Morning Matters - RHB TradeSmart · Leader Of Ready-To-Drink Tea Ichitan is a leading RTD green tea...

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5-Nov-2013

Morning Matters

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WHAT’S INSIDE

On The Platter

ICHITAN Group (ICHI TB; FVTHB19- Initial Public Offering (Initiate): Leader Of Ready-To-Drink Tea

Ichitan is a leading RTD green tea maker in Thailand. The company is also a fast-growing company with highly-efficient operations, having grown its market share from zero to 50% within two years of inception (vs Oishi’s flat 44%) while posting an NPM of 15% (4x over that of Oishi). With its capacity expansion, lower interest expenses, and FY13-FY15 sales growth of 80%/20%/15%, we project net profit to grow 177%/33%/16% respectively, with a THB19 TP (20x P/E).

MEDIA HIGHLIGHTS

Kittiratt: Overseas bonds 20%

B10bn for cassava income guarantee

KTB seeks to cut bad debt

Oil to trend lower on larger supply

Unease grows as politics threatens tourism sector

ECONOMIC HIGHLIGHTS

Rosneft eyes partnership with PTT in VN

BOJ Struggles to Convince on 2% as Abenomics Shine Fades

Thailand’s Top Fund Manager Sells Stocks as Protests Hurt Growth

Vietnam’s REE Bets on Market-Based Energy Pricing Future

U.K. Outlook Raised by CBI as Construction Strengthens

Americans’ Debt Hangover Seen Ending in Boost to Growth

SET Intra-Day Graph

Source: Bloomberg

Key Market Indices (4 November 2013)

Value Chg % Chg % YTD

SET 1388.40 -40.68 -2.8% -0.3%

SET50 949.84 -27.43 -2.8% 0.5%

SET100 2087.33 -63.32 -2.9% 0.4%

Dow Jones 15639.12 23.57 0.2% 19.3%

S&P500 1767.93 6.29 0.4% 24.0%

Nasdaq 3936.59 14.55 0.4% 30.4%

FTSE 6763.62 28.88 0.4% 14.7%

FSSTI 3203.94 2.74 0.1% 1.2%

Hang Seng 23189.62 -60.17 -0.3% 2.4%

Nikkei 14281.94 80.37 0.6% 37.5%

KLCI 1807.47 -2.94 -0.2% 7.0%

SHANGHAI SE 2149.64 0.07 0.0% -5.3%

JCI 4423.29 -9.30 -0.2% 2.5%

SET 5-yr avg 2012 2013F

PE (x) 13.9 15.1 14.0

P/BV (x) 1.8 2.2 2.1

Yield (%) 4.0 3.1 3.3

Key Statistics

SET Value by investor Type: Daily

Buy (THBm) Sell (THBm) Net (THBm)

Institution 2,842.83 3,267.31 -424.49

Proprietary 3,584.47 4,239.95 -655.48

Foreign 8,674.04 9,450.79 -776.75

Retail 19,610.88 17,754.17 1,856.71

SET Value by investor Type

MTD (THBm) YTD (THBm) Institution 338.58 81,499.21

Proprietary -747.72 -2,244.21

Foreign -2,547.97 -107,799.64

Retail 2,957.10 28,544.64

SET50 Index Future

Long Short Net MTD YTD

Institution 5,800 5,492 308 -135 10,785

Foreign 2,546 4,570 -2,024 -2,362 -11,912

Local 9,491 7,775 1,716 2,497 1,127

Foreign Fund Flows (USDm) Last MTD YTD YTD(%) -24.9 -81.6 -3,516.9 -315.1

See important disclosures at the end of this report 2

Media Highlights

Kittiratt: Overseas bonds 20%

The government plans to borrow up to 15-20% of the money in dollars required for its 2-trillion-baht worth of infrastructure projects, says Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong. Liquidity in the local financial market is ample to finance the entire project, but the government is poised to issue dollar-denominated bonds. The aim is to set the benchmark Thai government bonds in overseas markets, he said yesterday during a meeting with government agencies and state enterprises to encourage them to speed up budget disbursement. The pricing and coupon rate of the planned bonds will reflect foreign investors' view of the country's financial position. "In the past, we always offered overseas bonds when we were in dire need of money if the local market had a liquidity crunch. We disappeared from the international market when we had a liquidity surplus," he said. Earlier, Prime Minister Yingluck Shinawatra said when she and Mr Kittiratt met with the Thai Bankers' Association (TBA) in September that 40% of the infrastructure projects would be financed by issuing dollar-denominated bonds, matching machinery imports for the megaprojects. The projects, slated to start next year, should see their construction span for seven years. The administration pinned its hopes on the massive investment, the bulk of which is for dual-track and high-speed rail, aiming to boost the country's lacklustre economy. Mr Kittiratt said the government targets 95% disbursal of the 2.525-trillion-baht fiscal budget. Of the total, 17.5% or 441 billion baht is investment budget and 82% is estimated to be drawn this fiscal year.(Bangkok Post) B10bn for cassava income guarantee

The Commerce Ministry will seek a 10-billion-baht budget to manage its cassava income guarantee plan for the 2013/2014 season. Planters are set to receive between 2.60 to three baht per kilogramme of cassava. If market prices are lower, the state will pay to offset the losses, said Deputy Commerce Minister Yanyong Phuangrach. The income guarantee plan will replace the current pledging scheme in which the government used 27 billion baht, including 4 billion in management costs, to buy about 10 million tonnes of cassava from growers. Mr Yanyong estimated 28 million tonnes of cassava would be harvested next crop, benefitting 500,000 planters. He said the change helps prevent planters from harvesting all at the same time, which could result in market prices declining. (Bangkok Post)

