Retailers. Cutting a fine figure. 3Q16 Preview: Sluggish sales due to seasonality

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1 Cutting a fine figure Overweight (Initiate) Initiation report October 30, 2016 PT. Daewoo Securities Indonesia Trade Christine Natasya natasya@dwsec-id.com Indonesia stands to benefit from the rising middle class We initiate coverage on Indonesian retailers with an Overweight recommendation. Given vast population base, Indonesia s domestic consumption comprises more than 50% of the nation s total economic output. Disposable income of consumers has been growing, which drove the nation s purchasing power. Indonesia s middleincome households grew from c.38% of the population or 81mn people in 2003 to c.53% of the population or 131mn people as of Collectively, we believe that these positive developments serve as the key foundation of Indonesia s retail sales growth. Although purchasing power has weakened over the past three years, amid the headwinds to economic growth, the mid- to- long term outlook remains positive. As we expect to see economic rebound over the next couple of years, we believe this should trigger per capita GDP expansion and enlarge the nation's middle-income household base. All in all, we see increased consumption for higher quality products. 3Q16 Preview: Sluggish sales due to seasonality We expect 3Q16 retail sales growth to remain subdued on the back of seasonally high base effect (Ramadan was shifted to 2Q this year). Matahari Department Store (LPPF) and Ramayana Lestari Sentosa (RALS) are expected to experience slower SSSG given that the aforementioned companies show greater sensitivity to sales growth during Ramadan. Matahari Putra Prima (MPPA) expects to turn profitable in 9M16 (on a cumulative basis) given that the company has already mended its inventory problems and has discontinued a number of its unprofitable SKUs. Initiate coverage on MPPA (Buy), LPPF (Trading Buy), RALS (Trading Buy) We initiate our coverage on MPPA with a Buy rating and a target price of IDR2,260/share. MPPA s shares are trading at 35x forward P/E, still lower than its 3 year average P/E of 41x. We initiate coverage on LPPF with a Trading Buy rating and a target price of IDR19,950/share. LPPF is trading near -1STD deviation at 22x forward P/E, 13% premium to RALS which is trading at 19.5x. We like LPPF given the company is expected to show higher dividend yield (due to higher payout ratio), strong SSSG (see figure 61), as well as potential margin expansion supported by its strong performance of DP sales. We initiate coverage on RALS with a Trading Buy recommendation and present a target price of IDR1,450. RALS shares are trading at its average forward P/E of 19.5x. We believe RALS valuation should re-rate on the back of upside potential in its DP fashion segment and better performance of its supermarket business after the transformation into SPAR (note that its positive earnings performance will be visible over the longer horizon). Retail companies covered in this report Company name Ticker Rating Target price (IDR) ROE (%) P/E(x) P/B(x) 2016F 2017F 2016F 2017F 2016F 2017F Matahari Putra Prima MPPA Buy 2, Matahari Dept Store LPPF Trading Buy 19, Ramayana Lestari Sentosa RALS Trading Buy 1, estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

2 C O N T E N T S Overview of Indonesian 3 Apparel demand 4 Grocery Demand 5 Low penetration of modern retail in Indonesia 6 The battle begins 9 Modern store regulations 11 Online retail is the new trend 13 Matahari Putra Prima (MPPA) 15 Matahari Putra Prima 16 Company background 16 Competitive advantages 23 Valuations 28 Matahari Putra Prima (MPPA IJ/ Buy/ TP: IDR2,260) 29 Matahari Department Store (LPPF) 32 Matahari Department Store 33 Company Background 33 Competitive advantage 34 Strong SSSG supports market share expansion 34 Improving gross margin which was supported by higher DP margin 35 Strong demand for private label brands 36 Aggressive expansion to boost revenue 36 Larger dividend payout potential 37 Matahari Department Store (Valuations) 38 Matahari Department store (LPPF IJ/ Trading Buy/ TP: IDR19,950) 39 Ramayana Lestari Sentosa (RALS) 42 Ramayana Lestari Sentosa 43 Company Background 43 Investment thesis 45 The big transformation 45 Using social media for advertisement to keep costs low 49 RALS has launched its online shop on Tokopedia platform 50 Kartu Jakarta Pintar (Jakarta Smart Card) 50 Ramayana Lestari Sentosa (Valuations) 51 Ramayana Lestari Sentosa (RALS IJ/ Trading Buy/ TP: IDR1,450) 52 2

3 Overview of Indonesia retailers Indonesia stands to benefit from the rising middle class Large population and consumption base Located in South East Asia with five main islands; namely, Java, Sumatra, Kalimantan, Sulawesi and Papua, Indonesia s population stands at c. 250mn people, making it the fourth most populous country in the world. Given the vast population, Indonesia s domestic consumption is also large, totaling more than fifty percent of the nation s economic output. The country s disposable income has been growing, which results in the significant increase of the nation s purchasing power and the rise of middle-income households, from c. 38% of the population or 81mn people in 2003 to c. 53% of the population or 131mn people in We believe that this phenomenon serves as the key factor that would support Indonesia s retail sales growth. Figure 1. Contribution to Indonesia s GDP (%) More than 50% from consumption 0.7% 1.9% 33.1% Consumption Government spending 55.5 % Fixed capital formation Inventories 8.8% Net exports Source: Bloomberg, Daewoo Securities Research Figure 2. Indonesia the fourth most populated country Figure 3. Around 53% of population is middle-income class mn pax 1,600 1,400 1,200 1, ,000, ,000, ,000,000 number of people (L) 50% 45% 40% 35% ,000,000 30% ,000,000 25% 20% ,000,000 15% 0 20,000,000 10% 5% - Lower class Middle Low I Middle Low II Middle I Middle II Upper middle Upper class 0% Source: Wikipedia, Daewoo Securities Research Source: Central Bureau Statistics and Markplus, Daewoo Securities Research Research 3

4 Apparel demand The Economist Intelligence Unit (EIU) estimates that retail sales in Indonesia will rise from an estimated USD330bn in 2014 to USD639bn in 2018F with 18.1% CAGR ( F). Although Indonesia s clothing market accounts for only c.3% of the total retail sales in Indonesia, we consider the figure to be promising as it is predicted to grow by 20.5% CAGR during F, reaching USD20bn in 2018F. Figure 4. Indonesia s retail sales (USDmn) Figure 5. Indonesia s clothing market demand (USDmn) USDmn 700, , , , , , , F 2017 F 2018 F USDmn 21,000 19, % CAGR ( F) 20,036 17,000 15,000 13,000 11,000 9,000 7,000 5, F 2017 F 2018 F Source: Economist Intelligence unit, Daewoo Securities Research Source: Economist Intelligence unit, Daewoo Securities Research Indonesia has a large domestic market and favorable demographic profile (50.8% of the population is in the productive age range of 20-54), which collectively support the long-term potential for the retail sector. We believe retail sales growth in Indonesia will continue to depend on the low- to middle-income population since wealthy Indonesians will continue to fulfill most of their high-end shopping needs abroad. Moreover, we think that the government regulation implemented since July 2015 to raise the tax for imported luxury goods, such as food, cars, clothes, and many other consumer goods, would drive some of the high-end consumers to shop abroad. Nevertheless, we still believe Indonesia s retail apparel demand would be largely contributed by the middle-income households due to their increasing disposable income, which in turn will benefit Indonesia s retail sector. Figure 6. Indonesia s demographic profile Source: United Nations, Department of Economic and Social Affairs, Population Division, Daewoo Securities Research 4

5 1/1/2015 2/1/2015 3/1/2015 4/1/2015 5/1/2015 6/1/2015 7/1/2015 8/1/2015 9/1/ /1/ /1/ /1/2015 1/1/2016 2/1/2016 3/1/2016 4/1/2016 5/1/2016 6/1/2016 7/1/2016 October 30, 2016 Grocery Demand The consumers weakening purchasing power due to the high inflation in 2015 has resulted in the shift of consumption trend towards more economic products, which has also affected the grocery sector, as people chose to buy from traditional market or wet market given the lower pricing. Nevertheless, the demand for grocery goods still outperformed that of non-grocery goods due to its basic necessity nature. that sell basic necessities are more stable since their businesses are more defensive in nature e.g. Ranch Market (RANC; Not-rated) and Matahari Putra Prima (MPPA). Between the two, we see that RANC is more resilient towards consumers buying power as the company s target market is high-end consumers. However, MPPA s non-food products amounted to 30% of total products, which affected the company s performance to be unstable in However, we expect to see improved performance of MPPA in As a quick reminder, MPPA s Same- Store Sales Growth (SSSG) has exhibited improvement from -2% in 2015 to -0.3% in 1H16. Also, with lower fuel price, which has brought Indonesia s inflation under control, we predict private consumers spending on either grocery or non-grocery items will likely sustain in 4Q16. Figure 7. Proportion of revenue per quarter (%) Figure 8. Inflation was high during % 31% 29% 27% RANC LPPF RALS MAPI MPPA % % 23% 21% 19% % 1Q15 2Q15 3Q15 4Q15 Source: Bloomberg, Daewoo Securities Research Source: Bloomberg, Daewoo Securities Research Research 5

