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FOCUS RESEARCH 28 SEPTEMBER 2015 INITIATE COVERAGE PT KALBE FARMA TBK BUY STOCK INFORMATION Bloomberg Code KLBF IJ Sector Healthcare Current Price Rp1,370 Target Price Rp1,680 Upside/Downside 22.6% Share Out (bn shares) 46.9 Market Cap (Rpbn) 64,219 52 – w range (low-high) Rp1,370– Rp1,905 52 – w average daily Rp1,736 PRICE CHART Source: Bloomberg SHAREHOLDERS INFORMATION, AS OF 30 JUNE 2015 PT Gira Sole Prima 10.2% PT Santa Seha Sanadi 9.7% PT Diptanala Bahana 9.5% PT Lucasta Murni Cemerlang 9.4% PT Ladang Ira Panen 9.2% PT Bina Arta Charisma 8.7% Public (below 5%) 43.3% Source: Company data DISTRIBUTION NETWORK NATIONWIDE Source: Company data Febby Stephanie [email protected] (+62-21) 5785 1818 ext. 2068 Carried away by currency weakening… but remains defensive Dominant Player in Pharmaceutical and Healthcare Industry PT Kalbe Farma (KLBF IJ or “the company”) was founded in 1966 in Jakarta as a family pharmaceutical business. The company has been continuously expanding the business, both organically and through series of merger and acquisitions. And today, the company is the leader integrated healthcare solution provider in Indonesia, through its 4 business segments: the Prescription Pharmaceutical, Consumer Health, Nutritionals and Distribution and Logistics Division. Key to the steady growth... KLBF maintained to book a strong revenue growth, relying on: 1) its largest medical representative team in Indonesia; 2) strong brand awareness of existing major products; 3) comprehensive product offerings for all income groups; 4) huge long- term investments in research, including oncology plant, stem cells and cancer institute, etc.; 5) increasing healthcare spending under JKN program; and 6) extensive distribution network both national and international coverage. The company’s total revenue is projected to Rp23.5 trillion in 2017F attained by a 12.8% p.a CAGR between 2015F-2017F. This year, KLBF guided 5%-7% YoY sales growth, while its EPS expected to increase by 6%-8% YoY. These targets were revised from initial target of 11%-13% YoY sales growth and 14-16% YoY EPS growth, due to various challenges this year, i.e depreciating Rupiah, softening macroeconomic condition that lead to weaker purchasing power and CCI, coupled with internal issues i.e product recall in Feb’15 and termination of a distribution relationship with a major client. Improvement expected in 2H In terms of seasonality, company’s performance usually picked up in 2H (3 years average contribution: 53.2% to annual sales). In our view, the economic slowdown in 1H15 will gradually recover as the delayed government infrastructure projects are initiated in 2H15, which is expected to boost economy by stronger labor absorption and better national infrastructure that translates into improved consumption. Moreover, as the product recall case has been completed, it is expected to recover in early 4Q15. For FY15F and FY16F, we estimate sales growth of 6.4% and 11.4% to Rp18.47 trillion and Rp20.57 trillion, respectively. However, we remain cautious on margin pressure resulting from further currency weakness as well as intensifying competition that gives the price pressure on branded generics that are currently priced at a premium to unbranded generics. The management estimated that for each 10% of IDR/USD weakening, gross margin to suffer by 3%. To lower the risk of margin pressure, the company will focus on higher margin products such as oncology drugs etc (the company targeted to add 4-5 new SKUs from current 3 SKUs), while maintaining its USD cash balance of around USD40-50 million and raw material inventories for 3-4 months. Buy On Weakness – Fair value Rp 1,680 per share The share price has been corrected by 21% since the beginning of the month due to selling pressure mainly on the weakening of IDR. We feel that this gives an opportunity to pick up the share since our fair equity value came in at Rp 1,680 per share which represents a 2016F PER target of 30.0x and 2016F EV/EBITDA target of 21.2x. Based on yesterday’s closing price, KLBF was trading at a valuation of 24.5x PER 2016F and 16.9x EV/EBITDA 2016F indicating that our fair value offers a 22.6% upside potential. The Risk: 1) rising raw material prices as impact of weakening Rupiah currency that lead to further margin pressure; 2) intensifying competition; 3) delay in macroeconomics recovery. Financial Summary (Rp billion) 2013A 2014A 2015F 2016F 2017F Revenue 16,002.1 17,368.5 18,472.2 20,574.0 23,490.4 EBITDA 2,804.3 3,069.3 3,097.1 3,656.9 4,362.4 Net profit 1,919.5 2,064.7 2,221.0 2,622.9 3,154.8 EPS (Rp) 40.9 44.0 47.4 56.0 67.3 PER (x) 30.5 41.5 28.9 24.5 20.4 BVPS (Rp) 181.3 209.4 238.1 271.5 312.5 PBV (x) 6.9 8.7 5.8 5.0 4.4 EV/EBITDA (x) 20.6 27.4 20.1 16.9 14.0 Dividend yield (%) 1.5% 0.9% 1.4% 1.7% 2.0% RoE (%) 24.2 22.5 21.2 22.0 23.0 Source: Company data and Lautandhana Research Please see important disclosures at the end of this report 50.0 70.0 90.0 110.0 130.0 150.0 170.0 190.0 210.0 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct 2012= 100 KLBF IDX
Transcript
  • FOCUS RESEARCH

