Regional Industry Focus ASEAN Consumer: Food for Thought products in Indonesia, Vietnam, Myanmar,...

ed: JS / sa: JC, CW, CS

2019: Domestic plays favoured • Retain positive view on ASEAN consumer plays even

as we face global uncertainties

• Stable GDP growth for ASEAN-5 at 3-6.5%, play onelections in Thailand and Indonesia, and steady grossmargins in 1H19 to underpin consumption

• Project aggregate earnings growth of 12.6% in 2019F;valuations at -1SD of 5-year average

• Stock picks: Favour stocks with these themes -domestic consumption plays, election beneficiaries,earnings growth

2019: Uncertain outlook but valuations relatively attractive; consumer sector should outperform. The optimism which started in early 2018 did not last, unfortunately. For consumer sector counters under our coverage, we are scaling down our earnings growth projection to 4.5% for 2018. For 2019, we expect the following factors to favour the consumer sector: (i) stable GDP growth for ASEAN-5 at 3-6.5%; (ii) gradual recovery in consumption, helped by lead up to elections in Thailand and Indonesia; and (iii) stable gross margins in 1H19 on back of benign commodity prices. Among the ASEAN countries we track, we are more positive on consumer plays in Indonesia and Thailand.

Valuations attractive at -1SD below 5-year historical average. Along with the market, valuations of consumer stocks under our coverage have corrected. While outlook seems uncertain on the macro front led by trade war headwinds, currency volatilities, and mixed consumer sentiment within ASEAN, valuations for consumer stocks under our coverage are at -1 standard deviation below its 5-year historical average, which was last seen seven quarters ago in 1Q16.

Stock picks: Domestic consumption, election beneficiaries, earnings growth. We advocate taking bets on companies that will benefit from domestic consumption, record a turnaround in earnings or higher earnings, and/or have stock specific catalysts. For exposure to Indonesia, we favour Indofood Sukses Makmur, Japfa Comfeed Tbk. Our proxies to Thailand are CP ALL, HomePro. For Singapore-listed counters, we like ThaiBev and Japfa Ltd for their core operations as well as exposure to Vietnam, and Koufu as a resilient, mainstream food service provider and small cap play

STI : 3,012.88 KLCI : 1675.83 SET : 1560.03 JCI : 6221.01 PCOMP : 7680.6 Analyst Andy SIM, CFA +65 6682 3718 [email protected]

Alfie YEO +65 6682 3717 [email protected]

David Arie Hartono +62 2130034936 [email protected]

Namida ARTISPONG +66 28577833 [email protected]

King Yoong CHEAH +60 32604 3908 [email protected]

Regional Research Team

Indofood Sukses Makmur : Indofood Sukses Makmur is a Total Food Solutions company with operations spanning from the production of raw materials and their processing, to consumer products.

Japfa Comfeed Indonesia : Japfa Comfeed Indonesia : Japfa Comfeed is a leading industrialised and vertically integrated producer of poultry, beef, aquaculture and consumer food products in Indonesia. The group is the second largest poultry feed and DOC (Day-Old-Chicks) producer in Indonesia.

Japfa Ltd : Japfa Ltd : Japfa Ltd is a leading industrialised and vertically integrated producer of multiple animal proteins, dairy and consumer food products in Indonesia, Vietnam, Myanmar, India and China.

Thai Beverage Public Company : ThaiBev is a F&B company with exposure in alcoholic, non-alcoholic food and beverages.

Koufu Group Limited : Koufu is a leading foodcourt and coffee shop operator in Singapore with a presence in Macau. It also has other foodservice formats including tea kiosks, full service and quick service restaurants.

CP ALL : The Company's main business is the operation of convenience store retail outlets under the trademark of "7-Eleven" in Thailand.

Home Products Center : Operates a retail chain under “Home Pro”. It sells a complete line of products for renovation, decoration, and repair of homes and buildings.

DBS Group Research . Equity 4 Jan 2019

Regional Industry Focus

ASEAN Consumer: Food for ThoughtRefer to important disclosures at the end of this report

STOCK PICKS

12-mth

Price Mkt Cap Target Price Performance (%)

LCY US$m LCY 3 mth 12 mth Rating

Rp Rp Indofood Sukses

7,475 4,564 10,000 26.7 (1.0) BUY

Japfa Comfeed 2,210 1,802 2,600 10.8 63.7 BUY S$ S$

Japfa Ltd 0.73 986 0.89 15.0 44.6 BUY Thai Beverage

0.59 10,858 0.87 (15.7) (35.5) BUY

Koufu Group

0.62 250 0.80 (3.2) N.A BUY Bt Bt

CP ALL 70.50 19,651 83.00 1.8 (8.4) BUY Home Products

14.90 6,080 17.50 (2.0) 16.4 BUY

Source: DBSVI, DBS Bank, DBSVTH, Bloomberg Finance L.P. Closing price as of 3 Jan 2019


ASEAN Consumer: Food for Thought – 2019 Outlook

Table of Contents

Overview: 2019 Outlook – Seek defensive traits 3

Regional and Country 12-month forward PE 12

Performance Review and Regional Benchmarks 13

DBS ASEAN Consumer Stock Universe Performance 14

Same-store-sales-growth charts 15

Country briefings • Singapore 20 • Malaysia 22 • Thailand 25 • Indonesia 28 • Philippines 33

Macro Charts/ Data • GDP 38 • Inflation 39 • Forex 40 • Input costs 41

Peer comparison 43

Company Guides 46 58 72 81 93

• Japfa Comfeed Indonesia• Japfa Ltd• Koufu Group Limited• Thai Beverage Public• CP ALL• Home Products Center 101

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Overview: 2019 Outlook – Domestic focused plays

ASEAN5 Consumer staples sector indices ASEAN5 Consumer discretionary sector indices

Source: ThomsonReuters, DBS Bank Source: ThomsonReuters, DBS Bank

2018 review: Buffeted by macro headwinds. The optimism which started in early 2018 did not last unfortunately. The performance of consumer indices across the region were largely down, in line with their respective markets, largely on the macro headwinds, coupled with currency depreciation (against USD), downward adjustments in earnings forecasts, etc. For counters within the consumer sector under our coverage, we have scaled down our earnings growth projections to 4.5% for 2018, driven by contraction in earnings from Singapore and Malaysia listed counters. Nonetheless, this is an improvement from -1.1% contraction in earnings seen in FY17. Recap of 3Q18 performance: fairly mixed. As of Dec-18, earnings report cards for the quarter ending Sep was fairly mixed, with about 6 in 10 companies under our ASEAN coverage reporting results that were within or above expectations. Those that disappointed arose from higher-than-expected operating expenses (such as startup and admin costs e.g. Jumbo and Sheng Siong in Singapore) or slower than expected sales growth. 2019: Uncertain outlook but valuations relatively attractive; consumer sector should outperform. For 2019, we expect the following key factors to support the consumer sector: (i) stable GDP growth for ASEAN-5 at 3-6.5%; (ii) gradual recovery in consumption, helped by lead up to elections for Thailand and Indonesia; (iii) stable gross margins in 1H19 on back of benign

commodity prices. Among the ASEAN countries we follow, we are more positive on consumer plays in Indonesia and Thailand, particularly at the start of 2019. Valuations at -1SD over 5-year historical average. Along with the market, valuations of consumer counters under our coverage have corrected. While on a long-term basis (since 2007), the current valuation of c.24x forward PE is still at +0.5 standard deviation against the historical average, it is skewed by the slump seen during the Global Financial Crisis. While the outlook seems uncertain on the macro front buffeted by trade war headwinds, currency volatility, and mixed consumer sentiment within ASEAN, the current valuation for the consumer sector based on consumer counters under our coverage is at -1 standard deviation below its 5-year historical average, a level not seen since seven quarters ago in 1Q16. Stock picks: Domestic consumption, election beneficiaries, earnings growth. We advocate taking bets on companies that will benefit from domestic consumption, record a turnaround in earnings or higher earnings, and/or have stock specific catalysts. Amongst the countries, we prefer Thailand and Indonesia. For exposure to Indonesia, we favour Indofood Sukses Makmur, Japfa Comfeed Tbk. Our proxies to Thailand are CP ALL, HomePro. For Singapore-listed counters, we like ThaiBev and Japfa Ltd for their core operations as well as exposure to Vietnam, and Koufu as a resilient, mainstream food service provider and small cap play.

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3Q18 earnings review

FY18E forecasts impacted by uncertainties seen in 2H18. We had expected 2018 to be better vis-à-vis 2017 on the back of improving sentiment leading to stronger earnings growth profile. The year started well but macro uncertainties and currency volatility in 2H18 led to sharp downward revisions to our forecasts. We now expect 2018 to post just 4.5% profit growth over FY17, down from c.11% growth expected as at mid-year. In Singapore, the underperformers were largely from food retailers (Jumbo, BreadTalk, Koufu) arising from higher than expected operating costs, while Sheng Siong was impacted from start-up costs at its new stores. ThaiBev had a bad year on the back of slow domestic consumption, though we believe the worst is over and 1QFY19 should register y-o-y growth. In Thailand, 3Q18 results of companies under our coverage were a mixed bag. For food companies, core operations were helped by recovery of swine prices in Thailand and Vietnam (Charoen Pokphand Food), successful price negotiations and lower tuna raw material prices (for Thai Union). For Thai retailers under our coverage, all companies including CP ALL (CPALL), Home Products Center (HMPRO), Berli Jucker (BJC), and COM7 (COM7) posted positive earnings growth, except for Beauty Community (BEAUTY) delivering a decline in net profit. For hospitality/food-related operators, Minor International (MINT) recorded negative earnings growth, dragged by a jump in interest expenses related to NH Hotel acquisition, and its food unit which recorded negative same-store-sales growth

(SSSG) in all of its (MINT’s) operating hubs (Thailand: -4.4% SSSG). Meanwhile, higher revenue growth from new hotel openings and positive total system sales growth (TSSG), as well as a lower effective tax rate drove CENTEL’s net earnings. For Philippines, the stronger 1H18 did not follow through to 3Q18’s topline performance, as faster-than-expected inflation eroded disposable income gains from personal income tax cuts early in the year. Particularly hit were food manufacturers, i.e. Century Pacific Foods (CNPF; +10.1% vs 1H18: 20.5%) and Universal Robina Corp (URC; -1.5% vs 1H18: 5.9%), where demand failed to sustain in 3Q18. However, companies catering to higher income segments were less impacted as consumers were less sensitive to inflation, such as Emperador (EMP) and Robinson Retail Holdings Incorporated (RRHI). Meanwhile, despite a lower-income consumer base, PureGold Price Club (PGOLD)’s 3Q18 topline (+15.5%) did better than 1H18 (+13.1%), largely attributable to higher average basket sizes. Price increases for selected categories have arrested declines at the EBIT and net income level, albeit in varying degrees, for some consumer counters. The 3Q18 results proved that 9M18 has been particularly decent for EMP, with double-digit margin expansion buoyed by the performance of its international operations. Meanwhile, higher operating expenses (attributable to manpower and rental costs) wiped out PGOLD’s profits at the EBIT level, while lower supplier support contracted RRHI’s gross/EBIT margins across its business formats.

3Q18 consumer earnings FY18F net profit growth revised down

Source: DBS Bank Source: DBS Bank’s estimates

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In Indonesia, demand recovery is taking place at a gradual pace. For staples, revenue growth has been improving in a consistent manner in the past two quarters supported by regional elections and government’s populism. The growth was mostly from volume increase as there had been very minimum adjustments made to selling price YTD. Retailers posted weak revenue in 2Q18 but there were signs of improvements in 3Q18. Animal protein companies (Charoen Pokphand Indonesia Tbk and Japfa Comfeed Tbk) posted strong 3Q18

results on the back of resilient day-old-chicks (DOC) and broiler prices. Malaysia. Corporate results announced in November were largely within expectations. Padini stood out with disappointing earnings, mainly dragged by moderated topline growth, weaker gross margin which declined from 43% in 3QCY17 to 40% in 3QFY18 in the absence of reversal of inventories written off, coupled with higher product cost and poorer sales mix, and 9% increase in selling and distribution expenses.

Outlook and Key Themes for 2019 Focus on domestic consumption. This year, we still like the ASEAN consumer sector for its structural growth and amid macro uncertainties, as we believe this sector is seen to be a safe harbour. The following should continue to underpin the fundamentals of the sector: (i) stable GDP growth for ASEAN-5, at 3% - 6.5%; (ii) gradual recovery in consumption, helped by lead up to elections in Thailand and Indonesia; and (iii) stable gross margins in 1Q/2Q19 on back of benign commodity prices, with potential downside risk in 2H19. Key risks to watch are US rate hikes which could bring volatility to regional currencies. We are currently projecting consumer companies under our coverage to record earnings growth of 12.6% as a whole. Our preferred countries in ASEAN for the consumer sector are Indonesia and Thailand. Our regional equity strategist, Ms Joanne Goh believes there is upside risk for the ASEAN region as major pressure points could turn favourable. Quoting from DBS 2019-20 Outlook report published on 3 December 2018,

she stated that “the potential topping of the USD, bottoming oil price, pause in interest rate hikes, and peaking of US bond yields, could see prices skewed to the upside, and that ASEAN markets are typically sensitive to such factors. Common investment themes in the region include government spending, resilient domestic demand, and how companies can benefit from the ASEAN Economic Community (AEC). Thailand and Indonesia will hold elections in the first half of next year and domestic sentiments can be positive...” Stock picks: We advocate taking bets on companies that will benefit from domestic consumption, record a turnaround in earnings or higher earnings, and/or have stock specific catalysts. For exposure to Indonesia, we favour Indofood Sukses Makmur, Japfa Comfeed Tbk. Our proxies to Thailand are CP ALL, HomePro. For Singapore-listed counters, we like ThaiBev and Japfa Ltd for their core operations as well as exposure to Vietnam, and Koufu as a resilient, mainstream food service provider.

Key themes: DBS economists’ GDP forecasts for 2018E to 2020F

2014 2015 2016 2017 2018E 2019F 2020F

Singapore 2.9 2.0 2.0 3.6 3.4 3.0 2.8 Malaysia 6.0 5.0 4.2 5.9 4.7 4.5 4.2 Thailand 0.9 2.8 3.2 3.3 4.1 3.8 4.0 Indonesia 5.0 4.8 5.0 5.1 5.1 5.2 5.1 Philippines 6.1 5.9 6.9 6.7 6.3 6.5 6.4 Vietnam 6.0 6.7 6.2 6.8 6.9 6.6 6.3 US 2.4 2.6 1.5 2.3 3.0 2.5 1.5 Japan -0.1 0.5 0.9 1.7 1.0 1.0 0.5 Eurozone 0.9 1.9 1.8 2.5 1.9 1.8 1.8 China 7.4 6.9 6.7 6.9 6.6 6.2 6.0

Source: DBS estimates

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1) Macro economic outlook GDP outlook: ASEAN growth still on track. So far, as noted in our economists’ outlook report, 2018 has turned out to be relatively in line with their projections and that “global growth is on course for a tad above 3.5%, despite concerns about trade and pockets of geopolitical instability”. Project positive 2019 earnings growth for consumer companies. As per the table above, our economists are projecting positive and stable GDP growth for the various countries at about 3% to 6.5%. At the lower end of the range is Singapore, which is projected to deliver 3% growth, a tad below 2018E’s 3.4% on global uncertainties and being a trade dependent economy. Despite concerns of inflation, Philippines

is projected to deliver GDP growth of 6.5% in 2019F. Other countries such as Thailand, Indonesia and Malaysia are still projected to deliver growth of 3.8%, 4.5% and 5.2%, respectively, relatively similar to 2018. 2019: Better earnings growth. Transcending to our forecasts for companies under our coverage, we are projecting an aggregate 12.6% net profit growth, driven by topline increase of 7.9%. Delving deeper, while it seems significantly stronger, this partly stems from a relatively weak base in 2018. For 2019, we are still expecting some margin expansion from a benign commodity price environment. The downside risk is potential currency weakness which could negate this.

Net profit growth by country (FY14 - FY19F)

Source: DBS Bank estimates

2) Leverage on election boost, stimulus packages Play on elections in Thailand and Indonesia. We are excited on the pending elections in Thailand and Indonesia, particularly for the consumer sector. Thailand is expected to hold its General Election on 24 Feb 2019, while Indonesia’s Presidential Election will be held on 17 April 2019. The lead up to these should bode well for the stocks in the consumer sector.

Thailand – Feb 2019. In Thailand, we expect the general election to be a catalyst for consumer companies. The economy generally improves prior to any general election, as money tends to be injected into the economic system while the election will also boost investor confidence. However, domestic

spending before the general election may not benefit private consumption and economic growth significantly.

There are a few stimulus packages lined up before the general election. The major scheme is the welfare card policy for 14.5m low-income earners, whereby Bt330/month will be given to each household for electricity/water payments (Dec 2018 to Sept 2019) and a one-time (Dec 2018) Bt500 cash handout/person. Aid packages will also be given for rubber plantation and oil palm owners.

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Additional consumption stimuli are Shop for Nation campaign which allows a tax allowance of up to Bt15,000 for spending on tyres, books/e-books, and OTOP (One Tambon [sub-district] One Product) products, as well as 5% VAT refund scheme for spending up to Bt20,000 during Feb 1-15, 2019.

In Indonesia, several Government stimulus packages such as (i) increasing the number of recipients under the National Health Insurance, (ii) increasing the number of recipients under the Family Hope Program (Program Keluarga Harapan), (iii) Non Cash Food Aid programs, and (iv) various village funds. This stimulus will help to boost the overall consumer spending in FY19F, especially in rural areas.

Upcoming Elections in Thailand and Indonesia Country Date Remarks Thailand 24 Feb-

19* Thailand has lifted its ban on political activity after four years of military rule.

Indonesia Apr-19 Presidential Election; current incumbent President Joko Widodo will be running against Prabowo Subianto

*Note: tentative Source: Media report, DBS Bank

While investors may be concerned that any unforeseen and unexpected outcome may create volatility, we believe there are opportunities in the lead up to these events.

3) Margin has improved in 2018, to remain elevated at leastin 1H19

Back in late 2017, we had opined that as we entered into 2018, gross margins for consumer companies should improve on the back of benign raw material and commodity prices. As can be seen up to 3Q18, this has been panning out as expected. In 2019, we expect this trend to continue at least for 1H19 given still relatively benign prices, though positives could be partially negated by weakening regional currencies. In addition, companies have been relatively reluctant to raise prices too aggressively on the back of uncertain consumer demand and competition.

Packaging materials may come off on recent oil price weakness – potential upside to margins. Packaging materials couldprovide some additional buffer to margins for foodmanufacturing companies on the back of the recent oil priceweakness. While starting the year strong, oil price has lost itsluster in recent months and is down by c.23% in 2018 as itWTI hovers around US$46 per barrel (at time of writing). Thatsaid, this benefit could be delayed and seen later as majority ofthe companies we follow tend to lock in their purchases on aforward basis.

DBS: Margins should stay healthy in 1H19 Sugar: down 15% from Jan-Dec 2018

Source: Companies, DBS estimates Source: ThomsonReuters, DBS Bank

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CPO price: down 27% from Jan-Dec 2018 Milk Powder: up 38% from Jan-Dec 2018

Coffee: -18% from Jan-Dec 2018 Cocoa: +16% from Jan-Dec 2018


Oil price tumbled -23% from Jan-Dec 2018 PET tracking oil price



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Aluminium: -22% from Jan-Dec 2018 Tin: -3% from Jan-Dec 2018


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Strategy/ Stock picks Valuations at -1SD of 5-year historical average; Thailand, Indonesia preferred. Along with the market, valuations of consumer counters under our coverage have corrected. While on a long-term basis (since 2007), the current valuation at c.24x forward PE is still at +0.5 standard deviation against thehistorical average, it is skewed by the slump seen during theGlobal Financial Crisis. On a 5-year horizon, the sectorvaluation under our coverage are at -1 standard deviationbelow its 5-year historical average, which was last seen sevenquarters ago in 1Q16.

Domestic consumption, election beneficiaries, earnings growth. We advocate taking bets on companies that will benefit from domestic consumption, record a turnaround in earnings or higher earnings, and/or have stock specific catalysts. For exposure to Indonesia, we favour Indofood Sukses Makmur, Japfa Comfeed Tbk. Our proxies to Thailand are CP ALL, HomePro. For Singapore-listed counters, we like ThaiBev and Japfa Ltd for their core operations as well as exposure to Vietnam, and Koufu as a resilient, mainstream food service provider and small cap play.

Regional valuation has corrected to +0.5 SD On 5-year historical horizon, valuation is at -1SD

Source: DBS Bank estimates Source: DBS Bank estimates

Stock picks

Indofood Sukses Makmur [INDF IJ, BUY, TP: Rp10,000]. We like INDF IJ for its exposure to its Branded Consumer food business (through 80%-owned Indofood CBP) and its attractive valuations. INDF’s share price has fallen c.10% in 2018 (as of 18 Dec), underperforming the JCI by 5% due to concerns over its weak Agribusiness performance and exposure to foreign currency debt (35% of total debt) amid a weak rupiah environment. The stock currently trades at a deep discount of 38% to its sum-of-parts (SOP) valuation and we think the current valuation has priced in most of these concerns.

Our plantation sector analyst expects CPO price to average RM2,560/MT in 2019, higher than the YTD average price of RM2,325/MT, with the successful implementation of Indonesia’s biodiesel mandate as a key catalyst. A better outlook for CPO prices should pave way for the SOP discount to narrow in the future. INDF now trades at c.13x FY19F PE, which is below -1SD of its 5-year historical average.

Japfa Comfeed Tbk [JPFA IJ, BUY, TP: Rp 2,600]. We like JPFA in view of its (i) attractive valuation which is currently at a discount compared to the industry; (ii) strong Day-Old-Chicks (DOC) and broiler prices to support margins in the face of higher cost of raw materials (potentially higher corn price and weakening of IDR against USD); and, (iii) falling soybean meal price which should alleviate concerns over margin pressure.

JPFA is still trading at attractive valuations of 6.2x FY19F EV/EBITDA and 9.8x FY19F PE – which is at a discount vs. the industry’s 15x FY19F PE. Given that JPFA’s earnings CAGR is expected to be 37.5% over FY17-20F (which is higher vs Charoen Pokphand Indonesia (CPIN)’s 19.8%), we believe that JPFA should trade at a valuation that is closer to CPIN.

Japfa Ltd [JAP SP, BUY, TP: S$0.89]. We like Japfa Ltd, Japfa Comfeed’s parent company, as a value play given its valuation discount to its subsidiary, and industry peers. On top of that, we expect the recovery at its Vietnam swine operations to continue and drive profit growth. We forecast FY18E profit to

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post a strong turnaround to reach US$86.3m (vs US$1.3m in FY17), and further reaching US$92.6m in FY19F (+6%). Our FY19F earnings are c.12% below consensus, likely due to more conservative estimates from its business segments (ex-Animal Protein Indonesia). There is potential upside revisions to earnings if these operations perform better than expected. The counter is currently trading at 5.3x EV/EBITDA and 10.5x FY19F PE, which is still below peers’ average.

Thai Beverage Pcl [THBEV SP; BUY, TP: S$0.87]. The share price underperformed in 2018, and we believe negatives are priced in. The slow consumption in Thailand is temporary and we should see improvements ahead, driven by: (i) the lead up to the expected elections on 24 Feb 2019, and possibly the King’s coronation thereafter; and (ii) anticipated recovery in farm income which has recently turned to record positive growth.

In addition, we believe weak headline growth figures seen in FY18 has passed, and ThaiBev will show a return to growth in 1Q19 (quarter to Dec-2018), on the back of a low base effect, coupled with improved optimism from better consumer offtake in the lead up to elections. The counter now trades at c.15.7x FY19F core earnings, which is near to -2SD of its 5-year historical average forward PE. While management has trimmed its DPS on the back of its gearing, they have still committed to pay out at least 50% of profits, and this implies a gross yield of c.3.5% on our FY19F earnings.

Home Products Pcl [HMPRO TB; BUY, TP: THB17.50]. HMPRO is one of our top picks and has several positive catalysts working in its favour: i) improving domestic spending mood, ii) positive momentum on SSSG next year, and iii) healthyearnings growth of 16% in FY19F from stronger gross profitmargins and cost benefits from a larger operating scale.HMPRO deserves to trade at a premium as it continues to

dominate the home and garden specialist retailing segment in Thailand. This has been made possible by its strong business strategy execution in investment by striking a fine balance between growth and risk, coupled with its ability to anticipate and adjust to customers’ lifestyle changes. HMPRO has been expanding into a new store format which is more profitable and is also widening its customer base.

CP ALL [CPALL TB; BUY, TP: Bt83.00]. We believe the bad news is already priced-in. CPALL’s cash-and-carry business will still be pressured by the opening of new stores overseas, which are still loss making. However, we expect its convenience store business to benefit the most from upcoming elections and still be miles ahead of its competitors and continue to do well with positive SSSG, with new products and services to cater to customers’ changing needs. The strong operations of CVS would lead to solid earnings growth (FY19F earnings growth forecast of 14% y-o-y) for the whole group. CPALL is now trading at 26x forward PE, slightly lower than its historical average level of 28x.

Koufu Ltd [KOUFU SP; BUY, TP: S$0.80]. We like the counter for its defensive attributes. While FY18E is expected to post a slight decline in earnings, arising from start-up costs, we expect FY19F earnings to recover, and FY20-21F earnings to hold steady as revenue growth is offset by higher costs. Revenue growth to be led by new foodcourts in Singapore and Macau, but higher operating costs and depreciation would partially offset the increase in revenue. Longer term drivers include the setting up of an integrated facility aimed at delivering economies of scale, and overseas growth from Macau. The counter offers a dividend yield of c.3.8% based on 50% payout ratio in FY19F, and provides upside catalyst if the Board raises its payout on the back of its strong cashflow and balance sheet.

Stock picks

Source: DBS Bank, DBS Vickers, DBSVI

Mkt Price 12-mth

Cap (LCY) Target %

Company (US$m) 31-Dec Price Upside Rcmd 19F 20F 19F 20F 19F 20F 19F 20F 18E 19F 19F 20F

Indonesia

Indofood Sukses Makmur 4,537 Rp 7,450 10,000 34% BUY 14.1x 13.3x 1.8x 1.7x 7.4x 7.2x 13% 13% 3.3% 3.5% 6 6Japfa Comfeed Indonesia 1,749 Rp 2,150 2600 21% BUY 10.0x 9.5x 1.8x 1.6x 6.1x 5.8x 20% 18% 0.8% 1.9% 8 5

Singapore

Japfa Ltd 989 S$ 0.73 0.89 23% BUY 8.8x 8.2x 1.1x 1.0x 5.1x 4.8x 11% 11% 0.0% 0.0% 6 7

Thai Beverage Public 11,239 S$ 0.61 0.87 42% BUY 15.7x 13.6x 2.8x 2.5x 13.0x 11.5x 18% 19% 2.7% 3.5% 10 15

Koufu Group Limited 251 S$ 0.62 0.80 30% BUY 13.0x 12.8x 3.0x 2.7x 2.2x 2.1x 25% 22% 3.5% 3.8% 5 2

Thailand

CP ALL 19,109 Bt 68.75 83.00 21% BUY 26.0x 23.1x 6.2x 5.5x 16.2x 14.5x 25% 25% 1.7% 1.9% 14 13

Home Products Center 6,185 Bt 15.20 17.50 15% BUY 30.8x 27.7x 9.2x 8.5x 17.6x 15.9x 31% 32% 2.1% 2.4% 14 11

ROA E Div Y ield EPS Growth

PE (x ) P/BV (x ) EV /EBITDA (x) (%) (%) (%)

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Regional and Country 12-month forward PE (stocks under DBS coverage)

DBS Regional Coverage PE band Singapore coverage: PE band

Source: DBS Bank Source: DBS Bank Malaysia coverage: PE band Thailand coverage: PE band

Source: DBS Bank Source: DBS Bank Indonesia coverage: PE band Philippines coverage: PE band

Source: DBS Bank Source: DBS Bank

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Performance Review and Regional Benchmarks

Asia consumer indices largely down in 2018 due to mixed earnings and macro uncertainties. 2018 has generally been negative for ASEAN consumer stocks, with most consumer indices posting negative returns, largely marred by the trade war. With earnings from stocks under our coverage generally mixed along with macro uncertainties, most ASEAN consumer indices have traded in negative territory.

Cautiously optimistic outlook. On the consumer demand side, Thailand and Indonesia should see a boost to consumption such as pre-election stimulus. However, we are also mindful of cost and margin pressures on earnings growth. Inflationary pressures on labour, raw material costs, higher costs in expansion initiatives are likely earnings dampeners ahead. Resolution on the trade war will also impact the performances of indices.

