Description

Suntory was founded in 1899 in Osaka, Japan. Suntory Beverage and Food (TSE:2587) is a stable, conservatively financed, low revenue growth (1-4% annually), beverage company with trademarks and prominent brand names.

Suntory’s acquisition of Ribena and Lucozade from GSK in 2012-2014 for 1.35B pounds, and previous purchases of Orangina and Schweppes for 2.8B Euros in 2009— enhanced Suntory’s brand and share of mind.

Today, Suntory has more than 300 subsidiary companies, 38,000 employees with products in 50 countries. Don’t confuse Suntory’s alcoholic segment, Beam Suntory (private), with Suntory F&B (public)

The high margin, private, alcoholic segment called Beam Suntory— includes prominent brands such as Maker’s Mark, Jim Beam— comprising of 33% of revenues for the entire holding company. This entire article is dedicated to the non-alcoholic segment— Suntory F&B, which is public on the Tokyo stock exchange.

Let me get this straight, right off the bat—Suntory will not become another Coke—it will not reach the same scale as coke through geographic expansion or additional marketing and branding, nor is the current beverage industry as good as before, despite consolidation—competition has intensified. 

The majority of Suntory’s products are sold mainly to 8 countries under established brands such as Ribena, sports drink Lucozade, TEA+, MyTea, GoodMood, Boss Coffee, Brand’s Chicken Essence, Orangina, etc.

However, Suntory is still a predictable business worth studying.

Suntory has tried experimenting with a carbonated version of Ribena, and has come out with Lucozade with a lower sugar content— they changed their ingredients and marketing to become more health conscious brand in response to the imposed sugar tax in U.K and Thailand.

Despite having a 20% market share at home (Japan), owning most of their vending machine distribution channel, and being a major supplier to most convenient stores and groceries— Japan is a shrinking and saturated market.

Major growth for Suntory will come from improving operations in Europe (sports drinks and energy drinks) and working with Pepsi on their J.V in Thailand and Vietnam (growth continues to be faster than other markets), the United States (North Carolina), and New Zealand. 

Business model and summary of financials

Compared to Coke, Suntory’s business is less reliant on bottlers and franchisees. Coke does not import any of its ingredients— in China, Coke has 2 franchisees/bottlers— COFCO and Swire, which sets up a factory and gets Coke’s “proprietary” ingredients to produce— teas, Gatorade, Coke, Vitamin Water, Fuze, etc. The parent company, then collects a portion of these profits from bottlers. Distributors/Franchisees allow Coke to be more asset light on the balance sheet. Suntory owns most of their factories.

Gross margins have dropped from 54% in 2015 to 41% in 2020. This is not due to Suntory lowering their product price, but due to a decrease in sales in the past 3 to 4 years while maintaining the same cost of goods sold. Due to the pandemic, utilization rates were less than ideal at certain plants.

Over the last five years, operating margins have remained stable, because SG&A lowered from 43% in 2015, to 32% in 2020. Suntory’s management has indicated ideal EBIT margins to be 10%, and would like operating income growth to be at double digits by 2023. Having an EBIT of 10% is certainly possible, as 5 years ago in 2015, the EBIT was at 5-6%, and in 2020, EBIT margins are near 7-8%.

Suntory is conservatively financed— in 2015, debt to equity was 70%. By lowering both short term and long term debt, debt to equity is now 23%.

Key factors to future success:

Success in carbonated beverages, energy drinks, teas, and bottled water— boils down to—

1.       Pricing power & increasing sales volume

-   If Suntory has pricing power, can it be maintained through growth and acquisitions, or will competition deteriorate its moat?

2.      Geographical locations- prospective size and growth

-  How large of a market Suntory can capture based on each country’s consumption per capita (different countries consume a different amount of sugared water per person a year)?

-      Partly and indirectly GDP per capita (disposable income to buy sugared water and other non-alcoholic drinks)

3.         How focused management is on delivering shareholder value.

-          Improvement of existing product line

-          If buybacks aren’t done, how else is management producing value?

