Ace Hardware Indonesia (ACES ID)

Ace Hardware Indonesia (ACES ID) Leading Retail Company in Indonesia 15 December 2014 INDONESIA Retail Trade Initiating Coverage Company Background Ace Hardware Indonesia or AHI was established by PT Kawan Lama Sejahtera in 1995. The opening of the first Ace Hardware store in 1996 at Karawaci, Tangerang, Banten, marked the initial milestone for Ace Hardware Indonesia-or AHI- to keep focusing on its home improvement and lifestyle retail business. Now, Ace Hardware Indonesia has three business segments, comprises home improvement, lifestyle and toys. The company has 110 outlets all around Indonesia, covering Java, Sumatra, Kalimantan, Sulawesi and Bali, with a total area of 302,499 sqm. In the next five (5) years, AHI plans to expand with 15 new outlets every year. Initiated coverage with ACCUMULATE recommendation, and target price of IDR 940 for FY15. Investment Merits High Gross Profit Margin (GPM). Ace Hardware Indonesia maintained GPM at 46%-48%, one of the highest GPM in retail trade industry in Indonesia. Expansion funded by Internal Cash. AHI s expansion has been funded by internal cash, with minimum fund from bank loan, indicating strength in its financials. Positive Same Sales Growth (SSG). In the mid of huge expansions, SSG remained positive at 4.7% in 3Q14. Outlets all around Indonesia. Ace Hardware Indonesia has 110 outlets all around Indonesia, beating other competitors in home improvement and furniture distribution industry. Key Risk Factors Economic risk. Fluctuation in income of middle-class customers and their priorities. Government regulation risk. Government regulations, such as changes in importation and trade policy, taxation, and VAT tariffs. Exchange rate fluctuation risk. Rupiah fluctuation is important considering that a considerable portion of Company s merchandise is imported. Business Competition Risk. In the next few years, new competitors in retail trade industry especially home improvement and lifestyle product could emerge. Accumulate CMP IDR 785 TARGET IDR 940 (+19.7%) COMPANY DATA O/S SHARES (BN) : 17.15 MARKET CAP (IDR TN) : 13.5 MARKET CAP (USD BN) : 1.08 52 - WK HI/LO (IDR) : 570 / 1,025 3M Avg. Volume (mn shares): 22.5 PAR VALUE (IDR) : 10 SHARE HOLDING PATTERN, % PT Kawan Lama Sejahtera: 59.97% Public & Others : 40.03% PRICE VS. JCI 170 160 150 140 130 120 110 100 90 80 Nov-13 Mar-14 Jul-14 Nov-14 ACES IJ JCI Rebased Source: Phillip Securities Indonesia Research KEY FINANCIALS IDR bn FY14E FY15E FY16E FY17E Revenue 4,656 5,546 6,538 7,642 EBITDA 708 779 848 897 Net Profit 513 557 615 659 EPS, IDR 30 33 36 38 PER, x 26.2 24.2 21.9 20.4 EV/EBIDTA, x 19.8 20.9 19.3 18.3 P/BV, x 5.8 4.8 4.1 3.5 ROE, % 22 20 18.7 17.2 Debt/Equity (%) 1.2 1.1 1 0.9 Source: Phillip Securities Indonesia Research Est. Valuation Method: Residual Income Valuation Analyst Phillip Research Team (+65 6531 1240) research@phillip.com.sg Page 1 PHILLIP SECURITIES INDONESIA RESEARCH MCI (P) 019/11/2014_0013 Ref. No.: INDO2014_0014