Regional benchmark consumer indices’ valuation and performance

Source: Thomson Reuters Datastream, DBS Bank (as of 31 December 2018)

Regional benchmark consumer indices’ performance YTD

Source: Thomson Reuters Datastream, DBS Bank (as of 31 December 2018)

Benchmark IndicesIndex PE (A ct ) PE (Yr 1) Div Y ield 1m %chg 3m %chg 6m %chg 12m %chg QTD % YTD %Consumer StaplesPhilippines-Datastream Consumer Staples 20.9 17.5 1.1 -3.2 13.0 1.9 7.2 -5.1 0.7Malaysia-Datastream Consumer Staples 28.1 28.2 1.7 -0.3 -1.0 16.2 7.5 -2.9 5.5Singapore-Datastream Consumer Staples 15.4 13.8 3.0 -4.4 -5.4 -3.6 0.1 -4.8 -9.2Thailand-Datastream Consumer Staples 23.3 24.1 1.9 -0.4 -11.5 3.2 10.2 3.2 -5.0Indonesia-Datastream Consumer Staples 28 25.2 2.4 3.8 -4.3 -3.7 13.4 1.2 -6.7

Consumer Discret ionaryPhilippines-Datastream Consumer Discretion 33.1 25.3 0.7 4.8 2.4 1.0 45.8 5.8 0.2Malaysia-Datastream Consumer Discretionar 25 13.0 3.5 -10.7 -2.1 -2.6 9.4 -18.1 -27.5Singapore-Datastream Consumer Discretiona 15.6 12.4 2.8 -1.5 -8.7 -6.6 -3.0 3.8 -8.2Thailand-Datastream Consumer Discretionar 32.1 27.5 1.9 -2.5 -4.0 2.1 5.0 -3.8 -3.8Indonesia-Datastream Consumer Discretiona 16.2 15.0 2.3 16.1 -6.3 -11.4 0.8 12.4 -1.4

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DBS ASEAN Consumer Stock Universe Performance

Source: Thomson Reuters, DBS Bank, DBS Vickers, AllianceDBS, First Metro Securities (as of 31 Dec 2018)

DBS A sean Stock Univ erse

Company Rat ing12-mth

TP 1m 3m 6m 12m

2018 mk t cap

weighted av g return

Thai Beverage PCL BUY 0.87 -8.5% -7.8% -26.3% -35.5% -2.4%Dairy Farm International Holdings Ltd HOLD 9.35 2.9% 1.5% 8.8% 13.9% 1.2%Fraser and Neave Ltd HOLD 2.57 -4.4% -11.8% -17.7% -33.3% -0.4%Delfi Ltd BUY 1.49 3.1% 20.0% -12.0% -9.6% 0.0%BreadTalk Group Ltd HOLD 0.98 -5.2% -18.8% -13.7% -1.9% 0.0%JUMBO Group Ltd HOLD 0.44 -3.7% -21.8% -28.8% -32.3% 0.0%Sheng Siong Group Ltd BUY 1.24 3.9% -7.8% 5.9% 14.4% 0.1%Koufu Group Ltd BUY 0.80 -3.9% -6.1% na na na

Singapore return -1.6%

British American Tobacco (Malaysia) Bhd HOLD 35.60 -5.4% 0.9% 49.7% -4.7% -0.1%QL Resources Bhd FULLY VALUED 5.80 -6.1% 12.4% 34.5% 52.7% 0.9%Padini Holdings Bhd FULLY VALUED 5.05 -37.6% -41.6% -22.9% -33.9% -0.1%

Malay sia return 0.7%

CP All PCL BUY 83.00 1.8% 1.1% -19.7% -10.2% -1.3%Charoen Pokphand Foods PCL BUY 30.00 0.0% -3.8% 0.8% 0.8% 0.0%Minor International PCL BUY 46.00 -5.6% -9.4% -15.6% -22.9% -0.7%Thai Union Group PCL BUY 19.70 -10.1% -9.6% -10.1% -22.7% -0.4%Home Product Center PCL BUY 17.50 0.0% 3.5% 3.5% 13.7% 0.6%Beauty Community PCL HOLD 9.00 -29.0% -23.7% -67.7% -65.0% -0.3%Central Plaza Hotel PCL HOLD 40.00 0.0% 1.3% -23.8% -31.6% -0.4%Taokaenoi Food & Marketing PCL BUY 15.00 -23.4% -43.8% -49.7% -61.3% -0.1%Malee Group PCL FULLY VALUED 14.00 1.2% -38.8% -60.0% -78.8% 0.0%

Thailand return -2.5%

Universal Robina Corp FULLY VALUED 106.00 1.6% -4.1% -10.1% -15.7% -0.6%Jollibee Foods Corp BUY 264.00 4.3% 7.7% 5.0% 14.3% 0.6%Emperador Inc HOLD 6.50 2.6% -2.7% -3.5% -6.0% -0.1%Robinsons Retail Holdings Inc HOLD 87.00 10.6% 4.6% -5.7% -12.6% -0.2%Puregold Price Club Inc HOLD 44.50 7.8% 2.0% -13.2% -8.3% -0.1%Century Pacific Food Inc BUY 18.40 15.5% 6.9% -9.5% -2.8% 0.0%

Philippines return -0.4%

Unilever Indonesia Tbk PT HOLD 44,500 15.6% 11.5% -4.1% -12.0% -2.0%Indofood CBP Sukses Makmur Tbk PT BUY 10,200 21.2% 20.2% 27.8% 16.2% 0.9%Indofood Sukses Makmur Tbk PT BUY 10,000 27.2% 15.4% 3.8% -2.3% -0.1%Matahari Department Store Tbk PT BUY 10,200 28.3% -18.1% -47.3% -47.3% -0.4%Mitra Adiperkasa Tbk PT BUY 960 -0.6% -6.4% 2.9% 28.0% 0.2%Mayora Indah Tbk PT HOLD 2,000 4.8% -8.7% -11.2% 23.6% 0.6%Matahari Putra Prima Tbk PT HOLD 380 3.3% -25.0% -66.5% -70.4% 0.0%Japfa Comfeed Indonesia Tbk PT BUY 2,600 6.3% -1.3% 49.3% 58.4% 0.7%Charoen Pokphand Indonesia Tbk PT HOLD 5,200 30.2% 40.3% 109.4% 116.3% 6.4%

Indonesia return 6.3%A sean cov erage return 0.1%

Page 14



SAME-STORE-SALES-GROWTH CHARTS

Page 15



SSSG charts

BIG C Sheng Siong

Source: Company, DBS Bank Source: Company, DBS Bank

Puregold CP All


Robinson’s Retail Holdings Matahari Department Store


Page 16



SSSG charts

MK Restaurants and Yayoi Courts Singapore & Malaysia hvs hvs


Mitra Adiperkasa 7-Eleven Malaysia


Homepro Robinson’s Department Store Pcl Hvs

hvs


Page 17



SSSG charts

Centel Minor International foodhubs Hvs

hvs


Page 18



COUNTRY BRIEFINGS

Page 19



Singapore – More positive outlook (Alfie YEO)

Latest developments Area of focus Details/Comments

Singapore

retail sales

Singapore retail sales in recent months is seeing a shift in retail spending from consumer staples into more discretionary

categories. For consumer staples, supermarket sales have generally been lackluster throughout 2018. In contrast, Food &

Beverage Services have been doing relatively better in recent months, particularly restaurants and fast food outlets. A more

notable trend is that discretionary items including Apparel & Footwear, Medical Goods & Toiletries, Furniture and

Household Equipment, Recreational Goods, and Watches & Jewelry have seen a pick-up. Reasons can be attributed to a

more buoyant economy and stronger tourist arrivals.

Industry news There were sweeping developments in the ride hailing app market in Singapore in 2018. Two incumbents Grab and Uber

announced their merger in March. Both were subsequently fined S$13m by The Competition and Consumer Commission

of Singapore (CCCS) in September for lessening competition. In late November and early December, Indonesian ride hailing

app Go-Jek launched its service in Singapore. After entering Vietnam and Thailand in mid-2018, Singapore is its fourth

market. Singapore-based concierge app Honestbee, also opened its cashless supermarket in Pasir Panjang in 2018.

Source: DBS Bank

Earnings Outlook

2019 GDP to benefit from 2018 spillover. Our Singapore economist raised Singapore’s 2018E GDP forecast to 3.4% (from 3% previously) and 2019F’s GDP to 3% (from 2.7%) in October, following a sequential uptick in Singapore’s 3Q18 GDP. While the looming trade war points to potential dark clouds ahead, our economist notes that Singapore’s economy has remained sanguine.

Singapore F&B and Retail Services stand out amid uncertainties. Singapore retail sales over the past few months have seen a shift in retail spending from consumer staples into more discretionary categories. Food & Beverage Services have been doing relatively better in recent months, particularly restaurants and fast food outlets. A notable trend is that discretionary items such as Apparel & Footwear, Medical Goods & Toiletries, Furniture and Household Equipment, Recreational Goods, and even Watches & Jewellery have seen a y-o-y pick-up in terms of retail sales. This coincides with arecent survey by Singstats on the services businessexpectations, indicating that these categories (F&B, RetailServices) are expecting better prospects in the next six months(from Oct 2018) to Mar 2019.

Slower growth in some ASEAN countries, but not a slowdown. Our economics team currently projects ASEAN-6 ex Singapore’s GDP to grow by 4.2-6.6% in 2019. In particular, key emerging markets such as Vietnam, Philippines and Indonesia are expected to see an uptick in GDP growth from 2018’s rate. We note that Thailand and Indonesia are expected to hold their general elections in 2019, which should see their economies benefitting from domestic consumption ahead of the polls. Over the longer term, our economist postulates that the ASEAN region could benefit from trade diversion arising from the current US-China tension.

FY19F earnings growth uptick from recovery in weak demand, costs. Based on our coverage of the Singapore downstream consumer sector, we are projecting that earnings will decline by c.4% in FY18E, largely on the back of weaker earnings from ThaiBev. In addition, several companies under our coverage have reported higher operating costs, largely related to expansion initiatives into the UK, China, Hong Kong, Macau, Taiwan, and ASEAN in 2018. While revenues should be largely satisfactory, earnings would be dampened by initial start-up losses.

Barring a significant weakening in consumer sentiment, we believe operating margins could rise as start-up costs contract. We are currently projecting earnings growth for our downstream consumer coverage to be c.14% in FY19F, driven mainly by a rebound from ThaiBev’s soft FY18 earnings in the lead up to the Thai elections, and ramp up from new outlets opened in the past year (Sheng Siong, Jumbo).

Risks

Spillover effects of trade war uncertainty affecting consumer sentiment. While ASEAN countries may benefit from trade diversion over the medium term, a global slowdown would impact consumer sentiment. Singapore’s YTD-Sep 2018 gross margins have improved over 2017, benefitting from more favourable raw material prices. We expect margins to remain healthy but should regional currencies continue to weaken vs US dollar, this could have an impact on costs, particularly imported raw materials. Lastly, a longer-than-expected breakeven of start-ups among those companies expanding overseas may also dampen earnings in 2019F.

Page 20



Valuation & Stock Picks

Valuation attractive, currently below 5-year historical average. The sector valuation (based on stocks under our coverage) is currently at 21.7x PE, which is below its historical 13-year average of 23x. We believe with the headwinds facedby more cyclical sectors, the consumer sector’s defensive traitswill be sought after. To ride out the uncertainties in theimmediate term, we favour stocks with more resilient earnings,strong cashflows/balance sheets and/or attractive valuations.

Sheng Siong (BUY, TP: S$1.24). We maintain our BUY recommendation for Sheng Siong with TP of S$1.24 as we continue to see growth driven by more new stores after already opening eight new stores since 4Q17, improving efficiencies and margins from better sales mix, and warehouse expansion that will kick in from FY19F. The near-term outlook for new HDB supermarkets remains robust with five outlets up for tender in the next six months. Dividend yield is decent at 3-3.5% with potential for a higher payout.

Thai Beverage (BUY, TP: S$0.87). We maintain our view that we are near or at the bottom of its operational performance, which should pick up in FY19. This is on the back of the expected Thailand elections on 24 Feb and King’s coronation possibly thereafter later in 2019. ThaiBev recently issued Bt77bn of debentures to refinance existing bank loans, and the fixing of coupon rates should allay investors' concerns on the group’s exposure in light of the rising interest rate environment. Extraction of synergies from its Sabeco acquisition are medium-term growth drivers.

Koufu Group (BUY, TP: S$0.80). We maintain our BUY rating for Koufu with a TP of S$0.80. We expect FY19F earnings to recover after declining slightly in FY18, and expect FY20-21F earnings to hold steady as revenue growth is offset by higher costs. Revenue growth is expected to be led by new food courts in Singapore and Macau, but higher operating costs and depreciation would partially offset the increase in revenue. Longer-term drivers include the setting up of an integrated facility aimed at delivering economies of scale, and overseas growth from Macau. Dividend yield is attractive at close to 4%.

Singapore retail sales (ex motor vehicles) Singapore grocery retail sales

Source: Thomson Reuters Datastream, DBS Bank Source: Thomson Reuters Datastream, DBS Bank Singapore F&B retail sales Singapore real wages

Source: Thomson Reuters Datastream, DBS Bank Source: Thomson Reuters Datastream, DBS Bank

Page 21



Malaysia – Moderating consumer growth (CHEAH King Yoong)

Latest developments Area of focus Details/ Comments

Retail sales

(forecast)

Retail Group Malaysia has raised its 2018 growth forecast for Malaysia's retail sales to 4.4% from 4.1% after taking

into consideration the industry's better performance in the third quarter and expectations of moderate growth for the

fourth quarter.

Retail sales

(reported)

Retail Group Malaysia stated that Malaysia retail industry achieved an encouraging y-o-y growth rate of 6.7% in

3QCY18. This latest quarterly result was above market expectation. Members of Malaysia Retail Association (MRA)

had projected that 3QCY18 would record 6.1% growth.

GDP Malaysia’s real GDP growth moderated further to 4.4% y-o-y in 3Q18 versus 4.5% in 2Q18 and 6.2% in the same

quarter of the previous year. On the demand side, growth was largely supported by private consumption (+9.0% y-o-

y), private investment (+6.9%) and public consumption (+5.2%). However, public investments contracted 5.5% y-o-y

which also marks the fourth consecutive quarter of decline.

Source: AllianceDBS

Sentiments soften, amid from a high base. After surging to 132.9 points in 2Q18, the highest reading in 20 years, the recent MIER consumer sentiment index (CSI) for 3Q18 contracted by 25.4 points q-o-q to 107.5points.

Table 1 : Private consumption growth and CSI

Source: Department of Statistics, MIER

The sharp decline was largely expected as we have forewarned that the CSI would moderate from its 20-year high once the post-GE14 euphoria dissipates, given that the survey was done right after GE14 with hopes riding high on the new administration. Despite the sharp contraction, the index is still above the 100-point threshold of optimism, indicating still positive but more selective consumption pattern going forward.

Improved consumer sentiment was reflected in the recent 3Q18 GDP announcement where private consumption growth accelerated to 9.0% y-o-y in 3Q18 (2Q18: +8.0%). Furthermore, private consumption grew steadily at 2.5% on a seasonally adjusted (SA) q-o-q basis (2Q18: +3.0%), above the 2015-2017 average SA q-o-q growth of 1.5%.

Expect consumption growth to moderate in 2019. In line with the CSI, we expect the consumption growth to be strong in 2H18 before moderating in 2019. This is because we observed that many consumers have taken advantage of the tax holiday (Jun-Aug 2018) to engage in big-ticket purchases such as motor vehicles and household appliances prior to the implementation of the sales and service tax (SST).

We believe the bulk of these big ticket purchases are likely to involve personal financing such as hire purchase and/or instalment loans, which could limit their propensity to consume going forward, in view of the more leveraged household balance sheet. Furthermore, the implementation of SST in September would also weigh on consumption growth going forward.

Budget 2019- supportive but not a significant catalyst. In Budget 2019, the government has resorted to improve the livelihood of Malaysians, particularly among the B40, by proposing measures such as (1) raising the minimum wage to RM1,100 from RM1,050 initially – starting January 2019, and (2) targeted petrol and electricity subsidies. Overall, we believethat this Budget will be mildly positive for the consumer sectoras the initiatives outlined will help to offset the impact of risingcost of living, but does not serve as a significant catalyst for thesector.

Among the consumer stocks under our coverage universe, British American Tobacco (HOLD, TP: RM35.60) could be the beneficiary of Budget 2019 as the government has reiterated its commitment to clamp down on smuggling activities. The government is aiming to regain at least RM1bn in lost revenue due to illicit trades.

Page 22



3QCY18 results- not particularly appetising. The 3QCY18 corporate results announced in November were largely within expectations. However, Padini reported disappointing earnings dragged by (1) moderated topline growth, (2) gross margin declining from 43% in 3QCY17 to 40% in 3QFY18 in the absence of the reversal of inventories written off, coupled with higher product cost and poorer sales mix, and (3) 9% increase in selling and distribution expenses.

Cost pressure could be a concern. On the other hand, we highlight that cost pressures have increased led by (1) labour shortage issues and rising labour costs due to a higher minimum wage threshold, (2) weakening ringgit vs USD leading to more costly imported products, and (3) higher cost of production with the authorities expected to float the RON95 price in 2Q19, and the implementation of digital tax. These could exert downward pressures on companies’ profit margins, particularly in an increasingly competitive operating environment, coupled with expectations of moderating consumption in 2019 that may restrict companies’ ability to pass on any cost increase.

At present, the Bursa Malaysian Consumer Product Index (BMCPI) is trading at a forward PE of 22x, which is around +2SD of its historical mean. After the unexciting 3QCY18results reported by the stocks under our coverage, we do notsee room for significant earnings upgrades going forward. Assuch, we believe that valuation for the market is rich atpresent.

Table 2 : Indices’ performances on a YTD basis

Source: Bloomberg Finance L.P.

Table 3 : PE band chart of consumer index

Source: Bloomberg Finance L.P.

Maintain our Neutral stance on Malaysia consumer sector. We are maintaining our Neutral stance on the sector’s prospects, given that (1) we expect consumption growth to moderate in 2019, (2) we believe that the BMCPI has largely priced in the vastly improved consumer sentiments in view of its rich valuation, and (3) rising cost pressures.

3.4% 1.3%

-3.5%-6.5%

-13.8%

-23.0% -25.8%-29.3%

-48.1%-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

Finan

ce

Cons

umer

Prod

ucts

Indus

trial

Prod

uctio

n

KLCI

Plant

ation

Tech

nolog

y

Prop

erty

Small

Cap

Cons

tructi

on

YTD Growth

Mean:17.7x

+1 S.D:21.2x

-1 S.D:14.2x

+2SD:24.7x

-2 SD:10.7x

5

10

15

20

25

30 FBM Consumer Product's forward P/E

Page 23



Malaysia consumer sentiment index Malaysia private consumption growth

Source: MIER, Bloomberg Finance L.P. Source: Thomson Reuters Datastream

Malaysia food beverage and tobacco retail sales Malaysia retail trade index

Source: Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

Page 24



Thailand – Positive momentum kicking in (Namida Artispong)


Political data The Deputy Prime Minister announced that the general election is likely to be held in Feb 2019.

Economic data Donations to political parties are now tax deductible to encourage people to support the role of political parties in a

democracy of up to Bt10,000 and juristic entities up to Bt50,000.

Economic data The rate-setting Committee is expected to lift Thailand’s policy rate by 25bps at the meeting on Feb 6, 2019 to 1.75%.

Economic data The visa-on-arrival (VOA) fee waiver scheme was given to 21 nationalities including the Chinese, starting on 15 Nov and

will continue until 13 Jan.

Economic data Finance Ministry is proposing 5% VAT refund scheme for spending up to Bt20,000 during Feb 1-15 to the cabinet. Economic data Rubber Authority of Thailand (RAOT) is considering granting Bt1,800 per rai, not exceeding 15 rai each, to help farmers

offset the cost of living.

Economic data The tax allowance for shopping of up to Bt15,000 is between 15 Dec 2018 and 15 Jan 2019. However, the products

will cover only tyres, books, and community-based products (OTOP).

Company data MINT completed a tender offer for shares in the NH Hotel Group in Oct and now holds a 94.1% stake in the NH Hotel

Group at a total investment of EUR2.3bn or Bt87.4bn.

Company data BJC acquired 50.2% of White Group for Bt1.6bn in Nov. The mandatory tender offer is triggered for the remaining

49.8% of total number of WG shares at Bt180/share (implying an offer value of Bt1.6bn).

Source: DBS Vickers 3Q18 results review. Earnings results of the companies under our coverage in 3Q18 were a mixed bag. For food companies, core operations of Charoen Pokphand Food (CPF) improved significantly y-o-y, thanks to a recovery of swine prices in Thailand and Vietnam, supporting robust core earnings growth in the quarter. Meanwhile, operational environment was also more favourable for Thai Union (TU) as gross margin started to expand in 3Q18 following several quarters of decline, thanks to successful price negotiations and lower tuna raw material prices. Taokaenoi Food & Marketing (TKN)’s earnings results were a disappointment. Despite gross margin expansion and lower effective tax rate, its core earnings growth came in flat due to a spike in SG&A. For Thai retailers under our coverage, all companies including CP ALL (CPALL), Home Products Center (HMPRO), Berli Jucker (BJC), and COM7 (COM7) posted positive earnings growth, except for Beauty Community (BEAUTY) who delivered a decline in net profit. Lower gross margin from the convenient store business and higher SG&A to sales from MAKRO operations pressured CPALL’s bottom line to grow at only low-single-digit pace while HMPRO’s 3Q18 earnings growth continued to outpace revenue growth, thanks to higher EBIT margin and lower interest expense as a result of lower cost of debt from earlier refinancing activities. BJC’s earnings growth was saved by higher revenue and a plunge in effective tax rate from the company’s tax restructuring while COM7’s bottom line growth was robust, thanks to strong sales and margin expansion. BEAUTY was the only retailer that delivered a decline in net profit due to weak sales and gross profit contraction.

For hospitality/food-related operators in Thailand, Minor International (MINT) recorded negative earnings growth, dragged by a jump in interest expenses related to NH Hotel acquisition and its food unit in which negative SSSG was seen in all of its operating hubs (Thailand; -4.4% SSSG). Meanwhile, higher revenue growth from new hotel openings and positive TSSG, as well as, lower effective tax rate drove CENTEL’s net earnings. Thailand: 3Q18 earnings results review

Stocks Results Note

CPF Above Sales growth and lower SG&A to sales were the main reasons for a hike in core earnings y-o-y.

TU Above Core earnings were above our and market expectations due to higher-than-expected gross margin.

MINT Below

A decline in core profit y-o-y was due to lower margins at its time-share, food, and retail trading businesses, as well as a jump in interest expenses (+61.4%) related to NH Hotel acquisition.

CENTEL Above Higher revenue and lower effective tax rate drove earnings growth.

CPALL Slightly above

Slow earnings growth was mainly driven by higher revenue.

HMPRO In-line Despite slow revenue growth, earnings grew 16% y-o-y, thanks to fatter gross margin and lower interest expense.

BEAUTY Below The y-o-y decline in earnings was due to weak sales and gross profit margin contraction.

Source: DBS Vickers

Page 25



Stocks Results Note

BJC In-line

The y-o-y earnings growth was mainly supported by higher revenue and a plunge in effective tax rate from the company’s tax restructuring. However, operating profit decreased slightly.

TKN Below A spike in SG&A to sales and one-time penalty expense were the reasons for a decline in earnings.

COM7 Above Strong sales and margin expansion were key earnings drivers y-o-y

Source: DBS Vickers

Outlook. We expect the general election in Feb (subject to changes) to be another driver for consumer companies in Thailand in 2019. The economy generally improves prior to any general election, as money tends to be injected into the economic system while the election will also boost investor confidence. However, domestic spending before the general election may not benefit private consumption and economic growth significantly.

There are a few stimulus packages lined up before the general election. The major scheme is welfare card policy for 14.5m low-income earners, whereby Bt330/month will be given to each household for electricity/water payments (Dec 2018 to Sept 2019) and a one-time (Dec 2018) Bt500 cash handout/person. Aid package will also be given for rubber plantation and oil palm owners.

Additional consumption stimuli that are Shop for Nation campaign (from 15 Dec 2018 to 15 Jan 2019) which allows a tax allowance of up to Bt15,000 for spending on tyres, books/e-books, and OTOP products, as well as, 5% VAT refund scheme for spending up to Bt20,000 during Feb 1-15, 2019.

Overall, the economists expect economic growth in 2019 to be more domestic demand-led rather than export-led as seen in 2018. The Central Bank forecasts Thailand to register GDP growth of 4.2% in 2019. This should be supported by improving private consumption and government spending. However, the intensifying international trade row, low farm product prices, and high household debt remain the risks.

In the Consumer space, we prefer the commerce sector, on which we have an Overweight rating while we rate food and hospitality/food-related sectors as Neutral. We believe the commerce sector should benefit the most from the upcoming general election and coronation which would be another supporter of an economic recovery this year. Given expected improving domestic consumption, we expect the commerce sector’s double-digit earnings growth in FY19F to be driven by both revenue and operating margin expansion.

Domestic demand-led growth should boost SSSG into positive territory while retailers are expected to continue to accelerate store expansions. In terms of margin expansion, positive SSSG would raise operating leverage and companies’ specific factors

will be key drivers. Improvement in operating margins should be driven more by gross margin expansion arising from a shift in product mix towards high-margin products and companies’ efforts to increase the sales proportion of house brands.

For upstream and midstream food operators in Thailand like CPF and TU, we expect 2019 to be a year of recovery. We expect to see i) stronger domestic meat prices from demand/supply rationalisation, ii) sustainable swine price recovery in Vietnam, iii) less volatility of tuna raw material prices, and iv) companies to continue partially passing on high costs to customers. These should translate in margin improvement.

Domestic swine prices are expected to maintain positive momentum as the impact of supply rationalisation has already started to filter through. Similar positive trend should also be seen for broiler prices in Thailand next year, as Brazil’s supply cut and exports to new markets like China starts to take effect. Meanwhile, swine prices in Vietnam continued to rise and stand at above VND51,000/kg currently (vs VND41,332/kg in 9M18). This was thanks to more balanced demand and supply dynamics. As the production cycle of swine is 1-1.5 years, we expect swine prices in Vietnam to remain healthy at least for 1H19.

For seafood business, we believe the volatility of tuna raw material prices is less. Selling price adjustments were made successfully and tuna raw material prices are more stable now. This should enable TU to manage its cost of goods sold or inventory cost more effectively. Therefore, we expect to see y-o-y gross margin expansion in 2019 for seafood operators.

The risk remains for hospitality/food related companies stemming from slower-than-expected recovery of Chinese tourists. The capsizing of the boat in Phuket triggered the drop in Chinese tourists since July 2018 and has negatively impacted hotel operators, resulting in a drop in the average occupancy rate. This may further result in Thai hotel operators struggling to raise their average room rates amid expanding supply. As the Chinese account for almost 30% of Thailand’s total tourism receipts, the government is doing as much as it can to lure back the Chinese tourists.

Recently, the visa-on-arrival (VOA) fee waiver scheme was given to 21 nationalities including the Chinese, starting on 15 Nov 2018 and will continue until 13 Jan 2019. However, we believe the incentive may not draw Chinese tourists in the short-term as VOA fee is not the main concern for the Chinese but rather the issues involve safety and security. In our view, the decline in Chinese tourist arrivals this time is an issue of emotional insecurity from the Chinese which is very different from previous incidents which stemmed from domestic political turmoil or natural disasters. Therefore, the assurances of safety and security in Thailand from local authorities would be the better way to draw the Chinese back. For casual dining

Page 26



restaurants, these should get tailwinds from government stimulus, albeit there is intense competition.

Exchange movements has an impact on companies with overseas operations. The impact is more from the translation effect as the export content of companies under our coverage is quite low (5% of sales for CPF and less than 10% for TU). A strong appreciation of the Thai Baht had negatively impacted margins of TU, MINT, and CPF in 2018. However, we do not expect to see a strong appreciation of Thai Baht this year and thus currency risks should be limited.

Stock picks: HMPRO (BUY, TP: Bt17.50). HMPRO is one of our top picks and has several positive catalysts working in its favour: i) improving domestic spending mood, ii) positive momentum on SSSG this year, and iii) healthy earnings growth of 16% in FY19F from stronger gross profit margin and cost benefits from a larger operating scale. HMPRO deserves to trade at a premium as it continues to dominate the home and garden specialist retailing segment in Thailand. This has been made

possible by its strong business strategy execution in investment by striking a fine balance between growth and risk, coupled with its ability to anticipate and adjust to customers’ lifestyle changes. HMPRO has been expanding into a new store format which is more profitable and widening its customer base.

CPALL (BUY, TP: Bt83.00). We believe the bad news is already priced in. CPALL’s cash-and-carry business will still be pressured by the opening of new stores overseas, which will still contribute losses to the group. However, we expect its convenience store business to benefit the most from upcoming elections and still be miles ahead of its competitors and continue to do well with positive SSSG, with new products and services to cater to customers’ changing needs. The strong operations of CVS would lead to solid earnings growth (FY19F earnings growth forecast of 14% y-o-y) for the whole group. CPALL is now trading at 26x forward PE, slightly lower than its historical average level of 28x.

Thailand consumer confidence index Thailand retail sales growth (y-o-y %)

Source: Thomson Reuters Datastream


Thailand tourist arrivals (000’s) Thailand private consumption (Food) growth



Page 27



Indonesia – All set for election boost (David Arie Hartono)


GDP GDP growth came in slightly better than consensus at 5.17% in 3Q18 (vs 5.15% consensus estimate). Private

consumption growth slightly declined to 5.01% in 3Q18 (vs 5.14% in 2Q18). In 2019, our economist has forecast

GDP growth to slightly improve to 5.2% vs our forecast of 5.1% in 2018. Domestic consumption is expected to

benefit from the populist agendas ahead of the Presidential Election in April 2019.

Consumer

Confidence Index

Consumers remained upbeat in Nov with consumer confidence index (CCI) inching up to 122.5 from 119.4 in Oct.

CCI continued to hold up above its five-year mean.

Government

spending

Government spending has picked up pace, growing by 12% y-o-y in 10M18. Recall that in 1H18, government

spending only grew by 6% y-o-y.

Government

populist approach

2019

Government has budgeted total expenditure at Rp2,439.7tr for 2019, a 10% increase y-o-y. The biggest increase is

the budget for Villages Funds (Transfer ke Daerah atau Dana Desa) which increased by 9% y-o-y. We think 2019 state

budget signals a more populist stance from the Government with more transfers made to Village Funds in order to

minimise the inequality and increase the disposable income in rural areas. Besides that, there are also other programs

like (i) National Health Program (JKN), (ii) Family Hope Program, and (iii) non cash food aid program.

Presidential Election The upcoming Presidential Election will take place on 17 April 2019 and the campaign period is from 23 September

2018 – 13 April 2019. We believe the Presidential Election could benefit the domestic consumption from the populist

programs.

Animal protein:

Undersupply of DOC

The tide is turning for the Indonesia poultry industry, as it recovers from oversupply conditions which had negatively

impacted the poultry players’ profitability in the past. This year, the ASP of DOC and broilers remained very strong due

to undersupply of DOC in the market.

Source: DBSVI

FMCG sales trend

Source: DBSVI

8.8%

11.3%

8.4%

7.7% 7.4%

-2.9%

7.2%

1.7% 1.6% 3.1%

7.6%

9.7%

25.2%

-3.5%

10.8%

8.7%

17.2%

-3.2%

13.9%

14.8%

9.5%

13.9%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

Staples ex-INDF Retailers

Page 28



3Q18 review: sign of improvement in staples and retailers; strong results in animal protein. Demand recovery is taking place at a gradual pace. For staples, revenue growth has improved in the past two quarters supported by regional elections and government’s populism. The growth was mostly from volume increase as there was very minimal adjustments made to selling prices YTD. Retailers posted weak revenue in 2Q18 but started to show signs of improvement in 3Q18.

As for animal protein, both Japfa Comfeed (JPFA) and Charoen Pokphand (CPIN) posted a very strong 3Q18 results on the back of resilient DOC and broiler prices. In 3Q18, DOC price stood at Rp5,755/chick (+37.3% y-o-y) and broiler price was up by 12.8% y-o-y to Rp19,116/kg. The undersupply of DOC resulted in DOC prices being resilient. Both of the companies posted strong y-o-y earnings growth thanks to lower soybean meal price environment which resulted in margin expansion.