-          Europe isn’t generate a high ROIC based on the amount of assets…

Suntory has been working with retained earnings on the premise that there probably won’t be buybacks in the future, and 25-30% of earnings will be paid out as dividends and capital expenditures won’t be used to build new factories in countries where Suntory doesn’t have an existing base within the next 2 to 3 years.

Should Suntory reach USD 3-4B of free cash flow, it should be worth at least USD 40-65B, or 4 to 5x its current price, as current market capitalization as of February 2021 is approximately USD 10B.

Market Size for Energy Drinks and Carbonated Beverages

Globally, beverages form a significant industry—the sector has a combined value of around USD 1.8-2T and 950B liters of drinks in consumption. Packed water consumption exceeded 465 billion liters, making it the most consumed type of beverage, with alcoholic beverages and carbonated beverages ranked 2^nd and 3^rd. In terms of the volume of annual consumption, non-alcoholic drinks make up 65%, including— bottled water, carbonated drinks, soda, energy drinks, electrolyte drinks, fruit juices, ready-to-drink tea and coffee, etc. Of this, almost half, or 160-210B, is generated from North and Latin America.

Suntory B&F, in terms of size, is the 4th to 5th largest in retail value, but lags far behind Coke and Pepsi. U.S. beverage giant Coca-Cola commands the largest share of the market, 20-25%, with PepsiCo holding 10-15%.

North America and South America dominate the global non-alcoholic beverage market with a share of 25-33%. Suntory is weaker than Coke and Pepsi in America, and also practically non-existent in China and India (except for Beam Suntory, in which case Suntory’s alcoholic segment has entered these 2 countries).

Risks

1.    In the U.S, the leading four manufacturers of carbonated drinks had a concentrated market share of approximately 80%. The U.S is a stretch for Suntory to expand in, and despite Suntory’s joint venture with Pepsi— the U.S won’t be a major contributor to Suntory in the near future.

2.   Suntory has 20% market share in Japan, and is the 2^nd place leader in terms of market share, with Coke being number one. Japan is a shrinking market which will be further discussed below.

3.   How far of a runway does Thailand and Vietnam bring? Remember, operations in the United States and most of South East Asia is via a joint venture with Pepsi. Europe also has a lot of fixing to do.

4.  Steady declines in carbonated soft drink volumes are largely due to health concerns, as soda's high sugar and caffeine contents causes obvious health issues. Certain countries like the U.K and Thailand, which Suntory has operations in, have implemented a sugar tax, and Suntory is responding with healthier products.

The shifting trend towards healthier drinks—

In 2020, carbonated drinks only accounted for 20% of global non-alcoholic drinks sales, compared to mineral and spring water at 60% and fruit and vegetable juices at 20%. By volume, bottled water accounted for 24% of all US beverages in 2017, versus 22.3% for second-place carbonated soft drinks.

Still bottled water - spring, mineral and purified, carbonated & flavored bottled water - are the 2nd highest retail value of soft drinks with sales of 239B in 2019, representing growth of 33.4% or 60B since 2015. This is why Coke’s purchase of Vitamin Water was a no brainer and why Suntory is introducing ready to drink non-sweetened tea in Asia and Europe (MayTea).

Crucial Factors in measuring Suntory’s progress

From 2013-2020, in a span of 7 years, Suntory Beverage has generated 670B yen, or USD 6B in cash flow by roughly employing 8T yen, or USD 80B of capital. This gives us a cumulative return on capital of 8% in the last 7 years.

Can Suntory generate 700B to 1T yen, or USD 7-10B, in the next 4-5 years? I sure think it is possible. Will aggregate growth be in double digits? It seems unlikely.

The way to measure the potential is though GDP per Capita and consumption per capita based on population size, and pricing power.

Pricing Power

Coke sells approximately 1.8 billion, 8oz servings, daily. In a year, 657-660B, 8oz servings, are sold.

