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Changing consumption patterns. As per capita disposable income had more than
doubled over five years to Rp15.9m (US$1,776) in 2009, lifestyles and consumption
patterns have also evolved. Spending on non-food items has risen, from 45.4% of
monthly expenses in 2004 to 49.4% in 2009, and will benefit retailers like Ramayana
Lestari Sentosa (RALS) and Mitra Adiperkasa (MAPI).
Burgeoning middle class. The proportion of the middle- and upper-income groups
form 51% of the total surveyed population (in 2009) vs 42% a year ago. It is estimated
that the number of middle-income earners with an annual per capita income of
US$15,000 will grow to 36m in the next five years, which is larger than the population
of Malaysia (28m).
Indonesians spending more. Annual per capita private consumption over 2004-09
expanded at a 15.0% CAGR to Rp14.2m (US$1,586). Strong car and motorcycle
sales that hit monthly record highs in July this year, of 72,130 and 699,411 units
respectively, are indicative of Indonesians' propensity to spend.
Valuation .................................................................................................9
Industry ................................................................................................ 10
Stock Picks
- Mitra Adiperkasa ................................................................................. 15
- Ramayana Lestari Sentosa .................................................................. 17
2 Retail Sector
Investment Highlights
Retailers are beneficiaries of strong consumer spending. Growing disposable
income will directly benefit retailers. We run a regression analysis at the 95% confidence
level. The results show a significant positive correlation (R2 of 0.99) between disposable
income and listed retailers’ aggregate revenue. The 16.5% CAGR in annual disposable
income in 2005-09 led to a 15.4% CAGR in listed retailers’ aggregate revenue.
3,000
2,500
2,000
1,500
15.0 20.0 25.0 30.0 35.0
Aggregate retailers' revenues (Rpt)
Indonesians are changing their consumption patterns. The stronger economy has
raised Indonesia’s socio-economic status – per capita disposable income more than doubled
from Rp7.7m in 2004 to Rp15.9m in 2009 – and led to improving lifestyles and consumption
patterns. In the same period, per capita expenditure also more than doubled from Rp7.1m
to Rp14.2m. Spending on non-food items increased from 45.4% of monthly expenses in
2004 to 49.4% in 2009. The rising proportion of urban population, which allocates at
least 54.3% of their monthly expenses on non-food items, will also boost consumption.
This will benefit retailers like RALS and MAPI as they focus on the department stores
business.
15
50
10
45
5
40 -
2004 2005 2006 2007 2008 2009
Proportion of Food expenditures (LHS) Proportion of Non-food expenditures (LHS)
Annual disposable incomes/capita (RHS)
Retail Sector 3
Modern retailers’ low penetration rate provides another opportunity. The
proportion of modern retailers is projected to increase from 38% of the industry’s retail
channels in 2009 to 41% in 2012, which we believe would be supported by more store
openings amid rising income and changing lifestyle. Indonesia’s store penetration rate is
a low 52 stores/1m population, compared with that of countries with similar market
characteristics, like Malaysia (156 stores/1m) and Thailand (124 stores/1m). This provides
huge opportunities for RALS and MAPI which have strong positioning through their
supermarket arms.
250 Indonesia
200
150
100
T hailand
50 Singapore Korea
Malaysia T aiwan
- Hong Kong
- 100 200 300 400 500 600
Modern retailers/1m population
Source: Indonesian Retailers Association, Nielsen Indonesia, Bloomberg, UOB Kay Hian
We think the drivers of disposable income growth are as follows: a) a growing number of
middle-income earners, b) a growing urban population, c) a continued increase in domestic
and foreign direct investments, and d) relocation of foreign factories to Indonesia.
4 Retail Sector
Figure 4: Rising Expenditure By Higher-income Groups
Retail Sector 5
Figure 6: Indonesia's Growing Urban Population
(m people)
250
Urban Rural
200
150
100
50
-
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
2,000 200
0 0
1990 1994 1998 2002 2006 1Q10
Value (LHS) No. of project (RHS)
6 Retail Sector
PURCHASING POWER
Purchasing power has recovered. Purchasing power of the mid-low and lower-end
segments has started to recover since early this year, as can be seen in the recovery in
RALS’ same-store sales growth (SSSG) from -1.8% in Dec 09 to 13.0% in Jul 10.
