INDOFOOD - INDF

Industry Analysis

Retail Trades is considered growing slightly, 60 % of retail trade is fast moving consumer goods

Based on data of BPS, the wholesale and retail trades industry has average growth at 14.7 % (at current price) between in 2006 to in to 2012. Despite of higher BI rate, the retail trade will still grow slightly. For modern retail segment, accordance to aprindo, the modern retail will rise slightly at 10 % up than previous year. The fast moving consumer goods is biggest portion in modern retail trade; it is 60 % of total demand of consumers.

Manufacturing: Food, beverage and tobacco

The graph illustrates that the manufacturing industry growth tend to follow the trend of economic growth. It could be saw that since 2005 the growth of manufacturing industry is under economic growth. According to World Bank, Indonesian economic growth will increase at 5.2 % in 2015. In conclusion, the increase of manufacturing industry is predicted fewer than 5.2 %.

Based on National statistical bureau, in between 2006 -2012, the average growth of food, beverage and tobacco industry is at 19 %.( at current price). As long as the population increases, the demand for food and beverage will advance. Moreover, the biggest portion of GDP is domestic consumption includes food and beverage.

As a result of those, the manufacturing industry in food and beverage segment is expected raise slightly in 2015 as the demand of it is rising at 10 %, the higher BI rate in 2015 could reduce demand.   

The ASEAN Economic Community which will be conducted in indonesia may make the competition more tight. The country needs to look at the potential segment that could be comparative advantage of indonesia to others country in south east Asia. 

INDOFOOD

High Cash to sales ratio and faster cash to cash cycle

 Accordance to annual report of 2013, the sales has increase 15 % up than sales in 2012. The gross profit margin has fallen in to 27.1 % in 2013, lower than 2012, which it was at 29 %. The higher inflation rate increases the cost of raw material which is bought from oversea.

The key driver of sales is consumer branded product segment which is 43.1 % of total sales. It consists of familiar branded product such as indomie, supermie, lays, pepsi etc.

The account receivable has increased sharply in 2013 up than 2012. The sharp increase may possible be driven by the acquisition of few companies in 2013, in agribusiness segment and in consumer branded product segment.

Cash to cash cycle has improved in 2013; it is faster than cash to cash cycle in 2012. From 76 days in 2012 becomes in to 67. The supplier expands its time for payment. The company has high cash to sales ratio in 2013, 23.7 % of sales, the company may possibly have several plans to purchase other company share and more fixed asset to increase its production capacity due to big available cash.

Forecast

The increase of sales in 2014 until 2016 are predicted at 10 % as the retail trade predicted advance at 10 %. The inflation rate in 2015 is expected fall as the central bank increase interest rate. As a consequent, the demand decrease and people tend to keep their money in the bank.

Accordance to the standard chartered research, the inflation rate will fall in 2015 than 2014 as the central bank will increase its rate in anticipating the rise of fund fed rate in next year. 

CIPUTRA SURYA (CTRS)

Target of economic growth at 5.8 % with infrastructure project as stimulus

Government took target of economic growth at 5.8 % in 2015. Many infrastructure projects will be started at 2015 which is expected supporting economic growth in 2015. The project includes power plant, water reserve construction, road, irrigation and etc.

Some analyst believe that the central bank will rise its rate over 8.25 % in order to sustain inflation rate as its anticipation to the fed’s monetary policy which plan to advance its rate at second semester of 2015.

Accordance to the economist of indonesia university, Lana Sulistyaningsih there will be a deficit in its current account if government run after the target growth at 5.8 % with infrastructure project. The project still depends on import to provide equipment, raw material and etc. For example, infrastructure project needs steels which are imported from oversea. So does power plant, government has to import the equipment from abroad such as turbine, boiler and etc. Inflation rate will be difficult to reduce inflation rate.

