09 June 2016 Asia Pacific/ Equity Research & Catalog Retail (Retailing TH (Asia))

Thailand E-commerce Sector Research Analysts INDUSTRY PRIMER

Warayut Luangmettakul 662 614 6214 [email protected] CPALL: The most convenient stop for e-tailing Atul Sethi 66 2 614 6211 [email protected] Figure 1: Online retail sales have grown 3x since 2009 (US$ mn) (%) 1,600 35%

1,400 30%

1,200 25% 1,000 20% 800 15% 600 10% 400

200 5%

0 0% 2009 2010 2011 2012 2013 2014 2015

E-retailing sales (US$ mn) YoY growth (%)

Source: Euromonitor International

■ Emerging from infancy. Thailand's e-tailing market has witnessed significant growth in recent years, but is underpenetrated by global standards. The prolific use of smartphones (90% penetration) and rising 4G coverage should drive the next phase of growth. Many players have made strides over the past few years, but Thailand remains a fragmented market place and presents huge opportunities for e-tailing growth. ■ Two obstacles to overcome. Payments and logistics are two impediments that are preventing Thailand from seeing 'hockey stick growth'. The introduction of a nationwide e-wallet system and growing credit and debit card usage could increase adoption of e-payment channels. Logistics is more of a structural challenge, but CPALL's unique and extensive logistics network could emerge as a delivery point platform to tackle this. ■ One winner. CPALL is the best listed play for e-tailing potential. Its most extensive logistics and stores network gives CPALL a cost advantage. In this early stage where trust is a clear issue, CPALL's 24-hour counter payment would also give a first-mover advantage before an e-payment platform takes off. These advantages, in our view, will allow CPALL to reap substantial benefits from the potential in e-tailing. We raise our target price to Bt62 (from Bt54) to factor in the e-tailing potential and a roll over to mid-2017E. We reiterate our OUTPERFORM rating at a 12-month P/E of 24x, 1 s.d. below the five-year average.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, 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.

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09 June 2016 Focus charts

Figure 2: Thailand underpenetrated by global standards Figure 3: Rapid smartphone penetration key growth driver

(E-tailing as % of total retail sales) (Thailand smartphone penetration, %) 16% 100% 14%

12% 80%

10%

8% 60% 4G bidding Avg: 5.9% 6% 40% 4%

2% 20%

0% 3G bidding

UK USA

India 0%

China

Taiwan

Vietnam

Thailand

Australia

Malaysia

Indonesia

Singapore

Philippines

2010 2011 2012 2013 2014 2015 Hong Kong Hong South Korea South Source: Euromonitor International Source: Euromonitor International

Figure 4: A fragmented market place… Figure 5: …which we think CPALL can dominate

(% share of e-tailing sales, 2015) Locations 10,000 8,832 17% 8,000

CP Group 11% 6,000 Others 4,774 53% 8% 4,000

Apple 2,000 5% 95 3% (Tarad.com) 0 3% Kerry Logistics Thailand Post CPALL 7-11

Source: Euromonitor International Source: Company data

Figure 6: E-commerce to have a multiplier effect on traffic Figure 7: CPALL trading close to -1 s.d. forward P/E (x) CPALL 12M PE Store Interests/info Order Payment Pick-up Return search placement 45 40 +2SD Catalog/ call center Interests/info Order 35 +1SD Payment Pick-up Return search placement 30 Avg. 25 -1SD Websites Interests/info Order 20 MAKRO Payment Pick-up Return search placement acquisition 15 -2SD 10 Mobile/ social Interests/info Order

Payment Pick-up Return

Jun-16 Jun-12 Jun-13 Jun-14 Jun-15

media search placement Jun-11

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

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

Thailand E-commerce Sector 2 09 June 2016 CPALL: The most convenient stop for e-tailing A burgeoning marketplace

Thailand's online retailing, or e-tailing market, has seen substantial growth since 2009, E-tailing sales have grown expanding more than 3x. Internet retailing sales crossed the US$1 bn threshold in 2014 by an average of >20% per and now accounts for 1.6% of total retail sales. While this is a considerable increase from year since 2009 half a decade ago, Thailand looks underpenetrated by global standards: countries with more developed e-commerce markets such as South Korea, China and the US all have penetration levels >5%. That said, Thailand is a standout among ASEAN peers, only behind in terms of market penetration. In looking at various building blocks vital for e-tailing growth—credit card, internet and smartphone penetration—Thailand compares favourably in the region. A datapoint we believe investors should note is rapid growth in smartphone penetration. This is significant given broader global trends which point to e- commerce growth being driven by mobile. Despite promise seen thus far, two obstacles exist: (1) payments and (2) logistics. On payments, Thailand battles an aversion from consumers to adopt electronic payment methods. Cash on delivery (COD) remains the dominant mode of payment, with fear of being cheated the largest inhibitor to making online purchases. Logistics is a more structural issue, where lack of quality infrastructure makes last-mile delivery on a nationwide basis complex. Why growth should accelerate

We see many encouraging signs which could spearhead growth and tackle some of the Multiple factors suggesting present issues in e-tailing. Investments in Thai e-commerce is rife, with Alibaba acquiring more growth to come Lazada and Central Group taking over Zalora Thailand. CPALL has a unique and extensive logistics infrastructure network, which we believe it can leverage for pick-up and drop-off services throughout its CVS network. Growing credit and debit card use, and the introduction of a nationwide e-wallet system, could increase the adoption of electronic payment channels. For e-tailing, we see large opportunity in consumer electronics, appliances, beauty and apparel, where internet retailing penetration is low and growth is likely based on broader global e-tailing trends. Why CPALL is the best play

Not many options are available in Thailand and CPALL is the best listed play on e-tailing CPALL's most extensive opportunities, in our view. Its most extensive logistics and stores network should give CPALL logistics and stores network a first-mover advantage to tap into the potential e-retailing market. Also, in this early stage makes it the best listed play where trust is the issue, CPALL would have a clear advantage via its 24-hour OTC payment on e-tailing opportunities system. This should allow CPALL to reap three major benefits. First, commission fees related to e-commerce service will increase. With the most extensive pickups, returns and drop-off in Thailand, 7-11 can act as a store hub with a payment point service. Second, sales generation from newly launched e-tailing websites will allow CPALL to virtually add over 20k- 25k SKUs and tap into sales of popular e-tailing product categories (electronics, appliances, apparel, etc.). Third, foot traffic to bricks-and-mortar stores will likely rise from rising e- commerce-related activities. According to management, c. 40-60% of people using CPALL's Counter Service will buy more products from its 7-11 stores. Risks We believe that as a part of CP Group, CPALL will see both risks and opportunities in the e-commerce market, with the latter likely more than compensating for the former. There could potentially be a conflict of interest between CP Group and CPALL, given, the potential large volume, we believe CPALL will have a net incremental benefit under this group structure.

Thailand E-commerce Sector 3

E Thailand Valuation metrics

- commerce Sector commerce Figure 8: Comparable companies 7-Jun-16 Price TP % up/ Mkt cap P/E (x) EV/EBITDA (x) EPS grth (%) Yield (%) PBV (x) ROE (%) ROIC (%) Company Ticker Rat Country (lcc cur) (lcc cur) (dwn) (US$ mn) 16E 17E 16E 17E 16E 17E 16E 17E 16E 17E 16E 17E

Food grocery Regional peers

C.P. ALL PCL CPALL.BK O TH 50.0 62.0 24 12,753 26.8 21.8 16.7 14.7 22% 23% 2% 2% 9.5 7.6 36% 35% Supercenter PCL BIGC.BK N TH 205.0 220.0 7 4,802 21.0 18.7 12.6 11.5 17% 13% 1% 2% 3.2 2.8 15% 15% Siam Makro PCL MAKRO.BK N TH 33.5 35.0 4 4,566 29.2 25.3 17.7 15.4 3% 15% 3% 3% 10.4 9.4 36% 37% DELB.BR NC BE 96.7 11,489 17.6 16.4 6.3 6.0 4% 8% 2% 2% 1.6 1.5 9% 9% Sun Art Retail Group 6808.HK O CN 5.2 5.0 (3) 6,364 21.6 22.1 5.8 5.6 -6% -3% 2% 2% 1.9 1.8 10% 10% Yonghui Superstores 601933.SS O CN 4.2 5.0 20 5,175 54.9 45.9 17.4 15.0 2% 20% 1% 1% 2.1 2.1 4% 4% Sumber Alfaria AMRT.JK NC ID 590.0 1,851 38.0 30.4 10.0 9.1 38% 25% 1% 1% 4.7 4.2 13% 14% Matahari Putra Prima MPPA.JK N ID 1,315.0 1,300.0 (1) 534 28.7 17.8 11.2 8.8 35% 61% 3% 1% 2.5 2.2 9% 13% Modern Internasi MDRN.JK NC ID 129.0 45 -2.9 -28.1 25.6 5.3 -1488% -90% 1% 3% 0.4 0.4 -15% -1% Seven & i 3382.T NC JP 4,757.0 39,255 26.1 21.5 6.9 6.8 -7% 21% 2% 2% 1.8 1.7 7% 8% 2651.T NC JP 8,920.0 8,318 28.4 22.9 7.1 7.1 -4% 24% 3% 3% 3.4 3.2 12% 15% FamilyMart 8028.T NC JP 6,130.0 5,432 27.6 24.5 6.1 6.0 -18% 13% 2% 2% 2.1 1.9 8% 8% E-MART Co. Ltd 139480.KS O KR 178,500 248,000 39 4,303 12.4 10.5 8.6 7.8 -12% 19% 1% 1% 0.7 0.6 5% 6% Robinsons Retail Holdings, Inc. RRHI.PS N PH 82.0 74.4 (9) 2,468 23.1 20.3 13.3 11.5 17% 14% 1% 1% 2.4 2.2 10% 11% Puregold PGOLD.PS NC PH 42.9 2,578 21.4 19.1 11.1 9.7 11% 12% 1% 1% 2.8 2.5 14% 14% DairyFarm Intl DAIR.SI NC SG 6.7 9,005 20.2 18.5 12.2 11.1 4% 9% 3% 4% 5.7 5.1 30% 29% President Chain Store 2912.TW O TW 246.0 256.0 4 7,947 26.8 24.4 13.3 12.4 16% 10% 3% 3% 9.1 8.4 34% 34% Taiwan FamilyMart.Co.,Ltd. 5903.TWO N TW 200.0 190.0 (5) 1,387 29.7 24.6 11.3 9.5 18% 21% 2% 3% 8.6 7.7 29% 31% Regional avg. 25.0 19.8 11.8 9.6 -75% 12% 2% 2% 4.0 3.6 15% 16%