    28 SEPTEMBER 2015

    INITIATE COVERAGE PT KALBE FARMA TBK

    BUY

    STOCK INFORMATION Bloomberg Code KLBF IJ

    Sector Healthcare

    Current Price Rp1,370

    Target Price Rp1,680

    Upside/Downside 22.6%

    Share Out (bn shares) 46.9

    Market Cap (Rpbn) 64,219

    52 w range (low-high) Rp1,370 Rp1,905

    52 w average daily Rp1,736

    PRICE CHART

    Source: Bloomberg

    SHAREHOLDERS INFORMATION, AS OF 30 JUNE 2015

    PT Gira Sole Prima 10.2%

    PT Santa Seha Sanadi 9.7%

    PT Diptanala Bahana 9.5%

    PT Lucasta Murni Cemerlang 9.4%

    PT Ladang Ira Panen 9.2%

    PT Bina Arta Charisma 8.7%

    Public (below 5%) 43.3% Source: Company data

    DISTRIBUTION NETWORK NATIONWIDE

    Source: Company data

    Febby Stephanie

    [email protected]

    (+62-21) 5785 1818 ext. 2068

    Carried away by currency weakening but remains defensive

    Dominant Player in Pharmaceutical and Healthcare Industry

    PT Kalbe Farma (KLBF IJ or the company) was founded in 1966 in Jakarta as a family

    pharmaceutical business. The company has been continuously expanding the

    business, both organically and through series of merger and acquisitions. And today,

    the company is the leader integrated healthcare solution provider in Indonesia,

    through its 4 business segments: the Prescription Pharmaceutical, Consumer Health,

    Nutritionals and Distribution and Logistics Division.

    Key to the steady growth...

    KLBF maintained to book a strong revenue growth, relying on: 1) its largest medical

    representative team in Indonesia; 2) strong brand awareness of existing major

    products; 3) comprehensive product offerings for all income groups; 4) huge long-

    term investments in research, including oncology plant, stem cells and cancer

    institute, etc.; 5) increasing healthcare spending under JKN program; and 6) extensive

    distribution network both national and international coverage. The companys total

    revenue is projected to Rp23.5 trillion in 2017F attained by a 12.8% p.a CAGR

    between 2015F-2017F. This year, KLBF guided 5%-7% YoY sales growth, while its EPS

    expected to increase by 6%-8% YoY. These targets were revised from initial target of

    11%-13% YoY sales growth and 14-16% YoY EPS growth, due to various challenges this

    year, i.e depreciating Rupiah, softening macroeconomic condition that lead to weaker

    purchasing power and CCI, coupled with internal issues i.e product recall in Feb15

    and termination of a distribution relationship with a major client.

    Improvement expected in 2H

    In terms of seasonality, companys performance usually picked up in 2H (3 years

    average contribution: 53.2% to annual sales). In our view, the economic slowdown in

    1H15 will gradually recover as the delayed government infrastructure projects are

    initiated in 2H15, which is expected to boost economy by stronger labor absorption

    and better national infrastructure that translates into improved consumption.

    Moreover, as the product recall case has been completed, it is expected to recover in

    early 4Q15. For FY15F and FY16F, we estimate sales growth of 6.4% and 11.4% to

    Rp18.47 trillion and Rp20.57 trillion, respectively. However, we remain cautious on

    margin pressure resulting from further currency weakness as well as intensifying

    competition that gives the price pressure on branded generics that are currently

    priced at a premium to unbranded generics. The management estimated that for each

    10% of IDR/USD weakening, gross margin to suffer by 3%. To lower the risk of margin

    pressure, the company will focus on higher margin products such as oncology drugs

    etc (the company targeted to add 4-5 new SKUs from current 3 SKUs), while

    maintaining its USD cash balance of around USD40-50 million and raw material

    inventories for 3-4 months.

    Buy On Weakness Fair value Rp 1,680 per share

    The share price has been corrected by 21% since the beginning of the month due to

    selling pressure mainly on the weakening of IDR. We feel that this gives an

    opportunity to pick up the share since our fair equity value came in at Rp 1,680 per

    share which represents a 2016F PER target of 30.0x and 2016F EV/EBITDA target of

    21.2x. Based on yesterdays closing price, KLBF was trading at a valuation of 24.5x

    PER 2016F and 16.9x EV/EBITDA 2016F indicating that our fair value offers a 22.6%

    upside potential.

    The Risk: 1) rising raw material prices as impact of weakening Rupiah currency that

    lead to further margin pressure; 2) intensifying competition; 3) delay in

    macroeconomics recovery.

    Financial Summary (Rp billion) 2013A 2014A 2015F 2016F 2017F

    Revenue 16,002.1 17,368.5 18,472.2 20,574.0 23,490.4

    EBITDA 2,804.3 3,069.3 3,097.1 3,656.9 4,362.4

    Net profit 1,919.5 2,064.7 2,221.0 2,622.9 3,154.8

    EPS (Rp) 40.9 44.0 47.4 56.0 67.3

    PER (x) 30.5 41.5 28.9 24.5 20.4

    BVPS (Rp) 181.3 209.4 238.1 271.5 312.5

    PBV (x) 6.9 8.7 5.8 5.0 4.4

    EV/EBITDA (x) 20.6 27.4 20.1 16.9 14.0

    Dividend yield (%) 1.5% 0.9% 1.4% 1.7% 2.0%

    RoE (%) 24.2 22.5 21.2 22.0 23.0

    Source: Company data and Lautandhana Research

    Please see important disclosures at the end of this report

    50.0

    70.0

    90.0

    110.0

    130.0

    150.0

    170.0

    190.0

    210.0

    Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15

    Oct 2012= 100

    KLBF IDX

  • PT KALBE FARMA TBK 28 SEPTEMBER 2015

    2|P a g e

    COMPANY PROFILE

    Dominant Player in Pharmaceutical and Healthcare Industry

    PT Kalbe Farma (KLBF IJ or the company) was founded in 1966 by Dr. Boen Setiawan in Jakarta as a

