pg.jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/9/20/f0266b64-cb0c-41ed-bd9c...Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications

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) 094/06/2016 MCI (P) 085/06/2016 MICA (P) 021/01/2016

Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch

View HSBC Global Research at:

https://www.research.hsbc.com

A quality company with a valuation multiple to match

Volumes, cost efficiency and premiumisation to drive growth

Initiate coverage with a Hold rating and TP of IDR40,400

A major player. Unilever Indonesia (UNVR) is one of the country’s largest producers

of fast-moving consumer goods. Its strong cash generation, high ROE (124% in

2015) and consistent dividend payments have resulted in its stock being a core

holding for investors seeking exposure to Indonesia. This report takes a deep dive

into its product portfolio and business strategy to identify what will drive growth over

the next three years.

Bright outlook: The economy is enjoying a broad-based recovery, which is

increasing the purchasing power of consumers, and the country’s favourable

demographics provide an ideal environment for consumption growth. This in turn

creates opportunities for product premiumisation. Our research provides a

differentiated way of looking at each of UNVR’s six leading categories which

generate 73% of its revenue. We assess the performance of each category in terms

of winners and losers. See page 10 for details.

Earnings forecasts. In 2015 EPS growth slowed to 2% but we expect this to

increase to 14.5% in 2016e and 16.6% in 2017e. We forecast earnings to increase at

a CAGR of 16% over 2015-18e, driven by higher margins from premiumisation,

volume growth, and improved cost efficiency. The capping of the royalty fee UNVR

pays to its Dutch parent at a maximum of 8% of domestic revenue from 2015 after

three years of increases is another positive.

Valuation and risks. We initiate coverage with a Hold and a target price of

IDR40,400. The stock is trading at 50.4x 2016e PE and 35.2x 2016e EV/EBITDA,

which is above its historical trading range. At these multiples, we think the positives,

including EPS growth at a 16% CAGR over 2015-18e, are already in the price. Our

DCF-derived target price implies 9% downside. Our 2016-18e revenue and net

income forecasts are 3-10% ahead of consensus because we have a more positive

view of the home and personal care segment. Our bull and bear case scenario

analysis (see page 8) shows that even under a bullish scenario, there is little further

upside. Upside risks include stronger-than-expected GDP growth, industry

consolidation, and acquisitions that are earnings accretive. Downside risks include

the implementation of a plastic tax, increasing competition in the food segment,

weaker-than-expected GDP growth, and health/food safety issues.

20 September 2016

INITIATE AT HOLD

TARGET PRICE (IDR) PREVIOUS TARGET (IDR)

40,400

SHARE PRICE (IDR) UPSIDE/DOWNSIDE

44,300 -8.8% (as of 16 Sep 2016)

MARKET DATA Market cap (IDRb) 338,009 Free float 15%

Market cap (USDm) 25,670 BBG UNVR IJ

3m ADTV (USDm) 7 RIC UNVR.JK

FINANCIALS AND RATIOS (IDR) Year to 12/2015a 12/2016e 12/2017e 12/2018e

HSBC EPS 766.95 878.32 1024.27 1198.69

HSBC EPS (prev) - - - -

Change (%) - - - -

Consensus EPS 769.49 847.46 958.94 1093.13

PE (x) 57.8 50.4 43.3 37.0 Dividend yield (%) 1.7 1.9 2.2 2.6

EV/EBITDA (x) 40.2 35.2 30.2 25.7

ROE (%) 124.2 142.8 175.0 214.7

52-WEEK PRICE (IDR)

Source: Thomson Reuters IBES, HSBC estimates

Selviana Aripin*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch [email protected]

+65 6658 0610

Karen Choi* Head of Consumer & Retail Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch [email protected]

+822 3706 8781

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.

Unilever Indonesia (UNVR IJ) EQUITIES PERSONAL PRODUCTS

Indonesia

32000.00

41000.00

50000.00

Sep 15 Mar 16 Sep 16

Target price: 40400.00High: 47800.00 Low: 34600.00 Current: 44300.00

Initiate at Hold: Premiumisation and quality priced in

EQUITIES PERSONAL PRODUCTS

20 September 2016

2

Financial statements

Year to 12/2015a 12/2016e 12/2017e 12/2018e

Profit & loss summary (IDRbn)

Revenue 36,484 41,791 48,122 55,694

EBITDA 8,444 9,633 11,209 13,094

Depreciation & amortisation -505 -603 -720 -842

Operating profit/EBIT 7,939 9,030 10,490 12,252

Net interest -110 -94 -70 -57

PBT 7,829 8,935 10,420 12,195

HSBC PBT 7,829 8,935 10,420 12,195

Taxation -1,978 -2,234 -2,605 -3,049

Net profit 5,852 6,702 7,815 9,146

HSBC net profit 5,852 6,702 7,815 9,146

Cash flow summary (IDRbn)

Cash flow from operations 6,695 8,885 10,440 12,422

Capex -1,472 -1,881 -1,396 -1,615

Cash flow from investment -1,429 -1,881 -1,396 -1,615

Dividends -5,592 -6,366 -7,424 -8,689

Change in net debt 537 -223 -1,085 -1,481

FCF equity 5,155 7,005 9,045 10,807

Balance sheet summary (IDRbn)

Intangible fixed assets 493 474 456 438

Tangible fixed assets 8,321 9,620 10,317 11,111

Current assets 6,623 6,416 8,077 10,181

Cash & others 628 50 1,272 2,914

Total assets 15,730 16,664 19,027 21,935

Operating liabilities 8,428 10,389 12,744 15,653

Gross debt 2,166 1,365 1,503 1,663

Net debt 1,538 1,315 230 -1,251

Shareholders’ funds 4,827 4,557 4,374 4,148

Invested capital 6,381 6,072 4,834 3,163

Ratio, growth and per share analysis

Year to 12/2015a 12/2016e 12/2017e 12/2018e

Y-o-y % change

Revenue 5.7 14.5 15.1 15.7

EBITDA 3.8 14.1 16.4 16.8

Operating profit 2.3 13.7 16.2 16.8

PBT 2.0 14.1 16.6 17.0

HSBC EPS 2.0 14.5 16.6 17.0

Ratios (%)

Revenue/IC (x) 6.0 6.7 8.8 13.9

ROIC 98.3 109.0 144.6 230.2

ROE 124.2 142.8 175.0 214.7

ROA 39.6 41.9 44.1 44.9

EBITDA margin 23.1 23.0 23.3 23.5

Operating profit margin 21.8 21.6 21.8 22.0

EBITDA/net interest (x) 76.8 102.0 161.3 229.9

Net debt/equity 31.9 28.9 5.3 -30.2

Net debt/EBITDA (x) 0.2 0.1 0.0 -0.1

CF from operations/net debt 435.3 675.6 4532.1

Per share data (IDR)

EPS Rep (diluted) 766.95 878.32 1024.27 1198.69

HSBC EPS (diluted) 766.95 878.32 1024.27 1198.69

DPS 732.94 834.40 973.05 1138.76

Book value 632.68 597.24 573.22 543.63

Key forecast drivers

Year to 12/2015a 12/2016e 12/2017e 12/2018e

Home and Personal Care revenue 25,419 28,994 33,220 38,229

Food and Refreshment revenue ( 11,065 12,797 14,902 17,465

Total revenue (IDRbn) 36,484 41,791 48,122 55,694

Gross profit (IDRbn) 18,649 21,153 24,357 28,190

EBIT (IDRbn) 7,939 9,030 10,490 12,252

Valuation data

Year to 12/2015a 12/2016e 12/2017e 12/2018e

EV/sales 9.3 8.1 7.0 6.0

EV/EBITDA 40.2 35.2 30.2 25.7

EV/IC 53.2 55.9 70.0 106.5

PE* 57.8 50.4 43.3 37.0

PB 70.0 74.2 77.3 81.5

FCF yield (%) 1.5 2.1 2.7 3.2

Dividend yield (%) 1.7 1.9 2.2 2.6

* Based on HSBC EPS (diluted)

Issuer information

Share price (IDR) 44300.00 Free float 15%

Target price (IDR) 40400.00 Sector Personal Products

Reuters (Equity) UNVR.JK Country Indonesia

Bloomberg (Equity) UNVR IJ Analyst Selviana Aripin

Market cap (USDm) 25,670 Contact +65 6658 0610

Price relative

Source: HSBC Note: Priced at close of 16 Sep 2016

22000.00

27000.00

32000.00

37000.00

42000.00

47000.00

22000.00

27000.00

32000.00

37000.00

42000.00

47000.00

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

Unilever Indonesia Rel to JAKARTA S E COMPOSITE

Financials & valuation: Unilever Indonesia Hold

3


20 September 2016

Investment Summary 4

Earnings are set to rise rapidly 4

Key forecasts 6

Valuation and risks 6

How we are different from

consensus 8

Bull and bear care scenarios 8

Industry analysis 11

A young population and

strong GDP growth 11

Home and personal care 14

Food and refreshments 18

Bottom line 19

Unilever Indonesia 20

Company profile 20

Investment thesis 20

SWOT analysis 21

Corporate governance and

management 21

Management strategy 23

Forecasts, valuation, and risks 26

Financial analysis 26

Consensus vs. HSBC forecasts 35

Valuation 35

Risks 38

Disclosure appendix 40

Disclaimer 43

Contents


20 September 2016

4

Earnings are set to rise rapidly

Unilever Indonesia (UNVR) is one of the country’s largest producers of consumer goods. The

company has a strong portfolio of home and personal care goods as well as food and

refreshment products. Its brands include Wall’s, Lifebuoy, Vaseline, Pepsodent, Rinso, Blue

Band, Dove, Rexona, and Clear. The company, 85% owned by its Dutch holding company,

Unilever (ULVR LN, Not rated) is one of the stock market’s largest companies in terms of

market cap.

The economy is enjoying a broad-based recovery, which is increasing both the appetite for

consumption and purchasing power. After registering slower growth of 4.7% in 2015, HSBC

Economist, Lim Su Sian, is forecasting GDP growth of 4.9% in 2016e and 5.1% in 2017e.

We expect the performance of UNVR to follow a similar pattern. In 2015 EPS growth slowed to

2% but we expect this to increase to 14.5% in 2016e and 17% in 2017e. An important part of

this story is premiumisation as consumers become more comfortable about spending more

money on a wide range of higher quality products. Unilever Indonesia is at the forefront of this

trend (See page 10 for details). We now take a closer look at the company’s business.

UNVR: EPS growth driven by a broad-based economic recovery

Source: CEIC, World Bank, Company data, HSBC estimates

11.3%

22.9%

16.2%

10.6%

7.2%

2.0%

14.5%16.6% 17.0%

6.2% 6.2% 6.0%5.6%

5.0% 4.8% 4.9% 5.1% 5.1%

0%

1%

2%

3%

4%

5%

6%

7%

0%

5%

10%

15%

20%

25%

2010 2011 2012 2013 2014 2015 2016e 2017e 2018e

EPS Growth (Left HS) GDP growth (Right HS)

Investment Summary

Unilever Indonesia is benefiting from the country’s premiumisation

trend as the broader economy recovers

But we think that these positive factors are already in the price

Initiate coverage with a Hold rating and a target price of IDR40,400

5


20 September 2016

Winners and losers

Six product categories contribute 73% of UNVR’s revenue. We analyse these business

segments and, overall, we find that the growth prospects are intact and margins resilient.

Winning: UNVR is doing well in skin care, hair care, ice cream, and sauces.

Losing: UNVR’s oral care segment needs more work. Specifically, UNVR’s toothpaste

variant for sensitive teeth has not gained sufficient traction on rival GSK’s Sensodyne.

Targeted growth: Even though UNVR has lost market share in the laundry care segment,

we think that the strategy of concentrating on the washing machine detergent segment that

targets the middle-to-higher income consumers, while avoiding the cream-based hand-

wash detergent to be the right long-term strategy.

Growth outlook for home and personal care underestimated

Our estimates for top and bottom line growth for 2017 and 2018 are ahead of consensus by

between 3% and 10%. We think this is because of our more positive view on the home and

personal care segment. We forecast the segment to grow at a CAGR of 15% between 2015 and

2018 as a result of robust growth in the skin care category.

Growth model

The company’s growth model is based on being earnings accretive. Between 2010 and 2015,

Unilever Indonesia expanded its market share in the following categories: skin care: +5.7%

(2015: 47.1%); hair care: +0.8%% (2015: 39.1%); ice cream: +12.2% (2015: 67.7%); sauces,

dressings, and condiments: +1.9% (2015: 19.3%).

