Wednesday, October 16, 2013

Thai Beverage: Local beer consumption gives brewer reason to cheer, says StanChart’s Tiruchelvam

Written by Kang Wan Chern
Monday, 14 October 2013 13:05
More people than ever are consuming beer in Singapore as the citystate goes all out to attract more expatriates and tourists as a global financial and entertainment hub. At the same time, more beer is being sold in hawker centres, kopitiams and provision shops to folks in the heartlands while more women are tossing back a lager or two alongside their male counterparts in bars and clubs.

This merry outlook means plenty of opportunities for beer brewer Thai Beverage to market Chang Beer in Singapore in a big way, says Standard Chartered analyst Nirgunan Tiruchelvam. One method is to leverage on the far-reaching networks of soft drinks maker Fraser & Neave (F&N) to distribute its beers. ThaiBev, together with its controlling shareholder Thai tycoon Charoen Sirivadhanabhakdi, jointly own a 90.3% stake in F&N. ThaiBev first acquired a 22% stake in F&N from Oversea-Chinese Banking Corp and the family of the late rubber baron Lee Kong Chian last July. The brewer later raised its stake in F&N to 28.6% by purchasing shares on the open market.

To put it in numbers, ThaiBev could likely export 49 million litres of beer — or some 1.4% of its total beer production of 3.6 billion litres — to Singapore over the next five years. That could add THB2.1 billion ($83.6 million) to ThaiBev’s profit before interest and taxes (PBIT) and boost its growth through its international presence, says Tiruchelvam. For 1H2013, ThaiBev’s earnings dropped 13.5% to THB8.3 billion as revenue declined 7.3% to THB76 billion. Its beer division contributes some 22% to total revenues but is currently loss-making.

Tiruchelvam is thus recommending that investors pick up the stock at current levels, ahead of an expected surge in ThaiBev’s beer sales in the coming years. “Following the launch of its first casinos and the relaxation of its licensing laws, Singapore is becoming an entertainment and tourism hub. Beer drinking is no longer a strictly male preserve and more women are indulging in the pastime. Drinking outlets have proliferated, more hawker centres are serving beer and the number of bars is growing,” writes Tiruchelvam in a Sept 20 report. “A successful launch in Singapore could potentially project the Chang brand into the region, and beyond.”

Indeed, total beer sales in Singapore are expected to grow by 37.4% from 115 million liters in 2012 to 158 million liters by 2017, including beer consumed in entertainment outlets as well as in hawker centres and homes. In 2012, there were 576 bars operating in Singapore, compared to just 430 in 2007, contributing to a 44.7% rise in beer volumes sold in entertainment outlets to 110 million litres between 2012 and 2017.

One main reason for the higher sales is because of the rise in the number of entertainment options designed to attract more tourists. This includes rock concerts — where beer is sold — and international beer events such as Beerfest Asia 2011. Another reason is that an increasing number of women aged between 18 and 29 have begun drinking beer in Singapore as a result of rising disposable incomes and a shift in preferences towards beer from wines and cocktails. In fact, close to one third of the women surveyed by the Singapore Health Ministry chose beer as the preferred alcoholic beverage.

In addition, the government has made it more conducive for clubs and bars to stay open in response to demand over the past five years compared to previous years. For one, licence fees have remained largely unchanged from $520 for an outdoor beer stall to $1,760 for a first-class public house, which includes outlets selling all types of beer and liquor.

While these factors favour ThaiBev, competition from rival beer brewers and suppliers is intensifying. Currently, Asia Pacific Breweries (APB) is the largest supplier of beer to Singapore, with a 54% share of volumes in 2011, according to market research firm Euromonitor. Tiger, its most popular brand, enjoys 35% share of the Singapore market. APB also brews Heineken, Guinness Stout, Baron’s Strong Brew and Anchor. Last September, while Sirivadhanabhakdi was still fighting to gain outright control of F&N, the group sold its stake in APB to the Dutch brewer Heineken, which is also aggressively expanding its presence in the region.

Meanwhile, the other competitors which together command a 32% market share in Singapore include Carlsberg Brewery Malaysia, which distributes Carlsberg, Kronenbourg 1664, Asahi Super Dry and Corona Extra as well as craft beers such as Erdinger. In May, Carlsberg joined hands with Singapore bar chain Harry’s International to carry a range of Carlsberg’s beer brands on tap at all 26 of Harry’s outlets, replacing earlier brands by APB and Heineken. Then, there is also Pacific Beverages, a Singapore-based distributor of beer brands such as San Miguel and Stella Artois and several independently-owned craft breweries.

Beer-drinking has also moved well beyond clubs and bars to include more general and accessible outlets such as hawker centres and restaurants where ThaiBev could have an edge. Singapore houses 107 hawker centres, 85% of which served beer in 2012 compared with just 60% in 2007. In fact, beer is actively marketed at hawker centres, which are specially served by female promoters. Here, prices average $4 to $6 per 640ml bottle, which is half the cost of beer served at bars. Beer is also being sold across supermarkets and convenience stores in wide varieties to cater to the growing number of drinkers who prefer to consume beer in the comfort of their homes.

By leveraging on F&N’s extensive soft drinks network and its relationship with wholesale distributors in Singapore, ThaiBev can easily position Chang Beer in supermarkets, hypermarkets, convenience stores and hawker centres across the country. F&N distributes the 100Plus isotonic drink and its F&N range of carbonated soft drinks and teas in Singapore. “ThaiBev is planning to introduce Chang Beer into Singapore and we believe that F&N’s distribution network could provide an effective springboard for this,” writes Tiruchelvam.

At a price of, say, $3 per 330 ml bottle, Chang Beer will enter Singapore as its cheapest beer, enabling it to carve a niche in the market as an economy beer. Currently, Tiger is among the lowest priced beers in Singapore at $3.90 per 330 ml bottle, while Carlsberg and Heineken cost $4.10 and $4.40 per 330 ml bottle respectively. All three brands are categorised as standard priced beers, while beers that cost more than $9 per 330 ml bottle are considered premium beers. Between 2006 and 2011, beer sales in the standard priced category grew at an annual rate of 11.8% in terms of value versus 7% in the overall market.

This suggests good prospects for Chang Beer, which is competitively priced compared to the rest of the market. We believe that many investors have overlooked the potential of the synergies between F&N and ThaiBev, writes Tiruchelvam.

Shares of ThaiBev closed at 52 cents apiece on Oct 10, up about 30% since the start of the year. At its all-time high in June, the stock was trading at 70 cents each. At 52 cents ThaiBev has a market value of $13.1 billion.

Standard Chartered is forecasting earnings of THB20.5 billion for 2013, and THB25.5 billion for 2014. In his May 6 report, Tiruchelvam notes that that the stock is trading at more than 40% discount to the valuation of liquor companies in the region and a nearly 30% discount to beverage stocks in the region. He is recommending a “buy” on ThaiBev, with a price target of 71 cents, representing an upside of 36.5%.

Publish date: 14/10/13

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