Revenue and net income performance (y-o-y)

Revenue 3Q17 4Q17 1Q18 2Q18 3Q18 Indofood CBP Sukses Makmur 8.1% 3.4% 4.5% 6.4% 11.7% Indofood Sukses Makmur 10.7% 1.6% -1.1% 3.1% 7.3% Matahari Department Store -22.7% 4.3% 5.9% 1.8% 2.9% Mitra Adiperkasa 9.4% 19.8% 19.3% 16.9% 18.9%

Unilever Indonesia 6.3% 0.4% -0.9% 0.2% 4.0% Japfa Comfeed 7.1% 22.4% 18.7% 17.8% 14.2% Charoen Pokphand 35.2% 20.0% -1.3% 6.5% 9.8%

Net Income 3Q17 4Q17 1Q18 2Q18 3Q18 Comment

Indofood CBP Sukses Makmur 11.4% -1.7% 11.1% 7.8% 25.6% Inline

Indofood Sukses Makmur -0.2% -1.5% 1.1% -30.0% -14.2% Below

Matahari Department Store -63.2% -1.8% 1.0% 0.4% -9.5% Below

Mitra Adiperkasa -0.7% -2.3% 499.1% 20.0% -9.1% Below

Unilever Indonesia 10.5% 8.2% -6.2% 1.7% 135.1% Below

Japfa Comfeed -52.4% -56.6% 374.1% 70.5% 55.5% Above

Charoen Pokphand -46.2% -305.2% 59.2% 60.0% 151.7% Above Source: Companies, DBSVI

Indonesia consumer confidence index Indonesia consumer confidence index breakdown

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep-

16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep-

17

Nov

-17

Jan-

18

Mar

-18

May

-18

Jul-1

8

Sep-

18

Nov

-18

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

Jan-1

6

Mar-

16

May-

16

Jul-16

Sep-1

6

Nov-

16

Jan-1

7

Mar-

17

May-

17

Jul-17

Sep-1

7

Nov-

17

Jan-1

8

Mar-

18

May-

18

Jul-18

Sep-1

8

Nov-

18

Rp1mn-Rp2mn Rp2.1mn-Rp3mn Rp3.1mn-Rp4mn

Rp4.1mn-Rp5mn Above Rp5mn

Page 29



Indonesia DOC (Rp/chick) and broiler (Rp/kg) price Indonesia GDP breakdown

Source: Pinsar Source: SEKI Bank of Indonesia

Commodity prices

Source: DBSVI Our stance on the sector in FY19F. We view that the sector’s outlook should turn brighter this year, albeit at a gradual pace. There are several Government stimulus packages in place: (i) to increase the number of recipients under the National Health Insurance, (ii) to increase the number of recipients under the Family Hope Programs (Program Keluarga Harapan), (iii) Non Cash Food Aid programs, and (iv) Village Funds. These should help to boost overall consumer spending in FY19F, especially in rural areas.

While we expect top-line growth will continue to improve in 1Q19 supported by presidential election campaign, we see downside risk stemming from weaker Rupiah and lagged effect of higher commodity prices which could pressure overall margins in FY19F.

Forecast 8%/12% revenue growth for consumer staples/retail sub-sectors. Consumer sentiment is expected to gradually recover in FY19F – we estimate aggregate revenue growth of 8% y-o-y, largely driven by higher volume growth and slight increase in ASP. For the consumer staples sub-sector, we have seen that the revenue growth has improved consistently in the past two quarters supported by Regional Elections and Government populism. The growth was mostly from volume increases as there were very minimum adjustments made to selling prices YTD. Retailers catering to the middle to low income segment may reap the most benefits from the Presidential Election. We estimate an aggregate revenue growth of 12% y-o-y for retail sub-sector.

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

-

5,000

10,000

15,000

20,000

25,000

Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18 May 18 Sep 18

Broiler (LHS) DOC (RHS)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

Greater Jakarta Java ex-Greater Jakarta ex-Java

y-o-y GDP growth

USDIDR Wheat CPOSkim Milk

Powder

Arabica Coffee

Robusta Coffee

Cocoa SugarCrude oi l

(WTI)

yoy4Q16 -4% -18% 32% 20% 25% 28% -23% 42% 17%1Q17 -1% -8% 26% 34% 21% 40% -29% 36% 54%2Q17 0% -8% 6% 17% 2% 41% -36% -11% 6%3Q17 2% 13% 3% -4% -9% 23% -34% -31% 4%4Q17 2% 5% -11% -26% -18% -2% -18% -30% 13%1Q18 2% 6% -20% -23% -16% -20% 5% -31% 21%2Q18 5% 15% -13% -2% -10% -20% 34% -22% 40%3Q18 10% 13% -19% -1% -22% -21% 16% -23% 45%

qoq4Q16 1% -1% 12% 17% 4% 15% -16% 3% 6%1Q17 1% 6% 6% 0% -4% 7% -16% -6% 6%2Q17 0% 1% -12% -15% -10% 1% -7% -23% -7%3Q17 0% 5% -2% -3% 1% 0% 1% -8% 0%4Q17 2% -7% -3% -11% -6% -8% 4% 4% 15%1Q18 0% 7% -5% 5% -3% -13% 7% -7% 13%2Q18 3% 10% -4% 7% -3% 0% 19% -11% 8%3Q18 5% 4% -8% -2% -12% -2% -13% -9% 3%

Page 30



Limited room for margin expansion. With our house view that Rupiah will weaken further to Rp15,900 in FY19F. We also note that costs of materials like wheat, skim milk powder and packaging price have been on the rise since 2Q18. Therefore, raw material cost inflation would negatively impacted margins of consumer staples in 4Q18 and 2019 if the trend persists. In addition, we have yet to see a significant adjustment in ASP as companies are still on wait-and-see mode.

Post-election, possible risk on fuel price hike could hamper consumption in latter part of year. While we believe the campaign will help to lift private consumption, we see risk of government raising the price of premium fuel post election, which could hamper the consumption recovery momentum in 2019. Retailers’ earnings are more prone to fuel price hike (for the middle class) and Rupiah depreciation (for upper-middle segment), hence we expect earnings growth to slow to 11% in FY19F from 18% in FY18F

Animal protein: supply and demand conditions are favourable in FY19F. The tide is turning for the Indonesia poultry industry, as it recovers from oversupply conditions which had negatively impacted poultry players’ profitability in the past. In 2018, the ASP of DOCs and broilers remained very strong due to the undersupply of DOC in the market and we expect the situation to persist in 2019.

In FY19F, we estimate that poultry companies under our coverage would be able to maintain 10% revenue growth momentum from potentially higher demand for chicken in rural areas, and we assume that the ASP of DOCs and broilers would stabilise. We believe that consumer spending will also be supported by higher wages, and more stable electricity and fuel prices in 1H19. Besides that, the presidential election in April 2019 should also boost consumption, particularly in rural areas.

Stock picks Indofood Sukses Makmur (BUY, TP Rp10,000). INDF’s share price has fallen 14% YTD, underperforming the JCI index due to concerns over its poor agribusiness performance and exposure to foreign currency debt (35% of total debt) amid a weak rupiah environment. It now trades at a deep discount of 42% to its sum-of-parts (SOP) valuation.

Our plantation sector analyst expects CPO price to average RM2,560/MT in 2019, higher than the YTD average price of RM2,325/MT, with the successful implementation of Indonesia’s biodiesel mandate as a key catalyst. A better outlook for CPO prices should pave way for the SOP discount to narrow in the future.

Top pick in Indonesia animal protein space: Japfa Comfeed (BUY, TP Rp2,600). We maintain our BUY call on JPFA, in view of:

- Attractive valuation which is currently at a discount compared to the industry

- Favourable ASP of DOCs and broilers to support growth

- Improvement in demand for chicken per capita, which will boost earnings for JPFA

- Limited impact on gross margin despite higher corn price volatility given JPFA higher corn silo capacity (which enables the company to hold more inventory)

We gather that JPFA is still trading at an attractive valuation of 6.3x FY19F EV/EBITDA – which is at a discount vs. the industry’s 9.4x FY19F EV/EBITDA. We believe with the poultry industry's positive outlook on the back of stable DOC and broiler prices in FY19F, JPFA should be well placed for further growth. Although we assume a softer EBITDA margin of 13.4% for FY19F, it is still an improvement over the 7-12% recorded during FY13-17.

Indonesia consumer confidence index Indonesia 3-month price expectations

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

Page 31



Indonesia food, beverage and tobacco retail sales Indonesia 2 & 4-wheeler sales (y-o-y change %)

Source: Thomson Reuters Datastream Source: Indonesia 2W association (AISI)

Page 32



Philippines – Margin pressure to continue (Mark ANGELES)


GDP While decent and still ahead of most of its peers, PH’s 3Q18 GDP print disappointed consensus expectations (est. 6.3%),

coming in at 6.1% (3Q17: 7.2%). Growth from the demand side was largely brought about by government expenditure

(+5.9ppts to 14.3%) and capital formation (+6.4% to 16.7%), while the widening trade gap (-6ppts to -5%) proved to

be a major headwind to economic performance. Dampened household spending (-0.2ppts to 5.4%) conversely dragged

total demand, due in part to negative consumer sentiment and years’ high inflation. Meanwhile, the deceleration in

industries (-1.8ppts to 6.5%) and services (-0.4ppts to 6.9%) sectors was not able to lift national output figures, which

was further impaired by contraction in agricultural produce (-3ppts to -0.4%). With 9M18 GDP growth standing at

6.4%, growth of at least 7.0% in 4Q18 (4Q1 7: 6.5%) is now required to meet the lower band of the government’s

6.5% to 7.5% target for FY18. For 4Q18, cyclical boost in domestic demand may provide economic tailwinds, albeit

inflation, trade tensions, and tightening monetary policy may set back overall growth.

Consumer

Confidence

Following eight consecutive quarters of positive reading, consumer confidence index (CI) reversed to negative territory in

3Q18 at -7.1%. In 4Q18, CI further declined to -22.5% as pessimists continued to outnumber optimists, largely on

account of inflation, higher household expenditures, low income and no increase in income, and unemployment. In

general, sentiment declined across all three indicators (economy, household finances, and household income) and even

across income groups, as consumers expect inflation and interest rates to rise and the Peso to depreciate in the year

ahead. More households increased savings in view of future expenditures, resulting in the average debt-to-income ratio

declining to 24.3% (from 43.4%).

Government

spending

Government expenditures expanded by 14.3% (3Q17: 8.3%) – fastest pace in almost three years – having already

disbursed 94% of its programmed disbursements for FY18. We expect the government to sustain its spending

momentum given its first cash-based national budget of P3,757bn for FY19, wherein P1tr is allocated in capital spending.

To augment financing, the government is looking to borrow P1.2tr in 2019 (+33.9% vs 2018), with a 75-25 borrowing

ratio between domestic and foreign creditors. The government set a budget deficit cap of 3.2% of GDP (from 3.0% in

2018) amid its massive infrastructure overhaul.

Inflation

Headline inflation slowed down to 6.0% (est. 6.3%) in Nov-18, largely on the back of food inflation deceleration (which

slashed 0.5ppts off its headline figure). This brought year-to-date average to 5.2% – still above the BSP’s 2% to 4%

inflation target. While we welcome the marked slowdown in headline figures, we prefer to watch closely the movements

in core inflation which further increased m-o-m by 0.2ppts to 5.1%. This should send the signal that underlying price

pressures (sans volatile items in the CPI basket such as food and energy) are yet to show signs of deceleration. We expect

the BSP to proactively increase policy rates by another 25bps in its upcoming Monetary Board meeting. Despite the

expectation of two more hikes (+50bps) in 2019, our DBS in-house economist estimates inflation to hit 4.7% next year.

The government’s expansionary fiscal stance should keep domestic demand strong, neutralising some of the downside.

Local currency

valuation

Unfavourable local currency valuations have hit raw material costs of consumer companies as the Philippine peso slid to

US$1:P54.33 (-8.8%) YTD in early Oct-18. As for the Philippine Peso (PHP), DBS expects the currency to further weaken

but to a lesser extent at US$1:P55 (-3.8% vs est. end-2018 fx rate at US$1:P53) as the central bank still needs to catch

up to have competitive real rates among peers.

Overseas

Filipino

Remittances

Personal/cash remittances from Overseas Filipinos (OF) rose by only 2.4%/2.5% to US$23.7bn/US$2.2bn in 9M18, below

the BSP’s target of 4% growth y-o-y. The BSP attributed declines in recent months to lower remittances figures from

Saudi Arabia, Qatar, Kuwait, and United Arab Emirates (UAE), where over 4,000 OF workers were repatriated in early

2018. Possible catch-up of OF remittances in FY19F may provide tailwinds to consumer demand moving into 2020.

Source: Philippine Statistics Authority (PSA), Bangko Sentral ng Pilipinas (BSP), First Metro Securities, DBS Bank

Page 33



Better than most, but challenged nonetheless. As of 7 December, Philippine consumer stocks under our coverage (ex-San Miguel Pure Foods declined by 4.5% YTD (market-weighted) albeit outperformed the PSEi (benchmark index), which was down by 12.8% YTD. Individually, our picks early in the year (from 1 Jan 1 to 31 Jul) – i.e. JFC (+7.4%), URC (-5.9%), and PGOLD (-2.4%) – and post-rebalancing (from 31 Jul to 7 Dec) – i.e. FB (+21.4%) – fared well against the index but were challenged nonetheless. This was amid faster-than-expected inflation, higher operating costs, Peso depreciation, low consumer demand, and weak consumer confidence. 3Q18 results: A slow quarter for consumer names. Topline performance in 3Q18 was not able to follow through a stronger 1H18, as faster-than-expected inflation eroded disposable income gains from personal income tax cuts early in the year. Particularly hit were food manufacturers, i.e. CNPF (+10.1% vs 1H18: 20.5%) and URC (-1.5% vs 1H18: 5.9%), which failed to sustain demand in 3Q18. Consumers traded down to staple food manufacturers in the likes of FB (+12.8% vs 1H18: 13.6%), as well as foodservice giant JFC (+21.7% vs 1H18: 21.3%), which cater to low- to lower middle-income households. An exemption was EMP (+16.6% vs 1H18: 7.8%), as its international segment fared well due in part to Peso depreciation and because high middle- to high-income households were less sensitive to inflation vis-à-vis the general masses. RRHI’s consumer base are likewise less sensitive to inflation, as reflected by healthy 3Q18 topline performance (+13.2% vs 1H18: 13.0%) and blended SSSG (+6.6% YTD). Meanwhile, despite lower-income consumer base, PGOLD’s blended topline for 3Q18 (+15.5%) did better than 1H18 (+13.1%) however mainly on higher average basket sizes. Price increases for selected items arrested declines on the EBIT and net income level, albeit in varying degrees, for consumer counters. 3Q18 proved that 2018 was so far a particularly good year for EMP, where double-digit margin expansion was buoyed by the performance of its international operations. Meanwhile, higher operating expenses (attributable to manpower and rental costs) wiped out PGOLD’s profits at the EBIT level, while lower supplier support contracted RRHI’s gross/EBIT margins across its business formats. For URC and FB, increased commodity prices (particularly for sugar and livestock, respectively) allowed for some margin gains. URC was however negatively affected by higher A&P, labour, and financing costs, erasing some of its profits, while FB fared better upon the strategic consolidation of its higher margin beer business. JFC likewise consolidated Smashburger into its financials, but operating losses of the US subsidiary proved detrimental to margins. Meanwhile, for CNPF, margins

were sequentially pressured by higher prices of key raw materials, packaging, and financing costs. Consumer companies’ sales growth trend

Source: Thomson Reuters, First Metro Securities Consumer companies’ EBIT margin trend

Source: Thomson Reuters, First Metro Securities Results Review

Source: Thomson Reuters, First Metro Securities

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

4Q17 1Q18 2Q18 3Q18

Aggregate F&B Retailers

0%

2%

4%

6%

8%

10%

12%

14%

4Q17 1Q18 2Q18 3Q18

Aggregate F&B Retailers

Revenue 4Q17 1Q18 2Q18 3Q18 CommentCNPF 26% 22% 19% 10.1%EMP 15% 9% 7% 16.6%JFC 17% 19% 24% 21.7%FB 6% 12% 15% 12.8%PGOLD 9% 12% 14% 15.5%RRHI 8% 13% 13% 13.2%URC 24% 2% 10% -1.5%Aggregate 13% 12% 15% 13%F&B 16% 11% 16% 12%Reta ile rs 9% 12% 14% 14%

Net Income 4Q17 1Q18 2Q18 3Q18 CommentCNPF -32% 4% 9% 7%EMP -32% 6% 34% 11% In lineJFC 13% 17% 15% 26% AheadFB -1% -6% 17% 9% AheadPGOLD 3% 12% 37% 9% In lineRRHI -3% 22% 10% 0% In lineURC -14% -12% -35% 2% BelowAggregate -9% 2% 8% 9%F&B -13% -1% 4% 10%Reta ile rs 1% 16% 23% 5%

Page 34



FY19F Outlook – Unexciting year ahead. Lacklustre sector earnings expected in FY19F. Our cautious outlook on the Philippines consumer sector hinges on weak consumer sentiment, which has declined, amid years of high inflation. Despite recent slowdown in headline inflation, core trends (sans volatile food and energy items) indicate still elevated price levels overall. Note that FY19F comes without additional disposable income from personal income tax cuts (as opposed to early FY18), making high consumer demand from the first half of FY18 tough to beat. The government’s thrust to increase imports of food items that fall short of domestic supply may arrest further supply-side price increases, however sustained weakness of the Peso may still erode margins for importing companies. Higher labour costs and volatile oil prices will exert cost pressure, while regulatory risk is a concern amid proposals to hike excise taxes for tobacco items and alcoholic beverages. Margins to remain challenged. We see margins further deteriorating, if not at least sustained, in FY19F due to a slew of factors as follows: 1) increased labour expenses – recently approved wage hikes (13 out of 17 regions) should lead to contracting margins y-o-y for counters with operations across the country; 2) potential logistics disruption –the potential phasing out of 15 year-old trucks (if this measure is pushed through) would further increase costs on top of an already volatile oil market; 2) elevated A&P spend – due to competition; 3) higher borrowing costs – amid rising rates; businesses may become selective on expansion activities as funding is not as cheap as before; 4) Peso to further weaken – should sustain pressures for importing companies, albeit to a lesser extent vis-à-vis 2018 (DBSF: US$1:P55 by end-FY19F); and 5) changes in accounting standards for leases – should increase depreciation and interest expenses, as well as skew gearing ratios, upon recognition of on-balance sheet liabilities pertaining to operating leases.

Risks to our call are: 1) lower-than-expected inflation – we acknowledge marked decline in recent headline inflation figures, albeit we prefer to watch movements in the core inflation (indicative of demand-side inflation). DBS expects FY19F inflation to be 4.7% but the realisation of BSP’s estimates at 3.5% is a welcome development for both consumers and businesses alike; 2) infrastructure spend gaining traction – should ease logistics cost pressures and unlock efficiency gains for the economy as a whole; 3) election boost to kick in – the midterm elections should marginally boost some counters (but to a lesser extent than national elections); 4) catch-up of OF remittances and BPO revenues following a slow 2018 – should provide boost in disposable incomes and, consequently, demand; and 5) recovery of consumer sentiment to positive territory – is hoped for, but less likely. Stock pick (Sell) Universal Robina Corp. (URC:PM FULLY VALUED TP 106.00) – We reduced our FY18E/19F earnings by 16%/19%, to reflect the persistent weakness in URC’s domestic branded consumer foods (BCF) business and the risk of lower margins. We are of the view that URC’s valuation premium (currently trading at 27.6x FY18F PE) is difficult to justify and unlikely to be sustained given URC’s challenging and lacklustre earnings prospects (-1.1% 2-year earnings CAGR). Our earnings forecasts are lower than consensus as we expect a gradual decline in EBIT margins. This is reflective of higher contribution from international BCF business, elevated A&P spend and manpower cost (on increase in minimum wages), rising input costs, weak local currency, and the adverse impact of the excise tax on sugar-sweetened beverages (SSB). Nonetheless, potential catalysts remain: 1) better-than-expected recovery in Vietnam; 2) more pronounced improvements in profitability from the integration of Griffin’s and Snack Brands Australia (SBA); 3) lower input cost; 4) stable currency markets; 5) gains in domestic market share; 6) production innovation and successful launch of new products; and 7) significant improvement in international BCF segment’s margins.

Page 35



Overseas Filipino Remittances Headline vs Core Inflation (2012=100)

Source: Thomson Reuters, Bangko Sentral ng Pilipinas, First Metro Securities

Source: CEIC, Philippine Statistics Authority, Bangko Sentral ng Pilipinas, First Metro Securities

Consumer Confidence Index (CI) Household Final Consumption Expenditure (2000=100)

Source: Thomson Reuters, Bangko Sentral ng Piliipinas

Source: Thomson Reuters, Philippine Statistics Authority, First Metro Securities

-20

-10

0

10

20

30

40

50

60

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

US$ m YoY P m YoY

(%)

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2013 2014 2015 2016 2017 2018

Core Inflation Headline Inflation

(%)

BSP Target: Upper Bound

BSP Target: Lower Bound

-60

-40

-20

0

20

40

60

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Current Quarter Next three months Next 12 months

(Index Level)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

200

0

200

1

200

1

200

2

200

3

200

4

200

5

200

6

200

6

200

7

200

8

200

9

201

0

201

1

201

1

201

2

201

3

201

4

201

5

201

6

201

6

201

7

201

8

Household Final Consumption Expenditure % y-o-y

(P bn) (%)

Five-year average: 6.1%

Page 36



MACRO CHARTS / DATA

Page 37



Macro – Economic Charts Economic growth forecast & commentary Singapore GDP

GDP Growth (%) 2017 2018E 2019F 2020F

Singapore 3.6 3.4 3.0 2.8

Malaysia 5.9 4.7 4.5 4.2

Thailand 3.3 4.1 3.8 4.0

Indonesia 5.1 5.1 5.2 5.1

Philippines 6.7 6.3 6.5 6.4

Source: DBS Bank

Expect moderate economic growth momentum on the back of trade headwinds, tighter global liquidity conditions and more US Fed hikes.

Source: Thomson Reuters Datastream, DBS Bank

Malaysia GDP Thailand GDP

Growth could potentially fall short of expectations on a challenging external environment, uncertainties on oil related revenue flows, and risks of cut backs in government spending.

2019 is likely to be a more challenging year. From 4.1% y-o-y GDP growth projected in 2018E, growth is likely to moderate to 3.8% in 2019.


Indonesia GDP Philippines GDP

We think growth might pick up to 5.2% in 2019 supported mainly by election-transitory boost to consumption, but may slide back to 5.1% in 2020 in the face of stronger external headwinds.

We expect real GDP growth to pick up to 6.5% in 2019 and moderate slightly to 6.4% in 2020 as global trade trends weaken.


Page 38



Inflation forecasts & commentary Singapore

Source: DBS Bank

CPI Inflation (%) 2017 2018E 2019F 2020F

Singapore 0.6 0.7 1.8 1.5

Malaysia 3.8 1.1 2.5 1.6

Thailand 0.7 1.1 1.4 1.5

Indonesia 3.8 3.2 3.8 3.6

Philippines 2.9 5.3 4.7 3.8

Inflationary pressure should remain manageable. Low base effect due to declines in car prices arising from the supply glut in the secondary car market is expected to push inflation up in 2019F. Source: Thomson Reuters Datastream, DBS Bank

Malaysia Thailand

We expect inflation to rise to 2.5% in 2019, on the back of a low base this year (1.1%).

Inflation is near peak and is likely to trend lower in rest of this year and early next year. With global oil prices down more than 30% from year’s highs and THB outperformance, imported inflationary risks are subdued.

Source: Thomson Reuters Datastream, DBS Bank Source: Thomson Reuters Datastream, DBS Bank Indonesia Philippines

We think inflation might inch towards 4% in 2019 and ease back to 3.6% in 2020 barring further supply side disruption. The government might need to adjust domestic retail fuel price to catch up with the economical price even if oil price eases to US$60/bbl.

The prospects of lower oil prices on average this year would soften inflation. We estimate inflation will ease, but would stay above BSP’s target range of 4.7% in 2018 and ease to 3.8% in 2020.


Page 39



Forex forecasts & commentary USD/SGD

Source: DBS Bank

Exchange Rates, eop 2017 2018E 2019F 2020F

Singapore 1.34 1.40 1.42 1.38

Malaysia 4.06 4.20 4.25 4.15

Thailand 32.6 33.0 33.5 32.5

Indonesia 13,496 14,800 15,600 15,200

Philippines 49.9 53.0 55.0 54.0

Source: Thomson Reuters Datastream, DBS Bank

USD/MYR

USD/THB


USD/IDR

USD/PHP


Page 40



Input costs – Favourable commodity price environment Input prices generally mixed. The prices of some commodities have come off their 2018 highs, while some have bounced off the 2018 lows. Sugar, Coffee, Cocoa, Milk, Barley and Wheat are off recent lows, while Palm Oil, Rice, Aluminium and Tin have corrected from the highs this year. Nonetheless, many of these commodities are priced nowhere close to recent years’ peak and remain favourable on a mid-term basis.

Expect stable/mixed margin outlook. With input prices generally mixed, we expect input costs and margins to be relatively stable over the longer term. Most companies would have put in place hedging policies, which should help to keep margins stable going forward at least for the first half of 2019.

Sugar Coffee


Cocoa Palm Oil


Milk Rice - Thailand


Page 41



Barley Wheat


PET Aluminium


Tin WTI


Page 42



Peer Comparison Regional retailer peer comparison

Source: Thomson Reuters, DBS Bank, DBS Vickers, AllianceDBS, First Metro Securities (3 January 2019)

Company

Market Cap

(US$m) Px Last PE (A ct ) PE (Yr 1) PE(Yr 2)P/BV (x )

P/Sales (x )

ROE (%)

Operat ing Margin

(%)

Net Margin

(%)

Div idend Y ield (%)

NetGearing

(x )

South East A sia RetailersCP All PCL 19,553 70.25 30.3x 26.5x 23.6x 6.3x 1.1x 25% 6.4% 4.3% 1.9% 1.10

Dairy Farm International Holdings Ltd 12,242 9.05 25.4x 23.0x 21.4x 5.7x 1.0x 26% 3.9% 4.4% 2.3% 0.24

Kalbe Farma Tbk PT 4,959 1,525 26.8x 24.2x na 4.3x 2.9x 19% 16.1% 12.2% 1.9% cash

Siam Makro PCL 4,831 32.25 25.9x 26.9x 25.3x 9.2x 0.8x 35% 4.3% 3.3% 3.0% 0.30

Home Product Center PCL 6,153 15.10 35.0x 30.6x 27.5x 9.1x 2.9x 31% 12.5% 9.6% 2.4% 0.62

Big C Supercenter PCL 5,008 198.00 NULL NaN NaN NULL NULL 13% 7.0% 5.5% 1.0% 0.25

Minor International PCL 4,830 33.75 26.2x 21.7x 18.3x 2.7x 2.6x 13% 15.8% 11.9% 1.4% 1.20

Puregold Price Club Inc 2,268 43.00 19.4x 17.5x na 2.0x 0.8x 12% 6.9% 4.7% 0.8% cash

Robinsons Retail Holdings Inc 2,458 81.75 25.1x 22.8x na 1.6x 0.8x 7% 4.6% 3.4% 0.9% cash

Central Plaza Hotel PCL 1,673 40 25.2x 23.8x 21.0x 3.8x 2.3x 17% 13.6% 9.7% 1.7% 0.59

Sumber Alfaria Trijaya Tbk PT 2,686 930 71.8x 72.0x 54.6x 7.2x 0.6x 6% 1.7% 0.5% 0.4% 1.38

Matahari Department Store Tbk PT 1,139 5,625 8.2x 7.7x 7.1x 4.4x 1.4x 57% 13.4% 10.8% 9.1% cash

Philippine Seven Corp 1,786 123.00 66.2x NaN NaN 14.4x 2.5x 22% 6.1% 4.1% 0.3% cash

Siam Global House PCL 2,485 19.90 41.2x 39.3x 32.7x 5.6x 3.3x 12% 10.3% 7.7% 0.9% 0.85

Beauty Community PCL 636 6.85 16.2x 14.0x 12.4x 9.6x 4.4x 76% 39.5% 31.6% 6.1% cash

Ace Hardware Indonesia Tbk PT 1,801 1,510 27.1x 26.2x 23.1x 6.7x 3.8x 22% 16.3% 13.1% 1.5% cash

Sheng Siong Group Ltd 1,177 1.07 22.6x 21.6x 20.3x 5.1x 1.8x 25% 8.8% 8.1% 3.2% cash

Padini Holdings Bhd 557 3.50 12.9x 10.4x 10.2x 2.9x 1.3x 31% 16.5% 12.6% 3.3% cash

Mitra Adiperkasa Tbk PT 916 795 30.1x 17.0x 15.1x 2.5x 0.6x 15% 7.6% 3.8% 1.0% 0.24

Ramayana Lestari Sentosa Tbk PT 689 1,395.00 16.6x 17.8x 16.0x 2.5x 1.7x 12% 6.7% 7.2% 2.9% cash

7-Eleven Malaysia Holdings Bhd 409 1.50 30.3x 28.6x 26.5x 17.2x 0.7x 64% 3.6% 2.3% 2.8% 0.62

Hour Glass Ltd 323 0.63 7.4x NaN NaN 0.8x 0.6x 10% 9.2% 7.2% 3.2% cash

Hero Supermarket Tbk PT 242 830 NULL NaN NaN 0.7x 0.3x -4% -1.9% -1.5% na cash

Midi Utama Indonesia Tbk PT 215 1,070.00 22.2x NaN NaN 3.2x 0.3x 11% 3.4% 1.1% 1.0% 2.45

FN Factory Outlet PCL 53 1.41 17.4x 13.3x na 1.1x 1.2x 8% 7.1% 9.1% 3.0% 0.00

Courts Asia Ltd 59 0.16 5.6x 5.2x 4.8x 0.3x 0.1x 7% 5.0% 2.1% 6.4% 0.94

Matahari Putra Prima Tbk PT 78 150 56.8x 23.9x 10.1x 0.5x 0.1x 2% 1.0% 0.3% 0.0% cash

Parkson Holdings Bhd 64 0.24 NULL 13.0x 10.2x 0.1x 0.1x -4% -1.5% -2.5% na 0.35

Challenger Technologies Ltd 122 0.48 8.5x NaN NaN 1.9x 0.5x 19% 5.7% 5.0% 6.9% 0.35

Electronic City Indonesia Tbk PT 102 1,095.00 79.9x NaN NaN 0.8x 0.7x -1% -0.2% -0.5% na cash

Parkson Retail Asia Ltd 12 0.03 NULL NaN NaN 0.5x 0.0x -83% 3.4% -10.3% 0.0% cash

F J Benjamin Holdings Ltd 23 0.03 NULL NaN NaN 0.6x 0.2x -2% 1.8% -0.7% na 0.24

Modern Internasional Tbk PT 18 50 NULL NaN NaN nm 2.6x 258% -374.8% -471.0% na cash

EpiCentre Holdings Ltd 10 0.09 NULL NaN NaN 5.9x 0.7x -309% -14.6% -17.0% na 3.31Regional av erage 28.9x 22.9x 20.0x 4.2x 1.4x 13% -4.0% -9.1% 2.5% 0.8x

Page 43



Regional F&B peer comparison

Source: Thomson Reuters, DBS Bank, DBS Vickers, AllianceDBS, First Metro Securities (3 January 2019)

Company

Market Cap

(US$m) Px Last PE (A ct ) PE (Yr 1) PE(Yr 2)P/BV (x )

P/Sales (x )

ROE (%)

Operat ing Margin

(%)

Net Margin

(%)

Div idend Y ield (%)

NetGearing

(x )

South East A sia F &B

Unilever Indonesia Tbk PT 24,560 46,400 51.2x 49.1x 47.0x 65.7x 8.1x 134% 22.4% 16.6% 2.0% 0.60