Over the same period the company lost 2.9% market share (2015: 32.8%) in the laundry care

category because it declined to compete aggressively in the lower-end cream-based hand wash

detergent category. UNVR expanded its share in the automatic detergent category by 2.8%

(2015: 53.7%), while losing 2.2% (2015: 39.3%) within the hand wash detergent category.

Within the oral care category, UNVR introduced Pepsodent Sensitif Expert for people with

sensitive teeth. This competed with Sensodyne, the popular GlaxoSmithKline (GSK LN, Buy,

GBp1,624, TP: GBp1,970) brand, which had an estimated 7.8% market share as at 2015.

Between 2010 and 2015, Unilever Indonesia’s market share declined 5.8%, according to

Euromonitor, mainly due to the entry of Sensodyne.

Four of UNVR’s top six categories have a high degree of concentration. They are: 1) skin care:

the top three players control 68% of the market; 2) hair care: the top three have 77% market

share; 3) Oral care: the top three have 84% market share; and 4) ice cream: the top three

control 94% of the market. We estimate that 57% of Unilever Indonesia’s revenue is attributable

to segments with high levels of concentration.

Royalty expense will no longer be a drag on EBIT

UNVR has undertaken a series of initiatives to improve top line growth and cost efficiency.

These include the use market intelligence to increase consumption, improving labour

productivity, stretching operational efficiency, re-sizing stock keeping units (SKUs) and zero-

based budgeting.

However, the results are hard to quantify due to the yearly adjustment in royalty payments to its

Anglo-Dutch parent company, which started in 2013. Royalties, as a percentage of revenue,

have climbed from 3.4% of revenue in 2012 to 4.5% in 2013, 5.6% in 2014, and 7.4% in 2015.

This complicates the task off comparing the EBIT margin in different years.

Stripping out the royalty expense, the EBIT margin would have shown an improvement of

1.6ppts between 2012 and 2015 instead of a decline of 2.0ppts. Unilever Indonesia has done a

good job in making operational improvements and we think this upward trend in EBIT margin,

driven by the premiumisation trend, will continue. As the royalty fee is capped at a maximum of

8% of domestic revenue from 2015, we expect royalty fees to remain stable.


20 September 2016

6

UNVR: Ex-royalty, UNVR has done a good job of extracting operational improvement

UNVR: Impact of royalty expense on EPS growth

Source: Company data, HSBC Source: Company data, HSBC

Key forecasts

Summary of forecasts

(IDRbn) 2015 2016e 2017e 2018e

Revenue 36,484 41,791 48,122 55,694 EBIT 7,939 9,030 10,490 12,252 EBIT margin 21.8% 21.6% 21.8% 22.0% Net profit 5,852 6,702 7,815 9,146 EPS 767 878 1,024 1,199 EPS growth 14.5% 16.6% 17.0%

Source: Company data, HSBC estimates

Valuation and risks

Unilever Indonesia’s strong cash generation, high ROE, and consistent dividend payments have

resulted in its shares being a core holding for investors who seek exposure to Indonesia.

UNVR: Fwd PE Chart UNVR: EV/EBITDA Trailing 12M Chart

Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC

26.4% 26.9% 27.2% 27.8% 28.1% 28.8%

23.0% 23.7% 23.8% 23.3% 22.5% 21.8%

0%

5%

10%

15%

20%

25%

30%

35%

2010 2011 2012 2013 2014 2015

Operating margin, ex-royalty Operating margin

11.2%

22.0%

17.3%15.3%

12.5%

8.1%

11.3%

22.9%

16.2%

10.6%

7.2%

2.0%

0%

5%

10%

15%

20%

25%

2010 2011 2012 2013 2014 2015

EPS, ex-royalty, growth EPS growth

10

20

30

40

50

60

70

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

+1s.d. = 47x

-1s.d. = 28x

Ave = 37x

+2s.d. = 56x

-2s.d. = 19x

10

15

20

25

30

35

40


+1s.d. = 31x

+2s.d. = 36x

Ave = 26x

-1s.d. = 21x

-2s.d. = 16x

7


20 September 2016

Even though its valuation appears expensive, we do not think it is unreasonable. We think that

the rich valuation reflects UNVR’s superior ROE (2015: 124%), consistent dividend pay-out (in

between 80% and 108% and averaging 91% over the past decade), and potential growth level

(between 14.6% and 17.0% over 2016-18e). UNVR’s share price has historically traded at a

premium relative to consensus target prices, reflecting its cash generating ability and growth

potential. Based on current valuations of 50.4x 2016e PE and 35.2x 2016e EV/EBITDA, UNVR

is trading at an all-time high relative to its own history. Furthermore, UNVR’s current valuation

premium relative to the JCI is also at an all-time high relative to historical premium levels.

Our DCF-derived target price of IDR40,400 implies 9% downside to the current price. We initiate

coverage on Unilever Indonesia with a Hold rating because even though we think Unilever

Indonesia can look forward to many operational improvements – purchasing power driven by an

improving economy, operational efficiency, and working capital management – we think these

factors are already in the price. Furthermore, given the absence of negative catalysts, we think

that the rich valuations may be sustainable.

Risks

Upside risks: Stronger-than-expected GDP growth, consolidation among the players may ease

competitive intensity, acquisitions that are earnings accretive, and favourable sentiment towards

Indonesia may benefit UNVR’s stock. Downside risks: Implementation of plastic tax, increasing

competitive intensity in the food segment, a weaker-than-expected GDP growth rate may be

negative for consumption appetite, and health/food safety issues related to UNVR’s products.

UNVR: ROE and PE UNVR: Premium of stock price over

consensus TP

Source: Bloomberg, Thomson Reuters Datastream, HSBC estimates Source: Bloomberg, Thomson Reuters Datastream, HSBC estimates

65%75%77%

83%89%87%

108%

127%130% 130%

124%

23

2926 25

28

3734 33

3742

48

0

10

20

30

40

50

60

0%

20%

40%

60%

80%

100%

120%

140%

2005 2007 2009 2011 2013 2015

ROE (Left HS) P/E (Right HS)

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

Premium of closing price over consensus target price


20 September 2016

8

How we are different from consensus

Our rating is in line with consensus, given that 47% of covering analysts have a Hold rating on

Unilever Indonesia. Our revenue and earnings estimates are in line with Thomson Reuters

consensus for 2016. However, we are ahead of Thomson Reuters consensus in 2017 and

2018. This is because we are more optimistic about Unilever Indonesia’s ability to grow its home

and personal care segment and extract cost efficiencies, particularly in spending on advertising

and market research.

Our research also provides a differentiated way of looking at each of UNVR’s six leading categories

which generate 73% of the company’s revenue. We assess the performance of each category in

terms of winners and losers and identify the premiumisation trends. See page 10 for details.

Bull and bear care scenarios

Bull case

This scenario has Unilever Indonesia expanding its EBIT margin to 24% by 2018e, coupled with

a decline in its cost of equity (and hence WACC) of 100bp to 8.5%. This would warrant a

valuation of IDR48,690, representing 10% upside to the current market price. Margin expansion

and a decline in the cost of equity could occur in the following circumstances:

Stronger-than-expected GDP growth may be positive for consumption and

purchasing power.

Consolidation or mergers may ease the competitive environment.

Acquisitions that are earnings accretive may be positive for Unilever Indonesia.

Because Unilever Indonesia is a significant component of the Jakarta Composite

Index (JCI), improving sentiment towards Indonesia may result in inflows into

Unilever Indonesia stock.

Bear case

The company experiences EBIT margin compression to 20% by 2018e, warranting a valuation

of IDR37,083, representing 16% downside to the current market price. Margin compression

could occur in the following scenario:

Implementation of excise tax that penalizes producers using plastic bottles and packing

may be negative for Unilever Indonesia.

Increasing competition, particularly within the food and refreshment category, may be

negative for the company.

Weaker-than-expected GDP growth may be negative for consumption.

Under-investment in advertising and brand building may be negative for the long-term

growth of the business.

Failure to consistently innovate and launch new products/expand on existing category may

be negative for the company.

Acquisitions that are not earnings accretive may negatively impact Unilever.

Health/food safety issues related to the products that Unilever Indonesia sells may result in

lost revenues, loss of reputation and impairment of brand values.

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Unilever Indonesia: Comps table (pricing as at close of 16 September 2016)

Company Bloomberg ticker Rating Currency Price (lcy)

Target price (lcy)

Upside / Downside

Dividend yield

FY16

Market cap - consolidated

(USDm)

3Yr CAGR 2015-18

EPS growth

PE

2015a

PE

2016e

PE

2017e

EV/EBITDA

2015a

EV/EBITDA

2016e

EV/EBITDA

2017e

Net Debt /

Equity

2015

ROE

2015

Unilever Indonesia UNVR IJ Hold IDR 44,300.00 40,400 -9% 2.1% 25,670 16% 57.8 50.4 43.3 40.2 35.2 30.2 0.3 124% Asia ex-Japan Amorepacific 090430 KS Buy KRW 378,000.00 520,000 38% 0.4% 19,694 27% 46.0 33.1 27.5 24.4 16.6 14.1 (0.2) 18% Colgate-Palmolive CLGT IN Buy INR 969.55 1,100 13% 1.4% 3,936 14% 45.7 43.3 35.2 28.0 26.1 21.0 (0.3) 64% Dabur India DABUR IN Hold INR 292.80 280 -4% 1.0% 7,697 14% 41.4 36.6 32.1 33.2 29.4 25.0 0.1 32% Emami Ltd HMN IN Buy INR 1,209.60 1,330 10% 0.7% 4,097 27% 78.6 67.2 48.6 40.9 33.6 27.6 0.4 27% Gillette India Ltd GILL IN Not Rated INR 4,500.80 Not Rated N.A na 2,189 31% 68.8 52.6 na 45.3 31.1 na (0.6) 27% Godrej Consumer Products GCPL IN Buy INR 1,687.25 1,690 0% 0.4% 8,577 18% 50.2 41.3 34.8 36.2 29.7 25.1 0.3 24% Hindustan Unilever HUVR IN Buy INR 911.70 975 7% 1.6% 29,448 12% 48.0 43.9 38.7 32.6 29.6 25.5 (0.7) 103% LG Household & Healthcare 051900 KS Not Rated KRW 973,000.00 Not Rated N.A 0.7% 14,580 22% 35.4 25.8 22.0 20.9 16.2 13.8 0.4 25% Marico Industries MRCO IN Reduce INR 295.30 240 -19% 1.1% 5,686 17% 53.6 45.0 38.3 35.7 29.6 25.4 (0.1) 36% Universal Robina URC PM Reduce PHP 185.70 160 -14% 2.4% 8,464 16% 32.7 27.1 24.4 18.7 16.3 15.3 0.1 20% Procter & Gamble Hygiene & Healthcare PG IN Not Rated INR 6,680.05 Not Rated N.A 1.0% 3,236 15% 51.2 45.8 38.8 35.9 31.4 38.8 (0.7) 31% Nestle Malaysia NESZ MK Not Rated MYR 79.90 Not Rated N.A 3.5% 4,529 10% 29.1 27.4 25.7 19.7 18.5 17.5 0.5 80% Weighted average 1.2% 18% 45.6 38.1 31.7 29.0 24.2 20.6 -0.1 49% Indonesia Gudang Garam GGRM IJ Reduce IDR 62,500.00 54,000 -14% 2.0% 9,133 13% 18.7 17.2 15.1 12.4 10.9 9.6 0.5 18% Hanjaya Mandala Sampoerna HMSP IJ Reduce IDR 4,080.00 3,152 -23% 2.7% 36,041 9% 45.8 40.8 38.3 33.7 29.0 26.6 0.0 46% Indofood CBP ICBP IJ Hold IDR 9,475.00 8,650 -9% 1.4% 8,392 8% 36.8 33.1 30.6 24.1 20.5 17.2 (0.3) 21% Indofood Sukses Makmur INDF IJ Buy IDR 8,475.00 10,000 18% 2.5% 5,651 18% 24.4 18.8 16.1 10.6 9.6 7.3 0.3 11% Mayora Indah MYOR IJ Not Rated IDR 1,445.00 Not Rated N.A 1.0% 2,456 15% 22.4 24.1 20.6 11.9 13.3 11.9 0.4 27% Tempo Scan TSPC IJ Buy IDR 2,130.00 2,900 36% 1.7% 728 12% 18.4 17.1 14.7 10.5 8.9 7.9 (0.4) 12% Weighted average 2.4% 11% 37.4 33.4 30.9 26.1 22.6 20.3 0.1 34%

Source: Bloomberg, Thomson Reuters Datastream, HSBC estimates

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Unilever Indonesia: Product categories and premiumisation trends

Estimated

revenue

Market share

(2010-15) Unilever’s brands Competitor brands Premiumisation trends Comments

Skin care

25% +5.7% Bodycare: Citra, Vaseline

Facial care: Pond’s

Bodycare: Nivea (Beiersdorf), Marina (Tempo Scan)

Facial care: Olay (P&G)

Anti-ageing products

Whitening products

BB/ CC cream

Anti-ageing products: Pond’s (#1) and Olay (#2) are dominant and still gaining market share

Facial moisturisers: Pond’s (#1) and Olay (#2) are dominant and still gaining market share

Facial cleanser: Pond’s (#1) and Garnier (#3) by L’oreal are gaining market share; Biore (#2) by Kao is losing market share

Hair care

12% +0.8% Shampoo: Sunsilk, Clear, Lifebuoy, TRESemme

Conditioner: Sunsilk

Shampoo: Pantene (P&G), Rejoice (P&G), Head & Shoulder (P&G)

Conditioner: Pantene (P&G), Ellips (Kino), Garnier (L’Oreal), Rejoice (P&G), L’Oreal Paris (L’Oreal)

Intensive conditioning (leave-on or wash-off)

Salon-quality hair care

Coloured hair care

Styling products

Conditioner: Sunsilk (#1) and Pantene (#2) are dominant but slipped a little. Ellips (#3) is gaining market share. Garnier (#4) slipped significantly (-5.6% between 2010 and 2015).