    family pharmaceutical business. The company has been continuously expanding the business, both

    organically and through series of merger and acquisitions. To strengthen the pharmacy business, the

    company has established Dankos Lab (1977) as well as acquired Hexpharm Jaya (1985), Saka Farma

    (1997) and PT Hale International (2012). In 1985, the company entered the consumer health

    business through the acquisition of Bintang Toedjoe and initiated the energy drink business in 1994.

    Meanwhile, the nutritional business was strengthened through acquisition of Sanghiang Perkasa in

    1993. Kalbe Farma was listed in IDX in 1991 by releasing 20 million shares.

    Currently, the company is the leader in integrated healthcare solution provider in Indonesia, through

    its 4 business segments: the Prescription Pharmaceutical, Consumer Health, Nutritionals and

    Distribution and Logistics Division.

    Key Milestones

    Source: Company data

    Individual Controlling Shareholders

    Source: Company data

    Pharmaceutical Division

    This division produces ethical drugs. KLBF continuously strengthens its position as leading

    pharmaceutical company in Indonesia, through complete product range for all segments, from

    unbranded generic drugs, branded generics and licensed drugs. As of 2014, the companys

    pharmaceutical business enjoys majority market share nationwide (15%, according to IMS Health),

    backed by the largest medical representatives team in Indonesia with more than 2.5k personnel.

  • 28 SEPTEMBER 2015 PT KALBE FARMA TBK

    P a g e | 3

    Ethical and OTC Drugs Production Capacity Type Unit Annual Capacity

    Tablet millions 12,667

    Capsule millions 1,497

    Liquid millions of bottles 92

    Cream millions of tubes 33

    Injection millions of ampoules 113

    Intravenous infusion millions of liters 3

    Source: Company data, as of 2014

    Strong brand lineups

    Source: Company data

    In order to support government health program which commenced operation in early 2014, Jaminan

    Kesehatan Nasional/ JKN (National Health Insurance), the company has penetrated further in the

    lower-margin unbranded generics market. Hence, the unbranded generics product will account for

    the highest growth. As a commitment, as well as to maintain cost efficiency, the company also

    constructed a plant located in Cikarang in 2012 which focused in unbranded generic drugs.

    As one of the long-term investment strategy, in 4Q14 the company has just completed the first

    oncology (treatment for cancer) plant in Indonesia and have launched 3 SKUs, and also started to

    build competence in stem cells and genomics also expanding licensed products from multinational

    companies to gain technology transfer.

    Competitors

    Top 3 competitors:

    a. Sanbe; b. Dexa; c. Novartis

    Source: IMS Health Prescription Pharmaceuticals, 2014

    Consumer Health Division

    This division offers OTC drugs with therapeutic benefits, consumer products with health benefits

    including supplements and other preventive products along with energy and RTD products. The

    company also enjoy strong brands with leading market position over recent decades, such as

    Promag, Neo Entrostop, Extra Joss, Komix, Woods, Fatigon, etc.

    Consumer Health Production Capacity Type Unit Annual Capacity

    Liquid millionsof liters 23

    Tablet millions 424

    Capsule millions 33

    Effervescent powder tons 15,000

    Fruit Juice millions of liters 27

    Source: Company data, as of 2014

    Strong brand lineups

    Source: Company data

  • PT KALBE FARMA TBK 28 SEPTEMBER 2015

    4|P a g e

    Competitors, OTC Products

    Top 3 competitors:

    a. Tempo Scan (TSPC. IJ) ; b. Soho; c. Phapros

    Source: IMS Health OTC, 2014

    Nutritional Division

    This division offers a complete product range for all ages, from infants, toddlers, children, tweens,

    adults, expectant and lactating mothers, up to the elderly; as well as nutritional products for

    consumers with special medical needs. As an effort to expand the market penetration, the company

    also develop new channel of consumer order through hotline service (Kalbe Home Delivery 500-880)

    and e-store via www.kalbestore.com (mainly for consumer health and nutritional products).

    Nutritionals Production Capacity Type Unit Annual Capacity

    Powdered milk and other milk-based foods Tons 24,000

    Baby foods and biscuits Tons 5,000

    Source: Company data, as of 2014

    Strong brand lineups

    Source: Company data

    Competitors, Powder Milk

    Top 3 competitors:

    a. Nestle ; b. Sari Husada; c. Nutricia

    Source: AC Nielsen 2014, based on Value (Rp)

    Distribution and Logistics Division

    To ensure product availability across Indonesia, KLBF has built a Distribution and Logistics Division,

    run by its subsidiary PT Enseval Putera Megatrading Tbk (EPMT IJ), which is responsible for delivering

    Kalbes and third party principal products to over 1 million of outlets in Indonesia. In addition, the

    company has also expanded the business portfolio include raw material trading, medical device

    trading and retail health services. The company is supported by 2 Regional Distribution Centers

    (RDC) in Jakarta and Surabaya and 70 branches in 51 cities, to reach more than 1 million outlets all

    over Indonesia, both directly and indirectly, in cooperation with local sub-distributors. Some of the

    major third party customers, i.e.: PT Mead Johnson Indonesia, PT LOreal Indonesia, PT Kara Santan

    Pertama, and PT Beiersdorf Indonesia.

