CFA Society Thailand Thammasat University - CFA Institute Research Challenge Hosted by - Asia-Pacific Research ...

CFA Institute Research Challenge
 Hosted by
 CFA Society Thailand
 Thammasat University

Team Thammasat Student Research
 Food & Beverage Sector, Agro & Food Industry
 This report is published for educational purpose only by students Stock Exchange of Thailand (“SET”)
 competing in the CFA Institute Research Challenge.

 THAI UNION GROUP PUBLIC COMPANY LIMITED
 Date: 30-Dec-2016 Closing Price: THB 21.00 Recommendation: BUY (26.95% Upside Potential)
 Ticker: TU TB/TU BK USD 1.00: THB 35.30 Target Price: THB 26.66 (USD 0.76)

 Figure 1: 10-Year Stock Price Movement Investment Highlight
 450 Investment Recommendation
 400
 We place a ‘BUY’ recommendation on TU with a target price of THB 26.66, not including M&A, with 26.95%
 350
 TU TB Equity
 upside potential from its December 30, 2016 closing price of THB 21.00.
 SET Index
 300 Diversification substantiates an ability to maintain business performance volatility
 250 Enjoyed by Worldwide Consumers – 92% of TU’s total revenue come from 20 international countries
 200
 across the regions, hence allowing TU to rely less heavily on consumption trend in one country. Looking
 forward, TU is focusing on expansion to emerging-market territories, specifically in China and Middle East, to
 150
 capture 4.74% CAGR from 2015 to 2021 in processed seafood consumption.
 100
 Spanning the Seven Seas – TU has a global network of supply sourcing across the oceans, providing TU
 50 with greater access to raw material amid cyclical fishing patterns and natural uncertainties. As a result, TU is
 0 able to manage the inventory level fluctuation that drives up costs. Low volatility in business performance is
 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
 interpreted by relatively low standard deviations in gross profit margin, net profit margin, and return on equity,
 Source: Bloomberg comparing to peer average (Figure 3).
 Figure 2: Summary of Market Profile Fully integrated value chain accelerates growth in gross profit margin
 and Historical Financial Data
 From Oceans to Plate – TU ties up the whole value chain on its own from sourcing, processing, and
 Market Data distributing to end consumers. TU owns production facilities in more than 13 countries near fishing grounds
52 Week Price Range (THB/Share) 16.00 – 23.00 (Figure 5) ensuring cost optimization, stringent quality control, and the full supply chain traceability. Marketing
Average Daily Volume (Shares) 12,334,188 under its own trademarks, TU is able to examine consumption behaviors and work backward to cater to their
Dividend Yield (Estimate) 3.04% needs and preferences. Recently, TU has stepped forward into direct-to-consumer channel through the
Share Outstanding (Shares) 4,771,815,496
Free Float 64.80%
 acquisition of Red Lobster, which will contribute THB 0.78 accretive to share price.
Market Capitalization (THB mn) 100,208.13 From Head to Caudal Fin – A fully integrated value chain allows TU to utilize seafood-derived byproducts to
Book Value per Share (THB) 8.87 manufacture pet food and other value added with high gross profit margin up to 23%. TU has recently kicked
P/E (LTM) 19.33x
 off marine ingredient venture to redefine the use of seafood scraps into higher-margin B2B sales targeting
Source: SET Smart, Bloomberg global manufacturers of nutrient-rich consumer goods, such as infant formula and fish oil supplements. Initiative
 marine ingredient is expected to generate revenue of approximately THB 3.18 billion from 2018 onwards.
 Financial Data
 2011* 2012 2013** 2014 2015
 M&A strategy has been a catalyst for growth
Rev. Growth YoY (%) 37.99 8.14 5.75 7.61 3.11 TU has been actively engaged in M&A for the past 20 years.
 Towards the year 2020, TU has
Gross Margin (%) 16.64 15.34 12.61 15.67 15.58 TU acquires global seafood companies both upstream and
EBITDA Margin (%) determined an ambitious target
 9.50 8.92 5.59 8.83 8.40
 downstream to further enhance its production capacities and
Net Profit Margin (%) 5.14 4.38 2.53 4.19 4.24 to achieve USD 8 billion in
 customer exposure. A track record of successful M&A has
EPS (THB) 1.25 1.09 0.62 1.10 1.11
 revenue through organic growth,
ROA (%) 6.48 5.27 2.81 4.58 4.70 proven management ability to turnaround business and create
 M&A strategy, and new initiative
ROE (%) 22.53 15.22 7.43 12.24 11.85 positive synergies. Last-5-year average revenue contribution
Net Debt to Equity 1.43x 0.83x 0.92x 0.85x 0.75x 1 including expansions into
 from major acquired companies accounts for 64.81% of total
 emerging markets, foodservice,
*After the consolidation of Thai Union Europe (formerly MW annual sales. However, since M&A growth strategy is
Brands) and marine ingredients.
**Business performance in 2013 is deemed to be a result of confirmed to be replicated in the future, an additional upside
(1) Loss operations in Pet Care segment
(2) High volatility in tuna raw material price due to fishing ban
 potential to TU’s stock price could be impaired in case that the
(3) A shrimp supply shortage due to Early Mortality expected synergies are not met.
Syndrome (EMS) disease outbreak
Source: Bloomberg, Team Analysis
 Long-term sustainable growth is attainable yet challenging
 Figure 3: Performance Volatility
 Although TU is putting efforts to manage gross margin stability and long-term viability of seafood supply, every
 Standard Deviation* player in seafood industry is inevitably facing challenges of unforeseeable environmental changes and
 GPM NPM INV Days ROE regulations on marine conservation. Adverse impacts from marine disease and commercial fishing ban
 Peer Avg** 3.08 2.89 20.26 8.03 predominately cause raw material price to fluctuate, making gross profit margin uncertain. Thus, an active
 TU 1.47 0.85 10.76 4.73 management response to changes is critical to ensure sustainability in commercial fishing.
 Figure 5: Global Footprint and Fully Integrated Value Chain
*Annualized standard deviation (2007 – 2015)
**Including 7 internationally listed seafood companies
Source: Bloomberg

 Figure 4: Discounted Cash Flow Valuation TUNA SHRIMP

 Shrimp Feed
 DCF Component 3.61 M&A Fisheries
 Raw Material
 Acquisition

 Value per Share (THB) New Breeding
Cash 0.52 4.20 Initiatives
 Red Can & Label
5-year FCFF 5.05 0.78 Lobster Farming
Terminal Value 34.57 Atlantic Ocean
Total Firm Value 40.14 Western
 Processing Processing
 Pacific
Minority Interest 1.00
 Production

 Ocean
Debt 13.26 21.68 Organic

TU Equity Value 25.88 Canning Value Adding

Red Lobster 0.78 Corporate Offices
Target Price 26.66 Production Plants
 Distribution

 JV/Associated Indian Ocean Distribution Distribution
Source: Team Analysis Company
 Sourcing Grounds

1
 Including Tri-Union Seafood (Chicken of the Sea), Tri-Union Frozen Product (Chicken of the Sea Frozen Food), Thai Union Europe (formerly MW Brands), King Oscar, Songkla Canning, Pakfood, and Meralliance

