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https://www.research.hsbc.com Disclaimer & Disclosures: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. MCI (P) 126/02/2017 MCI (P) 069/06/2017 Indonesia Food & Beverages Introducing a fresh way to look at the sector Most Indonesian consumer stocks look expensive and growth in consumption has stalled – it’s time to take a fresh look at the sector We introduce our “five fundamentals” framework to assess barriers to entry, structural changes, balance sheets, profitability and management/ corporate governance Unilever Indonesia and Kalbe Farma (both rated Hold) score the highest marks in our framework EQUITIES CONSUMER & RETAIL October 2017 By: Selviana Aripin
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Page 1: Indonesia Food & Beveragespg.jrj.com.cn/acc/Res/CN_RES/INDUS/2017/10/10/4ccf5bf1... · 2017-10-18 · Unilever Indonesia and Kalbe Farma (both rated Hold) score the highest marks

https://www.research.hsbc.com

Disclaimer & Disclosures: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. MCI (P) 126/02/2017 MCI (P) 069/06/2017

Indonesia Food & B

everagesO

ctober 2017Equities // C

onsumer &

Retail

Indonesia Food & BeveragesIntroducing a fresh way to look at the sector

Most Indonesian consumer stocks look expensive and growth in consumption has stalled – it’s time to take a fresh look at the sector

We introduce our “five fundamentals” framework to assess barriers to entry, structural changes, balance sheets, profitability and management/corporate governance

Unilever Indonesia and Kalbe Farma (both rated Hold) score the highest marks in our framework

EQUITIESCONSUMER & RETAILOctober 2017

By: Selviana Aripin

Page 2: Indonesia Food & Beveragespg.jrj.com.cn/acc/Res/CN_RES/INDUS/2017/10/10/4ccf5bf1... · 2017-10-18 · Unilever Indonesia and Kalbe Farma (both rated Hold) score the highest marks

1

EQUITIES ● CONSUMER & RETAIL

October 2017

Why read this report?

Our “five fundamentals” framework offers a fresh way to

look at Indonesia’s F&B sector, in our view

We assess each company on barriers to entry, structural

changes, balance sheet strength, profitability and

management/corporate governance

We explain why Unilever Indonesia and Kalbe Farma score

the highest marks in our framework

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Exhibit 1: ASEAN food and beverage producers – valuation comparison

Bloomberg ticker Rating Currency

Latest price (lcy)

Target price (lcy)

Market cap

(USDm)

EPS growth 2017e

EPS growth 2018e

Dividend yield

FY2017e

PE (x) EV/EBITDA (x) Net debt/ equity

2016 ROE 2016 Name

3m ADTV (USDm) 2016a 2017e 2018e 2016a (x) 2017e (x) 2018e (x)

Century Pacific CNPF PM N.R. PHP 16.92 N.A. 0.6 1,183 7.0% 12.4% 1.2% 21.6 21.1 18.8 14.8 14.5 12.9 0.1 23% Charoen Pokphand CPIN IJ N.R. IDR 2,860.00 N.A. 1.4 3,465 17.4% 17.6% 1.3% 22.6 17.8 15.1 10.4 10.8 9.7 0.3 17% Delfi DELFI SP N.R. SGD 1.54 N.A. 0.4 689 -25.0% 33.3% 2.8% 37.6 25.2 18.9 18.3 13.2 11.4 -0.1 11% Indofood CBP ICBP IJ Reduce IDR 8,700.00 7,500.00 3.0 7,504 -1.7% 3.6% 2.5% 28.2 28.7 27.7 17.1 17.6 15.9 -0.3 22% Indofood Sukses Makmur INDF IJ Hold IDR 8,600.00 7,900.00 4.0 5,585 4.6% -0.3% 3.4% 18.2 17.4 17.5 8.6 8.3 7.8 0.2 15% Japfa Comfeed JPFA IJ N.R. IDR 1,255.00 N.A. 0.5 1,058 -36.2% 28.0% 1.8% 7.7 10.4 8.1 4.8 7.0 5.9 0.2 29% Kalbe Farma KLBF IJ Hold IDR 1,675.00 1,800.00 3.0 5,807 10.1% 9.9% 1.1% 34.1 31.0 28.2 22.3 20.1 18.2 -0.2 21% Mayora Indah MYOR IJ N.R. IDR 2,090.00 N.A. 0.3 3,453 4.5% 19.5% 0.8% 27.1 33.0 27.6 14.5 17.6 15.4 0.4 24% Nestle Malaysia NESZ MK N.R. MYR 84.80 N.A. 1.7 4,699 6.0% 6.6% 3.4% 28.8 29.5 27.6 19.9 20.3 19.0 0.4 94% PPB PPB MK N.R. MYR 16.82 N.A. 0.2 4,712 -3.8% 6.7% 1.5% 18.0 19.8 18.6 34.8 42.8 38.8 0.0 5% Thai President TF TB N.R. THB 268.00 N.A. 0.3 1,443 na na na 15.9 na na 10.0 na na -0.2 15% Thai Union TU TB N.R. THB 19.60 N.A. 4.9 2,799 -2.1% 15.5% 3.2% 17.3 16.5 14.3 15.1 14.7 12.7 1.6 13% Tiga Pilar Sejahtera Food AISA IJ N.R. IDR 895.00 N.A. 1.4 213 -39.6% 10.0% 0.9% 10.5 8.0 7.3 7.3 5.7 5.4 1.0 16% Unilever Indonesia UNVR IJ Hold IDR 50,825.00 45,100.00 6.0 28,683 20.1% 15.6% 1.9% 60.7 50.5 43.7 42.2 35.0 30.3 0.7 134% Universal Robina Corp URC PM Hold PHP 152.50 153.00 4.1 6,567 5.4% 16.4% 2.1% 26.1 24.8 21.3 15.5 14.7 13.1 0.2 17% Weighted Average 9.1% 12.1% 2.0% 37.9 33.6 29.7 26.4 24.0 21.2 Median 4.5% 14.0% 1.9% 22.6 23.0 18.9 15.1 14.7 13.0

Notes: Latest price as of 3 October 2017. N.R. = not rated, for non-covered companies. N.A. = not applicable Source: Thomson Reuters Datastream consensus forecasts for non-covered companies, HSBC estimates for covered companies

For more information on each of the four covered companies discussed in this report, please see our latest company-specific research, published on 6 October 2017.

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3

EQUITIES ● CONSUMER & RETAIL

October 2017

Executive summary 4

Taking stock of Indonesian F&B 4

The “five fundamentals” framework 6

Other high conviction ideas from Asia 8

Solid fundamentals 10

The background 10

The “five fundamentals”

framework 12

A fresh approach 12

Barriers to entry 13

Vertical integration and product

differentiation appear key 13

Structural changes 17

Demographic and rising

health/nutritional trends the key 17

Balance sheet strength 24

Net cash with good capex and

dividend coverage appears key 24

Profitability 25

Highlighting high returns and strong

earnings growth 25

Management/corporate

governance 26

Room for improvement 26

Valuation and risks 28

Appendix 1 33

Combining Framework 1 and

Framework 2 33

Appendix 2 37

The macro backdrop 37

Valuation and risks: Other stocks

mentioned 39

Disclosure appendix 41

Disclaimer 44

Contents

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EQUITIES ● CONSUMER & RETAIL

October 2017

4

Growth in consumer spending has stalled in Indonesia at a time when

the Food & Beverage sector is facing major shifts in consumer tastes

and preferences. We introduce a fresh way to look at the fundamentals

and the future direction of the four companies we cover.

Taking stock of Indonesian F&B

The four Indonesia’s F&B companies we cover – Indofood CBP (Reduce), Indofood Sukses

Makmur (Hold), Kalbe Farma (Hold) and Unilever Indonesia (Hold) – appear to be in pretty good

shape. In broad terms, over the past few years, they have recorded strong EPS growth while

maintaining strong cash positions and low levels of gearing. As a result, they have been

rewarded with higher PE multiples.

Today, the valuations of these companies are generally high. The F&B companies with the

exception of Indofood Sukses Makmur (INDF) trade at premiums relative to the Jakarta Stock

Exchange Composite Index (JCI) in terms of both PE and EV/EBITDA multiples. This is the

main reason behind our Hold ratings on three out of the four stocks under our coverage.

Against the backdrop of slower consumption growth in the first half of 2017, we believe it is time

to take a fresh look at the sector’s fundamentals and likely future direction. Thus, we introduce

what we call the “five fundamentals” framework to assess the fundamental strengths and

weaknesses of these companies without taking into account their individual valuations.

In the first half of 2017, most Indonesian consumer companies reported relatively weak

earnings growth y-o-y as consumption growth slowed. Annual GDP growth has been about

5.0% since 2014. While the rate was 5.0% in both 1Q and 2Q 2017, it was weaker than

expected in 2Q as HSBC’s economist had forecast 5.1%. Growth in private consumption was

relatively weak at 4.9% y-o-y. Another important factor that indicated just how weak

consumption was in 2Q 2017 was that Lebaran, a major national holiday associated with strong

consumer spending, was in 2Q in 2017 vs. 3Q in 2016. In August, Indonesia's central bank cut

its benchmark policy rate – the first change since October – in a bid to boost economic growth.

In this report, we discuss the four companies we cover:

Indofood CBP Sukses Makmur (ICBP) – this leading consumer staples company is

dominant in the instant noodles, which form part of the staple diet for a large part of the

population; the company also has a presence in dairy as well as snacks and beverages.

Indofood Sukses Makmur (INDF) –owns Indofood Consumer Branded Products (CBP),

Bogasari & Distribution (wheat flour) and Indofood Agri Resources (crude palm oil/CPO).

Unilever Indonesia (UNVR) – produces and markets fast-moving consumer goods

(FMCG) in the nutrition, hygiene and personal care categories as well as food & beverages.

Kalbe Farma (KLBF) – the largest pharmaceutical company in Indonesia with a significant

consumer arm.

Executive summary

MiFID II – Research

Is your access agreed?

CONTACT us today

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EQUITIES ● CONSUMER & RETAIL

October 2017

Exhibit 2A: ICBP – PE and EPS growth Exhibit 2B: INDF – PE and EPS growth

Source: Bloomberg Source: Bloomberg

Exhibit 3A: UNVR – PE and EPS growth Exhibit 3B: KLBF – PE and EPS growth

Source: Bloomberg Source: Bloomberg

Exhibit 4A: PE of the Indonesian F&B companies vs. the Index

Exhibit 4B: EV/EBITDA of the Indonesian F&B companies vs. the Index

Source: Bloomberg Source: Bloomberg

-5

0

5

10

15

20

25

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014 2015 2016 2017

P/E - LHS EPS growth % - RHS

-30

-20

-10

0

10

20

30

40

50

60

70

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014 2015 2016 2017

P/E - LHS EPS growth % - RHS

-5

0

5

10

15

20

25

0

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2010 2011 2012 2013 2014 2015 2016 2017

P/E - LHS EPS growth % - RHS

-10

-5

0

5

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15

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30

35

40

45

0

5

10

15

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2010 2011 2012 2013 2014 2015 2016 2017

P/E - LHS EPS growth % - RHS

2327

19

57

34

0

10

20

30

40

50

60

70

JCI ICBP INDF UNVR KLBF

P/E

12

17

9

39

22

0

10

20

30

40

50

JCI ICBP INDF UNVR KLBF

EV/ EBITDA

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EQUITIES ● CONSUMER & RETAIL

October 2017

6

The “five fundamentals” framework

Our framework assesses companies based on five metrics – barriers to entry, balance sheet

strength, structural changes, profitability and management/corporate governance. We rank each

on a scale of 1-5 with 5 the strongest. We think this approach lets investors assess whether

these F&B companies should be part their portfolios’ core holdings before making judgements

about valuations. As shown in the table below, Unilever Indonesia and Kalbe Farma tie with the

highest average scores based on our rankings. Below, we look at each metric in more detail.