Global peers METRO AG MEOG.F NC DE 29.6 10,919 16.8 14.6 4.9 4.9 -7% 15% 3% 4% 1.7 1.6 12% 12% Carrefour CARR.PA U FR 24.6 23.0 (7) 20,647 15.6 14.3 6.7 6.4 2% 9% 3% 3% 1.8 1.6 11% 11% TSCO.L U GB 1.6 1.2 (27) 18,636 46.0 27.6 9.4 8.8 -18% 66% 0% 1% 1.5 1.4 3% 5% Wm Morrison MRW.L N GB 1.9 1.8 (4) 6,383 24.3 18.2 8.5 7.5 -29% 34% 3% 3% 1.2 1.1 5% 6% Ahold AHLN.AS NC NL 20.5 19,441 17.7 16.8 7.4 6.8 1% 5% 3% 3% 2.8 2.6 16% 16% Magnit MGNTq.L U RU 36.3 36.0 (1) 17,139 22.3 19.6 12.5 10.9 -21% 14% 2% 2% 6.3 5.3 28% 27% Co. KR.N N US 36.3 34.0 (6) 34,613 17.4 16.9 7.9 7.7 17% 3% 1% 1% 5.2 4.3 30% 25% Whole Foods Market WFM.OQ O US 35.2 40.0 14 11,291 23.5 24.7 8.5 8.4 -8% -5% 2% 2% 3.5 3.4 15% 14% Target Corporation TGT.N N US 68.2 72.0 6 40,212 13.0 15.5 7.1 7.0 52% -16% 0% 0% 3.3 3.2 26% 21% Wal-Mart Stores, Inc. WMT.N N US 71.0 62.0 (13) 221,375 15.6 16.9 7.8 8.2 -8% -8% 3% 3% 2.7 2.6 18% 16% Costco Wholesale Corporation COST.OQ O US 152.6 165.0 8 66,858 29.0 NA 12.5 11.5 -3% NA 1% 1% 5.9 5.8 20% 22% SUPERVALU INC. SVU.N N US 4.8 6.0 24 1,287 6.0 6.5 4.6 4.6 9% -8% 0% 0% -3.0 -5.6 -50% -85% Alimentation Couche-Tard Inc. ATDb.TO U CA 57.5 35.9 (38) 21,525 27.5 27.5 10.5 9.8 17% 0% 1% 1% 4.5 3.8 21% 18% Metro Inc. MRU.TO U CA 45.1 37.0 (18) 8,442 19.4 18.4 12.8 12.2 12% 5% 1% 1% 4.1 3.8 22% 21%

Global avg. 21.0 18.3 8.6 8.2 1% 9% 2% 2% 3.0 2.5 13% 9% 2016 June09 Overall avg. 23.3 19.2 10.4 9.0 -42% 11% 2% 2% 3.6 3.1 14% 13% 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. Source: Thomson Reuters, Credit Suisse estimates for covered companies

4

09 June 2016 A burgeoning market place Thailand's e-tailing market has witnessed significant growth in recent years, but still looks underpenetrated by global standards. Amongst ASEAN peers, Thailand stacks up well and is only behind Singapore. Smartphone penetration has proliferated in Thailand and is now above 90%, which we think is significant given the increasing prominence of mobile in e- tailing. Thailand's competitive landscape is broad, with no clear dominant player. Despite growth thus far, we identify two challenges that are inhibiting parabolic growth: (1) payments; and (2) logistics. Rapid growth from a low base Thailand's online retailing—or e-tailing market—has seen significant growth over the past Online retail sales CAGR of six years. In 2009, e-tailing transactions totalled US$427 mn, or 0.6% of total retail sales. 22% since 2009 Since then, the market has seen a CAGR of 22% and increased by more than threefold (Figure 9). 2015 saw the highest growth in this period, with sales increasing by 29% YoY.

Figure 9: E-tailing market in Thailand has increased more than 3x since 2009 (US$ mn) (%) 1,600 35%

1,400 30%

1,200 25% 1,000 20% 800 15% 600 10% 400

200 5%

0 0% 2009 2010 2011 2012 2013 2014 2015

E-retailing sales (US$ mn) YoY growth (%)

Source: Euromonitor International

Thailand E-commerce Sector 5 09 June 2016

Internet shopping drove the first phase of growth in e-tailing in Thailand, but sales via mobile channels have increased significantly in the past few years (Figure 10). This is presumably on account of the rapid rise in smartphone penetration in the past few years, and is also in line with global e-tailing trends where mobile growth has outpaced internet. Currently, consumer electronics and appliances dominate internet retailing, followed by leisure and personal goods (Figure 11).

Figure 10: Mobile now starting to drive growth Figure 11: Electronics and leisure ~50% of total sales (US$ mn) (Share of internet retailing by category, %) 1,600

Other 1,200 17% Consumer Healthy and electronics and beauty appliances 800 8% 32% Apparel and footwear 6% 400 Home Leisure and improvement F&B personal 6% 11% 20% - 2009 2010 2011 2012 2013 2014 2015

Internet Mobile

Source: Euromonitor International Source: Euromonitor International Underpenetrated by global standards Online retailing has seen relatively high growth in Thailand, but is still in its relative infancy Current penetration level in comparison to many global markets. Current penetration of 1.6% is well below that of lower than other markets countries where e-commerce has proliferated (Figure 12). This includes those such as South Korea, China and the United Kingdom, where e-tailing accounts for more than 10% of total retail sales. We believe there is plenty of room for future growth in Thailand.

Figure 12: Internet retailing accounts for less than 2% of total retail sales (E-tailing as % of total retail sales) 16%

14%

12%

10%

8% Avg: 5.9% 6%

4%

2%

0%

UK

USA

India

China

Taiwan

Vietnam

Thailand

Australia

Malaysia

Indonesia

Singapore

Philippines HongKong South Korea South Source: Euromonitor International

Thailand E-commerce Sector 6 09 June 2016

An ASEAN leader, in particular for mobile Although appearing underpenetrated in comparison to many global peers, Thailand stacks Thailand stacks up well for up well on multiple accounts in ASEAN. Thailand's e-tailing penetration level is second e-tailing in ASEAN only behind Singapore, but higher than other countries in the region (Figure 13). The gap between Singapore and Thai levels is unsurprising to us given the disparate levels of economic development between the two countries. In addition to being one of the more highly penetrated markets in ASEAN, Thailand is also one of the fastest growing (Figure 14). Over the past five years, e-tailing sales in Thailand have seen a CAGR of 22%, far exceeding total retail sales which grew only 4% per year. Countries such as Vietnam and Indonesia displayed higher CAGRs over this period, but from extremely low bases, which we feel should not blemish the growth seen in Thailand.

Figure 13: Second-highest penetration in ASEAN … Figure 14: … and one of the fastest growing markets (E-tailing as a % of total retail sales) (2010-2015 e-tailing sales CAGR) 6.0% 60%

67% 5.0% 50%

4.0% 40%

3.0% 30%

2.0% 20%

1.0% 10%

0.0% 0% Singapore Thailand Indonesia Malaysia Vietnam Philippines Vietnam Indonesia Thailand Philippines Malaysia Singapore

Source: Euromonitor International Source: Euromonitor International Thailand also compares favourably to ASEAN peers in penetration rates for various factors which we believe are building blocks for e-commerce growth. For one, credit card penetration in Thailand is above 30%, only behind Singapore in ASEAN (Figure 15). High credit card penetration is not a requisite for e-commerce growth, as cash on delivery (COD) is the dominant mode of payment in Thailand, but there is a positive relationship globally between credit card and e-tailing penetration. Internet penetration is lower in Thailand than ASEAN peers (Figure 16), but is unlikely to be a future inhibiting factor given the emergence of mobile as a mode for .

Figure 15: Credit card penetration over 30% Figure 16: Internet penetration middle of the pack (Credit card penetration,%) (Internet penetration, %) 60% 100%

166% 50% 80%

40% 60% 30% 40% 20%

20% 10%

0% 0%

Vietnam

Thailand

Vietnam

Malaysia

Thailand

Malaysia

Indonesia

Indonesia

Singapore

Singapore Philippines Philippines Source: Euromonitor International Source: Euromonitor International

Thailand E-commerce Sector 7 09 June 2016

Smartphone penetration in Thailand has exploded in the past few years. Prior to the 3G Prolific smartphone growth bidding in 2013, smartphone penetration was under 20%, but is now above 90% as at the end of 2015 (Figure 17). Levels in Thailand are now on par with Singapore, and far ahead of other ASEAN countries (Figure 18). Following the fiasco of the more recent 4G spectrum auction in 2015, this trend will likely continue. The auction was clearly detrimental for telco operators in Thailand, but will most certainly benefit consumers via lower subscription costs.

Figure 17: Smartphone penetration rises rapidly... Figure 18: …and are now equal to Singapore levels

(Thailand smartphone penetration, %) (Smartphone penetration, %)

100% 100%

80% 80%

60% 60% 4G bidding

40% 40%

20% 20% 3G bidding 0%

0%

Vietnam

Thailand

Malaysia

Indonesia

Singapore

2011 2012 2013 2014 2015 Philippines 2010 Source: Euromonitor International Source: Euromonitor International Mobile phone usage in Thailand is prolific, which will likely be a critical factor for e-tailing given the increasing share of mobile-based transactions. One example demonstrating Thais being very 'mobile' is via data on usage of the LINE messaging platform: Thailand is LINE's second-largest market globally after Japan, where the messaging platform was created (Figure 19). According to LINE Corp, the number of users in Thailand represents 83% of all mobile-based internet users in the country. LINE is a predominantly Asian application and as such may be biased towards Thailand, but other anecdotes also point to the potency of Thai mobile usage. Rocket Internet's 2015 Annual Report cites that more than 60% of Lazada's gross merchandise volume (GMV) was via mobile. We believe this to be significant given the proliferation of mobile as a method of payment. Mobile in Thailand accounted for only 3% of total e-tailing sales, but has since increased almost eight-fold to 18% in 2015 (Figure 10). China—a more developed e-tailing market—is seeing mobile drive broader e-commerce growth and is an example of the growth potential in mobile. The share of mobile shopping in China was ~25% in 2014, but is expected to account for close to 60% of the market by 2018E (Figure 14).

Figure 19: Second-largest LINE community globally Figure 20: Mobile becoming dominant in China (Registered LINE users, millions) (%) 60 100%

50 80%

40 60% 30 40% 20

20% 10

0 0%

Spain Japan Thailand Indonesia India Taiwan Mexico Korea Columbia Malayisa USA 2011 2012 2013 2014 2015E 2016E 2017E 2018E

Share of PC online shopping Share of mobile shopping

Source: Euromonitor International Source: Euromonitor International

Thailand E-commerce Sector 8 09 June 2016

A highly fragmented market with no dominant player Several players have made strides in e-tailing over the past few years, Thailand remains a No player with more than fragmented market place that has recently seen new entrants emerge. Rocket Internet 20% market share GmbH (Rocket) was the market share leader as at the end of 2015 (Figure 21), divestments in 1H16 of two of its businesses has now resulted in an even more disjointed market: (1) Lazada—an online market place and retailer—was sold to Alibaba for US$1 bn and (2) Zalora—a fashion shopping website—to the Central Group, which according to Reuters was sold for US$10 mn. Rocket still maintains a presence via Foodpanda—an online food delivery marketplace—which we understand to be smaller in size to Lazada and Zalora. Tarad.com, Thailand's oldest e-commerce site was also sold by Japan's Rakuten to Porar Web Application Co. Ltd, a Thai web hosting and development company in April 2016. CP Group—through —has the second-largest market share in e-tailing, operating iTruemart.com and weloveshopping.com, an online shopping website and market place, respectively. CP Group used to have the second-largest market share at 12% in 2011 before Rocket entered the market. It has since regained market share, largely due to the success of iTruemart.com (Figure 22).

