LION Brewery Ceylon

Lion Brewery Ceylon

LION – Rs.452.4

Key Highlights Initiation Report Lion Brewery Ceylon (LION) is Sri Lanka’s largest producer and distributor of soft alcohol (beer)

with a market share of ~86%. Currently, LION’s portfolio mainly includes three Lion Brands (Lion Lager, Lion Strong and Lion Stout), Carlsberg and Carlsberg Special Brew both of which are marketed under a license

LION’s NP forecast at Rs.2,055mn for FY16E (+13% YoY). Meanwhile, we expect 4Q16E earnings to decline -16% YoY and -28% QoQ to Rs.328mn due to the decline in volumes subsequent to sharp excise duty led price increases in 3Q16, particularly for strong beer. Further, FY17E NP is forecast to decline -26% YoY to Rs.1,515mn on account of slower revenue growth. Meanwhile, FY18E NP is projected at Rs.2,119mn (+40% YoY off a low base), attributable to the expected recovery in volumes, improving margins and decline in interest costs

The LION share underperformed the market during the past year, declining -29% YoY and -15% during the past three months (vs. the ASI’s -10% YoY and +2% during the same period). Meanwhile, the share outperformed the broader market in the past ten years, rising at a CAGR of +21% (vs. ASI’s +12%)

Subsequent to the recent sharp price declines, material further downside risk seems limited. Despite the recent fall in prices, near term valuations seem pricey at 23.9x FY17E amid negative EPS expectations of -26% YoY, led by sharp decline in volumes post excise duty hikes. EPS growth forecast to rebound +40% YoY in FY18E, resulting in a PER multiple of 17.1x and ROE of ~17%

Nevertheless, LION’s premium multiples may be partly justified by its dominant market position with ~86% market share and significant upside growth potential in the Sri Lankan beer market. We expect the local beer industry to recover in the medium term amid the rise in GDP per capita and urbanization coupled with higher tourist arrivals. Sri Lanka’s low per capita consumption of beer at just 5 litres (vs. ~18 litres regionally) indicates there is much upside scope for the industry

LION seems well positioned to be the key beneficiary of this anticipated growth given its strong brand equity, superior distribution network coupled with its recent capacity expansion

Medium to long term investors favouring the consumption driven growth story could accumulate the share at current prices, to gain exposure to the only listed beer manufacturer on the CSE

Shares in Issue (mn) 80.0

Market Cap (US$ mn) 249.6

Estimated Free Float (%) 12.2

3M Avg Daily Volume 14,865

3M Avg Daily Turnover (US$) 51,669

12M High / Low (Rs) 700.0 / 450.0

3M / 12M Price Change (%) -14.6 / -28.5

Relative Share Price Movement (%)

LION: Valuation Ratios

Note: Valuations are based on recurring EPS, Adj. for Capital Issues (if any); Historic Ratios are based on Y/E MPS Source: LION, CT CLSA

Source: Company Interims `

Kavindu Ranasinghe

Email : [email protected] Phone : +94 76 9108973

Sri Lanka

Beverage, Food and Tobacco

29 April 2016

Key Trading Information

CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange

Y/E 31 March FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

Revenue (Rs mn) 7,919 11,250 17,649 22,192 25,804 32,350 35,982 37,332

Net Profits (Rs mn) 597 832 1,262 1,046 1,343 1,819 2,064 1,579

Earnings Per Share (Rs) 7.5 10.4 15.8 13.1 16.8 22.7 25.8 19.7

Earnings Per Share Growth (%) >+100 39.5 51.7 -17.1 28.4 35.4 13.5 -23.5

Price / Earnings Ratio (x) 61.0 43.7 28.8 34.8 27.1 20.0 17.6 23.1

Price / Earnings Growth (x) 0.0 1.1 0.6 -2.0 1.0 0.6 1.3 -1.0

Gross Dividend Per Share (Rs) 3.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

Gross Dividend Yield (%) 3.5 2.0 2.0 1.2 1.0 0.7 0.8 0.8

Net Book Value Per Share (Rs) 49.7 66.7 65.1 73.9 86.7 99.1 120.9 136.6

Price / Book Value (x) 9.1 6.8 7.0 6.2 5.3 4.6 3.8 3.3

Return On Equity (%) 15.0 15.6 24.2 17.7 19.4 22.9 21.3 14.4

Market Price Per Share (Rs) 86.5 200.0 200.0 333.0 391.0 600.0 500.0 500.0

ASPI

LION

Y/E 31 March FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Revenue (Rs mn) 7,919 11,250 17,649 22,192 25,804 32,350 35,248 36,577 45,346

Net Profits (Rs mn) 597 832 1,262 1,046 1,343 1,819 2,055 1,515 2,119

Earnings Per Share (Rs) 7.5 10.4 15.8 13.1 16.8 22.7 25.7 18.9 26.5

Earnings Per Share Growth (%) >+100 39.5 51.7 -17.1 28.4 35.4 13.0 -26.3 39.9

Price / Earnings Ratio (x) 11.6 19.2 12.7 25.5 23.3 26.4 17.6 23.9 17.1

Price / Earnings Growth (x) 0.0 0.5 0.2 -1.5 0.8 0.7 1.4 -0.9 0.4

Gross Dividend Per Share (Rs) 3.0 4.0 4.0 4.0 4.0 4.0 4.0 3.0 4.0

Gross Dividend Yield (%) 3.5 2.0 2.0 1.2 1.0 0.7 0.9 0.7 0.9

Net Book Value Per Share (Rs) 49.7 66.7 65.1 73.9 86.7 99.1 120.8 136.7 159.2

Price / Book Value (x) 9.1 6.8 6.9 6.1 5.2 4.5 3.7 3.3 2.8

Return On Equity (%) 15.0 15.6 24.2 17.7 19.4 22.9 21.3 13.8 16.6

Market Price Per Share (Rs) 86.5 200.0 200.0 333.0 391.0 600.0 452.0 452.4 452.4

70

80

90

100

110

120

29-Apr-15 25-Aug-15 11-Jan-16 27-Apr-16

EQUITY REPORT TITLE | Date EQUITY REPORT TITLE | Date A CT HOLDINGS GROUP AND CLSA GROUP COMPANY 2

Year Key Event

1860 The Ceylon Brewery was established by Sir Samuel Baker in Nuwara Eliya, country’s first brewery, to supply beer to English planters

1911 The brewery was acquired by G.W. Lindsay White and became a Limited Liability Company (LLC)

1940 The company expanded its product range, introducing Lion Lager, Lion Pale Ale, Sinha Pilsner and Lion Stout

1993 Ceylon Brewery becomes a subsidiary of Carson Cumberbatch Group

1996 LION was established with a manufacturing plant in Biyagama

1997 Listed on the Colombo Stock Exchange (CSE)

2001 Ceases operations in Nuwara Eliya

2011 Acquired distribution rights for Corona Brand

2012 Diversifies into Pubs & Retail

2012 The company was appointed as the sole importer and distributor of Diageo, as well Moët Hennessy

2014 Acquires Millers Brewery and its product portfolio for Rs.5bn

2015 Commissioning of the new bottling and canning lines

The Business

Lion Brewery Ceylon (LION) is Sri Lanka’s largest producer and distributor of soft alcohol (beer) with a market share of ~86%. LION is ~46% owned (effective holding) subsidiary of listed Carson Cumberbatch (CARS) with exposure to range of businesses including oil palm plantations, beverages, investment holdings, real estate and leisure. Currently, well known local business entrepreneur family “Selvanathan” holds majority of shareholdings in CARS