Valuation and Recommendation Ace Hardware Indonesia is expected to deliver net profit CAGR of 8.7% over FY14 18e with return on asset of 15.7% and return on equity of 20% at the end 2015. At current market price of IDR 785, the stock trades at 27.1x and at 24.2x in 2015. We initiate coverage with an ACCUMULATE rating and target price of IDR 940 per share. Retail Trade Industry Development in Indonesia Indonesia, the fourth (4 th ) biggest population and economy in the world, has large market share for trade and development. Indonesia s economy is growing, despite slower pace in recent years. In 3Q14 Indonesia s economic growth reached 5.11%. With population around 253.6 million, 53.3% of Indonesia s society is anticipated to be urban population by 2015, according to Statistics Indonesia estimate. Rising income creates cities from villages. Besides, demographic bonus of productive age populace and growth in middle income class are some of the reasons household expenses tend grow every year. Local households with annual disposable incomes exceeding USD 15,000 may surge to 19.7% in 2018 from 12.9% in 2014, according to Euromonitor. It indicates that in the next four years, middle income class will grow 6.8%. Households spending increases every year, according to Indonesia s Consumer Confidence Index (CCI), which stood at 120.6 in October, the highest level since January 2014. Consumer confidence is at the top of its range for the past five years, which may also boost spending at retail outlets. Since January to October, CCI rose 3.3%. CCI is the index that shows if the consumers are optimistic, they will tend to purchase more goods and services. This increase in spending will inevitably stimulate the whole economy. Source: Tradingeconomics, Bank Indonesia PHILLIP SECURITIES INDONESIA 2 P a g e

The increase of middle income class will be followed by residential needs. Their properties are dominated by minimalist concepts. The homeowners will seek knocked-down furniture, adapted for the house size. Young families classified as middle income class tend to buy their living needs at shopping centers or mall. This will also encourage growth of retail home improvement and furniture outlets in Indonesia. National retail trade turnover in 2014 is predicted to grow 10%. Indonesian Retail Merchants Association (Aprindo) forecasted sales value of modern retail trade in 2014 to reach IDR 162.8 trillion. The number of retail outlets, comprising supermarkets, hyper-marts and minimarkets tend to increase every year. The average growth is currently 17.9% for hyper-marts, 17.4% for minimarkets, and the smallest growth is supermarkets, which rose only 3%. The national penetration in terms of number of outlets is lower than other ASEAN countries such as Singapore, Thailand and Malaysia. Market penetration level in Indonesia is around 14%, Philippines 25% and Malaysia 53%. It implies that market is still underdeveloped and has ample room for growth. For the next few years, retail trade industry in Indonesia is expected to undergo development. The opportunity of expansion is still opened wide, especially in areas outside of Jakarta and other metropolitan cities in Indonesia. Expansion opportunities are present in areas outside Java, such as Sumatra, Sulawesi, Kalimantan and eastern regions of Indonesia, supported by growing population in those areas. In 2015, urban population in Kalimantan is predicted to be 45.2% of its population, Sumatra to reach 43.1%, Sulawesi 35.1% and eastern region of Indonesia 31.6%. Home Improvement and Lifestyle Products Players in Indonesia Ace Hardware Indonesia or AHI is the main player in home improvement and lifestyle products. In the furniture segment, there are several players such as IKEA, Courts and Chandra Karya Pramuka. IKEA and Courts are new players in the furniture segment in Indonesia. IKEA currently has one outlet at Alam Sutera, Banten, and Courts has one outlet at Harapan Indah, Bekasi. The last is Chandra Karya Pramuka who has experience of more than 35 years and has 3 outlets. Source: Lamudi Indonesia, Bloomberg PHILLIP SECURITIES INDONESIA 3 P a g e

Based on a survey by Lamudi Indonesia, Ace Hardware is the most frequently visited store, with 67% vote from respondents, followed by Informa, a unit of Kawan Lama Group with 37%, and Depo Bangunan 33%. From the three players in this business, no direct competitor can be compared head-to-head, except for Do It Best Pongs, who sells similar products to Ace Hardware. IKEA on the other hand, cannot be compared as direct competitor to Ace Hardware, as it dominantly sells furniture. Business Overview Ace Hardware Indonesia is a subsidiary of PT Kawan Lama Sejahtera. Established in 1995, Ace Hardware Indonesia is the licensee of Ace Hardware Corporation based in United States. The opening of the first Ace Hardware store in 1996 at Karawaci, Tangerang, Banten, marked the initial milestone for Ace Hardware Indonesia or AHI to keep focusing on its home improvement and lifestyle retail business. In addition to pioneering in home improvement and lifestyle retail business, Ace Hardware has also been a player in toys retail industry through the opening of Toys Kingdom starting from the first store opening on June 4, 2010. Now Toys Kingdom has 4,239 sqm areas. Source: Kawan Lama Group Currently, Ace Hardware Indonesia is the market leader in home improvement and lifestyle business with number of outlets growing every year. In 2014, Ace hardware Indonesia owned 110 outlets all around Indonesia. In fact, Ace Hardware Corporation, USA, has also recognized Ace Hardware store in Living World Mall of Alam Sutera, Banten, as The Largest Ace Store on Earth in 2011. So far, the total area of Ace Hardware s 110 outlets has reached 302,499 sqm. Ace Hardware has been constantly expanding. The company still focuses on organic growth. Ace Hardware sets a target to open 15 new outlets every year, with this year s target has been achieved at the time of this report. From the 15 new outlets, 9 are located outside Java (5 in Sumatra, 2 outlets in Sulawesi and the rest in Bali and Kalimantan). These expansions are mostly concentrated outside Java. Total added store area in 2014 is around 37,300 sqm. PHILLIP SECURITIES INDONESIA 4 P a g e

