Consumer Sector Update : Rising Consumerism, Tobacco Hit By Early Excise, Brewery To Await Verdict -...

8/8/2019 Consumer Sector Update : Rising Consumerism, Tobacco Hit By Early Excise, Brewery To Await Verdict - 07/10/2010

http://slidepdf.com/reader/full/consumer-sector-update-rising-consumerism-tobacco-hit-by-early-excise-brewery 1/6

of 6A comprehensive range of market research reports by award-winning economists and analysts are exclusively

available for download fromw w w . r h b i n v e st . c o m

Table 1 Consumer Valuations

FY E PriceFair

ValueEP S

(sen)EPS growth

(% )PE R(x )

P /NTA(x )

P /CF(x )

GDY(% ) Re c

(RM/ s) (RM/ s) FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY11 FY11

KFC Dec 3.12 3.61 22.5 26.1 16.7 15.7 13.8 12.0 1.9 10.3 9.0 OP

Carlsberg Dec 5.27 6.03 42.8 47.5 5.2 10.8 12.3 11.1 2.6 10.2 4.9 OP

KPJ Health Dec 3.54 4.51 26.6 29.9 10.7 12.2 13.3 11.8 1.6 10.5 4.5 OP

Parkson Jun 5.85 7.72 37.3 47.9 26.6 28.5 15.7 12.2 2.7 5.7 1.4 OP

Faber Dec 3.08 3.82 34.2 38.2 30.4 11.4 9.0 8.1 2.1 5.8 2.6 OP

QL Resources Mar 4.81 5.41 34.7 41.1 13.0 18.4 13.9 11.7 2.8 13.3 2.4 OP

Daibochi Dec 3.05 4.12 31.9 35.3 9.3 10.9 9.6 8.6 2.9 7.9 6.6 OP

Amway Dec 7.90 8.45 56.5 58.4 3.5 3.5 14.0 13.5 5.1 8.7 6.6 MP

AEON Dec 5.99 5.72 44.0 47.5 7.2 7.8 13.6 12.6 1.7 5.6 2.0 MP

Hai-O^ Apr 3.02 2.84 28.6 32.2 2.5 12.6 10.6 9.4 1.0 4.1 6.3 UPBAT Dec 47.50 42.60 229.3 226.0 -7.9 -1.4 20.7 21.0 n.m 17.6 4.3 UP

Sector Avg 11.1 10.8 15.8 14.2^ FY11-12valuations refer to those of FY12-FY13

♦ Consumer spending growth to mod erate but remain resilient. RHBRIforecasts a consumer spending growth of 5.4% p.a. for 2011. Although thisis a more moderate growth compared to the forecasted consumer spendinggrowth for 2010 of 5.6%, we believe the growth is still relatively resilient,given the rising consumerism and high savings of the Malaysian population.The main reasons for the slight dip in consumer spending growth in 2011are: 1) the subsidy removal; 2) the reinstatement of EPF employee’scontribution to 11% from 8%; and 3) the higher base effect.

♦ Domestic demand to drive retail sales. We expect the growth inconsumer spending to drive topline growth for a few of our retail players

such as AEON (MP, FV=RM5.72) and Amway (MP, FV=RM8.45), and to acertain extent, Parkson (OP, FV=RM7.72). For Hai-O (UP, FV=RM2.84)however, we believe its topline growth will be affected by the internal issueswith regards to its MLM division’s tighter stocking rules, thus affectingmembership drive and productivity.

♦ Daibochi will be boosted by an oversupply of plastic resin. Themargins of plastic packaging player Daibochi (OP, FV=RM4.12) will beboosted by an expected oversupply of plastic resin, its main raw material.We understand that the oversupply is expected to come at the end of 2010due to new capacity from the Middle-East. The new capacity would increasethe global supply of plastic resin, putting downward pressure on prices.

♦ F&B will be driven by geographical and segmental expansion. Theresilient growth in consumer spending will also be a factor for KFC (OP,FV=RM3.61) and QL Resources (OP, FV=RM5.25) revenue growth.However, for KFC, our view is that moving forward, its revenue will likely be

driven more by its expansion plans locally and overseas, mainly India. Forbasic food industry player QL Resources, we continue to like its outlookgiven its recent acquisition of a 23.29% stake in Lay Hong, which isinvolved in the production of eggs, broiler farming and feedmill activities,similar to QL.