KTB seeks to cut bad debt

Krungthai Bank (KTB) is slowing down its microfinance business in a bid to curb non-performing loans (NPLs) that have climbed in line with its growing loan portfolio, said senior vice-president Weidt Nuchjalern. After offering microfinance loans for two years, bad debt has increased to about 4% of outstanding loans of 1.5 billion baht, he said. The bank attributed the poor performance to its own weak debt-collecting system and borrowers' lack of financial discipline, said Mr Weidt. Improvements to KTB's debt collection are expected to be completed in January. It is also considering using the debt-collecting service of either Krungthai Card or KTB Leasing. Mr Weidt said the bank has changed its policy by separating debt collection staff from sales staff. Previously, branch staff had to collect debts and seek new microfinance clients. Under its development plan, KTB has targeted to limit bad debt to no more than 2% of loans. (Bangkok Post) Oil to trend lower on larger supply

Global oil prices will be on the downward trend next year, with Dubai crude expected to trade at US$104 a barrel, thanks to additional supply from non-Opec members, says PTT Plc. Jitwassika Hongthong Silpakul, petroleum analyst at the oil and gas giant, said yesterday that the price of Dubai crude should edge down from this year's average of $105. Global demand of crude is projected at 91 million barrels per day (bpd), up by around 1.1 million, while supply will increase by 1.7 million bpd, she said at the annual petroleum outlook forum hosted by IRPC Plc. "Opec is expected to produce one-third of the world supply. New supply from non-Opec members such as the US, Mexico and Brazil will make up the rest, causing a slight decline in price next year," said Ms Jitwassika. PTT also forecasts diesel prices in Singapore will average $122 next year, with premium petrol quoted at $117. Oil price estimates are based on global growth projections of 3.6% next year, she said. (Bangkok Post) Unease grows as politics threatens tourism sector

The hopes of retail and tourism firms for a high-season sales boost are being shattered by political problems. It will grow worse if protests turn violent and Ratchaprasong intersection is seized by demonstrators in the style of 2010's red-shirt rally, says the Ratchaprasong Square Trade Association (RSTA). Normally, the peak fourth quarter draws many foreign tourists and benefits hotels and shopping malls. "The retail and tourism situation in Bangkok will continue its normalcy as long as the protests are still peaceful and do not paralyse major business districts or Ratchaprasong intersection like before," said Chai Srivikorn, the RSTA president. The Ratchaprasong area is a tourist magnet. Foreigners account for 35-50% of sales at each shop in the district. Mr Chai said demonstrations are not a problem in themselves. The real issue is management: a rally can happen anywhere in the world, but it must be under control of law. The RSTA is monitoring the situation and stands ready to talk with every group about security measures. (Bangkok Post)


Economic Highlights

Rosneft eyes partnership with PTT in VN

Russian Rosneft Oil and Gas Group is reportedly seeking to become a partner of PTT, Thailand's national oil and gas company, in the development of the planned Nhon Hoi refinery complex in Vietnam. PTT in August formally announced a project to build Nhon Hoi Oil Refinery Complex in Binh Dinh, potentially with the investment of upto US$27 billion. Once completed, it will be one of the largest oil refinery complexes in Asia. Viet Nam News, a member of the Asia News Network, reported last week that a Russian business delegation, led by Igor Soglayev, general director of Sarvors Company under the Russian Rosneft, went on a fact finding tour in the country. Soglayev said Rosneft had announced its intention to become one of PTT’s strategic partners in the project. PTT's executives could not be reached for confirmation. Rosneft is now one of the world’s leading petroleum groups, with production capacity of 250 million tonnes of oil per year and annual profit of US$2.8 billion. Thailand's Prime Minister Yingluck Shinawatra is scheduled for an official trip to Russia in December. (The Nation) BOJ Struggles to Convince on 2% as Abenomics Shine Fades

Half a year after Bank of Japan Governor Haruhiko Kuroda unleashed record monetary easing, economists see the bank failing to meet its inflation target, underscoring the case for stronger steps to revive the economy. While the median estimate of BOJ board members released last week showed the bank expects consumer prices to rise 1.9 percent in the 2015 fiscal year -- in line with a 2-percent-in-two-years goal laid out in April -- just two of 34 analysts surveyed by Bloomberg News see the target met in that timeframe. With the central bank seen standing pat on the pace of asset purchases until it can assess the impact of an April 2014 sales-tax bump, the onus is now on the government to sustain confidence in the Abenomics project. Prime Minister Shinzo Abe has yet to introduce legislation such as corporate-tax cuts that companies have advocated to boost Japan’s potential. (Bloomberg) Thailand’s Top Fund Manager Sells Stocks as Protests Hurt Growth

Central banks in advanced economies from the U.S. to Europe and Japan said emergency currency-swap lines established during the global financial crisis will be made permanent, providing safeguards against future turbulence. Temporary, bilateral arrangements between the European Central Bank, the Federal Reserve, the Bank of Canada, the Bank of England, the Swiss National Bank, and the Bank of Japan will be converted into standing facilities, allowing lenders access to global currencies when needed, according to statements today from the central banks. “It’s a very sensible maneuver,” said Julian Callow, chief international economist at Barclays Plc in London. “Since the financial crisis it’s clear that central banks are coordinating much more closely. This makes permanent something that was born as an emergency reaction to that crisis.” (Bloomberg) Vietnam’s REE Bets on Market-Based Energy Pricing Future

