Carabao Group

Carabao Group Plc (CBG)  

 

Investment thesis

We believe that CBG’s next phase of sales expansion will carry its profit growth momentum into 2H15 and 2016 in earnest. Domestic sales will continue to edge up despite stagnant consumption thanks to CBG’s new cash-van program. The direct sales network will increase market reach and domestic GM without cannibalizing existing sales. Its exports will continue to hit record high revenues as the sales volume start to outpace the slight dip in ASP (causing small 1H15 growth). Thirdly, we believe CBG’s recent entry into the high margin, high volume British and Chinese markets has a high potential for even greater export GM and sales expansion. We reiterate our BUY rating, with CBG remaining as our beverage top pick.

Result recap—2Q15 net profit beat our estimate

NPAT for 2Q15 was Bt355m, up 38% YoY and 14% QoQ, beating our estimate by more than 10%. Selling costs were lower than expected, despite the hiring of new executives, increased below-the-ground marketing and expansion of the cash-van program. Exports were Bt619m, or 18% growth QoQ and 2% YoY, with strong gains in Cambodia, Vietnam and China, but dwindling sales in Afghanistan. Domestic sales also rose 16% QoQ and 3% YoY.

Domestic sales to grow despite tepid spending

Despite soft domestic consumer spending, we will observe growth in the firm’s domestic sales this year. Its cash-van program is the key success factor in driving up market penetration for CBG’s energy and electrolyte drinks in 2Q15—Start Plus sales grew 40% QoQ. The ongoing cash-van DC expansion (four DCs so far) will continue to support their agents and drive domestic growth at minimal cost. By establishing their own non-cannibalizing distribution network, domestic GM will also improve as a result of higher ASP from the vans.

Export revenue to hit new high in 2H15 with added SKUs

We expect the firm’s exports to hit record sales for 2015 and the growth to continue in 2016, at Bt2.7bn and Bt4bn respectively, from export volume growth and increased SKUs in the export mix (of its carbonated energy drink and Start Plus). Although 1H15 export sales grew only 4% YoY, its volume grew almost 10% (lower ASP mainly from a Middle-East sales dip). We see the high export volume momentum to continue in 2H15 as the firm starts to take on an active role in the CLMV markets—CBG plans to help its local Cambodian partner to set up cash-van DCs and become more aggressive in the Myanmar market.

Carbonated drink to penetrate high-margin, high-volume markets

There is vast potential in the British and Chinese markets after CBG’s successful entry—where we see scope for huge margin and volume expansion. Carbonated energy drinks retail at £1.00-1.40 (Bt55-78) in the UK and non-carbonated counters are at ¥5-8 (Bt28-45) per can in China—CBG’s export ex-factory ASP is currently Bt7.8. What’s more, market researcher Mintel reports that UK and Chinese energy drink market sizes are estimated at US$2.1bn and US$10.8bn respectively, much larger than the Thai market size of US$1bn (Bt34bn).