If you increase the price by a penny, you’ll get an additional 18 million dollars a day, which amounts to 6.57B dollars a year. With trademarks and strong branding and marketing and a 127 year history, Coke is able to get the consumer to pay an additional penny raised without decreasing volume.

Does Suntory have the same pricing power? Yes, but not on the same scale as Coke or Pepsi. Suntory’s non-alcoholic beverage division sells approximately 17B 500ml bottles, which amounts to 35B 8oz servings annually.

Should Suntory raise its products by a penny, it brings in an additional 350 million annually.

35B 8oz servings for Suntory vs. 660B 8oz servings for Coke means that in terms of volume consumed annually, people consume Coke products 18 times more than Suntory's drinks.

Coke definitely has a scale advantage, and Suntory has not expanded geographically to countries with the same population density to provide the same long runway, but is still has a decent runway ahead.

To repeat myself to make a point—  6.57B dollars a year for a penny raised and attests to Coke’s scale and marketing done to purchase a share of mind over decades. This is a moat not easily replicated by Suntory. 

GDP per Capita

Soft drink consumption generally increases with income. Although GDP per capita is often used as a broad measure of average living standards, high levels of GDP per capita does not necessarily correlate with high levels of household disposable income— a key measure of average material well-being of people. 

As a rough measure— a 10 times increase in per capita GDP was associated with a 5 times increase in the annual number of gallons of soft drinks consumed per person.

In the chart above, these are countries besides Japan which largely affect Suntory’s bottom line. Vietnam will eventually catch up to Thailand, and eventually, both countries will reach at least half of the GDP per capita of Western European countries, it is just a matter of time.

In relation to total population figures, sales of non-alcoholic beverages generated USD 52 per person  in 2020.

Consumption per Capita

In 2021, globally, the average per capita consumption stands at 27.4L per person, or 6.5— 8oz servings per person. While this is the average, different countries have vastly different consumption habits of non-alcoholic drinks, making certain markets more lucrative. The idea that the potential growth in any country could at least reach half the per capita consumption level in the U.S. – is a perfectly reasonable estimate.

Here are the top 10 countries where people drink the most 8-ounce servings of Coca-Cola products per person per year:

Per capita consumption of carbonated soft drinks in 2019 in the ten most populated countries worldwide (in 8-ounce servings)

With the charts above, and the key figures in consumption per capita, we will now proceed to talk about each geographical region which plays a big part in Suntory’s bottom line. As you can see in the top 10 most populated countries with consumption per capita, Suntory is only in USA, Japan, and Indonesia, with USA only being a surrogate, with Pepsi having all the power and most of the profits in the partnership. 

Regional Analysis: Dominant player at home (Japan, a shrinking market)

Suntory is a dominant player domestically (Japan), boasting the number two market share in Japan in terms volume, with Coke being number one. Suntory has a 21% market share—per capita consumption is almost 3 to 5 times that of other southeastern Asian countries, but Japan’s carbonated beverage market is shrinking along with its population.

As of January 2021, Suntory’s year-on-year % change of Soft Drinks sales volume in Japan was -9%. From January to June 2020, Suntory’s gross profit in Japan decreased 19.1 billion yen (USD181.7M) mainly due to volume decline and channel mix deterioration. Suntory will have to rely on acquisitions and expansion in the Asia Pacific for growth.

The domestic market comprises almost half of Suntory’s total revenue and 35-40% of operating profits. Suntory Tennensui (mineral water) and Boss Coffee, makes up 50% of the domestic sales in terms of volume sold. In addition Suntory is consolidating Japan Beverages’ sales branch, while growing core brands— Suntory Tennensui, BOSS, and Iyemon with a primary focus on branding them as healthy products. The coffee brand, Craft Boss is also undergoing a major brand renewal.

In Japan, a large part of sales derives from Suntory’s vending machines. As part of the agenda to counter shrinking domestic sales— installing machines in the right locations with large working population to prevent sales per machine from declining, and introducing larger machines to reduce refill rates are crucial.