Figure 6: Historical Performance Business Description
THB bn
140 5.0% Thai Union Group Public Company Limited (TU TB/TU BK), started out in 1977 as a family business,
120
 4.0%
 is now the world’s largest canned tuna manufacturer, capturing 18% of the 1.7 million tons of global tuna
100 production. Additionally, TU sources and processes a variety of seafood species such as shrimp, salmon,
 80 3.0%
 sardine, and mackerel in a canned, frozen, and chilled format together with manufacturing pet food and
 60 2.0% other value-added products. TU generated revenue of THB 125.18 billion in 2015 (Figure 6) of which 92%
 40
 1.0%
 came from exports and subsidiaries in more than 20 international markets (Figure 7) supported by its long-
 20
 established Original Equipment Manufacturer (OEM) capability and worldwide-known brand portfolio.
 0 0.0%
 2012 2013 2014 2015 9M16 Listed in the SET in November 1994, TU has a market capitalization of THB 100,208.13 million with 35.35%
 strategic shareholders, of which 26.74% is held by Chansiri and Niruttinanon co-founder family, and 64.65%
 Revenue Net Profit Margin
 Source: Company Data
 free float. To achieve its mission of “being the world’s most trusted seafood leader”, TU has been
 continuously thriving on a global scale through organic growth and strategic acquisitions.
 Figure 7: Revenue by Geography

 100% Robust revenue stream aggregated from 3 business segments
 13% 15% 13% 15% 14% 2
 8% 7% 7% 6% 6%
 In 2015, TU reclassified its product lines from 6 categories to 3 business segments for accounting
 80%
 14% 7% 7% 8% 8%
 disclosure purpose. The segmentation into these 3 businesses allows TU to efficiently manage each value
 60%
 26%
 30% 29% 29% 33% chain beyond sourcing due to respective differences in processing methods, distribution channels, and
 40%
 buying behavior of customers (Figure 8).
 Ambient Seafood mainly composes of shelf-stable products such as canned tuna, accounting for 80% of
 44% 42%
 20% 40% 41% 39%
 total ambient sales, sardine, and mackerel. This category generates the highest revenue contribution with
 0% gross profit margin of 18.90% in 2015 due to brand’s price premium from TU’s 8 leading international brands
 2012 2013 2014 2015 9M16
 (Figure 9). However, price adjustment of branded products, especially for canned tuna, is relatively stable
 USA Europe Thailand Japan Others*
 due to fierce competition amongst brands and negotiation with retailers.
 *Others: Asia, Australia, Middle East, Canada, Africa, and
 South America Frozen, Chilled Seafood and Related consists of shrimp, salmon, lobsters and others that are generally
 3
 Source: Company Data
 sold to foodservice as ingredients for further cooking. Shrimp and related are the main contribution,
 Figure 8: Core Business Segment accounting for 70% of this segment sales. Since aqua feed is a part of supply chain, it is also included in
 this segment as related business. This category generates 10.65% gross profit margin in 2015 as it is mainly
 9M16 Revenue
 Contribution
 47% 40% 13% sold under private labels. Revenue from private label is negotiated on the basis of cost-plus-margin with a
 4
 9% short-term rolling contract enabling TU to pass on raw material price fluctuation to OEM customers.
 34%
 60%
 Pet Care, Value Added and Others is a mix of various products including pet care, microwave ready
 OEM 91%
 meals, bakery, and aluminum cans for packaging, which is highly-customized according to clients’ specific
 5
 Brand 66% need under their own trademarks. Pet care accounts for the highest contribution, mostly supplied to world-
 6
 40%
 leading pet food companies . Due to an ability to commercialize seafood byproducts coupled with a recent
 7
 Ambient Frozen PetCare operational restructuring , this segment currently achieves high gross margin of around 23.00%.
 Format Can Plastic Bag Mix
 Shelf life < 1 Year 2–4 Years Mix

 Source: Company Data
 Leverage on a fully integrated and globally diversified value chain
 As tuna and shrimp contribute 66% of TU’s products, TU establishes a full control from sourcing to
 Figure 9: Brand Shares
 production and distribution. TU’s streamlined value chain exhibits a strong competitive advantage over cost
 reduction, quality management, and high-margin generation.
 Tuna – TU secures tuna catch from its own 7 fishing vessels with a capacity of 39,000 tons per year and
 #1 #3 #1 #1 #1 #3 #1
 from additional tuna supply from partners, covering 3 oceans (Figure 5). Tuna is processed in TU’s 8
 8
 factories in 7 countries near sourcing grounds and packaged in cans from wholly-owned aluminum food
 78.9%
 packaging company. TU distributes its tuna products mainly through a worldwide network of subsidiaries,
 47.2% 37.1% 35.7%
 operating under 8 brands in 5 continents. Thus, TU gains benefits of low production and logistic cost and
 27.0%
 14.2% 6.1% freshness of raw material due to economies of scale and traction in supply chain. Moreover, TU can exploit
 byproducts derived from each process to manufacture value-added such as pet food and aqua feed.
 Mareblu

 Rugen Fisch and
 Chicken of the Sea

 John West
 King Oscar
 SEALECT

 (1) Petit Navire and
 (2) Parmentier

 9
 Hawesta

 Shrimp – TU invests in its own shrimp feed production, shrimp hatchery operation, and farming, and
 10
 purchases of shrimp from domestic alliances. Apart from annual capacity of 110,000 tons in Thailand, TU
 recently acquired Avanti Frozen Food, a shrimp aquaculture company in India with an approximate capacity
 Source: Company Data
 of 40,000 tons per year, to compensate for shrimp supply shortage in Thailand. TU exports shrimp to the
 US, accounted 78% of total sales, through wholly-owned Chicken of the Sea Frozen Food, the US’s largest
 Figure 10: Post-acquisition Outperform
 frozen seafood distributor. Therefore, TU benefits from low-cost production bases and direct relationship
 Revenue
 (THB mn)
 Operating Profit
 (THB mn)
 with customers. (See Appendix B4: Production Flows)
 247
 5,900 300
 MerAlliance

 +136% A track record of over-achieving target led by a diversity of management
 5,800 200
 105 With an ambition to be the world’s seafood leader, TU’s management has always committed to pursue
 5,700
 5,840
 100 financial target and guideline predetermined in every reporting period. Even though an aggressive M&A is
 5,690 +4%
 one of its expansion strategies, TU still has a tight focus on consolidation only within seafood industry. TU’s
 5,600 0
 Plan Actual global executives team has evidently exhibited a strong performance due to a cross-regional talent pool,
 2,400
 +10%
 220 230 which includes more than 8 nationalities, to support both domestic and international operations.
 King Oscar

 2,300 220 Management’s expertise has proven a successful track record of over-achieving target, especially in terms
 199 210 11
 2,200 of synergies realization within group companies. Following the acquisition of MerAlliance and King Oscar
 2,318 200
 2,100 190
 in 2015, TU significantly outperformed target sales and operating margin (Figure 10). Moreover, TU has
 2,144 +8%
 2,000 180 recently set up new divisions to directly cope with new initiatives and M&A growth strategy. (See Appendix
 Plan Actual
 B8: Management Global Leadership Team)
 Source: Company Data

2
 (1) Tuna, (2) Shrimp and related business, (3) Sardine and Mackerel, (4) Salmon, (5) Pet care, and (6) Value-added and other products
3
 Shrimp and related is composed of shrimp, shrimp feed, lobster, and shrimp value-added, according to company data
4
 According to the company presentation, sales contracts, which are determined by the raw material price and production cost forecast plus target margin, are secured 2-3 months ahead.
5
 TU reported no single customer and supplier accounts for more than 30% of total sales in PetCare, value added and others, during the past 3 years according to 2015 56-1 Form.
6
 Namely Nestlé and Mars, and TU reported its OEM pet care accounted for 30% of global sales according to the company presentation.
7
 A restructuring of wholly-owned USPN has been reported to result in a continued improvement of gross profit margin since 2013 through a significant downscaling of its US production facility in exchange for more imports
from Thai plants.
8
 Including Ghana, the Seychelles, France, Thailand, Vietnam, Papua New Guinea, and the US.
9
 Production capacity of shrimp feed is 330,000 tons per year and TU gains around 15% share in Thailand’s shrimp feed market.
10
 Of which 110,000 tons from TU’s group companies in Thailand and approximately 40,000 tons from recently-acquired Avanti Frozen Food in India.
11
 MerAlliance is a European leading smoked salmon producer based in France.

