Description

What is Ginebra San Miguel Inc.?

Ginebra San Miguel Inc. (PSE:GSMI) is a Filipino spirits distiller that owns the world’s largest gin brand by sales volume, Ginebra San Miguel.

GSMI also owns several other alcohol brands including Vino Kulafu, the leading brand of Chinese wine in the Philippines.

Relevant Industry Context

Ginebra San Miguel is the largest gin brand in the world by sales volume. The other large gin brands (Gordon’s, Tanqueray etc.) are all global, whereas Ginebra San Miguel is primarily a Filipino brand without global brand recognition.

GSMI is the market leader in a local oligopoly. Spirits are a ₱181bn ($3.2bn) industry in the Philippines. Dominated by 3 local companies that control >90% of the market by volume and >65% by value. These are GSMI (dominant in gin), Tanduay (dominant in rum) and Emperador (dominant in brandy). The number four player in the market, The Keepers Inc., is far smaller (c. 8% market share by value) but is important because it imports aspirational foreign brands such as Jose Cuervo, Jagermeister and Glenfiddich to the Philippines. Over the long-term, I expect aspirational foreign brands, mainly distributed by The Keepers, to gain market share from a low base. GSMI is the market leader by both volume (c. 43% market share) and value (c. 26% market share). Despite already being so large in the market, GSMI has gained market share in recent years. 

The 3 Filipino market leaders (GSMI, Tanduay and Emperador) win due to:

• Price: A 700ml Ginebra San Miguel costs ₱117 (equivalent to $2.08). This compares to ₱663 for Gordon’s and ₱799 for Tanqueray.
• Distribution: As a collection of islands, distribution in the Philippines is challenging. GSMI historically dominant in the North and Tanduay in the South.
• Brand: Ginebra San Miguel is a 189-year-old Filipino gin brand. Tanduay is a 169-year-old Filipino rum brand. Emperador is more of an upstart as a 33-year-old Filipino brandy brand.

Core Investment Thesis: Market Leader That Made Missteps. Market Underappreciating Improvement in Quality Under New Management & Corporate Structure

• World’s largest gin brand by volume.
• Market leader in the Philippines Spirits market, which is an oligopoly.
• Their competitive advantage stems from price, distribution (which is challenging in the Philippines, as a collection of islands) and brand (189-year-old brand in the Philippines).
• Attractive financial profile with strong returns on capital (>30% ROE on an ungeared balance sheet), good cash generation (8% FCF margin) and growing topline (18% 5-year revenue CAGR).

This ultimately led to a new corporate structure and team. In 2017, long-time General Manager (effectively COO) Bernard Marquez was replaced by Emmanuel Macalalag. In 2018, a corporate restructure was concluded where GSMI became a subsidiary of San Miguel Food & Beverage Inc., which IPO’d (PSE:FB). In 2018, strong global skills were brought in at FB, notably Ildefonso Alindoganas as CFO (previously an Executive Director at Standard Chartered with MBA from Wharton). In 2020, long-time CEO Eduardo Cojuangco sadly passed away at age 85. He was effectively replaced by Ramon S. Ang (with the title of President). Ang effectively owns c. 27% of GSMI.

Since the changes in corporate structure and team, the business has improved markedly in its operations and capital allocation decisions:

• Implemented formal dividend policy in 2019.
• Redeemed preferred shares in 2020, removing potential equity dilution.
• In 2021, declared first special dividend since 1995 IPO.
• Cut overseas expansion (last Thailand impairments in 2020).
• Exited non-core businesses (sold non-alcoholic to FB in 2015 and rights to Don Papa Rum to Diageo in 2023)

The market seems to be underappreciating these improvements in quality, persisting with applying a discount to GSMI relative to peers and the broader Filipino market.

Key Risks

GSMI is in the Philippines and has a lot of risks, many of which are common to emerging market stocks.

• In 2020 (president at the time was Rodrigo Duterte), amendments were made to the tax code to significantly increase excise taxes. For distilled spirits, this meant an almost doubling of the excise tax per proof liter from ₱22 in 2019 to ₱42 in 2020, ₱47 in 2021, ₱52 in 2022, ₱59 in 2023, ₱66 in 2024 and increasing by 6% p.a. thereafter. The same amendments also increased the ad valorem tax from 20% to 22%.
• These taxes are included in GSMI’s cost of sales in the Taxes and Licenses line. This line item has risen from 30% of Revenue in 2019 to 42% of Revenue in 2022. I have forecast this to continue growing to 46% by 2028 based on the tax growth rates approved in the 2020 bill.
• Thus far, GSMI has increased prices without volumes taking a knock. Going forward, I have forecast prices to increase (6.6% CAGR) but for volumes to take a knock (2.5% CAGR, compared to 10.0% historical CAGR).

• In July 2022 (under current president, Bongbong Marcos), two members of the House of Representatives (one of whom is Paolo Duterte, Rodrigo’s son) proposed a bill to increase the legal drinking age from 18 to 21.
• Although not directly related to this action by Duterte’s son, it is notable that Duterte’s daughter, Sara, temporarily banned alcohol in Davao City while she was mayor. She is now Vice President.

• GSMI’s foreign ownership is limited to 40%. Currently at 8.6% (as of 31 August 2023). This makes foreign buyout highly unlikely (not impossible because can seek exemption, but highly unlikely).

• GSMI owns Barangay Ginebra San Miguel, one of the leading professional basketball teams in the Philippines. Its costs are not separately disclosed. While this is not rare in emerging markets (e.g. Aefes in Turkey has a similar setup), it really is not good governance.

• The Filipino market has a lot of cross-holdings.
• GSMI is 76% owned by San Miguel Food & Beverage Inc. (PSE:FB), which is majority owned by the San Miguel Corporation (PSE:SMC), which is majority owned by Top Frontier Investment Holdings Inc. (PSE:TFHI), which is in turn 53% owned by the Zobel de Ayala family and 35% owned by Ramon Ang (who is the CEO of TFHI and most of its group companies, including President of GSMI).

• Only 2 of GSMI’s 9 directors are independent.
• GSMI President (effectively CEO) chairs the Executive Compensation Committee of the board.
• There are related party transactions, mainly in GSMI buying packaging from SMC and transactions with Bank of Commerce, which is owned by SMC.

• Based on the experience of other countries, I believe that the market share of aspirational foreign brands (partnered with local distributors) will rise as Filipinos get wealthier. Keepers currently only has 8% market share but distributes great brands such as Hendrick’s (gin), Glenfiddich (whiskey) and Jose Cuervo (tequila).
• I am thus forecasting GSMI to lose share: 2022 –2028 sales CAGR of 9% vs. expected market growth of 11%.

• Management stated that they have sufficient capacity to meet their demand forecasts. However, the last major manufacturing expansion was in 2010 therefore more work is required to understand the capacity utilisation and gain comfort on potential furture capex.

• GSMI has a defined benefit pension plan in a ₱636m deficit (₱1.2bn assets vs. ₱1.8bn present value of obligations). I have included this deficit as debt in my model.

Catalyst

(1) Announcement of increased shareholder distributions (special dividend and/or share buyback) following sale of rights to Don Papa.

(2) Continued execution, which will make clear that GSMI no longer warrants its discount to peers or the broader Filipino market and that its absolute valuation (6% dividend yield and 9x P/E) is simply too cheap.