Indonesia Consumer

Indonesia Consumer
Sector outlook
Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor® proprietary database at clsa.com
Swati Chopra
swati.chopra@clsa.com
(65) 6416-7856
Jessica Irene
jessica.irene@clsa.com
(6221) 2554-8831
14 October 2010
Indonesia
Consumer
Top-five BUYs
Ace Hardware ACES IJ
Target Rp2,500
Upside 16%
Mayora MYOR IJ
Target Rp11,500
Upside 14%
Kalbe Farma KLBF IJ
Target Rp2,700
Upside 3%
Indofood CBP ICBP IJ
Target Rp6,000
Upside 7%
Mitra Adiperkasa MAPI IJ
Target Under review
Upside N/A
www.clsa.com
In the driving seat
The Indonesia consumer sector should exhibit J-curve growth over the
next decade, following a rapid growth in the middle class, urbanization,
and falling unemployment. The middle class is expected to grow by 50%
in the next three years, and disposable income to grow exceeding 13%
CAGR over the same period. Indonesian consumer stocks should re-rate
as country’s risk premium reduces. They offer comparable ROE, ROA and
similar growth profile but are trading at 25-30% discount to Chindia.
Great demographic dividend
􀂉 The number of middle class is expected to grow by 50% in 2012, with more than
60% of the population urbanized.
􀂉 As a result, disposable income can grow exceeding 13% Cagr over the same period.
􀂉 With young population, 44% below 24 years old, and an additional 20mn people
into the workforce over the next decade, domestic consumption is still in its early
growth.
Drivers to consumerism
􀂉 Key drivers to consumerism are access to finance, better infrastructure, and stable
currency.
􀂉 Better infrastructure should allow for better cost efficiency and more rapid
expansion while stable currency will boost margins.
􀂉 Challenges include more competition in the space. But due to the complicated
distribution system in the country, competition will likely to come gradually.
Re-rating of the consumers
􀂉 Political stability, surging middle class, low leverage, and growing confidence should
allow for lower risks premiums in the consumer sector.
􀂉 The sector posted good profit growth, offering 28% ROE, 10% ROA, and is trading
at 17.3x 2011 P/E. Excluding the outliers, the space has seen profits double from
2006.
􀂉 Indonesian consumer stocks under our coverage registered 38% profit CAGR in the
last five years matching Chindia, but still are trading at 25-30% discount to Chindia
peers. On a PE/G basis, Indonesian consumers are 42% cheaper.
Stock ideas
􀂉 Our top picks in the sector are Ace Hardware (ACES IJ), Mayora (MYOR IJ),
and Mitra Adiperkasa (MAPI IJ).
􀂉 In this report, we have also drill down into the wider consumer universe and
highlight some less known consumer names such as Sumber Alfaria (AMRT IJ),
Fast Food (FAST IJ), and Multistrada (MASA IJ).
􀂉 Though liquidity will be a significant constraint, there are opportunities for patient
investors.
Valuation matrix of China, India, and Indonesia consumer sector
PE EPS growth PE/G EV/EBITDA Net gearing
2011 2012 2011 2012 2011 2012 2011 2012 2011 2012
China 23.2 19.2 15.2 20.9 1.5 0.9 13.8 11.2 (29.9) (34.9)
India 26.3 22.1 17.1 16.8 1.5 1.3 16.4 14.7 3.9 (35.6)
Chindia 24.8 20.7 16.2 18.9 1.5 1.1 15.1 13.0 (13.0) (35.3)
Indonesia 17.3 14.9 19.4 15.7 0.9 1.0 9.8 8.5 7.2 (1.6)
Discount (%) 30.1 27.6 41.8 14.8 35.1 34.4
Chindonesia 22.3 18.8 17.2 17.8 1.3 1.1 13.3 11.5 (6.3) (24.0)
Source: CLSA Asia-Pacific Markets
In the driving seat Consumer
14 October 2010 jessica.irene@clsa.com 2
Great demographic dividend
Demographics and an increasing proportion of middle-income families will
drive consumption and consumerism in Indonesia over the next decade. In
many cases, it will be a J-curve hyper-growth trajectory, akin to what we
have seen in the telecoms sector over the past 15 years. The share of private
consumption from Indonesia as a percentage of Asia private consumption has
increased from 5.5% in 2000 to 8.3% now.
Figure 1 Figure 2
Indonesia mobile subscribers Indonesia as % of Asia private consumption
-
20
40
60
80
100
120
140
160
180
200
1997 1999 2001 2003 2005 2007 2009
5.8
7.2
7.8
7.1 7.0
7.6
7.5
7.2
8.3
5.5
5.0
6.0
7.0
8.0
9.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
(%)
Source: CEIC, CLSA Asia-Pacific Markets
Middle class boom
The number of middle class is expected to grow by 50% in 2012, with more
than 60% of the population urbanized. The proportion of middle and upper
middle class households will increase from 29% currently to 41% by 2012
while the proportion of lower incomes segment will reduce by 12% over the
same period. There will be nearly 100m middle class people in 2012, four
times the size of population in Australia. This should translate into 13 pa%
increase in discretionary spending.