Figure 11: 12-month Cumulative
 Director Trade
 Corporate Governance
 Trading Volume Average Price
 Shareholding Structure
 ('000 shares) (THB) Majority of TU shares is held by Chansiri and Niruttinanon co-founder family at 20.09% and 6.65%
32,000 23
 22
 respectively, and by Mitsubishi Corporation at 7.29%, indicating a concentration of voting power to
24,000
 21
 accelerate the process of strategic decision-making. As of August 20, 2016, free float is accounted for
16,000 20 64.65% of total shares, higher than average free float in SET of 46.20%. Minor shareholders, accounting
 12
 19 for around 25% of total shares, generate YTD average turnover ratio of 0.27%, indicating lower trading
 8,000 18 volume in relative to SET average of 0.41%. (See Appendix B5: Major Shareholders)
 17
 0
 16 Governance
 -8,000 15 TU has improved CG scoring given by Thai Institute of Director (IOD) from ‘Good’ in 2014 to ‘Excellent’
 level in 2016. Currently, 80 companies, accounting for only 13% of SET-listed companies, correspond to
 Cumulative Net Trading Volume
 Average Price
 ‘Excellent’ recognition level. (See Appendix B7: TU’s Responses to SEC’s Good Corporate Governance Principles)
 Source: SEC, Bloomberg Board Control – SEC standard suggests the Chairman of the board and the CEO positions should be held
 by different individuals. However, the Chairman and the CEO of TU are father and eldest son, together
 holding 8.91% of total voting rights. Board members and family are holding 27.49% of total shares. (See
 Appendix B6: Board Members)
 Independent Directors – The number of independent directors account for one-third of TU’s board
 members (4 out of 12), meeting a minimum qualification determined by SEC. 2 out of 4 independent
 directors have been in position for more than 6 years, whereas 1 out of 4 has been in position for more than
 16 years and hence should be subject to particularly rigorous review of his continued independence
 according to the SEC policy.
 Major shareholders trading activities – A certain amount of director trading has been reported throughout
 the last 1 year (Figure 11). Specifically, TU CEO started to accumulate the shares after TU stock price fell
 by 14.2%, following a termination of Bumble Bee in early December 2015. In addition, he had purchased
 over 35 million shares since December 21, 2015, when TU announced the acquisition of Rugen Fisch, and
 we see the stock price adjusted upward accordingly.
 Disclosure and Transparency – TU’s financial statements in 2015 is audited by EY. However, for the
 Figure 12: Global Seafood Consumption
 year 2016 onwards, PwC has been selected and appointed as the independent auditor. Apart from annual
 Disposable Income per capita (USD) report, TU has issued sustainability report since 2013 to report on annual progress against its 2020
 Population (mn) kg
8,000 22.00
 sustainability goals. (See Appendix B9: TU’s SeaChange® Sustainability Strategy)

 Industry Overview and Competitive Positioning
7,500 21.00
7,000
 20.00
6,500 Nature of Seafood Industry (See Appendix C1 and C2: Porter’s Five Forces and SWOT Analysis)
6,000
 19.00 Demand – Growth in population and disposable income per capita is associated with a higher demand for
5,500 18.00 seafood consumption (Figure 12). Since seafood products can be consumed alternatively, ranging from
5,000 17.00
 fresh to processed, there is a different demand characteristic for each type of seafood products in each
 market.
 Disposable Income per capita
 Supply – Due to the perishability, most seafood companies started from localized and family-owned
 Population business. Moreover, the seafood industry inherits a complicated supply chain relating to culturing, catching,
 Fish Consumption per capita
 processing, distribution, and selling to end demands. In order to achieve greater control over production
 Source: Euromonitor, FAO
 costs and a full-traceability market requirement, the company needs to adopt a geographical consolidation
 Figure 13: US Projected Volume Growth to expand market exposure, and vertical integration to better manage inventory flows. In fact, the diverse
 of Seafood Consumption and fragmented seafood industry presents several acquisition opportunities for dominant industry leaders.
 % Change in kt These factors stimulate substantial momentum in M&A activity in global seafood industry.
 8%
 Future Outlook
 6%
 Processed seafood consumption dynamism continues to shift towards emerging economies –
 4%
 Developed countries exhibit limited growth potential in canned seafood consumption as reflected in
 2%
 0.34% CAGR -0.53% and around 0.40% CAGR from 2015 to 2020 in the US and Europe, respectively. A relatively higher
 13
 0% consumer price of canned seafood coupled with a fear of mercury contamination lead to a weaker
 -2% demand in the US, as consumers have shifted spending towards fresh seafood (Figure 13). However,
 -4% emerging nations will expedite global fish consumption due to growing population and per capita disposable
 2015 2016F 2017F 2018F 2019F 2020F 14
 income (Figure 14). Specifically, consumers in emerging economies are estimated to contribute 4.74%
 Fresh Seafood
 Canned Seafood growth in processed seafood consumption during the forecasted period of 2015 to 2021. Thus, these
 Frozen Seafood developing regions are consumption powerhouse for leading seafood providers in the near future. (See
 Source: Euromonitor Appendix C4: Fish Consumption in Each Region)
 Figure 14: Fish Consumption Index
 Shifting in consumers’ diet behavior poses an advantage to seafood industry – As a number of food
 15
% Change in kt organization, including US department of Health and Human Services (HHS) , encourage higher
 0.3
 consumption of seafood as a rich source of protein, seafood has increasingly become a good choice for
0.25
 people’s diet. Per capita seafood consumption worldwide is projected to reach 21.8 kg in 2025 from the
 0.2
 current level of 10.9 kg. Besides fish-meat consumption, high-nutrient fish extracts such as fish oil has
0.15 recently gained popularity in response to growing consumer trend of health and wellness aspirations. Global
 0.1 fish oil market is expected to grow at 2.60% CAGR during the forecasted period 2016-2021, reaching USD
0.05 1.93 billion market size, according to FAO.
 0
 Avg . 2016F 2017F 2018F 2019F 2020F Pet care market is lucrative due to high margin generation and economic resistance – Seafood
 2013-15
 scraps can be exploited in a production of value-added pet food resulting in a high gross profit margin. Pet
 World Developed Countries Developing Countries care industry is also seen as recession-proof, as it historically maintains a healthy growth despite economic
 Source: FAO downturn and consumer spending cuts. Moreover, a rising trend of pet-related expenditure towards

12
 Divide trading volume by total number of shares outstanding
13
 According to Euromonitor
14
 Including China, Egypt, Saudi Arabia, United Arab Emirates, Iran, Thailand, Indonesia, Philippines, Malaysia, and Vietnam
15
 2015-2020 US Dietary Guidelines for American (DGA’s) was released by HHS in December 2015.

premiumization also reinforces global dog and cat food market size to grow significantly with 5.39% CAGR
 from 2016 to 2020. (See Appendix C5: Pet Care Industry)
 Overall, seafood industry exhibits growth at marginal with a constant pace in large traditional markets, but
 high growth potential in pockets from emerging economies with richly spending habits. A consumer trend
 towards healthier lifestyle would further reinforce the overall growth of seafood industry. However, there are
 potential impediments to growth due to adverse environmental conditions and regulations.