Thai Beverage PCL 11,118 0.61 17.1x 15.5x 13.4x 2.7x 1.3x 18% 12.9% 8.7% 3.5% 1.29Indofood CBP Sukses Makmur Tbk PT 8,414 10,400 27.5x 24.9x 22.8x 4.9x 2.8x 20% 14.8% 11.4% 2.0% cash

Universal Robina Corp 5,359 127.50 28.1x 26.5x na 3.1x 2.0x 12% 10.3% 7.8% 2.1% 0.14

Charoen Pokphand Foods PCL 6,617 24.80 28.3x 19.4x 17.8x 1.0x 0.4x 6% 3.1% 2.1% 3.0% 1.18

Indofood Sukses Makmur Tbk PT 4,431 7,275 14.6x 13.8x 13.0x 1.8x 0.8x 13% 12.0% 5.8% 3.6% 0.19

Jollibee Foods Corp 6,079 293.00 40.1x 34.7x na 6.2x 1.9x 19% 5.2% 5.4% 1.2% cash

Nestle (Malaysia) Bhd 8,330 146.70 51.5x 48.1x 44.4x 48.5x 6.3x 102% 16.1% 12.3% na 0.69

Charoen Pokphand Indonesia Tbk PT 7,906 6,950.00 26.0x 23.9x 22.0x 5.2x 1.9x 23% 11.2% 8.0% 1.6% cash

Mayora Indah Tbk PT 4,110 2,650 37.9x 33.0x na 6.4x 2.3x 19% 10.9% 7.1% 0.9% 0.02

Thai Union Group PCL 2,395 16.20 16.1x 14.1x 12.9x 1.4x 0.6x 11% 3.6% 3.9% 3.5% 1.05

Emperador Inc 2,170 7.10 16.4x 15.7x na 1.7x 2.7x 12% 22.6% 16.9% 2.2% 0.24Fraser and Neave Ltd 1,802 1.70 17.0x 16.4x 16.5x 0.8x 1.2x 5% 5.5% 7.6% 2.9% 0.01

MK Restaurant Group PCL 2,148 74.75 27.4x 25.5x 22.8x 5.1x 4.1x 18% 16.2% 15.1% 3.2% cash

QL Resources Bhd 2,666 6.80 53.5x 48.9x 41.2x 5.6x 2.9x 12% 8.1% 6.0% 0.6% 0.39

Japfa Comfeed Indonesia Tbk PT 1,782 2,190.00 10.9x 10.2x 9.6x 1.9x 0.7x 20% 11.1% 6.7% 1.8% 0.31

Century Pacific Food Inc 1,013 15.00 16.8x 14.5x na 2.7x 1.2x 20% 9.8% 8.1% 1.4% cash

Heineken Malaysia Bhd 1,494 20.42 22.3x 22.4x 20.7x 22.8x 3.1x 75% 19.0% 14.0% 4.4% na

Taokaenoi Food & Marketing PCL 348 8.15 17.7x 13.7x 11.1x 4.3x 1.7x 33% 13.6% 12.2% 5.1% 0.10

Delfi Ltd 590 1.32 26.2x 23.3x 22.2x 2.5x 1.4x 11% 9.6% 5.9% 2.1% cash

Thai President Foods PCL 1,449 266.00 NULL NaN NaN NULL NULL 14% 17.7% 13.2% 1.9% cashCarlsberg Brewery Malaysia Bhd 1,452 19.62 23.1x 22.6x 21.0x 38.2x 3.2x 74% 16.9% 12.5% 4.3% cash

Thai Vegetable Oil PCL 675 26.75 10.3x 11.1x 12.2x 2.6x 0.9x 16% 6.1% 5.4% 7.3% 0.10MSM Malaysia Holdings Bhd 443 2.60 30.9x 31.3x 20.0x 0.9x 0.8x -2% 0.1% -1.2% na 0.53

President Bakery PCL 853 60.75 19.6x NaN NaN 3.9x 3.7x 20% 19.5% 17.9% 2.5% cash

Khon Kaen Sugar Industry PCL 416 3.02 15.7x 18.3x 17.8x 0.7x 0.7x 5% 8.7% 4.8% 1.7% 1.30Dutch Lady Milk Industries Bhd 953 61.50 32.8x 29.9x 26.2x 29.6x 3.8x 113% 14.8% 11.1% 1.6% cash

Oishi Group PCL 430 73.50 13.6x NaN NaN 2.3x 1.1x 17% 9.2% 8.1% 3.8% 0.07

Nippon Indosari Corpindo Tbk PT 514 1,195.00 48.1x 47.7x 42.5x 2.7x 2.8x 5% 10.3% 5.9% 0.5% cash

Del Monte Pacific Ltd 182 0.13 7.0x 5.7x 4.9x 0.3x 0.1x 6% 6.5% 1.4% 0.0% 2.53

JUMBO Group Ltd 185 0.40 23.3x 20.5x 18.2x 3.6x 1.6x 18% 8.7% 7.8% 3.4% cash

Malee Group PCL 68 7.95 11.4x 7.5x na 1.3x 0.3x 19% 3.8% 4.1% 6.7% 1.03BreadTalk Group Ltd 336 0.82 29.7x 26.4x 24.8x 2.6x 0.7x 10% 6.9% 2.7% 3.1% 0.05

President Rice Products PCL 348 77.00 NULL NaN NaN NULL NULL 16% 8.0% 47.0% 2.9% cash

Neo Group Ltd 47 0.44 13.8x NaN NaN 1.9x 0.4x 10% 3.1% 2.0% 2.3% 1.92

Koufu Group Ltd 250 0.62 13.6x 13.0x 12.8x 3.0x 1.4x 25% 14.1% 10.9% 3.8% cashFood Empire Holdings Ltd 243 0.62 19.5x 15.5x 15.5x 1.4x 0.8x 8% 9.2% 5.2% 1.0% cash

Power Root Bhd 134 1.38 45.5x 16.0x 13.6x 2.4x 1.5x 4% 2.3% 2.1% 4.3% cash

Malindo Feedmill Tbk PT 219 1,410.00 24.3x 19.3x na 1.5x 0.5x 8% 5.7% 2.4% 0.6% 0.74

Japan Foods Holding Ltd 56 0.44 15.0x 16.4x 15.4x 2.3x 1.1x 17% 9.6% 8.5% 4.8% cash

Katrina Group Ltd 34 0.20 64.9x NaN NaN 3.4x 0.8x 7% 1.9% 1.7% 1.3% cashRegional av erage 25.9x 22.7x 20.8x 7.7x 1.9x 24% 10.3% 8.7% 2.7% 0.7x

Page 44



COMPANY GUIDES

Page 45

ed: CK/ sa: MA, CW, CS

BUYLast Traded Price ( 30 Oct 2018): Rp2,000 (JCI : 5,789.10) Price Target 12-mth: Rp2,600 (30% upside) (Prev Rp2,400)

Analyst David Arie Hartono +62 2130034936 [email protected]

What’s New 3Q18 earnings ahead of our estimate

Earnings were driven by higher ASP, and lower rawmaterial costs

FY18F/19F earnings raised by 26%/13%; TP lifted by8% to Rp2,600

Maintain BUY call

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2017A 2018F 2019F 2020F Revenue 29,603 32,979 36,514 40,464 EBITDA 2,942 4,684 4,947 5,188 Pre-tax Profit 1,741 3,218 3,460 3,642 Net Profit 997 2,289 2,461 2,590 Net Pft (Pre Ex.) 997 2,289 2,461 2,590 Net Pft Gth (Pre-ex) (%) (51.7) 129.5 7.5 5.3 EPS (Rp) 87.4 201 216 227 EPS Pre Ex. (Rp) 87.4 201 216 227 EPS Gth Pre Ex (%) (52) 130 8 5 Diluted EPS (Rp) 87.4 201 216 227 Net DPS (Rp) 49.9 17.5 40.1 43.1 BV Per Share (Rp) 807 991 1,166 1,350 PE (X) 22.9 10.0 9.3 8.8 PE Pre Ex. (X) 22.9 10.0 9.3 8.8 P/Cash Flow (X) 29.6 10.7 8.5 8.2 EV/EBITDA (X) 9.5 6.0 5.7 5.3 Net Div Yield (%) 2.5 0.9 2.0 2.2 P/Book Value (X) 2.5 2.0 1.7 1.5 Net Debt/Equity (X) 0.5 0.4 0.3 0.2 ROAE (%) 11.0 22.3 20.0 18.0 Earnings Rev (%): 26 13 (2) Consensus EPS (Rp): 182 208 218 Other Broker Recs: B: 16 S: 0 H: 1

Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P

Boosted by resilient prices in 3Q

Valuation stays attractive given its strong profit growth. We maintain our BUY call with a higher TP of Rp2,600/share on Japfa Comfeed (JPFA), in view of (i) its attractive valuation, (ii) stable DOC and broiler prices, and (iii) falling soybean mealprices. We gather that JPFA is still trading at attractivevaluations of 6.2x FY19F EV/EBITDA and 9.8x FY19F PE –which is at a discount vs. the industry’s 15x FY19F PE. Giventhat JPFA’s earnings CAGR is expected to be 37.5% overFY17-20F (which is higher vs CPIN’s 19.8%), we believe thatJPFA should trade at a valuation level that is closer level toCPIN’s.

FY18F/19F earnings raised by 26%/13%. JPFA booked a 3Q18 net profit of Rp563.8bn (+56% y-o-y; -16% q-o-q) – well ahead of our expectations on the back of higher-than- expected ASP and lower-than-expected raw material cost due to the stocking of inventory which will last for the rest of FY18F. The strong 3Q18 results prompted us to adjust our raw material cost assumptions (for soybean meal price), thus lifting overall margins for this year and the next. As a result, our GPM rises to 22%/21.3% in FY18F/F19F (vs our previous assumption of 18.7%/19% in FY18F/19, respectively).

3Q18 earnings trump our estimate. JPFA’s 3Q18 earnings of Rp563.8bn (+56% y-o-y; -16% q-o-q) bring 9M18 earnings to Rp1.6tr (+97% y-o-y). This represents 92.1% of our FY18 estimate. The strong results were primarily driven by higher DOC and broiler ASPs which could offset higher costs of raw materials, such as corn (as the second harvest, which usually happens in October or November, will be delayed into next year due to uncertain weather conditions).

Valuation: We reiterate our BUY call with a higher TP of Rp2,600/share, Our TP for JPFA is based on their historical mean EV/EBITDA between FY14-18 of 7.0x. Our TP also implies 12.1x FY19F PE. Key Risks to Our View: Higher-than-expected raw material cost (corn and soybean meal) will have an impact on JPFA’s margins. Government intervention on DOC and broiler prices could pose downside risks. At A Glance

Issued Capital (m shrs) 11,727 Mkt. Cap (Rpbn/US$m) 23,453 / 1,542 Major Shareholders (%) Japfa Ltd 51.0 KKR Jade 12.0

Free Float (%) 3m Avg. Daily Val (US$m) ICB Industry : Consumer Goods / Food Producers 1.5

DBS Group Research . Equity 31 Oct 2018

Indonesia Company Guide

Japfa Comfeed Indonesia Version 16 | Bloomberg: JPFA IJ | Reuters: JPFA.JK Refer to important disclosures at the end of this report

26

46

66

86

106

126

146

166

186

206

267.3

767.3

1,267.3

1,767.3

2,267.3

Oct-14 Oct-15 Oct-16 Oct-17 Oct-18

Relative IndexRp

Japfa Comfeed Indonesia (LHS) Relative JCI (RHS)

Company Guide

Japfa Comfeed Indonesia

WHAT’S NEW

Boosted by resilient prices

3Q18 results ahead of our expectation... Japfa Comfeed (JPFA) booked 3Q18 earnings of Rp563.8bn (+56% y-o-y; -16% q-o-q) – bringing 9M18 earnings to Rp1.6tr (+97% y-o-y). This represents 92.1% of our FY18 estimate. The sterling earnings growth was driven by sales surging by 14% y-o-y to Rp8.6tr (-2% q-o-q) due to resilient DOC and broiler ASPs in 3Q.

The strong results were primarily driven by higher DOC and broiler ASPs which could offset higher costs of raw materials, such as corn (as the second harvest, which usually happens in October or November, will be delayed into next year due to uncertain weather conditions).

…thanks to strong DOC and broiler ASPs in 3Q18. In 3Q18,DOC revenue increased by 38.7% y-o-y to Rp1.5tr (+10.9% q-o-q) on the back of strong ASP in 3Q (up by +31.5% y-o-y to Rp6,700/chick). The resilient ASP of DOC was driven by the shortage of DOC in the market. Despite the strong growth of broiler ASP in 3Q by +12.9% y-o-y to Rp19k/kg, broiler revenue only grew by +1.7% y-o-y to Rp3.1tr (-14.2% q-o-q) – we think this was due to softer demand in 3Q. As a result,DOC EBIT margin improved significantly to 28% in 3Q18 (vs 12.6% in 3Q17, and 22.9% in 2Q18).

Feed margin under pressure on the back of higher cost of raw materials. In 3Q18, feed revenue grew by Rp4.9tr (+9.4% y-o-y; +5.0% q-o-q) on the back of higher ASP in 3Q – as the company passed on some of the cost of rawmaterials, in our view. As of end-3Q18, the average domestic corn price reportedly increased to Rp4,073/kg (+4.5% q-o-q) due to lower corn production in Indonesia, as the second harvest is being delayed due to uncertain weather conditions. As a result, feed EBIT margin was slightly under pressure and retreated to 10.4% in 3Q18 (vs 10.2% in 3Q17; 13.4% in 2Q18).

Higher inventory days: As of September 2018, JPFA’s inventory days increased to 113 days (from 102 days in June 2018) on the back of stocking of raw materials (like corn and soybean meal). JPFA currently has decent stock levels of soybean meal and corn which could last for the rest of FY18F. The company had anticipated that corn price will move higher gradually in the next few months.

Outlook

The undersupply of DOC to remain in FY19F. In our view, since 2017, the GPS import quota has been in a downtrend, which we think would result in an even tighter supply of DOC going forward. Thus, we believe that in FY19F, we will see a more balanced supply and demand which will help stabilise the ASPs of DOC and broiler. If we look at the DOC ASP in

3Q, we opine that the ASP is too high and we do not expect the price of DOC to stay at Rp6,723/chick. Note that the price of feed will probably will increase (to pass on the potentially higher raw material costs) and broiler price has softened to Rp19,634/kg in 3Q (vs Rp20,450 in 2Q). If the price remains at the current level, we think that the farmers will see lower margins for broiler. Thus, we view that the price of DOC will hover between Rp5,800 and Rp6,000 per chick going forward.

FY18F/19F earnings raised by 26%/13%. JPFA’s 3Q18 earnings of Rp563.8bn (+56% y-o-y; -16% q-o-q) trump our expectation on the back of higher-than-expected ASP and lower-than-expected raw material costs due to the stocking of inventory which will last for the rest of FY18F. The strong 3Q18 results prompted us to adjust our raw material cost assumptions (for soybean meal price), thus lifting overall margins for this year and the next. As a result, our GPM rises to 22%/21.3% in FY18F/F19F (vs our previous assumption of 18.7%/19% in FY18F/19, respectively).

What is next? Poultry demand in Indonesia is on a structurally positive trajectory given its relatively young population, a growing middle class, and the role of chicken as a major protein source in a predominantly Muslim society. With consumption per capita relatively low in Indonesia (10.1 kg per capita in 2017), we believe that there should be potential upside in terms of higher chicken consumption per capita if GDP growth heads higher (especially in outside Java areas, due to the income disparity between Java and outside Java areas).

JPFA: Valuation remains attractive given its strong earnings growth. We maintain our BUY call on JPFA, in view of:

- Attractive valuation which is currently trading at a discount compared to the industry’s

- Strong DOC and broiler prices to support margins in the face of higher cost of raw materials (potentially higher corn price and weakening of IDR against USD)

- Falling soybean meal price would alleviate concerns over margin pressure

We gather that JPFA is still trading at attractive valuations of 6.2x FY19F EV/EBITDA and 9.8x FY19F PE – which is at a discount vs. the industry’s 15x FY19F PE. Given that JPFA’s earnings CAGR is expected to be 37.5% over FY17-20F (which is higher vs CPIN’s 19.8%), we believe that JPFA should trade at a valuation level that is closer level to CPIN’s.

Company Guide


‐5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

Poultry feed DOC Broilers

‐

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan‐10 Jan‐11 Jan‐12 Jan‐13 Jan‐14 Jan‐15 Jan‐16 Jan‐17 Jan‐18

EV/EBITDA

MEAN

+1 STDEV

+2 STDEV

‐1 STDEV

‐2 STDEV

‐

5.0

10.0

15.0

20.0

25.0 Jan‐16

Mar‐16

May‐16

Jul‐16

Sep‐16

Nov‐16

Jan‐17

Mar‐17

May‐17

Jul‐17

Sep‐17

Nov‐17

Jan‐18

Mar‐18

May‐18

Jul‐18

Sep‐18

P/E

MEAN

+1 STDEV

+2 STDEV

‐1 STDEV

ASP of feed (Rp/kg), DOC (Rp/chick), and broiler (Rp/kg) EBIT margin (%)

Source: Pinsar, Arboge, and Company DBSVI

EV/EBITDA band PE band

Source: Bloomberg Finance L.P and DBSVI DBSVI

Changes in our assumption

2018E 2019E

(Rpbn) Old New % change Old New % change

Revenue 32,979.1 32,979.1 0.0% 36,514.1 36,514.1 0.0%

Gross profit 6,183.0 7,241.6 17.1% 6,947.0 7,789.8 12.1%

Gross margin 18.7% 22.0% 19.0% 21.3%

Operating profit 3,043.0 3,854.9 26.7% 3,491.0 4,036.3 15.6%

Operating margin 9.2% 11.7% 9.6% 11.1%

EBITDA 3,872.0 4,622.9 19.4% 4,402.0 4,882.9 10.9%

EBITDA margin 11.7% 14.0% 12.1% 13.4%

Net profit 1,816.0 2,289.3 26.1% 2,177.0 2,461.0 13.0%

Net margin 5.5% 6.9% 6.0% 6.7%

Source of all data: DBSVI

12,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000

20,000

21,000

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

Poultry feed (Rp/kg) ‐ LHS DOC (Rp/chick) ‐ LHS Broilers (Rp/kg live) ‐ RHS

Company Guide


Quarterly / Interim Income Statement (Rpbn)

Source of all data: Company, DBSVI


Source of all data: Company, DBSVI


Quarterly result s (Rpmn) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18% chg. y-o-y

% chg. q-o-q

Sales 6,624,716 7,507,441 7,562,092 7,908,439 7,860,856 8,843,612 8,633,104 14% -2%COGS (5,528,003) (6,116,637) (6,216,651) (6,710,451) (6,136,983) (6,760,430) (6,803,931) 9% 1%Gross profit 1,096,713 1,390,804 1,345,441 1,197,988 1,723,873 2,083,182 1,829,173 36% -12%

G&A expemse (643,365) (479,206) (526,411) (475,536) (693,255) (612,635) (664,912) 26% 9%Selling expense (183,126) (168,825) (183,365) (201,539) (246,413) (204,643) (228,369) 25% 12%Operat ing profit 270,222 742,773 635,665 520,913 784,205 1,265,904 935,892 47% -26%

Financing costs (101,859) (118,084) (136,069) (212,968) (255,732) (263,090) (266,471) 96% 1%Interest income 8,540 10,114 7,451 8,372 17,907 9,899 8,373 12% -15%FX gains (losses) & swap costs 27,077 (2,134) (56,851) 31,908 0 0 0 NM NMOthers 57,517 (63,296) 61,564 49,740 84,729 (37,398) 118,187 92% NMPretax profit 261,497 569,373 511,760 397,965 631,109 975,315 795,981 56% -18%

Income tax (126,819) (133,926) (116,636) (255,403) (167,885) (265,416) (206,989) 77% -22%Net profit 134,678 435,447 395,124 142,562 463,224 709,899 588,992 49% -17%

Minority interest in subsidiary (43,261) (39,505) (32,647) 4,955 (29,825) (35,015) (25,216) -23% -28%Net profit at t ributable to owners 91,417 395,942 362,477 147,517 433,399 674,884 563,776 56% -16%

Quarterly marginGross margin 16.6 18.5 17.8 15.1 21.9 23.6 21.2Operating margin 4.1 9.9 8.4 6.6 10.0 14.3 10.8Pretax margin 3.9 7.6 6.8 5.0 8.0 11.0 9.2Tax rate 48.5 23.5 22.8 64.2 26.6 27.2 26.0Net margin 1.4 5.3 4.8 1.9 5.5 7.6 6.5Net margin ex translation FX losses 1.1 5.3 5.4 1.6 5.5 7.6 6.5

EBIT 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18Poultry feed (Rp m) 367,361 538,300 458,991 368,348 523,785 630,690 512,858 q-o-q growth -18.4% 46.5% -14.7% -19.7% 42.2% 20.4% -18.7% y-o-y growth -30.7% -19.8% -8.4% -18.1% 42.6% 17.2% 11.7%DOC (Rp m) 92,791 205,038 142,567 107,604 174,458 324,406 439,400 q-o-q growth -59.7% 121.0% -30.5% -24.5% 62.1% 86.0% 35.4% y-o-y growth 81.5% 20.1% -40.1% -53.3% 88.0% 58.2% 208.2%Broilers (Rp m) (70,466) 92,771 165,943 115,752 246,690 466,699 235,788 q-o-q growth NM NM 78.9% -30.2% 113.1% 89.2% -49.5% y-o-y growth NM -36.3% -21.2% 95.5% NM 403.1% 42.1%Cattle (Rp m) (2,917) (29,412) (26,867) 59,196 (19,854) (17,376) (2,213) q-o-q growth NM NM NM NM NM NM NM y-o-y growth NM NM NM NM NM NM NMAquaculture (Rp m) (7,585) 44,271 23,060 (59,746) (14,822) 32,346 12,542 q-o-q growth NM NM -47.9% NM NM NM -61.2% y-o-y growth NM NM -67.3% NM NM -26.9% -45.6%Trading & others (107,610) (107,348) (127,696) 342,654 (170,246) (119,860) (258,618) q-o-q growth NM NM NM NM NM NM NM y-o-y growth NM NM NM NM NM NM NMGross EBIT (Rp m) 271,574 743,620 635,998 933,808 740,011 1,316,905 939,757Elimination 36,388 (43,195) (3,865)Net EBIT (Rp m) 8% 776,399 1,273,710 935,892

EBIT margin 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18Poultry feed 9.0% 12.0% 10.2% 7.8% 11.2% 13.4% 10.4%DOC 9.4% 18.2% 12.6% 8.8% 13.6% 22.9% 28.0%Broilers -2.6% 3.0% 5.3% 3.5% 7.2% 12.6% 7.4%Cattle -0.9% -8.9% -6.7% 20.4% -6.7% -3.4% -0.4%Aquaculture -1.6% 7.8% 4.1% -9.6% -2.5% 4.9% 1.7%Trading & others -27.3% -25.9% -34.8% 76.7% -42.6% -24.6% -82.6%

Company Guide


CRITICAL DATA POINTS TO WATCH

Critical Factors

Cost of raw materials In our estimation, corn and soybean meal account for c.60-65% of JPFA’s poultry feed raw material costs.

As of end-1Q18, the average domestic corn price declined to Rp3,555/kg (-15.8% y-o-y) due to higher corn production in Indonesia which increased its supply. However, we do not expect corn prices to drop further as the big harvest season is almost over. In our model, we assume a corn price of Rp4,165/kg for FY18F.

On the other hand, declining domestic corn prices will be partly offset by soybean meal prices that have increased by 13.9% YTD due to a prolonged drought in Argentina. We estimate a higher soybean meal price for FY18E and this will have some impact on poultry players in 2H18.

Our sensitivity analysis shows that for every 5% drop in corn or soybean meal price, JPFA’s gross margin will improve by 0.1%.

Less impact from rupiah weakness. Since the import ban on corn and feed wheat, the company has had to use local corn. The import ban has also reduced JPFA’s operational risks against USD fluctuation. It still imports 100% of its soybean meal requirement.

Based on our sensitivity analysis, every 5% drop in the USD/IDR rate would reduce its gross margin by 0.4%.

Poultry feed prices (Rp/kg)

Poultry feed production (m kg)

Chicken consumption per capita (kg/year)

DOC prices (Rp/chick)

Broiler prices (Rp/kg live)

Source: Company, DBSVI

6286 6181 6219 6250 6280

0.0

906.9

1813.9

2720.8

3627.8

4534.7

5441.7

6348.6

2016A 2017A 2018F 2019F 2020F

2735

31533371 3464

3666

0.0

747.8

1495.6

2243.4

2991.2

3739.0

2016A 2017A 2018F 2019F 2020F

12.713.5

14.214.9

15.6

0.00

3.19

6.38

9.57

12.75

15.94

2016A 2017A 2018F 2019F 2020F

5369 5204

5750 5800 5850

0.0

1181.7

2363.4

3545.1

4726.8

5908.5

2016A 2017A 2018F 2019F 2020F

17140 16831

18824 1880019500

0.0

3939.0

7878.0

11817.0

15756.0

19695.0

2016A 2017A 2018F 2019F 2020F

Company Guide


500

550

600

650

700

750

800

850

900

0

500

1,000

1,500

2,000

2,500

Jan‐14 Jan‐15 Jan‐16 Jan‐17 Jan‐18

Share price Poultry feed production

15000

15500

16000

16500

17000

17500

18000

18500

0

500

1000

1500

2000

2500

Dec‐15 Mar‐16 Jun‐16 Sep‐16 Dec‐16 Mar‐17 Jun‐17 Sep‐17 Dec‐17

Share price Broiler ASP (Rp/kg)

Appendix 1: A look at Company's listed history – what drives its share price?

DOC price is critical for share price movement

Source: Bloomberg Finance L.P., company, DBSVI

Broiler price reflects demand

We believe broiler price is a good indicator of demand for chicken. Our study shows that JPFA’s share price tends to increase when broiler price is on the uptrend, and vice versa.

We expect broiler price to increase to Rp17,352/kg in FY18 from Rp16,846/kg in FY17. We believe the higher broiler ASP y-o-y will support JPFA’s share price.

Poultry feed production volume affects share price

Source: Bloomberg Finance L.P., company, DBSVI

Poultry feed volume as earnings and share price driver Although feed price increases do not bode well for JPFA’s share price, volume growth does. However, the economic downtrend since mid-2013 has offset gains from high 2014 poultry feed production. In 2015, its production volume dropped back to 2013 levels. Combined with an economic slowdown, this led to a big drop in JPFA’s share price.

In 2016, production volume began to increase back to 2014 levels. Combined with an economic recovery, this has resulted

in a share price uptrend. As we expect poultry feed production to increase by c.7% this year, we think that its share price retracement fails to reflect its intrinsic value.

Positive broiler ASP should be supportive of share price

Gap between poultry feed production volume and share price

Company Guide


Balance Sheet:

Lower capital spending. Between FY11 and FY16, JPFA expanded its poultry feed capacity by c.50% while utilisation rate declined (from 75% to 61%). We expect its expansion plans to accelerate in FY18F, having halted most of them in FY16 (due to industry overcapacity in DOC breeding nationwide). However, given the normalisation of the group’s margins in FY17, JPFA’s ROA eased to 4.9% from 11.3% in FY16 before recovering to 6.9% in FY18F.

Low leverage. As of end-December 2017, its total borrowings rose to Rp6.1tr from Rp5.8tr in September 2017 due to higher long-term bank borrowings. We expect net gearing to inch up to 51% by end-FY18F from 45% in FY17 due to higher capex. As at end-March 2017, JPFA had US$194.5m bonds due in 2018, but they have been called and refinanced through the recent issuance of US$250m bonds (BB- rating by S&P and Fitch) as well as additional Rp1tr re-tap bonds.

Share Price Drivers:

Improved demand outside Java. In our view, chicken consumption in Java is already huge. GDP improvement outside Java will be the next catalyst for higher chicken consumption in Indonesia.

Key Risks:

Disease outbreaks. Anything affecting livestock at the group’s poultry farms would have a material effect on the group’s business and financial status. While the group has implemented strict biosecurity measures to reduce risks, there are no guarantees that JPFA would be immune. An outbreak (such as bird flu) would likely have an adverse impact on demand.

Change in government regulations. Licensing, change in raw material import policy (as demonstrated by the corn import restriction in Aug 2015) and price/volume controls across various jurisdictions may adversely affect JPFA’s profitability. The group is also exposed to volatile movements in raw material costs and currencies across its key markets.