Figure 3 Figure 4
Percentage of population in the middle class Middle class population and spending cagr, 2009-
2014CL
5
9
12
19.0
29
27
51
11
14
22
30
42
45
62
0 10 20 30 40 50 60 70
India
Philippines
Indonesia
Asia ex-Japan
Thailand
China
Malaysia
(%)
2014
2009
3
4
5
6
6
8
10
12
13
15
18
1
1
0
0
6
8
11
11
15
11
19
0 2 4 6 8 10 12 14 16 18 20
Hong Kong
Singapore
Korea
Taiwan
Malaysia
Thailand
Philippines
Asia ex-Japan
Indonesia
China
India
(%)
Growth in middle-class population
Growth in discretionary-spending
Source: Euromonitor, World Bank, CLSA Asia-Pacific Markets
The spending surge will be a function of (1) those currently in the middle
class having rising incomes and thus spending more (2) spending of those
that enter into the middle class, and (3) buying power of both groups lifted by
currency appreciation.
Increasing middle class
families will drive
consumerism
Middle class is expected
to grow by 50% in 2012
Spending surge benefits
from currency
appreciation
In the driving seat Consumer
14 October 2010 jessica.irene@clsa.com 3
Young population
Indonesia has a young population with 44% people below 24 years old.
Median age is 28 years. Only India is younger. To put things into perspective,
Indonesia's population increased by 24mn people in the last decade. By 2020,
Indonesia's population is expected to grow by another 22m people to 254m.
This adds up to a fast growing, young labour force at a time when the West
faces not only a long phase of deleveraging but also an aging society.
Figure 5 Figure 6
No of people aged below 24 Median age by 2010
50.1
44.3
39.1
36.8
34.3
23.1
7.5 8.9
22.0
12.3
18.2
30.5
0
10
20
30
40
50
60
India Indonesia Europe China USA Japan
(%)
Aged 24 and under Aged 60+
25.6
28.2
32.3
34.9
36.6
37.9
38
40.3
40.5
44.4
0 10 20 30 40 50
India
Indonesia
Thailand
China
US
Australia
Korea
UK
France
Japan
(%)
Source: World population prospects, United Nations, 2009
Growing urbanization and shrinking unemployment
Further, most of these people will be living in the cities. Currently 50% of
Indonesia's estimated 240mn people live in cities, but United Nations expect
the proportion to grow to 62% within the next five years which translate into
3.4mn people moving into cities every year. The increasing urban population
is positive for consumption as statistics show that people living in urban areas
spend 80% more on average than people living in rural areas.
Figure 7 Figure 8
Urban and rural households Increase in workforce 2010-2020
-
20
40
60
80
100
120
140
160
180
200
1950 1960 1970 1980 1990 2000 2010 2020 2030
(m)
Urban Rural
(21.1)
(9.3)
(7.5)
11.4
12.3
14.9
20.5
22.7
135.7
-40 -20 0 20 40 60 80 100 120 140 160
Europe
Russia
Japan
USA
Phils
Brazil
Indonesia
China
India
(m)
Source: World population prospects, United Nations, 2009
Unemployment is at the lowest level since last seven years and poverty levels
are reducing fast. Within the next decade, Indonesia is expected to add
20.5mn people into the workforce, the third highest after India and China.
Indonesia has a young
population with 44%
people below 24 years
old. Median age is 28
years. Only India is
younger
62% urbanized within
next five years, meaning
3.4mn people move into
cities each year
Unemployment is at its
lowest level
In the driving seat Consumer
14 October 2010 jessica.irene@clsa.com 4
Figure 9
Most populous cities in Indonesia
Rank
Greater Jakarta
region
Population Rank
Other
provinces
Population
1 Jakarta 8,839,247 2 Surabaya 2,611,506
5 Bekasi 1,993,478 3 Bandung 2,364,312
6 Serang 1,755,491 4 Medan 2,029,797
7 Tangerang 1,451,595 8 Semarang 1,438,733
9 Depok 1,374,903 10 Palembang 1,342,258
12 South Tangerang 966,037 11 Makassar 1,194,583
13 Bogor 891,46 7
Source: Data-statistik Indonesia
Strong domestic consumption
Indonesia is largely a domestic consumption driven economy as 2/3 of GDP
contribution is from private consumption. Strong population growth is in
addition to growing doubling of GDP per capita (currently at US$2,150).
Indonesia’s GDP/capita (in US$) has doubled since 2003 and is expected to
double again by 2014.
Informal sector supports 2/3 of the labour force, making Indonesia one of the
most resilient economies in Asia. However, consumption is still basic. Majority
of individuals spend most of what they earn on basic consumptions and
almost half is spent on food. Indonesian domestic consumption is still on its
early growth, and as mentioned earlier in the report is expected to deliver a
J-curve trajectory growth over the next decade.
Drivers to consumerism
Key drivers to consumerism are access to finance, better infrastructure, and
stable currency. Consumer-credit penetration in Indonesia is very low, but it
will grow steadily as a larger part of the population comes into the bankable
category. Better infrastructure (more toll roads and electricity) will drive
logistics costs lower and support growth for penetration into the outer
regions.
For the most part, infrastructure is delayed by unstable political environment
and difficulties in land acquisition. However lately, we saw subsequent good
news regarding the long awaited land clearing law, and progresses in
government’s 2x10,000 MW power project.