Figure 21: The market place is very fragmented Figure 22: CP Group has regained market share

(% share of e-tailing sales, 2015) (% share of e-tailing sales) 20%

16% Rocket Internet 17% 12% CP Group 11% Others 8% 53% Amazon 8% 4%

Apple 0% 5% 2011 2012 2013 2014 2015 Groupe Casino 3% Rakuten Rocket Internet CP Group Amazon (Tarad.com) 3% Apple Rakuten Central Group

Note: Market share data not pro forma for Rocket Internet sale of Source: Euromonitor International Lazada and Zalora, and Rakuten sale of Tarad.com Source: Euromonitor

Thailand E-commerce Sector 9 09 June 2016

The combined market share of the top-three players in Thai e-tailing account is also smaller than other markets (Figure 23). This reduces the ability of one firm to control the market and will likely keep competition high.

Figure 23: Market share of top-three players below average in many other markets (combined market share of top 3 players, %) 90

80

70

60

50 Avg: 45%

40

30

20

10

0

UK

USA

India

China

Taiwan

Vietnam

Thailand

Australia

Malaysia

Indonesia

Singapore

Philippines Hong Kong Hong South Korea South Source: Company data, Credit Suisse estimates

Two obstacles inhibiting parabolic growth We have identified two key challenges which we believe prevent Thailand e-tailing from Payments and logistics seeing hockey-stick growth: (1) payments and (2) logistics. The issue with payments challenges to be considered appears to be largely cultural, stemming from a lack of trust and comfort towards online shopping. Logistics is more of a structural issue: Thailand's relatively poor infrastructure presents a challenge, in particular for last-mile delivery to Thailand's widely distributed population. Payments: Thailand is not lacking in the availability of secure payment platforms to act as conduits for the proliferation of e-commerce, but battles a serious cultural aversion to online purchases. As a result, cash on delivery (COD) is overwhelmingly the dominant mode of payment for online transactions. Our channel checks indicate that anywhere between 50- 70% of transactions are done through COD, despite increasing credit/debit card penetration and the introduction of new digital payment solutions such as LINE Pay in 2015. COD usage in Thailand is comparable to that of India, despite Thailand having far higher credit card penetration—31% vs. 2% in India.

Thailand E-commerce Sector 10 09 June 2016

Below is a description of the wide suite of payment options available to shoppers at Lazada (Figure 24):

Figure 24: Broad range of payment channels available at Lazada's checkout

Source: Lazada website Credit card or debit card: Payments are accepted via Visa and MasterCard supported credit cards. Lazada applies Secure Sockets Layer (SSL) encryption to the payment process to ensure security of data transfer and applies higher security policies for orders over Bt10,000. For orders from credit cards with a value of Bt3,000-30,000, consumers need to enter a one-time password (OTP) through their card issuer system. In addition, shoppers ordering goods above Bt30,000 will receive a phone call from a Lazada agent to reconfirm the order Cash on delivery (COD): COD is offered nationwide for orders up to Bt50,000. Payments are due to Lazada's delivery agent when customers receive a product. Shoppers are advised to provide exact change to minimise delivery complications. Over the counter (OTC): Shoppers can pay cash at one of the following counter service providers, using email confirmation and a reference code sent to the shopper. Transactions need to be completed within 48 hours after an order has been placed, which otherwise will be automatically cancelled

■ 7-Eleven

■ Tesco Lotus Counter Service

■ Big C Supercenter

■ Family Mart

■ mPay Station by AIS

■ Pay@Post by Thailand Post

■ True Money Express

■ Just Pay PayPal: Shoppers can pay for orders via PayPal. PayPal accounts in Thailand are linked to individuals' debit or credit card accounts, which can be used for payment. As is the case for credit card payments, shoppers ordering items Bt30,000 will receive a call from Lazada Instalments: Shoppers with credit cards from one of the following banks may pay for selected items with value over Bt3,000 in 3 to 6 month instalments: Kasikorn Bank, Bangkok Bank, Krungthai Bank, Thanachart Bank and Citi Bank. Product purchases using credit card instalments are not eligible for return unless parts are missing or damaged

Thailand E-commerce Sector 11 09 June 2016

LINE Pay: Shoppers may pay for orders using LINE Pay, a mobile payment service linked to the LINE messenger application. LINE Pay was introduced in Thailand in July 2015 and enables individuals to register their debit or credit cards on their LINE accounts in order to make mobile payments with participating merchants free of charge. Online banking payment: Shoppers can make payment by transferring funds from their bank account to one of six partnering banks. Despite a broad range of secure payment options available to consumers in Thailand, many are hesitant to purchase goods online from sites like Lazada. Despite the prevalence of COD, the overwhelming driver behind the aversion from consumers is a lack of trust in online payment systems and concerns inputting personal/credit card information online. This is evidenced by a survey done by the Thai Ministry of Information and Communication Technology (ICT) in 2015 (Figure 25).

Figure 25: Security is the overwhelming concern preventing online purchases

Source: Thailand Ministry of Information and Communication Technology (ICT) Logistics E-tailing—and more broadly—e-commerce in Thailand combats several logistic-related issues that are an impediment for growth. Our channel checks indicate that logistics is one of the largest challenges which e-tailers face. Quality of logistics infrastructure in Thailand falls behind that of many peers (Figure 26). Rail infrastructure is underdeveloped, leading to a reliance on roads, which is less cost efficient. The constraints arising from infrastructure-related problems increases the frequency of late deliveries and unhappy customers. This invariably leads to the slower adoption of online retailing, and raises the logistic costs of e-tailers.

Figure 26: Quality of infrastructure is a challenge in Thailand

Rank Hong Kong Singapore Malaysia South Korea Taiwan China Thailand India Indonesia Vietnam Philippines Quality of overall 3 4 16 20 21 51 71 74 81 99 106 infrastructure

Quality of roads 5 3 15 17 10 42 51 61 80 93 97

Quality of railroad 3 8 13 10 11 16 78 29 43 48 84 infrastructure Source: World Economic Forum, 2015

Thailand E-commerce Sector 12 09 June 2016

More than half of e-tailing transactions take place outside of Bangkok, underlining the importance of logistics infrastructure (Figure 27). Issues related to last-mile delivery to rural areas hamper more e-tailing transactions from taking place, in our opinion.

Figure 27: The majority of e-tailing transactions take place outside of Bangkok (Distribution of online transactions by region, 2015)

South 10%

Central 25% Bangkok Metropolitian Area (BMA) 44%

East 10% North 11%

Note: Based on sales of companies with greater than Bt50 mn in revenue. Source: Thailand Ministry of Information and Communication Technology (ICT)

Thailand's population is very widely distributed across the country (Figure 28) and with a low density (Figure 29), requiring the support of strong logistics infrastructure.

Figure 28: Thailand has a wide population distribution… Figure 29: …and extremely low population density

(% of population in respective province categories) (# of people per square km) 45% 700

40% 600

35% 500

30% 400 25% 300 20% 200 15% 100 10% 0

5%

UK

USA

India

China

Taiwan

Vietnam

Thailand Australia

0% Malaysia Indonesia >5mn 1mn – 5mn 500K – 1 mn <500K Philippines Korea South Source: National Economic Social Development Board (NESDB) Source: CIA World Factbook

Thailand E-commerce Sector 13 09 June 2016

Third-party logistics companies play an important role in Thailand and are used by many e-tailers. We think of these players in two categories: (1) traditional logistics providers such as ThaiPost and Kerry Express; and (2) more specialised e-commerce companies such as aCommerce. Players, such as Thailand Post and Kerry Express, have developed and integrated delivery services for e-tailers on top of their more traditional services. Thailand Post is a state enterprise and not the most efficient or reliable based on our channel checks. Kerry Express has developed coverage capabilities across Thailand, providing last-mile delivery services outside Bangkok. It is a partner of logistic services providers such as aCommerce, a one-stop shop providing e-tailing services including channel management, marketing, warehousing and delivery. aCommerce operates its own fleet and uses third-party logistics partners, such as Kerry Express, for delivery. Kerry Express is usually able to provide fulfilment services in Bangkok in 1-2 days, and 2-3 days upcountry.

Thailand E-commerce Sector 14 09 June 2016 Why growth should accelerate We see several promising signs which could spearhead further growth in e-tailing. Investments are pouring into e-tailing and more broadly e-commerce in Thailand, with new entrants, such as Alibaba, and also Thai corporates such as the Central Group becoming more active. CPALL's unique and extensive logistics infrastructure could be leveraged for pick-up and drop-off services throughout its CVS network, in our view. Growing credit card and debit card use, along with a nationwide e-wallet system, could increase the adoption of electronic payment channels. Within e-tailing, we see the largest opportunities in consumer electronics, appliances, beauty and apparel—where penetration is low and we see potential for further growth. Investments are being made Despite the challenges, investments are being made in many areas to tap various e- Money drawn to e-tailing commerce opportunities and this could further spur growth in Thailand, in our view. opportunities in Thailand Thailand is one of the most promising e-commerce markets in ASEAN. Its exponential growth combined with a high online penetration has been attracting a lot of interest from Thai and foreign investors. Over the past 12 months, the entrance of new notable players and more investments from existing ones include:

■ Alibaba which bought a controlling stake worth US$1 bn in SA, one of the leading retailers in ASEAN and the largest e-commerce operator in Thailand.

■ Central group acquired Zalora Thailand, an online fashion market, from Rocket Internet. The group plans to include Zalora as a part of its marketplace platform to be launched in 3Q16.

■ Ascend Group, owned by CP Group and the second-largest player in Thailand, has set up WeMall as an e-commerce market place website and plans to invest Bt5.3 bn on expanding its e-commerce presence in ASEAN.

■ DHL is ramping up its e-commerce operations in Asia with the launch of a next-day domestic delivery service in Thailand and expanding its partnership with JD.com in China. The fleet will provide next-day delivery to all urban areas, and COD service.

■ DKSH Group has acquired a minority stake in Bangkok-based aCommerce, an e- commerce enabler covering South-East Asia. aCommerce is to expand and develop services to cash in on the burgeoning regional e-commerce market.

■ Kerry Logistics, the leading e-commerce delivery service provider, has been building new facilities in Thailand to capture rising opportunities in this dynamic market. Two new recent logistics centres should allow the company to continue to ride on its established express service platform in Thailand and Vietnam, and expand to other neighbouring countries.

