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Thailand Initiating Coverage

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22 February 2017 Consumer Non-cyclical | Food & Beverage Products

Thai Union Group Buy (Re-initiating)

Target Price: THB24.00 Price: THB19.60

Becoming a Global Seafood Player Market Cap: USD2,670m Bloomberg Ticker: TU TB

We re-initiate coverage on Thai Union with a BUY and THB24.00 TP (23% upside). We view the current share price of the global manufacturer and exporter of frozen and canned seafood – via leading brands like Chicken of the Sea, John West, and King Oscar – as an opportunity to buy for longer-term holdings. This is supported by the: 1. Increasing sales volume driven by new market expansion; 2. Successful forward integration with Red Lobster; 3. Maintaining of its leading position in the global seafood market.

Share Data Avg Daily Turnover (THB/USD) 217m/6.13m 52-wk Price low/high (THB) 18.5 - 22.8 Free Float (%) 65 Shares outstanding (m) 4,772 Estimated Return 23% Shareholders (%) Thai NVDR 13.8 Thiraphong Chansiri 5.3 Mitsubishi Corp 4.6 Share Performance (%) YTD 1m 3m 6m 12m Absolute (6.7) (6.7) (9.7) (3.9) 5.4 Relative (8.1) (6.8) (15.5) (5.6) (13.1) Source: Bloomberg

Source: Bloomberg

Table Of Contents Financial Exhibits 2 Investment Thesis 3 Valuation 6 Risks 7 Financial Analysis 9 Industry Overview 12 Company Snapshot 14 SWOT 20

Expansion in China and the Middle East. One of Thai Union Group’s (Thai Union) upcoming revenue drivers in the coming years involves the developing of its customer base in new markets like China and the Middle East. In China, especially, consumers (mostly the younger generation) have shown a change in purchasing behaviour. They now prefer semi-prepared seafood products over the traditional way of purchasing raw seafood from wet markets. This is due to convenience’s sake and the less time required for preparation. Forward integration with Red Lobster Seafood Co (Red Lobster). Thai Union has acquired a 25% stake in US seafood restaurant chain Red Lobster, which has franchises in nine countries. The USD230m consideration is equivalent to 6.4x EBITDA (relatively cheap vis-à-vis average US restaurants’ multiples of 10x). The stake buy allows the group to strategically expand into a new business segment (foodservice retail), directly reach its consumer base and capitalise in a timely manner on the trend for eating out more in the US. Maintaining its no. 1 brands in many countries. Thai Union owns several leading brands (eg Chicken of the Sea, John West and King Oscar) that have maintained leading market shares in their respective product categories. This not only creates a sustainable global customer base, but also allows the group to gain competitive advantages via the sharing of market knowledge, best practices and technologies. Halal accreditation promotes Muslim consumption. According to the Pew Research Centre, the world’s Muslim population is estimated at 1.7bn currently. This is expected to increase to 2.8bn in 2050, given that its believers have the highest fertility rates vis-à-vis other religions. We see Thai Union as well positioned to serve this rising market segment, as seafood products are halal by nature. Furthermore, the group has also been accredited with the halal standard by the Central Islamic Committee of Thailand. However, with total debt at >33% of total assets, this counter is not shariah-compliant. BUY. We initiate coverage on Thai Union with a BUY and DCF-based THB24.00 TP (23% upside), which implies 17.7x P/E, ie slightly below mean. Not only is the group expanding into new markets and business segments, the current share price – when compared to its regional peers – is still far discounted. Key risks that could affect Thai Union’s fundamental include raw material supply shortages from fishing bans/diseases, tighter trade regulations (eg import tariffs or stricter standards) and raw materials price volatility. This report marks the transfer of coverage to Watcharaphol Chotchawroj.

Source: Company data, RHB

Forecasts and Valuations Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover (THBm) 121,402 124,904 134,375 145,663 150,549Reported net profit (THBm) 5,092 5,373 5,254 6,235 6,749Recurring net profit (THBm) 5,092 5,373 5,254 6,235 6,749Recurring net profit growth (%) 0.0 5.5 (2.2) 18.7 8.2Recurring EPS (THB) 1.07 1.13 1.10 1.31 1.41DPS (THB) 2.01 0.57 0.55 0.65 0.71Recurring P/E (x) 18.4 17.4 17.8 15.0 13.9P/B (x) 2.19 2.05 1.96 1.84 1.72P/CF (x) 10.0 6.5 13.0 19.9 13.1Dividend Yield (%) 10.3 2.9 2.8 3.3 3.6EV/EBITDA (x) 14.8 12.4 15.2 13.8 12.7Return on average equity (%) 0.0 12.2 11.2 12.6 12.8Net debt to equity (%) 93.0 75.0 136.3 129.5 118.3Our vs consensus EPS (adjusted) (%) (5.8) (5.0) (9.6)

849096102107113119

18.019.020.021.022.023.024.0

Thai Union Group (TU TB)Price Close Relative to Stock Exchange of Thailand Index (RHS)

10203040506070

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Analyst Watcharaphol Chotchawroj +662 2862 9999 Ext 2028 [email protected]

http://www.efa.biz/

mailto:[email protected]

Thai Union Group Thailand Initiating Coverage



Financial Exhibits

Financial model updated on: 2017-02-22. Asia Thailand Consumer Non-cyclical Thai Union Group Bloomberg TU TB Buy Valuation basis DCF. Key drivers

i. Rising sales volume from entry into new markets;

ii. The launching of new high-margin products. Key risks

i. Volatility of raw material costs; ii. Declining global fish populations.

Company Profile Thai Union is a manufacturer and exporter of frozen and canned seafood, accompanied by its leading brands such as Chicken of the Sea, John West and King Oscar.