Refrigeration Electrical Engineering Corp. plans to buy more stakes in Vietnamese state-run power companies, anticipating the government will gradually deregulate electricity pricing. REE, as the company is known, said last week profit surged 71 percent in the nine months ended Sept. 30, buoyed by investment income. The company will seek opportunities to add more utility assets and may consider separately listing the power and water holdings eventually, she said. Vietnam is moving the power sector toward competitive market-based arrangements, the World Bank said in a report this year. As the country struggles with slower economic growth, the government is seeking ways to save money. The government raised the average retail power price in August by 5 percent to 1,509 dong (7 cents) per kilowatt hour, according to state utility Vietnam Electricity Group. (Bloomberg) U.K. Outlook Raised by CBI as Construction Strengthens

The Confederation of British Industry raised its forecasts for U.K. economic growth and said business investment and trade will aid the recovery starting next year. The business lobby sees the economy expanding 1.4 percent this year and 2.4 percent in 2014, it said in a quarterly report. That’s up from 1.2 percent and 2.3 percent in August. The projections came as a survey from Markit Economics showed construction unexpectedly strengthened in October to the fastest rate in six years, led by homebuilding. U.K economic growth accelerated to its fastest pace in more than three years in the third quarter as the recovery continued across all main industries. The Bank of England may raise its forecasts this month and bring forward its projection for when unemployment will reach a 7 percent threshold that will prompt policy makers to consider an interest-rate increase. (Bloomberg) Americans’ Debt Hangover Seen Ending in Boost to Growth

Suffering from a debt hangover for the past four years, Americans will resort to a time-honored cure -- hair of the dog that bit them. A pickup in borrowing will give the world’s biggest economy a much-needed boost next year as federal government austerity pinches growth. Workers will be more willing to take out loans as the lowest unemployment rate in almost five years bolsters job security, while banks will be more likely to lend after cleaning up their own balance sheets. The resulting gains in personal spending will help counter the effects of federal-budget cuts that are weighing on the expansion, according to Ben Garber, an economist at Moody’s Capital Markets Research Inc. in New York. “Consumers taking on more debt at a time when the deficit is shrinking would be a strong positive for the economy,” Garber said. “This will help offset some of the fiscal austerity that we’re experiencing.” Federal outlays relative to the size of the economy declined to 22 percent in 2012, the smallest since 2008, according to figures from the Congressional Budget Office. It projects the share will drop over the subsequent five fiscal years, reaching 20.6 percent in 2017. (Bloomberg)


Outperform

Current Target Upside/

Rec. Price Price Downside PE (x) Yield (%) Remarks

(Bt) (Bt) (%) 2013F 2013F

BH Buy 87.25 107.00 22.6 26.4 1.9

CPN Buy 45.00 66.00 46.7 16.0 1.4

NOK Buy 23.70 37.60 58.6 10.5 4.8

TOP Buy 62.25 74.90 20.3 10.2 3.9 .

Underperform

Current Target Upside/

Rec. Price Price Downside PE (x) Yield (%) Remarks

(Bt) (Bt) (%) 2013F 2013F

AP Sell 5.20 4.75 -8.7 6.2 3.5

BCH Neutral 6.25 7.00 12.0 20.5 2.6

4 1 31 30 29 4 1 31 30 29

1 INTUCH 204.4 84.0 -3.4 263.2 33.6 SCB -322.4 65.9 52.1 17.2 14.6 INTUCH 288.4 AOT -324.3 INTUCH 50,423.5 SCC -11,602.4

2 BTS 182.2 77.8 117.1 133.1 186.0 LH -210.1 -37.6 2.2 95.7 -12.8 BBL 281.5 SCB -256.5 BAY 17,677.7 LH -2,224.0

3 CPN 139.3 10.2 -21.8 0.2 35.6 AOT -160.8 -163.5 25.8 47.4 -48.3 BTS 260.0 LH -247.7 ADVANC 17,118.2 SIRI -912.1

4 BANPU 103.3 0.8 41.1 24.7 6.1 BAY -151.5 -13.9 -379.4 -425.9 -235.5 SCC 162.6 BAY -165.4 PTT 14,641.7 CK -714.4

5 PTT 88.1 31.6 148.9 89.6 -42.3 KTB -82.3 -5.8 28.5 -71.1 -2.3 CPN 149.5 TRUE -113.0 DTAC 13,611.9 DEMCO -640.4

6 TOP 44.0 -12.8 -8.9 -1.5 11.9 CPF -60.6 25.2 -40.5 21.5 49.9 PTTGC 147.4 KBANK -88.5 PTTEP 12,344.6 UV -412.9

7 PTTGC 43.1 104.3 13.2 36.7 56.6 TRUE -54.6 -58.4 -6.9 25.3 -143.4 PTT 119.6 KTB -88.1 PTTGC 11,962.1 NOBLE -331.1

8 KBANK 31.9 -120.4 449.8 252.5 100.0 ADVANC -42.6 21.7 -221.1 126.2 195.8 BANPU 104.2 DTAC -85.4 STEC 5,042.4 ASP -305.5

