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Wednesday, December 7, 2011

Ace Hardware Indonesia Tbk. - Biggest Bite in a Big Cake

by Trimegah Securities

Promising Leading Indicator.

ACES continues to flourish on the back of robust property and auto sales this year. Lower mortgage rate from big banks and increased household income pushed marketing sales of property companies to exceed year opening targets. We believe this serves as a positive key indicator for ACES next year performance, as there is a 12 to 15 month time lag between marketing sales transaction and occupancy of property by owners. We expect a rosy outlook in property sales, supported by BI’s move for a 75bps cut in benchmark rate over the last three months. Furthermore, new car sales totaling 850,000 units this year similarly benefits ACES’ auto department, which generated 9.1% of total sales in 9M11.

Concerns over New Competitors.

PONG’s Do It Best is the first serious competitor for ACES in the home improvement retail business. We expect a continuous stream of bad news over the medium term as our sources confirmed rumors that IKEA will be establishing its first store in Indonesia, to be located in Alam Sutera.

We understand that IKEA is a closer competitor to Informa, ACES’ sister company. However, since ACES and Informa are usually placed under the same roof or in neighboring locations and IKEA also carries hardware in its product portfolio, we expect IKEA to capture a portion of ACES potential market.

Margin Contraction Eased with Robust Sales.

We expect ACES’ GPM to slow down next year after rising 300bps on a YoY basis during 9M11. The company doubled its A&P expenses and intensified discount and promotional programs in response to the entry of PONG’s Do It Best. The impact was clearly seen in 3Q11 results, in which top line grew 20% QoQ but GPM declined 150bps QoQ. Given a strong top line outlook and favorable industry prospects, we believe margin contraction would be eased by robust sales. We expect next year’s revenue to grow 30%, driven by a 35,000sqm expansion (including Toys kingdom) and 8% SSG.

Maintain BUY, higher TP of Rp4,550/shr.

We maintain our BUY recommendation with a higher target price at Rp4,550/shr on the back of upbeat expansion plans and SSG. Our DCF based TP uses 11.3% WACC and 7% LT growth assumptions. ACES currently trades at 18.7x FY12 est PE. Robust property sales, low interest rate, good execution rate underpin our bullish outlook on ACES. We expect ACES’ top line to continue outgrowing its peers with 30% CAGR until 2013.

Key Risks:

Increasing COGS on imports out of China and Thailand, slowdown in the property sector, tightening competition, changes in purchasing power are the main risks associated with investment in this stock.

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