Financial summary Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRecurring EPS (THB) 1.07 1.13 1.10 1.31 1.41EPS (THB) 1.07 1.13 1.10 1.31 1.41DPS (THB) 2.01 0.57 0.55 0.65 0.71BVPS (THB) 9.0 9.6 10.0 10.7 11.4Weighted avg adjusted shares (m) 4,772 4,772 4,772 4,772 4,772

Income statement (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal turnover 121,402 124,904 134,375 145,663 150,549Gross profit 19,020 19,967 19,927 22,377 23,463EBITDA 9,424 10,517 9,788 10,802 11,657Depreciation and amortisation (2,434) (2,726) (2,983) (2,772) (3,022)Operating profit 6,990 7,790 6,805 8,030 8,634Net interest (1,673) (1,589) (1,440) (2,198) (2,171)Income from associates & JVs 162 336 194 194 194Pre-tax profit 6,807 7,339 6,443 8,158 8,790Taxation (1,040) (1,350) (583) (1,224) (1,318)Minority interests (676) (616) (606) (699) (723)Recurring net profit 5,092 5,373 5,254 6,235 6,749

Cash flow (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FChange in working capital (1,134) 4,194 (606) (3,093) (1,334)Cash flow from operations 9,398 14,376 7,187 4,691 7,119Capex (3,801) (1,913) (6,332) (3,618) (3,384)Cash flow from investing activities (8,677) 742 (31,456) (3,618) (3,384)Proceeds from issue of shares (2,561) 0 0 0Dividends paid (2,398) (2,720) (2,627) (3,118) (3,374)Cash flow from financing activities 886 (15,701) 19,821 (2,126) (4,192)Cash at beginning of period 1,621 2,123 2,816 976 1,146Net change in cash 1,607 (583) (4,448) (1,054) (456)Ending balance cash 3,228 1,540 (1,632) (78) 690

Balance sheet (THBm) Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FTotal cash and equivalents 2,123 2,816 976 1,146 2,008Tangible fixed assets 23,052 22,118 23,281 25,355 25,538Intangible assets 27,276 27,396 29,583 28,355 28,533Total investments 1,995 2,124 13,774 13,774 13,774Total other assets 1,729 2,176 15,650 15,650 15,650Total assets 114,916 110,911 142,365 147,821 150,956Short-term debt 27,023 22,887 40,247 20,061 19,407Total long-term debt 19,225 15,928 25,381 46,559 46,395Other liabilities 7,870 8,339 10,307 10,307 10,307Total liabilities 67,449 62,941 94,930 97,267 97,028Shareholders' equity 42,788 45,600 47,819 50,936 54,310Minority interests 3,802 2,754 4,193 4,193 4,193Total equity 47,467 47,970 47,436 50,553 53,928Net debt 44,124 35,999 64,652 65,473 63,794Total liabilities & equity 114,916 110,911 142,365 147,821 150,956

Key metrics Dec-14 Dec-15 Dec-16F Dec-17F Dec-18FRevenue growth (%) 0.0 2.9 7.6 8.4 3.4Recurrent EPS growth (%) 0.0 5.5 (2.2) 18.7 8.2Gross margin (%) 15.7 16.0 14.8 15.4 15.6Operating EBITDA margin (%) 7.8 8.4 7.3 7.4 7.7Net profit margin (%) 4.2 4.3 3.9 4.3 4.5Dividend payout ratio (%) 0.0 0.0 50.0 50.0 50.0Capex/sales (%) 3.1 1.5 4.7 2.5 2.2Interest cover (x) 4.18 4.90 4.73 3.65 3.98




Investment Thesis BUY, with a THB24.00 TP. We re-initiate coverage on Thai Union with a BUY call and DCF-based THB 24.00 TP. This implies FY17F P/E of 17.7x (slightly below mean) and P/BV of 2.22x (slightly above mean).

We view the weakening share price performance due to the rising cost of raw materials as an opportunity to buy into this counter. This is due to the following supporting factors:

i. Increasing sales volume, especially in new markets like China and the Middle East that ought to boost revenue and economies of scale;

ii. The Red Lobster deal is likely to provide a smooth transition into the group’s new business;

iii. Owning well-known brands in many countries helps Thai Union to maintain its consumer base in each region;

iv. Benefiting from the popularity of halal-related products due to the rise in the global Muslim population;

v. Compelling valuations when compared to other regional peers.

Branching into China and 12 Middle Eastern countries One of the key revenue drivers for the coming years, in our view, would come from product launches in new markets, especially in the countries with a large population.

To that extent, Thai Union has already formed a joint venture (JV) with Saudi Arabia’s Savola Group (Savola) – one of the largest food producers in the Middle East – to bring in new seafood products to this region. This venture is to operate in all six Gulf Cooperation Council (GCC) nations, ie Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). It would also have operations in:

i. Egypt;

ii. Iran;

iii. Lebanon;

iv. Jordan;

v. Iraq;

vi. Syria

According to the United Nations (UN) Department of Economic and Social Affairs, the GCC and the aforementioned six nations have a combined population of 297m people as at Jun 2016. This represents around 4% of the global population.

We believe Thai Union would benefit from Savola’s distribution network and market knowledge. This would allow the group to successfully move into the Middle East, where it estimates the seafood market to worth more than USD3bn. The JV targets to reach annual sales revenue of USD400m within the next 3-4 years.

Additionally, Thai Union is also launching frozen salmon, lobster and shrimp products under its international seafood brand King Oscar in China, with the initial focus on the Beijing and Shanghai markets.