Recovery is also seen in the middle- to upper-income segments. We use MAPI’s SSSG
as an indicator, which we believe is suitable given its premium retail brands. MAPI’s
SSSG rose from 4% in Dec 09 to 9% in Mar 10. At the same time, car and motorcycle
sales in July have also reached new highs, reflecting the recovery in purchasing power.
High remittance inflow is positive for mid- and low-income segments. The inflow
of foreign remittance to Indonesia will have a positive impact on purchasing power in the
mid- and low-income segments as their income is highly dependent on the money sent
back by their relatives (mostly children) overseas. Workers’ remittance plays a more
significant role in Indonesia than in other countries in the region due to the much larger
number of Indonesian workers overseas (Figure 9). In 2005-09, workers’ remittance
inflow increased at a 4.0% CAGR to Rp50.7t, representing 0.9% of gross domestic
product (GDP) in 2009.
Retail Sector 7
Figure 10: Main Beneficiaries of Workers Remittance
Source: CEIC
High commodity prices will also boost purchasing power. Indonesians are enjoying
rising incomes, partly from the increase in commodity prices, as 42% of the total workforce
is employed in resources-related sectors. Strong commodity prices will thus have a
positive impact on purchasing power, particularly for those in non-Java islands. The
renminbi appreciation is also a positive catalyst as it could make Indonesia’s exports
more competitive.
8 Retail Sector
Valuation
We have an OVERWEIGHT rating on the Indonesian retail sector, with RALS as our
top pick due to its convincing recovery story, strong competitive advantage and robust
balance sheet. Our valuations are derived from a PE ratio methodology, with target
prices being pegged to the PE multiplier set within the historical trading mean and 2011F
as the valuation base year.
Indonesia
Mitra Adiperkasa MAPI IJ 283.2 BUY 1,530 1,920 15.5 12.3 10.3
Ramayana Lestari RALS IJ 708.9 BUY 900 1,100 19.0 20.1 13.5
Average 496.1 17.3 16.2 11.9
Hong Kong
Golden Eagle 3308 HK 5,142.6 BUY 20.6 20.8 35.6 28.0 20.7
Intime 1833 HK 2,273.6 BUY 10.0 10.4 45.9 30.9 24.2
Lianhua Supermarket 980 HK 2,504.1 BUY 31.3 35.0 33.1 25.4 20.5
Lifestyle Int'l Ltd 1212 HK 4,152.2 HOLD 19.2 11.6 25.9 23.3 20.0
Parkson Retail 3368 HK 5,195.8 SELL 14.4 11.1 38.2 33.6 27.2
Average 3,853.7 35.7 28.2 22.5
* Local currency
Source: Bloomberg, UOB Kay Hian
Retail Sector 9
Industry
SECTOR OUTLOOK
Growing number of retail outlets indicates industry optimism. There has been
growing interest in Indonesia’s modern retail sector, as seen in the 1,681 new outlets
(+25.6% yoy) opened last year. At the same time, department stores also expanded by
42 (+4.9% yoy). The continued strengthening of Indonesia’s fundamentals offers
attractive growth potential, and we believe there is more room for retailers’ expansion.
We expect major retailers to open more than 1,400 new outlets this year, reflecting their
optimism over the growth potential.
Department stores
Sales (US$m) 2,488 2,622 n.a. 5.4
Outlets 843 885 42 4.9
Selling space ('000sqm) 2,474.7 2,635.0 n.a. 6.4
Acquisitions denote keen interest in the sector. Given the attractive growth potential
in the retail sector, there have been plenty of acquisitions by both foreign and domestic
companies in the past two years. It started with the acquisition of Alfa Retailindo (ALFA)
by giant retailer Carrefour Indonesia in Jan 08. In Oct 08, Makro Indonesia, one of
Indonesia’s retail pioneers, was also acquired by South Korean retailer Lotte Mart. Next
was the acquisition of a 40% stake in Carrefour Indonesia by Trans Corp, the holding
company of Para Group’s Media, in Apr 10. In the same month, CVC Asia Pacific Ltd
completed a deal to buy 98% of Matahari Department Store (LPPF).