Shampoo: Pantene (#1) gaining market share. Sunsilk (#2), Clear (#3), Lifebuoy (#4), Rejoice (#5) slipped a little.

Laundry care

10% -2.9% Power detergent: Rinso

Handwash detergent: Rinso

Power detergent: So Klin (Wings)

Handwash detergent: Daia (Wings), Attack (Kao), So Klin (Wings), Wings (Wings)

Washing machine detergent Handwash: Daia (#2) and Attack (#3) are gaining market share; Rinso (#1), So Klin (#4), and Wings (#5) are losing market share. In spite of UNVR’s brands losing market share, we take a positive view on this because UNVR deliberately did not compete aggressively in the lower-end cream-based handwash detergent category.

Automatic detergent: Rinso (#1) and So Klin (#2) dominant and continue to gain market share

Ice cream

9% +12.2% Impulse ice cream: Paddle Pop, Cornetto, Wall’s

Take-home ice cream: Wall’s

Impulse ice cream: Campina, Diamond

Take-home ice cream: Campina, Diamond

New flavours (such as honeycomb, dark chocolate) in impulse ice cream

Impulse ice-cream: Paddle Pop (#1), Cornetto (#2), Wall’s (#3) remain dominant. Campina (#4) and Diamond (#5) are losing market share

Take-home ice cream: Wall’s gained significant (+13.1%) market share between 2010 and 2015. Campina and Diamond are losing market share.

Oral care

8% -1.9% Toothpaste: Pepsodent/ Signal

Toothbrush: Pepsodent/ Signal

Toothpaste: Ciptadent (Lion), Formula (Orang Tua), Sensodyne (GSK)

Toothbrush: Formula (Orang Tua), Oral-B (P&G)

Oral care for people with sensitive teeth

Toothpaste: Pepsodent (#1) has lost significant (-5.8%) market share, mainly due to the entry of Sensodyne (#5) which gained 4.5% market share over the same period. Close up (#3) and Formula (#4) gained market share while Ciptadent (#2) slipped a little.

Toothbrush: Formula (#1), Pepsodent/ Signal (#2), and Oral-B (#3) gained market share.

Sauces, Dressings, and Condiments

8% +1.9% Cooking sauce: Royco

Soy sauce: Bango

Cooking sauce: Masako (Ajinomoto), Sasa (Rodamas), Ajinomoto (Ajinomoto), Indofood (Indofood SM)

Soy sauce: ABC (Kraft Heinz), Indofood (Indofood SM), Sedaap (Wings), Nasional (Sari Sedap Indonesia)

Pre-prepared condiments/ marinade incorporating existing sauce (such as Bango)

New flavour variant (such as spicy sweet soy sauce)

Gel-based stock

Cooking sauce: Masako (#1) and Royco (#2) gained significant market share (+6.3% and +3.2%, respectively) while Sasa (#3) and Ajinomoto (#4) lost significant market share (-3.5% and -2.1%, respectively)

Soy sauce: Bango (#1), ABC (#2), Indofood (#3), and Sedaap (#4) gained market share. Nasional (#5) lost market share.

Others 27% Total 100%

Source: Euromonitor, HSBC estimates

11


20 September 2016

A young population and strong GDP growth

Indonesia, home to 256 million people, has a favourable demographic profile – 43.9% of the

population are under the age of 25 and 85.2% under 55. Over the past decade, Indonesia’s

GDP growth has been between 4.6% and 6.3%. This makes it a very attractive market for

producers of fast-moving consumer goods.

Indonesia: Demographics in 2016 Indonesia: GDP growth

Source: CIA World Factbook Source: CEIC, World Bank, HSBC estimates

High or moderate degree of concentration

The Herfindahl-Hirschman Index (HHI) is used to measure the degree of market concentration,

taking into account the market share of competitors in the industry. We estimate the HHI Index

of all the segments where Unilever Indonesia operates. We also show that Unilever Indonesia

has expanded its market share, particularly across skin care, hair care, ice cream, and sauces

categories in recent years. See the table on the next page.

(15) (5) 5 15

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

80-84

90-94

100+

Millions

Female

Male

5.7%5.5%

6.3%6.0%

4.6%

6.2%6.2%6.0%5.6%

5.0%4.8%

0%

1%

2%

3%

4%

5%

6%

7%

05 06 07 08 09 10 11 12 13 14 15

GDP growth

Industry analysis

Indonesia has a favourable demographic profile and robust

GDP growth

Most FMCG categories have a high to moderate degree of

concentration, pointing to sustainable pricing and margins

For Unilever Indonesia, the key segments to watch include skin care,

hair care, laundry care, oral care, and ice cream


20 September 2016

12

Herfindahl–Hirschman Index (HHI) (2015)

Est impact on UNVR’s revenue HHI Index Interpretation of HHI Index

Home and personal care Skin care 25% 0.252 High concentration Hair care 12% 0.251 High concentration Laundry care 10% 0.249 Moderate concentration Oral care 8% 0.326 High concentration Bath & Shower 6% 0.214 Moderate concentration Deodorants 2% 0.412 High concentration Men’s grooming 2% 0.189 Moderate concentration Surface care 2% 0.170 Moderate concentration Dishwashing 1% 0.369 High concentration Baby & Children 1% 0.164 Moderate concentration Toilet care 0% 0.325 High concentration Sub-total 70% Food and refreshment Ice cream 9% 0.498 High concentration Sauces, Dressings, and Condiments 8% 0.140 Unconcentrated industry Oils and fats 7% 0.235 Moderate concentration Tea 4% 0.135 Unconcentrated industry Juice 2% 0.223 Moderate concentration Sub-total 30% Total 100%

Source: Euromonitor, HSBC estimates

Revenue contribution by segment (2015) EBIT contribution by segment, before unallocated expenses (2015)

Source: UNVR Source: UNVR

70%

30%Home andpersonal care

Food andrefreshment

82%

18% Home andpersonal care

Food andrefreshment

13


20 September 2016

Market share in Indonesian skin care (%) Market share in Indonesian hair care (%)

Source: Euromonitor, HSBC Source: Euromonitor, HSBC

Market share in Indonesian oral care (%) Market share in Indonesian laundry care (%)


Market share in Indonesian ice cream (%) Market share in Indonesian sauces (%)


41 42 44 45 46 47

12 12 13 13 14 14 7 8 8 7 7 7

32 31 29 28 27 25

-

20

40

60

80

100

120

2010 2011 2012 2013 2014 2015

Unilever P&G L'Oréal

Kao Beiersdorf Others

38 39 39 39 39 39

28 28 28 28 28 28

10 10 10 10 10 10

-

20

40

60

80

100

120

2010 2011 2012 2013 2014 2015

Unilever P&G L'Oréal

Mandom Kino Others

54 53 52 52 52 52

17 18 18 18 18 18

14 14 14 14 14 14

0

20

40

60

80

100

120

2010 2011 2012 2013 2014 2015

Unilever Orang Tua Lion

GSK P&G Others

39 38 38 38 37 37

36 35 36 36 33 33

17 17 16 17 19 20

0

20

40

60

80

100

120

2010 2011 2012 2013 2014 2015

Wings Unilever Kao

Sinar Antjol P&G Others

56 58 60 63 65 68

21 21 20 19 19 18

0

20

40

60

80

100

120

2010 2011 2012 2013 2014 2015

Unilever FrieslandCampina

Diamond CS Indofood SM

Van Houten Others

22 22 22 22 23 24

17 18 18 19 19 19

15 15 16 16 16 1610 11 11 12 12 13

0

20

40

60

80

100

120

2010 2011 2012 2013 2014 2015

KraftHeinz Unilever Ajinomoto

Indofood SM Rodamas Others


20 September 2016

14

Home and personal care

Skin care

Unilever Indonesia is the leader in Indonesian skin care with a 47% share of the market, according

to Euromonitor, which estimates that the segment contributed 25% of 2015 revenue. Unilever

controls a number of leading brands in facial care (Pond’s) and body care (Citra and Vaseline).

Pond’s main competitor in the facial care segment in Indonesia is Proctor & Gamble’s (PG US,

Not Rated) Olay. Citra and Vaseline compete against Beiersdorf’s (BEI GR, Not Rated) Nivea

and Tempo Scan Pacific’s (TSPC IJ, IDR2,130, Buy, TP: IDR2,900) Marina. Skin care products

with whitening attributes remain popular among Indonesian consumers as fair, porcelain-white

skin is still widely perceived as the standard of beauty. According to Euromonitor data, the

Indonesian skin care market grew at a CAGR of 22% between 2010 and 2015, driven by facial

moisturisers and anti-ageing products which grew at CAGRs of 24% and 26%, respectively. We

think that this trend is driven by an increasing awareness of the importance of moisturising as

part of the consumer beauty regime, supported by rising disposable income.

Unilever Indonesia positions Citra as an Indonesian heritage beauty product which uses natural

ingredients. Examples include Citra Bengkoang White Lotion (whitening lotion which uses

turnips) and Citra Mangir Beauty Lotion (lotion which uses scaly ash, an evergreen rainforest

tree). Vaseline, on the other hand, is positioned as a mass-market skin care solution.

Based on Euromonitor’s data on market share the Indonesian skin care segment has a HHI

score of 0.252, which suggests a high degree of concentration. Furthermore, barriers to entry in

the skin care industry are generally high because of the need for economies of scale

(particularly in the area of distribution throughout Indonesia), brand equity, customer loyalty, and

initial capital requirement.

Indonesian skin care Herfindahl–Hirschman Index (HHI) (2015)

Market share Squared

Unilever Group 47% 0.222 Procter & Gamble 14% 0.021 L’Oréal Groupe 7% 0.005 Kao Corp 4% 0.001 Beiersdorf AG 3% 0.001 Others 25% 0.003 Total 100% 0.252

Source: Euromonitor, HSBC

We think that the skin care segments are driven by two major factors – whitening and anti-ageing.

Most major brands have SKUs that address these needs. Comparing Unilever Indonesia’s Pond’s,

which Euromonitor estimates has an 46.5% market share, with P&G’s Olay, the second most

popular skin care line with 16.1% of the market, Pond’s generally targets a broader, lower-income

market as the nominal prices of the products are cheaper.

Comparing Pond’s (UNVR) and Olay (P&G Indonesia)

Unilever Pricing (IDR) P&G Pricing (IDR)

Facial moisturisers Pond’s White Beauty Naturals Day Cream (50 g)

46,200 Olay White Radiance Advanced Whitening Moisturiser (50 g)

95,300

Facial cleanser Pond’s White Beauty Pearl Cleansing Gel (100 g)

24,100 Olay Regenerist Revitalising Cream Cleanser (100 ml)

47,990

Anti-aging Pond’s Age Miracle Day Cream (25g)

60,490 Olay Total Effects 7 Day Cream SPF15 (50 ml)

139,990

Anti-aging Pond’s Age Miracle Firm & Lift Serum (25ml)

199,490 Olay Regenerist Night Resurfacing Essense (50 ml)

219,990

Source: Euromonitor

Fair, porcelain-white skin is

still widely perceived in

Indonesia as the standard of

beauty

15


20 September 2016

Targeting the lower end of the market does not necessarily mean lower margins. For example,

Pond’s Age Miracle Day Cream, which retails for around IDR60,000 weighs 25 grams, while

Olay Total Effects 7 Day Cream, which costs IDR140,000, weighs 50 grams. In this case, it

seems that Pond’s is sold for a lower nominal price to accommodate the smaller packaging.