6 Low penetration of modern retail in Indonesia According to Euromonitor, Indonesia s modern retail sales accounted for 17% of total retail sales, which is seemingly low compared to China (66%), yet slightly higher than Vietnam (5%). In terms of floor size (m2) per population, Indonesia s department stores are relatively small compared to those of China, which makes up c.70,000m2 per million people. This suggests significant room for growth in Indonesia, a still-underpenetrated market. Therefore, we believe the potential for modern retailers to expand in Indonesia (funded by either local or foreign investment) is very high. In addition, we think that the deceleration of economic growth in China will prompt global retailers to gain more interest in smaller Asian markets, such as Indonesia and Vietnam, with the former being buoyed by income growth as well as strong demographic profile. Furthermore, we also believe the large population and consumption base are key arguments of why many multinational institutions currently rank Indonesia as one of their key foreign investment destination choices. Figure 9. Modern retail sales as % of total retail sales (2015) Figure 10. Department store sqm ( 000) per mn people (2015) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 17% '000 sqm China Singapore Japan Thailand Philippines Indonesia Source: Euromonitor, Daewoo Securities Research Source: Euromonitor, Daewoo Securities Research Attractive investment opportunity We believe Indonesia is able to attract significant foreign investment on the back of 1) its large population base with most of the people in the productive age group, 2) rising consumption, 3) abundant natural resources, as well as 4) relatively cheap labor. Currently, Indonesia s current account remains in the deficit, which is reflected by a current account deficit (CAD) to GDP ratio at 2.06%. Thus, in order to improve Indonesia s foreign reserves, the government has been loosening regulations to attract capital from abroad, in our view. The Indonesian government, through the Indonesia Investment Coordinating Board (BKPM), has created a government licensing procedure under the Presidential Regulation No. 44/2016. The regulation specifies that foreign investments shall be in the form of a PT Penanaman Modal Asing (PMA company limited liability) incorporated in Indonesia, in which the investor engages in a partnership with an Indonesian person or entity as the shareholder. The regulation states that foreigners are permitted to invest, with no restriction on the maximum size of the investment, the source of funds, or whether the products are destined for export or for the domestic market. In addition, foreigners can hold between 30% to 95% ownership in various industries and even up to 100%. However, in order to protect small/mid-sized enterprises in Indonesia, the regulation varies by sectors and businesses. 6

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8 Under the Presidential Regulation No. 44/2016, the government enacted the Negative Investment List, which means that all industries and fields of businesses are open to foreign investment unless they are included on the aforementioned list. If the industry or field are not mentioned on the negative investment list, it is regarded as open to foreign investment. Therefore, foreign investors should look into the negative lists that are mentioned in the regulations before investing. Modern stores that are permitted for foreigners to invest According to the regulation, large department stores with size of >2,000m², supermarkets with selling area of >1,200m², and minimarkets with selling area of >400m² are open to 100% foreign direct investment (FDI). Meanwhile, there are several principles for when businesses are not open to FDI in Indonesia, such as: businesses that are reserved for micro-, small- and mediumsized enterprises and cooperatives; businesses for which a partnership is required; businesses that may be conducted in certain locations; and businesses that require special licenses. Fields that require 100% domestic capital as stipulated in the presidential regulation are: retail sales in non-supermarkets and minimarkets, nondepartment stores, the retail businesses of textiles, game and toy stores, cosmetics, footwear, electronics, mail order or internet delivery, and food and beverage (F&B). Table 1. Presidential Regulation No. 44/2016. Area size Supermarkets which selling area is <1,200m² Minimarkets, convenience stores, and community stores which selling area is <400 m² Department stores which selling area is 400m²-2,000m² Retail non-supermarket or minimarket (very small) Retail non-department store (very small) Source: Presidential Regulation No. 44/2016, Daewoo Securities Research Ownership limit 100% local capital 100% local capital a) FDI max. 67% b) Have a special right from Trade Minister, with requirement: - Located inside a mall and not a stand alone - The addition of outlet stores depends on export performance 100% local capital 100% local capital 8

9 The battle begins While the under penetration of retail sales suggests huge room for modern retailers to grow, we think this could also become a threat for the existing modern retailers in Indonesia. Although foreign ownership in the modern retail sector does not necessarily mean that the stores will be more successful compared to the existing retail stores, we believe such regulations could pose risk for companies under our coverage, such as Matahari Putra Prima (MPPA) and Matahari Department Stores (LPPF), given that each of them operates department stores with size of >2,000 m², which will likely get competitors with the FDI scheme implementation. However, Ramayana (RALS) does not have peer-to-peer competitor so far. 1. Matahari Putra Prima (MPPA) We believe MPPA s key risk from the FDI scheme would be large hypermarkets planning to open or do expansion in Indonesia, for instances: Lulu Group and Carrefour. Lulu Group the United Arab Emirates (UAE)-based company - marked its first retail exposure in Indonesia by opening its first hypermarket in June 2016 in Jakarta. The group has already had its initial investment worth USD300mn for the first phase, including its plan to set up 10 hypermarkets by the end of 2017F. Lulu is located in Cakung (sub-district of East Jakarta) with sales area of ±20,000m². This new hypermarket s design is centered on customers convenience and providing onestop shopping destination for the city residents. We believe that if Lulu is successful in opening all 10 hypermarkets, it will have an aggregated selling area of c.200,000m², which is c. 23% of the total selling area of Hypermart (MPPA), according to our estimates. Furthermore, as of FY15, Carrefour owns a total of 83 Carrefour stores similar to the hypermarket format, and it plans to open additional 5~ 10 stores by 2016F. Given the tight competition in Java, MPPA is attempting to diversify its stores outside the island, where there is less competition. Therefore, once Carrefour starts expanding its stores outside Java (namely, Kalimantan, Sumatera, and Sulawesi), we believe it will also pose risk for MPPA in the future. However, we think MPPA is able to respond to the challenges over the longer term due to the following arguments: 1) Their target segment is middle income households, which we believe to be the largest consumer group in Indonesia, and therefore makes the franchise more resilient. 2) MPPA is the fastest-growing multi-format retailer in Indonesia. The company has been expanding its stores outside Java, given the tight competition in the island. We believe newcomers are reluctant to enter this market segment given that MPPA already built strong brand reputation (having been established since 1986), and the assumption that islands outside Java would not create much profitability. 3) Moreover, we believe that, in order for the new competitors to take MPPA s market share, they must be able to come up with better pricing strategy. However, since MPPA already has shallow net margins (average net margin over the last three years stood at c.3%), we believe it will be a tough competition for newcomers. Research 9

10 Figure 11. Carrefour vs. Giant vs. Hypermart stores Figure 12. Locations of Carrefour s stores (mostly in Java) 2. Matahari Department Store (LPPF) We believe key risk to LPPF is opening of department stores by competitors outside of Java, such as Centro. Centro Department Store was initially bought by Parkson Retail Asia Ltd (subsidiary of Parkson Holdings Berhad in Malaysia) in in 2011 under PT Tozy Sentosa. The department store s network has since expanded to total 12 stores as of October 31, Centro was first opened at Plaza Semanggi mall in Jakarta in November We believe the brand is not as strong as LPPF s Matahari brand, as the market share stood at 1.5% (vs. LPPF s 42.8%) as of However, we do notice that this could be a potential threat if Centro plans to open its stores outside Java (e.g. Sumatera, Sulawesi, and Kalimantan) given that LPPF s second-strongest SSSG in 2Q16 was outside Java (38.6%; Sumatera and Sulawesi recorded the highest SSSG at 42.2% and 53.2%, respectively). Currently, Centro only has one store located in Sumatera and another store in Kalimantan. Figure 13. LPPF s market share compared to competitors 160 Market share (RHS) #of stores (LHS) 45% % % 30% 25% 20% 60 15% 40 10% % % 10

11 Modern store regulations Ministry of Trade No. 70/2013 and 56/2014 Modern retail stores are defined as one-stop self-service stores which sell various goods in retail or wholesale market, for example: minimarket, supermarket, department stores, and hypermarket. The size of each type of modern retail stores: Minimarket Supermarket : <400m² : >400m² Department store : >400m² Hypermarket Wholesaler Table 2. Ministry of Trade No. 70/2013 and Ministry of Trade No. 56/2014 Items Maximum supporting goods sold: 10% Maximum private labels sold: 15% Requirement of minimum 80% of local product sales : >5,000m² : >5,000m² Remarks Modern retail stores can only sell supporting goods of max. 10% out of the total goods sold in the outlet. However, under certain circumstances, the Ministry of Trade can allow the supporting goods to be sold above 10%. Modern retail stores can only sell their private labels at max. 15% of the total stock keeping unit sold in modern retail stores, unless the company works with SME producers of the goods. Modern Stores and Shopping Center which are managed to conduct trading activities shall provide domestic production of at least 80% of the amount and type of goods traded. Ministry of Trade will give exemption of types of goods sold less than 80% for modern stores that have a standalone brand and stores which has a specialty stores, in terms of trading goods: - Need uniformity and sourced from one global supply chain - Has own brand which has been recognized in the world (premium product) and has not owned a basis of production in Indonesia - Originally comes from a certain country in order to meet Indonesian needs Requirement to operate a max. of 150 stores Ministry of Trade sets the maximum outlets that a company can open, which is 150 per company. If the company plans to build >150 outlets, it should form a partnership with a local SME, which can be in the form of: a) franchise, b) marketing partnership, c) space provision for SME in the stores, or d) supply partnership. If the company has already opened more than 150 stores prior to this regulation, it will still be allowed to operate the stores. Source: Ministry of Trade no 70/2013 and 56/2014, Daewoo Securities Research Impacts of the regulation on retailers under our coverage 1. Minimum sales requirement of 80% of local products We believe such regulation could impact Mitra Adiperkasa (MAPI IJ; Not rated) as the company will need to comply with the internal regulation of the department stores (Seibu, Debenhams, Galleries Lafayette) to source their products from overseas. Currently, MAPI is waiting for a room waiver in the regulation from the Ministry of Trade. 2. Requirement to operate a max. of 150 stores LPPF and MPPA are not subject to the applied regulation. As of 1H16, MPPA owns 112 Hypermart stores, 25 Foodmart fresh food stores, 106 Boston Stores, 52 FMX stores, and 2 SmartClub wholesale stores, while LPPF currently owns 146 Matahari stores. Thus, we believe the regulation would not impact MPPA or LPPF as they work with local SMEs that supply the products sold in their stores. Research 11