King Oscar products are made from the most premium raw materials, which are carefully hand-cut and packed with the strictest quality control measures in place. This could serve consumers in China, which have shown an increased demand for premium seafood products.

In this North Asian nation, seafood has traditionally been purchased live by consumers in wet markets. This is changing, as the younger generation is less familiar with seafood handling techniques and more inclined towards buying semi-prepared products. In this market, Thai Union intends to pursue traditional channels, eg high-end retail and foodservice outlets, as well as through various specialty food websites.

We believe the group is moving in the right direction by targeting emerging markets. This is because, in our view, seafood consumption in such countries ought to grow faster than in other parts of the world. This is due to the combination of population growth, rising income and increased urbanisation in such nations.




Figure 1: John West products in the Middle East Figure 2: The King Oscar brand in China

Source: Company Source: China Fisheries & Seafood Expo

Red Lobster – new business to back-up long-term revenue targets In 2016, Thai Union acquired a 25% stake in US seafood restaurant chain Red Lobster from private equity firm Golden Gate Capital LP for USD230m. This was together with USD345m in 10-year preferred shares. These shares can be converted into 24% of common shares at any time before the expiry date. They can also be redeemed at par at the date of expiry.

The preferred shares offer 8% pa returns, which could add around THB960m to the group’s interest income.

The investment was fully funded by long-term debt and corporate bonds. We believe this is another step for Thai Union as it looks to generate revenue from new channels while maintaining its competitive advantage in the delivery of high-quality seafood products.

The group’s investment in Red Lobster has already delivered an instant 8% interest return of USD34m vis-à-vis the preferred shares. It has also kept risk levels low while generating sales volume for Thai Union, given that it is a supplier of semi-cooked products to the restaurant chain. In the longer term, the group’s profitability would also be less beholden to the volatility of raw material prices.

Red Lobster is an American casual dining restaurant chain that operates 50 outlets in nine countries around the globe under franchise agreements. This is in addition to its own 704 outlets in North America.

We expect Red Lobster to generate sales of approximately USD2.5bn pa, which is a significant portion when compared to Thai Union’s current revenue levels. Although the current profit from the new business would only be put into the group’s equity income, Thai Union could potentially acquire a little more stake in the restaurant chain to consolidate USD2.5bn in revenue and meet its USD8bn in topline by 2020 target.

Figure 3: Red Lobster coverage in the US Figure 4: Red Lobster – over 4m likes on Facebook fan page

Source: MapHugger Source: Facebook




Rising Muslim population to increase halal food awareness According to Thailand’s National Food Institute (NFI), the halal industry is one of the fastest-growing segments in the world with an annual growth rate of 20%. The Pew Research Centre also states that the world’s Muslim population is currently estimated at 1.7bn and is expected to increase to 2.8bn in 2050, given that its followers have the highest fertility rate vs all other religious groups.

Furthermore, the Organisation of Islamic Cooperation (OIC) has estimated that global halal food imports are valued at around USD164bn.

We see Thai Union as being well positioned to serve this rising market segment, as canned tuna and other seafood products are halal by nature. In addition to other safety accreditations, namely the:

i. International Organisation of Standardisation (ISO);

ii. Good Manufacturing (GMP);

iii. Best Aquaculture Practices (BAP)…

…the group was also accredited with the halal standard by the Central Islamic Committee of Thailand. This was part of its drive to continuously strive for excellence in food safety and high standards.

In our view, the growing global Muslim population would eventually increase demand for seafood products over the long run.

Figure 5: Projected number of people in 2010-2050 Figure 6: Muslim population by percentage of each country

Source: Pew Research Centre Source: Pew Research Centre

Maintaining the no. 1 brands in many countries Thai Union Group is not only the world’s largest canned tuna producer – with the processing volume of approximately 18% of total global production – it also owns several leading seafood brands that create trust and value for its products.

While most Thai consumers can recall Sealect as the leading canned tuna brand in the country, the group also owns the John West, Chicken of The Sea and King Oscar brands, among many others. Many of Thai Union’s brands are the leaders in terms of market share in many countries. This includes developed markets like the UK, France, Norway and the US.

We believe such brands create loyalty among their consumers in terms of trust, reliability, and quality, while allowing Thai Union to maintain its market share in those countries it operates in. This success also provides a platform that makes the group competitive as it enters into other markets or when it launches new products.




Figure 7: Thai Union’s leading brands in the US and Europe

Source: Company data, AC Nielsen, IRI

Valuation We have a positive view on Thai Union. Our TP of THB24.00 implies 2017F P/E of 17.7x (slightly below mean) and 2.22x P/BV (slightly above mean). We expect the group’s FY17 earnings to grow by 25%YoY. This is based on the:

i. Improvement in gross margins after product price adjustments;

ii. Plans to expand into China and the Middle East.

We value Thai Union based on the DCF approach, using 7.3% WACC and 3% terminal growth. From this, we can derive the THB24.00 per share TP, which implies 17.7x FY17F P/E.

The DCF TP was backed up by the counter’s P/E level, which is close to the 5-year average and far discounted from Thai Union’s regional peers. Given its relatively low beta, we see the group as a defensive stock, which would be more attractive during times of a market correction.




Risks The risks to our call are:

i. Rising raw material prices. The main unit cost of Thai Union’s products is derived from raw materials, which include tuna, salmon and other seafood. As the complexity of the global seafood supply chain is beyond the control of a single company, there are several factors that could affect raw material prices. Examples of this are unpredictable diseases that affect marine life or weather patterns, which could reduce catch rates and cause significant price increases;

ii. Exchange rate. Because the group owns subsidiaries in Europe and the US – where they report their performances in EUR and USD respectively – Thai Union’s consolidated financial statement (which is dominated in THB) would be affected by fluctuations in foreign currency exchange rates. However, as the group has a policy for forex rate management (characterised by a natural hedge) and use of forward contracts, we believe the impact from such rate risks would be minimised;

iii. Trade policy uncertainties. This is especially so in the US, which imports more seafood than any other country in the world. Any new regulation related to trade restrictions or import tariffs may negatively affect the sales volume or costs of doing business in America;

iv. New investments. Thai Union has been acquiring several companies both in Thailand and abroad due to its strategy for continual expansion. This, however, could the group to post M&A risks such as cultural, political and social issues.

