Vietnamese brewer records remarkable comeback on ThaiBev balance sheet

Best known for its Chang beer brand, ThaiBev acquired 53.6% of Sabeco in December 2017 in Vietnam’s biggest corporate deal. Immediately the new owner stated its intention to reform Sabeco’s business significantly and said it hoped the move would help expand its overseas revenues to half of its business by 2020.

High-growth territories

The strategy was to tap into the beer-swilling Greater Mekong region of Vietnam, Cambodia, Laos and Myanmar, putting some high-growth territories under ThaiBev’s belt.

Through the Sabeco controlling stake, worth VND110tr (US$4.73bn), ThaiBev's share of the beer market within the 10-member Association of Southeast Asian Nations immediately rose to 24%. This within a market that consumes around 11bn litres annually.

By the time Neo had signalled his arrival, ThaiBev had finally amassed three Sabeco board members and an independent in its camp after months of wrangling. Now with sympathetic directors in place, it was on course to make investment decisions faster while lowering costs to boost productivity at the formerly state-owned company. At the time of its acquisition, Sabeco's Vietnam market share had fallen below 40% and the company was in a slump.

Vietnam: a strong beer market

Vietnam enjoys a youthful population, extensive distribution network and the strongest beer market growth in the region. According to the Vietnam Beverage Association, the Vietnamese market is worth $3.4bn and is on course to rise by 5-6% a year over the near future. Per-capita consumption equals a whopping average of 45 litres per year there.

Asia’s third placed market by volume is seen as a promised land for foreign and local brewers due to this massive consumption, though it is not all plain sailing amid huge competition.

The beer sector is dominated by just four brewers, Habeco, Carlsberg-owned Hue Brewery, Sabeco and Heineken NV. Together, these account for 90% of the market, while the remaining 10% is divided among Masan Brewery, Sapporo, AB InBev and Calsberg-owned Southeast Asia Brewery.

These brands are married to their own regional and demographic strongholds, however, complicating the market. Habeco, Hue Brewery and Sabeco dominate the northern, central and southern regions respectively, while Heineken NV controls the medium and high-end beer segments.

In light of heavy production and marketing expenses and steep competition, both Fosters Group and the former SABMiller had struggled in the past. Fosters sold two breweries to Asia Pacific Breweries for US$105m and exited the market a decade ago; while SABMiller only occupied a small share of the market before becoming part of AB InBev Vietnam.

But those with a strong local pedigree, like Sabeco, have been able to dominate. Founded in 1875 by Frenchman Victor Largue, Sabeco’s forerunner was 'liberated' 100 years later by the newly installed communist government and kept under state control. In 2003, the Saigon Beer Alcohol Beverage Corporation was formed, amalgamating Saigon Beer Company, Binh Tay Distillery, Chuong Duong Beverage Company and Phu Tho Glass Factory to create the biggest brewery in the country.

In figures announced earlier this month for the quarter ended December 31, 2018, Sabeco reported sales of VND13tr, with net profit of VND5.54tr on total revenues of VND54.28tr. This equates to 35% and 60% growth, respectively, year on year.

Thanks to the Vietnamese business’s 46% of ThaiBev’s revenues on the balance sheet, with sales of VND24.84tr for the quarter, beer products became the parent’s revenue driver for the first time.

From rum to beer

Founded in 2003 by Charoen Sirivadhanabhakdi and listed in the Singapore Stock Exchange, ThaiBev is one of Southeast Asia’s biggest beverage companies with a market capitalisation of US$14.56bn.

Its SangSom rum is a dominant brand on the Thai spirits market, selling over 70m litres each year with more than a 70% share of its category. Though it is sold in some 20 countries, exports account for barely 1% of total sales. Perhaps better known internationally is ThaiBev’s Mekhong rum brand: however this is not ThaiBev’s best liquor seller.

Though the company’s spirits wing showed exceptional performance in the first quarter, with with revenue growing 28.6% and net profit climbing 41.5%, driven by higher consumption in rural areas, its share dropped from 54% to 43% thanks to Sabeco’s strong showing and sheer weight of volume.

This all follows an unimpressive 2017-18 financial year for ThaiBev. Last August, when announcing its third-quarter financials, the company stated it would double down on the Vietnamese brewery, having finally installed Sabeco’s chief executive and brought the board on side. Only with a pliant board in Vietnam would it be able to start conducting due diligence of Sabeco’s production facilities, eight months after acquiring the company.

Another knock-on from the new corporate structure has been the ability to begin developing synergies between Sabeco and its parent across a number of areas, including procurement, marketing and R&D. The company has also been exploring how best to integrate market knowledge, as well as best practices in manufacturing.

Meanwhile, its optimisation of market share, production, packaging and transportation systems are still underway, with hopes of results by end of the current financial year.

Analysts have been buoyed by ThaiBev’s performance since it got its management in order at Sabeco, believing it’s well on track to reach its goal of 50% overseas revenues by next year.

Likewise, Sabeco’s chief executive is positive, though cautions it will take much longer for the Vietnamese brewer to reach its full potential under Thai stewardship.

“It will be a rock song, but a slow one​," he said. Changing the corporate culture of Sabeco "cannot be done overnight​”.