Thailand Initiating Coverage - RHB · PDF fileThailand Initiating Coverage See important disclosures at the end of this report 1 ... outperform the 6% pa expansion of the global energy

Thailand Initiating Coverage

See important disclosures at the end of this report 1

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31 May 2016 Consumer Cyclical | Consumer Services

Carabao Group PCL Buy

Target Price: THB48.00 Price: THB41.00

Long-term Opportunities In The Overseas Business Market Cap: USD1,149m Bloomberg Ticker: CBG TB

We expect Carabao to have a stronger presence, as its recent production expansion and intensive brand awareness campaigns can make it another Thai global player in the energy drink business. Earnings is expected to grow at a CAGR of 14.1% in 2016-2018 ahead of the industry’s 6%. Thus, we initiate coverage on the stock with a BUY and THB48.00 TP (17% upside) based on weighted average valuations of DCF and FY17F P/E.

Share Data Avg Daily Turnover (THB/USD) 38.3m/1.09m 52-wk Price low/high (THB) 32.3 - 44.0 Free Float (%) 25 Shares outstanding (m) 1,000 Estimated Return 17% Shareholders (%) Sathienthum Holdings Limited 25.0 Ms. Nutchamai Thanombooncharoen 24.0 Mr. Yuenyong Opakul 11.6 Share Performance (%) YTD 1m 3m 6m 12m Absolute 18.8 2.5 12.3 13.1 0.0 Relative 9.1 2.4 7.1 9.5 5.9 Source: Bloomberg

Source: Bloomberg

Source: Bloomberg

Bright export outlook. We opine that Carabao’s earnings can be driven by product exports. Key factors include rising health consciousness that may see energy drinks as an attractive alternative to carbonated drinks; numerous opportunities to penetrate potential new markets coupled with continuous growth in Cambodia, Laos, Myanmar and Vietnam (CLMV markets); and a canning line addition for exports in 2H16 that boosts total production capacity by 25%. Based on our total sales expansion forecast of 14.8% CAGR in 2016-2018, export sales may outperform at an average growth rate of 26% pa and see a rise in contribution to 39% in this period (2015: 29%).

Wider distribution network to boost local sales. Carabao’s domestic sales may see a moderate growth rate of 9% CAGR in 2016-2018 on a larger revenue base than exports. We expect the company to continue enjoying a local market share hike. Key drivers are a 2x increase in its cash van network and distribution centres (end-2015: nine centres and 113 vans) to reach customers in remote areas and traditional retail outlets throughout Thailand; and possible synergies with local modern grocery store CJ Express, which is owned by a key shareholder. This may be another distribution channel to improve its domestic revenue.

Stable margins likely. Typically, export products encounter selling price pressures to gain market share in new destinations. Yet, we expect Carabao’s improving business foundations at home to strengthen local sales, enable economies of scale production and stabilise profit margins. Also, it may be able to control opex, as the Chelsea Football Club (Chelsea FC) sponsorship may enrich brand awareness while costs range at 1.6-2.1% of total sales pa vis-à-vis its total budget of 9%. We expect EBIT and net margins to be stable at 19% and 16% respectively, allowing net profit to grow at 14.1% CAGR in 2016-2018.

BUY on a positive business outlook. Carabao’s overseas growth story seems attractive while its business expansion may solidify its local operations. Growth is likely to be still upbeat in the overall energy drinks business, which may expand 6% over the next three years. Our THB48.00 TP is derived from weighted average valuations of DCF and prospective FY17F P/E. The share price is trading at 24x FY17F P/E, still below the regional beverage sector average of 29x despite having earnings growth on par with peers. Key risks are consumption slowdown, uncertain orders from export markets, expansion plan delays, raw materials price volatility, weaker-than-expected opex controls and a possible increase in sugar tax on beverages.

Source: Company data, RHB

Forecasts and Valuations Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover (THBm) 7,448 7,753 9,298 10,775 11,725Reported net profit (THBm) 913 1,256 1,514 1,717 1,863Recurring net profit (THBm) 913 1,256 1,514 1,717 1,863Recurring net profit growth (%) 78.3 37.5 20.6 13.4 8.5Recurring EPS (THB) 1.13 1.26 1.51 1.72 1.86DPS (THB) 0.28 0.95 1.15 1.30 1.41Recurring P/E (x) 36.4 32.7 27.1 23.9 22.0P/B (x) 6.80 6.47 5.87 5.41 5.00P/CF (x) 156 22 20 20 19Dividend Yield (%) 0.7 2.3 2.8 3.2 3.4EV/EBITDA (x) 22.7 24.2 20.0 17.5 15.9Return on average equity (%) 26.2 20.3 22.8 23.6 23.6Net debt to equity (%) net cash net cash net cash net cash net cashOur vs consensus EPS (adjusted) (%) 4.4 2.2 (0.8)

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Carabao Group PCL (CBG TB)Price Close Relative to Stock Exchange of Thailand Index (RHS)

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Analyst Vatcharut Vacharawongsith +662 862 9736 [email protected]

http://www.efa.biz/

mailto:[email protected]

Carabao Group PCL Thailand Initiating Coverage



Financial Exhibits

Financial model updated on: 2016-05-30.