10 Retail Sector
Figure 15: Acquisitions In The Retail Sector Over The Past Two Years
130.0
120.0
110.0
100.0
90.0
2005 2006 2007 2008 2009 2010F 2011F
Retail Sector 11
Figure 17: Consumer Confidence Index By Country
130
120 3Q09 1Q10
110
100
90
80
70
60
50
40 Singapore
Hong Kong
New Zeland
India
Indonesia
South Korea
Australia
China
Malaysia
Vietnam
Thailand
Taiwan
Japan
Philipines
Figure 18: Per Capita Annual Disposable Income Grew At 15.6% CAGR
(Rpm)
18.0
P er Capita Annual dis pos able income - CAGR 15.6%
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2004 2005 2006 2007 2008 2009
12 Retail Sector
TYPES OF MODERN RETAILERS IN INDONESIA
Indonesia’s retail industry comprises modern retailers and traditional retailers, with the
latter also dubbed an “un-organised” market. Modern retailers are further divided into
several categories, including hypermarkets, supermarkets, minimarkets, drugstores,
discount stores, convenience stores, department stores, specialty stores, malls/supermalls/
plazas and trade centres.
Modern retail business started in 1962; rapid growth started after 1998. The
modern retail business in Indonesia was pioneered by Sarinah Department Store in 1962.
We think the industry took a leap in 1998 when the government removed the retail
business from the negative foreign investment list, thus allowing foreign retailers to enter
the market. There were very few foreign retailers before that and SOGO department
store was among the first, opening in early-90. Today, there are several foreign modern
retailers operating in Indonesia, which we believe has intensified competition. At the
same time, foreign players force local ones to improve and expand further.
Traditional stores still dominate, but modern retailers are expanding. The retail
industry is dominated by traditional stores with a 62% market share. However, the trend
is gradually moving in favour of modern retail stores, driven by rising socio-economic
levels, a growing economy and synergy from deeper penetration by modern retailers. At
the same time, modern retailers offer lower and more competitive prices than traditional
markets, due to their stronger bargaining power over suppliers, who then give them more
discounts and longer credit payment terms. The market share of modern retailers is
estimated to increase to 41% by 2012.
20%
0%
2006 2007 2008 2009F 2010F 2011F 2012F
Rising convenience store trend. There is also a growing trend in the mini market
and convenience store segment, most likely due to their accessibility in housing
developments and residential areas. Consumers can save time as they can buy groceries
and mobile phone vouchers in the same store. The latest newcomer to this segment is 7-
Eleven Stores, brought in by Modern Internasional (MDRN) in Mar 09.
Retail Sector 13
Risk Factors
Surge in inflation. A significant surge in inflation could hit retailers through a potential
decline in revenues as a result of weakening consumer purchasing power. Retailers’
costs may rise on lower margins if they are unable to fully pass on the higher costs and
operating expenses. In Aug 10, inflation reached 6.4% yoy, which could mean full-year
inflation could easily surpass the central bank’s target of 5.3% yoy.
Intense competition. The growing interest in the retail sector amid Indonesia’s strong
growth potential will result in intense competition. Foreign chains have been strengthening
their footholds in Indonesia. This could affect retailers’ revenue and profitability.
Regulatory risks. Unfavourable changes in regulations will affect the industry. These
regulations could involve monopoly/oligopoly, modern retail stores expansion rules, working
hours, promotional activities and purchasing terms, minimum space requirements and
power-saving measures.
Social and political risks. These risks include riots, demonstrations, bombings and
other violent acts.
