Mandiri Sekuritas ACES concept applies only in Greater Jakarta area?

ACES reported unaudited FY09 net income of Rp156bn, 9.4% above our estimate. Revenues grew 9.2%yoy despite negative same-store growth (SSG) of 1.7%. Margins are improving as ACES successfully shortened its cash cycle. In 2010, ACES expects a slim growth of 3.0% yoy in earnings despite 15.8% yoy in revenues. ACES estimated rising operating expenses will reduce 2010 operating margin for 2010 by 80bps to 12.0%. Our concern for ACES is the slowdown of sales outside greater Jakarta. We are maintaining our target price and downgrade our recommendation to Neutral.

Supported by home market. ACES -1.7% SSG in 2009 was actually helped by stores in Jakarta (SSG 09 : -0.5%), West Java (SSG: -1.9%) and Banten (SSG: 4.1%) . As these areas (Greater Jakarta) contributed 61.6% of total sales, ACES consolidated performance can still hold up. Greater Jakarta areas are where ACES stores mostly located (20 out of 39 ACES stores are ( within these areas). Whether the circums! tances ca n be considered as a result on the unpreparedness of other regions to embrace ACES concept, this will be seen in the coming quarters.

Expansion in 2010 to focus in Greater Jakarta. ACES plans to open another 6 stores, 5 stores in Greater Jakarta, and 1 in Central Java. Total gross spaces for the six stores are 24,581 sqm or 23.2% yoy increase from 105,697 sqm by end 2009. With approximately Rp4mn per sqm capex, capex for 2010 is estimated at Rp98bn, which will be intern! ally fund ed as ACES has strong cash position (9M09 cash Rp422bn). In mid-2010 ACES plans to expand into kids’ toys by opening Toy Kingdom. The expansion plan strengthen our argument that Greater Jakarta is still its only success story and its expansion to Toy Kingdom which is a competitive business, indicates exhaustion in current ACES home improvement concepts.

Downgrade to Neutral. We like ACES because of its transparency and willingness to share detailed data on their store operations. The arrays of information provided, highlighted ACES good management information system, hence better ability to manage goods and costs. We maintain our target price and downgraded our recommendation to Neutral. A good upside catalyst would be the acquisition of its sister company Index, a furniture wholesaler and retailer.