Due to the pandemic, vending machine sales roughly halved at one point due to the stagnant traffic in April and May 2020, and operations were inadequate to cover fixed costs. As of 2021, normal traffic (90%) resumed.

Regional Analysis: Asia – Vietnam and Thailand

Suntory entered developing markets such as Vietnam and Thailand through joint ventures with Pepsi contributing to a runway for compounding and growth. PepsiCo nearly tripled its business in emerging and developing markets from 8B in annual revenue in 2006, to 22B in 2011.

One can argue these east Asian countries Suntory has production in, are limited to a smaller population— Coke and Pepsi have a geographical reach for countries such as China, India and even Africa, which has billions of people, instead of millions like Vietnam (96M) and Thailand (70M).

Suntory’s revenue for Asia, which includes Vietnam, Thailand, and Indonesia, was 212.0 billion yen (USD2B). Suntory expects revenue growth of 9.6% to 292 billion yen (USD2.8B) in Asia, which will be driven by core brands— TEA+, Brandʼs Chicken Essence, V, and the energy drink, Sting.

South East Asia makes up 28-30% of Suntory’s total operating profits. Asia’s profit for Suntory was 27.9 billion yen (USD265M). Suntory’s target is to reach 37 billion yen, or 7.1% year-on-year growth.

Thailand makes up 28% of total revenues in Asia at 61.4B yen (USD 584M), and Vietnam makes up 37% at 79.5B yen (USD 756M), the third part of revenues comes from a health supplement called Brand’s Chicken Essence which is popular in Asia. It comprises of 23% of total revenue at 48.6B yen (USD 462M).  

While GDP per Capita is higher for Thailand than Vietnam, for non-alcoholic beverages, data (see previous chart in consumption per capita) suggests that Thailand also leads Vietnam by 108 liters per capita to 36.

However, due to Thailand’s sugar tax, when isolate soft drinks as a category, in 2020, Vietnam’s consumption per capita for sweet drinks is almost double of Thailand— with 55 Liters per capita for Vietnam, and 28 liters per capita for Thailand.

Vietnam

Vietnam, had its ups and downs— the bottled water brand Aquafina recorded double-digit volume growth, while Suntory’s TEA+, an oolong tea product captured sales of 10 million cases and above, but sales of Suntory’s Sting energy drink faltered. Suntory hopes to revive Sting sales with the launch of a new product, as rival Red Bull has increased its market share with the release of a lower-priced offering.

In Vietnam, there are roughly 135 manufacturing enterprises churning out 7-8billion liters of non-alcoholic beverages annually at a growth rate of roughly 6-8% which roughly translates to 85T VND of industry sales (3.67B). Beverage consumption is around 90-100B liters in 2020 according to EVBN report. Off-trade is a sales channel (such as supermarkets and groceries) accounts for about 60% of the non-alcoholic beverage market, while the remaining 40% is represented by products are directly sold at restaurants, eateries, etc.

Pepsi entered the Vietnam market in 1994, with only Pepsi and 7-up, and has since invested more than 500 million in five beverage manufacturing plants in Vietnam, a high priority for Pepsi's aggressive development in emerging markets. Today, there are more than 13 beverage brands.

Suntory created a joint venture with Pepsi after 2010. Coca-Cola and Pepsi were being questioned about the price transfer by local tax authorities since they both recorded huge losses for a long time. When significant profitability occurred in 2017, Pepsi erased losses with an accumulated profit of VND 2,735 billion (USD117M). Suntory PepsiCo Vietnam recently recorded accumulated profits over 150M.

Pepsi has in recent years outperformed Coke with double their revenues. Specifically, in 2017, Pepsi achieved a revenue of VND15 trillion (645 million) and an after-tax profit of VND 1.42T (61.3 million), up 5% and 27% respectively compared to 2016.