 Potential Impediments
 Seafood production is negatively affected by global climate change and unexpected environmental
 factors – Climate change increases carbon dioxide absorption in the world’s ocean causing warming water
 and ocean acidification, which lead to a change in marine habitat, a number of fish caught, and cost to
 16
 capture, especially for exclusive economic zones (EEZs) in tropic region. Tropical nations may face up to
 40% decline in catch potential in the near future. Furthermore, unforeseeable environmental factors,
 17 18
 ranging from algae bloom in Chilean salmon to Early Mortality Syndrome (EMS) disease in shrimp,
 result in a volatility of marine supplies and, hence, raw material price fluctuation (See Appendix C3: Seafood
 Price Fluctuation)
 Fish production is protected by wild-caught regulations promoting a supply sustainability – Apart
 from many non-profit organizations who promote sustainable fisheries, marine habitat and ecosystem is
 Figure 15: Global Fish Stock Situation 19
 legally protected to ensure a fish supply availability by imposing total allowable catch (TAC) as well as
 Fish Stock Abundance TU’s reliance regulating the fishing method. For example, in 2016, Indian Ocean Tuna Commission (IOTC) restricted
 Tuna
Species
 Eastern
 Pacific
 Western
 Pacific
 Indian Atlantic
 on species (%
 to total catches of yellowfin and skipjack in the Indian Ocean because of a significant slump in tuna population
 Ocean Ocean
 Ocean Ocean quantity uses)
 (Figure 15). Furthermore, IOCT also emphasized on a ban of drones for finding tuna schools, a ban of light
 20
Skipjack 70% at night for attracting the fish, and a reduction in the number of fish aggregation devices (FADs) . Hence,
 Bigeye
 Limited
 use
 seafood companies are facing challenges of limited commercial fishing quota in each area under
 implemented regulatory, forcing many of them to adopt a globally diversified business model.
Yellowfin 20%

 Bluefin 10% Competitive Positioning
 Dominated players in global seafood industry inherit a significant difference in market portfolio and
 supply chain integration – TU has been offering a variety of products that does not match with a product
 range of any competitors. Although there is no direct competition, we have identified 7 public and 2 private
Source: Company Data, ISSF Technical Report companies (Figure 16), who mainly operate similar businesses to compare with, and classified into 4 groups.
(September 2016)
 Figure 16: Peer Comparison

 Financial Indicators (2015) Evaluation of Competitive Advantages*
 Company Revenue
 GPM Net D/E R&D Value Chain Market
 (THB mn)
 Thai Union Group 125,183 15.58% 0.75x ¢¢¢¢¢ ¢¢¢¢¢ ¢¢¢¢¢
 (1) The world’s largest seafood companies by revenues
 Maruha Nichiro. (1333 JP) 256,359 12.43% 2.5x ¢¢¢¢¢ ¢¢¢¢£ ¢¢¢¢¢
 Nippon Suisan Kaisha. (1332 JP) 189,479 20.79% 1.7x ¢¢¢¢£ ¢¢¢¢£ ¢¢¢¢¢
 (2) US leading canned tuna companies
 Dongwon Industries (006040 KS) 41,142 15.64% 0.5x ¢¢£££ ¢¢¢¢¢ ¢¢£££
 Bumble Bee Food (Private Company) N/A N/A N/A ¢££££ ¢¢¢¢£ ¢££££
 (3) The world’s largest salmon farmers
 Marine Harvest (MHG NO) 117,699 42.77% 0.4x ¢¢¢¢£ ¢¢¢¢£ ¢¢¢££
 (4) Other competitors according to team’s analysis
 Oceana Group (OCE SJ) 17,215 37.82% N/A ¢¢¢££ ¢¢¢¢£ ¢¢¢¢¢
 Century Pacific Food (CPNF PM) 17,547 26.57% 0.1x ¢¢£££ ¢¢¢¢¢ ¢££££
 Bolton Group (Private Company) N/A N/A N/A ¢¢£££ ¢¢¢¢£ ¢¢¢¢£

 *Please refer to Appendix C6 for detailed peer comparison
 Source: Company Data, Bloomberg, Team Analysis

 However, per our analysis, TU’s business could potentially scale up vigorously in relative to its peers due to
 the followings:
 M&A promising a future growth – TU has actively engaged in M&A transactions to thrive on the world’s
 leading position in seafood industry. M&A principally supports TU to move from solely production-driven to
 fully integrated seafood providers. Evidently, TU has secured two of the world’s best fishing grounds,
 namely Seychelles and Ghana, and benefited from zero import duty to the EU markets, following the
 acquisition of MW Brands in 2011. This also allows TU to achieve customer exposure and fasten distribution
 on global landscape. Historically, TU has benefited from reasonably priced M&A deals at multiple of 6.5x-
 10x EV/EBITDA, comparing to TU’s 5-year average EV/EBITDA of 13.95x. A systematic M&A approach
 and competent management ensure business performance improvement of the group companies. After
 most M&A announcements TU earns positive reactions from stock market as measured by cumulative
 abnormal returns, indicating market optimism regarding deal outcomes (Figure 17). We expect TU to
 continue its acquisition spree with a focus shifting towards non-tuna and direct-to-consumer business, such
 as new brand equity acquisition, and untapped potential markets, such as Spain, Russia and Australia. (See
 Appendix B9: M&A Potential Target)

 Market leading brand portfolio with a secured global presence – Since 1994, TU has established an
 acquisition history in brand assets, which most of the acquired companies were previously held under
 21
 private-equity firms . (See Appendix B12: M&A History) M&A transactions have ramped up TU’s revenue
 shares from international consumers. Following the recent acquisition of a 51% equity stake of Rugen Fisch

16
 According to FAO
17
 Algae bloom is a massive spreading of algae population causing mortality through low oxygen and damage in fish gills.
18
 EMS outbreak hit Thailand during late 2012 devastating Thailand’s annual farmed shrimp output in 2013 to decline by more than half.
19
 Total allowable catches (TAC) are catch limits set for a particular fishery expressed in tons or the number of fish caught, for a year or a fishing season.
20
 FADs are anchored on drifting objects that are put in the ocean to attract fish which may endanger by-catch such as baby tuna, turtles, and sharks.
21
 For example, King Oscar from Procuritas Capital Investor, MW Brands from Trilantic Capital Partners, and Red Lobster from Golden Gate Capital.