Figure 8: Thai Union’s DCF valuation

Source: RHB

Figure 9: WACC breakdown Figure 10: Sensitivity on key assumptions

Source: Bloomberg, RHB Source: RHB

THBm 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026FEBIT (1-T) 8,938 9,448 10,700 11,453 12,066 12,414 12,776 13,152 13,542 13,947 Depreciation & Amortization 2,569 2,817 2,838 2,856 2,872 2,886 2,899 2,910 2,920 2,929 Capital Expenditure (4,800) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) Change in net working capital (3,093) (1,334) (974) (1,187) (1,270) (1,292) (1,334) (1,378) (1,422) (1,469) terminal valueFCFF 3,615 7,932 9,564 10,121 10,668 11,008 11,340 11,684 12,039 12,407 255,571 Present value 3,369 6,889 7,742 7,635 7,500 7,213 6,925 6,650 6,386 6,133 117,747 Terminal growth 3.0%WACC 7.3%Total discounted firm value 184,190 Less: Net debt (66,619) Less: Minority interest (4,193) Plus: Cash on hand 1,146 Total equity value 114,524 Number of share (M) 4,772 Equity value per share (THB) 24.00

WACC 7.3% cost of equity (W = 42%) 12.8% risk free 2.1% market return 15.5% beta 0.80 cost of debt (W = 58%) 3.3%

24.00 6.3% 6.8% 7.3% 7.8% 8.3%2.0% 35.4 28.8 23.8 19.8 16.5 2.5% 35.5 28.9 23.9 19.9 16.6 3.0% 35.7 29.1 24.0 20.0 16.7 3.5% 35.9 29.2 24.1 20.1 16.8 4.0% 36.1 29.4 24.2 20.2 16.9 Te

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al g

row

th

WACC




Relatively undervalued when compared to regional peers. In P/E terms, Thai Union’s share price is trading at around the average of its domestic peers. However, it is still far discounted vis-à-vis its regional peers. The latter could better reflect the group’s business exposure in terms of international presence in several regions. These include North America, Europe, Asia and the Middle East. Figure 11: Peers comparison

Note: Share price for related data as at 10 Feb 2017 Note 2: *RHB’s estimates Source: Bloomberg, RHB

Figure 12: Thai Union’s historical P/E ratios Figure 13: Thai Union’s historical P/BV ratios

Source: Bloomberg, RHB Source: Bloomberg, RHB

Company 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F

Thai Union Group PCL* TU tb equity 2,729 14.94 13.55 1.88 1.75 14.40 13.43 3.35 3.69 12.97 13.38

Charoen Pokphand Foods PCL* CPF tb equity 6,271 14.36 12.90 1.69 1.58 13.41 12.88 3.48 3.88 12.10 12.66

Thaifoods Group PCL TFG tb equity 947 16.05 13.83 4.10 3.50 10.80 9.92 3.28 3.65 30.30 27.80

GFPT PCL GFPT tb equity 529 11.31 10.83 1.60 1.47 8.72 8.76 2.60 3.12 14.65 13.96

Average Excluding TU 13.91 12.52 2.46 2.19 10.98 10.52 3.12 3.55 19.02 18.14

Kew pie Corp 2809 jp equity 3,967 22.72 20.35 1.94 1.82 9.41 8.81 1.32 1.47 8.84 9.14

Toyo Suisan Kaisha Ltd 2875 jp equity 3,845 19.35 19.19 1.50 1.40 8.19 7.85 1.56 1.59 7.56 7.24

Century Pacif ic Food Inc CNPF pm equity 1,169 20.12 17.44 3.98 3.40 13.55 11.78 1.21 1.36 21.69 20.93

Wessanen WES na equity 1,118 29.98 25.37 5.28 4.83 16.89 14.71 1.29 1.50 17.54 21.23

Fujicco Co Ltd 2908 jp equity 754 19.29 18.37 1.20 1.15 9.69 9.17 1.46 1.53 6.47 6.53

Average Excluding TU 22.29 20.15 2.78 2.52 11.55 10.46 1.37 1.49 12.42 13.01

ROE (%)

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Financial Analysis Revenue has been rising. Over the last few years, Thai Union has acquired several businesses, namely:

i. MerAlliance;

ii. King Oscar;

iii. Orion;

iv. Rügen Fisch…

…to raise its total sales volume. The rise in the prices of raw materials such as shrimp and salmon has also helped the group to continue booking record-high quarterly revenues.

This year, Thai Union is taking a further step by moving into the China and Middle East markets, where demand for seafood is growing with the rise in per capita consumption in those areas.

We estimate FY17 revenue to grow 8% to THB145bn. This is driven by:

i. The launch of frozen salmon, lobster and shrimp products in China under the King Oscar brand;

ii. A presence in 12 Middle Eastern countries, such as Saudi Arabia, Iraq and Iran.

Figure 14: Thai Union’s revenue and gross margins


Figure 15: Thai Union’s revenue breakdown by division


Gross margins have already bottomed out. In recent years, Thai Union’s profitability had been under pressure. This was mainly due to the unexpected high price for tuna, which is currently trading at around USD1,700 per tonne (+70%YoY). Continued high salmon prices have also hurt its salmon business since 1Q16.