Exhibit 5: Indonesian F&B – Rankings based on the “five fundamentals” framework

Scores are 1 through 5 with 5 being the strongest Barriers

to entry Structural

changes

Balance sheet

strength Profitability

Management/ Corporate

governance Average

Indofood CBP 4.2 2.5 4.0 4.0 3.0 3.5 Indofood Sukses Makmur 4.2 2.5 3.0 4.0 3.0 3.3 Unilever Indonesia 5.0 5.0 3.0 5.0 4.0 4.4 Kalbe Farma 4.2 5.0 4.0 5.0 4.0 4.4

Source: HSBC estimates

1) Barriers to entry

We assess the dominant players in the following areas: whether the company is operating in a

monopolistic/oligopolistic environment, regulatory barriers, distribution networks, the strength of

brands, relationships with suppliers, intellectual property, customer stickiness, level of vertical

integration, product differentiation and scale. We found that the four companies we cover all

score well in this category with barriers to entry generally high. We rank Unilever Indonesia the

highest with a score of 5.

Exhibit 6: Barriers to entry

Scores are 1 through 5 with 5 being the strongest

Dominant players

(monopoly/ oligopoly)

Distribution network

Strength of brand

Vertical integration

Extent of product

differentiation Scale Raw

score Score

(1-5)

Indofood CBP 83% 4.2 Indofood Sukses Makmur 83% 4.2 Unilever Indonesia 100% 5.0 Kalbe Farma 83% 4.2

Source: HSBC estimates

2) Structural changes

We list four structural changes – rising affluence, favourable demographics, rising

health/nutritional awareness and modern lifestyle/urbanization. We give Unilever Indonesia and

Kalbe Farma maximum points as we think they will benefit most.

Exhibit 7: Structural changes

Scores are 1 through 5 with 5 being the strongest Rising

affluence Favourable

demographics

Rising health/ nutritional awareness

Modern lifestyle/

urbanization Raw

score Score

(1-5)

Indofood CBP 50% 2.5 Indofood Sukses Makmur 50% 2.5 Unilever Indonesia 100% 5 Kalbe Farma 100% 5

Source: HSBC estimates

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EQUITIES ● CONSUMER & RETAIL

October 2017

3) Balance sheet strength

We believe the four F&B companies we cover all have sound balance sheets, based on our

analysis of their net debt/equity ratios, cash to market cap levels, capex and dividend coverage

as well as working capital efficiency ratios. We rank both Indofood CBP and Kalbe Farma at 4

out of 5.

Exhibit 8: Balance sheet strength

Scores are 1 through 5 with 5 being the strongest Net debt/

equity

Cash to market

cap

Capex plus dividend

coverage ratio

Inventory turnover

(days)

Receivables turnover

(days)

Payables turnover

(days)

Cash conversion

cycle (days) Score

Indofood CBP (0.37)x 8% 1.76x 48 39 42 46 4 Indofood Sukses Makmur 0.31x 18% 1.36x 65 25 27 63 3 Unilever Indonesia 0.62x 0% 0.88x 43 34 86 (9) 3 Kalbe Farma (0.22)x 4% 1.12x 123 50 42 131 4

Note: Based on 2016 financials. Source: Company data, HSBC estimates

4) Profitability

All four companies generally have good levels of profitability, based on our analysis. We looked

at returns on assets (ROA), operating income margins, cost efficiency (defined by opex adjusted

for advertising and promotions as a percentage of revenue), historical earnings growth and

future earnings growth. We rank Unilever Indonesia and Kalbe Farma at 5 out of 5.

Exhibit 9: Profitability

Scores are 1 through 5 with 5 being the strongest

Return on Assets

(ROA)

Operating income margin

Cost efficiency (Opex – A&P),

% revenue

Historical earnings growth

(2010-2016 6Yr CAGR)

Earnings growth forecast

(2016-19 3Yr CAGR) Score

Indofood CBP 12% 14% 13% 13% 4% 4 Indofood Sukses Makmur 5% 13% 14% 6% 1% 4 Unilever Indonesia 38% 22% 19% 11% 17% 5 Kalbe Farma 15% 15% 23% 10% 12% 5

Source: Company data, HSBC estimates

5) Management and corporate governance

None of the companies scores full marks for management and corporate governance. We

looked at the extent of related-party transactions and other well-reported incidents. We rank

Unilever Indonesia and Kalbe Farma at 4 out of 5.

Exhibit 10: Management/corporate governance

Scores are 1 through 5 with 5 being the strongest

Related-party transactions (source: 2016 annual reports)

Other well-reported

incidents Score

Indofood CBP Sales to related parties: 77% of revenue. Purchases from related parties: 27% of COGS.

3

Indofood Sukses Makmur Sales to related parties: 10% of revenue. Purchases from related parties: 6% of COGS.

3

Unilever Indonesia Sales to related parties: 6% of revenue. Purchases from related parties: 7% of COGS. Royalties (i.e. trademark, technology and service fees) payments to related parties: 7% of revenue.

4

Kalbe Farma Sales to and purchases from related parties: <1% 4

Source: Company data, HSBC estimates

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EQUITIES ● CONSUMER & RETAIL

October 2017

8

Other high conviction ideas from Asia

In Korea, Karen Choi likes CJ Cheil Jedang (097950 KS, KRW 354,500, Buy, TP: KRW

480,000) with the lysine oversupply issue showing signs of gradual improvement. Furthermore,

with a larger contribution from the processed food division, she is expecting a turnaround from

3Q17, as seen in her latest report Korea Consumer: Back from the wilderness, dated 2 August

2017.

In China, Christopher Leung likes Uni-President China (220 HK, HKD7.70, Buy, TP: HKD8.80)

because the instant noodle market in China is very consolidated with high entry barriers. He

also likes Uni-President China for its margin expansion story, as seen in his latest report

Buy: Further margin upside likely, dated 3 October 2017.

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We apply our framework to the four Indonesian F&B companies under our coverage and plot out the results in pentagons. We note that we rank each metric on a scale of 1 to 5

where 1 is the weakest and 5 is the strongest. Our conclusion is that Unilever Indonesia and Kalbe Farma rank best on our metrics.

Exhibit 11A: ICBP Exhibit 11B: INDF

Source: HSBC estimates Source: HSBC estimates

Exhibit 12A: UNVR Exhibit 12B: KLBF

Source: HSBC estimates Source: HSBC estimates

1

2

3

4

5Barriers to entry

Structural changes

Balance sheet strengthProfitability

Management/ Corporategovernance

1

2

3

4

5Barriers to entry

Structural changes

Balance sheet strengthProfitability

Management/ Corporategovernance

1

2

3

4

5Barriers to entry

Structural changes

Balance sheet strengthProfitability

Management/ Corporategovernance

1

2

3

4

5Barriers to entry

Structural changes

Balance sheet strengthProfitability

Management/ Corporategovernance

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EQUITIES ● CONSUMER & RETAIL

October 2017

10

The background

Against the backdrop of the weaker consumption appetite in 1H 2017, we expect EPS growth

for 2017 overall to be weaker than last year for the four companies we cover, except for UNVR.

Apart from INDF, the companies trade at premiums relative to the Jakarta Stock Exchange

Composite Index (JCI) on both PE and EV/EBITDA multiples. Given these valuation premiums,

we take stock of the companies’ fundamentals and long-term outlooks.

Indofood Consumer Branded Products (ICBP) – The company is one of the leading staples

companies in Indonesia and is dominant in instant noodles, part of the staple diet for a large

proportion of the population. This gives it more defensive characteristics, particularly when

compared with consumer discretionary and confectionary players. We like ICBP for its defensive

qualities and reasonably solid fundamentals in a slowing economy.

Indofood Sukses Makmur (INDF) – The company owns ICBP (instant noodle, dairy, snacks

and beverage division), Bogasari & Distribution (wheat flour division) and Indofood Agri

Resources (crude palm oil/CPO division). We see INDF as a value play on ICBP as we note

that INDF’s stock price implies that its Bogasari and distribution division has a negative

valuation after taking into account INDF’s stakes in ICBP and Indofood Agri (IFAR). INDF trades

at lower multiples due to its commodity-related businesses and the presence of foreign-currency

denominated debt, which mean its earnings are much more volatile.

Unilever Indonesia (UNVR) – We like the company due its strong cash generation, high ROE

(134% in 2016), and consistent dividend. We also think the company’s extensive distribution

network, brand strength and product differentiation, which present credible barriers to entry.

Furthermore, UNVR appears to benefit from a number of structural changes, including rising

affluence and favourable demographics. As a result, we think UNVR has a solid growth outlook.

In spite of all UNVR’s strengths, we have a Hold rating because we think that the expected

benefits from the improving macro environment are already reflected in the price.

Kalbe Farma (KLBF) – It is the largest pharmaceutical company in Indonesia. We consider

Kalbe Farma to be a best-in-class company with a leading market share by value in both

prescriptions and over-the-counter drugs. KLBF is benefitting from structural changes such as

rising affluence and favourable demographics. We view Kalbe as fairly valued as its valuations

appear to be in line with its recent history, reflecting the margin compression in the

pharmaceutical segment we expect as a result of the roll-out of the universal healthcare.

Solid fundamentals

All four of the Indonesian F&B companies we cover have sound

fundamentals, in our view, and have recorded strong EPS growth in

recent years

PE multiples have expanded to reflect companies’ earnings power

We present our investment thesis for each of the four companies we

cover as well as our bull- and bear-case scenarios

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EQUITIES ● CONSUMER & RETAIL

October 2017

Exhibit 13A: ICBP – PE and EPS growth Exhibit 13B: INDF – PE and EPS growth

Source: Bloomberg Source: Bloomberg

Exhibit 14A: UNVR – PE and EPS growth Exhibit 14B: KLBF – PE and EPS growth

Source: Bloomberg Source: Bloomberg

Exhibit 15A: PE multiples of the Indonesian F&B companies vs. index

Exhibit 15B: EV/EBITDA of the Indonesian F&B companies vs. the index

Source: Bloomberg Source: Bloomberg

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2010 2011 2012 2013 2014 2015 2016 2017

P/E - LHS EPS growth % - RHS

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50

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70

0

5

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2010 2011 2012 2013 2014 2015 2016 2017

P/E - LHS EPS growth % - RHS

-5

0

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10

15

20

25

0

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2010 2011 2012 2013 2014 2015 2016 2017

P/E - LHS EPS growth % - RHS

-10

-5

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30

35

40

45

0

5

10

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45

2010 2011 2012 2013 2014 2015 2016 2017

P/E - LHS EPS growth % - RHS

2327

19

57

34

0

10

20

30

40

50

60

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JCI ICBP INDF UNVR KLBF

P/E

12

17

9

39

22

0

10

20

30

40

50

JCI ICBP INDF UNVR KLBF

EV/ EBITDA

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EQUITIES ● CONSUMER & RETAIL

October 2017

12

A fresh approach

We introduce a framework to assess the fundamentals of the companies regardless of their

stocks’ valuations. Our framework assesses the companies based on five metrics:

Barriers to entry: We look at the monopolistic/oligopolistic environment, regulatory

barriers, distribution networks, brand strength, supplier agreements, intellectual property,

customer loyalty, vertical integration and the extent of product differentiation.

Structural changes: We examine whether a company is a beneficiary of structural

changes in the industry or the country or whether it is losing out to these changes. We also

examine the extent to which the companies are innovating in response to these market

shifts.

Balance sheet strength: We look at leverage levels, the amount of cash to market

capitalization and the flexibility to raise cash.

Profitability: We look at returns on assets (ROA) and operating income margins.

Management and corporate governance: We assess management’s strategy and quality

as well as whether the practices adopted by the company are favourable to minority

shareholders.

We rank each company on each metric on a scale of 1 to 5 in which 5 is the strongest. Unilever

Indonesia and Kalbe Farma record the highest scores on our rankings. In the following

sections of this report, we look at our findings in more detail by each fundamental ranking.

The “five fundamentals”

framework

We introduce a framework to assess the F&B companies

Irrespective of valuations, our framework looks at barriers to entries,

structural changes, balance sheet strength, profitability and

management/corporate governance

Unilever Indonesia and Kalbe Farma rank most favourably of the four

Indonesia F&B companies we cover

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EQUITIES ● CONSUMER & RETAIL

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Vertical integration and product differentiation appear key

Barriers to entry are generally high, but Unilever Indonesia enjoys the highest

The four F&B companies under our coverage generally enjoy high barriers to entry. They are

the dominant players in their own fields with strong distribution networks, and some enjoy a

degree of vertical integration.

