Mandiri Sekuritas Retail : Rising consumer wealth and confidence

Three retailers under our coverage, Ramayana (RALS), Mitra Adiperkasa (MAPI), and Aces Hardware (ACES) reported strong 1Q performances. All booked double- digit revenue growth (RALS +14.5% yoy, MAPI +12.7% yoy, and ACES +19.1% yoy). Same-store growth was also robust (RALS +13.5% ytd, MAPI +9% ytd, ACES +10.9% ytd). As the result,! operatin g profit also posted solid performances (RALS +297.8% yoy, MAPI +20.7% yoy, ACES +19.4% yoy). We believe top-line to remain strong, however margin might slightly ease due to the government’s plan to hike electricity tariff by an average of 10% starting July 2010. Utilities as percentage of sales were 2.8% for MAPI, 4.3% for RALS, and 1.9% for ACES in 1Q10.

Expanding profit margin. RALS recorded the highest margin expansion with operating margin returning from a depressed 0.7% in 1Q09 to 2.4% in 1Q10. Meanwhile, MAPI also saw its operating margin increasing 30bps to 5% in 1Q10, while ACES was stable at relatively high 12.1%. ACES obtained above-average margin due to its unique product offering (home improvements and life style) unmatched in number of products and product type. ACES source its product from China, enabling it to gain hi! gher marg in.

Rising consumer confidence, rising expenditure level. Compared with March 2009 level of 86.2, Consumer Confidence Index measured by Bank Indonesia, has risen to 96.4 in March 2010. Another interesting data was provided by AC Nielsen showed a 25.6% yoy increase in people with expenditure above Rp1.5mn (US$165)/month to 23.2mn people in 9 major cities, while people with below Rp1.5mn/month expenditure dropped 12.6% yoy to 25.4mn people (Exhi! bit 2). M inimum wages are rising in the range 3.7-13.0%, with regions in Kalimantan, and Sumatra having the highest jump in minimum wage (Exhibit 1)

But all is priced-in hence we maintain our Neutral recommendation on the sector. In the beginning of the year, we had already expected the rebound in retail sales. We are neutral as we think the market has not fully calculated the impact of electricity tariff hike. Company specific issues will drive each stock performance. We have a Buy and we like MAPI for its continuing operational improvements, Neutral on ACES as we’re waiting the replication of its success in Greater Jakarta area to other place and its sustainability. We have a Neutral recommendation for RAL! S as all the optimism has been factored-in.