Nevertheless, we believe that FY17 gross margins would gradually improve as the group re-negotiates its contracts with clients and focuses more on profitability instead of running promotions to drive sales.

THB M 2014 2015 2016 2017F 2018FAmbient Seafood 64,982 59,142 61,044 63,843 65,046 % growth -9% 3% 5% 2%Frozen and Chil led Seafood 40,572 50,307 55,832 63,446 66,210 % growth 24% 11% 14% 4%Pet Food and Other Value Added 15,848 15,734 17,499 18,374 19,293 % growth -1% 11% 5% 5%




Figure 16: Gross margins by division

Source: Company data

Debt has increased, but is still manageable. Thai Union recently issued THB12bn in new debentures and secured THB12.5bn in long-term loans in order to finance its investment in Red Lobster.

Despite the rise in government bond yields, the group can manage to reduce its debt costs by issuing long-term corporate bonds and maintaining its AA- credit rating with Thailand’s credit ratings agency, TRIS Rating Co Ltd (TRIS).

As the current net D/E ratio is well below its covenant of 2x, we believe Thai Union still has some room for M&A deals if opportunities arise that fit with the group’s strategies.

Figure 17: Thai Union’s net D/E ratio





The re-pricing of original equipment manufacturer (OEM) contracts ought to improve overall margins. Although FY16 had been a challenging year for Thai Union – as rising raw material prices had unexpectedly affected its GPMs – we believe the group can re-price its products going forward. This is especially with its OEM clients (who make up 57% of total sales) that have 6- to 12-month contract terms.

Moreover, Thai Union is targeting to not only grow in new markets like China and the Middle East, but plans to also launch new value-added products to serve a broader range of customers.

We estimate the group’s 2016 core profit at THB5.2bn, and forecast for this to grow at a CAGR of 15% approximately in 2017-2019. This would be driven by:

i. An increase in sales volume in new markets (eg China and the Middle East);

ii. Improvements in gross margins from product re-pricing and the launch of more value-added offerings.

Figure 18: Net profits and margins

Source: Company data




Industry Overview Tuna (37% of total sales) Another challenging year for canned products, with the rising price of raw materials. In 2016, the price of raw tuna remained remarkably high throughout the year. This was amid:

i. Less catches in the Pacific – impacted by the El Niño weather phenomenon;

ii. The earthquake in mid-Apr 2016 that hit Ecuador and damaged the port of Manta, one of the Pacific tuna fleet’s most important ports;

iii. The ban on using fishing aggregating devices (FADs) to catch fish in the Western and Central Pacific Ocean between the months of July and October.

If the price of tuna price continues to increase, this would pressure the margins of canned products. This is because the producers are unable to easily raise the price of their products in the retail market.

We believe that prices should seasonably soften in 1H17 before rising again in 3Q17. This is when the ban on FADs is implemented in July-October.

Figure 19: Average tuna price

Source: Company data, Bloomberg

Shrimp (29% of total sales) Recovery in Thai supply. The domestic shrimp industry has been affected by outbreaks of the deadly early mortality syndrome (EMS) disease since 2012. EMS causes baby shrimp to stop eating, release toxins and eventually die within 30 days.

The squeeze has recently been alleviated by the development of a new species of shrimp, as well as newer farming practices. This has led to a comeback in Thailand’s shrimp production to approximately 300,000 tonnes pa, according to the Thai Shrimp Association.

While the country’s competitors in the export of shrimp, ie India and Vietnam, hold 16.2% and 15.1% market shares respectively (according to the NFI’s data as at 2015), domestic producers distinguish themselves with their high quality and credible product traceability.




Figure 20: Average shrimp prices Figure 21: Thailand’s shrimp production

Source: Company data, Bloomberg Source: National Food Institute (NFI)

Salmon (9% of total sales) Elevated price levels hurting processing manufacturers. 2016 had been a difficult year for salmon farmers, specifically those in Norway and Chile. Norwegian farmers saw their livestock affected by sea lice, while an algal bloom in southern Chile resulted in large salmon mortalities and decreased harvests during the year.

In addition, Chilean authorities also introduced new regulations that limited production growth to 3% pa and penalised aquaculture companies for poor sanitary performances. The additional costs entailed by sanitary requirements – along with algal bloom issue – may cause salmon farmers in Chile to lay off their employees and decrease overall production levels.

At the same time, while big retail chains are likely to utilise their market power to resist the urge to pass on price hikes onto the consumer, processing manufacturers are likely to face the challenge of continually rising raw material prices in 2017, in our view.

Figure 22: Norway’s salmon export prices

Source: Bloomberg




Company Snapshot Thai Union is a processor and exporter of frozen and canned seafood. It has operations in 12 countries across five continents:

i. North America;

ii. Europe;

iii. Africa;

iv. Oceania;

v. Asia.

After almost 40 years of experience in the seafood industry, the group has become the world’s largest canned tuna producer. According to the UN’s Food and Agriculture Organisation’s (FAO) FishStat Plus data, Thai Union’s processing volume accounts for around 18% of the world’s total production.

Key divisions The group has divided the reporting of its operating performance into three main divisions:

i. Ambient seafood – this involves the production and distribution of canned tuna, sardines, salmon and other pelagic fish, mainly under owned brands like King Oscar, John West, Sealect and Mareblu;

ii. Frozen and chilled seafood – this involves the distribution of frozen shrimp, salmon, lobster, crab and squid directly to restaurants, hotels and food catering operations as ingredients for cooking;

iii. Pet care and value-added – this involves the production of other valued-added products such as wet seafood-based cat food, ready-to-eat meals, and scrap from its fish and shrimp processing lines.