12 Franchise regulations Ministry of Trade 68/2012 Ministry of Trade has set up a regulation concerning franchise for modern store business type. According to the regulation of the Minister of Trade No. 68/2012, in franchise development for modern store business type, it is expected that the company go into partnerships with Small and Medium businesses as franchisees and increase the supply of domestically produced goods. Table 3. Ministry of Trade 68/2012 Items Requirement to provide domestically-produced merchandises at least 80% of total goods traded Maximum outlets/stores to open: 150 For F&B franchise stores Max outlets to open: 250 Source: Table 3. Ministry of Trade 68/2012, Daewoo Securities Research Remarks Franchisor and the Franchisee for Modern Store business type are required to provide domestically-produced merchandises at least 80% of the amount and type of goods are traded. In certain case, the Minister may give permit to supply domestically-produced goods less than 80% as intended in paragraph (1) after considering the recommendations of the Assessment Team. Franchisors and Franchisees for modern retail store can have outlets owned and managed by them (company owned outlets) for a maximum of 150 outlets. In case they want to set up more than 150 additional outlets/stores, the additional outlets/stores shall be franchised with local SMEs. Exemptions: 1. Franchisor and Franchisee have had 150 outlets/stores but does not get profit yet (financial statements must be audited by a Public Accountant) 2. Based on the assessment of the Assessment Team, the Franchisor that will add outlets/stores in an area does not get local business entity to become their Franchisee. F&B franchisors and franchisees can only establish company owned outlet for a maximum of 250 outlets. If they want to have more than 250 outlets, the additional stores must involve third parties in a form of franchise format and/or equity participation from third parties, subject to the following: a) For any investment with value less than or equal to IDR10,000,000,000 (ten billion Rupiah), the total value of equity injection from the third party must be at minimum of 40%. b) For any investment with value more than IDR10,000,000,000 (ten billion Rupiah), the total value of equity injection from the third party must be at minimum of 30%. For those who have more than 250 outlets prior to September 2014 can continue to operate and own their outlets. Impact of the regulation on retailers under our coverage 1. Maximum outlets is 250 for F&B The regulation would not impact Mitra Adiperkasa (MAPI IJ; Not rated) as it applies a license agreement contract (not a franchise) with Starbucks. Currently, MAPI owns 256 Starbucks stores (as of 9M16), and it plans to add 60 stores/annum. 12

13 Online is the new trend Online retailers engage in Business to Customer (abbreviated as B2C), Business to Business (abbreviated as B2B), Customer to Business (abbreviated as C2B) as well as Customer to Customer (abbreviated as C2C) platforms. B2C is the most popular form of online shopping because the platform is most suitable for companies to perform direct sales via the Internet. For instance, some of the largest B2C websites are and locally famous and The second most popular form is the C2C type of online business, which commonly uses the social media platform, such as etc. Both online platforms need to be trustworthy as customers usually complete the payment through bank transfers before the purchased items get delivered. Figure 14. Example of e-commerce retailer (C2C) Figure 15. Example of payment receipt from Source: Internet, Daewoo Securities Research Source: Internet, Daewoo Securities Research We believe the growing internet access amongst Indonesian consumers is also facilitated by the fast growing smartphone users since smartphones are becoming more affordable for consumers. Data from emarketer shows that Indonesia is the third largest smartphone using country in the Asia-Pacific region after China and India. Furthermore, it is also expected that the number of smartphone users in Indonesia will increase from 55mn users in 2015 to 92mn by 2019F. Figure 16. Indonesia is the third largest smartphone users Figure 17. The number of smartphone users is expected to grow by 14% CAGR ( F) Million People 800 China India Indonesia Japan South Korea Philippines Vietnam Million peole % CAGR ( F) F 2017F 2018F 2019F F 2017F 2018F 2019F Source: emarketer, Daewoo Securities Research Source: emarketer, Daewoo Securities Research Research 13

14 Moreover, we also think that online retailers have wider coverage across Indonesia, thanks to the growing logistics networks of existing players (Kaskus, Toko Bagus, Lazada, Tokopedia, etc.) as well as newcomers. We argue that measuring the size of online retail market is an elusive task. Our argument is premised on the fact that most transactions conducted through social media platforms are unrecorded. According to Statista, online sales only accounted for less than one percent of Indonesia s entire retail sales despite growing number of internet and smartphone users. Therefore, we conclude that Indonesia s e- commerce market is set to see resilient growth over the next decade. Figure 18. Indonesia s online retail sales Figure 19. Indonesia s total retail sales USDbn USDbn F 2017F 2018F F 2017 F 2018 F Source: Statista, Daewoo Securities Research Source: Economist Intelligence unit, Daewoo Securities Research We see that both manufacturers and retailers under our coverage are speeding up their entry into online retailing by joining the established platforms (in a form of third-party marketplace format, for instance: RALS on or establishing their own platforms (MAPI, MPPA and LPPF such as: and Although it could create a short term cannibalization towards their revenue, we think retailers are positioning themselves ahead of the curve to capture the growing e-commerce needs. 14

15 10/15 11/15 12/15 1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 10/16 October 30, 2016 Matahari Putra Prima (MPPA) Strong market penetration Trade (Initiate) Target Price (12M, IDR) Share Price (28/10/16, IDR) BUY 2,260 1,830 Expected Return 23% OP (16F, IDRbn) 378 Consensus OP 16F, IDRbn) 326 EPS Growth (17F, %) 96 Market EPS Growth (17F, %) 72 P/E (17F, x) 36 Market P/E (17F, x) 33 Market Cap (IDRbn) 9,841 Shares Outstanding (mn) 5,378 Free Float (%) 23.6 Foreign Ownership (%) 37.8 Beta (12M) Week High 2, Week Low 1,185 (%) 1M 6M 12M Absolute 5% 24% -18% Relative 2% 12% -40% (D-1yr=100) JCI MPPA First established in 1986, PT Matahari Putra Prima (MPPA) has divested parts of its non-core assets (department stores and entertainment businesses) by the end of 2012, which in turn has made MPPA a more focused retailer now. MPPA s largest revenue contributor is Hypermart, contributing 78.1% of MPPA s total revenue as of 1H16. Given Hypermart is the main engine of MPPA s business, we believe the company will continue to expand to capture growing consumer needs by remodeling its existing stores, providing up-to-date shopping experience and presenting wide selection of quality household products. Rapid expansion across Indonesia Despite the fact that more than 40% of Indonesian population live outside of Java, most modern retailers are still hesitant to spread their businesses outside the main island due to the poor infrastructure situation. This provides competitive advantage for MPPA which has well-established extensive distribution network. Being the market leader of modern retailers, MPPA has developed extensive networks which enable the company to reach customers across the archipelago at a reasonable cost. That being said, we believe the company to be better positioned compared to its main competitors. The king of hypermarket; Initiate with a Buy We initiate our coverage on MPPA with a Buy rating and present a target price of IDR2,260/share, which was derived using a Discounted Cash Flow (DCF) method with 10-year time span. Our WACC assumption of 11.2% is derived from our estimates on risk free rate (Rf) of 7%, market risk premium (MRP) of 5%, a terminal growth rate of 5%, and equity beta of 1x. We believe the reduction in the cost of capital tracks the decline in Indonesia s bond yields, which in turn supports our DCF target price. We draw investors attention to MPPA on the back of its: 1) market leadership in the hypermarket segment, 2) lower working capital as the company has reduced its inventory stocks by reducing the number of unprofitable SKUs, 3) ability to tap into the markets outside Java, where there is less competition, and 4) diversified business as it is now capturing all grocery retailer markets (traditional and modern). Currently, MPPA is trading at 35x forward PE, still lower than its 3 year average PE of 41x F 2017F 2018F Revenue (Rp bn) 13,590 13,929 14,976 16,813 19,421 Gross Profit 2,354 2,356 2,571 3,064 3,458 Operating Profit Net profit EPS (Rp/share) BVPS P/E ratio (x) ROE 18.1% 6.5% 5.0% 9.3% 10.6% Note: All figures are based on consolidated FS; NP refers to net profit attributable to controlling interests Source: Company data, Daewoo Research estimates Research 15

16 Matahari Putra Prima Figure 20. MPPA s business structure (after 2014) Company background First established in 1986, PT Matahari Putra Prima (MPPA) has divested some of its non-core assets (department stores and entertainment businesses) at the end of 2012, which in turn has made MPPA a more focused retailer now. Since then, the company has been able to strengthen its position as Indonesia s number one modern multi-format retailer which owns hypermarkets, convenience stores, online stores, as well as wholesale supermarkets. Since 2014, MPPA has begun to remodel its existing stores into Hypermart G7 concept. In addition, MPPA has also opened a wholesale market, namely, SmartClub in 2015 (currently contributing c.15% to total revenue) in order to cater to the 60% traditional buyers, whose demand is seemingly large. Therefore, we believe MPPA s target market has now expanded to restaurants, hotel, as well as small stalls (warung) and wet markets (pasar tradisional). Figure 21. MPPA s business structure before

17 MPPA s total outletes outnumber its competitors MPPA boasts the largest market share in terms of hypermarket. The company s total number of Hypermart outlets (112 stores) outnumbers its competitors, such as Carrefour (83 stores), Giant Extra (55 stores), and Lottemart (14 stores). Other than the hypermarket, MPPA has other types of modern retail stores, such as supermarket (Foodmart) and wholesale retail store (SmartClub). As of 1H16, MPPA has an average gross area of 724,603m², with total stores of 297 (including Hypermart, Foodmart, Boston, and SmartClub). Figure 22. Hypermart s vs. peers number of stores (as of 1H16) Figure 23. Map of store locations throughout Indonesia Hypermart (MPPA IJ) Carrefour Giant Extra (HERO IJ) Lottemart Hypermarket Source: Internet, Wikipedia, Company data, Daewoo Securities Research Research 17