The land clearing law is now under intensive discussion among the parliament
members. While this may take another several months, the passing of the law
is largely beneficial to the property, and infrastructure sector, which
altogether spills over into the larger consumer sector.
Cheaper access to credit
Only 1 in 100 persons in Indonesia has a mortgage and only 1 in 100 has a
credit card. Access to cheaper and easier credit will drive consumption boom.
As people have more money in hands after providing for basic needs, the first
things they do is improve access to transportation and buy homes. Record
high car and motorcycle sales this year indicates that people are moving
beyond their basic needs.
There are currently 11
cities with population of
more than 1mn people in
Indonesia while USA has
only nine
2/3 GDP is derived from
private consumption
Consumption is still basic
and in its early growth
Access to financing,
infrastructure, and
currency are drivers to
consumerism
Infrastructure is delayed
by slow land acquisition
progress
Land clearing law is
largely beneficial
Access to cheaper credit
will drive consumption
boom
In the driving seat Consumer
14 October 2010 jessica.irene@clsa.com 5
Figure 10 Figure 11
Car sales are at record high.. And motorcycle..
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
00 01 02 03 04 05 06 07 08 09 10
Domestic car sales
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
00 01 02 03 04 05 06 07 08 09 10
Domestic motorcycle sales
Source: Gaikindo Source: Gaikindo
Proxies to the growing automotive sector are two tire producing companies:
Gajah Tunggal (GJTL IJ) and Multistrada (MASA IJ). The aftermarket for
cars and motorcycles are four times as big as the original sale, and
replacement tire sales made up around 80% of the total tire sales in
Indonesia. Both companies are the first and second largest domestic tire
producers, altogether holding 58% market share in the motorcycle
replacement tire and 35% share in car replacement tire.
The latest survey by Bank Indonesia reveals that 71% of home buyers use
mortgage financing. Property-related credit has grown by a Cagr of 31% over
the past seven years. Mortgages were just becoming available in the early
2000s since the end of the first Asian financial crisis. Nonetheless, mortgageto-
GDP is only a mere 2.2%, showing how unleveraged the property market
is. Consumption credit used to make up 11% of total credit in 2001 but now
makes up 30% of total credit.
Figure 12 Figure 13
Indonesia-property related credit Consumption credit increasing steadily
-
5.0
10.0
15.0
20.0
25.0
30.0
2003 2004 2005 2006 2007 2008 2009
Mortgage Construction & real estate
(US$bn)
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
Apr-
00
Apr-
01
Apr-
02
Apr-
03
Apr-
04
Apr-
05
Apr-
06
Apr-
07
Apr-
08
Apr-
09
Rp bn Consumption Credit
Source: Bank Indonesia
The impending housing boom will also likely to benefit Ace Hardware (ACES
IJ). As the largest DIY and home improvement retailer in Indonesia, Ace
Hardware has no direct competitor. 90% of its sales are related to house
wares, lightings, cleaning aids, electrical, and the remaining 10% to
automotive, car perfumes, wax, etc.
Proxies to automotive are
Gajah Tunggal and
Multistrada
Property related credit
has grown by a Cagr of
31% over the past seven
years
Impending housing boom
will likely benefit Ace
Hardware
In the driving seat Consumer
14 October 2010 jessica.irene@clsa.com 6
More toll roads and power
Indonesia has over 13,000 islands with 6,000+ islands inhabited. Majority of
the population (60% of the 240mn people) reside in Java Island while the
remaining 40% mostly inhabit in the other four big islands: Sumatra,
Kalimantan, Sulawesi, and Papua. The outer islands serve as a big
opportunity for the consumer companies, but logistics and infrastructure
remain as a challenge.
In a way, the logistic challenges act as a barrier to entry for competition. In
India and China, expectation of hockey stick growth has seen competition
intensify in the consumer space eroding margins. Hindustan Lever has seen
just 4% absolute returns since this decade. In Indonesia, it will not be easy
(and will be gradual) for competition since the distribution system is perhaps
the most complicated in the world.
The current winners among the consumer names are companies that have
well-established distribution networks. Companies that stand out in terms of
logistics are Kalbe Farma (KLBF IJ), Indofood CBP (ICBP IJ), and
Mayora (MYOR IJ). All companies have their own dedicated distribution
company that distributes their products into the smaller vendors, cities, and
regions – this does not come easy. The traditional market such as Warungs
(street-vendors) is still the main composer in the Indonesian consumer trade.
To put it into better perspective, as per Euromonitor survey, there are 2.8mn
retail outlets in Indonesia. Modern retail outlets of any kinds, groceries,
clothing, electronics, adds up to almost 100K outlets in total throughout the
country. The remaining 2.7mn outlets are still considered traditional.
Indonesia is looking to double its toll road network within the next four years
as indicated in the chart below. This is bullish for all construction, cement,
and toll road companies as indicated by their outperformance in recent
months. Another angle to this is the improvement in trade flow between cities
that could reduce consumer companies’ logistic costs.