Figure 23: Thai Union’s revenue breakdown by divisions (booked and forecasts)

Figure 24: Thai Union’s revenue breakdown by divisions (2015)

Source: Company data, Bloomberg Source: Company data




Ambient seafood (45% of total revenue) Thai Union’s ambient food business includes shelf-stable items sold to customers. These are mainly through retail channel such as:

i. Supermarket chains;

ii. Discount stores;

iii. Modern trade outlets.

The major product for this division is canned tuna. This is followed by sardines and salmon, which are mostly ready-to-eat and have a typical shelf life of between 2-4 years.

Figure 25: Thai Union’s ambient seafood segment’s revenue


Most of the raw materials are caught in the Pacific, Atlantic and Indian oceans, and are supplied to Thai Union’s production bases by regional traders. The group’s production bases are located in eight countries, with a maximum capacity of approximately 610,000 tonnes pa.

After the processing and canning processes, the finished products are marketed through Thai Union’s global distribution channels. It has seven major brands under its umbrella:

i. Sealect;

ii. King Oscar;

iii. Parmentier;

iv. Petit Navire;

v. John West;

vi. Mareblu

vii. Chicken of the Sea




Figure 26: Thai Union’s ambient seafood division’s supply chain

Source: Company

Frozen and chilled seafood (42% of total revenue) Thai Union’s primary frozen and chilled seafood division typically sells seafood items in the plastic bag format directly to:

i. Restaurants;

ii. Hotels;

iii. Food catering operations…

…as ingredients for further cooking. Shrimp is the main product of this division. This is followed by salmon, lobster, crab, squid and jelly fish. Generally, the products need to be refrigerated to maintain their shelf-lives, which range between a few days to a year.

Figure 27: Thai Union’s frozen and chilled seafood segment’s revenue





Unlike other seafood – where the raw materials are caught in the oceans – frozen products (specifically shrimp) are bred and farmed in Southern Thailand by Thai Union and its partner farms.

There are two main production plants in the kingdom, with a total capacity of 110,000 tonnes pa. Some of the operations include the:

i. Tailoring of shrimp sizes;

ii. Peeling of shrimp shells;

iii. Pre-cooking the products before distribution – mainly to Europe, Japan and the US.

Figure 28: Thai Union’s frozen and chilled seafood division’s supply chain

Source: Company




Pet care and value-added (13% of total revenue) The pet care and value-added category is a mix of several different items, comprising:

i. Pet care (mostly cat food);

ii. Snacks;

iii. Non-seafood, eg the sale of scrap or by-products.

Examples of these products include surimi-based fish snack, canned cod liver and wet seafood-based cat food. Due to the variety of products that involve customised features and high product standards, this division normally have higher margins than the group’s other businesses.

Figure 29: Thai Union’s pet care and value-added segment’s revenue


Figure 30: Examples of Thai Union’s products in the pet care and value-added business

Source: Company




Figure 31: Thai Union’s strategic business segments

Source: Company

Figure 32: Thai Union’s market-leading brands portfolio

Source: Company




SWOT Analysis

• Well-diversified operations across businesses and geographies

• High bargaining power over suppliers and clients

• Optimal weather for farming shrimp all year round in Thailand

• Possible animal disease outbreak that could adversely affect demand and supply

• Changing consumer behaviour towards fresh food consumption

• Trend toward ready-to-eat and frozen foods

• Still more room to globally expand in Africa and Asia

• Growing demand for shrimp in Japan

• Volatile profitability based on commodity price movements

• Higher labour cost vis-à-vis rivals in China and Vietnam

Recommendation Chart

Source: RHB, Bloomberg

Source: RHB, Bloomberg

10

12

14

16

18

20

22

24

Feb-12 May-13 Sep-14 Dec-15

Price Close

na

87.0

70.0

52.0

72.0

72.0

78.5

Recommendations & Target Price

Buy Neutral Sell Trading Buy Take Profit Not Rated

Date Recommendation Target Price Price

2014-09-17 Trading Buy 78.5 17.8

2014-08-15 Trading Buy 72.0 17.3

2014-05-16 Trading Buy 72.0 17.2

2014-01-07 Buy 72.0 16.3

2013-11-20 Buy 72.0 15.7

2013-08-05 Neutral 52.0 14.2

2013-04-22 Buy 70.0 14.4

2012-11-09 Buy 87.0 17.9


Consumer Non-cyclical | Food & Beverage Products

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RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Investment Research Disclaimers RHB has issued this report for information purposes only. This report is intended for circulation amongst RHB and its affiliates’ clients generally or such persons as may be deemed eligible by RHB to receive this report and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. 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Thai Institute of Directors Association (IOD) – Corporate Governance Report Rating 2016

Excellent CG Scoring

AMATA BTS DELTA EGCO INTUCH KTB MINT PPS QTC SCB SNC THCOM TSC AOT BWG DEMCO GFPT IRPC KTC MONO PS RATCH SCC SPALI TISCO TTCL BAFS CK DRT GPSC IVL LHBANK NKI PSL SAMART SCCC SSSC TKT TU BAY CPF DTAC GRAMMY KBANK LPN NYT PTT SAMTEL SE-ED STEC TMB UV BCP CPN DTC HANA KCE MBK OTO PTTEP SAT SIM SVI TNDT VGI BIGC CSL EASTW HMPRO KKP MCOT PHOL QH SC SITHAI TCAP TOP WACOAL WAVE

