Industry Outlook Midstream Consumer (Indonesia)

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1 Refer to important disclaimers at the end of this report DBS Group Research Asian Insights Office 24 August 216 Macro Outlook GDP growth back on upward trend Indonesia s GDP has been growing at a relatively slow pace since 213 Optimism was in the air when the new government was elected in late-214, with the target for GDP growth as high as 7% However, the slowing global economy has put pressure on the commodity sector, which Indonesia s economy is highly dependent on Commodity exports have slowed down and prices are also at multi-year lows This has put several companies out of business and dampened domestic economic growth In 215, GDP growth was recorded at 48% on-year, relatively slower compared to the past five years, largely due to a weak global economy, struggling commodity sector and the sluggish rollout of the government s infrastructure projects DBS estimates 216 GDP growth to be slightly stronger at 51% Our economist expects slightly stronger growth for 216 GDP at 51%, 3 basis points higher than 215 The rollout of infrastructure projects is expected to pick up pace this year, while consumption is expected to gradually recover in light of lower energy prices and the stimulus packages launched by President Joko Widodo in late-215 This estimate is in line with the central bank s estimate of 5-54% and the government s estimate of 52% In the second quarter, GDP growth picked up slightly to 518% from first quarter growth of 492%, arising from stronger personal consumption growth, though investments remained relatively slow GDP growth rate: Year-on-year change % growth y-o-y 1 Economic growth has been relatively weaker in the past five years 2 Second quarter GDP growth at 518%, increased marginally from 491% in the first quarter 3 GDP growth is expected to expand in subsequent quarters with faster rollout of infrastructure projects as well as higher consumption 4 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 4 DBS estimates 216 GDP growth at 51% on-year Source: Bank Indonesia, DBS Bank Page 1

2 Industry Outlook Consumer confidence is better than last year, but companies tend to signal cautious optimism We note that the Consumer Confidence Index (CCI) this year has been relatively better to date (around the 11 level) compared to last year, despite being on a downward trend in the first four months of the year Companies under our coverage have registered better topline growth of 15% and 84% on-year in the first and second quarters, respectively While this performance ties in with the improvement in the CCI, part of the improvement in sales should be attributed to the lead-up to the Lebaran festive season The Lebaran occurred ten days earlier in 216, in early-july, compared to mid- July in 215 In our view, this set of results suggested no further deterioration in demand and a recovery as being underway, though companies are still signalling that there is uncertainty over a full return of demand Key Industry Trends Consumer confidence reversed its downward trend to tick up in May to July Consumer confidence was on a downward trend in the first four months of this year, though still hovering near the 11 level It ticked up in May through to July and was at 1142 (as of July), from 19 in April, which gave slight relief as the consumptive effect from the Lebaran festive season usually comes four to five weeks prior Note that the Lebaran this year fell in the first week of July Consumer Confidence Index Consumer confidence is more stable this year compared to Downward trend in the CCI for the year was reversed in May through to July Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Source: Bank Indonesia, DBS Bank Page 2

3 Inflation is favourable this year With lower fuel prices, lower electricity tariffs, and the government s efforts to stabilise basic food prices, inflation has been relatively low and stable this year at around 4% on-year Although this could be partly due to a higher base from last year (fuel prices were high in 215 following the subsidy removal), a lower inflation rate will generally bode well for consumer sentiment and imply higher disposable income Our in-house estimate for the inflation rate in 216 is at 44% on-year Inflation rate: Year-on-year change 9 % y-o-y Inflation at 32%on-year in July 2 Lower fuel prices this year (15-32% lower) contribute to a lower inflation rate 3 Government s efforts to stabilise basic food prices also help to lower inflation rate 2 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Source: Bank Indonesia, DBS Bank Private consumption growth improving after hitting a low in the 215 fourth quarter After being on a declining trend for the past 12 quarters, private consumption growth seems to have bottomed out in the 215 fourth quarter and is on a higher growth trend It grew 54% in the 216 second quarter, improving from the first quarter s 494% This gives a positive signal that is in line with our expectation of a gradual improvement Private consumption growth: Year-on-year change 58% 568% 56% 538% 54% 532% 533% 525% 52% 514% 513% 511% 54% 51% 5% 497% 495% 492% 494% 48% 46% 44% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 1 Private consumption growth grew at a faster clip in the second quarter, indicating that the consumption trend growth could be turned up 2 Optimistically speaking, the first quarter marked an inflection point, with the second quarter registering stronger growth, though it could be partly due to the Lebaran effect Source: Bank Indonesia, DBS Bank Sales of two-wheel vehicles remained weak, implying cautiousness in high-ticket discretionary purchases Until June, the cumulative sales of two-wheel vehicles came in at 296 million units, down 7% on-year On a monthly basis, sales in June grew around 12% on-month over May, which was helped by the Lebaran season in early-july Historically, seasonally stronger sales in two-wheel vehicles should be seen one to two months prior to Lebaran Page 3

