending excise tax levy in Sep-17.

Other Updates

Competition remains intense with new rival entering the White Spirits market

Carabao Group Plc, a leading energy drink company has entered into the Thai spirits market under the company name, Tawandang 1999, to produce and distribute a full suite of spirits over the next three years.

Tawandang has invested THB3bn to build a fully automated distillery with production capacity of 54.75mn litres per annum in Chai Nat, a central province in Thailand. Taawandang commenced operation in Apr-17 with 50% utilization. It has recently introduced its first white spirit brand into the market and plans to capture 10% of Thailand white spirits market by next year, with a 10-20% lower selling prices compared to peers, via its over 200,000 points of sale throughout Thailand.

We believe ThaiBev will remain the dominant player. It has the competitive advantage of (i) strong brand equity and pricing power in Thai spirits market, (ii) economies of scale from its 18 local distilleries, and (iii) strong distribution channels, covering over 400,000 points of sales in Thailand.

Additional 2% of excise tax to be allocated to the Elderly Fund in 2018

Notwithstanding the Sep-17 excise tax levy, the Thai cabinet has recently approved an additional 2% increase on excise tax from liquor, tobacco and beer sales. The proceeds will be earmarked for the Elderly Fund.  The tax increase should take effect in 2018 after the National Legislative Assembly enacts the bill.

Currently, there are three government agencies receiving 1.5% to 2% of the alcohol excise tax, i.e. the Thai Health Promotion Foundation (2% of excise tax), the state-owned TV Thai Public Broadcasting Service (1.5% of excise tax), and the National Sports Development Fund (2% of excise tax).

Growing its wholly-owned Food business at home

ThaiBev has entered into an asset sale and purchase agreement with Yum Restaurants International (Thailand) Co., Ltd. (“Yum”) to acquire more than 240 existing and a number of developing KFC stores in Thailand.

ThaiBev first venture into Thailand’s food market in 2008 via its 89.9% stake in Oishi Group Plc. Ltd. Oishi Group key product offerings are the Japanese Restaurants and ready-to-cook or eat food products in Thailand.

In 2016, ThaiBev decided to invest further into food retailing. Its wholly-owned subsidiary and food product group flagship company, Food of Asia Co., Ltd., has been actively expanding the range product offerings since its incorporation in early-2016.

  • Apr-16: Entered into a 70-30 joint venture with Mei-Xin (International) Limited to engage in the bakery business in Thailand.
  • Apr-17: Incorporated Bistro Asia (Yet to see any corporate development, but we expect ThaiBev to venture into non-Japanese bistro or restaurant operation)
  • Aug-17: Singed a franchise agreement with Yum via QSR of Asia (“QSA”)

These somewhat completes the suite of foodservice market – quick service restaurants, full service restaurants, bakeries, as well as ready-to-eat or cook segments. Food of Asia’s vision is to be the leading quality food company in ASEAN with various foods for every lifestyle and occasion.

Background of Yum’s KFC sales

In Jan-16, Yum has announced its intention to sell all its self-managed restaurants (Pizza Hut stores and KFC stores) so it could focus on product development. The move would also enabled Yum to accelerate global growth through franchise partnerships. According to Yum, the franchisee strategy may boost KFC in Thailand to 1,000 stores in the near future, increasing from its earlier plan of 800 stores within 2020. Yum has successfully converted all KFC outlets as franchise model, with ThaiBev being the third and last franchisee in Thailand.

Acquisition of 240 existing KFC stores

KFC has been in Thailand for more than 30 years and has been the No. 1 quick service restaurant brand in Thailand in terms of brand share and number of outlets. There are c.600 KFC outlets run by Yum and two franchisers in Thailand. The two franchisers are Central Restaurant Group (224 branches) and Restaurant Development Co Ltd (128 branches).

Details of the franchise rights or the locations where it will operate have yet to be disclosed. However, from the media, ThaiBev’s competitors, Central Restaurants Group has the right to open KFC branches across the country and some locations in the South, while Restaurant Development Co holds the rights to open KFC in the South and Bangkok.

Yum will work together with its franchisees via ‘Brand Council’, which comprises executives from all three franchisees, to create identical experiences at all KFC restaurants and to avoid business conflicts between three franchisee partners.

The acquisition is expected to be completed by end-2017

The preliminary amount in consideration for the existing KFC stores is about THB11.3bn, including value added tax, and an additional amount in consideration for the KFC stores under development will be determined at closing. We expect ThaiBev to fund the acquisitions via borrowings and internally generated fund. Notwithstanding its yearly cash-flow generation of over THB20bn, its gearing ratio currently stood at 0.47x, i.e. a THB67.65mn debt headroom before reaching 1.0x.

Potential synergies with partnership with Yum

Leveraging on the partnership with Yum, ThaiBev could accelerate KFC’s further expansion in Thailand and enhance its Food business’ operations. KFC’s extensive network in Thailand will provide the Group direct access to multiple customer touch points across the country. This is also in line with ThaiBev’s expansion strategy for sustainable long-term growth.

As KFC is bonded by its international contract with PepsiCo as the official drinks supplier, ThaiBev may not be able to leverage on KFC’s distribution strength in Thailand to boost the sales and exposure of est Cola. Nonetheless, we do not discount the possibility of having Oishi beverages or even Chang beer on KFC’s tap in Thailand.

Note that there are exceptions where non-Pepsi branded soft drinks are being served in KFC outlets. E.g.  Barbados, Greece, New Zealand, the Philippines, Romania, South Africa, and Turkey, serve Coca-Cola. In addition to soft drinks, beer is even offered in some European outlets.

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About the author

Profile photo of Soh Lin Sin

Soh Lin Sin
Investment Analyst
Phillip Securities Research Pte Ltd

Lin Sin has been an investment analyst in Phillip Securities Research since June 2014, where she started as an economist, focusing on China and ASEAN macroeconomics. Currently, she covers primarily the Consumers and Healthcare sectors in Singapore equities market.

She graduated with a Bachelor of Science in Mathematics and Economics from NTU.

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