Thailand E-commerce Sector 15 09 June 2016

CPALL: A unique delivery point platform Scale brings efficiency at several levels, particularly in areas such as logistics. With a prevalent logistics problem in the e-tailing market, we believe that CPALL's 7-11 network could emerge as a unique logistic and delivery point platform. Most extensive logistics and delivery network We believe that CPALL's strong network of convenience stores—which are literally on Dominant network of 7-11 every block of major cities—can act as cheap delivery points where customers could pick could act as delivery points up goods ordered online. Compared to other countries, 7-11 in Thailand is the overwhelmingly dominant CVS network (a 70-80% market share) and the second-largest in the world only after Japan. On a population-per-store basis, each CPALL's 7-11 store covers 7,792 people, which is quite impressive for a less developed modern trade retail market compared to Taiwan, South Korea and Japan.

Figure 30: World's second-largest 7-11 network Figure 31: Decent 7-11 coverage

7-11 stores Population/7-11 store

20,000 700,000 18,000 600,000 16,000 14,000 500,000

12,000 400,000 10,000 8,000 300,000 6,000 200,000 4,000 100,000 2,000

0 0

US

US

China

China

Japan

Japan

Mexico

Mexico

Taiwan

Taiwan

Thailand

Thailand

Malaysia

Malaysia

Phillipines

Phillipines South Korea South Korea South Source: Company data Source: Company data, NESDB Leverage on efficient distribution centre With the best distribution network of any public or private organization in Thailand, we Best product distribution believe CPALL could potentially run rings around the postal service or the small private network in the country logistics firms like Kerry due to its extensive and hyper-efficient Distribution Centres. CPALL has seven world-class distribution centres (DCs)—four of which are regional DCs—to distribute their products daily to 8,000-9,000 stores all over Thailand. With this regional DC system, it is able to consolidate the shipment to each region and have the cross-docking deliveries to CVS stores nationwide. CPALL has a warehouse management system (WMS) and digital packing to manage the inventory with an error of only one per 500 mn pieces. Products can be delivered to the destination within 24 hours of the order being placed at the store.

Thailand E-commerce Sector 16 09 June 2016

Figure 32: The largest DC system allows frequent delivery Grocery DC location Chilled/ Dry food Sq m Area coverage Supported Temperature branches controlled Bang bua thong – BKK Yes Yes 25,000 BMA and central provinces 2450 Suvarnabhumi -BKK Yes Yes 22,000 BMA and central provinces 1798 Surat Thani Yes Yes 12,000 Southern provinces 845 Khon Kaen Yes Yes 12,000 North-eastern provinces 855 Lampoon Yes Yes 17,000 Northern provinces 643 Cholburi Yes Yes 10,000 Eastern provinces 520 Mahachai Yes Yes 20,000 BMA, western and upper 2,000 southern provinces Source: The Nation and Manager newspapers, Credit Suisse Our channel check with logistic experts who are familiar with the supply chain system in Thailand has reaffirmed that CPALL's DC and warehouse systems are advanced enough and could be adapted easily to help accommodate e-commerce pick-up and drop-off services. The key required investments would be for an improvement in the IT system. Prevalent pick-up services in other countries' CVS networks The CVS's e-business pick-up, drop-off payment and return services are highly prevalent and one of the convenient ways for product delivery in many developed countries with an extensive network of CVS. Online retailers are taking advantage of these networks to make deliveries. Consumers can place an order online and then proceed to a close to their home or office to pay for and collect their purchases. This business model has boosted online transactions as consumers find it safe and convenient. In addition to having a cheaper delivery cost, the product pick-up is preferred by consumers who do not have security guards at their homes or apartments and do not like to stay at home and wait for their parcels to be delivered. Examples in other countries include:

■ Japan: 7-11 has embraced omni-channel models, using the convenience chain as pick-up outlets for online orders and expanding to cover more products. In early 2016, Uniqlo, one of the most popular Japanese apparel brands, will also offer pick-ups for online purchases at 7-11 in some areas in the initial phase.

■ Taiwan: 7-11 Taiwan started a successful pick-up service with a leading online bookstore in 2000—Books.com.tw. The service proved a success before 7-11 Taiwan expanded its partnership to over 250 e-retailers.

Figure 33: Taiwan 7-11’s pick-up and payment services

Source: Company data

Thailand E-commerce Sector 17 09 June 2016

■ Hong Kong: In 2014, Alibaba introduced a self-pick-up delivery across Hong Kong for goods purchased on Marketplace Hong Kong, in partnership with 7-11.

■ Indonesia: Most recently, on 30 May 2016, Indonesian retail company Sumber Alfaria Trijaya is using its vast network of Alfamart convenience stores as pick-up points to tackle the country's logistical challenges. Alfamart is of the top-two convenience store chains in Indonesia with about 11,000 stores as of 2015.

■ Other countries that also provide the services include US, Canada, Singapore, etc. CPALL launched logistic services in 2015 CPALL launched third-party logistic services in 2015 via its two subsidiaries: Dynamic Pick-up and drop-off Management’s (DM) At All delivery service and 7-Catalog's 24 Delivery logistics service. services currently offered to DM is CPALL's main logistics arm and responsible for distributing CVS products to all 7-11 corporates and SMEs stores while 7-Catalog is CPALL's non-store retailing arm focusing on online sales, call centre and catalog channels, etc. Both services are somewhat similar but DM only allows pick-up and return services, and focuses mainly on large corporate accounts, while 7- Catalog targets SMEs and allows sellers to send their products from store-to-store. DM already manages 3PL services for well know corporates such as Amway, Aimstar, Booksmile, Big One, Dortmuend, Nuskin, ORIFLAME, True Select, etc.

Figure 34: CPALL’s third-party logistics, pick-up and Figure 35: CPALL’s logistics and store-to-store services drop-off services to corporate customers offered to SMEs

Source: Company data Source: Company data Payments challenge could improve We believe the current obstacles presented by payments may be alleviated as Thailand's Usage of credit and debit payment infrastructure continues to develop and cultural barriers subside. It appears to us cards in Thailand is that current challenges are borne more out of a lack of trust and resistance to online increasing shopping, rather than a lack of payment infrastructure. Credit card penetration levels have increased considerably in Thailand over the past five years and are expected to reach close to 40% by 2019E (Figure 36). This could help reduce reliance on COD as the dominant mode of payment and facilitate higher transaction volumes. It would be remiss to label COD as an ineffective form of payment, but electronic payment methods provide several advantages—in particular for vendors—including more efficient delivery processes and a lower rate of delivery failure.

Thailand E-commerce Sector 18 09 June 2016

Figure 36: Credit card penetration expected to double in 10 years (%) 40%

35%

30%

25%

20%

15%

10% 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E

Credit card penetration (%)

Source: Euromonitor International Debit card growth in Thailand has been on par with that of credit cards, which provides another means by which electronic payments could flourish. Some channel checks we have made suggest that credit card penetration levels may be overstated, as the number of card holders may be much smaller than the absolute number of cards in circulation. If this were true, we believe that the growing circulation of debit cards is a mitigating factor for such an argument. Thailand has more than 40 mn debit cards in circulation (Figure 37), where growth since 2010 has been in line with that of credit cards’ (Figure 38). Debit cards can be used interchangeably with credit cards to perform online transactions and in theory represent a payment channel which can grow faster than credit cards. Growth of credit cards may be constrained by the degree to which banks choose to provide credit to consumers, which is not a limiting factor for debit cards.

Figure 37: Debit and credit cards have been growing … Figure 38: … leaving ATM cards behind (Millions of cards) (2010-2014 CAGR) 50 10%

8% 40 6%

30 4%

2% 20 0% Credit cards Debit cards ATM cards 10 -2% -4% 0 -6% 2010 2011 2012 2013 2014

Credit cards ATM cards Debit cards -8%

Note: Data only available until 2014 Note: Data only available until 2014 Source: Bank of Thailand Source: Bank of Thailand

Thailand E-commerce Sector 19 09 June 2016

The development of a national e-payment system may also help bring on board people to make online payments and help bridge some of the cultural barriers that exist. The Thai government has been working on a national e-payment system designed to create a sort of national e-wallet and encourage electronic transactions in place of cash. This would create a Paypal-style e-wallet with an account for every Thai citizen and business. The government hopes that this system would improve tax compliance and enhance the efficiency of the financial system. In theory, the implementation of such a system could provide an impetus for consumers to move away from cash payments and embrace an electronic payment system. Widespread compliance may be an obstacle to the implementation process of such a system, but in theory could provide a solution to this problem. case study In the early days of e-commerce in China when the banking system did not provide sufficient protection for buyers and credit cards were not widely used, COD was the dominant method by which e-commerce transactions occurred. In 2009, COD accounted for over 50% of the payments for many e-commerce firms. While the credit card ecosystem has grown in China, third-party vendors including Alipay have begun to dominate the payment segment. The biggest contributor behind the success on this front was to address the trust issue at hand, similar to what we see in Thailand. Alipay introduced an escrow account mechanism as part of its payment service, whereby funds would only be released from a customer upon satisfactory receipt of ordered goods. With large concerns over the quality of products and the lack of an effective redressal mechanism, Alipay was well received. In 2010, Alipay along with eco-system partners, such as handset chip vendors, system solution providers and mobile application providers, established a Secure Payment Industry Alliance (SPIA) and introduced a mobile payment product, the first secure mobile payment product in China. It was an open platform for mobile app developers that could be easily integrated with other mobile applications. These have become very popular among Chinese online shoppers. Alipay's scope has expanded beyond that described above, with Alibaba now accounting for only half of its total business. Huge e-tailing opportunities The low penetration of internet retailing in electronic,appliance, and emerging new categories, presents a promising e-tailing growth opportunity in Thailand. Likely rapid increase in penetration in electronics and appliances In the early stage of e-tailing, we will likely see strong growth in consumer electronics and Low penetration to drive appliance categories. They are standardised products and the benefits of online and social strong e-tailing growth in media will conveniently provide consumers with access to compare prices, product electronics and appliances specifications and store offers. While consumer electronics and appliances are a significant category with a high market share of 32% of total internet retailing in Thailand, its penetration (consumer electronics and appliances online sales to total consumer electronics and appliances retail sales) is only 5% compared to 15-20% globally (Figure 39). Historically, electronics and appliances is the category that has seen a rapid increase in e-tailing penetration between 2008 and 2013 (Figure 40).

Thailand E-commerce Sector 20 09 June 2016

Figure 39: Penetration in electronics was 5% Figure 40: Globally, electronics and appliances' e-tailing penetration increased rapidly

E-retailing penetration (%)

Electronics and Appliance

Apparel and Footwear

Leisure and Personal

Home and Garden

Health and Beauty

0% 2% 4% 6% 8% 10% 12% 14% 16%

2015 2010

Source: Euromonitor International Source: Euromonitor International Opportunities to tap into the highly fragmented electronics and appliance space Electronics and appliances is highly fragmented with the top-five players holding around a 10% market share and this presents an opportunity for e-commerce players to break into the market, in our view (Figure 41). The large part of electronics and appliances is dominated by small electronics’ resellers but the dominance at present seems unsustainable. Based on our channel checks, they could enjoy a tax advantage (evasion) and offer minimal service, allowing them to offer a competitive price. However, their costs are likely higher (no scale) and consumers will also face the risk of counterfeiting, poor after-sale services, inconvenient locations, unpleasant shopping experiences, etc. The trust issue will escalate even more for an online shopping experience, in our view.