Company Background

The group was established in 1971 under Java Pelletizing Factory as a copra pellet producer. Following its listing in Jakarta and Surabaya stock exchanges in 1989 and the acquisition of four poultry feed producers in 1990, its name was changed to Japfa Comfeed Indonesia (JPFA IJ). The group is now run by the second generation of the Santosa family. Under them, the group has transformed into one of the largest and most integrated poultry companies in Indonesia.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.4

1.4

1.4

1.5

1.5

1.5

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2016A 2017A 2018F 2019F 2020F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

2016A 2017A 2018F 2019F 2020F

Capital Expenditure (-)

Rpm

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2016A 2017A 2018F 2019F 2020F

Avg: 9.7x

+1sd: 15.1x

+2sd: 20.6x

‐1sd: 4.2x

-1.1

3.9

8.9

13.9

18.9

23.9

28.9


(x)

Avg: 1.72x

+1sd: 2.19x

+2sd: 2.66x

‐1sd: 1.24x

‐2sd: 0.77x

0.5

1.0

1.5

2.0

2.5

3.0


(x)

Company Guide


Key Assumptions

FY Dec 2016A 2017A 2018F 2019F 2020F

Poultry feed prices (Rp/kg) 6,286 6,181 6,219 6,250 6,280 DOC prices (Rp/chick) 5,369 5,204 5,750 5,800 5,850 Broiler prices (Rp/kg live) 17,140 16,831 18,824 18,800 18,800

Segmental Breakdown

FY Dec 2016A 2017A 2018F 2019F 2020F

Revenues (Rpbn)

Poultry + aqua feed 12,056 12,872 14,092 15,473 16,971 DOC 1,932 2,267 2,793 3,124 3,488 Broiler 10,894 12,272 13,862 15,568 17,526 Others 2,181 2,192 2,232 2,349 2,480

Total 27,063 29,603 32,979 36,514 40,464 Gross profit (Rpbn)

Poultry + aqua feed 3,113 2,700 3,131 3,525 4,063 DOC 1,191 1,171 1,633 1,764 1,924 Broiler 680 749 790 887 999 Others 495 412 1,688 1,614 1,344

Total 5,479 5,031 7,242 7,790 8,330 Gross profit Margins (%)

Poultry + aqua feed 25.8 21.0 22.2 22.8 23.9 DOC 61.6 51.6 58.5 56.5 55.2 Broiler 6.2 6.1 5.7 5.7 5.7 Others 22.7 18.8 75.6 68.7 54.2 Others N/A N/A N/A N/A N/A Total 20.2 17.0 22.0 21.3 20.6

Income Statement (Rpbn)

FY Dec 2016A 2017A 2018F 2019F 2020F

Revenue 27,063 29,603 32,979 36,514 40,464 Cost of Goods Sold (21,584) (24,572) (25,738) (28,724) (32,134) Gross Profit 5,479 5,031 7,242 7,790 8,330 Other Opng (Exp)/Inc (2,558) (2,861) (3,387) (3,754) (4,162) Operating Profit 2,921 2,170 3,855 4,036 4,167 Other Non Opg (Exp)/Inc 330 106 43.1 59.8 67.8 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (484) (535) (680) (636) (594) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 2,767 1,741 3,218 3,460 3,642 Tax (595) (633) (805) (865) (910) Minority Interest (107) (111) (124) (134) (141) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2,065 997 2,289 2,461 2,590 Net Profit before Except. 2,065 997 2,289 2,461 2,590 EBITDA 3,866 2,942 4,684 4,947 5,188 Growth

Revenue Gth (%) 8.2 9.4 11.4 10.7 10.8 EBITDA Gth (%) 61.1 (23.9) 59.2 5.6 4.9 Opg Profit Gth (%) 69.0 (25.7) 77.7 4.7 3.2 Net Profit Gth (Pre-ex) (%) 340.9 (51.7) 129.5 7.5 5.3 Margins & Ratio

Gross Margins (%) 20.2 17.0 22.0 21.3 20.6 Opg Profit Margin (%) 10.8 7.3 11.7 11.1 10.3 Net Profit Margin (%) 7.6 3.4 6.9 6.7 6.4 ROAE (%) 28.6 11.0 22.3 20.0 18.0 ROA (%) 11.3 4.9 10.2 9.9 9.6 ROCE (%) 15.3 8.3 15.6 14.6 13.8 Div Payout Ratio (%) 7.7 57.1 8.7 18.6 19.0 Net Interest Cover (x) 6.0 4.1 5.7 6.3 7.0


Company Guide



FY Dec 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018

Revenue 7,562 7,908 7,861 8,844 8,633 Cost of Goods Sold (6,217) (6,711) (6,137) (6,760) (6,804) Gross Profit 1,345 1,198 1,724 2,083 1,829 Other Oper. (Exp)/Inc (710) (677) (940) (817) (893) Operating Profit 636 521 784 1,266 936 Other Non Opg (Exp)/Inc 4.70 81.6 84.7 (37.4) 118 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (129) (205) (238) (253) (258) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 512 398 631 975 796 Tax (117) (255) (168) (265) (207) Minority Interest (32.6) 5.00 (29.8) (35.0) (25.2) Net Profit 363 148 433 675 564 Net profit bef Except. 363 148 433 675 564 EBITDA 640 603 869 1,229 1,054

Growth

Revenue Gth (%) 0.7 4.6 (0.6) 12.5 (2.4) EBITDA Gth (%) (5.5) (5.9) 44.2 41.4 (14.2) Opg Profit Gth (%) (14.4) (18.1) 50.5 61.4 (26.1) Net Profit Gth (Pre-ex) (%) (8.5) (59.3) 193.8 55.7 (16.5) Margins

Gross Margins (%) 17.8 15.1 21.9 23.6 21.2 Opg Profit Margins (%) 8.4 6.6 10.0 14.3 10.8 Net Profit Margins (%) 4.8 1.9 5.5 7.6 6.5

Balance Sheet (Rpbn)

FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 7,512 8,346 9,750 10,858 11,773 Invts in Associates & JVs 7.00 8.00 9.00 9.00 9.00 Other LT Assets 678 1,554 1,577 1,598 1,639 Cash & ST Invts 2,713 1,642 2,120 1,669 2,250 Inventory 5,500 6,414 6,770 7,556 8,453 Debtors 1,212 1,541 1,469 1,627 1,803 Other Current Assets 1,637 1,593 2,133 2,363 2,620 Total Assets 19,251 21,089 23,820 25,669 28,538

ST Debt 2,259 797 1,516 665 815 Creditor 2,317 3,216 3,019 3,369 3,769 Other Current Liab 617 756 753 822 895 LT Debt 3,609 5,272 5,318 5,323 5,173 Other LT Liabilities 1,076 1,252 1,199 1,337 1,495 Shareholder’s Equity 8,844 9,209 11,305 13,308 15,407 Minority Interests 530 586 711 845 985 Total Cap. & Liab. 19,251 21,089 23,820 25,669 28,538

Non-Cash Wkg. Capital 5,414 5,575 6,601 7,354 8,212 Net Cash/(Debt) (3,155) (4,427) (4,713) (4,319) (3,738) Debtors Turn (avg days) 16.3 17.0 16.7 15.5 15.5 Creditors Turn (avg days) 44.1 42.3 45.6 41.8 41.8 Inventory Turn (avg days) 98.9 91.0 96.4 93.8 93.7 Asset Turnover (x) 1.5 1.5 1.5 1.5 1.5 Current Ratio (x) 2.1 2.3 2.4 2.7 2.8 Quick Ratio (x) 0.8 0.7 0.7 0.7 0.7 Net Debt/Equity (X) 0.3 0.5 0.4 0.3 0.2 Net Debt/Equity ex MI (X) 0.4 0.5 0.4 0.3 0.2 Capex to Debt (%) 26.4 25.3 31.8 32.6 31.2 Z-Score (X) 4.2 3.8 3.8 3.9 4.1


Margin remained stable at high level on the back of strong ASPs of DOC and broiler to offset higher cost of raw materials.

Company Guide


Cash Flow Statement (Rpbn)

FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 2,767 1,741 3,218 3,460 3,642 Dep. & Amort. 626 679 768 847 953 Tax Paid 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 242 (1,126) (1,041) (766) (891) Other Operating CF (881) (523) (810) (870) (916) Net Operating CF 2,754 771 2,136 2,670 2,787 Capital Exp.(net) (1,550) (1,537) (2,172) (1,954) (1,868) Other Invts.(net) (134) 108 (1.1) (1.2) (1.2) Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 1,186 65.0 (1.8) (1.6) (1.6) Net Investing CF (498) (1,364) (2,175) (1,957) (1,871) Div Paid (160) (570) (200) (458) (492) Chg in Gross Debt (1,815) 38.0 (131) (0.9) 0.0 Capital Issues 702 (1.5) 6.10 0.0 0.0 Other Financing CF 826 66.0 842 (707) 157 Net Financing CF (447) (467) 518 (1,166) (335) Currency Adjustments (9.4) 1.50 0.0 0.0 0.0 Chg in Cash 1,800 (1,059) 478 (452) 581 Opg CFPS (Rp) 220 166 278 301 322 Free CFPS (Rp) 105 (67.2) (3.2) 62.8 80.5


Target Price & Ratings History

Source: DBSVI

Analyst: David Arie Hartono

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 11 Dec 17 1215 1750 BUY

2: 12 Mar 18 1500 1700 BUY

3: 24 May 18 1615 1900 BUY

4: 12 Jul 18 1805 1900 BUY

5: 01 Aug 18 2160 2400 BUY

6: 19 Oct 18 1930 2400 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

23

4

56

1154

1354

1554

1754

1954

2154

2354

Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18

Rp

Company Guide


DBSVI recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 31 Oct 2018 17:58:06 (WIB) Dissemination Date: 31 Oct 2018 19:17:08 (WIB)

Sources for all charts and tables are DBSVI unless otherwise specified.

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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

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the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other

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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can

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The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may

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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual

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UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

Company Guide


Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)

mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the

commodity referred to in this report.

DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public

offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage

in market-making.

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

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(s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of

the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the

real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the

management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or

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COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates do not have a

proprietary position in the securities recommended in this report as of 30 Sep 2018.

2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services:

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should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced:

4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other

investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12

months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

ed: TH/ sa: MA, CW, CS

BUYLast Traded Price ( 1 Nov 2018): S$0.68 (STI : 3,060.85) Price Target 12-mth: S$0.89 (32% upside) (Prev S$0.86)

Analyst David Arie Hartono +62 2130034936 [email protected] Andy SIM, CFA +65 6682 3718; [email protected]

What’s New • 3Q18 core PATMI of US$96.3m was well ahead of our

expectations

• Results were boosted by contribution from JPFA andturnaround in Vietnam operations

• FY18F/19F EBITDA raised by 10%/6.5%

• Maintain BUY call with higher TP of S$0.89

Price Relative

Forecasts and Valuation FY Dec (US$m) 2017A 2018F 2019F 2020F Revenue 3,190 3,253 3,455 3,749 EBITDA 290 432 456 481 Pre-tax Profit 108 223 235 253 Net Profit 1.32 86.3 92.6 101 Net Pft (ex. BA gains) 47.8 96.4 127 152 Net Pft (Pre Ex.) 23.3 106 113 121 Net Pft Gth (Pre-ex) (%) (83.1) 355.7 5.9 7.3 EPS (S cts) 0.10 6.43 6.91 7.52 EPS Pre Ex. (S cts) 1.81 7.93 8.40 9.01 EPS Gth Pre Ex (%) (83) 337 6 7 Diluted EPS (S cts) 0.10 6.43 6.91 7.52 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 53.9 58.2 65.1 72.6 PE (X) 661.8 10.6 9.8 9.0 PE Pre Ex. (X) 37.5 8.6 8.1 7.5 P/Cash Flow (X) 6.2 nm 3.5 3.4 EV/EBITDA (X) 6.6 5.2 4.9 4.7 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 1.3 1.2 1.0 0.9 Net Debt/Equity (X) 0.7 0.8 0.6 0.5 ROAE (%) 0.2 11.7 11.2 10.9

Earnings Rev (%): (1) 0 (3) Consensus EPS (S cts): 7.1 7.9 8.9 Other Broker Recs: B: 4 S: 0 H: 0

Source of all data on this page: Company, DBSVI, DBS Bank, Bloomberg Finance L.P.

Stable outlook, remains attractive

FY18F/19F EBITDA raised by 10%/6.5%. We adjust our forecast for Japfa Limited (JAP) on the back of (i) strong JPFA performance, (ii) higher USD/IDR assumption, (iii) higher EBITDA loss on consumer food division, and (iv) potential losses from FX and biological assets. With our new revised USD/IDR assumption, JAP's revenue would decline by 2.9%/3.7% in FY18F/FY19F respectively. Our GPM for JAP is revised to 22.1%/21.8% for FY18F/19F – taking into consideration a lower assumption of lower soybean meal price. We project a higher core net profit of US$106m (ex. FX/ fair value). However, our headline net profit is revised to US$86.3m (vs US$86.7m in our previous assumption) in FY18F as we factor in the potential losses from FX and biological assets.

3Q18 results are ahead our expectation – thanks to Indonesia operations. JAP reported 3Q18 headline net earnings of US$14.3m (up from US$3m in 3Q17). This brought 9M18 reported earnings to US$60.5m. Core PATMI without forex came in at US$96.3m which is well ahead of our estimate of US$86.7m. The strong performance was driven by (i) higher EBITDA contribution from Japfa Comfeed (JPFA) of US$259.3m in 9M18 (+59.2% y-o-y), (ii) EBITDA turnaround from Animal Protein Other (APO) to US$29.7m (vs loss of US$18.7m in 9M17), and (iii) China dairy division which improved the EBITDA in 9M18 by 13.2% y-o-y to US$76.3m in 9M18.

Maintain BUY with higher TP of S$0.89. JAP is currently trading at 8.7x FY19F PE and <5x EV/EBITDA, at a discount vs regional average valuation and subsidiary company, JPFA. While the share price has jumped by c.7% since our reinstatement last week, we believe the current valuation remains attractive given (i) our view that the undersupply of DOC will remain, and thevolatility of DOC and broiler should be minimal next year, (ii) itsVietnam operations continue to improve, and (iii) China dairydivision to continue benefitting from milk yield improvement.

Valuation: Our TP is based on sum-of-parts valuation. Our target price, after incorporating a 15% holding company discount, is S$0.89 (which implies 12.6x FY19F PE).

Key Risks to Our View: JAP's share price is driven by DOC, broiler, and swine prices as well as China raw milk price movements and the USD/IDR exchange rate.

At A Glance Issued Capital (m shrs) 1,847 Mkt. Cap (S$m/US$m) 1,256 / 912 Major Shareholders (%) Rangi Management Limited 50.3 Morze International Limited 15.3 Tasburgh Ltd 6.8

Free Float (%) 27.5 3m Avg. Daily Val (US$m) 0.77 ICB Industry : Consumer Goods / Food Producers

DBS Group Research . Equity

2 Nov 2018

Singapore Company Guide

Japfa Ltd Version 15 | Bloomberg: JAP SP | Reuters: JAPF.SI Refer to important disclosures at the end of this report

35

55

75

95

115

135

155

175

195

215

0.3

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0.6

0.7

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1.0

1.1

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Relative IndexS$

Japfa Ltd (LHS) Relative STI (RHS)

Company Guide

Japfa Ltd

WHAT’S NEW

Indonesia and Vietnam divisions drove the good performance in 3Q

3Q18 earnings ahead of our estimate. Japfa Limited's (JAP) reported 3Q18 earnings came in at US$14.3m (up from US$3m in 3Q17). This brought 9M18 reported earnings to US$60.5m. Core PATMI without forex came in at US$96.3m which is well ahead of our estimate of US$86.7m. The strong performance was driven by (i) higher EBITDA contribution from Japfa Comfeed (JPFA) of US$259.3m in 9M18 (+59.2% y-o-y), (ii) EBITDA turnaround from Animal Protein Other(APO) to US$29.7m (vs loss of US$18.7m in 9M17), and (iii)China dairy division which improved the EBITDA in 9M18 by13.2% y-o-y to US$76.3m in 9M18.

Japfa Comfeed's (JPFA) contribution remained strong. The strong results were primarily driven by higher DOC and broiler ASPs which offset higher costs of raw materials, such as corn (as the second harvest, which usually happens in October or November, will be delayed to next year due to uncertain weather conditions). In 3Q18, DOC revenue increased by 38.7% y-o-y to Rp1.5tr (+10.9% q-o-q) on the back of strong ASP in 3Q (up by 31.5% y-o-y to Rp6,700/chick). The resilient ASP of DOC was driven by the shortage of DOC in the market. Despite the strong growth of broiler ASP in 3Q of 12.9% y-o-y to Rp19,000/kg, broiler revenue only grew by 1.7% y-o-y to Rp3.1tr (-14.2% q-o-q) – we think this was due to softer demand in 3Q. As a result, DOC EBIT margin improved significantly to 28% in 3Q18 (vs 12.6% in 3Q17, and 22.9% in 2Q18).

APO improved, thanks to recovery in Vietnam division. APO outside Indonesia contributed 3Q18 EBITDA of US$14.4m (vs loss of US$4.7m in 3Q17). The group attributed the improved performance mainly due to its Vietnam operations. In Vietnam, revenue increased by 29.4% y-o-y to US$153.8m driven by higher sales volume for poultry feed, and DOC, as well as higher ASP for DOC and swine fattening in 3Q18. With the strong recovery of swine prices, Vietnam recorded an operating profit of US$13.5m. However, the better Vietnam performance was muted by the operating losses in Myanmar and India. In Myanmar, the division recorded an operating loss of US$1.7m due to higher local corn price and the company was unable to pass on the higher production costs in an increasingly competitive environment.

Dairy milking continued to rise. In 3Q18, raw milk production in China rose 10.4% y-o-y to 126.5m kg in 3Q18 backed by a higher number of milkable cows and the contribution from Farm 7 (which started fully milking in March 2018). Dairy milk yield slightly improve to 38.1kg/head/day in 3Q18 (vs 37.4kg/head/day in 3Q17). Despite a relatively flat raw milk price environment in 3Q18, the division managed to post a revenue of US$101.9m (+20.5% y-o-y) on the back of better volume which could offset the flattish raw milk prices. The group expects raw milk prices to remain flattish in the near term, but it will be mitigated by operational efficiency and better yields.

EBITDA remained negative in 3Q18, as expected. The consumer food segment's EBITDA contribution remained negative at US$2.7m in 3Q18 due to (i) lower ASP of ambient food products due to increase market competition, (ii) inability to pass on the increased production costs arising from higher chicken raw material prices, and (iii) continued investment in advertising and promotion to maintain market share.

Outlook

FY18F/19F EBITDA raised by 10%/6.5%. Adjusting for JPFA's strong results in 9M18, we made changes to JPFA’s gross margin (to take into consideration the lower soybean meal price) which resulted in a higher GPM and EBITDA margin. The changes are:

- JAP revenue declined by -2.9%/-3.7% in FY18F/FY19Frespectively. As we maintained our revenue for JPFA, butwe revised our USD/IDR assumption toRp15,150/Rp15,675 in FY18F/FY19F respectively. As aresult, our revenue forecasts were lowered due to FXtranslation.

- We raised our GPM for JAP to 22.1%/21.8% inFY18F/19F – to take into consideration our adjustment inJPFA's GPM on the back of our assumption of lowersoybean meal price.

- As a result, JPFA's EBITDA contribution to JAP is alsoimproved by 17.3%/7.7% in FY18F/FY19F respectively.

- Furthermore, we also assume a higher EBITDA marginloss from the consumer product division as we view that(i) competition will remain fierce, (ii) inability to pass onthe higher cost of raw materials from higher chickenprice, and (iii) continued investment in advertising.

- We also factor in the potential loss from FX andbiological assets. As a result, our net profit slightlydeclined to US$86.3m (vs US$86.7m in our previousassumption) in FY18F.

Company Guide

Japfa Ltd

Valuation

TP adjusted to S$0.89; BUY rating reiterated. We employed SOP valuation based on EV/EBITDA multiple on each segment. Based on our forecast revisions, our TP was lifted to S$0.89 –

mainly to account for higher contribution from JPFA. We reiterate our BUY call for 32% upside to our revised TP. We believe the stock is trading at an attractive value given the (i) strong Indonesia performance, and (ii) Vietnam operation turnaround.

Quarterly / Interim Income Statement (US$m)

Source of all data: Company, DBSVI, DBS Bank

Quarterly EBITDA (US$m)

Source of all data: Company, DBSVI, DBS Bank

Changes in our assumption

Source of all data: Company and DBSVI, DBS Bank

Japfa Limit edCurrency US$FY Dec (m) 3Q17 4Q17 1Q18 2Q18 3Q18 y-o-y q-o-qSales 814.3 849.3 845.5 901.0 877.4 7.8% -2.6%Cost of Goods Sold (662.4) (705.6) (657.7) (684.1) (692.5) 4.5% 1.2%Gross Profit 151.8 143.7 187.8 216.9 184.9 21.8% -14.8%Other Operating Income 1.7 (1.5) 3.4 11.2 (0.1)Other Operating Expenses (95.8) (99.6) (113.9) (108.8) (102.4) 6.9% -5.8%EBIT 57.7 42.5 77.3 119.3 82.3 42.6% -31.0%Non-Operating Income (16.2) 13.8 (14.2) 2.7 (11.0)Interest Income 1.0 1.1 1.7 1.0 0.9 -5.9% -10.9%Interest Expense (17.7) (19.1) (19.1) (22.1) (20.2) 14.5% -8.5%Share of Associates' or JV Income 0.0 0.0 0.0 0.2 0.0Exceptional Gains/(Losses) (1.1) 1.3 (0.1) (24.8) (1.5) 32.5% -94.1%Pretax Profit 23.7 39.7 45.5 76.2 50.5 112.8% -33.7%Tax (8.0) (24.6) (9.4) (21.2) (16.8) 109.1% -20.8%Minority Interests (12.7) (15.5) (19.4) (25.5) (19.4) 53.2% -23.7%Net Profit 3.0 (0.4) 16.7 29.6 14.3 374.8% -51.7%Preference Dividend for the period 0.0 0.0 0.0 0.0 0.0Net Profit after Preference Div 3.0 (0.4) 16.7 29.6 14.3

EBITDA 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18AP-Indon 43.5 88.7 94.7 61.4 37.2 64.0 61.6 53.6 73.6 107.5 78.2AP-Others 11.7 18.8 13.5 5.8 (3.6) (10.4) (4.7) 0.0 2.6 12.6 14.4Dairy 18.1 21.7 16.4 18.2 25.2 20.7 21.8 26.5 27.8 25.1 23.3Consumer Food 2.1 1.9 4.9 0.6 2.8 (2.1) 1.3 (10.2) 0.3 (3.7) (2.7)Tota l 77.2 132.2 130.7 83.5 65.3 73.9 81.1 70.0 104.2 139.2 113.2

US$mn Old Ne w % c ha nge Old Ne w % c ha nge

Revenue 3,350.9 3,253.3 -2.9% 3,589.4 3,455.4 -3.7%Gross profit 690.9 718.4 4.0% 741.8 753.4 1.6%Gross margin 18.7% 22.1% 20.7% 21.8%Operating profit 285.9 325.1 13.7% 307.9 335.8 9.1%Operating margin 9.2% 10.0% 8.6% 9.7%EBITDA 392.7 432.0 10.0% 427.8 455.6 6.5%EBITDA margin 11.7% 13.3% 11.9% 13.2%Net profit 86.7 86.3 -0.5% 92.2 92.6 0.4%Net margin 2.6% 2.7% 2.6% 2.7%

2018E 2019E

Company Guide

Japfa Ltd

SOP valuation

Source of all data: DBSVI, DBS Bank

EBITDA (US$m)EV (US$m) FY19F Multip le Re ma rks

Animal Protein (ex.JPFA) 247.8 44.6 5.6 20% discount to JPFA valuationDairy 792.1 107.3 7.4 Based on 10% discount to regional EV/EBITDA FY19F valuationConsumer Food (64.8) (8.1) 8.0 20% discount to Indonesia consumer names

975.0 143.91,994.3

Le ss : 0.7Net debt (FY19F) (852.0) Based on DBSV estimate JPFA Comfeed net debt (Rp bn) 4,319.2 JPFA Comfeed net debt (US$m) 275.5

Net debt, ex JPFA Comfeed (576.4)Equity value (APO, Dairy, CF) 398.6Equity value JPFA Comfeed 1,019.3 DBSVI's TP of Rp15675/shareHold co discount ` (212.7) 15% holdco discountJAPFA Equity value (US$ m) 1,205.2JAPFA Equity value (S$ m) 1,651.1 1.37TP (S$) $0.89

Share outstanding (m shares) 1,845.6

Company Guide

Japfa Ltd


Critical Factors DOC and broiler price stability. Hampered by oversupply in FY14-15, Indonesia DOC and broiler prices declined significantly which resulted in weak earnings growth at that time. As the government started to control the supply of DOC in FY17 – it resulted in more stable price conditions and earnings. In FY18F, we foresee stronger DOC and broiler prices due to lack of DOC in the market given that the Indonesian government has imposed an AGP ban.

Cost of raw materials. In our estimates, corn and soybean meal account for c.60-65% of JPFA’s poultry feed raw material costs. As of 2Q18, the average domestic corn price declined to Rp3,961/kg (-7.8% y-o-y) due to higher corn production in Indonesia which increased supply. However, we do not expect corn prices to drop further as the big harvest season is almost over. In our model, we assume corn price of Rp4,165/kg for FY18F.

Swine price movement. The decline in swine price last year was due to the sharp reduction in China's import of swine from Vietnam. This was mainly due to the Chinese government's concerns over the quality of Vietnam swine. The situation has resulted in a decrease in swine export volume and impacted the domestic swine price in FY17 (which fell below VND30,000/kg). The weak swine price resulted in a lower earnings growth for the animal protein other (APO) division in FY17.

Pause in the China dairy expansion. Following the completion of its seventh farm in China last year and second farm in Indonesia this year, JAP will pause its farm expansion in China. Therefore, we believe growth in sales volume will only come from improving milk yields in the near future. However, some volume growth might still be seen as Farm 7 is still running at only half of its milking capacity.

Brand rejuvenation of consumer food division is the future growth catalyst. The group intends to expand its manufacturing and processing capacities in Indonesia and Vietnam, as it seeks to expand the reputation and market reach of its brands, including Real Good for UHT milk and So Good, So Nice and Best Chicken for processed meats.

Average Milkable Cow (heads)

Milk Yield (kg/head/day)

China raw milk price (US$/kg)

Indonesia DOC price (Rp/chick)

Indonesia Broiler Price (Rp/kg)

Source: Company, DBSVI, DBS Bank

3842042564

51077

61292

73551

0.0

10612.3

21224.6

31836.9

42449.2

53061.5

63673.8

2016A 2017A 2018F 2019F 2020F

37 38.4 39.5 39.5 39.5

0.0

8.1

16.1

24.2

32.2

40.3

2016A 2017A 2018F 2019F 2020F

0.550.5

0.450.42 0.42

0.00

0.11

0.23

0.34

0.45

0.56

2016A 2017A 2018F 2019F 2020F

5369 5204

5750 5800 5850

0.0

1181.7

2363.4

3545.1

4726.8

5908.5

2016A 2017A 2018F 2019F 2020F

17140 16831

18824 18800 18800

0.0

3802.4

7604.9

11407.3

15209.8

19012.2

2016A 2017A 2018F 2019F 2020F

Company Guide

Japfa Ltd

Appendix 1: A look at Company's listed history – what drives its share price? Share price is moving along with broiler price in Indonesia

Source: Bloomberg Finance L.P., Company, DBSVI

Broiler price reflects demand We believe broiler price is a good indicator of demand for chicken. Our study shows that JPFA’s share price tends to increase when broiler price is on the uptrend, and vice versa.

We expect broiler price to increase to Rp17,352/kg in FY18 from Rp16,846/kg in FY17. We believe the higher broiler ASP y-o-y will support share price.

Share price is moving along with swine price in Vietnam

Source: Bloomberg Finance L.P., Company, DBSVI

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0

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Sep-

14Oc

t-14

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Swine price (VND) Share price (SGD)

0.00

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15

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6

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7

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17

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18

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-18

Jul-1

8

Broiler price (IDR) Share price (SGD)

Company Guide

Japfa Ltd

Swine price – main contributor to Animal Protein Others

Swine prices have been declining even since China stopped importing swine from Vietnam in late 2016. As the main contributor to animal protein others (APO) segment, the Vietnam swine operation has been incurring losses due to the weak swine price. The swine price in Vietnam has increased continuously from early 2018 – as of June 2018, the swine price was at VND47,635/kg. At this price, we believe that the farmers are already profitable (breakeven cost at VND40,000-42,000/kg). The improvement in the price of swine was due to the decrease in supply since last year. According to Vietnam Department of Livestock, the swine supply had shrunk by 5.8% y-o-y in FY17.

When we see an improvement in swine price, the same goes for JAP's share price.

Company Guide

Japfa Ltd

Balance Sheet: JAP's net debt-to-total equity ratio came in at 1.0x as at end of December 2017 and is forecast to settle at 1.2x by the end of FY18F. The higher debt-to-total equity ratio jumped in FY18F due to a new 3-year syndication loan of US$253m with bullet repayment at maturity. The debt was taken to finance a minority buyout in its dairy segment. We forecast net operating cash flow to be negative in FY18F.

Share Price Drivers: DOC oversupply issues. The Indonesian poultry industry is dominated by a few players, which collectively control more than 75% of the market. Over-investment and/or miscalculated demand often lead to depressed DOC and broiler prices on top of an already volatile market. Changes in prices would have an instant impact on JAP's profitability – even with cuts in parent stock (PS) numbers. Rupiah movements. The group’s USD bonds have created translation FX losses in JAP's subsidiary, JPFA, together with the Rupiah’s depreciation YTD. Hence, Rupiah movements would impact reported earnings.

