Malaysia Breweries Sector - Credit Suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

22 March 2017 Asia Pacific/Malaysia

Equity Research Beer & Alcoholic Beverages

Malaysia Breweries Sector Research Analysts

Joanna Cheah, CFA

6 03 2723 2081

[email protected]

INITIATION

A tale of two breweries

Figure 1: Malaysia’s malt liquor market expected to stay stable

Source: Euromonitor, Credit Suisse estimates

■ A tale of two breweries. Malaysia’s malt liquor market (MLM) is expected to

grow at 4% p.a. (from 3.1% in 2015 and 3.6% in 2016) as we believe earlier

negative shocks to consumption courtesy of GST and price hikes should

gradually fade out on the back of an improved macro outlook. Beer is still one

of the cheapest forms of alcohol (aside from illicit alcohol) and thus should

benefit from consumer downtrading behaviour. While we cannot completely

rule out another round of tax hike for the brewers, we believe it is unlikely as

this will not only further dent the government's popularity prior to General

Elections, it is also insufficient to move the needle (alcohol excise collection

makes up 0.9% of the government revenue).

■ Initiate coverage on Carlsberg (CAB, OUTPERFORM, TP: RM17.80).

We expect Carlsberg’s earnings to recover swiftly in FY17, off a low base,

underpinned by: (1) rising market share in Malaysia with its convalescent

premium beer portfolio, (2) positive sales momentum in Singapore and (3)

associate Ceylon Brewery returning to the black. Carlsberg offers an

attractive 5.3% yield in FY17. The stock also trades at a cheaper valuation

multiple of 17x FY18 P/E vs Heineken’s 18x, whilst offering higher earnings

growth profile of 10% vs the latter’s 6%.

■ Initiate coverage on Heineken (HEIN, NEUTRAL, TP: RM18.70).

Heineken is a clear consensus favourite and is globally perceived to be a

stronger brand than Carlsberg, particularly from a marketing perspective.

However, following the stock’s strong outperformance and our earnings

growth expectations, we struggle to make the risk-reward work. We see

increasing signs of competitive threats from rival Carlsberg Malaysia, which

is now aggressively competing in the lucrative premium beer segment. The

stock offers attractive yields of 5.2% in FY17.

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22 March 2017

Malaysia Breweries Sector 2

Focus charts

Figure 2: We expect MLM volumes to grow 4% p.a. Figure 3: Consumption shocks should fade in 2017

Source: Euromonitor, Company data, Credit Suisse estimates Source: BNM, MIER

Figure 4: HEIN has the leading share at 60% Figure 5: Off-trade sales data — CAB gains traction

Source: Euromonitor, Company data, Credit Suisse estimates Source: Credit Suisse estimates

Figure 6: Carlsberg’s P/E looks more attractive Figure 7: Offering higher growth profile

Source: Credit Suisse estimates Source: Credit Suisse estimates

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22 March 2017


A tale of two breweries

No such thing as too much beer in the market

Malaysia’s MLM volumes is expected to grow at 4% pa in 2017 (from 3.1% in 2015 and

3.6% in 2016), as we believe the earlier negative shocks to consumption resulting from

GST and price hikes should gradually fade out on the back of an improved macro outlook

and consumers growing accustomed to the higher cost of living. Beer remains one of the

cheapest forms of alcohol and should benefit from consumer downtrading behaviour. A

key risk is another round of excise hike by the government, but we do not expect it to be

so soon following the hikes in 2016. While some would argue that the government is in

dire need to boost its revenue source to reign in its budget deficit, we argue that alcohol

excise collection makes up <1% of government revenue and therefore raising it would not

only further dent the government’s popularity leading up the General Elections (GE), it is

also insufficient to move the needle.

Heineken vs Carlsberg: The litmus test

Heineken has the leading market share as of 2016, at an estimated 61%. We expect

Carlsberg to slowly eat into Heineken’s market share in the next two years as the former’s

portfolio premiumisation starts to bear fruit. In terms of profitability, while Carlsberg has

overtaken Heineken since FY14 following the acquisition of Maybev by Carlsberg

Singapore, we expect Heineken’s profitability to lead going forward, as we have baked in

conservative estimates on Carlsberg’s earnings recovery. Heineken’s pre-tax margins will

continue to be superior to Carlsberg but the latter should show gradual improvement over

time. In terms of ROE expectation, we expect Carlsberg to continue to show better returns.

And lastly, the comparison on working capital cycle suggests that Carlsberg has a more

efficient cash cycle, though Heineken has been showing consistent improvement.

Prefer Carlsberg over Heineken

We like both companies as they are quality names with good execution track record.

Heineken globally is perceived to be a stronger brand than Carlsberg, particularly from a

marketing perspective. Meanwhile, the Carlsberg Group is undergoing a big restructuring and

reinvestment process, with key strategic focus in Asia given the lack of growth in Europe.

From a valuation standpoint, we believe Carlsberg looks more attractive trading at 17x FY18E

P/E, vs Heineken’s 18x. The former also offers a stronger growth profile at +10% in FY18E vs

Heineken’s +6%.

Heineken is a clear consensus favourite, but given the stock’s strong outperformance and our

earnings growth expectations, we struggle to make the risk-reward work. We see increasing

signs of competitive threats from rival Carlsberg Malaysia, which is now aggressively

competing in the lucrative premium beer segment. We initiate with a NEUTRAL rating and

target price of RM18.70, implying 5% potential upside. The stock offers attractive yields of

5.5% in FY18, assuming a 100% payout.

We initiate on Carlsberg with an OUTPERFORM rating and target price of RM17.80, implying

22% potential upside. Admittedly, Carlsberg’s earnings track record has not been as

consistent as Heineken in recent years, but we now expect the worst to be over and earnings

recovery to be underway, off a low base. Our expectation of a 13% EPS growth in FY17 is

underpinned by: (1) strong double-digit growth for its premium beer segment; (2) positive

sales momentum in Singapore (and the weak MYR vs SGD should also help), and (3)

associate Ceylon Brewery returning to profitability. The stock offers attractive yields of 5.8% in

FY18, assuming a 100% payout.

22 March 2017


Peer comparison

Figure 8: Global beer peers

Ticker Company Price Mkt cap P/E (x) P/B (x) EV/EBITDA (x) Yield (%) ROE (%) EPS growth (%)

LC US$ mn 2017C 2018C 2017C 2017C 2017C 2018C 2017C 2017C 2018C

ABI.BR Anheuser-Busch InBev 104.15 189,701 22.4 19.7 3.1 15.5 3.6% 3.6% 15% 68% 14%

DGE.L Diageo 2,328.00 72,397 20.9 19.0 5.9 17.7 0.0% 0.0% 27% 15% 10%

HEIN.AS Heineken 79.64 49,345 20.3 19.0 3.1 12.2 1.8% 1.9% 15% 7% 7%

TBEV.SI Thaibev 0.94 16,869 19.8 18.3 4.4 17.6 3.3% 3.6% 22% 16% 9%

2502.T Asahi Group 4,200.00 17,064 21.4 20.2 1.9 10.4 1.4% 1.5% 9% 10% 6%

2503.T Kirin Holdings 2,095.50 16,958 29.0 26.6 2.7 10.8 1.9% 1.9% 10% 14% 9%

CARLb.CO Carlsberg 628.50 13,870 19.3 17.6 1.8 10.5 2.6% 2.8% 10% 28% 10%

HEIN.KL Heineken Malaysia 17.86 1,219 19.2 18.1 13.7 13.3 5.2% 5.5% 76% -34% 6%

CBMS.KL Carlsberg Malaysia 14.64 1,019 18.8 17.1 13.9 12.8 5.3% 5.8% 81% 16% 10%

Average 21.2 19.5 5.6 13.4 2.8% 3.0% 29% 15% 9%

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

Figure 9: Malaysia consumer staples peers

Ticker Company Price Mkt cap P/E (x) P/B (x) Yield (%) ROE (%) EPS growth (%)

LC US$ mn 2017C 2018C 2017C 2017C 2018C 2017C 2017C 2018C

NESM.KL Nestle Malaysia 80.60 4,269 25.0 23.0 23.6 3.5% 3.8% 93.2 5% 6%

BATO.KL BAT Malaysia 47.70 3,077 18.3 16.4 20.9 5.1% 5.7% 114.2 10% 12%

FRAS.KL F&N Holdings 24.30 2,013 23.1 21.0 4.1 2.8% 3.1% 18.5 1% 10%

QRES.KL QL Resources 4.55 1,283 25.8 22.7 3.0 1.3% 1.4% 12.5 11% 13%

HEIN.KL Heineken Malaysia 17.86 1,219 19.2 18.1 13.7 5.2% 5.5% 71.6 -34% 6%

CBMS.KL Carlsberg Malaysia 14.64 1,019 18.8 17.1 13.9 5.3% 5.8% 0.7 16% 10%

MSMH.KL MSM Holdings 4.47 710 18.0 15.5 1.5 3.8% 4.3% 8.6 44% 17%

Average 21.2 19.1 11.5 3.9% 4.2% 45.6 8% 11%

Source: the BLOOMBERG PROFESSIONAL™ service, IBES, Credit Suisse estimates

22 March 2017


We expect MLM volumes to grow at 4% p.a. “There is no such thing as bad beer. It’s that some taste better than others” – Bill Carter

Malaysia's malt liquor market (MLM) boasts an estimated size of 203 mn litres in 2016,

according to Euromonitor. In 2015 and 2016, the industry grew at 3.1% and 3.6%

respectively, in part due to the GST implementation in 2015 and two rounds of price hikes

in 2016, which have had a negative bearing on demand.

Figure 10: We expect overall MLM volumes to grow by 4% pa


We expect the industry to grow at 4% pa over 2017-19E as we believe the earlier negative

shocks to consumption should fade out as 2017 progresses. Credit Suisse economist

Michael Wan expects the macro outlook to improve from a weak 2016, with GDP likely to

surprise on the upside at 4.5% in 2017 vs consensus of 4.2%, and up from 4.2% in 2016.

Meanwhile, beer is still one of the cheapest forms of alcohol (illicit matters aside, which is

estimated to be about 20% of the total market) and consumers in downtrading mode would

be more susceptible to drink beer rather than a glass of overpriced hard liquor. Recall that

a 150% excise duty hike (RM24/litre to RM60) was slapped on locally produced hard liquor

effective 15 December 2016, thus increasing the prices by about 75%.

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MLM volumes hit 203 mn litres in 2016; in

2016, the industry grew 3.6% pa

We are projecting for MLM volumes to grow

4% pa as consumer sentiment recovers on

the back of an improved macro

outlook

22 March 2017


Figure 11: Malaysia private consumption vs

consumer sentiment % YoY

Figure 12: Malaysia private consumption vs MLM

volume growth

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

In value terms, we expect the industry to grow by 5% pa from RM7.3 bn in 2016. This is a

moderation from the 11% and 6% in 2015 and 2016, respectively, with the absence of any

shocking price hikes.

Figure 13: Market value is likely to grow at a slower pace by 5% pa


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In value terms, we expect slower growth

with the absence of any price shocks

22 March 2017


Malaysia’s beer consumption is one of the lowest in

the region

This puts Malaysia's beer consumption per capita at 6.4 litres, one of the lowest in the

region. This is unsurprising, as approximately 60% of the country’s population is Muslims.

The legal drinking age is currently >18 years but this will soon be raised to 21, effective 1

December 2017.