Coca-Cola’s revenue in Vietnam grew at 6% in 2017, reaching VND 7.2T (310 million). However, due to steep increase in costs, Coke had a net profit of VND 227B (9.75 million)— half of previous years. Coca-Cola has reduced about VND 1 trillion (43 million) in accumulated losses thanks to its accumulated profits in recent years. Competitor Coca-Cola recently received approval from Vietnamese authority to establish a new 300 million production facility in Hanoi, its 4th in the country to produce beverages such as Coca-Cola, Fanta, and Schweppes and Fuze Tea.

The four biggest names in Vietnam’s non-alcoholic beverage market include Coca-Cola Vietnam, Suntory PepsiCo, URC Vietnam from the Philippines, and Vietnam’s Tan Hiep Phat.

Suntory-Pepsi and Coca-Cola’s biggest local rival is Tan Hiep Phat, which is leading the green tea segment with Zero-Degree Lemon Green Tea and Dr. Thanh products.

According to Euromonitor’s report, the non-alcoholic beverage market share in Vietnam based on PepsiCo's off-trade sales has risen sharply from 27% to 33% in the past five years.

Meanwhile, that of Coca-Cola was only around 10-11% and Tan Hiep Phat was down from 16.5% to 13.1%.

Thailand

Thailand's soft drinks market is estimated to be worth 800 billion yen (USD7.5B) in retail sales. According to Nielsen, the carbonated soft drink industry in Thailand was estimated to be worth 56 billion baht (USD1.85B) in 2019, up 12% over the previous year. Of the total carbonated soft drink industry, 71% belonged to cola drinks, 23% flavored drinks and the remaining 6% to the lemon-lime segment.

In order to create a joint-venture in Thailand, Suntory paid 33 billion yen (USD289M) to acquire a 51% stake in Pepsi’s International Refreshment. Suntory PepsiCo Beverage Thailand was established to expand sales of non-alcoholic drinks in the standard categories of carbonated drinks, bottled water, electrolyte drinks, ready-to-drink tea and coffee, and fruit juices.

At 42 liters per capita consumption for carbonated drinks, and 12-15% year on year growth, Thailand’s future for carbonated beverages may look bright, but for many years domestic demand has been weakening. Continuous double digit growth may not be sustainable, as shifting concerns with health and growing competition from local drinks manufacturers such as Thai Beverage.

In the last five years – 2012 through 2018 – Suntory & PepsiCo invested hundreds of millions of US dollars in Thailand in two beverages and two foods manufacturing plants. PepsiCo invested in its first beverage plant in Thailand, located in Amata City Industrial Estate of Rayong Province in 2012.

In 2016, Suntory Pepsi opened a beverage plant in Thailand, located in Nong Khae Industrial Estate, Saraburi Province, with an aim to double the capacity of its first plant.

In 2018, PepsiCo and Suntory established new distribution routes for goods through the Deutsche Post—DHL Group. At the same time, a network of sales agents were placed across the country in hope that more drinks will be sold at national retailers.

The collection of taxes in Thailand on drinks according to sugar content has brought about changes—Suntory raised their pricing in water and tea, and ingredients were aligned to avoid the sugar tax in beverages. In response to this, Suntory adjusted their production processes to reduce carbonated drinks’ sugar content and to use non-sugar sweeteners instead (with an accompanying cut in tax of THB 0.25-0.36 per bottle). Initially, the tax rates were set at a relatively low level but were increased every two years up until 2023.

Tea and coffee are tax-exempt from the list because they count as agricultural products beneficial to health. In 2017 to 2020, consumption of carbonated drinks continued to fall, shrinking by 3.2% YoY. This is especially serious for carbonated drinks, which typically have a high sugar content (taxes added THB 0.13-0.50 per bottle).

For the health supplement business, Bird’s Nest continues to be a non-performer, while Brand’s Chicken essence sales were especially strong in Thailand, rising 10% this year due to a better distribution strategy. Suntory also continued boosting marketing efforts for low to zero sugar Pepsi, and by investing more into the TEA+ brand.