  • 28 SEPTEMBER 2015 PT KALBE FARMA TBK

    P a g e | 5

    In addition, the company operates retail health services through Mitrasana Clinics, which provide

    one-stop service with 4-in-1 concept including family doctor, pharmacy, laboratory, and convenient

    store. These clinics are another channel used by the company to distribute its products to end-

    customer. To date, the company has opened 83 Mitrasana clinics in Jakarta and its greater area, and

    seeks another 10 clinics until the end of year, which 2 of them have been fully dedicated for BPJS

    patients.

    Distribution and Logistics Capacity Type Number Number of Pallet

    Regional Distribution Centers 2 21,000

    Branches 70 79,615

    Source: Company data, as of 2014

    Major Third Party Clients Prescription Pharmaceuticals Consumer Medical Instrument & Diagnostic Fine Chemical Raw Materials

    Source: Company data

    Sales breakdown by segment Sales breakdown by geographical location

    Source: Company data, Lautandhana Research Source: Company data, Lautandhana Research

    0%

    20%

    40%

    60%

    80%

    100%

    2010A 2011A 2012A 2013A 2014A 1H15

    Se

    gm

    en

    t C

    on

    trib

    uti

    on

    Prescription pharmaceutical Consumer health Nutritionals Distribution and logistics

    4.0%

    96.0%

    2010A3.9%

    96.1%

    2011A

    Export Domestic

    3.6%

    96.4%

    2012A

    4.1%

    95.9%

    2013A4.6%

    95.4%

    2014A

  • PT KALBE FARMA TBK 28 SEPTEMBER 2015

    6|P a g e

    FINANCIAL ANALYSIS

    Key to the steady growth...

    KLBF maintained to book a strong revenue growth, relying on: 1) its largest medical representative

    team in Indonesia; 2) strong brand awareness of existing major products; 3) comprehensive product

    offerings for all income groups; 4) huge long-term investments in research, including oncology plant,

    stem cells and cancer institute, etc.; 5) increasing healthcare spending under JKN program; and 6)

    extensive distribution network both national and international coverage. The companys total

    revenue is projected to Rp23.5 trillion in 2017F attained by a 12.8% p.a CAGR between 2015F-2017F.

    This year, KLBF guided 5%-7% YoY sales growth, while its EPS expected to increase by 6%-8% YoY.

    These targets were revised from initial target of 11%-13% YoY sales growth and 14-16% YoY EPS

    growth, due to various challenges this year, i.e depreciating Rupiah, softening macroeconomic

    condition that lead to weaker purchasing power and CCI, coupled with internal issues i.e product

    recall in Feb15 and termination of a distribution relationship with a major client.

    Revenue Breakdown In Rp billion 2013A 2014A 2015F 2016F 2017F CAGR*

    Segment

    Prescription Pharmaceuticals 3,869 4,329 4,675 5,142 5,862 12.0%

    Consumer Health 2,505 2,924 3,363 3,800 4,522 16.0%

    Nutritionals 3,792 4,581 5,177 5,953 7,144 17.5%

    Distribution and logistics 5,836 5,535 5,258 5,679 5,963 6.5%

    Total 16,002 17,369 18,472 20,574 23,490 12.8%

    % contribution to sales

    Prescription Pharmaceuticals 24.2% 24.9% 25.3% 25.0% 25.0%

    Consumer Health 15.7% 16.8% 18.2% 18.5% 19.2%

    Nutritionals 23.7% 26.4% 28.0% 28.9% 30.4%

    Distribution and logistics 36.5% 31.9% 28.5% 27.6% 25.4%

    *) 2015F-2017F

    Source: Company data and Lautandhana Research

    Potential downside that affecting costs...

    Kalbes direct costs of production are dominated by raw material (3 years average: 73.7% of total

    manufacturing cost or equal to 38.0% of COGS). According to company, 95% of raw materials are

    imported, mainly from China and India, while skimmed milk was imported from Australia and New

    Zealand. It is charged in US$ rate while the revenue is in Rupiah, hence, this is a key catalyst which

    will have an impact on the profitabilitys performance. To minimize the impact of forex transaction,

    the company conducts a natural hedge by forming a cash reserve of US$40-50 million and also

    increasing ASP to the customers, if necessary. Despite this strategy, the management acknowledges

    that for every 10% decrease in Rupiah value, its gross margin reduces by 3%.

    The other main component in COGS is distribution cost (3 years average: 48.6% of COGS), which is

    the direct cost for distribution and logistics division. The net sales figures from respective division

    represents the third party product sales and distribution margin of internal product (Kalbe group)

    sales for consolidated accounting purposes, as this division is run under companys subsidiary, PT

    Enseval (EMPT IJ). The gross margin of this division were mainly determined by agreement with third

    party principals, which may disrupted by infrastructure issues.