The LION brand was owned by Ceylon Brewery Company and was established in 1881 for commercial operations with the first brewery in Nuwara Eliya region (in the hill country of the Central Province, Sri Lanka). In 1993, the Ceylon Brewery became a subsidiary of listed conglomerate CARS. Subsequently, Lion Brewery was established in 1996 with Ceylon Brewery Company remaining as a holding company, whilst Carlsberg Brewery Malaysia Berhad operating as a joint venture partner after acquiring 25% of LION. Ceylon Brewery later became Ceylon Beverage Holdings (BREW). LION was listed on the Colombo Stock Exchange (CSE) in 1997

Currently, LION’s portfolio includes three Lion Brands (Lion Lager, Lion Strong and Lion Stout) while Carlsberg, Carlsberg Special Brew and Somersby are marketed under a license. Furthermore, with the acquisition of Millers Brewery for a total consideration of Rs.5bn in October 2014, Three Coins and Sando brands were added to Lion’s portfolio. Further, LION owns distribution rights for Corona brands in Sri Lanka. In addition, LION exports its products to many countries, mainly to the Maldives (~1% of revenue in FY15)

Lion Lager and Carlsberg are considered light beers with an alcohol content of less than 5% while Lion Strong, Lion Stout and Carlsberg Special Brew are strong beers with an alcohol strength in excess of 5% (Currently,comprising ~83% of LION’s sales mix)

LION’s production plant is located at the industrial zone of Biyagama (20km East of Colombo).

Currently the brewery has the capacity to produce ~2.1mn hectoliters (hL/yr) of beer, which could serve nearly twice the national consumption (vs. current production of 1.1mn hL/yr)

Currently LION serves customers through ~2,800 outlets (~1.4% FMCG space) of which 70%

are off-premises (take away wine stores)

Sectoral Information (Rs mn) 2Q14 2Q15 % YoY Composition (%)

2Q14 2Q15

Net Revenue 20,879.6 22,164.9 6.2 100 100

Transportation 4,135.8 3,230.8 -21.9 19.8 14.6

Leisure 5,268.2 5,480.8 4.0 25.2 24.7

Property 547.9 1,099.5 >+100.0 2.6 5.0

Consumer Foods & Retail 5,946.4 7,040.1 18.4 28.5 31.8

Financial Services 2,336.5 2,606.8 11.6 11.2 11.8

Information Technology 1,751.5 1,750.8 0.0 8.4 7.9

Others 893.3 956.0 7.0 4.3 4.3

Profit After Tax 2,302.4 2,976.9 29.3 100.0 100.0

Transportation 696.1 552.8 -20.6 30.2 18.6

Leisure 1,031.7 1,022.1 -0.9 44.8 34.3

Property 8.4 322.5 >+100.0 0.4 10.8

Consumer Foods & Retail 175.7 364.4 >+100.0 7.6 12.2

Financial Services 216.2 318.3 47.2 9.4 10.7

Information Technology 31.2 91.0 >+100.0 1.4 3.1

Others 143.1 305.8 >+100.0 6.2 10.3

Largest producer and distributor of beer with a market share of 86%

Lion Brewery Ceylon

Source: LION

Timeline of Major Events

EQUITY REPORT TITLE | Date EQUITY REPORT TITLE | Date CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange 3

LION Director Board Composition

LION : Board Composition

Lion Brewery Ceylon

Source: LION

LION Group Structure

Source: LION

Carson Cumberbatch (CARS)

Ceylon Beverage Holdings

(BREW)

LION

Brewery (LION)

Carlsberg

A/S

7.99%

52.25%

74.93%

Carlsberg

Malaysia

24.60%

6.88%

Director Name Executive/Non Executive

Description

Cubby Wijetunge (Chairman)

Non-Executive/ Independent

Appointed as Chairman in 2003 and he is the Chairman of Ceylon Beverage Holdings (BREW), Nestle Lanka (NEST) and Director of several listed and non-listed companies

Hari Selvanathan Executive

Serving the board since 1996 and Chairman of Bukit Darah (BUKI – Subsidiary of CARS) and Deputy Chairman of Goodhope Asia Holdings Ltd. He holds Directorships in several subsidiary companies within the Carsons Group. Past President of the National Chamber of Commerce

Suresh Shah Executive Serving the board for more than 20 years and director of CARS and BUKI and some other companies within the CARS group. He is the immediate Past Chairman of the Ceylon Chamber of Commerce

Chandima Gunawardena

Non-Executive Serving the board for more than 20 years and serves as an advisor to the LION's Strategic Planning and Management forums in Sri Lanka and serves on board committees

Chandraratne Liyanage

Executive He was serving as Head of Technical in 2004 and subsequently appointed as a board member in 2005

Ranil Goonetilleke Executive Appointed to the board in 2005 and he held various positions in the mercantile sector in the field of Finance and counts for over 25 years experience

Susan Evans Non-Executive/ Independent

Over 30 years experience in strategy and marketing, largely with multi-national consumer companies . She was appointed to the board in 2010

Henrick Anderson Non-Executive Regional CEO of Carlsberg Indochina Ltd (Thailand) from 2007 to 2013 overseeing Vietnam, Laos, Cambodia and Myanmar. He is now responsible for the South East Asia sub-region

Amal Cabraal Non-Executive/ Independent

Former Chairman and CEO of Unilever Sri Lanka. He has over three decades of business experience in general management, marketing and sales. Apart from Sri Lanka, he has served with Unilever in the UK, India and Bangladesh

Yoong Fah Lew Non-Executive Joined Carlsberg Group in 2010 and presently the CFO and Company Secretary of Carlsberg Brewery Malaysia Berhard. He is also a director of Luen Heng F&B Sdn. Bhd and Carlsberg Singapore Pte Ltd

Krishna Selvanathan

Executive Director of Carsons Management Services (Private) Limited and the investment sector companies of CARS

LION’s Ten member director board comprise 6 Non-Executive directors, including 3 independent directors

Ceylon Beverage Holdings (BREW)

Lion Brewery Ceylon (LION)

Carlsberg

A/S

Carson Cumberbatch (CARS)

Carlsberg

Malaysia

24.60%

52.25%

7.99% 74.93%

6.88%


Alcohol Industry Overview

Based on 2014 Department of Excise - Sri Lanka data, the legal alcohol industry had a total consumption of ~209mn liters. Main classification of the market includes Arrack (35% market share), Toddy (7%) and Beer (55%). During 2009-2014 total alcohol production grew at a CAGR of +7.0%.

• Local beer industry consists of strong beer and mild beer of which former comprises

90% of sales mix. The beer segment had a market share of ~55% of the total alcohol industry in 2014, while the segment grew at a CAGR of +17.5% during 2009-2014

Beer segment is dominated by LION with a market share of ~86% while the main direct

competitor is Asia Pacific Brewery (APB), with a market share of ~14%. In 2013, LION saw its market share declining to 75.1% (vs. 84.1% in 2010). However since then LION witnessed a increase in market share with the acquisition of Millers Brewery which held ~11% market share prior to the acquisition. Currently there are only three beer manufacturing licenses in Sri Lanka, out of which LION holds two of it.

Competition

Major players in the local beer industry are LION and Asia Pacific Brewery Lanka Limited

• Asia Pacific Brewery (APB) is a Singaporean-based joint venture between Heineken International and Fraser and Neave. APB commenced operations in Sri Lanka in 2005, after acquiring a 60% stake in United Brewery, partnering with the Sri Lankan-based Anandappa family group (20%) and MBL Offshore Limited (20%). The company was subsequently renamed Asia Pacific Brewery Lanka Limited. The company produces a range of King beers, including Archipelago, Bison, Kings Stout, Baron’s Lager, Baron’s Strong Brew.

