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Sector Update: Consumer Sector
April 28, 2015 09:09 WIB

In an attempt to gauge the market pricing for FMCG products, we recently conducted a channel check through a modern trade outlet. Although we are aware of the limitations of the findings, we still think our exercise serves as a useful proxy to company pricing policy, brand power and market strategy. We note clear dominance in certain segments (UNVR for most HPC products, INDF and ICBP for most food-related products), while other sectors are more fragmented, meaning companies have to compete hard for market share, limiting room for ASP hikes. 2Q15 should be strong on the back of the Ramadan festivities although we remain cautious on the stronger USD (which may lead to margins contraction) and weaker consumer purchasing power. We stick with all our target prices and stock recommendations, staying NEUTRAL on the sector.   

UNVR’s brand power is evident in HPC
Based on our channel check, we note that most of UNVR’s HPC product prices have been increased, in line with the company’s plans. We also note that the price increases have not been uniform, with higher price increases for items with greater brand power. With the market leader having raised prices, the prices of most other companies’ personal care products have also been increased, albeit more moderately than UNVR’s price increases. In the homecare segment, most of UNVR’s competitors tended to keep prices unchanged although, looking ahead, we believe that ASP increases are on the cards.

F&B – beverages: Where the action is!
The F&B segment showed an interesting variation, with the prices of most food products relatively stable but with the prices of beverages more dynamic. Following around Rp500/pack price hike earlier in 2015, instant noodle prices have been kept unchanged, and we note that distinctive flavors can demand a higher premium over other flavors. Meanwhile, several players seem to have adopted predatory pricing policies with UHT milk and soft drinks priced at substantial discounts, and with Bogasari placing around an 11% discount on its flour. This strategy will likely cap price increases going forward, meaning producers will have to work hard to improve their financial performance. Whilst we recognize that continuous innovations are needed in the FMCG sector to allow for the production of new variants/products, we also note that RTD beverages, and RTD tea in particular, seem to be attracting the most new entrants. With the Indonesian consumer’s penchant for sweet drinks coupled with the long-standing tea drinking culture, we believe that the RTD tea market is still highly prospective. Having first developed traditional tea flavors (green tea or black tea), most RTD tea producers are now developing other flavors such as honey.

Expecting 2Q15 to be strong thanks to Ramadan
Given softer demand trends than in 2014, we believe that most producers will approach price increases with caution this year. Nonetheless, with Ramadan just around the corner (fasting begins on 18 June; Idul Fitri on 17 July), we believe that demand will pick up, potentially translating into higher pricing in the period of the festivities. As such, we expect the 2Q15 results to be strong, a positive catalyst for consumer stocks in general. Looking at the stocks under our coverage, we retain our previous calls and still pitch INDF as our top pick in the sector.

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Trade Outlook

Trade Outlook April 2015
April 14, 2015 10:49 WIB

Indonesia’s exports tumbled in February 2015. The oil and gas exports fell 8.8 percent MoM to US$ 1.9 bn, while the non oil and gas exports dropped 7.8 percent MoM to US$ 10.4 bn. As a result, total exports sank 8.0 percent MoM to US$ 12.2 bn. Average aggregate prices edged up 0.6 percent MoM although the exports volume contracted 8.5 percent MoM.

On a MoM comparison, exports of two major product types posted declines. The first type, Mineral fuels (HS 27), posted a 9.8 percent decline in exports, whilst exports of the second type, animal and vegetable fats (HS 15), recorded a 6.5 percent decline in exports. In the first two months of 2015, the manufacturing sector accounted for the bulk of exports (68.4 percent), followed by oil and gas exports (15.5 percent), mining exports (12.8 percent), and agriculture exports (3.3 percent).

Indonesia’s non oil and gas exports to three major destination countries were all lower. Shipments to China dropped 13.1 percent MoM, followed by the U.S. (-5.7 percent) and Japan (-1.8 percent). ?? Indonesia’s imports also showed a sharp decline. On the back of an 18.7 percent MoM decline in oil and gas imports and a 6.3 percent fall in non oil and gas imports, total imports dropped 8.4 percent MoM to US$ 11.6 bn. Whilst the volume of imports was actually higher (+1.2 percent), average aggregate prices were down by 9.5 percent.

By product type, imports of mechanical machinery and equipment (HS 84) were 10.3 percent lower, while imports of electrical machinery and equipment (HS 85) fell by 6.2 percent. Shipments of non oil and gas products from China were down by 6.7 percent. However, imports from Japan and Thailand were 7.2 percent and 12.4 percent higher, respectively.

By classification of use, imports of consumption goods actually rose by 4.6 percent while imports of raw materials and capital goods fell 8.8 percent and 11.1 percent, respectively. ?? Overall, Indonesia recorded a trade surplus of US$ 738.3 mn in February following a surplus of US$ 743.5 mn in the previous month.

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CPI & SBI Outlook

Inflation Outlook March 2015
March 27, 2015 09:26 WIB

Inline with our earlier projection, the headline inflation rate fell further in February 2015. On a MoM comparison, the CPI showed higher deflation of 0.36 percent MoM, or translating into YoY inflation of 6.29 percent. By component, the food and non-food components declined by 0.61 percent and 0.22 percent, respectively.

Prices rose in all CPI components except the foodstuffs and transportation component. In the foodstuffs component, prices fell 1.47 percent due to the start of the harvesting season while in the transportation component prices fell 1.53 percent MoM, largely driven by the impact of the government’s move to cut retail prices of fuel in January. By contrast, prices in the clothing component rose the most (up 0.52 percent), followed by the prepared foods component (+0.45 percent MoM), the housing component (+0.41 percent MoM), the medical care component (+0.39 percent MoM), and the education component (+0.14 percent MoM).

In March, seasonality from the harvesting season will result in downward pressures on prices in the foodstuffs component. The harvesting of crops (especially those grown in paddy fields) will drive rice prices down. March average rice prices remain above the February average level, but shows a declining trend. From the production side, the government targets 73.4 million tons of milled dry grain rice production in 2015, or 3.7 percent higher than last year’s production.

The price of several commodities tend to increase such as red onions, cooking oil, and flour. At the same time, the collapse in global oil prices will help to keep domestic fuel prices stable. Hence, we predict March inflation of 0.16 percent MoM, translating into YoY inflation of 6.38 percent.

In the latest development, Bank Indonesia maintained its benchmark BI rate at 7.50 percent, with the Deposit Facility rate and the Lending Facility rate unchanged at 5.50 percent and 8.00 percent, respectively. The BI’s goal of achieving a healthier current account (2.5-3.0 percent of GDP) was one of the main factors behind BI’s move to keep the BI rate at its current level. However, we continue to believe that there is still scope for further cuts in the benchmark rate given the benign outlook for inflation over the near- term

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Forecast For March 2015

Exports US$ 12.80 bn
Imports US$ 12.30 bn
Trade Balance US$ 556.50 bn

Forecast for 2015

Exports US$ 182.80 bn
Imports US$ 180.30 bn
Trade Balance US$ 2.50 bn

DRI Forecast for March 2015

MoM(%) 0.16
YoY(%) 6.38

End of period(% p.a) 7.50

Forecast for 2015

Inflation(%) 5.04
SBI(% p.a) 7.50