    COGS Breakdown, 2014

    Source: Company data

    43.2%

    0.0%

    43.7%

    13.2%

    56.8%

    Distribution cost Manufacturing cost Raw material Other production costs

  • 28 SEPTEMBER 2015 PT KALBE FARMA TBK

    P a g e | 7

    Slower growth in 1H15

    During 1H15 the company booked overall sales of Rp8.72 trillion, grew only 4.1% YoY from Rp8.38

    trillion, resulting from setbacks in macroeconomic growth, termination of distribution contract, and

    product recall (licensed drug category) in February named Bunavest Spinal and Tranaxemat Acid

    (which accounted for 4-5% of pharma sales) due to malpractice case which resulted in the death of 2

    patients in Siloam Hospitals Karawaci (SILO IJ). This case was widely publicized and KLBF was

    declared guilty by BPOM (Indonesian FDA) and the company, as manufacturer, was penalized of

    temporary revocation of marketing authorization and suspend the production of all injection

    products in line 6. In this line, there are 26 special injection products produced by the company,

    including the type of Bunavest Spinal and Tranaxemat Acid. However, the company stated that the

    drug investigation has been completed, the production and distribution is expected to be continued

    in early 4Q15.

    In terms of segment, consumer health and nutritionals division posted the highest growth of 12.0%

    and 10.8% YoY to Rp1.59 trillion and Rp2.38 trillion, respectively, while its distribution revenue

    declined by 5.1% from Rp2.69 trillion to Rp2.55 trillion in consequence of contract termination with

    Abbot by the end of 2014 that accounted for ~3%-4% to total sales. The gross margin, however,

    expanded by 140bps to 49.3%, largely derived from ASP hikes of 3-4% and product mix. In line with

    margin improvements, the net profit increased by 7.1% YoY to Rp1.08 trillion from Rp493.1 billion.

    Meanwhile, the inventory days level remained high at 130 days (133 days in 1Q15), which mostly

    derived from the depreciating IDR that lead to higher value of inventory and compounded by weak

    demand in line with retreating CCI. The management stated that both payable and receivable ratio

    are currently in ideal level (43 and 54 days, respectively) and would continuously implement end-to-

    end supply chain management to overcome any fluctuation in inventory, and seeks at least 5-day

    reduction in current inventory days.

    Interim Financial Result

    1H14 1H15 YoY 1Q15 2Q15 QoQ Consensus Coverage

    P/L (in Rp billion)

    Revenue 8,379.8 8,719.8 4.1% 4,246.7 4,473.1 5.3% 17,369.0 50.2%

    Cost of revenue 4,367.4 4,422.0 1.3% 2,144.7 2,277.4 6.2% 8,892.9 49.7%

    Gross profit 4,012.4 4,297.7 7.1% 2,102.0 2,195.7 4.5% 8,476.1 50.7%

    Operating expense 2,684.0 2,921.4 8.8% 1,418.2 1,503.2 6.0% 5,327.1 54.8%

    Operating profit 1,328.3 1,376.3 3.6% 683.9 692.4 1.3% 3,149.0 43.7%

    Net profit 992.9 1,063.1 7.1% 528.7 534.5 1.1% 2,065.0 51.5%

    Profitability

    Gross margin 47.9% 49.3% 49.5% 49.1%

    EBIT margin 15.9% 15.8% 16.1% 15.5% 48.8%

    Net margin 11.8% 12.2% 12.4% 11.9% 18.1%

    Source: Company data and Lautandhana Research

    Improvement expected in 2H

    In terms of seasonality, companys performance usually picked up in 2H (3 years average

    contribution: 53.2% to annual sales), e.g increasing demand of ulcer drug in the fasting month. In our

    view, the economic slowdown in 1Q15 will gradually recover as the delayed government

    infrastructure projects are initiated in 2H15, which is expected to boost economy by stronger labor

    absorption and better national infrastructure that translates into improved consumption. Moreover,

    as the product recall case has been completed, it is expected to recover in early 4Q15. For FY15F and

    FY16F, we estimate sales growth of 6.4% and 11.4% to Rp18.47 trillion and Rp20.57 trillion,

    respectively.

    However, we remain cautious on margin pressure resulting from further currency weakness as well

    as intensifying competition that gives the price pressure on branded generics that are currently

    priced at a premium to unbranded generics. To lower the risk of margin pressure and currency

    fluctuation, the company will focus on higher margin products such as oncology drugs etc (the

    company targeted to add 4-5 new SKUs from current 3 SKUs), while maintaining its USD cash balance

    of around USD40-50 million and raw material inventories for 3-4 months.

  • PT KALBE FARMA TBK 28 SEPTEMBER 2015

    8|P a g e

    Revenue seasonality

    Source: Company data

    Healthy and strong components of balance sheet

    Along with the massive expansion in Indonesia and overseas, the company should be equipped with

    strong funding and healthy balance sheet components. As of 1H15, the company is still on net cash

    position with minor gearing of 0.04x. Therefore, the company plans to fund capital expenditures

    primarily through existing cash funds as well as internal cash flows. We expect that the company will

    continue to maintain a healthy balance sheet and a net cash position, while retaining small amounts

    of short term loans as a buffer, to give a lot of room to exercise any loan in the future once needed.

