• 1Q14 PATMI above expectation
• Intense competition in nonalcoholic beverage
• Maintain BUY

GP margin surprise in 1Q14 results

Despite Thailand' s political unrest scaling up in 1Q14, ThaiBev has shown earnings resilience. ThaiBev' s 1Q14 revenue increased 4.8% YoY to THB41.0b, in-line with expectation as it forms 25.1% of our FY14 forecast. Due to better-than-expected gross profit (GP) margin, PATMI increased 72.9% to THB6.0b, making up 30.2% of our expectation. The better GP margin came from beer and spirits segments. In 1Q14, beer' s GP margin was 18.9% (vs. 13.1% in 1Q13) while spirits' GP margin was 33.5% (vs. 32.0% in 1Q13). The higher GP margins are due to raising average selling price (ASP) more than the increase in excise tax in 4Q13. On a QoQ basis, the GP margins for beer (vs. 15.3% in 4Q13) and spirits (vs. 32.6% in 4Q13) segments were also better as pre-excise tax increase inventory were sold without the higher ASP in Oct-13.

Alcoholic segments retain market shares

In 1Q14, spirits sold was flat YoY at 141m litres. However, there was a shift in product mix from brown to white spirits, which is more profitable due to a lesser need for advertisements and promotions. Beer volume, on the other hand, dropped by 11.7% YoY to 144m litres. Nevertheless, ThaiBev' s beer market share is still ~30% as the overall beer market had shrunk by the same degree after excise tax increase last year.

Non-alcoholic beverage facing competition

In 1Q14, non-alcoholic beverage sales decreased by 22.1% YoY to THB3.7b, mainly due to competition that caused sales volume drop. Sermsuk product sales decreased 7.7% to 215.3m while sales volume of Oishi beverages dropped 16.0% to 57.8m litres. Going forward, ThaiBev will be working together with its subsidiaries (i.e. Oishi and Sermsuk) to extend one another&rsquo s distribution.

Revise GP margin upwards new TP S$0.74

We revise the GP margins for beer and spirits segments upwards to take into account the higher ASP. We maintain BUY with a slightly higher TP of S$0.74 (previous S$0.73)

Source: OCBC Research - 15 May 2014

• Stronghold in Thailand as income anchor
• Going regional with F& N' s network and financial war chest
• BUY with S$0.73 TP

Existing stronghold in Thailand as steady income pillar

ThaiBev is Thailand' s largest and leading beverage producer and distributor. Its four key product segments are Spirits, Beer, Non-Alcoholic Beverage and Food. ThaiBev has substantial market shares in beverage segments in Thailand, accompanied by pricing power and branding. In addition, ThaiBev has 93 sales offices covering every province of Thailand. This enables faster delivery to the market. Its current stronghold in Thailand will serve as a relatively steady income pillar as it expands beyond Thailand and into other product segments.

Unfazed by political turmoil in Thailand

We note that ThaiBev' s revenue grew by 2.4% and 12.4% in 2009 and 2010 respectively despite bouts of prolonged political unrests. Hence, we think the current political unrest&rsquo s impact on ThaiBev will not be significant as long as it is contained in terms of area and number of people involved. Meanwhile, we expect ThaiBev to be able to continue executing its long-term strategy.

Exploiting synergies with F& N to become a regional F& B force

ThaiBev, together with F& N, will have access to distribution networks in Singapore, Malaysia, Thailand and Myanmar. F& N has begun distribution of Oishi green tea products in Malaysia, and plans are in place for distribution of F& N' s 100plus in Thailand. We think the cross-distribution opportunities are not exhausted yet as we examine each company' s product portfolio. Furthermore, F& N Dairies and ThaiBev can also leverage on each other' s Thailand network. We think ThaiBev is well-positioned to penetrate the regional F& B markets with: 1) an enlarged distribution network waiting to be tapped upon, 2) more diversified products to capture different tastes and income level, and 3) a large war chest for marketing, capacity expansion etc. by being one of the biggest regional F& B companies.

Initiate with BUY TP S$0.73

Using  sum-of-the-parts,  we  initiate  with  a BUY  at  S$0.73  TP.  Our  TP  implies  a  23.0x FY14F  PER,  which  is  in  line  with  peers' average in ThaiBev' s operating segments. We believe  the  counter  is  also  attractive  due  to the  diversification  and  liquidity  provided  to investor.

Source: OCBC Research - 5 May 2014

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