RHB Indonesia Morning Cuppa - 10 November 2016- (Nippon Indosari, Strategy)

Good morning,

Nippon Indosari Corpindo: New SKU Launches, More Sales Force

In anticipation of improved consumer spending, Nippon is accelerating new SKU launches. The company is also boosting its sales force headcount to ensure availability of its products in every store in Greater Jakarta. We see huge room for a sales price increase, since it has not increased selling prices for more than two years. Given lower equity-financing costs, we raise our DCF-based TP to IDR1,870 (from IDR1,670, 17% upside), implying 25x FY17F P/E. Upgrade to BUY.

¨ More aggressive product launches. Nippon Indosari Corpindo (Nippon) aims to maintain and increase its domination in the local bread market by launching more aggressive product variants next year. It targets to launch 45 new stock keeping units (SKUs) and aims to have 100 SKUs by end-2017. Nippon only launched 15 new SKUs in 2016and four new SKUs pa in 2012-2015.

By having more product variants, it is looking to ensure that it has first-mover status on new bread types and flavours. Nippon is also refreshing the Sari Roti brand and product line. This would allow it to have more flexibility in serving local market demand – in line with local demand specialities. Hence, Nippon’s market penetration should increase going forward, in our view.

¨ Higher sales headcount. Nippon has strengthened its marketing arm by recruiting ~42 new merchandisers to ensure its products are available in modern trade stores in the Greater Jakarta area. Each merchandiser is responsible for a respective sales territory and has to ensure product availability (and not empty shelves) in stores. They would proactively fill Sari Roti products before such products on the shelves run out. We believe this can increase sales volume and lower sales returns. This is because Nippon is now able to more actively monitor product movements at each store. It would also have better knowledge on specific local market trends.

¨ Room to increase selling price. Nippon has not been increasing its selling prices for 28 months. During this same period, other domestic consumer food products like biscuits, snacks and instant noodles have seen selling prices increase by 5-6% pa. The price gap between bread and other consumer food products has widened, and we believe Nippon has huge room to increase its prices. This should help the company improve its EBIT margins.

¨ New distribution network. Sari Roti is now available at all 176 national railway routes across Java and Sumatera. This first-mover availability in trains across Indonesia is booked under general trade. We see this as a positive growth driver for general trade sales.

¨ Upgrade to BUY. Given lower equity-financing costs, we raise our DCF-based TP to IDR1,870 (from IDR1,670, 17% upside). This implies 25x FY17F P/E, ie near to its 5-year average forward P/E. Key risks to our call include rising competition, higher sales returns and weakened consumer spending. (Andrey Wijaya)

Link to report: Nippon Indosari Corpindo : New SKU Launches, More Sales Force

Link to Daily report: Indonesia Morning Cuppa - 101116

Strategy:

Trump victory - the impact on Indonesia

JCI went into considerable correction, down as much as 2.4% during the intraday, following the prospect of Trump’s winning. Selling pressure were visible across sector, with IDR also depreciated 0.9%. Closer to end of trading hour, market slightly improved mainly led by a rebound on commodity counters, with index closed down 1% with IDR relatively flat.

The Trump’s winning undoubtedly creates uncertainty, especially on the execution and direction of what would be the policy under his administrative, on both economy and politic. According to our economist, historical facts imply that a clean sweep tends to be more positive for the US economy in general because of less gridlock. As such, with Republican sweep (Trump President and GOP Congress), fiscal policy, both from higher spending and lower taxes, is likely to be more expansionary over the next four years on average. It is still too early to conclude for any potential downward revision on economic growth at this stage.

One of the main concerns of the Trump administration would be on potential trade protectionist (anti-trade) issue. In regards of Indonesia, the main export products to the US would be textile, rubber product, shoes, electronics and F&B with export to US accounts for 12% of total non oil and gas export. However, the impact the share of export to GDP in Indonesia remains the lowest in the region at 22% (Vs Thailand’s 58%, Malaysia 73% and Singapore 198%), which would provide much-needed shelter under global economy volatility circumstances. Domestic consumption and government-led infrastructure spending continue to serve as the underpinning factors for economic growth improvement and we still expect economy growth at 5.3% in 2017.