9 SPALI 31.1 19.6 0.5 24.4 1.1 CPALL -39.4 30.5 -22.1 -3.4 39.0 PTTEP 93.0 JAS -83.0 AOT 4,953.8 RML -266.2

10 EGCO 30.1 31.5 72.1 82.6 63.7 BLAND -38.4 5.0 -3.5 7.4 -1.8 EGCO 61.6 BECL -47.6 CPF 4,758.8 JAS -240.9

11 PS 24.3 13.5 18.8 22.6 6.9 CENTEL -35.9 -5.2 1.3 -0.7 5.4 SPALI 50.7 CENTEL -41.1 TOP 4,479.3 MINT-W4 -238.0

12 BBL 20.7 260.8 338.4 108.5 -35.0 BECL -32.6 -15.0 -5.2 23.8 18.8 DELTA 47.1 VGI -40.4 CPN 4,465.5 TRC -215.8

13 DELTA 19.6 27.5 8.9 21.7 -12.2 JAS -32.5 -50.5 -498.2 -45.6 -33.5 PS 37.8 CPF -35.4 CPALL 4,445.3 EARTH -211.2

14 PTTEP 17.5 75.5 71.8 -42.8 42.5 DTAC -31.4 -54.0 -18.6 -130.4 34.1 KCE 35.0 MINT -34.6 BIGC 4,227.4 MCOT -202.6

15 THAI 15.1 6.6 67.8 1.4 -2.8 SCC -29.9 192.5 -345.7 52.7 -76.6 BIGC 32.3 BLAND -33.5 MAKRO 4,168.9 LRH -189.9

16 KCE 13.3 21.7 2.7 4.7 9.8 HMPRO -26.4 5.3 -1.0 -18.9 0.8 TOP 31.2 BGH -32.7 THAI 3,344.5 GUNKUL -186.3

17 GLOW 12.9 16.8 17.4 24.1 12.1 MINT -22.9 -11.6 -11.4 -0.2 -7.7 BEAUTY 30.7 RATCH -30.4 MINT 3,307.8 GLOBAL -173.7

18 QH 12.5 -2.8 1.7 30.7 -5.5 BGH -22.2 -10.5 -116.6 20.0 8.0 GLOW 29.7 IRPC -28.0 DELTA 3,217.3 IRPC -169.4

19 WORK 10.1 2.2 2.3 13.1 3.3 ERW -18.5 -4.4 -13.5 3.7 2.1 BEC 28.1 SAMART -27.7 EGCO 3,163.8 TWFP -148.4

20 MAJOR 9.0 8.6 1.1 -9.3 -3.2 ITD -18.2 0.6 -30.7 3.3 2.1 THAI 21.7 HEMRAJ -24.9 TCAP 3,162.9 SINGER -146.7

% % of % of

Turn. paidup paidup

1 GJS 15.66 1 TISCO-P 66.16 65.86

2 BLAND 5.21 2 BBL 30.38 29.99

3 LH 52.61 3 KBANK 27.56 28.50

4 BTS 13.28 4 INTUCH 23.71 5.41

5 BAY 61.39 5 SPALI 21.92 17.94

6 TMB 8.77 6 E-W1 21.62 22.27

7 TRUE 2.19 7 GOLD-W1 20.03 14.87

8 SIRI 7.73 8 THRE 17.71 15.50

9 ITD 5.35 9 LH 17.66 21.18

10 JAS 1.45 10 LPN 17.17 21.73

11 CGD 13.57 11 DTAC 16.04 13.33

12 E 70.97 12 TWFP 15.56 24.77

13 QH 3.85 13 TCAP 15.46 12.60

14 KTB 7.87 14 THIP 14.50 12.64

15 CPF 21.41 15 AP 14.23 12.92

16 INTUCH 22.29 16 EGCO 13.85 10.17

17 BANPU 14.13 17 LALIN 13.71 13.53

18 ERW 21.38 18 STEC 13.57 7.26

19 KBANK 31.86 19 BAY 13.24 13.89

20 ANAN 18.42 20 PRANDA 12.83 14.59

Source : SET.OR.TH

376,100

4,457,200

3,690,601

1,423,425

1,178,900 4,869,501

-4,304,289

8,581,7004,478,900

4,119,803 348,400

7,907,111

1,806,400

1,801,411 6,105,700

5,439,5674,016,142

6,263,600 8,070,000

3,866,500 8,038,700 11,905,200 -4,172,200

2,162,000 6,790,800 8,952,800

2,859,920,138 -2,592,717

-4,628,800

4,102,800

197,592,941 161,065,653 1,277,816,397

8,000,000 1,160,000 1,011,300

-4,152,600

111,592,900

406,859,728 367,964,647

72,927,570 2,511,701

59,270,000 409,144,800

4,468,203 3,771,403

206,912,472 86,117,327

804,451,559

52,488,300 -3,683,400

176,4001,980,700 4,137,800

4,087,000

4,500 4,157,100

201,800 3,885,200

2,157,100

4,161,600

6,074,143,747

1,525,106,540

526,465,000

113,087,600

843,803,210

53,541,225

825,000,000

315,525,949 2,367,811,000 379,777,962

14,787,560 2,354,634 95,060,550

10,025,921,523

1,475,698,768

1,770,855,336 2,123,251,472

253,339,186 320,609,239

370,342,718

3,512,494,860

74,197,298 74,970,598

622,047,381 544,461,149

75,028,228 77,281,246

7,686,600

5,781,000 6,418,900

8,797,000 10,300,700

20,154,900 -3,961,500

12,199,900 -637,900

19,097,700 -1,503,700 347,000,000

8,096,700 12,058,200

11,987,400 -3,385,800

3,591,900 10,301,000 13,892,900 -6,709,100

4,300,800

3,206,420,305

-20,276,700

1,716,553,249

2,393,260,193

760,214,715

307,949,569 376,345,750

21,052,060 173,363,101 23,067,300 2,015,240 25,082,540

572,486,791 -23,474,700

659,542,591 682,155,834

579,830,530 33,243,700 43,012,700

9,292,800 29,569,500 38,862,300

NetBuy Sell Total

1,908,842,894

- 93,505,200 22,400 22,300 93,505,200 -93,505,200

9,769,000

33,858

Net Buy Net Sell Net Buy Net Sell

2 Jan- 04 Nov 13Oct13

(Last)

NVDR Shrs. Paid up CapitalNVDR Shrs.