Figure 41: Top electronics and appliances sellers command only a 10% market share Brand Company (GBO) 2012 2013 2014 2015 Power Buy Central Retail Corp 7.6 7.2 6.5 6.7 IT City Sahaviriya OA Group 2.2 2.0 1.8 1.8 I-Mobile Samart Corp Plc 0.6 0.9 1.1 1.2 Power, The Home Product Center PCL 0.6 0.8 0.8 0.9 Data IT Data IT Superstore Co Ltd - - - - Others 89.1 89.2 89.7 89.4 Total 100.0 100.0 100.0 100.0 Source: Euromonitor International Other product categories to boost growth While standardised products, such as books and electronic appliances, were the most Consumer interests in other obvious popular categories to begin with, there has been a strong interest in many other product categories are high categories such as apparel and footwear, health and beauty, leisure and personal products (DVDs, media products, etc.), etc. These categories posted strong growth over the past two years despite a weak economic environment (Figure 42). The most recent Thai consumer survey by the Thai Ministry of ICT also showed that fashion goods, and wellness and beauty products, are among the top-three choices searched online and of interest to Thai consumers (Figure 43).

Thailand E-commerce Sector 21 09 June 2016

Figure 42: Strong growth in other product categories (Thailand)

Internet retailing YoY (%)

100%

80%

60%

40%

20%

0% Electronics and Leisure and Food and Drink Home and Garden Apparel and Health and Beauty Appliance Personal Footwear

2011 2012 2013 2014 2015

Source: Euromonitor International

Figure 43: Strong consumer preference in fashions and beauty products

Source: Thailand Ministry of Information and Communication Technology (ICT)

Thailand E-commerce Sector 22 09 June 2016 Why we see CPALL as the best play Not many options are available and CPALL is the best listed play on e-tailing opportunities, in our view. CPALL's most extensive logistics and store network gives CPALL a first mover advantage to tap into a potential e-retailing market. This will increase related e-commerce commission fees, boost traffic and generate incremental e-commerce sales, in our view. Potential logistics and delivery point solution CPALL could emerge as the dominant logistics and delivery point platform. This would allow merchants the opportunity to focus on building their own site and brand, giving them more options and capabilities to run their business independently and work with local partners such as 7-11 (logistics) and Alipay (payment) for support. Best pick-up and return locations CPALL has the best pick-up and drop-off locations nationwide. As of 2015, CPALL had Thailand's most extensive 8,832 7-11 stores nationwide compared to 4,774 for Thailand Post, the country's largest pick-up and drop-off points postal service network and the 95 drop-off points for Kerry Express (Figure 44). The national postal service may be considered a cheap alternative, but delivery remains unreliable while private logistic operators still cover only selected areas and tend to be expensive. This should give large room for CPALL to monetise its network.

Figure 44: Largest pick-up and drop-off locations nationwide

Locations 10,000 8,832

8,000

6,000 4,774

4,000

2,000

95 0 Kerry Logistics Thailand Post CPALL 7-11

Source: Company data, Credit Suisse The pick-up and return service would not become a big burden to the store. The products can be stored at the 7-11. Most 7-11s are in leased buildings that usually have 3-4 storeys with an extra inventory space on the third or fourth floor. If no one picks up the products, they can be returned on an unloaded truck on the way back to the DC at a marginal cost. Counter service system in payment gives an advantage in the early stage In this early stage of development in Thailand where trust is the issue, CPALL would have Over the counter payment a clear advantage through its stores’ over-the-counter payment system. CPALL has a 24 service to give CPALL a first hour in-store payment service called Counter Service which provides a comprehensive mover advantage when a payment for various goods and services including an online e-commerce payment (Figure trust remains an issue in e- 45). This could give CPALL a first-mover advantage before the development of an e- tailing payment platform takes off.

Thailand E-commerce Sector 23 09 June 2016

While the Counter Service payment could take away store operators' times required to service other customers, we believe that once the traffic reaches a certain point, CPALL can further enhance the efficiency by installing automatic Counter Service machines, which have already been placed in some locations (Figure 46). The higher traffic in a certain store would also mean the potential for expanding selling space or locating a new store in a neighbouring area.

Figure 45: 24-hour Counter Service payment Figure 46: Automatic Counter Service machine

Source: Company data Source: Credit Suisse

These will likely lead to high growth in related e-commerce and high margin commission revenue. In Taiwan, where e-commerce activities are more prevalent, 7-11 has an increasing commission revenue contribution from e-commerce activities. As of 2015, the e-commerce related commission is about 30-31%.

Figure 47: Taiwan 7-11: Over 30% of commission comes from e-commerce activities Taiwan 7-11 commision 6.0 32%

5.0 30~31% 31%

4.0 30%

3.0 28~29% 29%

2.0 28%

1.0 26~27% 27%

0.0 26% 2013 2014 2015

Commission revenue (NT$ bn) Contribution of E-commerce related service (%, RHS)

Source: Company data, Credit Suisse

Thailand E-commerce Sector 24 09 June 2016

Opportunities in e-commerce sales CPALL is exploring an opportunity in e-tailing space and has formed 24 Shopping More resources are being Company Ltd to spearhead non-store retailing opportunities in 2014 (Figure 48). poured into e-tailing channel Customers can order and book through various distribution channels including four websites: www.shopat24.com, www.24Catalog.com, www.taiwang24.com, www.amulet24.com, www.booksmile.com and www.idealinthai.com (Figure 49). The delivery is mostly one day in Bangkok and 2-3 days in the provinces, and should not exceed three and five days, respectively, in special cases or distant locations. 24 Shopping is also extending its services to other ASEAN countries to cash in on opportunities from the single market. 24 Shopping has been distributing products made by Thai SMEs to sell in via a Thai-Lao trading company since May 2016. Following Laos and China, 24 Shopping plans to distribute SME products in and . Its own mobile application is to be developed as a sales alternative for customers.

Figure 48: 24 Shopping's sales channel

Source: Company data

Figure 49: CPALL's e-commerce channels Name Website Products Delivery www.shopat24.com Department store style with a variety of popular e- Free pick-up at 7-11 or commerce product categories including electronics, Bt200/package for home delivery appliances, etc. www.24catalog.com Products as appeared on 7-11 catalog. SMEs, daily Free pick-up at 7-11 or used products, etc. Bt200/package for home delivery www.amulet24.com Amulet products Free pick-up at 7-11 or Bt200/package for home delivery

www.taiwang24.com Thai SME products online to 8mn Chinese tourists to Free pick-up at 7-11 or Thailand Bt200/package for home delivery www.booksmile.co.th Media products (books, DVD, etc.) Free pick-up at 7-11 or Bt200/package for home delivery

www.idealinthai.com Discount deals on selected items and services NA

Source: Company data, Credit Suisse

Thailand E-commerce Sector 25 09 June 2016

Addition of virtual spaces These non-store retailing channels add virtual storage to limited CVS space. Despite E-tailing to allow more convenient locations in the neighbourhood, 7-11's product offerings are usually capped by offering items limited space. With these online channels and a high penetration of smartphones, CPALL can create higher sales by increasing the utilisation of selling space while leveraging on its distribution channel for product delivery at a marginal cost. The new entity provides services and distributes over 20,000-25,000 items, a substantial increase from CVS 7-11's 2,000-3,000 SKUs (Figure 50).

Figure 50: CVS vs websites' stock keeping units (SKUs)

Number of SKUs 25,000 20,000-25,000

20,000

15,000

10,000

5,000 2,000-3,000

- 7-11 CVS 24 shopping

Source: Company data

Multi-channel marketing to enhance off-line and online sales Apart from being cost competitive over its distribution network, CPALL can deploy Offline and online sales multichannel marketing by leveraging its bricks-and-mortar stores, which have daily traffic channels are being of over 11 mn visits per day (16% of the Thai population). CPALL has allocated its CVS integrated shelf to popular online items to promote its e-commerce channel and tap into impulse demand (Figure 51, Figure 53). Also, the promotional stamps or points received from purchasing in-store purchases and using payment services can be used as a discount to CPALL's online deals (Figure 52).

Thailand E-commerce Sector 26 09 June 2016

Figure 51: 24 Shopping products on shelf Figure 52: Cross-marketing: Stamps to be exchanged for discounts at CPALL's coupon website

Source: Company data Source: Company data

Figure 53: Offline to online (O2O) channel Shelf Catalog Online

QR Code

Source: Company data

Leverage on store network and extensive distribution centres CPALL's 24 Shopping is leveraging through an established network of 7-11 stores Leverage on 7-11 network nationwide (Figure 54). The 24 Shopping sends products via its own warehouse and fleets to give an edge in to home and 7-11 stores, but it also uses CPALL's existing logistics for certain locations operations where it can be more efficient and achieve a lower overall cost of operations.

Thailand E-commerce Sector 27 09 June 2016

Figure 54: Leverage on 7-11 store and logistic networks

Source: Company data

Increased traffic to increase sales We believe that the pick-up and return services will be drawing more foot traffic to Around 40-60% of people CPALL's bricks-and-mortar stores and increase sales. E-commerce activities provide who used CPALL's Counter additional reasons for Thais to visit the convenience stores. According to management, Service will buy more around 40-60% of people who used CPALL's Counter Service will buy more products from products from 7-11 stores 7-11 stores. This is in line with what we have seen in a more advanced economy like the US. Based on a survey of 5,100 US consumers by UPS and comScore, around 45% of those shoppers surveyed bought something else while picking up the purchase.

Figure 55: Increased visits to 7-11 stores via non-store retailing channels

Store Interests/info Order Payment Pick-up Return search placement

Catalog/ call center Interests/info Order Payment Pick-up Return search placement

Websites Interests/info Order Payment Pick-up Return search placement

Mobile/ social Interests/info Order Payment Pick-up Return media search placement

Source: Company data

Thailand E-commerce Sector 28 09 June 2016

Retail fundamentals also strong Aside from emerging e-commerce potential, CPALL's retail business fundamentals remain strong and can continue to prosper in the next 5-10 years, in our view. 2Q16 same-store sales growth (SSSG) is expected to accelerate and could surprise on the upside. Store expansion: More room for further penetration In Thailand, we still see significant room for retailers' grocery store expansion in the years We still see significant room to come. Following the SSSG deterioration in 2013-15, there are growing concerns among for retailers' grocery store investors about the industry reaching maturity. Figure 56 shows that Thailand's modern expansion in the years to grocery retail penetration is around 45%, a moderate level of development compared with come. other countries’. Based on our projection of per-capita GDP growth and the pace seen historically, Thailand could reach a penetration level of 49-50% by 2020—still far behind that of other developed countries. We believe CPALL will thrive as CVS is a more prevailing format. The zoning regulation has been getting stricter since 2003-04 in order to protect mom-and-pop shops, following the domination of hypermarkets during that time. The zoning regulation has made it more difficult to sort land plots at proper prices and suitable locations—making it more costly to open and run a large store format. CVS has significant advantage, as it can still open stores in local community areas, which are inaccessible to large format hypermarkets. As a result, CVS has been gradually gaining market share for over the past decade (Figure 57).

