APU - Initiation Report, BUY

The largest beverage company. APU JSC is the largest beverage company in Mongolia. Established in 1924, APU was one of the first companies privatized in 1990s and is listed on the Mongolian Stock Exchange. The Company’s current share price is MNT2801, up 40.8% YTD in 2011, after having posted impressive performance of +216% in 2010. APU produces and sells six brands of vodka, eight brands of beer, two non-alcoholic beverage brands and the Pure Milk and Frutta Juice brands. The “Bolor” and “Altanturuu” vodka brands and “Fusion” and “Borgio” beer brands are the most popular in Mongolia. APU has the largest share in vodka and beer market, and in water sales in the country. In 2009, it had a 40% market share in vodka and 46% in beer sales. APU exports its products to South Korea, Japan and Germany.

Expanding Capacity. In 2002‐2003, APU invested MNT25bn for the renovation of vodka, beer, water and soft drink factories and a state-certified laboratory. APU’s current beer factory capacity is 50mn liters per year, with utilization close to 100%. In APU’s vodka segment, the urgent issue is exports to the US, European and Asian markets. APU has registered "Chinggis Khan" vodka trademark in the US and Europe. The Company invested MNT15bn for alcoholic production in 2008‐2009, and opened a new spirits factory in February 2009.

Efficient distribution network. APU has the largest and most efficient distribution network in the country with 6000 outlets within four distribution channels, truck fleet for country-wide deliveries and a strong marketing team.

Modern production facilities. APU has modern plants specialized in manufacturing vodka, beer, soft drink and diary products. “Natur Agro” pure alcohol distillery is equipped with the technologies from Germany, Italy and New Zealand. The vodka and soft drink plants were fully modernized in 2003 and 2004. The “Natur Agro” facility was completed as a greenfield project in 2008.

Recent developments:

• APU cooperated with New Zealand\'s NZM‐Food Company in development of a milk factory in 2005‐2007. APU also renovated factory technologies in 2008 and started selling milk in February 2009. The milk factory’s capacity is 25mn liters per annum, or around 30% of the Ulaanbaatar city market.
• In May 2010, EBRD provided APU with a US$25mn loan to expand beer and non-alcoholic beverages production capacity and diversify product range.

We believe the outlook for APU over 2011 is positive given the demand for beverages and branded alcoholic drinks, which are expected to substantially increase thanks to the rapid income growth in Mongolia over the coming year. APU will also increase its market share after recent modernizations in 2010 and expand its brand portfolio targeting both domestic and international consumers.

We initiate equity research coverage on APU JSC with a BUY rating, targeting a share price of MNT4300 by year-end 2011 or 54% upside in MNT (69% in US$). We view APU, with its current PE of 15x (2010e) and estimated PE of 11x (2011f), is undervalued compared to an international peer average of 23x.

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