CPALL

Div yield is B0.9 or 1.8%, going XD on 2 May 2013. Recommend "BUY" on weakness BUY

CPALL Plc

Q4 2012 profit drops 5% QoQ due to high SG&A as projected, but rising 75% YoY

Apart from 99.99percent stake held by CPALL, CPRAM is a subsidiary who produces ready-toeat

line (bakery, dim sum, chilled and frozen food) of which 50% is directly launched into

7-11 convenience stores. CPRAM has revealed its strategy in 5 years ahead under the

total budget of B20bn, preparing to increase the production capacity of the existing 6

factories along with building 7 new factories in preparation for domestic market access

and to support 7-11 branch expansion that focuses more on ready meals. Moreover,

varieties of 3 meals have been increased which is considered CPALL's selling point and

uniquely outstanding strategy. For CPRAM's increase of production capacity, it would be

directly beneficial for CPALL as follows. 1) Food service sales (bakery, fast food, chilled

and frozen food) with the margin higher than other types of food would be raised,

standing at 21% in proportion of sales in 9M12 with around 35% of the gross margin. For

the total food products, they stand at around 73% in proportion with around 25.5% of

the gross margin. 2) CPALL has lower cost as if it produces and sells itself as CPRAM

produces and directly launches its products to CPALL. The products from CPRAM are

projected to boost CPALL's gross margin to go further than other producers' goods by

approx 15% (based on CPRAM's 2011 financial report). Despite only 4-5% contribution of

CPRAM's products to the total sales due to the current production capacity that's quite

limited, the abovementioned plan of CPRAM to increase the production capacity is

projected to raise sales of CPRAM and noticeably urge the future gross margin. In 2013,

CPRAM would gradually increase the production capacity under the budget of approx B1-

1.5bn, focusing firstly on frozen food in 1H13.



Q1 2013 profit to outshine 4Q12'. Long-term boost from food business

We're convinced that CPALL's 1Q13 profit is likely to increase continuously from 4Q12

due to the spending that tends to improve, the minimum wage policy that has been

applied for the rest provinces which has boosted customers' spending (thus becoming

CPALL's crucial customer base), and continuous selling promotions in 1Q13 especially

during Chinese New Year (giving discount Angpao). For the long-term target, the

company's strategy would focus on food sales with the concept "Convenience Food Store"

by enlarging the production capacity of CPRAM as mentioned earlier. Accordingly, the

production of frozen food and chilled food would be increased, projected to complete in

1H13 and 2H13 respectively. This would help support sales in 1,000 more branches from

the current number at 2,500 branches from almost 7,000 branches in overall, urging the

profitability to increase continuously in a long term. From our study, we've found that

CPALL is still constantly trying to make moves on food products and varieties such as

breakfast (boiled rice and rice porridge), vegetarian food, together with house-brand

products (to increase this year) such as mineral water which would be beneficial for the

profitability in a long term. We believe that the company's profitability in 5 years ahead

would thrive at around 22% (CAGR).

Limited upside. Recommend "BUY" on weakness, receiving div yield at Bt0.9

Despite more aggressive competition, we're still not concerned and maintain our positive

prospect toward CPALL's long-term growth which aims to break the target of 10,000

branches in a long term. Moreover, the company has a plan to expand more international

branches, starting at China which should be made clear in late-2013. This would be later

followed by other Indochinese countries, considered additional upside that's still not

included in our forecast. However, the share price has increased by 20% during the past

2 months, resulting in limited upside. Accordingly, we only recommend "BUY" on

weakness. In addition, CPALL's dividend yield has been reported at around B0.9 which is

close to our projection, considered 1.8% dividend yield, going XD on 20 May 2013

(payment is due on 20 May 2013).