Figure 56: Large room for further store openings in Figure 57: CVS has been gaining market share Thailand

80 Singapore Selling space share (%) 70 Norway 60% 56% Switzerland Hong Kong 60 50% 42% USA 45% Australia Netherlands 50 Canada 40% Taiwan GermanyDenmark 36% France 40 Japan UK 31% New Zealand 30% 24% S. Korea Malta 22% 30 Greece 24% Kazakhstan MalaysiaCyprus ItalySpain 20% Portugal Thailand 20% 20 Azerbaijan Turkmenistan Turkey 10% China Indonesia Mongolia

GDP per capita at PPP ('000 int. int. dollars) ('000PPPat capitaper GDP 10 Philippines Armenia Fiji India Laos Myanmar 0%

0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0 20 40 60 80 100 2000 Modern grocery sales (% of total grocery sales) Convenience stores Hypermarkets

Source: Euromonitor International, Credit Suisse estimates Source: Euromonitor International Margin expansion: RTE foods and personal care products We see large room for margin improvement from 7-11 two major product categories: ready Ready to eat meal and to eat (RTE) foods and personal care product. Thai CVS have around 15-23% of RTE food personal care products to products, a low proportion versus comparable CVS stores in China, Japan and the US drive margins where it is 33-45% (Figure 58). Not only do RTE products command 5-15% higher gross margins, they also attract people to visit CVS' more often (three meals per day). Based on consumer surveys by AC Nielsen, Thais have visited CVS more often over the past 12-24 months because of RTE products on offer and their close proximity. Thus, as CVS operators offer a higher proportion of RTE products, this should be well received by the market and should further help boost their gross margins, in our view. RTE food products are offered at 5,000-6,000 stores, but CPALL plans to cover more locations.

Thailand E-commerce Sector 29 09 June 2016

Figure 58: Thai CVS's fast/daily/RTE proportion is low

Fast/daily/RTE food (% of convenience store sales)

50 45.3 43.4 45 41.4 40 35.3 34.3 35 32.6 30 23.4 25 22-23% 21.2 20 16.1 15 10 5

0

7-11

(Japan)

Lawson

7-11

Japan

(Beijing)*

Phillipines

(Chendgu)

7-11 7-11 China 7-11 China

FamilyMart

7-11 Japan 7-11

US/Canada

7-11 Taiwan 7-11 7-11 Hawaii* 7-11 7-11 Thailand 7-11 Source: Company data

The increasing popularity of non-food products has been driving sales and expanding gross margins over the past several quarters. These new product categories are personal care and beauty products. More and more SKUs have been added to the stores and this allows CPALL to tap into an emerging trend of health and wellness in Thailand. These products include face powder, creams, lotions, soaps, etc. CPALL has added more partners and works with major FMCG companies to offer smaller items in order to better match CVS customer needs. While non-food products generally have low margins, these personal and beauty products have higher margins than even some food products (and could be comparable to RTE foods) and should continue to help widen CPALL's margins, in our view.

Figure 59: Rising non-food revenue mix from new product Figure 60: High-margin personal care products have category—personal care … driven non-food margins

CVS revenue mix (%) 7-11 gross margin (%)

75% 27.0%

73% 26.5%

71% 26.0%

69% 25.5%

67% 25.0%

65% 24.5% 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Non-food (personal care, household, tobacco, etc.) Food (RTE, dry food, beverage, etc.) Food (RTE, dry food, beverage, etc.) Non-food (personal care, household, tobacco, etc.)

Source: Company data Source: Company data

Thailand E-commerce Sector 30 09 June 2016

2Q16 SSSG momentum could surprise on the upside We expect strong SSSG momentum to continue into 2Q16 and this could surprise the Accelerating 2Q16 SSSG market on the upside. Management had a more positive tone at the 1Q16 analyst meeting and implied good CVS SSSG in April. This has been driven by unusually hot weather which favours closer convenient stores and boosts beverage and ice cream sales. In addition, these products have an above-average margin and the higher mix should widen the margin in 2Q16. The key drag to CPALL's consolidated earnings in 1Q16 was due to MAKRO's 18% earnings growth YoY on the back of lower gross margin from an unusual level last year. That said, MAKRO management already indicated a SSSG recovery in April thanks to robust food sales. Given these two factors, the earnings likely accelerate sequentially and surprise on the upside in our view.

Figure 61: Accelerating SSSG momentum could surprise on the surprise

CVS SSSG (%)

6.0% 4.6%

4.0% 3.0-4.0% 2.9% 2.6% 2.5% 1.5% 1.6% 2.0% 1.1% 1.2% 0.5% 0.3% 0.0%

-2.0% -1.1%

-4.0% -3.6% -4.5% -6.0% 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16E 2016E 2017E

Source: Company data, Credit Suisse estimates

TP raise: Attractive growth and valuation We raise our DCF-based target price to Bt62 to factor in (1) e-tailing business potential (Bt5/sh) and (2) roll over to mid-2017E (Bt3/sh). We quantify the e-business opportunities via three drivers.

■ E-commerce related service (pick-up, drop-off, payment, etc.) fees. We assume CPALL's logistics network will become one of the key solutions to the logistics and payment issues and expect its fee revenue to increase along with the e-commerce volume growth in Thailand. We forecast commission revenue as percentage of CVS revenue will increase from 1.1% in 2015 to 1.6% by 2025, or around 33% of 7-11 commission revenue in 2025. This looks sensible when we compare it to Taiwan 7- 11's around 30-31%. The commission revenue generally has a high margin, so this should improve CPALL's profitability as well.

■ E-tailing sales contribution. We assume e-tailing to contribute 1% of total CVS revenue by 2025 based on the fact that overall e-tailing sales as a percentage of retail sales (penetration) is currently around 1.3% in 2015. Thailand's e-tailing penetration will continue to increase and this means more growth potential for CPALL but we would like to remain conservative and see more concrete results before turning more aggressive.

Thailand E-commerce Sector 31 09 June 2016

■ Increased daily store visit and sales. We expect e-commerce activities to draw more traffic to the store and revise up our traffic growth assumption in 2017-2025 from 0.3-1.3% to 0.5-1.4%. Our revision looks conservative despite potential activities from potential e-tailing boom. As we have pointed out earlier, around 40-60% of 7-11 visits for bill payment, pick-up, drop-off services usually end up with purchasing something at the store. CPALL has a strong combination of short and long-term positives from store expansion, margin expansion and e-tailing potential. The valuation looks highly attractive with an EPS growth of 19-23% in 2016-18E and 12M P/E of 24x, one standard deviation below five year historical avg. CPALL is our top pick in Thai retail space and we reiterate our OUTPERFORM rating.

Figure 62: Attractive EPS growth profile Figure 63: PE at 1SD below historical avg. (x) EPS growth (%) CPALL 12M PE 25% 45 40 +2SD 20% 35 +1SD 30 15% Avg. 25 -1SD 10% 20 MAKRO acquisition 15 -2SD

5% 10

Jun-16 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 0% Dec-10 2016 2017 2018

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

Impact on other retailers likely limited in near term We believe the emergence of e-tailing could post long-term risks to Thai retailers but the The key to maintain their key to maintain their competitive position would be how they adapt to and embrace the competitive position would new environment over time. In this early stage, we see minimal negative impact on large be how they adapt to and listed Thai retailers but potentially larger impact on smaller players. As we have pointed embrace the new out earlier, the markets for popular e-commerce categories including electronics, environment over time appliance and apparel products are highly fragmented. The entry of various e-tailing operators with a goal to gain market share and achieve scale benefit will likely take away shares of those small SMEs and mom and pop operators. For large and listed players such as BIGC, HMPRO and ROBINS, the near-term impact should be limited as their products are available in popular e-tailing categories. In the longer term, the impact remains unclear but we have seen an adaptation of these companies. They have launched their online channels (click and collect) and some of their products are differentiated through exclusive brand offerings. Their scales and/or differentiated offerings combined with their trustworthiness could allow them to compete for the market share of smaller players. The impact on GLOBAL and MAKRO should be somewhat limited due to their focus on construction material and home improvement products and fresh food products, respectively. For CPN, the potential for e-tailing growth presents a threat, but we expect a limited impact in the near to medium term given that e-tailing sales are still relatively small. CPN has the leading market share amongst retail developers in Bangkok with ~21% of retail NLA. We believe that it is likely tenants any risk to occupancy levels from tenants moving

Thailand E-commerce Sector 32 09 June 2016 offline will be greater for companies with smaller market share. We note that CPN is also working to actively manage its tenant mix of new properties to be less reliant on fashion- based tenants. An example of this is the recently opened CentralFestival EastVille mall, where tenant mix was geared more towards F&B and entertainment. Typically, fashion represents ~30% NLA in a CPN mall, but in this asset was close to 15%. Other options unlisted; little liquidity Few other options exist to provide investors with exposure to the growth we see in Thai e- commerce or e-tailing. Most firms operating in the Thai e-commerce or e-tailing markets are unlisted. Central Online (COL.BK, Not Covered), is a listed entity that has a larger e- tailing component than other listed retailers. Investors may be familiar with this name given Central Group's recent acquisition of Zalora. However, COL trades less than US$0.1 mn a day. Company overview Central Online or COL Public Company Limited (previously known as Officemate Public Company Limited) was founded in 1994 by Ounjai Family that has over 40 years of business experience in stationery and office equipment. In 2008, the company became a public company. In 2010, the Company was listed on the Market for Alternative Investment (MAI). In 2012, the Company merged Office Club (Thai) Ltd. and its subsidiary as well as B2S Ltd., moving to be listed on The Stock Exchange of Thailand (SET). In 2016, the Company acquired the Thai unit of Zalora, Asia’s leading fashioned-focused e-commerce site.

Figure 64: COL business timeline

Source: Company data Nature of business operations COL operates three main groups of business. These include: 1) OfficeMate (62% of total sales in 1Q16) is a fully-integrated retail business offering top-notched office-related equipment and services with 61 stores in Thailand in 1Q16. Its key customers are corporate clients and business operators. Currently, Officemate is the market leader in office supplies solution provider in Thailand. Some of its competitors are (1) Hyper Market players such as Tesco Lotus, Big C (BIGC.BK) and Makro (MAKRO.BK), and (2) online and catalogues players with the likes of Goodchoiz.com and Lyreco

Thailand E-commerce Sector 33 09 June 2016

Figure 65: OfficeMate store concept

Source: Company data 2) B2S (34% of total sales in 1Q16) is a retail business offering stationery and art supplies, books, learning and recreation equipment, as well as other lifestyle products. Presently, B2S is number one in book, edutainment, stationery & lifestyle store and the first specialty store chain of its kind in Thailand, with 94 branches across the country as of 1Q16. Some of its competitors include Se-Ed Book Store (SE-ED.BK), Naiin Book Store, and Chula Book Store

Figure 66: B2S store concept

Source: Company data 3) Central Online and Cenergy Innovation (4% of total sales in 1Q16): Central Online is a retail business offering daily-life products and trendy fashion items via online channels i.e., www.central.co.th and www.robinson.co.th. The Company offers next day delivery and the payment via COD or credit card when receiving the products. Meanwhile, Cenergy Innovation is a retail-focused IT solution provider and digital marketing agency.

