Asia Pac Food Bev

Asia Pacific | Food & Beverage
EQUITY RESEARCH
20 October 2010
ASEAN Beer
Breaking the Glass Ceiling
We believe the ASEAN beer industry has outstanding growth prospects. Beer consumption looks set to rise at an average of 6% in the next three years, as it closely allied to higher disposable income. Both Thailand and the Philippines are in the throes of a consumer boom. Also, the urban youth populations in those countries are among the highest in the region, which is a fillip for beer demand. Their distribution systems are at a relatively advanced stage. ASEAN presents the beer majors with alluring acquisition opportunities, in our view. Beer companies like SAB Miller, ABInBev, Heineken and Molson Coors are facing stagnation in the West. We believe these cash-rich players are likely to direct their attention to Asia. The region has just displaced the West as the worlds largest beer market. Although beer demand is strong in Asia overall, ASEAN stands out, with Thai Beverage(12xFY10E) and San Miguel(13xFY10E) likely to generate over 17% earnings CAGR in the next two years. We expect the switch from glass bottles to disposable cans to transform Thai Beverages and San Miguel Corps cash generation. A further shift to cans would reduce inventory burden, given their disposable nature. A similar transformation took place in the US when cans were introduced in the 1930s. The companies should achieve FCF CAGR of 12% and 38% in the next 3 years. We believe the market is missing the FCF gains from the introduction of cans. We initiate coverage on this sector with Outperform recommendations on Thai Beverage (37% upside) and San Miguel Corp (36% upside), the dominant brewers in Thailand and the Philippines.
BB code Rec Thai Beverage PCL THBEV SP OP San Miguel Corporation SMC PM OP Mkt cap Up/ (US$m) Price PT Down ccy 5,390 SGD0.28 SGD0.38 37% THBm 5,225 PHP74 PHP101 36% PHPm Revenue 2010E 2011E 108 117 183 191 Net income 2010E 2011E 11 12.5 17 19 FCF Yield 2010E 2011E 9% 10% 5% 8%
Note: OP = OUTPERFORM, UP = UNDERPERFORM, IL = IN-LINE; Prices as at 19 October 2010 Source: Company, Bloomberg, Standard Chartered Research estimates
Nirgunan Tiruchelvam
Nirgunan.Tiruchelvam@sc.com +65 6307 1504
All rights reserved. Standard Chartered Bank 2010 IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX. http://research.standardchartered.com
Sector research ASEAN Beer | 20 October 2010
Contents
Why ASEAN consumer? Secular trends favour Beer Beer cans change the picture ASEAN resembles America in the 1930s Beer majors may go shopping in ASEAN Valuation comparison The Big 4 are Cash-Rich and Hungry Company updates Thai Beverage PCL San Miguel Corporation 27 42 3 7 10 14 17 20 25
Why ASEAN consumer?

Powerful trends favour consumerism in Asia
At the outset, we reiterate the underlying macroeconomic trends that have powered consumerism in Asia. As these trends are familiar, we summarise them thus: Millions are entering prosperity Middle class surge One of the outcomes of the rising prosperity of the Asian economies is a growing middle-class population. In the major Asian economies of China and India, hundreds of millions of people are becoming prosperous. A new market for household items, cars, food and healthcare has thus emerged in Asia. The addressable market for everything from chocolates to motorcycles has increased with this development. Growing consumerism is an obvious characteristic of a rise in the middle class population. A study by Surjit Bhalla of Oxus Investments (The Middle Class Kingdoms of India and China, 2009) defines the middle classes as those with earnings of between US$10 and US$100 per day. The middle classes' share of the global population rose to 57% from 30% in 1990 to 2006, according to this study. The study states that the proportion of the middle class population in Asia surpassed the ratio in the West in the mid-2000s. Fig 1: Middle class population as % of world total
80 70 60 50 40 30 20 10 0 1950 West
Source: Oxus Investments, Standard Chartered Research
1980 Asia
2006
Asia is now the mainstay of the worlds middle class, creating a new market. Figure 1 illustrates another aspect of middle class growth i.e., once a proportion of the population enters the middle class, it swells rapidly. According to the Economist (12 February 2009), the proportion of middle class in China in 1990 was only 15%. In 2005, it had swollen to 62%. This trend will be a fillip to consumerism in this region, in our view. Magical middle income status When a country reaches an income per capita of US$2,000, consumption growth also accelerates. The World Bank has identified an income per capita of US$2,000 as the threshold for middle-income status. From this point, disposable income represents one-third of average household income. China has just entered middle-income status. Its income per capita in 2008 was US$2,480. India, on the other hand, is a long way off middle-income status, at an income per capita of US$1,040. The impending arrival of these giant economies as middle-income countries represents a major turning point, in our view. 3
Consumption accelerates at US$2000 per capita
Migration to the cities helps consumption
Urbanization The migration of rural inhabitants to cities is another boost for consumerism in Asia. Urban dwelling encourages consumer spending in two clear ways. First, the distribution costs are less in an urban centre. It is easier to sell soap in a crowded city such as Mumbai or Jakarta than in the rural hinterland. The transportation of goods is cumbersome given the poor infrastructure. Second, urban dwelling changes taste and exposure. Migrants from rural areas are exposed to the bright lights of the big city. They tend to acquire a desire for consumer goods. Marketing of consumer goods can be more successful in cities compared to rural areas. Asias urban growth has outstripped its total population growth. The urban population growth has been 2.5% in the last 20 years, a figure almost twice the overall population growth rate, according to the UN. In 2008, the urban population was 42%, compared with 33% in 1990. Here again, China and India appear to be the global leaders in urbanization.
Thai and Filipino consumer story is comparable to India and China

ASEAN region deserves recognition Despite the excitement surrounding consumption in China and India, we believe the ASEAN consumer sector deserves much greater recognition. The ASEAN consumer is no poor relation to the Asian giants. The macro forces that have been cited in favour of Chinese and Indian consumerism are actually stronger in the ASEAN region. The ASEAN consumer sector is trading at 12x 2010 PER, compared to 21x 2010 PER and 17x 2010 PER for the Chinese and Indian consumer sectors (according to Bloomberg). We feel this is unwarranted for the following reasons: Higher proportion of middle class The proportion of the population within the middle class bracket in Thailand and the Philippines is higher than that in China and India. Definitions of middle class are controversial. The former Indian Minister Shashi Tharoor calls it a sociological not a logical category. A recent study by the Centre for Global Development has used a more stringent definition of middle class. It adopts a uniform definition of middle class between poor and rich countries, accounting for differences in purchasing power. The conclusions from the study (Working Paper 207, March 2010) are stark. Under the stringent definition, Thailands middle class accounts for 8.7% of the population. The middle class accounts for 17.4% of consumption. This compares favourably with India and China, where the middle class proportion of the total population is half that of Thailand (see figure 7).
Fig 2: Middle Class Statistics for Selected Countries (%)

Middle Class Size (proportion of population) Ghana India, urban Indonesia Morocco China, urban Thailand Philippines Turkey South Africa Mexico Russia Honduras Bolivia Paraguay Colombia Ecuador Brazil Venezuela Argentina, urban Chile Sweden United States 1990 0 2 0 4.4 6 4 3 10.1 9.6 17.7 24.4 0 8.2 4.8 10.5 9.7 16.4 20.6 39.1 20.6 95 93.8 2005 0 4 0 3.5 4.4 8.7 8.1 15.9 7.6 28 29.8 6.8 12.2 18 13.5 13.9 19.4 3.2 30.5 32.7 95 90.9 Middle Class Share (proportion of income/consumption) 1990 0 0 0 9.8 0 0 0 17.6 24.3 29.9 36.3 0 17.6 10.9 19.1 19.8 31.7 34.8 53.2 32.5 90.4 84.4 2005 0 0 0 7.3 7 17.4 12.1 27.4 20.3 40.5 43.9 15.7 25.4 31.5 25.5 25.7 33.1 8.1 46.4 41.9 87.9 81.2
Source: Centre for Global Development, Standard Chartered Research estimates for the Philippines
Thailand and Philippines have higher per capita incomes
Higher Per Capita Income Thailands population is only 67m, which is only equivalent to 3% of the combined population of China and India. The Philippines has a population of 90 m. However, we believe, the market is ignoring the fact that the Thai economy achieved middle income status about 15 years ago. The Philippines (GNI per capita of US$1,790) is expected to achieve the middle income milestone in the next three years. Middle income status is when the income per capita is over US$2,000. In fact, the GNI per capita of Thailand in 2008 was 25% higher than that of China and nearly fourfold that of India. The Philippines GNI per capita is almost twice that of India. From this perspective, we argue that the ASEAN consumer story is as appealing as China and India. Less urban deprivation Thailand and the Philippines have less urban deprivation than the Asian giants. The proportion of the population that lives in urban areas is higher in China than in Thailand. Thailand is on par with India on this yardstick. However, only 12 % of the Thai urban population are slum dwellers. The high urban populations of China and India include a huge proportion that inhabits the slums. The slum dwellers are typically marginalized and cannot be seen as symbols of the rise of consumerism. The Philippines urban population is a larger proportion of the total population than the corresponding ratio in China and India. This is an immense advantage for consumer companies such as beer producers, as we will discuss later.
Fig 3: Urban Population (2005)

China India Thailand Philippines Urban population % of Total Population 43.1 29.5 33.2 65.0 Slum population % of Urban Population 37.8 55.5 12.0 29.9
Source: ESCAP Statistical Yearbook, Standard Chartered Research estimates
ASEAN consumer has been unscathed by the troubles and looks set to drive the economy Thailand has been in the throes of political turmoil during the last year. There have been street protests and violence in the capital, Bangkok. Business has been disrupted and over 90 people were killed during two months of protests. However, according to government statistics, the overall economy grew at 9.1% YoY in 2Q2010. Private consumption expanded by 6.5% year-on-year in 2Q2010. On a QoQ basis it rose by 2.7%. This is an encouraging swing in momentum. There was a clear boost in durable goods purchase in 2Q2010. Stimulus is a boon for Thai consumption Thai consumption is likely to receive a boost from the THB 116 billion (US$3.33 billion) fiscal stimulus, announced in 2009. The stimulus package was designed to buttress consumption due to the global economic slump. The package includes a monthly living allowance of Bt2,000 (US$66) per head for low-income earners. We believe some 9 million people will benefit from this allowance. The fiscal stimulus also includes school subsidies and free electricity for certain households. Our economics team expects Thai GDP growth of 6.3% in 2010, followed by 4.8% in 2011. We are especially optimistic about domestic consumption. The operative factors are the high savings rate and the fiscal stimulus. The Filipino economy has had a similar trajectory. The economy is dependent on remittance flow from its expatriate workers. Remittance flows are 10% of the GDP. The Philippines economy is not as dependent on exports as others. Remittance growth is expected to remain at 8% to 9%. It is on a sound footing. Remittance drives Filipino consumption With the global downturn in 2008, there were fears that the remittance flows would dry up. That was not the case. Recently, Canada and South Korea have reached employment agreements with the Philippines. Consumption grew at (5%) YoY in 2009 and we expect it to continue in this vein. Our economics team expects GDP growth of 5.9% in 2010 and 5% in 2011 in the Philippines. Remittance flows from the vast number of Filipino expatriate workers should drive domestic consumption growth. There are over 8m overseas Filipino workers.
Secular trends favour Beer

Rising per capita income
The principal driver of beer consumption is the per capita income level of a country. One reason for the importance of the income per capita level is the affordability factor. The higher the income per capita level, the more people who can afford beer. Another reason is that economic growth is accompanied by a change in taste. Higher income levels also means that the distribution network for consumer goods in general becomes stronger. The same network that distributes consumer goods such as toothpaste, ice creams and beverages can be used for beer distribution. The link between income per capita and beer consumption has been subjected to rigorous study. Beer consumption increases with prosperity. Higher income per capita means that people have more money to spend. We examined the beer consumption patterns for over 150 countries. We found a 56% correlation coefficient between income per capita level (GNI per capita) and beer consumption per capita. Fig 4: GNI per capita in US$ (x axis) versus Beer consumption per capita in litres (y axis)
250
200
150
100
50
0 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000
Source: Beer Institute, World Bank
Norway has higher income per capita than Denmark but much lower beer consumption per head Good times drive beer drinking
A correlation coefficient of 56% may be significant, but it is not conclusive. There are some places where beer consumption is poor despite the relatively high income per capita levels. These include Norway, which has an income per capita that is 48% higher than Denmark. However, Denmarks beer consumption per capita is nearly 3 times higher than Norways (143 litres versus 54 litres). Beer consumption is more closely allied with better times than is spirits. People drink spirits in both good times and bad times. In 2008, a year of tremendous economic upheaval, spirit consumption rose in the US from 1.44 gallons per capita to 1.46. During the 2001 recession, spirit consumption per capita rose 3%. The peak month for spirit consumption was ironically September 2001. The terrorist attacks on the World Trade Centre and the Pentagon took place in that month. However, per capita beer consumption has a stronger correlation with rising income than with absolute income. China has seen per capita beer consumption grow at 9% CAGR from 2002 to 2008. The income per capita grew at a CAGR of 10% in this period. During periods of economic stagnation, beer consumption per capita suffers. We have mapped the correlation between GNI per capita growth for the same group of countries versus the Beer consumption per capita from 2002 to 2008. The correlation coefficient is much stronger at 74%. 7
The inference from this data is clear. It is not only the absolute income level of a country that drives beer consumption. The level of economic growth (or income per capita growth) is a stronger variable. The favourable outlook for the Thai and Filipino economies should be of direct benefit to beer consumption. Our economists expect GDP growth to average 6% in 10-12.
Urban Youth love beer