Politic situation in 2015 is unpredictable in indonesia

Based on research of Guillaume de gantes, 83 % of 60 rich persons (billionaires) which are interviewed, have bank account in oversea for saving and their business transaction. There is USD 200 millions of Indonesian billionaires’ asset which are in Singapore. They consider about stability of Indonesian politic circumstances in the future, no one knows about politic situation at the future.  11 % of Indonesian billionaires believe that is unpredictable.

In 2015, several analysts have prediction that the ministries in work team cabinet are vulnerable to be reshuffle.

Real estate Industry

Comprehensive Loan to Value regulation and higher interest rate

Loan to value regulation in 2013 protect the real estate investment from speculation. There are particular arrangements which manage Loan to Value base on number of ownership. People who own more than one loan for real estate will be charged smaller loan to value ratio. Bank will finance their loan in smaller part over the second loan.

Accordance to data, real estate industry has been growing steadily between in 2006 in to 2012. The average growth is at 13 % (current price). The industry is predicted growing slower as the demand of real estate predicted will drop because the central bank is predicted rising its rate in 2015 if the fed increase the fed fund rate at second semester of 2015. It will make the bank increase the interest rate.

The consumer will cut their spending include investing in real estate segment because of higher inflation rate, higher interest rate and new Loan to value regulation. Moreover, people will wait and see and they may possibly choose to save their money in the bank.

On other hand, government plans to conduct infrastructure project as stimulus. There will be many roads, toll road, bridges, those will open new access to several isolated district and there may be new residential houses, shop houses will be built.

Some investor tried to buy home in united state as its economy starts to recover; they expect the price will increase again in 2015.

Ciputra Surya

Family business with strong leadership  

Ciputra Surya is a subsidiary of CIputra development group which is run in real estate, hotel, and family recreation industry. Ciputra development is the majority share holder; it owns 63 % of total share.  The company leads by mr. ciputra’s family. His son in law, mr. Harun Hajadi is president director of the company. He holds MBA degree from university of southern california and architecture degree from university of California, Berkeley. Commonly they are good educated and hold master degree from oversea.

In 2013 the revenue increase 20.3 % up compared to sales in 2012. The company was able to increase its gross profit in to 57 % at 2013 which is bigger than gross profit in 2012, at 55 %.

In 2013 total asset has advanced at about 30 % compared to total asset of 2012. The company may possibly have many new projects in homes residential development. Real estate is still a key driver for the company which is contributing at 95 % of total revenue in 2013. The rest is villa and golf course. The biggest contribution was from project of citraland bagya city medan in north Sumatra. Its contribution was 33.4 % of its total land sold and it was 43.4 % of total sales.

The amount of Land development is at IDR 1,144 trillion, it hikes about 15 % up than its land development in 2012. Land for development is about 20 % of total asset in 2013. The company has land bank in several strategic places over all indonesia. Real Estate Company usually has land bank for future project. The valuation of its asset usually is conducted by independent appraisal.

Forecast

The predicted sales growth in 2014 is at 20.3 %, the same as the revenue growth in 2013, the company is expected at least reach the same increase at last year. The sales growth in 2015 and 2016 are predicted about 15 %. The average growth of real estate industry between in 2006 in to 2012 is at 13 %. The company is considered attain above 13 %, the stimulus of the government in infrastructure project might encourage real estate industry growing faster.

The net additional of fixed asset consider at 5-7 % of total sales in 2015 to in 2016. 

INDOSAT (ISAT)

Predicted Economic Growth : 5.2 %

Based on The World Bank, economic growth of indonesia is predicted rise 5.2 % in 2015. Mean while the third quarter of economic growth in 2014 is 5.1 %. Slow down of economic growth in the last two years is happening due to recovery of US economic, as the Fed rises its benchmark rate which has pulled the investment to the country.

United state is the biggest partner of indonesia in international trade. Indonesia imports various goods from US for production and consumption. The currency exchange rate is very important to indonesia.  

Based on data of statistic bureau the current account is still deficit because many company in indonesia needs raw material from over sea. They should conduct importing goods for production. Based on particular research center the current account deficit is predicted at range of 2.4 %  

If the price hike the demand will decline, and the people will decrease their consumption. The domestic consumption as the biggest part of GDP will decline and the total GDP will decrease.  