18 Figure 24. Revenue contribution as of FY15 Hypermart MPPA s largest revenue contributor is Hypermart, contributing 78.1% of MPPA s total revenue as of 1H16. Given Hypermart is the main engine of MPPA s business, we believe the company will continue to expand to capture growing consumer needs by remodeling its existing stores, providing up-to-date shopping experience and presenting wide selection of quality household products. In 2015, Hypermart has successfully opened 7 new stores and remodeled 8 existing stores into the latest G7 concept. We believe the company s strategies have demonstrated its commitment to roll out the G7 concept, which was primarily launched in late % 5.50% 0.50% 15.90% The new format features an improved store design which originally came from customer shopping experience. We believe the new format will prove that MPPA has competitive advantage over its competitors in delivering the Fast Moving Consumer Goods (FMCG) segment in Indonesia s modern retail sector. As of 1H16, Hypermart has total 112 stores, with average store size of 6,019sqm. MPPA plans to open six new Hypermart stores in 2016, and out of the total six, three have opened in 1H16. We conservatively expect another six G7 format of Hypermart to open next year following the recovery of inventory days and better SSSG. Figure 25. G7 format of Hypermart Figure 26. Hypermart 18

19 Foodmart Started in 1990, Foodmart offers its customers with a wide range of product varieties, consisting of fresh groceries, pharmacy products, perishables, and readyto-eat products. Currently, Foodmart is comprised of Foodmart Primo, Foodmart Fresh and fmx (Foodmart express). In 2015, MPPA further strengthened its Foodmart brand by rebranding Foodmart Gourment into Foodmart Primo. The new brand concept targets upper-middle segment with focus on quality, fresh, and premium product offerings. Foodmart Primo is a professionally designed supermarket format with improvements related to store layout and ambience as well as high quality and imported product selections with a large ready to eat section feature, boutique bakery cafe, imported products, and wine station. The store also offers a wide range of both local and imported fruits and vegetables as well as a good selection of beef, poultry, seafood, and delicatessen. Figure 27. Foodmart Primo Figure 28. Foodmart Primo In 2016, MPPA rebranded its regular Foodmart supermarkets to Foodmart Fresh. The new concept of Foodmart Fresh will focus on the quality and freshness of the food products. Additional features at Foodmart Fresh will be meat and seafood counters and an in-house bakery, all of which add up to a complete shopping experience for customers. The interior has a pleasant green-toned touch offering a feel of freshness in a bright new ambience. Figure 29. Foodmart Fresh Figure 30. Foodmart Fresh Research 19

20 Last but not least, MPPA has been rebranding some of its Foodmart express stores into FMX Foodmart Xpress since We think the concept has added the modern convenience store touch, in terms of lighting, graphics, and store layout given that it looks cleaner, tidier, and more appealing. FMX targets middle-income consumers by selling top-quality products which are available close to home or work places. On the other hand, the previous store (Foodmart Express) layout looks denser with vendible goods put in adjacent. Our recent visit to one of Foodmart Express stores (has not yet rebranded) located in Pasar Baru shows us that the store format is very compact with many products offered, such as fresh fruits, ready-to-drink products, over-the-counter vitamins, candies, ready-to-eat foods, etc. We believe the new concept would be able to attract more customers and improve its revenue. We also believe that in the longer term, MPPA would establish more FMX stores instead as opening new hypermarket as the latter requires bigger land (and land clearing process is not a simple task). Figure 31. Foodmart Express at Pasar Baru Figure 32. Foodmart Express at Pasar Baru Figure 33. Foodmart Express at Pasar Baru Figure 34. Foodmart Express at Pasar Baru 20

21 SmartClub SmartClub has the concept of one-stop shopping, where all business customers needs can be met in one place for greater efficiency. All of the products offered are displayed in both single and bulk quantities to serve business owners needs. Small business owners will receive a SmartClub membership card, making them eligible for discounts and other loyalty incentives. For the first time in MPPA, tiered pricing is available for the SmartClub shoppers. Tiered pricing means: If customers buy in retail, the price would be similar with Hypermart. If customers buy in boxes, the price would be slightly cheaper. If customers buy in a form of palettes, the price would be lower (B2B price). We believe that MPPA s plan to add two more SmartClub in 2017 is achievable. Furthermore, we expect the gross margin of SmartClub to be lower than that of Hypermart given the lower ASPs of SmartClub as customers buy in bulk quantities from the store. However, in terms of the EBITDA margin, it will be roughly the same due to SmartClub s lower operating expense. Figure 35. SmartClub (Trader wholesale) Figure 36. SmartClub (Trader wholesale) Boston Boston Health & Beauty ( Boston ) is MPPA s modern specialty format focusing on health and beauty. Currently, Boston is operating three formats in Indonesia: Boston Health, Boston Regular, and Boston Combo. Boston stores provide health, wellness, and beauty solutions for consumers, as well as a wide range of over-thecounter health care products, home health equipment, and beauty products. Research 21

22 Figure 37. Boston store Figure 38. Boston store Shareholders of MPPA In January 2013, PT Multipolar Tbk (MLPL; Not-rated), MPPA s major shareholder (MPPA ownership: 50.2%), through its wholly owned subsidiary, i.e. Prime Star Investment Pte Ltd, issued exchangeable rights (ER) with a total value of USD300mn, which was fully subscribed by Anderson Investments Pte. Ltd. (a subsidiary of Temasek Holding Pte. Ltd.). The ERs are exchangeable in full and are not part of the existing 26.1% of the outstanding shares of MPPA. Figure 39. MPPA s shareholding structure 22

23 Competitive advantages Rapid expansion across Indonesia Despite the fact that more than 40% of Indonesia population live outside of Java, most modern retailers are still hesitant to spread their businesses outside the main island due to the poor infrastructure situation. This provides competitive advantage for MPPA which has well-established extensive distribution network. Being the market leader of modern retailers, MPPA has developed extensive networks which enable the company to reach customers across Indonesia at a reasonable cost. That being said, we believe the company to be better positioned compared to its main competitors. MPPA has been able to expand outside Java as the company currently owns three centralized distribution centers (DC) which are located in Balaraja, Surabaya, and Cibitung. Recently, Cibitung s distribution center has just been expanded to 8,085m² from 4,000m² in The distribution centers consist of two types of DCs, such as dry goods and fresh goods. The dry goods DCs are located in Balaraja (serving mostly the Western part of Indonesia) and Surabaya (serving mostly the Eastern part of Indonesia) - see Figure 41, while the fresh goods distribution center is located in Cibitung (Bekasi district). Around 60% of MPPA s goods are sourced from DCs, while the remaining 40% are locally sourced (vendors distribute the products to MPPA s stores). As of 2015, MPPA s DC throughput as % of sales has reached 61% of the total sales; the figure has grown from 42% nearly 10 years ago. Figure 40. MPPA s distribution centers Figure 41. Cibitung s distribution center (m²) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000-8, H16 As of 1H16, nearly 50% of all MPPA s stores are located outside Java, whereas its competitors, such as Carrefour and Giant, only have c.20% and c.24% of their stores, respectively. We believe that MPPA s penetration outside Java holds stronger footholds than its peers as it is well driven by efficient logistics platform and distribution centers. In addition, as MPPA net logistic cost is lower than the vendors (given that MPPA sends goods in bulk), we think that MPPA s margin is set to expand as they would increase their DCs throughput as % of sales to 65% in 2-3 years. Therefore, we expect operating profit margin to increase gradually to 2.9% in 2018F from 1.9% in 2015 on the back of larger number of goods transported from MPPA s DCs, which should lower MPPA s logistic costs (sending goods in bulk lowers per unit net cost of logistics). Furthermore, given that stores outside Java generate higher margins (see Figure 42), we think MPPA plans to penetrate into top 120 cities in Indonesia, as well as cities which are still underpenetrated. We believe MPPA s DCs will enable the company to expand rapidly in order to maintain its position as the market leader. Research 23

24 Figure 42. EBITDA margin per region (as of 1H16) Figure 43. Operating margin trend EBITDA Margin (1H16) IDRbn 800 Operating profit Operating margin 6% % 5.2% 5% 2.8% 3.9% 2.3% 2.2% 1.9% Greater Jakarta Java Sumatera Kalimantan Sulawesi East Indonesia % 2.0% 2.6% 2.9% 4% 3% 2% 3.0% 100 1% F 2017 F 2018 F 0% Figure 44. Locations of Carrefour s stores Figure 45. Locations of Giant s stores Source: Internet, Company data, Wikipedia, Daewoo Securities Research Source: Internet, Company data, Wikipedia, Daewoo Securities Research 24

25 Figure 46. Distribution centers throughput Figure 47. MPPA s total number of stores as of 1H16 (excluding two SmartClubs) (IDRbn) DC Throuput (IDRbn) As % of sales Number of stores 10,000 9,000 8,000 8,875 61% 65% 60% Total number of stores outside Java Total number of stores in Java 7,000 6,000 55% 5,000 50% 4,000 3,000 42% 45% ,000 1,000 1,859 40% % Figure 48. Number of Hypermart s stores Figure 49. Distribution centers in Balaraja, Cibitung & Surabaya Number of stores Hypermart (outside java) Hypermart (Java) Figure 50. Number of Boston s stores Number of stores Boston (Outside Java) Boston (Java) Figure 51. Number of Foodmart Express, Primo s and Fresh s stores Number of stores Foodmart (Outside Java) Foodmart (Java) Research 25