14 Retail Sector
Mitra Adiperkasa
BACKGROUND
Mitra Adiperkasa (MAPI) is a leading lifestyle retailer and distributor, targeting the BUY
middle- and upper-income segments. It offers a diversified range of goods which
covers sports, fashion, department stores, food & beverage (F&B) and lifestyle products. Share Price Rp1,530
Target Price Rp1,920
Upside +25.5%
OUTLOOK/RECOMMENDATION
Company Description
z Significant operational improvements in 1H10. Operating profit jumped 51.7% Mitra Adiperkasa operates high-end
yoy to Rp185.9b in 1H10, with improvements seen in the department stores, specialty department stores in Indonesia, as well as
stores and F&B segments. Total operating margin was 8.7% (1H09: 6.2%) on higher specialty stores and F&B outlets.
sales productivity and operational efficiency. We expect the momentum to continue
for the rest of the year, driven by the following: a) higher SSSG, b) a better Stock Data
GICS sector Consumer Discretionry
merchandising strategy and product mix, and c) efficiency in promotional activities Bloomberg ticker: MAPI IJ
helped by more joint promotions with banks. Shares issued (m): 1,660.0
Market cap (Rpb): 2,539.8
z New strategy will enhance growth and profitability. MAPI will not acquire any Market cap (US$m): 283.2
more new brands for the rest of this year and next, and will focus on strengthening 3-mth avg t'over (US$m): 0.7
existing brands in the specialty store and F&B segments. These two segments
Price Performance
contributed 82% of 2009 operating profit and 69% of revenue. We think this strategy
52-week high/low Rp1,600/Rp445
will improve MAPI's cash flow generation. For specialty stores, expansion will 1mth 3mth 6mth 1yr YTD
focus on sports retailing which is characterised by low capital expenditure and high 37.8 125.0 115.5 264.3 146.8
returns, as well as Marks & Spencer and Zara in the fashion segment. Within F&B,
MAPI will strengthen the performance of Burger King and Domino's Pizza through Major Shareholders (%)
Satya Mulia Gema Gemilang 58.8
new store openings.
z Better earnings visibility. The proportion of foreign-denominated debt has declined, FY10 NAV/Share (Rp) 887
FY10 Net Debt/Share (Rp) 427
plunging from 70% in Sep 09 to 19% as of Jun 10, as a result of debt refinancing.
This will improve earnings visibility through lower foreign currency exposure. We
also expect net gearing to decline to 48% in Dec 10 from 75% currently, and MAPI to Price Chart
swing into net cash position by 2014. This will also increase profitability as more (lcy) M ITRA ADIPERKASA TBK PT M itra Adiperkasa Tbk Pt/ JCI Index (%)
than one-third of its operating profit is currently allocated for interest payments. 1600
350
1400
z Initiate with BUY. We initiate coverage with a BUY and target price of Rp1,920, 300
1200
based on 13.0x 2011F PE, higher the stock's historical mean of 10.0x since the initial 1000
250
public offering (excluding 2007-08), as we have seen a re-rating on the back of 800 200
operational turnaround, supported by the growing number of middle-income earners. 600 150
The main risk is potential short-term pressure arising from a surge in inflation due to 400 100
Retail Sector 15
Profit & Loss Balance Sheet
Year to 31 Dec (Rpb) 2009 2010F 2011F 2012F Year to 31 Dec (Rpb) 2009 2010F 2011F 2012F
