Company Note Alpha series Indonesia - brokingrfs.cimb.com · SMK, master franchisee of Pizza Hut in Indonesia, is the largest pizza chain operator ... that reducing 1 delivery man

Company Note │ Alpha series Food Retail│Indonesia│July 4, 2018 Shariah Compliant

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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INITIATION

Sarimelati Kencana PT Serving growth on silver platters ■ SMK, master franchisee of Pizza Hut in Indonesia, is the largest pizza chain operator

and one of the largest F&B franchises in Indonesia. ■ Low penetration, a fast-growing affluent middle class and an emerging eat-out lifestyle

provide vast growth opportunities. Pizza demand posted 9.5% CAGR in 2012-16. ■ An established track record, a well-known brand name, vertical integration, and an

experienced management team help entrench SMK's market leading position. ■ Sales delivered c.9% CAGR in 2014-17 and is projected to recorded c.15% CAGR in

2017-20F. We expect earnings to post c.22% CAGR over 2017-20F. ■ We initiate PZZA with an Add call and TP of Rp1,500 based on 22.0x 2019 P/E.

Vast growth opportunities in an increasingly affluent population Established in 1987, SMK is the master franchisee of Pizza Hut in Indonesia. It operates two outlet formats: Pizza Hut Restaurant (PHR) and Pizza Hut Delivery (PHD). As at end-1Q18, it had a total of 406 outlets across the country. Indonesia’s large and young population base with an emerging affluent middle class is driving strong demand for F&B establishments. Amid the greater acceptance of Western cuisine and higher appetite for wheat products, the demand for pizza saw 9.5% CAGR in 2012-16.

Plenty of untapped growth pockets Having established a strong presence in major cities, PHR now aims to expand to lower-tier cities while PHD enlarges its presence in first and second tier cities. Following an agreement for lower franchise fees from Yum!, SMK plans to accelerate its outlet expansion by opening at least 175 outlets in Indonesia in 2017-19. The company successfully opened a net addition of 51 outlets in 2017 and 13 outlets in 1Q18.

Adaptation leads to consistent growth Aside from its strong brand name and unchallenged operations, its highly adaptive nature by being continuously innovative in taste and technological aspects led SMK to achieve a consistent 9.3% sales CAGR in 2014-17, despite having operated for more than 20 years. Following PHD’s initiatives to work with online aggregators (e.g. Go-Jek) and more aggressive store expansion, we project stronger sales CAGR of 14.7% in 2017-20F.

Online delivery boost Engaging with online delivery leads to some aggregator cost, but this is more than compensated for by a large sales growth boost and employee efficiency. We estimate that reducing 1 delivery man in all PHD outlets saves at least Rp9.5bn annually or c.5% of earnings. With more food delivery services joining the fray, sales may see upside risk.

Robust c.22% earnings CAGR in 2017-20F As the strong sales growth leads to better operating leverage (salary and rental expenses fall as a % of sales), coupled with a lower franchise fee for the newly opened outlets as agreed with Yum!, we expect the company to book strong 26.3% yoy core earnings growth in 2018F, followed by more conservative 16.7% yoy growth in 2019F (given aggressive expansion) and 23.0% in 2020F.

Initiating coverage with an Add call and Rp1,500 TP We initiate PZZA with an Add and Rp1,500 TP pegged to 22.0x 2019 P/E. PZZA deserves a premium over its retailer peers (sector trading at 15.1x 2019 P/E) on the back of: 1) fast-growing F&B establishment in a country where mass market population and dining out trends are growing; and 2) strong track record, market leading position with over 3 decades of experience. Our TP implies 9.7x 2019 EV/EBITDA and 1.3x 2019 PEG. Risks: higher-than-expected opex and weak consumer purchasing power.

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Indonesia

ADD Consensus ratings*: Buy 0 Hold 0 Sell 0

Current price: Rp1,090

Target price: Rp1,500

Previous target: N/A

Up/downside: 37.6%

CIMB / Consensus: na

Reuters: PZZA.JK

Bloomberg: PZZA IJ

Market cap: US$228.8m

Rp3,293,844m

Average daily turnover: US$0.75m

Rp10,560m

Current shares o/s: 3,022m

Free float: 30.5% *Source: Bloomberg

Key changes in this note

N/A.

Source: Bloomberg

Price performance 1M 3M 12M

Absolute (%) -11.4

Relative (%) -5.5

Major shareholders % held PT Sriboga Raturaya 64.8

Mountain High Investments Ltd. 4.8

Insert

Analyst(s)

Kevie ADITYA

T (62) 21 3006 1738 E [email protected]

Financial Summary Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F

Revenue (Rpb) 2,695 3,027 3,474 4,006 4,563

Operating EBITDA (Rpb) 317.0 333.1 381.7 441.3 510.7

Net Profit (Rpb) 130.4 139.4 175.8 205.2 252.2

Core EPS (Rp) 45.25 46.07 58.18 67.89 83.47

Core EPS Growth 117% 2% 26% 17% 23%

FD Core P/E (x) 24.09 23.66 18.74 16.06 13.06

DPS (Rp) 22.5 106.6 23.1 29.1 33.9

Dividend Yield 2.06% 9.78% 2.12% 2.67% 3.11%

EV/EBITDA (x) 10.92 10.97 7.81 6.98 5.64

P/FCFE (x) 25.60 46.26 NA NA 13.01

Net Gearing 49.5% 97.0% (27.4%) (17.3%) (29.7%)

P/BV (x) 9.73 8.91 2.90 2.65 2.38

ROE 43.7% 39.3% 23.4% 17.2% 19.2%

% Change In Core EPS Estimates

CIMB/consensus EPS (x)

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Food Retail│Indonesia

Sarimelati Kencana PT│July 4, 2018

Serving growth on silver platters

COMPANY BACKGROUND

Business overview

PT Sarimelati Kencana (SMK) was established as a franchisee of Pizza Hut Indonesia under Yum! Brands. According to Yum! Brands' website, Yum! Brands currently has c.45,000 restaurants across 135 countries globally, with three established brands: KFC, Pizza Hut and Taco Bell. Through the franchise, SMK has access to innovative products, global procurement, international marketing strategies, best practice sharing as well as good quality control and regular technical support.

Pizza Hut Indonesia has two different types of outlet formats:

Pizza Hut Restaurant (PHR), which is a full-service pizza restaurant chain, first opened in 1987. As at end-3M18, PHR had a total of 239 outlets throughout Indonesia, located mostly in malls and free-standing buildings.

Pizza Hut Delivery (PHD), which is a pizza delivery chain, first opened in 2007. As at end-3M18, PHD had a total of 167 outlets spread across Indonesia, located mostly in shop houses near residential areas.

Figure 1: SMK’s number of outlets by format (2015-1Q18) Figure 2: Total number of outlets (2015-1Q18)

SOURCES: CGS-CIMB RESEARCH, COMPANY SOURCES: CGS-CIMB RESEARCH, COMPANY

The main difference between PHR’s and PHD’s business flow is its dough balls. PT Sriboga Flour Mill (SFM) directly supplies wheat flour to each PHR outlet to make fresh dough balls in the respective kitchens. Only lasagna and sausages are supplied from the company’s factories to PHR outlets.

For PHD, SFM supplies wheat flour to PHD’s dough ball factories and commissaries, where it is turned into ready-made chilled dough and then transported to PHD outlets in the relevant area.

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Figure 3: PHR’s business process flow diagram

SOURCES: CGS-CIMB RESEARCH, COMPANY

Figure 4: PHD’s business process flow diagram


As at end-1Q18, the company’s 406 total outlets were spread across the five big islands in Indonesia. Among these, 297 outlets were in first-tier cities, 66 in second-tier cities, and the remaining 43 in third-tier cities. About 81% of the company’s total outlets (PHR and PHD combined) were located in Java.

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Figure 5: SMK outlets based on city tiers as at end-1Q18


Figure 6: PHR outlets based on geographical area as at end-1Q18

Figure 7: PHD outlets based on geographical area as at end-1Q18

SOURCES: CGS-CIMB RESEARCH, COMPANY SOURCES: CGS-CIMB RESEARCH, COMPANY

To support its operations, SMK has developed manufacturing and distribution facilities to ensure vertical integration between its businesses. According to SMK, its parent company PT Sriboga Raturaya (SRR) has a subsidiary, PT Sriboga Flour Mill (SFM), which is one of Indonesia’s top five wheat flour producers and SMK’s sole wheat flour supplier currently. As at 2017, SMK’s manufacturing facilities included:

One dough ball and pasta factory located in Pulo Gadung, East Jakarta. This factory produces c.2,000 tonnes of chilled dough balls (for PHD) and pasta (e.g. lasagna) annually. The utilisation rate of the factory is 50% for dough balls but has reached 100% for pasta.

One dough ball and sausage factory located in Bandung, West Java. This factory produces c.400 tonnes of chilled dough balls (for PHD) and sausages annually. The utilisation rate of the factory is 100% for sausage despite only being able to supply sausages to 50% of SMK’s outlets, hence SMK also hires third-party sausage suppliers.