The Fed ends its quantitative easing; Russia raised its interest rate at 17 %

The Fed has finished its monetary policy, quantitative easing, which is likely a liquidity trap to the market. They sold Treasury bond with almost zero interest rate to generate their economy. Once situation start to recover, Aggregate demand move to its potential GDP, they advance the interest rate.  It is strengthening the US dollar to almost all global currency.

The Inflation rate of indonesia will rise at range of 6.5% - 7.5 % as the rupiah is weaken to US dollar and The government allocated its fuel subsidy to productive posts. The price is encouraged to shift price of goods as the transportation cost, energy cost and wages cost are increase.

While Russia increase its rate in order to rise its currency to US dollar. Russia suffered high inflation rate after US have given sanction of economic related to war in Ukraine.

Telecommunication Industry: Tariff war, merger and Technology competition

Indonesia is 4^th biggest country with almost 250 million citizens; the country is a potential market for telecommunication industry. 50 % of citizen in indonesia is under 30 years old and they are at productive age which has strong consumption in cellular service and data service.

The market is still potential; the industry grew more than 1.5 times between 2007 -2012. For data service, indonesia has relatively low internet penetration compared to other country. In 2013 indonesia only has 22 % internet penetration.  Malaysia has internet penetration 61 % and Vietnam has 34 %.

In indonesia there are commonly two kind of telecommunication operator, the CDMA and the GSM operator. The esia and smartfren, as the CDMA operators seem at its down turn as the technology of CDMA is not as fastest as the technology improvement of GSM cellular. In 2010, smart telecom did the same thing, they did merger with mobile-8 and they establish new company, Smart Fren. The two companies plan to do merger to strengthen their market share and positioning. Both of the companies impose loss of their profit. They loss its competition with GSM technology as the 3G GSM offers cheaper tariff in its service.

XL axiata, a Malaysian investment company has done acquisition of Axis Telekom Indonesia. The XL axiata gets wider spectrum of frequency, the company expand its spectrum in to bandwith of 1800 Mhz.

Indonesia is still acknowledged as potential market for Telecommunication industry, mostly cellular. Strong growth of Smartphone sales is also good signal for this industry.

The average cellular revenue per BTS of Top 3 operator in first quarter 2013 was at IDR 185 million, it is higher than first quarter of 2014. The decline is caused by higher inflation rate which force consumer to reduce their spending and price war between the operators, cheaper price is preferred.

 ISAT

Low operating profit Margin, high cash to sales ratio

Despite in 2013 revenue increase slightly at 6.4 % compared to the last year. The company still loss IDR -2,666 trillion rupiah. Loss in foreign exchange rate is amounting about IDR 3 trillion in 2013. In 2012 the company could get profit after they had sold particular asset and it was a gain amounting to IDR 1,2 trillion. In 2012 the company sold thousands of its telecommunication towers to Tower Bersama.  

The low operating profit margin causes the company hard to get positive profit margin. The biggest part of revenue contribution is in cellular segment. In 2013 it was 83 % of total sales.

Despite the net income of 2013 was negative, the EBITDA is at IDR 7,8 trillion, the high depreciation and amortization cost reduce the net profit margin of the company. The ratio of cash to sales is also high; in 2013 it was 9.4 %.

In the future the company will take position as the leader in data and smart device in its market and they also plan to reduce cost of operation. As the industry of telecommunication is still growing, The Company should be able to increase revenue. Based on merill lynch the industry grew from 6.5 in 2007 in to 10.5 in 2012, it was growing about 1.5 times. The smart phone sales in indonesia also increase sharply in 2013, based on gfk it advanced from 14,302 units in to 20,981 units. The average revenue per user in 2013 decreased compared to ARPU at 2012. The decline is happening because of hard competition with competitor, especially in its price and the usage of free internet service in several store or café. Consumer allocated their money for buying a cup of coffee for getting free internet service.

The company could expand their business in restaurant and café to capture this segment. For example, the company sells their coffee only with its e-money product as its payment.

