Hero Supermarket (HERO IJ) A new chapter for HERO
PT Hero Supermarket Tbk (HERO) is a modern retail company focusing on four types of Trade & services business: supermarket, health & beauty, hypermart, and home furnishing. Based on our ground check at Hero Supermarket and IKEA (HERO’s home furnishing business) located Company Report at Alam Sutera and Sarinah shopping centers, we predict that HERO’s earnings are to improve going forward. This is on the back of 1) the improvement in shopping December 27, 2016 experience and quality of Alam Sutera Hero Supermarket, 2) IKEA’s leading edge over its competitors, and 3) HERO’s efficiency strategy of closing a great number of Starmart stores. Recommendation Not rated A new story from a new supermarket Target Price (12M, IDR) N/A We have conducted a ground check at Hero Supermarket at Alam Sutera and Sarinah Share Price (12/23/16, IDR) 1,255 shopping centers. We came to the conclusion that the Alam Sutera Hero Supermarket is to be HERO’s earnings growth driver over the longer term. This is on the back of its new Expected Return N/A renovation, which has improved the shopping experience for its customers, compared to the Sarinah Hero Supermarket. Despite the supermarket’s premium pricing strategy, we
believe that the business is less price-sensitive predicated on the upper-middle class customer target. Consensus OP (16F, IDRtr) N/A IKEA is to be a key driver for HERO EPS Growth (16F, %) N/A P/E (16F, x) N/A Given the higher contribution of non-food segment revenue to HERO’s 9M16 total Industry P/E (16F, x) N/A revenue, we also visited the IKEA outlet in Alam Sutera for mystery shopping. We believe Benchmark P/E (16F, x) 16.5 that the success of a retail company can be seen by the number of customers and the Market Cap (IDRbn) 5,250.5 products they buy. As the time struck 9.00 p.m. in the day of our ground check, we Shares Outstanding (mn) 4,183.6 observed long queues of customers at IKEA’s cashiers, which we believe demonstrated Free Float (mn) 562.0 the customers’ enthusiasm towards IKEA’s products. All in all, we predict IKEA to be the Institutional Ownership (%) 27.1 growth engine for HERO’s earnings over the longer term. Beta (Adjusted, 24M) 0.9 As per IKEA Indonesia press release in 2015, the company successfully grabbed 2.5mn 52-Week Low (IDR) 960 visitors in the first year of its establishment in Indonesia. IKEA offers one-stop solution 52-Week High (IDR) 1,400 furniture, meaning that it sells all kinds of home furniture. The fact that IKEA also (%) 1M 6M 12M displays furniture layout designs for various rooms belonging to 25m2 - 55m2 houses in Absolute 0.4 11.1 9.1 its stores serves as IKEA’s edge over its competitors. Relative 3.9 7.9 -2.0
(D-1yr=100) JCI HERO Efficiency strategy by closing Starmart 120 110 Starmart is HERO’s convenience store business. After 81 of its stores being closed during 100 the course of January-September 2016, now Starmart only has 4 stores left. Given that 90 12% of HERO’s 9M16 total operating expenses were comprised of rent expenses, we 80 consider the closing of Starmart to be a good efficiency strategy to reduce the
company’s large rent expenses. Furthermore, the competition among convenience stores
1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16
10/16 11/16 12/15 in Indonesia proves to be very tight, with the mushrooming of Alfamart and Indomaret, their strong brand image as convenience stores, and their large number of customers. PT. Daewoo Securities Indonesia
FY (Dec) 12/10 12/11 12/12 12/13 12/14 12/15 7,667.3 8,952.1 10,510.4 11,900.4 12,769.0 14,352.7 Andy Wibowo Gunawan Revenue (IDRbn) +62-21-515-1140 OP (IDRbn) 355.3 426.6 487.1 144.5 -173.5 -246.4 [email protected] OP Margin (%) 4.6 4.8 4.6 1.2 -1.4 -1.7 Net Profit (IDRbn) 221.9 273.6 302.7 671.1 43.8 -144.1
EPS (IDR) 65.1 80.2 88.8 177.8 10.0 -34.0
ROE (%) 21.4 21.3 19.7 19.1 0.8 -2.7
6.4 13.2 47.0 13.6 156.4 - P/E (x) P/B (x) 1.2 2.6 8.6 1.9 1.8 0.9 Note: All figures are based on consolidated data; OP refers to operating profit Source: Bloomberg, Daewoo Securities Indonesia
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
December 27, 2016 Hero Supermarket
Cleaner, cooler, and more exclusive after renovation
We conducted a ground check using the mystery shopping method at Hero Supermarket located at Alam Sutera mall, Tangerang, and Banten provinces. Our findings revealed that the supermarket had become cleaner, cooler, and more exclusive after the renovation as of August 2016. Hero Supermarket, operated by PT Hero Supermarket Tbk (HERO), targets customers from the upper- middle income class; hence its premium pricing strategy. Given the customer target group, we believe that the business is less price-sensitive. Product quality, on the other hand, plays a more significant role in customers’ satisfaction.