Five dough ball commissaries located in Semarang, Surabaya, Denpasar, Makassar and Medan. Each commissary can produce c.200 tonnes of chilled dough balls (for PHD) annually. According to the company, when it establishes PHD chains in a new city, it usually opens one dough ball commissary for every 3-4 PHD outlets. In addition, as at 2017, SMK’s distribution facilities included:

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Five dry warehouses (or distribution centres or DC), two of which are located in Jakarta and one each in Medan, Surabaya and Makassar. The Jakarta DC is the main warehouse, with a rented space of 3,500 m

2, and it

receives all imported and local goods, which are then distributed to the other dry warehouses across the country.

Fifteen frozen warehouses in Jakarta (the main warehouse), Bandung, Semarang, Surabaya, Batam, Medan, Pekanbaru, Padang, Palembang, Banjarmasin, Balikpapan, Denpasar, Makassar, Manado and Pontianak. The company rents these frozen warehouses from third parties.

Figure 8: SMK’s dough ball and pasta factory in Pulo Gadung, East Jakarta


Figure 9: SMK’s main distribution centre in Ancol, North Jakarta


The company has more than one supplier for each raw material, except for wheat flour, which is fully supplied by its sister company, SFM. It plans to procure wheat flour from two additional flour mills in Medan and Makassar. Although the price of wheat flour may increase slightly, transport costs may decline due to the closer proximity of flour mills to SMK’s commissaries in Medan and Makassar.

Stronger growth beyond Java

In 2017, Jakarta’s outlets still made up the biggest chunk of SMK’s sales, although this declined from 46.9% in 2015 to 43.9% in 2017. Outlets located in Java contributed a total of 72.9% to Pizza Hut’s total sales in 2017 vs. 77% of the company’s total outlets as at end-2017, which indicates lower sales per outlet in the Java area.

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Although contributing a much smaller proportion of SMK’s total sales, total sales in Kalimantan, Sulawesi and Eastern Indonesia rose to 14.0% in 2017 from 12.0% in 2015. This was on the back of a notably strong economic performance in Kalimantan and Eastern Indonesia, with SSSG surging in the double-digits in 2015-2017 and outperforming other areas. In our view, this should lead to more opportunities for Pizza Hut to expand to lower-tier cities, especially given the continuous economic growth and infrastructure development as well as a recovery in commodity prices.

According to the company, a key challenge is that every time PHD enters a new city, it aims to open at least four outlets and one commissary within the first 12 months. This requires a sizeable investment, which we estimate to be c.Rp12bn per city. However, PHD can always leverage PHR’s presence since it has higher penetration than PHD. For instance, the existing dough ball commissary in Semarang is located on the upper level of PHR’s free-standing outlet. We note that one dough ball commissary can serve up to 10 PHD outlets.

Figure 10: Revenue contribution to SMK’s total revenue, based on location (2015-17)

Figure 11: SSSG based on location (2015-17)

NOTE: JAVA-BALI REGION EXCLUDES GREATER JAKARTA




Figure 12: Gross margin by location (2015-17) Figure 13: Operating margin by location (2015-17)





Product overview

Through the two outlet formats, the company targets young adults and families and we believe it is set to benefit from the rising middle-class segment in Indonesia. As at 2017, PHR’s average spending per customer per visit was Rp57k while PHD’s was Rp45k.

PHR positions itself as a casual dining restaurant that offers a wide range of products, with a total of 128 items vs. PHD’s 57 items as at end-2017. Since it

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has larger kitchens, PHR’s products in general take a longer time to prepare. As mentioned earlier, PHR’s pizza dough is prepared fresh from scratch every day in the respective kitchens while PHD has chilled dough delivered from the company’s factories/commissaries two or three times a week.

Figure 14: List of products sold at PHR and PHD as at end-2017


One of the company’s main competitive advantages is its ability to continuously use innovation to attract young customers. One of its strategies is to introduce new items every two months, either developed locally or introduced globally by Pizza Hut.

In 2003, the company introduced its ‘stuffed crust’, a cheese-filled pizza crust that is still popular today. SMK’s latest creation is the ‘black pizza’, which is currently only available in Indonesia. On the back of strong promotional activities, the new item has been a huge hit in Indonesia.

Figure 15: Pizza Hut Indonesia’s latest innovation, “Black Pizza”


Besides new product innovation, the company also continues to add sales channels. In 2017, it introduced its mobile app ‘PHD Indonesia’ and works closely with online food aggregators, Go-Jek.

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Figure 16: PHD Indonesia’s mobile app

SOURCES: COMPANY

INDUSTRY OUTLOOK

Growing middle-class population

Indonesia is home to more than 260m people (source: BPS, 2017) and its F&B business delivered a robust c.8% CAGR in 2010-17 (source: Euromonitor). BPS projected Indonesia’s population to reach 305.6m by 2035F (+18% from 260m in 2017), which would make Indonesia the fourth most populous country after China, India and the US. We believe that a higher number of consumers will be a boon for the F&B business.

In a survey by Boston Consulting Group (BCG) in 2014, 88m Indonesians were designated as affluent middle-class consumers who regularly spent more than Rp2m per month on household expenditures. Affluent middle-class consumers constituted c.35% of Indonesia’s population in 2014. By 2020, BCG project that this will almost double to 141m or 53% of Indonesia’s population. We believe this should translate to stronger consumer demand for lifestyle products, entertainment and F&B.

Based on our research, we believe strong consumption appetite will not only come in the form of consumers spending their own income, but also in the form of consumer credit. Nowadays, it is relatively easy for Indonesians to gain access to consumer credit by providing proof of stable income. Indeed, credit card ownership in Indonesia rose by 34% in 2010-17 (source: CEIC).

Figure 17: Indonesia’s population (in m people) Figure 18: Indonesia’s GDP per capita

SOURCES: CGS-CIMB RESEARCH, BPS SOURCES: CGS-CIMB RESEARCH, BPS

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Figure 19: Indonesia’s growing number of middle class and affluent consumers (in m people)

Figure 20: Credit and debit card ownership (in people)

SOURCES: CGS-CIMB RESEARCH, BCG SOURCES: CGS-CIMB RESEARCH, CEIC

Growing dining out trends

Increasingly busy and hectic lifestyles in urban areas mean Indonesians have less time for cooking, which has led to growth in the F&B business as more consumers opt for convenience. Euromonitor recorded an additional 700 restaurants in 2011-16, which brought the total number of restaurants in Indonesia to c.100k as at 2016. The number, we believe, should continue to grow as dining out frequency increases and demand surges. According to CEIC, restaurants and hotels grew by 9.7% yoy in 1Q18 (vs. 8.4% in 1Q17 and 9.2% in 4Q17), higher than total household expenditures that grew by 8.3% yoy.

Restaurant chains (such as Pizza Hut, Solaria) drove the F&B industry in terms of outlet growth, at a 4% CAGR in 2011-16 (or +250 restaurant outlets over the past five years). The number of sales transactions in Indonesia’s full-service restaurants reached c.4bn in 2016 from c.3.7bn in 2011. Although restaurant chains constituted only c.3% of the industry’s total transactions, their transactions posted a robust 6% CAGR in 2011-16 vs. 1% for independent restaurants, underpinned by aggressive expansion. We estimate 9% sales CAGR for restaurant chains in 2011-16 (vs. 8% for independent restaurants), indicating higher sales per transaction for restaurant chains.

Figure 21: Indonesian restaurants and hotels grew above household expenditures in the past few years (3M12-3M18)


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Figure 22: Number of full-service restaurants in Indonesia (in outlets)

Figure 23: Number of restaurant transactions (in m)

SOURCES: CGS-CIMB RESEARCH, EUROMONITOR SOURCES: CGS-CIMB RESEARCH, EUROMONITOR

Figure 24: Total sales in restaurants (in Rp bn)

SOURCES: CGS-CIMB RESEARCH, EUROMONITOR

As macro catalysts seem to be in favour of consumption this year, following the benign inflation rate from unchanged administered prices (electricity, fuel, and gas) and less volatile food prices, coupled with distribution of social assistance to 10m families this year (vs. 6m in 2017), we believe it should continue to support the F&B industry.

Consumption trend of wheat-based products

As an alternative carbohydrate source, wheat-based products have gained lots of interest, with sales CAGR of 5% in 2011-17 in Indonesia (Source: Euromonitor). Such strong growth was due to the country’s stable economic conditions and changing consumer lifestyles, with western-style foods, such as bread, pasta and pizza, becoming more popular. As more middle-income families adopt urban habits and as households benefit from double incomes, convenience becomes key.

However, 60% of total wheat flour consumption in Indonesia in 2016 was in the form of noodles, followed by bakery goods at 20%, biscuits at 10% and household use at 10% (Source: USDA). Hence, given this condition, coupled with low pizza consumption per capita, we believe pizza sales have room to grow. In 2012-16, pizza sales in Indonesia reached Rp5.8tr, with a rapid 9.5% CAGR (Source: Euromonitor). This was well above the 4.4% growth in Asia Pacific and 0.7% sales decline of pizza sales globally in 2012-16 (Source: Euromonitor).