Implied Alcohol Market Composition Recorded Alcohol Consumption (Bulk Litres)

Source: Excise Department of Sri Lanka

65% 19%

12%

3% 1%

Illicit Alchol

Beer

Arrack

Toddy

CMFL*

55% 35%

7%

3%

Beer

Arrack

Toddy

*CMFL

Source: State of the Sri Lankan Alcohol Industry and

Analysis of Governing Policies –G.D. Dayaratne(December

2013)/Excise Department of Sri Lanka

Beer Production Volumes/proof liter (mn) Licit Alcobev Market

Source: Excise Department of Sri Lanka Source: Excise Department of Sri Lanka

2009-2014 alcohol production grew at

CAGR of +7.0%

Lion Brewery Ceylon

*Country Made Foreign Liquor

40 Manufacturing Licenses

Arrack

27

CMFL

10

Beer

03

APB is the direct competitor with a

market share of ~14%

0

25

50

75

100

125

2009 2010 2011 2012 2013 2014

Alchohol content > 5% Alchohol content < 5%



Competition In 2014, LION acquired the 100% stake of Millers Brewery Limited (MBL, which held a

~11% market share) and its trademarks for a total consideration of Rs.5.2bn, at a 9x EBITDA multiple • Press articles speculated of DIST - hard alcohol (legal) market leader too being interested in

the acquisition of MBL as part of industry related diversification into the fast growing soft alcohol space. We assume LION to have outbid DIST in pricing, which likely would have been more cautious in its investment, especially given it was to enter a segment dominated by LION

• In 2011, Cargills (Ceylon) (CARG) acquired McCallum Breweries and its brand for a total consideration of Rs.1.4bn. The acquisition was carried out via CARG’s 100% owned newly formed subsidiary Millers Brewery Ltd. Subsequent to the acquisition, Millers Brewery saw its market share rising to 11% in 2013 (vs. 3% in 2011) on the back of an assumed Rs.3bn investment to expand MBL. MBL is however assumed to have faced challenges in further increasing its market share, with notable competition between LION and MBL, pressuring margins in both companies

LION faces indirect competition from the hard alcohol market primarily comprising arrack – coconut based arrack fermented from sap of coconut flowers. Sri Lanka’s market leader in the legal alcohol market segment is DIST with an estimated (legal) market share of ~60%. DIST is in the business of manufacturing arrack, local manufacturing of foreign liquor brands and importing of other liquor types. DIST holds an estimated ~70% market share in the local arrack segment

In addition, LION faces emerging competition from the toddy market due to its price competitiveness. Currently toddy is taxed at Rs.30 per bulk liter vs. Rs.315 per bulk liter for strong beer, whilst both contain a similar alcohol percentage

With the recent sharp rise in the prices in legal alcohol market due to excise duties, competition

from the illegal alcohol market is increasingly become a threat

SWOT Analysis

Strengths Dominance in local beer market - ~86% market share with a wide distribution network Holds 2 out of 3 beer licenses issued in the country Strong brand name led by its popular three lager brands Upgraded production facility with a capacity to cater twice the national consumption (~2mn

hL/yr) (land bank available to expand up to ~5mn hL/yr) Strong backing by joint venture partner Carlsberg Brewery Malaysia Berhad

Weaknesses Highly geared balance sheet due to partly debt funded expansion

Opportunities Existence of underdeveloped beer market in Sri Lanka (~6 liters per capita vs. ~18 regionally) Rise in GDP per capita, increased urbanization and rise in tourist arrivals expected to contribute

positively to LION’s volume Potential to enter into the hard alcohol market, which carries similar dynamics to beer market High level of entry barriers - Threat of new entrants is low as licenses needs to be issued by the

government or acquired by another player

Threats High competition with indirect substitutes - stiffening competition with hard alcohol after higher

excise duty led prices Prohibition on advertising – not even surrogate advertising Higher political and regulatory risks - Higher taxation could result in reducing price inelasticity

Lion Brewery Ceylon

Indirect competition from hard alcohol

MBL had 11% market share when acquired by

LION



Local Regulatory Environment

Alcohol Industry is a tightly regulated industry in the country, and is restricted to ~2% of the retail universe through a system of licensing. The annual increase in taxes over the period has led to the emergence of an inexpensive illicit liquor market which accounts for ~65% of the total alcohol market based on a research conducted by G.D Dayaratne (State of the Sri Lankan Alcohol Industry and Analysis of Governing Policies – 2013)

According to National Authority on Tobacco and Alcohol act of 2006 (NATA), any form of advertising is prohibited on alcohol and tobacco including promotion, sponsorship and surrogate advertising. In addition, there are restrictions on transfer of licenses, location of the licenses (within 500m from a place of worship & school is prohibited) and consumption age limits (21 up)

Excise duty

The local alcohol industry is amongst the highest taxed both regionally and globally (40%

corporate tax). On average, from 2011-2014 government increased excise duty on strong beer by ~23% YoY (vs. mild beer 21% YoY, arrack 18% YoY). In addition, the local beer industry is taxed at just two slabs of <5% and >5% based on the alcohol content. The general practice in Sri Lanka has been to increase alcohol excise duties annually in 3Q, prior to the national budget.

Prior to October 2014 alcohol industry was taxed under Value Added Tax (VAT), Nation Building

Tax (NBT) and Excise Duty. However, the National Budget 2015 consolidated excise duties for the alcohol (and tobacco) industry, resulting in the removal of VAT, NBT and merging VAT ,NBT with excise duty to be charged on manufacturer of alcohol. Subsequently, retailers were no longer able to claim their share of the input VAT, as alcohol producers were not in a position to issue a VAT claimable invoice, which resulted in halting selling of alcohol from October 2014 in major supermarkets (until June 2015) • Alcohol was sold at ~15% higher prices at supermarkets (until 2016 National Budget remove

VAT from retail trade), with retailers largely passing on the VAT cost to consumers, (subsequent to receiving approval from the Consumer Affairs Authority (CAA), as alcohol previously subject to a maximum retail price. Sales through modern retail trade accounts for ~4% of LION’s sales, with bulk being via standalone liquor stores, who are not liable for VAT

During 2015, excise duties were increased twice in October and November, resulting

in excise duty on strong beer increasing by an unprecedented 70% YoY to Rs.315 per bulk liter while that of mild beer increasing by 27% YoY to Rs.190 per bulk Liter. However tax increase on Arrack was lower at 25% YoY to Rs.1,850 per proof liter

The excise duty increase led to a notable volume dip in the beer industry primarily led by the strong beer, while arrack (and toddy) segments saw lesser pressure on volumes. This indicates there has been a shift of consumer demand from strong beer to hard alcohol after the excise duty hike in 2015. In October 2015, LION recorded a ~27% MoM dip in sales volume following the exercise duty increase

Licenses

. Going forward we believe it is unlikely the government would issue more beer licenses. In addition LION holds a strong brand image in the local market where it would be extremely difficult for any new entrant to captivate LION’s market share.

Lion Brewery Ceylon

Any form of advertising is prohibited by law

Excise duty revision on Alcoholic Beverage (Var %)

0

15

30

45

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Source: excise department of Sri Lanka

Sri Lanka Excise Duty Revisions on Alcoholic Beverages

2010 2011 2012 2013 2014 2015

Nov Oct Mar Oct YoY% Jul YoY% Oct Oct* YoY% Oct Nov YoY%

Beer - < 5% per bulk ltr 80 85 90 100 17.6 110 10.0 120 150 36.4 190 190 26.7

Beer - >/= 5% per bulk ltr 96 101 106 116 14.9 130 12.1 145 185 42.3 245 315 70.3

Molasses & Arrack (per proof ltr) 813 923 983 1,043 13.0 1,120 7.4 1,210 1,485 32.6 1,595 1,850 24.6

Foreign Liquor (per proof ltr) 953 1,063 1,123 1,183 11.3 1,250 5.7 1,370 1,700 36.0 1,860 2,030 19.4