  

Forecast

The assumption is taken with 7-10 % growth of the next 3 years. The assumption might not suit with the company’s business plan, but the assumption could be one of medium scenario. The consumption in cellular segment will drop as the inflation rate increase. The consumer may reduce their spending include buying pulse.

The growth of about 7-10 % is contributed with huge capital expenditure, 45-50 % of total revenue. The assumption used the same ration of 2013 such as activity ratio, profitability ratio and etc. 

CHANDRA ASRI PETROCHEMICAL CAP

Background

Indonesian economic in 2014 may possibly be at down turn, economic growth decline since 2012 -2013 which was at 6.3 and 5.8 consecutively. Accordance to bank mandiri, the economic growth of indonesia will be at 5.1 in 2014. Based on data at the central bank, Economic growth of third quarter is at 5.1 %.

The decline of economic growth might be caused by the economic slow down of emerging market such as india and china and also the hike of price level as government allocated fuel subsidy to other sectors.

Government allocated its subsidy for fuel and allocated it to several productive posts such as infrastructure and also fund for social security.

The inflation rate will be rise as the price of gasoline increases up. In other side Government spending will be higher as the its allocation of subsidy to others sectors. The inflation rate is predicted at 6.5 – 7.5.

In short run Aggregate demand will decrease and real GDP will decline, in order to keep better real GDP equal potential GDP, the allocation program has to be implemented as soon as possible.

Meanwhile the fed will increase its interest rate, the fed will reduce its money supply and they will sell more Treasury bill. Foreign capital may be removed out from indonesia in huge amount. The currency rate will be hit by the Fed’s policy which plans to rise  interest rate in second quarter of next year.   

Central Bank has increased interest rate at 7.75 % to reach its target of inflatiion rate. That means the central bank reduces the currency in the market. The currency rate will be expected at stable exchange rate to US dollar as the increase in interest rate of goverment bonds.

The positive news is the decrease of Global oil price that is expected reducing cost for importing crude oil. Based on Bloomberg in November 2013, oil price decline 30 %, demand of crude oil is slowing down and several industries seems start to use substitute product such as natural gas, solar energy,shale gas and coal etc. 

The weaken currency will be an opportunity to increase export sector. As the source of various commodities indonesia has opportunity to export commodity with cheaper price even though the bank will rise interest. The strategic industry related to export oriented may need lower financial cost to advance export. Government might give particular incentive such as tariff, quota and tax in order to increase export as operational cost climbs driven because of allocation of fuel subsidy.

Politics and Government

The government under president of Jokowi has programs in agriculture, infrastructure and social security. Government plans to build many water dams for plantation and farming and to open irrigation. Another program is at maritime industry. The sector related to its sectors may increase significantly during Jokowi administration.

The big concern is at the stability of politics situation. As long as parliament still has either internal conflict or external conflict there is no guarantee the politics circumstances will support the economic situation. According to Bloomberg news, 38 % of government bond is owned by investor from oversea that means rupiah exchange rate is likely affected by investor from abroad who is sensitive to political situation.

Parliament is owned by the opposite parties as they are the major part of parliament. The parliament plans to use its interpellation right to ask the government about the allocation of fuel subsidy. The politics situation may possibly be worse. Government needs support from the opposite parties, as they power more than 50 % of votes.

Petrochemical Industry

Expert said that this sector as the mother of industry because it contributes to give input to various industries such as automotive, textile, food and beverage and etc. In indonesia, petrochemical industry is still lack of investment because it needs much more fund to establish integrated petrochemical industry such as petrochemical refinery, olefin industry and etc.

Olefin as potential market

Olefin is the most demanded raw material in petrochemical industry at Indonesia. Olefin could be extracted in to various products such as polyethylene, polypropylene, styrene monomer and etc. These products could be used to produce many kind of product in downstream industry. These are plastic bags, bottles, food containers, automotive parts, tires, synthetic rubber, fibers and filaments and others consumer product.