Figure 14: Malaysia’s beer consumption per capita

at 6.4 litres Figure 15: One of the lowest in the region

Source: Euromonitor Source: Euromonitor, Credit Suisse estimates

A duopoly game

Heineken and Carlsberg dominate the Malaysia MLM with a combined market share of

approximately 98% in 2016. We expect these two players to continue to dominate with

98% market share going forward.

The Royal Malaysian Customs oversees the production and taxation of alcoholic

beverages in Malaysia. So far, there has only been one instance whereby another player

was given the license to manufacture and market beer. This was back in 2007, where a

small company called Napex Corporation, owned by two Chinese businessmen, was given

the license. The beer was called Jaz and was priced about 20% cheaper than the locally

brewed brands sold by Heineken and Carlsberg. In addition, Napex also brewed the

Starker beer for the Overtime chain of pubs. However, the brewery then mysteriously

disappeared and there have been no new players since.

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Heineken and Carlsberg Malaysia

dominate the market at ~98% share

22 March 2017


Figure 16: Heineken and Carlsberg dominate the market with a 98% share

Source: Euromonitor, Company data, Credit Suisse estimates

Majority of beer still consumed on-premise

The on-trade channel accounts for c.60% of beer consumption in Malaysia. Most

mainstream pubs and bars in Malaysia sign contracts with either Heineken or Carlsberg to

serve beers exclusively, and there are hardly any that serve beers from both breweries.

However, in recent years, off-trade sales have increased in popularity owing to the soft

economic climate which propels consumers to cut down on expensive dining and drinking

out. The Malaysia consumer confidence index has been on a declining trend since 1Q13

and stood at 69.8 points as at 4Q16, below the 100 threshold level of confidence.

Figure 17: Beer consumption still predominantly on-

trade but off-trade has been growing faster

Figure 18: Malaysia's consumer confidence index

slipped 3.8 pp in the latest 4Q16 reading


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22 March 2017


Highest beer excise duties in Asia

Compared to neighbouring Asian countries, Malaysia currently levies the second highest

excise tax rate on beer and stout (after Singapore). There were three consecutive excise

hikes between 2004 and 2006, and subsequently no revision in taxes up till March 2016.

In the past, the government had used a mixed tax system to regulate the alcohol industry.

Excise taxes were imposed evenly across all segments (i.e., beer, wine, spirits) on a "per

litre of alcohol basis" plus a 15% ad-valorem tax. A 5% sales tax was also imposed but

was replaced by the 6% goods and services tax (GST) effective 1 April 2016.

Figure 19: Revision in alcohol tax structure since March 2016

Year 1999-2003 2004 2005 2006 2016

Excise duty RM4.32/litre RM4.75/litre RM6.00/litre RM7.40/litre RM175 per litre of alcohol

Quantum hike +72 sen +43 sen +125 sen +140 sen n/a

Ad-valorem 15% 15% 15% 15% -

Source: Ministry of Finance, Credit Suisse Research

But in March 2016, a new alcohol tax structure was introduced. The government removed

the ad-valorem across all categories in beer and stout and converted it to specific tax,

based on alcohol content and type of liquor. Excise duty payment is now at RM175 per

100% volume per litre. GST is levied at 6% on all products sold.

Room for price hikes but unlikely, unless absolutely necessary

Both Heineken and Carlsberg did not increase prices throughout 2015. However, the tax

changes that occurred in 2016 propelled the group to adjust prices by a range of 2-5%.

Subsequently in July 2016, upon the expiry of Anti-Profiteering Act (APA) on 30 June, both

brewers reported a price adjustment that resulted in a 2-2.5% hike, on average. While the

recent APA mechanism allows for more flexibility in raising prices, both brewers have

indicated that they are unlikely to do so.

Figure 20: Details of government revenue derived from alcohol

Revised

estimates

Estimates

RM mil 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Import Duties 72 62 65 79 79 81 107 135 127 136

Liquor 68 56 54 58 64 49 65 89 84 92

Malt liquor 4 6 10 21 15 14 19 13 15 16

Wine 1 1 0 1 3 18 23 33 29 28

Excise Duties 1,339 1,268 1,369 1,457 1,417 1,520 1,500 1,635 1,709 1,939

Locally manufactured liquor 119 104 115 114 113 127 120 138 131 151

Beer from malt 1,139 1,096 1,192 1,272 1,137 1,275 1,244 1,313 1,375 1,576

Wine 2 2 2 2 3 2 1 2 11 12

Imported beer from malt 7 10 18 25 84 29 25 23

Imported liquor 81 68 62 70 75 44 56 82

Imported wine 1 1 1 1 5 42 54 77

Sales Tax 92 97 100 105 117 115 119 56

Locally manufactured liquor 11 19 14 15 15 16 16 8

Locally manufactured beer from malt 72 67 74 76 77 80 82 42

Imported wine 0 0 0 0 1 6 8 2

Imported beer from malt 0 1 2 3 13 5 4 1

Imported liquor 8 10 10 11 12 8 10 3

Source: Ministry of Finance

Malaysia levies the 2nd

highest excise tax in

the world (after Norway and Singapore)

In 2016, there were two rounds of price hikes

by both brewers.

22 March 2017


We don’t expect another round of excise hike so soon

It remains a key apprehension to us as to whether the government will raise excise tax in

2017. If we digest the projected excise collection tabled during the Budget 2017, the

government is essentially expecting a 13.5% YoY increase in excise duties from beer, which

we believe cannot come from higher volumes alone. But then again, government budget

estimates have not exactly been the most accurate and insightful in the past and there tends

to be a variation in which the government will then adjust the estimates subsequently.

To provide perspective, we have compiled the government’s initial budget estimates and

compare it to the actual collection subsequently. The variance between original estimates

and actual collection range between -3% and 16% over 2009-15.

Figure 21: Past government budget estimates vs actual collection

Excise duties (RM mn) Variance

2009

Original estimate 1,213

Actual collection 1,268 5%

2010



2011



2012



2013


Actual collection 1,520 -3%

2014



2015



Source: Ministry of Finance, Credit Suisse Research

While some would argue that the government is in dire need to boost its revenue sources

to reign in its budget deficit and therefore has incentives to raise excise, we note that

excise collection from alcohol only contributes 0.9% to the total government revenue.

Therefore, raising excise will not only further dent the government's popularity leading up

to General Elections, it is also undoubtedly insufficient to move the needle.

As alcohol excise contributes <1% of

total government revenue, we do not

expect another round of excise hike so soon

22 March 2017


Heineken vs Carlsberg: The litmus test

Market share test: Heineken leads, but easy market

share gain days could be over

Market share data is hard to come by, but an informative picture can still be pieced together

from data available in the past, media articles quoting senior management (once in a blue

moon), and conversations with distributors of brewers, personnel at supermarkets/

hypermarkets/ convenience stores/ bars/ pubs. Our conclusion is that Heineken is still the

leader and in fact, grew its market share from 52% in 2006 to 61% in 2016.

Nevertheless, we have reasons to believe that Carlsberg's market share has been slowly

inching up over the past several months, courtesy strong growth of its super premium beer

segment. We are cognisant that a few months is too short a time frame to draw any

conclusions and could be skewed by factors like heavy discounting due to overstocking,

etc., but we are of the view that Carlsberg’s portfolio premiumisation will continue to be a

success and drive up its overall market share.

Figure 22: Heineken has done a good job in growing

market share over time but we think Carlsberg is

playing catch-up

Figure 23: Our proprietary data from off-trade

channels suggest that Carlsberg’s recent share has

been slowly inching up

Source: Euromonitor, Company data, Credit Suisse estimates Source: Credit Suisse estimates

Profitability test: Carlsberg has overtaken Heineken,

courtesy strong Singapore operations

In terms of profit base, Heineken used to lead by a far wider margin until Carlsberg started

consolidating its Singapore operations in FY10. The latter subsequently overtook in FY14,

as EBIT contribution from its Singapore operations jumped 27% YoY (following the

acquisition of Maybev) along with a 11% EBIT growth in the Malaysia operations.

Heineken’s FY16 consists of 18-months of operations and therefore is not suited for

comparison purposes. We are erring on the side of caution for our Carlsberg numbers

over FY17-19E and thus Heineken’s profitability is expected to lead.

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Heineken is the market leader, but we see signs of Carlsberg

stepping up its game of late

Carlsberg’s profits have caught up with

Heineken’s, courtesy of its diversification into

Singapore

22 March 2017


Figure 24: Carlsberg started to play catch-up upon consolidating SG operations

Source: Company data

Margin test: Heineken is still superior

We have looked at pre-tax margins of both companies and encouragingly, both have shown

good improvement over time. Heineken's margins are superior to Carlsberg, at 19.5% in

2016 vs 16.9% for the latter. We continue to expect Heineken to lead in terms of margins,

though we believe Carlsberg’s margins should show gradual improvement over time with its

new strategy targeted at improving supply chain and operating expenses efficiencies.

Figure 25: Carlsberg’s EBITDA margins lags behind Heineken’s

Source: Company data, Credit Suisse estimates

ROE test: Carlsberg wins

In terms of ROE comparison, Carlsberg has shown better returns over time, having

improved from 18.0% in FY06 to 64.3% in FY15. We have excluded FY16 figures as it is

skewed by Heineken's 18-months period and Carlsberg's misfortune at Sri Lanka. Recall

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Heineken’s margins are superior but we expect

Carlsberg to play catch-up

22 March 2017


that Carlsberg’s associate Lion Brewery at Sri Lanka was hit by floods in 2016, thus

causing the factory to be out of commission for at least three months.

Our DuPont analysis highlights that Carlsberg's superior ROE in the past is mainly derived

from higher net margins and higher leverage. Going forward, while our projection is for lower

net margins for Carlsberg, its higher ROEs will be driven by higher leverage, in our view.

Figure 26: DuPont analysis—Heineken vs Carlsberg

Heineken FY10 FY11 FY12 FY13 FY14 FY15 FY16* FY17E FY18E FY19E

Net margin 11.2 12.2 12.8 13.0 12.3 12.2 15.2 13.5 13.8 14.1

Asset turnover 2.1 2.2 2.1 2.3 2.3 2.5 3.5 2.8 2.8 3.0

Leverage 1.4 1.3 2.1 2.0 2.0 1.8 2.1 1.9 1.9 2.0

ROE 32.4 35.1 54.6 59.5 55.5 56.9 108.8 71.6 75.9 81.8

Carlsberg FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Net margin 9.7 11.2 12.1 11.8 12.9 13.0 12.2 13.2 13.3 13.5

Asset turnover 1.5 2.7 2.8 2.6 2.5 2.5 2.5 2.6 2.7 2.8

Leverage 1.6 2.0 1.9 2.2 2.1 2.0 2.1 2.1 2.2 2.3

ROE 23.0 58.2 64.1 67.2 67.8 64.3 63.7 74.0 81.2 86.1


Cash cycle test: Carlsberg is more efficient, though

its CCC has been showing deterioration

Carlsberg appears to be more efficient and manages to convert cash through the cycle in

fewer than three days, though the group used to achieve negative conversion cash cycle

from 2010 to 2014. Meanwhile, Heineken’s cash conversion cycle, while higher than

Carlsberg, has been showing good improvement over time, from 23 days in 2010 to 11

days in 2016.

Figure 27: Heineken’s CCC has been improving over

time

Figure 28: Carlsberg’s CCC has been deteriorating

but still superior to Heineken


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22 March 2017


Valuation: Carlsberg looks more attractive

We like both companies as they are quality names with good execution track record. But

from a valuation standpoint, Carlsberg trades at a lower PER multiple of 17x in FY18E, vs

Heineken’s 18x. Carlsberg offers a stronger growth profile of +10% vs Heineken’s +6%.

