Sales in Retail Sectors Remain Weak in 1H17
Bank Indonesia reported that the Real Retail Sales Index grew 6.3% YoY in June 2017, against June 2016's high point of 16.3% YoY. While data on retail sales growth in 2016 stayed in the double-digits, since early 2017 it has slipped to 10% or even below, into single digits. The momentum of a new school year, along with the Idul Fitri festive in 2Q17, distorts consumer priorities; ultimately, retail sales growth in this festive season was not as high as it was in 2016.
Risk to OutlookBased on Nielsen Indonesia's research, overall retail sales growth during 1H17 was only 3.7%, while over the previous few years it had recorded double digits for the same period. The closing down of several retail outlets and stagnation of the shopping center occupancy rate is evidence of a slowdown in the industry. Decreasing budgets for consumption, turning to savings and investment, also meant people tended to restrain expenditures. This can be evidencedby the upward trend in deposits of third-party funds (DPK) which rose by 10.29% YoY in June 2017, with a total of Rp 5,045.99 trillion. In our view, the central issue we must be concerned about is the behaviorial shift in shopping patterns of people who were historically generally keen to shop in conventional retail stores, now evolving into a pattern of shopping through online applications: this can be seen either as an opportunity or a threat to retail business. Focus on Efficiency and InnovationIn such a current situation of uncertainty, retail business players adopt survival strategies for business sustainability: 1) Closing unproductive stores and focusing on developing productive outlets; 2) transformation strategy, changing the sales format (tenant mix) and shop refreshment; 3) Business development through mini-market concept, 4) Focus on efficiency to manage profitability. Sophisticated development of middle-class society in Indonesia, coupled with the government's policy of eliminating VAT on basic foods, has the potential of stimulating people's purchasing power.
NEUTRAL Outlook with Top Picks: ERAA, MAPI and RALS
Overall, we believe that the retail industry in Indonesia is experiencing a slowdown due to the decrease in purchasing power, occasioned by factors such as 1) the elimination of an electricity subsidy; 2) reluctance to raise UMR; 3) Idul Fitri momentum, and tight competition among retailers. We think that in the near future retailers will continue to focus on business efficiency and resist excessive expansion in opening new outlets. Taking several of the above factors into account, we recommend NEUTRAL for the retail sector. Nevertheless, we recommend certain preferred stocks, such as ERAA (BUY, TP: Rp1,100) that received a positive catalyst from the government's fight against illegal mobile phones; MAPI (BUY, TP: Rp7,650) able to maintain its operational and fundamental performance and RALS (BUY, TP: Rp1,140) which focuses on improving potential outlets and its ability to maintain margins.