Store Openings in 2014 Opening Date City Areas (sqm) 25 January 2014 Medan, North Sumatra ± 2,500 Samarinda, East Kalimantan ± 2,800 9 February 2014 Makassar, South Sulawesi ± 3,700 13 March 2014 Medan, North Sumatra ± 2,000 25 April 2014 Surabaya, East Java ± 6,000 11 May 2014 Surabaya, East Java ±1,900 14 May 2014 Binjai, North Sumatra ± 1,700 Medan, North Sumatra ± 1,100 12 June 2014 Bandung, West Java ± 1,400 18 June 2014 Pekanbaru, Riau ± 2,900 12 July 2014 Jakarta, DKI Jakarta ± 3,000 18 July 2014 Bali ± 1,600 18 October 2014 Makassar, South Sulawesi ± 2,800 26 October 2014 Tasikmalaya, West Java ± 1,900 15 November 2014 Malang, East Java ± 2,000 Total Areas ± 37,300 Source: Company, Phillip Securities Indonesia Research Aces Hardware s expansion is aimed at middle-up class, by opening new stores in metropolitan cities. The company prefers to open new stores in a region if SSG remains positive. The consequence of constant expansion is cannibalism among outlets outside Java and Jakarta, thus reduces Ace Hardware s SSG. Cannibalism happens when the distance between one outlet and the other is too close. But Ace Hardware s SSG grew 4.7% in 3Q14, versus the target of 5% at the end of 2014. Ace Hardware sets SSG target of 5% in 2015. Most of Ace Hardware outlets are located in Java excluding Jakarta, comprises 39.7%, Jakarta around 34.3%, and outside Java around 26%. In the next five years, Ace Hardware plans to rebalance its number of outlets in each region. Java excluding Jakarta will be reduced from 39.7% to 33% in the next five years, and regions outside Java, such as Sumatra, Sulawesi, Bali and Kalimantan will be increased from 26% to 33%. Sales by Region FY10 FY11 FY12 FY13 9M14 FY18e Jakarta 45.5% 41.2% 39.5% 36.6% 34.3% 34% Java ex Jakarta 30.2% 36.0% 37.3% 39.0% 39.7% 33% Ex Java 24.3% 22.8% 23.2% 24.4% 26.0% 33% Total 100.0% 100% 100% 100% 100% 100% Source: Company, Phillip Securities Indonesia Research Ace Hardware Indonesia Products Ace Hardware Indonesia provides various products of more than 80,000 items. These products are divided into three segments: Home Improvement: Hardware Home Appliances Cleaning Aids Lawn and Gardening Lighting Outdoor Living Paint and Sundries PHILLIP SECURITIES INDONESIA 5 P a g e

Plumbing Supplies and Fixtures Electrical Tools Miscellaneous Lifestyle: Automotive Accessories Furniture House-ware and Gifts Sporting Goods and Pet Supplies HORECABA (Hotel, Restaurant, Cafe, Bakery) Supplies Recently Ace Hardware Indonesia added new products in automotive accessories segment, in collaboration with Top One Oil, a prominent auto lubricant brand in Indonesia. Toys: Toys Kingdom is operated by its subsidiary since 2010. Working together with local distributors and overseas suppliers, Toys Kingdom does not only provide toys with various world-class brands, but also become a place offering a wide selection of unique products with brands that can only be found at Toys Kingdom. In 3Q14, the biggest support for net revenue came from Home Improvement department with 57.3% contribution, followed by Lifestyle department with 38.2%, and Toys department with 4.5%. In the next five years, ACES will reduce contribution from Home Improvement to 45% and increase contribution from Lifestyle department and Toys Kingdom to 45% and 10%, respectively. Source: Company, Phillip Securities Indonesia Research PHILLIP SECURITIES INDONESIA 6 P a g e