4-Nov-13 2-Jan-13

Most Active Values (Btmn)

5 November 2013

Nov-'Oct 13 Nov-'Oct 13

Total Volume Shares

NVDR Trading Data by Stock (Volume) NVDR Shares to Total Paid-up Shares(%)

NET BUY NET SELL Month to Date Year to Date

THAI NVDR : Top Ranking

See important disclosures at the end of this report Powered by Enhanced Datasystems’ EFATM

Platform 1

Company Update, 5 November 2013

ICHITAN Group (ICHI TB) Initial Public Offering (Initiate)

Food & Beverage Target Price: THB19.0

Market Cap: USD630mn

Leader Of Ready-To-Drink Tea

Macro

1.00

Risks

2.00

Growth

2.00

Value

2.00

No. of IPO share: 300m share

Par value : THB1

Paid up capital (post IPO): THB1,300m

% IPO share to total share : 23% (of post IPO)

Debt repayment

Capacity expansion

Working capital

Dividend policy : > 40% of net profit

Lead underw riter : Asia Plus Securities Plc

Source: RHB estimates

IPO summary

Use of proceeds:

Shareholding structure (Pre vs. post IPO)

Pre-IPO Post-IPO

Passakornatee family 51.5% 39.6%

6 nominees that hold shares to be 27.2% 21.0%

given to Tanpan Fundation in the future

Others 21.3% 16.3%

IPO n.a. 23.1%

Total 100% 100%

Paid-up capital (THBm) 1,000 1,300 Source: The company data, RHB Research

Thailand Research Team 662 862 9999 ext.2030

Forecasts and Valuations Dec-11 Dec-12 Dec-13F Dec-14F Dec-15F

Total turnover (THBm ) 1,057 3,907 7,032 8,439 9,704

Reported Net Profit (THBm) (791) 873 967 1,288 1,490

Recurring Net Profit (THBm) (198) 350 967 1,288 1,490

Recurring Net Profit Grow th (%) n.a. 277% 177% 33% 16%

Core EPS (THB ) (0.33) 0.35 0.74 0.99 1.15

Core P/E ( THB ) n.a. 43 20 15 13

Return On Average Equity (%) n.a. 80% 26.9% 19.7% 21.0%

P/B (x) n.a. 14 3 3 3

P/CF (x) n.a. 24.5 15.5 11.7 10.6

EV/EBITDA (x) n.a. 29 14 13 10

Net Debt to Equity (%) n.a. 2.92 Net cash Net cash Net cash

Our vs Cosdensus EPS (%) n.a. n.a. n.a. n.a. n.a.

Source: The company data, RHB Research

Remark: valuation calculation is based on IPO price of THB15

Ichitan is a leading RTD green tea maker in Thailand. The company is

also a fast-growing company with highly-efficient operations, having

grown its market share from zero to 50% within two years of inception

(vs Oishi’s flat 44%) while posting an NPM of 15% (4x over that of

Oishi). With its capacity expansion, lower interest expenses, and FY13-

FY15 sales growth of 80%/20%/15%, we project net profit to grow

177%/33%/16% respectively, with a THB19 TP (20x P/E).

To issue 300m new shares in IPO 23% share dilution. The company

was founded by Mr Tan Passakornatee, who is also the founder of Oishi

Group. Given its high expertise in the business, Ichitan managed to grow

its market share from zero to 50% within two years and has overtaken

Oishi with better NPM of 15% (4x over Oishi’s margin). Its products are

mainly distributed through: (i) modern trade channel via Diethelm (51%

of total sales), (ii) traditional trade via Boon Rawd Brewery and Diethelm

(36%), and (iii) a logistic company that belongs to Mr Tan’s sister (13%).

Key growth drivers include: i) effective cost control and efficient

market strategy (by controlling SG&A/sales ratio at 15-16% vs 30% for

Oishi), ii) capacity expansion by 60% in 2Q14, and iii) lower interest

expenses after debt repayment.

Valuation. We value Ichitan at 20x P/E of FY14 earnings, from which we

derive a FV of THB19. Our P/E assumption is comparable to 24x P/E for

retailers stocks and 16x P/E of Thailand’s food sector. Ichitan deserves

to trade closer to retailers’ P/E rather than that of listed food companies

as the latter are commodities-linked stocks, while Ichitan is a premium

drink product with high earnings growth. The stock is attractive with PEG

ratio of 0.6x 2014 earnings.

Key risk: i) its market strategy and profitability are highly reliant on one

key person, Mr Tan Passanakornatee, ii) stiff competition as earnings

are highly sensitive to SG&A (earnings +/-7.5% on SG&A +/-1%).

ICHITAN Group (ICHI TB) 5 November 2013


IPO summary

Ichitan plans to launch an IPO with 300m shares, or around 23% of total outstanding

shares after the IPO. Assuming the IPO price range of around THB15-17, the

company could raise cash of around THB4.5-5.1bn for working capital, paying down

debts, and funding the capacity expansion of its polyethylene terephthalate (PET)-

bottled green tea drinks (the company is set to expand the total capacity of bottled

green tea by 60% by 2Q14).