Hair care

Unilever Indonesia is the leader in hair care with 39% market share, according to Euromonitor,

which estimates that the segment contributed 12% to 2015 revenue. Unilever controls a number

of brands such as Sunsilk, Clear, Lifebuoy, TRESemme, and Dove across shampoo and

conditioner categories, as well as styling agents Brylcreem and Clear.

Within the shampoo segment, Unilever Indonesia competes against P&G, which owns brands

like Pantene, Rejoice and Head & Shoulders. In the conditioner segment it competes with

P&G’s Pantene and Rejoice, Kino Indonesia (KINO IJ, Not Rated), which owns brands like

Ellips, and L’Oreal Groupe (OR FP, Not Rated), which has Garnier and L’Oreal Paris. According

to Euromonitor, the Indonesian hair care market grew at a CAGR of 13% between 2010 and

2015, driven by conditioners (16% CAGR).

The rising popularity of conditioning products is based on: 1) many Indonesians (and Asians in

general) are genetically predisposed to hair cuticles that are thicker, wider, coarser, and more

densely packed; 2) the hot and humid weather encourages people to wash their hair more than

once a day; 3) many Indonesians have frequent, direct exposure to the sun; 4) many

Indonesians like to straighten or curl their hair.

Based on Euromonitor data on market share, the Indonesian hair care segment has a HHI

score of 0.251, which suggests a high degree of concentration. Barriers to entry are generally

high because of the need for scale, difficulties in distribution, and customer loyalty or stickiness.

TRESemme is an example of how Unilever Indonesia responds to local market trends.

Introduced to Indonesia a few years ago, the product has been gaining popularity thanks to

rising disposable income that allows more Indonesian women to indulge in frequent visits to the

hair salon. Introducing salon-quality hair care products that consumers can use at home opens

up a new product sub-category.

Indonesian hair care Herfindahl Hirschman Index (HHI) (2015)


Unilever Group 39% 0.154 Procter & Gamble 28% 0.077 L’Oréal Groupe 10% 0.009 Mandom Corp 9% 0.008 Kino Sentra Industrindo PT 5% 0.002 Others 10% 0.002 Total 100% 0.251


Oral care

Unilever Indonesia is the market leader in oral care with a 52% share of the market according to

Euromonitor, which estimates that the segment contributed 8% of 2015 revenue. The company

controls brands such Pepsodent, which is known as Signal in other markets. Pepsodent is the

leader in the toothpaste category, in while Orang Tua Group’s Formula leads the toothbrush

category. According to Euromonitor, the Indonesian oral care market grew at a CAGR of 8%

between 2010 and 2015.

Intensive conditioning

products are very popular

TRESemme is an example of

how UNVR responds to local

market trends


20 September 2016

16

The strategy of capturing market share and growing the segment has been successful. It has

resulted in: 1) the launch of variants such as Pepsodent Sensitive Expert Whitening, Pepsodent

Whitening and Pepsodent Herbal; 2) multiple SKUs with different sizes (50g, 65g, 100g); 3)

different price points (Pepsodent Gigi Susu Strawberry Bubble at 50g selling for IDR5,800;

Close-Up Diamond Attraction at 100g selling for IDR26,490; 4) different customer segments

(Pepsodent Gigi Susu Orange Fruity/Pepsodent Gigi Susu Strawberry Bubble for kids with milk

teeth and Pepsodent Sensitive).

Based on Euromonitor’s data on market share, the Indonesian oral care segment has a HHI

score of 0.326, which suggests a high degree of concentration. The main barrier to entry is

strong brand equity, built through years of advertising and marketing.

Rising disposable income and education levels have increased demand for oral care from

people with sensitive teeth. Sensodyne, GlaxoSmithKline (GSK LN, GBp1,624, Buy, TP:

GBp1,970) has filled this need and its market share grew from 3.3% in 2010 to 7.8% in 2015.

Unilever Indonesia’s Pepsodent Sensitif Expert has not gained traction as quickly, resulting in a

loss of market share within the toothpaste category.

Indonesian oral care Hirschman Index (HHI) (2015)


Unilever Group 52% 0.268 Orang Tua Group 18% 0.033 Lion Corp 14% 0.018 GlaxoSmithKline Plc 6% 0.003 Procter & Gamble Co, The 4% 0.002 Others 6% 0.000 Total 100% 0.326


Laundry care

Unilever Indonesia has the second largest market share (33%) according to Euromonitor, which

estimates that the segment contributed 10% to 2015 revenue. Unilever Indonesia controls

brands such as Rinso, Molto (a leading fabric softener) and Surf. According to Euromonitor

data, the Indonesian laundry care market grew at a CAGR of 11% between 2010 and 2015,

driven by automatic detergent (12% CAGR). Rinso is a leader in the automatic detergent

segment with a 54% market share.

We believe Unilever Indonesia’s strength in the detergent market is a result of its strategy to

avoid competing directly in the hand wash cream detergent segment. The overall detergent

category is dominated by hand wash detergents, which make up around 76% of the market. This

is due to the relatively low rate of washing machine ownership (32%). We think that as more

Indonesian households own a washing machine, the market will shift from hand wash detergents

to automatic detergents. Within the hand wash laundry segment, Unilever’s Rinso and Surf

compete against Wings Group’s Daia, So Klin, and Wings. Rinso is the most popular brand.

Rising disposable income

and education levels increase

demand for oral care from

people with sensitive teeth

17


20 September 2016

Indonesian laundry care segment by retail value


The pricing for hand wash detergent is designed to be both affordable and available in small

packages. This caters to the lower end of the market, especially consumers on day wages. For

example, Wings Sabun Cream Ekonomi Putih (Wings White Ekonomi Cream Soap) is available

in 230g packs and retails for IDR2,300. Compare this with machine wash detergent, Rinso Matic

Front Load, which is available in 1kg packs and sells for IDR29,600.

We are optimistic about growth in the higher-priced machine wash detergent segment. The

washing machine ownership rate is 32%, relatively low compared to other Asian countries. The

shift from hand wash to machine wash detergent will be driven by: 1) improved electricity

supply; 2) the rate of urbanization; and 3) disposable income.

Comparing washing machine possession rate

Washing machine possession rate in Indonesia


Based on Euromonitor’s data on market share, the laundry care segment has a HHI score of

0.249, which suggests a moderate level of concentration. We think that laundry care is unlikely

to be significantly affected by private labels, a view supported by conversations with grocery

retailers. The reason cited was that detergents impact how clothes feel, so customers are willing

to pay more in return for an increase in quality.

11%1%

12%

0%

76%

0%Automatic - Powder Detergents

Automatic - Liquid Detergents

Automatic - Concentrated Detergents

Other - Bar Detergents

Other - Hand Wash Detergents

Other - Fine Fabric Detergents

99% 96% 96% 93%88%

67%

35% 32%

9%

0%

20%

40%

60%

80%

100%

120%

SK

orea HK

SG

M's

ia

Chi

na

Tha

i

Php

Indo

Indi

a

Washing machine possession rate

23%25% 26% 27% 28% 29% 30% 31% 31% 32%32%

0%

5%

10%

15%

20%

25%

30%

35%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Indonesia - Washing machine possession rate

Washing machine

penetration in Indonesia

remains low


20 September 2016

18

Indonesian laundry care Herfindahl–Hirschman Index (HHI) (2015)


Wings Corp 37% 0.133 Unilever Group 33% 0.108 Kao Corp 9% 0.008 Sinar Antjol PT 1% 0.000 Procter & Gamble Co, The 1% 0.000 Others 20% 0.000 Total 100% 0.249


Food and refreshments

Ice cream

Unilever Indonesia is the market leader in the ice cream segment with a market share of 68%

according to Euromonitor, which estimated that the segment contributed 9% to 2015 revenue.

The company controls brands such as Wall’s, Paddle Pop, Cornetto, Feast, and Calippo.

Unilever Indonesia competes against privately-owned Royal FrieslandCampina (Campina

brand), privately-owned Diamond Cold Storage (Diamond brand) and Indofood CBP’s (ICBP IJ,

IDR9,475, Hold, TP: IDR8,650) TamTam brand. According to Euromonitor, the Indonesian ice

cream category grew at a CAGR of 17% between 2010 and 2015.

The main driver was “impulse” ice cream, which increased at a CAGR of 19% between 2010

and 2015. This category is dominated by single portion dairy ice cream that is more affordable

and also widely available throughout the traditional trade channels. The absolute price

differential between impulse ice cream and take-home ice cream is significant. A 56g serving of

Wall’s Paddle Pop retails for IDR3,500, while Wall’s take-home ice cream in a 750ml pack costs

IDR39,500. This makes impulse ice cream suitable for the price-sensitive consumer. By

comparison, take-home ice cream is usually sold in supermarkets and hypermarkets, which

target wealthier customers.

Distribution of impulse ice cream Distribution of take-home ice cream


Based on Euromonitor’s data on market share, the ice cream market has a HHI score of 0.498,

which suggests a high level of concentration. Entry barriers are very high because the ice cream

business is capital intensive, has high storage costs, and requires an efficient distribution network.

42%

58%

Modern trade

General trade

94%

6%

Modern trade

General trade

Barriers to entry in the ice

cream category are very high

19


20 September 2016

Indonesian ice cream Herfindahl–Hirschman Index (HHI) *(2015)


Unilever Group 68% 0.458 Royal FrieslandCampina NV 18% 0.032 Diamond Cold Storage PT 8% 0.006 Indofood Sukses Makmur Tbk PT 2% 0.000 Indo Van Houten PT 1% 0.000 Others 3% 0.001 Total 100% 0.498


Sauces, dressings and condiments

Unilever Indonesia is the dominant player in sauces, dressings, and condiments with a 19%

market share according Euromonitor, which estimates that the segment contributed 8% to 2015

revenue. The company controls brands such as Bango and Royco that compete with Kraft

Heinz’s (KHC US, Not Rated) ABC brand table sauce, Ajinomoto’s (2802 JP, Not Rated)

Masako brand, Indofood CBP’s (ICBP IJ, Hold, IDR9,475, TP: IDR8,650) own brand, and

privately-owned Rodamas Group’s Sasa brand.

The market features a large number of products made by companies. Based on Euromonitor’s

data on market share, the sauces, dressings and condiments market has a HHI score of 0.140,

suggesting an unconcentrated market.

Indonesian sauces, dressings, and condiments Herfindahl–Hirschman Index (HHI) (2015)


Kraft Heinz 24% 0.055 Unilever Group 19% 0.037 Ajinomoto 16% 0.024 Indofood Sukses Makmur Tbk PT 13% 0.016 Rodamas Group 6% 0.004 Others 23% 0.004 Total 100% 0.140


Bottom line

To recap, four out of Unilever Indonesia’s six leading categories compete in very concentrated

markets. They are: 1) skin care: the top three players have a 68% market share; 2) hair care:

top three 77%; 3) Oral care: top three 84%; and 4) ice cream: top three 94%.

We estimate that 57% of the company’s revenue is attributable to segments with a high degree

of concentration. The generally high barriers to entry confirm our view that top line growth and

margins remain sustainable and resilient.


20 September 2016

20

Company profile

Unilever Indonesia is one of the country’s leading fast moving consumer goods (FMCGs)

companies. It produces and distributes home and personal care products as well as food and

beverage products. Unilever Indonesia is an important component of the Jakarta Composite

Index (JCI) with a 6.0% weighting as at 30 August 2016. Unilever Indonesia is majority owned

(85%) by Unilever NV/ Plc (UNA NA, Not Rated).

The company has a track record of delivering growth. Over the past decade, revenue growth

has always exceeded the Indonesian inflation rate. Furthermore, in eight of out the past 10

years, EPS has grown at a rate that exceeds GDP growth.

Investment thesis

We initiate coverage on Unilever Indonesia with a Hold rating and a target price of IDR40,400, which

implies 9% downside to the current price. Our investment thesis is based on the following factors:

We expect premiumization to drive revenue growth. We believe this is the right strategy at a

time of robust GDP growth. We forecast 14.5% and 16.6% EPS growth in 2016e and

2017e, respectively, supported by 4.9% and 5.1% GDP growth over the same period.

We expect operational efficiency and the stabilization of the royalty expense rate (at a

maximum of 8% of domestic revenue) to boost margins, while further improvements in

working capital management will support cash flow.

We think that the expected improvements are already in the price. UNVR’s current price

implies 35.2x 2016e EV/EBITDA and 50.4x 2016e PE, which is at a premium relative to its

own trading range. Even at this level, we do not think that the valuation is unreasonable. It

reflects UNVR’s superior ROE (2015: 124%), consistent dividend pay-out, and potential

growth. The stock has historically traded at a premium relative to consensus, reflecting its

cash generating ability and strong growth of 16% CAGR over 2015-18e.