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Figure 25: Wheat vs. rice consumption per capita per kg Figure 26: Wheat flour sales

SOURCES: CGS-CIMB RESEARCH, USDA, BPS SOURCES: CGS-CIMB RESEARCH, APTINDO

Figure 27: Pizza sales in Indonesia (in Rp bn)


Figure 28: Pizza sales in Asia Pacific


Opportunities in ‘halal’ certification

Indonesia currently has the largest Muslim population in the world, at c.85% of the total (or c.200m people) (Source: MUI, 2017). Hence, it is not a surprise that the increasing demand for ‘halal’ products has boosted investment in the F&B industry. Sales of ‘halal’ food products in Indonesia came to US$158bn in 2014, making Indonesia the largest ‘halal’ market in the world (Source: Thomson Reuters). The Ministry of Industry of Indonesia forecasts that sales of ‘halal’ consumer food products will grow by 7% p.a. in the next 6 years.

Such increasing interest in consuming ‘halal’ food products is not only driven by religion but also by the quality of ‘halal’ products in terms of health, safety and eco-consciousness. Up to 1H17, there were only 48 restaurants (<1%) that were registered as ‘halal’ (Source: MUI). Hence, Pizza Hut, as one of the few restaurant chains in Indonesia with ‘halal’ certification, stands to be a major beneficiary.

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India INR million 33,768 40,498 47,900 60,434 71,016 20.4%

Malaysia MYR million 714 750 769 838 848 4.4%

Philippines PHP million 414,930 437,841 469,362 502,186 535,982 6.6%

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Growing F&B franchisers

F&B franchisers in Indonesia posted a robust 8% sales CAGR in 2012-17 (Source: Euromonitor). Fast food and full-service restaurants (33% and 48% contribution to total sales in 2017, respectively) recorded 8% sales CAGR in 2012-17, according to Euromonitor. The new rising star, take-away restaurants, delivered more rapid growth of 20% CAGR in 2012-17 but this only contributed c.3% to total F&B franchisers’ sales in 2017. Going forward, Euromonitor forecasted take-away restaurants to still book double-digit sales CAGR of 17% in 2018-21, underpinned by a low base, rapid outlet expansion and the growing popularity of online delivery. The presence of third-party food delivery applications, i.e. Go-Food and GrabFood, may also support the industry’s growth.

Meanwhile, kiosks (or traditional stalls) have lost sales over time. The segment is being battered in its competition with fast food and full-service restaurants as the latter is perceived to have better hygiene standards and a more comfortable dining environment.

Figure 29: F&B franchiser sales (in Rp bn)


Interestingly, pizza franchises grew a more promising 11% CAGR in 2012-17 and are projected to reach 13% sales CAGR in 2018-21, based on Euromonitor.

Figure 30: Pizza franchiser sales (in Rp bn)


Players in the industry

In 2016, Euromonitor ranked SMK as no.3 in the chained consumer food service segment in Indonesia in terms of retail value. KFC, as the no.1 player in the segment in terms of retail value, owned more than 650 outlets combined as of 2017, including KFC Coffee and KFC Box stores. The no.2 player was

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McDonald’s, with more than 200 outlets as of 2017, while PHR and PHD owned 393 outlets in 76 cities as of 2017.

Specifically in the pizza category, SMK dominated sales in 2016 with a 97% market share in chained pizza full-service restaurants, followed by Domino’s Pizza, Papa Ron’s and Pizza Express.

Figure 31: Market share in chained pizza full-service restaurant Figure 32: Market share in chained pizza takeaway restaurant

SOURCES: CGS-CIMB RESEARCH, EUROMONITOR SOURCES: CGS-CIMB RESEARCH, EUROMONITOR

Figure 33: Ranking of leading chained pizza consumer food service providers in Indonesia by retail value, 2012-2016


Opportunities beyond Java

The Java Island indeed stands in the spotlight when it comes to developing businesses in Indonesia, having contributed 58% to Indonesia’s GDP in 2016 and accounted for c.70% of the country’s population in 2016 (Source: BPS, 2017). However, we believe regions outside Java may also be able to provide attractive economic growth prospects, supported by improving infrastructure, rising spending power and government incentives.

The recovery in commodity prices and the lifting of the government embargo on the export of certain mineral ores have helped to accelerate economic recovery in Kalimantan and Sumatra, which produce a significant amount of commodities. Note that Kalimantan and Sumatra contributed c.8% and 22% to Indonesian’s GDP in 2016, respectively. We expect stable commodity prices to continue to aid purchasing power recovery as mining investment has already started to pick up.

In recent years, Sulawesi (6% contribution to the Indonesian economy in 2016) has significantly outpaced the national average in terms of economic growth. In 2017, the region recorded economic growth of more than 6% on the back of higher household consumption, investment and infrastructure projects.

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Unit: Ranking 2012 2013 2014 2015 2016

PT Sarimelati Kencana 1 1 1 1 1

PT Dom Pizza Indonesia 2 2 2 2 2

PT Entertainment Indonesia 3 3 3 3 3

PT Mitra Adi Perkasa Tbk 4 4 4 4 4

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Figure 34: GDP contribution per area

SOURCES: CGS-CIMB RESEARCH, CEIC

Figure 35: Kalimantan’s and Sumatra’s GDP growth have recovered along with commodity prices

Figure 36: Sulawesi’s GDP growth vs. national

SOURCES: CGS-CIMB RESEARCH, CEIC, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BPS

Adapting to the Millennials

Millennials (sometimes referred to as Gen-Y) are those born between the early 1980s and early 2000s, i.e. those in their late teens to late thirties right now. According to Indonesia’s 2015 Intercensal Population Survey, Millennials (15-34 years old at the time) accounted for around 35% of the total population. The ratio is even higher in urban areas like Jakarta.

According to AsiaToday, Millennials eat out more often than Baby Boomers (born between early-to-mid 1960s to early 1980s), and spend roughly 10% more than the latter. Millennials’ probability of eating out at least once a week is also double that of Baby Boomers.

The company is one of the fast-movers in terms of adapting to the habits of the Millennials. As Indonesian Millennials have a high presence in various social media, i.e. Facebook and Instagram, the company has long intensified its presence in those platforms. In Instagram, for example, Pizza Hut Indonesia has a total followers of 328k, side by side with its main competitors KFC Indonesia with 422k followers, and McDonald’s Indonesia with 332k followers as at the end of March 2018.

It also continuously enhances its store layouts and food offerings to attract more Millennials into the store, as well as get ‘free’ advertising when they post their visits on their social media accounts. Note that according to a survey by JakPat done in Jan 16, 33.8% of Millennial Instagram users in Indonesia used the app to post food photos and another 16.6% used the app to post photos of locations they deemed had a ‘cool’ ambience.

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Real GDP growth - Kalimantan - (LHS)

Real GDP growth - Sumatra - (LHS)

Coal price - 12MA (RHS)

CPO price - 12MA (RHS)

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2010 2011 2012 2013 2014 2015 2016 2017

Sulawesi National

15



Figure 37: Leading activities of Instagram users ages 16-35 in Indonesia (Jan 2016)

Figure 38: Instagram page of Pizza Hut Indonesia (end Mar 2018)

SOURCES: CGS-CIMB RESEARCH, JAKPAT SOURCES: CGS-CIMB RESEARCH, INSTAGRAM

Figure 39: New, innovative PHR outlets layout

SOURCES: CGS-CIMB RESEARCH, INSTAGRAM

Regulations

Based on Ministry of Trade regulation No.58/M-DAG/PER/9/2014, the franchiser of a restaurant, bar and café is allowed to self-own and self-manage a maximum of 250 outlets. Any franchiser who had more than 250 outlets as at 17 Sep 14 (the enactment date of the regulation) is still allowed to continue to self-own and self-manage them.

In the event the franchisee wants to expand its number of outlets to more than 250, the additional outlets are required to be: 1) franchised, and/or 2) in a capital participation scheme with a third party. The capital participation scheme is to be performed as follows: 1) for total investment of less than or equal to Rp10bn, the third-party investment is required to be at least 40% of total investment, and 2) for total investment of more than Rp10bn, the third-party investment is to be at least 30% of total investment.

Any violation of the above-mentioned regulation poses a risk to the company’s business, i.e. revocation of its operational license.

COMPANY OUTLOOK

Growth strategies

The company’s long-term strategy is to continue to grow its outlet base and position itself as a full-service family restaurant in both existing and new markets, which should translate into:

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Explore online shopping account

Explore funny or jokes account

Post travelling photos

Click search and look at new posts

View friend's or crush's accounts

Explore celebrity's account

Explore culinary post or account

Explore celebgram or vidgram account

Post food photos

Post cool place or cafe ambience

Posting meme

16



PHR and PHD outlets expanding into second-, third- and fourth-tier cities. The more matured PHR will focus its expansion mainly in third- and fourth-tier cities and PHD in second-tier cities.

Exploring new restaurant concepts, e.g. food court stalls.

To achieve the corporate growth target, the company plans to:

Relocate and enlarge the PHD dough ball factory as well as introduce new technology to produce frozen dough, which has a better shelf life of 30 days vs. the currently-used chilled dough’s short shelf life of 5 days (Source: company). The production of frozen dough will enable the company to establish only one factory to supply dough to a few regions at once, instead of having to establish many commissaries to supply dough to each region.