Net turnover 4,112.2 4,777.5 5,435.4 5,910.3 Fixed assets 1,116.8 1,054.5 987.5 920.8
EBITDA 540.4 629.6 709.4 758.0 Other LTassets 422.7 472.3 481.6 488.9
Deprec.&amort. 232.7 261.5 269.2 276.2 Cash/ST investment 189.7 256.8 294.9 61.6
EBIT 307.7 368.1 440.2 481.8 Othercurrentassets 1,650.3 1,942.6 2,198.5 2,432.7
Total other non-operating income 79.7 (0.6) (30.3) (26.1) Total assets 3,379.4 3,726.3 3,962.5 3,904.1
Associate contributions 3.2 3.7 4.2 4.5 ST debt 516.9 496.8 797.2 401.4
Netinterestincome/(expense) (108.8) (96.1) (86.4) (68.4) Other current liabilities 753.2 997.8 1,123.9 1,213.1
Pre-tax profit 281.8 275.1 327.7 391.8 LT debt 592.5 469.0 69.0 69.0
Tax (117.8) (68.8) (81.9) (98.0) Other LT liabilities 228.7 289.8 294.9 298.5
Minorities (0.0) (0.0) (0.0) (0.0) Shareholders' equity 1,288.0 1,472.9 1,677.4 1,922.1
Net profit 164.0 206.3 245.8 293.9 Minority interest 0.0 0.0 0.0 0.0
Netprofit(adj.) 164.0 206.3 245.8 293.9 Total liabilities & equity 3,379.4 3,726.3 3,962.5 3,904.1
Year to 31 Dec (Rpb) 2009 2010F 2011F 2012F Year to 31 Dec (%) 2009 2010F 2011F 2012F
Price Range
2007 2008 2009 2010*
Price (Rp)
High 940 680 640 1,600
Low 600 360 250 600
PE (x)
High 13.5 n.a. 6.5 12.9
Low 8.6 n.a. 2.5 4.8
* Forecast PE
16 Retail Sector
Ramayana Lestari Sentosa
BACKGROUND
Ramayana Lestari Sentosa (RALS) is a leading department store operator in the mid-tier
BUY
to low-end retail segment. It offers products ranging from clothing, shoes, bags, toys,
Share Price Rp900
and stationery to housewares. RALS also runs a supermarket business. Target Price Rp1,100
Upside +22.2%
OUTLOOK/RECOMMENDATION
Company Description
z Start of an aggressive year. We expect RALS to add a net 80,000sqm in 2010, which Ramayana Lestari Sentosa operates mid-
will be its second-most aggressive annual expansion, vs an average of 45,682sqm low segment department stores in
p.a. since 1995. Four new stores will open in 2H10, of which three will be in 4Q10. Indonesia.
About 60% of the stores are located outside of Java, which enjoy higher gross
margins and less competition. With an improving economy, RALS is likely to achieve Stock Data
GICS sector Consumer Discretionary
its 10% SSSG target this year. We have been seeing a significant recovery in SSSG Bloomberg ticker: RALS IJ
since early this year, with a 13% growth in Jul 10. Shares issued (m): 7,096.0
Market cap (Rpb): 6,386.4
z Supermarket restructuring will improve margins. RALS' 1H10 net profit was Market cap (US$m): 712.1
below consensus due to higher-than-expected increases in operating expenses which 3-mth avg t'over (US$m): 0.7
rose to 29.3% of net revenue, up from 25.6% in 2009. This was due to the following:
Price Performance
a) higher salaries on new hirings for supermarket restructuring and new store 52-week high/low Rp1,010/Rp540
openings, and b) higher utilities due to unusually low base effect (costs savings in 1mth 3mth 6mth 1yr YTD
2009 amid low purchasing power and store openings). The supermarket restructuring 3.4 (3.2) (2.2) 36.4 45.2
is expected to improve sales during the non-Idul Fitri months, and raise gross margin
by 2ppt to 16% through better merchandising. In 2H10, we expect margins to Major Shareholders (%)
Ramayana Makmursentosa 56.0
improve, driven by the Idul Fitri and year-end holidays.
