TRIS Rating has affirmed the company and senior debenture ratings of Oishi Group PLC (OISHI) at “A-” with “stable” outlook. The ratings reflect the company’s position as one of leading green tea producers in Thailand and its well-recognized brand. The ratings also take into consideration the support OISHI receives from its parent company, Thai Beverage PLC (ThaiBev), in terms of managerial talent, an extensive distribution network, and production facilities. These strengths are partially constrained by intense competition, the easy availability of substitute products, weakening margins, and a rise in leverage to finance business expansion. The “stable” outlook is based on the expectation that OISHI will be able to maintain its brand equity and continue to create synergies with ThaiBev. Despite intense competitive pressures, OISHI is expected to revive its operating margin in beverages segment and improve overall operating performance. Weakening margins, if sustained over a longer period, could have a negative effect on OISHI’s credit ratings.
OISHI operates business in two main segments, non-alcoholic beverages and food, by leveraging its core brand “Oishi”, and positioning its products in Japanese style. OISHI’s non-alcoholic beverages products cover Japanese green tea and functional drinks. In the food segment, OISHI operates a Japanese restaurant chain, produces and supplies frozen and chilled foods, seaweed snacks, and offers a food delivery service. OISHI had three beverage production facilities, with a combined annual production capacity of 450 million liters as of September 2013. OISHI owned 172 restaurant outlets at the end of September 2013, clustered in Bangkok and big cities. A new central kitchen is located in Chonburi province, replacing the old one in Pathumthani province.
OISHI’s business profile is supported by its position as one of leading green tea producers in Thailand. OISHI had a market share of about 44% of Thai ready-to-drink (RTD) tea market in 2012. However, OISHI gradually lost share during the last few years because of the intense competition and very aggressive promotional efforts and price cutting by its rivals. OISHI’s market share declined to about 38% for the first nine months of 2013. For the food segment, OISHI has good growth prospects in the restaurant segment, considering its brand equity and its medium coverage. OISHI’s strategy is to expand the number of outlets, increase market coverage, and offer a wider variety of food.
As part of the ThaiBev Group, a Thai leading beverage producer and distributor, OISHI enjoys great support and synergies, including mandated managerial talent, distribution services, and shared production facilities. ThaiBev is considered to be the distributor that has the most extensive market coverage in Thailand. ThaiBev’s distribution network provides OISHI nationwide market coverage and customer reach, plus growth opportunities in export markets. The benefits of the synergies with ThaiBev also extend to production. ThaiBev helped bridge supply gaps during times of shortage and has also supported the manufacture of new products at efficient cost levels. In addition, OISHI, by pooling its purchase with ThaiBev, has greater bargaining power with its counterparties. As of August 2013, ThaiBev controlled about 79.7% of OISHI’s outstanding shares.
OISHI reported Bt11,634 million of revenue in 2012, or a 22.5% rise from 2011. The beverages segment contributed about 54% of OISHI's total revenue while the food segment made up the rest. For the first nine months of 2013, total sales grew by only 3% year on year (y-o-y) to Bt8,759 million. The growth was fueled largely by an expansion in the number of food outlets. Revenue in the food segment rose by 14% y-o-y, offsetting a 7% drop in beverages revenue. In terms of EBITDA (earnings before interest, tax, depreciation, and amortization), the beverages segment contributed about 63% of total EBITDA in 2012, and dropped to 30% for the first nine months of 2013.
OISHI’s gross margin has been relatively stable at about 31%-32% over the last three years through the first nine months of 2013. However, the operating margin before depreciation and amortization as a percentage of sales has fluctuated. OISHI’s operating margin declined to 10.0% in 2012 and to 8.5% for the first nine months of 2013, compared with a range of 14%-16% during 2010-2011. The EBITDA margin in the food segment remained stable at about 11% for the first nine months of 2013. However, in the beverages segment, the EBITDA margin was only 5% for the first nine months of 2013, dropping from 12% in 2012. The cost burden was high promotional and selling expenses. OISHI’s selling expenses climbed from 13% of beverages sales in 2012 to 18% for the first nine months of 2013. OISHI spent more to boost sales and to defend its market position. The competition in the RTD market during the last two years has been unusually intense.
OISHI’s funds from operations (FFO) lowered to Bt820 million in 2012 and Bt742 million for the first nine months of 2013. Liquidity remained satisfactory as the FFO to total debt ratio was 44.7% in 2012, and 34.8% for the first nine months of 2013, based on the trailing 12 months.
For the next three years, TRIS Rating’s base-case scenario forecasts OISHI’s revenues in a range of Bt14,000-Bt18,000 million per annum. The growth drivers are increases in the number of food outlets, increasing demand in healthy beverages, new product launch, plus an expansion in production capacity. The operating margin remains under pressure in 2013 and is expected to improve in 2014. The margin improvement reflects the expectation that OISHI’s food segment will continue to maintain a good profit margin. The beverages segment will benefit from the cost savings derived from efficient cold aseptic filling (CAF) production lines. OISHI plans to invest in more CAF lines which are eligible for the BOI (Board of Investment) privileges. The higher margin also reflects the expectation that OISHI will be able to manage its selling expenses by utilizing more reasonable promotional campaigns.
OISHI’s expansion has pushed the debt to capitalization ratio to rise to 37% in 2012, and to 47% at the end of September 2013, compared with 28.9% in 2011. During 2014-2016, leverage is likely to rise as OISHI has planned capital expenditures of Bt1,000-Bt2,200 million per annum to expand number of food outlets and install new beverage production lines. The total debt to capitalization ratio is expected to peak at around 50% in 2014 and will gradually decline.
The Japanese restaurant market and the RTD tea market are expected to continue to grow, as consumer behavior is trending toward greater health consciousness. However, these two market segments are considered intensely competitive, with a large number of competitors and easy product substitution. Marketing activities and promotional campaigns are needed to give significant boosts in demand. OISHI faces challenges to initiate efficient promotional campaigns and to defend its market position.
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