Expand its existing sausage factory and add another facility as the utilisation rate of the sausage factory has reached 100% despite only being able to supply sausages to 50% of SMK’s outlets. It currently still sources ~50% of its sausage requirement from third parties.

Add a new pasta factory since the utilisation rate of the existing pasta factory has reached 100%.

Expand and relocate its dry warehouse/distribution centre, which could bring some financial savings as warehouse rental fees continue to rise.

Possible expansion of vertically-integrated facilities, e.g. cheese, fresh pasta or ice-cream factories.

In addition, the company plans to enhance its software systems and continue to develop its organisational capabilities in order to further improve customer experience and operational performance.

SWOT analysis

Strengths

Market leader in Indonesia in the full-service pizza restaurant category in terms of retail value in 2016 (97% market share) and in the delivery chained restaurants category in terms of retail value in 2016 (65% market share).

Targeting middle-class consumers, the fastest-growing segment of the Indonesian population.

Internal sourcing of its raw materials, i.e. flour, sausage and lasagna, which allows the company to maintain consistency of quality and stock levels. This also results in a lower cost of goods sold.

Minimum exposure to currency risk as majority of its raw materials is locally sourced.

Ability to innovate its own product item to suit local preferences.

Weaknesses

Low barrier to entry. However, we believe Pizza Hut’s strong brand equity supports the company’s growth.

High dependency on Yum! as brand owner and high royalty fees.

Opportunities

Entering second- and third-tier cities.

Diversification to new business format and product item.

Macro-economic factors, which support growth in consumers’ disposable incomes.

Increasing awareness of ‘halal’ certified products may boost Pizza Hut’s sales.

Threats

Discouraging policies on number of retail outlets.

Lower pricing point from minimarts that offer similar products.

Aggressive increase in minimum wages.

17



FINANCIAL PERFORMANCE

1Q18 review

The company booked a stellar 72.6% yoy core net profit growth to Rp35bn in 1Q18. This, we think, was a notable achievement given that seasonality wise, 1Q usually contributes to a lesser extent to the full year performance. We note that PZZA booked an Rp20bn core net profit in 1Q17, which is a mere 14% of its FY17 core net profit of Rp139bn.

This was on the back of a strong 18.4% yoy revenue growth to Rp803bn in 1Q18, thanks to a solid 6.6% SSSG and 13 net additional new stores. PHD has reportedly portrayed a much stronger performance than PHR since the past year. PHD booked a 5.5% SSSG in FY17 and booked an even stronger 29.7% SSSG in 1Q18. This, we think, is positive given that the company is accelerating its PHD expansion given the smaller investment needed when compared to the larger-format PHR. In 1Q18, the company opened 12 PHD outlets (and closed 1 outlet), in addition to 2 PHR outlets (closed no outlet) – making a total of 13 net additional stores in the quarter, broadly in line of its target to open c.60 stores in FY18F.

Gross profit margin, despite the rupiah depreciation in 1Q18, also managed to expand by 0.6% pts yoy to 67.7%, as the company has secured the majority of its imported raw material needs (e.g. cheese) since the beginning of the year. In addition, the world cheese price (c.20% of PZZA’s COGS) has continuously fallen in the past few years. This drove the strong 69.8% yoy EBIT growth to Rp55bn, in addition to better operating leverage from stronger sales growth, as well as some cost efficiency.

Figure 40: SMK’s revenue contribution by formats (2015-1Q18) Figure 41: SMK’s SSSG by formats (2015-1Q18)

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 42: 1Q18 results


Title:

Source:


85.4% 85.0% 81.0% 77.6%

14.6% 15.0% 19.0% 22.4%

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3.6%

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2015 2016 2017 1Q18

PHR PHD Blended

1Q18 1Q17 yoy, %

chg

Net sales 803 678 18.4%

COGS (259) (223)

Gross profit 544 455 19.6%

Opex (500) (435)

Income from delivery fee 7 8

EBIT 51 28 79.3%

EBITDA 82 56 45.8%

Other operating income (charges) 4 4

Interest income (charges) (11) (6)

PBT 44 26 66.9%

Tax benefit (expense) (11) (8)

Net profit 33 18 79.6%

Core net profit 35 20 72.6%

18



The company, following its plan to accelerate stores expansion, has opened a net additional 13 outlets in 1Q18, in line with its target of opening a net additional 60 outlets in FY18F. This makes a total of 406 stores (239 PHR and 167 PHD) as of end-1Q18 (see Figures 1 and 2).

Out of the 13 net additional stores, 11 are PHDs while only 2 are PHRs. In line with its expansion plan, PHR’s new store is located in Gorontalo, Sulawesi – which is a third-tiered city and is a new city for Pizza Hut as a group. Meanwhile, PHD’s expansion was focused more on Java island, where they opened a total of 8 new outlets. They also opened 3 new PHD outlets in Greater Jakarta area and 1 outlet in Palembang (South Sumatera). For PHD, they ventured to two new second-tiered cities, Cirebon (West Java) and Palembang.

More positives than negatives from partnership with Go-Jek

We think PHD’s partnership with Go-Jek, which started in Jun 2017, will undeniably play a huge part in supporting PHD’s strong 29.7% SSSG in 2018F (see Figure 41).

This, however, indeed comes with additional costs to bear. We estimate that PHD pays c.10% of the ticket size ordered through Go-Jek. This aggregator fee is then recorded under professional fees in the income statement, which significantly increased by 697% yoy to Rp5.5bn in 1Q18 (from Rp0.7bn in 1Q17), now 0.7% of sales. Additionally, income from delivery fee dropped from Rp8.2bn in 1Q17 to Rp7.2bn in 1Q18 amidst the solid revenue growth, falling from 1.2% of sales in 1Q17 to 0.9% in 1Q18.

In FY18F, we estimate a Rp22bn increase in aggregator fee to Rp33bn (1.0% of sales). Meanwhile, income from delivery fee could drop by Rp6bn to Rp27bn in FY18F (0.8% of sales). These, with straight-forward calculation, shall imply a Rp28bn reduction in core net profit in FY18F, although it should be well compensated by the significant revenue growth in PHD, which in turn will lead to better operating leverage that should improve profitability.

Furthermore, in return, the company is able to reduce its employee cost as it reduces the number of delivery fleet from c.6 people per store. With assumption of Rp3.8m monthly minimum wage, reducing 1 delivery man in all 209 PHD stores in 2018F, should enable it to save c.Rp9.5bn annually, or roughly 0.3% of 2018F sales.

Figure 43: SMK’s historical and projected income from delivery fee (2015-20F)

Figure 44: SMK’s historical and projected professional fees, mostly paid to online aggregators (2015-20F)


Franchise fee reduction

The company is required to pay a franchise fee to Yum! Brands of c.6% p.a. Nevertheless, PZZA has negotiated for a lower franchise fee from Yum! Brands in return for opening 175 new outlets within the years 2017-19F.

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2015 2016 2017 2018F 2019F 2020F

Professional fees As % of sales

19



We believe the company should be able to meet its agreement with Yum! Brands to open the 175 new outlets in 2017-19F, as the company has opened a net additional 64 outlets in 2017-1Q18, which then only requires them to open an average of 16 stores per quarter until 4Q19 to meet the remaining target.

Since there is no requirement from Yum! on what format to build, SMK plans to add more PHD outlets instead of PHR, which require a significantly smaller capex (thus, easier to accelerate expansion) of c.Rp2.0bn-2.5bn per outlet, vs. PHR which requires a Rp7.5bn-8.0bn capex for a stand-alone outlet and a Rp3.5bn-4.0bn capex for an outlet located in malls.

The company also plans to launch a new, even smaller format outlet in food courts, called PH Kiosk (of which revenue and store counts will be calculated under PHD), which requires a mere c.Rp800m capex per outlet. It is expected to have 5 new PH Kiosk outlets to be opened in 2H18F as a trial. As an express format, it will source chilled dough from the factory or commissaries, like PHD. If the format is deemed successful, we believe it will be even easier for SMK to accelerate expansion. Besides, we think PH Kiosk may have a higher gross profit margin when compared with PHD, as it may be able sell more drinks which generate a more hefty gross margin.

As PZZA meets the target, they will be entitled for a certain franchise fee reduction from Yum! for the new outlets that should bring significant improvements to the company’s profitability. As of 2017, the royalty fee was 6.4% of reported revenue, which we project to dip to 6.2%, 5.9%, and 5.8% in 2018F, 2019F, and 2020F, respectively.

We also believe that the lower franchise fee agreement may be extended beyond 2020F, given Pizza Hut’s dominance and stability in the Indonesian market, when compared to those in other countries.

Figure 45: Net additional stores in 2017-19F will receive a franchise fee reduction from Yum!


Title:

Source:


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2015 2016 2017 2018 2019 2020

Existing stores (before 2017) Net additional stores (after 2017)

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Figure 46: Income from delivery fee (as % of sales) is on declining trend

Figure 47: Blended franchise fee (as % of sales) is on declining trend


Figure 48: Salary expenses (as % of sales) may improve as the company may be able to reduce the no. of delivery fleets in PHD outlets


In addition, the company is required to pay an initial franchise fee per outlet that can last up to 10 years and is subjected to a renewal fee amounting to half of the initial franchise fee.