Regional Analysis: Europe— France, U.K, Spain

In Europe, Suntory’s main focus is in France (population: 65M), Spain (45M), the United Kingdom (65M). The European segment also includes Italy, Northern Europe, and Africa. Revenue was 190 billion yen (USD1.8B).  Segment profit was 27.2 billion yen (USD255M).

In 2009, Suntory acquired the Orangina Schweppes Group, which today manufactures and sells carbonated beverages (Orangina, Schweppes, etc.) and fruit juices (Oasis) in Europe. In 2013, SBF acquired the Lucozade and Ribena beverage brands from GSK.

Suntory expects further unit price deterioration in 2021 for Europe and a turn for the better in the next 3 years will require a push in new products and control costs.

In terms of the European segment, of the 190B yen in revenue from Europe, France and Belgium contributed to 86.6B yen (45% of sales), U.K and Ireland contributed to 54.1B yen (28% of sales), while Spain and Portugal contributed to 31.2B yen (16% of sales). France and Belgium are by far the biggest contributor to the European sales segment. Suntory expects revenue growth of 12.3% to 222.0 billion yen through brand expansion of Schweppes across Europe.    

France

Orangina was acquired by Suntory in 2009. Suntory now has six major flagship brands in France— Orangina, Schweppes, Oasis, Pulco, Champomy and Maytea. In France, Suntory has revitalized its Oasis brand, and thoroughly strengthened marketing activities for Orangina, to maximize both revenue and profit.

Suntory’s MayTea brand has become Suntory’s second-biggest brand in the French bottled tea market only two years after its launch and will be introduced to other European countries.

As the leader regarding fruit drinks in France with 20% market share (2019) and four production sites in France –La Courneuve, Meyzieu, Donnery and Châteauneuf-de-Gadagne— Suntory is one of the top players in the beverage segment with a 908 million euro turnover (2019) and a consumer base of 17 million households in France. In France, Orangina and Oasis performed much better than the market especially in the summer of 2019.

Suntory’s capital expenditures in France include upgrades at Suntory’s Orangina plant in Meyzieu— with an accumulation and packaging solution (GeboAQFlex, and Sidel’s Aseptic Combi Predispenser) that covers a wide range diverse bottle shapes and sizes –nine various bottle formats from 0.2 to 1 Liters, including square bottles to which traditional mass accumulation solutions are not suited— fully respecting fragile and lightweight containers for four brands – Oasis, Pulco, Maytea and O’verger.

This upgrade has immensely contributed in preserving Orangina’s product quality with smooth, all-in-one, and contactless, single-lane product handling. The accumulation solution also cover a wide range of outputs from 27,000 to 45,000 bottles per hour and provide extensive buffer capacity from 3 to 5 minutes of net accumulation to secure the overall line efficiency.

United Kingdom

In the UK, Suntory is trying to market Lucozade Sport for sporting occasions, while maintaining the sales of Lucozade Energy. Lucozade Energy trended steadily in 2020, resulting in better results than 2019. Suntory is rolling out sugarless and carbonated versions of Ribena to preempt the proposed introduction of the sugar tax. It seems some consumers have been less than impressed as YoY sales declines of 1- 2%.

Suntory’s USD16M investment in a factory bottling line in Coleford, Gloucestershire uses 40% less water and energy— resulting in an aggregate 15% water reduction across all U.K plants. The Coleford factory produces a billion bottles of Lucozade and Ribena a year.

Spain 

Schweppes’s brand is a market leader in Spain, with a 55% share, and has strong sales in tonic water due to gin and tonic’s popularity in Europe.

In 2014, Suntory filed a lawsuit against Coke for selling Schweppes tonic water made in the UK which was imported into Spain. From 2009 to 2014, 17.3 million bottles were sold by Coke just by importing Schweppes from the U.K to Spain at a lower price which gave Coke a 6 million pound profit. Coke argued that as they had the rights to distribute the product in the UK, they had the same rights to distribute it throughout Europe, but the court ruled against this. Suntory now has the competitive advantage by being the sole owner of the Schweppes brand in Spain.