Source: Excise Department of Sri Lanka *Consolidation of excise duties

0

10

20

30

40

Mar-12 Sep-13 Mar-15

Beer - Alchol >=5%Arrack - Proof Ltr

Local alcohol is amongst the highest taxed


EQUITY REPORT TITLE | Date EQUITY REPORT TITLE | Date A CT HOLDINGS GROUP AND CLSA GROUP COMPANY 7


Outlook

Beer consumption is expected to witness a temporary decline in the near term owing to sharp rise in excise duties coupled with fiscal tightening measures. Consequently, we expect a rise in beer to hard liquor substitution with excise duties on beer increasing significantly above those on hard liquor, which would in turn impact LION’s volume. This could also result in a slow down in overall domestic consumption subsequent to its boom in 2015 which came after three consecutive years of contractions. However the beer industry in the past has been resilient to economic fluctuations due to its inelastic nature and low per capita consumption levels in Sri Lanka

In the medium to long run, the local economic environment is not expected to witness volatilities similar to the pre-conflict period and also given the relatively inelastic nature of the beer industry we expect the industry to remain resilient to long term impact and gradually move into a sustainable growth trajectory. Furthermore Growth in GDP per capita and increased urbanization is likely to drive volume growth for LION going forward

Lion Brewery Ceylon

Beer industry to remain resilient to long term

impacts

Source: CBSL/ LION

LION: Revenue (Rs bn), Sri Lanka: GDP Per Capita (US$)

Key Lion Brands (625ml Bottle) Asia Pacific Brewery *Brands (625ml Bottle)

Beer Type Rs. Beer Type Rs.

Lion Trio Barron's

Lion Lager Mild 200 Barron's Lager Mild 210

Lion Strong Strong 300 Baron's Strong Brew Strong 310

Lion Stout Strong 310

Carlsberg Bison Strong 300

Carlsberg Beer Mild 230

Carlsberg Special Brew Strong 330

Distilleries Co. of Sri Lanka (DIST)

Arrack (180ml bottle) 330

Likely to witness a temporary slowdown in

beer volumes

Estimated GDP growth 2016E (%)

Source: IMF

4

5

6

7

8

Source: CT CLSA

0

10

20

30

40

2,000

2,500

3,000

3,500

4,000

2010 2011 2012 2013 2014 2015

GDP Per Capita (LHS) LION Revenue

Sri Lanka : Urban Population Growth (%)

0.8

0.9

1.0

2006 2008 2010 2012 2014

2012 = -2.7% YoY

Source: World Bank

Per Capita Beer Consumption (Liters)

0

15

30

45

Source: Merrill Lynch Report ‘Global Beer Primer 2014’

via; Canadean

Prices as at 25 April 2016


Outlook

Currently, per capita beer consumption in Sri Lanka is ~5 liters, which is relatively low compared to regional Asian peers thereby presenting growth opportunities for LION. Given Sri Lanka’s rising GDP per capita and significant rise in tourist arrivals, it is likely that soft alcohol consumption would rise in the medium term to long term • Rise in tourist arrivals likely to add impetus to LION’s volume growth - there is a strong

positive correlation between tourist arrivals and beer volumes. With the cessation of the war, tourist arrivals in Sri Lanka grew at a CAGR of +28% since 2009 to record ~1.5mn in 2014 while total beer volumes rose at a CAGR of +18% during the same period. We forecast tourist arrivals to grow 23% YoY to 2.2mn in 2016E and 15% YoY to 2.5mn in 2017E

Financial Review

Revenue

LION’s revenue increased at a 5-year CAGR of +33% during FY10-15, mainly driven by excise duty led price revisions and rise in volumes • Volumes grew at a 5-year CAGR of +18% to 103mn liters during 2009-2014, led by the

strong beer segment, which rose at a CAGR of +22% to 91mn liters BY 2014. This was partly due to shift from hard alcohol to strong beer as the latter was priced lower. Meanwhile, mild beer volumes remained flat over the period

• Since 2013 up to now, the price of strong beer has increased by on average ~19% YoY per

year while mild beer has increased ~10% YoY • Meanwhile in 3Q16, revenue declined -4% YoY and -16% QoQ to Rs.8,229mn – the lowest

revenue since 2Q15 and the first YoY decline on record (since 1Q09), amidst a notable drop in volumes subsequent to the sharp excise duty led price revisions. During October 2015, LION recorded a -27% MoM dip in sales volume, following the exercise duty increase

Gross and operating profits

LION’s Gross Profit rose at a 5-year CAGR of +26% during FY10-FY15, mainly driven by revenue growth and higher cost efficiencies amidst the full production of beer locally

Cost of sales increased at a CAGR of +35% over FY10-FY15, primarily led by excise duty increases which comprised ~68% of cost of sales in FY15. LION’s excise duty component rose at a CAGR of ~+36% over the period FY12-FY15 whilst raw material costs increased at a CAGR of ~+8% during the same period. LION uses rice as its main raw material to produce Lion range beers, whilst imported Malt is used for the Carlsberg range. However, Currency depreciation has not been a significant factor in driving costs of sales.

Lion Brewery Ceylon

Sri Lanka: Tourist Arrivals and Beer Volumes (mn)

Source: SLTDA/Excise Department

25

75

125

400

800

1,200

1,600

2005 2008 2011 2014

Tourist Arrivals (LHS)

Beer Volumes

Note: Beer volume data available only up to 2014


LION: Revenue (Rs bn) and Variance YoY (%) LION: Beer production volumes (Liters mn)

Source: LION

0

20

40

60

5

15

25

35

FY10 FY11 FY12 FY13 FY14 FY15

Revenue (LHS) Var YoY

0

25

50

75

100

2009 2010 2011 2012 2013 2014

Alchohol content > 5% Alchohol content < 5%

Revenue increased at a CAGR of +33% during

FY10-FY15

Price Change of Lion Strong Beer (%)

200

240

300

10

15

20

25

30

160

210

260

310

Oct-14 Oct-15 Nov-15

Lion Strong (LHS) Growth

Source: CT CLSA

GP increased at a CAGR of +26% during FY10-FY15


LION’s gross margins deteriorated from 33% in FY11 to 23% in FY14 due to importing of

beer during the period to meet the local demand amidst capacity constraints where the importing duty costs were significant. • Since then, LION witnessed gross margins improving to 25% by FY15 and to 26% for 1-

3Q16, largely due to the full production of beer at Biyagama Factory and sound procurement practices

• In addition, there is a rising trend towards Can beer (vs. Glass bottle) which yields lower

margins due to inability to recycle. This has been mainly due to convenience and portability. • General practice in Sri Lanka has been to pass on the excise duty increases to end

customers with a slight margin to the manufacturer. In 2015, total excise duty increase was Rs.81 for a 625ml Lion Strong beer while the price increase has been Rs.100 to the end customer inclusive of VAT

Lion Brewery Ceylon

Gross margin declined during FY11-FY14 due to

importing of beer

• Gross profit amounted to Rs.2,215mn in 3Q16 (unchanged YoY and -13% QoQ), whilst the GP margin rose to 26.9% - its highest level since 3Q12. 1-3Q16 GP margin of 25.8% (vs. 26.2% in 1-3Q15)

LION’s EBIT rose at a 5-year CAGR of +33% during FY10-FY15 mainly driven by the benefit of GP expansion. However, EBIT margin reduced to 10.7% in FY15 (vs. 11.0% in FY10)

• Operating expenditure however grew at a CAGR of +28% through FY10-FY15 led

by the expenses related to capacity expansion program which started in FY12. In addition operating expenditure rose by +28% YoY in FY15 to Rs.4,659mn (vs +6% YoY in FY14) partly due to the exemption from the VAT system (all alcohol and tobacco businesses) which costed the company as a result of the unclaimable VAT

• Group EBIT was Rs.980mn in 3Q16 (+6% YoY though -25% QoQ), resulting in a quarterly EBIT margin of 11.9% (vs. 10.8% in 3Q15 and 13.2% in 2Q16). 1-3Q16 EBIT margin of 12.3% (vs. 11.4% in 1-3Q15)