22
 AG in 1Q16, total sales contributions from European regions increased from 29% in 2015 to 33% in 9M16.
 (See Appendix B1: Revenue Contribution from Major Subsidiaries) TU benefits from global brand recognition,
 superior to most peers whose brand only has a domestic presence, accelerating consumers’ brand
 adoption in new market territories. Currently, TU further enhances its export business of John West brand
 23
 through a joint venture with local distributors in Middle East, Savola Food . It also established wholly-
 owned subsidiary in China (Thai Union China) to distribute frozen seafood products under King Oscar
 brand. We see a shift in purchasing behavior of Chinese consumers from traditional wet and unbranded
 seafood to modern trade distribution will benefit King Oscar premium brand positioning in China.
 Figure 17: 10-Year Stock Price Movement and Cumulative Abnormal Return
 (Please refer to Appendix B13 for detailed analysis) Acquisition of Rugen Fisch
 CAR(-1,1) = 6.5%
 Acquisition of Pakfood Announcement of Bumble Bee Acquisition* t-stat = 2.39
 TU TB Equity SET Index
 CAR(-1,1) = 4.0% CAR(-1,1) = -1.5%
 t-stat = 8.35 t-stat = 0.37
 Note: (1) Cumulative Abnormal Return (CAR)
 calculated over the 3-day period starting from Acquisition of MW Brands
 one day before to one day after the acquisition (Thai Union Europe)
 announcement by TU
 (2) T-score calculated by one-week CAR indicating CAR(-1,1) = 7.7%
 the significance of abnormal return t-stat = 3.36
 *TU announced 4:1 stock split 10 days after the Termination of
 announcement of Bumble Bee Acquisition Bumble Bee

 Acquisition of King Oscar Investment in Red Lobster
 CAR(-1,1) = 0.1% CAR(-1,1) = -1.1%
 t-stat = 0.52 t-stat = -0.91

 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
 Source: Bloomberg, Team Analysis

 Figure 18: Gii Structure and Study Integration of revenue stream from source to plate – Recently, the primary M&A focus of TU has
 been moving downstream towards direct-to-customer channels. In response to a shift in consumption
 trend towards fresh seafood in the US. TU invested USD 575 million 25% common shares and 10-year
 preferable unit convertible to 24% equity stake in Red Lobster, the largest seafood restaurant chain with
 Sensory research
 over 700 outlets in North America and 50 outlets internationally. Capitalizing on 20-year relationship with
 Red Lobster, TU expects to generate additional USD 100 million in revenue from supply collaboration,
 reinforced by North Atlantic lobster supply chain of TU’s subsidiaries, Orion Seafood International and
Source: Company Data Les Pecheries de Chez Nous. Moreover, we are positive that a change in Red Lobster’s management
 24
 team will contribute to its net profit margin improvement from negative to 3.00% at the end of 2021. All
 Figure 19: Historical Revenue
 Target Outperform in all, TU will benefit from increasing sales of lobster supply, dividend income, and profit sharing, leading
 2004 – 2008 Goal 2009 – 2012 Goal
 to TU’s stock price accretion. (See Appendix A7: Red Lobster and Stock Price Accretion)
Revenue Revenue
(USD mn) (USD mn) Global research hub to strengthen operational efficiency and to deliver innovative food solutions
2,100
 +3.5%
 3,600 +14.7% – TU has privileges granted from Thai government in capitalizing part of the investment in Global
2,000 3,200 Innovation Incubator (Gii), the world’s largest research center focused on tuna and seafood-related
1,900 2,800
 product established in 2015 (Figure 18). In response to low differentiation and fierce competition in
 2,070 3,441 seafood, TU is dedicated to develop processing technology and consumer-driven food solutions to
1,800 2,000 2,400
 3,000
 revolutionize the industry. In terms of shrimp business, TU conducts a study on shrimp disease-
 25
1,700 2,000
 resistance and shorter shrimp-breeding period from 150 to 120 days with an attempt to resume lost
 26
1,600
 Plan Actual
 1,600
 Plan Actual
 capacity after EMS outbreaks. In addition, TU has established new business unit of higher-margin
 marine ingredients, the most recent Gii’s innovative outputs, to enhance the value of byproducts instead
Source: Company Data 27
 of using in lower-margin shrimp feed. Marine ingredient venture is targeting manufacturers of nutrient-
 Figure 20: 2020 Guideline dense consumer goods such as infant formula and dietary supplements. We expected revenue from
USD bn
 marine ingredients to incur from 2018 onwards. (See Appendix B11: Gii)
 0.20 8.00
 0.60 0.40
 1.40
 1.70
 Clear-articulated vision committed to pursue revenue target – Historically, TU has set a promising
 3.70 track record in revenue target outperform. In 2009, TU aimed to reach USD 3 billion in revenue by the
 end of 2012, which was successfully achieved 1 year ahead of schedule (Figure 19). TU announced its
 mission to double the revenue from USD 3.7 billion in 2015 to USD 8 billion in 2020 through forward-
 looking guideline: (1) organic growth (2) M&A and (3) new initiatives including emerging market
 Ingredients
 Foodservice
 Emerging
 Organic

 2020 Goal
 M&A
 Growth
 2015 Actual

 Markets

 expansion mainly in China, Middle East, and Southeast Asia, foodservice business, and marine
 Revenue

 Marine

 ingredients (Figure 20).

Source: Company Data
 New Initiatives
 Investment Summary
 We place a ‘BUY’ recommendation on TU with a target price of THB 26.66, not including M&A, with
 26.95% upside potential from its December 30, 2016 closing price of THB 21.00. The price is calculated
 from DCF valuation with a WACC of 6.38% and terminal growth of 2.50%, implied 22.60x FY16F P/E
 and 19.27x FY17F P/E. Our recommendation is driven by:

 22
 Rügen Fisch AG is a number 1 leading ambient and chilled fish brand based in Germany.
 23
 Savola Food is one of the largest food producer and distributor owned by Savola Group in the Middle East. The line of business includes the retail sales of edible oil, dry goods, and agro cultivation.
 24
 According to a company presentation, a decline in Red Lobster’s performance during 2012-2016 was reported to be a result of poor management in an attempt to boost volume sales through more discount promotions diluting
 its premium-quality brand image.
 25
 Jon Fernquest (2016, April 8). Thailand’s first shrimp industry R&D center. Bangkok Post. Retrieved from www.bangkokpost.com
 26
 TU planned to invest around USD 10-12 million in a greenfield fish-oil refinery in Germany. TU already identified pieces of land upon which the plant will be built and production machines will be ordered by the end of this year,
 or latest in January 2017, according to the company presentation.
 27
 We expect Nestlé, a market leading producer of infant formula, to be a potential customer in this venture since TU has established an OEM partnership with Nestlé in pet food category according to the company presentation.