In 2002 to 2008, Thailand and the Philippines beer consumption per capita grew at one of the fastest levels in Asia, during a period of rising incomes. In Thailand, consumption per capita grew at 8% per annum. In the Philippines, a similar trend was observed, as the economy grew at an average of 5%. The correlation with the rise in income per capita was clearly discernible. There is another factor that gives the beer story in the ASEAN region an extra fizz. Thailand and Philippines have some of the strongest urban youth demographics in Asia. Urban youth are the core demographic segment Beer is a mark of prosperity for youth, and urban youth are getting richer. The history of beer shows that the urban youth are the core segment of society. They are at the forefront of consumer tastes, and are growing as a proportion of the population in both the societies under consideration. The percentage of the population between 15 and 35 is higher than the regional average of 31%, although by only a few percentage points. Fig 5: Percentage of Population between 15 and 35
38% 36% 34% 32% 30% % 28% 26% 24% 22% 20% China Malaysia Thailand India Indonesia Philippines Singapore Republic of Korea 25% 29% 36% 33% 34% 31% 35% 35%
Source: UNDP
A closer examination of the demographics shows that Thailand and the Philippines have superior statistics to the rest of the region. Non-slum urbanization levels are higher in these countries than the major Asian countries. The urban population that does not reside in slums is 88% in Thailand and 70% in the Philippines. The larger markets in Asia such as China, India and Indonesia have a much larger slum percentage. The demographic factors in Thailand and the Philippines are thus stronger for beer than elsewhere in the region. They have youthful, urban populations, the overwhelming majority of which do not live in slums, where affordability and distribution of beer is limited. The relative prosperity and superior demographics of the Thai and Filipino urban youth are a boost for beer consumption. The 18 to 35 age group is the ideal target market for beer. Beer is viewed in emerging markets as an aspirational beverage. Young people who start drinking view beer as a safer and more convivial form of alcohol, which they associate with sporting events and parties. Also, social norms encourage the public display of beer drinking more than that of spirits.
Regulators favour beer

Historically, regulators have favoured beer over spirits or hard liquor. The alcohol content in spirits is much higher, and they are associated with alcoholism. The stereotypical image of alcohol abuse involves solitary consumption of spirits. Beer, on the other hand, is associated with conviviality. Its alcohol content is a fraction of that of spirits. In fact, one of the founding fathers of the US President Thomas Jefferson famously said Beer, if drunk with moderation, softens the temper, cheers the spirit and promotes health. During the prohibition era in the US (1920-32), near beer (less than 0.5% alcohol) was exempted. Home brewing was permitted. Regulators are kinder to beer Excise taxes generally favour beer. This is particularly the case in Thailand and the Philippines. Thailand has just faced a 26 % increase in the beer excise tax, but the excise tax regime is kinder to beer than to spirits. This is the same for both countries.
Fig 6: Spirits versus Beer in Thailand

White Spirits Rate x % of Alcohol x Volume (640 ml bottle of beer) Excise Tax Municipal Tax 10% Health Fund 2% TPBS Tax 1.5% Total Tax (THB) Total Tax % 120 x 0.4 x 0.625 = 30 0.1 x 30 = 3 0.02 x 30 = 0.6 0.015 x 30 = 0.45 30 + 3 + 0.6 +0.45 = 34.05 5% Beer % of Ex-factory Price (640 ml bottle of beer) 0.6 x 31.61 = 18.97 0.1 x 18.97 = 1.9 0.02 x 18.97 = 0.38 0.015 x 18.97 = 0.28 18.97 + 1.9 + 0.38 + 0.28 = 21.53 3%
Note: The Beer excise tax is on an ad-valorem basis. Source: Thai Beverage
Distribution advantage
Wide network of sales points Thai Beverage and San Miguel have a tight grip on the distribution network, and their distribution penetration is unrivalled in Asia, outside the city-states of Hong Kong and Singapore. Thai Beverage has 400,000 points of sale (such as bars, restaurants, and roadside kiosks). This works out to a distribution penetration of 168 per POS. We estimate the distribution penetration for San Miguel to be similar at 150 per POS, which is even more impressive. The Philippines is a large archipelago with a population of 90 million. These penetration figures are superior to the rest of Asia. Outside Hong Kong and Singapore, we believe it is unlikely that any brewer can match these distribution penetration figures.
Beer cans change the picture

At present, beer is sold principally in glass bottles. For instance, 81% of the beer sold by Thai Beverage is in glass bottles. The dominant Filipino player San Miguel sells almost all of its beer in glass bottles. Cans set to gradually displace glass We expect cans to gradually displace glass bottles in the next 5 years in both Thailand and the Philippines. Both societies have crossed the threshold where canned beer is financially viable. They have crossed the canning hurdle. Both Thailand and the urban centers of the Philippines have reached the US$5000 per capita level, and canned beer makes more sense at these income levels. In fact, Canning companies have increased their capacity in both countries in expectation of this trend. San Miguel and Thai Beverage are likely to vastly increase their proportion of canned beer, in our view. Brewers have avoided developing cans because distributing bottles is cheaper. Glass bottles are returnable, and are often sold with a deposit that is repayable when the bottle is returned to the distributor. Fig 7: Thai Beverage Beer Bottles
Source: Thai Beverage
Reducing inventory is the main virtue of cans

Cans are easier to transport and store We believe that the onset of canned beer will transform the ASEAN beer industry. In the West, the main reason for the success of canned beer was convenience. Cans are smaller than bottles. They are also stackable and are less likely to break. This makes them easier to distribute and transport. They are easier to transport to bars and restaurants, which found cans easier to keep for longer periods. However, convenience is not the sole benefit offered by cans in the ASEAN region. Canned beer should emphatically improve inventory turnover. The first diagram shows the inventory cycle for bottled beer. This chart serves as an approximation of the distribution system used by Thai Beverage and San Miguel. The numbers in the chart are illustrative of the impact of bottled beer. In the bottle chart, the inventory cycle can take up to 100 days. The bottle is part of the brewers inventory, even after the beer is sold to the wholesaler and then the retailer. It is only after the bottle has been returned to the brewer, via the retailer and the wholesaler, that the inventory cycle has been completed. The purchaser of the beer has to pay a deposit (Bt 60) in this hypothetical case, in addition to the Bt 40 cost of the beer. In this illustration, we have compressed the retailer stage and wholesaler stage for simplicity.
They are less of a burden on inventory
10
Fig 8: Beer Bottle Inventory Cycle

60 deposit + 40 beer Brewer
= Bt 100
Bt 100
Bt 120
20 days
Retailer
30 days
Customer
(Bt 60) 25 days

Source: Standard Chartered Research
(Bt 60) 25 days
Canning has a completely different impact on inventory. Cans are generally not returnable. The customer can dispose of them. There is no deposit. The beer drinker can throw it into the trash can as soon as he has chugged it down. Importantly, the brewer does not hold it as inventory after selling to the retailer or the wholesaler. The inventory cycle of 40 days is a lot shorter than in the previous example. Fig 9: Beer Can Inventory Cycle
40 beer 20 can Brewer Retailer Customer
5 days
15 days
5 days
15 days
The glass ceiling, so to speak, accounts for the gap in the inventory cycle and the cash conversion cycle between giant beer companies and the brewers in emerging countries. Some of the Western companies have a positive cash conversion cycle. Inventory days should fall Canned beer lightens the inventory burden. Inventory days are much lower for the Beer majors. Hence, the cash conversion cycle tends to be lower for the Beer majors, who sell mostly canned beer in Western markets. Typically, the four beer majors have a cash conversion cycle of less than 50 days. The brewers in emerging markets have a cash conversion of cycle of around 100 days.
11
The inventory cycle and the cash conversion cycle appear about to change for the better in the ASEAN region. We expect canning to drive an improvement in these variables. The widespread adoption of canning by Latin American brewers in the 1990s had a similar impact. Canning was adopted in Brazil, Chile and Mexico once those countries reached a level of prosperity where canned beer was viable. The adoption of canned of beer by Cerveza in Mexico and Brazil led to a 25% improvement in their cash conversion cycle in 3 years. As Figure 10 shows, the introduction of canning saw a solid improvement in operating income. Operating income rose at a CAGR of 33% in FY01-06, compared with a CAGR of 10% for the previous five years. Fig 10: Femsa Cerveza: Impact of canning
2001 Total revenue (Mexican Pesos m) Income from operations (Mexican Pesos m) Volume (m hectolitres) Canned beer (% of volumes) 20,703 3,740 23.8 5% 2002 23,833 4,460 23.8 8% 2003 24,956 4,634 24.6 12% 2004 26,848 5,101 25.7 17% 2005 29,768 5,800 27 23% 2006 37,919 6,210 37.7 32%
Source: FEMSA, Standard Chartered Research estimates for canned beer %
Canned beer should have neutral impact on the cost of sales
In our forecasts for Thai Beverage, we assume that the proportion of canned beer in the sales volume will increase from 19% in FY09 to 40% in FY12. Figure 11 details the impact of this process. Canning should have a broadly neutral impact on the cost of sales. Although there is an increase in packaging costs per unit of sales as the firm increases its purchase of cans, the overhead costs of cleaning, collecting and maintaining the bottles should fall. This is reflected in our anticipated fall in the other category of the cost of sales from Bt 3 per litre to Bt 2 per litre from FY09 to FY10 and FY11. We expect a further fall to Bt 1.5 in FY12. Fig 11: Thai Beverage: Impact of Canning
FY2008 Beer and Water sales volume (000 hectolitres) Canned beer % Cost of Sales (Beer & Water) THB m Beer and water: (Bt per litres) Excise Tax Packaging Material Raw Material Other
Note: Please note that 1 hectolitre equals 100 litres. Source: The Company, Standard Chartered Research estimates
FY2009 FY2010E FY2011E FY2012E 6,674 19 25,930 26.6 7.0 2.6 3.0 6,981 25 27,894 31.0 8.0 2.6 2.0 7,367 32 29,878 31.0 8.5 2.6 2.0 7,771 40 31,992 31.0 9.0 2.6 1.5
8,697 12 31,143 26.6 7.0 3.3 3.0
As canned beer takes a hold of these markets, the inventory days and the cash conversion days should fall. We expect the following improvements in Thai Beverages inventory cycle.
12
Fig 12: Thai Beverage: Inventory Days

120 101 100 80 60 40 20 0 2008
Source: Bloomberg
87
80
72
64
2009
2010E
2011E
2012E
Similarly, we expect San Miguels canned beer proportion to increase from 1% to 17% in FY0912. As we saw for Thai Beverage, canning should have a neutral impact on the cost of sales. The additional purchase of cans is matched by less maintenance expenses for the bottles. In the figure below, packaging costs will rise to account for the additional cost of canning. However, the container costs, which is how SMG defines the glass bottles, will fall. The fall in container costs also represent the fall in the amortization charges for the bottles. San Miguel amortizes the bottles over their estimated useful life. Fig 13: San Miguel: Impact of Canning
2008 Percentage of canned beer Number of cases of canned beer (millions) Number of cases of bottled beer (millions) COGS (PHP m) COGS Breakdown (% of revenue) Raw materials and Excise Tax Containers (bottles) Overheads/Misc/Packaging
Source: the Company, Standard Chartered Research
2009 1% 2 173 119301 40% 20% 8%
2010E 6% 11 176 127723 43% 17% 10%
2011E 11% 22 178 134014 44% 14% 12%
2012E 17% 36 178 140742 45% 11% 14%
1% 2 173 119412 40% 20% 10%
Fig 14: San Miguel: Inventory Days

90 80 70 60 50 40 30 2008 2009 2010E 2011E 2012E 76 78 72 65 59
Source: the Company, Standard Chartered Research
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ASEAN resembles America in the 1930s

There are striking similarities between the beer market in ASEAN today and the US in the 1930s. In the US, Alcohol prohibition was lifted in 1933. A new paradigm in terms of drinking habits and regulation arose.
Glass was on its way out

During prohibition, plastic cans were used to sell soup. The US had a reached a level of consumption where beer cans had become viable. Previously, bottles were the principal means of selling beer. The debate about canned beer and bottled beer did not start until the 1930s, prior to which tin cans could not hold beer without exploding. Cans appeared in 1935, shortly after prohibition was lifted In 1935, soon after prohibition, the vinyl liner was invented. This prevents the beer from bursting the cans seam. The first beer to use the new cans was Kruegers Finest Beer, based in Virginia. The arrival was an instant public success. It was convenient to distribute and easy to consume. Crucially, it was a boon for the brewers during the dark days of the great depression. Their inventory cycle was shortened, and the working capital burden was eased. Gradually, beer in cans spread in popularity to Europe. Unfortunately, production of canned beer was stopped everywhere during World War II due to rationing. The Production of beer in cans resumed after the war. Beer cans quickly reached high levels of popularity. The introduction of the flat top can was a fillip to this process.
Consolidation
The beer market became consolidated with dominant players in each region, whereas it had previously been dispersed. In the 19th century, there were 4000 breweries in the US. Brooklyn itself had 48 breweries. People bought meat from the butcher, bread from the baker, and beer from the brewer. When prohibition ended, the industry consolidated. Big brewers like Anheuser-Busch had survived prohibition by producing non-alcoholic drinks (like near beer), chocolates and ice cream. They had a distribution network, which they exploited when prohibition ended. After prohibition, the larger brewers benefitted from the onset of canned beer. By 1970, the consolidation was complete. A similar structure to that of the 1930s US, with single brewer domination, is seen in Thailand and the Philippines.
3-Tier distribution network

One of the consequences of prohibition was a new distribution system. Before prohibition, brewers had exclusive arrangements with bars and other sales outlets. This was known as the tied house system. Brewers had a hand and a stake in distribution. Independent distributors The 21st amendment, which rolled back prohibition in 1933, set the stage for a strictly administered three-tier system. An independent network of beer distributors served as intermediaries between the brewers and the retailers. The virtue of the three-tier system was that retail outlets were left to concentrate on their business, and did not have to devote resources to subsidizing the distribution system. On-site drinking at retail outlets was growing. By 1940 in the US, on-site beer sales represented 1/3 of volume but of sales. Today, it is 50:50 in terms of volume, 70:30 in terms of sales. On-site drinking is much more profitable for the retailers, who charge a heavy premium.
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The ratio of on-site drinking versus off-site drinking in the ASEAN region is the similar to that in the 1930s in the US. Thai Beverage also operates in a three-tier arrangement. They have appointed a network of 930 agents and 4500 sub-agents, in addition to 1,050 direct sales employees. The agents and sub-agents are independent and serve as intermediaries between the brewer and the retail outlets. Fig 15: Thai Beverages Distribution Network has 3 tiers
The 1930s saw Beer volume take off in the US

The confluence of these factors, all which are relevant to ASEAN in the 21st century, were responsible for the transformation of the US beer industry. Beer volume took off with cans Canning caught on, particularly after WW2. The proportion of beer that was canned in the US increased by a factor of 6 from the end of the war in 1945 to 1950. The distribution advantage was hard to resist, and canning is likely to have aided the escalation in beer consumption. Fig 16: Cans as Percentage of US Beer Volumes
70% 60% 50% 40% 30% 20% 10% 0%
1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2008
59% 53% 45% 31% 34% 50%
59% 53% 51% 48% 49%
27% 19% 8% 0% 3%
Source: US Beer Institute
The arrival of canned beer in 1935 heralded a beer boom in the US. By 1950, per capita beer consumption was just 10% below the pre-prohibition level of 20 gallons per capita (76 litres).
15
Fig 17: US per capita Beer production/consumption (gallons per capita)

30 25 20.0 20 15 10 5 0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008
25.8 25.4 20.5 18.2 12.9 16.3 21.9 21.7 21.3 20.8 21.0 20.7 20.5 20.4 20.0
16.0
2.7
0.9
Source: US Beer Institute
Cans led to better cash generation
For the brewers, beer became much more of cash generative business. Prior to the can era, the working capital situation was dire. Brewers had to wait for up to four months to collect their cash. The three-tier distribution system also meant that brewers could focus on their principal activity the production of beer. They were not burdened with distribution and retailing, which is a localized and dispersed business. When prohibition was lifted in 1934, the beer business was dominated by regional players. Each region had a major player. This was in contrast to the dispersed nature of the pre-prohibition market. The end of the Second World War saw further consolidation. By the mid 1970s, Miller, Anhueser-Busch and Coors had cornered 50% of the US market. Today, they have 80% of the US market. Basically, the can factor and three-tier distribution system led to the creation of giant, nationwide brewers. The onset of canning in the ASEAN region has many parallels with the US in the mid-1930s. Canning is likely to strengthen the cashflow of Thai Beverage and San Miguel. The growth of the industry may accelerate along the lines of the 1935 to 1950 boom in US beer.
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Beer majors may go shopping in ASEAN

Asia has become the largest beer market
According to Japans Kirin Institute of Food and Lifestyle, in 2009 Asia exceeded Europe in beer production for the first time ever. Beer is almost entirely consumed domestically, and thus Asia is the largest beer market in the world. Chinas rise is at the core of the shift to Asia. Fig 18: Beer production (% of World Total)
40 35 30 24.9 25 20 15 1999 Europe
Source: Kirin Institute
34.1 30.5
32.4
2009 Asia
This development is an important signal for the four giants of the beer world Anheuser-Busch InBev (ABI), SABMiller, Carlsberg and Heineken. These four Western companies supply roughly 50% of the worlds beer.
Cash-rich giants face stagnation in the West.