Figure 14 Figure 15
Toll roads development Power capacity pre and post 2x10,000 MW program
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1978
1982
1986
1990
1994
1998
2001
2003
2005
2007
2009
2011F
2013F Toll Road existing (
km)
Toll Road forecast (km)
0
50
100
150
200
250
300
1995
1997
1999
2001
2003
2005
2007
2009
2011F
2013F
2015F
Existing capacity (watts/person)
Forecast capacity (watts/person)
Source: BPJT Source: PLN
Logistics and
infrastructure is a
challenge
Distribution system in
Indonesia is perhaps the
most complicated in the
world
Current winners are
companies with good
distribution system
There are over 2.7mn
traditional vendors across
the country
More toll road will boost
cross city trade and
improve efficiency
In the driving seat Consumer
14 October 2010 jessica.irene@clsa.com 7
Most of the impending toll road projects are concentrated in Greater Jakarta
and cross Java region. Key consumer beneficiaries from better toll road
network are companies with operations concentrated within the island.
Among all, two companies that we like are Sumber Alfaria (AMRT IJ) and
Nippon Indosari (ROTI IJ).
Sumber Alfaria is the second biggest mini-market operator in the country with
99% of its outlets in Java. Its distribution network includes few distribution
centres in major cities and over 1,000 trucks to supply its stores. Nippon
Indosari is the largest mass-producer of bread in the country with current
presence concentrated in East and West Java. From its three factories, the
company supplies to all modern grocery outlets in Java, 7,500 traditional
outlets, and large housing complexes.
Second infrastructure problem that we have is power blackouts, and this is
more prominent in the outer islands. Manufacturing businesses often needs to
pay higher than market prices to PLN to ensure the availability of the power
supply. If not, retailers need to spend additional costs in purchasing power
generators in case of blackouts. Consumer companies often complained about
their expansion plan being delayed or cancelled due to lack of power supply.
The planned 2x10,000 MW power projects across Indonesia should ease
power blackouts, giving more incentives for companies to expand into the
regions and reduce companies’ power costs. However, even with the addition,
we are still far behind Malaysia with over 1,800 watts/person capacity.
Currency appreciation will boost margins
An appreciating currency will also boost margins for consumer companies as
import costs fall. Unilever Indonesia, Indofood, Kalbe Farma, Ace Hardware
and Mayora would be substantial beneficiaries here. Indofood imports wheat,
skimmed milk for its consumer branded business and ACE hardware imports
most of its products from China. However increasing commodity prices will
negate some of the gains from currency.
Unilever Indonesia (UNVR IJ) has 70% of its raw material costs in US$.
Raw materials costs account for 90% of total cogs. We estimate that every
5% appreciation in rupiah has 8.3% increases in profits. Every 100bps
improvement in margins increases earnings by 4.8%. Assuming that
operating margins go back to 1Q08 level of 25.8% in 2010CL vs estimates of
20.6%, our profits would be 25% higher.
Indofood CBP (ICBP IJ) will see its margins expand by 100bps for 5%
appreciation in rupiah which will translate into 15% higher earnings. Nearly
80% of its raw materials costs are USD linked and raw materials account for
70% of COGS. The group imports 100% of its wheat requirements from
Australia, Canada and the Ukraine. It also imports skimmed milk, a key raw
material for its dairy products. Even palm oil, sugar costs are US$ linked.
Since there is a lag in passing on the costs cuts to consumers’ esp. for cost
plus business model such as Bogasari and cooking oil, Indofood will
experience a temporary expansion in margins in these segments. On the
consumer branded business such as noodles and dairy, it has a greater
pricing power and brand presence thus will be able to retain some of the
higher margins.
Ace Hardware (ACE IJ) ACE has been able to defend its margins incredibly
despite sharp fluctuations in currency last year. ACE imports 80% of its
Impending toll road
projects are concentrated
in Greater Jakarta and
cross Java region
Power shortages delays
expansion
Appreciating currency will
boost margins
Unilever has 70% of
COGS linked to US$
ICBP has 80% of its COGS
linked to US$
Ace Hardware imports
80% of its products
Planned 2GW power
project should ease
blackouts
In the driving seat Consumer
14 October 2010 jessica.irene@clsa.com 8
products, mostly from China. 5% appreciating rupiah impacts earnings
positively by 16.2% assuming the costs cuts are not passed.
Kalbe Farma (KLBF IJ). More than 95% of Kalbe Farma’s raw materials are
imported. Raw material make up 30% of the cost of goods sold. A 5%
stronger rupiah impacts earnings by 5%.
Figure 16
Potential earnings upside from stronger currency and margin expansion
Market
cap
(US$
m)
2010CL
profits
(Rp
bn)
Current
EBIT
margins
(%)
Peak
margins in
last two
years (%)
Increase
in
2010CL
profits
(%)
Impact of 100
bps
improvement in
EBIT margins on
earnings (%)
EPS impact
of 5%
stronger
rupiah (%)
10CL
P/E
11CL
P/E
ROE
(%)
10-11CL
Eps
growth
(%)
Unilever 9,237 3,047 20.6 25.8 25.3 4.8 8.3 27.8 23 84.8 15.9
ACE hardware 278 157 10.6 14.6 30 7.6 16.2 16.5 14 18 17.8
Kalbe Farma 1,500 1,006 15.7 17.5 12 6.6 5 13.2 11.6 20.6 18.4
Indofood 3,599 2,078 13.3 13.8 7.5 15 15 17.6 15.2 19.2 11.4
Source: CLSA Asia-Pacific Markets
Increasing competition
Another key challenge for the consumer sector is competition. We have seen
multinationals expanding aggressively in the country. Mayora has been seeing
new entrants in the biscuit market, increasing from four to over ten over the
past five years. Indofood’s Bogasari also faces stiff competition both from
domestic and imports in the flour market with number of competitors
increasing from less than five to currently more than 14.