Initial franchise fee for PHR, as of 2017, is US$50,100 per outlet (c.Rp700m). Meanwhile, PHD’s initial franchise fee is roughly half of PHR’s at US$25,100 per outlet (c.Rp350m) – see Figure 49.

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Franchise fee (Rp bn) As % of sales

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2015 2016 2017 2018F 2019F 2020F

Salary expenses (under selling) (Rp bn) As % of sales

21



Figure 49: Master franchise fee based on format (2015-17)


Financial outlook

SMK posted a 10.2% revenue CAGR in 2015-17, supported by a 3.6% SSSG in 2015 and stable c.6% SSSG in 2016-17 and aggressive new outlet expansion in 2017, especially for PHD. The company claimed that only c.3% of the c.6% SSSG in 2016-17 can be attributed to average selling price (ASP) growth while the remainder can be attributed to sales volume growth.

We expect SMK to post a strong 14.7% revenue CAGR in 2017-20F (vs. 10.2% revenue CAGR in 2015-17) on the back of 7.5%/5.3%/4.1% SSSG in 2018F, 2019F, and 2020F, respectively, coupled with more aggressive outlet expansion projected at a total 60 net new outlets in 2018, 65 in 2019 and 40 in 2020. From the 4.1-7.5% 2018-20 SSSG, we expect ASP growth to remain at 3% p.a., broadly in line with the Indonesian annual inflation rate.

We pencil in a higher revenue growth rate for PHD compared to PHR, with 60.6%/44.7%/27.9% in 2018F/19F/20F on the back of 20.0% SSSG in 2018, 10.0% in 2019 and 6.0% in 2020 as well as 157 net additional new outlets for PHD across the forecast period.

For PHR, we forecast revenue to climb 4.1%/4.7%/6.9% in 2018F/19F/20F on the back of a 3.0% SSSG in 2018-20F in addition to 9 net new outlets in 2018F-20F.

Following PHD’s impressive growth, we expect the format to contribute 26.5% revenue to the company’s total revenue by the end of this year (1Q18: 22.4%, FY17: 19.0%).

Figure 50: SMK’s historical and projected revenue and revenue growth (2015-20F)


2015 2016 2017

Initial fee per outlet (US$)

PHR 48,800 49,100 50,100

PHD 24,400 24,600 25,100

KPH 24,400 24,600 25,100

Renewal fee per outlet (US$)

PHR 24,400 24,550 25,500

PHD 12,200 12,300 12,550

KPH 12,200 12,300 12,550

Continuing franchise fee (as % of sales)

PHR 6%

PHD 5-6%

KPH 6%

Title:

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7.7%8.1%

12.3%

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22



Figure 51: SMK’s historical and projected revenue contribution based on outlet formats (2015-20F)

Figure 52: SMK’s historical and projected SSSG (2015-20F)


Figure 53: PHR’s historical and projected revenue and revenue growth (2015-2020)

Figure 54: PHD’s historical and projected revenue and revenue growth (2015-2020)

SOURCES: CIMB RESEARCH, COMPANY REPORTS SOURCES: CIMB RESEARCH, COMPANY REPORTS

Figure 55: Historical and projected net outlet opening (2015-20F) Figure 56: Historical and projected no. of outlets based on format (2015-20F)


85.4% 85.0% 81.0%73.5%

66.7%62.6%

14.6% 15.0% 19.0%26.5%

33.3%37.4%

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PHR PHD

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2015 2016 2017 2018F 2019F 2020F

PHR PHD Blended

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7.5%7.1%

4.1%

4.7%

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Revenue Revenue growth, %

Title:

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11.6%

41.7%

60.6%

44.7%

27.9%

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45.0%

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Opening Closure Net addition

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93 115156

214

275 313

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PHR PHD

23



Despite a 0.6% pt gross margin improvement in 1Q18, we remain conservative in our FY18F gross margin estimate at 66.2%, which is down by 0.7% pts yoy from 66.9% in FY17.

The company benefitted from the lower cheese price at end-2017, and has its contract secured until Sep 2018. Hence, it will be less impacted by rising cheese price and rupiah depreciation, as we highlighted that cheese made up of c.20% of the company’s COGS and is imported. Another important raw material is wheat (c.4% of COGS), which is supplied by its sister company SFM and has its contract re-negotiated once every 6 months. Since the company has locked wheat price until end-1H18, it has less to worry about despite the rise in wheat price since early-2018F, as well as Rp depreciation (since pricing is fixed based on agreed terms, world wheat prices, and agreed fixed exchange rates in each period).

These, supported by a benign food inflation rate in FY18F, should lead to an improved gross profit margin in both PHR and PHD formats by 0.4-0.5% pts to 68.6% and 62.8%, respectively, in our estimate. This was despite the fact that c.30% of the company’s COGS is US$-linked. With an assumption of c.4.6% yoy Rp depreciation to an average of Rp14,000 (average FY17: Rp13,380), we expect the impact to remain under control for now.

Note that PHD’s gross profit margin is roughly 5% lower than PHR’s on the back of the different product mix, wherein 1) PHR sells more drinks, which has a higher margin than foods, and 2) PHD sells almost twice the number of bundles (e.g. Big Box) than PHR, which are usually sold at a discount, hence lower margins.

As a result, despite expecting improved gross profit margin in the respective formats, we estimate blended gross profit margin to fall by 0.7% pts to 66.2% in FY18F, as PHD’s sales are expected to grow by 60.6% yoy in FY18F, vs. the more-matured PHR with a mere 4.1% yoy sales growth. As such, revenue contribution from PHD may increase to 26.5% in FY18F (vs. 19.0% in FY17), in our estimates.

Figure 57: Estimated COGS breakdown (2016-20F) (in Rp bn) Figure 58: Historical and projected gross profit margin per outlet format (2016-20F)

SOURCE: CGS-CIMB RESEARCH

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Cheese Chicken & beefs Flour Milk / ice cream Edible oils Others

67.5%67.1%

67.6% 67.8%68.2%

62.1%61.8%

62.2% 62.1%62.5%

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2016 2017 2018F 2019F 2020F

PHR PHD

24



Figure 59: Historical and projected gross profit and gross profit margin (2015-20F) (in Rp bn)


There are concerns that with its moderate SSSG of 4.1-7.5% estimated for 2018-20F, the company would not be able to sustain its current operating margins, as minimum wage hikes averaged at 10.0% p.a. in the past three years (2016-18). Nevertheless, as we expect the company to be able to reduce the number of delivery fleets in PHD, coupled with the company’s continuous effort to replace more permanent employees into contractual employees in PHR (which are c.20% cheaper), we estimate that the company’s salary expenses (under salary expenses) shall moderate to 22.8% of sales in 2018F (from 23.3% in 2017). It is worth highlighting that the company only added 24 permanent employees in 1Q18 despite 13 net additional new outlets.

Besides, rental expenses should continue to improve as the company aims to open more standalone outlets for PHR, instead of opening in malls, as rental growth rates in malls tend to be a lot faster than those in standalone outlets. Furthermore, as expansion is more aggressive for PHD, as compared to PHR, it should also help to ensure a benign rental growth rate of 3-4% p.a. as PHD outlets are mostly located in shophouses. As such, we project rental expenses to continue to fall to 5.4%, 5.2%, and 5.1% of sales in 2018, 2019, and 2020, respectively, from 5.6% of sales in 2017.

With salary and rental expenses under control, coupled with a lowered franchise fee, all in, we expect EBITDA margin (adjusted for income from delivery fee and sponsorship) to be maintained at 11.0% in FY18F, as the strong sales growth and cost efficiency measures should be more than enough to cover the rising expenses to aggregators (e.g. Go-Jek) and the declining blended gross profit margin.

Figure 60: SMK’s historical and projected opex-to-sales ratio (2015-2020F)

Figure 61: SMK’s historical and projected operating expenses breakdown (2015-2020F)

66.6%

67.6%

66.9%

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-57.0%2015 2016 2017 2018F 2019F 2020F

Title:

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40.4% 43.2% 43.2% 43.1% 43.2% 43.4%

10.3%10.6% 10.5% 10.3% 9.9% 9.7%

9.1%8.3% 8.2% 7.8% 7.9% 7.9%

9.5% 9.4% 9.1% 8.9% 8.7% 8.6%

6.8% 5.9% 6.3% 6.4% 6.5% 6.5%0.4% 0.6% 1.0% 2.0% 2.3% 2.7%

23.6% 22.1% 21.7% 21.4% 21.6% 21.3%

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2015 2016 2017 2018F 2019F 2020F

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All in, core net profit should expand by 26.3% yoy to Rp176bn in 2018, 16.7% yoy to Rp205bn in 2019, and 23.0% yoy to Rp252bn in 2020, with 21.9% CAGR over 2017-20F, in our estimates.