LION’s Effective Tax Rate (ETR) stood at 37% in FY15 (vs. 39% in FY14, 34% in 1-3Q16) - Company is liable to pay a corporate tax on top of the excise duty

LION: Operating Expenses (Rs bn)

Source: LION

Other Operating Expenditure rose at a

CAGR of +22% through FY10-FY15

LION: Gross Profit (Rs bn) & GP Margins (%)

Source: LION

LION: GP Margins (%) and EBIT Margins (%)

LION: Effective Tax Rate (%)

Source: LION

Source: LION

20

23

26

29

32

35

2

4

6

8

10


GP (LHS) GP Margins (%)

4

8

12

16

15

23

31

1Q13 1Q14 1Q15 1Q16

10

15

20

25

0

1

2

3

4

5


Administration Expenses

Selling and Distribution

Opex % Percentage of Sales (RHS)

32

34

36

38

40

42

FY11 FY12 FY13 FY14 FY15 1-3Q16


Financial Review

LION’s FY15 recurring net profits increased to Rs.1,819mn (+35% YoY, FY10-FY15 CAGR of +25%) driven primarily by improving operating earnings • 1-3Q16 net profit rose by +9% YoY to Rs.1,728mn due to improving operating

margins. However, earnings growth was partly hindered by the growth in finance costs (+50% YoY to Rs.902mn) and decline in volumes subsequent to excise duty increases

Debt and Net Finance Costs

LION’s net debt position amounted to Rs.6,336mn as at 31 March 2015 vs. Rs.841mn as at 31 March 2010 (net debt to equity of 80% in FY15) partly due to the acquisition of Millers Brewery and capacity expansion. However, as at 31 Dec 2015 net debt position declined by -18% to Rs.5,181mn • Accordingly net interest cost rose by ~5x times during FY15 to Rs.598mn from

FY14. Furthermore, during 1-3Q16 net interest cost rose by +50% YoY to Rs.706mn

• In 2013 and 2014 LION issued debentures (Rated Unsecured Redeemable Debentures) to raise Rs.3bn and Rs.2bn respectively for a period of five years to fund the capacity expansion program and to settle a short term loan facility. By 31st Dec 2015 LION redeemed Rs.402mn worth of debentures of the 2013 issue

LION has maintained a steady annual dividend of Rs.4 per share since FY11 - dividend

payout ratio of 18% in FY15 (vs. 38% in FY11)

During FY09, LION raised Rs.1.2bn via rights issue, to reduce the high gearing level that resulted from investment in South Asian Breweries Pte Ltd – Singapore (SABL) which was funded with short-term borrowings. SABL wholly owned Carlsberg India Private Limited, India

• However in FY12 LION disposed the investment in Carlsberg India resulting a net

cash position (at book value of Rs.2.2bn)

Capital Expenditure

LION’s capital expenditure has been on an uptrend where it peaked in FY15 to

Rs.4,053mn with company carrying out a major capacity expansion program during FY12-FY15. In FY13, new brewhouse was completed, whilst in FY14, capacity was increased in the processing area. Furthermore, LION commissioned the new bottling and canning lines during FY15 which completed majority of the capacity expansion

Going forward, the company expects to increase the capacities on a need only basis within the processing, utilities and other support sections. Hence capital expenditure is expected to decline gradually. The production plant is capable of producing up to 2hL/yr, with a current utilization of only ~50%

Lion Brewery Ceylon

2008 2009 2010 2011 2012 2013 2014 2015

SINS Revenue 13,734 11,914 16,029 22,032 25,441 25,486 29,700 36,711

Revenue Growth - % YoY -0.3 -13.3 34.5 37.5 15.5 0.2 16.5 30.3

GDP Growth - % YoY 6.0 3.5 7.0 12.6 21.0 9.8 7.3 6.0

Per Capita Income - % YoY 25.0 0.3 16.5 13.4 7.6 7.7 4.3 1.4

Credit to Private Sector - % YoY 7.0 -5.8 24.9 34.5 17.6 7.5 8.8 25.1

Average Weighted Lending Rate 18.9 15.7 10.2 9.4 12.4 13.3 9.1 11.0

Annual Average Inflation % YoY 22.6 3.5 6.2 6.7 7.6 6.9 3.3 0.9

-20

0

20

40

-20

-10

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013 2014 2015

Revenue Growth - % YoY Credit to Private Sector - % YoY

LION: Net Profit (Rs bn) and NP Margin (%)

Source: LION

4

5

6

7

8

0.4

0.8

1.2

1.6

2.0

FY10 FY12 FY14

NP (LHS) NP Margins

LION: Net Debt (Rs bn) and Net Debt to Equity (%)

Source: LION

LION: Capex (Rs bn) and Capex to Revenue (%)

Source: LION

-25

15

55

95

135

-2

0

2

4

6

8

FY10 FY12 FY14 1-3Q16

Net Debt (LHS) Net Debt to Equity

0

6

12

18

0

1

2

3

4

5

FY10 FY12 FY14 1-3Q16

Capex (LHS) Capex to Revenue

Significant increase in debt levels amidst

acquisition of Millers Brewery and capacity

expansion

LION: Debenture Issue

Debenture Category

Amount Rs.('000)

Interest Rates (Per

Annum)

Category 1- Type A* 201,200 AWPLR +

0.20%

Category 1- Type B* 201,200 AWPLR +

0.40%

Category 1- Type C 201,200 AWPLR +

0.60%

Category 1- Type D 201,200 AWPLR +

0.80%

Category 1- Type E 201,200 AWPLR +

1.10%

Category 2 - Type F 598,200 13.50%

Category 2 - Type G 598,200 13.75%

Category 2 - Type H 797,600 14.00%

Category 2 - Type I 2,000,000 7.85%

Source: LION


Financial Review On Oct 2014 (during FY15), LION together with its subsidiary Pearl Springs (Private) Limited

acquired 100% stake of Millers Brewery Limited (MBL) and its trademarks for a total consideration of Rs.5bn. Acquisition has hence led to two players in the beer segment

• MBL’s beer product portfolio included Three Coins, Sando Stout and Irish Dark etc. LION

amalgamated the brewing and packaging of MBL brands at the manufacturing facility in Biyagama to achieve better synergies. In addition, the company anticipates to sell the plant and machinery used for brewing and packaging at the Millers Brewery premises at Meegoda (Rs.58mn fair value as at 31 Mar 2015). At the moment, the board has decided to retain the MBL land (23 acres; an estimated value of Rs.900mn) and building at Meegoda, ~28km of Colombo.

Lion Brewery Ceylon

2008 2009 2010 2011 2012 2013 2014 2015

SINS Revenue 13,734 11,914 16,029 22,032 25,441 25,486 29,700 36,711


GDP Growth - % YoY 6.0 3.5 7.0 12.6 21.0 9.8 7.3 6.0





-20

0

20

40

-20

-10

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013 2014 2015


FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 7 YR

CAGR (%)* 1-3Q16 YOY%

Revenue (Rs mn) 5,207 6,095 7,919 11,250 17,649 22,192 25,804 32,350 35.6 27,168 18.8

Gross Profit (Rs mn) 1,717 1,949 2,594 3,679 5,053 4,979 5,987 8,132 29.6 7,000 16.8

EBIT (Rs mn) 384 473 873 1,553 2,529 1,543 2,353 3,473 44.3 3,330 27.2

Net Finance Costs (Rsmn) -230 -391 -240 -158 -376 39 -152 -598 17.3 -706 17.4

Profit Before Tax (Rs mn) 154 82 633 1,395 2,153 1,582 2,201 2,875 62.9 2,624 18.6

Net Profits Reported (Rs mn) 135 45 597 832 1,262 1,046 1,343 1,330 46.5 1,727 9.2

Net Profits Recurring (Rs mn) 135 45 597 832 1,262 1,046 1,343 1,819* 54.3 1,727 21.0