Asia Thailand Consumer Cyclical Carabao Group PCL Bloomberg CBG TB Buy Valuation basis DCF and prospective P/E. Key drivers Rising exports and expansion of its fleet of domestic cash vans. its fleet of domestic cash vans. Key risks

i. Slowdown in domestic consumption; ii. High operating expenses from brand marketing

overseas; iii. Uncertainty in purchasing orders in certain

export destinations. Company Profile Carabao Group (Carabao) is a holding company mainly invested in subsidiaries that are involved in the production, distribution, and sales and marketing of Carabao Dang energy drinks and START Plus Zinc sports drinks.


Financial summary Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring EPS (THB) 1.13 1.26 1.51 1.72 1.86EPS (THB) 1.13 1.26 1.51 1.72 1.86DPS (THB) 0.28 0.95 1.15 1.30 1.41BVPS (THB) 6.03 6.33 6.98 7.58 8.20Weighted avg adjusted shares (m) 810 1,000 1,000 1,000 1,000

Valuation metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring P/E (x) 36.4 32.7 27.1 23.9 22.0P/E (x) 36.4 32.7 27.1 23.9 22.0P/B (x) 6.80 6.47 5.87 5.41 5.00FCF Yield (%) (2.7) 4.3 3.4 4.7 5.1Dividend Yield (%) 0.7 2.3 2.8 3.2 3.4EV/EBITDA (x) 22.7 24.2 20.0 17.5 15.9EV/EBIT (x) 25.9 28.3 23.4 20.1 18.1

Income statement (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover 7,448 7,753 9,298 10,775 11,725Gross profit 2,510 2,860 3,412 3,921 4,260EBITDA 1,409 1,616 1,926 2,158 2,321Depreciation and amortisation (174) (236) (281) (284) (288)Operating profit 1,235 1,380 1,645 1,873 2,032Net interest (112) (2) 0 0 0Pre-tax profit 1,250 1,465 1,782 2,020 2,191Taxation (238) (209) (267) (303) (329)Minority interests (99) 0 0 0 0Recurring net profit 913 1,256 1,514 1,717 1,863

Cash flow (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FChange in working capital (79) (12) 219 47 60Cash flow from operations 213 1,877 2,014 2,049 2,211Capex (1,123) (115) (603) (103) (102)Cash flow from investing activities (1,114) (108) (603) (103) (102)Proceeds from issue of shares 4,343 0 0 0 0Dividends paid (279) (950) (964) (1,117) (1,243)Cash flow from financing activities 943 (920) (869) (1,117) (1,243)

Balance sheet (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal cash and equivalents 1,428 1,851 2,393 3,222 4,088Tangible fixed assets 4,754 4,667 4,993 4,815 4,632Intangible assets 17 16 16 16 16Total investments 143 108 104 100 97Total other assets 29 29 29 29 29Total assets 7,064 7,361 8,295 9,079 9,842Other liabilities 64 77 77 77 77Total liabilities 1,035 1,028 1,317 1,500 1,643Shareholders' equity 6,029 6,333 6,979 7,579 8,199Total equity 6,029 6,333 6,979 7,579 8,199Net debt (1,428) (1,851) (2,393) (3,222) (4,088)Total liabilities & equity 7,064 7,361 8,295 9,079 9,842

Key metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRevenue growth (%) 8.5 4.1 19.9 15.9 8.8Recurrent EPS growth (%) (2.6) 11.4 20.6 13.4 8.5Gross margin (%) 33.7 36.9 36.7 36.4 36.3Operating EBITDA margin (%) 18.9 20.8 20.7 20.0 19.8Net profit margin (%) 12.3 16.2 16.3 15.9 15.9Dividend payout ratio (%) 30.6 75.7 75.7 75.7 75.7Capex/sales (%) 15.1 1.5 6.5 1.0 0.9Interest cover (x) 11 842




Investment Merits We initiate coverage on Carabao with a BUY, based on the following:

i. Potential earnings growth. We expect Carabao to record a 14.1% earnings CAGR over 2016-2018, driven by a favourable outlook for its exports to existing destinations – particularly the CLMV markets. There, the company has strengthened its positioning as it penetrated into new overseas markets. It also increased the production capacity for manufacturing canned energy drinks in order to fulfil potential export demand. Carabao also launches new products such as carbonated energy drinks and flavoured energy drinks to serve new demand, while aggressively expanding its fleet of local cash vans and network of distribution centres throughout Thailand to improve domestic sales. We estimate export sales to increase at a 26% CAGR (2016-2018) vs 9% for domestic sales in the same period – this would still outperform the 6% pa expansion of the global energy drink industry.

ii. Stabilised profit margins. Carabao’s activities to grow overseas sales may pressure profit margins growth, due to both the pricing of its products (as overseas selling prices are lower vis-à-vis local prices) and marketing campaigns. However, we think this could be offset by the group’s improving business foundations domestically and, in our view, we expect economies of scale production levels to escalate on the back of this. We also expect Carabao to book stable EBIT and net profit margins of about 19% and 16% for respectively for 2016-2018.

iii. Undemanding valuations. We believe Carabao is a growth stock following its prospective market expansion. Its valuation has remained cheap. The stock is trading at 24x FY17F P/E, lower than its regional beverage peer mean of 29x. Meanwhile, we expect its 13% EPS growth next year to be level with the peer average. Comparing with other beverage stocks from Thailand, Carabao’s outlook is more positive. It has the potential to become a global player in the energy drinks segment. Hence, it deserves to be traded at premium valuation levels.