    Healthy Balance Sheet In Rp billion 2013A 2014A 2015F 2016F 2017F

    Cash and cash equivalent 1,426.5 1,894.6 2,145.3 2,762.4 3,581.7

    Inventories 3,053.5 3,090.5 3,291.3 3,579.6 4,011.1

    Equity 8,500.0 9,817.5 11,160.6 12,728.8 14,646.3

    Total interest bearing debt 583.8 296.1 296.1 280.3 266.1

    DER (x) 0.1 0.0 0.0 0.0 0.0

    Net debt to equity (x) Net cash Net cash Net cash Net cash Net cash

    Source: Company data and Lautandhana Research

    0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

    2010

    2011

    2012

    2013

    2014

    2015

    1Q 2Q 3Q 4Q

  • 28 SEPTEMBER 2015 PT KALBE FARMA TBK

    P a g e | 9

    INDUSTRY ANALYSIS

    JKN Program, the Fertilizer for the Growth of National Healthcare Sector

    As of 1 January 2014, the government initiated a program named Jaminan Kesehatan Nasional/ JKN

    (National Health Insurance) which is intended to provide a comprehensive guarantee of health

    insurance for all Indonesian citizens to be able to live healthy, productive and prosperous. Prior to

    JKN, the government have carried out some form of social security in health, such as:

    1. Askes Sosial (Social Health Insurance) for civil servants, pensioners and veterans; 2. Jaminan Pemeliharaan Kesehatan (JPK) Jamsostek for SOE and private company employees; 3. Jaminan Kesehatan for military and policemen; and 4. Jaminan Kesehatan Masyarakat (Jamkesmas) for poor residents

    Along with the commencement of JKN, all health insurance program that has implemented above,

    were integrated into the Badan Penyelenggara Jaminan Sosial Kesehatan (BPJS Kesehatan).

    The participation to this program is mandatory to all Indonesians, including foreigners who worked

    for at least 6 months in Indonesia. JKN participants consist of Subsidized/ Beneficiary Participants

    (Penerima Bantuan Iuran/ PBI) and Non-subsidized/ Non-Beneficiary Participants (Non-PBI). All

    participants are required to pay monthly premium to BPJS Kesehatan as JKN administrator.

    According to Presidential Decree no. 111 Year 2013, the first stage of implementation in 2014 will

    cover subsidy recipients, military members, civil servants and formal sector workers and the second

    stage will cover all population (100%) members by 1 January 2019. As of June 2015, there are more

    than 147 million people (more than 50% of population) who have been officially registered as BPJS

    participants.

    Premium Payment Class Categories Monthly Premium Fee Inpatient Grade

    Subsidized Participants (PBI) Poor and near poor residents Rp 19,225/ person Grade 3

    Non Subsidized Participants (Non-PBI) Civil servants/ military/ policemen/

    retired

    5% of salaries and compensations

    (2% paid by employers, 3% paid by employees) Grade 1, 2

    Formal sector workers 5% of salaries and compensations

    (4% paid by employers, 1% paid by employees) Grade 1,2

    Informal sector workers - Rp 25,500 (class III)/ person - Rp 42,500 (class II)/ person - Rp 59,500 (class I)/ person

    - Grade 3 - Grade 2 - Grade 1

    Source: Presidential Decree No 111/2013

    As of 2013, Indonesias healthcare expenditure ratio was relatively low at 3.3% of total GDP, far

    below the ratio of developed countries such as the US (18%) and UK (9.6%). With the

    implementation of JKN program, the healthcare expenditure ratio is expected to be significantly

    boosted and hence, more positive outlook for the healthcare sector. For 2015F, the International

    Pharmaceutical Manufacture Group (IPMG) expected that national pharmaceutical industry will

    grow by 11.8% YoY to US$4.6 billion, indicating pharmaceutical spending of US$19/ capita/ year. As

    a proof of demureness over this JKN program, stated by recent news that the government will

    increase the health budget allocation from current 3.7% to 5% of the 2016F state budget or more

    than Rp100 trillion, assuming the total government spending of Rp2,000 trillion next year. The funds

    will be allocated through the Ministry of Health for the financing of construction/ renovation of

    hospitals, provision of medical equipment and other needs relating to the JKN program.

    Healthcare Expediture/ GDP ratio 2013 Indonesia Pharmaceutical Sales (USD Bn)

    Source: Centers for Medicare and Medicaid Services, Office of the Actuary; United Kingdom:

    Healthcare Rerport, Economist Intelligence Unit; KementrianKesehatan Indonesia, China;

    Singapore Govt Budget; Economic Survey, India; Frost and Sullivan; Company presentation.

    Source: GP Farmasi, Business Monitor International, Pharmaceutical Healthcare Report, Lautandhana

    Research

    0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%

    Indonesia

    India

    Thailand

    Malaysia

    China

    Singapore

    United Kingdom

    United States

    -

    1.00

    2.00

    3.00

    4.00

    5.00

    6.00

    7.00

    8.00

    2008A 2009A 2010A 2011A 2012F 2013F 2014F 2015F

    USD

    Bn

  • PT KALBE FARMA TBK 28 SEPTEMBER 2015

    10|P a g e

    Ratio of Healthcare Spending to the State Budget

    Source: MoF

    Triggering Higher Demand for Unbranded Generic Drugs

    Regarding the JKN program, medicines for the patients that are covered by BPJS Kesehatan mostly

    limited to unbranded generic drugs, as stipulated in the Decree of the Minister of Health

    no.328/MENKES/SK/IX/2013 on the National Formulary (Fornas). National formulary is the list of

    drugs that are fully covered by BPJS Kesehatan, which based on latest scientific evidence by National

    Committee of Fornas, including the most efficacious and safest drugs with affordable prices. Thus,

    we believe that the demand on the unbranded generic drugs will advance and benefited the generic

    drugs producers to grow and expand their production capacity to meet national needs. However, we

    believe the market for branded and licensed drugs will still grow, although in a slower pace, in line

    with the fast-growing middle-upper economic class who demand for premium healthcare.