Unilever Indonesia

Earnings to benefit from a broad-based economic recovery,

operational efficiency and the stabilization of the royalty rate

However, we think that these positive factors are already in the price

Initiate with a Hold rating and target price of IDR40,400

21


20 September 2016

UNVR: Delivered positive real growth UNVR: EPS growth generally ahead of GDP

Source: Company data, Indonesian Statistics Board, HSBC Source: Company data, CEIC, World Bank, HSBC

SWOT analysis

Unilever Indonesia

Strengths Weaknesses

Strong product range and established distribution channel. Significant exposure to the Indonesian market with little external exposure to offset domestic weaknesses.

That most of Unilever Indonesia’s products are Halal certified gives a lot of comfort to Indonesian customers, the majority of whom are Muslims.

Exposure to the highly competitive and lower margin sauces, dressings, and condiments segment.

With the exception of the increase in royalty income starting 2013, Unilever Indonesia is generally recognized for having strong corporate governance.

Given the size of Unilever Indonesia, there are very few M&A opportunities that can significantly move the needle.

Opportunities Threats

Unilever Indonesia benefits from favourable demographics. Around 44% of the 256 million population is under the age of 25.

Possible introduction of excise tax on plastic bottles and packaging (the "plastic tax") is potentially negative. The exact framework of the plastic tax is currently unknown but it is likely to start in 2017.

Deep understanding of the consumer psyche presents opportunities to grow local products. For example, Unilever Indonesia recently introduced shampoo targeted at hijab wearers.

Increasing competition, particularly within the food & refreshment space, may be negative for Unilever Indonesia.


Health/food safety issues related to the products that Unilever Indonesia sells may result in lost revenues, loss of reputation, and impairment of brand values.

Source: HSBC

Corporate governance and management

Corporate governance practices at Unilever Indonesia include the Unilever Sustainable Living

Plan, which aims to reduce environmental impact while improving social consequences.

Unilever Indonesia, through its head office, is also committed to sourcing 100% of its palm oil

from sustainable sources. Key executives include:

0%

5%

10%

15%

20%

25%

30%

05 06 07 08 09 10 11 12 13 14 15

Revenue growth Inflation rate

0%

1%

2%

3%

4%

5%

6%

7%

-5%

0%

5%

10%

15%

20%

25%

30%

05 06 07 08 09 10 11 12 13 14 15

EPS Growth (Left HS) GDP growth (Right HS)


20 September 2016

22

Unilever Indonesia: Key executives

Name Title Biography

Maurits Daniel Rudolf Lalisang

President Commissioner He was appointed President Commissioner effective 1 December 2014. Prior to that, he served as President Director of Unilever Indonesia from May 2004 until December 2014. Since joining Unilever Indonesia in 1980, he has held several other prominent posts, including that of Corporate Relations Director, Foods Director, Home Care Director, and Sales Director.

Hemant Bakshi President Director He was appointed as President Director effective 1 December 2014. He joined Hindustan Unilever Limited (HUL) in 1989. Previous senior posts include Executive Director for the Home and Personal Care Business at HUL, and HUL’s Director, Customer Development.

Debora Herawati Sadrach

Refreshment & Marketing Service Director

She was appointed Director in 2002. She joined Unilever Indonesia in 1988 and currently serves as Refreshment & Marketing Services Director. Previous senior posts include Personal Care Director, Home and Personal Care Director, General Manager Marketing Services Department, Marketing Controller Personal Care Division, Marketing Manager Marketing Manager Oral Care & Leader of Oral Care Support Center for SEA/NEA.

Enny Hartati Sampurno Customer Development Director She joined Unilever Indonesia in 1991. She was appointed Director in 2011 and has served as Customer Development Director since January 2016. Previous senior posts include Human Resource Director (until 31 December 2015), General Manager Supply Planning; Commercial Manager, HPC; Commercial Manager, Customer Development; Senior Finance Business Partner; and Manager, Customer Development.

Tevilyan Yudhistira Rusli

Finance Director and Chief Financial Officer

He has served as Finance Director and Chief Financial Officer since 2013. He joined Unilever Indonesia in 2000. Senior posts include Commercial Manager - Food, Financial Planning & Analysis Director of Unilever Vietnam, Global Corporate Audit Director based in Singapore and Regional Finance Director for Asia Africa Food Solutions.

Sancoyo Antarikso Governance and Corporate Affairs Director

He was appointed Director in 2012. He has been with Unilever Indonesia since 1990, and currently serves as Governance and Corporate Affair Director and Corporate Secretary. Previous senior posts include Financial Controller; Group Audit Manager; Commercial Manager, Home Care; Commercial Director, PT Kimberly-Lever Indonesia; and International Project Manager, Ice Cream Take Home Innovation Centre, Unilever Europe, UK. He is currently the Chairman of Indonesian Advertising Council Presidium, Chairman of APPINA (Association of Indonesian Advertising Companies), Secretary General of APJP (Association of Corporate Priority Line) and Secretary General of PERKOSMI (Indonesian Cosmetics Association).

Annemarieke de Haan Personal Care Director She joined Unilever in 1999 and was appointed Director effective 1 January 2015. Currently, she serves as Personal Care Director. Previous senior posts include Vice President, Refreshment and Home and Personal Care Benelux; Vice President, Brand Building Home and Personal Care Benelux; Marketing Director Home and Personal Care Benelux; Marketing Director Hair Care Europe; Marketing Manager, Hair Care Netherlands; Brand Manager Robijn Netherlands.

Willy Saelan Director He joined Unilever Indonesia in 1995 and was appointed Director effective 1 January 2016. Previous senior posts at Unilever are Head of HR for Marketing, and Sales at PT Unilever Indonesia Tbk, (Acting) Head of HR at Unilever Australia and New Zealand, HR Director Marketing & R&D South East Asia, HR Director Leadership Supply & Organization Effectiveness, AACEE (Asia Africa Middle East, Eastern Europe Region), and Indonesia & Philippines Reward Director.

Amparo Cheung Aswin Supply Chain Director She was appointed Director in the role of Supply Chain Director since 1 January 2016. She joined the Unilever group in 1997 and previous senior posts include VP Supply Chain Foods Asia, Africa, Middle East, Turkey and Russia in 2009 to lead innovation and capacity deployment, VP Logistics Excellence Asia, Africa, Middle East, Turkey and Russia in 2011 to form and set up the central logistics excellence function and strategy prior to moving to her role as VP Manufacturing, Foods and Refreshment, SEAA.

Vikas Gupta Director He was appointed as a Director in the role of Vice President Home Care effective 1 September 2016. He joined Unilever in 1998 as a management trainee. Over the past 18 years, he has worked in sales, brand building and brand development across home and personal care categories, in local, regional and global roles. The last 2 roles have been as the VP, Laundry, India and South Asia based in Mumbai and Global VP, “Dirt is Good” initiative (marketing campaign run by Unilever) of OMO/Persil (aka Rinso in Indonesia) based in Singapore. He has developed deep expertise in marketing to consumers in the developing world in Asia, Africa and South America. This includes his particularly deep engagement with the Indonesian consumers and Unilever Indonesia over the years in various roles. He worked across offices in Delhi, Mumbai, London, Singapore, and Sao Paulo before coming to Jakarta.

Hernie Raharja Director for Foods She was appointed Director for Foods effective 1 September 2016. She joined Unilever Indonesia in 1997. Previous senior posts include Global Brand Director Pepsodent since 2014, leading innovations, marketing mix creation, business development and strategy: SEA, SA, Middle East and Africa; Regional Brand Director Oral Care SEA in 2013 leading innovation deployment and category strategy of Pepsodent and Close up; Hair Care Indonesia Marketing Director leading Indonesia Hair Care category business and expansion in 2010-13, and Oral Care Indonesia Marketing Director, leading Brands and business building in 2006-10 – PT Unilever Indonesia Tbk.

Source: Company data

23


20 September 2016

Management strategy

The modern trade channel in Indonesia has evolved over the past decade as a result of

changing shopping habits and the entry of multinational retailers. Despite this, traditional trade

will remain relevant in the future. Across the various product categories in which Unilever

Indonesia has exposure, traditional retailers account for between 19% and 72% of the

distribution. Unilever Indonesia’s dominance of the traditional trade channel is a source of

competitive advantage, given the difficulty in penetrating this channel. As a result of Unilever

Indonesia’s leading market share, the company has become the go-to supplier for modern

retailers, further enhancing its leading position and raising its bargaining power.

Home care: Distribution channel (%) Personal care: Distribution channel (%)


Sauces, dressings, and condiments: Distribution channel (%)

Ice cream: Distribution channel (%)


43 44 46 47 47 48 49 50 52 53 53

54 53 51 50 50 49 48 47 45 43 42

-

20

40

60

80

100

120

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Modern retailer Traditional retailer Others

32 33 33 33 34 34 35 36 36 37 37

24 25 25 25 26 24 24 23 21 20 19

25 24 24 23 22 23 22 22 23 23 23

7 9 9 9 9 10 10 10 10 10 11

12 9 9 10 9 9 10 10 10 10 10

0

20

40

60

80

100

120

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Modern retailer Traditional retailer H&B specialist

Dept stores Others

21 22 23 24 25 26 26 26 27 27 28

79 78 78 77 76 75 74 74 73 73 72

-

20

40

60

80

100

120

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Modern retailer Traditional retailer

55 55 54 54 55 55 55 55 56 56 56

45 45 46 46 45 45 45 45 44 44 44

-

20

40

60

80

100

120

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Modern retailer Traditional retailer


20 September 2016

24

Geared for growth

We think Unilever Indonesia can expand its EBIT margin and enhance cash flow because: 1)

Top line and expense initiatives, such as deploying market intelligence to drive consumption,

improving labour productivity, stretching operational efficiency, SKU re-sizing, zero-based

budgeting, should all drive margin expansion. The absence of a royalty rate adjustment should

also help; 2) the further improvement in working capital management should enhance cash flow.

A product for every price point and consumer

Unilever Indonesia addresses different price points and different consumer demographics. For

example, 120ml Citra Advanced White Minyak Almond & Alpukat, which retails for IDR13,200,

targets low-income consumers, while Pond’s Age Miracle Day Cream (25g, IDR60,500) is for

the middle-class. Meanwhile, Citra Hazeline Lasting Cool Snow (40g, IDR22,000) is suitable for

teenagers from middle-class families and Pond’s Flawless White Brightening Night Cream (50g,

IDR88,090) targets the middle-aged woman with spending power. Unilever Indonesia’s range of

products across the skin care category contributed an estimated 25% to 2015 revenue,

according to Euromonitor.

Product innovation and monitoring of SKU performance

Continuous product innovation allows Unilever Indonesia to launch new product variants or

target new product segments on a regular basis. In line with the initiatives to improve efficiency,

Unilever Indonesia has been reducing the number of SKUs in recent years. According to

management, the number of SKUs fell from 1,200 units in 2013 to 1,000 in 2015. Management

is using a “one-in, one-out” policy and expects the number of SKUs to be stable. This has

resulted in a reduction in inventory turnover days from 56 in 2012 to 47 in 2015.

Strong presence in the higher margin home and personal care segment

Unilever Indonesia derived 70% and 82% of its revenue and EBIT, respectively, from home and

personal care segment in 2015. We see this as a positive because this segment has higher

margins and is less vulnerable to competition from private labels. Our conversations with

supermarket operators confirm our view that personal products and some categories of

household products are relatively immune to the challenge from private label brands. We think

this is because: 1) Personal products have a high degree of innovation, creating a real or

perceived difference in quality; 2) advertising and marketing expenditure build strong brands,

building the perception that customers are paying for a superior product. This is particularly

important for skin care and hair care products; 3) personal products generally last longer than

food products, so customers tend to be less price-sensitive when faced with the choice of

private labels versus brand names.

25


20 September 2016

UNVR’s Home and Personal Care: Revenue contribution by category (2015)

UNVR’s Food and Refreshment: Revenue contribution by category (2015)

Source: Euromonitor, HSBC estimates Source: Euromonitor, HSBC estimates

Gross margin for Unilever Indonesia’s segments

Source: Company data, HSBC

25%

12%10%

8%

14%

0%

5%

10%

15%

20%

25%

30%

Skin care Hair care Laundrycare

Oral care Others

Impact on UNVR's revenue

9%8%

13%

0%

2%

4%

6%

8%

10%

12%

14%

Ice cream Sauces, Dressingand Condiments

Others

Impact on UNVR's revenue

53.6% 51.6% 52.3%55.1% 54.1% 54.0% 54.1% 52.5% 54.6%

38.2%40.6% 40.8% 42.3% 43.1% 42.4% 43.7% 42.1% 43.1%

0%

10%

20%

30%

40%

50%

60%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Home and personal care Food and refreshment


20 September 2016

26

Financial analysis

In this section we discuss the earnings drivers for our three-year forecasts and the income

statement, which is used to form the basis of our valuations.