Figure 29: Carlsberg’s PE looks more attractive Figure 30: Offering higher growth profile

Source: Credit Suisse estimates Source: Credit Suisse estimates

Carlsberg Malaysia (OUTPERFORM, TP: RM17.80, 22% potential upside

The Carlsberg Group is undergoing restructuring and reinvestment, with key strategic

focus in Asia. We believe earnings recovery is underway (off a low base), underpinned by

the following:

■ Continuous focus on portfolio premiumisation. The group’s premium beer

segment has been showing strong double-digit growth over the past few years

and this is likely to have grown to quite a sizeable base of the overall portfolio.

Various datapoints have also alluded to Carlsberg gaining market share of late.

■ Positive sales momentum from Carlsberg Singapore. The company continues

to make good inroads following its acquisition of Maybev in 2014, as well as the

changes in Asia Pacific Breweries practices. A weaker MYR against SGD should

also help in terms of translation profits.

■ Ceylon Brewery returning to the black. The associate was loss-making in 2016

following unfortunate floods, which caused its factory closure. This has since

started operating from November 2016, and we expect it to return to profitability in

2017. The associate contributed 7% of Carlsberg Malaysia’s 2015 bottom-line.

Carlsberg offers attractive yields of c.5.3% in 2017 and 5.8% in 2018.

Heineken Malaysia (NEUTRAL, TP: RM18.70, 5% potential upside)

Heineken globally is perceived to be a stronger organisation than Carlsberg, particularly

from a marketing perspective. This stock is clearly a consensus favourite but has

outperformed the market by 31% since 2016. In view of this and our earnings

expectations, we struggle to make the risk-reward work. Moreover, we believe competition

is heating up, particularly from Carlsberg’s lucrative premium beer segment. On 100%

payout assumption, Heineken offers attractive yields of 5.2% in 2017 and 5.5% in 2018.

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22 March 2017


Key industry risks Unexpected excise hikes

In 2016, the government had changed the excise duty structure for the brewery sector in

Malaysia, by removing ad-valorem across all categories in beer and stout, and converted it

into specific tax. This had caused a mix in selling prices as some brands experienced drop

in excise duties while the rest saw an upward adjustment. Any further excise hikes will

need to be passed on to consumers via higher selling prices, which in turn could hurt

demand especially in the short term.

Nevertheless, we note that excise collection from alcohol makes up only 0.9% of the total

government revenue. Therefore, raising excise will not only further dent the government's

popularity leading up to the General Elections, but is also unlikely to move the needle in

boosting government revenue.

Cost pressures

Raw material cost constitutes only 7-8% of group’s revenue and thus any future spike

would squeeze margins albeit manageable, in our view. Other cost pressures could also

come from packaging cost, staff cost as well as distribution, sales and administrative

costs. Both brewers have shown good discipline in their cost management.

Collapse in beer demand

2015 and 2016 were difficult years for consumption, as we saw the implementation of

Goods and Services Tax (GST) and also the brunt of depreciating Ringgit. Any further

shocks to consumption, in our view, could cause a decline in underlying beer

consumption. Nevertheless, our Credit Suisse economist expects the macro outlook to

improve in 2017, and for private consumption to stay healthy which would bode well for

beer demand. Short-term setbacks to demand could arise from the absence of any major

football event in 2017.

Other regulatory challenges

On 27 May 2016, the Ministry of Health came up with a new regulation mandate that all

retail outlets are to carry and display the health warning statement “Drinking alcohol is bad

for health.” Additionally, signages on the prohibition of the sale of alcohol beverages to

individuals below the age of 21 years are to be displayed. This regulation, which is set to

take effect on 1 December 2017, is likely to further constrain trade in an already

challenging market.

On 1 November 2016, the Ministry of Finance imposed several new decrees under the

Customs Act, which has adversely affected trade in the duty-free islands of Langkawi,

Labuan and Tioman. This includes the imposition of a quota system and licenses for

distributors and retailers on these islands. Government officers have also been deployed

to monitor the sale of liquor at duty-free locations. These measures are causing great

inconvenience to retailers and negatively impacting consumption and sales.

Long-term decline in structural demand

The low per capita consumption of beer in Malaysia can be partly explained by Muslims

making up about 60% of the country’s population. According to the Department of

Statistics, the percentage of Bumiputra population is anticipated to increase to 68% by

2040. This could pose a long-term structural demand decline, especially if there is an

official drinking ban on Muslims.

22 March 2017


Figure 31: Market focus and key brands of Heineken and Carlsberg

Heineken Carlsberg

Super premium Paulaner

Kronenbourg

Strongbow

Somersby Cider

Kirin Ichiban

Asahi

Premium Heineken

Corona

Guinness

Skol Super

Smirnoff ice

Carlsberg Gold

Mainstream Tiger

Royal Stout Beer

Anchor

Carlsberg Special Brew/ Green

Value Malta

Nutrimalt

Anglia Shandy

Jolly Shandy


22 March 2017


Asia Pacific/Malaysia Beer & Alcoholic Beverages

Carlsberg Brewery Malaysia Bhd

(CBMS.KL / CAB MK) Rating OUTPERFORM Price (20-Mar-17, RM) 14.66 Target price (RM) 17.80 Upside/downside (%) 21.5 Mkt cap (RM/US$ mn) 4,516 / 1,021 Enterprise value (RM mn) 4,517 Number of shares (mn) 308.08 Free float (%) 48.1 52-wk price range (RM) 15.20-12.42 ADTO-6M (US$ mn) 0.4 Target price is for 12 months.

Research Analysts

Joanna Cheah, CFA

6 03 2723 2081

[email protected]

INITIATION

Too many low hanging fruits

■ Initiating coverage with OUTPERFORM. We initiate coverage on Carlsberg

Malaysia (CAB) with an OUTPERFORM rating and a DCF-based target price

of RM17.80, implying 22% potential upside from current levels. Carlsberg has

the second-largest share in the domestic beer market. It also owns 100% of

Carlsberg Singapore and 25% of Lion Brewery Ceylon.

■ It wasn't always a smooth draught. Admittedly, Carlsberg has not been as

consistent as Heineken in the past in terms of earnings delivery. However, we

believe the worst is now over for the group, and earnings recovery is under

way (off a low base); we project a three-year earnings CAGR of 10%. On our

estimates, the stock trades at 19x FY17E P/E, lower than its Malaysia

consumer staples peers’ 21x and global beer peers’ 21x, while offering

stronger growth at 16% (vs 8% and 15%, respectively).

■ Too many low hanging fruits. Following several years of portfolio

premiumisation efforts, it is starting to pay off as its premium beer now

constitutes a sizeable base of the group’s portfolio. While too preliminary to

conclude, our proprietary data from the off-trade sales channel points towards

evidence of rising market share in the recent months. In addition, we expect

Carlsberg Singapore to continue its strong sales momentum, and for

associate Lion Brewery to return to profitability in 2017. Sail 22, an initiative

introduced in May 2016, is aimed at achieving efficiencies. We note that

Carlsberg Group is undergoing a big restructuring and reinvestment process,

with its key strategic focus being Asia.

■ Key risks. A sharp fall in consumption would negatively affect beer demand,

while another round of excise duty hike is also a key risk to our thesis.

Share price performance

The price relative chart measures performance against the

FTSE BURSA MALAYSIA KLCI IDX which closed at

1,749.41 on 20/03/17. On 20/03/17 the spot exchange rate

was RM4.42/US$1

Performance 1M 3M 12M Absolute (%) 1.7 4.6 8.0 Relative (%) -1.1 -3.1 5.9

Financial and valuation metrics

Year 12/16A 12/17E 12/18E 12/19E Revenue (RM mn) 1,679.5 1,805.5 1,961.7 2,130.7 EBITDA (RM mn) 327.8 353.1 386.2 417.6 EBIT (RM mn) 294.1 317.8 346.5 377.8 Net profit (RM mn) 205.0 238.0 261.2 286.8 EPS (CS adj.) (RM) 0.67 0.78 0.85 0.94 Change from previous EPS (%) n.a. - - - Consensus EPS (RM) n.a. 0.76 0.82 0.87 EPS growth (%) (5.1) 16.1 9.8 9.8 P/E (x) 21.9 18.8 17.2 15.6 Dividend yield (%) 4.9 5.3 5.8 6.4 EV/EBITDA (x) 13.8 12.8 11.8 10.9 P/B (x) 13.93 13.93 13.93 13.93 ROE (%) 62.4 74.0 81.2 89.2 Net debt/equity (%) Net Cash 4.1 8.7 14.4

Source: Company data, Thomson Reuters, Credit Suisse estimates

22 March 2017


Carlsberg Brewery Malaysia Bhd (CBMS.KL / CAB MK)

Price (20 Mar 2017): RM14.66; Rating: OUTPERFORM; Target Price: RM17.80; Analyst: Joanna Cheah

Earnings Drivers 12/16A 12/17E 12/18E 12/19E

- - - - - - - - - - - - - - - - - - - -

Income Statement (RM mn) 12/16A 12/17E 12/18E 12/19E

Sales revenue 1,679 1,806 1,962 2,131 Cost of goods sold 1,082 1,161 1,257 1,362 SG & A 311 335 366 400 Other operating exp./(inc.) (42) (43) (48) (48) EBITDA 328 353 386 418 Depreciation & amortisation 34 35 40 40 EBIT 294 318 347 378

Net interest expense/(inc.) 5 5 5 5 Non-operating inc./(exp.) (0) 0 0 0 Associates/JV (5) 8 10 13 Recurring PBT 284 321 351 385 Exceptionals/extraordinaries 0 0 0 0 Taxes 73 77 84 92 Profit after tax 211 244 267 293 Other after tax income 0 0 0 0 Minority interests 6 6 6 6 Preferred dividends 0 0 0 0 Reported net profit 205 238 261 287 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 205 238 261 287

Balance Sheet (RM mn) 12/16A 12/17E 12/18E 12/19E

Cash & cash equivalents 36 20 4 2 Current receivables 270 290 315 343 Inventories 96 105 114 123 Other current assets 6 6 6 6 Current assets 409 421 439 474 Property, plant & equip. 172 176 176 178 Investments 73 81 91 104 Intangibles 4 4 4 4 Other non-current assets 3 3 3 3 Total assets 662 686 714 763 Accounts payable 252 270 293 317 Short-term debt 33 33 33 52 Current provisions 0 0 0 0 Other current liabilities 29 29 29 29 Current liabilities 315 333 355 398 Long-term debt 0 0 0 0 Non-current provisions 0 0 0 0 Other non-current liabilities 17 17 17 17 Total liabilities 331 350 372 415 Shareholders' equity 322 322 322 322 Minority interests 8 14 20 26 Total liabilities & equity 662 686 714 763

Cash Flow (RM mn) 12/16A 12/17E 12/18E 12/19E

EBIT 294 318 347 378 Net interest 0 0 0 0 Tax paid (65) (77) (84) (92) Working capital (2) (11) (11) (12) Other cash & non-cash items 44 42 47 47 Operating cash flow 270 273 297 320 Capex (43) (39) (40) (41) Free cash flow to the firm 227 234 257 278 Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 1 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) 3 2 2 2 Investing cash flow (39) (37) (38) (39) Equity raised 0 0 0 0 Dividends paid (220) (238) (261) (287) Net borrowings (1) 0 0 19 Other financing cash flow (12) (7) (7) (7) Financing cash flow (233) (245) (268) (275) Total cash flow (1) (10) (9) 5 Adjustments 0 0 0 0 Net change in cash (1) (10) (9) 5

