CLSA Indo consumer sector

Great consumer report from our consumer analyst Swati. “Time to Imagine Indonesia”.

The concern: whether expectation of hockey stick growth in consumption will intensify competition thus eroding margins?

In India and China, expectation of hockey stick growth has seen competition intensify in the consumer space eroding margins. Indonesia Telco industry has seen sharp increase in penetration rates in the last five years but this has also resulted in intense price war.

We believe that in Indonesia it will not be easy (and will be gradual) for competition since the distribution system is one of the most complicated in the world due to 6,000+ inhabited islands and appalling infrastructure.

Winners will be companies with proactive management, strong franchise, and distribution network. We like DIY chain ACE Hardware (ACES IJ), biscuit maker Mayora (MYOR IJ), and Gudang Garam (GGRM IJ) at current valuations.

For GGRM and big cigarette companies, competition is actually being eased. Top five kretek producers control 77% of the market. The government will gradually phase out the middle players by increasing excise taxes unproportionately which is good for the big players.

Another point to make: Indonesians spend about 42% of the income on food (vs. 36% in India, 32% in China). Rising income will encourage discretionary spending. Bullish case for Astra Int’l (ASII IJ) and cement companies.