Very Good CG Scoring 2S ASIMAR CGH ERW IRC MFC PCSGH Q-CON SMK SYNTEC TIPCO TSR

AAV ASK CHG FORTH JSP MOONG PDI RICHY SMPC TAE TK TSTE

ACAP ASP CHO FPI K MSC PE ROBINS SMT TAKUNI TKS TSTH

ADVANC AUCT CHOW GBX KSL MTI PG RS SNP TASCO TMC TTA

AGE AYUD CI GC KTIS MTLS PJW RWI SPI TBSP TMI TTW

AH BANPU CIMBT GCAP L&E NCH PLANB S SPPT TCC TMILL TVD

AHC BBL CKP GL LANNA NOBLE PM S & J SPRC TF TMT TVO

AKP BDMS CM GLOBAL LH NSI PPP SABINA SR TFI TNITY TWPC

ALUCON BEM CNS GLOW LHK NTV PR SALEE SSF TGCI TNL UAC

AMANAH BFIT CNT GUNKUL LIT OCC PRANDA SAMCO SST THAI TOG UP

ANAN BLA COL HOTPOT M OGC PREB SCG STA THANA TPC UPF

AP BOL CPI HYDRO MACO OISHI PRG SEAFCO SUSCO THANI TPCORP VIH

APCO BROOK DCC ICC MALEE ORI PRINC SFP SUTHA THIP TRC VNT

APCS CEN EA ICHI MBKET PACE PT SIAM SWC THRE TRU WINNER

ARIP CENTEL ECF IFEC MC PAP PTG SINGER SYMC THREL TRUE YUASA

ASIA CFRESH EE INET MEGA PB PYLON SIS SYNEX TICON TSE ZMICO

Good CG Scoring AEC BA CHARAN EARTH GIFT ITD LALIN NCL PMTA SMG TLUXE VPO AEONTS BEAUTY CITY EASON GLAND J LPH NDR PPM SMIT TMD VTE AF BEC CMR ECL GOLD JMART MAJOR NEP PRIN SORKON TNP WICE AIRA BH COLOR EFORL GSTEL JMT MAKRO NOK PSTC SPA TOPP WIIK AIT BIG COM7 EPCO GYT JUBILE MATCH NUSA QLT SPC TPA WIN AJ BJC CPL EPG HPT JWD MATI PATO RCI SPCG TPAC XO AKR BJCHI CSC ESSO HTC KASET M-CHAI PCA RCL SPVI TPIPL AMARIN BKD CSP FE HTECH KBS MDX PDG RICH SSC TPOLY AMATAV BR CSR FER IFS KCAR MFEC PF RML STANLY TRITN AMC BROCK CSS FOCUS IHL KGI MJD PICO RPC STPI TRT APURE BRR CTW FSMART ILINK KKC MK PIMO SANKO SUC TTI AQUA BTNC DCON FSS INSURE KOOL MODERN PL SAPPE TACC TVI ARROW CBG DIMET FVC IRCP KWC MPG PLAT SAWAD TCCC TWP AS CGD DNA GEL IT KYE NC PLE SCI TCMC U SCN TEAM UBIS SEAOIL TFD UMI

SENA TFG UPOIC

SIRI TIC UT

SKR TIW UWC

SLP TKN VIBHA

IOD (IOD Disclaimer)

การเปิดเผลผลการสํารวจของสมาคมสง่เสริมสถาบนักรรมการบริษัทไทย (IOD) ในเร่ืองการกํากบัดแูลกิจการ (Corporate Governance) นีเ้ป็นการ

ดําเนินการตามนโยบายของสํานกังานคณะกรรมการกํากบัหลกัทรัพย์และตลาดหลกัทรัพย์ โดยการสํารวจของ IOD เป็นการสํารวจและประเมินจากข้อมลูของบรษัทจด

ทะเบียนในตลาดหลกัทรัพย์แหง่ประเทศไทยและตลาดหลกัทรัพย์เอ็มเอไอ ที่มีการเปิดเผยตอ่สาธารณะและเป็นข้อมลูที่ผู้ลงทนุทัว่ไปสามารถเข้าถงึได้ ดงันัน้ผลสํารวจ

ดงักลา่วจงึเป็นการนําเสนอในมมุมองของบคุคลภายนอกโดยไมไ่ด้เป็นการประเมินการปฏิบตัิและมิได้มีการใช้ข้อมลูภายในในการประเมิน

อนึ่ง ผลการสาํรวจดงักลา่ว เป็นผลการสํารวจ ณ วนัที่ปรากฎในรายงานการกํากบัดแูละกิจการบริษัทจดทะเบียนไทยเทา่นัน้ ดงันัน้ผลการสํารวจจงึอาจ

เปลี่ยนแปลงได้ภายหลงัวนัดงักลา่ว ทัง้นีบ้ริษัทหลกัทรัพย์ อาร์เอชบี จํากดั (มหาชน) มิได้ยืนยนัหรือรับรองถึงความถกูต้องของผลการสํารวจดงักลา่วแตอ่ยา่งใด