Figure 1: Non-oil & gas exports destination

	Mar-16	Apr-16	May-16	Jun-16	Jul-16	Aug-16	Sep-16	2015	Sep-16
	(% y-o-y)							Proportion
China	-8.6	-10.8	-11.1	-1.2	-17.1	21.9	28.6	10.1	11.7
Japan	-8.1	-7.2	-12.2	12.3	-18.6	12.0	-1.3	9.9	9.7
United States	-5.8	-2.3	-1.1	17.3	-14.8	2.2	6.1	11.6	11.9
India	-27.8	-32.9	-38.9	-27.6	-21.7	15.5	17.6	8.8	8.6
ASEAN	-2.7	0.4	6.9	5.2	-9.7	10.9	7.4	20.7	39.4
Singapore	0.8	7.8	5.7	1.7	-5.3	4.2	-9.0	6.6	6.0
Malaysia	-12.1	-13.3	-20.8	-11.2	-26.1	11.0	11.1	4.7	4.5
Thailand	-11.7	-7.2	-0.9	4.6	-16.2	4.2	8.0	3.5	3.5
Korea, Republic of	-13.2	-3.7	-10.5	-8.3	-15.4	-4.2	4.3	4.1	4.0
Australia	26.6	-0.7	2.2	-50.4	-1.2	-30.6	-16.8	2.3	2.6
Taiwan	-31.1	-42.8	-34.9	-27.3	-26.6	-41.3	-33.5	2.8	2.0
European Union	-5.3	-10.9	-9.7	-11.4	-13.7	-0.5	0.3	11.2	10.6
Germany	1.7	-4.1	-22.4	1.1	-13.8	-8.4	13.6	2.0	2.1
Netherland	-18.2	-22.1	-8.7	-24.0	3.9	33.5	-8.0	2.6	2.3
Italy	-27.4	-9.9	-29.2	-30.6	-14.3	-4.5	-23.2	1.4	1.0

Source: National Statistical Agency (BPS) of Indonesia, RHB estimates

Our economist still expect that the Fed is likely to go ahead with its tightening policy bias and raise rate by 25 bps this December. As such, one of the palpable risks would be on currency of which IDR has enjoyed 5% appreciation ytd. Any sudden increase in volatility could risk of escalation of importation of raw material and potential cost overrun in certain infra projects, which undoubtedly will led to inflation and growth risk. In our view, this risk would be contained, especially as: 1. Indonesia rising forex reserve of USD115b and expected to reach USD150b by 2017; 2. Repatriation fund inflow by end of the year; and 3. Record low inflation outlook at sub-4% level.

Acknowledging potential change in global trade and politics, Indonesia with its domestic consumption at the core, remains to offer attractive investment thesis. At this stage, we see no change on Indonesia fundamental investment story, and maintain our constructive view mainly underpin by macro improvement and government-led infrastructure investment. Our top picks in the market mainly comprise of company with strong balance and visible earnings growth and they are: BBNI, CTRA, BSDE, TLKM, INDF and WSKT. To play on the positive rally on the commodity, we like LSIP and UNTR. (Helmy Kristanto)

Media Highlights:

Economics

Indonesia retail sales grow by 6.5% YoY in September

Corporates

Indocement’s October cement sales came in line with expectation

Indocement booked cement sales of 1.6m tonnes (+8.2% MoM) in October, in line. However its market shares slightly declined to 25.3% in Oct (Sept: 25.5%) which was driven by lower market shares at its based market, especially West Java, Jakarta, and Kalimantan.

YoY, Indocement’s 10M16 sales declined to 13.5m tonnes (-2.4% YoY), while national cement sales increased to 52.2m tonnes (+2.5% YoY). Indocement said that flood and landside in certain areas in Java has affected delivery.

We maintain Neutral with DCF-derived TP of IDR17,900 (12% upside), implying 14x FY17F P/E. (Andrey Wijaya)

Semen Indonesia booked higher MoM sales in October, in line

MoM, Semen Indonesia’s October sales reached 2.6 tonnes (+5% MoM), driven by higher domestic cement sales. However, its market shares sligthly slipped to 42% in October (September: 43%). The company lowered its domestic ASP to IDR769,000/tonne (-1.7% MoM) in October.

YoY, Semen Indonesia’s 10M16 sales increased to 21.7m tonnes (+1.5% YoY), its market share was relatively stable at 41.7%. The company’s 10M16 domestic ASP declined by 7% YoY to IDR806,000/tonne.

We maintain Neutral on Semen Indoesia with DCF-based TP of IDR10,300 (10% upside), implying 12x FY17F P/E. (Andrey Wijaya)

United Tractors target to sell 2,500 units in 2017

United Tractors (UNTR IJ, BUY, TP: IDR24,700) targets to sell 2,500 units in 2017 or 25% increase YoY on the back of the rebound in coal price. The company will allocate USD230-240m capex next year or 15-20% increase YoY. Around 80% of the capex will be allocated to the company’s subsidiary, Pamapersada Nusantara (Pama). Pama then will use the allocated capex to acquire new heavy equipments for coal mining. The company will fund its capex through internal cash. (Bisnis Indonesia).

Comment: FY17 management guidance confirms our bullish view on United Tractors, which is still not factor-in by consensus. Our FY17 EPS is 22% higher than consensus. We think revising up consensus earnings ahead should boost its share price. We reiterate Buy call with TP:IDR24,700.(Hariyanto Wijaya)

Matahari Department Store to add 8 new stores in 2017

Ramayana target to book IDR8.3trn sales in FY16

United Tractors target to sell 2,500 units in 2017

Wijaya Karya to expand to five countries

PP Properti targets 25% YoY growth in FY16

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