Exhibit 16: Barriers to entry

Scores are 1 through 5 with 5 being the strongest

Dominant players

(monopoly/ oligopoly)

Distribution network

Strength of brand

Vertical integration

Extent of product

differentiation Scale Raw

score Score

(1-5)

Indofood CBP 83% 4.2 Indofood Sukses Makmur 83% 4.2 Unilever Indonesia 100% 5.0 Kalbe Farma 83% 4.2

Source: HSBC estimates

Dominant players

While all four companies are dominant players within their own industries, we highlight the

strength of Indofood CBP’s presence in instant noodles, where it has a 72% market share

(Exhibit 17). It derives 79% of its operating margin (after eliminations) from the instant noodle

segment, a category that is largely a duopoly.

Exhibit 17: Instant noodles: Market shares of Top 3 players by country in Asia (2016)

Source: Euromonitor, HSBC

71.7%60.6% 55.2% 49.1% 47.5% 43.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Indonesia South Korea Thailand Taiwan Japan ChinaPlayer #1 Player #2 Player #3

Barriers to entry

Most F&B companies we cover are dominant in their sectors with

good distribution networks, strong brands and substantial scale

The difference between the strong and the strongest appears to be in

terms of vertical integration and product differentiation

Unilever Indonesia scores the highest mark on this metric

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14

Relative to global instant noodle producers, Indofood CBP is one of the biggest in terms of sales

(Exhibit 22). In addition, its operating profit margin of about 17% is significantly higher than the

10% of global peers. Its dominance allows the company to reap the benefit of scale and, to a

certain extent, pricing power.

Distribution networks

Setting up distribution networks in Indonesia is a challenging task given the country’s geography

and size. In addition, most products are still distributed through general trade channels – small

retailers handling small amounts of merchandise in small stores. While there is a gradual shift to

modern trade, the companies that already have extensive distribution networks enjoy significant

barriers to entry. Indeed, it is difficult for new competitors to enter the market so most of the big

F&B companies appear favourably placed.

Exhibit 18: Indonesia Food – Product distribution through general trade (GT) (2016)

Source: Euromonitor, HSBC

Exhibit 19: Indonesia Beverages – Product distribution through general trade (GT), (2016)

Source: Euromonitor, HSBC

Brand strength

Brand strength is a barrier to entry because of customers’ strong association between the brand

and the product. It represents both an objective and subjective perception of the product’s

quality, reliability, safety and benefits. As a result, brand recognition generates customer loyalty

and product stickiness. We highlight the example of Unilever Indonesia. UNVR’s strong brand

across a number of products is due to its investment in advertising and promotions (A&P). In

2016, UNVR spent 11% of its revenue on A&P – more than any other Indonesian FMCG

company.

80% 78%72% 68%

64% 64%

51% 47% 43% 40%

26%18% 18% 14%

6% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Edible O

ils

Rice, P

astaand N

oodles

Sauces/

Condim

ents

Baked

Goods

Savoury

Snacks

Sw

eetB

iscuits

Confectioner

y

Dairy

Ice Cream

Baby F

ood

Processed

Meat

Ready M

eals

Processed

Fruit V

eg

Spreads

Soup

BreakfastC

ereals

73% 72%66% 64%

60%56% 53%

47%41% 40%

28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

RT

D T

ea

Asian

SpecialityD

rinks

Carbonat

es

Bottled

Water

Tea

Coffee

Juice

Other hotdrinks

Concentrates

Sports/

Energy

Drinks

RT

DC

offee

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EQUITIES ● CONSUMER & RETAIL

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Exhibit 20: Indonesian F&B companies – advertising and promotional expenses, % revenue (2016)

Source: Company data, HSBC

Vertical integration

A vertically integrated structure linking upstream and downstream operations can be a mutually

beneficial arrangement. The integration can exist within the same listed entity or with an unlisted

entity that often has the same majority shareholder.

Take the example of Indofood CBP and Indofood Sukses Makmur. Bogasari, which is owned by

holding company Indofood Sukses Makmur, is the largest flour miller in Indonesia with a 52%

market share (World-Grain.com, 10 April 2017) and meets ICBP’s flour needs. The extremely

close relationship between ICBP and Bogasari serves as a barrier to entry because it prevents

other competitors from growing quickly.

Product differentiation

Product differentiation helps to drive customer stickiness – personal products are a good

example.

Scale

Scale allows companies to run operations more efficiently, spreading higher volumes over fixed

costs. We highlight the example of Indofood CBP whose dominance in instant noodles

generates EBIT levels that are higher than peers’. We think this margin is largely sustainable

(with minimal deterioration) despite the recent fall in market share because the significant lead

that Indofood CBP enjoys over second-place Wings is unlikely to create any pricing pressure.

Exhibit 21: Instant noodles – Comparison of the global players

Source: Company data, HSBC

0%

3%

5%

8%

10%

13%

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000

Kalbe Farma (1,747, 9%)

Company (A&P expense (IDRb), A&P expense as % of revenue)

A&P expense (IDRb)

A&

Pex

pen

se a

s a

% o

f re

ven

ue Mayora Indah (1,680, 9%)

Multi Bintang (259, 8%)

Ultrajaya (288, 6%)

Indofood CBP (1,467, 4%)

Indofood Sukses (1,643, 2%)

Unilever Indonesia (4,263, 11%)

0%

4%

8%

12%

16%

20%

0 500 1,000 1,500 2,000 2,500 3,000 3,500

Ottogi Corporation

Thai President FoodsIndofood CBP

Toyo Suisan Kaisha

Uni-President China

Nissin Foods

Sales from instant noodles division (USDm)

Op

erat

ing

mar

gin

(in

stan

t n

oo

dle

s)

Tingyi

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October 2017

16

Exhibit 22: Instant noodles: A comparison of global players

Company Division Reporting currency

Sales for 2016 (reporting currency)

Sales for 2016 (USDm)

Operating margin

Uni-President China Instant noodles RMBm 8,221 1,237 4% Tingyi Instant noodles USDm 3,239 3,239 7% Nissin Foods All, excluding chilled and frozen foods and

others segment JPYm 365,580 3,374 10%

Toyo Suisan Kaisha Domestic instant noodles + overseas instant noodles

JPYm 199,104 1,838 11%

Ottogi Corp Noodles KRWm 641,960 553 6% Thai President Food Instant noodles THBm 9,759 277 19% Indofood CBP Instant noodles IDRm 22,539,655 1,694 17% Average 10%

Source: Company data, HSBC

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EQUITIES ● CONSUMER & RETAIL

October 2017

Demographic and rising health/nutritional trends the key

We list four structural changes impacting Indonesian F&B – rising affluence, favourable

demographics, rising health/nutritional awareness and modern lifestyle/urbanization. We rate

Unilever Indonesia and Kalbe Farma at 5 out of 5 because we think that they will benefit the

most. We note that structural changes may not impact all companies in the same ways.

Exhibit 23: Structural changes

Scores are 1 through 5 with 5 being the strongest Rising

affluence Favourable

demographics

Rising health/ nutritional awareness

Modern lifestyle/

urbanization Raw

score Score

(1-5)

Indofood CBP 50% 2.5 Indofood Sukses Makmur 50% 2.5 Unilever Indonesia 100% 5 Kalbe Farma 100% 5

Source: HSBC estimates

Rising affluence

Rising affluence allows consumers to purchase discretionary items. Ice cream is a good

example. Ice cream in Indonesia is often sold in a single servings, and purchases are often

impulse driven. The market leaders are Unilever Indonesia, Campina, Diamond Cold Storage,

and Indofood CBP. Unilever has a 69.5% market share, according to Euromonitor.

Any new competition in this category would likely need deep pockets and be well resourced

because ice cream is a capital-intensive sector (a recent new entrant is Wing Group, which has

partnered with Glico). The key barrier to faster growth is the rolling out of the ice boxes needed

to facilitate distribution.

Structural changes

Most Indonesian F&B companies are benefitting from the trends of

rising affluence and the shift to modern lifestyle/urbanization

The main differentiator is whether a company is leveraged to

demographic developments and rising health awareness

Unilever Indonesia and Kalbe Farma appear most poised to benefit

from structural changes

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18

Exhibit 24: Ice cream in Asia – Market shares of the Top 3 players (2016)

Source: Company data, HSBC

Exhibit 25: Ice cream in Asia – Market shares of the Top 3 players (2016)

Country Player

No. 1 Player

No. 2 Player

No. 3 Market shares

of Top 3 (2016) Players

Indonesia 69.5% 17.7% 7.6% 94.8% Unilever, Campina Ice Cream, Diamond Cold Storage Thailand 62.8% 13.0% 6.4% 82.2% Unilever, Nestle, Thai Beverage Philippines 54.6% 29.5% 8.3% 92.4% Unilever, Froneri, San Miguel Singapore 46.7% 19.6% 12.8% 79.1% Unilever, General Mills, Thai Beverage South Korea 43.1% 24.3% 14.9% 82.3% Lotte Group, Binggrae Co, Crown Confectionery Malaysia 36.4% 34.5% 17.1% 88.0% Nestle, Unilever Group, Thai Beverage UK 36.3% 5.1% 4.8% 46.2% Unilever, Mondelez, Froneri Taiwan 24.2% 15.5% 11.7% 51.4% Namchou Group, Xiao Mei, Meiji USA 23.6% 14.8% 6.6% 45.0% Unilever, Nestle, General Mills India 17.8% 9.8% 6.2% 33.8% Gujarat Co-operative, Unilever, Vadilal China 16.3% 8.4% 7.5% 32.2% Inner Mongolia Yili, China Mengniu, Unilever Japan 14.0% 11.0% 9.9% 34.9% Lotte Group, Ezaki Glico, Morinaga

Source: Euromonitor, HSBC

Demographics

Indonesia has a favourable demographic profile, in our view. This includes its large population,

high fertility rate, relatively high percentage of the population between aged 0 and 14, and

increase in the GNI per capita. We think that these trends favour some F&B producers more

than others, especially those that make products consumed by children (e.g. baby food).

Exhibit 26A: Comparison of fertility rates Exhibit 26B: Comparison of populations

Source: World Bank Source: World Bank

69.5%62.8%

54.6%46.7% 43.1%

36.4% 36.3%24.2% 23.6% 17.8% 16.3% 14.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Indo Thai Phil Sing SKorea Malay UK Taiwan USA India China JapanPlayer #1 Player #2 Player #3

0

0.5

1

1.5

2

2.5

3

3.5

Phil

Indo

India

Malay

UK

US

Chn

Thai

Japan

S.K

orea

Sgp

Fertility rate (births per woman) - 2015

-

200

400

600

800

1,000

1,200

1,400

1,600

Chn

India

US

Indo

Japan

Phil

Thai

UK

S.K

orea

Malay

Sgp

Population, total (M) - 2015

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EQUITIES ● CONSUMER & RETAIL

October 2017

Exhibit 27A: Comparison of increases in population aged between 0 and 14

Exhibit 27B: Comparison of increases in GNI per capita for 2006-15, sorted by the highest increase to the lowest increase

Source: World Bank Source: World Bank

Baby food: The main competitors in this category include Danone, Nestle, Friesland Campina,

and Kalbe Farma (via a JV with Morinaga). Foreign producers dominate because their products

are perceived to have greater levels of technological innovation and better food safety

standards. Of the companies we cover, Kalbe Farma is the only one with a significant exposure

to the segment. However, a comparison of KLBF’s operating margins with rivals is not available

because KLBF does not disclose the operating margins for its nutritionals business. This

business is KLBF’s fastest-growing segment and generated 29% of revenue in 2016.

Exhibit 28A: KLBF – Revenue contributions

Exhibit 28B: KLBF – gross margin for nutritionals

Source: Company data, HSBC Source: Company data, HSBC

Rising health/nutritional awareness

Rising levels of awareness about health and nutrition are making consumers more discerning

about the food they buy. We highlight the two examples of how this is driving demand for dairy

products and may also be negative for the long-term demand of certain edible oils.

Dairy: While dairy is not a traditional part of the Indonesian diet, it is becoming more popular

due to the increased awareness about the benefits of milk. At the same time, the dairy industry

is shifting from sweetened condensed milk products to milk-based products. We think

consumption of sweetened condensed milk products will grow at a slower rate given the rise in

health awareness – a potentially slower development for Indofood CBP whose legacy dairy

portfolio includes condensed milk products.