Weak growth in West All four giants are facing stagnation in the Western markets. Beer volume and revenue growth has been barely 1% in the past 5 years in Europe and the US. This Western stagnation is expected to worsen. The beer industry is expected to grow by 6% CAGR in the next five years (in terms of volumes), according to Datamonitor. The growth will mainly be in emerging markets. It is likely that these beer giants will turn their sights to Asia, the worlds most vibrant market for beer. These players have deep pockets and the appetite for a shopping spree, in our view. The cash mountain that they have accumulated is detailed elsewhere in the report.
China is dispersed
China is the largest beer market in the world. It has doubled its beer production in the last decade. The US has been emphatically displaced. A decade ago, China trailed the US. Today, China produces and consumes 71% more beer than the US. The Chinese beer market has grown at 10% per annum in the last decade. This is a seismic shift. Despite the rapid growth in China, the beer business has not been particularly profitable. In fact, the profits have trailed the US. ABInBev, the worlds largest brewer, has generated EBITDA margins of just 14%. In the US, ABInBev has recorded EBITDA margins of 41%. The reason for the poor profits in China is the dispersed nature of the market. Scale has proved elusive. The top two brewers control just a third of the market. The brewery business is highly fragmented, with many small regional players.
17
Fig 19: Beer Production

2009 Ranking 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Country China United States Russia Brazil Germany Mexico Japan United Kingdom Spain Poland Ukraine South Africa The Netherlands Venezuela Vietnam Canada Columbia Thailand Belgium Republic of Korea Czech Republic Australia Romania Argentina Nigeria Total
Source: Kirin Institute
Production volume (kiloliters) 42,363,800 23,023,400 10,850,000 10,800,000 9,998,400 8,232,500 5,996,100 4,514,100 3,380,000 3,220,000 3,050,000 2,564,000 2,537,700 2,314,100 2,300,000 2,239,400 2,014,000 1,945,000 1,800,900 1,799,500 1,781,300 1,775,900 1,760,000 1,700,000 1,600,000 180,999,200
Change from 1999 104.3% -1.0% 141.4% 35.0% -11.4% 41.8% -17.0% -22.0% 30.7% 43.1% 258.8% -1.0% 3.2% 36.1% 206.7% -2.4% 25.9% 85.3% 23.6% 7.8% 0.9% 0.3% 58.3% 30.3% 190.9% 32.2%
Production volume (kiloliters) 20,738,800 23,256,000 4,495,000 8,000,000 11,280,000 5,807,300 7,224,400 5,785,400 2,585,200 2,250,000 850,000 2,590,000 2,460,000 1,700,000 750,000 2,295,100 1,600,000 1,049,900 1,457,000 1,669,200 1,766,000 1,770,000 1,111,700 1,305,000 550,000 136,919,400
1999 Ranking 2 1 8 4 3 6 5 7 10 13 28 9 11 17 31 12 19 25 20 18 16 15 24 21 36
India is hard to enter

Venturing into India is also problematic. Despite being a low income country, India is a country of heavy drinkers, but beer has not taken a hold. India is one of the largest consumers of whisky in the world, but one of the lowest consumers of beer. Beer in India has not matched the sharp growth of China, and annual per capita consumption stands at just 0.6 liters, which is roughly a pint. This is compared with 31 liters in China, an average of 73 across Europe, and 76 in the U.S. The potential for beer consumption in India hinges on demographics. Nearly 60% of the population are below 30. GDP growth has averaged 8% in the last 5 years. Standard Chartered expects GDP growth to continue at this pace. Not only does India have a hot economy, it has a swelteringly hot climate. These are ideal hunting grounds for beer producers. High excise taxes Indians are unlikely to shed their preference for spirits. Brewers are faced with massive bureaucratic curbs. It is difficult and costly to win customers. Building a national footprint is actively discouraged by the regulations. Import tariffs are among the highest in the world. The state governments impose an excise tax of up to 150%. A pint of Indian beer costs about US$3, which is three times a shot of local whisky. India has disallowed beer ads. This is a formidable barrier to entry. The Kingfisher brand, controlled by United Breweries, rules the roost. It has a 45% share. SABMiller, one of the international brewers, comes in second with 37%. Apart from Kingfisher, the rest of the market is dispersed. New entrants such as Heineken and Carlsberg are struggling to cross the 10% threshold in market share. 18
ASEAN is ripe for picking

Thailand and Philippines look attractive Saddled with slim profits in China and a disdain for beer in India, the ASEAN region is an ideal hunting ground for the beer giants. Both Thailand and the Philippines have a dominant brewer, a well-built distribution system and are about to introduce cans. They also have favourable demographics. The FCF generation for these companies is about to undergo a transformation. The onerous inventory cycle has historically been a damper on FCF generation. We expect the arrival of cans to improve the FCF situation.
19
Valuation comparison
We have valued Thai Beverage and San Miguel using the DCF methodology. The price targets that we have derived imply 30% upside. Other valuation metrics support our case for these companies.
FCF yield improvement is the clincher

The FCF advantage will get better Thai Beverage and San Miguel are trading at FCF yields of 9% and 5% (2010E). These figures are at the top end of the emerging market yields. Other ASEAN brewers such as Carlsberg Malaysia and Grupo Modelo are behind them, but Thai Beverage and San Miguel are generating poorer FCF yields than developed market players such as Heineken (10.5%), Asahi Breweries (9%), ABInBev (9%), and Molson Coors (8.5%). Fig 20: FCF Yield (2010E)
FCF Yield Emerging markets Cervezas Carlsberg Brewery Malaysia Thai Beverage Ambev-Pref Grupo Modelo-C Tsingtao Brewery Co H San Miguel Corporation Guiness Anchor Bhd Beijing Yanjing Brewery Co A Hite Brewery Co Emerging Markets Average Developed markets Heineken Nv Asahi Breweries Anheuser-Busch InBEV Molson Coors-B Foster's Group SAB Miller Developed markets Average Industry Average
Source: Bloomberg, Standard Chartered Research for Thai Beverage and San Miguel Corporation
7.3 7.2 9.1 6.9 5.6 5.2 5.0 5.0 4.4 -4.3 4.9
10.5 9.0 9.0 8.5 7.6 5.9 8.4 6.5
The crucial difference, in our view, is that San Miguel and Thai Beverage are on the brink of a step up in FCF generation. The onset of cans should cut the inventory days, lessen the working capital burden and widen the FCF yield. We expect FCF CAGR of 38% and 12% for San Miguel and Thai Beverage in FY10-12. The beer producers in the mature markets are expected to generate FCF CAGR in the single digits, according to Bloomberg. This underlines the value proposition offered be the ASEAN brewers.
PER and EV/EBITDA

On both PER and EV/EBITDA bases, both players are at a 20-30 % discount to the industry average. The discount to the Chinese players is particularly wide. The Chinese brewers are trading in the low 30x in terms of PER and on EV/EBITDA ratios of between 11x to 15x. 20
The comparison that underlines the value of the ASEAN players is with the beer majors ABInBev, SAB Miller, Molson Coors and Heineken. These companies are trading at similar multiples to Thai Beverage and San Miguel, but their operations are mostly in the low growth markets of the West. The beer majors lack the growth potential of the ASEAN pair, in our view. Fig 21: Beer Industry: Comparative PER and EV/EBITDA ratios (2010E)
PER (x) Emerging markets Beijing Yanjing Brewery Co A Tsingtao Brewery Co H Grupo Modelo-C Ambev-Pref Hite Brewery Co Cervezas Guiness Anchor Bhd Thai Beverage Carlsberg Brewery Malaysia San Miguel Corporation Emerging Markets Average Developed markets Anheuser-Busch I SAB Miller Carlsberg Foster's Group Heineken Nv Asahi Breweries Molson Coors-B Developed Markets Average Industry Average
Source: Bloomberg, Standard Chartered Research for Thai Beverage and San Miguel Corporation
EV/EBITDA (x) 11.0 12.0 8.7 11.1 15.9 9.6 9.7 8.1 8.5 6.1 10.1
32.1 32.0 21.9 19.4 18.3 16.2 15.6 11.7 13.1 12.8 19.7
19.1 18.9 18.7 15.7 15.0 14.8 14.1 16.6 18.3
10.2 13.7 8.2 10.4 8.7 6.7 14.1 9.6 9.2
Wide chasm in PEG
The value that San Miguel and Thai Beverage represent is brought home by the PEG ratio comparison. PER ratios are more meaningful when compared to earnings growth. The PEG ratios reveal a wide chasm between our picks and the industry average. The discount is in the 50-60% range. These companies are dominant players in markets where beer volumes are rising at around 6%.
21
Fig 22: Beer Industry: PEG ratios (2010E-12E)

PEG Emerging markets Beijing Yanjing Brewery Co A Hite Brewery Co Guiness Anchor Bhd Grupo Modelo-C Ambev-Pref San Miguel Corporation Tsingtao Brewery Co H Cervezas Thai Beverage Carlsberg Brewery Malaysia Emerging Markets Average Developed markets Foster's Group Carlsberg Asahi Breweries Molson Coors-B Anheuser-Busch I SAB Miller Heineken Nv Developed markets Average Industry Average
Source: Standard Chartered Research estimates for Thai Beverage and San Miguel Corporation
5.3 3.7 2.5 2.3 1.7 1.4 1.4 1.3 1.3 0.5 2.1
1.8 1.6 1.5 1.2 1.1 1.1 1.0 1.3 1.9
P/B versus ROE and ROA

Undervalued on this metric The P/B versus ROE metric is another way of confirming the DCF valuation. The efficiency of a consumer play is marked by the degree to which it extracts returns from its equity base. A higher forecast ROE signifies a better use of the equity base. A lower P/B to ROE ratio implies that the company is cheaper. San Miguel and Thai Beverage are trading at a similar discount to the industrys average P/B to ROE valuation of 0.15x.
22
Fig 23: ROE (2010E) and P/B

ROE Emerging markets Guiness Anchor Bhd Ambev-Pref Cervezas Carlsberg Brewery Malaysia Thai Beverage Tsingtao Brewery Co H Grupo Modelo-C Beijing Yanjing Brewery Co A San Miguel Corporation Hite Brewery Co Average Developed markets Foster's Group Heineken Nv Anheuser-Busch I Carlsberg Asahi Breweries Molson Coors-B Average Industry Average 27.1 17.4 14.6 13.6 9.3 8.7 15.12 16.6 4.4 2.1 3.0 2.8 1.3 1.2 2.5 3.1 0.16 0.12 0.20 0.20 0.14 0.14 0.16 0.19 33.4 22.8 22.0 21.9 18.8 18.1 13.6 10.1 8.0 3.7 17.2 5.4 5.6 3.4 3.0 2.9 5.9 3.1 3.6 1.0 0.6 3.5 0.16 0.24 0.16 0.14 0.15 0.32 0.23 0.36 0.14 0.15 0.21 P/B P/B to ROE (x)
Source: Bloomberg, Standard Chartered Research estimates for Thai Beverage and San Miguel Corporation
The two firms are among the highest ROAs
P/B to ROE comparisons are skewed by the capital structure. San Miguel has an ROE of 8%, which is half the industry average, but the firms ROE has been depressed by the recent rise in its equity base. The equity base rose from PHP 168 billion in FY08 to PHP 241 billion in FY09. The company recorded a PHP 50 billion net gain from the divestment of its share in a subsidiary. This increased its cash reserves and unappropriated earnings. The P/B to ROA comparisons strip out changes in the capital structure, such as increases in the equity base. On this metric, San Miguel, as well as Thai Beverage, have among the highest ROAs. Their P/B valuation does not reflect this factor.
23
Fig 24: ROA (2010E) and P/B

ROA Emerging markets Carlsberg Brewery Malaysia San Miguel Corporation Ambev-Pref Thai Beverage Guiness Anchor Bhd Cervezas Tsingtao Brewery Co - H Grupo Modelo-C Beijing Yanjing Brewery Co - A Hite Brewery Co Average Developed markets Carlsberg Molson Coors-B Heineken Nv Anheuser-Busch I Asahi Breweries Foster's Group Average Industry Average 14.5 6.4 5.0 4.1 3.5 -6.1 4.6 9.3 2.8 1.2 2.1 3.0 1.3 4.4 2.5 3.0 0.19 0.19 0.42 0.73 0.39 -0.71 0.20 0.32 36.7 14.9 14.6 13.7 12.6 11.1 9.2 8.7 2.4 1.9 12.6 3.0 1.0 5.6 2.9 5.4 3.4 5.9 3.1 3.6 0.6 3.5 0.08 0.07 0.38 0.21 0.43 0.31 0.64 0.35 1.51 0.30 0.43 P/B P/B to ROA
24
The Big 4 are Cash-Rich and Hungry