Figure 1: IPO summary

No. of IPO share: 300m share

Par value : THB1

Paid up capital (post IPO): THB1,300m

% IPO share to total share : 23% (of post IPO)

Use of proceeds: Debt repayment

Capacity expansion

Working capital

Dividend policy : > 40% of net profit

Lead underwriter : Asia Plus Securities Plc


Mr Tan Passakornatee and family currently have a controlling stake of 51.5%, which

will be diluted to 39.6% after the IPO. The group of minority shareholders who

controls a combined 272m shares intends to transfer around 270m shares to Tanpan

Foundation. After the IPO, this fund will be managed by Ichitan’s three directors, one

external director, and one Ichitan’s legal advisor. These directors are entitled to

manage the fund’s future benefits (mainly dividend income).

Figure 2: Shareholding structure

Pre-IPO % Post-IPO %

No. of sh (m sh) No. of sh (m sh)

Passakornatee family 515 51.5% 515 39.6%

6 nominees that hold shares

to be given to Tanpan

Fundation in the future

270 27.2% 270 21.0%

Others 215 21.3% 215 16.3%

IPO n.a. n.a. 300 23.1%

Total 1,000 100.0% 1,300 100.0%


Remark: Par value at THB1



Diversified distribution channel

Ichitan is the market leader in RTD green tea, with a market share of 50% (as of June

2013). The company was founded by Mr Tan Passakornatee, who is also the founder

of Oishi Group. Its products are mainly distributed through: (i) modern trade channel

via Diethelm (51% of total sales), (ii) traditional trade via Boon Rawd Brewery and

Diethelm (36%), and (iii) a logistic company that belongs to Mr Tan’s sister (13%).

Figure 3: Distribution channel

% of total sales

Modern trade - Diethelm 51%

Traditional trade – Diethelm 26%

Traditional trade - Boon Rawd Brewery 9%

I AM Green Tea (Related party) 13%

Source :Company data, RHB Research estimate

Note that Diethelm is the company’s major distributor, covering both modern trade

and traditional trade, which accounts for 77% in total sales.

Capacity expansion

After selling its majority stake in Oishi to Thai Beverage (THBEV SP, NR) in March

2006, Mr Tan started the green tea drink business again in September 2010, but the

venture was seriously damaged by 2011’s massive floods. Subsequently, Mr Tan re-

started the business in early 2012 after receiving insurance claims. Currently, Ichitan

has five production lines (3 bottle lines, 2 UHT carbon lines) producing following

brands:

- Ichitan Green Tea

- Ichitan Dragon Black Tea

- Ichitan Double Drink

- Yen Yen by Ichitan

Among the four product lines, its main products are Ichitan Green Tea and Dragon

Black Tea, while Yen Yen Ichitan is a new product which was just launched in FY13.

Figure 4: Capacity of green tea

Current New capacity (2Q14)

Bottle 600mn bottles/yr 1,000m bottles/yr

UHT 200m boxes/yr 200m boxes/yr


Tax exemption for eight years

Ichitan production facilities are qualified for corporate income tax exemption and are

exempted from dividend tax payment for eight years. The board of Investment (BOI)

tax privileges along with the cold asceptic filled (CAF) technology at its plant will keep

its production costs low and improve its margins. The company’s CAF production

system helps lower packaging costs by reducing the amount of thermoplastic use.

The company also places a lot of emphasis on time management and human error

control. It has successfully implemented the automated storage & retrievable system,

which has proven to save time and reduce defect rates.

The company is adding new capacity by

around 60%, which is expected to be

completed by 2Q14

Ichitan is qualified for corporate income

tax exemption and is exempted from

dividend tax payment for eight years



Market leader in RTD green tea

The ready-to-drink (RTD) green tea drinks market size grew by a robust CAGR of

+28% from 2010-2012. It expanded by +39% when Ichitan joined the ranks in 2012.

Ichitan launched an aggressive marketing campaign by offering cash rewards and

lucky draws for drinkers, which enabled the company to gain market share from small

players. The three main players in the market are Ichitan, Oishi, and Puriku. Oishi

was ranked no.1 for almost a decade, until Ichitan joined the industry in January

2011.

Figure 5: Green tea by market size Figure 6: Market share (in 2012) of key players

6,317

7,798

9,481

13,177 16,500

0.230.21

0.39

0.25

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2009 2010 2011 2012 2013F

Mkt size Growth

THBm

44%

27%

14%

15%

Oishi

Ichitan

Puriku

Others

Source: Company prospectus Source: Company prospectus

A fast-growing company; set to overtake Oishi within 1.5 years

Within 1.5 years since its inception, Ichitan has gained market share over time from

25% in mid-2012 to around 50% in June 2013. The company is set to overtake Oishi

in terms of market share (Oishi’s current market share is around 44%), due to the

following factors:

1. Ichitan uses three of the best logistics companies to compete with Oishi’s

strong own distribution network.

2. Ichitan uses high-tech bottle-filling technology “cold aseptic filled” (CAF) for

all its production lines, which helps lower production costs.

3. Mr Tan promoted himself and its brands in charity-linked work. Thus, its

brand is well-recognised for among teenager and mass market.

Figure 7: Ichitan’s market share in green tea drinks

17%

25%

23%

41%

41%

43%

41%

33%

46%

43%

49% 50%

0%

10%

20%

30%

40%

50%

60%

Jul-1

2

Aug-1

2

Sep-1

2

Oct-

12

No

v-1

2

De

c-1

2

Jan-1

3

Feb

-13

Ma

r-1

3

Apr-

13

Ma

y-1

3

Jun-1

3

Source: RHB estimates, Nielsen



Room for expansion

I.) Maintain promotion campaign. Despite its high growth, there is still room

for Ichitan to expand further as RTD green tea is viewed as healthy drinks

vs carbonated drinks. The RTD green tea market was valued at THB8.64bn

in 1H2013 and is expected to reach THB16.5bn by end-2013. It is constantly

being driven by the introduction of new products and aggressive marketing

campaigns by RTD green tea producers. Thus, we are projecting Ichitan to

post three-year sales growth of 80%/20%/15% for FY13F/14F/15F.