Investment Merits High Gross Profit Margin (GPM) Ace Hardware Indonesia maintained GPM at 46%-48%, one of the highest GPM in retail trade industry. GPM in the last five years averaged at 46.9%. It indicated the company s ability to maintain high sales growth, though COGS also increased in the last five years. Internal Cash for Expansion Ace hardware s expansions have been funded with internal cash. The company has low debt ratio. Ace s prefers to seek bank loans than to issue shares or bonds. It drew bank loan when it funded the entry to toys business in 2010 and that so far is the only bank loan drawn by the retailer. Positive Same Sales Growth (SSG) In the mid of huge expansion, SSG growth is still positive at 4.7% in 3Q14. In the last 3 years, SSG grew 12%, but SSG is in a declining trend, due to massive expansions. The consequence of this is cannibalism among outlets outside Java and thus reduces Ace Hardware s SSG. However, Ace Hardware s SSG still has positive growth of 4.7% in 3Q14, versus the target of 5% at the end of 2014. Outlets all around Indonesia Ace Hardware Indonesia has 110 outlets all around Indonesia, beating other competitors in home improvement and furniture business. Ace Hardware consistently expands to areas across Indonesia, especially in urban areas such as Java, Sumatra, Sulawesi, Kalimantan and Bali. Key Risk Factors Economic risk The income level of middle-class customers and their spending priorities are a few of the major factors affecting the Company s business performance and turnover, along with other factors such as weakened purchasing power, inflationary pressure, electricity tariff and social uncertainty. From April 1, 2014 electricity tariff rose 5.6%-27.7%. Ace Hardware has several outlets located in shopping malls. Moreover, the average national minimum wage increased 12.77% from IDR 1.58 million to 1.78 million. It may decrease retailer net income due to increase in SG&A expenses. Government regulation risk Government regulations, such as changes in importation and trade policy, taxation, and VAT could affect the company s income generation. Government has increased subsidized fuel price at November 17, 2014. The effect from this policy may decrease household spending for lifestyle product. Exchange rate fluctuation risk Rupiah exchange rate is important to the company, considering a considerable portion of the company s merchandise is imported. 80% PHILLIP SECURITIES INDONESIA 7 P a g e

Ace s products are imported. 50% of the products are manufactured in China, 10% in the United States (US), 10% in Europe, and 10% in Asian countries excluding China. Business competition risk In the next few years, new competitors in retail trade industry especially home improvement and lifestyle products could emerge. There are currently only several new players, namely IKEA and Courts. These competitors may reduce Ace Hardware s market share and profit margin. Financial Overview Third Quarter Update Performance In 3Q14, Ace Hardware booked revenue of 3.4 trillion, a 20.2% increase yoy. The revenue increase was supported by home improvement, lifestyle and toys segments. Toys segment has the highest growth among others segment, with 50.5% yoy growth, followed by home improvement segment which grew 21.9% yoy, and lifestyle segment with 16.6% yoy advance. As revenue grew, Ace Hardware generated IDR 376 billion in net profit, 18% higher than the same period last year. (IDR Billion) FY11 FY12 FY13 3Q-2013 3Q-2014 Total Revenue 2,410 3,223 3,895 2,788 3,353 % growth y-y N/A 33.8% 20.9% N/A 20.2% Operating Income 383 562 651 410 488 % growth y-y N/A 47.0% 15.8% N/A 19.0% % operating profit margin 15.9% 17.5% 16.7% 14.7% 14.5% EBITDA 415 582 640 N/A N/A % growth y-y N/A 40.1% 10.0% N/A N/A % EBITDA margin 17.2% 18.0% 16.4% N/A N/A Net Income 286 437 509 318 376 % growth y-y N/A 52.8% 16.4% N/A 18.0% % net income margin 11.9% 13.6% 13.1% 11.4% 11.2% Source: Company, Phillip Securities Indonesia Research Financial Performance Projections With its constant expansion moves, revenue is projected to grow 19.5% until the end of this year. We estimate revenue to reach IDR 4.6 trillion, dominated by home improvement segment with 55% revenue contribution. In the next five years, we forecast revenue to grow 17.5% CAGR. The growth will be in line with middle income class growth. In 2015, 53.3% of Indonesian population is expected to live in urban areas. Operating profit is projected to grow 3.4% to IDR 673 million. For the next five years, operating profit is projected to grow at an average of 7.6%. Net profit is estimated to reach IDR 513 billion this year, up 0.8% from last year. We estimate net profit to grow 8.7% CAGR in the next five years. PHILLIP SECURITIES INDONESIA 8 P a g e