Per share 12/16A 12/17E 12/18E 12/19E

Shares (wtd avg.) (mn) 306 306 306 306 EPS (Credit Suisse) (RM)

0.67 0.78 0.85 0.94 DPS (RM) 0.72 0.78 0.85 0.94 BVPS (RM) 1.05 1.05 1.05 1.05 Operating CFPS (RM) 0.88 0.89 0.97 1.05

Valuation (x) 12/16A 12/17E 12/18E 12/19E

P/E 21.9 18.8 17.2 15.6 P/B 13.93 13.93 13.93 13.93 Dividend yield (%) 4.9 5.3 5.8 6.4 P/CF 16.6 16.4 15.1 14.0 EV/sales 2.7 2.5 2.3 2.1 EV/EBITDA 13.8 12.8 11.8 10.9 EV/EBIT 15.3 14.3 13.1 12.1

Earnings 12/16A 12/17E 12/18E 12/19E

Growth (%) Sales revenue 1.2 7.5 8.6 8.6 EBIT 7.7 8.1 9.0 9.0 Net profit (5.1) 16.1 9.8 9.8 EPS (5.1) 16.1 9.8 9.8 Margins (%) EBITDA 19.5 19.6 19.7 19.6 EBIT 17.5 17.6 17.7 17.7 Pre-tax profit 16.9 17.8 17.9 18.1 Net profit 12.2 13.2 13.3 13.5

ROE analysis (%) 12/16A 12/17E 12/18E 12/19E

ROE 62.4 74.0 81.2 89.2 ROIC 66.1 71.4 73.1 74.7 Asset turnover (x) 2.5 2.6 2.7 2.8 Interest burden (x) 1.0 1.0 1.0 1.0 Tax burden (x) 0.7 0.8 0.8 0.8 Financial leverage (x) 2.0 2.0 2.1 2.2

Credit ratios 12/16A 12/17E 12/18E 12/19E

Net debt/equity (%) (0.9) 4.1 8.7 14.4 Net debt/EBITDA (x) (0.01) 0.04 0.08 0.12 Interest cover (x) 57.02 62.43 68.08 74.23

12MF P/E multiple

12MF P/B multiple

Source: Credit Suisse, Thomson Reuters


22 March 2017


Focus charts

Figure 32: Premium brands within CAB’s portfolio Figure 33: No. #2 market position in Malaysia

Source: Company Source: Euromonitor, company data, Credit Suisse Estimates

Figure 34: But reclaimed lost share in recent

months Figure 35: 12% earnings CAGR projection, FY17-19E

Source: Credit Suisse Source: Company data, Credit Suisse estimates

38%

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22 March 2017


Figure 36: Stock yields 5.3% on 100% payout Figure 37: Trading in line with historical mean

Source: Company data, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL™ service, Company, Credit Suisse estimates

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22 March 2017


Too many low hanging fruits

Market share to gradually rise with portfolio

premiumisation

Carlsberg used to lead in market share back in the 1990s but Heineken had subsequently

overtaken, given the latter’s strong marketing initiatives and product innovation. Over the

past six years, we note that Carlsberg’s market share has not done much, hovering at

c.38%. However, we believe that the group’s portfolio premiumisation efforts over the past

few years are starting pay off as this segment becomes sizeable (we estimate 10-15% of

overall portfolio).

Figure 38: We expect Carlsberg’s market share to slowly inch up


Carlsberg recorded strong volumes for four of its premium brands: Kronenbourg 1664,

Somersby Cider, Asahi Super Dry, and Connor’s Stout Porter. In its annual report, the

breakdown of volume growth for these brands in 2016 was:

■ Kronenbourg +26% YoY

■ Somersby Cider +27% YoY

■ Asahi + 7% YoY

■ Connor’s Stout + 72% YoY

In addition, our proprietary data obtained from the off-trade sales channel suggests that

Carlsberg has consistently gained share of late. Nevertheless, four months is too short a

period of time to draw any conclusion, and therefore we have maintained a more cautious

outlook in our share gains expectations.

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2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

Carlsberg’s market share over the past six years has been flattish

Premium beer portfolio has shown double-digit

growth and is starting to be of a sizeable base

22 March 2017


Figure 39: CAB’s market share has been gaining traction of late

Source: Credit Suisse research

Earnings likely to recover 16% in 2017E, 10% in 2018E

Over the past six years, Carlsberg’s earnings have posted a 7% CAGR. In 2016, the group

was plagued by associate losses at Ceylon Brewery. Save for the one-offs, management

guided that underlying profit would have grown 5%.

Figure 40: We project a three-year CAGR of 12% over FY17-19


Over 2017-19, we expect the group to chalk in an earnings CAGR of 12%. This would be

driven by rising share gains in Malaysia and Singapore, Ceylon Brewery returning to

profitability as well as further extraction of cost efficiencies.

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22 March 2017


Figure 41: We expect associate Lion Brewery to return to the black in 2017…


In May 2016, an unfortunate flood hit the area where Lion Brewery is located. As such, the

loss of production for a period of time had caused the associate to turn in losses for the year.

We understand that the plant has been operating since November, but management is

cautioning 1H to be a challenging one although it does expect it to return to profitability for

the full year. Lion Brewery has received a large proportion of the insurance claims—but

insufficient compared to the asset writedowns. Our associate profit estimates over 2017-19E

are still below what the brewer was chalking in at 2015, with a 85% leading market share.

Figure 42: …and Singapore to continue its strong sales momentum


In Singapore, sales momentum has been strong since it acquired a 51% stake in Maybev

(sole distributor of Asahi in Singapore) in 2014. This acquisition, coupled with the changes

in Asia Pacific Breweries Singapore (APBS)’s business practices in 2015, has resulted in

significant improvement in Carlsberg Singapore’s operations.

To recap, the Competition Commission of Singapore (CCS) had investigated APBS in

relation to its practice of supplying draught beer to retail outlets solely on an exclusive

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22 March 2017


basis. APBS has since provided CCS with a voluntary commitment to cease its outlet-

exclusivity practice. Pursuant to these changes, Carlsberg Singapore was able to supply

to a lot of more retail outlets.

Sail 22

The Carlsberg Group is undergoing a big restructuring and reinvestment process, with its

key strategic focus in Asia given the lack of growth in Europe.

Sail 22 is a new corporate strategy launched in March 2016, aimed at consolidating

existing efficiency projects and new profit improvement initiatives into a single programme.

Managing Director Lars Lehmann took helm of the Group in July 201 and is prioritising the

implementation of Sail 22 in both Malaysia and Singapore. The seven strategic priorities

are:

1. “Grow in mainstream” with Carlsberg and Carlsberg Smooth Draught;

2. “Win in store” with better in-store execution;

3. Delivering efficiencies in Supply Chain, Operating Expenses and Value Management;

4. ‘Go big in premium’ with Kronenbourg, Somersby, Asahi and Connor’s Stout;

5. Build new revenue streams with innovations;

6. Organic growth in operating profit and

7. Deliver high and stable dividend yield for shareholders.

Strategic priority #4 saw Carlsberg delisting the imported Beck’s and Corono Extra and

focusing on brands like Kronenbourg, and Somersby where 320ml cans were launched

late last year and have generated incremental sales among supermarkets and

hypermarkets.

Carlsberg’s sales, general and administrative expenses as a proportion of revenue have

come off to 18.5% in 2016 from 20.8% in 2015. Given the strong focus on efficiencies

going forward, we expect the group to maintain at these levels, and thus any further

incremental efficiency could provide upside to our earnings forecasts.

Figure 43: Carlsberg’s SG&A as a percentage of revenue


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22 March 2017


Strong cash flow generation

Carlsberg’s cash flow (CF) generation is likely to stay strong, with operating cash flow

averaging 15% of sales. Management has indicated limited capex; thus free cash flows

should stay elevated. At current levels, the stock’s free cash flow yields are between 5%

and 6%.

Figure 44: Operating CF as a percentage of sales

average at 12% Figure 45: Rising free cash flow as capex stays low


While we expect the group to turn from net cash to net debt, this is at very low levels and

only 0.01x net debt-to-EBITDA.

Figure 46: We expect the group to turn net debt but at very low levels


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22 March 2017


Sustaining dividends

Carlsberg Malaysia has paid out 77-107% of net profit as dividends in the past six years.

Dividend yields based on 21 March 2016 share price ranges between 2.8% and 4.9%.

Assuming a 100% payout going forward, the stock yields attractive 5.3% in 2017 and 5.8%

in 2018.

Figure 47: We forecast dividend payout of 100%


Initiate with OUTPERFORM; TP of RM17.80

We initiate coverage on Carlsberg Malaysia with an OUTPERFORM rating and a RM17.80

target price, implying 22% potential upside from current levels. A discounted cash flow

(DCF) methodology forms the basis of our valuation, and we have used a WACC of 8.2%

(4.0% risk-free rate, 6.5% equity risk premium and 0.8x beta). Our explicit forecast period

goes up to 2020, and we have assumed a terminal growth rate of 3.0% thereafter.

Figure 48: Valuing Carlsberg Malaysia

DCF valuation 2017 2018 2019 2020

Year 1 2 3 4

EBIT 317.8 346.5 377.8 400.9

EBIT (1-t) 241.5 263.4 287.1 304.7

Capex -39.0 -40.2 -41.4 -42.6

Depreciation 35.3 39.7 39.8 40.1

Change in working capital -10.6 -11.4 -12.3 3.6

Free cash flow 227.2 251.5 273.2 305.8

Discounted cash flow 227.2 251.5 273.2 305.8

Total forecast period 1,058

Terminal value 4,383

Total free cash flow 5,441

Net cash / (debt) 3

Equity value 5,444

No of shares 306

Equity value per share 17.80

Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service

0%

20%

40%

60%

80%

100%

120%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

LHS - Div yield RHS - Payout

Our DCF-based TP of RM17.80 for Carlsberg

implies a 22% potential upside.

22 March 2017


Trading in line with historical mean

Carlsberg is trading at 19x FY17E P/E, in line with its historical average. However, against

the Malaysia consumer staples peers as well as global beer peers, Carlsberg's valuation is

lower and offers stronger growth of +16% versus 8% and 15%, respectively.

Figure 49: Carlsberg is trading in line with the historical average P/E (x)

Source: the BLOOMBERG PROFESSIONAL™ service

Figure 50: Malaysia consumer staples peers

Ticker Company Price Mkt cap P/E (x) P/B (x) Yield ROE (%) EPS growth (%)

LC US$ mn 2017C 2018C 2017C 2017C 2018C 2017C 2017C 2018C








Average 21.2 19.1 11.5 3.9% 4.2% 45.6 8% 11%


Figure 51: Global beer peers comparison


LC US$ mn 2017C 2018C 2017C 2017C 2017C 2018C 2017C 2017C 2018C


DGE.L Diageo 2,328.00 72,397 20.9 19.0 5.9 17.7 0.0% 0.0% 27% 15% 10%

HEIN.AS Heineken 79.64 49,345 20.3 19.0 3.1 12.2 1.8% 1.9% 15% 7% 7%

TBEV.SI Thaibev 0.94 16,869 19.8 18.3 4.4 17.6 3.3% 3.6% 22% 16% 9%

2502.T Asahi Group 4,200.00 17,064 21.4 20.2 1.9 10.4 1.4% 1.5% 9% 10% 6%

2503.T Kirin Holdings 2,095.50 16,958 29.0 26.6 2.7 10.8 1.9% 1.9% 10% 14% 9%


HEIN.KL Heineken Malaysia 14.64 1,019 18.8 17.1 13.9 12.8 5.3% 5.8% 81% 16% 10%


Average Average 21.2 19.5 5.6 13.4 2.8% 3.0% 29% 15% 9%


12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

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-14

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-15

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5

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-15

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16

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-16

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6

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-16

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17

x

Mean +1SD -1SD PER

22 March 2017


Investment risks Unexpected excise hikes






demand especially in the short-term.