Earnings Per Share (Rs) 1.7 0.6 7.5 10.4 15.8 13.1 16.8 22.7 54.3 21.6 21.0

GP Margin (%) 33.0 32.0 32.8 32.7 28.6 22.4 23.2 25.1 N/A 25.8 -0.4

EBIT Margin (%) 7.4 7.8 11.0 13.8 14.3 7.0 9.1 10.7 N/A 12.3 0.8

Total Opex (Rs mn) 1,333 1,476 1,722 2,126 2,524 3,436 3,634 4,659 23.2 3,669 9.1

Total Opex as a % of Revenue 25.6 24.2 21.7 18.9 14.3 15.5 14.1 14.4 N/A 13.5 -1.2

Effective Tax Rate (%) -15.9 -8.5 -1.2 40.4 41.4 33.9 39.0 36.7 N/A 34.2 -1.3

Net Debt / (Cash) (Rs mn) 1,674 2,265 841 996 -1,258 5,301 3,113 6,336 24.8 5,181 -28.0

Net Debt to Equity (%) 78.4 103.8 21.1 18.7 -24.1 89.7 44.9 79.9 N/A 57.3 -30.6

Interest Cover (x) 1.7 1.2 3.6 9.9 6.7 3.2 3.0 4.2 N/A 4.7 N/A

Capex (Rs mn) 172 210 118 669 1,243 3,645 3,968 4,053 69.3 1,093 -69.3

Source: LION

In 2013 LION raised Rs.3bn through a debenture issue (Rated Unsecured Redeemable Debentures). Debentures were listed on CSE and interest is paid on 30th June, 30th September, 31st December and 31st March for a period of 5 years. The company used the funds utilized through the debenture to fund the expansion program

In addition in November 2014, LION carried out a debenture issue (Rated Unsecured Redeemable Debentures) to raise Rs.2bn, which was listed December 2014 in CSE with a 7.85% fixed rate. The interest is paid 30th September and 31st March for a period of 5 years. LION used these funds to settle a short term loan facility to benefit from low interest rate environment during that time

LION: Key Financials

Millers Brewery Limited was acquired for Rs5bn

*FY15 Net profit includes Rs 302 mn on the loss of disposal of old canning plant and impairment losses on the canning line, Negative Goodwill of Rs 154mn in group accounts from purchase

consideration of MBL Rs 340mn - Provision for irrecoverable VAT


Outlook and Valuations

LION’s NP forecast at Rs.2,055mn for FY16E (+13% YoY). 1-3Q16 recurring net profits stood at Rs.1,727mn (+21% YoY) driven primarily by rise in disposable income and improved consumer sentiment. Meanwhile, we expect 4Q16E earnings to decline -16% YoY and -28% QoQ to Rs.328mn due to the decline in volumes, subsequent to sharp excise duty led price increases in 3Q16 (particularly for strong beer). Further, FY17E NP is forecast to decline -26% YoY to Rs.1,515mn on account of slower revenue growth. Meanwhile, FY18E NP is projected at Rs.2,119mn (+40% YoY off a low base), attributable to the expected recovery in volumes, improving margins and decline in interest costs

Revenue forecast at Rs.35,248mn for FY16E (+9% YoY; Rs.27,168mn for 1-3Q16, +19% YoY) and Rs.36,577mn for FY17E (+4% YoY), with the slowdown amid the expected decline in volumes.

• Volume decline forecast at -12% YoY in FY16E to 96mn liters (volume forecast to

decline for the first time since FY10) and -15% YoY to 82mn Liters in FY17E

Meanwhile, we expect revenue to grow to Rs.45,346mn in FY18E (+24% YoY) amidst excise led price revisions and a moderate rebound in volume growth of +7% YoY to 87mn liters. • We have forecast an average 22% YoY excise duty led price revision in FY17E (vs.

8% FY15, 24% in FY16E,) and 16% YoY for FY18E

• Currently LION’s sales mix remain at ~80% strong beer (vs. ~90% prior to the excise duty hikes in 2015). However, in the medium to long run we expect strong beer mix to revert to ~85% level given the relatively inelastic nature of strong beer. Further, we expect LION to slightly increase its market share given its ability to wither price competitiveness compared to smaller players. In addition, we expect LION to gradually add its newly acquired brands from Millers Brewery to its portfolio which include Three Coins, Sando Stout and Irish Dark among others

• We expect export revenue to grow at a 2 year average of +11% through FY16E-FY18E mainly led by the Maldivian market, amounting to ~1% of group revenue (broadly unchanged from FY15)

Gross profit forecast at Rs.9,065mn for FY16E (+11% YoY), Rs.8,724mn for FY17E (-4% YoY) and 10,926mn for FY18E (+25% YoY)

• GP margin forecast to improve to 25.7% for FY16E (vs. 25.1% FY15; 25.8%

1-3Q16) amidst higher growth in topline. However, we expect FY17E GP margin to decline to 23.9% due to slower growth in revenue and general rise in costs. Meanwhile, FY18E GP margin is forecasted to improve to 24.1%, with the general practice of passing down increasing costs to end consumers expected to continue

EBIT forecast at Rs.4,106mn for FY16E (+18% YoY), Rs.3,403mn for FY17E (-17% YoY) and Rs,4,390mn (+29% YoY)

• EBIT margin expected at 11.6% for FY16E (vs.10.7% FY15; 12.3% 1-3Q16) amidst

improving GP Margin. However we forecast FY17E EBIT margin to decline to 9.3% due to GP margin erosions. Meanwhile in FY18E margin is forecasted to improve to 9.7% amidst GP margin expansion, improvement in operation efficiencies with the production of full range of beers in Biyamga production factory and sound procurement practices.

• We forecast total opex as a % of revenue to record at 14.1% in FY16E, 14.6% in FY17E and 14.5% in FY18E

Capital expenditure is expected to decline as LION completed its major expansion

initiatives by FY15. Therefore we forecast capex to record broadly at Rs.1.4bn through FY16E-FY18E (-56% YoY in FY16E; vs. Rs.3.2bn FY15, Rs.1.1bn 1-3Q16)

• Depreciation forecast at Rs.954mn in FY16E (+32% YoY), Rs.1,005mn in FY17E

(+5% YoY) and Rs.1,075mn in FY18E (+7% YoY). In addition, capex to revenue is forecasted to decline to 3.1% in FY18E (vs. 3.8% FY17E, 4.0% FY16E and 9.9% FY15)

Lion Brewery Ceylon

Net Profit to grow +13% YoY in FY16E

Revenue growth to slowdown in FY17E, and

pick up in FY18E

Margins to decline amidst likely drop in

volumes

Capex forecasted to decline



Finance costs expected at Rs.1,060mn for FY16E (+29% YoY) on account of higher debt accumulated for expansion program (through FY13-FY15). Furthermore, in FY17E finance costs expected at Rs.1,153mn (+9% YoY) amidst likely increase in interest rates. However, in FY18E finance expense is forecast to decline -26% YoY to Rs.858mn with the expected paying off of debts

We forecast debt to equity to decline to 35.8% in FY18E (vs. 48.0% as at 31 December 2015). In addition, company expects to increase more long term debt in the debt composition. Therefore we expect LION to increase the non current portion of debt through FY17E-FY18E to 50% of total debt (22% as at 31 December 2015)

Group’s ETR expected at 40.0% in FY17E and FY18E (vs. 37.0% in FY16E, 36.7% in FY15, 34.2% 1-3Q16) without projecting capital allowance for any upgrading initiatives

Lion Brewery Ceylon

LION: Net Profits (Rs bn) & NP Margins (%)

Source: LION/CT CLSA

LION: Profit Margins (%)


LION: Key Ratios


FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Revenue Growth (%) 42.1 56.9 25.7 16.3 25.4 9.0 3.8 24.0