Earnings may surge 21% YoY in 2016

FY16 may be another good year for Carabao, as we expect its net profit to grow by 21% YoY to THB1.51bn, based on revenue growth of 20% YoY to THB9.30bn. However, we expect its EBITDA margin to nudge up by just 0.2ppt due to additional investments made in new production lines, and its net profit margin to grow only 0.1ppt. Sales growth may be delivered from:

i. An increase in production capacity by 25% to 1.78bn units pa from 1.43bn units in 2H16, mainly from exported canned drinks;

ii. Planned expansion of its distribution network in Thailand to boost retail shop coverage and to directly access the end-customers;

iii. Expected improving shipments to Afghanistan and Yemen, as these markets have started to increase their orders for energy drinks from two years ago (when the countries were affected by internal unrest).

Note that the beginning of its sponsorship of the Chelsea FC in the UK in mid-2016 may keep its sales, general and administrative (SG&A) expense-to-sales ratio unchanged at 19%. Expect net profit to grow 13% YoY in 2017

We expect Carabao to continue posting net profit growth of 13% YoY, and book earnings of THB1.72bn next year following the full-year operation of its new production line for canned energy drinks as well as the aggressive expansion of its distribution centre network and fleet of cash vans in 2016. We estimate total sales to increase 16% YoY to THB10.78bn, while its EBIT and net profit margins are maintained.




Valuation And Recommendation We initiate coverage on Carabao with a BUY rating, and expect it to post strong net profit growth of 21% YoY in 2016 and 13% YoY in 2017 mainly due to improved sales revenue from its domestic and export markets. We also think its long-term earnings prospects remain attractive based on:

i. Solid growth potential for existing export destinations particularly Cambodia, Myanmar, and Vietnam;

ii. Its penetration into more overseas markets, while could make it a new global energy drink manufacturer:

iii. Launching of further new products to meet consumer demand and add value to its owned distribution facilities.

Valuations are still attractive vis-à-vis its peers. The stock is trading at 24x FY17F P/E vs its regional sector average of 29x despite having EPS growth of 13%, ie on par with the regional peer average – and superior ROE of 23% compared with both local and regional peers. Carabao deserves to trade at a premium to its domestic peers due to its stronger EPS growth and long-term prospects to become a global energy drink company. Our TP of THB48.00 is derived from a applying weighted average valuation of the DCF (WACC: 8.2%, TG: 3%) and P/E (29x based on the regional sector average) valuation methodologies. Our TP implies 29x FY17F P/E, which is slightly below its regional peer average and offers an upside of 17%.

We also expect moderate dividend yields of 2.8-3.4% over FY16F-18F, assuming a payout ratio of 70% based on its payment record of 66% for FY14 and 71% for FY15 performances (vs the company’s policy of net less than 40% of net profit after tax). There is still room to take positions on the stock for the long-term.

Figure 1: Carabao’s DCF valuation

Source: RHB

THBm 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2025FEBIT (1-t) 1,717 1,863 2,023 2,176 2,311 2,443 2,515 2,584 2,642 2,704 Depreciation & Amortization 284 288 292 296 300 305 309 313 317 322 Net working capital 47 60 35 25 32 22 5 5 (3) (3) Capex (103) (102) (102) (101) (101) (101) (101) (100) (100) (100) Net free cash flow to firm 1,852 1,989 2,179 2,346 2,479 2,625 2,717 2,792 2,862 2,928

Terminal value 60,930

PV 1,712 1,699 1,720 1,712 1,672 1,636 1,565 1,486 1,408 29,037

Terminal growth 3.0%

WACC 8.2%Total discounted firm value 43,646 Less: Net debt (2,749) Less: Minority interest 0Equity value 46,395 Number of shares (m) 1,000 Equity value per share (THB) 46.40




Figure 2: Peer comparison

Note: Price data as of 27 May 2016. Valuations in red and with asterisk are from RHB. Consensus valuations are in black. Source: Bloomberg, RHB

Figure 3: Weighted average valuation

Source: RHB

Figure 4: Carabao’s P/E band

Source: RHB

Name Ticker Mkt. Cap.(USDm) 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F