Although the demand of olefin product has increased, the supply of chemical product is not able to capture the opportunity. The upstream petrochemical industry is not capable yet in serving domestic demand. There are two biggest companies in upstream industry of petrochemical which produce olefin, Pertamina and Chandra Asri centre.

Olefin is a downstream product which is having strategic value because of its derivative product is used in many industries.

The stumble in enhancing olefin production is the availability of naphta in indonesia. Naphta is a derivative form of crude oil. 90 % of cost of production in producing olefin is spent for purchasing naphtha. This is useful to breakdown the chain of hydrocarbon. In almost every year indonesia Imports 2 millions tones of naphta for domestic industry.

The lack of naptha supply for olefin industry is caused by less investment in petrochemical refinery in indonesia. The high demand of crude oil for fuel product and the decline of oil reserve in indonesia are affected the supply of naphta. This circumstance insists the industry player import the naphtha from another country. The cost is very affected by the fluctuation of foreign exchange rate which is used to make decision in investing fund for purchasing naphta.

In other side the industry is also having problem in capacity of production, especially for ethylene and propylene. The capacities of those are below the domestic demand. Its capacities are 600,000 tones and 865,000 tones while the demands are 1.04 million tones.

In 2015, few companies will increase the capacity of production; they are joint venture of pertamina - PTT Global chemical and Chandra Asri Petrochemical.

Chandra Asri Petrochemical is the only producer of ethylene, styrene monomer and butadiene in domestic. The company is also one of two producer of polyethylene and one of three producer of polypropylene in indonesia. Chandra Asri has 50 % market share for polypropylene and has 30 % of polypropylene’s market share in domestic. (annual report).

The opportunity in olefin industry and its derivative product is still promising for investor because the main player in its business is small in number and its capacity is under the domestic demand.

CHANDRA ASRI PETROCHEMICAL

Strong Capital access

The company is established in 2011, it is new company which was formed from a merger between two companies, Tri Polyta and Chandra Asri. This is owned by several conglomerates group, they are salim, ciputra and prayogo pangestu’s family,

The Majority shareholder is PT Barito Pacific with 55.36 % of total share. The biggest contribution to sales is Polyolefin product, which is at 50,86 %of total revenue.  The other products are Styrene Monomer, Olefin and Butadiene. 75 % of total revenue is contributed from domestic market and the rest is from export.

The company also has strategic partnership with international company such as Michelin for synthetic rubber production and Basf for production license.

Capital Barrier to new entry and high Plant Capacity utilization rate

The barrier for new entry in this industry is huge investment amount for establishing the business.  The company has big market share in indonesia. Accordance to its annual report the company has used its capacity almost 90 % in average. The demand in 2013 is still high and I think the company will have strong demand in 2014 as the competition in olefin production is low. 

The average of capacity utilization is also high; the demand in the market seems strong. The average of its utilization is 91.8 percent. The lack in this industry is limited supply of naptha, it is fully imported from abroad.

Chandra Asri Petrochemical is the only producer of ethylene, styrene monomer and butadiene in domestic. The capacity of production is still below the domestic demand. 

Global Oil price and inflation rate

naptha as the main raw material of the company declines in its price as the oil price decreases more than 30 % compared to the previous years. The company may reduce its cost of goods sold and it is expected increase profit. The decline of rupiah currency is expected exceed by the decline of oil price. As long as wages do not highly increase, the downward of oil price can be a good momentum to increase net income.

75 % of total revenue is contributed from domestic market, which means the biggest income is in local currency. The energy price is also higher caused by the allocation of oil subsidy by government; other costs which hike are transportations.

In 2013 the revenue has advanced 9.7 % up compared to 2012. The company has expanded its business segment in butadiene segment. The profit rises sharply and so did the gross margin in 2013 compared to 2012.

The activity ratio is better in 2013 than 2012, with good market share and low competition in domestic, the company will grow in the next 3 years. My assumption, the sales will grow more tha 10 % as the inflation rate advanced. The capacity of production is beneath the demand, the company should add new factory or equipment to increase production.