Competition will inevitably come, but as we mentioned above, it will be
gradual due to the complicated distribution system. Price wars prone to
happen, causing margins to erode when there are new entrants. This is
evident in instant noodle price war, where the Wings Group (unlisted)
successfully grab 20% market share and erode noodle margins to as low as
1%.
The existing companies have a head start in dominating the market, however,
continuous product development and innovation are needed to maintain
market share in the industry. Companies like Unilever have extensive R&D to
create a moving target for new entrants and competition. Smaller companies
like Indofood, Mayora, and Ace Hardware each have extensive product
differentiation that keeps them top of their respective sectors.
With increasing competition, we are seeing consumer companies ramping up
their advertising spending this year to grab or maintain their market share.
Proxy plays to this increasing competition is the media companies such as
Media Nusantara Citra (MNCN IJ) and Surya Citra Media (SCMA IJ). Both
companies registered above 50% growth in EBITDA as adspend grows from a
low base last year.
Re-rating of the consumers
We believe Indonesia’s best years lie ahead. Political stability, surging middle
class, low leverage and growing confidence should allow for lower risks
premiums. S&P and Fitch upgrade of Indonesia’s debt would bring down the
cost of doing business and allow for re-rating of the country.
Indonesian consumer companies are at the cusp of a new investment cycle.
Our combined capex forecast is US$2.3bn over 2010-2012CL, up 50%
Combined capex forecast
is up 50% compared to
last three years
More than 95% of Kalbe’s
raw materials are
imported
Increasing competition is
a challenge
Competition will come but
it will be gradual due to
the complicated
distribution system
Key to success is
continuous development
and innovation
Consumer companies are
spending more on
advertising and
promotion
In the driving seat Consumer
14 October 2010 jessica.irene@clsa.com 9
compared to last three years. Chindia capex is forecasted to increase by 12%
for the same period. This means there is upside risks to our forecasts.
For e.g. Unilever Indonesia plans to double capacity of the business over the
next five years while the parent will double capacity over next ten years.
Mayora Indah too plans to double capacity by 2013-2014. Indofood is
expanding capacities for its cup noodles and the dairy segment. Ace
Hardware and Ramayana are also expanding stores aggressively after scaling
back plans in 2009.
Colour of the consumer space
Indonesian consumer space offer average ROE of 31%, ROA of 17.4%
comparable to Chindia at 31.6% ROEs and 16% ROA. Chindia is trading at a
PE/G of 1.5x while Indonesia is trading at a PE/G of 0.89x. We believe that
over next five years, Indonesian consumer stocks should re-rate as country
risk premium reduce.
Figure 17
Ratio of consumer PE vs industry PE
1.3
0.5x
0.7x
0.9x
1.1x
1.3x
1.5x
1.7x
1.9x
2.1x
1994 1997 2000 2003 2006 2009
Consumer/industry PE ratio
Average
Source: CLSA Asia-Pacific Markets, Evalu@tor
Indonesian consumer stocks under our coverage registered 38% CAGR profit
growth in last five years matching Chindia but are trading at 28% discount to
Chindia peers in terms of P/E, EV/EBITDA ratios. In terms of PE/G ratio
Indonesian consumer stocks are 40% cheaper.
Figure 18 Figure 19
Consumer PER – Indo vs China Consumer PER – Indo vs India
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
35.0x
40.0x
Jan00 Jan02 Jan04 Jan06 Jan08 Jan10
Indonesia
China
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
35.0x
40.0x
45.0x
Jan00 Jan02 Jan04 Jan06 Jan08 Jan10
Indonesia
India
Source: Evalu@tor
Unilever, Mayora,
Indofood, Ace Hardware,
and Ramayana engage in
aggressive expansion
Indonesian consumer
stock should rerate as
country risk premium
reduce
Indonesian consumer
stocks under our
coverage registered 38%
CAGR profit growth
All-time high ratio was at
Dec 2003 when consumer
companies trade at 2.1x
industry’s PE
In the driving seat Consumer
14 October 2010 jessica.irene@clsa.com 10
Figure 20
Indonesia Consumer Index
200
400
600
800
1,000
1,200
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
JAKCONS Index
Source: CLSA Asia-Pacific Markets
There are more than 50 listed consumer stocks in Indonesia, of which we
cover seven of them. The sector is not liquid and combined daily turnover is
US$42mn while combined market cap is US$44.9bn. Combined market cap of
our coverage is US$30.2bn or 67% of the entire consumer universe, leaving a
market cap of US$12bn for the remaining 43 consumer stocks.
Small-cap consumer names
In this report, we have also drilled down into the wider consumer universe
and highlight some less known ones among the 43 names. Mostly are
consisted of lesser known small-cap stocks with liquidity constraint. However
for patient investors, there are few interesting ideas that we would like to
highlight.