Figure 1. A more exclusive look after the renovation
Source: Daewoo Securities Research
Upon checking the produce aisles in the newly renovated Hero supermarket, we found that the vegetables were fresh and neatly arranged. The refrigerators had low enough temperature so as to keep the vegetables fresh longer. In addition, there were more meat products sold, such as pork. This shows that the renovated Hero supermarket in Alam Sutera had a more complete meat product selection compared to that in the unrenovated ones. On a different note, the Alam Sutera Hero supermarket had cooler air conditioning system and brighter lights for a more comfortable shopping experience. Figure 2. Fresh & clean vegetables Figure 3. New products in the new HERO at Alam Sutera
Source: Daewoo Securities Research Source: Daewoo Securities Research
HERO has been expanding its supermarket business for as long as 4 years. By 2012, HERO had build 17 new supermarkets, 7 hypermarket stores, 48 health stores (Guardian) and 25 new convenience stores (Starmart) in Indonesia. This aggressive move resulted in the company’s increased 2012 earnings, with revenue and net profit amounting to IDR10.5tr (+17.4%) and IDR302.7bn (+10.6% YoY), respectively.
As of 2016, HERO has started to focus more on expanding its retail and supermarket businesses, Giant and Hero, respectively. The company also plans for retail and supermarket business penetration to Sumatra and Sulawesi islands. We consider this to be a good strategy given the stricter competition in Java island vis-à-vis in Sumatra and Sulawesi.
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KDB Daewoo Securities Research December 27, 2016 Hero Supermarket
Figure 4. Revenue increased 17.4% YoY in 2012 Figure 5. also net profit increased 10.6% YoY in 2012
(IDR tr) (IDR bn) 15.0 14.4 400.0 365.3 14.0 302.7 300.0 273.6 12.8 13.0 11.9 12.0 200.0
11.0 10.5 100.0 79.7 10.0 9.0 9.0 0.0
8.0 -100.0 7.0 -96.6
6.0 -200.0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
Source: Bloomberg, Daewoo Securities Research Source: Bloomberg, Daewoo Securities Research
Sarinah Hero Supermarket as a comparison
As a comparison, we also conducted a ground check in the unrenovated Hero Supermarket at Sarinah shopping center, Central Jakarta, and found several findings. Firstly, the supermarket’s location on the lower ground floor of Sarinah shopping center is less strategic compared to the one on the ground floor at Alam Sutera mall. Also, as we arrived at the Sarinah Hero Supermarket, we did not see many customers at the cashiers. In addition, its store design was not as attractive as the one in the newly renovated Hero supermarket. As per our discussion with the staff, it is still unclear whether the supermarket at Sarinah will see a renovation in the future. Figure 6. Less strategic location at Sarinah Figure 7. Not many shoppers in sight
Source: Daewoo Securities Research Source: Daewoo Securities Research
As we continued our trip inside the Hero Supermarket at Sarinah, we noticed that the air conditioning system was less cool compared to the one at Alam Sutera. The layout was also arranged in a less neat way and packed with too many products (see Figure 9). In the fruit and meat shelves, we saw that the fruits were less fresh (see Figure 10) and the meat product selection was not as complete as the one at Alam Sutera Hero Supermarket (see Figure 11).