Key Risks: Outbreak of diseases. Outbreak of diseases affecting livestock would have a material effect on the group's business and financial status. Currency movements. JAP's earnings face a risk of currency depreciation on the IDR, CNY, and VND against USD as Indonesia, China, and Vietnam are its largest markets. JAP's major revenue streams are denominated in local currency, while its debt and interest expenses are denominated in USD. Intense competition. Excess capacity and intense competition in Indonesia may continue to result in DOC oversupply and slower-than-expected price growth. Movements in raw material costs and currencies. JAP is exposed to volatile movements in raw material costs and currencies. For example, weakness in Rupiah and consumer purchasing power led to delays in passing on raw material costs. Changes in regulations. Changes in government regulations/licensing/price or volume controls may adversely affect JAP's

Company Background Japfa Ltd (JAP) is a leading industrialised and vertically integrated producer of multiple animal proteins, dairy and consumer food products in Indonesia (second largest), Vietnam, Myanmar, India and China. The group is involved in production of animal feeds, poultry breeding, poultry commercial farms, beef cattle feedlots, swine breeding, swine commercial farms, dairy farms as well as frozen and ambient temperature consumer food products.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


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2016A 2017A 2018F 2019F 2020F


US$m

0.0%

5.0%

10.0%

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20.0%

2016A 2017A 2018F 2019F 2020F

Avg: 11.7x

+1sd: 21.2x

+2sd: 30.8x

-1sd: 2.2x

-6.6

3.4

13.4

23.4

33.4

43.4


(x)

Avg: 1.26x

+1sd: 1.62x

+2sd: 1.99x

-1sd: 0.9x

-2sd: 0.53x0.4

0.6

0.8

1.0

1.2

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(x)

Company Guide

Japfa Ltd

Key Assumptions

FY Dec 2016A 2017A 2018F 2019F 2020F

Average Milkable Cow

38,420 42,564 51,077 61,292 73,551 Milk Yield (kg/head/day) 37.0 38.4 39.5 39.5 39.5 China raw milk price

0.55 0.50 0.45 0.42 0.42

Indonesia DOC price

5,369 5,204 5,750 5,800 5,850 Indonesia Broiler Price 17,140 16,831 18,824 18,800 18,800

Segmental Breakdown FY Dec 2016A 2017A 2018F 2019F 2020F

Revenues (US$m) Animal Protein Indonesia 1,987 2,167 2,199 2,329 2,529 Animal Protein Other 562 475 510 525 549 Dairy 283 345 349 396 452 Consumer Food 199 201 194 203 217 Others 3.10 1.60 1.68 1.76 1.85 Total 3,033 3,190 3,253 3,455 3,749 Operating profit (US$m) Animal Protein Indonesia 217 157 257 257 260 Animal Protein Other 42.5 (26.9) 15.3 15.8 16.5 Dairy 51.4 67.0 62.8 71.3 76.9 Consumer Food 2.97 (16.0) (17.5) (16.2) (10.9) Others (2.1) 7.47 7.47 7.47 5.00 Total 311 189 325 336 348 Operating profit Margins

Animal Protein Indonesia 10.9 7.2 11.7 11.1 10.3 Animal Protein Other 7.6 (5.7) 3.0 3.0 3.0 Dairy 18.2 19.4 18.0 18.0 17.0 Consumer Food 1.5 (8.0) (9.0) (8.0) (5.0) Others (67.5) 467.0 444.7 423.6 270.1 Total 10.3 5.9 10.0 9.7 9.3


Company Guide

Japfa Ltd

Income Statement (US$m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Revenue 3,033 3,190 3,253 3,455 3,749 Cost of Goods Sold (2,368) (2,616) (2,535) (2,702) (2,948) Gross Profit 665 574 718 753 801 Other Opng (Exp)/Inc (335) (385) (393) (418) (453) Operating Profit 330 189 325 336 348 Other Non Opg (Exp)/Inc 0.03 3.44 0.0 0.0 0.0 Associates & JV Inc (0.4) (0.1) 0.0 0.0 0.0 Net Interest (Exp)/Inc (56.5) (63.2) (82.5) (80.3) (75.4) Exceptional Gain/(Loss) (19.0) (22.0) (20.0) (20.0) (20.0) Pre-tax Profit 255 108 223 235 253 Tax (56.9) (51.3) (62.3) (65.9) (70.7) Minority Interest (78.9) (54.9) (74.0) (76.9) (81.0) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 119 1.32 86.3 92.6 101 Net Profit before Except. 138 23.3 106 113 121 Net Pft (ex. BA gains) 125 47.8 96.4 127 152 EBITDA 415 290 432 456 481 EBITDA (ex. BA gains) 402 315 400 455 501 Growth Revenue Gth (%) 8.8 5.2 2.0 6.2 8.5 EBITDA Gth (%) 60.5 (30.0) 48.8 5.5 5.5 Opg Profit Gth (%) 48.4 (42.7) 71.7 3.3 3.6 Net Profit Gth (Pre-ex) (%) 94.9 (83.1) 355.7 5.9 7.3 Margins & Ratio Gross Margins (%) 21.9 18.0 22.1 21.8 21.4 Opg Profit Margin (%) 10.9 5.9 10.0 9.7 9.3 Net Profit Margin (%) 3.9 0.0 2.7 2.7 2.7 ROAE (%) 21.4 0.2 11.7 11.2 10.9 ROA (%) 5.0 0.1 3.1 3.2 3.3 ROCE (%) 3.9 (1.9) 1.0 1.3 1.7 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) 5.9 3.0 3.9 4.2 4.6


Company Guide

Japfa Ltd

Quarterly / Interim Income Statement (US$m)

FY Dec 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018

Revenue 814 849 846 901 877 Cost of Goods Sold (662) (706) (658) (684) (693) Gross Profit 152 144 188 217 185 Other Oper. (Exp)/Inc (94.1) (101) (111) (97.6) (103) Operating Profit 57.7 42.5 77.3 119 82.3 Other Non Opg (Exp)/Inc (16.2) 13.8 (14.2) 2.66 (11.0) Associates & JV Inc 0.0 0.0 0.0 0.18 0.0 Net Interest (Exp)/Inc (16.7) (18.0) (17.4) (21.1) (19.3) Exceptional Gain/(Loss) (1.1) 1.34 (0.1) (24.8) (1.5) Pre-tax Profit 23.7 39.7 45.5 76.2 50.5 Tax (8.0) (24.6) (9.4) (21.2) (16.8) Minority Interest (12.7) (15.5) (19.4) (25.5) (19.4) Net Profit 3.01 (0.4) 16.7 29.6 14.3 Net profit bef Except. 4.12 (1.7) 16.8 54.3 15.7 EBITDA 65.6 81.2 89.0 149 102

Growth Revenue Gth (%) 3.0 4.3 (0.4) 6.6 (2.6) EBITDA Gth (%) 5.1 23.8 9.6 67.5 (31.8) Opg Profit Gth (%) 28.3 (26.3) 81.7 54.3 (31.0) Net Profit Gth (Pre-ex) (%) (170.4) (141.2) (1,090.3) 223.5 (71.0) Margins Gross Margins (%) 18.6 16.9 22.2 24.1 21.1 Opg Profit Margins (%) 7.1 5.0 9.1 13.2 9.4 Net Profit Margins (%) 0.4 0.0 2.0 3.3 1.6

Balance Sheet (US$m) FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 1,197 1,362 1,455 1,536 1,603 Invts in Associates & JVs 10.6 11.6 9.37 7.17 4.97 Other LT Assets 56.4 133 133 133 133 Cash & ST Invts 336 235 282 322 333 Inventory 612 671 646 688 751 Debtors 161 179 174 184 200 Other Current Assets 151 151 151 151 151 Total Assets 2,525 2,743 2,851 3,022 3,176

ST Debt 320 318 318 318 318 Creditor 302 623 278 296 323 Other Current Liab 25.8 30.3 72.9 76.5 81.3 LT Debt 520 627 877 857 797 Other LT Liabilities 269 123 123 123 123 Shareholder’s Equity 622 694 780 872 973 Minority Interests 468 329 403 480 561 Total Cap. & Liab. 2,525 2,743 2,851 3,022 3,176

Non-Cash Wkg. Capital 597 348 620 651 698 Net Cash/(Debt) (504) (709) (912) (852) (782) Debtors Turn (avg days) 17.7 19.5 19.8 18.9 18.7 Creditors Turn (avg days) 44.9 67.0 67.7 40.6 40.1 Inventory Turn (avg days) 97.6 93.0 98.9 94.3 93.3 Asset Turnover (x) 1.3 1.2 1.2 1.2 1.2 Current Ratio (x) 1.9 1.3 1.9 2.0 2.0 Quick Ratio (x) 0.8 0.4 0.7 0.7 0.7 Net Debt/Equity (X) 0.5 0.7 0.8 0.6 0.5 Net Debt/Equity ex MI (X) 0.8 1.0 1.2 1.0 0.8 Capex to Debt (%) 31.0 22.4 16.7 17.0 18.0 Z-Score (X) 2.5 2.0 2.0 2.3 2.5


Company Guide

Japfa Ltd

Cash Flow Statement (US$m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 255 108 223 235 253 Dep. & Amort. 84.8 97.7 107 120 133 Tax Paid (56.9) (51.3) (19.7) (62.3) (65.9) Assoc. & JV Inc/(loss) 0.37 0.13 0.0 0.0 0.0 Chg in Wkg.Cap. 0.0 0.0 (315) (35.0) (51.4) Other Operating CF 80.1 (13.6) 0.0 0.0 0.0 Net Operating CF 363 140 (4.9) 258 268 Capital Exp.(net) (260) (212) (200) (200) (200) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 94.5 2.16 2.20 2.20 2.20 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (9.6) (27.4) 0.0 0.0 0.0 Net Investing CF (175) (237) (198) (198) (198) Div Paid (6.5) (12.5) 0.0 0.0 0.0 Chg in Gross Debt 0.0 5.24 250 (20.0) (60.0) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 6.94 5.45 0.0 0.0 0.0 Net Financing CF 0.47 (1.8) 250 (20.0) (60.0) Currency Adjustments 0.0 (3.1) 0.0 0.0 0.0 Chg in Cash 188 (101) 47.3 40.1 10.3 Opg CFPS (S cts) 28.3 10.9 23.1 21.8 23.8 Free CFPS (S cts) 8.03 (5.5) (15.3) 4.32 5.08



Source: DBSVI, DBS Bank Analyst: David Arie Hartono

Andy SIM, CFA

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 25 Oct 18 0.68 0.86 BUY


1

0.42

0.47

0.52

0.57

0.62

0.67

0.72

0.77

Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18

S$

Company Guide

Japfa Ltd

DBSVI, DBS Bank, recommendations are based an Absolute Total Return* Rating system, defined as follows:







Completed Date: 2 Nov 2018 09:17:10 (SGT) Dissemination Date: 2 Nov 2018 09:36:06 (SGT)

Sources for all charts and tables are DBSVI, DBS Bank, unless otherwise specified.


This report is prepared by PT DBS Vickers Sekuritas Indonesia (''DBSVI''), DBS Bank Ltd. This report is solely intended for the clients of DBS Bank

Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or

duplicated in any form or by any means or (ii) redistributed without the prior written consent of PT DBS Vickers Sekuritas Indonesia (''DBSVI''), DBS

Bank Ltd.































Company Guide

Japfa Ltd






in market-making.




compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)

primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the

issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real

estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the






banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the

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COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates do not have a

proprietary position in the securities recommended in this report as of 30 Sep 2018.




manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further

information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document

should contact DBSVUSA exclusively.




months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.



ed: JS/ sa: DT, CW, CS

BUY Last Traded Price ( 9 Nov 2018): S$0.63 (STI : 3,077.97)

Price Target 12-mth: S$0.80 (27% upside) (Prev S$0.84)

Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM, CFA +65 6682 3718 [email protected]

What’s New • 3Q18 earnings below, led by slower pick up in revenue,

higher depreciation and rental expense

• Trimmed FY18-20F earnings by 2-7%

• Possible special dividend of about 2 Scts per share on

sale of Woodlands HQ and central kitchen by FY20F

• Maintain BUY, TP S$0.80

Price Relative

Forecasts and Valuation FY Dec (S$m) 2017A 2018F 2019F 2020F

Revenue 217 223 239 246 EBITDA 40.1 41.5 108 110 Pre-tax Profit 32.1 28.7 31.3 32.0 Net Profit 26.9 23.9 26.1 26.7 Net Pft (Pre Ex.) 26.9 25.2 26.3 26.7 Net Pft Gth (Pre-ex) (%) 3.8 (6.4) 4.6 1.5 EPS (S cts) 4.84 4.30 4.70 4.81 EPS Pre Ex. (S cts) 4.84 4.53 4.74 4.81 EPS Gth Pre Ex (%) 4 (6) 5 2 Diluted EPS (S cts) 4.84 4.30 4.70 4.81 Net DPS (S cts) 15.3 2.15 2.35 2.41 BV Per Share (S cts) 7.74 18.0 20.3 22.8 PE (X) 13.0 14.7 13.4 13.1 PE Pre Ex. (X) 13.0 13.9 13.3 13.1 P/Cash Flow (X) 6.9 10.4 9.1 8.7 EV/EBITDA (X) 7.5 6.0 2.3 2.1 Net Div Yield (%) 24.3 3.4 3.7 3.8 P/Book Value (X) 8.1 3.5 3.1 2.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 36.8 33.4 24.5 22.3 Earnings Rev (%): (7) (5) (2) Consensus EPS (S cts): 4.90 5.00 4.90 Other Broker Recs: B: 1 S: 0 H: 0

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Growth partly offset by new store expenses

Maintain BUY, TP S$0.80. We maintain our BUY rating for

Koufu with a slightly lower TP of S$0.80. We expect FY19F

earnings to recover after declining slightly in FY18, and expect

FY20-21F earnings to hold steady as revenue growth is offset by

higher costs. Revenue growth to be led by new foodcourts in

Singapore and Macau, but higher operating costs and

depreciation would partially offset the increase in revenue.

Longer term drivers include the setting up of an integrated

facility aimed at delivering economies of scale, and overseas

growth from Macau.

Where we differ. We like the stock for its strong cashflow

generation capability, defensive earnings, and net cash balance

sheet. Koufu’s return on average equity (ROAE) is one of the

strongest among peers, at 24.5% for FY19F. Dividend yield is

decent at 3.7% on a payout of 50% of earnings.

Potential catalyst. This will stem from realisation of economies

of scale over the long term and special dividends from sale of

existing central kitchen property before moving into the new

integrated facility.

Valuation:

The stock currently trades at 13.3x FY19F PE. Our TP of S$0.80

is based on 17x FY19F PE, pegged to peers’ average (ex-

BreadTalk) multiple.

Key Risks to Our View:

Key earnings risks include failure to renew leases, inability to

secure new outlets, departure of key tenants and food stalls,

customers downtrading to hawker centres and coffee shops,

competition from foodcourts that offer more attractive

propositions (environment, pricing, food quality etc.) to

customers.

At A Glance Issued Capital (m shrs) 555

Mkt. Cap (S$m/US$m) 350 / 254

Major Shareholders (%)

Jun Yuan Holdingss 78.2

Free Float (%) 21.8

3m Avg. Daily Val (US$m) 0.23

ICB Industry : Consumer Services / General Retailers


12 Nov 2018

Singapore Company Guide

Koufu Group Ltd Version 1 | Bloomberg: KOUFU SP | Reuters: KOUF.SI Refer to important disclosures at the end of this report

88

108

128

148

168

188

208

0.6

0.7

0.7

0.8

0.8

Jul-18 Oct-18

Relative IndexS$

Koufu Group Ltd (LHS) Relative STI (RHS)

Company Guide

Koufu Group Ltd

WHAT’S NEW

3Q18 results – below expectations

3Q18 below expectations: Core earnings of S$5.9m (-16.2%

y-o-y) was below expectations. While headline earnings

showed 33.6% y-o-y decline to S$4.6m, 3Q18 saw one-off

impact of S$1.3m in IPO expenses. An interim dividend of 1

Scts was declared.

Revenue slightly below, growth driven by new outlets.

Revenue of S$57.6m (+3.6% y-o-y) was driven by Outlet and

Mall Management segment (+6.9%, S$29m), which added

three new food courts year to date in Sengkang General

Hospital, Fusionpolis and Oasis Terrace, offset by closures of

Star Vista and Marina Bay Link Mall outlets. F&B Retail

Segment’s revenue remained relatively flat at S$28.6m. 9m18

revenue of S$166.8m made up 72% of our initial forecast,

slightly below expectations.

Gross margins improved: Gross margin was 0.8ppt higher at

84.4%. Gross margin improvement was due to better cost

control and leverage on new stores which contributed

additional revenue.

Higher depreciation and rents: Opex was S$41.8m, (+8.8% y-

o-y), led by new stores. New stores added to both

depreciation and rental expenses. Depreciation was higher by

43% y-o-y to S$3.2m while rental costs increased 15% y-o-y

to S$27.8m. These costs were due to longer than expected

fitting out of the outlets which opened recently. Staff costs,

admin costs and distribution & selling expenses were relatively

flat. Other operating expenses declined to S$0.5m from

S$1.7m due to absence of S$1m impairment to loss making

outlets booked in 3Q17. EBIT was 15% y-o-y lower at

S$6.8m. EBIT and operating margin as a result fell to S$6.8m

(-15.7% y-o-y) and 11.8% (-2.7ppt)

Reduce FY19-21F earnings by 2-7%: 3Q18 operating profit

made up 68% of our initial forecast, with net profit making

up 65%. Following slower than expected pick in revenue

growth, we reduce our FY19-21F earnings by 2-7%. Our

4Q18 earnings outlook assumes relatively flat y-o-y

performance which results in only a slight downward

adjustment to FY19F earnings.

Maintain Buy, lower TP to S$0.80: Following the earnings cut,

our TP based on 17x FY19F PE, pegged to peer average (ex-

BreadTalk) multiple is reduced slightly to S$0.80. We still like

the stock for its defensive qualities of strong cashflow,

balance sheet, and stable earnings. Dividend yield is decent at

3.7%, while return on average equity (ROAE) is one of the

strongest among peers, at 24.5% for FY19F. As Koufu is due

to move to its new integrated facility, stock catalyst includes

possible special dividend of about 2 Scts from sale of existing

Woodlands central kitchen and HQ by FY20F. Maintain BUY.

Quarterly / Interim Income Statement (S$m)

FY Dec 3Q2017 2Q2018 3Q2018 % chg yoy % chg qoq

Revenue 55.6 54.2 57.6 3.6 6.3

Cost of Goods Sold (9.1) (8.8) (9.0) (1.4) 1.8

Gross Profit 46.5 45.3 48.6 4.5 7.2

Other Oper. (Exp)/Inc (38.4) (38.2) (41.8) 8.8 9.5

Operating Profit 8.08 7.17 6.81 (15.7) (5.0)

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - -

Associates & JV Inc 0.10 0.05 0.10 (5.0) 95.9

Net Interest (Exp)/Inc 0.31 0.0 0.03 (89.1) nm

Exceptional Gain/(Loss) 0.0 0.0 (1.3) - -

Pre-tax Profit 8.49 7.21 5.64 (33.6) (21.8)

Tax (1.4) (1.1) (1.0) (30.6) (10.4)

Minority Interest 0.02 0.0 0.0 - -

Net Profit 7.09 6.08 4.64 (34.5) (23.6)

Net profit bef Except. 7.09 6.08 5.94 (16.2) (2.3)

EBITDA 10.4 10.3 10.1 (3.2) (1.9)

Margins (%)

Gross Margins 83.6 83.7 84.4

Opg Profit Margins 14.5 13.2 11.8

Net Profit Margins 12.8 11.2 8.1

Source of all data: Company, DBS Bank

Company Guide

Koufu Group Ltd


Critical Factors

Store count growth largely from foodcourts and self-operated

F&B stalls. We have assumed 2-3 new outlets per year for

foodcourts going forward and expect coffee shops to remain

stable at c.14 outlets as Koufu’s focus is currently on opening

more foodcourts. Likewise, we expect Koufu to continue

managing Punggol Plaza and Jurong West Hawker Centre

without further additions. Our increase in self-operated F&B

stalls is a function of the number of new foodcourts. We do not

expect aggressive increase in F&B kiosks, QSR and full-service

restaurants, as we believe some of these formats need to bring

in consistent profitability before scaling up.

More new outlets in Singapore. Growth continues to hinge on

more outlet opening in strategic locations with focus on

hospitals, commercial malls, educational institutions and new

housing estates. As Singapore’s population increases, the

development of more adequate infrastructure to accommodate

population increase will fuel the supply for more foodcourt

outlets going forward. We believe new hospitals such as

Woodlands Healthcare Campus and housing estates including

Bidaddari will carve opportunities for Koufu to penetrate with

more outlets.

Expands presence in Macau. Koufu entered Macau in 2011 to

operate a Koufu foodcourt at Sands Cotai Central, Macau. It

has also opened its first Supertea F&B kiosk at Sands Cotai

Central in Macau and is negotiating with landlords and

developers for new F&B outlets.

Longer term growth in other markets outside of Singapore and

Macau. Longer term, there is intention to expand in markets

around Singapore and Macau, namely PRC, Malaysia and

Indonesia, at an opportune time.

Builds traction on full service restaurants. Koufu has three

Elemen full-service restaurants serving natural meatless cuisine

with another opening at Paya Lebar Quarter in 1Q19. Plans for

Elemen include strengthening the brand name and building

store network in Singapore before expanding overseas into

China, Malaysia, Indonesia and Australia.

Building a larger facility to support future growth. There are

plans to establish an integrated facility to expand centralised

procurement, preparation and processing capabilities of the

existing central kitchens. The existing current central kitchens

currently have limited production capacities with some of the

food preparation processes partially done onsite at its F&B

Outlets and self-operated F&B stalls. With a larger central

kitchen, Koufu can drive economies of scale.

Outlet count

Revenue per outlet (S$m)

FY17 cost breakdown

Revenue breakdown by country FY17

Revenue breakdown by segment

Source: Company, DBS Bank

157 157169

176 181

0.0

26.1

52.2

78.3

104.5

130.6

156.7

182.8

2016A 2017A 2018F 2019F 2020F

0.61 0.61 0.6 0.6 0.6

0.0

0.1

0.3

0.4

0.5

0.6

2016A 2017A 2018F 2019F 2020F

Company Guide

Koufu Group Ltd

Balance Sheet:

Cash generative business, balance sheet in net cash. Koufu’s

business is generally cash generative with S$30-51m of

operating cashflow generated in the past three years. Capex is

comparatively low at less than S$12m per year over the same

period. The business is in net cash of S$51m in FY17. Working

capital is generally positive with average trade payable days of

39-41 days and inventory of 11-14 days, outstripping receivable

days’ 27-29 days.


Sale of existing Woodlands central kitchen. Koufu is due to

move into its new integrated facility in FY20F and intends to sell

its existing central kitchen at Woodlands. If sold, we estimate

that it could potentially book a gain of S$11m worth about 2

Scts per share which could be paid as special dividends.

Integrated facility to drive economies of scale. With the new

integrated facility coming up in FY20, Koufu can consolidate,

enhance productivity and operational efficiencies by rolling out

larger quantities at the new facility, while maintaining quality

and consistency. Excess capacity can also be used to derive

additional revenue stream by supplying food input to stall

holders at its foodcourts in the future.

Key Risks:

Food safety and licences. As a foodservice operator, it is

important to maintain food safety. Lapses would lead to

reputational risks and in extreme cases, food operation licences

could be revoked. Other risks include food contamination and

tampering risks, outbreak of diseases or viruses in livestock

inducing food scares, exposure to negative publicity, customer

complaints and potential litigation.

May be affected by disease outbreaks and poor weather.

Business could slow during a health crisis or poor weather such

as haze. During Singapore’s haze in October 2015, businesses

were disrupted as consumers hid indoors. The Singapore

government estimated that the haze had resulted in economic

losses of about S$700m.

Company Background

Koufu is a leading foodcourt and coffee shop operator in

Singapore with a presence in Macau. It also has other

foodservice formats including tea kiosks, full service and quick

service restaurants.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.9

1.1

1.3

1.5

1.7

0.00

0.05

0.10

0.15

0.20

0.25

2016A 2017A 2018F 2019F 2020F


0.0

5.0

10.0

15.0

20.0

25.0

2016A 2017A 2018F 2019F 2020F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2016A 2017A 2018F 2019F 2020F

Avg: 13.9x

+1sd: 14.4x

+2sd: 14.9x

-1sd: 13.3x

-2sd: 12.8x

11.5

12.5

13.5

14.5

15.5

16.5

Jul-18 Oct-18

(x)

Avg: 4.36x

+1sd: 4.76x

+2sd: 5.15x

-1sd: 3.97x

-2sd: 3.57x

3.2

3.7

4.2

4.7

5.2

5.7

Jul-18 Oct-18

(x)

Company Guide

Koufu Group Ltd

Key Assumptions

FY Dec 2016A 2017A 2018F 2019F 2020F

Outlet count 157 157 169 176 181

Revenue per outlet (S$m) 0.61 0.61 0.60 0.60 0.60

Segmental Breakdown

FY Dec 2016A 2017A 2018F 2019F 2020F

Revenues (S$m) Outlet and mall management

102 105 106 114 117

F&B retail business 113 111 117 125 129

Total 215 217 223 239 246

Operating profit (S$m) Outlet and mall management

10.9 13.5 13.6 14.6 15.0

F&B retail business 26.3 24.6 25.9 27.7 28.5

Others (7.6) (7.4) (9.8) (8.5) (9.3)

Total 29.6 30.7 29.7 33.8 34.2

Operating profit Margins (%) Outlet and mall management

10.7 12.8 12.8 12.8 12.8

F&B retail business 23.3 22.1 22.1 22.1 22.1

Others N/A N/A N/A N/A N/A

Total 13.8 14.2 13.3 14.1 13.9

Income Statement (S$m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Revenue 215 217 223 239 246

Cost of Goods Sold (35.9) (35.4) (35.4) (39.1) (40.2)

Gross Profit 179 181 187 200 206

Other Opng (Exp)/Inc (150) (151) (158) (166) (172)

Operating Profit 29.6 30.7 29.7 33.8 34.2

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 0.27 0.29 0.30 0.30 0.40

Net Interest (Exp)/Inc 0.72 1.12 0.04 (2.6) (2.6)

Exceptional Gain/(Loss) 0.0 0.0 (1.3) (0.2) 0.0

Pre-tax Profit 30.6 32.1 28.7 31.3 32.0

Tax (4.7) (5.3) (4.8) (5.2) (5.3)

Minority Interest 0.0 0.05 (0.1) 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 25.9 26.9 23.9 26.1 26.7

Net Profit before Except. 25.9 26.9 25.2 26.3 26.7

EBITDA 40.2 40.1 41.5 108 110

Growth

Revenue Gth (%) 8.3 0.7 2.9 7.3 2.9

EBITDA Gth (%) 18.9 (0.4) 3.5 159.1 2.4

Opg Profit Gth (%) 28.3 3.6 (3.3) 13.9 1.2

Net Profit Gth (Pre-ex) (%) 25.6 3.8 (6.4) 4.6 1.5

Margins & Ratio

Gross Margins (%) 83.3 83.7 84.1 83.7 83.7

Opg Profit Margin (%) 13.8 14.2 13.3 14.1 13.9

Net Profit Margin (%) 12.0 12.4 10.7 10.9 10.9

ROAE (%) 27.8 36.8 33.4 24.5 22.3

ROA (%) 14.9 18.3 17.6 10.9 8.1

ROCE (%) 21.5 30.5 30.6 12.7 8.7

Div Payout Ratio (%) 20.1 315.7 50.0 50.0 50.0

Net Interest Cover (x) NM NM NM 12.8 13.1


Company Guide

Koufu Group Ltd

Quarterly / Interim Income Statement (S$m)

FY Dec 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018

Revenue 55.6 54.2 55.1 54.2 57.6

Cost of Goods Sold (9.1) (8.7) (8.7) (8.8) (9.0)

Gross Profit 46.5 45.5 46.4 45.3 48.6

Other Oper. (Exp)/Inc (38.4) (37.1) (39.0) (38.2) (41.8)

Operating Profit 8.08 8.31 7.37 7.17 6.81



Net Interest (Exp)/Inc 0.31 0.32 0.0 0.0 0.03

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 (1.3)

Pre-tax Profit 8.49 8.63 7.44 7.21 5.64

Tax (1.4) (1.4) (1.3) (1.1) (1.0)

Minority Interest 0.02 0.04 0.0 0.0 0.0

Net Profit 7.09 7.24 6.15 6.08 4.64

Net profit bef Except. 7.09 7.24 6.15 6.08 5.94

EBITDA 10.4 10.5 10.4 10.3 10.1

Growth

Revenue Gth (%) 3.9 (2.5) 1.7 (1.7) 6.3

EBITDA Gth (%) 350.6 0.8 (1.1) (1.0) (1.9)

Opg Profit Gth (%) 12.9 2.9 (11.3) (2.8) (5.0)

Net Profit Gth (Pre-ex) (%) 12.3 2.1 (15.1) (1.1) (2.3)

Margins

Gross Margins (%) 83.6 83.9 84.3 83.7 84.4

Opg Profit Margins (%) 14.5 15.3 13.4 13.2 11.8

Net Profit Margins (%) 12.8 13.4 11.2 11.2 8.1

Balance Sheet (S$m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 16.8 18.9 22.9 171 189

Invts in Associates & JVs 0.29 0.40 0.70 1.00 1.40

Other LT Assets 28.3 22.9 23.6 24.1 24.4

Cash & ST Invts 62.4 53.0 104 109 115

Inventory 1.46 1.30 1.55 1.29 1.76

Debtors 0.26 0.32 0.30 0.32 0.33

Other Current Assets 77.3 10.4 10.4 10.4 10.4

Total Assets 187 107 164 317 343

ST Debt 9.08 0.18 0.18 0.18 0.18

Creditor 3.72 4.19 3.88 4.28 4.41

Other Current Liab 53.5 49.1 49.1 49.1 49.1

LT Debt 7.67 1.57 1.57 1.57 1.57

Other LT Liabilities 10.0 9.06 9.15 149 161

Shareholder’s Equity 103 43.0 99.9 113 126

Minority Interests 0.0 0.15 0.15 0.15 0.15

Total Cap. & Liab. 187 107 164 317 343

Non-Cash Wkg. Capital 21.8 (41.3) (40.8) (41.4) (41.1)

Net Cash/(Debt) 45.7 51.3 103 107 113

Debtors Turn (avg days) 0.6 0.5 0.5 0.5 0.5

Creditors Turn (avg days) 39.3 40.7 41.6 38.1 39.4

Inventory Turn (avg days) 13.4 14.2 14.7 13.2 13.8

Asset Turnover (x) 1.2 1.5 1.6 1.0 0.7

Current Ratio (x) 2.1 1.2 2.2 2.2 2.4

Quick Ratio (x) 0.9 1.0 2.0 2.0 2.2

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) 51.4 660.9 878.8 1,209.4 1,138.3


Company Guide

Koufu Group Ltd

Cash Flow Statement (S$m)

FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 30.6 32.1 28.7 31.3 32.0

Dep. & Amort. 10.3 9.08 11.5 73.4 75.5

Tax Paid (4.1) (4.0) (4.8) (5.2) (5.3)

Assoc. & JV Inc/(loss) (0.3) (0.3) (0.3) (0.3) (0.4)

Chg in Wkg.Cap. (2.9) 11.6 (1.4) 0.15 (0.7)

Other Operating CF (0.3) 2.47 0.0 (61.0) (61.0)

Net Operating CF 33.5 51.0 33.8 38.4 40.1

Capital Exp.(net) (8.6) (11.6) (15.4) (21.3) (20.0)

Other Invts.(net) (4.4) 20.1 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 1.10 56.8 0.0 0.0 0.0

Net Investing CF (11.9) 65.2 (15.4) (21.3) (20.0)

Div Paid (6.1) (86.5) (11.9) (13.1) (13.4)

Chg in Gross Debt (1.3) (24.9) 0.0 0.0 0.0

Capital Issues 0.0 0.0 45.0 0.0 0.0

Other Financing CF (0.6) (0.2) 0.0 0.0 0.0

Net Financing CF (8.0) (112) 33.1 (13.1) (13.4)

Currency Adjustments (0.8) (0.6) 0.0 0.0 0.0

Chg in Cash 12.8 4.00 51.4 4.06 6.71

Opg CFPS (S cts) 6.54 7.09 6.33 6.88 7.35

Free CFPS (S cts) 4.48 7.09 3.30 3.08 3.62



Source: DBS Bank

Analyst: Alfie YEO

Andy SIM, CFA

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 27 Aug 18 0.66 0.84 BUY


1

0.58

0.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

Jul-18 Aug-18 Aug-18 Aug-18 Sep-18 Sep-18 Oct-18 Oct-18 Nov-18

S$

Company Guide

Koufu Group Ltd

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:








Sources for all charts and tables are DBS Bank unless otherwise specified.


This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated

corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)

redistributed without the prior written consent of DBS Bank Ltd.































Company Guide

Koufu Group Ltd






in market-making.














the DBS Group.


1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates do not have aproprietary position in the securities recommended in this report as of 31 Oct 2018.



3. DBS Bank Ltd, DBS HK, DBSVS their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 monthsfor investment banking services from Koufu Group Ltd as of 31 Oct 2018.

4. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering ofsecurities for Koufu Group Ltd in the past 12 months, as of 31 Oct 2018.

5. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as amanager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain furtherinformation, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this documentshould contact DBSVUSA exclusively.


6. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published otherinvestment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.



ed: JS/ sa: MA, CW, CS

BUY Last Traded Price ( 26 Nov 2018): S$0.67 (STI : 3,093.38)

Price Target 12-mth: S$0.87 (29% upside) (Prev S$0.94)

Analyst Andy SIM, CFA +65 6682 3718 [email protected] Alfie YEO +65 6682 3717 [email protected]

What’s New • FY18 weak; core attributable net profit fell by 19%

• Spirits and Beer registered lower profits on lower

domestic volumes, while NAB losses widened; Food

segment shines

• Final DPS of THB0.24; FY18 payout ratio at 53%

• Maintain BUY, TP revised to S$0.87; Expect upturn

from 1Q19 and growth in FY19

Price Relative

Forecasts and Valuation FY Sep (Btm) 2017A 2018A 2019F 2020F

Revenue 189,997 229,695 265,816 282,984 EBITDA 36,767 36,733 44,122 49,158 Pre-tax Profit 39,812 25,332 32,642 37,764 Net Profit 34,510 18,530 23,170 26,690 Net Pft (Pre Ex.) 26,013 20,988 23,170 26,690 Net Pft Gth (Pre-ex) (%) 37.5 (19.3) 10.4 15.2 EPS (S cts) 5.71 3.07 3.83 4.42 EPS Pre Ex. (S cts) 4.31 3.47 3.83 4.42 EPS Gth Pre Ex (%) 37 (19) 10 15 Diluted EPS (S cts) 5.71 3.07 3.83 4.42 Net DPS (S cts) 2.78 1.62 2.08 2.29 BV Per Share (S cts) 21.3 20.1 21.8 23.9 PE (X) 11.7 21.8 17.5 15.2 PE Pre Ex. (X) 15.6 19.3 17.5 15.2 P/Cash Flow (X) 13.7 18.2 15.7 13.3 EV/EBITDA (X) 11.9 17.2 14.2 12.6 Net Div Yield (%) 4.2 2.4 3.1 3.4 P/Book Value (X) 3.1 3.3 3.1 2.8 Net Debt/Equity (X) 0.2 1.5 1.3 1.1 ROAE (%) 27.7 14.8 18.3 19.3 Earnings Rev (%): (16) (12) Consensus EPS (S cts): 4.20 4.60 Other Broker Recs: B: 15 S: 2 H: 3

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Darkest before dawn; expect upturn in FY19F

Expecting upturn in FY19F. We maintain our BUY

recommendation on ThaiBev with a revised TP of S$0.87. The

share price has underperformed this year, and we believe

negatives are priced in. The slow consumption in Thailand is

temporary and we should see improvements ahead, driven by:

(i) the lead up to the expected elections as well as the King’s

coronation; and (ii) anticipated recovery in farm income which

has recently turned to record positive growth. Looking forward

to 1Q19 (quarter to Dec-2018), we expect earnings to return to

growth. The counter is trading at 17.5x FY19F core earnings,

which is near to -2SD of its 5-year historical average forward PE.

Where we differ? Look past weak FY18; high gearing mitigated

by strong OCF. The market has been concerned about weak

Thai domestic alcohol sales, which we believe is temporary and

priced in. We advocate looking beyond these issues and

position for an eventual recovery. In addition, ThaiBev’s gearing

should progressively taper down over the forecast years given its

stable and strong operating cashflow.

Potential catalysts. Demand pick up in Thailand, realisation of

benefits from the acquisition of Saigon Beer Alcohol Beverage

Joint Stock Company (Sabeco), market share gains in beer and

non-alcoholic beverages, a faster turnaround in non-alcoholic

beverages, and monetisation/partial divestment of its stake in

Frasers Property Limited. Valuation:

Our TP is revised to S$0.87 as we lower our earnings

projections. Our TP is based on sum-of-parts valuation, derived

via discounted cashflows of its core operations, and fair values

for its stakes in listed associates.


Expectations of upturn in demand misplaced. Our current

thesis is premised on demand recovery on the back of recovery

in farm income; and, if not sustained or misplaced, could

present downside risks. At A Glance Issued Capital (m shrs) 25,111

Mkt. Cap (S$m/US$m) 16,825 / 12,237


Siriwana Co.Ltd 45.3

Maxtop Management Corp 20.6

Capital Group Cos Inc/The 5.0

Free Float (%) 29.1


ICB Industry : Consumer Goods / Beverages


27 Nov 2018

Singapore Result

Thai Beverage Public Company Version 11 | Bloomberg: THBEV SP | Reuters: TBEV.SI Refer to important disclosures at the end of this report

Result

Thai Beverage Public Company

WHAT’S NEW

FY18 a year to forget; expect upturn in FY19F

Maintain BUY, position for growth in FY19F. Despite weak

FY18 results, we maintain our positive view on the counter as

we expect that the worst operational performance is behind

us, and we should see the group return to a growth trajectory

in FY19F. The c.28% YTD decline in share price has priced in

the negative operating performance and the weak domestic

consumption, in our view. Looking into 1Q19F, we expect

operating performance to turn up as it enters into the peak

season, coupled with a lower base effect compared to 1Q18

when destocking had taken place arising from the increase in

excise tax in the prior quarter.

Valuation attractive at near to -2SD of 5-year average. We

continue to believe the slow consumption in Thailand is

temporary and we should see gradual improvement. This will

be driven by: (i) lead up to the expected election in 2019; (ii)

recovery in workers and farm income, albeit offset by high

household debt. We have trimmed our earnings by 16%/12%

for FY19F/20F on the back of lower sales volume and margins

from spirits and beer. Nonetheless, the counter is trading at

17.5x FY19F core earnings, which is near to -2SD below its 5-

year historical average forward PE of c.22x.

Results: Weak FY18; 4Q18 likely a kitchen sinking quarter.

FY18 a year to forget; core attributable net profit fell 19%.

ThaiBev’s FY18 results was weaker than expected. Headline net

profit registered a drop of 46% y-o-y largely due to the

absence of a fair value gains recognised by its associate (F&N)

on an investment coupled with costs relating to the acquisition.

These amounted to THB8.5bn and THB2.5bn, respectively.

Excluding that, core net profit (attributable to shareholders)

would have declined c.19.1% y-o-y to THB21bn, due to drop

in profits from its Spirits and Beer business, and higher losses

from its Non-Alcoholic Business (NAB).

Final DPS of THB0.24. A final DPS of THB0.24 was proposed,

down from THB0.47 last year. Along with the interim dividend

of THB0.15 paid, this equates to a payout ratio of 53%,

compared to 65% payout (excluding exceptional fair value

gain) in FY17. The final DPS is a tad below our expectations

due to the lower profits, though the cut in payout ratio is

expected given the group’s gearing from recent acquisitions.

4Q18 a kitchen sinking quarter? While 4Q18 revenue

increased by 17.3% y-o-y to THB55.8bn, net profit registered

34% y-o-y decline to THB3.3bn. The increase in topline was

helped by contribution from Beer and Food segments, arising

from its acquisitions earlier in the financial year, offset by drop

in Spirits and NAB. The drop in net profit was mainly due to

decline in Spirits contribution, which fell by c.28% y-o-y to

THB3.6bn. The seemingly huge decline could be partly

attributed to a high base effect in 4Q17 arising from agents/

distributors stocking up in anticipation of the excise duty

increase in Sep 2017.

For FY18, group revenue was THB229.7bn, an increase of 21%

y-o-y, on the back of increased contribution in beer (+64.8 %

y-o-y) due to acquisition and consolidation of Saigon Beer

(Sabeco), food business (+96.8%) but offset partially by decline

in its Spirits revenue (-3.1%) and Non-Alcoholic Beverages (-

3.5%).

Total Spirits volume growth contributed by Grand Royal, but

domestic volume sales declined. For FY18, Spirits registered

1.2% y-o-y growth in volume to 612.4m litres, which was

contributed by Grand Royal. Excluding this, Spirits sales volume

declined by 11.5% in Thailand. We believe the decline is partly

due to the stocking up prior to the increase in excise duties in

Sep 2017, thus leading to a high base effect. Coupled with an

increase in SG&A expenses, Spirits EBIT margins dipped by

2.4ppts to 21.1% in FY18, compared to the same period a

year ago. As a result, attributable net profit from Spirits

dropped by 16.9% y-o-y to THB16.98bn in FY18, from

THB20.4bn in FY17.

Domestic beer also dropped, offset by Sabeco’s contribution.

Similar to the situation seen in Spirits, revenue for Beer

segment was helped by consolidation of Sabeco, leading to a

surge in revenue to THB94.5bn (+64.8% y-o-y). Excluding

Sabeco, beer sales volume declined by 11.4% y-o-y. As a

result, Beer segment’s attributable net profit dropped by

53.2% to THB1.46bn, from THB3.13bn a year ago. According

to the company’s announcement, the group’s acquisition of

Sabeco contributed positively to its beer bottomline, although

we believe it was relatively small.

Non-Alcoholic Beverages losses widen. Continuing the trend

from 2Q18, NAB losses widened in FY18, due to changes in

product mix. The group saw a decline in sales volume of ready

to drink tea, Jubjai and 100Plus, offset partially by higher sales

of drinking water and carbonated soft drinks. Net loss for the

segment widened to THB1.3bnm, up by 33% y-o-y.

Food segment contributed positively. Revenue for Food

segment almost doubled to THB13.3bn (+96.8% y-o-y),

largely arising from increase in restaurants along with recent

acquisitions. Along with that and an increase in operating

leverage and margins, attributable net profit jumped to

THB521m (+624% y-o-y), from THB72m.

Result


Valuation and forecasts

Maintain BUY, TP revised to S$0.87. Despite the weak FY18

results, we maintain our view that we have seen the bottom

of its operational performance and we should see

improvements going forward. The drop in profits in FY18, in

our view, other than a weak domestic consumption

environment, could be partly due to a high base effect arising

from stocking up prior to the excise duty increase in Sep

2017. We believe consumption would recover on the back of

(i) upcoming elections stimulating demand; and, (ii) improving

farmers and workers’ income.

Projecting FY19/20F earnings returning to growth at

10%/15%. We trimmed our earnings forecasts by 16%/12%

for FY19F/20F on the back of lower sales volume and margins

from spirits and beer.

Notwithstanding our earnings revision, we are projecting

earnings growth of 10%/15% for FY19F/20F. The counter is

trading at 17.5x FY19F core earnings, which is near to -2SD

below its 5-year historical average forward PE of c.22x.

Quarterly / Interim Income Statement (Btm)

FY Sep 4Q2017 3Q2018 4Q2018 % chg yoy % chg qoq

Revenue 47,537 60,708 55,779 17.3 (8.1)

Cost of Goods Sold (33,381) (44,005) (38,992) 16.8 (11.4)

Gross Profit 14,156 16,704 16,787 18.6 0.5

Other Oper. (Exp)/Inc (7,712) (10,140) (12,204) 58.2 20.4

Operating Profit 6,443 6,564 4,583 (28.9) (30.2)

Other Non Opg (Exp)/Inc 124 278 1,121 804.2 302.7

Associates & JV Inc (42.1) 2,136 552 nm (74.2)

Net Interest (Exp)/Inc (237) (1,236) (1,596) (573.2) (29.2)

Exceptional Gain/(Loss) (32.0) 0.0 (114) (255.3) nm

Pre-tax Profit 6,256 7,743 4,547 (27.3) (41.3)

Tax (1,190) (1,096) (919) (22.8) (16.1)

Minority Interest (60.8) (656) (345) (467.8) (47.4)

Net Profit 5,005 5,991 3,282 (34.4) (45.2)

Net profit bef Except. 5,037 5,991 3,396 (32.6) (43.3)

EBITDA 6,525 8,978 6,256 (4.1) (30.3)

Margins (%)

Gross Margins 29.8 27.5 30.1

Opg Profit Margins 13.6 10.8 8.2

Net Profit Margins 10.5 9.9 5.9

Source of all data: Company, DBS Bank

Result



Critical Factors

In our study of historical share price movements and events

surrounding these movements, ThaiBev’s share price is marked

by several key periods (as indicated in Chart A1). In fact, prior to

May 2012, its share price had been relatively muted, given a

relatively subdued growth profile. We note that ThaiBev tends

to be viewed as a defensive counter, outperforming when the

market corrects and underperforming in an economic recovery.

Earnings growth is a critical factor. In our view, EPS growth is a

main driver of its share price, as can be seen in Chart A2, where

we plot ThaiBev’s share price vs 12-month forward EPS. In fact,

the correlation is 0.98 between the two variables. Going

forward, we are projecting increased segmental profits from

Beer’s contribution, coupled with turnaround in its Non-

Alcoholic Beverage segment.

Leading market share in beer by 2020. ThaiBev’s management

aims to achieve a leading market share in beer by 2020,

implying a share of about 45%. This was set in 2015 in its

Vision 2020 plans. Since the relaunch of Chang Beer, its beer

market share has jumped from c.30% to about 40% currently.

In fact, based on the previous target set in 2015 (when market

share was about 30%), a proportionate linear increase is about

3-ppt share increase per year. Within a year of Chang’s

relaunch, it had gained 10ppts, faster than expectations. Going

forward, we project continued increase, driven by consistent

and targeted marketing activities, and leveraging on its

widespread distribution network.

Turnaround in NAB will aid growth. Management targets to

achieve breakeven for Non-Alcoholic Beverages (NAB) by FY20F.

This segment still incurred net losses in FY18, which had

widened vs FY17 on the back of lower sales volume. We have

dialed back our assumptions for NAB and are forecasting

earnings turnaround for NAB in FY20F instead, but lower losses

in FY19F compared to FY18. Achieving breakeven will

contribute to bottom-line growth for the group.

Catalysts for share price performance. (i) Increased profits from

the Spirits segment due to consumption recovery and margin

expansion from excise-duty increase and up-selling; (ii) further

traction in the Beer segment to become the leading market

player by 2020; (iii) a turnaround in Non-Alcoholic Beverages;

(iii) monetisation and/or partial divestment of its stake in Frasers

Property Limited; and (iv) tangible results of synergies,

particularly pertaining to the acquisition of Sabeco.

Sprits vol gwth (%)

Spirits ASP gwth (%)

Beer vol gwth (%)

Beer ASP gwth (%)

Non-Alc Bev rev gwth (%)


Result


Appendix 1: A look at Company's listed history – what drives its share price?

Chart A1: Summary of significant events driving ThaiBev’s share price

Legend

A. Post-IPO in 2006, share price traded range bound due to muted growth. Outperformed peers heading into GFC till Oct’08 given defensive

profile (strong cashflow, >5% yield). Bottomed in Mar’09, but recovery lagged peers with defensive profile. Lack of widespread interest

given slow growth outlook. Acquired Thai consumer companies (Oishi, Serm Suk), but stock price failed to perform.

B. Acquired stake in FNN in July’12; with interest on counter up on surprise factor. Strong EPS growth on stocking up prior to excise duty

increase, corporate tax rate cuts. Share price up on clearer signs that FNN will be taken private by TCC/ ThaiBev. Surged to high on cash

distribution, helping to deleverage ThaiBev.

C. Uncertainties on drivers post FNN acquisition, writ of summons by MBL partner, surprise excise duty increase in Nov’13 (just one year

following from Aug’12’s increase), political uncertainty, effects of corporate tax cuts wears off.

D. Resilient results despite excise hikes. Signs of limited impact from political uncertainty, coup, expectations of corporate restructuring on

FNN/ FCL.

E. In absolute terms, share price flat but resilient vs peers. Uncertainty on corporate restructuring angle (dilutive) and expected excise duty

(based on alternate year timeline), extent of impact from beer relaunch.

F. Success of beer brand relaunch, with strong gains in beer market share seen and beer operations posted strong turnaround.

G. Correction post strong share price performance, and concerns of competitive reaction on beer, coupled with impact on consumption from

mourning period. ThaiBev announced three acquisitions – KFC franchise in Thailand, acquisition of 75% stake in Grand Royal whisky in

Myanmar and 53.59% stake in Saigon Beer (via 49% owned subsidiary, Vietnam Beverage Ltd).

E (Aug 07) – Excise duties increase (Dates): Aug’07, May’09, Aug’12, Nov’13, Sep’17

#A (Oishi) – Acquisitions (selected) undertaken by ThaiBev

Source: ThomsonReuters, DBS Bank

Result


Chart A2: ThaiBev’s share price vs EPS

Share price tracks 12-month forward EPS forecasts.

Re-rating from 2012, driven by EPS growth expected from margins expansion after excise tax increase, coupled with acquisition of stake in FNN.

Source: ThomsonReuters, DBS Bank

Result


Balance Sheet:

Gearing spiked up with the recent spate of acquisitions. The

group’s net gearing has increased significantly to c.1.65x (as of

Sep’18) after touching a low of 0.22x (as of end-FY17),

following its spate of acquisitions, particularly a 53.59% stake

in Sabeco by its JV. With net gearing now at c.1.65x,

management’s focus is on deleveraging, which we project

should be seen progressively given its stable and strong

operating cashflow.


Deleveraging and potential synergies/ earnings accretion from

acquisitions. With its recent acquisition spree, the group has

successfully leapt meaningfully outside Thailand, in our view.

However, gearing has also increased. While we believe its

strong internal cashflow lowers risks and probability of equity-

raising, a clear deleveraging plan and tangible results leading to

earnings accretion could help the share price to re-rate.

Changes in excise taxes. More than 50% of the group’s revenue

goes to excise duties. A change in excise tax would impact the

share price, and depending on whether the group is able to

pass on the cost increases to consumers, its share price could be

positively or negatively affected.

Recovery in domestic consumption and increase in Spirits/Beer

volumes. Consumption has been weaker than expected and a

recovery in sales of Spirits and Beer could allay concerns that the

recent decline is cyclical rather than structural.

Key Risks:

Prolonged slump in consumer sentiment. A prolonged slump

in the Thai economy could impact consumption, and hence our

forecasts. Vice versa, a pick-up in economic activity could offer

upside potential.

Political situation in Thailand. A change or deterioration in the

uncertain political situation in Thailand could have an adverse

impact on the broader economy and private consumption.

Further excise tax hikes. Further increases in excise duties

without a commensurate increase in ASP.

Company Background

ThaiBev is a leading beverage producer in Thailand, with

business segments spanning spirits, beer, non-alcoholic

beverages, and food. Its key brands are Sangsom, Hong

Thong, and Chang. It has 28.5%/ 28.3% associate stakes in

both Singapore-listed Fraser & Neave Ltd (FNN) and Frasers

Property Limited (FPL). It recently acquired a 53.59% stake in

Sabeco, via a 49%-owned JV entity.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Result


Key Assumptions

FY Sep 2016A 2017A 2018A 2019F 2020F

Sprits vol gwth (%) (1.8) 6.30 (9.3) 1.00 1.00

Spirits ASP gwth (%) (1.8) 0.60 2.00 2.00 2.00

Beer vol gwth (%) 32.9 (5.3) (33.6) 2.00 5.00

Beer ASP gwth (%) 3.30 2.20 2.00 3.00 3.00

Non-Alc Bev rev gwth (%) 7.50 (5.3) (3.5) 5.00 5.00

Segmental Breakdown

FY Sep 2016A 2017A 2018A 2019F 2020F

Revenues (Btm)

Spirits 76,649 109,297 105,900 111,380 114,887

Beer 44,397 57,326 94,486 123,942 136,080

Non-Alcoholic Bev. 13,290 16,777 16,184 16,993 17,843

Food 4,993 6,742 13,265 13,663 14,346

Others (176) (145) (140) (162) (172)

Total 139,153 189,997 229,695 265,816 282,984

Operating profit (Btm)

Spirits 18,081 25,468 21,888 23,390 25,275

Beer 3,060 3,533 5,724 10,279 12,314

Non-Alcoholic Bev. (1,811) (1,727) (2,971) (680) 178

Food 37.0 95.0 858 1,093 1,148

Others 16.0 155 126 126 126

Total 19,383 27,524 25,625 34,209 39,042

Operating profit Margins (%) Spirits 23.6 23.3 20.7 21.0 22.0

Beer 6.9 6.2 6.1 8.3 9.0

Non-Alcoholic Bev. (13.6) (10.3) (18.4) (4.0) 1.0

Food 0.7 1.4 6.5 8.0 8.0

Others (9.1) (106.9) (90.0) (77.8) (73.1)

Total 13.9 14.5 11.2 12.9 13.8

Income Statement (Btm)

FY Sep 2016A 2017A 2018A 2019F 2020F

Revenue 139,153 189,997 229,695 265,816 282,984

Cost of Goods Sold (97,591) (131,899) (162,477) (185,089) (194,420)

Gross Profit 41,562 58,098 67,218 80,726 88,564

Other Opng (Exp)/Inc (22,130) (30,539) (41,510) (46,518) (49,522)

Operating Profit 19,433 27,559 25,708 34,209 39,042

Other Non Opg (Exp)/Inc 647 622 2,115 620 620

Associates & JV Inc 3,375 4,073 4,230 4,449 4,485

Net Interest (Exp)/Inc (776) (939) (4,264) (6,635) (6,383)

Exceptional Gain/(Loss) 0.0 8,497 (2,458) 0.0 0.0

Pre-tax Profit 22,679 39,812 25,332 32,642 37,764

Tax (3,643) (5,132) (4,609) (5,639) (6,656)

Minority Interest (117) (171) (2,196) (3,834) (4,418)


Net Profit 18,920 34,510 18,530 23,170 26,690

Net Profit before Except. 18,920 26,013 20,988 23,170 26,690

EBITDA 27,801 36,767 36,733 44,122 49,158

Growth

Revenue Gth (%) (19.1) 36.5 20.9 15.7 6.5

EBITDA Gth (%) (23.8) 32.3 (0.1) 20.1 11.4

Opg Profit Gth (%) (16.9) 41.8 (6.7) 33.1 14.1

Net Profit Gth (Pre-ex) (%) (28.5) 37.5 (19.3) 10.4 15.2

Margins & Ratio

Gross Margins (%) 29.9 30.6 29.3 30.4 31.3



ROAE (%) 16.0 27.7 14.8 18.3 19.3

ROA (%) 10.2 18.1 6.2 5.7 6.5

ROCE (%) 9.6 13.7 7.6 7.4 8.4

Div Payout Ratio (%) 79.6 48.8 52.9 54.2 51.7

Net Interest Cover (x) 25.1 29.4 6.0 5.2 6.1


Result


Quarterly / Interim Income Statement (Btm) FY Sep 4Q2017 1Q2018 2Q2018 3Q2018 4Q2018

Revenue 47,537 45,604 67,604 60,708 55,779


Gross Profit 14,156 13,888 19,839 16,704 16,787

Other Oper. (Exp)/Inc (7,712) (8,312) (10,851) (10,140) (12,204)


Other Non Opg (Exp)/Inc 124 339 377 278 1,121

Associates & JV Inc (42.1) 828 714 2,136 552

Net Interest (Exp)/Inc (237) (399) (1,034) (1,236) (1,596)

Exceptional Gain/(Loss) (32.0) (2,350) 5.82 0.0 (114)

Pre-tax Profit 6,256 3,993 9,053 7,743 4,547

Tax (1,190) (975) (1,620) (1,096) (919)

Minority Interest (60.8) (106) (1,088) (656) (345)

Net Profit 5,005 2,912 6,345 5,991 3,282

Net profit bef Except. 5,037 5,262 6,339 5,991 3,396

EBITDA 6,525 6,743 10,081 8,978 6,256

Growth

Revenue Gth (%) 5.0 (4.1) 48.2 (10.2) (8.1)

EBITDA Gth (%) (19.9) 3.3 49.5 (10.9) (30.3)

Opg Profit Gth (%) 3.2 (13.5) 61.2 (27.0) (30.2)

Net Profit Gth (Pre-ex) (%) (25.2) 4.5 20.5 (5.5) (43.3)

Margins

Gross Margins (%) 29.8 30.5 29.3 27.5 30.1



Balance Sheet (Btm)

FY Sep 2016A 2017A 2018A 2019F 2020F

Net Fixed Assets 47,871 48,532 57,059 58,770 60,316

Invts in Associates & JVs 78,463 78,373 78,870 81,119 83,404

Other LT Assets 11,216 11,415 190,384 190,327 190,271

Cash & ST Invts 5,063 9,930 22,530 24,409 16,661

Inventory 38,145 37,761 42,185 44,444 46,703

Debtors 2,588 2,627 4,297 5,098 5,427

Other Current Assets 4,307 5,603 6,084 6,084 6,084

Total Assets 187,653 194,240 401,409 410,250 408,865

ST Debt 18,996 30,654 14,483 7,483 7,483

Creditor 4,532 4,797 7,903 5,926 6,227

Other Current Liab 9,290 12,219 15,073 18,444 19,461

LT Debt 25,089 10,000 216,804 216,804 196,804

Other LT Liabilities 6,033 4,057 6,575 6,575 6,575

Shareholder’s Equity 120,070 128,780 121,146 131,760 144,639

Minority Interests 3,642 3,733 19,425 23,259 27,677

Total Cap. & Liab. 187,653 194,240 401,409 410,250 408,865

Non-Cash Wkg. Capital 31,218 28,975 29,590 31,255 32,526

Net Cash/(Debt) (39,022) (30,724) (208,756) (199,878) (187,625)




Asset Turnover (x) 0.8 1.0 0.8 0.7 0.7

Current Ratio (x) 1.5 1.2 2.0 2.5 2.3

Quick Ratio (x) 0.2 0.3 0.7 0.9 0.7

Net Debt/Equity (X) 0.3 0.2 1.5 1.3 1.1

Net Debt/Equity ex MI (X) 0.3 0.2 1.7 1.5 1.3

Capex to Debt (%) 6.4 13.2 2.3 2.9 3.2

Z-Score (X) 2.2 2.5 2.7 2.7 2.7


Acquisition related costs

High base arising from agents stocking up prior to excise increase in Sep 2017

Result


Cash Flow Statement (Btm)

FY Sep 2016A 2017A 2018A 2019F 2020F

Pre-Tax Profit 22,679 39,812 25,335 32,642 37,764

Dep. & Amort. 3,295 4,360 5,812 4,847 5,013

Tax Paid (4,314) (3,635) (6,965) (2,268) (5,639)

Assoc. & JV Inc/(loss) (3,375) (4,073) (4,230) (4,449) (4,485)

Chg in Wkg.Cap. (1,750) 506 571 (5,037) (2,288)

Other Operating CF 1,955 (7,396) 1,760 0.0 0.0

Net Operating CF 18,490 29,575 22,282 25,736 30,366

Capital Exp.(net) (2,822) (5,351) (5,267) (6,500) (6,500)

Other Invts.(net) 0.0 3.66 (186,938) 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 2,356 2,273 2,661 2,200 2,200

Other Investing CF 20.0 21.0 (2,554) 0.0 0.0

Net Investing CF (446) (3,053) (192,098) (4,300) (4,300)

Div Paid (16,670) (15,162) (16,134) (12,556) (13,811)

Chg in Gross Debt 2,009 (5,615) 192,347 (7,000) (20,000)

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (942) (791) 5,871 0.0 0.0

Net Financing CF (15,603) (21,568) 182,083 (19,556) (33,811)

Currency Adjustments (870) (81.6) 335 0.0 0.0

Chg in Cash 1,571 4,872 12,603 1,880 (7,746)

Opg CFPS (S cts) 3.35 4.81 3.59 5.09 5.40

Free CFPS (S cts) 2.59 4.01 2.82 3.18 3.95



Source: DBS Bank

Analyst: Andy SIM, CFA

Alfie YEO

Result


DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:








Sources for all charts and tables are DBS Bank unless otherwise specified.


This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated

corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)

redistributed without the prior written consent of DBS Bank Ltd.































Result







in market-making.














the DBS Group.


1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates have a proprietary

position in Thai Beverage Public Company recommended in this report as of 31 Oct 2018




manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain

further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this

document should contact DBSVUSA exclusively.




months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published

by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12

months.

Directorship/trustee interests:

5. Olivier Lim Tse Ghow, a member of DBS Group Holdings Board of Directors, is a Advisor of Frasers Property Ltd as of 30 Sep 2018.



ed: KK/ sa: CW, CS

BUY Last Traded Price ( 30 Nov 2018): Bt68.25 (SET : 1,641.80)

Price Target 12-mth: Bt83.00 (22% upside)

Analyst Namida ARTISPONG +66 28577833 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Btm) 2017A 2018F 2019F 2020F

Revenue 471,069 510,005 558,871 609,831 EBITDA 40,788 41,955 46,448 51,109 Pre-tax Profit 23,506 25,036 29,255 33,736 Net Profit 19,908 20,863 23,806 26,789 Net Pft (Pre Ex.) 19,908 20,863 23,806 26,789 Net Pft Gth (Pre-ex) (%) 19.9 4.8 14.1 12.5 EPS (Bt) 2.22 2.32 2.65 2.98 EPS Pre Ex. (Bt) 2.22 2.32 2.65 2.98 EPS Gth Pre Ex (%) 20 5 14 13 Diluted EPS (Bt) 2.22 2.32 2.65 2.98 Net DPS (Bt) 1.00 1.16 1.32 1.49 BV Per Share (Bt) 8.38 9.75 11.1 12.6 PE (X) 30.8 29.4 25.8 22.9 PE Pre Ex. (X) 30.8 29.4 25.8 22.9 P/Cash Flow (X) 13.3 15.7 15.0 13.7 EV/EBITDA (X) 18.5 17.7 15.8 14.1 Net Div Yield (%) 1.5 1.7 1.9 2.2 P/Book Value (X) 8.1 7.0 6.2 5.4 Net Debt/Equity (X) 1.7 1.4 1.1 0.9 ROAE (%) 30.5 25.6 25.4 25.2 Earnings Rev (%): 0 0 0 Consensus EPS (Bt): 2.40 2.77 3.19 Other Broker Recs: B: 23 S: 1 H: 7

Source of all data on this page: Company, DBSVTH, Bloomberg Finance L.P

Prime beneficiary of upcoming general election Maintain BUY call. We believe CPALL’s slow earnings growth momentum, pressured by its cash-and-carry business, is already priced in. It is now trading at 26x forward PE, slightly lower than its historical average level of 28x.

Short term pains, long term gains. Although CPALL’s earnings

growth has been pressured from the overseas expansion of its

cash-and-carry business, its consolidating earnings growth

should start gaining traction more clearly in FY19F as 7-Eleven’s

gross margin is likely to start expanding y-o-y once again due to

the same base for a cigarette excise tax hike. Meanwhile, same

stores sale growth (SSSG) should be healthy, due to the

upcoming general election at the beginning of next year.

Additionally, the company will try to restore its service income

growth by adding new services. Lately, CPALL was designated

as, i) the banking agent for the Government Savings Bank,

offering money deposits/withdrawals to customers, ii) a

representative for value added tax (VAT) refund service at its

three branches in Bangkok and, iii) offering delivery services

within 24 hours to customers such as owners of small medium

enterprises (SMEs), e-commerce and start-ups. While its

contribution is still insignificant, this service should pave the way

for higher growth in its service income.

Where we differ? Our FY19F/20F earnings forecasts are lower

than market consensus due to lower gross margin assumptions.

Potential catalysts. Recovery of domestic consumption from the

upcoming general election.

Valuation:

Our TP is based on DCF valuation (WACC 10%, terminal

growth rate 3%).


Key risks are (i) delays in store expansion, (ii) weaker-than-

expected consumer confidence and, iii) intense competition.

At A Glance Issued Capital (m shrs) 8,983

Mkt. Cap (Btm/US$m) 613,097 / 18,591


C.P. Merchandising 30.50

South East Asia Uk (Type C) Nominees Limited 8.63

Thai NDVR 7.60

Free Float (%) 56.4


ICB Industry : Consumer Services / Food & Drug Retailers


3 Dec 2018

Thailand Company Guide

CP ALL Version 13 | Bloomberg: CPALL TB | Reuters: CPALL.BK Refer to important disclosures at the end of this report

79

99

119

139

159

179

199

219

33.8

43.8

53.8

63.8

73.8

83.8

93.8

Nov-14 Nov-15 Nov-16 Nov-17 Nov-18

Relative IndexBt

CP ALL (LHS) Relative SET (RHS)

Company Guide

CP ALL


Critical Factors

Aggressive outlet expansion. As at end-2017, CPALL had a

total of 10,268 outlets nationwide, with 44% in Bangkok and

suburban areas, and the remaining in provincial regions. CPALL

will continue to aggressively expand its network. It targets to

add at least 700 outlets p.a. and targets to reach 13,000 stores

by 2021. Of the total additional 700 stores p.a., 90% of the

new stores would be standalones while another 10% will be

located at PTT gas stations. More than half of the new outlets

will be in provincial areas as there is potential demand, due to a

much higher population catchment per store compared to

Bangkok.