Figure 62: SMK’s historical and projected EBITDA and EBITDA margin (2015-20F) (in Rp bn)


Figure 63: SMK’s historical and projected core net profit and core net profit margin (2015-20F) (in Rp bn)


Balance sheet and cash flow outlook

PZZA’s inventory days rose to 89 days as at end-1Q18, as the company procured more cheese in the beginning of the year to anticipate more store openings. As its receivable and payable days remained at 2 and 62 days in 1Q18, respectively, its cash cycle days were at 29 days (rising from 16 days at end-2017 and 8 days at end-2016).

As raw materials stock should normalise, we pencil in a more benign 80 inventory days at end-2018F, still on the higher side to anticipate another bulk of raw materials procurement amidst aggressive new store openings.

On a more positive note, as the company is constantly acknowledged as the best and fastest-growing Pizza Hut franchisee around the world, the company should have a better bargaining power over its suppliers, not only by getting product discounts, but also getting better terms of payment. Hence, we expect payable days to improve to 65 days at end-2018F (from 62 days at end-2017 and at end-1Q18) and further to 70 days at end-2019F onwards. Meanwhile,

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11.8%

11.0% 11.0% 11.0% 11.2%

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receivable days should be maintained at 2 days at end-2018F, hence a broadly stable cash cycle of 17 days (vs. 16 days at end-2017).

Figure 64: SMK’s historical and projected working capital days (2016-2020F)


The company spent Rp54bn capex in 1Q18, mainly used for stores expansion. We expect expansion to accelerate further in 2Q-4Q18F as they received their IPO proceeds amounting to Rp665bn in May 2018. Going forward, we project Rp300bn, Rp364bn, and Rp194bn capex for 2018F, 2019F, and 2020F, respectively, mainly to be used for 1) more aggressive outlet expansion, and 2) development of supporting facitilies (e.g. sausage and pasta factory, dough ball commissaries and warehouses).

We expect pre-construction for SMK’s sausage and pasta factory to start this year, while construction should start at the beginning of 2019. Currently the company is still on an early stage of land acquisition. This should be at the top of the company’s priority list, alongside its plan to develop a larger-scale frozen dough factory, which we have yet to include in our model. This frozen dough factory, after it is built, will oil the expansion of PHD to new cities since the company no longer needs to build a new commissary each time it enters a new city.

Figure 65: SMK’s projected capex needs based on allocation (2018F-20F) (in Rp bn)

Figure 66: SMK’s historical and projected capex needs based on type of assets (2018F-20F) (in Rp bn)


In 2017, following its high capex, coupled with an increase in inventory days from 67 in 2016 to 76 in 2017, FCF turned negative. Nevertheless, following the company’s strong earnings improvement forecasted in 2018F and a relatively unchanged cash cycle, we project a Rp114bn FCF in 2018F, followed by a Rp63bn and Rp292bn FCF in 2019F and 2020F, respectively.

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Figure 67: SMK’s historical and projected cash flow analysis (2015-20F) (in Rp bn)


As at end-1Q18, the company’s net debt was relatively maintained at Rp387bn (end-FY17: Rp359bn), with a debt-to-equity ratio of 1.1x and net gearing of 1.0x. Since the IPO proceeds has only been received in May 2018, and will be partially used to repay down debt, we estimate a Rp310bn debt repayment over 2018, 2019, and 2020, which should lead the company to a much healthier DER level of 0.2x, 0.1x and 0.1x in the respective years. Furthermore, we expect to see the company turned net cash starting this year, with net cash of Rp311bn, Rp215bn, and Rp412bn in 2018F, 2019F, and 2020F, respectively.

Figure 68: SMK’s historical and projected gross debt and debt-to-equity ratio (2015-20F) (in Rp bn)

Figure 69: SMK’s historical and projected net debt/(cash) and net gearing (2015-20F) (in Rp bn)


The company has set a policy to distribute cash dividends of up to 50% of its net profit, starting in 2018. Following PZZA’s strong OCF generation, as well as its projected net cash position, we pencil in a 50% dividend payout in 2018F, 2019F, and 2020F amounting to Rp70bn, Rp88bn, and Rp103bn, respectively.

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28



Figure 70: Projected dividend and dividend payout ratio (2018F-20F)


RISKS

We identify several key risks to Pizza Hut’s business and earnings, as follows:

Low purchasing power

Pizza Hut targets the middle-class segment. Hence, lower purchasing power, which may result in downtrading by consumers, will negatively impact the company’s revenue and profitability.

Termination of brand license

SMK holds the international franchise agreement from Yum! Brands to operate the Pizza Hut brand in Indonesia. SMK is entitled to pay 6% royalty fees from its sales p.a. Currently, each Pizza Hut outlet has a franchise agreement of 10 years and this can be renewed for another 10 years under certain conditions that must be met beforehand. If the company fails to comply with the terms, Yum! Brands has the right to terminate the agreement.

Given the company’s dependency on the brand, revocation of the agreement may materially impact its operations. Nevertheless, the relationship has been established since 1987 and Yum! Brands needs local partnership to maintain its presence in Indonesia.

Higher-than-expected minimum wage growth

Salary expenses comprise c.40% of the company’s operating expenses in 2017. Hence, any increase in minimum wage may lower the company’s profits.

‘Halal’ certification

As Pizza Hut is one of the few ‘halal’ certified restaurants in Indonesia, we believe the loss of the ‘halal’ certificate may have a material and adverse impact on the company’s business. The company obtained its ‘halal’ certificate in 1998 and has maintained the certification to date.

Rental

The company leases most of its property from third parties, with a lease term generally up to 20 years for Pizza Hut and 10 years for PHD. As such, the stability of the company’s business depends on the continuity of the lease agreements.

There is no guarantee that the lease for the current retail outlets will not be terminated by the respective landlord. Given the limited strategic locations and relatively high lease cost, there is no guarantee that the company will be able to renew the lease on the same terms.

The company may be able to relocate for the same or more favourable terms but the relocation will take time and result in a temporary loss of sales. In addition, relocation may incur extra costs, such as goods transport.

0%

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120

2018F 2019F 2020F

Dividend (Rp bn) DPR

29



Regulatory and political issues

Any changes in government regulation, e.g. max number of outlets franchised or higher restaurant taxes, may have a negative impact on the company’s business.

VALUATION

Peers comparison

Despite its scalability and although profitability margins were still below its regional peers’ (as of 2017), in the past 3 years (2015-2017), the company displayed the highest EPS CAGR of 47.4% on the back of strong revenue CAGR of 10.2% (third-highest among regional peers).

The company also had the highest ROE of 39.3% as of 2017 on the back of a strong asset turnover ratio of 2.5x and good equity multiplier of 4.0x, the highest among regional peers.

Figure 71: Regional peers’ revenue CAGR comparison (2015-17) Figure 72: Regional peers’ net profit CAGR comparison (2015-17)

SOURCE: CGS-CIMB RESEARCH SOURCES: CGS-CIMB RESEARCH

Figure 73: Regional peers’ no. of stores comparison (2017) Figure 74: Regional peers’ revenue per store comparison (2017)


0.0%

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10.0%

15.0%

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25.0%

-30.0%

-20.0%

-10.0%

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30.0%

40.0%

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60.0%

7,983

3,797

2,135

649 628 474 393 184 68

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,0003,481,765

2,465,783

894,902 755,332 687,412 630,979 575,572 531,943

384,696

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1,000,000

1,500,000

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3,000,000

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ven

ue

/sto

re (

US$

)

30



Figure 75: Regional peers’ EBITDA margin comparison (2017) Figure 76: Regional peers’ net profit margin comparison (2017)


Figure 77: Regional peers’ asset turnover, equity multiplier and ROE comparison (2017)

SOURCES: CGS-CIMB RESEARCH

Initiating coverage with an Add call and TP of Rp1,500

The company is currently trading at 18.7x 2018F P/E, which is at a 25% discount to its regional F&B peers’ weighted-average 2018 P/E of 25.0x. It is also at a 4% discount to its closest peer, Shakey’s Pizza Philippines (PIZZA PM).

Both Sarimelati Kencana and Shakey’s Pizza Philippines are the market leaders in chained pizza full service restaurants in their respective countries, according to Euromonitor. The latter has operated in Philippines since 1975 and had a total of 184 outlets nationwide as of end-2017. Meanwhile, Sarimelati Kencana has a total of 393 outlets across Indonesia (as of end-2017) since it opened its first outlet in 1987.

In short, Sarimelati Kencana has more than twice the number of outlets owned by Shakey’s, despite entering Indonesia 12 years after Shakey’s entry to the Philippines. Given Indonesia’s large population, we believe PZZA still has much room for growth: we expect PZZA to have a total of 558 stores as of end-2020F which in turn will help to drive a sales CAGR of 14.7% in 2017-20F. Along with continuous efficiency measures, we estimate PZZA to record a 21.9% earnings CAGR in 2017-20F, higher than Shakey’s 12.8% earnings CAGR in 2017-20F, according to Bloomberg consensus’ estimates. Assuming a 50% dividend payout ratio, we also expect PZZA to have a higher dividend yield of 2.1-2.7% in 2018-19F vs. Shakey’s 0.9-1.3%. Nevertheless, PZZA’s net profit margin is roughly half of Shakey’s.