Figure 8. Air conditioner not working well Figure 9. Layout not neatly arranged
Source: Daewoo Securities Research Source: Daewoo Securities Research
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KDB Daewoo Securities Research December 27, 2016 Hero Supermarket
Figure 10. The fruit is less fresh Figure 11. Less complete meat products
Source: Daewoo Securities Research Source: Daewoo Securities Research
Lower 3Q16 earnings, but only a seasonal phenomenon
For 3Q16, HERO posted lower net profit of IDR25.1bn (-54.6% QoQ) due to its lower revenue of IDR3.3tr in 3Q16 vs. IDR3.8tr in 2Q16. Another factor which dragged down the company’s earnings is the higher income tax expenses of IDR17.9bn in 3Q16, compared to IDR6.4bn in 2Q16. We believe the lower earnings were only a seasonal phenomenon as we notice that these also happened to other retail companies, such as Matahari Putra Prima (MPPA), Ramayana Lestari Senotsa (RALS), and also Ranc Market (RANC) (see Figure 13). Figure 12. Lower net profit in 3Q16 Figure 13. Retail companies’ quarterly net profit
(IDR bn) (IDR bn) 2Q16 3Q16 500.0 300.0 400.0 250.0 300.0 200.0 200.0
100.0 150.0
0.0 100.0
-100.0 50.0
-200.0
4Q13 1Q14 2Q16 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 3Q16 0.0 HERO MPPA RALS RANC
Source: Bloomberg, Daewoo Securities Research Source: Bloomberg, Daewoo Securities Research
HERO’s revenue portfolio is divided into two segments: food and non-food segments. For 9M16, food segment is the biggest contributor to HERO’s total revenue, which accounted for 86.3% of 9M16 total revenue. Non-food segment, on the other hand, contributed 13.7% to 9M16 total revenue. On YoY basis, we found that non-food segment contribution in 9M16 was slightly higher compared to that in 9M15 (see Figure 14). We attribute the higher revenue contribution from IKEA as one of the company’s well-performing businesses.
Figure 14. HERO’s breakdown of revenue history
(%) Food Non Food
105.0
100.0
95.0 13.4 13.7 90.0
85.0
80.0 86.6 86.3
75.0 9M15 9M16
Source: Company data, Daewoo Securities Research
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KDB Daewoo Securities Research December 27, 2016 Hero Supermarket
IKEA’s mystery shopping results
Given the higher contribution of non-food segment revenue to HERO’s 9M16 total revenue, we also visited the IKEA outlet in Alam Sutera for mystery shopping. For a quick reminder, IKEA, which franchise in Indonesia in owned by HERO, started operating in October 2014. As per IKEA Indonesia press release in 2015, the company successfully grabbed 2.5mn visitors in the first year of its establishment in Indonesia. IKEA offers one-stop solution furniture, meaning that it sells all kinds of home furniture. The fact that IKEA also displays furniture layout designs for various rooms belonging to 25m2 - 55m2 houses in its stores serves as IKEA’s edge over its competitors. The furniture layout designs help customers imagine how they would furnish their own house in a way which is not provided by IKEA’s competitors. Figure 15. 55m2 house Figure 16. 55m2 furniture layout 1
Source: Daewoo Securities Research Source: Daewoo Securities Research
In regards to this, we observed IKEA’s furniture layout design for a 55m2 house. The sample layout looked good with the furniture mix. What is more interesting is the layout design for a 25m2 house, which is more or less equal to a studio apartment. We believe this will be suitable for people who own a studio apartment, which number keeps growing in Jakarta due to the increased price of landed house in the metropolis. Figure 17. 55m2 furniture layout 2 Figure 18. 55m2 furniture layout 3
Source: Daewoo Securities Research Source: Daewoo Securities Research
Figure 19. 25m2 house Figure 20. 25m2 furniture layout 1
Source: Daewoo Securities Research Source: Daewoo Securities Research
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KDB Daewoo Securities Research December 27, 2016 Hero Supermarket
Figure 21. 25m2 layout 2 Figure 22. 25m2 layout 3
Source: Daewoo Securities Research Source: Daewoo Securities Research
