Friday, February 02, 2024

Thai Beverage - Singapore's compounder

This third Singapore name has been a strong compounder since its IPO c.17 years ago, almost quadrupling its share price back then. With STI barely up over the same time period, this is an idea that has worked out and I think the share price is not expensive today. As usual, the simple financial numbers below:

Simple financials (Sep 2024 estimate, SGD)
  • Sales: 11.7bn
  • EBITDA: 1.9bn
  • Net income: 1.2bn
  • FCF: 1.5bn
  • Debt: 4.7bn, Mkt Cap 25.1bn
Financial Ratios
  • ROIC: 10% and ROE: 16%
  • EV/EBITDA 11.4x (Sep 24)
  • PER 11.5x (Sep 24)
  • Past margins: OPM 12-14%
  • FCF yield: high single digit for last few years

Interestingly, share price has stagnated since 2020 and we are not far from the Mar 2020 low today. Recall that this was at the height of COVID-19 when the markets capitulated. Compare now to 2020, things has improved so much, yet the stock is trading as if we are still in the worrisome heydays of the pandemic. This warrants a closer look!

The company in question is Thai Beverage (ticker: THBEV), the spirits, alcohol and beverage conglomerate controlled by the Charoen Sirivadhanabhakdi’s family listed on SGX. It is the largest spirits producer in Thailand and the second largest beer producer and has expanded its empire into Vietnam, Myanmar and Singapore as well as into other business segments.

1. Fundamentals

Thai Beverage’s investment thesis is predicated on the alcohol being an inherently high ROE and sticky business as people enjoy drinking and the markets in which THBEV operates in continue to see strong growth. Thailand is still seeing mid single digit growth in the spirits market while beer is also seeing strong growth with Vietnam's volume surpassing pre-COVID era. Margins have also been stable with EBIT* margins for spirits at 20+% and beer at close to 10% (while it was closer to 5% in 2017). As the dominant player in various markets, THBEV will continue to generate above market growth and investors stand to benefit from this compounding.

*EBIT = Earnings Before Interest and Tax

Thai Beverage has been acquisitive and currently owns c.80% of Oishi, green tea business acquired in 2008, c.65% of soft drink maker Sermsuk (2011) and c.28% of F&N and Fraser Property (2012) and c.53% of Sabeco, the largest Vietnam beer company (2021). It generated c.SGD1.5bn in FCF last year (FY ending Sep 2022) and is on track to sustain FCF at SGD1.5bn, which implies that we can buy it now at the magical 10% sustainable FCF yield today!

10% sustainable FCF yield is magical because technically, you never need to sell. If an investment gives 10% yield you get back your capital in 10 years or less. If you sell it then at cost, you just made 100%. But chances are, you can sell for higher, so this investment will probably give you 3x. If the FCF compounds, then the sky is the limit, it could be a ten bagger. Or a moonshot, or a fat pitch. You get the idea. That is why 10% FCF yield is magical.

THBEV is also one of the larger companies listed on the SGX at c.SGD14bn market cap today. It has compounded value since its listing and management continues to look for ways to increase value. The company intended to spin off 20% its beer business in 2020 as a separate listing but unfortunately that did not work out. Recently, the company talked about privatizing its food business which would make it a pure beverage manufacturer (both alcohol and non-alcoholic drinks) and eliminate the conglomerate discount on its valuation. More on this later.

For now, let’s discuss the few positives layering on top of the fundamental thesis:


High and growing market share: THBEV has very high market share in Thai's spirits market (c.80% share) and has maintained that edge over the last decade driven with strong local brands. With high market share, THBEV enjoys economies of scale and lower cost per unit which has contributed to its good margins at c.20+% EBIT margins vs c.10% for its beer business.

EBITDA and EBIT margin snapshots:
  • Spirits: EBITDA margin 24-25%, EBIT margin 20-22%
  • Beer: EBITDA margin 13-16%, EBIT margin 10-12%
  • Non-alcoholic beverages: EBITDA margin 13-14% EBIT margin 10-11%
  • Food: EBITDA margin 10-13% EBIT margin 7-10%
Its beer market share in Thailand and Vietnam has remained stable at c.30-35% for both markets. In Thailand, it has impressively grown its market share from 27.4% in 2012 to 33.4% in 2021 and targets to displace the #1 leader Singha going forward. The following chart from its investor presentation deck shows the contribution from the various business segments:

In Vietnam, while Heineken has grown rapidly in Vietnam with its strong Tiger Beer brand capturing the bulk of the demand growth, we believe THBEV's market share should stabilize going forward. Sabeco’s iconic Vietnamese brands such as Saigon beer and 333 beer should see further recovery as the pandemic subside and tourists visit the country again and going forward, the Vietnamese demand comes back as the population embrace local brands.