Regional peerSUNTORY BEVERAGE & FOOD LTD 2587 JP 14,588 2.8 18.7 36.6 30.8 2.7 2.6 10.9 10.5 1.4 1.5 7.5 8.2KAGOME CO LTD 2811 JP 2,413 23.4 0.0 52.9 52.9 2.2 2.1 20.8 20.1 0.9 0.9 3.7 3.7LOTTE CHILSUNG BEVERAGE CO 005300 KS 2,027 -17.6 11.1 26.8 24.1 1.1 1.1 8.5 7.7 0.4 0.4 4.0 4.3UNI-PRESIDENT CHINA HOLDINGS 220 HK 3,743 17.9 10.6 24.1 21.8 2.0 1.8 9.5 8.8 1.0 1.1 8.6 8.9VITASOY INTL HOLDINGS LTD 345 HK 2,055 29.7 15.2 31.7 27.5 7.2 6.4 17.3 15.1 2.1 2.5 24.5 25.5HEBEI CHENGDE LOLO CO-A 000848 CH 1,440 13.1 2.2 17.8 17.4 4.9 4.3 11.4 10.6 3.2 3.7 25.5 23.7FRASER & NEAVE HOLDINGS BHD FNH MK 2,135 42.1 8.8 20.5 18.8 4.2 3.9 14.3 13.4 3.1 3.2 21.4 21.3CARABAO GROUP CBG TB 1,149 20.6 13.4 27.1 23.9 5.9 5.4 19.9 17.8 2.6 2.9 21.7 22.7Average 7.3 13.1 32.9 29.0 3.8 3.5 14.1 13.0 1.8 2.0 14.6 14.8Domestic peerICHITAN GROUP ICHI TB 419 -3.7 6.6 17.2 16.1 2.4 2.3 11.1 10.6 4.0 4.2 13.7 13.8MALEE SAMPRAN MALEE TB 178 20.7 17.6 14.7 13.0 4.6 4.0 11.6 10.4 3.2 3.8 30.4 30.8SAPPE SAPPE TB 121 3.0 19.7 12.6 10.3 2.2 2.0 7.7 7.4 4.0 4.5 18.4 17.9CARABAO GROUP CBG TB 1,149 20.6 13.4 27.1 23.9 5.9 5.4 19.9 17.8 2.6 2.9 21.7 22.7Average 10.2 12.7 21.3 18.9 3.8 3.4 12.6 11.5 3.4 3.9 21.0 21.3

EPS growth (%) Net P/E (x) P/BV (x) EV/EBITDA (x) Dividend yield (%) ROE (%)

Valuation Criteria TP Weight Weighted (THB) TP (THB)

DCF 8.2% WACC, 3% long-term growth 46.40 50% 23.20P/E 29x FY17F prospective P/E, equivalent to regional 49.60 50% 24.80

beverage peer's current average tradingTotal 48.00

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Business Overview Carabao’s story began on 22 Aug 2001 when a joint-venture company, Carabao Tawandang Ltd, was established by the owner of the German Tawandang Brewery Restaurant and Mr Yuenyong Opakul (popularly known as Aed Carabao, founder and lead singer of the popular Thai rock band Carabao). Its major business includes manufacturing and distributing energy drinks under the Carabao Dang brand, with an initial registered capital of THB1m. Its product was launched in Oct 2002 and hit the export market in 2004.

Due to its continual and consistent growth, the group’s major shareholders set up Carabao Group Co Ltd on 28 Aug 2013. This was to meet strategic expansion goals for an integrated business model that included material sourcing, production, marketing and distribution. Carabao became a public company on 8 Jul 2014 and was listed on the SET on 21 Nov 2014.

Carabao consists of three wholly-owned subsidiaries:

i. Carabao Tawandang Co Ltd, its beverage manufacturing and marketing arm;

ii. Tawandang DCM Co Ltd, which operates product distribution activities via traditional and modern trades;

iii. Asia Pacific Glass Co Ltd, which produces glass bottles for energy drinks and other beverages.

The group’s current product includes Carabao Dang – a bottled non-carbonated, canned non-carbonated, and sleek canned carbonated energy drink – and the Start Plus electrolyte beverage. It also recently launched Carabao Drinking Water, which is produced by an outsourced manufacturer, and became a local distributor of a seaweed snack under the Koriko brand. 71% of total sales in 2015 were generated domestically. Of this figure, approximately three-fourths were from the traditional trade channel. The rest came from the modern trade channel. Carabao’s recent strategy of using a cash van distribution network contributed only 3% of domestic sales last year. Its energy drink products are currently exported to more than 30 nations, with the biggest markets being Afghanistan, Cambodia, Myanmar, Vietnam and Yemen. Overseas sales now represent 29% of revenue generated.

At end-2015, Carabao’s total production capacity was 1.08m units pa for bottled energy drinks and 350m units pa for canned energy drinks. Total utilisation rate stood at 70% and 80.6% respectively. The group is also planning to double its production capacity for the canned energy drink segment to serve an expansion of its carbonated products business. This is expected to be completed in 2H16.

Figure 5: Carabao’s group structure Figure 6: Carabao’s products

Source: Company, RHB Source: Company

Carabao Group PCL.