With Spain having such a high consumption per capita, should Suntory grow sales in Spain through its Schweppes brand and introduce other drinks to penetrate further in the market, this could prove instrumental in growing their European segment. Of the 1.2B liters of beverages sold in Europe, Spain only makes up 16% of sales, or 134M liters. I understand both U.K and France have a population around 65M, while Spain has a smaller population at 45M, but Spain can be a major contributor to operating profits. 

Valuation

With a clean balance sheet and 30% debt to equity, selling at 12B enterprise value—

Suntory generates approximately 1B of free cash flow annually, while growing revenue in low single digits. My conservative assumptions of intrinsic value is at least 25-40B.

Suntory still has room for international expansion. Currently, 45-50% of its sales from abroad and further expansion should help with the stagnant growth within Japan. Management has indicated future acquisitions will be in Southeast Asia.

20-30% of Suntory’s free cash flow will be paid out as dividends. Management mentioned in earnings calls that they forecast a revenue of 2.5T yen by 2030 and they hope to return to a level of operating income of 115B yen or USD1B. As of 2020, revenue was 1.1-1.2T. This implies a CAGR of 7-8%.

Charlie Munger wrote an essay in 1996 explaining why Coca Cola ought to be a 2 trillion dollar enterprise from 2 million dollars over a time period of 150 years, which roughly translates into a compounded annual growth rate of 9-10%.— “Practical Thought on Practical Thought”.

https://entrepreneurshandbook.co/charlie-mungers-how-to-start-coca-cola-in-1884-thought-experiment-38a49cb9cc05

As mentioned before, coke is now worth 250B. Assuming Charlie misses his target and coke is only worth 1 trillion by 2030, that’s a gain of 4x in 10 years (assuming we start from 2020). A doubling in 5 years, corresponds to an annual rate of return of 15%.

As of February 2021, Coca Cola is worth an enterprise value of approximately 240B while generating 8B of free cash flow, which gives it a multiple of roughly 30 times. Pepsi, has an enterprise value of 220B, with free cash flow of 6B. Pepsi and Coca Cola lead the market share in terms of soft drinks, but Pepsi has to generate double the sales of Coke, since they are in the low margin business of snacks and chips.

In a decade, it should be feasible for Suntory to be at least worth 40B, should it improve its international portfolio as the Japanese market shrinks.

When Coke was generating free cash flow of 1-2 billion dollars in 1988-1994, its market cap was around 25-50B dollars. Right now, Suntory is selling at a bargain price of 10-12B dollars.

Under realistic assumptions, I think in the next decade, at the very least, by 2030, 2.5 Trillion yen (23 Billion USD) sales by 2030, will be achieved by Suntory.

Is Suntory going to turn into another Coke or Pepsi? Does it have a moat as strong as these 2 companies? No. I would argue its runway isn’t even as long as Coke or Pepsi for compounding.

But in terms of valuation, for a company with such a healthy balance sheet, it is undervalued.

Catalyst

 - Improvements in factory efficiency and new products (Maytea) in U.K & France will be felt 1-2 years later

 - Exclusive producer of the Schweppes brand in Spain, which has a high consumption per capita

 - For Thailand, Chicken Essence and other beverage types may replace the slow down in carbonated beverages for double digit growth

 - For Vietnam, bottled water and Tea+ products replacing the slow down in energy drink Sting

 - For the domestic market (Japan), maintaining the dominance of having a 20% market share and finding ways to prevent shrinking consumption

 - The market realizing for such a beverage company that utilizes very little leverage and having such brand names, should be worth a whole lot more than 12B,

 - If Suntory were listed in the U.S, it would be at least worth 35B. Suntory can close the cash flow gap with Monster Beverage, but still may not realize an enterprise value of 46B....