Potential buyers have massive cash reserves
We believe the big 4 beer players are likely to set their sights on the ASEAN region, and their interest may lead to a revaluation of companies such as Thai Breweries and San Miguel. The big 4 are marked by massive cash reserves and underleveraged balanced sheets, and can easily raise more cash for an acquisition. ABInBev stands out on this list. Fig 25: Beer Majors Cash Reserves (US$ m)
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 SAB Miller
Source: Bloomberg
3,689
501
745
734.2
ABinBev
Heineken
Molson Coors
Fig 26: Beer majors: Net Gearing (%)

160 140 120 100 80 60 40 20 0 -20 -40 SAB Miller
Source: Bloomberg
136.71
144.63
41.91
-21.29 ABinBev Heineken Molson Coors
25
Big 4 Face low growth in the West

Fig 27: Overview of Beer Majors
Anheuser-Busch Headquarters Anheuser-Busch InBev, Brouwerijplein 1, 3000 Leuven, Belgium. Heineken Tweede Weteringplantsoen 21, 1017 ZD Amsterdam, the Netherlands. SABMiller One Stanhope Gate, London, W1K 1AF, England Molson Coors 1225 17th St., Ste. 3200, Denver, CO 80202 United States Main Brands Budweiser Stella Artois Becks Amstel Cruzcampo Birra Moretti Pilsner Urquell Peroni Nastro Azzurro Miller Genuine Draft Coors Light Blue Moon Belgian Wheat Ale Keystone
Net income (US$m) Revenue (US$m)
4,613 36,758
1,420 20,500
1,910 18,020
720 3,032
Source: Datamonitor, Bloomberg
ABInBev and Heineken are two of the beer majors who appear to be actively on the lookout for emerging markets. ABInBev is the product of the Belgian brewer InvBevs US$52 billion acquisition of Anheuser-Busch in November 2008. The merged company became the largest brewer in the world with annual production of 400 million hectolitres. Despite its scale, ABInBev is constrained by the fact that 60% of its revenue comes from the developed markets. Beer volumes are flat in these markets. The biggest challenge that ABInBev faces is the faltering volumes in the US. The US accounts for half of ABInBevs EBITDA. Beer volumes have fallen by 7% and 3% in the last two quarters. Emerging markets have been their saving grace. In Brazil, beer volume rose almost 14% in 2Q10. A foray into the dynamic ASEAN region should thus be a welcome move for ABInBevs shareholders. Cerveza unit of Femsa was priced at 11x EV/EBITDA Heineken has been further down the emerging market acquisition trail. Earlier this year, they bought the beer unit (Cerveza) of the Mexican company Fomento Economico Mexcano (Femsa) for US$8 billion in stock. Cerveza was valued at 11x EV/EBITDA. Cerveza operates in Mexico and Brazil, where beer volume growth easily outstrips the mature markets. The deal increased Heinekens share of global beer volume to 9.2% from 6.9%. They have managed to retain their position as the second largest beer company in terms of volume.
26
Thai Beverage PCL

Cans will do the trick
OUTPERFORM
PRICE as at 19 October 2010
(initiating coverage)
Price target
SGD0.28
We initiate coverage on Thai Beverage with an Outperform rating and a price target of S$ 0.38, implying 37% upside. Thai Beverage is the leading brewery in Thailand with a market share of 55%. We believe Thai Beverage is ideally placed to gain from the beer boom in Thailand. The beer industry should gather momentum with the onset of canned beer.
Bloomberg code
SGD0.38
Reuters code
THBEV SP
Market cap
TBEV.SI
12 month range
SGD7.03bn (US$5.39bn)
EPS est. change n.a.
SGD0.23 - 0.29
The Thai beer industry has compelling prospects. Beer consumption looks set to rise at over 6% in the next three years, having a close correlation with higher disposable income. The Thai urban youth population is relatively large and prosperous, which is ideal for beer sales. Thai Beverage has a wide distribution network reaching the countrys main sales points. Thai Beverage is a potential acquisition target. The worlds major beer companies such as Anheuser-Busch InBev are facing low growth in the Western markets. They could be looking for acquisition opportunities in emerging markets, where beer demand is accelerating. Recently, Heineken acquired the Mexican beer unit of Femsa at an EV/EBITDA of 11.2x, which is a sharp premium to Thai Beverage. Thai Beverage may be revalued as more emerging market acquisitions take place, in our view. The introduction of cans is likely to improve FCF generation. We expect a gradual shift from bottled beer to canned beer. Bottles lengthen the inventory cycle and depress the FCF generation. Cans are disposable, and should be instrumental in cutting Thai Beverage inventory days from 87 in FY09 to 64 in FY12. The impact should be FCF CAGR of 12% in FY10-12. Other metrics support our DCF valuation. At 12x FY10E PER and 8x EV/EBITDA, Thai Beverage is below the industry average. It is also at a 60% discount to the PEG ratio average of the peer group. We believe the market is missing the FCF benefits of canned beer.
Year end: December 2009 2010E 2011E 2012E Sales (THBm) 107,969 107,793 111,663 115,128 Gross profit (THBm) 31,360 33,696 35,512 33,093 15,542 16,709 18,794 21,547 EBIT (THBm) 548.6 1,181.2 1,081.3 1,040.1 Interest Expense (THBm) Contrib. fr new invts/acqu (THBm) 11.2 330.6 363.7 0.0 15,004.8 15,858.5 18,075.8 20,506.7 PBT (THBm) Tax % 30.60 30.60 30.60 30.60 10,566.4 11,001.0 12,539.2 14,225.5 Earnings (THBm) 0.42 0.50 0.57 0.65 EPS (THB) DPS - net (THB) 0.33 0.26 0.30 0.34 1.3 1.9 1.9 1.9 Dividend cover (x) Sales growth (%) 2.4 -0.2 3.6 3.1 3.4 7.5 12.5 14.7 EBIT growth (%) EPS growth (%) 2.2 18.8 14.0 13.4 DPS-net growth (%) 10.0 -19.7 14.0 13.4 FCF Yield (%) 10 7 8 9 Dividend yield (%) 5 4 5 6 14.7 11.7 10.7 9.4 PER (x) EV/EBITDA (x) 8.7 7.6 7.1 6.4
Source: Company, Standard Chartered Research estimates
Share price performance

0.31 0.30 0.29 0.28 0.27 0.26 0.25 0.24 0.23 Oct09 Jan10 Apr10 Jul10 Oct10
ThaiBeveragePCL
STRAITSTIMESINDEX(rebased)
Share price (%) Ordinary shares Relative to Index Relative to Sector Major shareholder Free float Average turnover (US$)
Source: Company, Bloomberg
-1 mth -3 mth -12 mth -2 -2 10 -5 -9 -7 Siriwana Company Limited (45.3%) 36% 1,729,870
27
Investment Summary
Earnings growth driven by rising beer volumes
We expect 17% earnings CAGR We expect 17% earnings CAGR in 2009-12, based on improved prospects for the beer segment. The beer segment should be see increased sales volumes. Thai Beverage is the dominant beer producer (55% market share) in Thailand. Thai beer consumption looks set to rise by an average of 6% in the next three years. Structural reasons such as a large middle class, favourable urban youth demographics and an advanced distribution network should push beer consumption. Thailand has one of the highest points of sale per capita ratios. Thai Beverages beer segment is on the brink of a recovery, and we believe the firm is likely to control costs after a 27% rise in the excise tax in 2009. We expect a relatively stagnant cost of sales in the forecast period, and we believe the beer segment is likely to pass on part of the increased costs to the consumer in FY10-12. The spirit segment should grow, but at the more muted pace of 3% per annum in FY10-12. Fig 28: Beer volumes
FY2008 Beer segment (Sales Volumes, 000 litres) Net earnings (THB m)
Note: Please note that the Beer segment also includes water. Source: The Company, Standard Chartered Research
FY2009 6,360 10,566
FY2010E 6,711 11,673
FY2011E 7,082 12,710
FY2012E 7,470 14,454
8,290 10,342
Introduction of cans should drive FCF improvement

We expect the increased use of canned beers to transform Thai Beverages FCF generation. Bottled beer increases the inventory burden as the bottles are returnable. Cans are disposable and should reduce the inventory cycle. The proportion of beer volume represented by canned beer should increase from 19% in FY09 to 40% in FY12. The onset of canned beer should lead to an improvement in FCF generation, with inventory days will fall from 87 to 64. The cash conversion cycle should fall from 79 to 56 days. We believe this will translate to a FCF CAGR of 12% in the forecast period. Any FCF improvement will have a direct impact on our DCF-based valuation.
Stable Balance sheet

Thai Beverage is well-funded and under-leveraged. The firm has a cash balance of THB 2.5 billion. Despite a dividend payout rate of 55 to 70% in the forecast period, the company should have net cash in FY11 and FY12. Large FCF generation should more than meet the companys dividend payments and capital expenditure. We do not expect the company to increase its leverage.
Dominance is unlikely to be shaken.

Wide reach and brand recognition Thai Beverage has a tight grip on the Thai beer and spirit market. It has a 55% market share in beer and a similar dominance of the spirit market. We are confident that it will maintain this position. The firm has its tentacles on the distribution system with 400,000 points of sale. It also ranks very high on the branding surveys. According to the Beer Service Annual Report, Thai Beverage beer brands (Chang, Archa and Chang Draft) are the top 3 brands in terms of market share in Thailand.
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Valuation
11% WACC is reasonable We employ a DCF methodology to calculate our valuation for Thai Beverage. The company operates mainly in Thailand. We thus assume a market risk premium of 8%, in line with our reference point for other companies of this scale in the region. Our risk-free rate of 2% is equivalent to the 10-year Treasury bill rate for Thailand. We have assumed a Beta of 1, as we believe Thai Beverages earnings are more susceptible to risk than the official beta suggests. The official Beta on Bloomberg is a lot lower. We have decided to increase it because we view Thai Beverages performance as more volatile than the market assumes. We assume a target debt-to-equity ratio of 30%. The company is operating at a net debt-to-equity ratio of 17%. The companys gearing should fall due to vigorous cash generation in the forecast period, and we believe the actual gearing level is likely to be lower than our target. However, we have assumed a higher leverage in our WACC calculations to be conservative. The debt premium of 3% is a reflection of the stature of Thai Beverage, as a major Thai corporate. This leads us to a WACC of 11% Our DCF valuation assumes a terminal growth rate of 1% in perpetuity. The terminal growth rate is based on our long-term expectation of Thailands GDP growth rate. The Thai GDP growth rate has averaged 4.7% since the Asian crisis of 1997-98. We expect it to rise to an average of 6% in the next three years. Hence, we believe our terminal growth rate is a reasonable assumption. Fig 29: WACC Calculations
WACC Cost of Equity Cost of Debt Equity Beta Debt Beta Asset Beta Risk Free Rate Market Risk Premium Target Gearing Effective Corporate Tax Rate Debt Premium
Source: Standard Chartered Equity Research
11% 10.50% 10.50% 1.00 1.00 1.00 2.0% 8.00% 30.00% 20.00% 3.00%
Fig 30: DCF Assumptions

WACC Terminal growth rate
Source: Standard Chartered Research estimates
11% 1%
29
Our DCF analysis provides us with a price target of SGD 0.38, which implies potential upside of 38%. At our price target, Thai Beverage trades at 11x PER 2010E and at 11x EV/EBITDA 2010E. Fig 31: DCF Calculations (THB m)
DCF of operations NPV of the terminal value (THB m) Total value of the operations (THB m) Net (cash)/debt (THB m) Equity value (THB m) Equity value per share (THB) Equity value per share (S$)
32,729 170,159 202,888 9,396 193,492 8.79 0.38
We have also run a sensitivity analysis for the DCF valuation: Fig 32: Sensitivity Analysis Sensitivity of Equity value (THB m)
WACC 193,492 -1.0% Terminal growth 0.0% 1.0% 2.0% 3.0%
6.2% 282,968 327,809 390,064 482,322 633,156
7.2% 246,198 279,651 323,984 385,533 476,744
8.2% 217,478 243,325 276,402 320,237 381,094
9.2% 194,428 214,951 240,510 273,219 316,565
10.2% 175,522 192,178 212,475 237,752 270,100
PEG ratios
46% discount to industry We have compared the PER ratios to expected FY10-12 earnings CAGR for brewery industry. Thai Beverage stands out at a massive discount to the industry average. There is, however, a mismatch between the PEG ratios of the developed countries and the emerging market brewers. The discount to the developed country brewers is only 16%, but the discount to the emerging market brewers is 46%. We believe one would be hard pressed to find a more undervalued emerging market brewer. Fig 33: PEG ratios
Thai Beverage Industry Average Developed Country Brewers Emerging Market Brewers
1.3 1.9 1.3 2.1
P/B versus ROE

Thai Beverage stands out in this metric. Its ROE is superior to the industry average, as well as both the developed country brewers and emerging market brewers. The P/B to ROE discount implies that Thai Beverage is undervalued, and we believe the company deserves to trade at a higher P/B multiple
30
Fig 34: P/B versus ROE

ROE Thai Beverage Industry average Developed Country Brewers average Emerging Market Brewers average 18.8 16.6 15.1 17.2 P/B 2.9 3.1 2.5 3.5 P/B to ROE 0.15 0.19 0.16 0.21
FCF yield
Thai Beverages FY10E FCF yield of 9.1% places it at an advantage over the beer industry, and is 40% above the industry average. FCF yield of 9% is set to rise The comparison with the emerging markets brewers and developed country brewers is revealing. The details of these brewers are provided in the valuation section. Thai Beverage has better FCF generation than the emerging market brewers (an average of 4.9%). However, the FCF yield of the developed country brewers is similar at 8.4%. We expect Thai Beverages FCF yield to grow at a CAGR of 14% in FY10-12. The developed market brewers should be put in the shade by Thai Beverage because they have much more limited growth prospects, in our view. We believe the FCF yield gap is likely to narrow in favour of Thai Beverage in FY10-12. Fig 35: FCF yield
Thai Beverage Industry Average Developed Country Brewers Emerging Market Brewers
9.1 6.5 8.4 4.9
31
How we stack up?