    Tender Process through E-Catalogue

    According to the Regulation of Minister of Health No. 63/2014, JKN is conducted through electronic

    purchasing method based on e-catalogue (instead of tender auction process, as it used to), in order

    to ensure transparency, effectiveness and the efficiency of the drug procurement process. As seen in

    the government e-catalog portal (www.lkpp.go.id), all of the information i.e drug name, suppliers

    name, packaging, smallest unit price (in Rp), distributors list, and the contract are clearly published.

    Such transparency leads the private hospitals, in particular, to have the negotiating power and

    hence, opens wider competition window among pharmaceutical companies.

    Source: www.lkpp.go.id

    Rising opportunity for consumer health business

    According to BCG in March 2013, a portion of Indonesias population is expected to continue

    entering the middle-class socioeconomic category. On the following chart, in the same tone, World

    Bank projected that in 2025, the middle-upper class with average monthly expenditure of Rp2.6-5.2

    million/capita/month will dominate the population. Hence, we believe the growth of this group will

    create more opportunities for consumer health business (nutritional food, vitamins, energy/ healthy

    drinks, milk, etc), as their lifestyle encourage higher health-consciousness.

  • 28 SEPTEMBER 2015 PT KALBE FARMA TBK

    P a g e | 11

    2012A vs 2020F Projected Indonesian Population Projected Monthly Expenditure Categories

    Categories

    Monthly household

    expenditure

    (IDR mn)

    Population 2012,

    million (%)

    Population 2020,

    million (%)

    Elite >7.5 2.5 (1.0%) 6.9 (2.6%)

    Affluent 5.0-7.5 6.6 (2.7%) 16.5 (6.1%)

    Upper middle 3.0-5.0 23.2 (9.3%) 49.3 (18.4%)

    Middle 2.0-3.0 41.6 (16.8%) 68.2 (25.5%)

    Emerging middle 1.5-2.0 44.4 (17.9%) 50.5 (18.9%)

    Aspirant 1.0-1.5 65.4 (26.3%) 47.9 (17.9%)

    Poor

  • PT KALBE FARMA TBK 28 SEPTEMBER 2015

    12|P a g e

    FINANCIAL HIGHLIGHTS OF PT KALBE FARMA, TBK

    In Rp Billion

    BALANCE SHEET 2013A 2014A 2015F 2016F 2017F INCOME STATEMENT 2013A 2014A 2015F 2016F 2017F

    ASSETS

    Cash & cash equivalents 1,426 1,895 2,145 2,762 3,582 Revenue 13,636 16,002 17,369 18,472 20,574

    Accounts receivable 2,145 2,347 2,497 2,649 2,896 COGS (7,103) (8,323) (8,893) (9,510) (10,379)

    Inventories - net 3,053 3,091 3,291 3,580 4,011 Gross profit 6,533 7,679 8,476 8,962 10,195

    Other current assets 872 789 914 1,024 1,133

    Total current assets 7,497 8,121 8,847 10,016 11,622 Operating expenses (4,316) (5,130) (5,715) (6,050) (6,738)

    Fixed assets 2,926 3,404 4,035 4,639 5,201

    Other non-current assets 892 900 1,108 1,149 1,313 Operating profit 2,218 2,549 2,761 2,912 3,457

    Total Non-current assets 3,818 4,304 5,143 5,788 6,514

    TOTAL ASSETS 11,315 12,425 13,991 15,804 18,136 EBITDA 2,453 2,804 3,069 3,097 3,657

    LIABILITIES & EQUITY

    Interest expense (18) (29) (52) (31) (28)

    Short term loans 584 252 252 236 222

    Other income (expenses) 33 2 (9) 13 2

    Accounts payable 1,152 1,133 1,234 1,384 1,604

    Total other income/(expenses) 16 (27) (61) (18) (26)

    Other payables 905 1,001 1,100 1,191 1,371

    Total Current Liabilities 2,641 2,386 2,586 2,812 3,197 Income before tax 2,234 2,522 2,700 2,894 3,431

    Total Non-Current Liabilities 175 222 244 263 292 Tax expense (533) (602) (643) (690) (817)

    Capital Stock 469 469 469 469 469

    Other items 6 12 12 10 12 Net profit before minority interest 1,701 1,920 2,058 2,204 2,614

    Non-controlling interest 392 435 449 506 579 Minority interest (41) (51) (56) (58) (66)

    RE 7,633 8,901 10,231 11,743 13,587

    Total Equity 8,500 9,817 11,161 12,729 14,646 Net profit 1,659 1,869 2,001 2,145 2,548

    TOTAL LIABILITIES & EQUITY 11,315 12,425 13,991 15,804 18,136 EPS (Rp) 37 41 44 47 56

    CASH FLOW STATEMENT 2013A 2014A 2015F 2016F 2017F KEY FINANCIAL RATIOS 2013A 2014A 2015F 2016F 2017F

    Net profit 1,734 1,920 2,065 2,221 2,623 Growth (%)