Consumer names that are not in our coverage performed more than three
times as better within the last three months (returning 73% versus 24%),
while if we take a longer term view on both, the outperformance is not as
contrast (193% versus 120%). There are some hidden opportunities in the
smaller-capped names, as suggested in the extreme outperformance of the
non-covered stocks.
We think that there are still more opportunities in the small-cap consumer
space. Some stocks have performed exceedingly well, but some remained a
laggard. We have compiled a list of small-cap ideas that might still be holding
hidden opportunities and serve as a good long term investment. Among which
are our two top picks in the small-cap consumer names: Ace Hardware and
Mayora.
Other names include Mitra Adiperkasa - the largest upscale retailer in
Indonesia, Sumber Alfaria - the second largest mini-market chain, Fast Food
Indo - the sole franchise holder for KFC, Media Nusantara Citra – the largest
media company, Nippon Indosari, and Multristrada.
The above mentioned small-cap consumers have recently performed well on
the back of improved consumer sentiment and a series of better than
expected earnings releases, marking the initial stage of the J-curve growth in
the consumer sector. All of the names are trading at historical high, with
We cover seven of the 50
consumer stocks,
accounting for 67% of the
entire market cap
We have drilled down into
the wider consumer space
and found some other
interesting names
Non-coverage consumer
stocks performed three
times better than our
covered stock
There are still more
opportunities in the small
cap space. Our top picks
are Mayora and Ace
Hardware
Other interesting names
are Multistrada, Mitra
Adiperkasa, Sumber
Alfaria, Fast Food
The consumer index has
had a good rally since the
beginning of the year,
starting the initial stage
of the J-curve trajectory
In the driving seat Consumer
14 October 2010 jessica.irene@clsa.com 11
better positioning than ever: large and resilient consumer base, benefiting
directly from higher discretionary spending and growing middle class.
All companies prove to be resilient against the global crisis in 2008 and are
now trading at above the pre-crisis level. On average, the six companies
above outperformed the JCI Index by a hefty 80% and the Consumer Index
by 43%. Despite the strong performance, we think that there is still upside
from the current level. Liquidity is still an issue, but for patient investors,
there are some hidden jewels behind these names.
On the back of this report, we have put 11 company profiles that we think are
interesting (both small and large caps), and a matrix of the consumer
universe.
The six companies have
outperformed the stock
market by 80%
Ace Hardware Indo
Rp2,150 - BUY
Financials
Year to 31 Dec 08A 09A 10CL 11CL 12CL
Revenue (Rpbn) 1,280 1,373 1,668 2,244 2,658
Net profit (Rpbn) 131 152 183 229 252
EPS (Rp) 76.1 88.6 106.7 133.6 146.9
CL/consensus (0) (EPS%) - - 102 102 98
EPS growth (% YoY) 84.8 16.3 20.4 25.2 9.9
PE (x) 28.2 24.2 20.1 16.0 14.7
Dividend yield (%) 0.4 0.4 0.5 0.7 0.7
FCF yield (%) 1.9 6.8 0.1 3.3 3.9
PB (x) 5.5 4.5 3.8 3.0 2.6
ROE (%) 20.7 20.3 20.3 21.1 19.5
Net debt/equity (%) (43.5) (62.8) (50.8) (49.9) (49.9)
Source: CLSA Asia-Pacific Markets
Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor® proprietary database at clsa.com
Swati Chopra
swati.chopra@clsa.com
Jessica Irene
jessica.irene@clsa.com
13 October 2010
Indonesia
Consumer
Reuters ACES.JK
Bloomberg ACES IJ
Priced on 11 October 2010
Jakarta Comp @ 3,548.7
12M hi/lo Rp2,200/1,200
12M price target Rp2,500
±% potential +21%
Target set on 25 Jun 10
Shares in issue 1,715.0m
Free float (est.) 40.0%
Market cap US$393m
3M average daily volume
Rp516bn (US$0.1m)
Major shareholders
PT Kawan Lama Sejahtera 60.0%
Kuncoro Wibowo
Stock performance (%)
1M 3M 12M
Absolute 13.9 14.5 68.0
Relative 1.9 (2.6) 18.4
Abs (US$) 14.8 15.8 81.2
630
1,005
1,380
1,755
2,130
Nov-07 Jul-08 Mar-09 Nov-09 Jul-10
0
50
100
150
200
250
Ace Hardware Indo (LHS)
Rel to Comp (RHS)
(%(Rp) )
Source: Bloomberg
www.clsa.com
Ace-pansion
Indonesia’s largest DIY store is expanding rapidly, opening stores in
strategic locations such as popular malls creating barriers of entry for
competitors. It has pricing power as it is a one-stop shop for products not
conveniently available elsewhere. Ace is in the frontline to benefit from
hockey stick growth in middle class. Its revenue is expected to increase
2015 projected to grow by nearly three fold from 2009. The stock is
trading at 16.0x 11CL PE, offering 25% upside to our target price.
One of its kinds
Ace is a leader in the do-it-yourself (DIY) stores in Indonesia with 45% of its
sales from Jakarta. It has 45 stores in Indonesia with 53% in popular malls
and other half as independent stores. It has more than doubled the number
of stores since 2006 and now it is present in most of the major cities in
Indonesia and is still adding. By occupying the key spots, it creates barriers
to entry. Key products include home appliances, plumbing tools, automotive,
houseware, sporting goods, paints etc.
