Siam Global House

Investment thesis

GLOBAL looks set to continue to delivering the worst performance in Thai Retail space, as its operation is closely tied to the spending of low- to mid-income demographics in the provinces, where spending power is the weakest. Also, it is very expensive—PERs of 57x for FY14 and 43x for FY15. Even adjusting for the impact of asset revaluation, its PERs would still be 45x for FY14 and 36x for FY15, versus peer means of 35x and 28x, respectively. By rolling over our investment horizon to YE15, our target price rises to Bt13.50 from Bt11.80, but our SELL rating stands.

SSS remains in decline

Demand for low-end to mid-range building materials upcountry remains weak in 3Q14 and recovery has yet to manifest; it may not start till after harvest season in November. High household debt and low agricultural product prices, particularly for paddy and rubber, are likely to discourage consumer spending. Coupled with cannibalization effects and the temporary closure of the Surin store, we expect GLOBAL to post SSS declines of 8% for 3Q14 and 3% for 4Q14.

Expansion resumes

GLOBAL froze its expansion plan after part of its Surin store collapsed in May. But expansion resumed in 3Q14, when two stores opened; another three outlets will start operating in 4Q14, which will take the total for FY14 to seven. Next year, the firm targets rolling out 12 stores; most of them are to open in 2H15. However, in each of the last three years, GLOBAL has failed to achieve its rollout targets, so we currently assume 10 new stores in FY15. Note that the firm has targeted opening 12 stores/year since 2012 but achieved only seven stores a year during FY12-14.

Gross margin may not expand much after DC is completed

After a long delay, GLOBAL confirmed that its DC will start operating in mid 2015 (the original schedule was early 2014). The firm expects inventory turnover to shorten from 150-180 days to 120 days within one year and to 100-110 days over the longer-term, which would substantially reduce working capital and overall costs. However, it seems that margin won’t expand much, as management policy is to keep sales prices low in order to fight competition.

Overseas expansion—short-term pain, long-term probable gain

Myanmar is likely to be the first neighboring country in which GLOBAL will set a new footprint, probably in late FY15 at the earliest. This new territory could be a great opportunity for the firm, but it is likely to be a major squeeze on earnings in the short- to medium-term. Moreover, huge working capital requirements in the face of GLOBAL’s small capital base may eventually force a cash call.