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Hero Supermarket (HERO IJ) a New Chapter for HERO

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Hero Supermarket (HERO IJ) a New Chapter for HERO 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 P/E (x) 6.4 13.2 47.0 13.6 156.4 - 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. Daewoo Securities Research 2 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 79.7 100.0 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 Daewoo Securities Research 3 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.
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