GP Margins (%) 32.7 28.6 22.4 23.2 25.1 25.7 23.9 24.1

Operating Profit Margin (%) 13.8 14.3 7.0 9.1 10.7 11.6 9.3 9.7

PBT Margins (%) 12.4 12.2 7.1 8.5 8.9 9.3 6.9 7.8

NP Margins (%) 7.4 7.2 4.7 5.2 5.6 5.8 4.1 4.7

Opex as a % of Revenue 19.0 15.6 15.6 14.1 15.1 14.1 14.6 14.5

Effective Tax Rate (%) 40.4 41.4 33.9 39.0 36.7 37.0 40.0 40.0

Capex forecasted to decline

3

5

7

1

1

2

2

3

FY12 FY14 FY16E FY18E

Net Profits (RHS) NP Margins

4

9

14

19

10

15

20

25

30

FY12 FY14 FY16E FY18E

GP Margins (LHS) EBIT Margin



The LION share underperformed the market during the past year, declining -29% YoY and -15% during the past three months (vs. the ASI’s -10% and +2% respectively). Meanwhile, the share outperformed the broader market in the past ten years, rising at a CAGR of +21% (vs. ASI’s +12%)

Subsequent to the recent sharp price declines, material further downside risk seems

limited. Despite the recent fall in prices, near term valuations seem pricey at 23.9x FY17E amid negative EPS expectations of -26% YoY, led by sharp decline in volumes. EPS growth forecast to rebound +40% YoY in FY18E, resulting in a PER multiple of 17.1x and ROE of ~17%. Valuations seem comparatively rich vs. regional players

Nevertheless, LION’s premium multiples may be partly justified by its dominant market

position with ~86% market share and significant upside growth potential in the Sri Lankan beer market. We expect the local beer industry to recover in the medium term subsequent to near term growth being hampered by significant excise duty hikes, amid the rise in GDP per capita and urbanization coupled with higher tourist arrivals. Sri Lanka’s low per capita consumption of beer at just 5 litres (vs. ~18 litres regionally) indicates there is much upside scope for the industry

The highly illiquid nature of the share could however act as a deterrent to investors. LION’s reported public float is at 13.9% and one year average daily turnover is US$52,000, boosted by share crossings). LION currently meets CSE’s minimum public float requirement under the condition a market cap of Rs.5bn of the firm’s public holding is among a minimum of 500 public shareholders, whilst maintaining a public holding of ~10%

LION seems well positioned to be a key beneficiary of the anticipated growth in local

beer market given its strong brand equity, superior distribution network coupled with its recent capacity expansion and partnership with JV Carlsberg, providing the company global technical expertise and procurement synergies. LION is expected to solidify its market position with the threat of new entrants remaining low

Medium to long term investors favouring the consumption driven growth story could

accumulate the share at current prices, to gain exposure to the only listed beer manufacturer on the CSE

Lion Brewery Ceylon

Current multiples are slightly more expensive

than regional peers

Direct beneficiary of rising GDP per capita,

urbanization and increase in tourist

arrivals

Regional Relative Valuations

Source: Bloomberg

Relative Valuations: Key Inelastic Demand Industry Leaders

LION

FY17E DIST

FY17E CTC

2016E

MPS (Rs) 452.4 214.7 1,059.6

Market Cap (US$ mn)

249.6 444.2 1,368.8

EPS (Rs) 18.9 23.2 63.4

EPS Growth (%) -26.3 6.1 12.5

P/E Ratio (X) 23.9 9.3 16.7

Gros Dividend Yield (%)

0.7 1.6 5.9

Return on Equity (%)

13.8 11.0 411.6

Est. Free Float (%) 12.2 41.6 15.9

3M Avg Daily T/O (US$)

51,669 57,032 105,349

Regional Ratio Comparison

Company Name Mkt Cap Key

Players

Est. Market

share

EPS Growth (%)

PER(X) Dividend Yield(%)

ROE (%)

(US$ mn) No % FY17E FY17E FY17E FY17E

Carlsberg Malaysia 1,068 2 43 5.4 17.4 5.2 81.1

United Breweries Limited India 3,006 4 53 30.9 52.2 0.2 16.2

Thai Beverage Company Thailand 13,536 4 32 7.9 18.3 4.0 20.1

Guinness Anchor Berhad Malaysia 1,155 2 52 5.3 16.6 6.1 71.9

LION Brewery 249.6 2 86 -26.3 23.9 0.7 13.8

Source: Bloomberg

Company Name Revenue(US$ mn) GP Margin (%) NP Margin (%) Effective Tax Rate (%) FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 Carlsberg Malaysia 500 427 36.3 36.6 12.9 13.0 20.9 22.4

United Breweries Limited India 700 767 n/a n/a 5.3 5.5 32.4 31.3

Guinness Anchor Berhad Malaysia 497 508 35.9 35.5 12.3 12.2 25.4 26.8

Thai Beverage Company Thailand 4,990 5,031 29.2 29.2 13.4 15.4 17.5 14.6

Lion Brewery 179 225 23.2 25.1 5.2 5.6 39.0 36.7

Major downside risks for the valuations are further unexpected decline in beer volumes due to unanticipated excise duty changes or increase in hard liquor substitution. Major upside risks are more favorable excise duty changes going forward so that hard liquor and beer would have a equal playing field in terms of prices which would in turn increase the demand for beer

Source: CT CLSA


Forecast Summarized Financials

Lion Brewery Ceylon

2008 2009 2010 2011 2012 2013 2014 2015

SINS Revenue 13,734 11,914 16,029 22,032 25,441 25,486 29,700 36,711


GDP Growth - % YoY 6.0 3.5 7.0 12.6 21.0 9.8 7.3 6.0





-20

0

20

40

-20

-10

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013 2014 2015


LION: Income Statement Extracts (Rs mn)

Source: LION Annual Report, CT CLSA

LION: Balance Sheet Extracts (Rs mn)

Source: LION Annual Report, CT CLSA Research

FY11 FY12 FY13 FY14 FY15 FY16E FY17E

Non Current Assets 5,745 4,890 7,999 11,915 18,789 19,523 19,835

Property Plant & Equipments 3,537 4,880 7,991 11,658 14,584 15,352 15,664

Intangible Assets 21 10 8 257 4,206 4,171 4,171

Current Assets 3,473 5,237 9,090 12,149 7,732 10,293 10,207

Inventories 997 1,317 2,407 2,695 2,798 3,099 3,493

Trade Receivables 1,364 1,072 2,855 2,383 1,874 2,169 2,352

Cash in hand and t bank 1,100 2,848 2,233 6,857 2,312 4,169 3,482

Total Assets 9,218 10,127 17,090 24,065 26,521 29,815 30,042

Stated Capital 2,538 2,538 2,538 2,538 2,538 2,538 2,538

Revenue Reserves 1,937 1,952 2,653 3,675 4,669 6,413 7,672

Total Equity 5,336 5,209 5,910 6,932 7,927 9,670 10,929

Non-Current Liabilities 2,442 1,745 3,593 6,404 9,648 9,174 10,045

Long Term Borrowings 1,921 1,104 2,724 2,308 2,875 2,466 2,488

Current Liabilities 1,440 3,172 7,586 10,729 8,946 10,971 9,068

Trade & Other Payables 248 598 786 774 796 959 1,112

Short Term Borrowings 55 328 1,364 6,862 4,244 5,753 3,731

Bank Overdrafts 120 158 3,446 801 1,529 1,200 1,000

Total Equity and Liabilities 9,218 10,127 17,090 24,065 26,521 29,815 30,042

FY14 FY15 %YoY FY16E %YoY FY17E %YoY FY18E %YoY

Revenue 25,804 32,350 25 35,248 9 36,577 4 45,346 24

Cost of Sales -19,818 -24,218 22 -26,183 8 -27,853 6 -34,420 24

Gross Profit 5,987 8,132 36 9,065 11 8,724 -4 10,926 25

Operating Income 15 239 >+100 24 -90 24 0 24 0

Operating Expenses -3,649 -4,898 34 -4,983 2 -5,345 7 -6,559 23

EBIT 2,353 3,473 48 4,106 18 3,403 -17 4,390 29

Net Finance Cost -152 -598 >+100 -844 41 -878 4 -858 -2

Profits Before Tax 2,201 2,875 31 3,262 13 2,524 -23 3,532 40

Income Tax -858 -1,056 23 -1,207 14 -1,010 -16 -1,413 40

Net Profit 1,343 1,819 35 2,055 13 1,515 -26 2,119 40

Source: LION Annual Report, CT CLSA

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Non Current Assets 5,745 4,890 7,999 11,915 18,789 19,060 19,484 19,839

