3/13/2017 BerliJucker,Thailand'snewsupermarketgiant,YoungInvestorsForumTHEBUSINESSTIMES

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BerliJucker,Thailand'snewsupermarketgiant
Part of the TCC Group that also owns Thai Beverage and F&N, Berli Jucker is the conglomerate's regional retail and distribution arm

Monday, March 13, 2017 - 05:50

BJC owns a 98 per cent stake in BigC Supercenter, the third-largest grocery retailer in South-east Asia. PHOTO: BLOOMBERG

BERLI Jucker (BJC) is a leading regional consumer conglomerate and integrated supply chain operator.

The company is engaged in ve core businesses:

Packaging supply chain, with BJC a top manufacturer of glass bottles and aluminium cans;
Consumer supply chain, with the company a producer of potato chips, soaps and tissue papers in Thailand;
Healthcare supply chain, with BJC acting as a trader in medical and technical devices;
Modern supply chain, with BJC owning a 98 per cent stake in BigC Supercenter, the third-largest grocery retailer in South-east Asia
(SEA); and
Other businesses, including bookstores and convenience stores in Vietnam.

We forecast a 36 per cent compound annual growth rate (CAGR) in earnings per share for BJC over 2017 to 2019, with an extraordinary
growth rate of 118 per cent in 2017 with the full consolidation of BigC and operational growth of 17 per cent in 2018-19.

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This is expected to be contributed by BigC's organic growth and synergies as well as the favourable interest rate climate, leading to lower
interest costs.

TCC links

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BJC acts as the retail and distribution arm of the TCC conglomerate.

TCC Group, which is unlisted, is a leading Thai conglomerate with Thai Beverage, Fraser & Neave, BJC, BigC, Oishi and Gold as listed
entities.

TCC, or Thai Charoen Corporation Group, is one of Thailand's leading corporations. Established by Khun Charoen and Khunying Wanna
Sirivadhanabhakdi in 1960, it has developed into one of the kingdom's leading conglomerates.

It currently operates in ve principal business areas: food and beverage, industrial and trading, nance and insurance, property and real
estate, and agricultural and agro industrial. TCC Group currently has more than 60,000 employees in the region.

History

BJC was set up in 1882 as an international trading and insurance broker. It was the rst listed company on the Stock Exchange of Thailand
in 1985, when the exchange was established.

In 2001, the TCC Group acquired a majority stake in BJC from First Pacic. The group, under Nakorn Chien, is currently the major
shareholder of BJC with a 73.83 per cent stake as of Sep 1, 2015.

BJC has a long track record of acquisitions, especially since the TCC Group became a major shareholder.

This is in line with the TCC Group's strategic direction that wants BJC to spearhead the consumer business with a wide range of
businesses, from upstream (packaging) to midstream (beverage and consumer product manufacturing) to distribution channels (retail
grocery and book stores).

The BigC transaction was the largest mergers and acquisitions deal in Thailand in 2016, at 203 billion baht (S$8 billion) for a 98 per cent
stake in BigC, the second-largest hypermarket in Thailand.

The objective of the transaction was for BJC to immediately become the third-largest SEA retailer with multiple formats, instead of relying
on in-house growth or creating its own retail startup from scratch.

Packaging supply chain

This business manufactures and distributes glass packaging, aluminium can packaging and rigid plastic packaging, and serves mainly the
TCC Group.

It is the largest glass packaging manufacturer in SEA with four production facilities, and the No 1 aluminium can manufacturer in
Thailand. Glass bottles are mainly used to contain alcoholic drinks, carbonates, energy drinks, and consumer healthcare and packaged
food.

The
business unit also manufactures aluminium cans in Thailand via Thai Beverage Can, and in Vietnam via its joint venture with Ball
Industries, Thai Beverage Can Ball. The company also makes plastics in Thailand.

Consumer supply chain

The CSC business unit manufactures and distributes household consumer goods such as snacks, beverages, candies, tofu, soaps,
shampoos, cosmetics and tissue papers for its own and third-party brands.

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It is the largest manufacturer of rice crackers, the second-largest manufacturer of potato chips, and the third-largest manufacturer of
yoghurt in Thailand. In addition, BJC also provides customs clearing, warehousing, transportation and distribution services for both the
group and outside companies.

The company's Cellox Paper plant also produces toilet and tissue papers for major Thai retailers such as Makro. It also provides private
label manufacturing for selected international packaged goods companies such as Johnson & Johnson (Thailand) and Procter & Gamble
Thailand.

Healthcare supply chain

The business unit imports and distributes various products, including industrial chemicals, food ingredients, pharmaceuticals, imaging
products and hospital supplies.

It is also involved in the design, supply and assembly of automation and control systems, industrial equipment, logistics and warehouse
equipment and galvanised steel towers for power transmission lines.

Within the healthcare segment, BJC acts as a distributor and trader of medical devices and medicines to both the government and private
hospitals. The company also provides technical services to the medical sector and chemical supply for the healthcare business. It is the
No 1 trader of mammography machines in Thailand.