ขอมูล Anti-Corruption Progress Indicator ของบริษัทจดทะเบียน

ระดบั 1

ACD BAT-3K CCN DTCI HFT LST

NEP PRIN SCN SPPT TCJ TRUBB UPA

AEONTS BIG

CGD

E HTECH

MAJOR

NNCL PSTC

SEAFCO SPVI

TCOAT

TSE UPOIC

AFC BJC

CMR

EMC IHL

MATCH

NWR PYLON

SF STA

TH

TTA UTP

AIRA BLISS

CPH

ESSO ILINK

MAX

OHTL RAM

SHANG STAR

TKS

TTI UVAN

AJ BMCL

CSC

FOCUS ITD

M-CHAI

PICO RICH

SIRI SVH

TNH

TTL VARO

ALUCON BOL

CSP

FSMART JSP

MDX

PK RS

SMART SVOA

TNPC

TTTM VI

AMC BRR

CTW

GIFT KDH

MIDA

PL SANKO

SMM SWC

TPA

TWP VIBHA

AQUA BSBM

DCON

GLAND KTIS

ML

PPM SAUCE

SOLAR TAPAC

TPAC

TWZ VIH

ARIP CBG

DRACO

GRAND KTP

MPIC

PRAKIT SAWAD

SPACK TC

TPOLY

U VTE

AUCT CCET

DSGT

GUNKUL LEE

NC

PRECHA SAWANG

SPG TCCC

TRC

UMS WG

ระดบั 2 2S

ABICO

AF

AKP

AMARIN

AMATA

AOT

APCO

AYUD

BEAUTY

BFIT BH BKD BLAND BTNC CCP CI CSR CSS EFORL

EPCO FE FNS FVC GEL GLOBAL HEMRAJ IEC IFS INET

JUTHA KASET KCAR KKC KSL L&E LALIN LTX M MALEE MBK MBKET MEGA MK MPG MTLS NCH NCL NPP OCC

OCEAN PB PCA PRINC QH ROCK RPC S & J SGP SIAM

SIS SKR SMG SMIT SORKON SUSCO TAKUNI TEAM TF TIC TIP TIPCO TMC TMI TPP TRT TRU TRUE TSC TSI

TTW TVD TVO UKEM UNIQ UWC VNG WIIK WIN XO

ระดบั 3A ABC

ACAP

ADVANC

AEC

AGE

AH

AIE

AMANAH

ANAN

AP

APCS APURE AS ASIA ASIAN ASIMAR BIGC BROOK BTS BWG

CEN CENTEL CFRESH CHARAN CHO CHOTI CM CNT COL CPALL CPF CPI CPL DELTA DEMCO DIMET DNA DTAC EA ECF

EE EVER FPI GBX GC GFPT GLOW HMPRO HOTPOT ICC

ICHI IFEC INOX INSURE IRC JAS JTS JUBILE KC KTC KYE LHK LPN LRH MAKRO MC MCOT MFC MFEC MINT

MJD MONO MOONG NBC NDR NINE NMG NSI NTV OGC

PACE PCSGH PDI PG PHOL PLAT PPS PR PRANDA PREB PS QLT RATCH RML ROBINS ROJNA RWI SAMCO SCCC SCG

SEAOIL SE-ED SENA SINGER SITHAI SMK SMPC SPALI SPC SPCG

SPI SRICHA SSI STANLY SUPER SVI SYMC SYNEX SYNTEC TASCO TCMC TFI THAI THRE THREL TICON TKT TLUXE TMILL TMT TNL VNT

TPCORP WACOAL

TSTE WHA

TSTH ZMICO

TTCL TU TVI UOBKH UREKA VGI

ระดบั 3B AAV

AHC

AI

AIT

AKR

ARROW

ASK

BA

BDMS

BEC

BECL BJCHI BUI CGH CHG CHOW CIG CITY CK CKP

COLOR CWT EARTH EASON EPG F&D FANCY FIRE FMT FORTH GENCO GL GOLD GPSC GRAMMY HYDRO IRPC IT JCT KCM

KWC LH LIT LOXLEY MACO MANRIN MATI MODERN MSC NOBLE

NOK NPK NUSA OISHI OTO PAF PAP PATO PF PJW PLANB PLE POLAR PRG PTL Q-CON QTC RCI S11 SALEE

SAM SAMART SAMTEL SAPPE SC SCP SFP SIM SLP SMT

SPA SPORT SSC SST STEC STPI SUC SUTHA T TAE TBSP TCC TFD TGCI TGPRO THANA THIP TIW TK TMW

TNDT TOPP TPC TPCH TPIPL TSR TT TYCN UAC UBIS

UEC UMI UP UPF UT UV VPO WAVE WINNER YUASA

ระดบั 4 ASP

BAFS

BANPU

BAY

BBL

BKI

BLA

CIMBT

CNS

CSL

DCC DRT DTC EASTW ECL EGCO ERW FSS GCAP HANA

HTC INTUCH IRPC IVL KBANK KCE KGI KKP KTB LANNA LHBANK MTI NKI PSL PTG PTTEP SABINA SCB SNC SNP

SSF SSSC TCAP THCOM TISCO TMB TMD TNITY TOG

ระดบั 5 BCP

CPN

GYT

PE

PM

PPP

PT

PTT

PTTGC

SAT

SCC THANI TOP

ไมเปดเผยหรือไมมีนโยบาย

A ACC AJD AQ BCH BGT BROCK BSM BTC CHUO

CPR CRANE EIC FER JMART JMT KAMART KBS KIAT LDC

MBAX MCS METCO NEW NEWS NYT PAE PDG PERM PMTA POST RCL RICHY ROH S SIMAT TCB TR TSF TVT

WORK

หมายเหต ุ

ระดับ 1: มีนโยบาย ระดับ 2: ประกาศเจตนารมณ ระดับ 3: มีมาตรการปองกัน ซ่ึงทั้ง 2 กรณี ถือเปนผลการประเมินในระดับเดียวกัน 3A: บริษัทมีการประกาศเจตนารมณเขารวมโครงการ CAC หรือภาค 3B: บริษัทมีคํามั่นและนโยบายของบริษัท แตมิไดประกาศเจตนารมณเขารวมโครงการ CAC หรือภาค ระดับ 4: ไดรับการรับรอง ระดับ 5: ขยายผลสูผูที่เกี่ยวของ

thailand initiating coverage - rhb securities · of the sea, john west, and : ... swot 20 :...

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