Resilient SSSG. As c.71% of its product mix is generated from

staple foods (ready-to-eat meals, processed foods, bakery,

snacks, beverages) we expect CPALL’s operations and SSSG to

be resilient. As domestic consumption is recovering and

purchasing power is rising, CPALL would benefit as it sells

mainly consumer products.

Solid gross margin. We expect economies of scale from outlet

expansion and larger contribution from higher-margin products

to support CPALL’s margins. With a larger network, CPALL will

be leveraging its high bargaining power on supply contracts.

The group will continue to add high-margin product lines like

ready-to-eat meals and from the health and beauty category,

which yield higher margins than other products.

Lower financing expenses. CPALL has refinanced its loans by

issuing debentures to replace high-cost bank loans. Additionally,

CPALL continues to issue subordinated perpetual debentures

which are classified as equity and would strengthen its balance

sheet.

Same-store-sales (%)

Spending per ticket (Bt)

Customers/store/day

New Stores

Total stores at year end

Source: Company, DBSVTH

2.4

1.6

3.6

3 3

0.0

0.5

1.0

1.6

2.1

2.6

3.1

3.6

2016A 2017A 2018F 2019F 2020F

65 67 69 70.4 71.8

0.0

14.6

29.3

43.9

58.6

73.2

2016A 2017A 2018F 2019F 2020F

1216 1184 1190 1196 1202

0.00

248.06

496.13

744.19

992.26

1240.32

2016A 2017A 2018F 2019F 2020F

710 726700 700 700

0.0

146.7

293.3

440.0

586.6

733.3

2016A 2017A 2018F 2019F 2020F

954210268

1096811668

12368

0.0

2498.3

4996.7

7495.0

9993.3

12491.7

2016A 2017A 2018F 2019F 2020F

Company Guide

CP ALL

Balance Sheet:

Expect gearing to decline. Following the MAKRO acquisition,

CPALL’s net gearing surged to 4.9x in FY13. Nonetheless, its net

gearing dropped to 2.1x as at end-2017, thanks to the nature

of its business – being cash-generative and providing decent

free cash flow.


A pick-up in domestic consumer spending. Spending is likely to

improve going forward, which will benefit all retailers including

CPALL.

Key Risks:

Weak consumer confidence. CPALL’s business may suffer if

consumer confidence (as measured by the Consumer

Confidence Index) in Thailand weakens because of an

economic slowdown or domestic political unrest. In any case,

CPALL tends to adjust its product mix in response to changing

economic conditions.

Unfavourable weather conditions. Customer traffic at CPALL’s

stores mostly involves walk-ins. Unfavourable weather

conditions could deter walk-in customers. CPALL normally

registers softer sales during the rainy season.

Company Background

CP ALL PCL was established in 1988 and is a flagship company

of Charoen Pokphand Group’s marketing and distribution

business. It is the leading operator of convenience store chains

(7-Eleven) in Thailand with the highest market share. It also

operates other related businesses such as bill payment

collection service, manufacturing and sales of frozen foods and

bakery.

Leverage & asset turnover (x)

Capital expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.2

1.3

1.3

1.4

1.4

1.5

1.5

1.6

1.6

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2016A 2017A 2018F 2019F 2020F


15,000.0

15,500.0

16,000.0

16,500.0

17,000.0

17,500.0

18,000.0

18,500.0

19,000.0

19,500.0

2016A 2017A 2018F 2019F 2020F


Bt m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2016A 2017A 2018F 2019F 2020F

Avg: 27.9x

+1sd: 31.2x

+2sd: 34.6x

-1sd: 24.5x

-2sd: 21.2x

18.9

23.9

28.9

33.9

38.9

Dec-14 Dec-15 Dec-16 Dec-17

(x)

Avg: 9.92x

+1sd: 11.45x

+2sd: 12.97x

-1sd: 8.4x

-2sd: 6.87x

5.9

6.9

7.9

8.9

9.9

10.9

11.9

12.9

13.9


(x)

Company Guide

CP ALL

Key Assumptions

FY Dec 2016A 2017A 2018F 2019F 2020F

Same-store-sales (%) 2.40 1.60 3.60 3.00 3.00

Spending per ticket (Bt) 65.0 67.0 69.0 70.4 71.8

Customers/store/day 1,216 1,184 1,190 1,196 1,202

New Stores 710 726 700 700 700

Total stores at year end 9,542 10,268 10,968 11,668 12,368


FY Dec 2016A 2017A 2018F 2019F 2020F

Revenue 434,712 471,069 510,005 558,871 609,831


Gross Profit 95,024 105,067 113,679 125,658 137,825





Net Interest (Exp)/Inc (8,213) (7,754) (6,842) (6,340) (5,645)

Exceptional Gain/(Loss) 77.1 (0.5) 0.0 0.0 0.0

Pre-tax Profit 20,142 23,506 25,036 29,255 33,736

Tax (3,323) (3,487) (4,006) (5,266) (6,747)

Minority Interest (143) (111) (167) (183) (200)


Net Profit 16,677 19,908 20,863 23,806 26,789


EBITDA 36,473 40,788 41,955 46,448 51,109

Growth

Revenue Gth (%) 10.9 8.4 8.3 9.6 9.1

EBITDA Gth (%) 12.0 11.8 2.9 10.7 10.0

Opg Profit Gth (%) 11.9 10.5 2.0 11.7 10.6

Net Profit Gth (Pre-ex) (%) 21.3 19.9 4.8 14.1 12.5

Margins & Ratio

Gross Margins (%) 21.9 22.3 22.3 22.5 22.6



ROAE (%) 36.0 30.5 25.6 25.4 25.2

ROA (%) 4.9 5.6 5.6 6.2 6.9

ROCE (%) 9.1 9.9 9.6 10.4 11.4

Div Payout Ratio (%) 48.5 45.1 50.0 50.0 50.0



Company Guide

CP ALL


FY Dec 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018

Revenue 118,242 123,365 123,652 124,915 125,482


Gross Profit 26,500 27,872 27,438 27,406 28,008





Net Interest (Exp)/Inc (1,955) (1,883) (1,734) (1,743) (1,764)

Exceptional Gain/(Loss) 4.55 8.25 (120) (3.9) 57.8

Pre-tax Profit 5,848 6,356 6,519 5,757 6,245

Tax (853) (817) (1,068) (928) (998)

Minority Interest (25.0) (14.0) (34.2) (49.9) (65.5)

Net Profit 4,970 5,525 5,417 4,779 5,182


EBITDA 10,086 8,960 10,738 9,790 8,681

Growth

Revenue Gth (%) 1.8 4.3 0.2 1.0 0.5

EBITDA Gth (%) 2.0 (11.2) 19.8 (8.8) (11.3)

Opg Profit Gth (%) 3.7 5.5 1.7 (10.4) 6.0

Net Profit Gth (Pre-ex) (%) 6.4 11.1 0.4 (13.6) 7.1

Margins

Gross Margins (%) 22.4 22.6 22.2 21.9 22.3



Balance Sheet (Btm)

FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 99,127 106,394 113,472 119,338 124,335


Other LT Assets 183,242 187,331 182,987 182,906 182,831

Cash & ST Invts 34,819 30,264 45,086 36,060 34,069

Inventory 26,705 27,376 33,150 36,327 39,639

Debtors 1,026 1,601 1,733 1,899 2,073

Other Current Assets 7,349 7,332 8,066 8,872 9,759

Total Assets 352,268 360,299 384,494 385,403 392,705

ST Debt 31,554 21,222 27,799 23,454 20,607

Creditor 66,959 74,742 80,935 88,468 96,390


LT Debt 157,552 145,816 143,336 127,398 114,307



Minority Interests 4,407 4,896 4,945 4,994 5,044

Total Cap. & Liab. 352,268 360,299 384,494 385,403 392,705

Non-Cash Wkg. Capital (47,184) (54,575) (55,682) (60,772) (66,195)

Net Cash/(Debt) (154,287) (136,774) (126,049) (114,792) (100,845)




Asset Turnover (x) 1.3 1.3 1.4 1.5 1.6

Current Ratio (x) 0.6 0.6 0.7 0.6 0.6

Quick Ratio (x) 0.3 0.3 0.4 0.3 0.3

Net Debt/Equity (X) 2.6 1.7 1.4 1.1 0.9


Capex to Debt (%) 10.1 10.7 9.6 10.9 12.2

Z-Score (X) 3.0 3.2 3.2 3.2 3.2


Company Guide

CP ALL


FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 20,142 23,506 25,036 29,255 33,736

Dep. & Amort. 8,195 9,527 10,077 10,853 11,728

Tax Paid (3,322) (3,486) (4,005) (5,265) (6,746)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. 8,060 12,882 1,047 5,027 5,357

Other Operating CF 0.0 0.0 0.0 0.0 0.0

Net Operating CF 37,939 46,156 38,959 40,854 44,927

Capital Exp.(net) (19,010) (17,921) (16,450) (16,450) (16,450)

Other Invts.(net) 27.4 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 188 (2,459) (2,508) (2,558) (2,609)

Net Investing CF (18,794) (20,380) (18,958) (19,008) (19,059)

Div Paid (8,085) (8,983) (9,414) (10,742) (12,088)

Chg in Gross Debt (779) (22,459) 4,097 (20,283) (15,938)

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF 1,631 1,322 0.0 0.0 0.0

Net Financing CF (7,233) (30,120) (5,317) (31,025) (28,026)

Currency Adjustments 12.5 (221) 0.0 0.0 0.0

Chg in Cash 11,925 (4,564) 14,684 (9,178) (2,158)

Opg CFPS (Bt) 3.33 3.70 4.22 3.99 4.40

Free CFPS (Bt) 2.11 3.14 2.50 2.72 3.17



Source: DBSVTH

Analyst: Namida ARTISPONG

THAI-CAC Certified

Corporate Governance CG Rating (as of Oct 2017)

THAI-CAC is Companies participating in Thailand's Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of May 2018) are categorised into:

Score Description

Declared Companies that have declared their intention to join CAC

Certified Companies certified by CAC.

Corporate Governance CG Rating is based on Thai Institute of

Directors (IOD)’s annual assessment of corporate governance

practices of listed companies. The assessment covers 235 criteria

in five categories including board responsibilities (35% weighting),

disclosure and transparency (20%), role of stakeholders (20%),

equitable treatment of shareholders (10%) and rights of

shareholders (15%). The IOD then assigns numbers of logos to

each company based on their scoring as follows:

Score Range Number of Logo Description

90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass

<50 No logo given N/A

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 26 Jan 18 80.25 95.00 BUY

2: 23 Feb 18 84.00 95.00 BUY

3: 29 Mar 18 87.25 95.00 BUY

4: 17 Apr 18 83.25 95.00 BUY

5: 02 May 18 88.00 95.00 BUY

6: 14 May 18 86.50 95.00 BUY

7: 05 Jul 18 76.50 95.00 BUY

8: 10 Aug 18 71.25 89.00 BUY

9: 26 Oct 18 63.75 83.00 BUY

10: 14 Nov 18 69.75 83.00 BUY

11: 16 Nov 18 69.25 83.00 BUY


1

23 4 5

6

7

8

9

10

11

59.85

64.85

69.85

74.85

79.85

84.85

89.85

Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18

Bt

Company Guide

CP ALL

DBSVTH recommendations are based an Absolute Total Return* Rating system, defined as follows:







Completed Date: 3 Dec 2018 11:31:24 (THA) Dissemination Date: 13 Dec 2018 06:46:36 (THA)

Sources for all charts and tables are DBSVTH unless otherwise specified.


This report is prepared by DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). This report is solely intended for the clients of DBS Bank Ltd, its

respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in

any form or by any means or (ii) redistributed without the prior written consent of DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH'').































Company Guide

CP ALL






in market-making.














the DBS Group.


1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates have a

proprietary position in CP ALL recommended in this report as of 31 Oct 2018

2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research

Report.


3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of

securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons

wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any

security discussed in this document should contact DBSVUSA exclusively.


4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published

other investment recommendations in respect of the same securities / instruments recommended in this research report during the

preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment

recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other

affiliates in the preceding 12 months.



ed: KK/ sa: CW, CS

BUYLast Traded Price ( 30 Nov 2018): Bt15.20 (SET : 1,641.80)

Price Target 12-mth: Bt17.50 (15% upside)

Analyst Namida ARTISPONG +66 28577833 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Btm) 2017A 2018F 2019F 2020F

Revenue 59,888 62,921 67,613 73,726 EBITDA 9,501 10,786 12,120 13,374 Pre-tax Profit 5,987 7,054 8,068 9,033 Net Profit 4,886 5,672 6,485 7,227 Net Pft (Pre Ex.) 4,886 5,672 6,485 7,227 Net Pft Gth (Pre-ex) (%) 18.5 16.1 14.3 11.4 EPS (Bt) 0.37 0.43 0.49 0.55 EPS Pre Ex. (Bt) 0.37 0.43 0.49 0.55 EPS Gth Pre Ex (%) 18 16 14 11 Diluted EPS (Bt) 0.37 0.43 0.49 0.55 Net DPS (Bt) 0.28 0.32 0.37 0.41 BV Per Share (Bt) 1.42 1.53 1.65 1.79 PE (X) 40.9 35.2 30.8 27.7 PE Pre Ex. (X) 40.9 35.2 30.8 27.7 P/Cash Flow (X) 27.9 22.0 19.2 17.2 EV/EBITDA (X) 22.4 19.8 17.6 15.9 Net Div Yield (%) 1.8 2.1 2.4 2.7 P/Book Value (X) 10.7 9.9 9.2 8.5 Net Debt/Equity (X) 0.7 0.7 0.6 0.5 ROAE (%) 27.1 29.3 31.0 31.9

Earnings Rev (%): 0 0 0 Consensus EPS (Bt): 0.43 0.49 0.56 Other Broker Recs: B: 19 S: 2 H: 7

Source of all data on this page: Company, DBSVTH, Bloomberg Finance L.P

Strong business strategy execution

Maintain BUY. We maintain our positive view on the stock due

to, i) improving domestic spending mood, which will support

same store sales growth (SSSG) and help accelerate store

expansion, ii) increasing operational efficiency, iii) its ability to

anticipate and adjust to lifestyle changes and, iv) healthy FY19F

profit growth of 14%. Home Products Center (HMPRO)

deserves to trade at a premium as it continues to dominate the

home and garden specialist retailing segment in Thailand

FY19F earnings to be driven by sales and profitability. We

expect stronger sales to boost HMPRO’s earnings in FY19F.

Accelerating sales growth should be driven by improving

domestic consumption which will be reflected as healthier

SSSG, and accelerating store expansion. Higher operating

efficiency and larger sales mix of house brands will continue to

strengthen its profitability.

Strong business strategy execution. HMPRO continues to dominate the home and garden specialist retailing segment in Thailand, due to its strong business strategy execution in investment that strikes a fine balance between growth and risk, coupled with its ability to anticipate and adjust to customers’ lifestyle changes. HMPRO has been expanding into a new store format (HomePro S) which is more profitable and widening its customer base.

Potential catalysts. Recovery of domestic consumption from the

upcoming general election.

Valuation:

Our DCF-based TP is based on WACC 8%, terminal growth

rate 3%.


Key risks are (i) delays in store expansion, (ii) weaker-than-

expected consumer confidence and, iii) intense competition.

At A Glance Issued Capital (m shrs) 13,151

Mkt. Cap (Btm/US$m) 199,898 / 6,062


Land And Houses (%) 30.2

Quality Houses (%) 19.9

Niti Osathanugrah (%) 6.0

Free Float (%) 45.0


ICB Industry : Consumer Services / General Retailers

DBS Group Research . Equity 3 Dec 2018

Thailand Company Guide

Home Products Center Version 14 | Bloomberg: HMPRO TB | Reuters: HMPR.BK Refer to important disclosures at the end of this report

73

93

113

133

153

173

193

213

5.4

7.4

9.4

11.4

13.4

15.4

Nov-14 Nov-15 Nov-16 Nov-17 Nov-18

Relative IndexBt

Home Products Center (LHS) Relative SET (RHS)

Company Guide

Home Products Center

Critical Factors

Outlet expansion. As at end-2017, HMPRO had a total of 81

regular HomePro stores (25 in Bangkok, 56 in upcountry), three

HomePro S stores in Thailand (two in Bangkok, one in

upcountry), 12 Mega Home stores (two in Bangkok, ten in

upcountry), and six stores in Malaysia. As the domestic

consumption outlook has improved, HMPRO is adding one to

two HomePro stores in a standard format and eight HomePro S

outlets in Thailand this year.

Restructuring of private label brands. HMPRO has been

increasing its proportion of private label brand sales by 1-2ppts

p.a., as these products yield >10ppts higher gross margins than

the other brands. Private brands' sales contribution to total

revenue grew from 16% in FY10 to 19.1% in FY17. Currently,

HMPRO is in the process of restructuring its house-brand

products. It is adding more value-added products and selections

while dropping some private label items that are less

competitive. The restructuring is expected to support its

margins.

More room to expand margins. HMPRO’s gross margins should

no longer be pressured by a higher mix of revenue from Mega

Home which yields lower margins. We expect HMPRO’s EBIT

margins to expand as a result of private brand adjustment and

benefits from a larger scale of operations of Mega Home in

Thailand as well as the HomePro business in Malaysia.

Additionally, accelerating sales growth would lower selling,

general and administrative (SG&A) expenses to sales.

New business model to capture changing lifestyle trends.

Besides the Bike Club and home renovation services, HMPRO

introduced a new business model – HomePro S – in 2017. This

new store format will have a floor size of 1,000-2,000 sqm

within department stores and offer a variety of household

product lines such as bedding accessories and kitchenware, and

yield higher margins compared to regular HomePro stores – as

more than half of its products are private brands. HomePro S

will target a younger market segment and this will expand the

company’s customer base.

Same-store-sales growth

Number of stores

Sellable area (sqm)

Rental area (sqm)

House brand to sales


0.01

0.02

0.03

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

2016A 2017A 2018F 2019F 2020F

9399 99

104108

0.0

22.0

44.1

66.1

88.1

110.2

2016A 2017A 2018F 2019F 2020F

721500765000 774000

826000867000

0.00

176868.00

353736.00

530604.00

707472.00

884340.00

2016A 2017A 2018F 2019F 2020F

141000 141200 141200 141600 141800

0.0

28643.6

57287.2

85930.8

114574.4

143218.0

2016A 2017A 2018F 2019F 2020F

0.19 0.190.2

0.210.22

0.0

0.0

0.1

0.1

0.2

0.2

2016A 2017A 2018F 2019F 2020F


Company Guide


Balance Sheet:

HMPRO's balance sheet has remained healthy with an interest-

bearing debt-to-equity ratio of 0.8x as at end-2017. This is far

below its debt covenant with financial institutions of 2.5x. Its

strong balance sheet should provide the flexibility to support its

expansion plan.


i) Improving domestic spending mood; ii) positive momentum

for SSSG this year; iii) healthy earnings growth of 14% in FY19F

from accelerating sales growth, stronger gross profit margins,

and cost benefits arising from larger operating scale.

Key Risks:

Weak consumer confidence. HMPRO’s business might suffer if

consumer confidence in Thailand weakens due to an economic

slowdown or domestic political unrest. As home improvement

products are non-essentials, such purchases are usually

postponed during poor economic conditions

Competition in home improvement product retail market.

More intense competition from existing and new players in this

space could have a negative impact on HMPRO’s sales and

margins.

Company Background

Home Product Center Public Company Limited (HMPRO) is

Thailand and Southeast Asia’s largest retailer of building

materials and home improvement products. Its product range

covers more than 40,000 items, including hardware, tools,

home appliances, household accessories, furniture, decorative

products, construction materials, leisure goods. It operates 81

HomePro stores in Thailand, three HomePro S stores in

Thailand, 12 Mega Home stores in Thailand, and six HomePro

stores in Malaysia.

Leverage & asset turnover (x)

Capital expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.1

1.1

1.1

1.2

1.2

1.2

1.2

1.2

1.3

1.3

1.3

0.00

0.20

0.40

0.60

0.80

1.00

2016A 2017A 2018F 2019F 2020F


0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

2016A 2017A 2018F 2019F 2020F


Bt m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2016A 2017A 2018F 2019F 2020F

Avg: 27.1x

+1sd: 30.6x

+2sd: 34.1x

-1sd: 23.5x

-2sd: 20x

17.8

22.8

27.8

32.8

37.8


(x)

Avg: 7.46x

+1sd: 9.1x

+2sd: 10.74x

-1sd: 5.82x

-2sd: 4.18x3.7

4.7

5.7

6.7

7.7

8.7

9.7

10.7

11.7


(x)

Company Guide



FY Dec 2016A 2017A 2018F 2019F 2020F

Revenue 56,928 59,888 62,921 67,613 73,726


Gross Profit 14,524 15,839 16,956 18,475 20,221



Other Non Opg (Exp)/Inc 4,216 4,346 4,757 5,235 5,819


Net Interest (Exp)/Inc (504) (448) (407) (395) (382)

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 5,095 5,987 7,054 8,068 9,033

Tax (970) (1,100) (1,383) (1,583) (1,807)



Net Profit 4,125 4,886 5,672 6,485 7,227


EBITDA 8,505 9,501 10,786 12,120 13,374

Growth

Revenue Gth (%) 8.4 5.2 5.1 7.5 9.0

EBITDA Gth (%) 10.7 11.7 13.5 12.4 10.3

Opg Profit Gth (%) 12.4 51.0 29.5 19.4 11.4

Net Profit Gth (Pre-ex) (%) 17.9 18.5 16.1 14.3 11.4

Margins & Ratio

Gross Margins (%) 25.5 26.4 26.9 27.3 27.4



ROAE (%) 24.0 27.1 29.3 31.0 31.9

ROA (%) 8.4 9.5 10.9 11.9 12.6

ROCE (%) 3.3 4.9 6.1 7.0 7.5

Div Payout Ratio (%) 86.0 75.4 75.0 75.0 75.0



Company Guide



FY Dec 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018

Revenue 15,098 15,718 14,875 15,445 15,401


Gross Profit 3,965 4,315 3,991 4,169 4,243


Operating Profit 516 634 606 695 690

Other Non Opg (Exp)/Inc 1,059 1,314 1,026 1,020 1,093


Net Interest (Exp)/Inc (115) (98.2) (98.1) (98.2) (95.4)

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 1,460 1,850 1,533 1,617 1,688

Tax (277) (324) (285) (304) (322)


Net Profit 1,183 1,526 1,248 1,313 1,366


EBITDA 2,341 2,718 2,389 2,476 2,545

Growth

Revenue Gth (%) 2.0 4.1 (5.4) 3.8 (0.3)

EBITDA Gth (%) 3.1 16.1 (12.1) 3.7 2.8

Opg Profit Gth (%) (3.3) 22.9 (4.5) 14.7 (0.6)

Net Profit Gth (Pre-ex) (%) 4.6 29.0 (18.2) 5.1 4.1

Margins

Gross Margins (%) 26.3 27.5 26.8 27.0 27.6



Balance Sheet (Btm)

FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 35,530 35,348 38,257 39,751 40,944


Other LT Assets 316 360 360 360 360

Cash & ST Invts 3,721 2,505 1,497 1,469 1,980

Inventory 9,672 10,343 10,793 11,538 12,563

Debtors 1,895 1,797 1,897 2,005 2,123

Other Current Assets 613 597 627 674 735

Total Assets 51,746 50,949 53,431 55,797 58,705

ST Debt 6,265 4,146 5,078 5,156 4,887

Creditor 14,032 14,085 14,697 15,712 17,108


LT Debt 10,610 10,917 10,280 9,765 9,519



Minority Interests 0.0 0.0 0.0 0.0 0.0

Total Cap. & Liab. 51,746 50,949 53,431 55,797 58,705

Non-Cash Wkg. Capital (4,047) (3,495) (3,636) (3,919) (4,330)

Net Cash/(Debt) (13,155) (12,558) (13,862) (13,452) (12,426)




Asset Turnover (x) 1.2 1.2 1.2 1.2 1.3

Current Ratio (x) 0.7 0.7 0.7 0.7 0.7

Quick Ratio (x) 0.2 0.2 0.2 0.1 0.2

Net Debt/Equity (X) 0.8 0.7 0.7 0.6 0.5


Capex to Debt (%) 30.5 19.1 40.0 34.5 35.7

Z-Score (X) 5.3 5.4 5.4 5.4 5.4


Company Guide



FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 5,095 5,987 7,054 8,068 9,033

Dep. & Amort. 2,905 3,066 3,324 3,656 3,958

Tax Paid (970) (1,100) (1,383) (1,583) (1,807)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (29.5) (552) 188 283 411

Other Operating CF 216 (240) (83.1) 0.0 0.0

Net Operating CF 7,217 7,160 9,100 10,424 11,596

Capital Exp.(net) (5,143) (2,880) (6,150) (5,150) (5,150)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.0 0.0 0.0 0.0 0.0

Net Investing CF (5,143) (2,880) (6,150) (5,150) (5,150)

Div Paid (3,550) (3,683) (4,254) (4,864) (5,420)

Chg in Gross Debt (2,498) 1,812 (295) 437 514

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF 4,996 (3,625) 590 (874) (1,029)

Net Financing CF (1,052) (5,495) (3,959) (5,301) (5,935)

Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash 1,023 (1,216) (1,008) (27.2) 511

Opg CFPS (Bt) 0.55 0.59 0.68 0.77 0.85

Free CFPS (Bt) 0.16 0.33 0.22 0.40 0.49



Source: DBSVTH

Analyst: Namida ARTISPONG

THAI-CAC Certified

Corporate Governance CG Rating (as of Oct 2017)

THAI-CAC is Companies participating in Thailand's Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of May 2018) are categorised into:

Score Description

Declared Companies that have declared their intention to join CAC

Certified Companies certified by CAC.

Corporate Governance CG Rating is based on Thai Institute of

Directors (IOD)’s annual assessment of corporate governance

practices of listed companies. The assessment covers 235 criteria

in five categories including board responsibilities (35% weighting),

disclosure and transparency (20%), role of stakeholders (20%),

equitable treatment of shareholders (10%) and rights of

shareholders (15%). The IOD then assigns numbers of logos to

each company based on their scoring as follows:

Score Range Number of Logo Description

90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass

<50 No logo given N/A

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 13 Dec 17 12.20 15.00 BUY

2: 25 Jan 18 14.50 17.50 BUY

3: 28 Feb 18 14.40 17.50 BUY

4: 12 Apr 18 14.40 17.50 BUY

5: 24 Apr 18 14.70 17.50 BUY

6: 05 Jul 18 14.00 17.50 BUY

7: 06 Aug 18 14.20 17.50 BUY

8: 26 Sep 18 15.80 17.50 BUY

9: 31 Oct 18 14.90 17.50 BUY


1

2

3

45

6

7

8

9

11.59

12.59

13.59

14.59

15.59

16.59

Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18

Bt

Company Guide


DBSVTH recommendations are based an Absolute Total Return* Rating system, defined as follows:







Completed Date: 3 Dec 2018 11:41:32 (THA) Dissemination Date: 13 Dec 2018 06:50:32 (THA)

Sources for all charts and tables are DBSVTH unless otherwise specified.


This report is prepared by DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). This report is solely intended for the clients of DBS Bank Ltd, its

respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in

any form or by any means or (ii) redistributed without the prior written consent of DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH'').































Company Guide







in market-making.














the DBS Group.


1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates have a

proprietary position in Home Products Center recommended in this report as of 31 Oct 2018


Report.
















Page 47

DBS Bank, DBSVI, DBSVTH, AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows:






Share price appreciation + dividends Completed Date: 4 Jan 2019 12:08:29 (SGT) Dissemination Date: 4 Jan 2019 15:18:14 (SGT)

Sources for all charts and tables are DBS Bank, DBSVI, DBSVTH, AllianceDBS unless otherwise specified.


This report is prepared by DBS Bank Ltd, PT DBS Vickers Sekuritas Indonesia (''DBSVI''), DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''),

AllianceDBS Research Sdn Bhd (''AllianceDBS''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and

associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means

or (ii) redistributed without the prior written consent of DBS Bank, DBSVI, DBSVTH, AllianceDBS.

































Page 48






in market-making.




compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)

primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the

issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real

estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the






banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the

DBS Group.


1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”) or their subsidiaries and/or other affiliates have

proprietary positions in Thai Beverage Public Company, Sheng Siong Group, CP ALL, Charoen Pokphand Foods, Minor International,

Home Products Center, Matahari Department Store, recommended in this report as of 30 Nov 2018.


Report.


3. DBS Bank Ltd, DBS HK, DBSVS their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12

months for investment banking services from Koufu Group Ltd as of 30 Nov 2018

4. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering

of securities for Koufu Group Ltd in the past 12 months, as of 30 Nov 2018





1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of

which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.




Page 49







RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946. DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report has been prepared by an entity(ies) which is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Bank (Hong Kong) Limited, a registered institution registered with the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).

This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Bank (Hong Kong) Limited, a registered institution registered with the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).

For any query regarding the materials herein, please contact Carol Wu (Reg No. AH8283) at [email protected]

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR



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Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.

United Kingdom

This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai International Financial Centre

This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608 - 610, 6th Floor, Gate Precinct Building 5, PO Box 506538, DIFC, Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United Arab Emirates

This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

United States This report was prepared by DBS Bank Ltd, PT DBS Vickers Sekuritas Indonesia (''DBSVI''), DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''), AllianceDBS Research Sdn Bhd (''AllianceDBS''). DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.



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DBS Regional Research Offices

HONG KONG DBS (Hong Kong) Ltd Contact: Carol Wu 11th Floor The Center 99 Queen’s Road Central Central, Hong Kong Tel: 852 3668 4181 Fax: 852 2521 1812 e-mail: [email protected]

MALAYSIA AllianceDBS Research Sdn Bhd Contact: Wong Ming Tek (128540 U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah 50100 Kuala Lumpur, Malaysia. Tel.: 603 2604 3333 Fax: 603 2604 3921 e-mail: [email protected]

SINGAPORE DBS Bank Ltd Contact: Janice Chua 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel: 65 6878 8888 Fax: 65 65353 418 e-mail: [email protected] Company Regn. No. 196800306E

THAILAND DBS Vickers Securities (Thailand) Co Ltd Contact: Chanpen Sirithanarattanakul 989 Siam Piwat Tower Building, 9th, 14th-15th Floor Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 857 7831 Fax: 66 2 658 1269 e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

INDONESIA PT DBS Vickers Sekuritas (Indonesia) Contact: Maynard Priajaya Arif DBS Bank Tower Ciputra World 1, 32/F Jl. Prof. Dr. Satrio Kav. 3-5 Jakarta 12940, Indonesia Tel: 62 21 3003 4900 Fax: 6221 3003 4943 e-mail: [email protected]

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