Thai Beverage @ 28.5 cts ( Alcohol / Thailand ) 1 comments

Final Poll Results: 3:2

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. Insipid domestic consumption growth in beers and spirits

2. Increased regulatory and political risk

It is increasingly hazardous to make my hotstocksnot predictions as the market surges to new highs day after day. In the early part of 2006 it was all about China stocks; this time the rise looks to be more broad-based, starting with the blue chips but increasingly seeing mid-cap participation. These are exciting times.

Of course to look at it another way, it also suggests that there are new batches of stocks that could potentially surface as overvalued stocks for me to write on. However, over-valuation may not yet have set in across the market yet (just my personal opinion). Here I cover Thai Beverage, which I would view as a stable stock that I don't see as worth buying because of limited growth potential and hence limited ability to participate in any market rally.

The first point to establish is that this stock is all about the Thailand alcohol consumption market. Out of its total BT90B revenue in FY05, export sales constitute BT0.7B, or <1% of total sales. The total BT16-17B raised in its SGX IPO was almost all used to offset its high debt, which means there is no immediate abundance of working capital to finance overseas expansion. Indeed, Everton football club's (my favourite football club) jerseys no longer endorse Chang beer, an indication that the company might be scaling back on overseas marketing efforts.

The Thais are one of the biggest alcohol guzzlers in Southeast Asia (not surprising given that most of the countries around are Muslim) and some might argue that paying 16X trailing PE for a market leader in the domestic economy beer and spirits market is cheap or at worst, fair. Yet if we examine certain trends from a bottom-up perspective, domestic growth looks limited and unexciting.

The two main segments of Thai Beverage's operations are the beer and the spirits segment. According to statistics provided by the IPO, Thailand's consumption CAGR growth rate in these two segments are 10% and 3% respectively. Thai Beverage's spirits segment has a much high margin than the beer segment --- about 3 times the latter's. According to the latest 2Q06 results, the group's beer segment sales growth year-on-year was ~10% and spirits segment sales growth was near-zero ---- corroborating the nationwide trend. This consumption trend does not bode well for the medium-term.

Regulatory risk will be a big factor. Direct costs constitute ~80% of total costs of operation, and excise taxes (ie. alcohol production tax) constitute 70% of these direct costs. Those studying the group's sales and profit trend from 2003-2005 would have noticed a quantum jump in net profit from the BT7B range in FY03 to the BT10B range in FY04 and FY05 despite little change in sales. This was not due to any sudden increase in pricing power, but rather mainly due to the decrease in excise taxes from the BT48B range to the BT45B range. Government policy and attitude towards alcohol consumption plays a big role in corporate bottomline here. Now put into perspective the recent reports of a hardened stance towards alcohol consumption by the Thai government: a full ban on advertising of alcohol, a possible raising of the drinking age to no less than 25 years old and even possible raising in excise tax. Thai Beverage has claimed that the advertising ban will in fact be good for the company because it creates barriers to entry against foreign brands; that is debatable but they have missed the point ---- which is that regulatory headwind will be strong in the future given that the spirit of these regulations are to limit alcohol consumption --- tell me how good that can be for domestic alcohol producers.

This regulatory risk is closely allied to the political risk which has emerged out of nowhere with the overthrow of Thaksin. Suddenly foreign investors have a new government to deal with, one that has no track record unlike Thaksin who, despite his faults, was the one who drove domestic consumption with his Thaksinomics. Already, Temasek is suffering the brunt of the backlash against Thaksin-friendly foreign investors. The reaction towards increased country risk must be to raise the equity risk premium, and the side effect would be to lower interest and liquidity in Thai stocks/investments.

It would be advisable to avoid Thai-related stocks for the medium-term. Nestle, for example, has recently disposed of its Thai dairy products business and exited the country.

References:
(1) AP-FoodTechnology.com article Oct 2006: Alcohol firms fight ad ban in Thailand

Poll(please vote)
I agree that Thai Beverage is a hot-stock-not: Yes/No