26 Capturing the traditional market into the business Although hypermarkets, supermarkets, and convenience stores are growing at a rapid pace (i.e., growth pace of 13%, 12%, and 23% CAGR respectively in F), Indonesia s grocery retailers are still dominated by traditional traders (accounting for more than 80% of the total grocery retails; according to Euromonitor). Figure 52. Traditional trade still dominates Figure 53. Penetration of traditional trade: Indonesia in third place 120% 100% 80% 60% 40% 20% 0% Source: Euromonitor, Daewoo Securities Research Source: Euromonitor, Daewoo Securities Research In order to cater the 80% traditional traders, which embeds huge consumer demand, MPPA is venturing into the wholesale industry, with SmartClub (currently SmartClub contributes c.15% to total revenue in 1H16). SmartClub s average sales/sqm stands at 2x~ 2.5x higher than Hypermart s sales per sqm of IDR19mn/sqm. We expect gross margin of SmartClub to be lower than that of Hypermart given that ASPs of SmartClub will be lower as customers make bulk purchases. However, EBITDA margin will be roughly the same as SmartClub s operating expenses are lower. Although the contribution seems small, we believe SmartClub s growth will accelerate in the future as the target market expands, such as restaurants, hotels, as well as small stalls (warung) and wet markets (pasar tradisional). Expecting better inventory management In 2015, high cost of inventory was one of the problems for MPPA, given that 1) during the renovation of some of their Hypermart stores, the inventory shrinkage was higher due to some goods being damaged and thrown away, 2) in 2015, MPPA planned to open 13~ 15 new stores, but it turned out that the developers could only deliver 7~ 8 new stores, which resulted in the pre-inventory stocks being outdated. The company s gross margin dropped by 180bps from 17.8% in 1Q15 to 16% in 4Q15. Yet, we believe headwinds in the form of inventory problems are over, given MPPA monitor all current inventories and would not repeat its past mistake of keeping large inventory stocks in renovated stores. Indeed, MPPA s gross margin expanded by 395bps from 14.1% in 1Q16 to 18% in 2Q16, thanks to the better inventory management. According to our calculation, inventory days have dropped to 89 days in 2Q16 from its peak of 104 days in 3Q15. 26

27 Figure 54. Gross profit and gross margin (quarterly) Figure 55. Average days of inventory IDR bn Gross profit (L) Gross profit margin (R) % 17% % 16% % 18% 20% 18% 16% 14% Average days of inventories % % 300 8% % 4% % - 3M15 6M15 9M15 12M15 3M16 6M16 0% 80 2Q15 3Q15 4Q15 1Q16 2Q16 Profitable SKUs are monitored thoroughly We also expect MPPA s performance to turn to profit in 9M16 following the changes in inventory recognition method starting from 1H16 (MPPA has converted their retail accounting method to cost accounting method). The new method enabled the company to recognize stock keeping units (SKUs/individual items) which are profitable/ unprofitable as the inventory per SKU has been segmented (vs. the cost method). Thus, after certain monitoring period, MPPA has discontinued a number of unprofitable SKUs. Year-to-date, MPPA has been able to reduce the number of SKUs from 140,000 to 40,000. We consider current SKUs to be more manageable, as we believe the products are more salable and have higher margins as well as higher turnover ratio. We are expecting better inventory management, which should translate into lower working capital. We expect the inventory days to drop to 80 days in 2017F and gross margin to expand to 18% in 2017F. Figure 56. MPPA s gross margin Figure 57. MPPA s inventory days 3,500 Gross profit Gross margin (%) 19% 90 Inventory Turnover (RHS) Average days of inventories (LHS) 5 3,000 2,500 2,000 17% 17% 17% 18% 18% 18% 17% % 1,500 1,000 16% 16% 16% % F 2017 F 15% F 2017 F 4 Research 27

28 Valuations We initiate our coverage on MPPA with a buy rating and a target price of IDR2,260/share, which was derived by using a Discounted Cash Flow (DCF) method with 10-year time span. Our WACC assumption of 11.2% is derived from our estimates on risk free rate (Rf) of 7%, market risk premium (MRP) of 5%, a terminal growth rate of 5%, and equity beta of 1x. We believe the reduction in the cost of capital tracks the decline in Indonesia s bond yields, which in turn supports our DCF target price. We draw investors attention to MPPA on the back of its: 1) market leadership in the hypermarket segment, 2) lower working capital as the company has reduced its inventory stocks by reducing the number of unprofitable SKUs, 3) ability to tap into the markets outside Java, where there is less competition, and 4) diversified business as it is now capturing all grocery retailer markets (traditional and modern). Currently, MPPA is trading at 35x forward PE, still lower than its 3 year average PE of 41x. Table 4. DFC assumption table Item Details Cost of Equity 12% Risk free rate 7.0% Beta 1.00 Equity risk premium 5% WACC 11.2% Terminal growth rate 5% After tax Cost of Debt 7.72% Total PV of FCF 4,422 PV of TV 7,421 Total PV of FCF and TV 11,843 Cash Debt Equity value (in bn) 12,171 Equity value/share 2,263 Figure 58. MPPA Forward P/E Band ( x ) Std Dev Std Dev Avg PER 28-1 Std Dev 18 8 Jan-13 Jan-14 Jan-15 Jan-16 28

29 Matahari Putra Prima (MPPA IJ/ Buy/ TP: IDR2,260) Table 5. Forecast and valuations F 2017F Revenue (IDRbn) 13,590 13,929 14,976 16,813 EBITDA (IDRbn) Net profit (IDRbn) EPS (IDR/share) DPS (IDR/share) ROE (%) 18.1% 6.5% 5.0% 9.3% Dividend yield (%) 10.2% 2.0% 0.7% 0.5% P/E ratio (x) P/BV ratio (x) EV/EBITDA (x) Table 6. Income Statement projection IDRbn F 2017F Revenue 13,590 13,929 14,976 16,813 COGS 11,236 11,572 12,405 13,749 Gross Profit 2,354 2,356 2,571 3,064 Opex (1,708) (2,074) (2,387) (2,686) Operating Profit Other income/(expenses) 84 (49) (1) (19) Profit before income tax Income tax expenses (177) (50) (42) (82) Minority interest Net profit EBITDA Research 29

30 Table 7. Balance sheet projection IDR bn F 2017F Assets Cash and equivalents Receivables Inventories 2,655 2,759 2,889 3,014 Others Total current assets 3,904 3,971 4,305 4,734 Fixed assets - net 1,273 1,462 1,666 1,803 Prepaid rent-net Others Total non-current assets 1,930 2,323 2,564 2,774 Total assets 5,834 6,294 6,870 7,508 Liabilities and equity Short-term bank loans and current maturities Accounts payables 1,893 1,763 2,235 2,478 Others current liabilities Total current liabilities 2,752 2,815 3,311 3,704 Long term debt Others Total non-current liabilities Total liabilities 3,006 3,519 4,018 4,428 Minority interests Shareholders' equity 2,828 2,776 2,852 3,080 30

31 Table 8. Cash flow statement projection IDRbn F 2017F CF from operation Net profit Depreciation/amortization Change in working capitals (183) (830) Others CF from operation 593 (413) CF from Investments Net capex (407) (422) (567) (570) Others CF from investments (407) (422) (567) (570) CF from financing activity Increase/(decrease) in debt (188) Increase/(decrease) in equity Dividend payments (1,000) (194) (64) (49) Others CF from financing activity (741) 497 (41) 8 Net changes in cash (555) (339) Table 9. Key Ratio F 2017F Growth (%) Revenue 14% 2% 8% 12% EBITDA 23% -41% 0% 42% Net profit 25% -67% -23% 97% Profitability (%) Gross margin 17% 17% 17% 18% Operating margin 5% 2% 1% 2% EBITDA margin 7% 4% 4% 5% Net margin 4% 1% 1% 2% ROE 18% 7% 5% 9% ROA 9% 3% 2% 4% Leverage (X) Current ratio Quick ratio Debt to equity Net debt to equity (0.3) 0.1 (0.0) (0.1) Interest coverage Research 31

32 10/15 11/15 12/15 1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 10/16 October 30, 2016 Matahari Department Store (LPPF) Value play Trade (Initiate) Target Price (12M, IDR) Trading Buy 19,950 Share Price (28/10/16, IDR) 18,100 Expected Return 10.2% OP (16F, IDRbn) 3,083 Consensus OP 16F, IDRbn) 3,190 EPS Growth (17F, %) 21.3% Market EPS Growth (17F, %) 23.8% P/E (17F, x) 22 Market P/E (17F, x) 19 Market Cap (IDRbn) 52,814 Shares Outstanding (mn) 2,918 Free Float (%) 79.5 Foreign Ownership (%) 65.2 Beta (12M) Week High 22, Week Low 14,500 (%) 1M 6M 12M Absolute -9% -5% 9% Relative -13% -17% -12% (D-1yr=100) JCI LPPF PT Matahari Department Store Tbk (LPPF) is Indonesia s leading fashion retailer of affordable fashion, accessories, as well as beauty and homeware products, targeting Indonesia s middle-income households. LPPF delivers compelling proposition of stylish merchandises and exceptional shopping experience by partnering with both trusted local and international suppliers to offer an incomparable assortment of fashion brands. Highest market share compared to similar peers, and still growing LPPF is currently operating 142 stores in 66 cities across Indonesia, with total retail space of 932,416m². We believe the demand for LPPF products hinges on the disposable income trend, which is aligned with Indonesia s economic growth. Despite recent economic turmoil, LPPF was still able to maintain its stellar market share performance. According to Euromonitor, since 2008 through 2015, LPPF has grown its market share from 26.4% in 2008 to 42.8% in 2015, the highest compared to its peers, such as Ramayana (RALS IJ) of 14.6%, Mitra Adi Perkasa (MAPI IJ; Not rated) of 6.5%, Metro (not listed) of 4.8%, and Centro (not listed) of 4.6%. Larger dividend payout potential The company s healthy balance sheet (i.e., net cash of IDR1.8tr as of 1H16 vs. IDR946bn as of FY15) should enable LPPF to increase its dividend payout ratio to 70% (vs. 60% in 2015). Going forward, we believe LPPF will increase its payout ratio to maintain its ROE (135% in 2016F), since it has a large free cash flow (>IDR 2tr) as well as large equity base. Initiate with a Trading Buy call (TP: IDR 19,950/share) We initiate our coverage on LPPF with a trading buy rating and a target price of IDR19,950/share, which was derived using a blended method of target P/E multiple of 27x (at +1 standard deviation) and DCF with 10 year life span. Our WACC assumption of 12% is derived by the following assumptions: risk free (Rf) rate of 7%, market risk premium (MRP) of 5%, terminal growth rate of 5%, and equity beta of 1x. LPPF is currently trading near -1std deviation at 22x forward P/E, 13% premium to RALS which is trading at 19.5x. We like LPPF given that the company is projected to register higher dividend yield (due to higher payout ratio), strong SSSG (see figure 61), as well as margin expansion supported by its strong performance of DP sales F 2017 F 2018 F Revenue (Rp bn) 7,926 9,007 10,211 11,439 12,718 Gross Profit 5,048 5,671 6,410 7,167 7,959 Operating Profit 2,084 2,338 2,813 3,083 3,453 Net profit 1,419 1,781 2,161 2,391 2,690 EPS (Rp/share) EV/EBITDA P/E ratio (x) ROE 891% 161% 107% 89% 84% Note: All figures are based on consolidated FS; NP refers to net profit attributable to controlling interests Source: Company data, Daewoo Research estimates 32