Dividend Based on the annual report, the company has a dividend policy based on the following method: Net Profit After Tax Up to IDR 200 billion 10% More Than IDR 200 billion to IDR 500 billion 15% More than to IDR 500 billion 20% Source: Company, Phillip Securities Indonesia Research Estimated Percentage of Cash Dividend to Net Profit After Tax We projected Ace s dividend for the financial year 2014, 2015, 2016 and 2017 to amount to IDR 5.9, IDR 6.0, IDR 6.5 and IDR 7.2 per share, respectively. FY12 FY13 FY14e FY15e FY16e FY17e EPS (IDR) 25.0 29.7 29.9 32.5 35.8 38.4 DPS (IDR) 2.5 10.0 5.9 6.0 6.5 7.2 Div. Payout Ratio (%) 15% 39% 20% 20% 20% 20% Source: Company, Phillip Securities Indonesia Research Est. Valuations Middle income class growth is the blessing given to retail business in Indonesia. Consumption has been growing every year and increase in purchasing power has made retail a promising industry. Increasing needs for residential homes from new mid-income populace have also provided retailers such as Ace Hardware Indonesia with opportunities to sell household equipments. In addition, development in eastern part of Indonesia could become a new target market for expansion. In the next few years, urban population in eastern Indonesia is expected to increase significantly. Based on these advantages and the company s future growth potential, we recommend accumulate for Ace Hardware Indonesia s shares. We have positive view on retail industry as it is an important industry that supports economic growth in Indonesia. We derived our valuation for Ace Hardware Indonesia with Residual Income Valuation method, with Cost of Common Equity of 8.04% and terminal growth of 5.5%. We estimate Ace Hardware Indonesia s fair value for end of 2015 at IDR 940 per share. Dividend for 2015 financial year is estimated at IDR 6 per share, with a dividend payout ratio of 20%. From Ace Hardware Indonesia s closing price on Dec, 12 at IDR 805 per share, there is a potential upside of 19.7%. PHILLIP SECURITIES INDONESIA 9 P a g e

SWOT Analysis S GPM above 40% in the last 5 years. Outlets located in various regions in Indonesia, including Sumatra, Sulawesi, Kalimantan, Java and Bali. SSG grew positively in the last 3 years. W Dependence on purchasing power. Dependence of imported products. Sensitivity to exchange rate. O Expanding population in Indonesia (the world's fourth largest, after China, India and the US). Growth of middle income class. Room for expansion in eastern Indonesia region is still wide open. T Rise of new players in furniture segment, such as IKEA and Courts. Competitors with the same concept with Ace Hardware Indonesia could emerge. Changes in the government s trade policy, taxation and VAT tariffs. PHILLIP SECURITIES INDONESIA 10 P a g e

FY12 FY13 FY14e FY15e FY16e FY17e Valuation Ratios P/E (X) 37.23 26.60 26.25 24.15 21.91 20.44 P/E (X). Adj 36.45 26.60 26.25 24.15 21.91 20.44 P/B (X) 9.86 7.07 5.78 4.84 4.09 3.52 EV/EBITDA (X), adj 24.7 16.1 19.8 20.9 19.3 18.3 Dividend Yield (%) 0.27 1.26 0.76 0.76 0.83 0.91 Per Share data (IDR) EPS, reported 25 30 30 33 36 38 EPS, adj. 26 30 30 33 36 38 DPS 2 10 6 6 7 7 BPS 94 112 136 162 192 223 Growth & Margins (%) Growth Revenue 33.8% 20.9% 19.5% 19.1% 17.9% 16.9% EBITDA 40.1% 10.0% 10.6% 10.1% 8.8% 5.8% EBIT 41.6% 9.6% 11.1% 9.3% 7.9% 4.5% Net Income, adj 52.8% 16.4% 0.8% 8.7% 10.2% 7.2% Margins EBITDA Margin 18.0% 16.4% 15.2% 14.1% 13.0% 11.7% EBIT Margin 16.0% 14.5% 13.5% 12.4% 11.3% 10.1% Net Profit Margin 13.6% 13.1% 11.0% 10.0% 9.4% 8.6% Key Ratios ROE (%) 27.0% 26.6% 22.0% 20.0% 18.7% 17.2% ROA (%) 22.8% 20.5% 17.2% 15.7% 14.6% 13.5% Net Debt (Cash) (240,712) (133,104) (256,541) (292,856) (335,719) (364,307) Net Debt / Equity Net Cash Net Cash Net Cash Net Cash Net Cash Net Cash Debt / Equity 1.8% 1.5% 1.2% 1.1% 1.0% 0.9% Income Statement (IDR bn) Revenue 3,223 3,895 4,656 5,546 6,538 7,642 EBITDA 582 640 708 779 848 897 Depreciation & Amortization 66 75 80 93 108 123 EBIT 515 565 628 686 740 774 Net Finance (Expense) / Income -25-28 -32-35 -40-44 Associates & JVs 0 0 0 0 0 0 Profit Before Tax 537 623 642 707 770 816 Taxation 108 120 135 156 162 163 Profit After Tax 429 503 507 551 608 652 Non-controlling Interest -8-6 -6-6 -6-6 PATMI 437 509 513 557 615 659 Source: Company, Phillip Securities Indonesia Research Est. PHILLIP SECURITIES INDONESIA 11 P a g e

FYE Dec FY12 FY13 FY14e FY15e FE16e FE17e Balance Sheet (IDR bn) PPE 445 446 497 549 601 653 Others assets 253 286 321 379 438 505 Total Non-Current Assets 698 732 818 929 1,040 1,158 Inventories 620 1,113 1,304 1,553 1,831 2,140 Account Receivables 31 25 33 44 59 53 Investments 0 0 0 0 0 0 Cash 270 162 283 322 368 400 Others 298 448 545 708 903 1,135 Total Current Assets 1,219 1,747 2,164 2,628 3,160 3,728 Total Assets 1,917 2,479 2,983 3,557 4,200 4,886 Short Term Loans 22 28 34 29 32 36 Account Payables 49 195 239 287 342 405 Others 138 216 247 294 342 389 Total Current Liabilities 208 439 520 610 717 829 Long Term Loans 14 7 0 0 0 0 Others 77 117 135 163 195 232 Total Non-Current Liabilities 91 124 135 163 195 232 Non Controlling Interest 17 11 12 13 15 16 Shareholder's Equity 1,618 1,915 2,328 2,784 3,288 3,825 Cashflow Statements (IDR mn) CFO Net Income 437 509 513 557 615 659 Adjustments (572) (654) (502) (667) (755) (822) WC Changes 330 297 336 374 425 456 Cash generated from ops 195 152 348 264 285 292 Taxes paid (8) 7 4 6 2 0 Cashflow from Operating 204 145 343 258 283 292 CFI Capex, net 138 84 0 132 145 160 Others (231) (126) (121) (249) (273) (298) Cashflow from Investments (93) (42) (121) (117) (128) (138) CFF Share Issuance 0 0 0 0 0 0 Loans, net of repayments 37 33 11 28 32 37 Dividens (43) (171) (102) (103) (111) (123) Others (46) (74) (10) (27) (31) (36) Cashflow from Financing (51) (211) (101) (101) (110) (121) Net change in cash 60 (108) 122 39 46 32 CCE, end 270 162 283 322 368 400 Source: Company, Phillip Securities Indonesia Research Est. PHILLIP SECURITIES INDONESIA 12 P a g e

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