♦ Risks. 1) Further drop in consumers’ disposable income; and 2) Risingcosts of goods and services, hence reducing consumers’ spending power.

♦ Maintain Neutral. We are maintaining our Neutral stance on the sector.Our top picks are Parkson and Carlsberg.

C o r p o r a t e H i g h l i g h t s

S e c t o r U p d a t e

Consumer SectorRising Consumerism, Tobacco Hit By Early Excise,Brewery To Await Verdict

7 October 2010

Recom : Neutral (Maintained)

Table 2: Basis For Fair Value EstimatesCompany Valuation BasisKFC Target PER of 16x CY11

discount to the sectorbenchmark.

Amway DCF based on WACC of 8.1%.

Carlsberg DCF based on WACC of 9.2%.

Hai-O Target PER of 10x CY11discount to the sectorbenchmark due to smallermarket capitalisation.

Parkson SOP based on: 1) target PERof 22x CY11 for PRG; 2)target PER of 11.5x CY11 EPSfor Vietnam; 3) target PER of 14x CY11 for Malaysia; 4) 6excluded stores in China at10x PE; and 5) net cash(debt) balance.

QLResources

Target PER of 16x CY11.

AEON Target PER of 13x CY11

BAT DCF based on WACC of 7.5%.

Daibochi Target PER of 13x FY11

Hoe Lee Leng(603) 92802641

[email protected]

Please read important disclosures at the end of this report.

RHB ResearchInstitute Sdn BhdA member of theRHB Banking GroupCompany No: 233327 -M

M a l a s i a

M A R K E T D A T E L I N E

P P

7 7 6 7 / 0 9 / 2 0 1 1 ( 0 2 8 7 3 0 )





Consumer Spending Outlook

♦ Consumer spending growth to moderate but remain resilient. RHBRI forecasts a consumer spendinggrowth of 5.4% p.a. for 2011. Although this is a more moderate growth compared to the forecasted consumerspending growth for 2010 of 5.6%, we believe the growth is still relatively resilient, given the risingconsumerism and high savings of the Malaysian population. The main reasons for the slight dip in consumerspending growth in 2011 are: 1) the subsidy removal; 2) the reinstatement of EPF employee’s contribution to11% from 8%; 3) the higher base effect.

Chart 1. Domestic demand on account of consumer spending

-5

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10

% yoy

Domestic demand

Consumer s pending

Source: Department of statistics

♦ Rising consumerism. Private consumption as a percentage of GDP has grown over the last 10 years, indicatinga more consumer-centric economy. In absolute terms, 2000-2009 private consumption has grown at a CAGR of 6.6% p.a., faster than 4.3% p.a. GDP growth throughout the period.

Chart 2. Private consumption as a % of GDP

40

42

44

46

48

50

52

54

56

58

00 01 02 03 04 05 06 07 08 09 10

%

0

10000

20000

30000

40000

50000

60000

70000

80000

Source: Department of statistics

Retail

♦ Domestic demand to drive retail sales. We expect the growth in consumer spending to drive topline growthfor a few of our retail players such as AEON (MP, FV=RM5.72) and Amway (MP, FV=RM8.45), and to a certainextent, Parkson (OP, FV=RM7.72). For Hai-O (UP, FV=RM2.84) however, we believe its topline growth will beaffected by the internal issues with regards to its MLM division’s tighter stocking rules, thus affectingmembership drive and productivity. Given that Hai-O’s MLM division contributes the bulk of its revenues and PBT





7 October 2010

(FY04/10: 64% and 59% for revenue and PBT respectively), we expect a contraction of Hai-O’s FY11 topline andnet profit.

♦ China consumer spending to drive Parkson. Parkson would, to a certain extent, be able to ride on the risingdomestic demand. However, the bigger impact towards its topline and earnings would come from its departmentstores in China, given that it contributes 95% towards Parkson’s PBT. We believe Parkson would benefit fromChina’s recent plan to increase its minimum wage by 20% p.a., ultimately doubling it by 2015.

♦ MLM to see better margins. Notwithstanding Hai-O’s internal issues, we expect both Hai-O and Amway’s grossmargins to improve in 2011 given the stronger ringgit against the USD, as both purchase a portion of theirproducts in US$. Although the impact for Amway would be stronger, given ~80% of its product purchases aredenominated in US$, as compared to Hai-O’s ~20%. However, the impact for Amway will only be felt in 2011 asit has hedged its inventory for 2010.