Carabao Tawandang Co.,Ltd.(100%)

Tawandang DCM Co., Ltd.(100%)

Asia Pacific Glass Co.,Ltd.(100%)




Figure 7: Revenue breakdown (by product) Figure 8: Revenue breakdown (by destination)

Source: Company data, RHB Source: Company data, RHB

Industry Overview Based on data from Statista and Research And Markets, and our own extrapolation, we expect the c.USD44bn energy drinks market to contribute a minimal 2% share of the 2015 global beverage sales, which was valued at USD1,980bn. However, the segment’s outlook seems stronger than that of the beverage industry as a whole. This is given its sales growth CAGR of 5% in 2013-2015, which is estimated to increase by 5.6% pa in 2016-2018. By comparison, global beverage sales grew at a slower pace of 3.7% pa in 2013-2015 and may continue expanding by 4.3% per year in 2016-2018.

Based on increasing health concerns, energy drinks could also be an alternative to carbonated drinks. This is because health-benefiting ingredients contained in energy drinks could attract consumers and help such products to gain more popularity amongst most age groups.

Key markets for energy drinks are:

i. North America (c.30% contribution);

ii. Asia-Pacific (c.20% contribution);

iii. Western Europe (c.15% contribution).

In terms of 2015 market share, the segment has been dominated by few brands, namely:

i. Red Bull (28%);

ii. Monster (11%);

iii. Rock Star (2%).

Carabao has less than 0.5% market share. This is less than another non-listed Thai brand M-150 (0.7%).

Having only five major export destinations, ie Afghanistan, Cambodia, Myanmar, Vietnam and Yemen, we believe there are many potential markets for the group to penetrate into over the longer term. This is apart from China and the UK, where Carabao is undertaking marketing initiatives currently.

100% 100% 100% 99% 96% 94% 94% 94%

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Drinking water Start PlusSleek can carbonated energy drink Carabao Dang energy drink

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Figure 9: Global beverage sales Figure 10: Global energy drinks sales

Source: Statista, RHB Source: Research And Markets, RHB

The 2015 energy drink market in Thailand was valued at THB35bn (c.USD1bn), with a mild expansion rate of 3-5% pa. Carabao Dang was ranked the second-largest brand after M-150 while Red Bull came in third in its own country. Being in a growth stage, we opine that Carabao has become successful in penetrating the domestic market via the:

i. Popularity of major shareholder Aed Carabao who is an idol of “song for life” music genre among Thailand’s middle- to primary-income earners;

ii. Growth of its owned distribution network that allows it to have direct access to end-consumers upcountry.

Rival brands M-150 and Red Bull, meanwhile, utilise standard strategies, such as lucky draw promotions and music marketing campaigns, to raise brand recognition and keep their domestic revenue from this cash cow business growing. This is as the level of competition gets stronger as a result of new entrants into the local market. As a result of these factors, Carabao has enjoyed a rise in market share over the past five years. By comparison, the market share of two others players gradually shrank over the same period.

Figure 11: Worldwide energy drinks market share Figure 12: Thailand energy drinks market share

Source: Euromonitor, RHB Source: Nielsen, Company data

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Red Bull 28%

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48.7% 47.7% 46.9% 46.8% 44.4%

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15.5% 14.7% 12.9% 12.0% 15.4%

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M-150 Carabao Dang Red Bull Lipovitan-D Others




Investment Highlights Production capacity to improve 25% by 3Q16 Carabao’s existing production facilities have a total annual capacity of 1.04bn units. Of this figure, three-fourths is for bottled energy drinks while the remainder is for canned products. Production utilisation rate for the bottling line was stable at 70% at end-2015 compared to the previous year’s, while the utilisation rate for the canning line surged rapidly to 81% at end-2015 from 52% two years ago, thanks to accelerated export sales over the period. The company plans to install new machines for canned energy drinks by end-3Q16, which may raise its total annual production capacity by 25% to 1.78bn units. The higher capacity would meet rising demand and launches of new canning products in the pipeline starting with carbonated and flavoured energy drinks to serve overseas markets. With an extensive local distribution network and market penetration overseas, we assume a rise in capacity utilisation rates in both its bottling and canning lines as shown in Figure 13.

Figure 13: Carabao’s production capacity and utilisation rate Figure 14: Distribution centre and cash van expansion plan

Source: Company data, RHB Source: Company

Aggressive expansion on cash vans and distribution centres this year In order to gain more market share, Carabao works to boost domestic sales by having direct access to end-consumers in Thailand provinces. It has set up its owned distribution network via the establishment of a subsidiary, Tawandang DCM. Besides approaching traditional wholesalers and modern trade retailers, it has its own in-house on-the-ground marketing event team known as the “Carabao Dang Ladies”, who sell and deliver the company’s products to individuals at their homes. To enhance its sales coverage in remote areas, Carabao last year launched its cash-van caravan and built distribution centres (DCs) across the country. It owned 113 cash vans in nine DCs at end-2015 and aggressively plans to raise the number of DCs to 27 with c.300 cash vans covering 300,000 retail outlets throughout Thailand by 3Q16. Such an expansive fleet may add value to Carabao by supporting distribution of its new products (eg private label drinking water) and may possibly allow it to distribute consumable products for other suppliers (such as food snacks). We expect the opening of new DCs and its cash van fleet expansion to materialise in 1H16, which could be another key catalyst to boost Carabao’s domestic turnover in the near term.

