Company Update

14 September 2017

Consumer Sector Outlook

1H17: Purchasing Power and Retail Sales Growth is Declining

The strengthening of household consumption is still a major driver of national economic growth, with a contribution of 55.61% to total GDP in 1H17. The household consumption sector recorded growth of 4.95% YoY in 1H17 (vs. 5.07% YoY in 1H16) lower compared to Indonesia's economic growth of 5.01% in 1H17.Retail industry sales also served as an indicator to assess the growth of the consumption sector; a significant decrease was observed, to 4.6% by May 2017.


The Demographic Bonus and Increasing Purchasing Power are Positive Catalyst

We believe that the sector is still able to be in stable condition, mainly due to : 1) the strengthening of consumer sentiment in current economic and employment conditions, reflected in the improvement of the Indonesian Consumer Confidence Index (IKK), from the end of 2016 to June 2017 it stood at a level of 122.40; 2) a large population and middle-class income growth.In our view, FMCG sector are believed to be the most resilient businesses to resist any economic slowdown. However, we see that public purchasing power and rising imported raw material prices are inhibiting the growth of this sub-sector.


Commodity Price Increase and Exchange Rate Fluctuation Become Main Focus

Imported raw materials are mostly used by listed companies in the consumer sector, especially sugar, skimmed milk and wheat. Dependence on imported raw materials means the sector is vulnerable to USD / IDR exchange rate exposure; strengthening of the rupiah by 0.88% YTD in June 2017 became a positive catalyst for cheaper raw materials. On the other hand, the upward trend in commodity prices for imported raw materials such as sugar, skimmed milk and wheat in early 2017 overshadowed the production expenses of publicly-listed consumer manufacturers.


Neutral Outlook with Top Picks: INDF and ICBP

After appraising positive catalysts and risks, we recommend NEUTRAL for the consumer sector in Indonesia. Nevertheless, we still give a nod to several preferred shares: INDF (BUY; TP: Rp9.400), which is able to generate fresh funds from the disposal of China Minzhong Food Corporation Limited (CMZ) shares, supported by the positive performance of majority of its subsidiaries in 2Q17, and ICBP (BUY ; TP: Rp9.200) which has strong financial performance and a distribution network and is supported by high consumer demand for the Company's products.


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