Packaging

♦ Daibochi will be boosted by an oversupply of plastic resin. The margins of plastic packaging playerDaibochi (OP, FV=RM4.12) will be boosted by an expected oversupply of plastic resin, its main raw material. Weunderstand that the oversupply is expected to come at the end of 2010 due to new capacity from the Middle-East. The new capacity would increase the global supply of plastic resin, putting downward pressure on prices.As Daibochi’s earnings were recently affected by rising plastic resin cost, we believe this is a positive news andwe expect Daibochi to be able to take advantage of its expanding margins. Demand wise, we expect Daibochi’scontinuous product innovation and foray into the non-F&B sector to continue to drive revenue growth.

Food and Beverage

♦ F&B w ill be driven by geographical and segmental expansion. The resilient growth in consumer spendingwill also be a factor for KFC (OP, FV=RM3.61) and QL Resources (OP, FV=RM5.25) revenue growth. However,for KFC, our view is that moving forward, its revenue will likely be driven more by its expansion plans locally andoverseas, mainly India. For basic food industry player QL Resources, we continue to like its outlook given its

recent acquisition of a 23.29% stake in Lay Hong, which is involved in the production of eggs, broiler farmingand feedmill activities, similar to QL. We believe the acquisition will contribute positively for QL in terms of synergistic cost savings and incremental earnings. Furthermore, it is in the process of expanding its palm oildivision, with its recent purchase of 40.51% stake in Boilermech, a palm oil biomass boiler manufacturer. Thepurchase would complement its palm oil division.

Tobacco

♦ Dark days for tobacco players continue. For the third time in a row, the excise duty was increased earlierthan the tabling of the Budget. We believe this surprise hike was done so as to stop smokers from stocking upbefore the announcement is made. To add to the misery, the hike was higher than expected, at 3 sen/stick,translating to a hike of 70 sen per 20 stick pack. Note that we have previously assumed a lower hike of 1sen/stick. BAT’s premium segment pack price rose to RM10 from RM9.30, while its value for money segmentpack price rose to RM8.50 from RM7.80. This new pricing does not include a potential further increase whichcould be implemented as a result of an additional 0.5 sen/stick cess to be paid to the NKTB, although there is noconfirmation if and when it will come into play. We believe the price rise will be followed by a further increase inillicit trade of cigarettes, which is currently estimated to be at ~38% of the market as the price diferentialbetween illicit and legal cigarettes has now widened. The rise in illicit coupled with the Government’s variousinitiatives (Table 2), will cause a further drop in TIV, which has already been on the downtrend. We estimatethat for 2011, the TIV could drop by 5%. The only positive thing for smokers now is that with cigarette prices atRM10, they do not need to wait for the change.





7 October 2010

Table 2 Directives from Ministry of Health

Implementation Directive CommentNov 08 Price parity for all packs of cigarettes Price of 25s pack was increased by as much as RM1.50 (only

applicable to BAT).

Feb / Mar 09 Price discounting of not more than 5% andnot to last for more than a month

Implemented to reduce price war among industry players.

Jun 09 Price/stick of cigarette for packs less than20s to be at least 5% more than price/stickfor 20s

Industry players adjusted the prices of its 14s and 18s to be atleast 5% more than the price/stick for 20s.

Jun 09 Pictorial health warning Initial impact from the pictorial health warning could be as shortas two months, as they expect smokers to gradually becomeimmune to the new pictorial health warnings. However, thesepictorial health warnings would likely have to be replaced everytwo to three years, which would cause additional printing costmoving forward.

Jan 10 Minimum floor price of 32sen/stick Implemented to ensure that cigarettes are not easily accessibleto smokers, especially youths, as well as to ensure that cheapcigarettes will not be flooding the market, once the AFTA-Cepttakes place. Would not have as great an impact to the Big Threecigarette players as they have successfully differentiated theirVFM packs from the ELPCs i.e. raised their price bar toRM7.80/pack, which is RM1.40 (or 22%) above the minimumthreshold.

Jan 10 Price discounting of maximum three times ayear

Implemented to reduce price war among industry players.

June 10 Less than 20s pack ban Implemented to curb younger smokers.