Encouraging signs in existing export markets Apart from its strong market positioning in Cambodia, we expect to see improving purchase orders from other existing key export destinations including Myanmar, Afghanistan and Yemen. Carabao’s Myanmar business accounted for 9.8% of total export sales and only 2.7% of total sales in 2015. To achieve more growth, the company recently assigned another new distributor to expand its coverage areas throughout the country and to penetrate both traditional and modern trade channels. It may also hold more marketing campaigns, including a sponsorship deal with Chelsea FC to promote the brand. We expect its Myanmar sales to expand by a strong 35% CAGR over 2016-2018 (vs the company’s guidance of 50% this year), potentially increasing its contribution to 12% of total exports and 5% of total sales by FY18F.

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Bottling line (m units per annum) Canning line (m units per annum)Bottling utilization rate - RHS Canning utilization rate - RHS




Meanwhile, the company’s sales from Afghanistan and Yemen were sluggish in 2013-2014 (Figure 8) due to the countries’ internal unrest and sporadic/infrequent ordering patterns compared to other key destinations. Nonetheless, management is positive on attaining better sales in these two countries this year.

Chelsea FC sponsorship to create brand recognition in global platform Carabao stepped up its marketing activities by becoming the principal partner of English Premier League’s Chelsea FC starting May this year, for a period of three years from 2016/2017 to 2018/2019 seasons. Carabao would spend GBP11m (c.THB560m) in total sponsorship fees or GBP3.67m (c.THB190m) pa over the 3-year period. It will also begin its mass product selling in the UK in 2Q16, which could help create brand awareness worldwide and facilitate its product shipments to new market destinations in the longer term. We expect its promotional budget to remain under control despite incurring additional costs from the sponsorship.

Figure 15: Carabao’s partner sponsorship for Chelsea FC over 2016/2017-2018/2019 seasons

Source: Company

Potential synergies with CJ Express Supermarket The group of Carabao’s management individually became major shareholders of CJ Express, a local modern trade retail grocery with a strong network of 230 stores in the community areas in Thailand’s central, western and eastern provinces, and a plan to open more new stores in the future. Unlike convenience stores, CJ Express offers a wide range of consumer necessities and promotional campaigns to attract customers. During our channel check at a CJ Express outlet in the western Bangkok suburb, we found that Carabao’s key products (ie energy drinks and drinking water) were prominently displayed at the front of the store and priced lower than other brands. However, patronage visit here may not be as frequent as in convenience stores. We still expect CJ Express to be another effective distribution channel for Carabao’s products at competitive prices and help sustain its domestic sales revenue in the longer term.

Figure 16: CJ Express store Figure 17: CJ Express: a mini supermarket format

Source: RHB Source: RHB




Figure 18: Carabao products were promoted at CJ Express with lower prices than other competitive brands

Figure 19: Company management, Aed Carabao, promotes his drinking water – a new locally-distributed product

Source: RHB

Source: RHB

Financial Analysis Carabao’s total revenue moderately grew 9% in 2014 and 5% in 2015 due to weak consumption, which led to sluggish domestic sales and shrinking exports to key destinations of Afghanistan and Yemen. However, we forecast the company’s revenue to grow 20% in 2016 and 16% in 2017, supported by the following:

i. We expect production capacity of canned energy drinks to double this year, allowing the company to meet a possible rise in demand from overseas market penetration;

ii. An increase in the number of distribution centres and cash van fleets to boost domestic sales.

We expect the mix between local and export sales contribution to improve to 61:39 by 2018 from 71:29 in 2015.

Figure 20: Carabao’s total sales revenue (THBm) Figure 21: Profit margin trend


76% 76%77% 72% 71% 66% 62% 61%24%

24%

23% 28% 29%

34%38%

39%

2011 2012 2013 2014 2015 2016F 2017F 2018F

Domestic Exports

4,2764,963

6,8637,448 7,753

9,298

10,77511,725

32.429.4 30.2

33.736.9 36.7 36.4 36.3

7.15.4

13.4

18.3 18.9 19.2 18.7 18.7

4.8 2.8

7.5

12.3

16.2 16.3 15.9 15.9

0%

5%

10%

15%

20%

25%

30%

35%

40%

2011 2012 2013 2014 2015 2016F 2017F 2018F

Gross profit margin SG&A/sales ratio EBIT margin Net profit margin




Carabao’s export sales generate c.6-7ppts lower GPM compared to domestic sales as it has limited bargaining power on selling prices due to intense competition and its efforts to gain market share in overseas markets. For local sales, GPM may gradually increase driven by its larger distribution network and owned glass bottle material production that may lead to cost savings given operational economies of scale. However, we estimate that the rise in export sales contribution may soften the company’s overall GPM to 36.3% in the next three years from 36.9% in 2015.

Carabao’s sponsorship deal with Chelsea FC for 2016-2019 may be positive to its brand awareness. While operating expense remain high, we expect it to be manageable at 1.6-2.1% of total sales pa in 2016-2018 from the company’s total budget of 9%. We keep sales, general and administrative (SG&A) expense-to-sales ratio unchanged at 19% throughout FY16F-18F, which should help keep EBIT margin and net margin stable at 19% and 16% respectively over the 3-year period.