II.) Capacity expansion by 60% in 2Q14. Proceeds from the IPO will be used

to finance capacity expansion of its bottled green tea drinks from 600m

bottles/year currently to 1,000m bottles/year by 2Q14.

Ichitan’s business outshines that of Oishi

The company has grown rapidly over the years via strategies such as: i) running an

aggressive promotion campaign with cash rewards, ii) leveraging on the founder’s

high profile in charity events, iii) capitalising on the founder’s expertise in the green

tea business, and iv) maximising profits with fewer production lines. As a result,

Ichitan has been able to grow its net profit at a much faster pace than Oishi despite

the fact that both are selling green tea drinks with similar flavours.

Better growth and margins

Ichitan reported a core loss of THB198m when it started operation in 2011. However,

it took only one year to overtake Oishi in terms of sales and net profit. In 1H13, the

group posted a net profit of THB541m vs Oishi’s THB79m. Ichitan’s key drivers

include product cost efficiency, a more efficient marketing campaign, and lower

marketing expenses with a SG&A/sales ratio of 15.7% (vs Oishi’s 29.5%).

Figure 8: Green tea drink performance (Ichitan vs. Oishi)

Sales (THBm) Core profit (THBm) – exceeding Oishi in 1H13

NPM – far better Oishi

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2010 2011 2012 1H13 2013F 2014F

OISHI Ichitan

772

633 537

79

220

392

(8)

(198)

(350)

541

967

1,233

(600)

(400)

(200)

-

200

400

600

800

1,000

1,200

1,400

2010 2011 2012 1H13 2013F 2014F

OISHI

Ichitan

9.9%

8.4%

2.6% 2.9%

4.3%

-9.0%

14.4% 13.8%14.6%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2011 2012 1H13 2013F 2014F

OISHIIchitan

Source: Company data, OISHI, RHB Research estimate



Valuation and recommendation

1H13 earnings made up 56% of our full-year forecast. Ichitan’s 1H13 sales

revenue alone hit THB 3.74bn, up 144% y-o-y, representing 53% of our full-year

forecast. Its EBIT soared 426% y-o-y to THB621m from THB118m in 1H12. The

group’s huge growth in sales and operating income was attributed to its ability to sell

its products through the traditional trade channel. Traditional retail accounts for 48%

of the company’s total sales, while modern trade accounts for 51%. Ichitan uses

three main distributors, namely DiethelmKellerSiberHegner (DKSH), Boon Rawd

Logistics and I AM Green Tea for both modern and traditional trades. However, the

use of Boon Rawd Logistics as its distributor in the traditional trade channel was a

game change for the company. Due to higher sales, Ichitan’s GPM jumped from

12.2% in FY11 to 27% in FY12, and climbed further to 31% in 1H13. Its NPM

expanded from 7.4% in FY12 to 13.6% in FY13F due to economies of scale.

Target price of THB19, based on 20x FY14F P/E. Going forward, we assume

sales growth of 20%/15% for FY14/FY15, with a constant GPM of 30% and NPM of

14.6%. Meanwhile, we maintain its SG&A/sales ratio at 15.8%. We use a 20x P/E of

FY14 earnings to derive the company’s fair value of THB19.

Figure 9: Key assumptions and forecast

THBm 2011 2012 1H13 2013F 2014F 2015F

Sales 1,057 3,907 3,747 7,032 8,439 9,704

Gross profit 129 1,055 1,167 2,145 2,532 2,936

EBIT (172) 475 621 1,127 1,303 1,520

Core profit (198) 350 541 967 1,288 1,490

EPS (THB) (0.35) 0.35 0.54 0.74 0.95 1.12

Sales growth n.a. 270% 144% 80% 20% 15%

Net profit n.a. n.a. 641% 173% 28% 18%

GPM n.a. 27% 31.1% 30.5% 30.0% 30.0%

EBIT margin n.a. 12.2% 16.2% 16.0% 15.4% 15.7%

Net profit n.a. 9.0% 14.3% 13.8% 14.6% 14.6%

% SG&A to sales 28.5% 16.3% 15.7% 15.8% 15.8% 15.8%

Effective tax rate - - - - - -

D/E ratio -10.3x 2.9x 1.9x Net cash Net cash Net cash

ROE 793.2% 81.1% 80.9% 27.6% 19.7% 21.0%

ROA -27.0% 16.3% 17.8% 8.1% 9.4% 10.0%

Source: Company data, RHB estimates

SG&A/sales change by 1%, earnings change by 7.5%. Net profit is sensitive to

change in SG&A to sales assumption. By sensitivity, change in SG&A by 1% will

make net profit change by around 7.5%.



Key Risks

The key risk to this company is its highly dependence on Mr. Tan as the key

representative in all the marketing campaigns, new product initiation, brand

awareness. Mr. Tan is viewed as a celebrity figure in Thailand. His TanPan

foundation concentrates on sports, education, natural calamities and public benefit.