0%

5%

10%

15%

20%

25%

30%

35%

Phil

India

Indo

Malay

US

UK

Thai

Chn

Sgp

S.K

orea

Japan

Population ages 0-14 (% total) - 2015

-

10,000

20,000

30,000

40,000

50,000

60,000

Chn

Indo

Phil

India

Thai

Malay

S.K

orea

Sgp

US

Japan

UK

GNI per capita, Atlas (current '000 USD) -2006

24% 24% 25% 24% 23%

16% 16% 17% 17% 18%

22% 24% 26% 29% 29%

38% 36% 32% 30% 30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 2016

Pharmaceuticals Consumer Health Nutritionals Distribution & Logistics

48.0%

50.0%

52.0%

54.0%

56.0%

58.0%

60.0%

62.0%

64.0%

2012 2013 2014 2015 2016 2017e 2018e 2020e

Gross Margin - Nutritionals

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20

The main players include Royal FrieslandCampina, Indofood CBP, Ultrajaya (ULTJ IJ, not

rated), Nestle and Yakult Honsha. This is a relatively crowded segment in which the top five

control only 68% of the market share. The drivers of dairy product consumption are 1) the

association with a western lifestyle through the consumption of cheese, milk, and yoghurt and 2)

better health awareness.

Exhibit 29A: Dairy – Breakdown of the sub-categories of dairy

Exhibit 29B: Dairy – 5-yr CAGR of dairy sub-segments

Source: Euromonitor Source: Euromonitor

Edible oils: This is big business in Indonesia. For example, Indofood Sukses Makmur derived

22% of its 2016 revenue and 21% of its operating income from edible oils. The issue here is that

deep-fried food is very popular in a country, which also has one of the highest levels of mortality

due to cardiovascular diseases. As people become more health conscious, they are also

becoming more discerning about the type of edible oils they purchase. We think that unless

Indofood addresses this issue, its edible oil business could suffer. The warning signs are

already there – INDF’s market share of the edible oil sector has fallen from 51.2% in 2011 to

41.0% in 2016, according to data from Euromonitor.

Exhibit 30: Proportional mortality due to cardiovascular disease

Source: WHO

For example, Bimoli, INDF’s flagship brand, is marketed simply as a high quality cooking oil

while it competitors are promoting the health benefits of avoiding high-fat products. We think

Topical, which is owned by Bina Karya Prima, and Sania, which is owned by Sari Agrotama

Persada, present credible threats. Tropical, whose market share has risen from 13.6% in 2011

to 18.6% in 2016, is marketed as having a high unsaturated fatty acid content, which is believed

13%

5%

54%

6%

22%

Yoghurt and SourMilk Products

Cheese

Drinking MilkProducts

Butter andMargarine

Other Dairy

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Yoghurtand Sour

MilkProducts

Cheese DrinkingMilk

Products

Butter andMargarine

OtherDairy

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

CHN INA MAS PHI VIE SGP USA GBR THA JPN KOR IND

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EQUITIES ● CONSUMER & RETAIL

October 2017

to lower blood cholesterol. Topical is also promoted as being good for the heart because it has

gone through a double refining processes. Sania, whose market share has increased from 8.7%

in 2011 to 13.7% in 2016 is marketed as a healthy choice due to its zero use of preservatives,

its high content of Omega-6 and Omega-9 and its zero cholesterol content.

Modern lifestyle and urbanization

Changing lifestyles and growing urbanisation offer benefits to all four F&B companies. These

are apparent in a wide range of experiences, including the rising importance of convenience

foods, the consumption of a western-style diet (dairy, pizza, pasta, snack food, processed food

and juices) as well as the growing demand for a greater choice of products. Here we look at

these changes in more detail.

RTD tea: Convenience is the key to a more modern lifestyle as illustrated by the rise in

popularity of ready-to-drink (RTD) tea. This product has seen the most significant shift among all

the F&B categories in Indonesia in recent years. Usually, dominant brands become more

dominant, but RTD is the exception. The market leader, Sinar Sosro, lost its dominant position

between 2011 and 2014 as the market became an oligopoly rather than something close to a

monopoly. In 2011, Sinar Sosro had a market share of 72.4%. By 2016, the market share of the

top four companies – Orang Tua Group, Sinar Sosro, Tirta Fresindo, and Beverage Partners –

ranged between 13.8% and 29.3%. Although none of the companies covered in this report has

a presence in this category (other than Indofood CBP through its JV with Asahi), we think RTD

offers a fine example of how markets can change.

Exhibit 31A: RTD tea: Market share of the top 3 players

Exhibit 31B: RTD tea: Evolution of market share

Source: Euromonitor, HSBC Source: Euromonitor, HSBC

Savoury snacks: More people are switching from traditional Indonesian snacks, which are

often home-made or produced locally in limited quantities, to factory-made savoury food. The

two biggest operators are Garudafood (privately held) and PepsiCo, which operates a joint

venture with Indofood CBP. Indofood CBP derived 7% of its 2016 revenue and 2.5% of its 2016

operating income from snack food.

ICBP’s snack food division has low margins. Its EBIT margin for 2016 was 5.4% vs. 14.3% for

the company as a whole. We forecast an EBIT margin of 4% for 2017, and management guides

for 4-6%. Two forces are at play here – this category is highly competitive and the company

appears to be focusing on volume. It is no surprise to us that margins are lower than those of its

local and international peers.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Top 3 Outside Top 30

20

40

60

80

100

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Orang Tua Sinar Sosro

Tirta Fresindo Beverage Partners

Wings Corp

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EQUITIES ● CONSUMER & RETAIL

October 2017

22

In Indonesia, the operating margins of the producers of savoury snacks and confectionary are

similar at about 11%. Globally, savoury food divisions have margins of about 16% and

confectionary food and sweet biscuit producers of about 11%.

We think Indofood CBP’s margins are lower than Indonesian peers’ such as Siantar Top and

Tiga Pilar because:

Higher input costs. ICBP uses higher-priced raw materials (corn flour and potato) than its

rivals, who use lower-priced flour as their product portfolios are weighted towards extruded

snacks.

Focus on volume. Until ICBP’s market share stabilises, we think the company is unlikely to

raise prices. Wings’ recent entry into the savoury snack category (in partnership with

Calbee) is likely to keep ICBP’s focus on volume.

Exhibit 32: Savoury snacks: Comparison of global leaders

Source: Company data, HSBC

Exhibit 33: Savoury snacks – Comparison of global leaders

Company Division Currency

(Local) Sales for 2016

(Local currency) Sales for 2016

(USDm) Operating

margin

Indofood CBP Snack Foods IDRm 2,288,962 172 5% Siantar Top* Consolidated IDRm 2,544,278 191 12% Tiga Pilar Food Manufacturing IDRm 2,497,599 188 19% Universal Robina Branded Consumer Food PHPm 93,231 1,963 14% Want China Rice Crackers RMBm 5,449 820 20% TaoKaeNoi Consolidated THBm 4,705 133 21% PepsiCo Frito Lay North America USDm 15,549 15,549 30% Kellogg’s US Snacks USDm 3,198 3,198 10% Hup Seng Biscuit Manufacturing Division MYRm 209 50 21% Synder's Lance Consolidated USDm 2,109 2,109 5% Average 16%

Note: *For Siantar Top, the numbers are based on annualized 9M2016 financials because the FY12/2016 is not available. Source: Company data, HSBC

0%

5%

10%

15%

20%

25%

30%

35%

0 500 1,000 1,500 2,000 2,500 3,000 3,500

Indofood CBP

15,500

Siantar Top

Tiga Pilar

TaoKaeNoi

Hup Seng

Want Want

Universal Robina

Synder's Lance

Kellogg's

PepsiCo

Sales from savoury snacks division (USDm)

Op

erat

ing

mar

gin

(sav

ou

ry s

nac

ks)

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EQUITIES ● CONSUMER & RETAIL

October 2017

Exhibit 34A: ICBP – snack food segment; revenue and revenue growth

Exhibit 34B: ICBP – snack food segment: segment EBIT (%)

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

Processed meat and seafood: This category is also highly competitive with the top three

players controlling about 50% of the market. Malvolia/Japfa Comfeed, Charoen Pokphand

Indonesia (CPIN IJ, not rated) and Sierad Produce (SPID IJ, not rated) are integrated players

that also have upstream operations. None of the companies under our ASEAN equity coverage

has a presence in these categories.

Juice: The main competitors are The Coca-Cola Company (KO US, USD45.19, Buy, TP:

USD52), privately-owned Wings Corp, Unilever Indonesia, Kalbe Farma and Takeda

Pharmaceutical. In the past decade, there has been a rise in the popularity of drinks containing

real fruit pulp (Coca-Cola’s Minute Maid and Wings’ Floridina), alternative juices (Kalbe Farma’s

coconut water) and hybrid juices (Takeda Pharmaceutical’s YOU C1000, which combines juice

and isotonic drinks). The big loser has been Unilever Indonesia, which saw its market share fall

from 26.2% in 2007 to 8.9% in 2016, according to Euromonitor. We think UNVR did not react to

the change in trends quickly enough.

-5%

0%

5%

10%

15%

20%

25%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2013 2014 2015 2016 2017e 2018e 2019e

Revenue - Snack Food (IDRbn) - RHSRevenue growth - Snack Food - LHS

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2013 2014 2015 2016 2017e 2018e 2019e

Operating profit margin - Snack Food

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EQUITIES ● CONSUMER & RETAIL

October 2017

24

Net cash with good capex and dividend coverage appears key

The four F&B companies we cover all have sound balance sheets, based on their net

debt/equity ratios, cash to market cap levels, capex and dividend coverage as well as working

capital efficiency ratios. We rank both Indofood CBP and Kalbe Farma at 4 out of 5.

Exhibit 35: Balance sheet strength

Scores are 1 through 5 with 5 being the strongest Net debt/

equity

Cash to market

cap

Capex plus dividend

coverage ratio

Inventory turnover

(days)

Receivables turnover

(days)

Payables turnover

(days)

Cash conversion

cycle (days) Score

Indofood CBP (0.37)x 8% 1.76x 48 39 42 46 4 Indofood Sukses Makmur 0.31x 18% 1.36x 65 25 27 63 3 Unilever Indonesia 0.62x 0% 0.88x 43 34 86 (9) 3 Kalbe Farma (0.22)x 4% 1.12x 123 50 42 131 4

Note: Based on 2016 financials. Source: Company data, HSBC estimates

Net debt/equity

Indofood CBP and Kalbe Farma are in net cash positions. Although Unilever Indonesia has the

highest net debt/equity ratio, we are not concerned as we think it is a function of the company’s

high dividend payout ratio (>90% in recent years). Having said that, we think that its low cash

level does prevent UNVR from reacting quickly to market changes.

Cash to market capitalization

Indofood Sukses Makmur maintains the highest cash to market capitalization ratio, ensuring the

company has ample liquidity.

Capex plus dividend coverage ratio

Indofood CBP and Indofood Sukses Makmur maintain higher capex plus dividend coverage

ratios, suggesting that both can use their internal cash to cover their capex and dividend needs.

Unilever Indonesia appears to have a funding gap, based on our analysis, given that its cash

flow from operations (CFFO) falls below its capex and dividend needs.

Cash conversion cycle (days)

Unilever Indonesia operates a negative cash conversion cycle and appears to be the most

efficient in terms of working capital management. We think this is due its ability to stretch

payable days, allowing the company to enjoy favourable payment terms from suppliers. KLBF

has the longest cash conversion cycle, mainly as a result of its long inventory turnover cycle.

Balance sheet strength

Most companies under our coverage could cover their capex and

dividend needs using their cash flows from operations…

…while leverage, as indicated by net debt/equity level, appears to be

generally at manageable levels

Indofood CBP and Kalbe Farma lead on this metric

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EQUITIES ● CONSUMER & RETAIL

October 2017

Highlighting high returns and strong earnings growth

All four companies we cover generally have good levels of profitability. We look at returns on

assets (ROA), operating income margins, cost efficiency (defined by opex adjusted for

advertising and promotions as a percentage of revenue), historical earnings growth and future

earnings growth. We rank Unilever Indonesia and Kalbe Farma at 5 out of 5.

Exhibit 36: Profitability

Scores are 1 through 5 with 5 being the strongest

Return on Assets

(ROA)

Operating income margin

Cost efficiency (Opex – A&P),

% revenue

Historical earnings growth

(2010-2016 6Yr CAGR)

Earnings growth forecast

(2016-19 3Yr CAGR) Score

Indofood CBP 12% 14% 13% 13% 4% 4 Indofood Sukses Makmur 5% 13% 14% 6% 1% 4 Unilever Indonesia 38% 22% 19% 11% 17% 5 Kalbe Farma 15% 15% 23% 10% 12% 5

Source: Company data, HSBC estimates

Returns on assets (ROA)

Unilever Indonesia and Kalbe Farma register the highest and the second-highest returns on

assets, based on our analysis.