Nevertheless, we note that excise collection from alcohol makes up only 0.9% of total

government revenue. Therefore, raising excise will not only further dent the government's

popularity leading up to the General Elections, but is also unlikely to move the needle in

boosting government revenue.

Cost pressures

Raw material cost constitutes only 8% of Carlsberg’s revenue and thus any future spike

would squeeze margins, albeit manageable, in our view. Other cost pressures could also

come from packaging cost, staff cost as well as distribution, sales and administrative

costs. Carlsberg has shown good discipline in their cost management.





consumption. Nevertheless, Credit Suisse economist expects the macro outlook to







for health”. Additionally, signages on the prohibition of the sale of alcohol beverages to



challenging market.


Customs Act which has adversely affected trade in the duty-free islands of Langkawi,





22 March 2017


Appendix

Company overview

Carlsberg Malaysia is 51%-owned by Carlsberg A/S and was incorporated in Malaysia

since 1969. The group owns 100% of Carlsberg Singapore as well as a 25% stake in Lion

Brewery (Ceylon) in Sri Lanka.

In 2008, the group bought a 70%-stake in Luen Heng for RM2.1 mn, a distributor and

supplier of imported beers, wines and spirits. Some of the imported beers in its portfolio

include Hoegarden, Leffe, Franziskaner and Budweiser. Subsequently in 2015, Carlsberg

Malaysia divested its stake to “focus on beer as core” and also due to the fact that wine

and spirits business are fairly capital intensive given the high value of products and need

for keeping inventories.

Figure 52: Malaysia contributed 65% of group

revenue in FY16

Figure 53: While EBIT contribution is fairly similar at

67%


Carlsberg Singapore

Carlsberg currently has more than 20% market share in Singapore and holds the No. 2

position in the market. In April 2014, Carlsberg Singapore acquired a 51% stake in

MayBev, the sole distributor for Japan’s No. 1 beer brand, Asahi, in Singapore. This

acquisition, coupled with the changes in Asia Pacific Breweries Singapore (APBS)’s

business practices in 2015, has resulted in significant improvement in Carlsberg

Singapore’s operations.

To recap, the Competition Commission of Singapore (CCS) had investigated APB in

relation to its practice of supplying draught beer to retail outlets solely on an exclusive

basis. APBS has since provided CCS with a voluntary commitment to cease its outlet-

exclusivity practice. Pursuant to these changes, Carlsberg Singapore was able to supply

to a lot of more retail outlets.

Malaysia65%

Singapore35%

Malaysia67%

Singapore33%

Carlsberg Malaysia also owns 100% of

Singapore and 25% of Ceylon Brewery, Sri

Lanka

Carlsberg Singapore has No. #2 market

share.

22 March 2017


Figure 54: Carlsberg Singapore's revenue on the rise since 2013


Lion Brewery Ceylon

Lion Brewery is an associate of Carlsberg Malaysia (25% stake), and is engaged in the

brewing bottling and selling of beers, under license, for local and export markets. In Sri

Lanka, Lion dominates with an 85% market share, followed by Asia Pacific Breweries with

the remaining 15% share. Brands include Lion Lager, Carlsberg, Strong Beer, Special

Brew and Lion Stout.

Brand portfolio

The flagship brand is Carlsberg, complemented by premium brands Kronenbourg,

Somersby Ciders and Asahi Super Dry as well as power brands Royal Stout, SKOL, Jolly

Shandy and Nutrimalt. In Malaysia, we have Connor’s Stout Porter, a premium draught

stout and Corona Extra, an imported third-party beer brand.

Figure 55: Carlsberg Malaysia portfolio of beers


Arguably, Carlsberg has a much stronger premium beer brand portfolio currently (driven by brands Kronenbourg, Somersby and Asahi), previously dominated by the Heineken brands.

0

100

200

300

400

500

600

700

2008 2009 2010 2011 2012 2013 2014 2015 2016

RM mn

Revenue EBIT

Lion Brewery dominates the market

in Sri Lanka. The unfortunate floods in

2016 have caused a shutdown of its plant.

22 March 2017


Figure 56: Distributor's price list

Off-trade

Super premium Kronenbourg 330ml pint 13.29

Somersby Cider 330ml pint 10.11

Premium Skol Super 320ml can 7.78

Asahi 320ml can 6.99

Carlsberg Gold 320ml can 6.74

Mainstream Royal Stout Beer 320ml can 6.63

Carlsberg Special Brew 320ml can 6.18

Carlsberg Green 320ml can 5.68

Chang Beer 320ml can 5.59

Value Skol Beer 320ml can 5.01

Nutrimalt 320ml can 1.74

Jolly Shandy 320ml can 1.75

Source: Credit Suisse

Analysis of group revenue

Excise and customs duties make up 45% of Carlsberg Malaysia's group revenue in 2016.

Net profit made up approximately 13% of group revenue.

Figure 57: Approximately 13% of Carlsberg's 2016 group revenue is flown to

profits


Excise & custom duties45%

Sales, distribution, admin & other costs

23%

Raw & packaging material costs

8%

Staff costs6%

Taxation4%

Depreciation2%

PAT13%

22 March 2017


Management background Lars Lehmann, Managing Director

Lars Lehmann was appointed as Managing Director of Carlsberg Malaysia on 1 July 2016.

He is responsible for the South East sia sub-region comprising Malaysia and Singapore

and oversees Carlsberg's investment in Sri Lanka. He has been with the Carlsberg Group

since 2003 and has undertaken various senior positions in the area of sales, marketing

and general management for Western and Eastern Europe markets as well as Export

businesses. Prior to the appointment, he was the Regional CEO, Western Europe

Challenger Markets from 2012 overseeing 11 European markets.

Yee Chin Beng, Chief Financial Officer

Yee Chin Beng was appointed as CFO on 6 February 2017. Since 2012, he was the

Group CFO of PureCircle Limited, a major provider of natural ingredients listed on the

London Stock Exchange. Previously, he also held senior positions in

PricewaterhouseCoopers, Advance Synergy Capital Bhd, Cabot Corporation and Lafarge

Aggregates Sdn Bhd.

Gary Tan, Sales Director

Gary Tan has over 20 years of experience in the FMCG business. Prior to his appointment

as Sales Director of Carlsberg Malaysia in August 2009, he spent 14 years at Unilever

Malaysia.

Juliet Yap, Marketing Director

Juliet Yap joined Carlsberg Malaysia in 2007 from a business consulting background. She

had since held various senior positions in consumer insights, innovative and strategy

development. She was subsequently promoted to Business Development in January 2011

and took over the role of Marketing Director in February 2013.

David Bidau, Supply Chain Director

David Bidau came on board the Carlsberg Group from Brasseries Kronenbourg, France

following the acquisition of its parent company, Scottish & Newcastle in 2008. He brings

over 15 years of international experience having worked in Europe and Asia. Prior to his

appointment as Supply Chain Director of Carlsberg Malaysia in September 2015, he

oversaw the production operations of some 50 plants across nine markets in Asia as the

Asia Regional Production Director.

Jimmy Toh, General Manager of Carlsberg Singapore

As the General Manager of Carlsberg Singapore, Jimmy Toh brings over ten years of

managerial experience in the FMCG industry to the Singapore operations. He started his

career at British American Tobacco Singapore in the sales, marketing and distribution

function. Prior to joining Carlsberg Singapore in November 2015, he held several senior

commercial positions at Nestle, the most recent one being Country Business Manager for

Nestle Professional, managing the entire out-of-home business.

22 March 2017


Carlsberg Brewery Malaysia: HOLT® view

(HOLT is not part of Credit Suisse Research)

The HOLT methodology uses a proprietary performance measure known as Cash Flow

Return on Investment (CFROI®). This is an approximation of the economic return, or an

estimate of the average real internal rate of return, earned by a firm on the portfolio of

projects that constitute its operating assets. A firm's CFROI can be directly compared with

its real cost of capital (investors' real discount rate) to see if the firm is creating economic

wealth. By removing accounting and inflation distortions, the CFROI allows for global

comparability across sectors, regions and time, and is also a more comprehensive metric

than the traditional ROIC and ROE.

Carlsberg vs custom peer aggregate: Historical and

near-term expectations for returns and growth

HOLT provides the ability to aggregate economic returns and compare Carlsberg relative

to its custom peer group¹.

The aggregate of peers has had relatively stable returns averaging 16% since 2009. While

it is worth noting that Carlsberg has exhibited secular growth over the same period, with

returns rising to the historical peak of 27%.

Given the consistently strong and stable returns, Carlsberg has been awarded an eCAP®

in HOLT (empirical competitive advantage). Under this the HOLT default fade window is

extended to ten years, thus delaying the mean reversion to long-term observed levels.

Near-team consensus expectations (the pink bars) for Carlsberg are for returns to stabilise

at 25%—almost at a historical high vs its cost of capital of 4%. Market expectations are for

27% in the next ten years (the green dots in Figure 58 below), in line with what the

company achieved in 2015. Consensus expectations for the peer aggregate indicate a

decline in returns to 13% by 2018 from 15% in 2016, while market expectations are for an

increase to 18%—seemingly demanding as it has been never achieved before.

Figure 58: Exceptional value creation by Carlsberg Malaysia

Source: Credit Suisse HOLT®

1Peer group consists of Anheuser, Asahi, Carlsberg, Carlsberg Malaysia, Diageo, Heineken NV, Kirin Holdings, Suntory Beverage, Thai Beverage

22 March 2017


Breaking down the performance into sales, margins and asset turnover, it can be seen that

Carlsberg’s asset efficiencies are higher relative to the peers. While operating margins

have gained 800 bp since 2009, they are still below the peer levels. An increase in

margins following the penetration in high margin premium beer business could be potential

growth driver for the company.

Figure 59: HOLT chart comparison—sales, margins and turns


Analysing the economic returns

Carlsberg’s economic returns have also been on an uptrend since 2009 reinforced by the

strong driver’s value shown above. This has been rewarded by the markets seen in stock

outperformance (green line below).

Figure 60: Carlsberg’s economic profit and shareholder returns


22 March 2017


Driving returns forward to create value

Figure 61 below reflects the drivers of returns, in terms of margins and asset efficiency

across Carlsberg and its peers. The figure positions where the firms are currently,

representative of the levels of CFROI as expressed by the size of the bubbles.

Carlsberg currently trades at one of the highest asset efficiencies across its peers, while

margins are at peer median levels. If Carlsberg can improve margins, moving towards its

European peers, further upside is plausible.

Figure 61: Relative performance—drivers of returns on capital


Valuation

HOLT P/B vs CFROI®

HOLT is used to plot invested capital (price to book) against the near-term corporate

profitability (forecast CFROI). The linear regression shows potentially overvalued share

prices (above the line) and undervalued share prices (below the line). The custom portfolio

of Carlsberg and its peers has a correlation of c.89% between the corporate performance

and near-term valuation. As seen below, Carlsberg is attractively priced in comparison to

its peers.