Figure 21: Raw Material Price Fluctuation Diversified market exposure to secure revenue growth potential
 Against GPM Strengthening its leading position in existing markets – As the world has changed, so has the
 geographical distribution of seafood consumption. TU, thus, aims to maintain market leadership as well
40% as gain more market share from competitors, as evidenced by 4.20% annual revenue growth from John
30% TUNA
 West brand in the UK in 2016, where the processed meat and seafood market shrank by 0.53%.
20%
 Capturing lucrative growth in emerging markets – TU continues to establish a strong foothold in
10%
 China and Middle East markets. As Chinese prefer frozen to ambient seafood products, TU recently
 0%
 introduced premium frozen seafood under King Oscar brand to boost up sales revenue from China. With
-10%
 a solid partnership with local distributor, TU also plans to market John West in 12 Middle Eastern
-20%
-30%
 countries, increased from only 2 existing markets in UAE and Saudi Arabia.
 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15
 Stable gross profit margin profile with substantial improvement underway
 Change in GPM of Ambient Segment A fully integrated value chain enables TU to effectively manage its inventory and develop a procurement
 Change in Tuna Raw Material Price strategy under different raw material price situations. The result is evidenced by a long track record of
30% solid gross margin (Figure 21). In addition, we expect that TU’s gross profit margin will be further
20% enhanced from both internal and external factors.
 SHRIMP
10% Internal mechanism – We expect TU to reap benefits of packaging cost reduction by 15 bps from 2017
 0%
 to 2018 from Gii’s innovative production technologies. Moreover, TU will focus more on brands which
-10%
 offer approximately 12% higher gross profit margin than that of OEM business for ambient segment.
-20%
 External conditions – Since 2013, EMS crisis caused global shrimp price to increase significantly due
-30%
 to a shortfall in supply. Thailand’s shrimp processors need to incur more costs since shrimp has to be
 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 purchased from outsiders to compensate for lost capacity. However, TU recently invested in Indian
 shrimp production to alleviate pressure on rising procurement cost, thereby easing a negative impact on
 Change in GPM of Frozen and Chilled Segment
 gross profit margin. Moreover, Southeast Asian shrimp production is expected to recover at 8.85%
 Change in Shrimp Raw Material Price
 CAGR from 2015 to 2020 based on FAO, posing a decline in future shrimp price. Although TU’s wholly-
Source: Company Data
 owned subsidiary, MerAlliance, is still suffering from rising salmon price from algae bloom effect started
 in 2016, a 4-year recovery phase is still foreseen.

 Figure 22: Stock Price Accretion from Revenue stream top-ups from ongoing downstream focus in the US
 Red Lobster Acquisition Soon-to-be-realized value from Red Lobster – We see Red Lobster as a sound investment for TU for
PV of Stock Price Contribution several reasons: (1) the transaction is reasonably priced at LTM EV/EBITDA of 8.1x. comparing to TU’s
from RL Acquisition
(THB)
 processing business’ LTM EV/EBITDA of 13.64x and an average US restaurants’ LTM EV/EBITDA of
 2.18
 11.0x (2) the cost of debt in financing the acquisition is only 4%, whereas TU will gain dividend yield of
 - 4.23
 8% from preferred equity (3) Red Lobster’s bottom line is expected to improve in the next 5 years from
 1.44 better management and contribution of TU’s expertise. As a result, we expect THB 0.78 stock price
 1.38
 0.78
 accretion from the acquisition of Red Lobster (Figure 22).
 Foodservice business – TU plans to develop state-of-the-art frozen seafood products such as ready-
 (1) (2) (3) (4) Net to-cook frozen seafood, targeting large-to-medium food professionals, including hotels, restaurants, and
 Equity Preferred Terminal Acquisition Accretion
 income yield Value Cost caterings (HoReCa) in the US. We believe a unique product value proposition and a long-standing
Note: (1) Equity income (25%) from RL for 10 years relationship with restaurant customers, such as Subway and Olive Garden, will spearhead the revenue
(2) Preferred yield (8% fixed yield) for 10 years
(3) Terminal value after exercising convertible rights into
 ramp-up from the foodservice segment, reaching the goal of USD 400 million in 2020. (See Appendix B3:
24% equity in the next 10 years Domestic and International Business Customers)
(4) Acquisition cost calculated at the time of acquisition
(USD 1: THB 35.12)
*Discounted by RL’s WACC 6.47%
 Initiative marine ingredient venture starting to unveil a clear progression
Source: Company Data, Team Analysis TU has shown a progressive orientation towards marine ingredient through an announcement of
 approximately USD 10-12 million investment in greenfield oil refinery located in Germany. After obtaining
 medical certification, TU aims to push out fish oil extracts to supplying nutrition-rich consumer goods
 manufacturers, such as infant formula. Thus, we estimate the revenue of THB 3.18 billion to incur from
 2018 onwards, supported by 6.30% baby food market growth.
 Continued acquisition spree thanks to solid balance sheet
 Marching towards 2020 with a trend of globalization and vertical integration for traceability in seafood
 industry, strategic M&A is still foreseen as a growth vehicle to fuel TU’s large-scale expansion and to
 intensify the value chain. Supported by current net D/E at 0.92x as of 3Q16, we expect to see TU
 engaging in approximately 3 deals per year in both upstream and downstream integration, to achieve
 USD 1.4 million in revenue by 2020 as projected by the company, of which has been secured by the
 acquisition of Rugen Fisch and Le Pecheries de Chez Nous in 2016.
 Valuation
 We derived TU's target price from a Discounted Cash Flow method (DCF) as it best reflects the
 forthcoming business performance from both organic and inorganic growth, including potential value
 creation from Red Lobster. Our valuation suggests a 'BUY' recommendation for target price of THB
 26.66, not including M&A, at 6.38% WACC and 2.50% terminal growth.
 Risks
 Key risks associated TU's future performance are the followings:
 • Environmental Risk – Unforeseeable disease outbreak, climate change, and commercial
 fishery ban plunge a seafood supply availability, thus fluctuating raw material price significantly.
 • Acquisition Risk – Overestimated synergies, including overpricing and mismanagement, may
 incur unexpected loss to the firm.
 • Market Risk – Intensive competition for branded products put a ceiling to potential growth,
 hence lower-than-expected revenue growth achievement.
 • Financial Risk – Overseas operations are subject to foreign exchange rate fluctuation in terms
 of transaction and economic exposure.

 Valuation
 Due to a full integration and global diversification of TU’s entire value chain, a Discounted Cash Flow
 method (DCF) is used to reflect a predictability of its business performance with limited volatility. We

Figure 23: Target Price Breakdown derive the target price of THB 26.66, not including M&A, with the forecasted period of the next 5 years
 39.02 (2016-2021), which allows us to factor in both seafood industry trends and TU’s growth strategies
 towards the year 2020. Out of THB 26.66 target price, THB 0.78 accounts for TU’s recent equity stakes
 3.61
 in Red Lobster. We derive such amount from a separated DCF valuation on grounds of the rights to
 26.66 (+3.61)
 9.43
 receive preferred dividends for the next 10 years (Figure 4). (See Appendix A5: FCFF Valuation)
 Additional
 3.61 Upside