Operating income margin

Unilever Indonesia and Kalbe Farma register the highest and the second-highest operating

income margins, based on our analysis.

Cost efficiency

We define cost efficiency as operating expenses, excluding advertising and promotions

expenses, as a percentage of revenue. We exclude A&P expenses from our definition of cost

efficiency to account for situations in which we may incorrectly favour companies with relatively

low operating expenses because these companies underinvest in A&P expenses, which may

reduce their long-term growth outlook. Indofood CBP and Indofood Sukses Makmur have the

highest levels of cost efficiency, spending 13-14% of their revenues on selling, general and

administrative expenses, based on our analysis.

Historical earnings growth and future earnings growth forecasts

Indofood CBP and Unilever Indonesia registered the highest and second-highest levels of

earnings growth based on our analysis, but we think that the growth outlook is stronger for

Unilever Indonesia and Kalbe Farma (see table for details).

Profitability

Consistent ROAs with double-digit historical earnings growth rates

Companies that score well on profitability have high ROAs and are

expected to register strong double-digit earnings growth

Unilever Indonesia and Kalbe Farma score highest on profitability

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EQUITIES ● CONSUMER & RETAIL

October 2017

26

Room for improvement

None of the four companies we cover scores full marks for management and corporate

governance. We looked at the extent of related-party transactions and other well-reported

corporate government incidents. We rank Unilever Indonesia and Kalbe Farma at 4 out of 5.

Exhibit 37: Management/corporate governance

Scores are 1 through 5 with 5 being the strongest

Related-party transactions (source: 2016 annual reports)

Other well-reported

incidents Score

Indofood CBP Sales to related parties: 77% of revenue. Purchases from related parties: 27% of COGS.

3

Indofood Sukses Makmur Sales to related parties: 10% of revenue. Purchases from related parties: 6% of COGS.

3

Unilever Indonesia Sales to related parties: 6% of revenue. Purchases from related parties: 7% of COGS. Royalties (i.e. trademark, technology, and service fees) payments to related parties: 7% of revenue.

4

Kalbe Farma Sales to and purchases from related parties: <1% 4

Source: Company data, HSBC estimates

Related-party transactions

We looked at the extent of related-party transactions as disclosed in the respective companies’

2016 annual reports. Kalbe Farma scored well with sales to and purchases from related parties

contributing 1% of the total.

Other well-reported incidents

We looked at well-reported incidents and the potential impact on the companies.

Indofood Sukses Makmur/Indofood CBP – In a filing to the Hong Kong Stock Exchange on

11 November 2016, First Pacific (142 HK, not rated) stated that Indofood Sukses Makmur had

an agreement with Anthoni Salim-related entities granting them exclusive licences, or sales of

finished goods, subject to caps of USD256m in 2017 (4% of 2016 INDP’s revenue), USD317m

in 2018, and USD387m in 2019. In another filing in Hong Kong on 7 June 2017, First Pacific

stated that Indofood Sukses Makmur had purchased land on which Salim Ivomas’ factory sits

Management/corporate

governance

All four companies we cover have some management/corporate

governance issues, in our view

The companies that score best in our rankings have lower levels of

related-party transactions

Unilever Indonesia and Kalbe Farma score the highest marks

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EQUITIES ● CONSUMER & RETAIL

October 2017

from Mr Salim. First Pacific is a Hong-Kong listed holding company controlled by Mr Salim, who

holds a portfolio of companies, including Indofood Sukses Makmur and Indofood CBP.

Unilever Indonesia: The service and royalty expenses being charged by the head office

increased from 3.4% of domestic revenue in 2012 to 4.5% in 2013, to 6.0% in 2014 and to 7.4%

in 2015, according to data from the Annual Report.

Kalbe Farma: The company disclosed in its 2015 annual report that it had product recalls. The

products involved were Buvanest and Tranexamic Acid. Following complaints, Kalbe voluntarily

recalled the products and temporarily suspended all production activities at the production line

facility. The production line was reopened by end-2015.

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EQUITIES ● CONSUMER & RETAIL

October 2017

28

Valuation and risks

Valuation Risks

Indofood CBP

ICBP IJ

Current price:

IDR8,700

Target price:

IDR7,500

Up/downside:

-13.8%

We value Indofood CBP using a discounted cash flow (DCF)

valuation. Our DCF assumptions are a free cash flow CAGR for

2017-26e of 24.8%, FCF CAGR for 2018-26e of 5.2%, risk free rate

of 2.5%, beta of 1.00, equity risk premium of 6.5%, Indonesia cost of

equity 9.0%, WACC of 9.0%, terminal growth rate of 5% and tax

rate of 25%. Our target price implies 13.8% downside; we rate the

stock Reduce as we think that intensifying competition across

various segments (including instant noodles and snacks) will

increase A&P expenses and translate into higher capex as ICBP

rolls out new products.

Key upside risks: Accretive acquisitions, such as its

acquisition of Milkuat; a strengthening of the IDR against the

USD for which we estimate that every 10% appreciation

against the USD, ICBP’s PBT would rise by 2.2% all other

variables held equal; accelerating economic growth in the

form of faster GDP growth that would boost consumption;

faster non-noodle-division organic growth; and faster

operational profitability growth for the beverages division.

Reduce

Selviana Aripin*, CFA | [email protected] | +65 6658 0610

Indofood

Sukses

Makmur

INDF IJ

Current price:

IDR8,600

Target price:

IDR7,900

Up/downside:

-8.1%

We value Indofood Sukses Makmur using a sum-of-the-parts

approach. We values its two listed subsidiaries, Indofood CBP

Indofood Sukses Makmur, at our target prices. We value the

Bogasari and distribution arm using a discounted cash flow (DCF)

valuation. Our key DCF assumptions are a free cash flow CAGR for

2017-26e of 2.9%, risk free rate of 2.5%, beta of 1.00, equity risk

premium of 6.5%, Indonesia cost of equity of 9.0%, WACC of 8.8%,

terminal growth rate of 5% and tax rate of 25%. We also apply a 15%

conglomerate discount to the resulting fair value to arrive at our target

price of IDR7,900. We apply a 15% discount to account for the lack of

efficiencies in the valuation of conglomerates as well as to take into

account INDF’s corporate governance practices. Our target price

implies 8.1% downside and we downgrade our rating from Buy to

Hold. Our Hold rating reflects the risks associated with the corporate

governance issues and uncertainties around input costs and forex.

Key upside risks: A stronger IDR against major foreign

currencies as we estimate that every 10% appreciation

against the foreign currencies of its borrowings, Indofood’s

PBT would increase by 14.4% all other variables held equal;

stronger production yields from its agri-business unit as well

as a higher average selling price; and decreasing

competition for Bogasari, which could lead to a higher ASP.

Key downside risks: A weakening of the IDR against major

foreign currencies as we estimate that for every 10%

depreciation against the foreign currencies of its borrowings,

Indofood’s PBT would decline by 14.4% all other variables

held equal; weak production yields from its agri-business

unit as well as a lower ASP; and increasing competition for

Bogasari, which could lead to a lower ASP.

Hold

Selviana Aripin*, CFA | [email protected] | +65 6658 0610

Unilever

Indonesia

UNVR IJ

Current price:

IDR50,825

Target price:

IDR45,100

Up/downside:

-11.3%

We value Unilever Indonesia using a discounted cash flow (DCF)

valuation. Our key assumptions are a free cash flow CAGR for

2017-31e of 16.5%, risk free rate of 2.5%, beta 1.00, equity risk

premium of 6.5%, Indonesia cost of equity of 9.0%, WACC of 9.0%,

terminal growth rate of 5% and tax rate 25%. Our price target

implies 11.3% downside; we rate the share Hold because we

believe any expected operational improvements is already mostly

in the price, and while valuations look fairly rich, we believe that

this is sustainable given the company’s strong fundamentals.

Key upside risks: Stronger-than-expected GDP growth may

be positive for consumption and purchasing power;

consolidation or mergers may ease the competitive

environment; improving sentiment towards Indonesia may

result in inflows to the stock given that UNVR has a significant

weighting in JCI; better-than-expected top-line growth and cost

saving initiatives; acquisitions that are earnings accretive may

be positive for Unilever Indonesia; faster-than-expected

penetration; and domination of new product categories.

Key downside risks: Implementation of plastic bottles and

packing; increasing competition particularly in the Food and

Refreshment segment; weaker-than-expected GDP growth

may be negative for consumption; under-investment in

advertising and brand building may be negative for the long-

term growth; failure to consistently innovate and launch new

products/expand existing categories; acquisitions that are

not earnings accretive; and health/food safety issues that

may result in lost revenues, loss of reputation and

impairment of brand values.

Hold

Selviana Aripin*, CFA | [email protected] | +65 6658 0610

Kalbe Farma

KLBF IJ

Current price:

IDR1,675

Target price:

IDR1,800

Up/downside:

+7.5%

We value Kalbe Farma using a discounted cash flow (DCF)

valuation. Our key assumptions are a free cash flow CAGR for

2017-26e of 14.5%, risk free rate of 2.5%, beta of 1.00, equity risk

premium of 6.5%, Indonesian cost of equity of 9.0%, WACC of

9.0%, terminal growth rate of 5% and tax rate of 23%. Our price

target implies 7.5% upside. We rate the share Hold as we expect a

weak outlook in the pharmaceutical segment as the BPJS roll-out

puts pressure on players.

Key upside risks: Accretive transformational acquisitions;

faster organic growth than forecast; strengthening of the IDR

against the USD; better-than-expected implementation of

universal healthcare; limited liberalisation of the

pharmaceutical industry, which would limit competition; and

regulatory reforms friendlier to branded generics.

Key downside risks: Slowing economic growth; weakness

in the IDR/USD; adverse regulatory developments; drug

pricing pressure from universal healthcare; greater

competition; disruptions in the supply chain; and suboptimal

implementation of universal healthcare.

Hold

Selviana Aripin*, CFA | [email protected] | +65 6658 0610

Notes: Priced at 3 October 2017. *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations. Source: HSBC estimates

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29

EQUITIES ● CONSUMER & RETAIL

October 2017

Financial statements

Year to 12/2016a 12/2017e 12/2018e 12/2019e

Profit & loss summary (IDRbn)

Revenue 34,466 37,108 39,432 41,787

EBITDA 5,519 5,534 6,088 6,337

Depreciation & amortisation -754 -818 -1,131 -1,156

Operating profit/EBIT 4,765 4,716 4,958 5,181

Net interest 224 190 127 160

PBT 4,989 4,906 5,085 5,341

HSBC PBT 4,989 4,906 5,085 5,341

Taxation -1,358 -1,335 -1,384 -1,454

Net profit 3,600 3,540 3,669 3,854

HSBC net profit 3,600 3,540 3,669 3,854

Cash flow summary (IDRbn)

Cash flow from operations 4,585 3,830 4,507 4,751

Capex -1,065 -3,537 -1,352 -1,339

Cash flow from investment -1,560 -3,537 -1,352 -1,339

Dividends -1,544 -2,531 -2,496 -2,703

Change in net debt -1,479 2,626 -640 -689

FCF equity 3,320 852 3,479 3,705

Balance sheet summary (IDRbn)

Intangible fixed assets 2,330 2,330 2,330 2,330

Tangible fixed assets 9,369 12,088 12,309 12,492

Current assets 15,571 12,756 13,968 15,243

Cash & others 8,372 5,566 6,309 7,104

Total assets 28,902 28,806 30,239 31,697

Operating liabilities 6,437 5,720 5,921 6,130

Gross debt 2,233 2,053 2,155 2,261

Net debt -6,139 -3,513 -4,154 -4,843

Shareholders' funds 17,564 18,573 19,747 20,898

Invested capital 12,461 15,888 16,377 16,830

Ratio, growth and per share analysis

Year to 12/2016a 12/2017e 12/2018e 12/2019e

Y-o-y % change

Revenue 8.6 7.7 6.3 6.0

EBITDA 20.1 0.3 10.0 4.1

Operating profit 22.2 -1.0 5.1 4.5

PBT 24.4 -1.7 3.6 5.0

HSBC EPS 20.0 -1.7 3.6 5.0

Ratios (%)