22 March 2017


Figure 62: HOLT P/B vs CFROI


Analysing the Market-Implied Competitive Advantage Period (MICAP®)

Established/branded staples often have high expectations (elevated P/B), as a result of

their high/stable CFROI and inconsistent accounting treatment of substantial off-balance

sheet brand assets. HOLT offers a solution for this which is called the Market-Implied

Competitive Advantage Period (MICAP)—this implies solving for the number of years the

market is expecting a firm to maintain its forecast CFROI (MICAP), assuming low stable

growth. This approach improves comparability across global staples by normalising for

“buy vs build” brand assets.

It is worth noting that Carlsberg Malaysia has one of the most attractive ten-year median to

current MICAP spread across all peers.

22 March 2017


Figure 63: Carlsberg has one of the most attractive ten-year median to current MICAP


Overlay momentum to current valuations

The CFROI revisions in Figure 64 refer to changes in CFROI estimates by IBES

consensus forecasts in aggregate. Momentum has been negative for Carlsberg over the

past couple of months. Positive consensus revisions for Carlsberg should be necessary for

potential upside.

22 March 2017


Figure 64:Carlsberg has seen negative momentum in consensus revisions over the past couple of months


What’s priced in according to HOLT – Link to HOLT Lens

Against the backdrop of Carlsberg’s historical performance and near-term expectations,

HOLT is used to address the question “what’s priced in?” Figure 65 shows a scenario

implying 0% upside to the current share price.

The market is currently pricing in a c.2% CAGR in assets over the next ten years, together

with increase in returns to 30% levels. This is driven by the assumptions of 6% top-line

CAGR, alongside stable margins and asset efficiencies. Given that Carlsberg embeds

expectations for rising market share, earnings recovery along with the good growth

prospects, the CAGR of 6% in top line and 2% in assets are not very demanding.

https://holtlens.credit-suisse.com/dal/LnadjnZyNy73p9H

22 March 2017


Figure 65: HOLT Scenario with 0% upside to current price

Source: Credit Suisse HOLT ®

Additional information about the Credit Suisse HOLT methodology is available upon

request.

22 March 2017


Asia Pacific/Malaysia Beer & Alcoholic Beverages

Heineken Malaysia Bhd (HEIN.KL / HEIM MK) Rating NEUTRAL Price (20-Mar-17, RM) 17.88 Target price (RM) 18.70 Upside/downside (%) 4.6 Mkt cap (RM/US$ mn) 5,402 / 1,221 Enterprise value (RM mn) 5,460 Number of shares (mn) 302.10 Free float (%) 47.7 52-wk price range (RM) 18.66-13.68 ADTO-6M (US$ mn) 0.4 Target price is for 12 months.

Research Analysts

Joanna Cheah, CFA

6 03 2723 2081

[email protected]

INITIATION

Hold on to your drink

■ It’s been an excellent brew. Heineken is a well-run brewer which has

consistently generated strong cash flows and paid out good dividends to

shareholders. It has an enviable market position in Malaysia at ~60%. Key

brands within the group include Tiger, Guinness and Heineken.

■ But are the easy market share gains over? Carlsberg has done well in its

portfolio premiumisation and following years of strong double-digit growth, we

believe it has now grown to quite a sizeable base. Our proprietary data

obtained from off-trade channels suggests that Carlsberg has seen four

consecutive months of market share gains. While too preliminary to draw

conclusion from four months of data, we believe the days of “easy” share

gains by Heineken are over and it is likely to face rising threats to its position.

■ Priced to perfection; initiate with NEUTRAL. Following the stock’s strong

share price performance (+35% since 2016) and our earnings growth

expectation, we struggle to make the risk-reward work. The stock trades at

19x FY17E P/E, vs peers at 21x but the former offers a lower growth profile of

6% vs peers of 11%. We thus initiate coverage on Heineken Malaysia with a

NEUTRAL rating and DCF-based target price of RM18.70, implying 5%

potential upside from current levels.

■ Key risks. A collapse in consumption would negatively affect beer demand,

while another round of excise duty hike is also a key risk to our thesis.

Heineken has also entered into royalties contracts with Diageo and Heineken

N/V for a five-year period. Beyond that, any unfavourable changes in terms

could also affect the company negatively.

Share price performance

The price relative chart measures performance against the

FTSE BURSA MALAYSIA KLCI IDX which closed at

1,749.41 on 20/03/17. On 20/03/17 the spot exchange rate

was RM4.42/US$1

Performance 1M 3M 12M Absolute (%) 6.3 5.1 28.1 Relative (%) 3.6 -2.6 26.0

Financial and valuation metrics

Year 12/16A 12/17E 12/18E 12/19E Revenue (RM mn) 2,810.3 2,079.6 2,150.4 2,280.1 EBITDA (RM mn) 712.6 410.7 431.5 457.2 EBIT (RM mn) 551.1 370.8 391.9 419.8 Net profit (RM mn) 427.3 281.2 297.8 321.3 EPS (CS adj.) (RM) 1.41 0.93 0.99 1.06 Change from previous EPS (%) n.a. - - - Consensus EPS (RM) n.a. 0.95 1.01 1.07 EPS growth (%) 99.5 (34.2) 5.9 7.9 P/E (x) 12.6 19.2 18.1 16.8 Dividend yield (%) 8.1 5.2 5.5 5.9 EV/EBITDA (x) 7.7 13.2 12.5 11.8 P/B (x) 13.76 13.76 13.76 13.76 ROE (%) 111.2 71.6 75.9 81.8 Net debt/equity (%) 17.8 4.7 3.4 3.2

Source: Company data, Thomson Reuters, Credit Suisse estimates

22 March 2017


Heineken Malaysia Bhd (HEIN.KL / HEIM MK)

Price (20 Mar 2017): RM17.88; Rating: NEUTRAL; Target Price: RM18.70; Analyst: Joanna Cheah

Earnings Drivers 12/16A 12/17E 12/18E 12/19E

- - - - - - - - - - - - - - - - - - - -

Income Statement (RM mn) 12/16A 12/17E 12/18E 12/19E

Sales revenue 2,810 2,080 2,150 2,280 Cost of goods sold 1,827 1,352 1,391 1,471 SG & A 492 362 372 394 Other operating exp./(inc.) (221) (45) (44) (42) EBITDA 713 411 432 457 Depreciation & amortisation 162 40 40 37 EBIT 551 371 392 420

Net interest expense/(inc.) 2 1 0 (3) Non-operating inc./(exp.) 0 0 0 0 Associates/JV 0 0 0 0 Recurring PBT 549 370 392 423 Exceptionals/extraordinaries 0 0 0 0 Taxes 122 89 94 101 Profit after tax 427 281 298 321 Other after tax income 0 0 0 0 Minority interests 0 0 0 0 Preferred dividends 0 0 0 0 Reported net profit 427 281 298 321 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 427 281 298 321

Balance Sheet (RM mn) 12/16A 12/17E 12/18E 12/19E

Cash & cash equivalents 4 62 67 67 Current receivables 448 330 336 344 Inventories 62 56 55 56 Other current assets 13 13 13 13 Current assets 526 460 470 480 Property, plant & equip. 222 220 220 224 Investments 0 0 0 0 Intangibles 34 34 34 34 Other non-current assets 32 32 32 32 Total assets 814 746 756 769 Accounts payable 292 219 229 242 Short-term debt 74 80 80 80 Current provisions 16 16 16 16 Other current liabilities 0 0 0 0 Current liabilities 383 315 325 338 Long-term debt 0 0 0 0 Non-current provisions 0 0 0 0 Other non-current liabilities 38 38 38 38 Total liabilities 421 353 364 377 Shareholders' equity 393 393 393 393 Minority interests 0 0 0 0 Total liabilities & equity 814 746 756 769

Cash Flow (RM mn) 12/16A 12/17E 12/18E 12/19E

EBIT 551 371 392 420 Net interest 2 1 0 (3) Tax paid (123) (89) (94) (101) Working capital (152) 50 5 4 Other cash & non-cash items 170 40 40 37 Operating cash flow 447 373 343 357 Capex (70) (39) (40) (41) Free cash flow to the firm 378 334 303 316 Disposals of fixed assets 0 0 0 0 Acquisitions (18) 0 0 0 Divestments 2 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) 3 3 4 7 Investing cash flow (82) (36) (36) (34) Equity raised 0 0 0 0 Dividends paid (411) (281) (298) (321) Net borrowings (1) 6 0 0 Other financing cash flow 0 (4) (4) (4) Financing cash flow (412) (279) (302) (325) Total cash flow (46) 58 5 (2) Adjustments 0 0 0 0 Net change in cash (46) 58 5 (2)

Per share 12/16A 12/17E 12/18E 12/19E

Shares (wtd avg.) (mn) 302 302 302 302 EPS (Credit Suisse) (RM)

1.41 0.93 0.99 1.06 DPS (RM) 1.45 0.93 0.99 1.06 BVPS (RM) 1.30 1.30 1.30 1.30 Operating CFPS (RM) 1.48 1.23 1.13 1.18

Valuation (x) 12/16A 12/17E 12/18E 12/19E

P/E 12.6 19.2 18.1 16.8 P/B 13.76 13.76 13.76 13.76 Dividend yield (%) 8.1 5.2 5.5 5.9 P/CF 12.1 14.5 15.8 15.1 EV/sales 1.9 2.6 2.5 2.4 EV/EBITDA 7.7 13.2 12.5 11.8 EV/EBIT 9.9 14.6 13.8 12.9

Earnings 12/16A 12/17E 12/18E 12/19E

Growth (%) Sales revenue 60.7 (26.0) 3.4 6.0 EBIT 86.6 (32.7) 5.7 7.1 Net profit 99.5 (34.2) 5.9 7.9 EPS 99.5 (34.2) 5.9 7.9 Margins (%) EBITDA 25.4 19.7 20.1 20.1 EBIT 19.6 17.8 18.2 18.4 Pre-tax profit 19.5 17.8 18.2 18.5 Net profit 15.2 13.5 13.8 14.1

ROE analysis (%) 12/16A 12/17E 12/18E 12/19E

ROE 111.2 71.6 75.9 81.8 ROIC 99.5 64.5 72.9 78.7 Asset turnover (x) 3.5 2.8 2.8 3.0 Interest burden (x) 1.0 1.0 1.0 1.0 Tax burden (x) 0.8 0.8 0.8 0.8 Financial leverage (x) 2.1 1.9 1.9 2.0

Credit ratios 12/16A 12/17E 12/18E 12/19E

Net debt/equity (%) 17.8 4.7 3.4 3.2 Net debt/EBITDA (x) 0.10 0.04 0.03 0.03 Interest cover (x) 301.45 436.22 n.a. n.a.

12MF P/E multiple

12MF P/B multiple

Source: Credit Suisse, Thomson Reuters


22 March 2017


Focus charts

Figure 66: Key brands within Heineken’s portfolio Figure 67: #1 market position in Malaysia

Source: Company Source: Company data, Euromonitor, Credit Suisse estimates

Figure 68: CAB’s share appears to be inching up Figure 69: 7% earnings CAGR projection FY17-19E

Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 70: Stock yields >5% based on 100% payout Figure 71: Trading above historical mean

Source: Company data, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL™ service, Company, Credit Suisse estimates

57%58%

60% 60% 59% 59%

61%60%

59% 59%

2010

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18M2

016

2017

E

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E

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Heineken Carlsberg

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PER Mean +1SD -1SD

22 March 2017


Hold on to your drink Heineken, in our view, is an excellent-run brewer which consistently generates strong cash

flows and rewards dividends to shareholders. It has an enviable leading market position,

which supports its robust earnings growth momentum in a matured MLM market.