 0.78
 4.20
 Potential
 Revenue Forecast (See Appendix A2: Assumptions for Financial Projection)
 0.78 We derive the revenue growth of CAGR 7.52% during 2015-2021 from two main sources of revenue:
 organic and inorganic as stated by TU’s new business divisions.
 Target
 Price
 Organic Revenue – Based on unique characteristic of TU business, the average selling price (ASP)
 25.20
 21.68 26.66 and raw material price (RMP) should not have direct relationship in the short run as the company
 engages in selling contract with 1-year and 45-day predetermined pricing for branded and OEM,
 28
 respectively. This assumption is verified by nearly zero Spearman’s rank correlation between ASP/ton
 and RMP/ton. However, TU negotiates the contract pricing on the basis of processing cost and raw
 TU's 2020 Target Team Analysis material price forecast plus margin, thus RMP movement should still be reflected in ASP in longer-period
 Organic Red Lobster of consideration. In addition, we presume that regardless of supply shortage, RMP is still inflation-
 New Initiatives M&A dependent, so does ASP. Hence, we, instead, derive forecasted ASP of ambient and frozen products
Source: Team Analysis by factoring in 1.9%-2.2% expected inflation rate of the US (50%), EU (40%), and Thailand (10%)
 Figure 24: Football Field Valuation weighted proportionately to historical sales contribution from these three regions. We expect sales
 quantity to grow at 1% CAGR over 2016-2021 mainly due to a relatively stable consumption growth in
 Current Price Target Price
 THB 21.00 THB 26.66 developed countries. However, Pet Care and Value Added exhibits respective difference from ambient
 and frozen categories in terms of consumers’ buying behavior and distribution channels. Sales revenue
 DCF 21.17 34.18 in this category is expected to grow at 5% CAGR for pet food and 9% CAGR for value-added products
 over the same period, according to rising pet population and robust growth in ready-to-eat meals market,
 P/E Band 21.9 28.70
 respectively.
 New Initiatives Revenue – According to TU’s revenue guideline towards the year 2020, revenue from
 new divisions are estimated as follows:
 P/E 18.75 23.08 • Marine Ingredient – BHA and Omega-3 contribute approximately 9% of infant formula
 producing costs, implying baby food manufacturers have to pay up to 9 cents US for fish oil
 15 20 25 30 35 40
 supplies for every dollar produced. We have seen a relationship between TU’s executives and
Source: Team Analysis top three infant formula producers (Please refer to Appendix B8 for management team experiences),
 Figure 25: Forecasted Revenue together accounting for 41.8% of THB 1.7 trillion market size of baby food products. We expect
THB bn the revenue of THB 3.18 billion to kick off from 2018 onwards according to TU’s planned
250 schedule, reaching the number of THB 7.63 billion in 2021.
 193.39
 • Emerging Market Expansion – Significant progress has been made in emerging-market
200
 172.01
 185.48
 expansion through an establishment of a subsidiary in China and a joint venture with local
 160.46
 146.39 distributors in Middle East. However, we disagree with TU revenue expectation of USD 600
150 137.04
 125.18 million or THB 21.2 billion in 2020 due to (1) market fragmentation in China, where the largest
100
 frozen seafood distributor has only 0.4% of market share equivalent to THB 8.1 billion, which
 impedes TU from gaining market share, (2) a concentration of major players and a limited size
 50 of Middle East processed seafood market of THB 141.2 billion not allowing TU to capture THB
 14 billion of revenue which is accounted for 10% market share. Thus, we prudently estimate
 29
 -
 2015 2016F 2017F 2018F 2019F 2020F 2021F
 based on historical performance which accounts for TU’s effort and competitive advantages
 of premium brand will help the company establish itself as the fifth place in both markets,
 Organic New Initiatives Rugen Fisch and Ches Nous generating revenue of THB 2.3 billion (0.1% market share) and THB 3.5 billion (2% market
Source: Team Analysis share) in 2021 from Chinese and Middle Eastern markets, respectively.
 • Foodservice – Expected foodservice revenue of THB 15 billion in 2021, mainly from the US,
 supported by (1) an investment of Red Lobster, which ensures additional supply agreement of
 THB 3.5 billion, and (2) innovative food development that enhances product offerings such as
 ready-to-cook frozen seafood. With a team of culinary professionals and food scientists, we
 believe these product lines will capture more expenditures from existing business partners by
 THB 4.1 billion and more contracts with new large-to-medium HoReCa customers by THB 7.3
 billion, which is a drop in the bucket as it accounts for only 0.03% of total market size in the US
 foodservice.
 Figure 26: Capital Expenditure CAPEX for Expansion
THB mn We derive CAPEX growth based on a sensitivity between sales growth and CAPEX growth during the
 3,839
4,000 3,594 3,684 3,734
 3.0% last 5 years. The 5-year historical average CAPEX growth per sales growth of 0.26x suggests that when
 3,292 3,514
 2.5%
 sales grow by 1%, CAPEX grow by 0.26% accordingly, consistent with our assumption of TU’s
3,000 economies of scale advantage. The forecasted CAPEX is ranging from THB 3.2 billion and THB 3.8
 2.0%
 billion during the year 2016 to 2021. Since TU will leverage on a partnership with local distributors, we
2,000 1.5%
 do not expect TU to incur a significant investment exceeding its annual budgeting of THB 3.5 billion from
1,000
 1.0% its geographical expansion. However, we estimate an additional CAPEX of THB 423.6 million in 2017
 0.5% due to a greenfield project of fish oil finery in Germany, supporting new marine ingredient venture.
 0 0.0%
 2016F 2017F 2018F 2019F 2020F 2021F Terminal Value
 Marine Ingredient
 We apply a terminal growth of 2.50% derived by weighting GDP growth in 2021 of the US (50%), Europe
 CAPEX (40%), and Thailand (10%), reflecting major revenue contribution. Despite the fact that TU has historically
 Total CAPEX/Total assets
 managed to grow with the rate higher than GDP, we do not intend to project long-term prospect of the
Source: Team Analysis company, since it is highly uncertain.

28
 Since we have limited data points (7-period), we decide to use Spearman rank correlation to find the correlation, which is a non-parametric test used to measure the degree of association between two variables. It does not
assume any assumptions about the distribution of the data and is the appropriate correlation analysis when the variables are measured on a scale that is at least ordinal.
29
 TU has spent only 3 years to gain 2% market share in United Arab Emirates and Saudi Arabia with its John West canned tuna.