Modern supply chain

After acquiring BigC in May 2016, BJC set up this unit for all of its modern trade business. It currently operates the grocery retailer chain
under the brand BigC supercenter in Thailand.

BigC operates hypermarkets, which are a large-store format comprising Big C Supercenter, Big C Extra and Big C Jumbo trade names, and
medium and small stores comprising supermarkets operated under Big C Markets, community shops under Mini Big C and drugstores
under Pure.

The company is currently the third-largest retailer in SEA, with more than 700,000 customers visiting BigC stores a day and 8.6 million
members under its royalty programme. As of end-2016, BigC owned more than 131 hypermarket stores, 59 BigC Market (small
hypermarkets) and 391 Mini BigC (convenience stores) nationwide.

Strategy

The company targets to expand stores more aggressively. In the past year, BigC's store expansion has stagnated due to the lack of capital
for expansion and the diculties in accessing good locations for new stores.

According to our analysis, the protability of the store remains only in the hypermarket - the small format remains in net loss. We believe
the future growth driver will be large store expansion while smaller formats drag the company's performance.

Currently, rental income is one of BigC's key strengths, which brings in recurring cash ow even when retail sales are declining, footfalls
as well as enhances margins. We believe this is the right direction to pursue.

By optimising the tenant mix of shopping malls and negotiating lease terms with tenants, BJC expects to further improve BigC's
protability. We expect more shopping areas in the new stores, going by the strategy to boost rental income and earnings margins.

BJC is expected to replicate the fully integrated business model across Asean and will focus on "onshore Asean countries": Thailand,
Vietnam, Cambodia, Malaysia, Myanmar and Laos. Currently, BJC has presence in Vietnam (Metro and B's mart) and BigC is actively
exploring expansion in Cambodia and Laos.

Through time, we expect BigC to benet via cost savings from leveraging on TCC group facilities.

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By having BJC as a major shareholder and becoming part of the TCC group, BigC no longer has to pay expensive management fees to the
Casino group. In addition, BigC was able to change its insurance provider to Southeast Insurance, the TCC group's insurer, which allows
BigC to save on insurance fees.

Growth drivers

Over time, we expect BJC to strategically turn around BigC's growth direction via its management team. We expect BigC's 16.5 per cent
earnings CAGR during 2017-18 will mainly derive from margin expansion (12 per cent growth), store expansion (6 per cent growth) and
other synergies with BJC (2 per cent growth), while same store sales growth will be a drag at minus 4 per cent.

BJC increased its debt massively to nance the BigC transaction. The company gradually issued debentures to nance those loans. In the
current low interest rate environment, we believe this will substantially lower BJC's nancial costs.

We forecast revenue growth for the packaging supply chain business of 3 per cent in 2017 followed by an aggressive increase of 10 per
cent in 2018-19 from its additional capacity.

Momentum in the glass business will deliver higher revenue growth compared to aluminium on the popularity of new beer bottles and
high export sales of beer in the Cambodia, Laos, Myanmar and Vietnam market.

We forecast 6 per cent revenue growth for the consumer supply chain business in 2017-19 thanks to a recent contract win to become the
main distributor of Vinamilk in Vietnam, the increased utilisation rate from the private labels of the food and non-food segments to
produce for BigC, and expectations of a rebound in consumer spending in Thailand.

This should help lift up bottom-line growth from 2016 despite a challenge from the cost side due to a rise in production costs, especially
from the palm oil and energy cost prices, which are the major production costs for the food business.

Challenges

The healthcare supply chain business already has reached maturity. Nonetheless, the company is sticking with the business as it is high
margin in nature and requires relatively low levels of capital expenditures. We forecast a gradual slowdown due to delays in budget
disbursements to government hospitals.

Currently, there is no clarity on how much new excise tax will be collected on alcoholic beverages (more than 60 per cent of BJC's
packaging supply chain business clients are alcohol-related). At present, most of BJC's major customers still have insucient sourcing of
local bottles and must import bottles from the international market especially from China. We thus believe the impact from this
regulation change will be marginal to BJC's business.

Valuation

We value BJC using a sum-of-parts model.

The BigC operation is valued at 13 times 2018 estimated enterprise value (EV) to Ebitda (earnings before interest, taxes, depreciation and
amortisation), set half a standard deviation above the ve-year BigC mean.

We believe this is justied given rising penetration by modern trade operators, such as BigC, and an expected gradual upturn in
consumer sentiment in Thailand.

Further support for a valuation premium should come from margin expansion and additional store openings. We use 2018 as our
valuation base year for the BigC business as we believe investors will increasingly begin to factor in the synergies likely to be realised a
year after the acquisition.

For BJC's original business, we apply a valuation of 18 times 2017estimated EV/Ebitda, set half a standard deviation above the ve-year
BJC mean, reecting the growth potential in the Cambodia, Laos, Myanmar and Vietnam markets.

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With the company successfully recapitalising in Q2 2016 and the stock currently trading within an attractive valuation range, we initiate
coverage of BJC with a "buy" rating and target price of 55 baht per share.

The above was compiled from a Citi Research initiation report on Berli Jucker on March 8 by analyst Pimolrat
Sathaworawong.

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