CFA Institute Research Challenge 2011–2012: THAMMASAT UNIVERSITY, THAILAND Opening A Defensive Stock with an Aggressive Business Attitude Summary & Overview Why Buy? Valuation & Financials Bloomberg CPALL TB Risks Ticker:Conclusion Market Profile Trading Value: USD 16 Million/ day Market Capitalization: USD billion Top 10 Stock in SET* Market Profile (As of Jan 31, 2012) 52-week Price Range (THB)/ (USD) 33.25 - 58.50 / 1.1 - 1.9 Trading Volume 8.5 Million Shares/ Day Dividend Yield 2.1% Number of Shares Outstanding 4.5 Billion Shares Foreign Holding/ Limit 31%/49% Free Float 40% Price to Earnings 32.8x Price to Book Value 12.1x Return on Equity (2011) 40.8% *SET stands for Stock Exchange of Thailand Summary & Overview Why Buy? Valuation & Financials Risks Conclusion Investment Summary & Company Overview THB 69.72 Target Price Recommendation 21% (USD 2.27) Upside Market Price (as of Jan 31, 2012) BUY Potential THB 58.50 (USD 1.90) # convenience food store in Southeast Asia serving million customers daily 7-Eleven Daily Customers Total Population % of Population Served Thailand million 67 million 10.4% USA million 313 million 1.9% Country Summary & Overview Why Buy? Valuation & Financials Risks Conclusion Investment Summary & Company Overview THB 69.72 Target Price Recommendation 21% (USD 2.27) Upside Market Price (as of Jan 31, 2012) BUY Potential THB 58.50 (USD 1.90) # convenience food store in Southeast Asia serving million customers daily 7-Eleven Thailand vs Global 3rd largest in terms of number of stores 6,276 Stores Summary & Overview Why Buy? Fastest growing number of stores 12% CAGR (As of Dec 2011) Valuation & Financials Risks (6 years) Conclusion Revenue Breakdown & Objective CPALL Revenue Breakdown Food Item 68% Non-Food Item 26% Service Fee 2% Others 4% To further increase food in the product mix Objective To become “the convenience food store of Thais” Higher gross margin Summary & Overview Why Buy? Valuation & Financials Differentiation Risks Conclusion Why Buy? Defensive Growth Stock Defensive Growth Summary & Overview Why Buy? Sustainable Business Model Confirmative Valuation Sustainable Business Model Valuation & Financials Risks Conclusion Why Buy? Defensive Growth Defensive Growth Stock Defensive Growth Summary & Overview Why Buy? Sustainable Business Model Confirmative Valuation Sustainable Business Model Valuation & Financials Risks Conclusion Defensive Growth: Defensive CPALL is a defensive growth stock with liquidity Basic consumer staples Defensive products x y GDP Growth SSS* Growth Correlation 0.17 *SSS stands for Same Stores Sales Price Index 170 Beta (AP): 0.48 150 Beta (World): 0.37 130 110 MSCI Asia-Pacific 90 MSCI World Index 70 Tolerant to Economic Downturn Defensive Growth Summary & Overview Why Buy? 50 Sustainable Business Model Valuation & Financials Risks Conclusion Defensive Growth: Growing CPALL is a defensive growth stock with liquidity CPALL CAGR 14% Unit: In billion THB 2,000 (09-15F) 1,500 132 109 1,000 448 411 151 479 177 523 201 569 224 616 249 661 CPALL Modern Store Traditional Store 500 780 750 09A 10A 810 11A Defensive Growth Summary & Overview Why Buy? 840 12F 870 13F 910 14F Sustainable Business Model Valuation & Financials 940 15F Year Source: McKinsey’s Report and t eam’s est imates Risks Conclusion Why Buy? Sustainable Business Model Defensive Growth Stock Defensive Growth Summary & Overview Why Buy? Sustainable Business Model Confirmative Valuation Sustainable Business Model Valuation & Financials Risks Conclusion CPALL Supply Chain CPALL: Push Cost Along Supply Chain Various Suppliers Provide “Convenience” Small portion relative to total purchase Differentiation: Food Convenient Stores Low negotiating power No Price Competition High Pressure on Pricing Secure High Margin Summary & Overview Why Buy? Valuation & Financials Risks Conclusion Source: Team’s Analysis Why weighting 65/35? 