Revenue growth: Between 2010 and 2015 revenue grew at a CAGR of 13.1%. This was driven

by economic growth, the broadening of product categories and premiumisation. Last year’s

purchasing power was weaker than usual as a result of Indonesia’s economic slowdown and a

weakening IDR (against the USD). We expect revenue to grow at a CAGR of 15.7% between

2015 and 2018e.

Forecasts, valuation,

and risks

We expect revenue to grow at a CAGR of 15.7% between 2015

and 2018e

Improved cost efficiency is potential driver of EBIT margin improvement

Spending on advertising and market research as a percentage of

revenue should continue to decline

27


20 September 2016

Unilever Indonesia: Income statement

(IDRbn) 2010 2011 2012 2013 2014 2015 2016e 2017e 2018e

Revenue breakdown: Home and personal care 14,697 17,191 19,922 22,415 24,634 25,419 28,994 33,220 38,229 Food and refreshment 4,993 6,278 7,381 8,343 9,878 11,065 12,797 14,902 17,465 Total revenue 19,690 23,469 27,303 30,757 34,512 36,484 41,791 48,122 55,694 COGS 9,485 11,463 13,414 14,979 17,412 17,835 20,638 23,765 27,504 Gross profit 10,205 12,006 13,889 15,778 17,099 18,649 21,153 24,357 28,190 Home and personal care 8,091 9,300 10,757 12,137 12,943 13,874 15,737 18,121 20,972 Food and refreshment 2,114 2,706 3,132 3,642 4,156 4,775 5,416 6,236 7,217 Operating expense Marketing and selling expenses 4,523 5,243 5,889 6,628 6,614 7,239 8,180 9,378 10,746 G&A 1,139 1,308 1,545 2,029 2,706 3,466 3,954 4,502 5,207 Total 5,662 6,551 7,434 8,657 9,320 10,705 12,134 13,880 15,952 Operating profit 4,543 5,455 6,455 7,122 7,779 7,944 9,019 10,477 12,237 Other operating income (10) 113 43 43 (17) (4) 11 12 14 EBITDA 4,832 5,929 6,888 7,680 8,137 8,444 9,633 11,209 13,094 Reported EBITDA Depreciation and amortization 300 361 390 516 375 505 603 720 842 Depreciation 180 279 292 457 354 483 582 699 821 Amortization 120 82 98 59 20 21 21 21 21 EBIT 4,532 5,568 6,498 7,164 7,762 7,939 9,030 10,490 12,252 Interest expense (23) (27) (69) (20) (96) (121) (103) (70) (75) Interest income 36 33 38 14 10 11 9 1 18 Net interest 14 7 (31) (6) (86) (110) (94) (70) (57) Profit before tax 4,546 5,575 6,467 7,159 7,677 7,829 8,935 10,420 12,195 Tax expense (1,161) (1,410) (1,628) (1,806) (1,938) (1,978) (2,234) (2,605) (3,049) Minority interest (2) 1 (0) - - - - - - NPAT 3,387 4,163 4,839 5,353 5,739 5,852 6,702 7,815 9,146 EPS 444 546 634 702 752 767 878 1,024 1,199 Revenue growth - Home and personal care 6% 17% 16% 13% 10% 3% 14% 15% 15% Revenue growth - Food and refreshment 15% 26% 18% 13% 18% 12% 16% 16% 17% Revenue growth - consolidated 8% 19% 16% 13% 12% 6% 15% 15% 16% Inflation (source: Statistics Board, Indonesia)

7% 4% 4% 8% 8% 3% 4% 5% 5%

Real growth 1% 15% 12% 4% 4% 2% 11% 11% 11% Gross margin - consolidated 49.6% 51.8% 51.2% 50.9% 51.3% 49.5% 51.1% 50.6% 50.6% Gross margin - Home and personal care 55.1% 54.1% 54.0% 54.1% 52.5% 54.6% Gross margin - Food and refreshment 42.3% 43.1% 42.4% 43.7% 42.1% 43.1% Marketing and selling expenses, % revenue

23.0% 22.3% 21.6% 21.5% 19.2% 19.8% 19.6% 19.5% 19.3%

G&A, % revenue 5.8% 5.6% 5.7% 6.6% 7.8% 9.5% 9.5% 9.4% 9.3% EBIT, % revenue 23.0% 23.7% 23.8% 23.3% 22.5% 21.8% 21.6% 21.8% 22.0% EBITDA, % revenue 24.5% 25.3% 25.2% 25.0% 23.6% 23.1% 23.0% 23.3% 23.5% Interest rate -24% -6% -8% -2% -9% -8% -8% -8% -8% Tax rate -26% -25% -25% -25% -25% -25% -25% -25% -25% Net income, % sales 17.2% 17.7% 17.7% 17.4% 16.6% 16.0% 16.0% 16.2% 16.4% Net income growth 11% 23% 16% 11% 7% 2% 15% 17% 17% EPS growth 11% 23% 16% 11% 7% 2% 15% 17% 17% Dupont Analysis Profit margin 17% 18% 18% 17% 17% 16% 16% 16% 16% Asset turnover 2.43 2.45 2.43 2.43 2.50 2.43 2.58 2.70 2.72 Equity multiplier 2.09 2.48 2.94 3.08 3.12 3.18 3.45 4.00 4.81 ROE 87% 108% 127% 130% 130% 124% 143% 175% 215%



20 September 2016

28

Revenue growth – volume vs. ASP: Our estimates are driven by expectations that most of the

revenue growth will come from volume growth. We think that any increase in ASP will be the

result of sales mix improvement, driven by new products and premiumisation. This is the

preferred way of raising prices for many Indonesian companies. Outright price increases, while

possible, are unlikely to be significant. According to management, Unilever Indonesia increased

its prices by an aggregate 1.8% in 1Q16 and did not undertake any price increase in 2Q16.

Over the past decade, under a normal moderate inflationary environment, Unilever’s price

increases have generally been below the inflation level, according to management.

Unilever Indonesia: Revenue growth

2010 2011 2012 2013 2014 2015 2016e 2017e 2018e CAGR CAGR

Home and personal care 2010-15 2015-20e Detergents 3% 5% 8% 10% 6% 13% 8% 8% 8% 8% 8% Skin care 23% 25% 28% 27% 24% 23% 23% 23% 23% 25% 23% Hair care 11% 11% 14% 13% 12% 16% 13% 13% 13% 13% 13% Bath & shower 8% 6% 11% 10% 10% 10% 9% 9% 9% 9% 9% Oral care 3% 3% 5% 8% 9% 9% 7% 7% 7% 7% 7% Others -10% 41% 19% 2% -6% -58% 0% 0% 0% -8% 0% Food and refreshment Ice cream 9% 19% 22% 25% 23% 22% 26% 26% 26% 22% 26% Sauces, Dressing and Condiments 10% 16% 15% 15% 16% 15% 16% 16% 16% 15% 16% Tea 17% 13% 16% 16% 17% 8% 18% 18% 18% 14% 18% Juices 21% 27% 20% 18% 21% 18% 22% 22% 22% 21% 22% Others 24% 48% 17% 0% 16% 0% 0% 0% 0% 15% 0%


Gross margin: We expect gross margin to decline 0.5% in 2016e versus 2015 as a result of: 1)

the relatively low price of raw materials in 2015, in particular crude palm oil; 2) increases in raw

material prices, particularly for coconut sugar, which was not hedged in 2016.

Unilever Indonesia: Gross margin

Gross margin 2010 2011 2012 2013 2014 2015 2016e 2017e 2018e

Home and personal care 55.1% 54.1% 54.0% 54.1% 52.5% 54.6% 54.3% 54.5% 54.9% Food and refreshment 42.3% 43.1% 42.4% 43.7% 42.1% 43.1% 42.3% 41.8% 41.3% Total gross margin 51.8% 51.2% 50.9% 51.3% 49.5% 51.1% 50.6% 50.6% 50.6%


Unilever Indonesia: Gross margin


51.8%

51.2%50.9%

51.3%

49.5%

51.1%

50.6% 50.6% 50.6%

48%

49%

49%

50%

50%

51%

51%

52%

52%

2010 2011 2012 2013 2014 2015 2016e 2017e 2018e

29


20 September 2016

Impact of changes in CPO prices on COGS

Source: Bloomberg, HSBC

Selling expense, % revenue: Selling expense, as a percentage of revenue, declined from 23%

in 2010 to 19.8% in 2015. This is mainly because spending on advertising and market research

as a percentage of revenue fell from 10.1% in 2010 to 8.1% in 2015. We believe this is part of

the company’s cost-cutting drive, which includes efforts to reduce agency fees, production

costs, and the price of ads.

As Unilever Indonesia is one of the top ad spenders in the country, we believe this gives it the

upper hand in negotiating favourable rates. As a result, we expect advertising spending to

continue to fall as a percentage of revenue (even though it is still growing in nominal terms),

from 8.1% in 2015 to 7.1% in 2018e.

Selling expenses, % revenue


0

200

400

600

800

1000

1200

1400

46.5%

47.0%

47.5%

48.0%

48.5%

49.0%

49.5%

50.0%

50.5%

51.0%

51.5%

Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15

COGS, % revenue - Right HS CPO (USD per MT) - Left HS

10.1% 11.1% 10.8% 10.1% 8.5% 8.1% 7.7% 7.4% 7.1%

4.0%4.0% 4.1% 4.3%

4.3% 4.5% 4.6% 4.7% 4.8%

4.3% 3.2% 2.6% 3.1%3.0% 3.5% 3.6% 3.7% 3.7%

0%

5%

10%

15%

20%

25%

2010 2011 2012 2013 2014 2015 2016e 2017e 2018eAdvert and market research Distribution Promotion


20 September 2016

30

A comparison of ad spend across leading Indonesian corporates (2015)


General and administrative expense, % revenue: Between 2010 and 2015, general and

administrative expense increased as a percentage of revenue from 5.8% to 9.5%. The main

driver was the rise in service fees and royalties, which started to increase in 2013. The royalty

fee is capped at a maximum of 8% of domestic revenue from 2015. G&A expenses, % revenue


Unilever Indonesia: Service fees & royalties, % domestic revenue

2010 2011 2012 2013 2014 2015 2016e 2017e 2018e

Service fees and royalties, % revenue 3.3% 3.2% 3.4% 4.5% 6.0% 7.4% 7.5% 7.5% 7.5% Made up of: Trademark license agreement 1.0% 2.0% 3.0% 3.0% 3.0% 3.0% Technology license agreement 1.0% 1.5% 2.0% 2.0% 2.0% 2.0% Central service agreement (CSA) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Potential total impact 5.0% 6.5% 8.0% 8.0% 8.0% 8.0%


EBIT margin, % revenue and EPS growth

We forecast EBIT margin to expand to 22% by 2018e as a result of top-line growth and cost

efficiency initiatives being undertaken. These initiatives include the deploying of market

intelligence to drive consumption, improving labour productivity, stretching operational

efficiency, SKU re-sizing, and zero-based budgeting. As discussed earlier, the EBIT margin in

2015 is not comparable to that of 2014, 2013, and 2012 due to the adjustment of royalty rates.

As a result, we forecast EPS to grow between 14.5% and 17.0% over 2016-18e.

2,942 2,877

1,825 1,529

1,265

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Unilever Indonesia HM Sampoerna Gudang Garam Mayora Indofood CBP

Unilever Indonesia HM Sampoerna Gudang Garam Mayora Indofood CBP

3.3% 3.2% 3.4%4.5%

5.6%7.0% 7.1% 7.1% 7.1%0.6% 0.5% 0.4%

0.4%

0.6%

0.6% 0.5% 0.4% 0.4%

1.3%1.5% 1.4%

1.5%

1.5%

1.8% 1.8% 1.8% 1.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2010 2011 2012 2013 2014 2015 2016e 2017e 2018eService fees and royalties Remuneration Amortization Others

31


20 September 2016

Unilever Indonesia: EBIT margin (%)


Unilever Indonesia: Net income and EPS growth (%)


Balance sheet

Cash conversion cycle: Unilever Indonesia operated a negative cash conversion cycle of -20

days in 2015. The main driver is UNIVR’s ability to tap into working capital financing options. For

example, based on the 2015 annual report the company has an agreement to sell PT Bank BNP

Paribas Indonesia trade receivables that meet certain criteria. Inventory turnover has also been

rising as the company cut the number of SKUs from 1,200 in 2013 to 1,000 in 2015. We think

the negative cash conversion cycle is sustainable and could even be shortened. Many Unilever

affiliates around the world operate a shorter working capital cycle.

