DSG International (Thailand)

Investment thesis

We have initiated coverage on DSGT with a BUY rating and a YE15 target price of Bt11.60, pegged to a PER of 20x (in line with the sector mean). The firm’s NPAT is forecast to rise at a robust 18% CAGR, FY14-16, driven by ongoing sales growth in Thailand and Malaysia and swift sales expansion (albeit from a low base) in the high-growth market of Indonesia. Because DSGT makes diapers for both infants and adults, it caters to both aging demographics in Thailand and to youthful fast-reproducing urbanizing populations in Indonesia and Malaysia. Our key investment ideas are highlighted below.

Positive #1: Defensive features—captive and growing markets  

Nowadays, even working class families with infants regard disposable diapers as a necessity, not a luxury. At the other end of the age spectrum, the population of Thailand is aging. Adult diapers are increasing popular, as they enable the elderly and the infirm to maintain their dignity in public. In fact, during the next 10 years of so, demand for adult diapers looks set to expand at a rate that exceeds the rate of population aging because changing diets and other health-related factors have led to a sharp increase in the incidence of incontinence among men in Southeast Asia. DSGT is the market leader in sales of adult diapers in Thailand.    

Positive #2: Earnings profile trending up   

We expect DSGT to deliver a strong NPAT CAGR of 18% during FY14-16, driven by fair revenue growth in Thailand and Malaysia and robust sales expansion in Indonesia. Furthermore, product innovations and expertise in product life cycle management should maintain GM its current high level of 35% through the years ahead.

Positive #3: Great scope for upside in Indonesia    

With a population of 250m people, of which about 15m (and rising) are infants aged under 3 years, urbanization and a rapidly growing middle class, Indonesia is already the biggest diaper market in ASEAN and has the greatest capacity for long-term growth. Management expects a swift Indonesian sales CAGR of at least 50% for the next couple of years. 

Positive #4: Demographic trends secure the sales outlook

Of the three markets, Thailand has the highest proportion of people aged 80 years or older at 10% of population (2m); in both Malaysia and Indonesia the proportion is only about 5%. In proportionate terms Thailand has a bigger adult diaper market, but by sheer weight of numbers Indonesia has as many old people, so is potentially as big a market for adult diapers. Malaysia and Indonesia have fast-growing infant diaper markets, while Thailand’s infant diaper market, while mature in disposable penetration, is still dynamically evolving.