Related work. He has created an image of a philanthropist as a part of the profits that

ICHI makes goes to his foundation. The TanPan foundation will continue to own

20.8% of the company post IPO. There are worries that without Mr. Tan, his products

will no longer be attractive to the customers. He is as the promotion campaigns will

not be as effective. We agree that there are risks attached to Mr. Tan do good

promotion campaigns as sales promotion is one of the major factors that has pushed

ICHI to the number one position in the RTD green tea market in Thailand. Without

Mr. Tan, ICHI’s green tea functional drink as a product is no different from other

brands. Our view is that, RTD green tea has created a niche of its own in the ready to

drink market. Carbonated drinks market size in Thailand is about THB50bn, while

RTD green tea is only THB16bn. Thus, the market size of RTD green tea is small

compared to the carbonated drinks. There is still room for growth. With market leader

position, ICHI’s brand has ample to gradually wean Mr. Tan off the campaigns.

Fast growing in RTD green tea comes mainly from promotion campaign that being

offered by two key competitors, Ichitan and Oishi. Thus, green tea business is

distorted by heavy marketing promotion. At this level, it is difficult to extract the reality

growth that green tea drink should be if promotion campaign is pull-backed. In

addition, continued hard sell promotions by offering cash reward seem to be an

industry norm and growth potential is highly sensitive to level of marketing promotion.

One man show company, highly reliance on Mr. Tan

Risk to growth in case marketing promotion pull-backed



Profit & Loss (THBm ) Dec-11 Dec-12 Dec-13F Dec-14F Dec-15F

Total turnover 1,057 3,907 7,032 8,439 9,704

Cost of sales 928 2,852 4,887 5,907 6,769

Gross profit 129 1,055 2,145 2,532 2,936

Gen & admin expenses 301 637 1,108 1,329 1,528

Oerating profit (172) 418 1,037 1,203 1,407

Operating EBITDA (159) 634 1,299 1,530 1,862

Depreciation of f ixed assets 13 159 171 226 341

Operating EBIT (172) 475 1,127 1,303 1,520

Other recurring income 0 57 90 101 113

Interest expense (26) (125) (160) (15) (30)

Exchange gains - - - - -

Exceptional income-net (593) 524 - - -

Pre-tax profits (791) 873 967 1,288 1,490

Taxation - - - - -

Profit after tax & minorities (791) 873 967 1,288 1,490

Net in come to ord equity (791) 873 967 1,288 1,490

Recurring net profit (198) 350 967 1,288 1,490


Cash flow (THBm) Dec-11 Dec-12 Dec-13F Dec-14F Dec-15F

Operating profit (791) 873 967 1,288 1,490

Depreciation & amortisation 13 159 171 226 341

Change in w orking capital (77) (470) (782) (39) (452)

Other operating cash flow 623 (420) 120 145 -

Operating cash flow (206) 267 636 1,635 1,409

interest paid (26) (125) (160) (15) (30)

Tax paid

Cash flow from operations (232) 142 476 1,620 1,379

Capex (2,310) (2,655) (1,500) (1,500) (600)

Othe investing cash flow (5) 1,168 - - -

Cash flow form investing activities (2,316) (1,487) (1,500) (1,500) (600)

Divedends paid 484 644

Increase in debt 2,224 4,657 - - -

Other f inancing cash flow - (3,701) (30) (500) (999)

Cash flow form financing activities 2,665 1,213 4,310 (515) (1,029)

Cash at beginning of period 50 - - - -

Total cash generated 168 36 3,323 2,928 1,384

Implied cash at end of period




Balance Sheet (THBm) Dec-11 Dec-12 Dec-13F Dec-14F Dec-15F

Total cash and equivalents 168 36 3,323 2,928 1,384

Inventories 66 454 489 591 677

Accounts recivable 248 656 1,055 1,266 1,456

Other current assets 703 276 150 150 150

Total current assets 1,184 1,422 5,016 4,935 3,666

Tangible f ixed assets 1,734 3,938 4,528 6,228 6,540

Intangible assets n.a. n.a. n.a. n.a. n.a.

Total other assets 703 276 150 150 150

Total non-current assets 1,749 3,949 4,528 6,228 6,540

Total assets 2,933 5,371 9,545 11,163 10,206

Short-term debt 328 641 - 585 200

Accounts payable 249 488 611 738 846

Other current liabilities 655 633 304 850 850

Total current liabilities 1,233 1,762 915 2,173 1,896

Total long-term debt 1,896 2,530 2,500 2,000 1,001

Total non-current liabilities 4 6 - - -

Total liabilities 3,132 4,297 3,415 4,228 2,980

Shared capital 600 1,000 1,300 1,300 1,300

Retained earnings reserve (799) 74 630 1,434 1,726

Other reserves

Share holders'equity (199) 1,074 6,130 6,934 7,226

Total equity (199) 1,074 6,130 6,934 7,226

Total liabilities & equity 2,933 5,371 9,545 11,163 10,206


Key Ratios (THB ) Dec-11 Dec-12 Dec-13F Dec-14F Dec-15F

Revenue grow th (%) n.a. 270% 80% 20% 15%

Operating profit grow th (%) n.a. 343% 148% 16% 17%

Net profit grow th (%) n.a. 210% 11% 33% 16%

EPS grow th (%) n.a. 166% -15% 33% 16%

BV pershare grow th (%) n.a. 423% 339% 13% 4%

Operating margin (%) n.a. 10.7% 14.8% 14.3% 14.5%

Net profit margin (%) n.a. 9.0% 13.8% 15.3% 15.4%

Return on average assets (%) n.a. 16.3% 10.1% 11.5% 14.6%

Return on average equity (%) n.a. 80.0% 26.9% 19.7% 21.0%

Net debt to equity (%) n.a. 2.92 net cash net cash net cash

Recurrent cash flow per share n.a. 0.61 0.97 1.28 1.41


10

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