Gearing: Unilever Indonesia operates a minimal level of debt financing. We see no need for

aggressive capex and expect its gearing level to remain low.

23.0%

23.7% 23.8%

23.3%

22.5%

21.8%21.6%

21.8%22.0%

20.5%

21.0%

21.5%

22.0%

22.5%

23.0%

23.5%

24.0%

2010 2011 2012 2013 2014 2015 2016e 2017e 2018e

EBIT margin (%)

3,387 4,163

4,839 5,353

5,739 5,852 6,702

7,815

9,146

11%

23%

16%

11%

7%

2%

15%17% 17%

0%

5%

10%

15%

20%

25%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2010 2011 2012 2013 2014 2015 2016e 2017e 2018e

Net income (IDRbn) EPS growth (%)


20 September 2016

32

Unilever Indonesia: Balance sheet

(IDRbn) 2010 2011 2012 2013 2014 2015 2016e 2017e 2018e

CA Cash and cash equivalents 318 336 230 261 859 628 50 1,272 2,914 Inventories 1,574 1,813 2,062 2,084 2,326 2,298 2,546 2,801 3,091 Account receivable 1,568 2,076 2,426 3,270 2,896 3,245 3,373 3,489 3,580 Advances, prepaid taxes, others 289 221 318 248 257 453 448 515 596 Total 3,748 4,446 5,036 5,863 6,337 6,623 6,416 8,077 10,181 NCA PP&E 4,149 5,314 6,283 6,874 7,348 8,321 9,620 10,317 11,111 Goodwill 62 62 62 62 62 62 62 62 62 Intangible asset 646 584 533 480 452 431 412 394 376 Others 96 76 70 69 81 293 154 178 205 Total 4,953 6,036 6,949 7,485 7,944 9,107 10,248 10,950 11,754 Total Assets 8,701 10,482 11,985 13,348 14,281 15,730 16,664 19,027 21,935 CL Bank borrowings 190 699 1,040 977 1,250 1,700 831 888 951 Account payable 1,817 2,434 2,764 3,765 4,632 4,842 6,282 8,015 10,180 Accruals 1,461 2,209 2,239 1,841 1,141 1,120 1,282 1,477 1,709 Employee benefits 27 37 33 39 63 72 83 97 Other payables 935 1,132 1,455 1,804 1,803 2,403 2,752 3,169 3,668 Total 4,403 6,502 7,536 8,419 8,865 10,128 11,219 13,632 16,604 NCL Deferred tax liabilities 50 71 127 181 246 372 426 491 568 Long-term employee benefits 200 229 354 493 571 403 462 532 615 Total 249 300 481 674 817 775 888 1,022 1,183 Total Liabilities 4,652 6,801 8,017 9,094 9,682 10,903 12,107 14,654 17,787 Net Assets 4,049 3,681 3,968 4,255 4,599 4,827 4,557 4,374 4,148 Equity 4,045 3,677 3,968 4,255 4,599 4,827 4,557 4,374 4,148 Minorities 3 4 - - - - Total 4,049 3,681 3,968 4,255 4,599 4,827 4,557 4,374 4,148 Shares outstanding (M of shares) 7,630 7,630 7,630 7,630 7,630 7,630 7,630 7,630 7,630 Turnover PPE/ Sales 0.21 0.23 0.23 0.22 0.21 0.23 0.23 0.21 0.20 Intangibles/Sales 0.04 0.03 0.02 0.02 0.01 0.01 0.01 0.01 0.01 Inventory/COGS 0.17 0.16 0.15 0.14 0.13 0.13 0.12 0.12 0.11 Inventory days on COGS 61 58 56 51 49 47 45 43 41 Trade receivables/Sales 0.08 0.09 0.09 0.11 0.08 0.09 0.08 0.07 0.06 Trade receivable days on sales 29 32 32 39 31 32 29 26 23 Trade payables/COGS 0.19 0.21 0.21 0.25 0.27 0.27 0.30 0.34 0.37 Trade payable days on COGS 70 78 75 92 97 99 111 123 135 Cash conversion cycle 20 12 13 (2) (18) (20) (37) (54) (71) Liquidity Current ratio 0.85 0.68 0.67 0.70 0.71 0.65 0.57 0.59 0.61 Quick ratio 0.49 0.41 0.39 0.45 0.45 0.43 0.34 0.39 0.43 Gearing Total debt 190 699 1,040 977 1,250 1,700 831 888 951 Net debt (128) 363 810 716 391 1,072 781 (385) (1,963) Total debt/Equity 0.05 0.19 0.26 0.23 0.27 0.35 0.18 0.20 0.23 Net debt/Equity (0.03) 0.10 0.20 0.17 0.08 0.22 0.17 (0.09) (0.47) Equity/Total Assets 0.47 0.35 0.33 0.32 0.32 0.31 0.27 0.23 0.19


33


20 September 2016

Unilever Indonesia: Cash conversion cycle (days)


A comparison of cash conversion cycle across Unilever affiliates (2015)


Cash flow statement

Capital expenditure: Capex ranged between 1.8% and 6.5% of revenue between 2010 and

2015. We think it will remain within this range. Management guides capex spending to be

around IDR2trn for FY16.

Dividend: Unilever Indonesia has a history of paying good dividends, with the pay-out ratio

ranging between 80% and 108% over the past decade, or an average of 91% per year. We

forecast this to rise to 95% over the next three years.

61 58 56 51 49 47 45 43 41

29 32 32 39 31 32 29 26 23

(70) (78) (75) (92) (97) (99) (111) (123) (135)

(150)

(100)

(50)

-

50

100

150

2010 2011 2012 2013 2014 2015 2016e 2017e 2018eInventory turnover Accounts receivable turnover Accounts payable turnover

-173

-98 -94-79

-48

-20

52

-200

-150

-100

-50

0

50

100

UnileverPakistan

UnileverPakistan Foods

Unilever Nigeria Unilever NV HindustanUnilever

UnileverIndonesia

UnileverCaribbean

Cash conversion cycle (days)


20 September 2016

34

Unilever Indonesia: Cash flow statement

(IDRbn) 2010 2011 2012 2013 2014 2015 2016e 2017e 2018e

Cash receipts from customers 21,264 25,200 29,560 32,816 37,489 39,598 41,662 48,006 55,603 Cash payments to suppliers/employees (15,753) (17,677) (21,971) (23,452) (27,205) (28,803) (30,796) (35,346) (40,615) Receipts from finance income 37 27 30 12 9 8 9 1 18 Payments of long-term employee benefits (27) (20) (23) (33) (32) (39) Payments of service fees and royalty (643) (741) (868) (1,274) (1,836) (2,430) Payments of corporate income tax (1,233) (1,304) (1,485) (1,806) (1,859) (1,911) (2,234) (2,605) (3,049) Payment of tax underpayment - - - Income tax, net - - 17 Payments of finance costs (30) (27) (69) (20) (96) (121) (103) (70) (75) Loans, net 4 - - (8) (4) Net cash from operating activities 3,619 5,458 5,192 6,242 6,463 6,299 8,538 9,986 11,882 Cash flow from investing activities Sale of business - - 31 Acquisition (sale) of intangible of assets (74) 84 (33) (35) Acquisition (sale) of FA (1,239) (1,601) (1,112) (1,150) (1,126) (1,472) (1,881) (1,396) (1,615) Allocation of proceeds from the sale of trademarks by the parent entity

57 8

Proceeds from the sale of fixed assets 2 83 17 4 119 36 Others - 3 (4) (5) Net cash used in investing activities (1,310) (1,430) (1,102) (1,129) (1,007) (1,429) (1,881) (1,396) (1,615) Cash flow from financing activities Proceeds (repayment) loan 190 509 341 (63) 273 450 (869) 57 63 Dividend paid (3,037) (4,520) (4,538) (5,059) (5,127) (5,592) (6,366) (7,424) (8,689) Others - - - Net cash used in financing activities (2,847) (4,011) (4,197) (5,122) (4,854) (5,142) (7,236) (7,367) (8,625) Foreign exchange effects (2) 0 1 41 (4) 42 Net change in cash (538) 18 (107) (9) 602 (273) (578) 1,223 1,641 Beginning balance 858 318 336 230 261 859 628 50 1,272 Ending balance 318 336 230 261 859 628 50 1,272 2,914


Unilever Indonesia: Capital expenditure


1,274 1,420

1,218

1,031

618

1,345

1,881

1,396

1,615

0%

1%

2%

3%

4%

5%

6%

7%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2010 2011 2012 2013 2014 2015 2016e 2017e 2018e

Capex (B of IDR) Change in gross fixed assets (B of IDR) Capex, % revenue

35


20 September 2016

Unilever Indonesia: Dividends


Consensus vs. HSBC forecasts

Our revenue and earnings estimates are in line with Thomson Reuters consensus expectations

for 2016, but we are ahead in 2017 and 2018. Our more positive outlook is based on: 1) our

higher revenue forecast, particularly our growth estimates for the home and personal care

segment and 2) our forecast for declining advertising and market research expenses, as a

percentage of revenue. Our Hold rating is in line with consensus, given that 47% of covering

analysts have a Hold rating on Unilever Indonesia.

HSBC vs. Consensus

(IDRbn, except per share data) _________ 2016e _________ _______ 2017e _________ ________ 2018e _________ HSBC Consensus % diff HSBC Consensus % diff HSBC Consensus % diff

Revenue 41,821 40,475 3% 48,167 45,084 7% 55,697 51,137 9% EBIT 9,037 8,740 3% 10,500 9,809 7% 12,252 11,091 10% Net profit 6,707 6,449 4% 7,823 7,329 7% 9,146 8,314 10% Target price/ share 40,400 41,200 -2%

Source: Thomson Reuters Datastream, HSBC estimates

Unilever Indonesia: Range of sell-side ratings

Count Percentage

Buy 3 20% Hold 7 47% Reduce 5 33% Total 15 100%

Source: Thomson Reuters Datastream, HSBC

Valuation

We value Unilever Indonesia based on a discounted cash flow (DCF) model which assumes the

following: FCF CAGR 2015-30e of 19.5%, cost of equity of 9.5%, cost of debt of 5.3%, tax rate

of 25%, WACC of 9.5%, and terminal growth rate of 5.0%. We think DCF is an appropriate

model to value Unilever Indonesia because DCF allows us to model growth expectations and

changes in working capital and capex expectations.

398

592 595 663 672

733 834

973

1,139

90%

108%

94% 95%89%

96% 95%95%

95%

0%

20%

40%

60%

80%

100%

120%

0

200

400

600

800

1,000

1,200

2010 2011 2012 2013 2014 2015 2016e 2017e 2018e

Dividend per share (IDR) Dividend payout ratio


20 September 2016

36

Our target price of IDR40,400 implies 46.0x 2016e PE and 31.9x 2016e EV/EBITDA. Given our

target price implies 9% downside to the current price, we initiate coverage on the stock with a Hold

rating because we think that a likely rise in purchasing power, as a result of an improving

economy, better operational efficiency, and working capital management, are already in the price.

DCF assumptions

DCF assumptions

FCF CAGR 2015-30e 19.5% Cost of equity 9.5% Cost of debt 5.3% Tax rate 25% WACC 9.5% Terminal growth rate 5.0%

Source: HSBC estimates

Our cost of equity is based on HSBC global strategist’s cost of equity for Indonesia in 2016. The

9.5% cost of equity reflects the volatility of investing in Indonesian equity market versus the US

equity market. We think that a terminal growth rate of 5% is appropriate given that this is in line

with the GDP growth rate of Indonesia, and that the Indonesian FMCG industry is still growing,

with new products continuously being rolled out.

As DCF is sensitive to the various assumptions that are built into the model, we have run an

analysis that reflects the sensitivity of our target price to different cost of equity and terminal

growth rate assumptions.

Unilever Indonesia: Sensitivity analysis

___________________________ Terminal growth rate ____________________________ (IDR/share) 3.0% 4.0% 5.0% 6.0% 7.0%

7.5% 55,737 63,927 78,699 113,311 289,440 8.5% 43,199 47,211 53,524 64,915 91,638 Cost of equity 9.5% 35,159 37,302 40,400 45,277 54,083 10.5% 29,646 30,861 32,519 34,918 38,695 11.5% 25,661 26,381 27,323 28,609 30,471


Also, as valuation is particularly sensitive to the changes in EBIT margin, we have run an

analysis that reflects the sensitivity of our target price to different weighted average cost of

capital and EBIT margin assumptions.