FY10 NAV/Share (Rp) 373
z Main beneficiary of rising disposable income. Given its mid-tier to low-income
FY10 Net Cash/Share (Rp) 135
target markets, RALS should be the biggest beneficiary among retailers of rising
disposable income. This is because its target consumers are more price-sensitive Price Chart
than those in the middle- and upper-income segments. Higher purchasing power RAM AYANA LESTARI SENTOSA PT
(lcy) (%)
should translate into higher SSSG, and eventually result in higher operating leverage 1100
Ramayana Lest ari Sent osa Pt /JCI Index
170
due to a lower operating expenses-to-sales ratio. 160
1000
150
z Re-initiate coverage with BUY. We re-initiate coverage with a BUY call and a target 900 140
price of Rp1,100, based 16.5x 2011F PE, which is still within its five-year mean of 800
130
120
15.5x. Additional appeal comes from its strong net cash position without underlying 700 110
debts. The main risk is potential short-term pressure arising from a surge in inflation 600
100
90
on rising food prices and electricity tariffs. 500 80
60
Volume
40
20
Key Financials
0
Sep 09 Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10
Year to 31 Dec (Rpb) 2008 2009 2010F 2011F 2012F
Net turnover 4,407.6 4,310.4 4,944.3 5,492.3 6,118.3 Source: Bloomberg
EBITDA 350.8 441.2 496.5 687.4 777.0
Operating profit 416.6 366.5 317.6 486.8 553.4
Net profit (rep./act.) 429.7 334.8 315.5 470.9 539.5 Analyst
Net profit (adj.) 429.7 334.8 315.5 470.9 539.5
EPS (Rp) 60.8 47.4 44.7 66.7 76.4 Indonesia Research Team
P/E (x) 14.8 19.0 20.1 13.5 11.8 + 6221 2993 3916
P/BV (x) 2.7 2.5 2.4 2.2 2.0 researchindonesia@uobkayhian.com
Dividend yield (%) 3.4 3.4 2.8 2.6 3.9
Net margin (%) 9.8 7.8 6.4 8.6 8.8
Net debt/(cash) to equity (%) (38.6) (33.0) (36.3) (40.6) (44.1)
ROE (%) 19.0 13.8 12.3 16.9 17.5
Consensus net profit - - 394.0 476.7 565.4
UOBKH/Consensus (x) - - 0.80 0.99 0.95
Retail Sector 17
Profit & Loss Balance Sheet
Year to 31 Dec (Rpb) 2009 2010F 2011F 2012F Year to 31 Dec (Rpb) 2009 2010F 2011F 2012F
Netturnover 4,310.4 4,944.3 5,492.3 6,118.3 Fixed assets 944.4 1,015.4 1,079.2 1,136.2
EBITDA 441.2 496.5 687.4 777.0 Other LTassets 505.9 526.7 544.7 565.3
Deprec.&amort. 74.7 178.9 200.7 223.6 Cash/ST investment 823.7 954.6 1,191.1 1,422.8
EBIT 366.5 317.6 486.8 553.4 Othercurrentassets 956.4 953.5 1,014.1 1,098.4
Total other non-operating income (26.7) 5.1 10.7 11.4 Total assets 3,230.3 3,450.2 3,829.1 4,222.7
Netinterestincome/(expense) 64.3 58.2 71.0 86.5 ST debt 0.0 0.0 0.0 0.0
Pre-taxprofit 404.1 380.9 568.5 651.3 Other current liabilities 626.2 692.9 754.0 839.5
Tax (69.4) (65.4) (97.6) (111.8) LT debt 0.0 0.0 0.0 0.0
Minorities 0.0 0.0 0.0 0.0 Other LT liabilities 110.4 124.7 138.0 154.9
Net profit 334.8 315.5 470.9 539.5 Shareholders' equity 2,493.8 2,632.7 2,937.2 3,228.3
Netprofit(adj.) 334.8 315.5 470.9 539.5 Minority interest 0.0 0.0 0.0 0.0
Total liabilities & equity 3,230.3 3,450.2 3,829.1 4,222.7
Year to 31 Dec (Rpb) 2009 2010F 2011F 2012F Year to 31 Dec (%) 2009 2010F 2011F 2012F
Price Range
2007 2008 2009 2010*
Price (Rp)
High 1,110 860 710 1,010
Low 770 450 380 640
PE (x)
High 21.4 14.1 15.0 22.8
Low 14.8 7.4 8.0 14.5
* Forecast PE
18 Retail Sector
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Retail Sector 19
As of 21 September 2010, the analyst and his / her immediate family do not hold positions in the securities recommended
in this report.
We have based this document on information obtained from sources we believe to be reliable, but we do not make any
representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness.
Expressions of opinion contained herein are those of UOB Kay Hian Research Pte Ltd only and are subject to change
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