Revenue/IC (x) 2.8 2.6 2.4 2.5

ROIC 28.1 24.2 22.4 22.7

ROE 21.8 19.6 19.2 19.0

ROA 13.6 12.9 13.1 13.1

EBITDA margin 16.0 14.9 15.4 15.2

Operating profit margin 13.8 12.7 12.6 12.4

EBITDA/net interest (x)

Net debt/equity -33.2 -18.0 -20.1 -22.2

Net debt/EBITDA (x) -1.1 -0.6 -0.7 -0.8

CF from operations/net debt

Per share data (IDR)

EPS Rep (diluted) 308.73 303.59 314.63 330.51

HSBC EPS (diluted) 308.73 303.59 314.63 330.51

DPS 127.46 217.06 214.00 231.76

Book value 1506.10 1592.63 1693.26 1792.00

Key forecast drivers

Year to 12/2016a 12/2017e 12/2018e 12/2019e

Noodles revenue 22,167 23,054 23,976 24,935

Dairy revenue 6,803 7,415 8,083 8,810

Food seasoning revenue 873 943 1,018 1,100

Snack food revenue 2,289 2,770 3,157 3,473

Nutrition & drinks revenue 2,334 2,926 3,197 3,469

Total 34,466 37,108 39,432 41,787

Valuation data

Year to 12/2016a 12/2017e 12/2018e 12/2019e

EV/sales 2.7 2.6 2.5 2.3

EV/EBITDA 17.1 17.6 15.9 15.1

EV/IC 7.6 6.1 5.9 5.7

PE* 28.2 28.7 27.7 26.3

PB 5.8 5.5 5.1 4.9

FCF yield (%) 3.3 0.8 3.5 3.7

Dividend yield (%) 1.5 2.5 2.5 2.7

* Based on HSBC EPS (diluted)

Issuer information

Share price (IDR) 8700.00 Free float 19%

Target price (IDR) 7500.00 Sector Food Products

Reuters (Equity) ICBP.JK Country Indonesia

Bloomberg (Equity) ICBP IJ Analyst Selviana Aripin, CFA

Market cap (USDm) 7,504 Contact +65 6658 0610

ESG metrics

Environmental Indicators Governance Indicators

GHG Intensity (kg/USD) n/a No. of board members 6

Energy Intensity (kWh/USD) n/a Average board experience (years) 6

CO2 reduction policy No Female board members (%) 0

Social Indicators Board members Independence (%) 50

Employee costs as % of sales n/a

Employee turnover (%) n/a

Diversity policy No

Source: Company data, HSBC

Price relative

Source: HSBC Note: Priced at close of 03 Oct 2017

5000.00

6000.00

7000.00

8000.00

9000.00

10000.00

11000.00

5000.00

6000.00

7000.00

8000.00

9000.00

10000.00

11000.00

01/15 07/15 12/15 06/16 12/16 06/17

Indofood CBP Rel to JAKARTA S E COMPOSITE

Financials & valuation: Indofood CBP Reduce

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EQUITIES ● CONSUMER & RETAIL

October 2017

30

Financial statements

Year to 12/2016a 12/2017e 12/2018e 12/2019e

Profit & loss summary (IDRbn)

Revenue 66,750 70,403 74,278 77,928

EBITDA 11,109 11,680 12,496 12,891

Depreciation & amortisation -2,655 -2,719 -2,868 -3,026

Operating profit/EBIT 8,454 8,960 9,628 9,865

Net interest -654 -1,018 -1,710 -1,771

PBT 7,800 7,943 7,918 8,094

HSBC PBT 7,800 7,943 7,918 8,094

Taxation -2,533 -2,527 -2,519 -2,575

Net profit 4,145 4,334 4,320 4,416

HSBC net profit 4,145 4,334 4,320 4,416

Cash flow summary (IDRbn)

Cash flow from operations 10,346 11,203 11,990 12,415

Capex -3,297 -1,407 -1,492 -1,405

Cash flow from investment -849 -1,407 -1,492 -1,405

Dividends -1,965 -2,591 -2,631 -2,825

Change in net debt -4,903 197 199 188

FCF equity 3,862 6,252 6,270 6,664

Balance sheet summary (IDRbn)

Intangible fixed assets 6,307 6,307 6,307 6,307

Tangible fixed assets 43,607 45,527 47,564 49,483

Current assets 28,985 30,420 31,955 33,400

Cash & others 13,896 14,615 15,390 16,120

Total assets 82,175 85,530 89,101 92,466

Operating liabilities 15,816 16,513 17,421 18,277

Gross debt 22,417 23,333 24,307 25,225

Net debt 8,521 8,718 8,917 9,105

Shareholders' funds 28,974 30,124 31,237 32,286

Invested capital 49,187 51,126 53,014 54,793

Ratio, growth and per share analysis

Year to 12/2016a 12/2017e 12/2018e 12/2019e

Y-o-y % change

Revenue 4.2 5.5 5.5 4.9

EBITDA 11.6 5.1 7.0 3.2

Operating profit 12.6 6.0 7.4 2.5

PBT 43.4 1.8 -0.3 2.2

HSBC EPS 39.6 4.6 -0.3 2.2

Ratios (%)

Revenue/IC (x) 1.3 1.4 1.4 1.4

ROIC 11.0 12.2 12.6 12.5

ROE 14.7 14.7 14.1 13.9

ROA 7.3 7.8 8.0 7.9

EBITDA margin 16.6 16.6 16.8 16.5

Operating profit margin 12.7 12.7 13.0 12.7

EBITDA/net interest (x) 17.0 11.5 7.3 7.3

Net debt/equity 19.4 19.1 18.8 18.6

Net debt/EBITDA (x) 0.8 0.7 0.7 0.7

CF from operations/net debt 121.4 128.5 134.5 136.3

Per share data (IDR)

EPS Rep (diluted) 472.02 493.55 491.98 502.94

HSBC EPS (diluted) 472.02 493.55 491.98 502.94

DPS 223.76 295.05 299.67 321.78

Book value 3299.87 3430.76 3557.56 3677.01

Key forecast drivers

Year to 12/2016a 12/2017e 12/2018e 12/2019e

CBP revenue 34,110 36,724 39,024 41,355

Bogasari revenue 18,934 19,502 20,087 20,690

Agribusiness revenue 14,467 15,007 16,073 16,829

Distribution revenue 5,334 5,600 5,880 6,174

Total 66,750 70,403 74,278 77,928

Valuation data

Year to 12/2016a 12/2017e 12/2018e 12/2019e

EV/sales 1.4 1.4 1.3 1.3

EV/EBITDA 8.6 8.3 7.8 7.6

EV/IC 1.9 1.9 1.8 1.8

PE* 18.2 17.4 17.5 17.1

PB 2.6 2.5 2.4 2.3

FCF yield (%) 4.4 7.1 7.1 7.5

Dividend yield (%) 2.6 3.4 3.5 3.7

* Based on HSBC EPS (diluted)

Issuer information

Share price (IDR) 8600.00 Free float 50%

Target price (IDR) 7900.00 Sector Food Products

Reuters (Equity) INDF.JK Country Indonesia

Bloomberg (Equity) INDF IJ Analyst Selviana Aripin, CFA

Market cap (USDm) 5,585 Contact +65 6658 0610

ESG metrics

Environmental Indicators Governance Indicators

GHG Intensity (kg/USD) n/a No. of board members 8

Energy Intensity (kWh/USD) n/a Average board experience (years) 10

CO2 reduction policy No Female board members (%) 0

Social Indicators Board members Independence (%) 38

Employee costs as % of sales n/a

Employee turnover (%) n/a

Diversity policy No

Source: Company data, HSBC

Price relative

Source: HSBC Note: Priced at close of 03 Oct 2017

4100.00

5100.00

6100.00

7100.00

8100.00

9100.00

4100.00

5100.00

6100.00

7100.00

8100.00

9100.00

01/15 07/15 12/15 06/16 12/16 06/17

Indofood Sukses Makmur Rel to JAKARTA S E COMPOSITE

Financials & valuation: Indofood Sukses Makmur Hold

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31

EQUITIES ● CONSUMER & RETAIL

October 2017

Financial statements

Year to 12/2016a 12/2017e 12/2018e 12/2019e

Profit & loss summary (IDRbn)

Revenue 40,054 44,784 50,783 58,246

EBITDA 9,258 11,176 12,866 15,273

Depreciation & amortisation -551 -714 -794 -873

Operating profit/EBIT 8,708 10,462 12,072 14,400

Net interest -136 -167 -171 -169

PBT 8,572 10,294 11,901 14,231

HSBC PBT 8,572 10,294 11,901 14,231

Taxation -2,181 -2,620 -3,028 -3,621

Net profit 6,391 7,675 8,873 10,610

HSBC net profit 6,391 7,675 8,873 10,610

Cash flow summary (IDRbn)

Cash flow from operations 6,813 9,782 11,489 12,267

Capex -1,787 -1,523 -1,523 -1,456

Cash flow from investment -1,779 -1,523 -1,523 -1,456

Dividends -5,843 -7,368 -8,518 -10,185

Change in net debt 1,544 -189 -728 8

FCF equity 4,911 8,260 9,966 10,811

Balance sheet summary (IDRbn)

Intangible fixed assets 472 451 429 408

Tangible fixed assets 9,529 10,359 11,110 11,715

Current assets 6,588 7,242 8,591 10,001

Cash & others 374 837 1,879 2,302

Total assets 16,746 18,227 20,329 22,351

Operating liabilities 8,485 10,087 12,238 14,036

Gross debt 3,456 3,730 4,044 4,476

Net debt 3,082 2,893 2,166 2,174

Shareholders' funds 4,704 4,298 3,919 3,693

Invested capital 7,730 7,129 6,014 5,786

Ratio, growth and per share analysis

Year to 12/2016a 12/2017e 12/2018e 12/2019e

Y-o-y % change

Revenue 9.8 11.8 13.4 14.7

EBITDA 9.6 20.7 15.1 18.7

Operating profit 9.7 20.1 15.4 19.3

PBT 9.5 20.1 15.6 19.6

HSBC EPS 9.2 20.1 15.6 19.6

Ratios (%)

Revenue/IC (x) 5.7 6.0 7.7 9.9

ROIC 92.2 105.2 137.2 182.2

ROE 134.1 170.5 216.0 278.8

ROA 40.0 44.6 46.7 50.4

EBITDA margin 23.1 25.0 25.3 26.2

Operating profit margin 21.7 23.4 23.8 24.7

EBITDA/net interest (x) 68.2 66.9 75.3 90.4

Net debt/equity 65.5 67.3 55.3 58.9

Net debt/EBITDA (x) 0.3 0.3 0.2 0.1

CF from operations/net debt 221.0 338.1 530.5 564.3

Per share data (IDR)

EPS Rep (diluted) 837.57 1005.89 1162.91 1390.55

HSBC EPS (diluted) 837.57 1005.89 1162.91 1390.55

DPS 765.82 965.65 1116.39 1334.92

Book value 616.55 563.25 513.64 483.99

Key forecast drivers

Year to 12/2016a 12/2017e 12/2018e 12/2019e

Home and Personal Care revenue

(IDRbn)

27,697 30,390 33,959 38,514

Food and Refreshment revenue

(IDRbn)

12,356 14,394 16,825 19,732

Total revenue (IDRbn) 40,054 44,784 50,783 58,246

Gross profit (IDRbn) 20,459 23,323 26,447 30,334

EBIT (IDRbn) 8,708 10,462 12,072 14,400

Valuation data

Year to 12/2016a 12/2017e 12/2018e 12/2019e

EV/sales 9.8 8.7 7.7 6.7

EV/EBITDA 42.2 35.0 30.3 25.5

EV/IC 50.6 54.8 64.8 67.4

PE* 60.7 50.5 43.7 36.6

PB 82.4 90.2 99.0 105.0

FCF yield (%) 1.3 2.1 2.6 2.8

Dividend yield (%) 1.5 1.9 2.2 2.6

* Based on HSBC EPS (diluted)