Transformation: Thai Beverage intends to continue to transform into an ASEAN multi-national empire with potential to further focus on its core, divesting the legacy property business from F&N. While not executed, its 2022 move to spin off BeerCo and current intent to privatize its food business are testimonies of how the group is constantly thinking about value creation. We believe the company can continue to improve margins and ROICs for lower performing business as it has done with its beer business.

The strengths of companies show through in margins, ROE and ROA and we see THBEV doing well with overall teens EBIT margins and teens ROEs. It has also maintained high ROA at 6+% despite the pandemic.

Recovery: The third and final positive is simply recovery back to pre-pandemic demand. Consumption has not fully resumed to levels seen in 2018-19 but historical volume growth points towards mid single digit growth going forward. Interestingly, only 20% of consumption is off-premise in Thailand which means that on-premise demand rebound will greatly benefit THBEV.


Management has a strong and proven track record in building strong businesses. The founder family tsar Charoen Sirivadhanabhakdi (79) and his son continues to run the company efficiently and has created a strong culture which is reflected in the numbers such as strong margins and ROICs discussed above. His business empire spreads across retail, food and other asset classes with property being prominent as well. His daughter runs the property business arm. THBEV’s M&A track record has also been stellar, buying Singapore's F&N and Vietnam's Sabeco well and has created value after the acquisitions. His wealth is estimated to be USD12.7bn.

Charoen’s third son Thapana Sirivadhanabhakdi (48) is the CEO of Thai Beverage today, a role he stepped in since 2008. While having more a decade of management under his belt and holding directorships in a variety of businesses, he undoubtedly has less of a free rein in running THBEV’s business with his father still in the Chairman role and probably calling the key shots. But he is definitely smart and more than capable to run an oligopolistic alcoholic beverage business.


Key man risk: While the company culture seemed strong, key man risks will be inevitable. The question about what happens when the father is no longer around will always linger. The son must build his own team and appoint key lieutenants before that. As of today, the management team seemed capable having staffed with high calibre people and we should expect the ship to continue to sail forward.

Minority shareholder risk: Alongside the key man risk is how they treat minority shareholders. Unfortunately, Asian businessmen had a weak track record of being fair to minority shareholders and one has to be always mindful that we will receive the shorter end of the bargain if the owners can get away with it. The family still owns c.62% of Thai Beverage. So far, they have not been unscrupulous and the share price reflects that as well.

Regulatory risk: Thailand, as a Buddhist country, with restriction on alcohol consumption has been a risk to the investment thesis since the IPO of the company. Part of the share price weakness today reflects the recent concern that the new Thai government may implement stricter rulings such as no alcohol consumption in public premises outside 11am-2pm and 5pm-midnight. In my experience, when share price corrects on such news, it is often good times to buy because people just want to drink and regulations do not deter them drinking less. They will just drink more when it is permissible to drink.

2. Technicals

THBEV became a public company in 2006 and the following chart shows the share price movement over this past 17 years. While it is a FMCG company, drawdowns are frequent and not easy to stomach. Its largest drawdowns are 30-35% usually over the course of 6-12 months and the most recent one is c.20% which brought it close to its pandemic low.

The pandemic low was SGD0.45 which means that we have c.15% downside if it ever revisits that level. On the upside, the stock hit its all-time high of SGD0.84 in 2019 which implies c.50% upside. So by just looking at technicals, we already have favorable risk rewards. But that’s not enough. Let’s look at valuation.

3. Valuations

Thai Beverage trades at a significant discount when compared against its global peers although that’s partially due to its lower margins as a conglomerate with food and non-alcoholic beverage businesses and lower ROEs and ROICs as we can see below.

That being said, the valuation gap is too big to be ignored. If we apply slight discount to the average valuation on the various metrics (except for FCF where we are applying a crazy discount at 20x vs 40x), we will still get significant upside as shown below:

Recall that the stock hit its all-time high at only SGD0.84, the lowest value amongst the three intrinsic value (ie SGD0.90 with 57% upside) might be a better estimate while keeping in mind that this has been a compounder and it would not be surprising that the stock hit SGD1.11 (almost doubling for today’s price) on the back of its strong free cashflow someday.

Huat Ah!

This post does not constitute investment advice and should not be deemed to be an offer to buy or sell or a solicitation of an offer to buy or sell any securities or other financial instruments.

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