33 Matahari Department Store Company Background PT Matahari Department Store Tbk (LPPF) is Indonesia s leading fashion retailer of affordable fashion, accessories, as well as beauty and homeware products, targeted at middle-income consumers. LPPF delivers compelling proposition of stylish merchandises and an exceptional shopping experience by partnering with both trusted local and international suppliers and offers incomparable assortment of fashion brands. Figure 59. Company s shareholding structure (as of 1H16) Cyport Limited 100% Grandhill Asia Limited Public 26.97% 5.05% 67.98% PT Multipolar Tbk 17% Asia Color Company Ltd Public 2% 81% PT Matahari Department Store Tbk 10% PT Global Ecommerce Indonesia Source: Company data, Daewoo Securities Indonesia Research 33

34 Competitive advantage Highest market share compared to similar peers, and still growing LPPF is currently operating 142 stores in 66 cities across Indonesia, with total retail space of 932,416m². We believe the demand for LPPF products hinges on the disposable income trend, which is aligned with Indonesia s economic growth. We see that despite recent economic turmoil, LPPF was still able to maintain its stellar market share performance. According to Euromonitor, since 2008 through 2015, LPPF has grown its market share from 26.4% in 2008 to 42.8% in 2015, the highest compared to its peers, such as Ramayana (RALS IJ) of 14.6%, Mitra Adi Perkasa (MAPI IJ; Not rated) of 6.5%, Metro (not listed) of 4.8%, and Centro (not listed) of 4.6%. Figure 60. Market share and number of stores Figure 61. LPPF s market share ( ) 160 Market share (RHS) 45.0% 45% #of stores (LHS) 40.0% 43% % 40% 38% 30.0% % % 35% 35% 20.0% 33% % 30% 30% 31% % % 25% 26% % 20% Strong SSSG supports market share expansion In 2Q16, LPPF posted a net profit growth of 275% QoQ to IDR913bn (or cumulatively IDR1.1tn in 1H16), largely supported by revenue growth of 78% QoQ to IDR3.3tr in 2Q16 or IDR5.1tr cumulatively. We believe that the stellar revenue achievement came from strong 2Q16 performance which was largely due to the improving economy as evidenced by the strong achievement of same-store-salesgrowth (SSSG) of 40% in 2Q16 (vs. 1Q16 of 9.4% and IH15 of 12.2%). Figure 62. Quarterly SSSG 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16-5% 34

35 The largest contribution of its outstanding SSSG came from Java (excluding greater Jakarta), which delivered 43.1% growth, followed by outside Java, which booked 38.6% growth (Sumatera and Sulawesi recorded the highest SSSG at 42.2% and 53.2%, respectively), and lastly, Greater Jakarta booked SSSG of 38%. Furthermore, the shifting of Ramadan (Idul Fitri holiday) into 2Q16 also supported the strong revenue although the effect is not that significant as the company saw SSSR of 7.5% during this year s Ramadan compared to 6.5% growth posted during last year s Ramadan. The strong SSSG print in 2Q was driven by strong volume growth at 29.4% YoY with an average selling price increase of 8.2%. Nonetheless, we think the overall euphoria of the extraordinary SSSG will likely be subdued in 3Q16 on the back of high base effect (Ramadan occurred in 3Q15). Since LPPF management has conservatively guided the SSSG for the rest of the year at 7~ 7.5%, as well as an 18~ 20% decline of SSSG in 3Q16, we expect share price to remain stable until another catalyst kicks in. Improving gross margin which was supported by higher DP margin LPPF posted consolidated gross profit margin of 36.8% in 2Q16, which increased by 140bps compared to 1Q16 or 500bps higher compared to 2Q15. The company s margins have continued to improve on the back of strong margins from direct purchase (DP) goods (GPM was 45% in 2Q16 vs. 42% in 1Q16) which have performed well in 2Q16 and increased contribution from direct purchase to revenue (DP contributed around 37.6% to total revenue in 2Q16 vs. 36.7% in 1Q16). We believe that consumer demand for LPPF products remain high, given that its average retail price increases have been controlled over the last couple of years, suggesting higher volume demand. In 2Q16, volume contributed 29.4%, whereas price adjustment contributed 8.2% to the overall SSSG. However, we believe sales could still grow from price increase, given that in 2Q16, management was able to mix children s tops and bottoms as one set, which has supported the company s push for higher selling price. In addition, we believe prudent inventory management - which led to the decrease in inventory days from 118 days in 1Q16 to 109 days in 2Q16 - has led to higher DP gross profit margin. Figure 63. Gross margin each segment vs. consolidated (%) Figure 64. Contribution (%) to total revenue 50% Gross profit margin (consolidated) Direct purchase gross margin Consignment gross margin 100.0% 90.0% Consignment vendors Direct purchase 45% 80.0% 40% 70.0% 60.0% 65.8% 64.8% 67.0% 66.4% 64.9% 63.0% 65.7% 63.6% 63.3% 62.4% 35% 50.0% 40.0% 30% 30.0% 25% 20.0% 10.0% 34.2% 35.2% 33.0% 33.6% 35.1% 37.0% 34.3% 36.4% 36.7% 37.6% 0.0% 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Research 35

36 Strong demand for private label brands In 2015, 80% of DP sales were generated from LPPF s local exclusive private brands, including Nevada, Cole, Little M, and Connexion. According to MarkPlus Insight Consumer Survey in 2012, Nevada is the leading affordable fashionable clothing brand in Indonesia (ahead of all international brands), whereas Cole, Little M, and Connexion were all on the top ten list. These private brands are available only at LPPF stores, which we believe differentiates the company from the competition given that it reinforces the image of LPPF as the premier shopping destination for middle-income consumers. In addition, LPPF owns couple of private labels; namely, American Jeans and Surf the Earth, which serve as a bridge between the cheaper private labels and the higher price labels, such as Levi s. Thus, we believe LPPF has captured most of Indonesian middle-income class needs. Figure 65. % of total DP sales for FY % 28% 9% Nevada Cole St.Yves Little M Connexion Others 6% 6% 6% Aggressive expansion to boost revenue As of 1H16, LPPF has managed to successfully open 4 new stores (adding to a total of 146 stores now) across Greater Jakarta, Java and outside Java. LPPF plans to open additional 2~ 4 stores in 2H16 (two of the stores will be opened in Greater Jakarta) and another 6~ 8 stores in 2017F. We expect 8 stores would be opened in 2016F and 8 more in 2017F. Since LPPF has no major direct competitor (the apple-to-apple competitor is Centro (not listed)), the new store openings should boost its revenue once private consumption increases along with the improvement of the broader economy. In our view, LPPF would remain the fashion retailer with the largest market share. 36

37 Figure 66. LPPF s first store in Pasar Baru Figure 67. LPPF s first store in Pasar Baru Larger dividend payout potential Given the company s healthy balance sheet (i.e., net cash of IDR1.8tr as of 1H16 vs. IDR946bn as of FY15) should enable the company to increase its dividend payout ratio of 70% (vs. 60% in 2015). Going forward, we believe LPPF will increase its payout ratio to maintain its ROE (135% in 2016F), since it has a large free cash flow (>IDR 2tr) as well as large equity base. Figure 68. Dividend yield as of October 28 h 2016 Figure 69. Dividend and payout trend Dividend per share (LHS) Dividend yield (RHS) 5% 4% 4% (IDRbn) 2,500 2,000 Dividend (LHS) Dividend payout ratio (RHS) 100% 90% 80% 500 3% 70% 400 3% 2% 1,500 60% 50% % 1% 1% 1, % 30% 20% 10% F 2017 F 2018 F 0% F 2017 F 2018 F 0% Research 37

38 Matahari Department Store (Valuations) We initiate our coverage on LPPF with a trading buy rating and a target price of IDR19,950/share, which was derived using a blended method of target P/E multiple of 27x (at +1 standard deviation) and DCF with 10 year life span. Our WACC assumption of 12% is derived by the following assumptions: risk free (Rf) rate of 7%, market risk premium (MRP) of 5%, terminal growth rate of 5%, and equity beta of 1x. LPPF is currently trading near -1std deviation at 22x forward P/E, 13% premium to RALS which is trading at 19.5x. We like LPPF given that the company is projected to register higher dividend yield (due to higher payout ratio), strong SSSG (see figure 62), as well as margin expansion supported by its strong performance of DP sales. Figure 70. LPPF Forward P/E Band ( x ) Std Dev +1 Std Dev Avg PER -1 Std Dev -2 Std Dev Mar-13 Mar-14 Mar-15 Mar-16 38