Broker recommendations
Despite the run-up in the stock price, the present broker recommendations are evenly split between 2 Buys and 2 Holds, according to Bloomberg. The average price target is S$0.29, which is in Hold territory, as opposed to our price target of S$0.38.
We are in line with consensus in 2010 and 2011 but ahead in 2012
Our net income forecasts are in line with the Bloomberg consensus in 2010 and 2011. We are just 2% and 3% above consensus on those years. However, we are 11% above consensus in 2012. We are ahead of consensus in 2012 This difference can be attributed to our conviction that beer volumes will rise in excess of GDP growth. We expect a 7% rise in beer volumes in those years. We are more optimistic on the sustainability of the companys earnings than the market. We are confident of the fundamental case for beer in Thailand.
Fig 36: Forecasts compared to Consensus

2010E THB m Sales Net profit Consensus 116,649 10,806 Standard Chartered 107,793 11,001 Difference -8% 2% Consensus 122,211 12,169 2011E Standard Chartered 111,663 12,539 Difference -10% 4% Consensus 124,903 12,777 2012E Standard Chartered 115,128 14,225 Difference -8% 11%
Source: Bloomberg, Standard Chartered Research estimates
What is the market is missing?

Market is missing the beer story and FCF gains from cans We believe that Thai Beverages current valuation of 12x PER 2010E and 8x EV/EBITDA does not do justice to the momentum of its earnings and cashflow. We expect Thailands beer consumption to accelerate. Structurally, Thailand has the ingredients of a beer boom. We expect 6% growth in beer consumption. The urban population has some of the most favourable demographics in the regions. Thai Beverage, the pre-eminent player, has a superb distribution network that covers the best part of Thailand. Thailand is just entering the income bracket (US$5000 per capita) where canned beer has become viable. Canned beer should generate an improvement in FCF. The inventory burden should be lighter. Thai Beverage may be revalued Also, we see Thailand as a possible acquisition target for the major beer companies. The beer majors are facing flat volume growth in the mature markets. A dynamic emerging markets company such as Thai Beverage may be an ideal target. At the very least, the recent US$8 billion acquisitions of Cerveza, the Mexican beer unit of Femsa by Heineken should lead to a revaluation of San Miguel. That deal was priced at 11x EV/EBITDA which suggests that Thailand is deeply undervalued. Thailand has similar fundamentals for beer growth to Mexico. In fact, Thai Beverages dominance of Thailand is stronger than that of Cerveza in Mexico.
32
Forecasts and Assumptions

Revenue Drivers
Our revenue drivers are derived with reference to assumptions on the overall status of the Thai liquor industry. We assume that the Thai beer market will grow in line with GDP growth expectations for that country. We believe spirit industry growth will trail GDP growth. As countries become more prosperous, beer demand outstrips spirit demand. Fig 37: Revenue Drivers (Macro)
FY2007 Size of beer market - thousand hl Beer market growth - Thailand Size of spirit market - thousand cases Spirit market growth - Thailand
Source: The Company, Standard Chartered Research estimates
FY2008 19,349 4.80% 79,081 4.0%
FY2009 20,297 4.90% 81,454 3.0%
FY2010E 21,515 6.00% 83,898 3.0%
FY2011E 22,806 6.00% 85,576 2.0%
FY2012E 24,175 6.00% 88,143 3.0%
18,463 5.60% 76,040 4.5%
2.2 billion Litre market
The company-specific drivers are shown below. We expect Thai Beverage to retain its 55% market share. We estimate the Thai beer market to be 22 million hectolitres in 2010. There are formidable entry barriers including licensing regulations. We expect sales volume growth to be in line with the growth of the industry.
Fig 38: Revenue Drivers (Company)

Sales Volume Growth % Beer and Water Beer Drinking water Soda water Spirits White spirits Brown spirits
FY2007 7.0 0.0 -2.0 3.0 7.0
FY2008 5.0 2.0 0.0 2.0 6.0
FY2009 5.0 2.0 0.0 2.0 6.0
FY2010E 6.0 1.0 2.0 2.0 5.0
FY2011E 6.0 1.0 2.0 1.0 5.0
FY2012E 6.0 0.0 2.0 1.0 5.0
We expect ASPs of THB 47.50 for beer and water in the forecast period. Our ASP expectation for spirits is THB 1,068 per case.
Cost Drivers
The basic cost structure is detailed below. Excise tax represents the most important cost item.
Fig 39: Beer Cost Structure Operating Expenses SG&A Excise Tax Packaging COGS Raw material Depreciation Labour Other
Source: The Company, Standard Chartered Research
22% 57% 14% 7% 2% 1% 4%
33
We assume that the recent 27% excise tax will not be reviewed for another three years. Generally, excise taxes are reviewed on a three year basis. In the cost assumptions table below, we provide details of both cost of sales and operating expenses. Fig 40: Cost Assumptions
Beer and water (in Bt per litre) Excise Tax Packaging Material Raw Material Other Spirits (in Bt per case) Excise Tax Packaging Material Raw Material Other
FY2007 26.6 5.9 3.3 2.7 470.9 72.3 45.5 58.3
FY2008 26.6 7.0 3.3 2.7 470.9 79.5 45.5 58.3
FY2009 26.6 7.0 2.6 2.7 470.9 79.5 45.5 58.3
FY2010E 31.0 7.0 2.6 15.0 470.9 79.5 45.5 58.3
FY2011E 31.0 7.0 2.6 13.0 470.9 79.5 45.5 58.3
FY2012E 31.0 7.0 2.6 17.0 470.9 79.5 45.5 58.3
Profitability
Profitability should be driven by volume growth. We assume ASPs to be flat. The gross profit growth is detailed below. The profitability variables should rise steadily at about 6% per annum. Beer looks set to recover The spirit business will provide the bulk of the profits. FY09 was a poor year for the beer segment. The troubles in Thailand and the 27% increase in excise tax led to a THB 1.6 billion net loss for the beer segment. The gross profit margin was 14%. The entirety of Thai Beverages profits were from the spirits segment. The beer losses were reduced in 1H10. The trajectory has improved. The company has adjusted sales prices to cover the amount of the tax rise. We expect to see a return to beer profitability in FY11 and FY12. Fig 41: Profitability trend
23,000 21,000 19,000 17,000
S$m
15,000 13,000 11,000 9,000 7,000 2007 2008 Operating profit 2009 2010E Pretax Profit 2011E 2012E Net profit
Working Capital
Our working capital assumptions are presented below. The operative factor is the fall in inventory days, driven by the introduction of canned beer. At present, canned beer represents just 19% of Thai Beverages volumes. The growing prosperity of the market should lead to more cans as a proportion of beer volumes. Cans are disposable and do not require a deposit.
34
Falling inventory days
We expect inventory days to fall from 87 in FY09 to 64 in FY12. In FY09, inventory days for the beer segment were 40. The spirit segment is actually well in excess of 100. The gradual introduction of canned beer should depress the inventory days for beer to below 40. This should have a direct benefit for the overall cash conversion cycle, which we expect to compress from 79 days to 56 days. Fig 42: Working Capital Assumptions
2007 Accounts receivable days Inventory days Accounts payable days Cash conversion cycle days
2008 5 101 16 90
2009 7 87 15 79
2010E 7 80 15 72
2011E 7 72 15 64
2012E 7 64 15 56
7 97 13 91
Capex, dividends and financing plans

We have modelled Thai Beverages capex expectations in line with the companys guidance and its recent history. The company has capital expenditure guidance of THB 4.7 billion in FY10 and THB 2.6 billion in FY11. We expect capex to represent 3% of the companys sales in the forecast period. As the leading player industry in the Thai liquor industry (55% market share in beer), Thai Beverages expansionary capex plans are limited. Instead, the bulk of the capex seems to involve maintenance activities. We expect the company to maintain a dividend payout ratio of 55 to 70% in the forecast period. Despite the high dividend payout rate, the company should have a dividend cover of 1.9x. The firm is unlikely to increase its debt because it is underleveraged. We also expect rising cashflow from operations.
FCF generation
12% FCF CAGR We view the main benefit of the gradual introduction of cans as a steady rise in FCF generation. The cash conversion cycle should contract and generate superior cashflow from operations. As the capital expenditure expectations are just 2% of revenue, Thai Beverages FCF generation should improve. We expect FCF CAGR of 12% in the forecast period. Fig 43: Thai Beverage FCF
19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 2007 2008 2009 2010E 2011E 2012E 11,681 15,551 15,327 14,203 15,792 17,963
Source: Bloomberg, Standard Chartered Research estimates
35
Risk Analysis
Government regulations
Excise tax may rise again The foremost risk that Thai Beverage faces is government regulations, to which its earning are vulnerable. Excise taxes are the largest part of Thai Beverages cost of sales. The Thai government may increase excise taxes to buttress its fiscal position. Alcohol is one of the leading sources of indirect taxation in that country. The latest excise tax increase in 2009 was steep. It represented a 27% rise and had a severe impact on beer sales in 2009. Another rise in the excise tax may have a devastating impact on beer sales.
Lack of Disclosure
The companys financial statements provide limited operating details. For instance, the sales breakdown includes the absolute sales number in terms of some of the product segments. However, details of the food business could be stronger. There are other areas where the level of disclosure is poor. The company does not provide, in our view, sufficient details of its hedging strategies, particularly the use of derivatives. The poor level of disclosure increases the margin of error for our earnings forecasts. This means that in projecting the companys earnings, it is necessary to take a leap of faith regarding the operating details. These opaque operating data are far from satisfactory and make our forecasts subject to qualification.
Conglomerate risk
Thai Beverage is a large conglomerate. Though the liquor business is the core of its operations, there, are other businesses. They are active in the food business and non-alcoholic beverages. There may be transfer pricing between different business segments. Another risk associated with a family-held conglomerate is potential conflict within the controlling family. The Charoen family founded Thai Beverage. They occupy many of the key management positions. It is conceivable that conflicts within the family may derail the companys prospects.
Raw material prices

The beer and spirit businesses are susceptible to raw material prices. The main ingredient for beer is barley. The main raw material for spirits is molasses. Both these commodities are at historically high levels. A further increase in the prices of these commodities may seriously affect the profitability of the liquor business. Thai Beverage is principally a price-taker of these inputs. However, the risk of a raw material price rise is not as formidable as the risk of an excise tax rise. Raw material prices represent just a quarter of Thai Beverages cost of sales.
Cans may be slow to take off

Canned beer is a relatively new concept in Thailand. It has only been oin the market since the 1990s, while bottled beer has a longer history. Though 19% of beer volume is canned, the core of the market is bottled beer. As with all new products, there may some consumer resistance to bottled beer. The market may not adopt bottled beer as quickly as our forecasts imply.
36
All about Thai Beverage

Company Outline
Beer and spirits are the core Thai Beverage Public Company Limited (ThaiBev) is a beverage company. It is the largest liquor company and brewer in Thailand. It has a 55% market share in beer. The Company operates five segments: beer, spirits, non-alcoholic beverages, and food and alcohol. Beer includes production and sales of branded beer products. The Spirit business includes production and sales of branded spirit products. Non-alcoholic beverages include production and sales of branded soda, water, ready-to-drink coffee, energy drink, green tea and fruit juice flavour. The food segment includes Japanese restaurants, bakery shops and distribution of food and beverages. The Companys subsidiaries include International Beverage Holdings (UK) Limited, Best Spirits Company Limited, InterBev (Singapore) Limited, Blairmhor Limited, Inver House Distillers Limited and Blairmhor Distillers Limited. In November, 2009, ThaiBev completed the acquisition of Yunnan Yulinquan Liquor Co., Ltd. (source: Google Finance) The following chart provides an outline of Thai Beverages operations Fig 44: Thai Beverages Operations
37
Company History
The notable events in the Company's business are set out below: Fig 45: Landmarks
October May April July May March July December July January October August October June May October October September January Sep-Nov September November December 1977 1983 1986 1988 1994 1995 1998 1998 1999 2000 2001 2002 2003 2004 2006 2006 2006 2007 2008 2008 2009 2009 2009 Acquisition of Sangsom Co.,Ltd. to produce Sangsom rum Successful bid for concessions offered by the Government to build and operate 12 distilleries in Thailand Spirit business was merged with Sura Maharasadorn Group Acquisition of Red Bull Distillery (1988) Co.,Ltd. Bang Ban brewery commenced operations Joint Venture between Carlsberg A/S and Chang Beer was launched in Thailand Acquisition of United Winery and Distillery Co.,Ltd Chang Beer became a market leader with approximately 54% market share of beer produced in Thailand Acquisition of Bang Ban brewery from joint venture with Carlsberg A/S Acquisition of 12 distilleries from the Government Kampaengphet brewery commenced operations Acquisition of Thai Alcohol Public Company Limited Thai Beverage was established as a holding company for all the subsidiaries Expansion of Kamphaengphet brewery commenced Thai Beverage successfully listed in the SGX-ST Acquisition of distillery assets from Sin Surang Karn Sura Co.,Ltd. Acquisition of PSUK, acquisition of BSHK Acquisition of United Products Company Limited and SPM Foods and Beverages Company Limited Acquisition of energy drink and ready-to-drink coffee assets from Wrangyer Beverage Company Limited Acquisition of 43.9% of Oishi in Sept; 89.9% following a tender offer in Nov, for a total cost of 6.24 billion Baht ThaiBev turned a new chapter in the history of "Beer Chang" under the one umbrella concept of "Kon Thai Hua Jai Deaw Gun" Acquisition of Yunnan Yulinquan Liquor Co., Ltd., Chinese white spirit distillery in China ThaiBev extended spirit product portfolio by launching Thailand's newest premium brandy, "Meridian V.S.O.P."
Source: The Company
The Management
Controlled by the third richest man in Thailand The management is controlled by the Sirivadhanabhakdi family. They hold 67% of Thai Beverage. The patriach of the family is the Executive Chairman Charoen Sirivadhanbhakdi. Mr. Charoen is ranked by Forbes as the third richest man in Thailand, with a personal fortune of US$4.2 billion. Mr. Charoen controls the day-to-day operations of the company. Mr. Charoen rose from humble origins in Bangkok. He started off as a street vendor in Bangkok selling beer and whisky. His privately held TCC Land owns Bangkok's famous tech-mall Pantip Plaza. He also holds Hotel Plaza Athne in Bangkok and Manhattan, as well as hotels in Asia, the U.S. and Australia.
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Fig 46: Share price performance

0.30 0.28 0.26 0.24 0.22 0.20 0.18 0.16 Jan-09 Mar-09 Jan-10 Sep-08 Nov-08 Sep-09 Nov-09 Mar-10 Jul-09 May-09 May-10 Sep-10 Jul-10
Fig 47: PER comparison