Enviable market share position

Figure 72: Heineken has the leading market share


Attractive dividend yields of >5%

Over the past seven years, the stock has been yielding between 3% and 8% (using

today’s share price). Dividend payout has been commendable, between 89% and 182%

over 2010-16. We have imputed a 100% payout assumption over FY17-19E, translating

into attractive yields of 5.2 – 6.0%.

Figure 73: On our 100% payout assumption, HEIN yields >5%


57%58%

60% 60% 59% 59%61%

60%59% 59%

2010

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22 March 2017


Supported by our 7% earnings CAGR projection

Figure 74: We expect earnings momentum to stay robust for HEIN


Heineken's bottom-line has been witnessing a CAGR of 7.0% between 2010 and 2015,

faster than its top-line, courtesy of the group's consistent delivery of cost savings. We

expect FY17 earnings to fall by 34% YoY but this is not comparable given the change in

financial year. Recall that the group had changed its financial year end from 30 June to 31

December in 2016 to coincide with the financial year of Heineken N.V. In FY18, we project

profits to grow by 6% and a further 8% in FY19.

Revenue CAGR was 5.2% between 2010 and 2015. We expect similar sales momentum,

at a 5.0% CAGR over 2017-2019E.

Figure 75: We expect sales CAGR of 5% over FY17-19E


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22 March 2017


Strong CF generation and manageable gearing

Operating cash flow averages at 14% of sales since 2010. Meanwhile, capex spending

has been minimal, giving rise to strong free cash flow levels.

Figure 76: Strong operating cash flow generation Figure 77: Rising FCF due to limited capex


Heineken’s net gearing at 17% in 2016 is at a manageable level, with net debt to EBITDA

at a paltry 0.1x. We expect gearing to gradually decline to ~5%.

Figure 78: Turned net cash to net gearing of 18% Figure 79: Net debt-to-EBITDA only at 0.1x


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22 March 2017


Risk-reward looks less attractive now Despite the above, we believe the risk-reward proposition looks less attractive for

Heineken now. The stock has done well, up 24% in 2016 and a further 9% in 2017.

Against KLCI, it has outperformed by 31% since 2016.

Figure 80: Heineken’s outperformance vs KLCI

Source: the BLOOMBERG PROFESSIONAL™ service

The strong share price performance versus our earnings growth expectation renders the

stock‘s valuation less attractive versus its own long-term mean and versus peers.

Against its historical mean of 16.6x, the stock is currently trading at a 16% premium at

19.2x P/E.

Figure 81: Heineken is trading at a 19% premium vs mean

Source: the BLOOMBERG PROFESSIONAL™ service, Company data, Credit Suisse estimates

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22 March 2017


Trades broadly in-line via-a-vis peers, but offers

lower growth

Figure 82: Heineken versus Malaysia consumer peers

Ticker Company Price Mkt cap P/E (x) P/B (x) Yield ROE (%) EPS growth (%)

LC US$ mn CY17 CY18 CY17 CY17 CY18 CY17 CY17 CY18C








Average 21.2 19.1 11.5 3.9% 4.2% 45.6 8% 11%

Source: the BLOOMBERG PROFESSIONAL™ service, I/B/E/S, Credit Suisse estimates

Heineken Malaysia trades at 19x FY17E P/E, below the Malaysia consumer names at an

average 21x. However, Heineken offers a much lower growth profile at 6% in FY18 versus

peers at 11%.

Against the global beer peers, Heineken is trading at a lower valuation multiple but similar

to the above, it offers a lower growth profile compared to Carlsberg.

Figure 83: Global beer peer comparison


LC USD mn CY17 CY18 CY17 CY17 CY17 CY18 CY17 CY17 CY18


DGE.L Diageo 2,328.00 72,397 20.9 19.0 5.9 17.7 0.0% 0.0% 27% 15% 10%

HEIN.AS Heineken 79.64 49,345 20.3 19.0 3.1 12.2 1.8% 1.9% 15% 7% 7%

TBEV.SI Thaibev 0.94 16,869 19.8 18.3 4.4 17.6 3.3% 3.6% 22% 16% 9%

2502.T Asahi Group 4,200.00 17,064 21.4 20.2 1.9 10.4 1.4% 1.5% 9% 10% 6%

2503.T Kirin Holdings 2,095.50 16,958 29.0 26.6 2.7 10.8 1.9% 1.9% 10% 14% 9%


HEIN.KL Heineken Malaysia 17.86 1,219 19.2 18.1 13.7 13.3 5.2% 5.5% 76% -34% 6%


Average 21.2 19.5 5.6 13.4 2.8% 3.0% 29% 15% 9%

Source: the BLOOMBERG PROFESSIONAL™ service, I/B/E/S, Credit Suisse estimates

Rising competition from Carlsberg in the lucrative

premium segment

While Heineken has an enviable position with a market share of ~60%, we are seeing

increasing signs of Carlsberg gaining traction with its super premium beer portfolio.

To give perspective, in 2016, Carlsberg’s super premium brands namely Asahi, recorded a

+7% YoY growth in volumes. Kronenbourg volumes grew 26% YoY, while Somersby Cider

grew 27%. After several years of double-digit growth, we believe this premium segment is

now off a sizeable base of the group’s portfolio and is starting to be a threat.

22 March 2017


Figure 84: Carlsberg's premium beer brands have enjoyed double-digit growth and starts to be sizeable

Source: Company presentation

Based on proprietary data that we were able to gather from off-trade channels, we

observed that Carlsberg’s market share in Peninsular Malaysia has been slowly inching up

over the past four consecutive months. Although four months is too short a period of time

to draw any conclusions, we now believe that the “easy” days of share gains for Heineken

are over and competition will start to heat up.

Figure 85: Carlsberg Malaysia's market share has slowly inched up

Source: Credit Suisse estimates

Initiate with NEUTRAL

We initiate coverage on Heineken Malaysia with a NEUTRAL rating and RM18.70 target

price, implying 5% potential upside from current levels. A discounted cash flow (DCF)

methodology forms the basis of our valuation, and we have used a WACC of 8.2% (4.0%

risk-free rate, 6.5% equity risk premium and 0.8x beta). Our explicit forecast period goes

up to 2020, and we have assumed a terminal growth rate of 3.0% thereafter.

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22 March 2017


Figure 86: Valuing Heineken Malaysia

DCF Valuation 2017 2018 2019 2020

Year 1 2 3 4

EBIT 370.8 391.9 419.8 437.8

EBIT (1-t) 281.8 297.8 319.0 332.7

Capex -38.5 -39.7 -40.8 -42.1

Depreciation 39.9 39.7 37.4 38.0

Change in working capital 50.1 5.1 4.1 3.7

Free cash flow 333.3 302.9 319.8 332.4

Discounted cash flow 333.3 302.9 319.8 332.4

Total forecast period 956

Terminal value 4,764

Total free cash flow 5,720

Net cash / (debt) -70

Equity value 5,651

No of shares 302

Equity value per share 18.70


22 March 2017


Key risks Unexpected excise hikes






demand especially in the short term.

Nevertheless, we note that excise collection from alcohol makes up only 0.9% of total

government's revenue. Therefore, raising excise will not only further dent the

government's popularity leading up to the General Elections, but is also unlikely to move

the needle in boosting government revenue.

Cost pressures

Raw material and packaging cost constitutes 9% of Heineken’s revenue and thus any

future spike would squeeze margins albeit manageable, in our view. Other cost pressures

could also come from packaging cost, staff cost as well as distribution, sales and

administrative costs. However, Heineken has shown good discipline in their cost

management.





consumption. Nevertheless, our Credit Suisse economist expects the macro outlook to







for health”. Additionally, signages on the prohibition of the sale of alcohol beverages to



challenging market.


Customs Act which has adversely affected trade in the duty-free islands of Langkawi,





22 March 2017


Appendix Heineken Malaysia was formerly known as Guinness Anchor Berhad (GAB); the latter was

a result of the merger with Malayan Breweries in 1989.

Shareholding structure

In October 2015, Heineken N.V. acquired the entire interest of Diageo in GAPL Pte Ltd

(GAPL), a major shareholder of GAB. Heineken N.V. now owns 100% of GAPL (based in

Singapore) which in turn holds a 51% interest in GAB. The company officially changed its

name in April 2016.

Pursuant to this transaction, Heineken Malaysia would continue to benefit from access to

both Heineken N.V. and Diageo's international brand portfolios. There are currently other

brands under Heineken N.V. that are not carried by Heineken Malaysia. The latter is

looking to introduce new variants to the Malaysia market but will need to do a careful study

of the most suited brands to cater to tastes and preferences. In terms of cost-saving

measures, since GAB is now part of Heineken's global supply chain, it will enjoy huge

cost-savings through strategic procurement that will improve its efficiency.

Figure 87: Latest shareholding structure


A clear market leader

The malt liquor market in Malaysia is dominated by Heineken Malaysia with about 60%

market share. The company has played catch-up and overtook Carlsberg Malaysia, having

grown its market share from approximately 47% back in 2002.

22 March 2017


Figure 88: Heineken Malaysia market share trend

Source: Company data, Euromonitor, Credit Suisse estimates

The key driver behind this commendable market share gain, in our view, goes beyond just

introduction of innovative products over the years. The company is backed by good

leadership and there is a clear distinction in the way their supply chain is handled versus

competitor, which is crucial in defending a leadership position.

Figure 89: Heineken Malaysia's portfolio of beers

Tiger Guinness Heineken Anchor Kilkenny Anglia Malta Strongbow Paulaner Kirin Ichiban Smirnoff Ice


Price point comparison

Based on the data collected from Heineken's distributor to both on-trade and off-trade

channels, we have classified their offerings into Super Premium, Premium, Mainstream

and Value (Figure 90). Tiger, Guinness and Heineken are arguably the group's strongest

brands within its portfolio, thus suggesting that its market share is skewed towards the

Premium and Mainstream segments.

47% 47%

49%50% 50%

55%56%

57% 57%58%

60% 60% 60% 60%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

22 March 2017


Figure 90: Distributor's price list

Off-trade On-trade

Super premium Paulaner 325ml pint 12.62 14.33

Strongbow 330ml pint 9.73 10.25

Kirin Ichiban 320ml can 8.95 9.49

Premium Heineken 320ml can 8.20 8.91

Guinness 320ml can 7.55 8.42

Smirnoff ice 275ml pint 7.53 7.81

Mainstream Tiger 320ml can 6.60 7.24

Anchor Strong 320ml can 5.66 7.17

Anchor Smooth 320ml can 5.66 5.92

Value Tiger Radler 320ml can 3.26 3.42

Malta 320ml can 1.96 2.14

Anglia Shandy 320ml can 1.91 2.07

Source: Credit Suisse estimates

Analysis of group revenue

Excise and customs duties as well as sales tax make up 48% of Heineken Malaysia's

group revenue in 2015. Net profit made up approximately 12% of group revenue.

Figure 91: Approximately 12% of Heineken's 2015 revenue were flown to profits


Excise, customs

duties & sales tax,

48%

Distribution, sales &

admin costs, 18%

Raw materials &

packaging costs,

9%

Staff costs, 6%

Taxation, 5%

Depreciation, 2%

PAT, 12%

22 March 2017


Management background Hans Essaadi, Managing Director

Hans Essaadi was appointed Managing Director in March 2013. His most recent role prior

to joining Heineken Malaysia was the General Manager of Sirocco, a joint venture

between Heineken and Emirates in Heineken Region – Africa and Middle East. He has

been with the Heineken Group since 1991 where he started his career as a Sales

Representative in Netherlands. His other roles within the Group include Sales Manager,

Export Manager, Country Manager (Puerto Rico), a key market for Heineken Group as the

No. 10 Heineken beer market in the world.