In the frontline of the booming middle class
ACE targets middle class and has pricing power thanks to one- stop shop for
products not conveniently available elsewhere. It has a driven, focused
management team which is fast tapping niche segments such as nationwide
organized DYI store and now the first dedicated toy store in Indonesia. ACE’S
branded “Toys Kingdom” has immense potential. To put into perspective,
Singaporeans spend US$27/capita on toys and there are 650k people below
15 years vs. 67m in Indonesia.
Hockey stick growth
We expect ACE revenue to reach almost US$440m by 2015, nearly three fold
from 2009. We forecast 21% revenue and 16% net profit CAGR for next five
years. Home Depot in the US achieved hockey stick growth from 1994-2005,
averaging 20% for the period. Rising middle class, young demographics, and
rising incomes should mean J-curve growth in DIY.
Valuation
The stock should continue to re-rate to Chindia peers which are trading at 20x
2011CL earnings. ACE has a good transparent governance and excellent
management who has proven good execution. The stock offers a good 20%
ROE and can fund its growth through internal cash flow.
Sector review
Mayora Indah
Rp10,100 - BUY
Financials
Year to 31 Dec 08A 09A 10CL 11CL 12CL
Revenue (Rpbn) 3,908 4,777 6,768 8,460 10,575
Rev forecast change (%) - - 1.4 1.4 1.4
Net profit (Rpbn) 196 372 439 543 748
NP forecast change (%) - - (1.2) (6.6) 4.4
EPS (Rp) 255.98 485.48 573.19 707.74 976.15
CL/consensus (5) (EPS%) - - 98 97 104
EPS growth (% YoY) 38.6 89.7 18.1 23.5 37.9
PE (x) 39.5 20.8 17.7 14.3 10.4
Dividend yield (%) 0.4 0.5 0.9 0.7 1.5
ROE (%) 16.9 26.4 24.9 24.6 27.1
Net debt/equity (%) 52.6 38.6 45.6 40.8 32.7
Source: CLSA Asia-Pacific Markets
Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor® proprietary database at clsa.com
Jessica Irene
jessica.irene@clsa.com
(62) 2125548831
Swati Chopra
14 October 2010
Indonesia
Consumer
Reuters MYOR.JK
Bloomberg MYOR IJ
Priced on 11 October 2010
Jakarta Comp @ 3,458.7
12M hi/lo Rp11,100/2,800
12M price target Rp11,500
±% potential +14%
Target set on 23 Aug 10
Shares in issue 766.6m
Free float (est.) 67.1%
Market cap US$855m
3M average daily volume
Rp7.5bn (US$.8m)
Major shareholders
Unita Branindo 32.9%
Stock performance (%)
1M 3M 12M
Absolute (6.6) 34.5 243.1
Relative (14.9) 12.2 137.6
Abs (US$) (5.8) 36.3 263.5
580
2,880
5,180
7,480
9,780
Oct-05 Feb-07 Jun-08 Oct-09
0
50
100
150
200
250
300
350
400
450
500
550
600
Mayora Indah (LHS)
Rel to Comp (RHS)
(%(Rp) )
Source: Bloomberg
www.clsa.com
Sweet tooth
Mayora is the largest biscuit manufacturer in Indonesia, trading at 14.3x
11CL earnings, benefitting from the growth in processed food
consumption. The second generation has brought in a fresh lease of life in
the business since they took over in 2004. Mayora plans to add 25% new
capacity each year for the next three years, potentially doubling revenue
over the same period. Rising commodity prices post short term margin
pressure, but we remain structural buyer on weaknesses.
Biscuit king
Mayora is the largest biscuit manufacturer with a solid brand presence
throughout its product line: biscuits and wafer, candies, chocolate, coffee, and
health food. With over 20 product variants, Mayora holds on average 18%
market share in the confectionery business with its strongest positioning in
the biscuit industry. Management has over 30 year’s track record in the
business and deemed reliable in developing good quality products at very
competitive prices. The second generation of the founding family have joined
the business after returning from education in the US. Mayora has been hiring
best people from the industry and now has a mix of both professionals and
family running the business.
Beneficiary of processed food growth
We expect Mayora to be a beneficiary of the growth in domestic consumption,
and more importantly the rapid growth in processed food consumption.
Annual compounded rate of processed food consumption shows a 15.6%
growth per annum since 2000, overtaking other fresh food categories. The
second generation has brought in a fresh lease of life in the business since
they took over in 2004. The turnaround is clearly visible from declining
receivables and 34% CAGR in profits from 2004-2009 vs 13%, from 1999-
2004. Mayora has plans to add 25% new capacity each year for the next
three years, potentially doubling revenue within that period if crossed with
ASP increases. Capex will be funded partially through debt.
Valuation is still not demanding
Despite short term margin pressure due to rising commodity prices, Mayora is
a good long term story given its solid growth profile. Good corporate
governance and reliable management, paired with a large consumer base in
Indonesia, Mayora still has much room to grow. At some stage, we expect the
unlisted distributor owned by the group will be consolidated the family. The
stock is currently trading at 14.3x 11CL PE.