Unilever Indonesia: Sensitivity analysis

_______________________________ EBIT 2018 ________________________________ (IDR/share) 20.0% 21.0% 22.0% 23.0% 24.0%

7.5% 48,883 51,103 53,323 55,543 57,762 8.5% 41,262 43,119 44,976 46,833 48,690 WACC 9.5% 37,083 38,742 40,400 42,058 43,717 10.5% 34,333 35,860 37,388 38,915 40,442 11.5% 32,467 33,906 35,345 36,783 38,222


On multiples-based valuations, such as forward PE and trailing 12-month EV/EBITDA, Unilever

Indonesia’s stock price is trading at the high end of its historical trading range. Relative to the

Jakarta Stock Exchange Composite Index (JCI), UNVR has historically traded at a premium, on

PE and EV/EBITDA basis. Current levels of UNVR’s premium are at an all-time high relative to

the JCI, perhaps a reflection of UNVR’s growth and superior ROE level.

37


20 September 2016

UNVR: Fwd PE chart UNVR: EV/EBITDA trailing 12M chart

Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC

UNVR’s PE and JCI’s PE UNVR’s EV/EBITDA and JCI’s EV/EBITDA

Source: Bloomberg, HSBC Source: Bloomberg, HSBC

UNVR: While EPS growth has slowed… ...ROE has kept increasing

Source: Company data Source: Company data, HSBC

10

20

30

40

50

60

70


+1s.d. = 47x

-1s.d. = 28x

Ave = 37x

+2s.d. = 56x

-2s.d. = 19x

10

15

20

25

30

35

40


+1s.d. = 31x

+2s.d. = 36x

Ave = 26x

-1s.d. = 21x

-2s.d. = 16x

0

10

20

30

40

50

60

0%

20%

40%

60%

80%

100%

120%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Cur

rPremium (LHS) UNVR P/E (RHS)

JCI P/E (RHS)

0

10

20

30

40

50%

100%

150%

200%

250%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Cur

r

Premium (LHS)

UNVR EV/EBITDA (RHS)

JCI EV/EBITDA (RHS)

-2%

20%

14%

23%

26%

11%

23%

16%

11%

7%

2%

-5%

0%

5%

10%

15%

20%

25%

30%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

EPS Growth

65%75% 77%

83%89% 87%

108%

127%130%130%

124%

0%

20%

40%

60%

80%

100%

120%

140%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ROE


20 September 2016

38

Risks

Our valuations and ratings for Unilever Indonesia are subject to the following industry and

company-specific upside and downside risks.

Industry-level upside risks

Stronger-than-expected GDP growth may be positive consumption and purchasing power.

Consolidation or mergers may ease the competitive environment.

Because Unilever Indonesia is a significant component of the Jakarta Composite Index

(JCI), improving sentiment towards Indonesia may result in inflows into the stock.

Company-level upside risks

If Unilever Indonesia’s top line growth and cost saving initiatives are more successful than

we expect, Unilever Indonesia could grow its revenue and net income faster than expected.


If Unilever Indonesia is able to rapidly penetrate and dominate new categories, revenue and

earnings growth may be faster than we expect.

Industry-level downside risks

Implementation of excise tax that penalizes producers using plastic bottles and packing

may be negative for companies such as Unilever Indonesia.

Increasing competition, particularly in the food and refreshment category, may be negative

for Unilever Indonesia.

Weaker-than-expected GDP growth may be negative for consumption.

Company-level downside risks

Under-investment in advertising and brand building may be negative for the long-term

growth of Unilever Indonesia.

Unilever’s failure to consistently innovate and launch new products/expand existing

categories may be negative for the company.

Acquisitions that are not earnings accretive may negatively impact Unilever.

Health/food safety issues related to the products that Unilever Indonesia sells may result in

lost revenues, loss of reputation, and impairment of brand values.

39

EQ

UIT

IES

P

ER

SO

NA

L P

RO

DU

CT

S

20 S

epte

mber 2

01

6

Unilever Indonesia: DCF model

(IDRbn) 2015 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e

Revenue 36,484 41,791 48,122 55,694 64,772 75,678 88,810 104,654 123,805 146,995 175,122 209,293 250,865 301,512 363,294 438,749 % change 6% 15% 15% 16% 16% 17% 17% 18% 18% 19% 19% 20% 20% 20% 20% 21% Gross profit 18,649 21,153 24,357 28,190 32,784 38,305 44,952 52,971 62,664 74,402 88,639 105,934 126,976 152,612 183,883 222,075 Gross margin 51.1% 50.6% 50.6% 50.6% 50.6% 50.6% 50.6% 50.6% 50.6% 50.6% 50.6% 50.6% 50.6% 50.6% 50.6% 50.6% EBIT 7,939 9,030 10,490 12,252 14,262 16,677 19,587 23,098 27,344 32,486 38,725 46,305 55,529 66,768 80,480 97,228 EBIT margin 21.8% 21.6% 21.8% 22.0% 22.0% 22.0% 22.1% 22.1% 22.1% 22.1% 22.1% 22.1% 22.1% 22.1% 22.2% 22.2% Unlevered net Income 5,934 6,772 7,867 9,189 10,696 12,508 14,690 17,324 20,508 24,365 29,044 34,729 41,647 50,076 60,360 72,921 Plus: Depreciation and amortization 505 603 720 842 939 1,053 1,185 1,341 1,526 1,744 2,004 2,314 2,685 3,130 3,666 4,313 Less: Capital expenditure (1,472) (1,881) (1,396) (1,615) (1,878) (1,878) (2,575) (3,035) (3,590) (4,263) (5,079) (6,069) (7,275) (8,744) (10,536) (12,724) Less: (Increases)/ decline in net working capital 272 1,581 1,905 2,434 1,351 1,623 1,955 2,358 2,850 3,452 4,187 5,086 6,188 7,538 9,196 11,231 Free cash flow 5,238 7,075 9,097 10,850 11,108 13,306 15,255 17,988 21,294 25,297 30,155 36,059 43,244 52,000 62,686 75,741 PV of free cash flow 6,462 7,587 8,264 7,727 8,452 8,849 9,530 10,302 11,178 12,168 13,288 14,553 15,982 17,594 19,414 Terminal value 454,715 PV of terminal value 116,554 Enterprise Value 287,905 Net debt (1,122) Equity value 289,027 Adjustment for time value 1.07 Adjusted equity 308,252 No of shares (m) 7630 Value per share (IDR) 40,400 Target price (IDR) 40,400



20 September 2016

40

Disclosure appendix

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the

opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their

personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific

recommendation(s) or views contained in this research report: Selviana Aripin and Karen Choi

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's

existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons

when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different

securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and

therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should

carefully read the entire research report and not infer its contents from the rating because research reports contain more

complete information concerning the analysts' views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis:

The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12

months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will

be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a

Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is

between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more

than 20% below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage,

change in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

Prior to this date, HSBC’s rating structure was applied on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,

regional market established by our strategy team. The target price for a stock represented the value the analyst expected the

stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as

Overweight, the potential return, which equals the percentage difference between the current share price and the target price,

including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the

succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight,

the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or

10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12

months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However,

stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the

past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,

however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 19 September 2016, the distribution of all independent ratings published by HSBC is as follows:

Buy 43% (25% of these provided with Investment Banking Services)

Hold 41% (25% of these provided with Investment Banking Services)

Sell 16% (19% of these provided with Investment Banking Services)

41


20 September 2016

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to

current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current

model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis

for financial analysis” above.

For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at

http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.

Share price and rating changes for long-term investment opportunities

Unilever Indonesia (UNVR.JK) share price performance

IDR Vs HSBC rating history

Rating & target price history

From To Date Analyst

Neutral N/A 18 Mar 2013

Target price Value Date Analyst

Price 1 N/A 18 Mar 2013

Source: HSBC

Source: HSBC

To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please

see the disclosure page available at www.research.hsbc.com/A/Disclosures.

HSBC & Analyst disclosures

Disclosure checklist

Company Ticker Recent price Price date Disclosure

UNILEVER INDONESIA UNVR.JK 44300.00 16-Sep-2016 7

Source: HSBC

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.

2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3

months.

3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company.

4 As of 31 August 2016 HSBC beneficially owned 1% or more of a class of common equity securities of this company.

5 As of 31 July 2016, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of investment banking services.


and/or paid compensation to HSBC in respect of non-investment banking securities-related services.


and/or paid compensation to HSBC in respect of non-securities services.

8 A covering analyst/s has received compensation from this company in the past 12 months.

9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below.

10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below.

11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company

10100

15100

20100

25100

30100

35100

40100

45100

Sep

-11

Sep

-12

Sep

-13

Sep

-14

Sep

-15

Sep

-16


20 September 2016

42

12 As of 13 September 2016, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued

share capital, calculated according to the SSR methodology.

13 As of 13 September 2016, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued

share capital, calculated according to the SSR methodology.

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt

(including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment

banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.

This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as

such, this report should not be construed as an inducement to transact in any sanctioned securities.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that

company available at www.hsbcnet.com/research. In order to find out more about the proprietary models used to produce this

report, please contact the authoring analyst.

Additional disclosures

1 This report is dated as at 20 September 2016.

2 All market data included in this report are dated as at close 16 September 2016, unless a different date and/or a specific

time of day is indicated in the report.

3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research

operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier

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4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest

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and/or (iii) measuring the performance of a financial instrument.

Production & distribution disclosures

1 This report was produced and signed off by the author on 19 Sep 2016 10:02 GMT.

2 In order to see when this report was first disseminated please see the disclosure page available at

https://www.research.hsbc.com/R/34/dWC7SXS

43


20 September 2016

Disclaimer

Legal entities as at 1 July 2016

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[528241]

Europe

Consumer Brands & Retail

Global Head of Consumer Brands & Retail Research Antoine Belge +33 1 56 52 43 47 [email protected]

Analyst Anne-Laure Bismuth +44 207 991 6587 [email protected]

Head of Consumer Retail, Europe David McCarthy +44 207 992 1326 [email protected]

Analyst Andrew Porteous +44 20 7992 4647 [email protected]

Analyst Paul Rossington +44 20 7991 6734 [email protected]

Analyst Jérôme Samuel +33 1 56 52 44 23 [email protected]

Analyst Emmanuelle Vigneron +33 1 56 52 43 19 [email protected]

Analyst Graham Jones +44 20 7992 5347 [email protected]

Analyst Damian McNeela +44 20 7992 4223 [email protected]

Analyst - Beverages Anthony Bucalo +44 20 7991 9815 [email protected]

Analyst Joe Thomas +44 20 7992 3618 [email protected]

CEEMEA


Analyst Bulent Yurdagul +90 212 3764612 [email protected]

Analyst Jeanine Womersley +27 21 6741082 [email protected]

Analyst Ankur P Agarwal +971 4 423 6558 [email protected]

Asia


Head of Consumer Brands and Retail Equity Research, Asia-Pacific Karen Choi +822 3706 8781 [email protected]

Analyst Christopher Leung +852 2996 6531 [email protected]

Analyst Lina Yan +852 2822 4344 [email protected]

Scott Chan +852 3941 7005 [email protected]

Analyst Permada (Mada) Darmono +65 6658 0613 [email protected]

Analyst Selviana Aripin +65 6658 0610 [email protected]

Analyst Amit Sachdeva +91 22 2268 1240 [email protected]

Analyst Kuldeep Gangwar +91 22 3396 0686 [email protected]

Analyst Chloe Wu +8862 6631 2866 [email protected]

Associate Eric Chen +8862 6631 2870 [email protected]

Associate Jenny Chae +822 3706 8774 [email protected]

Gaming

Head of Gaming Research, Asia-Pacific Charlene Liu +65 6658 0615 [email protected]

Analyst Scott Chan +852 3941 7005 [email protected]

North & Latin America

Consumer & Retail

Global Head of Consumer Brands & Retail Research Erwan Rambourg +1 212 525 8393 [email protected]

Analyst Rafael Shin +1 212 525 6707 [email protected]

Analyst Ana C Hernandez +52 55 5721 2745 [email protected]

Analyst Henry Nasser +52 55 8551 2422 [email protected]

Food & Beverage

Global Head of Beverages Research Carlos Laboy +1 212 525 6972 [email protected]

Analyst Andrew Muench +1 212 525 4866 [email protected]

Agricultural Products

Analyst Alexandre Falcao +1 212 525 4449 [email protected]

Analyst Ravi Jain +1 212 525 3442 [email protected]

Analyst Augusto A Ensiki +1 212 525 4915 [email protected]

Specialist Sales

David Harrington +44 20 7991 5389 [email protected]

Jean Gael Tabet +44 20 7991 5342 [email protected]

Global Consumer Brands & Retail Research Team

Documents

pg.jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/9/20/f0266b64-cb0c-41ed-bd9c...Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications