RHB Indonesia Morning Cuppa - 15 September 2016- (Ironically Iconic, Regional Consumer)

Good morning,

Ironically Iconic Companies In Asia

This report looks at businesses that were once industry/market darlings but who have now seen better times. We also review some examples of failed companies from other global markets and assess some of the factors that can bring once high flying companies crashing back to earth. Some of these previously iconic companies still harbour hopes of reclaiming some of their past glories, while others are simply past it. From our regional selection of Ironically Iconic companies, our most preferred stocks are Lenovo, United Tractors, SGX and DRB-HICOM. The least preferred are BEC World and DTAC. Sime Darby deserves a special mention for its 47% blue sky TP upside should market conditions permit value unlocking.

¨ Change or die. The Greek philosopher Heraclitus once said, “The only thing that is constant is change”. This very much applies in the corporate context where an AEI study comparing Fortune 500 companies in 2015 and 1955 revealed that only 61 companies appeared in both lists. The remaining 88% have fallen out of the top 500 or may have gone bankrupt or been acquired. The report suggests that the high degree of market disruption is a positive sign of the dynamism and innovation in today’s hyper-competitive global economy and emphasises the point that past success is no guarantee of future success The emergence of companies belonging to the New Economy is displacing companies from the old order and this is a broadly discernible theme in our country analyses of the biggest listed companies now and before.

¨ “We have always done it that way”. The annals of corporate history are littered with the carcasses of successful companies that have fallen by the wayside for a multitude of reasons. Reams have been written on the reasons why successful companies fail and circumstances will differ from case to case. Catherine DeVrye reminds us of the seven most expensive words in business: “We have always done it that way”. The inability to adapt to changes in the market place, be they consumer tastes, lifestyle, competition, technology and the advent of the internet have been common causes of corporate failure. Management mis-steps are usually easier to identify after the fact, while failures arising from economic crises or regulatory change suggest an underlying weakness in the business model. Instances of fraud or corruption can be hard to detect, especially when there is collusion to cover up wrong doing.

¨ Effective leadership and strong governance are important but no guarantee. The lessons from our review of Enron, Yahoo!, Nokia and Kodak are stark reminders to investors of the importance of critical notions like effective leadership, accountability, governance and transparency, as well as a strong and independent board to provide effective checks and balances.

¨ Ironically Iconic. Amongst our selection of stocks from around the region that have seen better days are those that are trying to make a comeback. The preferred stocks are Lenovo, United Tractors, SGX and DRB-HICOM. Sime Darby deserves a special mention for its 47% blue sky TP upside should market conditions permit value unlocking. (Alex Chia, Ng Kong Yong, Helmy Kristanto, Ong Kian Lin, Kasamapon Hamnilrat)

Link to report: Regional Strategy: Ironically Iconic Companies In Asia

Link to Daily report: Indonesia Morning Cuppa - 150916

Sector Update:

Regional Consumer: Ready for Tomorrow?

Jane’s mum bought her first pair of running shoes in the late 1980s. She chose a brand she recognised from numerous TV advertisements. In any case, the nearest sportswear store carried mainly this brand. Fast forward today, Jane saw an Instagram post of her favourite celebrity wearing a new brand of running shoes. Intrigued, she googled about it and decided to buy a pair online. After using it for a week, she made her own Instagram post with the hashtag #bestshoesever, where it was “liked” by many of her friends. Her story is an increasingly common one all over the world.

¨ Evolve to prosper. While consumption growth has slowed down in recent years, we believe long-term upside remains huge in the growing economies of China and ASEAN. Yet, in the context of a new generation of consumers spoilt with ever more choices, and the disruptive structural forces to the sector at play, we believe that it will be a trying period for listed consumer firms. We also believe that only those that areable to evolve successfully will prosper.

¨ Marketing is no longer justprice, product, place and promotion, the “4Ps”.Consumers are increasingly techsavvy, have greater access to information and are not as easily convinced by a catchy jingle. New approaches, especially through the online space, needs to be integrated into a holistic branding and sales strategy. E-commerce already dominates everyday life in China. We believe the wheels are in motion for it to be a similarly disruptive force in ASEAN.

¨ Harnessing social media. Social media is now very much a part of daily life, and companies that harness its power can reach out to consumers in a more targeted way. Subtly getting a message across through creative and interesting content is a more effective way of building brand loyalty than traditional push marketing. Social media marketing in China has already spawned an industry of Internet celebrities.

¨ Can do better.In our view, ASEAN firms need to step up as the field opens up to foreign competition in modern trade channels. The key risk is that many of these companies are market leaders that may be afraid of alienating existing customers. This results in a middling approach. Chinese firms need to improve their branding, as more consumers are likely to trade up to more desirable foreign brands as their income levels rise.

¨ Some standouts, in these aspects,in our consumer coverage universe are:

i. Unilever Indonesia (Unilever), which has been making a huge effort in reaching out to consumers online;

ii. Home Product Center (Home Pro), which is widely known for its often hilarious viral content marketing in Thailand;

iii. Berjaya Food, which has been innovative in terms of new products and store concepts for Starbucks in Malaysia;

iv. China Mengniu, which has embraced more innovative digital media and product placement strategy to reach consumers. (James Koh, Andrey Wijaya, Robin Yuen CFA, Philip Wong Ching Wern, Vatcharut Vacharawongsith, Juliana Cai)

Link to report: to be sent out later

Media Highlights:

Corporates

Astra International to add 15 SMIs partners

Axiata Group in the midst of study to sell XL stock

BRI targets single digit credit rate next year

Charoen Pokphand introduce new beverage line

PLN to announce PLTGU Jawa I final tender in October

Chandra Asri Petrochemical to increase capacity

Deltamas targets to sell 100ha industrial land in FY17

Domestic coal production recorded at 153.53m tonnes in 8M16

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