We believe that the success of a retail company can be seen by the number of customers and the products they buy. As the time struck 9.00 p.m. in the day of our ground check, we observed long queues at IKEA’s cashiers, which we believe demonstrated the customers’ enthusiasm towards IKEA’s products. All in all, we predict IKEA to be the growth engine for HERO’s earnings over the longer term. Figure 23. Long queue at the cashier Figure 24. IKEA’s storage
Source: Daewoo Securities Research Source: Daewoo Securities Research
Before we went to the cashier, we found several helpful kitchen appliances, such as manual mixer which works only by turning the handle instead of using power (see Figure 25). We also saw IKEA’s foodcourt crowded with customers having a meal after their shopping time, which can also indicate a strong demand for IKEA’s products. Figure 25. A helpful kithchen appliances Figure 26. IKEA’s foodcourt
Source: Daewoo Securities Research Source: Daewoo Securities Research
All in all, we have been able to observe HERO’s performance by ground checking using mystery shopping method, which we believe to be the best way to see a retail company’s level of success. Based on our observation, we expect IKEA to be HERO’s success key driver over the longer term.
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KDB Daewoo Securities Research December 27, 2016 Hero Supermarket
Starmart shutdown: HERO’s efficiency program this year
By 2015, HERO had five unit businesses: Hero Supermarket, Giant, Starmart, Guardian, and IKEA, each of which had 34, 173, 84, 318, and 1 store(s), respectively. However, HERO had planned to close several Starmart stores for efficiency.
Starmart is HERO’s convenience store business operating in high traffic areas within Jakarta. However, changes in format during 2014 – 2015 failed to boost Starmart’s earnings.
Figure 27. HERO’s 2015 unit business
173 stores 34 stores
84 stores 318 stores
Source: Company data, Daewoo Securities Research
After 81 of its stores being closed during the course of January-September 2016, Starmart now only has 4 stores left. Given that 12% of HERO’s 9M16 total operating expenses were comprised of rent expenses, we consider the closing of Starmart to be a good efficiency strategy to reduce the company’s large rent expenses. Furthermore, the competition among convenience stores in Indonesia proves to be very tight, with the mushrooming of Alfamart and Indomaret, their strong brand image as convenience stores, and their large number of customers.
Figure 28. Starmart stores remained 4 by 9M16 Figure 29. Rent expenses contributed 12.0% of opex
(stores) (%) 90 85
80 12.0 70 60 50 Rent 40 Others 30 20 10 4 88.0
-
Jan-16 Sep-16
Source: Alfamart (AMRT) presentation, Daewoo Securities Research Source: Company data, Daewoo Securities Research
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KDB Daewoo Securities Research December 27, 2016 Hero Supermarket
APPENDIX 1
Important Disclosures & Disclaimers
Disclosures As of the publication date, PT Daewoo Securities Indonesia, and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.
Stock Ratings Industry Ratings Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening Sell Relative performance of -10% * Ratings and Target Price History (Share price (----), Target price (----), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.
Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Indonesian jurisdiction and are subject to Indonesian securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of PT Daewoo Securities Indonesia, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or PT Daewoo Securities Indonesia except as otherwise stated herein.
Disclaimers This report is published by PT Daewoo Securities Indonesia (“Daewoo”), a broker-dealer registered in the Republic of Indonesia and a member of the Indonesia Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Bahasa Indonesia. If this report is an English translation of a report prepared in the Indonesian language, the original Indonesian language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.
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KDB Daewoo Securities Research December 27, 2016 Hero Supermarket
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