65% FCFE 35% P/E • Account for company’s future growth • Long-term perspective • Account for Market sentiment • Short-term perspective Macro information leads to “Bearish Market” Weight more on “ DCF FCFE “ Institutional investors = 65% Summary & Overview Why Buy? Valuation & Financials Free float = 35% Risks Conclusion Source: Team’s Analysis Monte Carlo – Ke and Growth Sensitivity Analysis Ke Summary & Overview Growth 6.10% 6.60% 7.10% 11.15% 70.44 74.40 79.35 11.65% 66.52 69.72 73.62 12.15% 63.26 65.88 69.02 Why Buy? Valuation & Financials Risks Conclusion Source: Team’s estimates Earning Per Share Growth EPS(THB) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F Year Summary & Overview Why Buy? Source: Company release, Team’s estimates Valuation & Financials Risks Conclusion CPALL VS SET50 Index Index Level 115 CPALL 110 105 100 SET50 95 90 85 80 75 70 1/8/11 Summary & Overview 1/9/11 Why Buy? 1/10/11 Valuation & Financials 1/11/11 Source: Bloomberg Risks Conclusion Regional Competitor Comparison Table Comparison Table between CPALL and Competitors Dimension Number of Stores 6,206 541 44 661 1,200 700 Franchising System High Med Low Low Distribution Channel High High Med Low Low Med Bangkok Stores High Med Low Med Low Low Provincial Stores High Low Low Med Med Brand Equity High High High Med Financial Resources High High Low Med Summary & Overview Why Buy? High Valuation & Financials Med Risks Conclusion Promotion to support per ticket sale Summary & Overview Why Buy? Valuation & Financials Source: release Risks Company Conclusion Case example: 7-11 in business center 50 stores within the area of business center No cannibalization Summary & Overview Why Buy? Valuation & Financials Source: Google map Risks Conclusion PEG Analysis P/E(X) 16.63% PEG = 1x 45 PT Modern Philippine Seven Dairy Farm President Chain 35 CPALL 29x Taiwan Family Mart 25 Circle K 15 EPS Growth(%) Summary & Overview 15 Why Buy? 25 Valuation & 35 Financials 45 Risks 55 Conclusion ROA of Thailand retails Retail stocks in Thailand are traded at premium Stock Market Cap (Million USD) 9,131 4,163 2,391 3,942 CPALL BIGC MAKRO Average P/E Ratio %ROA 34.8 23.9 27.6 23.6 17.0 6.1 10.0 11.7 Source: Bloomberg Summary & Overview Why Buy? Valuation & Financials Risks Conclusion Compensation for Franchisees Avg Daily Sales per Store (2011) Baht 82,265 Income Statement (Million Baht) Value Dimensions IRR 30% - 36% Pay Back Period 3.1 years for 10-year contract Qualitative Values Brand equity Efficient supply chain management Technical support Knowledge and entrepreneurial training Discount Factor 15% 25.52 19.37 6.15 2.89 3.26 0.72 0.97 0.60 0.97 0.12 0.85 Sales COGS Gross Profit To CPALL Franchisee Land Rent Employee Utilities EBIT Tax NI 10 6.7% 6.7% 6.7% 6.7% 4.8% 4.8% 4.8% 4.8% 4.8% 0.85 0.90 0.96 1.03 1.10 1.15 1.21 1.26 1.32 2.48 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 1.94 Growth CF -2.63 IRR 36% No Growth CF -2.63 31% & IRR Summary Overview Why Buy? Valuation & Financials Risks Conclusion Optimal Portfolio Breakup 7% With CPALL (Sharpe Ratio = 0.92x) 6% With top Thai stocks (w/o CPALL) Sharpe Ratio = 0.89x) 5% 4% 3% Top Asian markets + Thailand (Sharpe Ratio = 0.48x) 2% 1% 0% Summary & Overview 1% 2% 3% Why Buy? 4% 5% Valuation & Financials 6% 7% 8% Risks 9% 10% Conclusion Portfolio Weights Portfolio Return Portfolio Risk Sharpe Ratio 3.15% 3.11% 92.29% Portfolio Weights CPALL.TB CPF.TB ADVANC.TB PTTEP.TB PTT.TB DYMKKLCI Index 14% 14% 33% 2% 13% 24% CPALL DYMKKLCI CPF PTT Summary & Overview PTTEP Why Buy? Valuation & Financials ADVANC Risks Conclusion Emerging Market Portfolio Return(Monthly) 6% 5% CPALL doubled emerging market portfolio’s Sharpe Ratio 4% With CPALL Sharpe Ratio = 0.4x 5-Year Monthly 3% Without CPALL Sharpe Ratio = 0.2x 2% 1% 0% 0% Summary & Overview 2% 4% Why Buy? 6% 8% 10% 12% Standard Deviation Valuation & Risks Conclusion Source: Bloomberg and team’s estimates Financials Emerging Market Sharpe Ratio Improvement Sharpe Ratio Sharpe Ratio with CPALL 0.45 0.4 0.35 0.3 0.25 Maximum Sharpe Ratio of Emerging Index Portfolio 0.2 0.15 0.1 0.05 0% Summary & Overview 20% Why Buy? 40% 60% Valuation & Financials 80% 100% Weight of CPALL Risks Conclusion ... 1-Feb-12 1-Mar-12 1-Apr-12 Risks Conclusion Closing Thank You Q&A Special Thanks to: ? ?CFA Institute Research Challenge ? ?CFA Society of Thailand Bloomberg CPALL BBA, Thammasat University Asst Prof... Charoenrook Summary & Overview Why Buy? Valuation & Financials Risks Conclusion Slide Navigator Presentation Slides Summary and Overview: Valuation and Financials: Market Profile Weighted Average:... Valuation & Financials Risks Conclusion Corporate Governance Corporate Governance Award As of 2010 Thai Institute of Director(IOD) “Very Good” 80 - 89 TRIS Rating Corporation Limited 15% Criteria 20%