✨Saigon Beer Alcohol Beverage Corporation (SABECO)
You can buy the Anheuser-Busch of Vietnam today at just 22x normalized PE
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Big Brewery is an incredibly high quality business with a nearly impenetrable moat - considering the immense amounts of CAPEX and A&P spend required to compete with incumbents.
Both Vietnam’s broader GDP growth and its brewery industry are expected to benefit from attractive growth rates, which will also lift Sabeco’s projected revenue growth. Vietnam’s beer market is a duopoly - with both Sabeco and Heineken holding ~40% market share each.
There remains plenty of room for Sabeco to improve its capital structure and therefore margins - going by readily observable metrics in their current financial statements.
Sabeco’s impenetrable business moat and visible headroom for further operational efficiencies can sufficiently justify an investment in their shares today at 22x normalized PE. There is also an even more optimistic upside scenario with a potential 16.7% earnings growth.
In 2008 and 2016 respectively, two mega-mergers in the brewery industry captured the world’s imagination - Anheuser-Busch and InBev in 2008, and the resulting merged AB-InBev with SABMiller in 2016. The combined company is now the largest brewery in the world, and trades under the name Anheuser Busch Inbev SA with a market cap of about €100 billion today.
The reason why these mega-mergers were such big news at the time was because dominant beer brands are amongst the most robust business moats in the world. Try and imagine the barriers to entry for the industry. First, you’d need an established manufacturing operation - which includes the actual processing of the beer beverage from raw materials (barley, hops, etc) and the bottling operations. Setting up a processing plant capable of producing hundreds of thousands of beer cans a day involves hundreds of millions of dollars in CAPEX investments, as shown by the picture below:
On top of that, you’d need to get your beers in stores once they’ve left the assembly line. This involves setting up a huge and complex distribution channel which is not only capable of delivering your beer cartons from the factory to the final sales destination, but is also efficient enough to avoid unnecessary waste via proper inventory tracking and operational risk management. On top of that, you’d also need to build a network of individual vendors via piecemeal negotiations over years, and get them to like you enough to want to sell your brand over a competitor’s - who are likely also paying them for the privilege of occupying exclusive shelf or bar space.
If that’s not enough, you also need to get customers to like you enough to want to buy your beer before they’ve even set foot inside the store. Just think about it, when was the last time you thought “I could really go for a _____ cola drink” besides Coca-Cola or Pepsi? The same psychological phenomenon exists in the beer industry, which is of a very similar nature to mindshare in the Tech industry.
And since there is literally zero switching cost between choosing a Carlsberg over a Heineken from a fridge or at a bar, breweries need to brainwash you even before you get to the store by assailing your senses with creative ads - which tends to require hundreds of millions of annual advertising & promotion (A&P) spend just to slot a tagline in between your favorite TV shows.
And then there’s competition. As evidenced by the mega-merger of AB InBev SA described above, large breweries tend to have massive firepower at their disposal which smaller entrants have no ability to match. Sure, there was that temporary craft beer scare in the mid-2010’s, when premium craft beers started popping up all around the United States and took market share from the standard-issue stuff - but the big boys can just decide to get a running start into the new market via acquisitions if they wanted to anyway (which they did). This is as Old World as business gets - and the industry is usually characterized as being very mature and oligopolistic after successive waves of industry consolidation.
To oversimplify, commoditized industries like the Consumer sector (which the beer industry is part of) tend to see waves of consolidation with every market cycle - resulting in the industry consolidating into just a few oligopolistic players once it has reached maturity. This is evident in the global beer industry, where the top 5 companies alone have amassed over 50% of global market share:
One possible exception to this rule is that beer brands tend to be very good at defending their home turf from foreign competitors. This is evident by the fact that in many international beer industries, local beer brands tend to share roughly equal market share with their behemoth foreign brands despite the former being much smaller. While I don’t have any particular insight into why exactly this might be the case, an easy explanation could be that the local beer brand has already had decades to develop its mindshare amongst the local population - which could in turn allow them to defend their domestic market share against a foreign brand’s unlimited advertising budget.
As such, owning a piece of a dominant beer brand’s business can be considered one of the highest quality businesses to own across all industries. Unfortunately everyone also knows this, which is why the largest beer companies tend to trade at relatively high multiples - roughly 15x-20x EV/EBIT despite effectively flat earnings growth. As explained by the esteemed Edward Chancellor in his bestseller book Capital Returns, the reason behind this was because the global beer leaders significantly overbuilt capacity throughout the early to mid 2010’s, and are now paying for their sins of commission - in very much the same way that US shale oil companies are doing today.
Around the same time as the final mega-merger between AB InBev and SABMiller in 2016, another two large breweries were also completing their mergers halfway across the world. In early-2018, ThaiBev acquired a 54% stake in Saigon Beer Alcohol Beverage Corporation (SABECO) - the former being the largest brewery company in ASEAN, while the latter was the dominant beer brand in Vietnam (at the time). Sabeco itself had been the staple beer beverage amongst the young and burgeoning Vietnamese population for decades, cultivated by the Communist state as the alcoholic beverage of choice in much the same way that Kweichou Moutai had been in China. Apparently, ThaiBev saw so much value in Sabeco that it was willing to pony up an ear-screeching 30x EV/EBITDA for it - with unsurprising results:
What could ThaiBev have seen in Sabeco at the time which made it so overtly generous? Here are some guesses:
Vietnam has the 3rd largest beer consumption by volume in Asia after China and Japan; the 2nd largest per capita consumption in ASEAN (after Cambodia); and the 5th highest beer consumption per capita growth in the world as of 2017.
90% of Vietnam’s alcohol sales are represented by beer sales, with a population almost 100 million strong and growing by about 1% annually.
The median age of Vietnam’s population is relatively young at just 33 years old - which implies outsized future working-age population growth, and therefore a higher forecasted discretionary income base.
Average beer unit prices in ASEAN are currently around USD 2.50/liter; Sabeco’s unit beer prices are currently only around USD 1.50/liter.
Sabeco and Heineken both own roughly equal market share in Vietnam’s burgeoning beer industry, at nearly 40% each. The remaining 20% is mostly split between Carlsberg and local competitor Habeco.
Quite clearly, Sabeco does have some merits to their underlying business fundamentals - and its share price has since fallen to a much more palatable 28x trailing PE, or 22x normalized PE (i.e. based on pre-acquisition 2017 earnings). But is it a value investment - i.e. do you get more than what you paid for? Let’s find out.
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