Figure 67: 18 product categories on Central.co.th

Source: Company data

Thailand E-commerce Sector 34 09 June 2016

Figure 68: Online account for less than 5% of total COL sales Bt mn Bt mn 12,000 3,000 2% 2% 3% 3% 4% 10,000 2,500

8,000 2,000 38% 38% 37% 37% 34% 6,000 39% 37% 1,500

4,000 1,000

2,000 61% 500 62% 60% 60% 60% 62%

0 0 2014 2015 1Q15 2Q15 3Q15 4Q15 1Q16

OfficeMate B2S Online OfficeMate B2S Online

Source: Company data Strategy currently focuses on offline, not online COL’s strategy appears to be very focused on growing offline i.e., expanding the physical stores of Officemate and B2S (including new store concepts), rather than purely focusing on growing the online business at the moment. In particular, its 2016 store expansion plans include additional of 8 Officemate stores and another 6 B2S stores. Little liquidity COL only traded an average of US$0.1 mn a day over the past six months, despite having a free float of 42%. HOLT® valuation We use CS HOLT®, a Credit Suisse valuation tool that derives the stock price based on a company's cash flow return on investment (CFROI®) and estimated asset growth rates. On this basis, COL looks slightly overvalued on HOLT, with a warranted price of Bt29.29, implying 14% potential downside from the current share price.

Figure 69: Stock performance remained weak for the past 18 months as the company experienced mostly negative CFROI revisions during the same period

Source: IBES consensus, CS HOLT®

Thailand E-commerce Sector 35 09 June 2016

Risks and opportunities under CP Group As a part of CP Group, CPALL will see both risks and opportunities in the e-commerce market with the latter likely more than compensate for the former. Ascend Group, directly held by CP Group, aims to create Thailand's world class digital platforms comparable to Alibaba and Amazon. As the owner of two Thailand's top e-tailing websites (iTruemart.com and weloveshopping.com), Ascend Group does have the potential. Historically, when CP Group (the world's leading conglomerate and owned by , Thailand's richest man according to the Forbes ranking) gets serious at something, they will pour resources into achieving its goal. In the initial stage where the market share gain is the priority, Ascend Group should see an exponential growth and could choose to leverage on CPALL's network as one of key distribution options. While there could be a conflict of interests among the two holdings, given a potential large volume we believe CPALL will have a net incremental benefit under this group structure.

Thailand E-commerce Sector 36 09 June 2016

Asia Pacific / Thailand Food Retail

C.P. ALL PCL

(CPALL.BK / CPALL TB) Rating OUTPERFORM* INCREASE TARGET PRICE Price (07 Jun 16, Bt) 50.00 Target price (Bt) (from 54.00) 62.00¹ Upside/downside (%) 24.0 New growth area: Convenient stop for e-tailing Mkt cap (Bt mn) 449,155 (US$ 12,738) Enterprise value (Bt mn) 611,187 ■ TP raise on new outlook. We raise our DCF-based TP to Bt62 (from Bt54) Number of shares (mn) 8,983.10 Free float (%) 55.6 to factor in (1) e-commerce potential (Bt5/sh) and (2) rollover to mid-2017E 52-week price range 51.2 - 39.0 (Bt3/sh) following our research into e-tailing opportunities in Thailand. Our ADTO - 6M (US$ mn) 32.1 study points out that a potential e-tailing opportunity could be massive once two major issues are overcome. CPALL's 7-11 network could emerge as a *Stock ratings are relative to the coverage universe in each unique platform for the solution to the problems, in our view. analyst's or each team's respective sector. ¹Target price is for 12 months. ■ Best play on e-opportunities. Not many options are available and CPALL

Research Analyst is the best listed play on e-tailing opportunities, in our view. In this early Warayut Luangmettakul stage where logistics and trust are issues, CPALL's extensive distribution 662 614 6214 network and OTC payment system with 9,000-plus CVS stores nationwide [email protected] should give the company a first-mover advantage to tap into the e-retailing potential. We see three major benefits for CPALL: (1) higher service fees related to e-commerce activities, (2) sales generation from CPALL's newly launched websites, and (3) increased foot traffic and sales drawn via the e- channels. ■ Positive short- and long-term drivers. In the near term, we see the strong SSSG momentum to continue into 2Q16, which could surprise on the upside. It is driven by unusually hot weather which favours close distance CVS and boosts beverage and ice cream sales. In the longer term, aside from the emerging e-trend, CVS business fundamentals remain solid and should continue to prosper in the next five years on the back of store expansion and an increasing mix of high-margin ready-to-eat products, in our view. ■ Attractive outlook and valuation. The valuation looks highly attractive with EPS growth of 19-23% over 2016-18E and 12-month P/E of 24x, i.e., one standard deviation below the five-year historical average. CPALL is our top pick in Thai retail space and we reiterate our OUTPERFORM rating.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Price (LHS) Rebased Rel (RHS) Revenue (Bt mn) 391,817.3 436,920.6 481,923.9 531,896.1 60 120 EBITDA (Bt mn) 32,626.2 36,965.7 42,075.0 47,406.9 50 110 EBIT (Bt mn) 25,268.7 28,588.5 32,965.9 37,627.1 40 100 Net profit (Bt mn) 13,686.6 16,732.1 20,630.7 24,580.6 30 90 EPS (CS adj.) (Bt) 1.52 1.86 2.30 2.74 20 80 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Change from previous EPS (%) n.a. -1.3 0.8 3.1 Consensus EPS (Bt) n.a. 1.78 2.13 2.46 The price relative chart measures performance against the EPS growth (%) 39.3 22.3 23.3 19.1 THAILAND SET IDX which closed at 1442.42 on 07/06/16 P/E (x) 32.8 26.8 21.8 18.3 On 07/06/16 the spot exchange rate was Bt35.26/US$1 Dividend yield (%) 1.8 1.9 2.3 3.3 EV/EBITDA (x) 18.9 16.5 14.3 12.4 Performance over 1M 3M 12M P/B (x) 11.7 9.5 7.6 6.1 Absolute (%) 7.5 7.5 8.7 — ROE (%) 38.8 39.1 38.7 37.0

Relative (%) 3.8 3.8 13.1 —

Net debt/equity (%) 403.0 321.6 242.9 180.8 Source: Company data, Thomson Reuters, Credit Suisse estimates

Thailand E-commerce Sector 37 09 June 2016

C.P. ALL PCL CPALL.BK / CPALL TB Price (07 Jun 16): Bt50.00, Rating: OUTPERFORM, Target Price: Bt62.00, Analyst: Warayut Luangmettakul Target price scenario Key earnings drivers 12/15A 12/16E 12/17E 12/18E Scenario TP %Up/Dwn Assumptions SSSG (%) 0.90 2.52 2.90 3.78 Upside 64.00 28.00 Base case SSSG +1% Retail sales growth (%) 9.6 11.4 10.6 11.3 Central Case 62.00 24.00 SSSG of 2-3% Retail sales/m2 (Bt) 241,581 248,433 255,386 265,526 Downside 60.00 20.00 Base case SSSG -1% EBITDA/m2 (Bt) 24,205 26,127 27,656 29,413

Income statement (Bt mn) 12/15A 12/16E 12/17E 12/18E Per share data 12/15A 12/16E 12/17E 12/18E Sales revenue 391,817 436,921 481,924 531,896 Shares (wtd avg.) (mn) 8,983 8,983 8,983 8,983 Cost of goods sold 306,519 342,161 376,663 414,760 EPS (Credit Suisse) (Bt) 1.52 1.86 2.30 2.74 SG&A 73,901 81,431 89,364 98,490 DPS (Bt) 0.90 0.93 1.15 1.64 Other operating exp./(inc.) (21,229) (23,637) (26,177) (28,762) BVPS (Bt) 4.28 5.24 6.61 8.20 EBITDA 32,626 36,966 42,075 47,407 Operating CFPS (Bt) 2.53 3.24 3.79 4.38 Depreciation & amortisation 7,357 8,377 9,109 9,780 Key ratios and 12/15A 12/16E 12/17E 12/18E EBIT 25,269 28,588 32,966 37,627 valuation Net interest expense/(inc.) 8,381 7,811 7,301 7,066 Growth(%) Non-operating inc./(exp.) 0.14 0.14 0.14 0.14 Sales revenue 9.5 11.5 10.3 10.4 Associates/JV — — — — EBIT 23.3 13.1 15.3 14.1 Recurring PBT 16,888 20,777 25,665 30,561 Net profit 39.3 22.3 23.3 19.1 Exceptionals/extraordinaries (4.2) — — — EPS 39.3 22.3 23.3 19.1 Taxes 3,066 3,906 4,876 5,807 Margins (%) Profit after tax 13,818 16,871 20,789 24,754 EBITDA 8.33 8.46 8.73 8.91 Other after tax income 4.2 — — — EBIT 6.45 6.54 6.84 7.07 Minority interests 135.0 139.1 158.3 173.8 Pre-tax profit 4.31 4.76 5.33 5.75 Preferred dividends — — — — Net profit 3.49 3.83 4.28 4.62 Reported net profit 13,687 16,732 20,631 24,581 Valuation metrics (x) Analyst adjustments — — — — P/E 32.8 26.8 21.8 18.3 Net profit (Credit Suisse) 13,687 16,732 20,631 24,581 P/B 11.7 9.5 7.6 6.1 Cash flow (Bt mn) 12/15A 12/16E 12/17E 12/18E Dividend yield (%) 1.80 1.86 2.30 3.28 EBIT 25,269 28,588 32,966 37,627 P/CF 19.7 15.4 13.2 11.4 Net interest (8,911) (7,811) (7,301) (7,066) EV/sales 1.58 1.40 1.25 1.11 Tax paid (3,066) (3,906) (4,876) (5,807) EV/EBITDA 18.9 16.5 14.3 12.4 Working capital 463 2,720 3,484 4,086 EV/EBIT 24.4 21.4 18.2 15.6 Other cash & non-cash items 9,016 9,502 9,783 10,517 ROE analysis (%) Operating cash flow 22,771 29,094 34,056 39,358 ROE 38.8 39.1 38.7 37.0 Capex (15,410) (15,435) (16,125) (16,289) ROIC 10.1 11.0 12.5 14.1 Free cash flow to the firm 7,361 13,659 17,930 23,069 Asset turnover (x) 1.19 1.31 1.39 1.48 Disposals of fixed assets — — — — Interest burden (x) 0.67 0.73 0.78 0.81 Acquisitions — — — — Tax burden (x) 0.82 0.81 0.81 0.81 Divestments — — — — Financial leverage (x) 7.90 6.61 5.51 4.67 Associate investments — — — — Credit ratios Other investment/(outflows) (1,938) 362 145 315 Net debt/equity (%) 403 322 243 181 Investing cash flow (17,348) (15,073) (15,980) (15,974) Net debt/EBITDA (x) 5.15 4.38 3.62 2.94 Equity raised — — — — Interest cover (x) 3.02 3.66 4.52 5.33 Dividends paid (7,186) (8,085) (8,366) (10,315) Source: Company data, Thomson Reuters, Credit Suisse estimates Net borrowings (8,994) (12,162) (8,134) (11,319) Other financing cash flow 71.1 — — — 12MF P/E multiple Financing cash flow (16,109) (20,247) (16,500) (21,635) 40 Total cash flow (10,686) (6,226) 1,575 1,749 35 Adjustments — — — — 30 Net change in cash (10,686) (6,226) 1,575 1,749 25 Balance sheet (Bt mn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 21,518 15,292 16,867 18,616 20 Current receivables 854 919 1,002 1,100 15 Inventories 25,072 25,191 26,527 28,604 10 Other current assets 9,528 10,027 10,915 11,902 5 Current assets 56,973 51,429 55,312 60,222 0 Property, plant & equip. 89,447 97,239 105,004 112,277 2011 2012 2013 2014 2015 2016 Investments 357.6 357.6 357.6 357.6 Intangibles 179,513 180,606 181,721 182,858 Other non-current assets 2,792 3,106 3,426 3,781 12MF P/B multiple Total assets 329,083 332,737 345,819 359,495 Accounts payable 62,624 65,528 70,430 76,691 18 Short-term debt 23,803 31,658 23,351 27,656 16 Current provisions — — — — 14 Other current liabilities 14,705 16,415 18,070 19,897 12 Current liabilities 101,131 113,601 111,851 124,245 10 Long-term debt 165,684 145,666 145,839 130,215 8 Non-current provisions — — — — 6 Other non-current liab. 20,593 23,095 25,424 27,995 4 Total liabilities 287,407 282,362 283,114 282,455 2 Shareholders' equity 38,462 47,109 59,374 73,639 0 Minority interests 4,326 4,379 4,444 4,514 2011 2012 2013 2014 2015 2016 Total liabilities & equity 329,083 332,737 345,819 359,495