We expect earnings to grow 21% to THB1.51bn this year, 13% to THB1.72bn in 2017, and 8% to THB1.86bn in 2018 on the back of growing exports, launch of new products, and increased coverage of its owned domestic distribution network.

Figure 22: Healthy balance sheet with net cash position Figure 23: Strong cash flow to support future investments


Carabao had no interest-bearing debt and is in a net cash position of THB1.38bn in 2015. We expect its healthy balance sheet position to continue to 2018, leaving ample room to finance major investments in the longer term. Its strong operating cash flow of THB1.9bn-2.2bn pa may be sufficient to support its low investment of THB600m this year and projected maintenance capex of THB100m pa in 2017-2018.

1.52

5.32

3.63

0.17 0.16 0.19 0.20 0.20

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

2011 2012 2013 2014 2015 2016F 2017F 2018F

Net debt D/E ratio - RHS(THBm) (x)

0

500

1,000

1,500

2,000

2,500

3,000

2012 2013 2014 2015 2016F 2017F 2018F

Operating cash flow CAPEX(THBm)




Risks Volatility in raw materials Approximately 55% of Carabao’s production cost comes from raw materials, which comprise mainly packaging (glass bottle and aluminum can) (c.30%) and sugar (c.10%). The volatility in flint cullet, aluminium and sugar prices may affect the company’s profitability as manufacturers are normally price takers in the energy drink industry.

The annual production capacity of 650m units by Asia Pacific Glass, which is Carabao’s wholly-owned subsidiary, will be reserved or used for production of glass bottles of Carabao Dang energy drink only

Asia Pacific Glass (Carabao’s wholly-owned subsidiary) has annual production capacity of 650m units of amber glass bottles, which are entirely reserved for Carabao Dang energy drink only. This allows the company to potentially enjoy cost savings of 10% compared to a production outsourcing scheme. However, in the unforeseen event of insufficient glass bottles, Carabao may have to source for more packaging from external suppliers, which could undermine its GPM.

Figure 24: Estimated cost breakdown


Highly dependent on one single product Carabao Dang energy drink accounted as high as 99% and 96% of total sales in 2014 and 2015 respectively. Changes in consumer preference, consumption trend and government regulations related to production, marketing and distribution activities may significantly impact the company’s sales and/or costs. The company is working to limit such impact in the long run by launching drinking water and carbonated energy drinks with a selection of flavours as part of its diversification strategy.

Successful of overseas distributors There is a risk or uncertainty on the longer-term business relationships between the company and its designated distributors of Carabao Dang in foreign countries. Changes of distributors abroad may severely affect total sales and possible business opportunities during the transition period.

Possible increase in sugar tax on beverages Thailand’s National Reform Steering Assembly’s recent proposal of a new tax rate for beverages with high sugar content reignited concerns among manufacturers as the retail price for beverages may increase by 20-25%. Drinks that have high sugar content include soft drinks, coffee, green tea, energy drinks, fermented milk, soymilk and juices. The measure, if implemented, could adversely affect sales as companies may pass on the cost hike to end-consumers. However, details of the matter remain unclear at this juncture and it may take a long period of time for legal endorsement, in our view.

Packaging30%

Sugar10%

Overheads7%

Taxes40%

Others13%




SWOT Analysis

• Strong management expertise with active business expansion plans both in local and overseas markets

• Having owned packaging facility and distribution network

• Robust balance sheet ready for investments

• Slow expansion of local energy drink market with mild annualised growth of 3-5%

• Intense competition limits ability to raise selling prices

• Substitution from alternative beverages eg coffee, tea and functional drinks

• Government’s regulatory controls

• Vast room for market penetration abroad

• New product development to meet demand from rising health consciousness

• Highly dependent on the legendary Carabao band as a local marketing gimmick

• Difficulty in penetrating the upper market segment as its brand image is associated with mid- to low-income group

• Product diversification still minimal

Recommendation Chart

Source: RHB, Bloomberg

29

31

33

35

37

39

41

43

45

Nov-14 Apr-15 Sep-15 Feb-16

Price Close


Consumer Cyclical | Consumer Services

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RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Investment Research Disclaimers RHB has issued this report for information purposes only. This report is intended for circulation amongst RHB and its affiliates’ clients generally or such persons as may be deemed eligible by RHB to receive this report and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. 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Thai Institute of Directors Association (IOD) – Corporate Governance Report Rating 2015

Excellent ADVANC CPN GRAMMY KBANK MCOT PS RATCH SCB THCOM WACOAL BAFS DRT HANA KCE MINT PSL ROBINS SCC TISCO BCP DTAC HMPRO KKP MONO PTT SAMART SE-ED TKT BIGC DTC INTUCH KTB NKI PTTEP SAMTEL SIM TMB BTS EASTW IRPC LHBANK PHOL PTTGC SAT SNC TOP CK EGCO IVL LPN PPS QTC SC SPALI VGI

