Thailand grocery retailers enjoy robust profit growth

A big boys’ domain. Robust economic growth in South-East Asia’s 2nd largest economy
with 68m people, as well as market share gains from their traditional counterparts have
boosted the profits of Thailand’s modern grocery retailers. This sector is dominated by a
few key players that account for ~76% of the pie.

Key growth drivers. While these retailers operate in different formats, they share the
same growth drivers - a growing number of stores and same-store-sales growth (SSSG).
Our analysis suggests that new stores accounted for 50% and 90% of revenue growth for
CPALL and BIGC from 2006-10. SSSG was more prevalent in CPALL at 50% versus
BIGC’s 10%, presumably on a higher mix of food items, which is vital in enhancing
margins. While there are signs of the landscape maturing, we expect these drivers to
remain relevant.

Providing shelter during 2007 volatility. Despite the volatility, the share prices of
CPALL and BIGC held up well for the first 10 months when the market corrected from Oct
2007 to Oct 2008, during which the SET index dived ~60%. We believe the Thai
consumption thesis remains intact and will continue to provide investors with defensive
and growth ideas amid the current uncertainty. Potential price dips due to the recent
floods will present good entry opportunities.

CPALL our top pick. We initiate coverage on CPALL with a BUY at TP THB55. It is the
exclusive 7-Eleven operator in Thailand, commanding a ~50% share in the convenience
sub-segment, and has delivered consistent dividend growth since 2007. The share price
has reacted positively to the higher dividends and is trading at a FY13F 17x PER, with a
6% dividend yield. New stores are expected to continue to fuel earnings growth,
translating into a stream of higher dividends.

BIGC may surprise on upside. We also like BIGC as it enters into a high growth phase.
After integrating Carrefour’s Thai operations, BIGC has set ambitious 2015 targets.
Valuation is undemanding at a FY13f 12x PER while a potential securitization of its
property assets could be an upside catalyst. While its proposed rights issue is EPS
dilutive, we see a 32% earnings CAGR from 2010-13 to support its share price. We
initiate coverage with a BUY, TP THB118.

Industry risks. These include: i) regulatory constraints, ii) market saturation, and iii)
intensifying competition.