Issuer information

Share price (IDR) 50825.00 Free float 15%

Target price (IDR) 45100.00 Sector Personal Products

Reuters (Equity) UNVR.JK Country Indonesia

Bloomberg (Equity) UNVR IJ Analyst Selviana Aripin, CFA

Market cap (USDm) 28,683 Contact +65 6658 0610

ESG metrics

Environmental Indicators Governance Indicators

GHG Intensity (kg/USD) n/a No. of board members 5

Energy Intensity (kWh/USD) n/a Average board experience (years) 5

CO2 reduction policy No Female board members (%) 0

Social Indicators Board members Independence (%) 80

Employee costs as % of sales 4.3

Employee turnover (%) n/a

Diversity policy No

Source: Company data, HSBC

Price relative

Source: HSBC Note: Priced at close of 03 Oct 2017

29000.00

34000.00

39000.00

44000.00

49000.00

54000.00

29000.00

34000.00

39000.00

44000.00

49000.00

54000.00

01/15 07/15 12/15 06/16 12/16 06/17

Unilever Indonesia Rel to JAKARTA S E COMPOSITE

Financials & valuation: Unilever Indonesia Hold

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EQUITIES ● CONSUMER & RETAIL

October 2017

32

Financial statements

Year to 12/2016a 12/2017e 12/2018e 12/2019e

Profit & loss summary (IDRbn)

Revenue 19,374 21,118 23,230 26,017

EBITDA 3,421 3,797 4,169 4,782

Depreciation & amortisation -434 -480 -528 -591

Operating profit/EBIT 2,987 3,317 3,641 4,190

Net interest 104 102 115 133

PBT 3,091 3,419 3,756 4,323

HSBC PBT 3,091 3,419 3,756 4,323

Taxation -740 -819 -900 -1,035

Net profit 2,300 2,531 2,780 3,200

HSBC net profit 2,300 2,531 2,780 3,200

Cash flow summary (IDRbn)

Cash flow from operations 2,485 2,946 3,158 3,483

Capex -1,039 -935 -898 -1,027

Cash flow from investment -1,015 -835 -785 -898

Dividends -902 -878 -1,062 -1,089

Change in net debt -282 -262 -321 -424

FCF equity 1,187 1,709 1,959 2,155

Balance sheet summary (IDRbn)

Intangible fixed assets 400 436 480 537

Tangible fixed assets 5,253 6,188 7,086 8,112

Current assets 9,573 10,379 11,357 12,647

Cash & others 2,896 3,156 3,472 3,888

Total assets 15,226 17,004 18,922 21,297

Operating liabilities 2,469 2,597 2,802 3,072

Gross debt 291 289 284 277

Net debt -2,605 -2,867 -3,188 -3,612

Shareholders' funds 11,909 13,562 15,281 17,392

Invested capital 9,862 11,250 12,648 14,336

Ratio, growth and per share analysis

Year to 12/2016a 12/2017e 12/2018e 12/2019e

Y-o-y % change

Revenue 8.3 9.0 10.0 12.0

EBITDA 12.6 11.0 9.8 14.7

Operating profit 12.2 11.1 9.8 15.1

PBT 13.6 10.6 9.9 15.1

HSBC EPS 14.7 10.1 9.9 15.1

Ratios (%)

Revenue/IC (x) 2.1 2.0 1.9 1.9

ROIC 24.9 24.2 23.5 24.0

ROE 20.6 19.9 19.3 19.6

ROA 16.4 16.3 16.0 16.5

EBITDA margin 17.7 18.0 17.9 18.4

Operating profit margin 15.4 15.7 15.7 16.1

EBITDA/net interest (x)

Net debt/equity -20.9 -20.3 -20.1 -20.1

Net debt/EBITDA (x) -0.8 -0.8 -0.8 -0.8

CF from operations/net debt

Per share data (IDR)

EPS Rep (diluted) 49.06 54.00 59.32 68.26

HSBC EPS (diluted) 49.06 54.00 59.32 68.26

DPS 18.25 18.73 22.65 23.23

Book value 254.06 289.33 326.00 371.03

Key forecast drivers

Year to 12/2016a 12/2017e 12/2018e 12/2019e

Prescription pharmaceuticals 4,468 4,752 5,111 5,854

Consumer Health 3,408 3,801 4,251 4,761

Nutritionals 5,611 6,335 7,201 8,326

Distribution and logistics 5,888 6,230 6,667 7,077

Total 19,374 21,118 23,230 26,017

Valuation data

Year to 12/2016a 12/2017e 12/2018e 12/2019e

EV/sales 3.9 3.6 3.3 2.9

EV/EBITDA 22.3 20.1 18.2 15.8

EV/IC 7.8 6.8 6.0 5.3

PE* 34.1 31.0 28.2 24.5

PB 6.6 5.8 5.1 4.5

FCF yield (%) 1.5 2.2 2.5 2.7

Dividend yield (%) 1.1 1.1 1.4 1.4

* Based on HSBC EPS (diluted)

Issuer information

Share price (IDR) 1675.00 Free float 43%

Target price (IDR) 1800.00 Sector Pharmaceuticals

Reuters (Equity) KLBF.JK Country Indonesia

Bloomberg (Equity) KLBF IJ Analyst Selviana Aripin, CFA

Market cap (USDm) 5,807 Contact +65 6658 0610

ESG metrics

Environmental Indicators Governance Indicators

GHG Intensity (kg/USD) n/a No. of board members 7

Energy Intensity (kWh/USD) n/a Average board experience (years) n/a

CO2 reduction policy Yes Female board members (%) 14

Social Indicators Board members Independence (%) 43

Employee costs as % of sales 9.8

Employee turnover (%) n/a

Diversity policy No

Source: Company data, HSBC

Price relative

Source: HSBC Note: Priced at close of 03 Oct 2017

1000.00

1200.00

1400.00

1600.00

1800.00

2000.00

1000.00

1200.00

1400.00

1600.00

1800.00

2000.00

01/15 07/15 12/15 06/16 12/16 06/17

Kalbe Farma Rel to JAKARTA S E COMPOSITE

Financials & valuation: Kalbe Farma Hold

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EQUITIES ● CONSUMER & RETAIL

October 2017

Combining Framework 1 and Framework 2

We have taken a look at the various food categories in Indonesia. We divided the F&B

industries into four different categories determined by the product category’s level of

competition within the category and its historical growth level. We believe the level of

competition within the product category is an indication of the level of the barriers to entry

(Metric 1 of the framework) while the growth level is an indication of the degree to which

structural changes (Metric 2 of the framework) are benefitting products within this category.

We define a high-growth product category to be a product category where its 5-year CAGR is

less than 11.7% and low-growth product category to be a product category where its 5-year

CAGR is 11.7% or higher. We define a high-competition product category to be a product

category where its HHI score is below 0.15 and low-competition product category to be a

product category where its HHI score is 0.15 or higher.

Based on the definition above, we arrive at these four quadrants:

Quadrant 1 – Categories with high growth and aggressive competition

Within the food sector, the categories that fall into this quadrant include 1) dairy, 2) processed

meat and seafood, and 3) sauces, dressing, and condiments. Within the beverage sector, no

specific categories fall into this quadrant.

Listed Indonesian F&B companies with exposure to this quadrant include Indofood CBP,

Ultrajaya (ULTJ IJ, not rated), Malvolia/Japfa Comfeed (JPFA IJ, not rated), Charoen Pokphand

Indonesia (CPIN IJ, not rated) and Sierad Produce (SPID IJ, not rated).

Quadrant 2 – Categories with high growth and benign competition

This is the sweet spot. However, this is also a category likely to draw future competition.

Within the food sector, categories that fall into this quadrant include 1) baby food, 2) breakfast

cereals, 3) ice cream and frozen desserts and 4) soup. Within the beverage sector, categories that

fall into this quadrant include 1) juice, 2) RTD coffee, 3) Asian specialty drinks and (4) coffee.

Listed Indonesian F&B companies with exposure to this quadrant include Kalbe Farma and

Unilever Indonesia.

Quadrant 3 – Categories with low growth and aggressive competition

Within the food sector, categories that fall into this quadrant include 1) confectionery,

2) processed fruit and vegetables, 3) savoury snacks, 4) spreads, and 5) sweet biscuits, snack

bars, and fruit snacks. Within the beverage sector, categories that fall into this quadrant include

1) concentrates, 2) tea and 3) other hot drinks.

Listed Indonesian F&B companies with exposure to this quadrant include Indofood CBP,

Mayora (MYOR IJ, not rated), Tiga Pilar (AISA IJ, not rated), Siantar Top (STTP IJ, not rated),

Kalbe Farma, Indofood CBP, Unilever Indonesia, Sido Muncul (SIDO IJ, not rated) and Delfi

Appendix 1

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EQUITIES ● CONSUMER & RETAIL

October 2017

34

(DELFI SP, not rated). Universal Robina (URC PM, PHP152.50, Hold, TP: PHP153) also falls

into this category.

Quadrant 4 – Categories with low growth and benign competition

Within the food sector, categories that fall into this quadrant include 1) instant noodles, 2) baked

goods, 3) edible oils and 4) ready meals. Within the beverage sector, categories that fall into

this quadrant include: 1) bottled water, 2) carbonates, 3) RTD tea, 4) sports and energy drinks.

Listed Indonesian F&B companies with exposure to this quadrant include Indofood CBP and

Indofood Sukses Makmur.

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35

EQ

UIT

IES

● C

ON

SU

ME

R &

RE

TA

IL

Octo

be

r 2017

Exhibit 38: Indonesian food sector (HHI, historical 5-yr CAGR, size of industry in IDRbn)

Source: Euromonitor, HSBC

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65

Spreads(0.1496), (11%), (1,399)

Processed Meat and Seafood(0.1088), (17%), (19,342)

Dairy(0.1067), (13%), (28,107)

Soup(0.1824), (14%), (81)

Baby Food(0.1885), (12%), (36,571)

Baked Goods(0.2500), (11%), (30,796)

Breakfast Cereals(0.4133), (16%), (979)

Ice Cream and Frozen Desserts(0.5206), (18%), (5,654)

Noodles(0.5309), (11%), (30,487)

Edible Oils(0.2499), (6%), (10,514)

Confectionary(0.0906), (9%), (25,260)

Savoury Snacks(0.0664), (10%), (18,814)

Sauces, Dressings and Condiments(0.1336), (13%), (16,602)

Sweet Biscuits, Snack Bars and Fruit Snacks(0.1054), (10%), (14,279)

Processed Fruit and Vegetables(0.0958), (9%), (535)

Ready Meals(0.2324), (11%), (81)

5Y

rgro

wth

HHIIndustry size (IDRbn)

Quadrant 2

Quadrant 3

Quadrant 1

Quadrant 4

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EQ

UIT

IES

● C

ON

SU

ME

R &

RE

TA

IL

Octo

be

r 2017

Exhibit 39: Indonesian beverage sector (HHI, historical 5-yr CAGR, size of industry in IDRbn)

Source: Euromonitor, HSBC

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75

5Y

rgro

wth

HHIIndustry size (IDRbn)

RTD Coffee(0.3325), (42%), (2,461)

Juice(0.2538), (27%), (8,796)

Asian Speciality Drinks(0.3162), (29%), (3,646)

Bottled Water(0.3326), (14%), (29,741)

RTD Tea(0.1790), (12%), (18,492)

Sports and Energy Drinks(0.2787), (12%), (9,881)

Concentrates(0.0974), (5%), (8,488)

Carbonates(0.6144), (8%), (11,203)

Coffee(0.2697), (19%), (37,526)

Other hot drinks(0.1333), (12%), (12,368)

Tea(0.1333), (11%), (10,017)

Quadrant 3

Quadrant 4

Quadrant 1 Quadrant 2

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EQUITIES ● CONSUMER & RETAIL

October 2017

The macro backdrop

Our economics team forecasts Indonesia’s GDP to grow at a faster rate of 5.2% in 2017 from

5.0% in 2016. After the GDP growth forecast for 2017 registered a downgrade in 2Q 2016 it

received a 0.1% upgrade in 2Q 2017 with consumer confidence at a recent high at 126 points.

In spite of that, demand appears soft with inflation at a benign level of 4.2% so far in 2017 and

corporate earnings for 2017 being 0.5% lower today vs 12 months ago.