Very Good AAV BBL COL HEMRAJ MC PG SCG SST THIP TPC TWS ACAP BDMS CPF HOTPOT MEGA PJW SEAFCO STA THRE TPCORP UAC AGE BECL CPI HYDRO MFEC PM SFP STEC THREL TRC UT AHC BKI CSL ICC NBC PPP SIAM SVI TICON TRU UV AKP BLA DCC ICHI NCH PR SINGER SWC TIP TRUE VNT AMATA BMCL DELTA INET NINE PRANDA SIS SYMC TIPCO TSC WAVE ANAN BOL DEMCO IRC NSI PREB SITHAI SYNTEC TK TSTE WINNER AOT BROOK ECF KSL NTV PT SMK TASCO TKS TSTH YUASA APCS BWG EE KTC OCC PTG SMPC TBSP TMI TTA ZMICO ARIP CENTEL ERW LANNA OGC Q-CON SMT TCAP TMILL TTCL ASIMAR CFRESH GBX LH OISHI QH SNP TF TMT TTW ASK CHO GC LOXLEY OTO RS SPI TGCI TNDT TU ASP CIMBT GFPT LRH PAP S&J SSF THAI TNITY TVD BANPU CM GLOBAL MACO PDI SABINA SSI THANA TNL TVO BAY CNT GUNKUL MBK PE SAMCO SSSC THANI TOG TWFP* * On Oct 1,2015 TWFP TWFP merged with TWS resulting in a new company, TWPC

Good 2S AS CBG DNA GCAP ITD LHK MK PATO PTL SEAOIL STPI AEC ASIA CGD EARTH GENCO JSP LIT MODERN PB PYLON SIRI SUC AEONTS AUCT CHG EASON GL JTS LIVE MOONG PCA QLT SKR SUSCO AF AYUD CHOW ECL GLAND JUBILE LST MPG PCSGH RCL SMG SUTHA AH BA CI EFORL GLOW KASET M MSC PDG RICHY SOLAR SYNTEC AIRA BEAUTY CITY ESSO GOLD KBS MAJOR MTI PF RML SORKON TAE AIT BEC CKP FE GYT KCAR MAKRO MTLS PICO RPC SPA TAKUNI AJ BFIT CNS FIRE HTC KGI MATCH NC PL S SPC TCC AKR BH CPALL FOCUS HTECH KKC MATI NOK PLANB SALEE SPCG TCCC AMANAH BIG CPL FORTH IEC KTIS MBKET NUSA PLAT SAPPE SPPT TCJ AMARIN BJC CSC FPI IFEC KWC M-CHAI NWR PPM SAWAD SPVI TEAM AP BJCHI CSP FSMART IFS KYE MFC NYT PRG SCCC SRICHA TFD APCO BKD CSS FSS IHL L&E MILL OCEAN PRIN SCN SSC TFI AQUA BTNC CTW FVC IRCP LALIN MJD PACE PSTC SCP STANLY TIC TIW TPIPL UPF VPO TLUXE TRT UPOIC WHA TMC TSE UREKA WIN TMD TSR UWC XO TOPP UMI VIBHA TPCH UP VIH

IOD (IOD Disclaimer)

การเปิดเผลผลการสํารวจของสมาคมสง่เสริมสถาบนักรรมการบริษัทไทย (IOD) ในเร่ืองการกํากบัดแูลกิจการ (Corporate Governance) นีเ้ป็นการ

ดําเนินการตามนโยบายของสํานกังานคณะกรรมการกํากบัหลกัทรัพย์และตลาดหลกัทรัพย์ โดยการสํารวจของ IOD เป็นการสํารวจและประเมินจากข้อมลูของบรษัทจด

ทะเบียนในตลาดหลกัทรัพย์แหง่ประเทศไทยและตลาดหลกัทรัพย์เอ็มเอไอ ที่มีการเปิดเผยตอ่สาธารณะและเป็นข้อมลูที่ผู้ลงทนุทัว่ไปสามารถเข้าถงึได้ ดงันัน้ผลสํารวจ

ดงักลา่วจงึเป็นการนําเสนอในมมุมองของบคุคลภายนอกโดยไมไ่ด้เป็นการประเมินการปฏิบตัิและมิได้มีการใช้ข้อมลูภายในในการประเมิน

อนึ่ง ผลการสาํรวจดงักลา่ว เป็นผลการสํารวจ ณ วนัที่ปรากฎในรายงานการกํากบัดแูละกิจการบริษัทจดทะเบียนไทยเทา่นัน้ ดงันัน้ผลการสํารวจจงึอาจ

เปลี่ยนแปลงได้ภายหลงัวนัดงักลา่ว ทัง้นีบ้ริษัทหลกัทรัพย์ อาร์เอชบี จํากดั (มหาชน) มิได้ยืนยนัหรือรับรองถึงความถกูต้องของผลการสํารวจดงักลา่วแตอ่ยา่งใด

การเปิดเผยข้อมูล Anti-corruption Progress Indicator

ข้อมูล Anti-corruption Progress Indicator จากสถาบนัไทยพฒัน์ (ข้อมูล ณ วนัที ่6 พฤศจิกายน 2558)

Documents

Thailand Initiating Coverage - RHB · PDF fileThailand Initiating Coverage See important disclosures at the end of this report 1 ... outperform the 6% pa expansion of the global energy