Teo Hong Keng, Finance Director

Teo Hong Keng was appointed as Finance Director in July 2016. Prior to this appointment,

he has held several senior finance roles within the Heineken Group in his tenure of more

than 15 years. His roles included Head of Finance of Cambodia Brewery Limited and

Finance Manager and Management Accountant of Tiger Export Pte Ltd. His most recent

role before joining Heineken Malaysia was as Finance Director in Asia Pacific Breweries

(Singapore) Pte Ltd.

Maud Meijboom van Wel, Marketing Director

Maud Meijboom van Wel was appointed in April 2016 and has over 14 years of experience

with the Heineken Group in Brand Development, Marketing Strategy, Communication and

Media Strategy. Prior to her appointment, she was the Marketing Director at DB Breweries

in New Zealand and under her leadership, DB Breweries has been winning in premium,

sub-premium and cider categories with brands like Heineken, Tiger, Monteith’s, Orchard

Thieves and Old Mout and has won several marketing awards, like a Cannes Golden and

Bronze Lion and the Marketing Company of the year award at the Effies.

Andrew Woon Kah Leong, Sales Director

Andrew Woon Kah Leong was appointed as Heineken Malaysia's sales director in

September 2016. Woon has over 20 years of experience working for some of the top

global multinational corporations such as Procter & Gamble, Johnson & Johnson, Nokia

and Samsung in increasingly senior local and regional roles.

William Mathers, Supply Chain Director

William Mathers joined Heineken Malaysia in April 2015 as Supply Chain Director. He has

over 30 years of brewing experience covering technical and operation functions, with

several major brewing companies working in the United Kingdom, Europe and most

recently working globally from the Netherlands. He started his career in 1981 where he

opened a micro brewing company in Glasgow brewing his own beer. Thereafter, he moved

on as a Brewing Manager at Webster’s Brewery, then part of the Diageo Group.

22 March 2017


HOLT® analysis Credit Suisse HOLT is not part of Equity Research

The HOLT methodology uses a proprietary performance measure known as Cash Flow

Return on Investment (CFROI®). This is an approximation of the economic return, or an

estimate of the average real internal rate of return, earned by a firm on the portfolio of

projects that constitute its operating assets. A firm's CFROI can be directly compared with

its real cost of capital (investors' real discount rate) to see if the firm is creating economic

wealth. By removing accounting and inflation distortions, the CFROI allows for global

comparability across sectors, regions and time, and is also a more comprehensive metric

than the traditional ROIC and ROE.

Heineken vs Custom Peer Aggregate – historical and near-term expectations for returns and growth

HOLT provides the ability to aggregate economic returns and compare Heineken relative

to its custom peer group¹

The aggregate of peers has had relatively stable returns averaging 16% since 2009. In

comparison, Heineken has earned higher returns averaging 19% since 2009, while the

recent uptrend makes it stand out compared to peers.

Given the consistently strong and stable returns, Heineken has been awarded an eCAP in

HOLT (empirical competitive advantage). Under this the HOLT default fade window is

extended to 10 years, thus delaying the mean reversion to long-term observed levels.

In Figure 92, near-team consensus expectations (the pink bars) for Heineken are much

more optimistic for returns at 30%. Market is pricing in a further increase to 32% in the

next 10 years (the green dot) - demanding compared to the company’s historical returns.

Figure 92: High value creation by Heineken Malaysia; optimistic market expectations


1Peer group consists of Anheuser, Asahi, Carlsberg, Carlsberg Malaysia, Diageo, Heineken NV, Kirin Holdings, Suntory Beverage, Thai Beverage

Breaking down the performance into sales, margin and asset turnover, it can be seen that

Heineken’s asset efficiencies are higher relative to the peers. It also stands out on sales

growth especially in the last couple of years. However operating margins did not follow the

22 March 2017


2009 uptick of peers and have grown marginally since then. Rising margins along with

healthy top line increase could be potential drivers for growth in future.

Figure 93: HOLT chart comparison: Sales, Margins and Turns


Analysing the economic returns

Underpinned by the strong drivers of value as mentioned above, Heineken’s economic

returns have also been on an uptrend since 2008, and the impact is clearly visible in the

shareholder returns (green line below).

22 March 2017


Figure 94: Value creation: Economic Profit and Shareholder Returns (TSR)


Driving returns forward to create value

Figure 95 below reflects the drivers of returns, in terms of margins and asset efficiency

across Heineken and its peers. The figure positions where the firms are today,

representative of the levels of CFROI as expressed by the size of the bubbles.

Heineken currently trades at the one of the highest asset efficiencies across its peers. If

Heineken can improve margins, moving towards European peers further upside is

plausible.

Figure 95: Relative performance – Drivers of returns on capital


22 March 2017


Valuation

Historical market expectations vs consensus forecasts

The peer set as a whole has been facing consensus upgrades (pink bars) since 2010

along with resilient market expectations. However it is worth noting that for Heineken, the

market expectations have followed the consensus expectation and have fallen over the

last one year. This has resulted in lowest spread in expectations between analysts’

expression of near-term corporate profitability and market implied expectations, limiting the

upside potential for the company.

Figure 96: Peer aggregate: Forecast vs market-implied returns on capital over time


Figure 97: Heineken: Forecast vs market-implied returns on capital over time


22 March 2017


HOLT P/B vs CFROI®

HOLT is used to plot invested capital (price to book) against the near-term corporate

profitability (forecast CFROI). The linear regression shows potentially overvalued share

prices (above the line) and undervalued share prices (below the line). The custom portfolio

of Heineken and its peers has a correlation of c.89% between the corporate performance

and near-term valuation. Heineken sits just below the line, again suggesting fair valuation.

Figure 98: HOLT P/B vs CFROI

Source: Credit Suisse HOLT

Analysing the Market-Implied Competitive Advantage

Period (MICAP)

Established / Branded staples often have high expectations (elevated P/B), as a result of

their high/stable CFROI and inconsistent accounting treatment of substantial off-balance

sheet brand assets. HOLT offers a solution for this which is called the Market-Implied

Competitive Advantage Period (MICAP) – This implies solving for the number of years the

market is expecting a firm to maintain its forecasted CFROI (MICAP), assuming low stable

growth. This approach improves comparability across Global Staples by normalising for

“buy vs. build” brand assets.

Heineken Malaysia is trading below the 10-year median levels, thus falling under the

attractive realm.

22 March 2017


Figure 99: Market-Implied Competitive Advantage Period


Overlay momentum to current valuations

The CFROI revisions in Figure 100 refer to changes in CFROI estimates by IBES

consensus forecasts in aggregate. Heineken has had the largest positive revisions in the

last 13 weeks across peers.

Figure 100: Changes in CFROI estimates

Source: Credit Suisse HOLT®, IBES

22 March 2017


What’s priced in according to HOLT - Link to HOLT

Lens

With the backdrop of Heineken’s historical performance and near-term expectations,

HOLT is used to address the question “what’s priced in?” Figure 101 shows a scenario

implying 0% upside to the current share price.

IBES is used as the starting point. The market is currently pricing in a c2% CAGR in

assets over the next ten years, together with increase in returns to 28% levels. This is

driven by the assumptions of 6% top-line CAGR, alongside stable margins and asset

efficiencies. Given that Heineken has consistently maintained its market share, if they can

introduce more innovative products and push marketing aggressively, the CAGR of 6% in

top line and 2% in assets are not very demanding.

Figure 101: HOLT Scenario with 0% upside to current price


For further details, please contact your HOLT representative.

https://holtlens.credit-suisse.com/dal/LOZaM6UcUSGxbLC

https://holtlens.credit-suisse.com/dal/LOZaM6UcUSGxbLC

22 March 2017


Companies Mentioned (Price as of 20-Mar-2017) Anheuser-Busch InBev (ABI.BR, €104.15) Asahi Group Holdings (2502.T, ¥4,138) BAT Malaysia (BATO.KL, RM47.7) Carlsberg (CARLb.CO, Dkr628.5) Carlsberg Brewery Malaysia Bhd (CBMS.KL, RM14.66, OUTPERFORM, TP RM17.8) Diageo (DGE.L, 2328.0p) F&NHB (FRAS.KL, RM23.6) Heineken (HEIN.AS, €79.64) Heineken Malaysia Bhd (HEIN.KL, RM17.88, NEUTRAL, TP RM18.7) Kirin Holdings (2503.T, ¥2,074) MSM (MSMH.KL, RM4.49) Nestle MY (NESM.KL, RM77.38) QL Resources (QRES.KL, RM4.58) Thai Beverage (TBEV.SI, S$0.94)

Disclosure Appendix

Analyst Certification I, Joanna Cheah, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less a ttractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as Eu ropean ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neu tral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 39% (61% banking clients) Underperform/Sell* 14% (53% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are d etermined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

22 March 2017


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Target Price and Rating Valuation Methodology and Risks: (12 months) for Carlsberg Brewery Malaysia Bhd (CBMS.KL)

Method: Our RM17.80 target price for Carlsberg Brewery Malaysia Bhd is based on a DCF (discounted cash flow) valuation methodology, using a WACC (weighted average cost of capital) of 8.2% and terminal growth rate of 3.0%. Our OUTPERFORM rating is premised on earnings recovery from portfolio premiumisation in Malaysia and Singapore as well as associate Ceylon Brewery returning to the black.

Risk: Key risks to our OUTPERFORM rating and RM17.80 target price for Carlsberg Brewery Malaysia Bhd include a collapse in consumer spending which will negatively impact beer consumption, rising cost pressures and keen competition affecting Carlsberg's market share.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Heineken Malaysia Bhd (HEIN.KL)

Method: We have used a DCF (discounted cash flow) valuation methodology to value Heineken Malaysia Bhd, given its strong free cash flows. Our target price of RM18.70 is premised on a WACC (weighted average cost of capital) of 8.2% and terminal growth rate of 3.0%. Following strong share price outperformance and our earnings growth expectation, we find risk-reward for Heineken less attractive at these levels. Valuations are on-par with peers whilst offering a much lower earnings growth profile. We thus have a NEUTRAL rating on the stock.

Risk: Key risks to our RM18.70 target price and NEUTRAL rating FOR Heineken Malaysia Bhd include further excise hikes, collapse in beer consumption, loss of market share and sustained weakness in MYR which would have a negative impact on imported raw materials. Upside risks include stronger than expected market share gains and further cost efficiencies that would see earnings surprise on the upside.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (DGE.L, 2503.T, ABI.BR, TBEV.SI, HEIN.AS) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (2503.T, ABI.BR, HEIN.AS) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (ABI.BR) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (2503.T, ABI.BR, HEIN.AS) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (CBMS.KL, CARLb.CO, DGE.L, 2503.T, BATO.KL, ABI.BR, TBEV.SI, HEIN.AS, 2502.T) within the next 3 months. Credit Suisse may have interest in (HEIN.KL, CBMS.KL, BATO.KL) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (DGE.L, 2503.T). Credit Suisse has a material conflict of interest with the subject company (2503.T) . Credit Suisse is acting as Financial Advisor to Heineken NV in relation to their announcement of the 20th January 2017, that they are in discussions regarding a potential transaction with respect to Brasil Kirin Holding SA, a subsidiary of Kirin Holding Company. Credit Suisse has a material conflict of interest with the subject company (HEIN.AS) . Credit Suisse is acting as Financial Advisor to Heineken NV in relation to its acquisition of Brasil Kirin Holding SA, a subsidiary of Kirin Holding Company

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Malaysia Breweries Sector - Credit Suisse

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