What’s gone wrong and what they can do to fix it

Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. MCI (P) 126/02/2017 MCI (P) 069/06/2017 Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch View HSBC Global Research at: https://www.research.hsbc.com MiFIDII–ResearchIsyouraccessagreed?CONTACT us today  Stock prices are down sharply y-t-d; weaker consumption growth and stronger online competition are concerns  But we believe the problems are cyclical rather than structural and the department stores can bounce back next year  LPPF (Buy): lower TP to IDR17,250 from IDR19,000; RALS (Hold): cut TP to IDR1,010 from IDR1,300 Underperforming: Business has not being going to plan for Matahari Department Store (LPPF) and Ramayana (RALS). Matahari’s stock price has fallen 30.2% y-t-d and Ramayana’s 15.5%, while the Jakarta Stock Exchange Composite Index (JCI) has gained 8.9% over the same period. However, we think the sell-off is overdone. In this report we look at what’s gone wrong and what solutions are available. Problems: (1) Weaker consumption growth is a concern, especially after disappointing sales figures during the important Lebaran holiday period led managements of both companies to cut guidance for 2017; (2) the impending rise in online competition as internet giants like Alibaba move into Indonesia; and (3) fast fashion competition (see Fighting fast fashion, 20 March 2017). Solutions: (1) Reinvigorating the infrastructure programme should act as a catalyst for economic growth, boosting consumer spending; (2) we think the pace of growth in e-commerce in Indonesia will be relatively slow, unlike in China, due to poor logistics, undeveloped payment systems, and lifestyle factors; an omni-channel approach should also help retailers; (3) more engagement with customers through membership programmes; and (4) opening new stores to support sales. Valuations and risks. We maintain our Buy rating on LPPF but lower our TP to IDR17,250 from IDR19,000. Despite cutting our earnings forecast, we remain confident about the long-term prospects. We maintain our Hold rating on RALS but cut earnings and lower our TP to IDR1,010 from IDR1,300. We remain concerned about the supermarket division. Risks: Weaker macro growth, delayed spending on infrastructure, and faster online penetration rate. 6 September 2017 Selviana Aripin*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch selviana.aripin@hsbc.com.sg +65 6658 0610 Karen Choi* Head of Consumer & Retail Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch karen.choi@kr.hsbc.com +822 3706 8781 *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations. Indonesian Retailers EQUITIES MULTILINE RETAIL Indonesia Figure 1: Indonesian retail companies under coverage Company Ticker Currency Current TP - Old TP - New Rating Upside Market cap (USDm) 3m ADTV (USDm) Matahari Department Store LPPF IJ IDR 10,150 19,000 17,250 Buy 70.0% 2,219 5 Ramayana Lestari Sentosa RALS IJ IDR 975 1,300 1,010 Hold 3.6% 518 1 Note: Priced as of 4 September 2017. Source: Bloomberg, HSBC estimates What’s gone wrong and what they can do to fix it  EQUITIES ● MULTILINE RETAIL 6 September 2017 2 Difficult times The main concerns that investors have about the sector are challenges from fast fashion competition, weak consumption in 1H17, and the rising popularity of online sales. We addressed the fast fashion issue in Fighting fast fashion, 20 March 2017. In this report, we address the problems of weaker consumption and the threat from e-commerce and look at the possible solutions. Weak macro What we hear: Consumption was relatively weak in 1H17, with GDP growth of 5% in both the first and second quarters. HSBC’s economist had expected 5.1% growth in 2Q and 5.2% for 2017. Some of the reasons cited include the tighter controls around infrastructure development, changes in savings patterns, curtailment of spending following the completion of the tax amnesty programme, and the impact from declining oil and gas revenue. Indonesia retailers have asked the government to speed up infrastructure projects to increase employment and boost the spending power of consumers (Reuters, 9 August 2017). Our view: We do not expect a recovery going into 2H17 mainly because the all-important Lebaran holiday is behind us. However, we do think that the restarting of the infrastructure development programme is a potential catalyst. Indonesia has plans to roll out an ambitious USD424bn investment plan between 2015 and 2019 to build roads, airports, and seaports. However, since the start of the infrastructure plan, reports of delays to various projects are often heard. Over the long term, we see growth opportunities within the middle/lower seg