20140128-Maybank_KERPL-Indonesia_Retail_Sector_71页_2mb

Indonesia Retail Sector Summary

Core Content

The Indonesia retail sector is currently rated UNDERWEIGHT and remains unchanged. While the sector faces short-term challenges due to rising costs and increasing competition, long-term growth is anticipated driven by rising incomes and the improving standard of living. The shift towards modern trade is expected to continue, with its market share increasing from 26% in 2003 to 45% in 2012, according to Nielsen data.

Main Points

• Short-term Hiccup: The retail sector is expected to experience margin pressure due to rising wages, rents, and electricity tariffs. The removal of electricity subsidies for shopping malls in 2014 will add to this pressure.
• Long-term Growth: Despite near-term challenges, the sector is projected to grow due to rising incomes and a growing middle class, with a relatively young population (44% under 25 years) supporting demand.
• Competition: New international players such as Uniqlo, H&M, Lotte, and Lulu are entering the market, intensifying competition, especially in the middle to middle-upper segments. This is expected to cap existing players' pricing power.
• Preferred Retailers: Food retailers are favored for their resilience and earnings stability. The top picks are Matahari Putra and Ramayana due to their strong fundamentals and growth potential.
• Valuation: The PER valuation method is used to standardize comparisons among retailers. Matahari Putra (MPPA IJ) and Ramayana (RALS IJ) are recommended with target prices of IDR2,250 and IDR1,800, respectively.

Key Information

Top Picks

• Matahari Putra (MPPA IJ): Buy recommendation, with a target price of IDR2,250 (33.4x PER FY15F).
• Ramayana (RALS IJ): Buy recommendation, with a target price of IDR1,800 (15.8x PER FY15F).

Market Trends

• Modern Trade Growth: Expected to continue with an 18% YoY aggregate sales growth in 2014F.
• Margin Compression: Top-five retailers' aggregate EBIT is forecasted to grow 14% YoY on 18% YoY sales growth, with an EBIT margin compression of 30bps to 7.8%.
• Expansion Rate: The top-five retailers are expected to expand at a 10% CAGR for 2013–16F, with Matahari Putra leading at 20% YoY sales area expansion.

Cost Pressures

• Wage Costs: National average minimum wage increased by 19% YoY in 2013, with Jakarta seeing a 44% increase. Wage cost to revenue is expected to remain high.
• Rental Costs: Rents are expected to stay high due to increased competition for retail space.
• Electricity Costs: The removal of subsidies for shopping malls is expected to increase electricity tariffs by 10–20% YoY, further affecting margins.

Competitive Landscape

• Non-food Retailers: Face more intense competition and are more vulnerable to margin compression due to discretionary spending and less mature markets.
• Food Retailers: More resilient and stable, with a more mature competitive environment and a broader range of products that are less affected by economic slowdowns.

Online and Mobile Shopping

• Growth: Online and mobile shopping are on the rise, with internet penetration increasing from less than 1% in 2003 to 15% in 2014.
• Impact: These channels could pose a risk to non-food retailers in the long term, especially due to their relatively small size and growing influence.

Regulatory Environment

• Restrictions: Modern retail outlets (over 400 sqm) are restricted from being too close to traditional markets and are limited in sourcing raw materials.
• Foreign Entry: Foreign players are allowed in modern markets over 400 sqm, while mini markets and department stores under 2,000 sqm remain restricted to domestic players.

Conclusion

The Indonesia retail sector is expected to experience a short-term hiccup due to rising costs and competition, but long-term growth remains positive. Food retailers are preferred for their stability and resilience, while non-food retailers face more challenges. The sector is likely to see continued expansion, especially in secondary and tertiary cities, and the impact of currency depreciation and regulatory changes will vary by segment and company.