Source: Media, BAT, RHBRI

Brewery

♦ Brewer’s verdict next. On the brewery side, we opine that a potential excise duty hike might be on the cardsthis year as the industry has had excise duty hike free years for the past 4 years. We estimate that an extremecase scenario of a 20% increase in excise duty will cause Carlsberg’s gross profit to contract by 28% assumingno subsequent price hike. However, should there be an excise duty hike, it is likely that a price hike wouldensue, although the quantum of hike may not completely cover the incremental cost caused by the excise dutyhike as has been the case in previous years. Furthermore, Carlsberg’s margins could also be affected by wheatprices, its main raw material, which is experiencing upward pressure due to Russia’s export ban on wheat.However, the near-term risk of eroding margins due to the rise in wheat prices is mitigated as Carlsberg hassecured most of its input requirements up to early 2012.

Valuations and Recommendation

♦ Retail, F&B and Packaging. In terms of valuations, we have in our recent strategy piece increased most of our

target PERs for our PER based valuation stocks by 1-1.5x, given improving growth prospects. For KFC and QL,we increased the target PERs by 1.5x to 16x CY11 as we believe both stocks should trade in line with the marketgiven their strong fundamentals and reasonable liquidity. The changes in fair values and recommendations forthe said companies are laid out in Table 3.

♦ BAT and Carlsberg. After the excise duty hike, we are maintaining our Underperform call on BAT, butincreased its DCF derived fair value to RM42.60 (from RM40.25) to account for an updated WACC of 7.5% (from7.9% previously) in line with RHBRI’s current assumptions. We believe that the current share price of RM47.50has run up ahead of its fundamentals, which is currently trading at rich valuations of 20.7x and 18.4x of our andthe street FY11 earnings estimates respectively. Comparatively, JTI, BAT’s competitor, is trading at only 11.6x





7 October 2010

FY11 street estimates. We are also maintaining our Outperform call on Carlsberg with an unchanged DCF-derived fair value of RM6.03.

♦ Maintain Neutral. We are maintaining our Neutral stance on the sector. Our top picks are Parkson andCarlsberg.

Table 3. Change In Target PER, Fair Value and RecommendationPER Indicative Fair Value Recommendation

Old New Old New Change Old New Change

(RM) (RM) (%)

Daibochi 12.0 13.0 3.80 4.12 8.3 OP OP -KFC 14.5 16.0 3.27 3.61 6.9 OP OP - QL Resources 14.5 16.0 4.90 5.41 7.2 OP OP -AEON 12.0 13.0 5.28 5.72 8.3 MP MP -Hai-O 10.0 10.0 2.84 2.84 - UP UP

Chart 3: HaiO Technical View P oint

♦ After a strong rally to a fresh all-time high of

RM4.93 and the record of a bearish “shooting star” candle, the share price of HaiO turned into a beartrend.

♦ Though it has always tried to stage a technicalrebound, the stock was constantly capped at belowthe Downtrend Resistance Line (DRL).

♦ In early Sep 2010, when it launched a technicalrebound to above the RM3.20 level, the DRL nearRM3.40 – RM3.50 region capped its upside.

♦ As a result, the stock plunged to below the RM3.20level with a huge technical gap on the chart. Itrecently touched a fresh year low of RM2.85.

♦ Technically, given the strong resistance at the DRL,coupled with the firm downtrend on both the 10-day and 40-day SMAs, the stock is likely to staywithin the current downtrend.

♦ Any increase in selling momentum will press thestock towards the support at RM2.59, or evenRM2.00.

♦ It must remove RM3.20, near the DRL, and boththe SMAs convincingly before it can reverse thecurrent bearish scenario, in our view.





7 October 2010

IMP ORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinionsand information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or becontrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to beconstrued as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in anymanner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated personsmay from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives

of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluateparticular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment orstrategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents acceptsany liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providinginvestment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHBGroup may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equitysecurities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holdi ng company and the respective directors,officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or otherservices from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflectinformation known to, professionals in other business areas of the “Co nnected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation basedupon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% ormore over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to takeon higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market cap italisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommendedsecurities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever forthe actions of third parties in this respect.

Consumer Sector Update : Rising Consumerism, Tobacco Hit By Early Excise, Brewery To Await Verdict -...

Documents

Transcript of Consumer Sector Update : Rising Consumerism, Tobacco Hit By Early Excise, Brewery To Await Verdict -...