18 17 16 15 14 13 12 11 10 9 Jan-09 Nov-09 Jan-10 Nov-08 Sep-09 May-09 May-10 Sep-08 Sep-10 Jul-09 Mar-09 Mar-10 Jul-10
Thai Beverage PCL
Thai Beverage PCL
Thai Beverage PCL
Thai Beverage PCL
Source: Bloomberg, Standard Chartered Research
39
Financials
Fig 48: Income statement (THBm)
Year end: December Sales Gross profit EBIT Interest Expense Contrib. from new invts / acquisitions PBT Tax % Earnings EPS (THB) DPS - net (THB) Dividend cover (x) Sales growth (%) EBIT growth (%) EPS growth (%) DPS-net growth (%)
2004 90,126.3 26,523.1 15,901.0 1,740.3 0.0 14,160.7 31.7 10,417.5 0.47 0.12 3.9 -1.6 +4.7 +50.4 +31.4
2005 92,091.2 28,947.7 16,717.7 1,595.4 0.0 15,122.3 31.2 10,409.4 0.47 0.24 2.0 +2.2 +5.1 -0.1 +100.0
2006 28,472.8 15,922.6 1,568.7 23.7 14,377.7 30.1 10,054.8 0.42 0.23 1.8 +6.2 -4.8 -10.7 -3.2
2007 31,283.5 16,810.8 1,050.2 50.8 15,811.4 30.6 10,628.2 0.42 0.29 1.5 +7.5 +5.6 +0.1 +24.9
2008 30,126.2 15,033.6 680.9 552.5 14,905.1 30.6 10,341.9 0.41 0.30 1.4 +0.3 -10.6 -2.7 +3.4
2009 31,359.7 15,542.2 548.6 11.2 15,004.8 30.6 10,566.4 0.42 0.33 1.3 +2.4 +3.4 +2.2 +10.0
2010E 33,695.9 16,709.1 1,181.2 330.6 15,858.5 30.6 11,001.0 0.50 0.26 1.9 -0.2 +7.5 +18.8 -19.7
2011E 35,511.5 18,793.5 1,081.3 363.7 18,075.8 30.6 12,539.2 0.57 0.30 1.9 +3.6 +12.5 +14.0 +14.0
2012E 33,093.0 21,546.8 1,040.1 0.0 20,506.7 30.6 14,225.5 0.65 0.34 1.9 +3.1 +14.7 +13.4 +13.4
97,797.9 105,107.9 105,452.4 107,969.2 107,793.3 111,663.0 115,127.8
Fig 49: Balance sheet (THBm)

Year end: December FAs tangible FAs intangible Other LT Assets Total LT Assets Inventories Receivables Cash & equivalents Other current assets Total current assets Total assets Payables Borrowings Other liabilities Minority interest Shareholders' funds Capital employed
2004 45,950.2 233.6 1,389.9 47,573.7 30,737.9 840.6 887.5 9,081.7 41,547.8 89,121.4 1,797.9 47,126.8 6,834.2 0.0 33,362.6 80,489.3
2005 48,295.0 262.2 255.6 48,812.8 26,034.7 400.6 3,260.7 2,702.7 32,398.6 81,211.4 1,504.6 40,386.8 7,954.0 0.0 31,366.0 71,752.8
2006 49,532.1 355.4 2,156.3 52,043.9 28,315.2 1,317.9 1,923.9 1,978.6 33,535.6 85,579.5 2,275.7 19,508.3 11,242.0 0.0 52,553.6 72,061.9
2007 44,639.8 1,007.1 2,390.1 48,037.0 28,277.7 1,956.5 2,702.0 1,432.7 34,368.9 82,406.0 2,640.1 16,160.5 6,510.8 1,244.4 55,850.2 73,255.1
2008 39,578.2 3,178.3 2,360.9 45,117.3 29,729.4 1,514.4 1,930.1 1,768.0 34,941.9 80,059.2 3,389.4 17,300.6 5,368.0 238.3 53,763.0 71,301.9
2009 37,736.4 3,311.4 2,614.4 43,662.2 26,203.9 2,050.4 2,594.0 2,639.3 33,487.5 77,149.7 3,139.8 11,986.6 5,579.7 232.7 56,210.9 68,430.2
2010E 36,772.5 3,311.4 2,614.4 42,698.3 23,954.1 2,047.0 9,178.5 2,639.3 37,818.9 80,517.2 3,036.9 10,286.6 5,579.7 232.7 61,381.4 71,900.6
2011E 35,199.2 3,311.4 2,614.4 41,125.0 22,332.6 2,120.5 16,577.4 2,639.3 43,669.8 84,794.8 3,121.1 8,586.6 5,579.7 232.7 67,274.8 76,094.1
2012E 38,497.5 3,311.4 2,614.4 44,423.3 20,467.2 2,186.3 25,495.4 2,639.3 50,788.2 95,211.5 3,362.2 6,886.6 5,579.7 232.7 73,960.8 81,080.0
40
Fig 50: Cash flow statement (THBm)

Year end: December EBITDA Working capital Other Operating cash flow Capex Asset disposals Acquisitions/Investments/Other Investing Investing cash flow Dividends paid Net borrowings Equity funding Other financing Financing cash flow Net change in cash/ST investment
2004
2005
2006 -98.0 -6,562.3 -4,038.5 50.3 -1,394.7 -5,383.0 -8,042.1
2007 -879.7 -4,101.9 -1,595.9 1,142.9 -338.8 -791.8 -5,775.8 -3,758.2 0.0 -5,986.3 835.0
2008 -624.6 -5,787.4 -2,514.3 447.7 -4,250.9 -6,317.4 -7,282.1 1,138.1 0.0 -1,106.0 627.7
2009 2,262.3 -4,556.3 -2,288.0 80.6 -666.7 -2,874.1 -8,364.6 -5,312.7 0.0 -566.5 497.6
2010E 2,150.2 -6,091.7 -3,807.3 0.0 0.0 -3,807.3 -8,286.3 -1,700.0 0.0 2,455.8 -7,530.6 6,584.6
2011E 1,632.2 -6,670.9 -3,411.9 0.0 0.0 -3,411.9 -5,830.6 -1,700.0 0.0 -815.2 -8,345.8 7,398.9
2012E 2,040.8 -7,374.3 -3,298.3 0.0 0.0 -3,298.3 -6,645.8 -1,700.0 0.0 -893.7 -9,239.5 8,918.0
20,195.4 20,999.9 20,831.7 22,128.6 20,607.0 19,909.4 21,863.9 24,195.3 26,789.3 -1,913.8 12,448.5 -3,129.6 -3,070.9 173.9 -951.9 -2,009.8 -9,848.8 521.3 -3,040.2 -3,074.3 -4,985.6 -7,220.2 551.3 -8,169.6 -2,640.0
15,152.0 28,462.9 14,171.4 17,147.0 14,195.0 17,615.5 17,922.4 19,156.5 21,455.8
-3,848.9 -14,838.5
-6,740.0 -21,736.9 0.0 20,325.8 -1,874.3 2,364.6 -790.8 -1,478.4
-14,377.5 -11,254.3 -10,244.1 -15,520.3
-7,250.0 -14,243.8
Fig 51: Key ratios

Year end: December ROE (%) Post tax ROACE (%) Total debt (THBm) Net debt (THBm) Net debt to equity (%) Net debt / Net debt + equity (%) Equity (THBm) Book value per share - (S$) PBR (x) Interest cover (x) Payout ratio FCF Yield Dividend yield
2004 35.9 13.4 47,126.8 46,239.2 139% 58% 33,362.6 1.5 4.1 9.1 25% 9% 2%
2005 32.2 15.1 40,386.8 37,126.1 118% 54% 31,366.0 1.4 4.3 10.5 51% 16% 4%
2006 24.0 15.5 19,508.3 17,584.4 33% 25% 52,553.6 2.2 3.0 10.2 55% 7% 4%
2007 19.6 16.1 16,160.5 13,458.5 24% 19% 55,850.2 2.2 2.8 16.0 69% 10% 5%
2008 18.9 15.0 17,300.6 15,370.5 29% 22% 53,763.0 2.1 2.9 22.1 73% 8% 5%
2009 19.2 15.4 11,986.6 9,392.6 17% 14% 56,210.9 2.2 2.8 28.3 78% 10% 5%
2010E 18.7 16.8 10,286.6 1,108.0 2% 2% 61,381.4 2.8 2.5 14.1 53% 9% 4%
2011E 19.5 18.0 8,586.6 -7,990.8 -12% -13% 67,274.8 3.1 2.3 17.4 53% 10% 5%
2012E 20.1 19.0 6,886.6 -18,608.8 -25% -34% 73,960.8 3.4 2.1 20.7 53% 12% 6%
41
San Miguel Corporation

Beer cans do it
OUTPERFORM
PRICE as at 19 October 2010
(initiating coverage)
Price target
PHP74.05
We initiate coverage on San Miguel Corporation with an OUTPERFORM rating and a target price of PHP 101 (36% upside). San Miguel is the largest listed beverage company in ASEAN. They have a 95% market share of the Filipino beer market. We believe San Miguel is well-set to benefit from the beer boom in the Philippines. The beer industry should receive a fillip from the gradual introduction of canned beer.
Bloomberg code
PHP101
Reuters code
SMC PM
Market cap
SMGBF.PK
12 month range
PHP226.904bn (US$5.225bn)
EPS est. change
n.a.
PHP64.50 - 74.95
The Filipino beer industry has outstanding prospects. Beer consumption is set to rise at over 6% in the next three years. It is linked to higher disposable income. The urban youth population is one of the highest in the region. Also, San Miguels distribution system is highly advanced, reaching the countrys main consumer centres. San Miguel may become an acquisition target. The worlds major beer companies such as Anheuser-Busch InBev are facing low growth in the Western markets. They could be looking for acquisition opportunities in emerging markets, where beer demand is accelerating. San Miguel may be revalued as more emerging market acquisitions take place. Canning should transform San Miguels cash generation. As prosperity rises, we expect a gradual switch from bottled beer to canned beer. Bottles have an onerous impact on San Miguels inventory cycle because they are returnable. The onset of disposable cans should reduce San Miguels inventory days from 78 in 2009 to 56 in 2012, shortening the cash conversion cycle. Hence, we expect an FCF CAGR of 38% in FY10-12. San Miguel DCF valuation is supported by other metrics. At 13x, the company is trading at a 15% discount to the industry PER average of 15x. It is also at a 50% discount to the PEG ratio average of its peer group. The P/B to ROE ratio suggest a 20% discount. We believe the market is missing the FCF benefits of canned beer.
Year end: December Group Revenue (PHPm) COGS (PHPm) Gross profit (PHPm) GP margin (%) Total EBIT (PHPm) OP margin (%) PBT (PHPm) Taxation (PHPm) PAT (PHPm) Minority interest (PHPm) PATMI (PHPm) PATMI margin (%) yoy % MI interest in PAT (%) EPS basic (PHP) EPS diluted (PHP) EPS Growth (%) DPS (PHP) DPS Growth (%) FCF Yield (%) Dividend yield (%) PER (x) EV/EBITDA (x)
2009 2010E 2011E 2012E 174,213 182,462 191,449 201,061 -119,301 -127,723 -134,014 -140,742 54,912 54,739 57,435 60,318 32% 30% 30% 30% 19,669 19,965 21,740 23,644 11% 11% 11% 12% 13,705 24,628 26,883 29,617 -3,706 -6,660 -7,269 -8,009 60,629 17,969 19,613 21,608 -2,830 -742 -822 -920 57,799 17,227 18,791 20,688 33% 9% 10% 10% 199% -70% 9% 10% 5% 4% 4% 4% 19.21 5.86 6.39 7.03 19.10 5.82 6.35 6.99 213% -70% 9% 10% 0.70 0.47 0.51 0.56 -50% -33% 9% 10% 7 5 8 9 1 1 1 1 3.9 12.8 11.7 10.6 13.9 10.8 6.1 5.8
Share price performance

100 95 90 85 80 75 70 65 60 Oct09 Jan10 Apr10 Jul10 Oct10 SanMiguelCorporation PSEiPHILIPPINESEIDX(rebased)
Share price (%) Ordinary shares Relative to Index Relative to Sector Major shareholder Free float Average turnover (US$)
Source: Company, Bloomberg
-1 mth -3 mth -12 mth 0 9 11 -5 -12 -22 Top Frontier Investment Holdings (34%) 65% 140,180
42
Investment Summary
Structural rise in beer volumes
30% Earnings CAGR We expect San Miguel to generate adjusted average earnings growth of 30% in FY10-12. The operative factor is our expected rise in beer volumes of 6% in this period. San Miguel is the pre-eminent beer producer in the Philippines with a market share of 95%. The firm should be the beneficiary of structural trends driving beer consumption in the Philippines. We expect beer volumes to rise due to the increasing prosperity of the Filipino middle class and the rising urban youth population. San Miguel has one of the best distribution networks in Asia. It has a vice-like grip on the beer distribution centres in the Filipino archipelago. We believe the beer cost structure is unlikely to rise as a percentage of revenue in the forecast period. We have assumed that cost of sales will represent 68% to 70 % of revenue. The largest cost item is the excise tax, which may not be reviewed for another three years. It is due for revision only in 2013. Fig 52: San Miguel: Beer Volumes, Net Profit
2009 Net Profit (PHP million) (adjusted for exceptionals) Beer Domestic Volumes (Cases, millions)
Source: Company, Standard Chartered Research
2010 17,227 187
2011 18,791 200
2012 20,688 214
9,999 175
38% FCF CAGR