4 Sales of two-wheel vehicles: Year-on-year growth 6% 5% 4% 3% 2% 1% % % growth y-o-y 1 Cumulative two-wheel sales volume until July was down 9% on-year 2 Cumulative growth remained slow, implying that discretionary purchases remained weak -1% -2% -3% -4% -5% Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 3 Unit sales in June were higher on a month-onmonth basis, helped by the Lebaran effect in early-july Source: Indonesia 2W Association, DBS Bank Fuel prices are lower this year The removal of the energy subsidy in late-214 by President Widodo raised fuel prices, which led to weaker purchasing power in 215 Fuel prices are now determined quarterly based on the global oil price, the Indonesian rupiah exchange rate, as well as the domestic inflation rate The current low oil price environment has been favourable for fuel prices: The RON88 fuel price is now 15% lower than last year, while the diesel fuel price is 32% lower To provide more certainties to consumers purchasing power, the latest revision in April will hold until September (ie no revision in July) RON88 fuel price and diesel price (rupiah per litre) 9, RON88 fuel price 8, Diesel price 7, 6, 6,45 5, 5,15 4, Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 1 Removal of subsidies in late-214 led to a spike in fuel prices, which contributed to weak purchasing power 2 Currently, the RON88 fuel price is 15% lower than last year, while the diesel fuel price is 32% lower 3 The current price level will hold until September Source: Pertamina, DBS Bank Page 4

5 Sub-segment Outlook 1 Packaged food Packaged food sales expected to grow at a compound annual growth rate (CAGR) of 116% over 215 to 22 The value sales of packaged food are estimated to grow at a CAGR of 116% over 215 to 22 after growing at a CAGR of 134% over 21 to 215, led by the ice cream and breakfast cereals categories Value sales of packaged food segment in Indonesia 6, 5, 4, 3, Rp bn Rice, Pasta and Noodles Baby Food Baked Goods Dairy Confectionery Savoury Snacks Processed Meat and Seafood Oils and Fats Others 1 Other segments include ice cream, sweet biscuits, sauces and dressings, etc 2 In 215, 36% of sales in packaged food came from rice, pasta and noodles 2, 1, a) Rice, pasta, and noodles Value sales of rice, pasta, and noodles in Indonesia 25, Rp bn 2, Pasta Noodles Rice 15, 1 Rice remains the primary source of carbs for Indonesians, making up 73% of total sales in this category 1, 5, 2 The rice, pasta and noodles category is projected to grow at a CAGR of 12% over 215 to 22 Page 5

6 Value share of noodles in Indonesia ConscienceFood Holding Ltd 26% Jakarana Tama PT 28% ABC President Indonesia PT 19% Wings Corp 152% Others 56% 1 Indofood with its instant noodle brand, Indomie, commands a 72% share of the domestic noodles market Indofood Sukses Makmur Tbk PT 719% b) Confectionery Value sales of confectioneries in Indonesia 45, Rp bn 4, Others 35, Sugar Confectionery Chocolate Confectionery 3, 25, 2, 15, 1, 5, 1 Chocolate confectioneries make up more than half of the market, and is projected to grow at a CAGR of 16% over 215 to 22 2 The total confectionery market in Indonesia is expected to grow at a CAGR of 1% over 215 to 22 Value share of confectionery players in Indonesia Others 415% Nestlé SA 51% Petra Foods Ltd 24% Perfetti Van Melle Group 133% Mayora Indah Tbk PT 13% Mondelez International Inc 58% 1 Petra Foods dominates the confectionery space; its Silver Queen chocolate bars commanded a 13% market share in Sugar mints Mentos by Perfetti Van Melle Group commands around a 6% value share in the confectionery market Page 6

