09 June 2016 Asia Pacific/Thailand Equity Research Internet & 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 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 Rocket Internet 17% 8,000 CP Group 11% 6,000 Others 4,774 53% Amazon 8% 4,000 Apple 2,000 5% Groupe Casino 95 3% Rakuten (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 Singapore 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 Thailand E Valuation metrics - commerce Sector 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% Big C 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% Delhaize Group 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% Lawson 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.