Source: IBES

Thailand E-commerce Sector 38 09 June 2016

Companies Mentioned (Price as of 07-Jun-2016) Ahold (AHLN.AS, €20.505) Holding Limited (BABA.N, $77.84) Alimentation Couche-Tard Inc. (ATDb.TO, C$57.52) Bangkok Bank (BBLf.BK, Bt165.5) Big C Supercenter PCL (BIGC.BK, Bt205.0) C.P. ALL PCL (CPALL.BK, Bt50.0, OUTPERFORM, TP Bt62.0) COL (COL.BK, Bt34.0) Carrefour (CARR.PA, €24.6) Central Pattana Pcl (CPN.BK, Bt57.25) Citigroup Inc. (C.N, $45.54) Costco Wholesale Corporation (COST.OQ, $152.62) Dairy Farm International (DAIR.SI, $6.66) Delhaize (DELB.BR, €96.72) E-MART Co. Ltd (139480.KS, W179,000) FamilyMart (8028.T, ¥6,000) Home Products Center PCL (HMPRO.BK, Bt9.1) Kasikornbank (KBANKf.BK, Bt179.0) Kroger Co. (KR.N, $36.29) Lawson (2651.T, ¥8,880) Magnit (MGNTq.L, $36.25) Matahari Putra Prima (MPPA.JK, Rp1,315) Metro (MEOG.F, €29.649) Metro Inc. (MRU.TO, C$45.05) Modern Internasi (MDRN.JK, Rp129) President Chain Store (2912.TW, NT$245.0) Puregold Price Club, Inc (PGOLD.PS, P42.7) Rakuten (4755.T, ¥1,185) Robinson Department Store PCL (ROBINS.BK, Bt58.25) Robinsons Retail Holdings, Inc. (RRHI.PS, P81.95) SUPERVALU INC. (SVU.N, $4.84) Seven & i (3382.T, ¥4,669) Siam Global House PCL (GLOBAL.BK, Bt12.7) Siam Makro PCL (MAKRO.BK, Bt33.5) Sumber Alfaria (AMRT.JK, Rp590) Sun Art Retail Group (6808.HK, HK$5.18) Taiwan FamilyMart.Co.,Ltd. (5903.TWO, NT$200.5) Target Corporation (TGT.N, $68.24) Tesco (TSCO.L, 156.8p) Thanachart Capital Public Co Ltd (TCAP.BK, Bt34.5) United Parcel Service Inc. (UPS.N, $103.87) Wal-Mart Stores, Inc. (WMT.N, $71.03) Whole Foods Market (WFM.OQ, $35.17) Wm Morrison (MRW.L, 188.0p) Yonghui Superstores (601933.SS, Rmb4.21)

Disclosure Appendix Important Global Disclosures Warayut Luangmettakul and Atul Sethi each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for C.P. ALL PCL (CPALL.BK)

CPALL.BK Closing Price Target Price Date (Bt) (Bt) Rating 27-Jun-13 38.75 33.00 U 07-Aug-13 36.75 32.00 06-Aug-14 46.75 39.00 12-Feb-15 41.75 37.00 12-May-15 42.50 50.00 O * 19-May-15 45.50 54.00 19-Aug-15 48.50 54.50 04-Sep-15 49.25 60.00 04-Dec-15 43.00 52.00 14-Mar-16 46.25 54.00 UNDERPERFORM OUTPERFORM * Asterisk signifies initiation or assumption of coverage. 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

Thailand E-commerce Sector 39 09 June 2016

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 attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European 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 attractiveness 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 Neutral 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.

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* 56% (39% banking clients) Neutral/Hold* 35% (20% banking clients) Underperform/Sell* 9% (44% banking clients) Restricted 0% *For purposes of the NYSE and NASD 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 determined 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 holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. This material is intended for your use only and not for general distribution. This material is not intended to promote or procure a particular outcome in the UK referendum on membership of the European Union (the “Referendum”). Credit Suisse does not promote or endorse either campaign in the Referendum. This material does not constitute, and should not be interpreted as, a recommendation by Credit Suisse as to the merits of a particular outcome of the Referendum.

Target Price and Rating Valuation Methodology and Risks: (12 months) for C.P. ALL PCL (CPALL.BK) Method: Our 12-month target price of Bt62/share for C.P. ALL PCL is derived based on a DCF (discounted cash flow) valuation assuming a risk- free rate of 3% and a market risk premium of 10%. As CPALL is now highly leveraged with a net D/E (debt-to-equity) of 4.7x as of 2014, the beta will initially be high along with the debt proportion before declining through a gradual deleveraging process. We expect CPALL's

Thailand E-commerce Sector 40 09 June 2016

net D/E level to reach 3x in 2017. Our OUTPERFORM rating is based on a positive outlook on modern trade penetration in Thailand and CPALL's superior convenience store retail format. Risk: The risks to our Bt62 target price and OUTPERFORM rating for CPALL include: (1) weaker-than-expected consumer spending that could limit same-store-sales growth and new store network expansion for 7-Eleven; (2) rising competition from other operators could lead to a worse-than-expected level of cannibalisation; (3) higher-than-expected operating costs from marketing activities may result in lower earnings; (4) if the Wholesale and Retail Business Act is implemented, this may restrict the ability to open new stores/competition; (5) unfair competition from its overly dominant position in CVS may lead to consumer resistance.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures 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 (SVU.N, TGT.N, TSCO.L, WMT.N, CARR.PA, 3382.T, MRW.L, RRHI.PS, BIGC.BK, 139480.KS, 8028.T, BABA.N, ROBINS.BK, UPS.N, TCAP.BK, C.N) 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 (CARR.PA, BIGC.BK, 8028.T, BABA.N, UPS.N, C.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (TSCO.L, CARR.PA, MRW.L, UPS.N, C.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (C.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (CARR.PA, BIGC.BK, 8028.T, BABA.N, UPS.N, C.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (SVU.N, TGT.N, COST.OQ, TSCO.L, 2912.TW, CARR.PA, 2651.T, 3382.T, MRU.TO, KR.N, RRHI.PS, BIGC.BK, 139480.KS, 8028.T, ATDb.TO, BABA.N, ROBINS.BK, GLOBAL.BK, UPS.N, TCAP.BK, C.N, 4755.T) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (TSCO.L, CARR.PA, MRW.L, UPS.N, C.N) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (SVU.N, TGT.N, COST.OQ, WMT.N, WFM.OQ, KR.N, UPS.N, KBANKf.BK, C.N). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (CARR.PA). Credit Suisse has a material conflict of interest with the subject company (SVU.N) . Credit Suisse, along with certain other financial institutions, agreed to arrange the financing in connection with the acquisition of certain assets of Supervalu Inc. by Cerberus Capital Management L.P. Credit Suisse has a material conflict of interest with the subject company (BABA.N) . Credit Suisse acted as the exclusive financial advisor to Alibaba Group in relation to its investment in .com. Credit Suisse is the financial advisor to Alibaba Group Holding Limited’s acquisition of a controlling stake in Lazada Group S.A.” Credit Suisse has a material conflict of interest with the subject company (C.N) . Credit Suisse is acting as a financial advisor for Springleaf in relation to the acquisition of OneMain Financial from CitiFinancial Credit Company, a wholly-owned subsidiary of Citigroup. As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (C.N). As of the date of this report, an analyst involved in the preparation of this report, Susan Katzke, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in the common and preferred stock Citigroup (C).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.

Thailand E-commerce Sector 41 09 June 2016

Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (MRW.L). The following disclosed European company/ies have estimates that comply with IFRS: (TSCO.L, CARR.PA, MGNTq.L, MRW.L). As of the end of the preceding month, the subject company (CARR.PA) beneficially owned 5% or more of the total issued share capital of Credit Suisse Group. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (SVU.N, WMT.N, BABA.N, C.N) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. For Thai listed companies mentioned in this report, the independent 2014 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: C.P. ALL PCL (Good) , Siam Makro PCL (Good) , Big C Supercenter PCL (Excellent) , Central Pattana Pcl (Excellent) , Robinson Department Store PCL (Excellent) , Home Products Center PCL (Excellent) , Siam Global House PCL (Very Good) , Kasikornbank (Excellent) , Bangkok Bank (Very Good) , Thanachart Capital Public Co Ltd (Very Good) To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Thailand) Limited ...... Warayut Luangmettakul ; Atul Sethi Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.

Thailand E-commerce Sector 42 09 June 2016

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IT0383.doc Thailand E-commerce Sector 43