The rise of canned beer should drive FCF improvements. Only 1% of San Miguels beer volumes are from canned beer. This ratio should change as the Philippines is approaching a prosperity level where canned beer is viable. We expect the canned beer proportion to rise to 17% by FY12. We expect inventory days to fall from 78 to 59, and the cash conversion cycle to fall by a similar degree. Cash conversion days should fall from 99 to 70. As a result of the shortening cash cycle, we expect FCF to grow at a CAGR of 38% in the forecast period. This FCF improvement is of direct benefit to our valuation. We have used DCF valuation, discounting the steam of FCF.
Unassailable dominance
Hard to dislodge San Miguel has a virtual monopoly in the beer market in the Philippines, and its position seems to be unassailable in the forecast period. A new entrant would take several years to raise brand awareness and expand distribution. Brand surveys place San Miguels as the top 8 brands in the beer market in the Philippines. We estimate the firm has a points of sale per capita ratio of 150. This is one of the best in the region, in our view.
43
Valuation
10% WACC We use a DCF methodology to calculate our valuation for San Miguel. The assumptions behind our valuation include a WACC of 10%. San Miguels operations are largely in the Philippines, so we assume a market risk premium of 5%, in line with our reference point for other companies of this scale in that country. Our risk-free rate of 5% is the 10-year Treasury bill rate for the Philippines. According to our view, San Miguels adjusted Beta is 1. This is higher than the Beta recorded on Bloomberg, but we believe San Miguel should be seen as strongly correlated to the overall prospects of the Filipino economy. We assume a target debt-to-equity value of 40%. The company is operating at a net gearing of 37% (implying that it has net cash). Given the handsome cash generation that we forecast, we view the company as underleveraged. The gearing level may rise in the long term. The debt premium of 3% is a reflection of the stature of San Miguel as one of the leading companies in the Philippines. Fig 53: WACC Calculations
WACC Cost of Equity Cost of Debt Equity Beta Debt Beta Asset Beta Risk Free Rate Market Risk Premium Target Gearing Effective Corporate Tax Rate Debt Premium
10% 10.20% 12.50% 1.04 1.50 1.20 5.00% 5.00% 40.00% 20.00% 3.00%
1% terminal growth
Our DCF valuation assumes a terminal growth rate of 1% in perpetuity. The terminal growth rate is based on our long-term expectation of Filipino GDP growth rate. The Philippine GDP growth rate has averaged 5% since the Asian crisis of 1997-98. We expect it to rise to an average of 6% in the next three years. Hence, we believe, our terminal growth rate is a reasonable assumption. Fig 54: DCF Assumptions
WACC Terminal growth rate
Source: Standard Chartered Research estimates
10% 1%
Fig 55: DCF Calculations (PHPm)

DCF of operations NPV of the terminal value Total value of the operations Net (cash)/debt Equity value Equity value per share (PHP)
43,072 173,399 216,470 (79,660) 296,130 100.66
44
Our DCF analysis provides us with a price target of PHP 100.66, which means a potential upside of 27%. At our price target, San Miguel trades at 17x PER 2010E and at 12x EV/EBITDA 2010E. We have also run a sensitivity analysis for the DCF valuation: Fig 56: Sensitivity Analysis (PHPm)
WACC 296,130 -1.0% Terminal growth 0.0% 1.0% 2.0% 3.0%
6.2% 374,165 417,630 477,975 567,401 713,607
7.2% 338,519 370,946 413,918 473,578 561,990
8.2% 310,676 335,730 367,792 410,281 469,271
9.2% 288,329 308,222 332,998 364,703 406,719
10.2% 270,000 286,144 305,818 330,320 361,676
PEG ratios
32% discount to industry PEG ratio On a PEG ratio basis, San Miguel looks deeply undervalued compared to the industry. Its PEG ratio is at a 32% discount to the industry. San Miguel stands at a discount to both the emerging markets brewers and the developed country brewers. Evidently, the PEG ratio valuation metric supports our case for San Miguel. Fig 57: Brewery Industry: PEG ratios
San Miguel Industry Average Developed Country Brewers Average Emerging Market Brewers Average
1.3 1.9 1.5 2.3
P/B versus ROA

High ROA not reflected in price Instead of comparing San Miguel on a P/B versus ROE basis, we have used the P/B versus ROA metric. San Miguels ROE is just 8%, which is half the industry average of 15.9%. The firms ROE has been depressed by a massive rise in its in equity base in FY09. The equity base was boosted by a PHB 50 billion gain from the divestment of part of its stake in San Miguel Brewery to Kirin Beer. We thus believe the ROA metric is fairer. ROA strips out the capital structure. On this basis, San Miguel is at a vast discount. Its ROA is one of the best in the industry at 14.9%. However, the P/B ratio is a third of the industry average. Fig 58: P/B versus ROA
ROA San Miguel Corporation Industry average Developed Country Brewers Emerging Market Brewers
P/B 1.0 3.0 2.3 3.6
P/B to ROA 0.07 0.32 1.30 0.28
14.9 9.3 6.6 12.6
FCF yield
San Miguels FCF yield of 5% is below the industry average. The emerging markets brewers have inferior FCF yields compared to the developed market brewers. However, San Miguel is on a better footing than both categories.
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We expect the gap between San Miguel and the rest to narrow. We expect San Miguels FCF yield to grow at a CAGR of 38% in FY10-12. The developed market brewers should not match this increase, as they are constrained by the poor growth prospects for beer in the mature markets, in our view Fig 59: FCF yield
San Miguel Industry Average Developed Country Brewers Emerging Market Brewers
5.0 6.4 7.9 6.1
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How we stack up?

Broker recommendations
There are two recommendations for San Miguel Corp: one Buy and one Hold. The average target price is PHP 80.30. Our price target is 20% higher.
What is the market is missing?

Undervalued We believe that San Miguels current valuations of 13x PER 2010E and 6x EV/EBITDA 2010E do not capture our projected improvements in earnings and FCF. We expect Philippines beer consumption to accelerate. We view the macro situation for Filipino beer consumption growth as solid. We expect GDP growth to be 6% and 5% in the next two years. The Philippines has a large and increasingly prosperous urban youth market. This is an ideal demographic for beer. A sophisticated distribution system is also in place. The urban areas of the Philippines have just entered the income bracket (US$5000 per capita) where canned beer has become viable. Canned beer should generate an improvement in FCF, with a lighter inventory burden. May be revalued in line with other emerging market players We believe San Miguel is also a prospective acquisition target for the major beer companies. The beer majors are facing flat volume growth in the mature markets. A dynamic emerging markets company such as San Miguel may be an ideal target, in our view. At the very least, the recent US$8 billion acquisitions of Cerveza, the Mexican beer unit of Femsa by Heineken should lead to a revaluation of San Miguel. That deal was priced at 11x EV/EBITDA which suggests that San Miguel is severely undervalued. The Philippines has similar fundamentals for beer growth to Mexico. In fact, San Miguels dominance of the Philippines is stronger than that of Cerveza in Mexico. San Miguel Corporation has a history of divesting its holdings to major international corporations. In 2006, San Miguel has sold its 65% stake at its Coca-Cola Philippine venture to The Coca-Cola Company (TCCC) for $590 million. In November 2007, they sold Boags Brewery to Lion Nathan for A$325 million. In the same period, SMC also sold National Foods to Kirin for 294 billion. Last year, they sold a 48% stake in San Miguel Brewery for PHP 50 billion.
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Forecasts and Assumptions

Revenue Drivers
The assumptions for our revenue drivers are presented below: Fig 60: Revenue Drivers
Beverage segment Revenue (PHPm) Beer Domestic International (USDm) International (Pm) Average exchange rate Hard liquor & soft beverages Volume (Cases, millions) Beer Domestic YoY International YoY Hard liquor & soft beverages YoY ASP Beer Domestic YoY International (USD) YoY Hard liquor & soft beverages YoY 263 1% 5 1% 449 n.a. 280 6% 6 22% 485 8% 292 4% 6 0% 530 9% 298 2% 6 5% 540 2% 304 2% 6 5% 551 2% 310 2% 7 5% 562 2% 168 4% 48 0% 29 n.a. 175 4% 48 1% 32 9% 175 0% 47 -3% 37 16% 187 7% 47 1% 38 4% 200 7% 48 1% 40 4% 214 7% 48 1% 42 4% 13,111 15,428 19,549 44,139 229 48,787 283 51,010 275 55,672 292 12,745 44 20,738 60,761 309 13,516 44 21,998 66,314 328 14,333 44 23,336 2007 69,334 2008 78,599 2009 82,735 2010E 89,154 2011E 96,275 2012E 103,984
We have modelled San Miguels revenue with two main factors: sales volume and ASP. The company breaks down volume and ASP details into three categories beer, hard liquor and soft beverages. The beer category consists overwhelmingly of domestic sales, in addition to an international segment. We model beer volume using GDP forecasts We have modelled volume growth for beer using Standard Chartereds Filipino GDP growth expectations as a benchmark. We expect beer volume to grow at 1% above the GDP growth expectations for 2010, 2011 and 2012. The Philippines has just entered middle income status. The consumption of beer accelerates from this point, according to our analysis. We expect steady growth in the spirit business. An increase in prosperity is usually accompanied by a shift in the proportion of alcohol represented by soft liquor, which is more expensive on a per unit of alcohol basis. Our ASPs for both beer and spirits are modelled in line with our inflation expectations. We expect ASPs to increase slightly more than the CPI because some of the inputs are driven by international market prices.
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Cost Drivers
The cost drivers are provided below. Fig 61: Cost Drivers (PHPm)
2007 COGS YoY Marketing and distribution yoy General and Administrative yoy Total SG&A yoy 105,601 2 10,331 3 13,947 2 24,278 2 2008 119,412 0 13,518 0 13,526 (0) 27,044 0 2009 119,301 (0) 12,905 (0) 15,013 0 27,918 0 2010E 127,723 7% 12,772 -1% 15,013 0% 27,785 0% 2011E 134,014 5% 13,401 5% 15,013 0% 28,414 2% 2012E 140,742 5% 14,074 5% 15,013 0% 29,087 2%
The breakdown of the cost of sales is not explicitly revealed by the company. We have assumed that roughly half the cost of sales consists of packaging, a quarter consists of raw materials and the rest includes overheads and depreciation. We have derived the cost of sales as a percentage of revenue. In the forecast period (2010-12), we expect the cost of sales to represent 70% of revenue. The operating expenses are divided into marketing & distribution and general & administration. We assume marketing & distribution expenses to be 7% of revenue. This is in line with the companys recent history. We expect general & administrative expenses to be relatively flat.
Profitability
30% gross margin Increased volume and ASPs should result in a steady rise in gross profit. Gross profit should be at roughly 30% of revenue. On a normalized basis, we expect FY10 to see net profit growth of 73%. We view the company as on course to achieve net profit of PHP 17.2 billion. In 1H10, it recorded a net profit of 9.1 billion. Our estimated FY10 net profit is a return to the pre-crisis levels of FY07-09. Fig 62: Gross Profit (PHPm)
65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000 2007 2008 2009 2010 2011 2012 42,421 48,629 54,912 57,435 54,739 60,318
We expect to see net profit margins of 9% in FY10, and 10% in FY11 and FY12, generating an earnings CAGR of 23% in FY09-12.
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Fig 63: Net Profit (normalized) (PHPm)

25,000 20,000 15,000 10,000 5,000 0 2007 2008 2009 2010 2011 2012 8,630.0 9,999.0 19,348.0 17,226.8 20,688.3 18,791.0
Working Capital
Cash conversion cycle will fall Our working capital assumptions are presented below. The operative factor is the fall in the inventory days, driven by the introduction of canned beer. At present, canned beer represents just 1% of San Miguels volumes. The growing prosperity of the market should lead to more cans as a proportion of beer volume. Cans are disposable and do not require a deposit. Inventory days should fall from 78 in FY09 to 59 in FY12. This should have a direct benefit for the cash conversion cycle, which we expect to contract from 99 days to 70 days. Fig 64: Working Capital assumptions
2008 Accounts receivable (Days) Inventories (Days) Other current assets (Days) Trade accounts payable (Days) Accruals and other payables (Days) Cash conversion (Days)
2009 105 78 34 84 3 99
2010E 103 72 34 84 3 91
2011E 100 65 34 84 3 81
2012E 95 59 34 84 3 70
122 76 29 67 5 132
Capex, dividends and financing plans

Limited capex for beer We have modelled San Miguels capex expectation in line with the companys guidance and its recent history. According to the companys guidance, San Miguel's capex this year should be about P7.0 billion. We expect capex to represent 4% of the companys sales in the forecast period. As the pre-eminent player in the Filipino liquor industry (95% market share in beer), San Miguels expansionary capex plans are limited. Instead, the bulk of the capex involves maintenance activities. The company is also diversifying its business model by investing in non-core business such as infrastructure, particularly power generation. They have won the bid for the operation of the 620MW Limay power plant. San Miguel has had further success in their bids to administer the 1000MW Sual power plant and 345MW San Roque power plant. San Miguel has a massive cash balance of PHP 209,411 million (FY09). The cash reserves were boosted by the sale of San Miguels stake in its subsidiary San Miguel Brewery in March 2009. San Miguel Corporation sold a 48% stake in San Miguel Brewery to Kirin Beer of Japan for PHP 58.92 billion. The company recognized a net gain of PHP 50.54 billion. San Miguel retained a 51% stake in the San Miguel Brewery. 50
The company appears intent on using its cash reserves for its expansion into the infrastructure field. They have bid for several of the main infrastructure projects in the Philippines, including power projects and highways. We believe they are unlikely to tap the capital markets to finance these projects In light of the uncertain financing schedule of the companys forays into infrastructure, we believe it is unlikely that the dividend payout ratio will exceed 20% of net profits. We expect the company to hoard its cash reserves in anticipation of these infrastructure projects.
FCF generation
38% FCF CAGR We see the main benefit of the gradual introduction of cans as an impressive rise in FCF generation. The cash conversion cycle should contract and generate superior cashflow from operations. As capital expenditure expectations are just 4% of revenue, we believe San Miguels FCF generation will be strong. We expect FCF CAGR of 38% in the forecast period. Fig 65: San Miguel FCF (PHPm)
25,000 20,552 20,000 15,000 10,000 5,000 0 2008 2009 2010 2011 2012 8,533 14,291 10,735 17,702
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Risk Analysis
Government regulations
San Miguels earning are vulnerable to government regulations. This is the most formidable risk facing the company. The Philippine government may increase excise taxes to buttress its fiscal position. Alcohol is one of the leading sources of indirect taxation in the Philippines.
Lack of Disclosure
The companys financial statements provide limited operating details. For instance, the sales breakdown includes the absolute sales number in terms of some of the product segments. However, details of the food business could be stronger. There are other areas where the level of disclosure is poor. The company does not provide, in our view, sufficient details of its hedging strategies, particularly the use of derivatives. The poor level of disclosure increases the margin of error for our earnings forecasts. This means that in projecting the companys earnings, it is necessary to take a leap of faith regarding the operating details. These opaque operating data are far from satisfactory, and make our forecasts subject to qualification.
Conglomerate risk
One wing of the conglomerate may subsidize another San Miguel Corporation is a large conglomerate. Though the beer business is the core of its operations, there are other businesses. The firm is active in the spirit business, food business, as well as infrastructure. There may be transfer pricing between different business segments. San Miguel Corporation has made forays into infrastructure, and has have recently won bids to operate and administer power plants. It has won concessions to operate or administer up to 3000 MW of power. The management may focus intensely on the infrastructure side of the business, at the expense of its core liquor business. Another risk associated with a family-held conglomerate is the potential conflict within the controlling family. The Cojuangco family has held sway over San Miguel for over two decades. It is conceivable that conflicts within the family may derail the companys prospects.
Raw material prices