0.0%

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SarimelatiKencana

Domino'sPizza

EnterprisesLtd

Yum! China Shakey'sPizza

Phillippines

JollibeeFoods Corp

Cafe deCoral

Fast FoodIndonesia

Ajisen China Tsui Wah

Asset turnover Equity multiplier ROE (RHS)

31



As such, we assign a valuation target of 22.0x 2019 P/E to PZZA and arrive at a target price of Rp1,500. Pizza Hut’s strong brand equity, supported by its mass target market and opportunity to penetrate lower-tiered cities, are some of the key catalysts that support our Add call, especially as mass-market consumption should recover this year and dining out trends continue upwards.

We believe our TP is justified as it also implies 9.7x 2019 EV/EBITDA (32% discount to its regional peer, despite 20% premium to Indonesia retail sector) and 1.3x 2019 PEG.

Figure 78: Sector comparison

*) based on Bloomberg estimates **) based on 3 Jul 2018 closing price


Figure 79: Ace Hardware Indonesia’s 5-year rolling P/E band Figure 80: Matahari Department Store’s 3-year rolling P/E band


PriceTarget

Price

(local curr) (local curr) 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F

Sarimelati Kencana PZZA IJ Add 1,090 1,500 229 18.7 16.1 21.9% 2.9 2.7 23.4 17.2 7.8 7.0 2.1% 2.7%

Ace Hardware Indonesia ACES IJ Add 1,250 1,700 1,490 23.2 19.4 18.6% 5.3 4.7 24.8 25.5 17.1 14.4 1.8% 2.6%

Matahari Department Store LPPF IJ Add 8,500 11,000 1,724 12.4 11.4 6.4% 8.3 6.6 76.3 64.4 7.5 6.8 5.4% 5.7%

Mitra Adi Perkasa MAPI IJ Add 790 925 911 21.4 17.9 30.3% 3.1 2.8 14.1 14.3 6.6 5.9 0.5% 1.3%

Ramayana Lestari RALS IJ Add 1,325 1,550 653 18.5 16.1 18.3% 2.5 2.4 14.4 15.1 10.2 8.9 2.8% 3.8%

Indonesia consumer discretionary 17.1 15.1 18.4% 4.4 3.9 28.4 27.6 9.1 8.1 3.6% 4.4%

Fast Food Indonesia* FAST IJ na 1,500 na 209 17.0 14.9 9.1% na na 13.2 14.0 6.9 6.0 na na

Yum! China* YUMC US na 38.0 na 14,667 23.6 21.2 11.9% 4.5 4.0 21.6 20.6 9.7 9.1 1.3 1.5

Cafe De Coral* 341 HK na 19.00 na 1,418 20.6 19.0 12.0% 3.2 3.1 14.5 16.1 10.3 9.5 4.3 4.3

Ajisen (China) Holdings Ltd 538 HK Add 3.10 4.80 431 9.7 8.7 14.3% 1.0 0.9 10.3 11.0 3.2 2.5 5.1 5.7

Tsui Wah* 1314 HK na 0.97 na 175 13.9 9.7 18.4% 0.9 0.8 9.0 8.9 4.9 4.1 5.2 6.2

Jumbo Group Limited JUMBO SP Add 0.5 0.6 251 25.7 19.7 13.9% 5.0 4.5 19.8 24.0 14.2 11.2 2.9 3.6

Jollibee Foods Corp* JFC PM na 260.00 na 5,291 36.5 31.4 13.8% 6.2 5.5 18.2 18.8 20.5 17.4 1.0 1.1

Shakey's Pizza Phillippines* PIZZA PM na 12.32 na 354 21.9 19.6 12.8% 4.1 3.5 19.7 19.3 15.0 13.2 0.9 1.3

Domino's Pizza Enterprises Ltd DMP AU Hold 52.95 51.5 3,294 33.9 27.7 18.4% 14.9 12.9 45.6 52.5 18.9 15.8 2.1 2.6

Yum! Brands Inc.* YUM US na 78.11 na 25,175 22.9 20.4 6.4% na na na na 17.2 16.2 1.9 2.1

Regional F&B 25.0 22.0 9.8% 3.0 2.7 11.8 12.1 15.1 13.8 1.7 2.0

P/BV (x)Recurring

ROE (%)

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(x)

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13

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32



Figure 81: Mitra Adi Perkasa’s 3-year rolling P/E band Figure 82: Ramayana Lestari’s 5-year rolling P/E band


Figure 83: Fast Food Indonesia’s 5-year rolling P/E band Figure 84: Yum! China’s rolling P/E band, since inception


Figure 85: Cafe De Coral’s 5-year rolling P/E band Figure 86: Ajisen China’s 5-year rolling P/E band


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7

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Figure 87: Tsui Wah’s 5-year rolling P/E band Figure 88: Jumbo Group Limited’s rolling P/E band, since inception

SOURCES: CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 89: Jollibee Foods Corp’s 5-year rolling P/E band Figure 90: Shakey’s Pizza Philippines’s rolling P/E band, since inception

SOURCES: CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 91: Domino’s Pizza Enterprises Ltd’s 5-year rolling P/E band

Figure 92: Yum! Brands Inc’s 5-year rolling P/E band


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(5.0)

5.0

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55.0


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45.0

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65.0


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34



APPENDIX

Management profile

Figure 93: SMK’s Board of Commissioners


35



Figure 94: SMK’s Board of Directors


36



BY THE NUMBERS


14.0%

18.4%

22.8%

27.1%

31.5%

35.9%

40.3%

44.6%

49.0%

3.90

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P/BV vs ROE

Rolling P/BV (x) (lhs) ROE (rhs)

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11.3%

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12-mth Fwd FD Core P/E vs FD Core EPS Growth

12-mth Fwd Rolling FD Core P/E (x) (lhs)

FD Core EPS Growth (rhs)

Profit & Loss

(Rpb) Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F

Total Net Revenues 2,695 3,027 3,474 4,006 4,563

Gross Profit 1,823 2,025 2,300 2,640 3,014

Operating EBITDA 317 333 382 441 511

Depreciation And Amortisation -106 -118 -135 -166 -183

Operating EBIT 211 215 247 275 328

Financial Income/(Expense) -31 -33 -23 -16 -11

Pretax Income/(Loss) from Assoc. 0 0 0 0 0

Non-Operating Income/(Expense) -4 8 11 15 19

Profit Before Tax (pre-EI) 176 189 234 274 336

Exceptional Items

Pre-tax Profit 176 189 234 274 336

Taxation -46 -50 -59 -68 -84

Exceptional Income - post-tax

Profit After Tax 130 139 176 205 252

Minority Interests

Preferred Dividends

FX Gain/(Loss) - post tax

Other Adjustments - post-tax

Net Profit 130 139 176 205 252

Recurring Net Profit 137 139 176 205 252

Fully Diluted Recurring Net Profit 137 139 176 205 252

Cash Flow


EBITDA 317.0 333.1 381.7 441.3 510.7

Cash Flow from Invt. & Assoc.

Change In Working Capital 71.7 (67.4) 62.7 3.8 14.8

(Incr)/Decr in Total Provisions

Other Non-Cash (Income)/Expense

Other Operating Cashflow (29.3) (22.8) 19.8 17.3 22.0

Net Interest (Paid)/Received (32.5) (33.6) (31.9) (18.9) (13.2)

Tax Paid (45.9) (50.1) (58.6) (68.4) (84.1)

Cashflow From Operations 281.1 159.1 373.7 375.1 450.2

Capex (109.2) (257.5) (305.0) (370.1) (197.3)

Disposals Of FAs/subsidiaries

Acq. Of Subsidiaries/investments

Other Investing Cashflow 12.6 15.6 11.4 (4.7) 54.9

Cash Flow From Investing (96.5) (241.8) (293.6) (374.9) (142.4)

Debt Raised/(repaid) (55.9) 153.9 (208.1) (61.7) (54.6)

Proceeds From Issue Of Shares (11.1) 213.7 659.3 (8.0) (8.4)

Shares Repurchased

Dividends Paid (68.0) (322.0) (69.7) (87.9) (102.6)

Preferred Dividends

Other Financing Cashflow

Cash Flow From Financing (135.0) 45.6 381.4 (157.6) (165.6)