Sector review
Mitra Adiperkasa
Rp2,375 - NR
Financials
Year to 31 Dec 08A 09A 10IBES 11IBES 12IBES
Revenue (Rpbn) 3,468 4,112 4,683 5,431 6,034
Net profit (Rpbn) (70) 164 180 230 287
EPS (Rp) (42) 99 108 138 173
EPS (% YoY) na na 9.6 27.6 25.4
PEx na 23.9 22.0 17.2 13.7
ROAE (%) (5.9) 13.6 14.2 15.1 15.9
Price/book (x) 3.4 3.1 2.7 2.3 2.1
Net gearing (%) 44 97 72 75 70
Source: CLSA Asia-Pacific Markets
Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor® proprietary database at clsa.com
Stock performance (%)
1M 3M 12M
Absolute 26.4 131.8 264.3
Relative 18.5 103.2 168.2
Abs (US$) 26.6 133.6 294.1
240
595
950
1,305
1,660
Sep-05 Jan-07 May-08 Sep-09
0
50
10
15
Mitra (LHS)
Rel to Comp (RHS)
(%(Rp) )
Source: Bloomberg
www.clsa.com
Jessica Irene
jessica.irene@clsa.com
(62 21) 2554 8831
Swati Chopra
swati.chopra@clsa.com
Snoopin around
Small-caps research
13 October 2010
Indonesia
Consumer
Reuters MAPI.JK
Bloomberg MAPI IJ
Priced on 27 September 2010
Jakarta Comp @ 3,468.0
12M hi/lo Rp2,450/Rp415
12M price target
±% potential
Target set on
Shares in issue 1,660.0m
Free float (est.) 34.4%
Market cap US$343m
3M average daily volume
Rp7bn (US$0.7m)
Major shareholders
Satya Gemilang 58.8%
Boyke Gozali
Rising star
Mitra Adiperkasa is set to post record earnings in 2010 after years of
lacklustre performances. It is Indonesia’s leading high-end nationwide
retailer, holding exclusive rights to over 80 international brands with a
presence in 23 cities. The company is now focusing on rolling out existing
brands rather than acquiring new ones, so margins should improve as
pre-operating expenses drop. While there are corporate governance risks,
the stock is trading at just 9.6x 2010 PE based on our back of the
envelope calculation versus retailer peers at 22x.
Largest upscale retailer in the country
MAPI has high bargaining power over the mall owners due to its large mall
penetration area (31% of upscale malls in Jakarta). With its department store
acting as an anchor tenant, MAPI can secure premium locations for its vast
range of specialty stores at relatively low rent. MAPI has no direct competitor
in the retailing business. Each of its segments competes with smaller-scale
retailers, focused on, at most, five brands. No one retailer comes close to
MAPI’s scale. New brands that wish to penetrate the Indonesian market would
likely approach MAPI. In the future, the company will have the liberty and
choice to replace its less profitable brands.
Harvest time
Since its IPO in 2005, the company has been operating on a negative free
cashflow to accommodate brand acquisitions and store expansions. MAPI has
stopped acquiring new brands since early 2009 and plans to focus on rolling
out its existing ones for the next five years. “Harvest time” is how it describes
as its new strategy. The near-term focus is to expand its F&B businesses and
specialty stores. The company aims to achieve a 20% net gearing ratio within
the next five years. Debt repayment will be funded through stronger internal
cashflow. We believe this can be a turnaround point for the company.
More to come
MAPI’s sales and operating profit per square metre were substantially higher
compared to peers in Indonesia. Revenue has grown by 12.2% compounded
for the past five years. Revenue growth proved to be resilient even during the
global crisis last year. Net profit grew by 8.5% compounded over the same
period, slightly undermined by interest burden. A back-of-the-envelope
calculation suggests that MAPI could register an Ebitda of Rp900bn this
year (versus consensus at Rp648bn), which translates into net profit of
approximately Rp380bn. With a market cap of Rp2.4tn, the stock is now
trading at 9.6x 2010 PE versus retailer peers at 22x.
In the driving seat Consumer
14 October 2010 jessica.irene@clsa.com 12
Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market
by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%.
Performance is defined as 12-month total return (including dividends).
©2010 CLSA Asia-Pacific Markets (“CLSA”). Note: In the interests of timeliness, this document has not been edited.
The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views and
opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or pressure by any person/s in
compiling such publication/ communication.
The CLSA Group, CLSA's analysts and/or their associates do and from time to time seek to establish business or financial relationships with companies
covered in their research reports. As a result, investors should be aware that CLSA and/or such individuals may have one or more conflicts of interests
that could affect the objectivity of this report. The Hong Kong Securities and Futures Commission requires disclosure of certain relationships and
interests with respect to companies covered in CLSA's research reports and the securities of which are listed on The Stock Exchange of Hong
Kong Limited and such details are available at www.clsa.com/member/research_disclosures/. Disclosures therein include the position of the CLSA
Group only and do not reflect those of Credit Agricole Corporate & Investment Bank and/or its affiliates. If investors have any difficulty accessing this
website, please contact webadmin@clsa.com or (852) 2600 8111. If you require disclosure information on previous dates, please contact
compliance_hk@clsa.com
IMPORTANT: The content of this report is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory Notices
as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group,
18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888. 27/08/2010