Figure 27: Cost of Capital Weighted Average Cost of Capital (WACC) (See Appendix A4: WACC Valuation)
 Cost of debt is 3.91% based on TU latest issuance of AA- corporate bond yield of 3.66% plus 25 bps in
 WACC Calculation
 the wake of the Fed’s announcement of interest-rate increase. Cost of equity is calculated by CAPM
 Risk-free Rate 2.89%
 model, using a risk-free rate of 2.89% from 10-year government bond yield according to going-concern
 Market Return 11.58%
 Levered Beta 0.64
 assumption, an expected equity risk premium of 8.69% and 2-year weekly adjusted beta of 0.64. We
 Cost of Equity 8.45% then obtain an effective cost of capital of 6.38%.
 Cost of Debt 3.91%
 Effective WACC 6.38%
 Potential Value Creation from Red Lobster (See Appendix A7: Red Lobster and Stock Price Accretion)
 With an investment in Red Lobster (RL) in 4Q16, financed by 4% coupon debt instrument, TU will
 Source: Team Analysis
 principally receive 25% equity income contribution and dividend income of 8% from 10-year convertible
 Figure 28: Forward P/E Band preferred stock. We are optimistic that a reassignment of CEO Kim Lopdrup in 2016, who had left RL in
 40 2011 which thereafter RL has suffered from an ongoing decline of EBITDA margin, and long-established
 35 relationship between TU and RL for 20 years will help turnaround RL’s operating loss. We expect RL will
 30
 contribute to THB 0.78 accretive to TU stock price from (1) annual preferred dividend of approximately
 +2 SD THB 974 million and (2) equity income of THB 229 million starting from 2017 onwards. Here our
 25
 +1 SD assumption is different from TU prediction of THB 60 million profit sharing starting 4Q16, due to a
 +0.5 SD
 20 possibility that the business turnaround may be achieved later than expected.
 15 -0.5 SD
 -1 SD Additional Upside Potential from M&A Strategy (See Appendix A8: Potential Upside from M&A)
 10
 -2 SD Historically, TU acquired a target firm whose EV/EBITDA lower than 10x with an average transaction
 5 size of 45% of target’s revenue. Given no termination of Bumble Bee acquisition in 2015, we believe that
 0 TU would have been able to bridge its 2015 revenue target of USD 5 billion, since TU could have
 2011 2012 2013 2014 2015 2016
 consolidated an incremental revenue of around USD 985 million from Bumble Bee alone. We observe
 F P/E Avg. F P/E a very low likelihood that such incident would recast, since management would call for more scrutiny
 Source: Team Analysis upon the future deal. Hence, we expect TU to be able to achieve its predetermined M&A-driven revenue
 Figure 29: PEG target of THB 50 billion by 2020, of which has already been secured by approximately THB 5.96 billion
 EPS Median
 from the acquisition of Rugen Fisch and Chez Nous in 2016. We set an assumption that TU will further
 20.00 engage in 3 deals per year with an acquisition cost of 100% of target’s sales and EV/EBITDA of 10x. Per
 CNPF PM our conservative assumption, TU will consolidate an annual revenue of THB 10.5 billion from each
 OCE SJ acquisition. As a result, TU’s stock price would reach THB 30.27, representing 13.54% additional upside
P/E 2017

 TU TB P/E
 15.00 Median potential and 2017 EPS accretive of THB 0.02. However, downside potential from M&A due to an
 CPF TB
 006040 KS
 overestimation of the firm value could bring down additional upside potential to 9.30%.
 …
 1332 JP Relative Valuation (See Appendix A6: Multiple Analysis)
 MHG NO
 10.00
 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 24.0% Apart from the DCF valuation, we consider relative valuation by using P/E and P/E band to reflect the
 EPS Growth 2016-2018 market sentiment on TU stock price in question to peers and its historical P/E, respectively. P/E multiple
 ’16 P/E ‘16-‘18 EPS Growth PEG
 indicates that TU is fairly priced. Yet, we observe potential pitfalls of P/E peers since the method
 Median 17.15 15.9% 1.06 disregards TU’s respective differences in terms of growth potential and unique characteristics.
 TU 17.80 17.3% 1.03
 Specifically, PEG ratio below median (Figure 29) demonstrates TU being relatively undervalued due to
 its lucrative growth potential from future expansion. Regarding P/E band, TU is currently traded at 16.62x,
Source: Bloomberg, Team Analysis which is lower than 5-year historical average of 18.27x by 0.34 SD.

 Financial Analysis
 ROE Decomposition Ratio Analysis
 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F
 NPM (%) 4.19 4.24 4.11 4.50 4.83 4.89 5.09 5.13
 Assets
 Liquidity Analysis
 Turnover
 (X)
 1.09 1.11 1.08 1.01 1.06 1.09 1.13 1.14 Current Ratio (X) 1.51 1.48 1.13 2.06** 1.65 2.19** 1.93 2.38**
 ROA (%) 4.58 4.70 4.45 4.56 5.14 5.34 5.75 5.83 Quick Ratio (X) 0.53 0.50 0.50 0.51** 0.37 0.69** 0.56 0.74**
 A/E (X) 2.42 2.31 2.80 2.71 2.64 2.56 2.48 2.37 Leverage Analysis (Without M&A)
 ROE (%) 12.24 11.85 12.33 13.85 15.12 15.20 15.78 15.36
 Net Debt to Equity (X) 0.85 0.75 1.20 1.12 1.05 0.97 0.90 0.81
 Interest Bearing Debt to Equity (X) 0.98 0.82 1.25 1.16 1.10 1.02 0.95 0.85
 EBITDA to Interest Coverage (X) 6.40 6.60 7.56 6.53 7.22 6.96 7.70 7.67
 Efficiency Analysis
 Figure 30: Gross Profit Margin Accounts Receivable Turnover (X) 7.94 8.00 8.36 8.28*** 8.35 8.28*** 8.30 8.17
 Inventory Turnover (X) 2.73 3.00 3.15 3.13*** 3.18 3.16*** 3.17 3.12
 30%
 Assets Turnover (X) 1.09 1.11 1.08 1.01 1.06 1.09 1.13 1.14
 25% Profitability Analysis
 Gross Profit Margin (%) 15.67 15.58 14.94* 15.46 15.87 16.05 16.20 16.27
 20%
 EBITDA Margin (%) 8.83 8.40 8.39 9.61 9.86 9.95 9.98 10.07
 15% Net Profit Margin (%) 4.19 4.24 4.11* 4.50 4.83 4.89 5.09 5.13
 Return on Average Equity (%) 12.24 11.85 12.33 13.85 15.12 15.20 15.78 15.36
 10%
 Return on Capital Employed (%) 11.37 12.23 10.18 9.66 11.50 11.06 12.12 11.68
 5% Shareholder Ratios
 Payout Ratio (%) 47.54 51.31 53.04 50.00 50.00 50.00 50.00 50.00
 0%
 2015 2016F 2017F 2018F 2019F 2020F 2021F
 * Decline in GPM and NPM is from unexpected increase in tuna, shrimp and salmon price.
 Ambient Frozen ** Increase in current ratio and quick ratio is due to a repayment of current portion of debt in 2017, 2019 and 2020 and the repayment also results in a decrease in debt related ratios
 PetCare and value added Total GPM *** Drop in A/R Turnover and Inventory Turnover is resulted from new initiative sales, which boost sales and COGS in higher proportion than average of A/R and inventory

 Source: Company Data, Team Analysis Gross margin improvement due to Gii innovation, shrimp and salmon recovery, and new
 Figure 31: NPM and ROE Improvement
 high-margin products introduction – Gross margin of TU is expected to increase from 14.94% in
 2016 to 16.27% in 2021 as a result of (1) Gii’s technological development of production process is
 13.85
 15.12 15.20 15.78 15.36 expected to contribute to 1% decrease in packaging cost equivalent to 15 bps decrease in total costs of
 12.24 11.85 12.33 goods sold in 2018, (2) Shrimp and salmon recovery will gradually raise a gross margin of frozen
 segment from 9.0% in 2016 to 10.6% in 2021, (3) Fish oil and ready-to-cook frozen products are going
 4.19 4.24 4.50 4.83 4.89 5.09 5.13 to be launched to the market in 2018. These products are expected to realize high gross margin of 25%
 4.11
 and 13%, respectively.
 Du-Pont analysis suggests an efficiency in asset and equity management, thus higher
 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F profitability – Our analysis suggests that ROE will increase by 1.52% in 2017 due to (1) revenue
 ROE (%) Net Profit Margin (%) realization from new initiatives, which are new market penetration and foodservice business expansion,
 Source: Company Data, Team Analysis (2) annual sales contribution from Chez Nous, (3) the gross margin improvement in frozen segment