20170301-辉立证券-Carabao_GroupFY17_growth_at_risk_from_investment_in_China_13页_1mb

Carabao Group Summary

Core Content

Carabao Group (CBG) is a Thai-based company primarily engaged in the production, distribution, and sales of energy drinks, specifically "Carabao Dang." The company operates through three main subsidiaries: Carabao Tawan Dang (CBD), Tawandang DCM (DCM), and Asia Pacific Glass (APG). It has a strong presence in the domestic market and has been expanding its export operations, particularly in the CLMV (Cambodia, Laos, Myanmar, Vietnam) region and the UK.

Main Points

• 4QFY16 Performance:

  • Net profit dropped by 2.3% year-over-year (y-y) and 35.9% quarter-over-quarter (q-q) to Bt281.5mn.
  • This was due to a Bt169.8mn loss from ICUK, which was hit by sales shortfalls and increased expenses.
  • Total sales grew by 37.7% y-y to Bt2,858.8mn, driven by domestic sales and buoyant export sales in Afghanistan and Cambodia.
  • Gross profit margin declined to 33.9% from 36.8%, attributed to higher costs of amber glass bottles.

• FY16 Performance:

  • Net profit increased by 18.7% y-y to Bt1,489.8mn.
  • Total sales rose by 28.5% y-y to Bt9,965.4mn, supported by strong domestic and export growth.
  • Gross profit margin slightly decreased to 35.9% from 36.9%, impacted by higher costs and lower margins from new products.

• China Expansion Plan:

  • CBG plans to establish a joint venture (JV) with a local Chinese partner in April 2017 to enter the Chinese market.
  • The company is expected to hold 45%-49% stake in the JV.
  • The move is seen as a strategic step towards global brand recognition, but poses risks due to fierce competition (Red Bull holds ~70% market share), distribution challenges, and significant marketing costs.

• Earnings Forecast and Rating:

  • FY17 net profit target was revised down to Bt1,554.3mn from Bt1,860.2mn, implying a 4.3% y-y growth.
  • The downgrade reflects risks from ICUK losses, China investment, and rising interest expenses.
  • The rating was cut to 'SELL' with a revised DCF-based target price of Bt62.00/share, down from the previous target.

• Financial Highlights (as of 31 Dec 2016):

  • Sales: Bt9,965.4mn
  • Net profit: Bt1,489.8mn
  • EPS: Bt1.49
  • P/E: 43.1x
  • BVPS: Bt7.10
  • P/B: 9.0x
  • Dividend Yield: 1.6%

• Key Financials (2016):

  • Sales grew by 28.5% y-y
  • Net profit increased by 18.7% y-y
  • Gross profit margin dropped to 35.9% from 36.9%
  • Operating profit margin declined to 15.88% from 17.80%
  • Net profit margin decreased to 14.95% from 16.19%

• Valuation Ratios:

  • P/E (adjusted): 41.3x
  • P/B (adjusted): 8.5x
  • Dividend Yield: 1.6%

• Growth Projections:

  • FY17 sales expected to grow by 35.4% y-y to Bt13,488.5mn
  • Gross profit margin projected to improve to 36.3%
  • Net profit margin expected to decrease to 11.52%

• Peer Comparison (as of 28 Feb 2017):

  • CBG TB: Mkt Cap. Bt64,250, P/E 43.1x, P/BV 9.3x, Div Yield 1.5%
  • ICHI TB: Mkt Cap. Bt13,260, P/E 36.4x, Div Yield 4.9%
  • SAPPE TB: Mkt Cap. Bt8,466, P/E 20.6x, Div Yield 1.5%
  • OISHI TB: Mkt Cap. Bt24,188, P/E 21.0x, P/BV 5.3x, Div Yield 3.1%

Key Risks

• Competition: The energy drink market in China is highly competitive, with Red Bull as the dominant player.
• New Product Launches: Potential risks associated with new product introductions, such as drinking water and 3-in-1 instant coffee.
• Operations as a Holding Company: The structure of CBG as a holding company may present challenges in operational efficiency and control.

Key Developments

• 2015: CBG signed a sponsorship deal with Chelsea Football Club and expanded regional distribution centers.
• 2014: CBG was converted into a public limited company.
• 2013: CBG was incorporated as a holding company and acquired three subsidiaries: CBD, DCM, and APG.
• 2012: DCM was established.

Corporate Governance

• The company participated in the Thailand Private Sector Collective Action Coalition Against Corruption (Thai CAC) program.
• The Corporate Governance Survey was conducted by the Thai Institute of Directors Association (IOD) and is based on public information.

Summary of Financials

• Income Statement:

  • Revenue: Bt7,753mn (FY15), Bt9,965mn (FY16), Bt13,488mn (FY17E), Bt16,529mn (FY18E)
  • Net Profit: Bt1,256mn (FY15), Bt1,490mn (FY16), Bt1,554mn (FY17E), Bt1,841mn (FY18E)
  • EPS: Bt1.26 (FY15), Bt1.49 (FY16), Bt1.55 (FY17E), Bt1.84 (FY18E)

• Balance Sheet:

  • Total Assets: Bt7,361mn (FY15), Bt9,778mn (FY16), Bt12,402mn (FY17E), Bt12,860mn (FY18E)
  • Total Liabilities: Bt1,028mn (FY15), Bt2,679mn (FY16), Bt4,857mn (FY17E), Bt4,508mn (FY18E)
  • Shareholder Equities: Bt6,333mn (FY15), Bt7,100mn (FY16), Bt7,544mn (FY17E), Bt8,352mn (FY18E)
  • Debt/Equity: 0.16 (FY15), 0.38 (FY16), 0.64 (FY17E), 0.54 (FY18E)

• Cash Flow:

  • Net change in cash: Bt43mn (FY15), Bt5,429mn (FY16), Bt8,938mn (FY17E), Bt13,188mn (FY18E)
  • CFO: Bt1,109mn (FY16), Bt1,554mn (FY17E), Bt2,026mn (FY18E)
  • CFI: Bt-1,686mn (FY16), Bt-10,262mn (FY17E)
  • CFF: Bt935mn (FY15), Bt60mn (FY16), Bt900mn (FY17E)

Conclusion

CBG has demonstrated strong sales growth in recent years, particularly in FY16, driven by successful domestic strategies and export expansion. However, the company faces significant challenges, including the risk of losses from ICUK, the high costs of entering the Chinese market, and increased interest expenses. These factors have led to a revised earnings forecast and a downgrade in the investment rating to 'SELL.' Despite the risks, the company's expansion efforts in the UK and China are seen as foundational for future growth.