Exhibit 40: Indonesia – GDP growth rate

Source: HSBC forecasts

Exhibit 41A: Indonesia GDP growth revision, 2017F

Exhibit 41B: Indonesia GDP growth revision, 2018F

Source: HSBC Source: HSBC

6.2% 6.0%5.6%

5.0% 4.9% 5.0% 5.2% 5.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2011 2012 2013 2014 2015 2016 2017f 2018f

Indonesia - GDP growth

5.3% -0.2%

5.2%

+0.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17Indonesia GDP revision (2017f)

5.3% 5.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

3Q16 4Q16 1Q17 2Q17Indonesia GDP revision (2018f)

Appendix 2

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EQUITIES ● CONSUMER & RETAIL

October 2017

38

Exhibit 42: Indonesia: Consumer confidence index

Source: HSBC, Bank Indonesia Consumer Confidence

Exhibit 43: Indonesia: Inflation

Source: CEIC, HSBC estimates

Exhibit 44A: Indonesia consumer companies’ EPS revisions (market cap > USD500m) – market cap weighted average

Exhibit 44B: Indonesian consumer companies’ EPS revisions (market cap > USD500m) – simple average

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

103

117 116 117 117108

115126

0

20

40

60

80

100

120

140

2010 2011 2012 2013 2014 2015 2016 2017*

Indonesia - Consumer Confidence Index (as at 31 Dec)

5.3%

4.0%

6.4% 6.4% 6.4%

3.5%

4.2%3.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2011 2012 2013 2014 2015 2016 2017f 2018f

Indonesia - Headline CPI, average (% y-o-y)

98

99

100

101

102

103

Jul-16 Oct-16 Jan-17 Apr-17 Jul-17

Weekly EPS revision (Market cap weighted average)

87

90

93

96

99

102

Jul-16 Oct-16 Jan-17 Apr-17 Jul-17

Weekly EPS revision (Simple average)

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EQUITIES ● CONSUMER & RETAIL

October 2017

Valuation and risks: Other stocks mentioned

Valuation Risks

Uni-President

China

220 HK

Current price:

HKD7.70

Target price:

HKD8.80

Up/downside:

+13.7%

We value Uni-President China using three-stage discounted cash

flow (DCF) model. For stage one, we forecast revenue CAGR of

3% and NOPLAT CAGR of 39% over 2017-19e. For stage 2, we

use a semi-explicit period of seven years (2020-26e) with revenue

CAGR of 6% and a NOPLAT CAGR of 10%. For stage 3, we use a

terminal growth rate of 1%. Our WACC of 7.2% is based on cost of

equity of 7.8% (risk-free rate: 2.5%, beta: 0.90, equity risk

premium: 6.0%), cost of debt of 5.0% and debt-to-equity ratio of

18%. Our TP of HKD8.80 implies 13.7% upside to the curent

market price. We have a Buy rating on the stock as we see

earnings upside and believe further margin expansion in the

upcoming results would support higher valuation.

Key downside risks include lower-than-expected margin

expansion, unsuccessful new products roll-outs and a

worse-than-expected pricing environment.

Buy

Christopher K Leung* | [email protected] | +852 2996 6531

CJCJ

097950 KS

Current price:

KRW354,500

Target price:

KRW480,000

Up/downside:

+35.4%

We use a sum-of-the-parts (SOTP) approach and see fair value at

an unchanged EV/EBITDA 2017e target multiple of 11.0x – the

company’s average multiple since the holding company structure

was introduced in 2007. We separately value the overseas bio

affiliates by applying an unchanged target 2017e PE multiple of

17.8x, using Ajinomoto’s oneyear average trading band. We no

longer include the value Samsung Life shares in SOTP valuation

approach. This leads to a target price of KRW480,000 which

implies 35.4% upside from the current price and we have a Buy

rating on the stock.

Key downside risks include a sharp surge in grain prices,

depreciation of the KRW against the USD and delays in

lysine or other bio price recovery.

Buy

Karen Choi* | [email protected] | +822 3706 8781

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Priced at 3 Oct 2017 Source: HSBC estimates

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EQUITIES ● CONSUMER & RETAIL

October 2017

40

Notes

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EQUITIES ● CONSUMER & RETAIL

October 2017

Disclosure appendix

Analyst Certification

The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)

whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering

analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or

issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any

other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately

reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific

recommendation(s) or views contained in this research report: Selviana Aripin, CFA and Karen Choi

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's

existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons

when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different

securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and

therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should

carefully read the entire research report and not infer its contents from the rating because research reports contain more

complete information concerning the analysts' views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis:

The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12

months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will

be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a

Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is

between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more

than 20% below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage,

change in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

Prior to this date, HSBC’s rating structure was applied on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,

regional market established by our strategy team. The target price for a stock represented the value the analyst expected the

stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as

Overweight, the potential return, which equals the percentage difference between the current share price and the target price,

including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the

succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight,

the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or

10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12

months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However,

stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the

past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,

however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

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EQUITIES ● CONSUMER & RETAIL

October 2017

42

Rating distribution for long-term investment opportunities

As of 06 October 2017, the distribution of all independent ratings published by HSBC is as follows:

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to

current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current

model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis

for financial analysis” above.

For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at

http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.

Information regarding company share price performance and history of HSBC ratings and target prices in respect of long-term

investment opportunities for the companies that are the subject of this report is available from www.hsbcnet.com/research.

To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please

use the following links to access the disclosure page:

Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures

Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures

HSBC & Analyst disclosures

Disclosure checklist

Company Ticker Recent price Price date Disclosure

CJ CHEIL JEDANG 097950.KS 354500.00 05 Oct 2017 1, 4, 5 KALBE FARMA KLBF.JK 1680.00 05 Oct 2017 7 UNI-PRESIDENT CHINA 0220.HK 7.70 05 Oct 2017 6 UNILEVER INDONESIA UNVR.JK 50100.00 05 Oct 2017 7

Source: HSBC

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.

2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3

months.

3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company.

4 As of 31 August 2017 HSBC beneficially owned 1% or more of a class of common equity securities of this company.

5 As of 31 August 2017, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of investment banking services.

6 As of 31 August 2017, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-investment banking securities-related services.

7 As of 31 August 2017, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-securities services.

8 A covering analyst/s has received compensation from this company in the past 12 months.

9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below.

10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below.

11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company

12 As of 02 Oct 2017, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share

capital, calculated according to the SSR methodology.

Buy 45% ( 27% of these provided with Investment Banking Services )

Hold 41% ( 24% of these provided with Investment Banking Services )

Sell 14% ( 17% of these provided with Investment Banking Services )

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43

EQUITIES ● CONSUMER & RETAIL

October 2017

13 As of 02 Oct 2017, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share

capital, calculated according to the SSR methodology. HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt

(including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment

banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.

This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as

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Additional disclosures

1. This report is dated as at 06 October 2017.

2. All market data included in this report are dated as at close 03 October 2017, unless a different date and/or a specific time

of day is indicated in the report.

3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research

operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier

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confidential and/or price sensitive information is handled in an appropriate manner.

4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest

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and/or (iii) measuring the performance of a financial instrument.

Production & distribution disclosures

1. This report was produced and signed off by the author on 06 Oct 2017 06:30 GMT.

2. In order to see when this report was first disseminated please see the disclosure page available at

https://www.research.hsbc.com/R/34/BpnzDbH

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EQUITIES ● CONSUMER & RETAIL

October 2017

44

Disclaimer Legal entities as at 13 July 2017

‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong

Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc.; HSBC Bank, Paris Branch;

HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and

Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt

SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai

Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul

Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South

Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA)

Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo

Financiero HSBC; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong

and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and

Shanghai Banking Corporation Limited, Bangkok Branch; PT Bank HSBC Indonesia

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Limited, Singapore Branch

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Website: www.research.hsbc.com

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and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be

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Singapore should contact a representative of "The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" in respect of any matters arise from, or in connection with this report.

Further, without prejudice to any of the foregoing disclaimers, where this material is distributed to accredited investors or expert investors as defined in Regulation 2 of the Financial Advisers Regulations

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requirements in Section 36 of the FAA mandating disclosure of any interest in securities referred to in this material, or in their acquisition or disposal. Recipients who do not fall within the description of

persons under Regulations 34 and 35 of the Financial Advisers Regulations should seek the advice of their independent financial advisor prior to taking any investment decision based on this document

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the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (ABN

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Corporation Limited Singapore Branch. MCI (P) 069/06/2017, MCI (P) 126/02/2017

[909501]

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Europe

Consumer Brands & Retail

Global Head of Consumer Brands & Retail Research Antoine Belge +33 1 56 52 43 47 [email protected]

Analyst Anne-Laure Bismuth +44 207 991 6587 [email protected]

Head of Consumer Retail, Europe David McCarthy +44 207 992 1326 [email protected]

Analyst Andrew Porteous +44 20 7992 4647 [email protected]

Analyst Paul Rossington +44 20 7991 6734 [email protected]

Analyst Emmanuelle Vigneron +33 1 56 52 43 19 [email protected]

Analyst Lena Thakkar +44 20 7991 3448 [email protected]

Analyst Joe Thomas +44 20 7992 3618 [email protected]

Analyst Ali Naqvi +44 20 3359 4068 [email protected]

CEEMEA

Consumer Brands & Retail

Analyst Bulent Yurdagul +90 212 3764612 [email protected]

Analyst Jeanine Womersley +27 21 6741082 [email protected]

Analyst Ankur P Agarwal +971 4 423 6558 [email protected]

Asia

Consumer Brands & Retail

Head of Consumer Brands and Retail Equity Research, Asia-Pacific Karen Choi +822 3706 8781 [email protected]

Analyst John Chung +8862 6631 2868 [email protected]

Analyst Jeremy Chen +8862 6631 2866 [email protected]

Analyst Christopher Leung +852 2996 6531 [email protected]

Analyst Lina Yan +852 2822 4344 [email protected]

Analyst Scott Chan +852 3941 7005 [email protected]

Associate Alexis Yan +852 2996 6570 [email protected]

Analyst Selviana Aripin +65 6658 0610 [email protected]

Analyst Amit Sachdeva +91 22 2268 1240 [email protected]

Analyst Kuldeep Gangwar +91 22 3396 0686 [email protected]

Associate Jenny Chae +822 3706 8774 [email protected]

Gaming

Head of Gaming Research, Asia-Pacific Charlene Liu +65 6658 0615 [email protected]

Analyst Scott Chan +852 3941 7005 [email protected]

North & Latin America

Consumer & Retail

Global Head of Consumer Brands & Retail Research Erwan Rambourg +1 212 525 8393 [email protected]

Analyst Ravi Jain +1 212 525 3442 [email protected]

Analyst Thor Solanes +52 55 5721 2308 [email protected]

Food & Beverage

Global Head of Beverages Research Carlos Laboy +1 212 525 6972 [email protected]

Botir Sharipov, CFA +1 212 525 5150 [email protected]

Abribusiness

Analyst Alexandre Falcao +1 212 525 4449 [email protected]

Analyst Augusto A Ensiki +1 212 525 4915 [email protected]

Analyst Mauricio Arellano +52 55 5721 3863 [email protected]

Ricardo N Rezende, CFA +44 203 268 3325 [email protected]

Specialist Sales

David Harrington +44 20 7991 5389 [email protected]

Jean Gael Tabet +44 20 7991 5342 [email protected]

Global Consumer Brands & Retail Research Team

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Indonesia Food & B

everagesO

ctober 2017Equities // C

onsumer &

Retail

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.

Main contributors

Issuer of report:The Hongkong and Shanghai Banking Corporation Limited

Singapore Branch21 Collyer Quay #03-01

HSBC BuildingSingapore 049320

Website: www.research.hsbc.com

Selviana Aripin*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6658 0610 | [email protected]

Selviana Aripin joined HSBC as a consumer analyst covering ASEAN markets in September 2015. She has worked as an equity analyst since 2007. Selviana holds a masters in finance from London Business School and bachelor’s degree in accountancy from Singapore Management University. She is a chartered accountant (Singapore) and a CFA charterholder.

Karen Choi* Head of Consumer and Retail Research, Asia-Pacific The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8781 | [email protected]

Karen Choi joined HSBC in 2010 and is Head of Consumer and Retail Research, Asia-Pacific. In addition to coordinating our pan-Asia coverage of consumer and retail equities, she covers Korean consumer stocks. Prior to joining HSBC, she covered food and beverage, and tobacco stocks at a leading brokerage in Seoul, a role in which she was ranked a top analyst by a Korean business daily. She has a bachelor’s degree in English literature and psychology from Yonsei University, Seoul.


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