Property Plant & Equipment 3,537 4,880 7,991 11,658 14,584 15,060 15,484 15,839

Intangible Assets 21 10 8 257 4,206 4,000 4,000 4,000

Current Assets 3,473 5,237 9,090 12,149 7,732 11,031 12,425 13,724

Inventories 997 1,317 2,407 2,695 2,798 3,013 3,358 4,055

Trade Receivables 1,364 1,072 2,855 2,383 1,874 2,125 2,305 2,982

Cash in hand and t bank 1,100 2,848 2,233 6,857 2,312 5,038 5,883 5,803

Total Assets 9,218 10,127 17,090 24,065 26,521 30,091 31,909 33,563

Stated Capital 2,538 2,538 2,538 2,538 2,538 2,538 2,538 2,538

Revenue Reserves 1,937 1,952 2,653 3,675 4,669 6,404 7,679 9,478

Total Equity 5,336 5,209 5,910 6,932 7,927 9,662 10,936 12,736

Non-Current Liabilities 2,442 1,745 3,593 6,404 9,648 9,485 10,928 11,533

Long Term Borrowings 1,921 1,104 2,724 2,308 2,875 2,466 3,168 3,559

Debentures - - - 2,799 4,598 3,798 3,597 3,396

Current Liabilities 1,440 3,172 7,586 10,729 8,946 10,944 10,045 9,295

Trade & Other Payables 248 598 786 774 796 933 1,068 1,415

Short Term Borrowings 55 328 1,364 6,862 4,244 5,753 4,751 3,559

Bank Overdrafts 120 158 3,446 801 1,529 1,200 1,000 1,000

Total Equity and Liabilities 9,218 10,127 17,090 24,065 26,521 30,091 31,909 33,563


Major Shareholder Movements

Lion Brewery Ceylon

Major Shareholder Movements as at 31st December 2015

*Changes since December 2014

Exited Top 20 since 31 December 2014 (Name & No of shares held): NEWGREENS LIMITED : 83,200, UNION

ASSURANCE PLC/ACCOUNT NO.05 : 71,527 shares, FERN HOLDINGS (PRIVATE) LIMITED : 56,590 shares, K L

Udayananda : 55,179 shares

^Route One Funds Collectively sold a total – 791,590 shares

No Name No.of Shares % Change (Shares)*

Comment

1 Ceylon Beverage Holdings Plc 41,798,788 52.25 - CARS Related Party

2 Carlsberg Brewery Malaysia Berhad 20,000,686 25.00 21,000 Joint Venture

Partner

3 Carson Cumberbatch Plc A/C No.2 4,107,793 5.13 - CARS Related Party

4 Wasatch Frontier Emerging Small Countries Fund 2,120,243 2.65 -136,000

5 Barca Global Master Fund Lp 1,473,118 1.84 -

6 Carson Cumberbatch Plc A/C No. 01 1,400,758 1.75 - CARS Related Party

7 Bukit Darah Plc A/C No 2 1,300,000 1.63 - CARS Related Party

8 Route One Offshore Master Fund L.P. 1,254,414 1.57 -322,074

9 Gf Capital Global Limited 1,205,199 1.51 -60,000

10 Route One Fund 1,L.P. 1,148,572 1.44 -427,916

11 Verdipapirfondet Odin Emerging Markets 500,000 0.63 New Entrant

12 Wasatch Frontier Emerging Small Countries Cit Fund 410,139 0.51 -

13 Harvest Funds (Cayman) - Asia Frontier Equity Fund 322,394 0.40 -8,600

14 Mrs.Priyani Dharshini Ratnagopal 300,000 0.375 -

15 Florida Retirement System 212,700 0.27 New Entrant

16 Morgan Stanley And Co Intl Plc - Own A/C 200,000 0.25 -

17 Commonwealth Pen Pub School 166,193 0.21 -

18 Portelet Limited 161,920 0.20 -

19 Tranz Dominion,L.L.C. 129,251 0.16 -

20 Russell Institutional Funds Public Limited Company 119,000 0.15 New Entrant

Total Top 20 78,331,168 97.91

LION: Trailing Twelve Month PER (X) : FY12-FY16YTD

Source: CT CLSA 0

400

800

1200

04-Jan-05 10-May-11 14-Jan-16

Relative Share Price Movement 2005- 2016YTD

ASI

LION

10

15

20

25

30

35

40

45

15-Feb-12 29-Nov-13 08-Sep-15

Source: CT CLSA

Trading & Sales

Lasantha Iddamalgoda [email protected] +94 11 255 2295 +94 77 778 2103 Dyan Morris [email protected] +94 11 255 2320 +94 77 722 4951 Manura Hemachandra [email protected] +94 77 261 4797 Rosco Todd [email protected] +94 77 262 7233 Dhammika de Silva [email protected] +94 77 356 2699

Arusha Michael [email protected] +94 77 395 6765

Nuwan Madusanka [email protected] +94 76 858 9722 Shirali Rodrigo [email protected] +94 11 255 2290

CT CLSA SECURITIES (PVT) LTD A Member of the Colombo Stock Exchange

4-14 Majestic City, 10 Station Road, Colombo 4, Sri Lanka

General: +94 11 255 2290 to 2294 Facsimile: +94 11 255 2289 Email: [email protected] Web: www.ctclsa.lk

A CT HOLDINGS GROUP AND CLSA GROUP COMPANY

Disclaimer : This document has been prepared and issued by CT CLSA Securities (Pvt) Ltd. on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated are accurate and the opinions given are fair and reasonable, neither CT CLSA Securities (Pvt) Ltd. nor any director, officer or employee, shall in any way be responsible for the contents. CT CLSA Securities (Pvt) Ltd. may act as a Broker in the investments which are the subject of this document or in related investments and may have acted upon or used the information contained in this document, or the research or analysis on which it is based, before its publication. CT CLSA Securities (Pvt) Ltd., its directors, officers or employees may also have a position or be otherwise interested in the investments referred to in this document. This is not an offer to buy or sell the investments referred to in this document. It is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this publication/communication, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek your own professional advice, including tax advice. The markets in which CT CLSA Securities (Pvt) Ltd. operates may not have regulation governing conflict of interest over preparation and publication of research reports (including but not limited to disclosure of perceived or actual conflict of interest) as may be found in more developed markets. Please contact your investment advisor / analyst should you require further information over the relevant regulation and particular disclosure over perceived or actual conflict of interest.

Research

Sanjeewa Fernando [email protected] +94 77 742 7439 Chayanika Ranasinghe [email protected] +94 77 237 9731 Yasas Wijethunga [email protected] +94 77 053 2059 Gayana Jayathilake [email protected] +94 11 255 2290 Maduranga Hettiarachchi [email protected] +94 11 255 2290 Ryan Jansz [email protected] +94 11 255 2290 Kavindu Ranasinghe [email protected] +94 11 255 2290

Consultant / Sales

Rohan Fernando [email protected] +94 11 255 2297 +94 76 778 2101

Documents

LION Brewery Ceylon