    Depreciation & Amortization 235 255 308 185 200 Revenue 25.0 17.3 8.5 6.4 11.4

    Change in WC (727) (935) (257) (249) (291) Gross profit 17.7 17.5 10.4 5.7 13.8

    Others 44 (184) 179 (26) (19)

    Operating Profit 12.7 14.9 8.3 5.5 18.7

    Net Operating Cash Flow 1,286 1,055 2,295 2,130 2,513

    EBITDA 13.3 14.3 9.4 0.9 18.1

    Net Profit 17.0 10.7 7.6 7.6 18.1

    Change in fixed assets - net (630) (926) (787) (815) (804)

    Others (301) (171) (8) (209) (41)

    Profitability (%)

    Net Investing Cash Flow (931) (1,097) (795) (1,024) (845)

    Gross margin 47.9 48.0 48.8 48.5 49.6

    Operating margin 16.3 15.9 15.9 15.8 16.8

    Change in borrowings - net 64 380 (288) - (16) EBITDA margin 18.0 17.5 17.7 16.8 17.8

    Change in equity 12 746 50 13 56 Net Profit margin 12.7 12.0 11.9 12.0 12.7

    Change in other liabilities 27 20 3 22 19 ROAA 19.6 18.5 17.4 16.8 17.6

    Dividend payment (916) (901) (810) (891) (1,110) ROAE 25.0 24.2 22.5 21.2 22.0

    Adjustment 25 (636) 13 - -

    Net Financing Cash Flow (787) (392) (1,032) (855) (1,051) Solvency (x)

    Current ratio 3.4 2.8 3.4 3.4 3.6

    Change in cash (432) (433) 468 251 617 Quick ratio 2.3 1.7 2.1 2.1 2.3

    DER 0.0 0.1 0.0 0.0 0.0

    Cash at the beginning period 2,291 1,860 1,426 1,895 2,145 EBITDA coverage 140.1 97.9 59.0 99.6 130.7

    Cash at the ending period 1,860 1,426 1,895 2,145 2,762 Net debt to equity Net cash Net cash Net cash Net cash Net cash

    Source: Company data and Lautandhana

    Research

    Notes:

    The definitions of Lautandhana Research for Investment Ratings:

    - BUY : +15% and above, over the next 12 months - Neutral : -15% to +15%, over the next 12 months

    - SELL : -15% and worse, over the next 12 months

  • 28 SEPTEMBER 2015 PT KALBE FARMA TBK

    P a g e | 13

    APPENDICES

    Manufacturing Infrastructure

    Source: Company data

  • PT Lautandhana Securindo Wisma KEIAI 15th Floor

    Jl. Jendral Sudirman Kav. 3

    Jakarta 10220

    Tel : +6221 5785 1818

    Fax : +6221 5785 1717

    BRANCH OFFICE

    Pluit Medan

    Kawasan CBD Pluit Blok A No.20 Kampus STMIK-STIE MIKROSKILL

    Jl. Pluit Selatan Raya No.1 Jl Thamrin no. 140

    Jakarta 14440 Medan

    Tel : +6221 66675345

    Fax : +6221 66675234

    Mangga Dua Kelapa Gading

    Mangga Dua Square Blok F No.23 Sentra Bisnis Artha Gading

    Jl. Gunung Sahari Raya No.1 Jl. Boulevard Artha Gading Blok A6B No. 7

    Jakarta 14420 Jakarta Utara 14240

    Tel : +6221 62313288 Tel : +6221 45856402

    Fax : +6221 62311365 Fax : +6221 45873961

    Karawaci Puri

    Karawaci Office Park Blok L No. 29-30 Rukan Grand Taman Aries Niaga

    Lippo Karawaci Tangerang Jl. Taman Aries Kembangan Blok G 1 No. 1 I

    Banten 15115 Jakarta Barat 11620

    Tel : +6221 55770718 Tel : +6221 2931 9515

    Fax : +6221 55770719 Fax : +6221 2931 9516

    Bandung Gading Serpong

    Komplek Paskal Hyper Square Blok C No. 15 Ruko Paramount Centre Blok A No. 2

    Jl. Pasir Kaliki No. 25 - 27 Jl. Raya Kelapa Dua, Tangerang

    Bandung 40181 Banten 15810

    Tel : +6222 86061027 Tel : +6221 29014800 / 29014731

    Fax : +6222 86060684 Fax : +6221 2901 4656

    Medan Surabaya

    Jalan Kartini No.5 Jl. Diponegoro 48D-E

    Medan 20152 Surabaya 60264

    Tel : +6261 451 8855 Tel : +6231 562 2555

    Fax : +6261 451 6836 Fax : +6231 567 1398

    DISCLAIMER

    This report has been prepared by PT. Lautandhana Securindo on behalf of itself and its affiliated companies and is provided for information purposes

    only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. This report has been produced

    independently and the forecasts, opinions, and expectations contained herein are entirely those of PT. Lautandhana Securindo.

    While all reasonable care has been taken to ensure that information contained herein is not untrue or misleading at the time of publication, PT.

    Lautandhana Securindo makes no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided

    solely for the information of clients of PT. Lautandhana Securindo who are expected to make their own investment decisions without reliance on this

    report. Neither PT Lautandhana Securindo nor any officer or employee of PT Lautandhana Securindo accept any liability whatsoever for any direct or

    consequential loss arising from any use of this report or its contents. PT Lautandhana Securindo and/or persons connected with it may have acted

    upon or used the information herein contained, or the research or analysis on which it is based, before publication.


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