39 Matahari Department store (LPPF IJ/ Trading Buy/ TP: IDR19,950) Table 10. Forecast and valuations F 2017F Revenue (IDRbn) 7,926 9,007 10,211 11,439 EBITDA (IDRbn) 2,290 2,572 3,108 3,424 Net profit (IDRbn) 1,419 1,781 2,161 2,391 EPS (IDR/share) DPS (IDR/share) (158) (292) (427) (592) ROE (%) -456% 281% 138% 102% Dividend yield (%) 1% 2% 2% 3% P/E ratio (x) P/BV ratio (x) EV/EBITDA (x) Table 11. Income statement projection IDRbn F 2017F Revenue 7,926 9,007 10,211 11,439 Broadcasting expenses (2,878) (3,336) (3,802) (4,272) Gross Profit 5,048 5,671 6,410 7,167 Opex 2,937 3,342 3,631 4,118 Operating Profit 2,084 2,338 2,813 3,083 Other income/(expenses) (27) Profit before income tax 1,851 2,245 2,844 3,147 Income tax expenses (431) (464) (682) (755) Minority interest Net profit 1,419 1,781 2,161 2,391 EBITDA 2,290 2,572 3,108 3,424 Research 39

40 Table 12. Balance sheet projection IDR bn F 2017F Assets Cash and equivalents ,937 2,646 Receivables Inventories 955 1,008 1,205 1,322 Others Total current assets 2,118 2,273 3,563 4,431 Fixed assets - net ,031 Long term investments Others Total non-current assets 1,295 1,616 1,666 1,847 Total Assets 3,413 3,889 5,229 6,278 Liabilities and equity ST bank loans & current maturities Trade payables 1,411 1,552 1,768 1,987 Others current liabilities ,036 1,163 Total current liabilities 2,519 2,439 2,804 3,150 Long term debt Others Total non-current liabilities Total liabilities 3,254 2,783 3,208 3,595 Minority interests Shareholders' equity 159 1,106 2,020 2,683 40

41 Table 13. Cash flow statement projection IDRbn F 2017F CF from operation Net profit 1,419 1,781 2,161 2,391 Depreciation/amortization Change in working capitals (64) Others 42 (100) 61 (20) CF from operation 1,604 2,069 2,587 2,879 CF from Investments Net capex (205) (385) (350) (441) Others CF from investments (205) (385) (350) (441) CF from financing activity Increase/(decrease) in debt (907) (689) - - Increase/(decrease) in equity Dividend payments ,247 1,729 Others (907) (689) - - CF from financing activity (1,353) (527) 1,247 1,729 Net changes in cash Table 14. Key Ratio F 2017F Growth (%) Revenue 17% 14% 13% 12% EBITDA 14% 12% 0% 0% Net profit 23% 25% 21% 11% Profitability (%) Gross margin 35% 35% 36% 37% Operating margin 14% 15% 16% 16% EBITDA margin 16% 16% 17% 17% Net margin 10% 11% 12% 12% ROE -456% 281% 138% 102% ROA 45% 49% 47% 42% Leverage (X) Current ratio Quick ratio Debt to equity Net debt to equity (0.6) (0.9) (1.0) (1.0) Research 41

42 10/15 11/15 12/15 1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 10/16 October 30, 2016 Ramayana Lestari Sentosa (RALS) Undergoing a metamorphosis Trade (Initiate) Target Price (12M, IDR) Share Price (28/10/16, IDR) Trading Buy 1,450 1,300 Expected Return 11.5% OP (16F, IDRbn) 355 Consensus OP 16F, IDRbn) 335 EPS Growth (17F, %) 19.6% Market EPS Growth (17F, %) 16.4% P/E (17F, x) 19.4 Market P/E (17F, x) 20.2 Market Cap (IDRbn) 9,224 Shares Outstanding (mn) 7,096 Free Float (%) 40.45% Foreign Ownership (%) 18.53% Beta (12M) Week Low Week High 1,375 (%) 1M 6M 12M Absolute -9% -5% 9% Relative -13% -17% -12% PT Ramayana Lestari Sentosa (RALS) was first established in 1978 by Mr. Paulus Tumewu and his wife, Mrs. Tan Lee Chuan. RALS went public on December 14th, The company sells clothes and accessories for men, women and children, as well as selling other retailers goods, such as shoes, toys, and stationery targeted at middle- to- lower income households. RALS started to open a supermarket inside the Ramayana department store back in Currently, there are 17 supermarkets that have been transformed into SPAR (RALS targets to transform 25 stores/ year). The transformation of RALS supermarkets into SPAR would turn the segment into profit, in our view. However, we don t expect an imminent turnaround for at least a couple of years, given RALS has more than hundreds of supermarkets. The company s transformation has exhibited improvements given that RALS was able to narrow its net loss to IDR36bn in 1H16 from net loss of IDR79bn in FY2015. The big transformation Recently, Mrs. Jane Melinda Tumewu, the daughter of RALS owner, inherited the business and made significant improvements to RALS clothing business, which we believe to have lifted up RALS performance. Indeed, its fashion outright sales gross margin is higher compared to the other segments. The company has implemented new fashion concept in which local celebrities become their brand ambassadors and suppliers for RALS fashion direct-purchase segment. We believe that celebrity endorsements have made RALS products more popular, which in turn translated into stronger revenue in 2Q16. Although it is also partly supported by the Kartu Jakarta Pintar (KJP or Jakarta Smart Card; last year people spent the budget in 3Q vs. 2Q this year) as well as Ramadan effect (inventory days declined in 2Q due to the shift in Ramadan); the top line figures were actually higher than previous years. In addition, fashion contribution to total revenue has widened, indicating improved performance of the company. On a side note, the current total sales of RA jeans and Zaskia Mecca products only account for 1% of total outright sales of ±40%, suggesting a huge upside growth potential for RALS. (D-1yr=100) JCI RALS Initiate coverage with a Trading buy recommendation (TP: IDR1,450/sh) We initiate our coverage on RALS with a Trading Buy rating and a target price of IDR1,450, implying 26.2x 2016F PER. Our IDR1,450 target price is derived using a blended calculation of target PER at 23.8x (+1std deviation) and Discounted Cash Flow (DCF) method with 10-year time span with 2017 as our base year. Currently, RALS is trading at nearly its average forward PE of 19.5x F 2017 F 2018 F Revenue (Rp bn) 5,861 5,533 6,016 6,290 6,598 Gross Profit 2,048 1,996 2,284 2,441 2,585 Operating Profit Net profit EPS (Rp/share) BVPS P/E ratio (x) ROE 11% 10% 11% 13% 12% Note: All figures are based on consolidated FS; NP refers to net profit attributable to controlling interests Source: Company data, Daewoo Research estimates 42

43 Ramayana Lestari Sentosa Company Background PT Ramayana Lestari Sentosa (RALS) was first established in 1978 by Mr. Paulus Tumewu and his wife, Mrs. Tan Lee Chuan. Soon after their marriage, the couple left the family home in Ujung Pandang, Sulawesi, to start their business in Jakarta, armed only with a strong retail business background developed over generations in the Tumewu family. They opened their first store, which was then known as Ramayana Fashion Store, on Jalan Sabang in Central Jakarta. RALS went public on December 14 th, Its main business is selling clothes and accessories for men, women and children, as well as selling other retailers goods, such as shoes, toys, and stationery targeted at middle- to- lower income households. Well known as the pioneer of Indonesia s retail business dating back to 1980s, RALS started to open a supermarket inside the Ramayana department store. We believe the supermarket has completed RALS retail business since the company also sells basic necessities through Robinson supermarket. Currently, RALS has 101 department stores with supermarkets inside them, and 12 department stores without the supermarket. Since 2015, some of the supermarkets have transformed into SPAR international (SPAR), a Dutch multinational retail chain and franchise brand. RALS signed the agreement with SPAR in September 2014, and started transforming some of their supermarkets into SPAR since March Currently, there are 17 supermarkets that have been transformed into SPAR (RALS targets to transform 25 stores/ year). The transformation of RALS supermarkets into SPAR would turn the segment into profit, in our view. However, we don t expect an imminent turnaround for at least a couple of years, given RALS has more than hundreds of supermarkets. The company s transformation has exhibited improvements given that RALS was able to narrow its net loss to IDR36bn in 1H16 from net loss of IDR79bn in FY2015. Figure 71. Robinson (before the transformation into SPAR) Figure 72. SPAR (after the transformation) Source: Internet, Daewoo Securities Research Source: Internet, Daewoo Securities Research Research 43

44 The business segments: Outright sales and consignment sales We believe the competition between existing retailers is fierce that a retailer cannot simply rely on the broad demographics of customers and expect to succeed. However, we view RALS to have strategically targeted the low-income consumer segment and became successful in its retail chain business. Currently, RALS has two main businesses (i.e., supermarket and fashion), and two segments (i.e., direct purchase (outright sales) and consignment sales (see Figure 81)). Outright sales: RALS direct purchase or notably known as outright sales segment has two divisions, which are fashion and supermarket. Fashion direct purchase contributes 50% to the company s total gross profit, while its supermarket business contributes 37% to total gross profit. Consignment sales The contribution of fashion consignment sales to gross profit is 37%, whereas the supermarket consignment contributes less than 2%. Figure 73. Contribution to total sales Figure 74. Contribution to total gross profit 100% Supermarket (consignment + outright) Fashion (consignment sales) Fashion (outright sales) 120% Supermarket (consignment) Fashion (consignment) Supermarket (outright sales) Fashion (outright sales) 90% 80% 70% 60% 50% 37% 36% 36% 33% 32% 29% 27% 30% 30% 32% 34% 37% 100% 80% 60% 2% 1% 1% 1% 1% 1% 18% 18% 16% 14% 14% 13% 29% 34% 35% 36% 35% 37% 40% 30% 40% 20% 10% 36% 34% 34% 35% 34% 34% 20% 51% 47% 48% 50% 51% 50% 0% FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY %

45 Investment thesis The big transformation Since its establishment in 1978, the owner of RALS, Mr. Paulus Tumewu, did not make any meaningful transformation to his business, causing its top line growth to falter in recent years. Recently, Mrs. Jane Melinda Tumewu, the daughter of RALS owner, inherited the business and made significant improvements to RALS clothing business, which we believe to have lifted up RALS performance. Indeed, its fashion outright sales gross margin is higher compared to the other segments. Figure 75. Gross margin of each segment 45% 40% 35% Fashion gross margin (consignment) Fashion gross margin (direct purchase) Supermarket gross margin (consignment) Supermarket gross margin (direct purchase) 40% 30% 25% 20% 24% 15% 10% 12% 5% 0% 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 0.3% Some business strategies carried out by Mrs. Jane Melinda Tumewu to improve RALS are as follows: Reducing the number of house brands The number of RALS house brands was greatly reduced with the new business strategy. Previously, RALS owned up to 80~ 90 house brands, each of which represented a particular variety of apparel (for example, trouser, blouse, and shirt would each have a different house brand). However, since 2015, this number has been greatly reduced to only about ten brands, meaning that one brand can consist of more than one apparel types (jeans, trousers, blouse, shirt, etc.). We believe this new strategy has made RALS more attractive to the customers given that fewer brands led the company to focus more on the best and most popular clothing brands. Expanding target market RALS also plans to expand its DP clothing target market to focus more on teenagers and children fashion wear by 2017F. Standardizing the clothing size Since 2015, RALS has set a uniformed standard for the measurement (e.g. the length and width) of each clothing size, which applies for all RALS clothing lines from all suppliers. We think the standardized sizes would make the clothes shopping experience easier and more comfortable for customers. Research 45

46 Improving the quality control Numerous efforts in improving the quality of the products and the stores have been incorporated by RALS. These include monitoring the clothing quality through tailor inspections and renovating the stores fixtures - such as making the shelf cleaner, renewing the display section, changing old furniture as well as the lighting, etc. Management also claims that there is a rise in the number of middle-income customers shopping in RALS stores due to its recent improvement in quality control and the transformation of the stores outlook (cleaner and better visualization of the merchandizes on the shelves). Figure 76. Ramayana store in Pasar Baru Figure 77. Ramayana store in Pasar Baru Partnering with top local celebrities RALS has implemented new fashion concept in which local celebrities become their brand ambassadors and suppliers for RALS fashion direct-purchase segment. Some Indonesian celebrities with whom RALS is currently partnering as its clothing suppliers include Raffi Ahmad, who has his own clothing brand called RA (which stands for his name) and Zaskia Mecca, who supplies hijab, a type of Muslim clothes. Celebrities who are currently working as RALS brand ambassadors are Prilly Latuconsina and Aliando Syarief, who are famous for their roles in a popular Indonesian soap opera called Ganteng-Ganteng Srigala. Figure 78. RA jeans by Raffi Ahmad (supplier) Figure 79. Prilly Latuconsina (RALS brand ambassador) Source: Various sources from the internet, Daewoo Securities Research Source: Various sources from the internet, Daewoo Securities Research 46

47 Figure 80. Aliando and Prilly (brand ambassadors) Figure 81. Zaskia Mecca for Ramayana (supplier) Source: Various sources from the internet, Daewoo Securities Research Source: Various sources from the internet, Daewoo Securities Research The owner of RALS came up with this idea of working with celebrities to appeal more to the customers after having observed the cultural environment, in which idolizing celebrities seems to be more common compared to other countries. Also, with celebrity endorsement being a popular fad, the company can take advantage of brand campaigns on social media, which requires the celebrities to have huge audience of passionate followers on a particular social media platform. Given that many Indonesian celebrities actually have more followers on Instagram compared to Hollywood celebrities or even Indonesia s popular leaders, we believe that this strategy is brilliant and would result in positive outcomes. We also think that the power of the local celebrity image should not be underestimated given that RALS target customers, comprised of mid- to- low income households, tend to idolize local celebrities as it is less likely that they watch foreign movies. All in all, we believe that celebrity endorsements have made RALS products more popular, which in turn translated into stronger revenue in 2Q16. Although it is also partly supported by the Kartu Jakarta Pintar (KJP or Jakarta Smart Card; last year people spent the budget in 3Q vs. 2Q this year) as well as Ramadan effect (inventory days declined in 2Q due to the shift in Ramadan); the top line figures were actually higher than previous years. In addition, fashion contribution to total revenue has widened, indicating improved performance of the company. On a side note, the current total sales of RA jeans and Zaskia Mecca products only account for 1% of total outright sales of ±40%, suggesting a huge upside growth potential for RALS. Figure 82. Fashion outright sales contribution grows Figure 83. RALS quarterly gross sales 100% Consignment Supermarket Fashion IDRbn 3,500 90% 80% 33% 32% 40% 34% 33% 37% 45% 35% 36% 37% 3,000 Lebaran Lebaran Lebaran 70% 2,500 60% 2,000 50% 36% 33% 24% 34% 35% 27% 21% 31% 31% 22% 1,500 40% 1,000 30% 20% 32% 35% 36% 32% 31% 37% 34% 34% 34% 40% % - 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 0% 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Research 47

48 We expect RALS to continue delivering a strong performance, given the high entry barrier. We reckon that currently RALS business is already well-targeted to its segment (mid- to- low income customers). In addition, we think that in order for a company to compete with RALS business, they need to maintain good connection and relationship with celebrities, which we think is hard as it requires patience and skills. Moreover, RALS has been long well-known among the mid- to- low consumers given that it has been established for more than three decades. Figure 84. Inventory days days Figure 85. Payable days days M15 6M15 9M15 FY15 3M16 6M M15 6M15 9M15 FY15 3M16 6M16 Figure 86. RALS brand ambassadors have incredible followers Source: Instagram, Daewoo Securities Research 48

49 Using social media for advertisement to keep costs low In order to popularize its new concept, RALS needs to advertise. However, instead of using costly advertisements (for example, nationwide TV, which they aired once during Ramadan, this year), RALS further utilized social media platforms which are practically embeds zero-cost. In order to maintain low expenses RASL is increasing activities on Facebook, Instagram, Twitter as well as uploading videos on Youtube. Amazingly, RALS Instagram account has currently reached 188k followers, and their 30-second video uploaded on Youtube has been viewed for almost 3 million times, indicating positive feedback from the consumers. Figure 87. RALS on Instagram account (@ramayanadeptstore) Figure 88. RALS on Youtube Source: Internet, Daewoo Securities Research In 2Q16, RALS was able to book IDR1.1tr of fashion direct-purchase sales, which exhibited significant increase of 131% QoQ or 40% YoY growth. We believe the strong fashion direct-purchase sales have translated into a better EBIT margin as RALS was able to muffle their expenses for the clothing suppliers. RALS EBIT margin grew by 140bps to 13% in 2Q16 from -1% in 1Q16. Going forward, we expect to see more stable EBIT margin on the back of better sales and stable expenses. Figure 89. EBIT margin per quarter Figure 90. EBIT margin yearly 14% 450 EBIT EBIT Margin 9% 12% 10% EBIT margin 13% % 7.2% 7.3% 6.6% 8% 7% 8% % 6% 6% % 5% 4% % 4% 2% 150 3% 0% -2% 4Q15 1Q16 2Q % 1% -4% F 0% Research 49

50 RALS has launched its online shop on Tokopedia platform On September 4th 2016, RALS launched an online shop through the famous online platform, Tokopedia (see Figure 92). We think the online shop would only place minimal impact for RALS as their customers are mostly low- income consumers, who have limited exposures to online shopping (which requires smartphone technology, internet, etc.). In addition, RALS has only supplied 431 SKUs to sell at the platform, a very small number compared to the SKUs at the stores. Nonetheless, we consider the establishment of online shop is lucrative over the longer horizon as: 1) It will allow the company to grab opportunities on the growing e-commerce platform, in the future. 2) We believe the online platform through Tokopedia is not as expensive as establishing its own online website, just like its competitors ( Figure 91. RALS in Tokopedia platform Figure 92. RALS outline on Tokopedia Source: Internet, Daewoo Securities Research Source: Internet, Daewoo Securities Research Kartu Jakarta Pintar (Jakarta Smart Card) Kartu Jakarta Pintar (KJP) or Jakarta Smart Card is provided by the government for schoolchildren whose parents income is not sufficient to meet their educational basic needs. With the JKJP, parents are able to purchase items including uniforms, shoes, school bags, transportation costs, meals, and extracurricular activities. The card was created to provide minimum education level for low-income households in Jakarta up to high school by funding them from the city budget. In 2016, as much as c. IDR6tr is expected to be disbursed to c.530,000 KJP receivers (eligible households decreased slightly by 5% compared to last year). We believe the KJP card will provide higher purchasing power for the low- income households, and in turn boost RALS earnings as we expect majority of the eligible households to shop at RALS stores. Table 15. Kartu Jakarta Pintar allowances Remarks Monthly allowance (IDR) New school year allowance (IDR) Additional subsidy for private school students (IDR) Primary 100, , ,000 Secondary 150, , ,000 High school 200, , ,000 Vocational 200, , ,000 Community based institution 100, ,000 - Source: KJP site, Daewoo Securities Research 50