Eyes on Four Beverage Stocks as Government Considers Raising Sugar Tax

Thailand’s Excise Department is reportedly planning to overhaul the tax structure that would affect the entire beverage, alcohol, and tobacco industries in order to make it more equitable and further in line with the current environment; analysts at FSS International Investment Advisory believe this should pose a threat to companies engaging in beverage business.

As the current tax system has been in place since 2017, said the deputy director-general Kriengkrai Pattanaporn, the department is now considering enhancing its overall tax collection plan while focusing on promoting environmental protection.

He advocated updating the tax system to reflect the present and account for market changes. 

Mr. Kriengkrai cited that the agency is unable to impose tax on soda sold through vending machines due to unclear in the rules, and the current taxation rate on non-alcoholic beers, at 11% of the suggested retail price, which is still far below other beverage categories, and is therefore unfair to manufacturers of bottled soda, who are responsible for excise tax payment.

The government body is also looking at raising the sugar tax on functional drinks, which currently ranges from 3% to 10% based on the sweetening level, and is lower than the average beverage drink rate of 14% (tax rate for soft drink, soda, energy drink, tea, coffee is 14%, while juice at 0% to 10%).

FSS International Investment Advisory (FSSIA) believes that if the new sugar tax goes into effect, it will have a negative impact on companies with domestic market exposure, such as Sapper Pcl. (SET: SAPPE 13%), Osotspa Pcl. (SET: OSP 10%), Ichitan Group Pcl. (SET: ICHI 6,3%), and Carabao Group Pcl. (SET: CBG less than 5%).

Meanwhile, KGI Securities only sees a significant challenge to CBG and OSP, particularly in terms of material costs. OSP and CBG taxes would increase from THB0.1/liter to THB0.3/liter, and sugar makes up roughly between 10% and 15% of their cost of goods sold (COGS). According to guidance from the companies, the new sugar tax would likely narrow margins 0.5ppts-0.6ppts. Unfortunately, the price of sugar has risen steeply by 20% YTD. This adds more negative pressure to costs. Assuming other key material costs are unchanged, KGI thinks the new sugar tax and rising sugar prices would lower the GPMs of both CBG and OSP by around 1.0ppts-1.5ppts and impact earnings around 5%-6%.