The beer and spirits business are susceptible to raw material prices. The main ingredient for beer is barley. The main raw material for spirits is molasses. Both these commodities are at historically high levels. A further increase in the prices of these commodities may seriously affect the profitability of the liquor business. San Miguel is principally a price-taker of these inputs.
Canned Beer may not take off

Canned beer occupies a small part of the beer volume produced by San Miguel. At present, it represents just 1% of beer volume, and is a relatively new product. There may be consumer resistance to canned beer because of its novelty. In light of this factor, the FCF gains that we anticipate may not materialize as quickly as we expect.
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All about San Miguel

Company Outline
San Miguel Corporation (SMC) is a beverage and packaging Company based in the Philippines. Its product portfolio includes beer, hard liquor, and non-carbonated non-alcoholic beverages. It is also active in processed and packaged food products. These include meat, poultry, flour, dairy products and a number of packaging products. It is also engaged in the development of infrastructure projects, including power producers and highways. San Miguel Corporation has strategic partnerships with foreign companies. The partners include Nihon Yamamura Glass Company, Ltd., Hormel Foods International Corp. of the United States and Kirin Holdings Company Ltd. of Japan. It has five breweries in the Philippines and operates one brewery each in Indonesia, Vietnam, Thailand, Hong Kong and two breweries in China. The brewery business is also separately listed in Hong Kong and the Philippines as San Miguel Breweries. These securities are far less liquid than San Miguel Corporation.
History
The company was established in 1890 as La Fabrica de Cerveza de San Miguel. The Philippines was then under Spanish rule. It was considered Southeast Asia's first brewery. By 1914, San Miguel Beer was exported to other places in the Asia/Pacific such as Shanghai, Hong Kong and Guam. San Miguel established a brewery in Hong Kong in 1948, the first local brewer in the crown colony. From 1918 to 1963, the company was controlled by Mr. Andres Soriano y Roxas. In 1927, the firm became one of the first foreign franchisees for Coca-Cola. It also expanded its brewery business within the Philippines and entered other consumer areas such as food. It was only in the 1970s that San Miguel faced a serious competitor in the domestic market. Asia Brewery entered the market in that period. By the 1980s, the Soriano familys control was weakened. The Cojuangco familys holding in the group rose.
Management
The management is controlled by the Cojuangco family. The family controls at least 34% of the shares through an investment vehicle called Top Frontier Investment Holdings. The Cojuangco family, which was then active in the coconut business, initially gained control of San Miguel Corporation in the mid 1980s. The Chairman of the board is Mr. Eduardo Cojuangco, Jr. The daily operations are managed by the President and COO Mr. Ramon Ang.
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Fig 66: Share price performance

75 70 65 60 55 50 45 40 35 Jun-09 Aug-09 Jun-10 Aug-10 Oct-08 Oct-09 Feb-09 Dec-08 Dec-09 Feb-10 Oct-10 Apr-09 Apr-10
Fig 67: PER comparison

35 30 25 20 15 10 5 0 Jun-09 Aug-09 Jun-10 Dec-08 Dec-09 Aug-10 Apr-09 Feb-09 Feb-10 Apr-10 Oct-08 Oct-09 Oct-10
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Financials
Fig 68: Income Statement (PHPm)
Year end: December Group Revenue COGS Gross profit GP margin (%) Total EBIT OP margin (%) Net investment and interest income Others,Goodwill, net PBT Taxation Exceptional PAT Minority interest PATMI PATMI margin (%) yoy % MI interest in PAT (%) EPS basic (PHP) EPS diluted (PHP) EPS Growth (%) DPS (PHP) DPS Growth (%)
2007 148,022 (105,601) 42,421 29% 11,627.0 8% (4,866.0) 3,614.0 10,375.0 (4,520.0) 2,496.0 8,351.0 279.0 8,630.0 6% n.a. -3% 2.74 2.73 1.05
2008 168,041 (119,412) 48,629 29% 14,818.0 9% (534.0) (2,262.0) 12,022.0 (6,098.0) 14,159.0 20,083.0 (735.0) 19,348.0 12% 124% 4% 6.13 6.11 124% 1.40 33%
2009 174,213 (119,301) 54,912 32% 19,669.0 11% 879.0 (6,843.0) 13,705.0 (3,706.0) 50,630.0 60,629.0 (2,830.0) 57,799.0 33% 199% 5% 19.21 19.10 213% 0.70 -50%
2010E 182,462 (127,723) 54,739 30% 19,964.9 11% 4,663.4 24,628.3 (6,659.8) 17,968.5 (741.7) 17,226.8 9% -70% 4% 5.86 5.82 -70% 0.47 -33%
2011E 191,449 (134,014) 57,435 30% 21,739.9 11% 5,142.8 26,882.7 (7,269.4) 19,613.3 (822.2) 18,791.0 10% 9% 4% 6.39 6.35 9% 0.51 9%
2012E 201,061 (140,742) 60,318 30% 23,644.4 12% 5,972.6 29,617.0 (8,008.8) 21,608.2 (919.9) 20,688.3 10% 10% 4% 7.03 6.99 10% 0.56 10%
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Fig 69: Cash Flow Statement (PHPm)

Year end: December Cash Flows from operating Activities Profit before tax and minorities Depreciations Gains / Disposals / Impairments / Bad debts Interest Income Interest Expenses FX Share options & other Operating Cash Flow before Working Capital Receivables Inventories Payables Other Cash Generated from Activities Interest Received Interest Paid Income Taxes Net Cash from Operations Cash flow from investing Activities Purchase of property, plant, equipment Cash flow from financing Activities Increase in interest bearing debt Repayment of interest bearing debt Others, financing Dividends paid Net Cash Flow Cash & Equivalents at Open Change in Cash & Cash Equivalents Cash & Equivalents at Close Free Cashflow
2007 14,045 10,236 (984) (2,087) 7,117 89 28,416 28,416 2,087 (7,117) (6,201) 17,185 (9,310) 430,187 (425,854) 380 (3,228) 58,205 22,987 70,294 93,281 7,875
2008 26,174 9,303 (14,171) (6,630) 6,032 1,499 22,207 22,207 6,630 (6,032) (7,835) 14,970 (6,437) 608,820 (618,424) 202 (4,463) 33,003 93,281 23,658 116,939 8,533
2009 64,335 14,724 (50,630) (5,989) 7,926 (1,238) 29,128 29,128 5,989 (7,926) (6,651) 20,540 (6,249) 758,879 (728,226) 5,210 (3,301) 102,257 116,939 92,472 209,411 14,291
2010E 24,628 6,988 (10,866) 9,018 (2,816) 26,953 (2,407) 263 (2,534) 570 22,846 10,866 (9,018) (6,660) 18,033 (7,298) (1,374) 9,360 209,411 9,360 218,771 10,735
2011E 26,883 7,280 (11,345) 9,018 (2,816) 29,020 (962) 1,329 860 56 30,303 11,345 (9,018) (7,269) 25,360 (7,658) (1,499) 16,203 218,771 16,203 234,975 17,702
2012E 29,617 7,587 (12,175) 9,018 (2,816) 31,231 121 1,115 919 60 33,447 12,175 (9,018) (8,009) 28,595 (8,042) (1,651) 18,902 234,975 18,902 253,876 20,552
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Fig 70: Balance Sheet (PHPm)

Year end: December Property, Plant & Equipment Goodwill & Intangibles Others Long term assets C&CE STI Inventories Receivables Others Total current assets Total assets Payables ST debt Others Current liabilities LT debt Deferred Income tax Others Total liabilities Minorities Shareholders funds Gross liabilities + Equity 2007 64,355 8,550 22,399 95,304 93,281 5,792 23,852 61,879 8,001 192,805 288,109 20,311 45,453 8,463 74,227 54,612 456 12,721 142,016 11,329 134,764 288,109 2008 68,313 9,013 57,784 135,110 116,939 25,836 50,814 10,674 204,263 339,373 23,292 57,604 5,992 86,888 40,719 17,851 25,691 171,149 18,307 149,917 339,373 2009 65,919 10,038 64,421 140,378 209,411 2,746 25,458 49,082 11,416 298,113 438,491 31,404 57,866 4,759 94,029 71,885 12,037 19,602 197,553 27,121 213,817 438,491 2010E 68,300 7,967 67,237 143,504 218,771 2,746 25,195 51,489 11,825 310,026 453,530 29,279 57,866 5,329 92,474 71,885 12,037 19,602 195,998 27,863 229,669 453,530 2011E 70,749 5,896 70,053 146,698 234,975 2,746 23,865 52,452 12,407 326,445 473,143 30,721 57,866 5,386 93,972 71,885 12,037 19,602 197,496 28,685 246,961 473,143 2012E 73,276 3,825 72,869 149,970 253,876 2,746 22,750 52,331 13,030 344,733 494,703 32,263 57,866 5,446 95,575 71,885 12,037 19,602 199,099 29,605 265,999 494,703
Fig 71: Ratios

Year end: December ROE Post tax ROACE Total debt (m) Net debt (m) Net debt to equity Equity (m) Book value per share - (S$) PBR (x) Interest cover (x) Payout ratio FCF Yield Dividend yield
2007 6% 5% 100,065 6,784 5% 134,764 42.74 1.7 2 52% 3% 1%
2008 13% 9% 98,323 (18,616) -12% 149,917 47.49 1.6 (25) 25% 4% 2%
2009 27% 18% 129,751 (79,660) -37% 213,817 72.68 1.0 10 8% 7% 1%
2010E 8% 6% 129,751 (89,020) -39% 229,669 78.07 1.0 (11) 8% 5% 1%
2011E 8% 6% 129,751 (105,224) -43% 246,961 83.94 0.9 (9) 8% 8% 1%
2012E 8% 7% 129,751 (124,125) -47% 265,999 90.41 0.8 (7) 8% 9% 1%
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Disclosures appendix
Global disclaimer
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard Chartered - STCI Capital Markets Limited and/or one or more of its affiliates (together with its group of companies,SCB) and the research analyst(s) named in this report. SCB makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to in the document.
DISCLOSURES INCLUDING THOSE REQUIRED BY THE UNITED STATES

The research analysts responsible for the content of this research report certify that
The view expressed and attributed to the research analyst or Analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and No part of his or her compensation and other benefits was, is or will be directly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Our ratings are under constant review.
Additional information with respect to any securities referred to herein will be available upon request. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES. Disclosures Appendix Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the date of the report, unless otherwise stated.
Company San Miguel Corporation As at the disclosure date, the following applies: SCB and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one year
San Miguel Corporation - current rating is:
76 74 72 70 68 66 64 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10
Source: FactSet prices / SCB ratings and price targets
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Company Thai Beverage PCL As at the disclosure date, the following applies:
Thai Beverage PCL - current rating is:
0.30 0.29 0.28 0.27 0.26 0.25 0.24 0.23 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10
Source: FactSet prices / SCB ratings and price targets Recommendation Distribution and Investment Banking Relationships
% of covered companies currently assigned this rating % of companies assigned this rating with which SCB has provided investment banking services over the past 12 months
OUTPERFORM IN-LINE UNDERPERFORM
58.2% 26.7% 15.1%
11.5% 6.7% 5.9%
Research Recommendation Terminology Definitions The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months The total return on the security is not expected to outperform or underperform the relevant market IN-LINE (IL) index by 5% or more over the next 12 months The total return on the security is expected to underperform the relevant market index by 5% or UNDERPERFORM (UP) more over the next 12 months OUTPERFORM (OP) SCB uses an investment horizon of 12 months for its price targets.
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Asia Pac Food Bev

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Asia Pacific | Food & Beverage

Sector research ASEAN Beer | 20 October 2010

Sector research ASEAN Beer | 20 October 2010

Why ASEAN consumer?

Consumption accelerates at US$2000 per capita

Sector research ASEAN Beer | 20 October 2010

Migration to the cities helps consumption

Thai and Filipino consumer story is comparable to India and China

Sector research ASEAN Beer | 20 October 2010

Fig 2: Middle Class Statistics for Selected Countries (%)

Thailand and Philippines have higher per capita incomes

Sector research ASEAN Beer | 20 October 2010

Fig 3: Urban Population (2005)

Source: ESCAP Statistical Yearbook, Standard Chartered Research estimates

Sector research ASEAN Beer | 20 October 2010

Secular trends favour Beer

0 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

Source: Beer Institute, World Bank

Sector research ASEAN Beer | 20 October 2010

Urban Youth love beer

Sector research ASEAN Beer | 20 October 2010

Regulators favour beer

Fig 6: Spirits versus Beer in Thailand

Sector research ASEAN Beer | 20 October 2010

Beer cans change the picture

Source: Thai Beverage

Reducing inventory is the main virtue of cans

They are less of a burden on inventory

Sector research ASEAN Beer | 20 October 2010

Fig 8: Beer Bottle Inventory Cycle

(Bt 60) 25 days

(Bt 60) 25 days

Sector research ASEAN Beer | 20 October 2010

Source: FEMSA, Standard Chartered Research estimates for canned beer %

Canned beer should have neutral impact on the cost of sales

8,697 12 31,143 26.6 7.0 3.3 3.0

Sector research ASEAN Beer | 20 October 2010

Fig 12: Thai Beverage: Inventory Days

2009 1% 2 173 119301 40% 20% 8%

2010E 6% 11 176 127723 43% 17% 10%

2011E 11% 22 178 134014 44% 14% 12%

2012E 17% 36 178 140742 45% 11% 14%

1% 2 173 119412 40% 20% 10%

Fig 14: San Miguel: Inventory Days

Source: the Company, Standard Chartered Research

Sector research ASEAN Beer | 20 October 2010

ASEAN resembles America in the 1930s

Glass was on its way out

3-Tier distribution network

Sector research ASEAN Beer | 20 October 2010

Source: Thai Beverage

The 1930s saw Beer volume take off in the US

59% 53% 45% 31% 34% 50%

59% 53% 51% 48% 49%

Source: US Beer Institute

Sector research ASEAN Beer | 20 October 2010

Fig 17: US per capita Beer production/consumption (gallons per capita)

Source: US Beer Institute

Cans led to better cash generation

Sector research ASEAN Beer | 20 October 2010

Beer majors may go shopping in ASEAN

Cash-rich giants face stagnation in the West.

Sector research ASEAN Beer | 20 October 2010

Fig 19: Beer Production