Total Cash Generated 49.6 (37.1) 461.5 (157.4) 142.2

Free Cashflow To Equity 128.7 71.2 (128.1) (61.5) 253.2

Free Cashflow To Firm 217.0 (49.1) 112.0 19.1 321.1

37



BY THE NUMBERS… cont’d


Balance Sheet


Total Cash And Equivalents 112.5 75.5 537.0 379.5 521.8

Total Debtors 17.4 18.4 21.4 22.4 25.5

Inventories 148.2 268.7 246.0 299.4 318.3

Total Other Current Assets 119.8 152.7 171.4 194.5 220.0

Total Current Assets 397.9 515.3 975.7 895.9 1,085.5

Fixed Assets 498.9 671.0 848.8 1,061.9 1,090.6

Total Investments 0.0 0.0 0.0 0.0 0.0

Intangible Assets 0.0 0.0 0.0 0.0 0.0

Total Other Non-Current Assets 254.9 307.7 333.2 388.9 388.6

Total Non-current Assets 753.8 978.7 1,182.0 1,450.8 1,479.1

Short-term Debt 134.9 147.0 0.0 0.0 0.0

Current Portion of Long-Term Debt 66.2 60.6 61.7 54.6 54.6

Total Creditors 165.1 173.1 209.1 262.0 297.1

Other Current Liabilities 156.5 228.4 263.6 303.0 347.7

Total Current Liabilities 522.7 609.1 534.4 619.6 699.4

Total Long-term Debt 79.0 226.5 164.2 109.6 55.0

Hybrid Debt - Debt Component

Total Other Non-Current Liabilities 211.3 288.8 324.0 373.2 424.7

Total Non-current Liabilities 290.4 515.2 488.2 482.8 479.7

Total Provisions 0.0 0.0 0.0 0.0 0.0

Total Liabilities 813.1 1,124.3 1,022.7 1,102.4 1,179.1

Shareholders' Equity 338.6 369.7 1,135.1 1,244.3 1,385.6

Minority Interests

Total Equity 338.6 369.7 1,135.1 1,244.3 1,385.6

Key Ratios

Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F

Revenue Growth 8.1% 12.3% 14.8% 15.3% 13.9%

Operating EBITDA Growth 41.6% 5.1% 14.6% 15.6% 15.7%

Operating EBITDA Margin 11.8% 11.0% 11.0% 11.0% 11.2%

Net Cash Per Share (Rp) (55.5) (118.7) 102.9 71.3 136.4

BVPS (Rp) 112.0 122.3 375.6 411.8 458.5

Gross Interest Cover 6.49 6.39 7.72 14.58 24.73

Effective Tax Rate 26.0% 26.4% 25.0% 25.0% 25.0%

Net Dividend Payout Ratio 52% 231% 40% 43% 41%

Accounts Receivables Days 1.40 1.58 1.65 1.56 1.48

Inventory Days 67.25 75.98 80.00 72.87 72.98

Accounts Payables Days 49.74 49.83 47.61 50.89 53.40

ROIC (%) 29.0% 30.0% 24.2% 24.0% 23.4%

ROCE (%) 34.3% 30.3% 23.6% 20.1% 22.7%

Return On Average Assets 14.7% 13.0% 10.9% 9.8% 10.7%

Key Drivers

Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F

ASP (% chg, main prod./serv.) N/A N/A N/A N/A N/A

Unit sales grth (%, main prod./serv.) N/A N/A N/A N/A N/A

No. of POS (main prod/serv) 227 237 239 243 245

SSS grth (%, main prod/serv) 6.1% 5.9% 7.5% 5.3% 4.1%

ASP (% chg, 2ndary prod./serv.) N/A N/A N/A N/A N/A

Unit sales grth (%,2ndary prod/serv) N/A N/A N/A N/A N/A

No. of POS (2ndary prod/serv) 115 156 214 275 313

SSS grth (%, 2ndary prrod/serv) N/A N/A N/A N/A N/A

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AAV, ADVANC, AMATA, AOT, AP, BANPU, BBL, BCH, BCP, BCPG, BDMS, BEAUTY, BEM, BGRIM, BJC, BH, BLA, BLAND, BPP, BTS, CBG, CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EA, EGCO, EPG, ERW, ESSO, GGC, GFPT, GLOBAL, GLOW, GPSC, GUNKUL, HANA, HMPRO, INTUCH, IRPC, ITD, IVL, KBANK, KCE, KKP, KTB, KTC, LH, LPN, MAJOR, MEGA, MINT, MTLS, ORI, PRM, PSH, PSL, PTG, PTT, PTTEP, PTTGC, QH, RATCH, ROBINS, RS, SAWAD, SCB, SCC, SGP, SIRI, SPALI, SPRC, STA, STEC, SUPER, TASCO, TCAP, THAI, THANI, TISCO, TKN, TMB, TOA, TOP, TPIPL, TPIPP, TRUE, TTW, TU, TVO, UV, WHA, WHAUP, WORK.

Corporate Governance Report:

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Score Range: 90 - 100 80 – 89 70 - 79 Below 70 or No Survey Result

Description: Excellent Very Good Good N/A

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Where this material is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent “research” (cannot remove research from here under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any such non-independent material will not have been prepared in accordance with legal requirements designed to promote the independence of research (cannot remove research from here) and will not subject to any prohibition on dealing ahead of the dissemination of research. Any such non-independent material must be considered as a marketing communication.

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Spitzer Chart for stock being researched ( 2 year data )

Sarimelati Kencana PT (PZZA IJ)

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2017, Anti-Corruption 2017

AAV – Very Good, n/a, ADVANC – Excellent, Certified, AEONTS – Good, n/a, AMATA – Very Good, n/a, ANAN – Excellent, n/a, AOT – Excellent, Declared, AP – Excellent, Declared, ASK – Very Good, Declared, ASP – Very Good, Certified, BANPU – Excellent, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – Good, Declared, BCP - Excellent, Certified, BCPG – Very Good, n/a, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, n/a, BEC – Very Good, n/a, , BGRIM – not available, n/a, BH - Good, n/a, BJC – Very Good, Declared, BJCHI – Very Good, Declared, BLA – Very Good, Certified, BPP – Good, n/a, BR - Good, Declared, BTS - Excellent, Certified, CBG – Good, n/a, CCET – Good, n/a, CENTEL – Very Good, Certified, CHG – Very Good, Declared, CK – Excellent, n/a, COL – Very Good, Declared, CPALL – not available, Declared, CPF – Excellent, Declared, CPN - Excellent, Certified, DELTA - Excellent, n/a, DEMCO – Excellent, Certified, DIF – not available, n/a, DTAC – Excellent, Certified, EA – Very Good, n/a, ECL – Very Good, Certified, EGCO - Excellent, Certified, EPG – Very Good, n/a, GFPT - Excellent, Declared, GGC – not available, Declared, GLOBAL – Very Good, Declared, GLOW – Very Good, Certified, GPSC – Excellent, Declared, GRAMMY - Excellent, n/a, GUNKUL – Excellent, Declared, HANA - Excellent, Certified, HMPRO - Excellent, Certified, ICHI – Excellent, n/a, III – not available, n/a, INTUCH - Excellent, Certified, IRPC – Excellent, Certified, ITD – Very Good, n/a, IVL - Excellent, Certified, JAS – not available, Declared, JASIF – not available, n/a, JUBILE – Good, Declared, KAMART – not available, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KGI – Very Good, Certified, KKP – Excellent, Certified, KSL – Very Good, Certified, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Certified, M – Very Good, n/a, MACO – Very Good, n/a,

Rating Distribution (%) Inv estment Banking clients (%)

Add 61.1% 5.5%

Hold 29.7% 2.0%

Reduce 8.9% 0.4%

Distribution of stock ratings and inv estment banking clients for quarter ended on 31 March 2018

1275 companies under cov erage for quarter ended on 31 March 2018

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

May-18 May-18 Jun-18 Jun-18 Jun-18 Jul-18

Price Close

43



MAJOR – Very Good, n/a, MAKRO – Very Good, Declared, MALEE – Very Good, n/a, MBKET – Very Good, Certified, MC – Very Good, Declared, MCOT – Excellent, Certified, MEGA – Very Good, n/a, MINT - Excellent, Certified, MTLS – Very Good, Declared, NYT – Excellent, n/a, OISHI – Very Good, n/a, PLANB – Excellent, Declared, PLAT – Very Good, Certified, PSH – Excellent, Certified, PSL - Excellent, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Certified, RATCH – Excellent, Certified, ROBINS – Excellent, Certified, RS – Very Good, n/a, SAMART - Excellent, n/a, SAPPE - Good, n/a, SAT – Excellent, Certified, SAWAD – Very Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCBLIF – not available, n/a, SCC – Excellent, Certified, SCN – Very Good, Declared, SCCC - Excellent, Declared, SIM - Excellent, n/a, SIRI – Very Good, Declared, SPA - Good, n/a, SPALI - Excellent, n/a, SPRC – Excellent, Declared, STA – Very Good, Declared, STEC – Excellent, n/a, SVI – Excellent, Certified, TASCO – Very Good, n/a, TCAP – Excellent, Certified, THAI – Very Good, n/a, THANI – Very Good, Certified, THCOM – Excellent, Certified, THRE – Very Good, Certified, THREL – Excellent, Certified, TICON – Very Good, Declared, TIPCO – Very Good, Certified, TISCO - Excellent, Certified, TK – Very Good, n/a, TKN – Very Good, Declared, TMB - Excellent, Certified, TNR – Good, n/a, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – not available, n/a, TRUE – Excellent, Declared, TTW – Very Good, n/a, TU – Excellent, Declared, TVO – Excellent, Declared, UNIQ – not available, Declared, VGI – Excellent, Declared, WHA – not available, Declared, WHART – not available, n/a, WORK – not available, n/a.

Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorized into:

- Companies that have declared their intention to join CAC, and

- Companies certified by CAC

Recommendation Framework

Stock Ratings Definition:

Add The stock’s total return is expected to exceed 10% over the next 12 months.

Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

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