7 c) Savoury snacks Value sales of savoury snacks in Indonesia 4, Rp bn 35, 3, 25, 2, 15, 1, 5, 1 Savoury snacks in Indonesia are expected to grow at a CAGR of 123% over 215 to 22 2 Growth driven by population growth, expanding midincome segment, as well as growth in convenience stores Value share of savoury snacks in Indonesia Others 55% Siantar Top Tbk PT 49% Garudafood Group 21% PepsiCo Inc 115% Dua Kelinci PT 76% Orang Tua Group 54% 1 GarudaFood Group with its roasted peanuts Kacang Garuda leads the market with approximately 16% value share 2 Second largest value share is held by PepsiCo Inc which owns popular brands such as Cheetos and Chiki Its presence in Indonesia is under Indofood Sukses Makmur PT Page 7

8 2 Drinks Total domestic drinks market to grow at a CAGR of 112% over 215 to 22 The value sales of drinks are estimated to grow at a CAGR of 112% between 215 and 22 after growing at a CAGR of 128% between 21 and 215 Value sales of drinks segment in Indonesia 25, 2, 15, 1, 5, Rp bn Alcoholic Drinks Hot Drinks Soft Drinks 1 In 215, soft drinks made up around 7% of total sales in drinks, while hot drinks made about 24% 2 Soft drinks include juice and energy drinks, and hot drinks include tea and coffee as well as milk products a) Tea products Value sales of tea drinks in Indonesia 18, Rp bn 16, 14, Others 12, Black Tea Green Tea 1, 8, 6, 4, 2, 1 Value sales of tea drinks (excluding ready-to-drink teas) estimated to grow at a CAGR of 113% over 215 to 22 2 Green tea dominates the tea market with 61% share, while black tea has 35% Page 8

9 Value sales of ready-to-drink tea in Indonesia 35, Rp bn 3, 25, 2, 15, 1, 1 The value sales of ready-to-drink tea exceed that of regular tea bags/ powdered tea 2 Ready-to-drink tea expected to grow at a CAGR of 125% over 215 to 22 5, Value share of ready-to-drink tea in Indonesia ABC President Indonesia PT 39% Others Beverage Partners 79% Worldwide SA 97% Mayora Indah Tbk PT 16% Orang Tua Group 123% Sinar Sosro PT 556% 1 Sinar Sosro leads the ready-to-drink tea market with its Teh Botol brand 2 Teh Gelas by Orang Tua Group has the second largest value share with 123%, a far cry from Sosro s 556% Page 9

10 Risks Rupiah weakness Our in-house estimate on the rupiah is at 13,973 rupiahs per US dollar by the end of the year, and at 14,331 rupiahs by the end of the 217 first half The rupiah is currently hovering at the 13,3-rupiah level, implying slight downside from the current level However, the rupiah has been relatively stable this year compared to last year, and has also appreciated by around 3% year-to-date The further rupiah depreciation that is expected this year is mostly on the back of a strengthening US dollar, ie when the Fed decides to tighten its monetary stance US dollar/rupiah movement 16, 14, 12, 1, 8, Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 1 The rupiah is relatively stable this year, appreciating around 3% year-to-date it is currently at the 13,3- rupiah level against the US dollar 2 Our in-house estimate calls for slight downside to the rupiah, closing the year at around 13,973 rupiahs per US dollar largely due to a stronger US dollar as the US Federal Reserve is expected to hike rates Source: Bloomberg Finance LP, DBS Bank Commodity price spikes The prices of most commodities (save for sugar, coffee and crude palm oil) are at multi-year lows given sluggish demand and the fragile global economy This has provided slight relief to input costs and selling prices for some companies However, we note that most commodities are denominated in US dollars therefore, an unexpected rapid depreciation in the rupiah could crimp margins for some food and beverage companies as input costs rise Recovery in oil price Currently, the oil price is relatively low (around US$5 per barrel) which provides slight relief to the prices of non-subsidised fuel and electricity But, as the supply and demand dynamics of the global oil market become less volatile, a recovery in the oil price could potentially increase domestic energy prices, thereby negatively impacting consumer sentiment and purchasing power Page 1

11 Companies We Cover Indofood CBP Sukses Makmur Indofood Sukses Makmur Matahari Department Store Matahari Putra Prima Mayora Indah Mitra Adiperkasa Unilever Indonesia Our In-House Expert Andy Sim Please note that DBS Bank Ltd may have research coverage in the companies mentioned in this industry report, that have been produced prior to or subsequent to its publication Please refer to the links below for the latest specific equity research reports published on below-mentioned companies and the accompanying disclaimer/disclosure of DBS interest in the companies mentioned in the respective reports Page 11

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